UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2002
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[ ] TRANSITION REPORT UNDER 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.
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(Name of small business issuer in its charter)
DELAWARE 23-2265039
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(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
5935 CARNEGIE BLVD, SUITE 101, CHARLOTTE, NC 28209
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (704) 553-9330
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
Common Stock, par value, $0.04 American Stock Exchange
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Securities registered under Section 12(g) of the Exchange Act: NONE
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year (12 months ending
June 30, 2002): $40,723,866
The aggregate market value of the voting common equity held by non-affiliates as
of September 20, 2002 was $10,551,500.
The number of shares outstanding of each of the issuer's Common Stock as of
September 20, 2002: 12,408,820
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TABLE OF CONTENTS
Page
PART I
ITEM 1. Description of Business 3
General 3
Aviation Travel Services 4
Home Technology 4
Technology Solutions 5
Telecommunications Call Center 5
Recent Business Developments 5
Factors Affecting Future Results and Forward-looking Statements 5
Stratos Inns Concept 12
Discontinued Operations 12
Employees 12
Recent Accounting Pronouncements 12
ITEM 2. Properties 13
ITEM 3. Legal Proceedings 13
ITEM 4. Vote of Security Holders 13
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters 13
ITEM 6. Management's Discussion and Analysis of Financial Condition and Results of Operations 15
ITEM 7. Financial Statements 20
ITEM 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 47
PART III
ITEM 9. Directors and Executive Officers 47
ITEM 10. Executive and Director Compensation 48
ITEM 11. Security Ownership of Certain Beneficial Owners and Management 50
ITEM 12. Certain Relationships and Related Transactions 51
PART IV
ITEM 13. Exhibits List and Reports on Form 8-K 53
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
eResource Capital Group, Inc. and its subsidiaries ("RCG", "We" or the
"Company") is a network of travel and entertainment and technology services
companies brought together under one operating company to benefit from
synergistic relationships and the infusion of intellectual and capital
resources. The Company is engaged in the operation of aviation travel services,
home technology and technology solutions businesses and a call center operation.
RCG is a Delaware corporation incorporated in 1982. The Company's fiscal year
ends on June 30.
In fiscal 2001, the Company brought in new executive management and modified
its business plan to focus on acquiring and enhancing travel and entertainment
and technology services companies and, as a result, acquired companies in the
telecommunications call center, home technology and technology solutions
business segments. The Company also brought in new management to its aviation
business and completed the acquisition of an aviation services company that,
together, have expanded that business into a highly specialized travel
organization that delivers a unique turnkey air service. This air travel
services business generated $27 million in revenue in fiscal 2002 and has
contracts with two affiliates of the largest air inclusive tour operator in the
world. As a result of this growth, the Company has increased its focus on the
travel and entertainment sector and plans to continue to acquire substantial
interests in, operate and enhance the value of expansion phase companies
operating in the travel and entertainment sectors. The Company is in the early
phases of our expanded strategy and continues to focus on existing operations as
well as our efforts to implement this strategy.
At different times prior to fiscal 2000, the Company operated businesses in
several industries including drug-screening, computer software and residential
and commercial real estate development, all of which have now been discontinued.
During fiscal 2000, the Company, under the name flightserv.com, Inc. was engaged
in the development of an Internet website to provide access to private aviation
travel services. In March 2000, the Company launched its private aviation
program, called Private SeatsTM. The Company was able to generate only minimal
customer bookings through the Private SeatsTM program and did not book any
flights under this program after June 2000.
In October 2000, the Company changed its name to eResource Capital Group,
Inc. to reflect the new business direction.
Certain statements contained in this report, including, without limitation,
statements containing the words "believes", "anticipates", "expects", and words
of similar import, constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties, and other factors
that may cause the actual results, performance or achievements of the Company,
or industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: international,
national and local general economic and market conditions; the ability of the
Company to sustain, manage or forecast its growth; the ability of the Company to
successfully make and integrate acquisitions; existing governmental regulations
and changes in or the failure to comply with, governmental regulations; adverse
publicity; competition; changes in business strategy or development plans;
business disruptions; the ability to attract and retain qualified personnel; and
other factors referenced in this report. Certain of these factors are discussed
in more detail elsewhere in this report. Given these uncertainties, readers of
this report and investors are cautioned not to place undue reliance on such
forward-looking statements. The Company disclaims any obligation to update any
such factors or to publicly announce the result of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
AVIATION TRAVEL SERVICES
flightserv.com, Inc. ("flightserv"), headquartered in Atlanta, GA, is a
nationally recognized airline and travel program management company providing
tour operators, corporate travel departments, sports teams and casinos with cost
effective and reliable charter air transportation on a scheduled and ad-hoc
basis. flightserv acts as a program manager by providing turnkey charter
services including aircraft and related services such as ground support and
aircraft fueling, passenger service and support, and real-time flight tracking.
flightserv also provides its clients with Internet-ready reservations services
and aviation consulting. flightserv differentiates itself in the charter travel
industry by focusing on full program management services, which combines the
functions of aircraft brokerage, flight operations, airport operations, contract
negotiation between clients and air service providers, airport subsidy
negotiations and consumer marketing. flightserv does not own or operate any
aircraft.
3
Flightserv has an agreement with Vacation Express, a member of the MyTravel
Group, ending in December 2004, to operate a passenger hub at the
Orlando-Sanford International Airport. Pursuant to the terms of the agreement,
six commercial jet aircraft originate in six eastern and mid-western cities and
serve five Caribbean destinations and Orlando, Florida. Also, in July 2002,
flightserv entered into a three-year agreement with Suntrips, Inc., a sister
company of Vacation Express in the MyTravel Group, to operate scheduled weekly
flights between three west coast cities and two Mexican destinations. The
majority of the revenue of flightserv and the Company is generated pursuant to
these contracts. During the three month period ended June 30, 2002, sales to
Vacation Express, represented approximately 63% of the Company's consolidated
revenue. For the fiscal year then ended, sales to Vacation Express represented
approximately 54% of consolidated revenue.
The Company acquired Internet Aviation Services, Ltd. ("IASL"), a leisure
and business travel services company which provided charter aviation services,
in August 2000. IASL was integrated into our aviation travel services business
through our flightserv subsidiary.
In fiscal 1999 and 2000, flightserv developed an Internet web site to
provide access to private jet flight and travel services. The web site was
launched on March 9, 2000 and featured our Private SeatsTM program which was
designed to aggregate individual demand for private jet travel between
designated cities to make chartering of an aircraft economical for the charter
operator and individual travelers. From April 17, 2000 through June 30, 2000,
flightserv chartered a limited number of flights. Thereafter, flightserv did not
generate any revenue from the Private SeatsTM program. From October 2000 through
December 2001, flightserv provided charter aircraft services to Cancun, Mexico
and Tunica, Mississippi under a separate program.
HOME TECHNOLOGY
The Company operates its home technology business through its subsidiary
LST, Inc., d/b/a Lifestyle Technologies ("Lifestyle"). Lifestyle is a full
service home technology integration company providing complete installation and
equipment for structured wiring, home security, PC networking, home audio, home
theater, central vacuum and accent lighting. Lifestyle creates relationships
with high-end residential homebuilders (those that build residences with value
equal to or greater than $250,000) and provides such homebuilders with a basic
structured wiring and security package in exchange for an agreement to introduce
the homeowner to a Lifestyle sales consultant and to offer the homeowner a visit
to the local Lifestyle showroom. While in the showroom, the homeowner is
introduced to the complete line of home security, entertainment, lighting, and
home office options. Lifestyle has also secured relationships with product
manufacturers, distributors and service providers (cable, Internet service
provider, broadband and security) to ensure the highest quality and most
attractive pricing for the homeowners' needs.
During fiscal 2001, Lifestyle expanded from its headquarters in Charlotte,
NC to Raleigh, NC; Greenville, SC; Columbia, SC and Hilton Head, SC. In the
fourth quarter of fiscal 2001, Lifestyle began development of a national
franchising program, which was implemented in September 2001. In connection with
the franchising program through June 2002, Lifestyle sold its Raleigh, Hilton
Head, Greenville and Columbia locations to franchisees and has sold franchises
in 14 total markets.
On April 3, 2001, the Company acquired Lifestyle in exchange of 1,153,525
shares of Common Stock pursuant to certain stock purchase agreements. Including
direct acquisition costs, the total purchase price aggregated $7,695,586 and the
transaction was recorded using the purchase method of accounting. The excess
value of the purchase price over the fair value of Lifestyle's net assets on the
acquisition date aggregating $8,069,669 was allocated to goodwill.
On July 10, 2001, the Company, through Lifestyle, acquired certain net
assets, liabilities and the business of a home technology company located in
Atlanta, GA for an aggregate purchase price of $1,255,000, which was paid by
delivery of a cash payment ($275,000), Common Stock (139,365 shares) and a
four-year term promissory note ($250,000). Including direct acquisition costs,
the total purchase price for this business, which is operated as Lifestyle
Technologies Atlanta, Inc. ("LSTA") aggregated $1,260,000 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 $1,208,000 which was allocated to goodwill.
TECHNOLOGY SOLUTIONS
Our technology solutions business is the result of our acquisitions of
Avenel Alliance, Inc. ("Avenel Alliance") in February 2001 and Logisoft Corp.
(f/k/a Logisoft Computer Products Corp., "Logisoft"), and its wholly-owned
subsidiary eStorefronts.net Corp. in June 2001. Avenel Alliance was a
wholly-owned subsidiary of Avenel Ventures, Inc. ("Avenel Ventures"), which was
also acquired by us in February 2001 and integrated into our corporate unit.
4
Our technology solutions business provides integrated products and services
to assist customers in meeting their strategic technology initiatives. Our
products and services include distribution of third-party published software
titles to the educational market and corporate customers, full service Internet
development, Internet site hosting and co-location and Internet business
development services encompassing partner site management and marketing. In our
Internet business development and marketing services business, we generally
participate in the development and implementation of the business plan in
exchange for revenue-sharing and/or equity-based arrangements.
On February 13, 2001, the Company acquired all of the outstanding capital
stock of Avenel Ventures, and its wholly-owned subsidiary Avenel Alliance, in
exchange of 957,143 shares of Common Stock pursuant to a stock purchase
agreement dated as of November 8, 2000. The total purchase price aggregated
$6,834,000 and the transaction was recorded using the purchase method of
accounting. The excess value of the purchase price over the fair value of Avenel
Ventures' net assets on the acquisition date aggregating $5,610,000 was
allocated to goodwill. This goodwill was allocated to the technology solutions
business segment, except for, $1,000,000 that was allocated to the Company's
Corporate segment in the Company's adoption of Statement of Financial Accounting
Standards ("FAS") No. 142.
On June 19, 2001, the Company acquired Logisoft in exchange of 785,714
shares of Common Stock pursuant to that certain agreement and plan of merger.
The total purchase price aggregated $5,504,879 and the transaction was recorded
using the purchase method of accounting. The excess value of the purchase price
over the fair value of Logisoft's net assets on the acquisition date aggregating
$4,146,000 was allocated to goodwill. The aggregate purchase price and goodwill
were both adjusted in fiscal 2002 by $42,000 to reflect the issuance of earn-out
shares to certain members of Logisoft's management.
TELECOMMUNICATIONS CALL CENTER
We operate our telecommunications call center business through our
subsidiary DM Marketing, Inc. ("DMM"). DMM operates a thirty-five seat
telecommunications call center located in Pensacola, Florida which is equipped
to provide telemarketing, help desk and other services to companies. In fiscal
2001, we determined that we would not develop our Private SeatsTM program and,
accordingly, that DMM would not be utilized to provide customer service for the
program. Our telecommunication call center provides support to our aviation
travel services business as a reservations and customer care center for
airlines, tour operators and internal programs for which DMM will take
reservations from travelers.
RECENT BUSINESS DEVELOPMENTS
On September 5, 2002 the Company closed the sale of Lifestyle (the "LFSI
Transaction") to Lifestyle Innovations, Inc. ("LFSI"). LFSI is a fully reporting
company whose common stock is publicly traded on the over the counter market.
Pursuant to the LFSI transaction, Lifestyle became a wholly-owned subsidiary of
LFSI and the Company received 16,000,000 shares of LFSI common stock, which
represents approximately 79% of the outstanding common stock of LFSI at the
closing date. LFSI has agreed to complete a registration statement within 90
days of closing to register the shares of LFSI common stock received by the
Company in the LFSI Transaction. The transaction added $320,000 of cash and
$50,000 of other assets to the existing assets of Lifestyle. In addition,
subsequent to the closing of the LFSI Transaction, a further $300,000 of capital
was raised by LFSI during September 2002. The increase in the net assets of LFSI
resulting from the LFSI Transaction, approximately $620,000 as of September 30,
2002, will be reported by the Company as minority interest. The Company will
continue to consolidate LFSI and report the portion of income or loss
attributable to the minority interest as an increase or decrease to the minority
interest.
In September 2002, the Company completed the private sale of 125,000 shares
of LFSI common stock, received as a result of the LFSI Transaction, to a private
investment bank. The Company sold this stock at $2.00 per share and received
proceeds of $250,000 as a result of this sale.
In September 2002, the Company's aviation travel services business received
$262,000 in grant proceeds from a government assistance program designed to
provide grants to companies whose businesses were impacted directly by the
events of September 11, 2001.
FACTORS AFFECTING FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS
The Company's business, results of operations and financial condition are
subject to many risks, including those set forth below. The following discussion
highlights some of these risks and others are discussed elsewhere herein or in
other documents filed by the Company with the SEC. In addition, statements in
this report relating to matters that are not historical facts are
forward-looking statements based on management's belief and assumptions using
currently available information. Although the Company believes that the
5
expectations reflected in such forward-looking statements are reasonable, it
cannot give any assurances that these expectations will prove to be correct.
Such statements involve a number of risks and uncertainties, including, but not
limited to, those set forth below.
WE MAY NEED TO RAISE ADDITIONAL FUNDS IN ORDER TO CONTINUE TO OPERATE AND
GROW OUR BUSINESS.
The Company believes that its existing balances of cash and cash equivalents
and investments, including the proceeds received from the LFSI Transaction (a
portion of which may or may not be sold from time to time depending on market
conditions and the effectiveness of a LFSI registration statement), the
September 2002 sale of LFSI stock and a commitment received for $750,000 of
additional funding from a private investment bank will be sufficient to meet
working capital and capital expenditure requirements of our continuing
operations through the end of fiscal 2003 . If we are unable to grow our
business or improve our operating cash flows as expected, we suffer significant
losses on our investments or are unable to realized adequate proceeds from those
investments, including our holdings of LFSI stock, or the investment bank is not
able to meet its funding obligation to the Company, then we will need to secure
alternative debt or equity financing to provide us with additional working
capital. However, there can be no assurance that we will be able to complete
such financing if required. If we raise funds through debt financing, then we
will incur additional interest expense going forward. If we raise additional
funds by issuing additional equity securities, then the percentage ownership of
our current stockholders will be diluted. We cannot be certain that additional
financing will be available when and to the extent required or that, if
available, it will be on acceptable terms. In addition, our ability to complete
future financings may be affected by the market price of our Common Stock. If
adequate funds are not available on acceptable terms, then we will not be able
to continue to fund our existing businesses or our planned expansion or take
other steps necessary to enhance our business or continue our operations.
WE HAVE BEEN INCURRING OPERATING LOSSES AND THERE CAN BE NO ASSURANCE THAT
WE WILL ACHIEVE OR SUSTAIN PROFITABILITY.
We incurred operating losses in our fiscal years ended June 30, 2002, 2001
and 2000. Our fiscal 2000 operating loss included significant losses associated
with our aviation businesses and in particular losses associated with the
development of our Private SeatsTM program. Our fiscal 2001 operating results
included a significant loss from our jet shuttle service based in Norfolk,
Virginia, the discontinuance of the Private SeatsTM program and the write-off of
goodwill. We have suspended our operations of both the Private SeatsTM and jet
shuttle programs and our aviation business reported a reduced operating loss for
the year ended June 30, 2002. Certain of our other operating businesses have
incurred and continue to incur operating losses. In particular, we have, and
continue to, incurr operating losses in connection with our efforts to grow our
home technology business. We expect to continue to incur significant operating
costs in connection with our efforts to expand our existing businesses and to
grow through acquisitions. As a result of these costs and uncertain revenue
growth, there can be no assurance that we will achieve or sustain profitability
for any annual period.
THE PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE.
The stock market in general, and the market for travel, entertainment and
technology services companies has recently experienced extreme volatility.
Similarly, the per share trading price of our Common Stock during the year ended
June 30, 2002, as reported by the American Stock Exchange, fluctuated from a
high of $6.30 to a low of $0.70. Fluctuations in the price of our Common Stock
may occur, among other reasons, in response to:
o operating results;
o regulatory changes;
o economic changes;
o market valuation of firms in related businesses; and
o general market conditions.
In addition, the volume of shares of our Common Stock bought and sold on any
trading day has been subject to wide fluctuations which also contributes to
fluctuations in the trading price of our Common Stock. The trading price of our
Common Stock could continue to be subject to wide fluctuations in response to
these or other factors, many of which are beyond our control. If the market
price of our Common Stock decreases, stockholders may not be able to sell their
shares of Common Stock at a profit.
6
WE MAY BE UNABLE TO MAINTAIN OUR LISTING ON THE AMERICAN STOCK EXCHANGE.
Our Common Stock is presently listed and trading on the American Stock
Exchange (the "Exchange"). The Exchange has previously raised the question of
whether the Company meets the qualifications for continued listing and may raise
such questions in the future. The Company believes that it meets the standards
for continued listing but such a determination is subjective and no assurance
can be given that the Exchange will agree or that our Common Stock will be
trading on the Exchange at the time that the stockholders are able to sell
shares under applicable securities laws.
CERTAIN OF OUR BUSINESSES HAVE LIMITED OPERATING HISTORIES.
We acquired DMM, IASL, Avenel Ventures, and its subsidiary Avenel Alliance,
and Lifestyle during the fiscal year ended June 30, 2001. DMM was formed in
October 1998 and IASL, Avenel Ventures and Lifestyle were each formed during
calendar year 2000. Each of these companies has incurred losses since their
inception and has a limited operating history. Furthermore, due to these losses,
we have significantly curtailed the operations of Avenel Ventures and DMM. As a
result, there is limited information upon which to base an evaluation of these
components of our business and their prospects. You should evaluate the chances
of financial and operating success of these businesses in view of the risks,
uncertainties, expenses, delays and difficulties associated with starting new
businesses.
WE HAVE BEEN UNSUCCESSFUL IN IMPLEMENTING OUR PRIOR BUSINESS PLANS, HAVE
RECENTLY MODIFIED OUR BUSINESS PLAN AND MAY NOT BE ABLE TO SUCCESSFULLY
IMPLEMENT OUR CURRENT BUSINESS PLAN.
During our fiscal year ended June 30, 2000, we incurred substantial expenses
developing our Private SeatsTM program. We were unable to generate sufficient
customer use of our Private SeatsTM program and had to discontinue the service
shortly after it was launched. As a result, we made a decision to diversify
through the acquisitions of DMM, IASL, Avenel Ventures, Lifestyle and Logisoft
in fiscal 2001, expanding our business plan to attempt to acquire
expansion-stage travel, entertainment and technology services companies. At the
same time, we have had a change in our executive team. However, we have limited
resources and there can be no assurance that we will be able to implement our
expanded business plan or achieve profitability. In addition, while we have no
intention to change our business strategy in the future, if we are not
successful in implementing our strategy or if we otherwise believe it to be in
our best interest, then we may modify or change our business plans.
WE MAY BE UNABLE TO SUCCESSFULLY EXECUTE OUR ACQUISITION STRATEGY.
We anticipate that a portion of our future growth will be accomplished
through acquisitions. The success of this plan depends upon our ability to:
o identify suitable acquisition opportunities;
o effectively integrate acquired personnel, operations, products and
technologies into our organization;
o retain and motivate the personnel of acquired businesses; o retain
customers of acquired businesses; and
o obtain necessary financing on acceptable terms or use Common Stock as
consideration for acquisitions.
In addition, turbulence in financial markets and the slowdown in the U.S.
economy may result in a diminished pool of companies that meet our criteria for
acquisition. Even if we are successful in acquiring companies, we may be unable
to integrate them into our business model or achieve the expected synergies.
OUR ACQUISITION STRATEGY HAS AND WILL CONTINUE TO DILUTE OUR CURRENT
STOCKHOLDERS' OWNERSHIP.
We have issued a total of 4,525,628 shares in connection with the
acquisitions of IASL, DMM, Avenel Ventures, Lifestyle, Logisoft and LSTA. Our
acquisition strategy contemplates that we will continue to issue shares of our
Common Stock to make strategic acquisitions and attempt to grow our business.
However, each of the acquisitions that we complete in the future, involving the
issuance of Common Stock, will further dilute our current stockholders'
ownership interest in the Company.
WE FACE COMPETITION FROM OTHER ACQUIRORS AND INVESTORS WHICH MAY PREVENT US
FROM REALIZING STRATEGIC OPPORTUNITIES.
7
We plan to acquire or invest in existing companies to fulfill our business
plan. In pursuing these opportunities, we face competition from other capital
providers and operators of companies, including publicly-traded companies,
venture capital companies and large corporations. Some of these competitors have
greater financial, operational and human resources than we do. This competition
may limit our opportunity to acquire interests in companies that we believe
could help us fulfill our business plan and increase our value.
OUR SUBSIDIARIES FACE SIGNIFICANT COMPETITION.
Our success depends on our ability to grow our subsidiaries' businesses, all
of which operate in highly competitive business segments. Many of our
subsidiaries' competitors have substantially greater financial, operational and
human resources than we do. As a result, our subsidiaries may be unable to
compete successfully with such competitors.
OUR GROWTH PLACES STRAIN ON OUR MANAGERIAL, OPERATIONAL AND FINANCIAL
RESOURCES.
Our growth has placed, and is expected to continue to place, a significant
strain on our managerial, operational and financial resources. Further growth
will increase this strain on our managerial, operational and financial
resources, which may inhibit our ability to successfully implement our business
plan.
WE DEPEND ON CERTAIN IMPORTANT EMPLOYEES, AND THE LOSS OF ANY OF THOSE
EMPLOYEES MAY HARM OUR BUSINESS.
Our performance is substantially dependent on the performance of our
executive officers, Michael D. Pruitt and Melinda Morris Zanoni and other key
employees. The familiarity of these key employees with the technology industry
and the familiarity of the key employees of our charter aviation business, Kent
Elsbree and Cary Evans, with the charter services business makes them especially
critical to our success. In addition, our success is dependent on our ability to
attract, train, retain and motivate high quality personnel, especially for our
management team. The loss of the services of any of our executive officers or
key employees may harm our business. Our success also depends on our continuing
ability to attract, train, retain and motivate other highly qualified technical
and managerial personnel. Competition for such personnel is intense and our
limited resources are likely to make it more difficult for us to attract and
retain such personnel.
OUR AVIATION TRAVEL SERVICES BUSINESS IS DEPENDENT UPON A FEW, KEY CUSTOMERS
AND SERVICE PROVIDERS.
During the three month period ended June 30, 2002, sales to Vacation
Express, a MyTravel Group company and a customer of the Company's aviation
travel services business, represented 63% of the Company's consolidated revenue.
For the year then ended, sales to Vacation Express represented 54% of the
Company's consolidated revenue. This concentration of revenue with Vacation
Express, and its sister company, Suntrips, Inc. ("Suntrips"), increased in July
2002 with the beginning of a new program for Suntrips.
If these customers default under the contracts that they presently have with
the Company, or otherwise are unable to fulfill their obligations under such
contracts, the Company's aviation travel services business would suffer
operating losses which may result in a material adverse impact on the Company's
financial position and its ability to continue operations.
The Company's aviation travel services business generally contracts with
one to two carriers for each of the long-term tour operator contracts discussed
above. While this concentration generally reduces the costs of the carrier
service, if one or more of these carriers is unable to perform under its
contract, our aviation travel services business may experience service
interruptions which could reduce its revenue. Additionally, the Company's
aviation travel services business may be forced to replace such a carrier, which
could result in higher costs for the carrier services, thereby reducing
profitability.
EVENTS OF SEPTEMBER 11, 2001 MAY HAVE AN ADVERSE EFFECT ON OUR BUSINESSES.
The terrorist attack against the United States has produced great
uncertainty in the economy in general and in the aviation industry in
particular. Industry reports indicate that these events have had a substantial
negative impact on the demand for air travel generally. These events may
drastically alter the long-term demand for charter services. In addition, these
events may lead the Federal Aviation Administration to place additional
restrictions on charter flight operators, which may increase the cost of private
charter services. The long-term impact of these events on the aviation industry
and the chartered services segment of that industry are not known. These events
could have a material adverse effect on our aviation travel services business
including the operation of our charter hub service through Orlando, Florida.
Also, the terrorist attack against the United States has produced
uncertainty in the financial markets, which could prolong the current economic
uncertainty. The long-term impact of these events on the United States' economy
is unknown. These events could also have a material adverse effect on our home
technology business and our other business segments.
8
IF OUR AVIATION TRAVEL SERVICES BUSINESS DOES NOT PRODUCE REVENUE AS
FORECASTED, THEN WE WILL NEED TO RAISE ADDITIONAL CAPITAL SOONER THAN
EXPECTED.
Pursuant to an agreement with a major tour operator we created and operate a
passenger hub at the Orlando-Sanford International Airport. Pursuant to the
terms of the related agreement, aircraft originate in six eastern and
mid-western cities and serve five Caribbean destinations and Orlando, FL. This
program began operations in December 2001. This agreement represents the
majority of our fiscal 2002 aviation services revenue, and along with a similar
three year agreement to service several Mexican destinations from several
western cities that flightserv signed in July 2002, is expected to comprise the
majority of our revenue in fiscal 2003. However, due in part to the slowdown and
uncertainty in the economy in general and in the air travel industry in
particular, there can be no guarantee that the revenue from these agreements
will materialize. In fact, our customer for the Sanford, FL hub operation has
reduced its scheduled flights between August 2002 and December 2002. These
schedule changes are expected to reduce the Company's aviation services revenue,
from the original schedule by approximately $1.9 million and gross profit during
that period by $200,000. If our aviation travel services business does not
generate the forecasted revenue, then our aviation travel services business may
not operate profitably and we would not be able to offset any operating losses
in other business segments or corporate expenses. As a result, we would need to
raise additional capital, through debt or equity financing, sooner than
expected.
AVIATION SERVICES CONTRACTS MAY RESULT IN LOSSES.
The Company actively pursues opportunities to operate scheduled and ad-hoc
charter service outside of its two primary aviation services contracts with
major tour operators, in order to utilize capacity on aircraft that it has under
contract. These programs often require the Company to provide such services for
a fixed fee or with limited ability to pass along increases in operating costs
over the amounts estimated during the bid process. If actual operating costs are
higher than forecast, the Company may lose money on such programs and these
losses may exceed the operating profit generated on other aviation travel
services contracts. For example, in the fourth quarter of fiscal 2002, the
Company lost approximately $427,000 on a two-month program to provide service
from four western cities to two Mexican destinations, due primarily to higher
than anticipated fuel usage and other operating costs related to the use of a
higher cost aircraft than originally estimated to operate the program.
GOVERNMENT REGULATION OF THE TRAVEL INDUSTRY COULD IMPACT OUR AVIATION
TRAVEL SERVICES' BUSINESS OPERATIONS.
Certain segments of the travel industry are regulated by the United States
Government and, while we are not currently required to be certified or licensed
under such regulation, certain services offered by our aviation travel services
business are affected by such regulation. Charter flights operators, upon which
our aviation travel services business depends, are subject to vigorous and
continuous certification requirements by the Federal Aviation Administration.
Changes in the regulatory framework for charter aviation travel could adversely
affect our aviation travel services business' operations and financial
condition.
OUR AVIATION TRAVEL SERVICES BUSINESS FACES INTENSE COMPETITION FOR
CUSTOMERS FROM THE TRAVEL INDUSTRY.
We provide leisure charter jet travel and face intense competition from
commercial airlines for the potential customers who travel to these locations
and other locations that we may serve in the future. These commercial airlines
have greater resources, marketing efforts and brand equity than we do and they
also offer a potential customer more flights to these locations. Furthermore,
travelers have numerous choices of location when choosing travel destinations.
Since we offer only limited travel destinations, we face intense competition
from travel agents, commercial airlines, hotels, resorts, casinos and other
organizations in the travel industry that offer alternative travel destinations
to those offered by us. Such competitors possess far greater capital and human
resources, marketing efforts and brand equity than we do. If we are unable to
compete effectively with these various competitors in the travel industry, we
may not be able to maintain profitability.
OUR HOME TECHNOLOGY BUSINESS MAY NOT ACHIEVE OR SUSTAIN PROFITABILITY.
Our home technology business began operations in March 2000 and since then
has not achieved profitability for a sustained period of time. Through our home
technology business, we provide homeowners complete installation and equipment
for structured wiring, home security, PC networking, home audio, home theater,
central vacuum and accent lighting. We also provide similar services to the
commercial market. Our planned expansion of this business through franchising
and entering new markets may fail due to intense competition from competitors in
the residential technology industry who have greater capital, technical,
operational, marketing and human resources and greater experience and brand
equity than we do. Furthermore, we may have overestimated the depth of the
residential technology industry and the demand for our home technology products.
9
Our inability to execute the expansion plan of our home technology business and
to attract and retain customers for this business would likely result in our
home technology business continuing to operate at a loss.
OUR EFFORTS TO GROW OUR HOME TECHNOLOGY BUSINESS THROUGH THE SALE OF
FRANCHISES MAY NOT SUCCEED.
We began franchising our home technology business in September 2001. There
is no guarantee that efforts to franchise our home technology business model
will be successful. To the extent we are successful in selling franchises, we
may incur significant costs related to supervising and monitoring our
franchisees and protecting our proprietary rights associated with our business
model. Furthermore, franchise operations are regulated by the federal and state
governments and compliance with such regulations may cause us to incur
additional costs. We cannot be certain that we will generate adequate revenue
from our franchise activities to offset these costs.
OUR TECHNOLOGY SOLUTIONS BUSINESS GENERALLY DOES NOT HAVE LONG-TERM
CONTRACTS.
The clients of our technology solutions business are generally retained on
project-by-project basis, rather than pursuant to long-term contracts. As a
result, a client may or may not engage us for further services once a project is
completed or may unilaterally reduce the scope of, or terminate, existing
projects. The absence of long-term contracts creates an uncertain revenue
stream, which could negatively affect the financial condition of our technology
solutions business.
THE DEVELOPING MARKET FOR STRATEGIC INTERNET SERVICES AND THE LEVEL OF
ACCEPTANCE OF THE INTERNET AS A BUSINESS MEDIUM WILL AFFECT OUR TECHNOLOGY
SOLUTIONS BUSINESS.
The market for strategic Internet services is relatively new and is evolving
rapidly. The future growth of our technology solutions business is dependent
upon the ability of such business to provide strategic Internet services that
are accepted by existing and future clients. Demand and market acceptance for
recently introduced services are subject to a high level of uncertainty. The
level of demand and acceptance of strategic Internet services is dependent upon
a number of factors, including:
o the growth in consumer access to and acceptance of new interactive
technologies such as the Internet;
o companies adopting Internet-based business models;
o the development of technologies that facilitate two-way communication
between companies and targeted audiences;
o the level of capital spending on Internet, technology and communications
initiatives; and
o the extent and nature of any domestic or international regulation of
e-business or uses of the Internet.
Significant issues concerning the commercial use of these technologies
include security, reliability, cost, ease of use and quality of service. These
issues remain unresolved and may inhibit the growth of Internet business
solutions that utilize these technologies.
Industry analysts and others may have made many predictions concerning the
growth of the Internet as a business medium. You should not rely upon these
predictions. Recently, the market for strategic Internet services in particular
has contracted. If the market for strategic Internet services fails to develop,
or develops more slowly than expected, or if the services provided by our
technology solutions business do not achieve market acceptance, then revenue and
operating results of such business may be volatile and our technology solutions
business may be unable to achieve or sustain operating profits.
OUR TECHNOLOGY SOLUTIONS BUSINESS MAY NOT BE ABLE TO KEEP UP WITH THE
CONTINUOUS TECHNOLOGICAL CHANGE IN ITS MARKET.
The success of our technology solutions business will depend, in part, on
its ability to respond to technological advances. This business may not be
successful in responding quickly, cost-effectively and sufficiently to these
developments. Many of the competitors of our technology solutions business are
larger than we are and have significantly more financial resources to invest in
advances in technology, products, engagement methodology and other areas central
to providing technology and Internet solutions. Our technology solutions
business will not be able to compete effectively or meet its growth objectives
if it is unable, for technical, financial or other reasons, to adapt in a timely
manner in response to technological advances. In addition, employee time
allocated to responding to technological advances will not be available for
client engagements.
10
THE SUCCESS OF OUR TECHNOLOGY SOLUTIONS BUSINESS IS LARGELY DEPENDENT UPON
ITS ABILITY TO RETAIN ITS MANUFACTURER AUTHORIZATIONS THAT ALLOW IT TO SELL
SOFTWARE TO EDUCATIONAL CUSTOMERS AT DISCOUNTED PRICING.
Our technology solutions business has been accumulating authorizations from
key software manufacturers that allow it to sell products to educational
facilities at deep discounts. If our technology solutions business were to lose
any of these authorizations, its ability to sell computer products to
educational customers would be adversely impacted, which could have a similar
impact on its sales, profitability and ability to expand within this business
line. In addition, this business uses credit lines extended by software and
hardware manufacturers and distributors. The loss of any of these credit lines
would limit the ability of our technology solutions business to meet customer
demand, thereby reducing sales and profits.
THE EXERCISE OF OUTSTANDING OPTIONS AND WARRANTS COULD SUBSTANTIALLY DILUTE
EXISTING STOCKHOLDERS AND COULD HAVE A NEGATIVE EFFECT OUR STOCK PRICE.
We have adopted the eResource Capital Group, Inc. Stock Option Plan (the
"Plan") and our stockholders have authorized the issuance of options to acquire
up to 20,000,000 shares of Common Stock under the Plan. Currently, we have
outstanding options for 1,160,517 shares under the Plan that have been granted
to our officers, directors, employees and other service providers of which
options for 957,707 shares are vested. Options for 335,010 shares of Common
Stock that were issued under the Plan have been exercised. In addition to
options issued under the Plan, we currently have outstanding options and
warrants for up to 2,602,874 shares. Our outstanding options and warrants have
exercise prices ranging from $0.28 to $28.00. The exercise of these options or
warrants will dilute the percentage ownership of our current stockholders and
the potential sale of shares issued upon the exercise of these warrants or
options could have a negative impact on the market price of our Common Stock.
THE CONVERSION OF DEBT BY EXISTING DEBT HOLDERS COULD SUBSTANTIALLY DILUTE
EXISTING STOCKHOLDERS AND COULD HAVE A NEGATIVE EFFECT OUR STOCK PRICE.
We have entered into debt conversion agreements with certain debt holders
to give such parties the option to convert up to $1.049 million of debt and
interest of the Company and two of its subsidiaries into the right to receive
shares of the Company's Common Stock. The terms of these agreements allow such
debt holders to convert balances due them into shares of our Common Stock at a
20% discount to an average market price, but no less than $1.12 per share, and
require us to register the shares underlying the convertible debt on a
registration statement. Up to 714,286 shares may be issued in connection with
such debt conversions.
In addition, we have $650,000 of debt outstanding that is convertible at
$4.55 per share, the principal of which is due in August 2003, and $800,000 that
is convertible at $2.10 per share or a mutually agreed upon discounted market
price, the principal of which is due $200,000 in December 2002 and $600,000 in
December 2003.
Conversions of debt to shares of the Company's Common Stock will result in
dilution of a stockholder's investment in the Company and the potential sales of
Common Stock by the Selling Stockholders could have a negative impact on the
market price of our Common Stock.
THE FUTURE SALES OF RESTRICTED SECURITIES COULD HAVE A NEGATIVE EFFECT ON
OUR STOCK PRICE.
The market price of our Common Stock could be negatively affected by the
future sale of shares of restricted Common Stock, including shares of restricted
Common Stock underlying options and warrants that have been or will be issued by
us. As of June 30, 2002, approximately 2,100,000 of our 12,280,820 issued and
outstanding shares of Common Stock are believed to be restricted securities as
defined in Rule 144 promulgated under the Securities Act or otherwise not
available for trading by the public. Rule 144 provides generally that restricted
securities must be held for a one year period prior to resale and provides
certain additional limitations on the sale of such shares, including limitations
on the volume of such shares that a beneficial owner may sell in any three month
period thereafter. Generally, non-affiliated stockholders may sell restricted
shares that have been held for at least two years without any limitations. In
addition, Rule 145 permits the sale by non-affiliates of restricted securities
issued in connection with certain business combinations one year after such
shares are issued. As restricted shares become eligible for resale pursuant to
Rule 144 or Rule 145, the number of sellers of our Common Stock could increase
significantly and, as a result, the market price of our Common Stock could
decrease.
11
INABILITY TO PROTECT INTELLECTUAL PROPERTY RIGHTS.
We rely primarily on a combination of intellectual property laws and
contractual provisions to protect our proprietary rights and technology, brand
and marks. These laws and contractual provisions provide only limited protection
of proprietary rights and technology. If we are not able to protect our
intellectual property, proprietary rights and technology, we could lose those
rights and incur substantial costs policing and defending those rights. Our
means of protecting our intellectual property, proprietary rights and technology
may not be adequate.
STRATOS INNS CONCEPT
During 2000 and 2001, the Company held a lease on property at the
Dekalb-Peachtree Airport in Dekalb County, GA (the "PDK Property") on which it
had planned to develop a hotel property, the "Stratos Inns concept". The PDK
Property and similar properties at other general aviation airports provided an
opportunity for Stratos Inns or a strategic partner to develop and provide a
variety of lodging and related hospitality services to private aviation pilots
and passengers. The Company was declared in default of the lease by the landlord
in October 2000 on the basis that it did not commence construction on the PDK
property. Due to its limited available capital and inability to secure a hotel
management partner, the Company determined it was unlikely that it would be able
to complete the construction of a hotel facility within the time constraints of
its property lease or to obtain a lease extension from the landlord. In December
2000, the Company recorded a non-cash charge of $1,164,000 to write off its PDK
and Stratos Inns investments. The Company has no plans to develop the Stratos
Inns concept.
DISCONTINUED OPERATIONS
The Company discontinued its residential real estate development business in
fiscal 1999. During fiscal 1999 and 2000, the Company disposed of the majority
of its residential real estate holdings and disposed of the remaining properties
in fiscal 2001.
In fiscal 2001, the Company discontinued its commercial real estate
business, which consisted of two strip-mall shopping centers in the Atlanta, GA
area. In May 2001, the Company entered a contract to sell its two shopping
centers, which closed on August 31, 2001. As a result, the Company recorded a
gain of approximately $575,000 in August 2001.
EMPLOYEES
At June 30, 2002, the Company had 86 full-time employees:
Aviation Travel Services .... 17
Home Technology ............. 33
Technology Solutions ........ 27
Telecommunication Call Center 2
Corporate ................... 7
--
86
==
The Company has no collective bargaining agreements with any unions and
believes that overall relations with its employees are good.
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.
In June 2002, the Financial Accounting Standards Board issued FAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities". FAS 146
addresses the financial accounting and reporting for costs associated with exit
or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". FAS 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when it is incurred and measured initially as fair value. The new guidance will
impact the timing of recognition and the initial measurement of the amount of
liabilities the Company recognizes in connection with exit or disposal
activities initiated after December 31, 2002, the effective date of FAS 146.
12
ITEM 2. PROPERTIES
At June 30, 2002 the Company leased office building space as follows:
Business Segment Locations Square Feet Ann. Rent Termination
----------------------------- ---------------------------------- ------------ --------- -----------
Aviation Travel Services Atlanta, GA/Sanford, FL 3,574 $ 48,000 Monthly
Home Technology Charlotte,NC/Atlanta, GA/Ft. Lauderdale, FL 22,963 243,000 June 2007
Technology Solutions Fairport, NY/Charlotte, NC 8,499 200,000 Dec. 2009
Call Center Pensacola, FL 7,380 34,000 June 2004
Corporate Charlotte, NC 2,386 50,000 Dec. 2009
In addition, the Company's subsidiary, Logisoft owns two adjacent office
units comprising 5,200 square feet in Fairport, NY. These units have a net book
value at June 30, 2002 of approximately $259,000. At June 30, 2002, Logisoft
owes $179,000 on its mortgage associated with these units. The mortgage bears
interest at 7.96% and is payable monthly at $1,751 through October 2015.
Management believes that all property occupied by the Company and its
subsidiaries is adequately covered by insurance.
ITEM 3. 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 is not party to any legal proceedings the adverse
outcome of which would have any material adverse effect on its business, its
assets, or results of operations.
The Company and its subsidiary LSTA have initiated a lawsuit against David
Watson, the sole shareholder of Greater Atlanta Alarm Services, Inc. ("GAAS"),
which LSTA acquired in July 2001, seeking damages or rescission for claims of
fraud and breach. Mr. Watson has counterclaimed against us and LSTA for default
in payment of the purchase price and for attorneys' fees. This matter is in the
discovery stage and no assurance can be given that the Company and LSTA will
prevail in its claims or that the Company and LSTA will not be required to pay
amounts allegedly owed to Mr. Watson.
ITEM 4. VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 17, 2002. At that
meeting, the Company's stockholders elected six members of the Company's Board
of Directors (all directors elected were those serving at the time of the annual
meeting), approved a range for a reverse stock split and ratified the selection
of the Company's independent auditors. No other votes of security holders were
held during the quarter ended June 30, 2002.
A summary of the matters voted upon at the Company's annual meeting is as
follows:
----------------------------------------------- ----------------- ----------------- ---------------
Description Votes in favor Votes against Abstentions
----------------------------------------------- ----------------- ----------------- ---------------
----------------------------------------------- ----------------- ----------------- ---------------
Election of six director candidates 8,433,723 151,336 -0-
----------------------------------------------- ----------------- ----------------- ---------------
----------------------------------------------- ----------------- ----------------- ---------------
Approval of range for reverse stock split 8,114,020 466,941 4,099
----------------------------------------------- ----------------- ----------------- ---------------
----------------------------------------------- ----------------- ----------------- ---------------
Ratification of independent accountants 8,430,965 146,038 8,056
----------------------------------------------- ----------------- ----------------- ---------------
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
The Company's Common Stock is listed on the American Stock Exchange under
the symbol "RCG". The following table shows the high and low trading and closing
prices of the Common Stock during the last two fiscal years as reported on the
Exchange:
Fiscal 2002 High Low Close
------------------ ------ ------- -------
First Quarter $ 6.30 $ 4.27 $ 4.62
Second Quarter 4.34 1.12 1.54
Third Quarter 2.38 0.84 0.98
Fourth Quarter 1.82 0.70 0.95
13
Fiscal 2001 High Low Close
---------------- ----- ----- -----
First Quarter $ 14.00 $ 1.75 $ 7.35
Second Quarter 10.50 3.15 6.30
Third Quarter 10.50 5.25 6.16
Fourth Quarter 8.40 4.62 5.88
The prices reflect inter-dealer prices, without retail markup, mark-down or
commission and may not represent actual transactions.
Dividends
The Company has never paid cash dividends and currently intends to retain any
future earnings to expand its operations. Therefore, it is not contemplated that
cash dividends will be paid on the Company's Common Stock in the foreseeable
future.
Record Holders
The approximate number of record holders of the Company's Common Stock as of
September 20, 2002 was 6,000.
Securities authorized for issuance under equity compensation plans
The following table summarizes certain information as of the end of the
Company's fiscal year 2002 with respect to compensation plans (including
individual compensation arrangements) under which Common Stock of the Company
are authorized for issuance:
Number of securities to be
Plan category issued upon exercise of Weighted average exercise Number of securities
------------- outstanding options, warrants price of outstanding remaining available
and rights options, warrants and rights for future issuance
---------- ---------------------------- -------------------
Equity compensation plans approved by security
holders 1,160,517 $ 4.20 18,839,483
Equity compensation plans not approved by
security holders
security holders 2,602,875 $ 8.70 --
----------------------- -------------------- --------------------
Total 3,763,392 $ 7.31 18,839,483
======================= ===================== ====================
The material features of the Company's stock option plan, the data for
which is summarized under the Equity compensation plans approved by security
holders in the table above, and its warrant arrangements with vendors and other
service providers are summarized in Note 10 to the consolidated financial
statements that appear in Item 7 of this Annual Report.
Sales of Unregistered Securities
During the quarter ended June 30, 2002, the Company issued 138,860 shares of
restricted Common Stock as follows:
(i) The Company issued an aggregate of 107,143 shares of restricted Common
Stock in connection with a private placement sale of Common Stock;
(ii) In June 2002, the Company issued 10,884 shares of restricted Common Stock
to two directors for their service to the Company as directors in 2001;
(iii)In June 2002, the Company issued 20,833 shares of restricted Common Stock
to management of Logisoft in exchange for Logisoft reaching certain
performance criteria set forth in the purchase agreement governing the
Company's acquisition of Logisoft.
The securities issued in connection with the Company's acquisition of
Logisoft and the private placement 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.
14
The securities issued in connection with the services rendered to the
Company by directors 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.
In fiscal 2001, the Company issued 409,061 shares of restricted Common Stock
in connection with the exercise of Common Stock options and warrants and 239,435
shares of restricted Common Stock for services, including 57,143 treasury
shares. These shares were issued without registration under the Securities Act,
in reliance upon the exemption in Section 4(2) of the Securities Act.
In fiscal 2002, the Company issued options and warrants to purchase its
Common Stock to employees, directors, certain investors and firms for loan
origination, consulting and other services. Following is a summary of options
and warrants issued in fiscal 2002:
Number of Shares Exercise Vesting
Purchasable Price Per Share Grant Date Term Period
------------- ---------------- ---------- -------- --------
50,000 $ 1.05 6/21/02 3 yrs. 12 mos.
35,714 1.26 12/21/01 3 *
69,286 1.26 12/12/01 10 48
50,000 1.47 6/21/02 3 12
50,000 1.75 6/21/02 3 12
42,143 1.75 1/25/02 10 48
38,571 1.89 12/12/01 10 48
5,714 1.96 1/14/02 10 48
42,857 2.45 12/18/01 4 *
64,286 5.95 7/11/01 10 12
10,715 12.25 11/13/01 3 **
-------
459,286
=======
* Fully vested.
** The warrant for these shares vests upon performance of capital raising
activities by its holder.
Of the options and warrants indicated in the above table, 255,714 were
granted under the Company's option plan which was registered on Form S-8. The
remaining options and warrants were issued without registration under the
Securities Act, in reliance upon the exemption in Section 4(2) of the Securities
Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
During fiscal 2001 the Company acquired leisure and business travel
services, telecommunications call center, technology consulting, home
technology, and technology solutions businesses in connection with the
implementation of its business plan to acquire and enhance development stage
enterprises operating in the travel, entertainment and technology services
markets. Due to the fact that several of these business acquisitions were made
in the fourth quarter of fiscal 2001, the Company's revenue and expense amounts
in fiscal 2002 vary significantly from fiscal 2001. In addition, the Company
discontinued its commercial real estate business in fiscal 2001 and sold those
assets during fiscal 2002.
15
The following table summarizes results of continuing operations by business
segment for fiscal 2002 and 2001:
Year Ended June 30, 2002 Year Ended June 30, 2001
------------------------------------- -------------------------------------
Gross Gross
Revenue Profit (Loss) Revenue Profit (Loss)
----------- ----------- ----------- ----------- ----------- -----------
Aviation Travel Services .... $ 27,209,440 $ 908,547 $ (794,421) $ 11,179,473 $ 441,883 $ (1,500,721)
Home Technology ............. 2,877,804 1,020,118 (1,183,764) 974,602 47,725 (1,465,882)
Technology Solutions ........ 10,294,141 1,922,854 (609,099) 1,223,403 924,317 (289,499)
Telecomunications Call Center 63,380 63,380 (151,440) 229,615 229,615 (5,723,419)
Corporate ................... 279,101 279,101 (1,439,411) -- -- (12,078,569)
------------ ------------ ------------ ------------ ------------ ------------
$ 40,723,866 $ 4,194,000 $ (4,178,135) $ 13,607,093 $ 1,643,540 $(21,058,090)
============ ============ ============ ============ ============ ============
Results of Continuing Operations
The Company's revenue in the year ended June 30, 2002 was $40,723,866 compared
to $13,607,093 in 2001. The increase of $27,116,773 or 199% in 2002 is due to
the newly acquired businesses and the expanded charter aviation business. These
increases were partially offset by the termination of the aviation travel
service business' jet shuttle services and a decline in the call center
operations. Revenue reported in the Corporate segment relates to fees received
for business advisory services. The technology solutions segment results in
fiscal 2001 include $726,000 of revenue and gross profit related to business
advisory services. As noted above, business advisory services revenue and income
is classified in the Corporate segment starting in fiscal 2002.
During the three month period ended June 30, 2002, sales to Vacation
Express, a MyTravel Group company and a customer of the Company's aviation
travel services business, represented 63% of the Company's consolidated revenue.
For the year then ended, sales to Vacation Express represented 54% of the
Company's consolidated revenue.
Gross profit in 2002 was $4,194,000 compared to $1,643,540 in the prior
year, an increase of $2,550,460 or 155%. The increase in the current period is
due to the gross profit generated by the newly acquired businesses, the expanded
charter aviation business and elimination of the jet shuttle business, which
operated at a gross margin deficit. The Company reported a 10% overall gross
margin in 2002 as compared to 12% in 2001. The decrease in margin was due to the
increase in revenue in the Company's aviation travel services business, which
incurred start up costs associated with the launch of its Sanford, FL hub
program in fiscal 2002 and also experienced negative gross margins on certain of
its non-tour operator charter programs. In addition, business advisory services
revenue and gross profit decreased by $447,000 from fiscal 2001 to 2002, which
contributed to the decrease in the Company's overall gross margin percentage due
to the high margin on these services.
In the year ended June 30, 2002, the Company reported $28,825 of non-cash
expense related to the issuance of stock options and warrants, a decrease of
$6,856,376 from 2001. The Company incurred lower costs because it granted fewer
compensatory options and warrants in the current year.
Selling, general and administrative expenses-other in the year ended June
30, 2002 was $7,706,185 compared with $6,593,637 in fiscal 2001, an increase of
$1,112,548 or 17%. This increase is due to expenses of the newly acquired
businesses and increased staff in the aviation travel services business to
support its expanded charter operations partially offset by lower marketing
expenses, due to the termination of the jet shuttle service and reduced
corporate expenses. The reduction in corporate expenses is related to lower
staff costs, lower public and investor relations expenses, due in part to
settlement of a contract with a service provider, and lower legal and
professional services expenses. Selling, general and administrative
expenses-other as a percentage of revenue were reduced to 19% of revenue from
48% of revenue in 2001.
Bad debt expense increased to $264,641 in fiscal 2002 from $95,924 in
fiscal 2001, as a result of bad debts in the newly acquired businesses.
The Company's depreciation and amortization expense in the year ended June 30,
2002 was $385,678 as compared with $2,299,653 in the prior year. The decrease is
due primarily to the discontinuance of goodwill amortization ($2,030,630 in
2001) in accordance with FAS 142 offset partially by depreciation of the fixed
assets of newly acquired businesses.
16
In fiscal 2002, the Company incurred $297,972 of net interest expense
related to its debt portfolio, which increased from $668,000 at June 30, 2001 to
$3,260,652 at June 30, 2002.
In the year ended June 30, 2002, the Company recorded a net gain on
investments of $146,000 of which $421,000 relates to net losses on market value
adjustments of stock purchase warrants offset by a net realized gain of $567,000
on sales of securities. These results are reported primarily in the Corporate
segment results. The Company's operating results for 2002 also include a gain of
$164,691, primarily on the sale of certain home technology net assets to
companies that are presently operating these businesses as franchise locations.
Also, in fiscal 2001, the Company recorded non-cash expenses to reflect the
write off of the goodwill related to the DMM acquisition ($4,660,570),
pre-development costs of its Stratos Inns concept ($1,164,043), and Private
SeatsTM web site ($753,931).
The Company realized a gain of $575,824 on the sale of its discontinued
commercial real estate business in the quarter ended September 30, 2001.
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.
The Company experiences some seasonality in its aviation travel services
and technology solutions businesses. In fiscal 2002, the seasonality was not
apparent due primarily to the fact that the Vacation Express contract started in
December 2001 and increased revenue in the second half of the fiscal year. In
fiscal 2003, the Company expects that its combined revenue in the first and
fourth fiscal quarters will represent approximately 54% of its full year
revenue. The seasonality in the aviation 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 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.
During its closing procedures for the fiscal year ended June 30, 2002, the
Company discovered that certain accounts, including certain cash accounts,
prepaid expenses, accounts receivable and certain accrual accounts were not
adequately reconciled during the year at its aviation travel services business.
These accounts required adjustments totaling $1,464,246 to increase operating
expenses and properly state the related balances. These adjustments were
recorded during the year end closing process. The items that were not recorded
properly or reconciled in a timely manner related exclusively to flight program
operating costs and are incorporated in the discussion of operating results
above. A detailed review of the activity in these accounts during the year
indicated that adjustments were required to properly state the operating results
for prior quarters during the fiscal year ended June 30, 2002 for these errors.
An immaterial amount of this adjustment related to the fiscal year ended on June
30, 2001 and that amount is included in the adjustment to the quarter ended
September 30, 2001. The revised quarterly results are presented in Note 16 to
the Company's consolidated financial statements, presented elsewhere in this
document, and will be presented when these individual periods are presented in
future filings.
Liquidity and Capital Resources
The Company's net loss for the year ended June 30, 2002 of $4,295,311, an
increase in treasury stock of $707,756, as a result of the return of shares
pursuant to a settlement of a contract with an service provider, and unrealized
losses on marketable securities of $139,127 were partially offset by increases
to shareholders' equity related to a business acquisition, a capital
contribution, and the sale of Common Stock, resulting in a net decrease in
shareholders' equity of $2,997,249 for the year. This decrease was $2,304,249
excluding the impact of the adoption of FAS 142.
For fiscal 2002, continuing operations used $3,989,982 of cash and
discontinued operations provided $150,000 of cash. Note payable proceeds of
$2,652,488 and the sale of investments of $1,214,437 and common stock of
$858,500 offset the use of cash in operations and purchases of assets, resulting
in a net cash increase of $225,508 for the year. At June 30, 2002, the Company
had a working capital deficit of $1,438,819. At June 30, 2002 the Company held
cash and cash equivalents of $1,511,502 and investments of $813,554.
The Company's aviation travel service business reported an operating loss
of $794,000 for the year. However, for the fourth quarter of 2002, operating
income was $37,000 and earnings before interest, taxes, depreciation and
amortization was $89,000. The aviation travel service results were improved in
the fourth quarter of 2002 as a result of the Company's hub operation in
Sanford, FL offset by a loss of $427,000 on a two month scheduled charter
program between four western cities and two Mexican destinations. This loss was
17
incurred due to higher than anticipated operating costs related to the
substitution of the aircraft used to operate that program for a higher cost
aircraft. The Company continues to service its existing contracts and to market
complementary flights to further utilize the aircraft it has under contract and,
in July 2002 began a new program to provide service between several western
cities and destinations in Mexico for another major tour operator.
In the quarter ended September 30, 2001, the Company implemented a national
franchising program for its home technology business. Since its launch, the
Company has sold 14 geographic markets to franchisees, primarily in the south
and southeastern United States. During the year ended June 30, 2002, the Company
recognized revenue for the sale of 14 franchises sold. Total revenue from
franchise sales and royalties was $747,000 for the year ended June 30, 2002. For
the year ended June 30, 2002, the Company's home technology business reported an
operating loss of $1,184,000 due primarily to investments made in the
establishment and growth of the franchising program and operating losses in the
two markets that the Company presently operates, Charlotte, NC and Atlanta, GA.
For the quarter ended June 30, 2002 the home technology business reported a loss
of $528,000, an increase of $169,000 from the third quarter of fiscal 2002. The
higher loss is due to increased staffing to support franchisor operations and
lower sales in its two owned markets and in its franchise operation. Franchise
operation revenue decreased by $74,000 from the third quarter to the fourth
quarter as a result of a reduction in the number of franchises sold during the
last quarter of 2002 to two from five in the third quarter, offset partially by
increased royalties. Sales in the Company's two owned markets for the quarter
decreased by $51,000 from the previous quarter due to the impact of a customer
selectivity program in which certain builder relationships were terminated
earlier in the fiscal year, to allow the Company to focus on building
relationships with higher end builders and in the commercial market. The
continued implementation of the franchise plan, the development of new customer
relationships in its owned markets and cost control efforts are expected to
result in continued operating losses for the near term. In September 2002, the
Company closed on a transaction to sell its home technology business to
Lifestyle Innovations, Inc., a separate publicly traded company in which the
Company received a 79% interest. As a result of this transaction, the home
technology business raised $720,000 in cash, through September 2002, to continue
implementing its business plan to build a national operation.
In fiscal 2002, the Company's technology solutions business has grown
through the expansion of its products, services and its sales force while
reducing its operating expenses. These initiatives, focused on concurrent
revenue growth and cost control, have resulted in improved operating results in
each of the last four (4) quarters. During the quarter ended June 30, 2002, the
technology solutions business reported an operating loss of $34,000 and a
positive result of $23,000 excluding depreciation, interest and taxes (EBITDA).
In 2001, the technology solutions segment included business advisory revenue of
$726,000. In 2002 the Company's $279,000 of business advisory revenue is
classified in the Corporate segment.
The Company's corporate expense in the current year decreased from a year
ago due to the issuance of fewer stock options and warrants, staff reductions,
lower public and investor relations costs, including a benefit from the
resolution of a contract with a service provider, lower legal and professional
fees and other costs saving measures. In addition, The Company recorded $279,000
in revenue from business advisory services during the year ended June 30, 2002.
In 2001, business advisory revenue was included in the technology solutions
segment.
In addition to the operational improvements, in 2002 the Company raised in
excess of $2 million in debt financing and commenced a $1,000,000 private
placement sale of Common Stock. Through June 30, 2002, the Company had received
$876,000 from the private placement program. The remaining $124,000 was received
in August and September 2002. In September 2002, the Company received proceeds
of $250,000 from the private sale of LFSI stock. The Company believes that its
existing balances of cash and cash equivalents and investments, including the
proceeds received from the LFSI Transaction (a portion of which may or may not
be sold from time to time depending on market conditions and the effectiveness
of a LFSI registration statement), the September 2002 sale of LFSI stock and a
commitment received for $750,000 of additional funding from a private investment
bank will be sufficient to meet working capital and capital expenditure
requirements of our continuing operations through the end of fiscal 2003. If we
are unable to grow our business or improve our operating cash flows as expected,
we suffer significant losses on our investments or are unable to realize
adequate proceeds from those investments, including our holdings of LFSI stock,
or the investment bank is not able to meet its funding obligation to the
Company, 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.
18
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.
19
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are contained in this Item 7:
Independent Auditors' Report.
Consolidated Balance Sheets as of June 30, 2002 and 2001.
Consolidated Statements of Operations for the years ended June 30, 2002 and
2001.
Consolidated Statements of Changes in Shareholders' Equity for the years ended
June 30, 2002 and 2001.
Consolidated Statements of Cash Flows for the years ended June 30, 2002 and
2001.
Notes to the Consolidated Financial Statements.
20
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
eResource Capital Group, Inc. and Subsidiaries
Charlotte, North Carolina
We have audited the accompanying consolidated balance sheet of eResource Capital
Group, Inc. and Subsidiaries as of June 30, 2002, and the related consolidated
statements of operations, shareholders' equity and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. The Company's consolidated
financial statements as of and for the year ended June 30, 2001 were reported on
by other auditors whose report dated September 27, 2001, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as overall financial statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, the 2002 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of eResource
Capital Group, Inc. and Subsidiaries as of June 30, 2002, and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
/S/ CRISP HUGHES EVANS LLP
Charlotte North Carolina
September 13, 2002
21
eRESOURCE CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30,
--------------------------
2002 2001
--------------------------
ASSETS
Cash and cash equivalents............................. ................................ $ 1,511,502 $ 1,285,994
Accounts receivable, net of allowance for doubtful accounts of
$258,169 and $105,940, respectively ............................................. 3,135,270 2,018,159
Inventory ............................................................................. 210,514 125,970
Investments .......................................................................... 813,554 1,591,543
Prepaid expenses - compensation ....................................................... 123,400 627,570
Prepaid expenses - charter flight costs ............................................... 2,454,754 833,081
Prepaid expenses - other .............................................................. 340,141 219,935
------------- -------------
Total current assets ................................................... 8,589,135 6,702,252
Deferred costs and other assets....................................................... 321,199 319,172
Property and equipment, net ........................................................... 1,471,837 1,645,057
Goodwill, net.......................................................................... 18,489,884 17,898,207
------------- -------------
Total assets .......................................................... $ 28,872,055 $ 26,564,688
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable - current portion ....................................................... $ 407,221 $ 488,987
Notes and amounts due to affiliates.................................................... 144,440 336,052
Accounts payable and accurued expenses................................................. 6,147,405 4,553,304
Deposits and other liabilities ...................................................... -- 657,500
Unearned income ...................................................................... 3,328,888 1,161,056
------------- -------------
Total current liabilities............................................... 10,027,954 7,196,899
Notes payable ......................................................................... 2,853,431 179,046
Net liabilities of discontinued operations ............................................ -- 200,824
------------- -------------
Total liabilities....................................................... 12,811,385 7,576,769
------------- -------------
Shareholders' equity:
Common stock, $0.04 par value, 200,000,000 shares authorized,
12,381,463 and 10,833,390 issued and outstanding, respectively................ ... 495,259 433,335
Preferred stock, $0.01 par value, 10,000,000 shares authorized, none oustanding... -- --
Additional paid-in capital.......................... ............................ 114,040,111 111,957,090
Accumulated deficit.............................. ............................... (97,774,118) (93,478,807)
Accumulated other comprehensive (loss) income................. .................. (51,493) 87,634
Treasury stock at cost (92,643 and 5,133 shares, respectively)................... (719,089) (11,333)
------------- -------------
Total shareholders' equity ............................................. 15,990,670 18,987,919
------------- -------------
Total liabilities and shareholders' equity.............................. $ 28,872,055 $ 26,564,688
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
22
eRESOURCE CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30,
----------------------------
2002 2001
---- ----
Revenue
Services .................................................. $ 29,566,365 $ 12,364,348
Product sales ............................................. 11,157,501 1,242,744
------------ ------------
Total revenue ...................................... 40,723,866 13,607,093
Cost of revenue
Services .................................................. 26,868,834 1,148,009
Product sales ............................................. 9,661,032 10,815,544
------------ ------------
Total cost of revenue .............................. 36,529,866 11,963,553
------------ ------------
Gross profit ....................................... 4,194,000 1,643,540
Selling, general and administrative expenses - compensation
related to issuance of stock options and warrants ..... 28,825 6,885,201
Selling, general and administrative expenses - other ...... 7,706,185 6,593,637
Provision for bad debts ................................... 264,641 95,924
Depreciation and amortization ............................. 385,678 2,299,653
Write-off of goodwill ..................................... -- 4,660,570
Write-off of web site development costs ................... -- 753,931
Write-off of predevelopment costs ......................... -- 1,164,043
------------ ------------
Operating costs and expenses ....................... 8,385,329 22,452,959
------------ ------------
Operating loss ..................................... (4,191,329) (20,809,419)
Interest expense (income), net ............................ 297,972 (30,104)
(Gain) on sale of assets .................................. (164,691) --
(Gain) loss on investments, net ........................... (246,475) 278,775
------------ ------------
Loss from continuing operations .................... (4,178,135) (21,058,090)
Loss of discontinued operations ........................... -- (332,611)
Gain (loss) on disposal of discontinued operations ........ 575,824 (300,000)
------------ ------------
Loss before cumulative effect of change in
accounting principle ....................... (3,602,311) (21,690,701)
Cumulative effect of change in accounting principle ....... (693,000) --
------------ ------------
Net loss ........................................... $ (4,295,311) $(21,690,701)
============ ============
Basic and diluted net loss per share:
Loss from continuing operations ....................... $ (0.36) $ (3.02)
Loss of discontinued operations ....................... -- (0.05)
Gain (loss) on disposal of discontinued operations .... 0.05 (0.04)
Cumulative effect of change in accounting principle ... (0.06) --
------------ ------------
Net loss ........................................... $ (0.37) $ (3.11)
============ ============
Weighted average shares outstanding ....................... 11,520,096 6,962,924
============ ============
Weighted average shares outstanding, assuming dilution .... 11,520,096 6,962,924
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
23
eRESOURCE CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2002
Common Stock Additional
------------------------ Paid-In
Shares Amounts Capital
------------------------ ------------
Balance at June 30, 2000 ....................... 4,793,512 $ 191,740 $ 79,298,115
Comprehensive loss:
Net loss June 30, 2001 ......................... -- -- --
Unrealized gain on investments
available for sale .......................... -- -- --
------------- ------------- -------------
Comprehensive income (loss) ........... -- -- --
Sale of Common Stock ........................... 1,092,143 43,686 2,885,792
Purchase of Business ........................... 4,353,525 174,141 26,667,426
Exercise of options and warrants ............... 409,061 16,362 549,636
Issuance of common stock for services .......... 185,149 7,406 1,218,295
Issuance of treasury stock for services ........ -- -- (126,174)
Issuance of options and warrants ............... -- -- 1,464,000
------------- ------------- -------------
Balance at June 30, 2001 ....................... 10,833,390 $ 433,335 $ 111,957,090
Comprehensive loss:
Net loss June 30, 2002 ......................... -- -- --
Unrealized loss on investments
available for sale .......................... -- -- --
------------- ------------- -------------
Comprehensive income (loss) ........... -- -- --
Sale of Common Stock ........................... 1,251,429 50,057 808,443
Purchase of Business ........................... 172,103 6,884 767,075
Issuance of common stock for services .......... 53,112 2,124 178,163
Issuance of common stock for loan fee .......... 71,429 2,859 129,340
Issuance of treasury stock for services ........ -- -- --
Capital contribution ........................... -- -- 200,000
Return of shares pursuant to contract settlement -- -- --
------------- ------------- -------------
Balance at June 30, 2002 ....................... 12,381,463 $ 495,259 $ 114,040,111
============= ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
24
eRESOURCE CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2002
(CONTINUED)
Accumulated
Other
Accumulated Comprehensive Treasury
Deficit Income (Loss) Stock Total
-------------------------------------------------------------
Balance at June 30, 2000 ....................... $(71,788,106) $ -- $ (137,507) $ 7,564,242
Comprehensive loss:
Net loss June 30, 2001 ......................... (21,690,701) -- -- (21,690,701)
Unrealized gain on investments
available for sale .......................... -- 87,634 -- 87,634
------------ ------------ ------------ ------------
Comprehensive income (loss) ........... (21,690,701) 87,634 -- (21,603,067)
Sale of Common Stock ........................... -- -- -- 2,929,478
Purchase of Business ........................... -- -- -- 26,841,567
Exercise of options and warrants ............... -- -- -- 565,998
Issuance of common stock for services .......... -- -- -- 1,225,701
Issuance of treasury stock for services ........ -- -- 126,174 --
Issuance of options and warrants ............... -- -- -- 1,464,000
------------ ------------ ------------ ------------
Balance at June 30, 2001 ....................... $(93,478,807) $ 87,634 $ (11,333) $ 18,987,919
Comprehensive loss:
Net loss June 30, 2002 ......................... (4,295,311) -- -- (4,295,311)
Unrealized loss on investments
available for sale .......................... -- (139,127) -- (139,127)
------------ ------------ ------------ ------------
Comprehensive income (loss) ........... (4,295,311) (139,127) -- (4,434,438)
Sale of Common Stock ........................... -- -- -- 858,500
Purchase of Business ........................... -- -- -- 773,959
Issuance of common stock for services .......... -- -- -- 180,287
Issuance of common stock for loan fee .......... -- -- -- 132,199
Issuance of treasury stock for services ........ -- -- 3,604 3,604
Capital contribution ........................... -- -- -- 200,000
Return of shares pursuant to contract settlement -- -- (711,360) (711,360)
------------ ------------ ------------ ------------
Balance at June 30, 2002 ....................... $(97,774,118) $ (51,493) $ (719,089) $ 15,990,670
============ ============ ============ ============
25
eRESOURCE CAPITAL GROUP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
2002 2001
---------------------
Loss from continuing operations ......................................... $ (4,178,135) $(21,058,090)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization .................................... 385,678 2,299,653
Bad debt expense ................................................. 264,641 95,924
Common stock issued for services and settlement of contract ...... (31,315) 624,128
Stock purchase warrants received for services .................... (279,100) (723,156)
Affiliate balance converted on sale of home technology franchises (120,000) --
(Gain) loss on sale of investments ............................... (146,475) 278,772
(Gain) loss on sale of assets .................................... (164,691) --
Compensation expense related to stock options and warrants ....... 28,825 6,885,201
Write-off of goodwill ............................................ -- 4,660,570
Write-off of Web site development costs .......................... -- 753,931
Write-off of predevelopment costs ................................ -- 1,164,043
Changes in operating assets and liabilities:
Accounts and notes receivables .............................. (1,492,573) (380,370)
Inventory ................................................... (168,284) 24,347
Prepaid expenses ............................................ (1,784,406) (922,150)
Deferred costs and other assets ............................. (46,631) (124,119)
Accounts payable and accrued expenses ....................... 2,014,652 1,133,996
Deposits and other liabilities .............................. (440,000) 657,500
Unearned income ............................................. 2,167,832 1,036,758
------------ ------------
Cash used in continuing operations .......................... (3,989,982) (3,593,062)
Discontinued operations, net ..................................... 150,000 (5,021)
------------ ------------
Net cash used in operating activities ....................... (3,839,982) (3,598,083)
Purchase of property, plant and equipment ........................ (327,051) (107,150)
Sale of investments .............................................. 1,214,437 112,712
Sale of assets ................................................... (44,859) --
Cash (paid) acquired in connection with business acquisitions, net (271,991) 924,396
------------ ------------
Net cash provided by investing activities ................... 570,536 929,958
Notes payable proceeds ........................................... 2,652,488 228,597
Proceeds (repayments) of debt from affiliates .................... (2,270) 12,228
Principal debt repayments ........................................ (63,764) --
Capital contribution by shareholder .............................. 50,000 --
Sale of common stock ............................................. 858,500 3,292,707
------------ ------------
Net cash provided by financing activities ................... 3,494,954 3,533,532
------------ ------------
Net increase in cash and cash equivalents.................... 225,508 865,407
Cash and cash equivalents at begining period................. 1,285,994 420,587
------------ ------------
Cash and cash equivalents at end of period................... $ 1,511,502 $ 1,285,994
============ ============
Supplemental cash flow information - Cash paid during the period for:
Interest ......................................................... $ 95,225 $ 627,610
============ ============
Income taxes ..................................................... $ -- $ --
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
26
eRESOURCE CAPITAL GROUP, INC AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
These financial statements include the operations of eResource Capital
Group, Inc. ("RCG") and its subsidiaries (collectively the "Company"). At June
30, 2002, the Company operated businesses in the aviation travel services, home
technology, technology solutions and telecommunications call center segments in
the United States. In October 2001, the Company changed its name from
flightserv.com, Inc. to eResource Capital Group, Inc. to better reflect its plan
to acquire substantial interests in, operate and enhance the value of expansion
phase companies operating in the travel, entertainment and technology services
sectors. Prior to that time, the Company was engaged in the development of its
private aviation business and limited commercial real estate activities.
The Company experienced an operating loss of $4.3 million during fiscal 2002
and used cash of $3.8 million in operations during the year. This cash loss was
offset by the raising of debt and equity financing and the sales of investments.
At June 30, 2002, the Company has cash and cash equivalents of $1.5 million and
investments of $0.8 million. The Company believes that its existing balances of
cash and cash equivalents and investments, including the proceeds received from
the LFSI Transaction (a portion of which may or may not be sold from time to
time depending on market conditions and the effectiveness of a LFSI registration
statement), the September 2002 sale of LFSI stock, both as described and defined
in the Recent Business Developments section of Note 2 below, and a commitment
received for $750,000 of additional funding from a private investment bank will
be sufficient to meet the working capital and capital expenditure requirements
of our continuing operations through the end of fiscal 2003.
CONSOLIDATION
The Company's consolidated financial statements include the assets and
liabilities and results of operations of RCG and each business acquired by RCG
from the date of its acquisition through June 30, 2002. All significant
intercompany balances and transactions have been eliminated. Certain prior
period amounts have been reclassified to conform to the fiscal 2002
presentation.
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.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
o Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash approximates its fair value.
o Accounts receivable and accounts payable: Due to their short term nature,
the carrying amounts reported in the balance sheet for accounts receivable
and accounts payable approximate their fair value. The Company provides for
any losses through its allowance for doubtful accounts.
o Investments: The fair values for available-for-sale equity securities are
based on quoted market prices.
o Notes Payable: The carrying amount of the Company's notes payable
approximate their fair value.
27
During the three month period ended June 30, 2002, sales to Vacation
Express, a MyTravel Group company and a customer of the Company's aviation
travel services business, represented 63% of the Company's consolidated revenue.
For the year then ended, sales to Vacation Express represented 54% of the
Company's consolidated revenue. This concentration of revenue with Vacation
Express, and its sister company, Suntrips, Inc. ("Suntrips"), both part of the
MyTravel Group, increased in July 2002 with the beginning of a new scheduled
charter program for Suntrips.
INVENTORY
Inventory consists mainly of purchased-in components used in the Company's
Home Technology business. Inventory is recorded at the lower of cost or market
with cost being determined on a first-in, first-out basis.
INVESTMENTS
Investments, including certificates of deposit with maturities of greater
than three months, not readily marketable equity securities, and other
marketable securities, are classified as available for sale. Investment
securities that are not readily marketable include securities (a) for which
there is no market on a securities exchange or no independent publicly quoted
market, (b) that cannot be publicly offered or sold unless registration has been
effected under the Securities Act of 1933, or (c) that cannot be offered or sold
because of other arrangements, restrictions, or conditions applicable to the
securities or the Company. Certificates of deposit are recorded at cost plus
accrued interest. Marketable equity securities are recorded at estimated values
based on quoted market values for marketable securities of the 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 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 fiscal 2002 aggregated $421,000 versus $368,000
in fiscal 2001.
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 which extend the useful life
or add value to the asset are capitalized and then expensed over that asset's
remaining useful life.
Sales and disposals of assets are recorded by removing the related cost and
accumulated depreciation amounts with any resulting gain or loss reflected in
the statement of operations.
The carrying value of property and equipment and predevelopment costs is
reviewed for impairment whenever events or changes in circumstances indicate
that such amounts may not be recoverable. If such an event occurred, the Company
would prepare projections of future results of operations for the remaining
useful lives of such assets. If such projections indicated that the expected
future net cash flows (undiscounted and without interest) are less than the
carrying amounts of the property and equipment and the predevelopment costs, the
Company would record an impairment loss in the period such determination is
made. As a result of such review, the Company recorded charges of $753,931 and
$1,164,043 related to the write off of web site development costs of its private
aviation travel services business and predevelopment costs of its Stratos Inns
concept, respectively, during the year ended June 30, 2001.
28
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 Company's adoption of FAS 142 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.
Prior to the implementation of FAS 142, the Company evaluated goodwill for
impairment when events and circumstances indicated that the assets might be
impaired and recorded an impairment loss if the undiscounted cash flows
estimated to be generated by those assets were less than the carrying amount of
those assets. In cases where the undiscounted cash flows were less than the
carrying amount of the assets, the associated impairment losses recognized were
equal to the difference between the discounted cash flows and the carrying
amount of the assets. As a result of such evaluation in fiscal 2001, the Company
recorded a charge of $4,660,570 related to goodwill impairment in connection
with its acquisition of DM Marketing, Inc.
REVENUE RECOGNITION
Charter Travel Aviation
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 services work is completed in three phases -
pre-wiring, trim-out and then hardware installation. The Company invoices its
customers and records revenue as work is completed on each project. For alarm
monitoring service contracts sold by the Company, revenue is recognized only
when the contracts are sold to third party finance companies or as billed if the
Company holds and services the contract. The Company sells substantially all of
its alarm monitoring contracts immediately subsequent to the date the contracts
are signed by the customer.
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.
Technology Solutions
Internet website development services project revenue is recognized on a
percentage of completion basis for fixed fee contracts, based on the ratio of
costs incurred to total estimated costs for individual projects. Revenue is
recognized as services are performed for time and material contracts at the
applicable billing rates.
Unbilled revenue represents revenue earned under contracts in advance of
billings. Such amounts are normally converted to accounts receivable within 90
days. Unearned income represents 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.
29
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" which requires dual presentations of basic and diluted
earnings per share.
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 outstanding during the period. Options and warrants
to purchase 3,763,392 and 3,633,343 shares of Common Stock were outstanding at
June 30, 2002 and 2001, 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 2002 and 2001 as
the impact would have been anti-dilutive.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising expense
aggregated $378,004 and $493,917 for the years ended June 30, 2002 and 2001,
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."
Accordingly, deferred income taxes are recognized for the tax consequences of
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities. The measurement of deferred tax assets is
reduced, if necessary, by the amount of any benefits that, based on available
evidence, are not expected to be realized.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 2001, the Financial Accounting Standards Board issued FAS No. 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.
In June 2002, the Financial Accounting Standards Board issued FAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities". FAS 146
addresses the financial accounting and reporting for costs associated with exit
or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". FAS 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
when it is incurred and measured initially as fair value. The new guidance will
impact the timing of recognition and the initial measurement of the amount of
liabilities the Company recognizes in connection with exit or disposal
activities initiated after December 31, 2002, the effective date of FAS 146.
NOTE 2. GROUP BUSINESSES AND ACQUISITIONS
30
RECENT BUSINESS DEVELOPMENTS
On September 5, 2002 the Company closed the sale (the "LFSI Transaction")
of its subsidiary LST, Inc. to Lifestyle Innovations, Inc. ("LFSI"). LFSI is a
fully reporting company whose common stock is publicly traded on the over the
counter market. Pursuant to this transaction, LST, Inc. became a wholly-owned
subsidiary of LFSI and the Company received 16,000,000 shares of LFSI common
stock, which represents approximately 79% of the outstanding stock of LFSI at
the closing date. LFSI has agreed to complete a registration statement within 90
days of closing to register the shares of LFSI common stock received by the
Company in the LFSI Transaction. The transaction added $320,000 of cash and
$50,000 of other assets to the existing assets of Lifestyle. Additionally, in
September 2002 and subsequent to the closing of the LFSI Transaction, LFSI
received an additional $300,000 in equity funding from its private placement
program. The increase in the net assets of LFSI resulting from the LFSI
Transaction, approximately $620,000 as of September 30, 2002, will be reported
by the Company as minority interest. The Company will continue to consolidate
LFSI and report the portion of income or loss attributable to the minority
interest as an increase or decrease to the minority interest recorded.
In September 2002, the Company completed the private sale of 125,000 of
LFSI common stock that it received as a result of the LFSI Transaction to a
private investment bank. The Company sold these shares at $2.00 per share and
received $250,000 in proceeds as a result of this sale.
In September 2002, the Company's aviation travel services business received
$262,000 in grant proceeds from a government assistance program designed to
provide grants to companies whose businesses were impacted directly by the
events of September 11, 2001.
AVIATION TRAVEL SERVICES
The Company's aviation travel services business provides tour operators,
corporate travel departments, sports teams and casinos cost effective and
reliable charter air transportation. The Company acts as a program manager for
these customers by providing turnkey aircraft services including ground support
and aircraft fueling, passenger service and support, and real-time flight
tracking.
On August 25, 2000, the Company completed the acquisition of Internet
Aviation Services, Ltd. ("IASL") in accordance with a definitive purchase
agreement dated August 11, 2000, which provided for the exchange of 250,000
shares of the Company's Common Stock for all of IASL's common stock. On August
11, 2000, the 250,000 shares of common stock issued for IASL had a market value
of $984,375. Including direct acquisition costs, the aggregate purchase price
for IASL was $1,176,905 and the transaction was accounted for using the purchase
method of accounting. The excess value of the purchase price over the fair value
of IASL's net assets on the acquisition date aggregating $1,126,905 was
allocated to goodwill.
IASL was a new leisure and business travel services company offering charter
services. In October 2000, RCG formed a new wholly-owned subsidiary,
flightserv.com, Inc. ("flightserv"), which now operates the Company's aviation
travel services business.
HOME TECHNOLOGY
The Company's home technology business is a full service home technology
integration company providing complete installation and equipment for structured
wiring, home security, PC networking, home audio, home theater, central vacuum
and accent lighting. It offers these products to residential homeowners through
its relationships with home builders and to the commercial market. The Company
operates two company owned locations in Charlotte, NC and Atlanta, GA and has
franchise operations in 14 other markets in the south, southeast and Texas.
On April 3, 2001, the Company acquired LST, Inc. d/b/a Lifestyle
Technologies ("Lifestyle") in exchange for 1,153,525 shares of Common Stock
pursuant to certain stock purchase agreements. At June 30, 2002, Lifestyle had
met none of the performance goals related to contingent consideration provisions
of two of these stock purchase agreements. Including direct acquisitions costs,
the total purchase price aggregated $7,695,586 and the transaction was recorded
using the purchase method of accounting. The excess value of the purchase price
over the fair value of Lifestyle's net assets on the acquisition date
aggregating $8,069,669 was allocated to goodwill.
Michael D. Pruitt, President, CEO and Chairman of the Company, was a 3.2%
shareholder of Lifestyle prior to the acquisition by the Company. Avenel
Ventures, Inc., then a subsidiary of the Company, was a 3.5% shareholder of
Lifestyle prior to the acquisition by the Company.
31
On July 10, 2001, the Company acquired certain net assets and the business
of a home technology company in Atlanta, GA, now operated as Lifestyle
Technologies Atlanta, Inc. ("LSTA") for $1,255,000 which was paid in cash
($275,000), Common Stock (139,365 shares) and a four - year term 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 $1,207,669 which was
allocated to goodwill.
TECHNOLOGY SOLUTIONS
The Company's technology solutions business is the result of the
acquisitions of Avenel Alliance, Inc. ("Alliance") in February 2001 and Logisoft
Corp. (f/k/a Logisoft Computer Products Avenel Corp.), and its wholly-owned
subsidiary eStorefronts.net Corp. (together with Logisoft Corp., "Logisoft") in
June 2001. Avenel Alliance was a wholly-owned subsidiary of Avenel Ventures,
Inc. ("Avenel Ventures"), which was also acquired by the Company in February
2001.
The Company's technology solutions business provides integrated products and
services to assist customers in meeting their strategic technology initiatives.
The Company's products and services include distribution of third-party
published software titles to the educational market and corporate customers,
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.
On February 13, 2001, the Company acquired all of the Common Stock of Avenel
Ventures in exchange for 957,143 shares of Common Stock pursuant to a share
exchange purchase agreement dated as of November 8, 2000. The total purchase
price aggregated $6,834,000 and the transaction was accounted for using the
purchase method of accounting. The excess value of the purchase price over the
fair value of Avenel Ventures' net assets on the acquisition date aggregating
$5,610,144 was allocated to goodwill. The Avenel Ventures business forms the
core of the Company's current corporate staff, which incorporates its business
advisory activities. Michael D. Pruitt, the Company's current President, CEO and
Chairman, was an officer, director, and 4.9% shareholder of Avenel Ventures
prior to the acquisition. Melinda Morris Zanoni, the Company's Executive Vice
President, was an officer, director and 29.9% shareholder of Avenel Ventures at
the time of acquisition.
On June 19, 2001, the Company acquired Logisoft , in exchange of 785,714
shares of Common Stock pursuant to an Agreement and Plan of Merger. Also, during
fiscal 2002, the Company issued an additional 32,738 shares of Common Stock in
connection with the acquisition because Logisoft met certain performance goals
from September 30, 2001 through June 30, 2002. Including direct acquisition
costs, the total purchase price aggregated $5,504,879 and the transaction was
accounted for using the purchase method of accounting. The excess value of the
purchase price over the fair value of Logisoft's net assets on the acquisition
date aggregating $4,146,489 was allocated to goodwill. The aggregate purchase
price and goodwill were both adjusted in fiscal 2002 by $42,000 to reflect the
issuance of the earn-out shares.
TELECOMMUNICATIONS CALL CENTER
The Company operates a thirty-five (35) seat telecommunications call center
providing telemarketing, help desk and other services for Internet related and
other companies. The call center provides support to aviation travel services
businesses as a reservations and customer care center for airlines, tour
operators and for internal programs for which the Company takes reservations
from travelers.
On September 7, 2000, the Company completed the acquisition of DM Marketing,
Inc. ("DMM") in accordance with a definitive purchase agreement dated August 16,
2000, which provided for the exchange of 1,207,143 shares of the Company's
Common Stock for all of the common stock of DMM. On August 16, 2000, the
1,207,143 shares of common stock issued for DMM had a market value of
$5,281,250. Including direct acquisition costs, the aggregate purchase price for
DMM was $6,210,897 and the transaction was accounted for using the purchase
method of accounting. The excess value of the purchase price over the fair value
of DMM's net assets on the acquisition date aggregating $5,722,267 was allocated
to goodwill. As of June 2001, the unamortized balance of the DMM goodwill was
written off due to significant reductions in the prospects for this business.
Michael D. Pruitt, the Company's current President, CEO and Chairman, was
an officer, director and a 50% shareholder of DMM at the time it was acquired by
the Company. Mr. Pruitt was not an officer, director, or shareholder of RCG
prior to its acquisition of DMM.
32
STRATOS INN CONCEPT
The Company owns the Stratos Inns business concept and during fiscal 2001
the Company held a lease on approximately two acres at the Dekalb-Peachtree
Airport in Dekalb County, Georgia (the "PDK Property"). The PDK Property and
similar properties at other general aviation airports provided an opportunity
for Stratos Inns or a strategic partner to develop and provide a variety of
lodging and related hospitality services to private aviation pilots and
passengers. The Company was declared in default of the lease by the landlord in
October 2000 on the basis that it did not commence construction on the PDK
property. Due to its limited available capital and inability to secure a hotel
management partner, the Company determined it was unlikely that the Company
would be able to complete the construction of a hotel facility within the time
constraints of its property lease or to obtain a lease extension from the
landlord. In December 2000, the Company recorded a non-cash charge of $1,164,000
to write off its PDK and Stratos Inns investments. The Company has no plans to
develop the Stratos Inns concept.
PRO FORMA RESULTS OF OPERATIONS
Following is the unaudited pro forma consolidated financial information
reflecting the Company's acquisitions of IASL, DMM, Avenel, Lifestyle and
Logisoft as if such acquisitions had occurred as of the beginning of fiscal 2001
(in thousands, except per share amounts and weighted average shares):
2001
----------
Revenue................................ $ 22,591
Net loss from continuing operations.... $ (30,835)
Net loss............................... $ (31,468)
Basic and diluted net loss per share... $ (3.08)
Weighted average shares................ 10,232,245
DISCONTINUED OPERATIONS
Residential Real Estate
Effective January 1, 1999 the Company discontinued its residential real
estate development operations. Residential real estate operations included
developed lots, undeveloped land, and equity investments in residential real
estate development companies, partnerships, and joint ventures. In fiscal 2001,
the Company recorded a $300,000 loss on disposal of discontinued operations to
reflect its disposal of these assets.
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, GA
area, classifying the operating results for this business, a loss of $332,000,
as loss from discontinued operations. In May 2001, the Company entered into a
contract to sell its two shopping centers which provided for closing on August
31, 2001. 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 the quarter ended
September 30, 2001.
33
NOTE 3. INVESTMENTS
Investments consist of the following at June 30, 2002 and 2001:
June 30, 2002 June 30, 2001
------------- -------------
Net Net
Unrealized Fair Unrealized Fair
Cost (Loss) Value Cost Gains Value
------ ----- ------ ----- ------ -----
Equity securities ..... $ 711,696 $ (51,493) $ 660,203 $ 1,019,716 $ 87,634 $ 1,107,350
Certificates of deposit 51,879 -- 51,879 99,051 -- 99,051
----------- ----------- ----------- ----------- ----------- -----------
$ 763,575 $ (51,493) 712,082 $ 1,118,767 $ 87,634 1,206,401
=========== =========== =========== ===========
Stock purchase warrants 101,472 385,142
----------- -----------
$ 813,554 $ 1,591,543
=========== ===========
The Company's certificates of deposit at June 30, 2002 were pledged as
collateral security for letters of credit for an office space lease and a trade
credit line. As of June 30, 2002, $350,000 of the Company's equity securities
and $98,000 of its stock purchase warrants related to Team Sports Entertainment,
Inc.
The unrealized loss on equity securities at June 30, 2002 consists of unrealized
accumulated losses of $96,000 offset by unrealized accumulated gains of $45,000.
NOTE 4. PROPERTY AND EQUIPMENT
At June 30, 2002 and 2001 property and equipment consists of the following:
June 30,
----
2002 2001
---- ----
Land, buildings and improvements $ 381,992 $ 314,209
Furniture and fixtures ......... 430,364 512,590
Computers and office equipment . 1,154,711 730,846
Software ....................... 251,499 180,790
Showroom (home technology) ..... 102,468 20,000
Vehicles (home technology) ..... 12,074 --
----------- -----------
2,333,108 1,758,435
Accumulated depreciation ....... (861,271) (113,378)
----------- -----------
$ 1,471,837 $ 1,645,057
=========== ===========
NOTE 5. GOODWILL
The changes in goodwill, by business segment, for the fiscal year ended June
30, 2002, are as follows:
Aviation
Travel Technology Home
Services Solutions Technology Corporate Total
-------- --------- ---------- --------- -----
Balance at June 30, 2001 ................ $ 939,088 $ 8,259,991 $ 7,699,128 $ 1,000,000 $ 17,898,207
Cumulative effect of change in accounting
principle (adoption of FAS 142) ...... -- (693,000) -- -- (693,000)
------------ ------------ ------------ ------------ ------------
Balance on July 1, 2001 ................. 939,088 7,566,991 7,699,128 1,000,000 17,205,207
Goodwill acquired during period ......... -- -- 1,207,669 -- 1,207,669
Other goodwill adjustments .............. -- 63,684 13,324 -- 77,008
------------ ------------ ------------ ------------ ------------
Balance at June 30, 2002 ................ $ 939,088 $ 7,630,675 $ 8,920,121 $ 1,000,000 $ 18,489,884
============ ============ ============ ============ ============
34
Goodwill was reduced by $693,000 in the 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 Avenel
Alliance.
Goodwill allocated to the Corporate segment relates to business advisory
activities that were acquired by the Company as a part of the acquisition of
Avenel Ventures in February 2001 and integrated into Corporate.
In July 2001, the Company acquired LSTA, which resulted in the recording of
$1,207,669 in goodwill. During fiscal 2002, goodwill increased by $42,000 in the
technology solutions business as a result of the issuance of 32,738 shares of
Common Stock in accordance with the contingent consideration provisions of the
related acquisition agreement. The remaining goodwill adjustments in fiscal 2002
relate to resolutions of contingencies that existed as of the dates that the
related businesses were acquired by the Company.
Reported net income (loss) adjusted for the amounts of goodwill amortization
recorded by the Company prior to the adoption of FAS 142 is as follows:
Year Ended June 30,
2002 2001
------------- -------------
Reported (loss) loss before cumulative effect of change
in accounting principle ............................. $ (3,602,311) $ (21,690,701)
Add back: Goodwill amortization .......................... -- 2,030,630
------------- --------------
Adjusted (loss) before cumulative effect of change in
accounting principle ............................. (3,602,311) (19,660,071)
Cumulative effect of change in accounting principle ...... (693,000) --
------------- --------------
Adjusted net (loss) ............................... $ (4,295,311) $ (19,660,071)
============= ==============
Basic and diluted net income (loss) per share:
Reported (loss) before cumulative effect of change in
accounting principle .................................. $ (0.31) $ (3.11)
Add back: Goodwill amortization .......................... -- 0.26
------------- --------------
Adjusted (loss) before cumulative effect of change in
accounting principle ............................. (0.31) (2.85)
Cumulative effect of change in accounting principle ...... (0.06) --
------------- --------------
Adjusted net (loss) ................................. $ (0.37) $ (2.85)
============= ==============
The effect of the adoption of FAS 142 on the quarter ended September 30,
2001 was to increase the Company's reported net loss, restated as described in
Note 16, of $1,748,914 ($0.15 per share) by the amount of the cumulative effect
of change in accounting principle measured as of July 1, 2001, $693,000 ($0.06
per share), to $2,441,914 ($0.21 per share).
35
NOTE 6. NOTES PAYABLE
Notes payable consists of the following at June 30, 2002 and 2001:
June 30,
2002 2001
---- ----
Note payable - due on demand bearing interest at the prime rate plus 1.0% and
secured by assets pledged by an affiliate of the Company ................................. $ 100,000 $ --
Note payable - unsecured and due on demand ............................................... 55,000 --
Notes payable - due in August 2003 with interest imputed at 8% and unsecured (3) ......... 462,500 57,500
Note payable - due in August 2003 with interest at 10% and collateralized by certain home
technology assets (3) .................................................................... 300,000 --
Note payable - due in August 2003 with interest at 12% and unsecured ..................... 381,782 425,000
Note payable - due in August 2003 with interest at 10% and unsecured (3) ................. 200,000 --
Note payable - due in August 2003 with interest at 12% and collateralized by certain......
home technology accounts receivable and inventory (1) .................................... 650,000 --
Note payable - due in monthly installments of $3,000 and a balloon payment in July 2005,
interest payable at 8.00% and collateralized by home technology accounts receivable....... 217,000 --
Capital lease obligation at 12% due in monthly installments of $710 through September 2004 11,498 --
Mortgage payable to a bank in monthly installments of $1,751, including interest
at 7.96% through October 2015 and collateralized by a building ........................... 179,271 185,533
Note payable - $200,000 due December 31, 2002 and $600,000 due December 31, 2003
with interest at 12% and collateralized by certain aviation travel service
business assets, less discount of $96,399 (2) ............................................ 703,601 --
----------- -----------
3,260,652 668,033
Less current maturities, including demand notes .......................................... (407,221) (488,987)
----------- -----------
Long-term portion ........................................................................ $ 2,853,431 $ 179,046
=========== ===========
(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 $4.55 of
outstanding principal and interest.
(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. The Company can force the debt holder to convert to stock at
$7.00 per share under certain conditions.
(3) The principal and accrued interest on this note payable are convertible to
share of Common Stack 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.
Future maturities of the mortgage payable and notes payable are as follows at
June 30, 2002:
Note
Fiscal Year Mortgage payable Total
----------- -------- ------- -----
2003 $ 7,023 $ 400,198 $ 407,221
2004 7,603 2,632,582 2,640,185
2005 8,231 36,000 44,231
2006 8,910 109,000 117,910
2007 9,646 -- 9,646
Thereafter 137,858 -- 137,858
----------- ----------- -----------
$ 179,271 $ 3,177,780 3,357,051
=========== ===========
Discount (96,399)
-----------
$ 3,260,652
===========
36
NOTE 7. INCOME TAXES
Deferred income tax assets and (liabilities) consist of the following as of
June 30, 2002 and 2001:
June 30,
2002 2001
---- ----
Deferred income tax assets:
Warrants and stock options ............................. $ 18,957,496 $ 18,957,496
Net operating loss carryforwards ....................... 14,850,202 14,458,697
Other .................................................. 271,513 229,605
------------ ------------
Total deferred income tax assets ................... 34,126,011 33,645,798
Deferred income tax liabilities - property and equipment (167,057) (167,057)
------------ ------------
Net deferred income tax assets ......................... 33,958,954 33,478,741
Deferred income tax asset valuation allowance .......... (33,958,954) (33,478,741)
------------ ------------
Net deferred income tax assets $ - $ -
============ =============
A reconciliation of the Company's effective income tax rate (-0-%) to the
statutory income tax rate (39%) is as follows:
Year Ended June 30,
-------------------
2002 2001
---- ----
Federal tax benefit at statutory rate $ (1,460,406) $ (7,374,838)
State tax benifit, net of federal (214,766) (1,084,535)
Permanent differences 303,672 4,358,525
Adjustment of net operationg loss 891,286 --
Change in deferred tax asset valuation
allownce 480,214 4,100,848
-------------- --------------
Income tax expense - actual $ -- $ --
============== ==============
As of June 30, 2002 the Company had approximately $38,000,000 of net
operating loss carry forwards (NOL's) for federal income tax purposes, which
expire between 2019 through 2022. A deferred income tax asset valuation
allowance has been established against all deferred income tax assets as
management is not certain that the deferred income tax assets will be realized.
In addition, due to substantial limitations placed on the utilization of net
operating losses following a change in control, utilization of such NOL's could
be limited.
In fiscal 2001, the Company received a preliminary 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 has appealed. At June 30, 2002, the Company had
recorded a federal tax liability of $305,830 related to such assessment.
NOTE 8. UNEARNED INCOME
Following is a summary of unearned income at June 30, 2002 and 2001:
June 30,
----
2002 2001
---- ----
Charter flight revenue $3,223,969 $1,069,566
Other unearned income 104,919 91,490
---------- ----------
$3,328,888 $1,161,056
========== ==========
NOTE 9. COMMON STOCK AND PAID IN CAPITAL
In fiscal 2002, the Company issued 139,365 shares of restricted Common Stock
in connection with the acquisition of LSTA and 32,738 shares of restricted
Common Stock to management of Logisoft in exchange for Logisoft reaching certain
performance criteria set forth in the purchase agreement governing the Company's
acquisition of Logisoft.
During the year ended June 30, 2002, the Company issued 54,746 shares of
restricted Common Stock in exchange for consulting and legal services and as a
reimbursement of expenses for one employee. Included in this amount are 10,884
shares issued to two directors of the Company as reimbursement for their service
to the Company as directors.
In December 2001, the Company issued 71,429 shares of restricted Common
Stock as a loan origination fee.
In the period from December 2001 to June 30, 2002, the Company issued an
aggregate of 1,251,429 shares of restricted Common Stock in connection with the
Company's private placement sale of Common Stock at $0.70 per share. Through
June 30, 2002, the proceeds raised in this private placement were $858,500 net
of direct expenses.
37
On June 17, 2002 the Company implemented a reverse stock split exchanging
one share of Common Stock for every seven shares held by the Company's
stockholders as of the close of business on June 14, 2002. As a result, an
adjustment was recorded to reduce the recorded amount of common stock and
increase additional paid in capital, each by $2,600,014. The reverse stock split
was approved by the Company's shareholders at its annual meeting held on May 17,
2002. All of the share amounts in these financial statements have been adjusted
for this reverse stock split.
During fiscal 2002, the Company received a capital contribution of $200,000
in connection with the launch of its national franchising program for its home
technology business.
During fiscal 2002, the Company terminated a public relations contract
pursuant to which it had issued 132,000 shares of restricted Common Stock during
fiscal 2001. Pursuant to the terms of the settlement, 89,143 shares were
returned to the Company and were placed in treasury stock as of June 30, 2002.
In August 2000, the Company sold 1,010,000 shares of restricted Common Stock
at $2.625 per share in a private placement transaction. After fees and expenses,
the Company realized $2,409,000 from the private placement.
In January and February 2001, the Company raised $575,000 in a private
placement sale of 41,071 units. Each unit consists of 1) two shares of
restricted Common Stock, 2) a warrant to purchase two shares of restricted
Common Stock at $21 per share, based on certain criteria, that expires 12 months
after the shares underlying the warrant can be sold pursuant to an effective
registration statement under the Securities Act as amended; 3) a warrant to
purchase two shares of restricted Common Stock at $28 per share, based on
certain criteria, that expires in 24 months after the shares underlying the
warrants can be sold pursuant to an effective registration statement under the
Securities Act.
In fiscal 2001, the Company issued 4,353,525 shares of restricted Common
Stock in connection with the acquisition of IASL, DMM, Avenel, Lifestyle, and
Logisoft.
In fiscal 2001, the Company issued an aggregate of 110,292 shares of
restricted Common Stock, including 57,143 treasury shares, in exchange for
legal, strategic acquisition, franchise and other consulting services from third
parties and issued 132,000 shares of restricted Common Stock in connection with
a one year contract with a public relations and investor relations consultant.
The Company recorded $624,128 of expense related to such issuances.
In fiscal 2001, the Company issued an aggregate of 409,061 shares of Common
Stock in connection with the exercise of options and warrants.
NOTE 10. 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 FAS 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 FAS No. 123.
At the July 11, 2000 meeting, the shareholders approved the Company's 2000
Stock Option Plan (the "Option Plan"). The Company's Option Plan provides for
the granting of either incentive stock options or non-qualified options to
purchase shares of the Company`s Common Stock to provide incentives to
employees, directors and other individuals or companies at the discretion of the
Board of Directors. The 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 or less after the date of grant unless
otherwise specified by the Board of Directors. At the January 10, 2001 annual
shareholders meeting, the shareholders increased the number of shares available
for the granting of incentive stock options under the Option Plan from
10,000,000 to 20,000,000 shares.
In 2002, the Company issued options to purchase 255,715 shares of Common
Stock to certain employees, officers and directors under the Option Plan versus
1,347,611 options in fiscal 2001. In addition, in fiscal 2001, the Company
issued non qualified options to purchase 125,000 shares of Common Stock to an
employee. The Company recognized $1,125,000 of compensation expense in
connection with its 2001 option grants to employees due primarily to the
granting of options to two key management of the Company's aviation travel
services business with exercise prices below the Company's stock price on the
date of grant.
38
Also, in fiscal 2001, the Company issued options and warrants to purchase
428,571 shares of Common Stock in exchange for venture capital and investment
banking services.
In fiscal 2002, the Company cancelled 329,237 stock options, primarily in
connection with employee terminations.
In fiscal 2001, options to purchase 285,714 shares of Common Stock at an
exercise price of $2.80, 8,571 shares at an exercise price of $1.75, and 14,286
shares at an exercise price of $4.90 were exercised. Also, in May 2001, options
to purchase 57,143 shares of Common Stock at an exercise price of $3.08 were
exercised on a cashless basis. The Company recognized $151,000 of expense in
fiscal 2001 in connection with these cashless exercises.
The following table summarizes the outstanding options at June 30, 2002 and
2001:
June 30, 2002 June 30, 2001
------------- -------------
Vesting Vesting
Exercise Term Period Exercise Term Period
Shares Price (Years) (Months) Shares Price (Years) (Months)
------- ------ ------ -------- ------- --- ------ -------
87,857 $ 1.26 10 * 48 * -- $ -- -- --
479,286 1.75 to 1.96 10 12 to 48 420,000 1.75 10 12
328,571 4.90 10 12 442,857 4.90 10 12 to 48
142,857 5.25 10 -- 142,857 5.25 10 --
8,328 5.46 10 18 31,518 5.46 10 18
35,714 5.88 10 36 to 42 68,572 5.88 10 36 to 42
96,476 5.95 10 12 to 38 146,807 5.95 10 12 to 38
38,571 6.65 10 12 to 46 38,571 6.65 10 12 to 46
14,286 7.00 10 46 14,286 7.00 10 46
71,429 10.08 10 -- 71,429 10.08 10 --
17,857 21.00 10 -- 17,857 21.00 10 --
--------- ---------
1,321,232 1,394,754
========= =========
* 35,714 non-qualified options issued to an employee in December 2001 have a
three-year term and are fully vested.
In fiscal 2002 and 2001, the Company issued warrants to purchase 203,571 and
880,535 shares of its Common Stock, respectively, in exchange for consulting and
legal services and as debt issuance costs. In addition, in fiscal 2001 the
Company issued warrants in connection with Common Stock private placement
transactions. Certain of the warrants issued contain registration rights
provisions. In fiscal 2001, the Company recognized compensation expense of
$5,609,202 in connection with the issuance of warrants, including $100,000 in
fiscal 2001 related to the re-pricing of warrants to purchase 71,429 shares of
Common Stock that were exercised in fiscal 2001.
In fiscal 2001, the Company cancelled warrants to purchase 719,286 shares of
Common Stock.
39
The following table summarizes the outstanding warrants at June 30, 2002 and
2001:
June 30, 2002 June 30, 2001
------------- ---------
Exercise Term Exercise Term
Shares Price (Months) Shares Price (Months)
------ ----- -------- ------ ----- --------
793,768 $ 0.28 54 793,768 $ 0.28 54
150,000 1.05 to 1.75 36 - - -
42,857 2.45 36 - - -
57,143 3.50 120 57,143 3.50 120
679,106 5.25 120 679,106 5.25 120
14,286 5.67 48 14,286 5.67 48
1,429 7.00 -- 1,429 7.00 --
7,143 7.70 36 7,143 7.70 36
96,428 12.25 -- 85,714 12.25 --
82,143 21.00 * 82,143 21.00 *
517,857 28.00 120* 517,857 28.00 120*
----------------- ----------------
2,442,160 2,238,589
================= ===============
* All of the $21.00 warrants and 82,143 of the $28.00 warrants in the above
table have a term that is variable, subject to the market value of the
Common Stock and other conditions.
All of the warrants issued by the Company are exercisable, except for 79,377
with an exercise price of $0.28 that vest in December 2002, 14,286 with an
exercise price of $5.67 that vest over 3 years, 150,000 that vest in equal
quarterly amounts in September 2002, December 2002, March 2003 and June 2003 and
16,667 that vest upon the holder meeting the requirements of a capital raise
commitment.
In January 2001, the Company entered into a settlement agreement (the
"Corners Settlement") with Four Corners Capital, LLC ("Four Corners") and DC
Investment Partners Exchange Funds, L.P. ("DC Fund"), regarding, among other
issues, the termination of Four Corners' investment banking agreement with the
Company and the resolution of disputed issues related to the stock purchase
agreement and related documents entered into between the Company and Four
Corners in January 2000. An investor of Four Corners was formerly a Director of
the Company. The Corners Settlement provides for, among other things, (1) the
cancellation of warrants to purchase 28,571 and 142,857 shares of Common Stock
with exercise prices of $12.25 and $28.00, respectively, outstanding at June 30,
2000; (2) the issuance of an option to purchase 142,857 shares of Common Stock
at an exercise price of $5.25 which expires in January 2006; (3) the amendment
of Four Corners' warrants to purchase 371,409 shares of Common Stock outstanding
at December 31, 2000 reducing the exercise prices of $42.42 and $68.39 to $5.25
and increasing the term from 18 to 60 months expiring in January 2006; (4) the
amendment of a warrant to purchase 17,686 shares of Common Stock outstanding at
June 30, 2000 held by DC Fund which amendment reduced the exercise price from
$68.37 to $5.25 and extends the expiration to January 2006; and (5) the issuance
of 28,571 shares of restricted Common Stock to Four Corners.
In February 2001, the Company entered into a settlement agreement ("the
Acqua Settlement) with the Acqua Wellington Value Fund, Ltd. ("Acqua") resolving
disputed issues arising out of the stock purchase agreement and related document
entered into between the Company and Acqua in January 2000. The Acqua Settlement
provides for, among other things, the amendment to Acqua's warrants to purchase
232,868 shares of Common Stock outstanding at December 31, 2000 and the
amendment of Acqua's registration rights. The warrants' exercise prices were
reduced from $42.42 and $68.39 to $5.25 and the expiration terms were reduced
from 18 months to 12 months after the shares underlying the warrants can be sold
pursuant to an effective registration statement under the Securities Act of 1933
as amended. In connection with the Corners Settlement and the Acqua Settlement,
the Company recorded $182,000 of compensation expense.
On June 26, 2000, the Company entered into a series of agreements with a
supplier of technical, marketing and programming services for the provision of
services related to the development of its Private SeatsTM program. These
agreements provided that the supplier was to vest in warrants to purchase at
combined total of approximately 794,000 shares of the Company's Common Stock at
$0.28 per share, which are reflected in the warrant table above. The vesting
dates related to these warrants were December 31, 2000, 2001 and 2002. Due to
the termination of its Private SeatsTM program, during fiscal 2001, the Company
expensed $5.2 million in connection with these warrants. The Company has
questioned whether the supplier has actually vested in the warrants due to the
fact that the program was terminated and the supplier was not required to
perform the services among other considerations. The Company is presently in
negotiations with this supplier to terminate these agreements and eliminate the
related warrants. At this time, the Company cannot predict what the outcome of
these negotiations will be.
41
Following is a summary of certain information regarding the Company's
options and warrants for fiscal 2002 and 2001:
2002
----
Weighted
Weighted Weighted Average
Average Average Remaining
Exercise Grant-date Contractual
Number Price Fair Value Life
------- ------ ----------- -----
Outstanding at beginning of year ... 3,633,343 $ 10.57
-----------
Grants during the year:
Exercise price greater than market 387,143 $ 2.66 $ 1.26 6.1 yrs.
Exercise price equal to market ... 72,143 $ 1.27 $ 0.98 6.0 yrs.
Exercise price below market` ..... -- -- $ -- --
-----------
Total granted .................. 459,286 $ 0.79 $ -- --
-----------
Exercised during the year .......... -- $ 0.74 $ -- --
Cancelled during the year .......... 329,237 $ 4.07 $ -- --
-----------
Outstanding at end of year:
Exercisable at $0.28 to $1.96 .... 1,510,912 $ 0.95 -- 4.4 yrs.
Exercisable at $2.94 to $7.00 .... 1,459,623 $ 5.14 -- 3.3 yrs.
Exercisable at $7.70 to $12.25 ... 175,000 $ 11.17 -- 0.9 yrs.
Exercisable at $14.00 to $21.00 .. 100,000 $ 21.00 -- 1.3 yrs.
Exercisable at $28.00 ............ 517,857 $ 28.00 -- 0.7 yrs.
-----------
Total outstanding ............... 3,763,392 $ 7.31
===========
Exercisable at end of year:
Exercisable at $0.28 to $1.96 .... 1,170,105 $ 0.85 -- --
Exercisable at $2.94 to $7.00 .... 1,356,338 $ 5.08 -- --
Exercisable at $7.70 to $12.25 ... 167,858 $ 11.13 -- --
Exercisable at $14.00 to $21.00 .. 100,000 $ 21.00 -- --
Exercisable at $28.00 ............ 517,857 $ 28.00 -- --
----------
Total exercisable .............. 3,312,158 $ 7.95
===========
42
2001
----
Weighted
Weighted Weighted Average
Average Average Remaining
Exercise Grant-date Contractual
Number Price Fair Value Life
------- ------ ----------- -----
Outstanding at beginning of year ... 3,206,446 $ 20.37
-----------
Grants during the year:
Exercise price greater than market 423,236 $ 14.49 $ 0.03 --
Exercise price equal to market ... 772,233 $ 5.04 $ -- --
Exercise price below market` ..... 1,479,106 $ 3.29 $ 0.46 --
-----------
Total granted .................. 2,674,575 $ 5.53 $ -- --
-----------
Exercised during the year .......... 444,286 $ 5.18 $ -- --
Cancelled during the year .......... 1,803,392 $ 28.49 $ -- --
-----------
Outstanding at end of year:
Exercisable at $0.28 to $1.96 .... 1,213,768 $ 0.77 $ -- 3.2 yrs.
Exercisable at $2.94 to $7.00 .... 1,637,432 $ 5.25 $ -- 6.0 yrs.
Exercisable at $7.70 to $12.25 ... 164,286 $ 11.13 $ -- 9.3 yrs.
Exercisable at $14.00 to 21.00.... 100,000 $ 21.00 $ -- 3.1 yrs.
Exercisable at $28.00 ............ 517,857 $ 28.00 -- 8.5 yrs.
Total outstanding ............... 3,633,343 $ 10.57
===========
Exercisable at end of year:
Exercisable at $0.28 to $1.96 .... 871,352 $ 0.84 $ -- --
Exercisable at $2.94 to $7.00 .... 1,093,262 $ 5.18 $ -- --
Exercisable at $7.70 to $12.25 ... 164,286 $ 11.13 $ -- --
Exercisable at $14.00 to $21.00 .. 100,000 $ 21.00 -- --
Exercisable at $28.00 ............ 517,857 $ 28.00 -- --
Total exercisable .............. 2,746,757
===========
Pro forma information regarding net loss is required by FAS No. 123, which
also requires that the information be determined as if the Company had accounted
for its employee stock options granted subsequent to July 1, 1996 under the fair
value method of that statement. The fair value for these options was estimated
at the date of grant using the Black-Scholes Model with the following weighted
average assumptions for fiscal 2002; risk-free interest rate range of 3.62% to
4.76%; no dividend yield; volatility factor of the expected market price of the
Company's Common Stock of .974; and an expected life of the option of 3 to 5
years. The weighted average grant date fair value of options granted in 2002 was
$0.24 per share.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can naturally affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of the Company's employee stock options.
The Company's pro forma net loss and net loss per share assuming
compensation cost was determined under FAS No. 123 for all options would have
been the following for the years ended June 30, 2002 and 2001:
43
For The Year Ended June 30,
--------------------------
2002 2001
---- ----
Net loss from continuing operations ............... $ (5,504,346) $ (24,245,948)
Net loss from discountinued operations ............ -- (632,611)
Gain on disposal of discontinued operations ....... 575,824 --
Cumulative effect of change in accounting principle (693,000) --
------------- --------------
Net loss .......................................... $ (5,621,522)$ (24,878,559)
============= ==============
Net loss per share from continuing operations ..... $ (0.48) $ (3.15)
Net loss per share from discountinued operations .. -- (0.07)
Net loss per share from discontinued operations ... 0.04 --
Net loss per share from accounting principle change (0.05) --
------------- --------------
Net loss per share ................................ $ (0.49) $ (3.22)
============= ==============
Note 11. GENERAL AND ADMINISTRATIVE EXPENSE - OTHER
Following is a summary of the Company's general and administrative expenses
for the years ended June 30, 2002 and 2001:
Year ended June 30,
------------------
2002 2001
---- ----
Compensation expense $ 4,153,266 $ 2,605,316
Legal and professional fees 604,203 1,094,928
Public and investor relations 10,674 728,428
Marketing and advertising 378,004 493,917
Rent expense 579,357 334,837
Insurance 364,448 259,447
Telecommunications 313,183 166,474
Office and printing expense 457,848 374,393
Travel and entertainment 375,768 242,198
Other 469,434 293,699
-------- --------
$ 7,706,185 $ 6,593,637
======== ========
Note 12. RELATED PARTY TRANSACTIONS
In fiscal 2002 and 2001, the Company's CEO, Michael D. Pruitt, and a company
owned by Mr. Pruitt made loans to the Company. At June 30, 2002, notes and
advances due to affiliates consisted of the following:
Note payable to Mr. Pruitt ................... $ 10,657
Advance payable to Mr. Pruitt ................ 25,391
Notes payable to a company owned by Mr. Pruitt 108,392
--------
$144,440
========
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 has pledged certain of his personal assets to secure a $100,000
bank credit facility for the Company's home technology business. At June 30,
2002, the balance outstanding on this bank facility was $100,000.
Mr. Pruitt is also a minority investor in a company that has purchased
franchise licenses and business operations of the Company's home technology
business in three markets in South Carolina and in another company that is a
franchisee of the Company's home technology business in three locations in the
state of Maryland. During the quarter ended March 31, 2002, $80,000 of the notes
payable to a company owned by Mr. Pruitt was used as payment for the purchase
price of two Maryland franchise locations of the Company's home technology
business. Also, during the quarter ended June 30, 2002, Mr. Pruitt offset
$109,000 of debt owed to him in connection with the payment of $69,000 of
royalties from franchises in which he has an interest and the payment of a
franchise fee of $40,000 for a third party to whom Mr. Pruitt was indebted.
44
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. In addition, Mr. Johnson was named Chief
Executive Officer and a board member of Lifestyle Innovations, Inc., which
acquired the Company's home technology business in September 2002 as further
described in Note 2 to these financial statements.
During fiscal 2002, Glenn Barrett resigned as President of Lifestyle and
began a low voltage wiring business headquartered in Charlotte, NC to service
the commercial market. Mr. Barrett's company operates as a Lifestyle franchisee
in the commercial low voltage wiring marketing in Charlotte, NC and also owns
the Greenville and Columbia, SC franchises. The Company waived Mr. Barrett's
franchise fee for the commercial franchise, however, these locations pay
royalties at the same rate as other franchises. At June 30, 2002, Mr. Barrett's
company owes the Company and its subsidiaries $227,000.
During fiscal 2002, G. David Gordon, an RCG shareholder, and a company in
which he is the president and a shareholder, loaned the Company and its
subsidiaries $1,144,000 at interest rates of 8% to 12%. At June 30, 2002, total
debt outstanding to Mr. Gordon and this company was $1,500,000. Mr. Gordon has
an ownership interest in seven of the Company's home technology business
franchises, including two locations that were purchased from the Company during
fiscal 2002 and for which the Company recorded a gain on sale of $119,000, and
acts as special legal counsel to the Company from time to time.
NOTE 13. BUSINESS SEGMENT INFORMATION
Information related to business segments is as follows (in thousands):
Year ended June 30, 2002: Aviation
Travel Call Technology Home
Services Center Solutions Technology Corporate Total
------------------------------------------------------------------ -------- -------- -------- -------- -------- --------
Revenue .......................................................... $ 27,210 $ 63 $ 10,294 $ 2,878 $ 279 $ 40,724
Income (loss) from continuing operations ......................... (795) (151) (609) (1,184) (1,439) (4,178)
Identifiable assets .............................................. 5,551 192 11,197 9,950 1,982 28,872
Capital expenditures ............................................. 21 -- 67 238 1 327
Depreciation and amortization .................................... 58 18 229 65 15 385
Year ended June 30, 2001: ........................................ Aviation
Travel Call Technology Home
Services Center Solutions Technology Corporate Total
------------------------------------------------------------------ -------- -------- -------- -------- -------- --------
Revenue .......................................................... $ 11,179 $ 230 $ 1,223 $ 975 $ -- $ 13,607
Income (loss) from continuing operations ......................... (1,501) (5,724) (290) (1,466) (12,077) (21,058)
Identifiable assets .............................................. 2,680 410 13,192 8,602 1,681 26,565
Capital expenditures ............................................. 43 22 -- 40 2 107
Depreciation and amortization .................................... 406 967 514 410 3 2,300
NOTE 14. 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 and its subsidiary LSTA have initiated a lawsuit against David
Watson, the sole shareholder of Greater Atlanta Alarm Services, Inc. ("GAAS"),
which LSTA acquired in July 2001, seeking damages or rescission for claims of
fraud and breach. Mr. Watson has counterclaimed against RCG and LSTA for default
in payment of the purchase price and for attorneys' fees. This matter is in the
discovery stage and no assurance can be given that the Company and LSTA will
prevail in its claims or that the Company and LSTA will not be required to pay
amounts allegedly owed to Mr. Watson.
45
Commitments
The Company leases office space under non-cancelable office leases and also
enters into vehicle lease arrangements for its home technology business. The
future minimum lease payments required under these leases at June 30, 2002 are
as follows:
Fiscal Year Total
----------- -----
2003 $ 559,677
2004 487,063
2005 449,770
2006 465,872
2007 442,269
Thereafter 550,891
------------
$ 2,955,542
============
Rent expense under operating leases aggregated $579,357 and $334,837 for the
years ended June 30, 2002 and 2001, respectively.
NOTE 15. NON-CASH TRANSACTIONS
Non-cash transactions occurring during the year ended June 30, 2002 and 2001 are
as follows:
Year ended June 30,
------------------
2002 2001
----------- -----------
Schedule of non-cash transactions:
Common stock issued for acquired businesses ....................... $ 775,962 $26,841,567
=========== ===========
Sale of real estate in exchange for note receivable ............... $ 162,500 $ 2,265,000
=========== ===========
Issuance of compensatory stock purchase warrants in connection
with strategic alliances and other services ................... $ 94,900 $ 1,053,360
=========== ===========
Payment for services with common stock ............................ $ 36,513
===========
Value of investments received in capital contribution ............. $ 150,000
===========
Payment of notes payable through forgiveness of accounts receivable $ 197,560
===========
Unrealized loss on available for sale investments ................. $ 139,127
===========
Issuance of common stock and warrants for loan origination fees ... $ 130,197
===========
Return of stock to the Company in settlement of services contract . $ 627,570
===========
Cumulative effect of adoption of FAS 142, reducing goodwill ....... $ 693,000
===========
Impact of reverse stock split effected in June 2002 ............... $ 2,600,014
===========
NOTE 16. INTERIM FINANCIAL INFORMATION - UNAUDITED
During its closing procedures for the fiscal year ended June 30, 2002, the
Company discovered that certain accounts, including certain cash accounts,
prepaid expenses, accounts receivable and certain accrual accounts were not
adequately reconciled during the year at flightserv. These accounts required
adjustments totaling $1,464,246 to increase operating expenses and properly
state the account balances. These adjustments were recorded during the year end
closing process. The items that were not recorded properly or reconciled in a
timely manner related exclusively to flight program operating costs. A detailed
review of the activity in these accounts during the year indicated that
adjustments were required to properly state the operating results for prior
quarters during the fiscal year for these errors. An immaterial amount of this
adjustment related to the fiscal year ended on June 30, 2001 and that amount is
included in the adjustment to the quarter ended September 30, 2001. The impact
of these adjustments on the quarters during fiscal 2002 is summarized in the
table below (unaudited):
September 30, December 31, March 31, June 30, Year ended June 30,
2001 2001 2002 2002 2002
---------------------------------------------------------------------------
Net Income/(Loss) as reported .. $ (1,417,043) $ (600,985) $ 24,865 $ (2,302,148) $(4,295,311)
Adjustments -- cost of goods sold ..... (1,024,871) (232,236) (207,139) 1,464,246 --
------------- ----------- --------- ------------- -------------
Net Income/(Loss) as restated ......... $ (2,441,914) $ (833,221) $(182,274) $ (837,902) $(4,295,311)
============= =========== ========= ============= =============
Net Income/(Loss) as reported per share $ (0.13) $ (0.05) $ -- $ (0.19) $ (0.37)
Adjustments per Share ................. $ (0.09) $ (0.02) $ (0.02) $ 0.12 $ --
------------- ----------- --------- ------------- -------------
Net Income/(Loss) per share as restated $ (0.22) $ (0.07) $ (0.02) $ (0.07) $ (0.37)
============= =========== ========= ============= =============
46
The Company's quarterly results, as restated, for the year ended June 30, 2002
are as follows (unaudited):
Year Ended
September 30, December 31, March 31, June 30, June 30,
2001 2001 2002 2002 2002
-------------- ------------- ----------- ------------ -----------
Revenue
Services .................................................. $ 6,675,244 $ 5,026,079 $ 7,320,765 $ 10,544,277 $ 29,566,365
Product sales ............................................. 2,930,531 2,137,927 2,425,811 3,663,232 11,157,501
------------ ------------ ------------ ------------ ------------
Total revenue ...................................... 9,605,775 7,164,006 9,746,576 14,207,509 40,723,866
Cost of revenue
Services .................................................. 7,040,442 4,227,572 6,225,260 9,375,560 26,868,834
Product sales ............................................. 2,467,674 1,698,352 2,184,768 3,310,238 9,661,032
------------ ------------ ------------ ------------ ------------
Total cost of revenue .............................. 9,508,116 5,925,924 8,410,028 12,685,798 36,529,866
------------ ------------ ------------ ------------ ------------
Gross profit ....................................... 97,659 1,238,082 1,336,548 1,521,711 4,194,000
Selling, general and administrative expenses - compensation
related to issuance of stock options and warrants ..... -- 11,875 7,125 9,825 28,825
Selling, general and administrative expenses - other ...... 2,227,783 1,703,291 1,580,353 2,194,758 7,706,185
Provision for bad debts ................................... 58,555 7,098 19,433 179,555 264,641
Depreciation and amortization ............................. 87,460 96,737 100,918 100,563 385,678
------------ ------------ ------------ ------------ ------------
Operating costs and expenses ....................... 2,373,798 1,819,001 1,707,829 2,484,701 8,385,329
------------ ------------ ------------ ------------ ------------
Operating loss ..................................... (2,276,139) (580,919) (371,281) (962,990) (4,191,329)
Interest expense (income), net ............................ 8,887 83,645 93,165 112,275 297,972
(Gain) loss on investments, net ........................... 210,505 168,657 (282,172) (243,465) (146,475)
Gain on sale of assets .................................... (170,793) -- -- 6,102 (164,691)
------------ ------------ ------------ ------------ ------------
Loss from continuing operations .................... (2,324,738) (833,221) (182,274) (837,902) (4,178,135)
Gain on disposal of discontinued operations ............... 575,824 -- -- -- 575,824
------------ ------------ ------------ ------------ ------------
Loss before cumulative effect of change in
accounting principle ....................... (1,748,914) (833,221) (182,274) (837,902) (3,602,311)
Cumulative effect of change in accounting principle ....... (693,000) -- -- -- (693,000)
------------ ------------ ------------ ------------ ------------
Net loss ........................................... $ (2,441,914) $ (833,221) $ (182,274) $ (837,902)$ (4,295,311)
============ ============ ============ ============ ============
Basic and diluted net loss per share:
Loss from continuing operations $ (0.20) $ (0.07) $ (0.02) $ (0.07) $ (0.36)
Gain on disposal of discontinued operations 0.05 - - - 0.05
Cumulative effect of change in accounting principle (0.06) - - - (0.06)
------------ ------------- ------------ ------------- ------------
Net loss $ (0.21) $ (0.07) $ (0.02) $ (0.07) $ (0.37)
============ ============= ============ ============= ============
Weighted average shares outstanding 10,954,006 11,025,560 11,866,094 12,250,181 11,520,096
============= ============= ============ ============= ============
The restated amounts will be reported in future financial statements in which
these periods are presented.
47
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 31, 2002, the Company dismissed Ernst & Young LLP ("EY") as the
Company's independent public accountants. In connection with the dismissal of
EY, the Company engaged Crisp Hughes Evans LLP ("CHE") as the Company's
independent public accountants for fiscal year 2002. EY reported on the
Company's financial statements for the fiscal years ended June 30, 2000 and
2001. Such reports contained no adverse opinion or disclaimer of opinion and
were not modified as to uncertainty, audit scope or accounting principles. The
Company's Audit Committee and Board of Directors approved the decision to change
the Company's independent public accountants. In connection with the audits of
the Company's financial statements for the past two fiscal years and through
January 31, 2002, there were no disagreements with EY on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure which, if not resolved to the satisfaction of EY, would have
caused it to make a reference to the subject matter of the disagreement in
connection with its reports on the Company's financial statements for such
years.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages (at September 20, 2002), positions and
offices held and a brief description of the business experience during the past
five years of each person who is an executive officer or director of the
Company.
DR. JAMES A. VERBRUGGE (age 62) has served as a director of the Company since
January 11, 1999 when he was appointed by the Board to fill the vacancy created
by the resignation of a director of the Company. Dr. Verbrugge is a Professor of
Finance and Director of the Center for Strategic Risk Management at the
University of Georgia, where he has been employed since 1968. Dr. Verbrugge is
also actively involved in executive education programs at the University of
Georgia and elsewhere. Since July 2001, Dr. Verbrugge has also been a director
of Crown Crafts, Inc.
ERIC A. BLACK (age 57) has served as a director of the Company since June 14,
2001 when he was appointed by the Board as an additional outside director of the
Company. Prior to joining the Board, Mr. Black was engaged in consulting
activities. From January 2000 through December 2000, Mr. Black was President of
L & H Healthcare Solutions Group. From August 1999 to December 1999, Mr. Black
was President Chief Executive Officer of E-DOC'S. From 1976 to 1999, Mr. Black
was employed by Browning-Ferris Industries, Inc. working domestically and
internationally with the last three years serving as President and Chief
Operating Officer of Browning-Ferris International.
PAUL B. JOHNSON (age 53) has served as a director of the Company since July 11,
2001 when he was appointed by the Board to fill a vacancy on the Board created
by the resignation of Arthur G. Weiss as a director of the Company. In September
2002, Mr. Johnson was named Chief Executive Officer and a member of the board of
directors of Lifestyle Innovations, Inc. Since January 2001, Mr. Johnson has
been Managing Partner of La Meg Holdings, L.P. and since 1999, he also has held
the position of Chief Executive Officer and owner of MLI Solutions and Chief
Executive Officer of SportsLineUp.com. MLI Solutions owns the rights to the
Dallas, TX franchise of the Company's home technology business. During 1999 and
2000, Mr. Johnson was Chief Executive Officer and majority owner of
Myhomesource.com. From 1998 through 2000, Mr. Johnson was a director of Ariel
Performance - Centered Systems. Prior to 1998, Mr. Johnson was Chief Executive
Officer of Multimedia Learning, Inc.
MICHAEL D. PRUITT (age 42) has served as Chairman since July 11, 2001 and as a
director of the Company since October 3, 2000 when he was appointed by the Board
to fill a vacancy on the Board. Mr. Pruitt was elected to the Board at the
Annual Stockholders meeting held on January 10, 2001. Mr. Pruitt has served as
Chief Executive Officer of the Company since November 8, 2000. In addition, Mr.
Pruitt is the founder of Avenel Ventures, Inc., an e-commerce investment and
business development company, and has served as President, Chief Executive
Officer and director of Avenel Ventures, Inc. since its formation in June, 2000.
In May, 1999, Mr. Pruitt founded Avenel Financial Group, Inc., a financial
services firm specializing in e-commerce and technology investments, where he
concentrated his efforts until June 2000. From October, 1997 through May, 1999,
Mr. Pruitt was the Executive Vice President of Marketers World International,
which was acquired by High Speed Net Solutions, Inc. Prior to that, Mr. Pruitt
was an independent consultant from January 1997 through October 1997. From
January 1992 through January 1997, Mr. Pruitt was the COO of a trucking company
with revenues in excess of $50 million per year.
MELINDA MORRIS ZANONI (age 32) has served as a director of the Company since
January 10, 2001 when she was elected at the Annual Stockholders meeting. Ms.
Zanoni has served as Executive Vice President of the Company since November 8,
2000. In addition, Ms. Zanoni has served as a director and Executive Vice
President of Avenel Ventures, Inc. since June, 2000. Prior to joining Avenel
Ventures, Inc., from February 1996 through June 2000, Ms. Zanoni was an attorney
with the law firm of Nelson Mullins Riley & Scarborough, LLP in Charlotte, North
Carolina where she concentrated in the areas of mergers and acquisitions and
commercial finance. From May, 1994 through February, 1996, she was a
transactional attorney concentrating in corporate law at Fagel & Haber in
Chicago, Illinois.
48
JOHN VAN HEEL (age 36) has served as Vice President of Finance and Treasurer of
the Company since January 1, 2002. From May 2000 through January 2002, Mr. Van
Heel was Chief Financial Officer of Logisoft Corp., a provider of Internet and
technology solutions to corporate customers and educational entities, which the
Company acquired in June 2001. From 1997 to May 2000, Mr. Van Heel was a
Director - Transaction Services in the New York and Milan, Italy offices of
PricewaterhouseCoopers where he consulted with corporate and private equity
clients on mergers and acquisitions and financial reporting matters.
There are no family relationships among any of the executive officers or
directors of the Company. No arrangement or understanding exists between any
executive officer or any other person pursuant to which any executive officer
was selected as an executive officer of the Company. Executive officers of the
Company are elected or appointed by the Board and hold office until their
successors are elected or until their death, resignation or removal.
Sylvia A. De Leon, a director of the Company since December 12, 1999,
resigned as a director effective August 28, 2002 in order to dedicate more time
to other corporate boards that she presently serves on. Eric Black, a director
of the Company since June 14, 2001, has notified the Company that he will resign
as a director effective September 30, 2002 in order to dedicate more time to his
personal consulting and investment businesses. The Company's board of directors
is currently considering candidates to fill these director seats.
John Van Heel, VP Finance and Treasurer since January 1, 2002, notified the
Company of his resignation on August 22, 2002 to pursue another opportunity. Mr.
Van Heel is transitioning his duties to a new Senior Vice President Finance and
Treasurer who will start with the Company in September 2002.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities and Exchange Act of 1934, as amended,
requires the Company's directors, executive officers, and persons who own
beneficially more than 10% of a registered class of the Company's equity
securities, to file with the SEC initial reports of ownership and reports of
changes in ownership of such securities of the Company. Directors, executive
officers and greater than 10% stockholders are required by SEC regulations to
furnish the Company with copies of all Section 16(a) reports they file. To the
Company's knowledge, based solely on review of the copies of such reports
furnished to the Company, all Section 16(a) filing requirements applicable to
its directors, executive officers and greater than 10% beneficial owners were
complied with during the fiscal year ended June 30, 2002.
ITEM 10. EXECUTIVE AND DIRECTOR COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth for the fiscal years ended 2000, 2001 and
2002 the cash and non-cash compensation awarded, earned or paid by the Company
to all individuals serving as Chief Executive Officer of the Company at any time
during fiscal year 2002 and all executive officers of the Company or any of its
subsidiaries who received salary and bonuses in excess of $100,000 during fiscal
year 2002 (collectively, the "Named Executives").
Long-Term
Fiscal Compensation Other Annual
Name and Principal Position Year Salary Bonus Stock Options(6) Compensation
---------------------------------------------- ------ ----------- -------- ------------------------------
Michael D. Pruitt, Chairman/President/CEO 2002 $ --(1) -- -- $ --
2001 --(1) -- 85,714
2000 -- -- -- --
Melinda Morris Zanoni, Executive Vice President
and Secretary(2) 2002 $ 147,167 -- -- $ --
2001 93,333 -- 85,714
2000 -- -- -- --
Kent Elsbree, Chief Executive Officer, 2002 $ 146,500 -- -- $ --
flightserv.com (3) 2001 120,000 -- 214,286 (7)
2000 -- -- -- --
49
Cary Evans, President, flightserv.com (3) 2002 $ 146,500 -- -- $ --
2001 120,000 -- 214,286 (7)
2000 -- -- -- --
John W. Van Heel, Vice President Finance and 2002 $ 104,307 -- 40,000 $ --
Treasurer (4) 2001 -- -- -- --
2000 -- -- -- --
William L. Wortman, former Chief Financial Officer 2002 $ 75,000 -- 35,714 $ 37,500
(5) 2001 150,000 -- 71,429 $ 1,800
2000 133,750 $10,000 (8) $ 1,125
(1) Mr. Pruitt's employment contract dated November 8, 2000 provides for an
annual base salary of $180,000. Mr. Pruitt agreed to forego his salary in
fiscal 2001 and fiscal 2002.
(2) Ms. Zanoni's employment contract dated November 8, 2000, provides for an
annual base salary of $160,000.
(3) Mr. Elsbree and Mr. Evans joined flightserv.com in August 2002 in their
respective positions.
(4) Mr. Van Heel was Chief Financial Officer of Logisoft Computer Products
Corp. when the Company acquired Logisoft. In January 2001, Mr. Van Heel was
named Vice President Finance and Treasurer of the Company. The salary
amount listed for Mr. Van Heel includes compensation from both Logisoft and
the Company paid during fiscal 2002. Mr. Van Heel was granted 31,429 stock
options subsequent to the Company's acquisition of Logisoft and 40,000 in
January 2002 in connection with his appointment as Vice President Finance.
(5) Mr. Wortman was Vice President and Chief Financial Officer of the Company
from June 24, 1999 to December 31, 2001. Mr. Wortman was paid $37,500 in
consulting fees for service rendered between January 2001 and March 2002.
Mr. Wortman was granted 35,714 stock options in December 2001. These stock
options are exercisable at $1.26 per share, are fully vested and have a
term of three years. Mr. Wortman was also granted 71,429 stock options in
December 2000, which expired on March 31, 2002.
(6) The stock options listed below have an exercise price at or above the fair
market value of the Common Stock on the date of grant of such options
except the stock options issued to Mr. Elsbree and Mr. Evans, which are
described in Note 7 below.
(7) The stock options issued to Mr. Elsbree and Mr. Evans carry an exercise
price of $1.75. On the date that these options were granted, the Company's
closing stock price was $4.38. The Company reported $1,125,000 in stock
compensation expense related to these stock options grants.
(8) In fiscal 2000, the Company's Board approved nonqualified options to
purchase Common Stock for Mr. Wortman subject to stockholder approval,
which approval was not submitted for a stockholders vote at the Annual
Meeting held on July 11, 2000. The options to purchase 42,857 shares of
Common Stock approved by the Board for Mr. Wortman were cancelled in
connection with the grant of 71,429 options to Mr. Wortman in fiscal 2001.
Long-term Compensation - Stock Options
The following table sets forth information regarding the grant of stock
options to the Named Executives during the fiscal year ended June 30, 2002:
Number of % of Total
Securities Options Granted
Underlying to Employees Exercise Expiration
Options Granted in Fiscal 2001 Price Date
--------------- -------------- ------- ---------
John Van Heel .... 40,000 15.6% $ 1.75 1/25/2012
William L. Wortman 35,714 14.0% $ 1.26 12/21/2004
The following table sets forth information concerning each exercise of
options during the last completed fiscal year by each of the Named Executives
and the value of unexercised options held by the Named Executives as of June 30,
2002.
Number of Securities
Underlying Value Of Unexercised
Unexercised Options In-The-Money
Shares Acquired Value At 6/30/02 Options At 6/30/02
Name On Exercise Realized(1) Exercisable/Unexercisable Exercisable/Unexercisable(2)
-------------------------- --------------- ------------------------------------------------------------------
Michael D. Pruitt 0 $ 0 71,429/-0- -0-/-0-
Melinda Morris Zanoni 0 0 85,714/-0- -0-/-0-
Kent Elsbree 0 0 211,429/-0- -0-/-0-
Cary Evans 0 0 208,571/-0- -0-/-0-
John Van Heel 0 0 13,750/57,679 -0-/-0-
William L. Wortman 0 0 35,714/-0- -0-/-0-
(1) Calculated by determining the difference between the fair market value of
the shares of RCG Common Stock underlying this option and the exercise price
of such option on the date of exercise.
50
(2) The dollar values of the RCG stock options are calculated by determining the
difference between the fair market value of the shares of RCG Common Stock
underlying the options and the exercise price of such options at June 30,
2002.
COMPENSATION OF DIRECTORS
Directors of the Company who are not employees of the Company receive
compensation of $750 for telephonic Board meetings and $1,000 per regular Board
meeting. The Board expects to meet at least on a quarterly basis in fiscal 2002.
Directors are also entitled to reimbursement of reasonable out-of-pocket
expenses incurred by them in attending Board meetings. In fiscal 2002, the
Company expensed $20,215, for director fees and expenses.
In December 2000, the Company approved options to purchase 428,571 shares
of Common Stock at an exercise price of $4.90 per share. These options were
granted as follows: options for 85,714 shares to each Dr. Verbrugge, Mr. Pruitt,
Ms. Zanoni, Mr. Weiss, and Ms. deLeon.
EMPLOYMENT CONTRACTS
On November 8, 2000, the Company entered an employment agreement ("the
Pruitt Agreement") with Mr. Pruitt. The Pruitt Agreement provides for an annual
base salary of $180,000 and an initial term of two years. After the initial
term, the Pruitt Agreement renews automatically for successive one (1) year
terms unless either party gives 60 days' written notice.
On November 8, 2000, the Company entered an employment agreement ("the
Zanoni Agreement") with Ms. Zanoni. The Zanoni Agreement provides for an annual
base salary of $160,000 and an initial term of two years. After the initial
term, the Zanoni Agreement renews automatically for successive one (1) year
terms unless either party gives 60 days' written notice.
On January 1, 2002, the Company entered an employment agreement ("the Van
Heel Agreement") with Mr. Van Heel, which provided for an annual base salary of
$99,000 and a term of eighteen (18) months. After the initial term, the Van Heel
Agreement renews automatically for successive one (1) year terms periods unless
either party gives 60 days' written notice. In July 2002, Mr. Van Heel's base
salary was adjusted to $122,000 per year. Mr. Van Heel notified the Company of
his resignation on August 22, 2002 to pursue another opportunity. Mr. Van Heel
is transitioning his duties to a new Senior Vice President Finance and Treasurer
who will start with the Company in September 2002.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of September 20, 2002 by:
(i) each person known by the Company to beneficially own more than 5% of the
outstanding shares of Common Stock; (ii) each of the Company's directors; (iii)
each of the Company's named executive officers included in the Summary
Compensation Table included elsewhere herein; and (iv) all of the Company's
current directors and executive officers as a group. Except as otherwise noted,
the person or entity named has sole voting and investment power over the shares
indicated.
Shares of Common Stock Benificially Owned(1)
-----------------------------------------
Name Number Percent(10)
----- ------- --------
Michael D. Pruitt + ++(2) ................. 829,571 6.6%
Four Corners Capital, LLC(3) ............... 542,838 4.2
Eric A. Black ++(4) ........................ 28,571 *
Paul B. Johnson ++(4) ...................... 28,571 *
Sylvia A. de Leon (5) ...................... 85,714 *
Dr. James A. Verbrugge ++(6) ............... 101,548 *
Melinda Morris Zanoni + ++(7) .............. 371,429 3.0
William Wortman (8) ........................ 35,714 *
John Van Heel + (9) ........................ 20,310 *
All Current Executive Officers and Directors
as a Group (6 Persons) ................... 1,379,999 10.8%
========= ====
51
+ Executive Officer of the Company
++ Director of the Company
* Less than 1%
(1) Information as to beneficial ownership of Common Stock has been furnished
to the Company either by or on behalf of the indicated person or is taken
from reports on file with the SEC.
(2) Includes 607,142 shares issued in connection with the Company's acquisition
of DMM of which Avenel Financial Group, Inc., which is owned by Mr. Pruitt,
now holds 285,714 shares. Also includes 46,429 shares issued in each of the
LST, Inc. and Avenel Ventures, Inc. ("Avenel") acquisitions. Includes
71,429 shares issuable upon exercise of options. Mr. Pruitt's address is
5935 Carnegie Boulevard, Suite 101, Charlotte, North Carolina, 28209.
(3) Includes 514,267 shares issuable upon exercise of warrants. The address of
Four Corners Capital, LLC is 10 Burton Hills Boulevard, Suite 120,
Nashville, Tennessee, 37215.
(4) Represents shares issuable upon exercise of options.
(5) Represents shares issuable upon the exercise of options.
(6) Includes 85,714 shares issuable upon exercise of options.
(7) Consists of 85,714 shares issuable upon exercise of options and 285,714
shares issued in connection with the acquisition of Avenel.
(8) Represents shares issuable upon the exercise of options. Mr. Wortman was
Vice President and Chief Financial Officer of the Company from June 24,
1999 to December 31, 2001.
(9) Includes 3,286 shares owned plus 17,024 issuable upon exercise of options.
Excludes 54,405 shares issuable upon exercise of options that are not
exercisable on or within 60 days of September 20, 2002.
(10) In computing the percentage ownership of a person, shares of Common Stock
that are acquirable by such person within 60 days of September 20, 2002 are
deemed outstanding. These shares of Common Stock, however, are not deemed
outstanding for the purpose of computing the percentage ownership of any
other person. As of September 20, 2002, there were 12,408,820 shares of
Common Stock outstanding.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with consulting services related to the Company's
Internet-based, private aviation travel service business provided by Mr. Bert
Lance, the father of the Company's former President and Chief Executive Officer,
the Company in fiscal 2000 and 1999 granted warrants to purchase 228,571 and
57,143 shares, respectively, of its Common Stock to the Bert Lance Grantor
Trust. In addition, the Company paid consulting fees of $183,000 to Mr. Bert
Lance in fiscal 2000. In August 2000, the Bert Lance Grantor Trust assigned
35,714 of such warrants to an unrelated third party, with the Company's consent,
and such warrants were exercised for cash proceeds of $125,000 to the Company.
In January 2000, the Company entered into a common stock purchase agreement
(the "Four Corners Purchase Agreement") with Four Corners Capital, LLC ("Four
Corners"), which provides for an equity financing package consisting of the sale
of restricted Common Stock and warrants. Under the terms of the Four Corners
Purchase Agreement, Four Corners purchased from the Company, for an aggregate
purchase price of $1,000,000, 23,581 shares of restricted Common Stock, and
warrants to purchase up to 389,095 shares of Common Stock. In connection with
the Four Corners Purchase Agreement, the Company entered into a Registration
Rights Agreement with respect to the Common Stock purchased by Four Corners and
the Common Stock underlying all options or warrants held by Four Corners. The
terms of the Purchase Agreement were the result of arms' length negotiations
between the parties. Mr. Goldberg, a former director of the Company, owns a 25%
interest in Four Corners.
In connection with the equity financing provided by the Four Corners
Purchase Agreement and the Company's $5,000,000 private placement of Common
Stock in January 2000, the Company agreed to pay Four Corners a fee for services
provided to the Company equal to 6% of the proceeds actually received by the
Company and to reimburse Four Corners for expenses relating to the financing. In
fiscal 2000, the Company paid fees to Four Corners in the amount of $360,000 and
has reimbursed Four Corners for approximately $58,000 in expenses.
On January 23, 2001, the Company entered into a General Release and
Settlement Agreement with Four Corners and D.C. Investment Partners Exchange
Fund, L.P. pursuant to which all claims relating to the Four Corners Purchase
Agreement and the fees owed to Four Corners by the Company, if any, were settled
and released.
In September 2000, the Company acquired all of the issued and outstanding
shares of capital stock of DMM for 1,207,143 shares of the Company's Common
Stock. Mr. Pruitt was a 50% stockholder of DMM at the time of the acquisition.
Mr. Pruitt was not a director, officer or stockholder of the Company at the time
the acquisition was negotiated and the consideration paid was determined as a
result of arms-length negotiations.
52
In February 2001, the Company acquired all of the issued and outstanding
capital stock of Avenel Ventures for 957,143 shares of the Company's Common
Stock. Mr. Pruitt was an officer, director and 4.9% stockholder of Avenel
Ventures. Melinda Morris Zanoni was a director, officer and 29.9% stockholder of
Avenel Ventures. In connection with the acquisition, Mr. Pruitt and Ms. Zanoni
entered into employment agreements to serve as executive officers of the
Company. Ms. Zanoni was not an officer, director or stockholder of the Company
at the time the Avenel Ventures acquisition was approved by the Company's Board
of Directors. The consideration paid was the result of arms-length negotiations
between the Company and the Avenel Ventures stockholders and was recommended by
a special committee of the Company's Board of Directors.
In April 2001, the Company acquired 100% of the issued and outstanding
capital stock of Lifestyle, the Company's home technology business, for
1,153,510 shares of the Company's Common Stock. Mr. Pruitt was a 3.2%
stockholder of Lifestyle at the time of the acquisition and sold his shares for
the same per share consideration received by the other Lifestyle stockholders.
In December 2001, Mr. Pruitt provided collateral securing a bank line of
credit of $100,000 for the Company's home technology business.
In fiscal 2002 and 2001, the Company's CEO, Michael D. Pruitt, and a company
owned by Mr. Pruitt made loans to the Company. At June 30, 2002, notes and
advances due to affiliates consisted of the following:
Note payable to Mr. Pruitt ................... $ 10,657
Advance payable to Mr. Pruitt ................ 25,391
Notes payable to a company owned by Mr. Pruitt 108,392
--------
$144,440
========
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 has purchased
franchise licenses and business operations of the Company's home technology
business in three markets in South Carolina and in another company that is a
franchisee of the Company's home technology business in three locations in the
state of Maryland. During the quarter ended March 31, 2002, $80,000 of the notes
payable to a company owned by Mr. Pruitt was used as payment for the purchase
price of two Maryland franchise locations of the Company's home technology
business. Also, during the quarter ended June 30, 2002, Mr. Pruitt offset
$109,000 of debt owed to him in connection with the payment of $69,000 of
royalties from franchises in which he has an interest and the payment of a
franchise fee of $40,000 for a third party to whom Mr. Pruitt was indebted..
Mr. Johnson, a director of the Company, is a minority stockholder in a
company that is a franchisee of the Company's home technology business in the
Dallas, Texas market. In addition, Mr. Johnson was named Chief Executive Officer
and a board member of Lifestyle Innovations, Inc., which acquired the Company's
home technology business in September 2002 as further described in Note 2 to the
Company's consolidated financial statements, which appear in Item 7 of this
Annual Report.
During fiscal 2002, Glenn Barrett resigned as President of Lifestyle and
began a low voltage wiring business headquartered in Charlotte, NC to service
the commercial market. Mr. Barrett's company operates as a Lifestyle franchisee
in the commercial low voltage wiring marketing in Charlotte, NC and also owns
the Greenville and Columbia, SC franchises. The Company waived Mr. Barrett's
franchise fee for the commercial franchise, however, these locations pay
royalties at the same rate as other franchises. At June 2002, Mr. Barrett's
company owes the Company and its subsidiaries $227,000.
During fiscal 2002, G. David Gordon, an RCG shareholder, and a company in
which he is the president and a shareholder, loaned the Company and its
subsidiaries $1,144,000 at interest rates of 8% to 12%. At June 30, 2002, total
debt outstanding to Mr. Gordon and this company was $1,500,000. Mr. Gordon has
an ownership interest in seven of the Company's home technology business
franchises, including two locations that were purchased from the Company during
fiscal 2002 and for which the Company recorded a gain on sale of $119,000, and
acts as special legal counsel to the Company from time to time.
ITEM 14 CONTROLS AND PROCEDURES
Disclosure controls and procedures
The Company has established and currently maintains disclosure controls and
procedures for the Company. The disclosure controls and procedures have been
designed to ensure that material information relating to the Company is made
known to the Company's Principal Executive Officer and Principal Accounting
Officer within a reasonable time of such information becoming known by others
within the Company.
During the period immediatedly after the end of each quarter, the Company's
Principal Executive Officer and Principal Accounting Officer conduct an update
and a review and evaluation of the effectiveness of the Company's disclosure
controls and procedures. It is opinion of the Company's Principal Executive
Officer and Principal Accounting Officer, based upon the evaluation completed by
September 13, 2002, that the controls and procedures currently being utilized by
the Company are sufficiently effective to ensure that any material information
relating to the Company would become known to them within a reasonable time.
Changes in internal controls
During the quarter ended June 30, 2002, the Company made changes to the
internal accounting processes and control procedures in its aviation travel
services business to improve the recording of flight program operating costs.
These changes were implemented, effective July 1, 2002, because during its
closing procedures for the fiscal year ended June 30, 2002, the Company
discovered that certain accounts were not adequately reconciled during the year
at its aviation travel services business. These accounts required adjustment
during the year end close totaling $1,464,246 to increase operating expenses and
properly state the related asset and liabilitiy balances. These adjustments are
disclosed in Note 16 to the Company's consolidated financial statements,
presented elsewhere in this annual report.
53
PART IV
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Exhibit Description
----- ------------------------------------------
2.1 Stock Purchase Agreement dated as of August 16, 2000 between the Company,
Michael Pruitt, and Darek Childress (incorporated by reference to Exhibit
2.1 to the Company's Current Report on Form 8-K filed on September 22,
2000).
2.2 Stock Purchase Agreement dated as of August 11, 2000 between the Company
and Caliente Consulting (incorporated herein by reference to exhibit 2.1 to
the Company's Current Report on Form 8-K filed on September 22, 2000).
2.3 Share Exchange Purchase Agreement dated as of November 8, 2000 between the
Company and Avenel (incorporated by reference to Exhibit 2.2 to the
Company's Current Report on Form 10-QSB for the quarter ended December 31,
2000 filed on February 14, 2001).
2.4 Stock Purchase Agreement between the Company and the majority of the
stockholders of Lifestyle (incorporated by reference to the Company's
Current Report on Form 8-K filed on April 18, 2001).
2.5 Stock Purchase Agreement dated as of March 16, 2001 between the Company and
Glenn Barrett, Jr. (incorporated by reference to Exhibit 2.2 to the
Company's Current Report on Form 8-K filed on April 18, 2001).
2.6 Stock Purchase Agreement dated as of March 31, 2001 between the Company and
Brandon Holdings, Inc. (incorporated by reference to Exhibit 2.3 to the
Company's Current Report on Form 8-K filed on April 18, 2001).
2.7 Agreement and Plan of Merger dated as of June 5, 2001 between the Company,
Logisoft Acquisition Corporation and the individuals listed on Exhibit A
thereto (incorporated by reference to Exhibit 2.1 the Company's Current
Report on Form 8-K filed on June 13, 2001).
2.8 Joinder to the Merger Agreement executed by Logisoft (incorporated by
reference to Exhibit 2.2 the Company's Current Report on Form 8-K filed on
June 13, 2001).
2.9 Asset Purchase Agreement dated as of June 20, 2001, by and among Greater
Atlanta Alarm Services, Inc., the Company, Glenda Watson and David Watson
(incorporated by reference to Exhibit 2.1 to the Company's Current Report
on Form 8-K filed on August 14, 2001).
2.10 Stock Purchase Agreement dated as of May 15, 2001 between the Company and
Brikor, Inc. (incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K filed on September 17, 2001).
2.11 Agreement and Plan of Merger dated as of August 30, 2002 among the Company,
LST, Inc., Lifestyle Innovations, Inc. and LFSI Merger Corporation
(incorporated by reference to Exhibit 2.1 of the Company's Current report
on Form 8-K filed on September 20, 2002).
54
3.1 Restated Certificate of Incorporation of the Company dated as of January
19, 2001 (incorporated by reference to Exhibit 3.1 to the Company's
Quarterly report on Form 10-QSB for the quarter ended December 31, 2000
filed on February 14, 2001).
3.2 Amended and Restated Bylaws of the Company (incorporated by reference to
the Company's Annual Report on Form 10-KSB for the year ended June 30, 2000
filed on September 28, 2000).
3.3 Certificate of Amendment of Restated Certificate of Incorporation of
eResource Capital Group, Inc. dated June 17, 2002
4.1 Registration Rights Agreement between the Company and Worldspan, L.P. dated
as of June 26, 2000 (incorporated by reference to the Company's Annual
Report on Form 10-KSB for the year ended June 30, 2000 filed on September
28, 2000).
4.2 Registration Rights Agreement between the Company, Four Corners Capital,
LLC and DC Investment Partners Exchange Fund, L.P. dated as of January 23,
2001 (incorporated by reference to Exhibit 4.1 of the Company's Quarterly
Report on Form 10-QSB for the quarter ended December 31, 2000 filed on
February 14, 2001).
4.3 Registration Rights Agreement between the Company and Acqua Wellington
Value Fund, Ltd. Dated as of January 23, 2001 (incorporated by reference to
exhibit 4.2 of the Company's Quarterly Report on Form 10-QSB for the
quarter ended December 31, 2000 filed on February 14, 2001).
4.4 flightserv.com 2000 Stock Option Plan (incorporated by reference to exhibit
B to the Company's Definitive Proxy Statement on Schedule 14A filed on June
19, 2000).
4.5 Registration Rights Agreement between the Company and each of the
stockholders of Lifestyle(incorporated by reference to Exhibit 4.2 to the
Company's Current Report on Form 8-K filed on April 18, 2001).
10.1 Form of Officer/Director Non-Qualified Option Agreement dated as of July 2,
1999 (incorporated by reference to Exhibit 10.9 to the Company's Annual
Report on Form 10-KSB for the year ended June 30, 1999 filed on September
28, 1999).
10.2 Schedule of Option Agreements granted in February, April and July, 1999
(incorporated by reference to Exhibit 10.10 to the Company's Annual Report
on Form 10-KSB for the year ended June 30, 1999 filed on September 28,
1999).
10.3 Form of Officer/Director Non-Qualified Option Agreement dated December 2,
1999 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended December 31, 1999 filed on
February 14, 2000).
10.4 Schedule of Option Agreements granted December 2, 1999 (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-QSB
for the quarter ended December 31, 1999 filed on February 14, 2000).
55
10.5 Employment Agreement between the Company and Todd Bottorff (represents a
compensatory plan or arrangement) (incorporated by reference to Exhibit
10.3 to the Company's Annual Report on Form 10-KSB for the year ended June
30, 2000 filed on September 28, 2000).
10.6 Agreement between the Company and Arthur G. Weiss dated as of July 27, 2000
(represents a compensatory plan or arrangement) (incorporated by reference
to Exhibit 10.14 to the Company's Annual Report on Form 10-KSB for the year
ended June 30, 2000 filed on September 28, 2000).
10.7 Agreement between the Company and C. Beverly Lance dated as of July 27,
2000 (represents a compensatory plan or arrangement) (incorporated by
reference to Exhibit 10.15 to the Company's Annual Report on Form 10-KSB
for the year ended June 30, 2000 filed on September 28, 2000).
10.8 Consulting Agreement between the Company and Todd Bottorff dated as of
January 17, 2001 (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-QSB for the quarter ended December
31, 2000 filed on February 14, 2001).
10.9 Employment Agreement between the Company and Michael D. Pruitt dated as of
November 8, 2000 (represents a compensatory plan arrangement) (incorporated
by reference to Exhibit 10.2 to the Company's Quarterly Report on Form
10-QSB for the quarter ended December 31, 2000 filed on February 14, 2001).
10.10Employment Agreement between the Company and Ms. Melinda Morris Zanoni
dated as of November 8, 2000 (represents a compensatory plan or
arrangement) (incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended December 31, 2000
filed on February 14, 2001).
10.11General Release and Settlement Agreement between the Company and Four
Corners Capital, LLC and DC Investment Partners Exchange Fund, L.P. dated
as of January 23, 2001 (incorporated by reference to Exhibit 10.4 to the
Company's Quarterly Report on Form 10-QSB for the quarter ended December
31, 2000 filed on February 14, 2001).
10.12General Release and Settlement Agreement between the Company and Acqua
Wellington Value Fund, Ltd. Dated as of January 23, 2001 (incorporated by
reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-QSB
for the quarter ended December 31, 2000 filed on February 14, 2001).
16.1 Change in Accountants - Letter from Ernst & Young dated February 22, 2002
(incorporated herein by reference to Exhibit 16.1 to the Company's Current
Report on Form 8-K/A filed on February 22, 2002).
21.1 Subsidiaries of the Company
23.1 Consent of Independent Auditors - Crisp Hughes Evans
23.2 Consent of Independent Auditors - Ernst & Young
99.1 Non-Interest Bearing Promissory Note executed by Brikor, Inc. in favor of
the Company dated as of August 31, 2001 (incorporated by reference to
Exhibit 99.1 to the Company's Current Report on Form 8-K filed on September
17, 2001).
56
99.2 Indirect Charter Agreement between flightserv.com and Vacation Express,
dated November 29, 2001
99.3 Charter Aircraft Services Agreement between flightserv.com and Suntrips,
Inc., dated June 11, 2002
(b) 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 June 30,
2002 and to the date of the Annual Report:
(a)on April 22, 2002, reporting under Items 5 of such report that the Company
signed a letter of intent to sell an interest in its home technology
business;
(b)on June 3, 2002, reporting under Items 5 of such report that the Company's
shareholders approved the proposed reverse stock split and the other
proposals put forth for a shareholder vote or ratification at our Annual
Meeting of Stockholders held on May 17, 2002; and
(c)on September 20, 2002, reporting under Item 2 of such report that the
Company completed its sale of an interest in its home technology business
to Lifestyle Innovations, Inc.
57
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.
eResource Capital Group, Inc.
Date: September 30, 2002 By: /s/ Michael D. Pruitt
--------------------------------
Michael D. Pruitt
President, Chief Executive Officer and
Chairman of the Board (principal executive officer)
In accordance with the requirements of the Exchange Act, this report has
been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Date: September 30, 2002 By: /s/ Michael D. Pruitt
--------------------------------
Michael D. Pruitt
President, Chief Executive Officer and
Chairman of the Board (principal executive officer)
Date: September 30, 2002 By: /s/ Melinda Morris Zanoni
---------------------------------
Melinda Morris Zanoni
Executive Vice President, Secretary and Director
Date: September 30, 2002 By: /s/ John W. Van Heel
---------------------------------
John W. Van Heel
Vice President Finance and Treasurer
(principal financial and accounting officer)
Date: September 30, 2002 By: /s/ Dr. James A. Verbrugge
---------------------------------
Dr. James A. Verbrugge
Director
Date: September 30, 2002 By: /s/ Eric A. Black
---------------------------------
Eric A. Black
Director
Date: September 30, 2002 By: /s/ Paul B. Johnson
---------------------------------
Paul B. Johnson
Director
58
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Annual Report of eResource Capital
Group, Inc. (the "Company") on Form 10-KSB for the fiscal year ending June 30,
2002, as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Michael D. Pruitt, Principal Executive Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge,
that:
1. I have reviewed the Report;
2. Based on my knowledge, the Report does not contain any untrue statement of
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as, and for the periods presented in the Report;
4. I am responsible, along with the Company's Principal Accounting Officer,
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have;
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant is made known to me by others within
the Company, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of the
Report (the "Evaluation Date"); and
c) presented in the Report my conclusions about the effectiveness of the
disclosure controls and procedures based on my evaluation as of the
Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls;
6. I have indicated in the Report whether or not there were significant
changes in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of my most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
By: /s/Michael D. Pruitt
Michael D. Pruitt
Principal Executive Officer
September 30, 2002
59
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Annual Report of eResource Capital
Group, Inc. (the "Company") on Form 10-KSB for the fiscal year ending June 30,
2002, as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, John W. Van Heel, Principal Accounting Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge,
that:
1. I have reviewed the Report;
2. Based on my knowledge, the Report does not contain any untrue statement of
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as, and for the periods presented in the Report;
4. I am responsible, along with the Company's Principal Executive Officer, for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have;
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant is made known to me by others within
the Company, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of the
Report (the "Evaluation Date"); and
c) presented in the Report my conclusions about the effectiveness of the
disclosure controls and procedures based on my evaluation as of the
Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls;
6. I have indicated in the Report whether or not there were significant
changes in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of my most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
By: /s/John W. Van Heel
John W. Van Heel
Principal Accounting Officer
September 30, 2002
60
Exhibit 3.3
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
eRESOURCE CAPITAL GROUP, INC.
It is hereby certified that:
1. The name of the corporation (hereinafter called the "Corporation") is
eResource Capital Group, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware.
2. Article IV of the Restated Certificate of Incorporation of the Corporation is
amended by deleting Article IV thereof in its entirety and by substituting in
lieu of said Article IV the following:
"ARTICLE IV
(A) The aggregate number of shares of stock of all classes which the
Corporation shall have authority to issue is 210,000,000 shares, of
which 200,000,000 shares shall be common stock of the par value of $.04
per share (the "Common Stock") and 10,000,000 shares shall be preferred
stock of the par value of $.01 per share (the "Preferred Stock").
(B) That, effective at 12:00 a.m., eastern time, on June 17, 2002 (the
"Effective Date"), each 7 issued and outstanding shares of Common Stock
shall be combined, reclassified and changed into 1 share of Common
Stock of the Corporation; provided, however, in lieu of any fractional
interests in shares of Common Stock to which any stockholder would
otherwise be entitled pursuant hereto (taking into account all shares
of capital stock owned by such stockholder), such stockholder shall be
entitled to receive a cash payment equal to such fractional share
multiplied by the then fair market value of the Common Stock as
determined by the Board of Directors of the Corporation.
(C) The Board, or a duly authorized committee thereof, is authorized,
subject to limitations prescribed by law and the provisions of this
Article IV, to provide for the issuance of the shares of Preferred
Stock in series, and by filing a certificate pursuant to the applicable
law of the State of Delaware, to establish from time to time the number
of shares to be included in each such series, and to fix the
designation, powers, preferences and rights of the shares of each such
series and the qualifications, limitations or restrictions thereof. The
authority of the Board with respect to each series shall include but
not be limited to, determination of the following:
(1) the number of shares constituting that series and the
distinctive designation of that series;
(2) the dividend rate on the shares of that series, whether
dividends shall be cumulative,and, if so, from which date or
dates, and the relative rights of priority, if any, of
payment of dividends on shares of that series;
(3) whether that series shall have voting rights, in additions to
the voting rights provided by law, and , if so, the terms of
such voting rights;
(4) whether that series shall have conversion privileges, and, if
so, the terms and conditions of such conversion, including
provision for adjustment of the conversion rate in such events
as the Board shall determine;
61
(5) whether or not the shares of that series shall be redeemable,
and, if so, the terms and conditions of such redemption,
including the date or date upon or after which they shall be
redeemable, and the amount per share payable in case of
redemption, which amount may vary under different conditions and
at different redemption dates;
(6) whether that series shall have a sinking fund for the
redemption or purchase of that series, and if so, the terms and
amount of such sinking fund;
(7) the rights of the shares of that series in the event of
voluntary or involuntary liquidation, dissolution or winding up
of the Corporation, and the relative rights of priority, if any,
of payment of shares of that series; and
(8) any other relative rights, preferences and limitations of that
series.
Dividends on outstanding shares of Preferred Stock shall be paid or
declared and set apart for payment before any dividends shall be paid
or declared and set apart for payment on the Common Stock with respect
to the same dividend period. If upon any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, the assets
available for distribution to holder of shares of Preferred Stock of
all series shall be insufficient to pay such holders the full
preferential amount to which they are entitled, then such assets shall
be distributed ratably among the shares of all series of Preferred
Stock in accordance with the respective preferential amounts (including
unpaid cumulative dividends, if any) payable with respect thereto."
3. Pursuant to Section 242 of the General Corporation Law of the State of
Delaware, on April 10, 2002 the Board of Directors of the Corporation adopted at
a meeting a resolution setting forth the foregoing amendment and declaring said
amendment to be advisable and directing that it be submitted to and considered
by the stockholders of the Corporation for approval.
4. A majority of the holders of record of all the outstanding stock of the
Corporation entitled to vote thereon duly approved the foregoing amendment.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed as of this 17th day of June, 2002.
eRESOURCE CAPITAL GROUP, INC.
By: /s/ Melinda Morris Zanoni
Name: Melinda Morris Zanoni
Title: Executive Vice President
62
Exhibit 21.1
Subsidiaries of eResource Capital Group, Inc.
---------------------------------------------
State of
Incorporation
-------------
flightserv.com, Inc. Delaware
Travel Depot and Cruises, Inc. Georgia
Internet Aviation Services, Limited Nevada
DM Marketing, Inc. Delaware
Avenel Ventures, Inc. Nevada
Avenel Alliance, Inc. Florida
LST, Inc. Delaware
Lifestyle Technologies Atlanta, Inc. Georgia
Lifestyle Technologies Franchising Corp. Nevada
Lifestyle Security, Inc. Nevada
Logisoft Corp. New York
eStorefronts.net Corp. New York
Gateway Development Corp. New York
Capital First, Inc. Georgia
PDK Properties, Inc. Georgia
Regional Developers, Inc. Florida
63
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We consent to the incorporation by reference in the Registration Statement on
Form S-3 (No. 33-57178) and on Form S-8 (No. 33-55476) of eResource Capital
Group, Inc. of our report dated September 13, 2002 which appears on page [21] of
this annual report of Form 10-KSB for the year ended June 30, 2002.
/S/ CRISP HUGHES EVANS LLP
Charlotte, North Carolina
September 23, 2002
64
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 33-57178) and the Registration Statement (Form S-8 No. 33-55476)
pertaining to the eResource Capital Group, Inc. Stock Option Plan of our report
dated September 27, 2001, with respect to the consolidated financial statements
of eResource Capital Group Inc. for the year ended June 30, 2001, included in
the Annual Report (Form 10-KSB) for the year ended June 30, 2002.
/s/ ERNST & YOUNG LLP
Atlanta, GA
September 26, 2002
65