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U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2001
eRESOURCE CAPITAL GROUP, INC.
(Formerly FLIGHTSERV.COM)
(Exact name of registrant as specified in its charter)
DELAWARE 1-8662 23-2265039
(State of Incorporation) (Commission File Number) (IRS Employer
Identification No.)
1225 NORTHMEADOW PARKWAY
SUITE 116
ROSWELL, GA 30076
(770) 754-9449
(Address of registrant's principal executive offices
including zip code and telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Securities
Exchange Act of 1934:
TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, par value $0.04 American Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Securities
Exchange Act of 1934: NONE
Check whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding twelve months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The Registrant's revenues for its most recent fiscal year (12 months
ending June 30, 2001): $13,607,093.
The aggregate market value of the voting stock held by non-affiliates
as of September 28, 2001 was $45,949,000.
Check whether the issuer filed all reports required to be filed by
Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court. Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock as of
September 27, 2001: 76,773,354
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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TABLE OF CONTENTS
Page
PART I
ITEM 1. Description of Business 3
General 3
Aviation Travel Services 4
Telecommunications Call Center 4
Technology Business Consulting 4
Home Technology 4
Internet/Technology Solutions 5
Recent Business Developments 5
Factors Affecting Future Results and Forward-looking Statements 5
Discontinued Operations- Real Estate 9
Employees 9
Recent Accounting Pronouncements 10
ITEM 2. Properties 10
ITEM 3. Legal Proceedings 11
ITEM 4. Vote of Security Holders 11
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters 11
ITEM 6. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
ITEM 7. Financial Statements 15
ITEM 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 36
PART III
ITEM 9. Directors and Executive Officers 36
ITEM 10. Executive and Director Compensation 37
ITEM 11. Security Ownership of Certain Beneficial Owners and Management 39
ITEM 12. Certain Relationships and Related Transactions 40
PART IV
ITEM 13. Exhibits Lists and Reports on Form 8-K 42
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
eResource Capital Group, Inc. (formerly flightserv.com) and its
subsidiaries ("RCG" or the "Company") are currently engaged in the operation of
leisure charter travel services, telecommunications call center, technology
business consulting, home technology, and Internet solutions businesses. RCG is
a Delaware corporation incorporated in 1982.
Prior to fiscal 1996, the Company, then known as Proactive
Technologies, Inc., operated a drug-screening and testing lab and a computer
software development business. In fiscal 1996, the Company discontinued these
operations when it acquired Capital First Holdings, Inc., a residential real
estate development company. Through the first half of fiscal 1999, the Company
was engaged primarily in the design, development and sale of single-family
subdivisions.
In the second half of fiscal 1999, the Company acquired a commercial
real estate business consisting of two strip-mall, shopping centers and a hotel
development concept. Also, during the second half of fiscal 1999, the Company
decided to discontinue its residential real estate development operations and
focus primarily on developing an Internet Web site to provide access to private
aviation travel services. The Company changed its name to flightserv.com in June
1999 to reflect the new business direction. In fiscal 2000, the Company
continued development of the private aviation concept and launched the Private
Seats program in March 2000. The Company was able to generate only minimal
customer bookings through the Private Seats program and did not book any flights
after June 2000.
In fiscal 2001, the Company modified its business plan and acquired
several companies in various business segments. In October 2000, the Company
changed its name to eResource Capital Group, Inc. to reflect the new business
direction. Also, in fiscal 2001 the Company discontinued its commercial real
estate business.
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
In fiscal 1999 and 2000, the Company 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 the Company's Private Seats(TM) 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,
the Company chartered a limited number of flights. Thereafter, the Company has
not generated any revenue from the Private Seats program. The Company currently
has no plans to further develop and market its private aviation charter travel
services business.
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 1,750,000
shares of the Company's common stock, par value $0.04 per share (the "Common
Stock"), for all of IASL's common stock. On August 11, 2000, the 1,750,000
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.
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.
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IASL was a new leisure and business travel services company, which
provided charter services. In October 2000, RCG formed a new wholly-owned
subsidiary, flightserv.com ("FSW"), which now operates the Company's aviation
travel service business. FSW does not own or operate any aircraft. FSW has an
agreement with a tour operator to provide air charter services between
Charlotte, North Carolina and Cancun, Mexico for a 12-month period ending
December 21, 2001. FSW has an agreement with Southeast Airlines to operate the
aircraft. In addition, FSW has an agreement with Casino Express Airline to
charter a 122 seat B-737-200 jet aircraft to provide air service for casinos in
Tunica, Mississippi and an agreement to provide additional charter service to
Cancun with a major tour operator.
In October 2000, FSW entered into a contract with Southeast Airlines to
charter two additional DC-9-30 jet aircraft to provide jet shuttle service
between Norfolk, Virginia and New York City, New York and between Norfolk and
Orlando, Florida. Due to low consumer demand for this service FSW suspended its
jet shuttle operations in January 2001 and terminated its contract with
Southeast for the two DC-9-30 aircraft.
In May 2001, FSW added retail travel agency operations to generate
additional revenue and provide services to FSW's leisure charter operations.
In July 2001, FSW entered into an agreement with Vacation Express,
which is effective December 2001, to create a passenger hub in Orlando-Sanford
International Airport. Pursuant to the terms of the agreement, six commercial
jet aircraft will originate in six eastern and midwestern cities and serve five
Caribbean destinations and Orlando, Florida.
TELECOMMUNICATIONS CALL CENTER
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 8,450,000 shares of the
Company's Common Stock for all of the common stock of DMM. On August 16, 2000,
the 8,450,000 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 recorded 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.
DMM operates a thirty-five (35) seat telecommunications call center
providing telemarketing, help desk and other services for Internet related and
other companies. Currently, none of the seats in the call center are being
utilized.
In fiscal 2001, the Company determined that it would not develop its
Private Seats business and, accordingly, that DMM would not be utilized to
provide services to the Private Seats business. In addition, DMM reduced
employee staff significantly due to its inability to secure service contracts.
As a result, the Company wrote-off unamortized goodwill of $4,660,570 related to
the DMM acquisition in June 2001.
TECHNOLOGY BUSINESS CONSULTING
On February 13, 2001, the Company acquired all of the outstanding
capital stock of Avenel Ventures, Inc. ("Avenel") in exchange of 6,700,000
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's net assets on the
acquisition date aggregating $5,610,144 was allocated to goodwill.
Avenel Ventures provides investment and advisory services to technology
and other companies, and through its wholly-owned subsidiary, Avenel Alliance,
provides e-commerce and business development services to clients implementing
innovative strategies in e-commerce Internet marketing.
Avenel began operations in June 2000 and Avenel Alliance in August
2000. Since that time, the companies had developed relationships with major
companies offering marketing services. In connection with the acquisition of
Avenel, two key employees of Avenel joined the Company's management team. At
June 30, 2001, the Company had reduced the staff of Avenel from ten employees to
one employee in part because certain employees of Avenel became employees of RCG
upon RCG's acquisition of Avenel and in part due to the business downturn in the
economy in general and the technology sector in particular. The companies
continue to pursue consulting contracts that will enable them to grow their
consulting business in the future.
HOME TECHNOLOGY
On April 3, 2001, the Company acquired LST, Inc. d/b/a Lifestyle
Technologies ("LST") in exchange of 8,074,675 shares of Common Stock pursuant to
certain stock purchase agreements. Including direct acquisition costs, the total
purchase price aggregated $7,267,208 and the transaction was recorded using the
purchase method of accounting. The excess value of the purchase price over the
fair value of LST's net assets on the acquisition date aggregating $8,069,669
was allocated to goodwill.
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LST 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. During
fiscal 2001, LST expanded from its headquarters in Charlotte, N.C. to Raleigh,
N.C., Greenville, S.C., Columbia, S.C., Hilton Head, S.C. and Charleston, S.C.
LST creates relationships with high-end ($250,000 and higher) residential
homebuilders providing a basic structured wiring and security package in
exchange for an agreement to introduce the homeowner to a LST sales consultant,
as well as a visit to the local LST showroom. While in the showroom, the
homeowner is introduced to the complete line of home security, entertainment,
lighting, and home office options. Using LST pricing software, the sales
consultant can customize, design and price the consumer's package while they are
enjoying their "showroom experience," a significant advantage within the
industry. LST has also secured relationships with product manufacturers,
distributors and service providers (cable, Internet service provider - "ISP",
broadband and security) to insure the highest quality and most attractive
pricing for the homeowners' needs. The "up sales" for these products and
services usually range from $2,000 to $10,000. LST, however, has installed
packages up to $100,000.
In the fourth quarter of fiscal 2001, LST began development of a
national franchising program, which was implemented in September 2001. In
connection with the franchising program, LST, at June 30, 2001, had received non
binding letters of intent from prospective franchisees to purchase franchise
licenses for 11 markets, including all LST-operated markets, except Charlotte
N.C. Also, in July 2001, LST acquired a home technology business in Atlanta,
Georgia. LST plans to own and operate the Charlotte, NC and Atlanta, GA markets.
INTERNET/TECHNOLOGY SOLUTIONS
On June 19, 2001, the Company acquired Logisoft Computer Products
("Logisoft") in exchange of 5,500,000 shares of Common Stock pursuant to 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 approximately $4,146,489 was allocated to goodwill.
Logisoft works with clients on projects ranging from e-commerce
strategies and implementation, to software and hardware needs, to LAN
configurations and system integration consulting. Logisoft, which was founded in
1989, conducts its business through two units:
Technology Solutions: provides data networking and communications
infrastructure consulting and implementation and is a leading distributor of
third party software to corporate and educational customers.
Internet Solutions: Logisoft Interactive, Logisoft's strategic Internet
services business ("LGI"), is a full spectrum Internet services provider with a
focus on enabling globalization of e-business. LGI creates global and localized
Internet solutions for Global 2000 and top tier private companies that require a
sophisticated cost-effective Internet presence. LGI employs a comprehensive
approach to Internet services engagements including up-front planning with its
strategic consulting services, custom front-end-architecture and web site
development as well as comprehensive back end support upon web site completion.
LGI e-commerce and globalization services address business strategy, currency
exchange, cultural assessment, logistical support, tax, legal and fraud issues,
language requirements and micro-marketing. In addition, LGI partners with
traditional and pure web-based businesses to take those businesses to the
Internet through partner sites. LGI participates in the development and
implementation of the business plan in exchange for revenue-sharing and/or
equity-based arrangements.
RECENT BUSINESS DEVELOPMENTS
On July 10, 2001, the Company acquired certain net assets and the
business of a home technology company in Atlanta, Georgia for approximately
$1,255,000 which was paid in cash ($275,000), common stock (975,556 shares) and
a four - year term note ($250,000). The total purchase price including direct
acquisition costs, aggregated approximately $1,260,000 and the transaction was
recorded 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
aggregating approximately $1,136,000 has been allocated to goodwill.
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 Securities and
Exchange Commission ("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 expectations reflected in such
forward-looking statements are reasonable, it cannot give any assurances that
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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.
Many of RCG's Businesses Have Minimal Operating History
DMM, FSW, Avenel and LST generally have limited operating history upon
which to base an evaluation of their business and prospects. As a result, there
is limited information upon which to base an evaluation of the Company's
prospects. RCG's chances of financial and operating success should be evaluated
in view of the risks, uncertainties, expenses, delays and difficulties
associated with starting a new business.
Loss Of Key Management Personnel Could Adversely Affect The Business
RCG's success depends primarily on the skills of its management team.
Several of its officers have joined the Company recently and many of its key
personnel have worked together for a relatively short time. The loss of one or
more of our key management personnel may adversely affect RCG's business and
financial condition.
RCG Faces Significant Competition
The success of RCG depends on its ability to grow its businesses all of
which operate in highly competitive business segments. Many of its competitors
have financial resources substantially greater than RCG.
RCG Growth Is Dependent On The Successful Completion Of Acquisitions And RCG May
Be Unable To Successfully Execute It's Acquisition Strategy.
RCG anticipates that a portion of the future growth will be
accomplished through acquisitions. The success of this plan depends upon RCG's
ability to:
- identify suitable acquisition opportunities;
- effectively integrate acquired personnel, operations,
products and technologies into our organization;
- retain and motivate the personnel of acquired
businesses;
- retain customers of acquired businesses;
- obtain necessary financing on acceptable terms or be
able to use Common Stock as consideration for
acquisitions.
Additionally, in pursuing acquisition opportunities, RCG may compete with other
companies with similar growth strategies, many of which are larger than RCG and
have greater financial and other resources than does the Company. Competition
for acquisition targets could also result in increased prices for acquisition
targets as well as turbulence in financial markets and the slowdown in the U.S.
economy, may result in diminished pool of companies available for acquisition.
The Loss Of One Or More Major Customers Could Harm RCG's Business.
RCG's businesses currently have just a few or limited number of
customers. The loss of one or more major customers, the failure to attract new
customers on a timely basis, or a reduction in revenue associated with existing
or proposed customers would harm its business and prospects.
RCG Needs To Raise Additional Funds In Order To Continue To Operate And Grow Its
Business.
Based on RCG's current operations and projections, RCG will need to
raise additional funds in order to continue to operate, to grow its business and
to continue to execute its business acquisition strategy. RCG is currently in
the process of attempting to secure debt financing to provide RCG with
additional working capital. If RCG raises funds through debt financing, then RCG
will incur additional interest expense going forward. If RCG raises additional
funds by issuing additional equity securities, then the percentage ownership of
RCG's current stockholders will be diluted. RCG 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, RCG's ability to
complete future financings may be affected by the market price of the Common
Stock. If adequate funds are not available on acceptable terms, RCG will not be
able to continue to fund its existing businesses or its planned expansion or
take other steps necessary to enhance its business, or continue its operations.
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RCG Has Been Incurring Operating Losses And There Can Be No Assurance That RCG
Will Achieve Or Sustain Profitability.
RCG has incurred substantial operating losses in fiscal years ended
June 30, 2001 and 2000. RCG's past operating losses include significant losses
associated with its aviation businesses and in particular losses associated with
the development of the Private Seats(TM) program and the jet shuttle service
based in Norfolk, Virginia. While RCG has suspended its operations of both the
Private Seats(TM) and Norfolk jet shuttle programs, RCG's other businesses have
been and continue to incur operating losses as well. In particular, RCG has
incurred significant operating losses in connection with its efforts to expand
its existing businesses and to grow through acquisitions. As a result of these
costs and uncertain revenue growth, there can be no assurance that RCG will
achieve or sustain profitability.
RCG Has Been Unsuccessful In Implementing Its Prior Business Plans, Has Recently
Modified Its Current Business Plan And May Not Be Able To Successfully Implement
Its Current Business Plan.
During the fiscal year ended June 30, 2000, RCG incurred substantial
expenses developing its Private Seats program. RCG was unable to generate
sufficient customer use of its Private Seats program and had to discontinue the
service shortly after it was launched. As a result, RCG made a decision to
diversify through the acquisitions of DMM, IASL, Avenel, LST and Logisoft. In
addition, RCG expanded its business plan to attempt to acquire expansion-stage
technology companies. At the same time, RCG has had a change in its executive
team. However, RCG has limited resources and there can be no assurance that RCG
will be able to implement its current business plan or achieve profitability. In
addition, if RCG is not successful in implementing its new strategy or if RCG
otherwise believe it to be in its best interest, RCG may modify or change its
business plans.
RCG's Acquisition Strategy Has And Will Continue To Dilute Our Current
Stockholders' Ownership.
RCG issued a total of 30,474,675 shares in connection with the
acquisitions of IASL, DMM, Avenel, LST, and Logisoft and RCG's acquisition
strategy contemplates that it will continue to issue shares of its Common Stock
to make strategic acquisitions and attempt to grow its business in the future.
However, each of the acquisitions that RCG completes in the future will further
dilute its current stockholders' ownership interest in the Company.
Events of September 11, 2001 May Have an Adverse Affect on RCG's 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 sudden and
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 FAA 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 FSW's charter services business including FSW's planned
commencement of 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
recession. The long-term impact of these events on the United States economy is
unknown. These events could have an adverse effect on RCG's home technology and
other business segments.
Volatility of Stock Price/Potential for Future Sales of Restricted Securities
The market price of the Company's Common Stock is highly volatile and
is likely to continue to be subject to wide fluctuations in response to factors
including the announcement by the Company of future acquisitions or other
corporate developments. Additionally, in recent years many companies with
Internet related businesses have experienced extreme price and volume
fluctuations that have often been unexplained by the operating performance of
such companies. The Company's stock price could also be negatively affected by
the future sale of shares of restricted Common stock or shares underlying
options and warrants that have been issued by the Company. Approximately
47,250,000 issued and outstanding shares of the Company's Common Stock are
believed to be restricted securities as defined in Rule 144 promulgated under
the Securities Act of 1933, as amended (the "Securities Act"). Rule 144 provides
generally that restricted securities must be held for one year prior to resale
and provides certain additional limitations on the sale of such shares after one
year including restrictions on the volume that a beneficial owner may sell in
any three month period. Generally, non-affiliated owners may sell restricted
securities without the volume limitations, after the shares have been held for
at least two years. In addition, certain holders of restricted shares have
registration rights and, to the extent any shares of restricted stock are
included in a registration statement filed by the Company, these shares will
become freely tradable on the effective date of such registration statement. The
Company has also issued warrants and options which, if exercised, could result
in up to an additional 25,433,398 shares of the Company's Common Stock being
outstanding.
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FSW Is Dependent On The Availability And Quality Of Charter Flight Operators
FSW does not intend to own or operate any aircraft and will be
dependent upon aircraft operators to provide all flight services. The success of
FSW will depend directly on the ability of aircraft operators to provide quality
service. Shortages in available aircraft could be disruptive to FSW's business.
In addition, the quality of the services (including the reliability and comfort
of services at the airport and in flight) provided by the aircraft operators
will be critical to the success of FSW's business.
FSW's Business May Be Negatively Effected If The Cost Of Chartering Flights
Increases
FSW does not intend to own or operate any aircraft. However, FSW's
revenue for leisure charter flights will be equal to the difference between the
fares negotiated with the travel agency and the cost to operate the aircraft
including the fee charged by the aircraft operator. FSW plans to enter into
contracts with aircraft operators establishing fees, which will be fixed for
limited periods of time. However, if the costs of operating charter flights
increase over time, the aircraft operators may increase the price of chartering
a flight. In that event, FSW will have to increase the price to its customers or
experience a reduced profit margin it receives from each flight. FSW will have
limited control over the cost of aircraft, which could increase as a result of
changes in operating costs (such as jet fuel, pilot fees, airport fees or
maintenance fees) or as a result of other factors such as high demand for
charter flights or general economic conditions or increased FAA regulations. If
aircraft costs increase and, as a result, FSW increases its customers prices, it
may lose customers.
Government Regulation Of The Travel Industry Could Impact FSW's Operations
Certain segments of the travel industry are regulated by the United
States Government and, while FSW is not currently required to be certified or
licensed under such regulation, certain services offered by FSW are affected by
such regulation. Charter flight operators, which FSW depends on, are subject to
vigorous and continuous certification requirements by the Federal Aviation
Administration ("FAA"). Changes in the regulatory framework for aviation travel
(including changes resulting from the events of September 11, 2001) could
adversely affect FSW's business, operations and financial condition.
Logisoft's Fixed-fee Contracts Involve Financial Risk
Many of Logisoft's existing strategic Internet services contracts are
on a fixed-fee basis. Logisoft assumes greater financial risk on fixed-fee
contracts than on time-and-materials engagements. Logisoft has a limited history
in estimating costs for fixed-fee engagements. If Logisoft fails to estimate
costs on fixed-fee contracts accurately or encounter unexpected problems, its
financial performance will be adversely affected. To reduce this financial risk,
Logisoft is continuously refining its estimating methods, attempts to price new
contracts on a time-and-materials basis and negotiates payments for extended
requirements gathering engagements when possible. From time to time, Logisoft
has had to commit unanticipated resources to complete some of its projects,
resulting in lower gross margins. Logisoft may experience similar situations in
the future.
Logisoft Generally Does Not Have Long-term Contracts
Its clients generally retain Logisoft on a project-by-project basis,
rather than under long-term contracts. As a result, a client may or may not
engage Logisoft 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 Logisoft's financial condition.
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The Developing Market For Strategic Internet Services And The Level Of
Acceptance Of The Internet As A Business Medium Will Affect Logisoft's Business
The market for strategic Internet services is relatively new and is
evolving rapidly. Logisoft's future growth is dependent upon its ability to
provide strategic Internet services that are accepted by its existing and future
clients as an integral part of its business model. 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:
- the growth in consumer access to and acceptance of
new interactive technologies such as the Internet;
- companies adopting Internet-based business models
- the development of technologies that facilitate
two-way communication between companies and targeted
audiences.
- the level of capital spending on Internet, technology
and communications initiatives; and
- 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 have made many predictions concerning the
growth of the Internet as a business medium. These predictions should not be
relied upon and 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 Logisoft's services do
not achieve market acceptance, Logisoft's revenue and operating results may be
volatile and insufficient.
Logisoft May Not Be Able To Keep Up With The Continuous Technological Change In
Its Market
Logisoft's success will depend, in part, on its ability to respond to
technological advances. Logisoft may not be successful in responding quickly,
cost-effectively and sufficiently to these developments. Many of Logisoft's
competitors are larger than Logisoft 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. Logisoft
will not be able to complete effectively if Logisoft 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.
Logisoft's Business Is Largely Dependent Upon Retaining Its Manufacturer
Authorizations That Allow It To Sell Software To Educational Facilities At
Discounted Pricing
Since 1991, Logisoft has been accumulating authorizations from key
software manufacturers that allow it to sell products to educational facilities
at deep discounts. If Logisoft were to lose any of these authorizations, its
ability to sell computer products to educational customers could 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 Logisoft's ability to meet
customer demand, thereby reducing sales and profits.
DMM Has Been Unable To Consistently Generate Service Contracts For Its Call
Center
DMM has a 35-seat telecommunications call center that is currently not
being utilized. RCG had intended to utilize a portion of the call center in
connection with its private aviation travel services business but RCG determined
that such services from DMM were not needed after it determined not to proceed
with its Private Seats program. In order to utilize its call center, DMM is
dependent upon securing service contracts. To date, DMM has not been able to
secure sufficient service contracts to utilize its call center in a profitable
manner.
STRATOS INNS CONCEPT
The Company owns the Stratos Inns business concept and during 2000 and
2001 the Company held a lease on property 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 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
9
10
noncash 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,
Georgia 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.
EMPLOYEES
At June 30, 2001, the Company had 135 full-time employees:
Aviation Travel Services 12
Telecommunication Call Center 5
Technology Business Consulting 1
Home Technology 60
Internet/Technology Solutions 50
Corporate 7
---
135
---
The Company has no collective bargaining agreements with any unions and
believes that overall relations with its employees are good.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued FAS No.
141 "Business Combinations" ("FAS 141") and FAS No. 142 "Goodwill and Other
Intangible Assets" ("FAS 142"). FAS 141 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. FAS 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead be tested for impairment at
least annually. 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.
The Company adopted FAS 141 and 142 effective July 1, 2001. In adopting
FAS 142, the Company will no longer amortize goodwill. The Company recorded
$2,030,630 of goodwill amortization in fiscal 2001 or the equivalent of $0.04
per share. The Company would have recorded approximately $4,038,000 of goodwill
amortization in fiscal 2002 based on the Company's existing goodwill at June 30,
2001 and the goodwill related to the business acquisition in July 2001. The
Company has not yet determined what other effect, if any, FAS 141 and 142 will
have on the Company's results of operations or financial position.
ITEM 2. PROPERTIES
At June 30, 2001 the Company leased office building space as follows:
Business Segment Locations Square Feet
---------------- --------- -----------
Aviation Travel Services Atlanta, GA/Stockbridge, GA 4,549
Call Center Pensacola, FL 7,380
Technology Business Consulting Ft. Lauderdale, FL 1,449
Home Technology Charlotte,NC/Morrisville,NC/Hilton Head Island, SC/Greenville, SC 19,431
Internet/Technology Solutions Fairport, NY/Chicago, IL/Kansas City, MO 13,087
Corporate Charlotte, NC/Atlanta, GA 6,666
10
11
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.
ITEM 4. VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders of
the Company during the quarter ended June 30, 2001.
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
("AMEX") 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 AMEX:
Fiscal 2001 High Low Close
----------- ------ ------ ------
First Quarter $ 2.00 $ 0.25 $ 1.05
Second Quarter 1.50 0.45 0.90
Third Quarter 1.50 0.75 0.88
Fourth Quarter 1.20 0.66 0.84
Fiscal 2000 High Low Close
----------- ------ ------ ------
First Quarter $ 7.31 $ 2.00 $ 6.50
Second Quarter 11.88 4.88 8.88
Third Quarter 12.00 4.00 6.25
Fourth Quarter 6.31 0.56 0.81
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 number of record holders of the Company's Common Stock as of
September 28, 2001 was 1,140.
Sales of Unregistered Securities
During fiscal 2001, the Company sold the following shares in private
placements:
1. In August 2000, the Company sold 7,070,000 shares of
restricted Common Stock at $0.375 per share in a private
placement transaction. After fees and expenses, the Company
realized $2,409,000 from the private placement.
2. In January and February 2001, the Company raised
$575,000 in the private placement sale of 287,500 units. Each
unit consists of 1) two shares of restricted Common Stock, 2)
a warrant to purchase two shares of restricted Common Stock at
$3 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; 3) a warrant to purchase two shares of
restricted Common Stock at $4 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.
11
12
During fiscal 2001, the Company issued 30,474,675 shares of restricted
Common Stock in connection with the acquisitions of IASL, DMM, Avenel, LST, and
LCP as follows:
1. In August 2000, the Company issued 1,750,000 shares of Common
Stock in exchange for all the outstanding capital stock of
IASL;
2. In September 2000, the Company issued 8,450,000 shares of
Common Stock in exchange for all the outstanding capital stock
of DMM;
3. In February 2001, the Company issued 6,700,000 shares of
Common Stock in exchange for all the outstanding capital stock
of Avenel;
4. In April 2001, the Company issued 8,074,675 shares of Common
Stock in exchange for all the outstanding capital stock of
LST; and
5. In June 2001, the Company issued 5,500,000 shares of Common
Stock for all the outstanding capital stock of Logisoft.
The securities issued in connection with the private placement sales in
January and February 2001 and the acquisition of IASL, DMM and Avenel were
issued without registration under the Securities Act, in reliance upon the
exemption in Section 4(2) of the Securities Act. The Company based such reliance
upon the factual representations made to the Company by the recipients of the
securities as to such recipients' investment intent and sophistication, among
other things.
The securities issued in connection with the private placement sale in
August 2000 and the acquisitions of LST and Logisoft 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 upon the factual representations made to the Company by the
recipients of the securities as to such recipients' investment intent and
sophistication, among other things.
Also in fiscal 2001, the Company issued 2,863,427 shares of restricted
Common Stock in connection with the exercise of Common Stock options and
warrants and 1,696,042 shares of restricted Common Stock for services, including
400,000 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 2001, the Company issued options and warrants to purchase its
Common Stock to employees, directors, certain investors and firms for consulting
services. Following is a summary of options and warrants issued in fiscal 2001:
Number of Shares Exercise Vesting
Purchasable Price Per Share Grant Date Term Period
---------------- --------------- ---------- ------- ---------
2,000,000 $ 0.04 8/31/00 10 yrs. *
3,000,000 0.25 8/23/00 10 12 mos.
500,000 0.50 8/15/00 10 *
3,710,000 0.70 12/29/00 10 *
5,353,743 0.75 1/19/01 5 36
100,000 0.81 5/01/01 4 36 to 42
605,000 0.84 5/01/01 10 38
1,027,650 0.85 6/19/01 10 18
320,628 0.90 4/03/01 10 18 to 48
270,000 0.95 6/14/01 10 *
10,000 1.00 5/01/01 3 *
50,000 1.10 3/15/01 3 *
500,000 1.44 12/7/00 *
700,000 3.00 2/1/01 ** *
575,000 4.00 2/1/01 ** *
----------
18,722,021
==========
* Fully vested.
** The term is variable subject to the market value of the
Common Stock and other conditions.
Of the options and warrants indicated in the above table, 11,433,278
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.
12
13
Information regarding other sales of unregistered securities by the
Company during the fiscal year ended June 30, 2001 is contained in the Company's
Quarterly Reports on Form 10-QSB for the quarters ended September 30, 2000,
December 31, 2000 and March 31, 2001.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
In fiscal 2000, the Company's continuing operations included
development of an Internet-based, private aviation travel services business and
other investments. In addition to these businesses, the Company, in fiscal 2001
acquired leisure and business travel services, telecommunications call center,
technology consulting, home technology, and Internet solutions businesses. Due
to these business acquisitions, the Company's revenue and expense category
amounts in fiscal 2001 vary significantly from fiscal 2000. Also in fiscal 2001,
the Company discontinued its commercial real estate business.
Results of Continuing Operations
The following table summarizes operating results by business segment
for fiscal 2001 and 2000:
Gross
Segment Sales Profit (Deficit) Net Loss
------------------------------ ------------ ---------------- ------------
Aviation Travel Services
Charter $ 10,017,428 $ 708,766 $ (221,604)
Jet Shuttle 1,162,045 (266,883) (1,279,117)
------------ ------------ ------------
11,179,473 441,883 (1,500,721)
Call Center 229,615 229,615 (5,723,419)
Technology Business Consulting 878,477 878,477 (202,991)
Home Technology 974,602 47,725 (1,465,882)
Internet/Technology Solutions 344.926 45,840 (86,508)
Corporate -- -- (12,078,569)
------------ ------------ ------------
$ 13,607,093 $ 1,643,540 $(21,058,090)
============ ============ ============
The Company's revenues in fiscal 2001 were $13,607,093 compared to
$10,040 in fiscal 2000. The increase in fiscal 2001 is due to the newly acquired
businesses. In fiscal 2000, the Company generated $10,040 of revenue from the
Private Seats program which began flight operations in April 2000. The Private
Seats program did not generate any revenue in fiscal 2001. The Company operated
jet shuttle flights from November 2000 to January 2001. Due to low customer
demand, the Company suspended its jet shuttle services in January 2001. The
Company's leisure charter operations commenced in October 2000.
Gross profit in fiscal 2001 was $1,643,540 compared to a deficit of
$83,521 in fiscal 2000. The increase in fiscal 2001 is due to the newly acquired
businesses.
In fiscal 2001, the Company recognized $6,885,201 of non-cash expense
related to the issuance of stock options and warrants compared to $48,996,238 in
fiscal 2000. This expense decreased in fiscal 2001 because the Company granted
fewer compensatory options and warrants than in fiscal 2000.
Selling, general and administrative expenses -- other in fiscal 2001
were $6,593,637 compared to $6,677,618 in fiscal 2000. This decrease is due to
the non-recurring development costs of the Private Seats program partially
offset by the expenses of newly acquired businesses.
The Company's depreciation and amortization expense in fiscal 2001 was
$2,299,653 compared to $154,367 in fiscal 2000. The increase is due primarily to
amortization of the goodwill related to the business acquisitions in the current
fiscal year, which aggregated $2,030,630. Amortization of the Company's web site
and depreciation of its businesses acquired in fiscal 2001 also contributed to
the increase.
13
14
Also, in fiscal 2001, the Company recorded noncash 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
Seats web site ($753,931).
Discontinued Operations
In fiscal 2001 and 2000, the Company recognized a loss on disposal of
discontinued operations of $300,000 and $600,000, respectively, which reflect
revised estimates of costs and expenses to liquidate the remaining assets of
discontinued residential real estate operations and, in fiscal 2001, a federal
tax income assessment from prior years. Also in fiscal 2001 and 2000, the
Company recognized a loss from discontinued operations of $332,611 and $461,232,
respectively, which reflects the operating results of the Company's commercial
real estate operations that were discontinued in fiscal 2001.
Liquidity and Capital Resources
The net loss in fiscal 2001 of $21,690,701 was offset by an increase in
stockholder's equity of $26,841,567 related to the stock purchases of IASL, DMM,
Avenel, LST and Logisoft. A $2,689,701 increase related to the issuance of stock
and stock options and $3,495,476 of proceeds from the sale of Common Stock and
exercise of options and warrants resulted in a net increase in stockholders'
equity of $11,423,677.
The Company experienced an operating loss of $5.3 million before
non-cash expenses of $15.8 million during fiscal 2001. The Company used cash of
$3.6 million in operations in fiscal 2001 and has cash and cash equivalents of
$1.3 million at June 30, 2001. As a result of these factors, the Company will
continue to monitor costs in relation to revenues, and if necessary, undertake
cost reduction measures. In addition, the Company is actively pursuing debt and
equity investment alternatives to provide additional cash to support operations.
The Company believes the existing balances of cash and cash equivalents
and cash flow from operations, coupled with the assurance of financial support
from one of the Company's shareholders, will be sufficient to meet working
capital and capital expenditure requirements for the next twelve months.
The Company's aviation travel service business has been cash flow
positive since terminating the Jet Shuttle operations in the third quarter of
fiscal 2001. The Company expects cash flow to increase significantly in the
second half of fiscal 2002 when it realizes the benefit of its new leisure
charter contract which is projected to generate $40,000,000 in annual revenues
and $1,600,000 of annual cash flow.
The Company currently is not utilizing its 35-seat telecommunication
call center and, therefore, is not generating any revenue from its
telecommunications business at this time. During fiscal 2001, in connection with
the decision to shut down the Private Seats program, the Company determined that
it would not need the call center to support its travel services business. As a
result, the Company will need to generate external service contracts in order to
generate revenue from its call center.
During fiscal 2001, the Company's technology consulting business was
substantially reduced due in part to the economic conditions in the technology
market place and in part to the transition of certain employees of Avenel to
RCG. After joining RCG, these employees focused on developing RCG's business
plan as opposed to providing services for third parties. Currently, the Company
has one employee providing technology consulting services and, while it intends
to attempt to grow this business in the future, the Company does not expect
significant revenue increases from consulting services during fiscal year 2002.
In the fourth quarter of fiscal 2001, the Company began development of
a national franchising program for its home technology business and determined
to sell certain markets to franchisees. The home technology business also
reduced staff in connection with this change in the business plan. Further, the
Company has identified revenue enhancements and other cost savings that should
reduce the home technology operating losses significantly in fiscal 2002.
In fiscal 2002, the Company intends to continue the development of its
Internet/Technology solutions business. The Company added two (2) new markets in
June 2001 and has restructured its administrative staff to reduce costs.
Currently, the Internet/Technology solutions business has significantly reduced
its cash flow deficit from the previous 12 months of operations and the Company
expects this improvement to continue.
Also, the Company expects corporate overhead expenses to decrease
approximately $1,000,000 in fiscal 2002 due to staff reductions, limited
investor relations services, reduced business acquisition activities, and
relocation of the Atlanta corporate office to more economical office space.
14
15
In addition to the changes discussed above, the Company has taken the
following actions to provide near-term liquidity while it continues the
development of its businesses in an effort to reach positive cash flow from
operations:
(i) Obtained $1,100,000 in term loans subsequent to June 30, 2001
(ii) Obtained a commitment letter for a $1,000,000 term loan from
certain shareholders.
(iii) Plans to continue the sale of certain marketable securities.
With the measures discussed above (including completion of the $1
million term loan), the Company expects to have adequate cash balances to
operate its businesses while it continues to focus on improving its cash flow.
However, even with these measures, the Company may need additional debt or
equity financing depending upon its ability to grow its newly acquired
businesses and improve cash flow from operations. 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.
The Company's business, results of operations, and financial condition
are subject to many risks. In addition, statements in this annual report
relating to matters that are not historical facts are forward-looking statements
based on management's belief and assumptions using currently available
information. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it cannot give any assurances
that these expectations will prove to be correct. Such statements involve a
number of risks and uncertainties, including, but not limited to those discussed
herein or in other documents filed by the Company with the Securities and
Exchange Commission.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are contained in this Item 7:
Report of Independent Auditors.
Consolidated Balance Sheets as of June 30, 2001 and 2000.
Consolidated Statements of Operations for the years ended June 30, 2001 and
2000.
Consolidated Statements of Changes in Shareholders' Equity for the years ended
June 30, 2001 and 2000.
Consolidated Statements of Cash Flows for the years ended June 30, 2001 and
2000.
Notes to the Consolidated Financial Statements.
15
16
REPORT OF INDEPENDENT AUDITORS
Board of Directors
eResource Capital Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
eResource Capital Group, Inc. and Subsidiaries (formerly flightserv.com) as of
June 30, 2001 and 2000 and the related consolidated statements of operations,
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of eResource Capital
Group, Inc. and Subsidiaries at June 30, 2001 and 2000, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
September 27, 2001
16
17
eRESOURCE CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30,
-----------------------------------
2001 2000
------------ ------------
ASSETS
Cash and cash equivalents $ 1,285,994 $ 420,587
Accounts receivable, net of allowance for doubtful accounts of
$105,940 and $0, respectively 2,018,159 45,881
Inventory 125,970 --
Investments 1,591,543 --
Prepaid expenses - compensation 627,570 4,615,862
Prepaid expenses - charter flight costs 833,081 --
Prepaid expenses - other 397,020 119,912
------------ ------------
Total current assets 6,879,337 5,202,242
Net assets of discontinued operations -- 125,936
Deferred costs and other assets 319,172 717,528
Predevelopment costs -- 1,164,043
Property and equipment, net 1,645,057 1,105,728
Goodwill, net of accumulated amortization of $1,155,359 17,898,207 --
------------ ------------
Total assets $ 26,741,773 $ 8,315,477
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable - current portion $ 488,987 $ --
Notes and amounts due to affiliates 336,052 --
Accounts payable and accrued expenses 4,730,389 751,235
Deposits and other liabilities 657,500 --
Deferred income 1,161,056 --
------------ ------------
Total current liabilities 7,373,984 751,235
Net liabilities of discontinued operations 200,824 --
Notes payable 179,046 --
Shareholders' equity:
Common stock, $.04 par value, 200,000,000 shares
authorized, 75,833,728 and 33,554,584 issued, respectively 3,033,349 1,342,183
Additional paid-in capital 109,357,076 78,147,672
Accumulated deficit (93,478,807) (71,788,106)
Unrealized gain on investments available for sale 87,634 --
Treasury stock - at cost (35,930 and 435,930 shares, respectively) (11,333) (137,507)
------------ ------------
Total shareholders' equity 18,987,919 7,564,242
------------ ------------
Total liabilities and shareholders' equity $ 26,741,773 $ 8,315,477
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
17
18
eRESOURCE CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30,
-----------------------------------
2001 2000
------------ ------------
Sales $ 13,607,093 $ 10,040
Cost of sales 11,963,553 93,561
------------ ------------
Gross profit (deficit) 1,643,540 (83,521)
General and administrative expense - compensation related to
issuance of stock options and warrants 6,885,201 48,996,238
General and administrative expenses - other 6,593,637 6,677,618
Bad debt expense 95,924 --
Depreciation and amortization 2,299,653 154,367
Interest (income) expense, net (30,104) (49,143)
Loss on investments 278,775 1,011,716
Write off of goodwill 4,660,570 --
Write off of web site development costs 753,931 --
Write off of pre-development costs 1,164,043 --
------------ ------------
Loss before discontinued operations (21,058,090) (56,874,317)
Discontinued operations:
Loss from discontinued operations (332,611) (461,232)
Loss on disposal of discontinued operations (300,000) (600,000)
------------ ------------
Net loss $(21,690,701) $(57,935,549)
------------ ============
Basic and diluted loss per share:
Loss per share before discontinued operations $ (0.39) $ (1.80)
Discontinued operations (0.01) (0.03)
------------ ------------
Net loss $ (0.40) $ (1.83)
============ ============
Weighted average shares outstanding used in
calculating basic and diluted net loss per share 54,183,520 31,596,541
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
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19
eRESOURCE CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2001 AND 2000
Common Stock Additional Unrealized Gain
----------------------- Paid-In Accumulated On Investments Treasury
Shares Amount Capital Deficit Available for Sale Stock Total
----------- ---------- ------------- ------------ ------------------ --------- ------------
Balance at June 30, 1999 31,593,235 $1,263,729 $ 18,089,625 $(13,852,557) $ -- $(331,992) $ 5,168,805
Net loss June 30, 2000 -- -- -- (57,935,549) -- -- (57,935,549)
Issuance of Common Stock 825,354 33,014 4,559,219 -- -- -- 4,592,233
Exercise of options and
warrants 1,135,995 45,440 (45,440) -- -- -- --
Issuance of treasury stock -- -- 1,184,495 -- -- 68,005 1,252,500
Legal settlement -- -- 67,334 -- -- 126,480 193,814
Issuance of options and
warrants -- -- 54,292,439 -- -- -- 54,292,439
----------- ---------- ------------- ------------ ------- --------- ------------
Balance at June 30, 2000 33,554,584 1,342,183 78,147,672 (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 7,645,000 305,800 2,623,678 -- -- -- 2,929,478
Purchase of businesses 30,474, 675 1,218,987 25,622,580 -- -- -- 26,841,567
Exercise of options and warrants 2,863,427 114,537 451,461 -- -- -- 565,998
Issuance of Common Stock for
services 1,296,042 51,842 1,173,859 -- -- -- 1,225,701
Issuance of treasury stock for
services -- -- (126,174) -- -- 126,174 --
Issuance of options and
warrants -- -- 1,464,000 -- -- -- 1,464,000
----------- ---------- ------------- ------------ ------- --------- ------------
Balance at June 30, 2001 75,833,728 $3,033,349 $ 109,357,076 $(93,478,807) $87,634 $ (11,333) $ 18,987,919
=========== ========== ============= ============ ======= ========= ============
The accompanying notes are an integral part of these consolidated financial
statements.
19
20
eRESOURCE CAPITAL GROUP, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
2001 2000
------------ ------------
Cash flows used by operating activities:
Loss before discontinued operations $(21,058,090) $(56,874,317)
Adjustments to reconcile net loss to net cash used by operating activities:
Compensation expense related to issuance of options and warrants 6,885,201 48,996,238
Depreciation and amortization 2,299,653 154,367
Bad debt expense 95,924 --
Issuance of common stock for services 624,128 --
Gain on sales of investments (90,071) --
Unrealized loss on stock purchase warrants 368,843 --
Stock and warrants received for services (723,156) --
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, net of businesses acquired:
Accounts and notes receivables (380,370) 419,460
Inventory 24,347 --
Prepaid expenses (922,150) (115,481)
Deferred costs and other assets (124,119) (22,272)
Accounts payable and accrued expenses 1,133,996 369,533
Deposits and other liabilities 657,500 --
Unearned income 1,036,758 --
------------ ------------
Cash used by operating activities before discontinued operations (3,593,062) (7,072,472)
------------ ------------
Discontinued operations, net (5,021) (507,458)
------------ ------------
Net cash used by operating activities (3,598,083) (7,579,930)
------------ ------------
Cash flows from investing activities:
Sales of investments 112,712 --
Purchase of property and equipment (107,150) (1,140,628)
Cash acquired in business acquisitions 924,396 --
Predevelopment costs -- (78,995)
------------ ------------
Net cash provided (used) by investing activities 929,958 (1,219,623)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 3,292,707 5,844,733
Notes payable proceeds 228,597 --
Proceeds from debt from affiliates 12,228 --
------------ ------------
Net cash provided by financing activities 3,533,532 5,844,733
------------ ------------
Net increase (decrease) in cash and cash equivalents 865,407 (2,954,820)
Cash and cash equivalents at beginning of year 420,587 3,375,407
------------ ------------
Cash and cash equivalents at end of year $ 1,285,994 $ 420,587
============ ============
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest $ 627,610 $ 571,150
============ ============
Income taxes $ -- $ --
============ ============
Schedule of non-cash transactions:
Common Stock issued for acquired businesses $ 26,841,567 $ --
============ ============
Sale of real estate in exchange for note receivable $ 2,265,000 $ 1,002,570
============ ============
Issuance of compensatory stock purchase warrants
in connection with strategic vendor alliances $ 1,053,360 $ 5,389,686
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
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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") (formerly flightserv.com) and its subsidiaries (collectively
the "Company"). In October 2000, RCG changed its name from flightserv.com to
reflect the new business direction of the Company. Prior to June 30, 2000, the
Company was engaged in the development of its private aviation business and
limited commercial real estate activities. In fiscal 2001, the Company acquired
several companies and businesses. At June 30, 2001, the Company operated leisure
charter aviation travel services, telecommunications call center, technology
consulting, home technology, and Internet/technology solutions businesses in the
United States.
All significant intercompany balances and transactions have been
eliminated. Certain prior period amounts have been reclassified to conform to
the fiscal 2001 presentation and to reflect the commercial real estate business
segment as discontinued operations.
The Company experienced an operating loss of $5.3 million before
non-cash expenses of $15.8 million during fiscal 2001. The Company used cash of
$3.6 million in operations in fiscal 2001 and has cash and cash equivalents of
$1.3 million at June 30, 2001. As a result of these factors, the Company will
continue to monitor costs in relation to revenues, and if necessary, undertake
cost reduction measures. In addition, the Company is actively pursuing debt and
equity investment alternatives to provide additional cash to support operations.
The Company believes the existing balances of cash and cash equivalents
and cash flow from operations, coupled with the assurance of financial support
from one of the Company's shareholders, will be sufficient to meet working
capital and capital expenditure requirements for the next twelve months.
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 managements 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:
- Cash and cash equivalents: The carrying amount
reported in the balance sheet for cash
approximates its fair value.
- Accounts receivable and accounts payable: Due to
their short term nature, the carrying
amounts reported in the balance sheet for
accounts receivable and accounts payable
approximate their fair value.
- Marketable Securities: The fair values for
available-for-sale equity securities are
based on quoted market prices.
- Notes Payable: The carrying amount of the Company's
note payable approximates its fair value, as
the interest rate is variable.
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.
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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 2001 aggregated $368,843. The Company did not hold any stock
purchase warrants prior to July 1, 2000.
INVENTORY
Inventory is stated at cost using the first-in, first-out method.
Inventory consists primarily of finished goods.
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 the assets
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.
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.
Technology Business Consulting
The Company provides e-commerce 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.
Deferred revenue consists of advanced payments for consulting services and is
recognized over a one-year period from the date of the consulting agreement.
Home Technology
The Company's home technology services work is completed in two phases
- wiring, then hardware installation. The Company invoices its customers and
records revenue as work is completed on each project. For customers that
purchase contracts for alarm monitoring services, revenue is recognized only
when the contracts are sold to third parties. The Company sells substantially
all of its alarm monitoring contracts immediately subsequent to the date the
contracts are signed by the customer.
Internet/Technology Solutions
Internet services project revenue is recognized on a percentage of
completion basis for fixed fee contracts, based on the ratio of costs incurred
to total estimated costs for individual projects. Revenue is recognized as
services are performed for time and material contracts at the applicable billing
rates.
22
23
Unbilled revenue represents revenue earned under contracts in advance
of billings. Such amounts are normally converted to accounts receivable within
90 days. Advanced billings represent amounts billed or cash received in advance
of services performed or cost incurred under contracts. Any anticipated losses
on contracts are charged to earnings when identified.
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.
IMPAIRMENT OF LONG-LIVED ASSETS
Goodwill represents the excess of cost over net tangible assets
acquired of purchased businesses and through June 30, 2001 was being amortized
using the straight-line method over five years.
The Company evaluates goodwill for impairment when events and
circumstances indicate that the assets might be impaired and records an
impairment loss if the undiscounted cash flows estimated to be generated by
those assets are less than the carrying amount of those assets. The impairment
loss recognized is equal to the difference between the discounted cash flows and
the carrying amount of the assets. As a results of such evaluation, the Company
recorded a charge of $4,660,570 related to goodwill impairment in connection
with its acquisition of DM Marketing, Inc. during the year ended June 30, 2001.
NET LOSS PER SHARE
The Company computes net loss per share in accordance with SFAS No.
128, "Earnings per Share" which requires dual presentations of basic earnings
per share ("EPS") and diluted EPS.
Basic earnings per share is computed using the weighted average number
of common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common shares outstanding and
potentially dilutive shares outstanding during the period. Options and warrants
to purchase 25,433,398 and 22,445,120 shares of Common Stock were outstanding at
June 30, 2001 and 2000, respectively. Such outstanding options and warrants
could potentially dilute earnings per share in the future but have not been
included in the computation of diluted net loss per share in 2001 and 2000 as
the impact would have been antidilutive.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising expense
aggregated $522,944 and $134,424 for the years ended June 30, 2001 and 2000,
respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with the liability
method as provided under SFAS 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 reported period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued FAS No.
141 "Business Combinations" ("FAS 141") and FAS No. 142 "Goodwill and Other
Intangible Assets" ("FAS 142"). FAS 141 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. FAS 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead be tested for impairment, at
least annually. 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.
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The Company adopted FAS 141 and 142 effective July 1, 2001. In adopting
FAS 142, the Company will no longer amortize goodwill. The Company recorded
$2,030,630 of goodwill amortization in fiscal 2001 or the equivalent of $0.04
per share. The Company would have recorded approximately $4,038,000 of goodwill
amortization in fiscal 2002 based on the Company's existing goodwill at June 30,
2001 and the goodwill related to the business acquisition in July 2001. The
Company has not yet determined what other effect, if any, FAS 141 and 142 will
have on the Company's results of operations or financial position.
NOTE 2. ACQUISITIONS
RECENT BUSINESS DEVELOPMENTS
On July 10, 2001, the Company acquired certain net assets and the
business of a home technology company in Atlanta, GA for $1,255,000 which was
paid in cash ($275,000), Common Stock (975,556 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 approximately $1,135,860
which was allocated to goodwill.
AVIATION TRAVEL SERVICES
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 1,750,000
shares of the Company's Common Stock for all of IASL's common stock. On August
11, 2000, the 1,750,000 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, which
offers charter services. In October 2000, RCG formed a new wholly-owned
subsidiary, flightserv.com ("FSW"), which now operates the Company's aviation
travel services business. FSW has an agreement with a tour operator to provide
air charter services between Charlotte, North Carolina and Cancun, Mexico for a
12-month period ending December 21, 2001. FSW has an agreement with Southeast
Airlines to operate the aircraft. In addition, FSW signed a contract with Casino
Express Airline to provide air service for casinos in Tunica, Mississippi and
has an agreement to provide additional Cancun service for a major tour operator.
In October 2000, FSW entered into a contract with Southeast Airlines to
charter two additional jet aircraft to provide jet shuttle service between
Norfolk, Virginia and New York City, New York and between Norfolk and Orlando,
Florida. Due to low consumer demand for this service FSW suspended its jet
shuttle operations in January 2001 and terminated its contract with Southeast
Airlines for the two aircraft.
In May 2001, FSW added retail travel agency operations to generate
additional revenue and provide services to FSW's leisure charter operations.
In July 2001, FSW has entered into an agreement with Vacation Express
to create a passenger hub in Orlando-Sanford International Airport. Pursuant to
the terms of the agreement, six commercial jet aircrafts will originate in six
eastern and Midwestern cities and serve five Caribbean destinations and Orlando.
TELECOMMUNICATIONS CALL CENTER
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 8,450,000 shares of the
Company's Common Stock for all of the common stock of DMM. On August 16, 2000,
the 8,450,000 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.
DMM operates a telecommunications call center providing telemarketing,
help desk and other services for Internet related companies. Michael D. Pruitt,
the Company's current Chief Executive Officer, was an officer, director and
a 50% shareholder of DMM at the time it was acquired by the Company. Mrs. Pruitt
was not an officer, director, or shareholder of RCG prior to its acquisition
of DMM.
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TECHNOLOGY BUSINESS CONSULTING
On February 13, 2001, the Company acquired all of the Common Stock of
Avenel Ventures, Inc. ("Avenel") in exchange of 6,700,000 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's net assets on the acquisition date
aggregating $5,610,144 was allocated to goodwill.
Michael D. Pruitt 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.
Avenel Ventures provides investment and advisory services to technology
companies, and through its wholly-owned subsidiary, Avenel Alliance, provides
e-commerce and business development services to clients implementing innovative
strategies in e-commerce Internet marketing.
HOME TECHNOLOGY
On April 3, 2001, the Company acquired LST, Inc. d/b/a Lifestyle
Technologies ("LST") in exchange of 8,074,675 shares of Common Stock pursuant to
certain stock purchase agreements. Also, the Company may issue an additional
2,000,000 shares of Common Stock in connection with the acquisition if LST
achieves certain performance goals through December 31, 2004. At June 30, 2001,
LST had met none of the performance goals. 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 LST's net assets on the acquisition date aggregating
$8,069,669 was allocated to goodwill.
Michael D. Pruitt was a 3.2% shareholder of LST prior to the
acquisition by the Company. Avenel was a 3.5% shareholder of LST prior to the
acquisition by the Company.
LST 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.
During fiscal 2001, LST expanded from its headquarters in Charlotte, N.C. to
Raleigh, N.C., Greenville, S.C., Columbia, S.C., Hilton Head, S.C. and
Charleston, S.C. LST has also secured relationships with product manufacturers,
distributors and service providers.
In the fourth quarter of fiscal 2001, LST began development of a
national franchising program. In connection with the franchising program, LST,
at June 30, 2001, had received non binding letters of intent from prospective
franchisees to purchase franchise licenses in 11 markets, including all of the
LST-operated markets except Charlotte, N.C. Also in July 2001, LST acquired a
home technology business in Atlanta, Georgia. LST plans to own and operate the
Charlotte, NC and Atlanta, GA markets.
INTERNET/TECHNOLOGY SOLUTIONS
On June 19, 2001, the Company acquired Logisoft Computer Products Corp.
("Logisoft") in exchange of 5,500,000 shares of Common Stock pursuant to an
Agreement and Plan of Merger. Also, the Company may issue an additional 500,000
shares of Common Stock in connection with the acquisition if Logisoft achieves
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 approximately
$4,146,489 was allocated to goodwill.
Logisoft works with clients on projects ranging from e-commerce
strategies and implementation, to software and hardware needs, to LAN
configurations and system integration consulting. Logisoft, which was founded in
1989, conducts its business through two units:
Technology Solutions: provides data networking and communications
infrastructure consulting and implementation and is a leading distributor of
third party software to corporate and educational customers.
Internet Solutions: Logisoft Interactive, Logisoft's strategic
Internet services business ("LGI"), is a full spectrum Internet services
provider with a focus on enabling globalization of e-business. LGI creates
global and localized Internet solutions for Global 2000 and top tier private
companies that require a sophisticated cost-effective Internet presence. LGI
employs a comprehensive approach to Internet services engagements including
up-front planning with its strategic consulting services, custom
front-end-architecture and web site development as well as comprehensive back
end support upon web site completion. LGI's e-commerce and globalization
services address business strategy, currency exchange, cultural assessment,
logistical support, tax, legal and fraud issues, language requirements and
micro-marketing. In addition, LGI partners with traditional and pure web-based
businesses to take those businesses to the Internet through
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partner sites. LGI participates in the development and implementation of the
business plan in exchange for revenue-sharing and/or equity-based arrangements.
The Company's consolidated results of operations include the results of
operation of each of the acquired companies discussed above for the period from
each respective purchase date through June 30, 2001.
STRATOS INN CONCEPT
The Company owns the Stratos Inns business concept and during fiscal
2000 and 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 noncash 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, LST and Logisoft as
if such acquisitions had occurred as of the beginning of fiscal 2001 and 2000
(in thousands, except per share amounts):
2001 2000
------------ ------------
Revenue ...................................... $ 22,591 $ 5,598
Net loss from continuing operations .......... $ (30,835) $ (60,699)
Net loss ..................................... $ (31,468) $ (61,760)
Basic and diluted net loss per share ......... $ (.44) $ (1.28)
Weighted average shares ...................... 71,625,714 48,206,267
NOTE 3. DISCONTINUED OPERATIONS
Residential Real Estate
Effective January 1, 1999 the Company discontinued its residential real
estate development operations. Residential real estate operations include
developed lots, undeveloped land, and equity investments in residential real
estate development companies, partnerships, and joint ventures. The Company made
certain estimates regarding the fair values of certain assets and the costs to
dispose of the remaining assets of the discontinued residential real estate
operations during fiscal 2001 and 2000.
In July 1999, the company sold certain undeveloped land with a book
value of approximately $1,200,000 in exchange for approximately $768,000 of cash
and the assumption of approximately $799,000 of mortgage indebtedness. In fiscal
1999, the Company recorded a gain of approximately $367,000 on the transaction.
In September 1999, the Company transferred, pursuant to a contractual
arrangement, the remaining discontinued operations real estate assets with an
aggregate book value of approximately $3,700,000 to an entity, in which a former
chief executive officer was an affiliate. The Company received a note for
$1,000,000 and the buyer assumed mortgage indebtedness of approximately
$2,200,000. The Company recorded a loss of approximately $500,000 on the
transaction in 1999. The Company is contingently liable on indebtedness
aggregating $2,200,000 which is due to mortgage holders. In the event the entity
is not able to satisfy the $2,200,000 of mortgage notes, the Company would be
obligated to satisfy such obligations and would have the right to foreclose on
the land. In June 2000, the Company determined that it was unlikely that the
buyer would be able to complete the terms of the contract. As a result, the
Company recorded a $900,000 loss on disposal of discontinued operations to
reflect the estimated net realizable value of this property.
The $600,000 loss on disposal of discontinued operations in 2000
consists of a write down in the valuation of real estate inventory ($900,000)
partially offset by a reduction ($300,000) in the estimated expenses to dispose
of discontinued operations assets.
In January 2001, the Company sold a portion of its discontinued
operations real estate. The net proceeds of approximately $85,000 were used to
reduce the note payable of the discontinued operations.
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In June 2001, the Company sold certain real estate of discontinued
operations for $380,000. Also, in June 2001, the Company repaid certain mortgage
notes and accrued interest payable of discontinued operations by transferring
certain real estate inventory valued at approximately $2,265,000 to the
mortgagor.
In fiscal 2001, the Company recorded a $300,000 loss on disposal of
discontinued operations to reflect revised estimates of the net realizable value
of the residential real estate inventories and of the income tax liability from
prior years assessed in March 2001 by the Internal Revenue Service.
Commercial Real Estate
In fiscal 2001, the Company discontinued its commercial real estate
business, which consisted of two strip-mall shopping centers in the Atlanta,
Georgia area. In May 2001, the Company entered a contract to sell its two
shopping centers which provided for closing on August 31, 2001. As of June 30,
2001 the Company received $162,500 in refundable deposits related to this sale
which are included in deposits and other liabilities on the Company's balance
sheet. In August 2001, the Company completed the sale of the stock of its
commercial real estate business in exchange for cash ($312,500) and a 60-day
note ($62,500). The Company realized a gain of approximately $575,000, in August
2001, on the sale. The Company's fiscal year 2000 financial statements have been
reclassified to reflect the commercial real estate business as discontinued.
Following is a summary of the net assets (liabilities) of discontinued
operations at June 30:
2001 2000
------------ ------------
Cash $ 46,414 $ 106,070
Real estate holdings 8,184,107 11,318,599
Other assets 30,404 218,661
Notes payable (7,582,707) (10,313,390)
Accounts payable and accrued expenses (879,042) (936,335)
Reserve for estimated expenses and other liabilities -- (267,669)
------------ ------------
$ (200,824) $ 125,936
============ ============
NOTE 4. INVESTMENTS
Investments consist of the following at June 30, 2001:
Gross
Unrealized Fair
Cost Gains Value
---------- ---------- ----------
Equity securities $1,019,716 $ 87,634 $1,107,350
Certificates of deposit 99,051 -- 99,051
---------- ---------- ----------
$1,118,767 $ 87,634 1,206,401
========== ==========
Stock purchase warrants 385,142
----------
$1,591,543
==========
Of the Company's certificates of deposit at June 30, 2001, $81,041 was pledged
as collateral security for the Company's letters of credit for office space
leases.
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NOTE 5. PROPERTY AND EQUIPMENT
At June 30, 2001 and 2000 property and equipment consists of the
following:
2001 2000
------------ ------------
Land, buildings and improvements $ 314,209 $ 20,074
Computers and office equipment 730,846 136,628
Software 180,790 --
Furniture and fixtures 532,590 43,318
Web site development costs -- 1,043,901
------------ ------------
1,758,435 1,243,921
Accumulated depreciation (113,378) (138,193)
------------ ------------
$ 1,645,057 $ 1,105,728
============ ============
NOTE 6. NOTES PAYABLE
Notes payable consists of the following at June 30, 2001:
Notes payable - due on demand with an interest rate of 12% and unsecured $ 425,000
Notes payable - due on demand, interest inputed at 8% and unsecured 57,500
Mortgage payable to a bank in monthly installments of $1,751, including
interest at 7.96% through October 2015 collateralized by the building 185,533
---------
668,033
Less current maturities (488,987)
---------
Long-term portion $ 179,046
=========
In July 2001, the Company executed two promissory notes payable in connection
with a home technology business acquisition. The first note, with principal of
$250,000 payable over 48 months, bears interest at 6.75% per annum-payable
monthly and is secured by certain accounts receivable of the Company's home
technology business. The second note, with principal of $300,000 payable in July
2002, bears interest at 10% per annum payable monthly, and is secured by
certain assets of the Company's home technology business.
Also in July 2001, the Company executed an unsecured promissory note with
principal of $200,000 due in July 2002 which bears interest at 10% per annum
payable monthly.
In September 2001, the Company executed a promissory note with principal of
$650,000 due in September 2002 which bears interest at 12% per annum payable
monthly, and is secured by accounts receivable and inventory of LST. At the
option of the noteholder, this note can be converted into the RCG's Common Stock
at a ratio of one (1) share of Common Stock for each $0.65 of outstanding
principal and interest.
Future maturities of the mortgage payable and notes payable are as
follows at June 30, 2001:
Notes
Fiscal Year Mortgage Payable Total
----------- -------- -------- --------
2002 $ 6,487 $482,500 $488,987
2003 7,023 -- 7,023
2004 7,603 -- 7,603
2005 8,231 -- 8,231
2006 8,910 -- 8,910
Thereafter 147,279 -- 147,279
-------- -------- --------
$185,533 $482,500 $668,033
======== ======== ========
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NOTE 7. INCOME TAXES
Deferred income tax assets and (liabilities) consisted of the
following:
June 30
-----------------------------------
2001 2000
------------ ------------
Deferred income tax assets:
Warrants and stock options $ 18,957,496 $ 19,609,571
Reserve for discontinued operations -- 442,856
Net operating loss carryforwards 14,458,697 8,951,701
Other 229,605 36,460
------------ ------------
Total deferred income tax assets 33,645,798 29,040,588
Deferred income tax liabilities - property and equipment (167,057) (407,121)
------------ ------------
Net deferred income tax assets 33,478,741 28,633,467
Deferred income tax asset valuation allowance (33,478,741) (28,633,467)
------------ ------------
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:
June 30
-----------------------------------
2001 2000
------------ ------------
Federal tax benefit at statutory rate $(7,374,838) $(19,698,087)
State tax benefit, net of (1,084,535) (2,896,777)
Permanent differences 4,358,525 13,715
Change in deferred income tax asset
valuation allowance 4,100,848 22,581,149
----------- ------------
Income tax expense - actual $ -- $ --
=========== ============
As of June 30, 2001 the Company had approximately $37,074,000 of net
operating loss carry forwards (NOL's) for federal income tax purposes, which
expire between 2019 through 2021. A deferred income tax asset valuation
allowance has been established against all deferred income tax assets as
management is not certain that the deferred income tax assets will be realized.
In addition, due to 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. The Company plans to appeal the IRS assessment when
received in fiscal 2002. At June 30, 2001, the Company had recorded a federal
tax liability of $305,830 related to such assessment.
29
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NOTE 8. UNEARNED INCOME AND DEPOSITS
Following is a summary of unearned income at June 30, 2001:
Amount
----------
Charter flight revenues $1,069,566
Other unearned income 91,490
----------
$1,161,056
==========
NOTE 9. COMMON STOCK AND PAID IN CAPITAL
In August 2000, the Company sold 7,070,000 shares of restricted Common
Stock at $0.375 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 287,500 units. Each unit consists of 1) two shares of
restricted Common Stock, 2) a warrant to purchase two shares of restricted
Common Stock at $3 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 $4 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 30,474,675 shares of restricted
Common Stock in connection with the acquisition of IASL, DMM, Avenel, LST, and
Logisoft.
In fiscal 2001, the Company issued an aggregate of 772,042 shares of
restricted Common Stock, including 400,000 treasury shares, in exchange for
legal, strategic acquisition, franchise and other consulting services from third
parties and issued 924,000 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 2,863,427 shares of
Common Stock in connection with the exercise of options and warrants.
On January 18, 2000, the Company entered into Common Stock purchase
agreements (the "Purchase Agreements") with Acqua-Wellington Value Fund, Ltd.,
("AWVF") and Four Corners Capital, LLC, ("Four Corners") which provided for a
private placement of restricted Common Stock and warrants to purchase restricted
Common Stock. On January 18, 2000, Four Corners purchased 165,070 shares of
restricted Common Stock for an aggregate purchase price of $1,000,000. In
addition, the Company issued to Four Corners warrants to purchase up to
1,238,030 and 1,485,228 shares of Common Stock at initial exercise prices of
$9.77 and $6.06 per share, respectively, subject to adjustments. In January
2001, the Company replaced the Four Corners warrants. See Note 10.
Under the terms of the AWVF Purchase Agreement, AWVF agreed to purchase
from the Company for aggregate consideration of $10,000,000 (i) 1,650,709 shares
of restricted Common Stock and (ii) warrants to purchase up to 3,260,151 shares
of restricted Common Stock at a future date. The AWVF Purchase Agreement
required AWVF to complete the acquisition of the Common Stock and warrants in
two equal tranches. The first tranche for $5,000,000 closed simultaneously with
the execution of the AWVF Purchase Agreement. The second tranche was to have
closed no later than February 29, 2000. AWVF failed to close the second tranche
as required by the AWVF Purchase Agreement. At the closing of the first tranche,
AWVF purchased from the Company, for an aggregate purchase price equal to
$5,000,000, 825,354 shares of restricted Common Stock and warrants to purchase
up to 1,052,327 and 577,748 shares of Common Stock at initial exercise prices of
$9.77 and $6.06 per share, respectively, subject to adjustment. In January 2001,
the Company settled with AWVF regarding the breach of provisions of the Purchase
Agreement and replaced AWVF's warrants. See Note 10.
In March 2000, the Company sold 50,000 shares of restricted Common
Stock from treasury for $312,500 cash in a private placement transaction to a
third party.
In fiscal 2000, the Company issued 1,135,995 shares of restricted
Common Stock in connection with the exercise of stock options and warrants.
30
31
In December 1999, the Company issued 400,000 shares of restricted
Common Stock from treasury stock to certain parties including a former director
and former officer of the Company. The shares were issued pursuant to an
agreement resolving outstanding issues related to certain prior transactions
involving the Company's discontinued real estate operations, which reduced the
related asset valuations by $193,000. In connection therewith, the Company
entered into a Registration Rights Agreement providing the holders of such
shares with certain registration rights.
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 FASB No. 123, "Accounting For Stock Based
Compensation". For the options and warrants issued to non-employees, the fair
value of each award has been calculated using the Black Scholes Model in
accordance with FASB No. 123.
In fiscal 1999, the Company issued nonqualified stock options to
purchase 2,000,000 shares of its Common Stock at an exercise price of $0.44 per
share to directors and certain officers. During fiscal 2000, options to purchase
200,000 shares were exercised. In fiscal 2001, 1,400,000 of these options were
cancelled and 400,000 were exercised.
At the July 11, 2000 meeting, the shareholders approved the Company's
2000 Stock Compensation 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 after the date of grant unless
otherwise specified by the Board of Directors. At the January 10, 2001 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 2001, the Company issued options to purchase 9,433,278 shares of
Common Stock to certain employees, officers and directors under the Option Plan.
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 these option grants to employees.
Also, in fiscal 2001, the Company issued options to purchase 3,000,000
shares of Common Stock in exchange for venture capital and investment banking
services.
In fiscal 2001, options to purchase 2,000,000 shares of Common Stock at
an exercise price of $0.40, 60,000 shares at an exercise price of $0.25, and
100,000 shares at an exercise price of $0.70 were exercised. Also, in May 2001,
options to purchase 400,000 shares of Common Stock at an exercise price of $0.44
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:
2001 2000
-------------------------------------------------- --------------------------------------------
Vesting
Exercise Term Period Exercise Term Vesting
Shares Price (Years) (Months) Shares Price (Years) Period
----------- -------- ------- --------- ---------- -------- ---------- -------
2,940,000 $ 0.25 10 12 -- $ -- -- --
-- -- -- -- 1,800,000 0.44 10 --
3,100,000 0.70 10 12 to 48 -- -- -- --
1,000,000 0.75 10 -- -- -- -- --
480,000 0.84 10 36 to 42 -- -- -- --
1,027,650 0.85 10 38 -- -- -- --
320,628 0.90 10 18 -- -- -- --
270,000 0.95 10 12 to 46 -- -- -- --
500,000 1.44 10 -- -- -- -- --
125,000 3.00 10 -- -- -- --
---------- ---------
9,763,278 1,800,000
========= =========
In fiscal 2001 and 2000, the Company issued warrants to purchase
6,163,743 and 19,295,120 shares of its Common Stock, respectively, in exchange
for consulting and legal services and for strategic vendor alliances provided by
outside third parties. In addition, the Company issued warrants in connections
with Common Stock private placement transactions. Certain of the warrants issued
contain
31
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registration rights provisions. In fiscal 2001 and 2000, the Company recognized
compensation expense of $5,609,202 and $48,996,218, respectively, in connection
with the issuance of warrants, including $100,000 in fiscal 2001 related to the
repricing of warrants to purchase 500,000 shares of Common Stock that were
exercised in fiscal 2001.
In fiscal 2001, the Company cancelled warrants to purchase 5,035,000
shares of Common Stock.
The following table summarizes the outstanding warrants at June 30:
2001 2000
------------------------------------------- --------------------------------------------
Exercise Exercise
Shares Price Term Shares Price Term
---------- -------- ------- ---------- -------- -------
5,556,377 $ 0.04 54 mos. 5,556,377 $ 0.04 54 mos.
-- 0.42 -- 200,000 0.42 120
-- 0.44 -- 200,000 0.44 120
400,000 0.50 120 450,000 0.50 120
4,753,743 0.75 120 400,000 0.75 120
100,000 0.81 48 -- -- --
10,000 1.00 -- -- -- --
50,000 1.10 36 -- -- --
600,000 1.75 -- 2,985,000 1.75 120
-- -- -- 1,000,000 2.00 120
-- -- -- 400,000 2.50 120
575,000 3.00 * -- -- --
3,625,000 4.00 120* 5,100,000 4.00 120
-- -- -- 2,063,386 6.06 18
-- -- -- 2,290,357 9.77 18 and 60
---------- ----------
15,670,120 20,645,120
========== ==========
* All of the $3.00 warrants and 575,000 of the $4.00 warrants in the
above table have a term that is variable, subject to the market value of the
Common Stock and other conditions.
All of the warrants issued by the Company are exercisable, except for
1,666,913 with an exercise price of $0.04 that vest in stages over periods
ranging from 6 to 18 months and 100,000 with an exercise price of $0.81 that
vest over 3 years.
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 200,000 and 1,000,000 shares of Common
Stock with exercise prices of $1.75 and $4.00, respectively, outstanding at June
30, 2000; (2) the issuance of an option to purchase 1,000,000 share of Common
Stock at an exercise price of $0.75 which expires in January 2006; (3) the
amendment of Four Corners' warrants to purchase 2,599,866 shares of Common Stock
outstanding at December 31, 2000 reducing the exercise prices of $6.06 and $9.77
to $0.75 and increasing the term from 18 to 60 months expiring in January 2006;
(4) the amendment of a warrant to purchase 123,802 shares of Common Stock
outstanding at June 30, 2000 held by DC Fund which amendment reduced the
exercise price from $9.77 to $0.75 and extends the expiration to January 2006;
and (5) the issuance of 200,000 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
1,630,077 shares of Common Stock outstanding at December 31, 2000 and the
amendment of Acqua's registration rights. The warrants exercise prices were
reduced from $6.06 and $9.77 to $0.75 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.
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Following is a summary of certain information regarding the Company's
options and warrants for fiscal 2001 and 2000:
2001 2000
---------------------------------------------- ---------------------------------------------
Weighted Weighted
Weighted Weighted Average Weighted Weighted Average
Average Average Remaining Average Average Remaining
Exercise Grant-date Contractual Exercise Grant-date Contractual
Number Price Fair Value Life Number Price Fair Value Life
---------- -------- ---------- ----------- ---------- -------- ---------- ----------
Outstanding at beginning of year 22,445,120 $ 2.91 4,350,000 $ 0.52 $ -- --
---------- ----------
Grants during the year:
Exercise price greater than market 2,962,650 $ 2.07 $ 0.03 -- 2,290,357 $ 9.77 $ 6.00 --
Exercise price equal to market 5,405,628 $ 0.72 $ 0.00 -- 400,000 $ 2.50 $ 1.82 --
Exercise price below market` 10,353,743 $ 0.47 $ 0.46 -- 16,604,763 $ 2.42 $ 4.07 --
---------- ----------
Total granted 18,722,021 $ 0.79 -- -- 19,295,120 $ 3.29 $ 4.25 --
---------- ----------
Exercised during the year 3,110,000 $ 0.74 -- -- 1,200,000 $ 0.49 -- --
---------- ----------
Cancelled during the year 12,623,743 $ 4.07 -- -- -- -- -- --
----------
Outstanding at end of year:
Exercisable at $.04 to $0.25 8,496,377 $ 0.11 -- 3.2 yrs. 5,556,377 $ 0.04 -- 4.5 yrs
Exercisable at $.42 to $1.00 11,462,021 $ 0.75 -- 6.0 yrs. 3,050,000 $ 0.49 -- 8.7 yrs
Exercisable at $1.10 to $1.75 1,150,000 $ 1.59 -- 9.3 yrs. 2,985,000 $ 1.75 -- 9.2 yrs
Exercisable at $2.00 to $3.00 700,000 $ 3.00 -- 3.1 yrs. 1,400,000 $ 2.14 -- 7.1 yrs
Exercisable at $4.00 to $6.06 3,625,000 $ 4.00 -- 8.5 yrs. 7,163,386 $ 4.59 -- 2.2 yrs
Exercisable at $9.77 -- -- -- -- 2,290,357 $ 9.77 -- --
---------- ----------
Total outstanding 25,433,398 $ 1.51 22,445,120 $ 2.91 -- --
---------- ----------
Exercisable at end of year:
Exercisable at $ 0.04 to $0.25 6,099,464 $ 0.12 -- -- -- -- -- --
Exercisable at $0.42 to $1.00 7,652,834 $ 0.74 -- -- 3,025,000 $ 0.49 -- --
Exercisable at $1.10 to $1.75 1,150,000 $ 1.59 -- -- 2,985,000 $ 1.75 -- --
Exercisable to $2.00 to $3.00 700,000 $ 3.00 -- -- 1,400,000 $ 2.14 -- --
Exercisable at $4.00 to $6.06 3,625,000 $ 4.00 -- -- 7,163,386 $ 4.59 -- --
Exercisable at $9.77 -- -- -- -- 2,290,357 $ 9.77 -- --
---------- ----------
Total exercisable 19,227,298 16,863,743 $ 3.85 -- --
---------- ----------
Pro forma information regarding net loss is required by FASB No. 123,
which also requires that the information be determined as if the Company had
accounted for its employee stock options granted subsequent to July 1, 1996
under the fair value method of that statement. The fair value for these options
was estimated at the date of grant using the Black-Scholes Model with the
following weighted average assumptions for fiscal 2001; risk-free interest rate
range of 4.91% to 5.97%; no dividend yield; volatility factor of the expected
market price of the Company's Common Stock of .975; and an expected life of the
option of 5 years. The weighted average grant date fair value of options granted
in 2001 was $0.39 per share. Pro forma information regarding FASB No. 123 is not
presented for fiscal 2000 because there were no option grants in fiscal 2000 and
all outstanding options at that date were fully vested on the date of grant.
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.
33
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The Company's pro forma net loss and net loss per share assuming
compensation cost was determined under FASB No. 123 for all options and warrants
would have been the following for the year ended June 30, 2001:
Net loss before discontinued operations $ (24,245,948)
Net loss from discontinued operations $ (632,611)
Net loss $ (24,878,559)
Net loss per share before discontinued operations $ (.45)
Net loss per share from discontinued operations $ (.01)
Net loss per share $ (.46)
Note 11. GENERAL AND ADMINISTRATIVE EXPENSE - OTHER
Following is a summary of the Company's general and administrative
expenses for the year ended June 30:
2001 2000
---------- ----------
Compensation expense $2,582,264 $1,883,431
Legal and professional fees 1,094,928 1,804,839
Public and investor relations 728,428 679,322
Marketing and advertising 522,944 134,424
Rent expense 334,837 173,855
Insurance 259,447 42,250
Website and telecommunications 275,226 764,904
Office and printing expenses 271,719 223,891
Travel and entertainment 213,325 651,859
Other 310,519 318,843
---------- ----------
$6,593,637 $6,677,618
========== ==========
Note 12. RELATED PARTY TRANSACTIONS
In fiscal 2001, the Company's CEO, Michael D. Pruitt, and a company
owned by Mr. Pruitt made loans to the Company. At June 30, 2001, notes and
advances due to affiliates consisted of the following:
Note payable to Mr. Pruitt $100,000
Advance payable to Mr. Pruitt 20,000
Notes payable to a company owned by Mr. Pruitt 216,052
--------
$336,052
========
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.
Paul B. Johnson, a director of the Company, is an investor in a company
which intends to become a franchise of the Company's home technology business in
the Dallas, Texas market upon regulatory approval of the Company's franchising
program.
Michael D. Pruitt, President/CEO and director of the Company, is a
minority investor in the two companies that intend to become franchisees of the
Company's home technology business in Baltimore, Maryland and three markets in
South Carolina upon regulatory approval of the Company's franchising program.
In connection with consulting services related to the Company's 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 an aggregate of 2,000,000 shares of
its Common Stock to the Bert Lance Grantor Trust. Of these warrants, 400,000
have an exercise price of $.50 per share, 600,000 a $1.75 per share price and
1,000,000 a $4.00 per share price. In fiscal 2001, the Bert Lance Grantor Trust
assigned, with the Company's consent, 250,000 of these warrants to third parties
and cancelled 1,350,000 of these warrants. In addition, the Company paid
consulting fees of $183,000 to Mr. Bert Lance in fiscal 2000.
In December 1999, the Company settled certain matters regarding
residential real estate transactions in prior fiscal years with a former
officer, a former director, and the latter's father. In connection with this
settlement the Company issued 400,000 shares of Common Stock to these parties.
34
35
NOTE 13. BUSINESS SEGMENT INFORMATION
Information related to business segments is as follows (in thousands):
Fiscal 2001:
Aviation Technology Internet/
Travel Business Call Home Technology
Services Consulting Center Technology Solutions Corporate Total
-------- ---------- -------- ---------- ---------- --------- --------
Revenue $ 11,179 $ 878 $ 230 $ 975 $ 345 $ -- $ 13,607
Net loss before discontinued operations (1,501) (203) (5,724) (1,466) (87) (12,077) (21,058)
Identifiable assets 2,680 6,601 410 8,602 7,591 857 26,742
Capital expenditures 43 -- 22 40 -- -- 107
Depreciation and amortization 406 479 967 410 35 3 2,300
Fiscal 2000:
Aviation Technology Internet/
Travel Business Call Home Technology
Services Consulting Center Technology Solutions Corporate Total
-------- ---------- -------- ---------- ---------- --------- --------
Revenue $ 10 $ -- $ -- $ -- $ -- $ -- $ 10
Net loss before discontinued operations (56,874) -- -- -- -- -- (56,874)
Identifiable assets 7,025 -- -- -- -- 1,164* 8,189
Capital expenditures 1,138 -- -- -- -- 3 1,141
Depreciation and amortization 154 -- -- -- -- -- 154
*Represents $1,164,000 of identifiable assets of the Stratos Inns Concept, which
were written off in fiscal 2001.
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 defend such
suits vigorously and believes that they will not result in any material loss to
the Company.
Commitments
The Company leases office space under non-cancelable lease
arrangements. The future minimum lease payments required under these leases at
June 30, 2001 are as follows:
Fiscal Year Amount
----------- ----------
2002.................................... $ 638,415
2003.................................... 329,737
2004.................................... 248,954
2005.................................... 215,532
2006.................................... 179,610
Thereafter............................. --
----------
$1,612,248
==========
Rent expense under operating leases aggregated $334,837 and $173,855
for the years ended June 30, 2001 and 2000, respectively.
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On February 14, 2000 the Company dismissed Jones and Kolb as the
Company's independent auditors and engaged Ernst & Young LLC to serve as the
Company's independent auditors. Jones and Kolb served as independent auditors of
the Company for the fiscal years ended June 30, 1997, 1998, and 1999. The
Company's principal auditors' report on the financial statements for the year
preceding the dismissal of Jones and Kolb did not contain an adverse opinion or
disclaimer opinion, nor was it modified as to uncertainty, audit scope or
accounting principles. The decision to change accountants was approved by the
Company's Board of Directors (the "Board"). There were no disagreements with the
former accountant on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope of procedure. The Company had no
discussions with the new accountants as to specific accounting matters or type
of opinion that might be rendered, other than those related to the normal
engagement of certified accountants.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages (at September 28, 2001), 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.
ERIC A. BLACK (age 57) has served as a director of the Company since June 14,
2001 when he was appointed by the Board to fill a vacancy on the Board created
by the resignation of a 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 as an additional outside director of the
Company. Since January 2001, Mr. Johnson has been Managing Partner of La Meg
Holdings, L.P. and Chief Executive Officer and owner of MLI Solutions. Since
1999, Mr. Johnson has been Chief Executive Officer and owner of MLI Solutions.
Since 1999, Mr. Johnson has been Chief Executive Officer of the
SportsLineUp.com. 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.
SYLVIA A. de LEON (age 51) has served as a director of the Company since
December 12, 1999 when she was appointed by the Board to fill the vacancy
created by the resignation of Joel A. Goldberg as a director of the Company. Ms.
de Leon is a Senior Partner with the law firm of Akin, Gump, Strauss, Hauer &
Feld, L.L.P., where she has been employed since 1977. Ms. de Leon also serves on
the Board of Directors of the National Railroad Passenger Corporation (Amtrak).
During the last five years, Ms. de Leon has also served on the National Civil
Aviation Review Commission, the National Commission to Ensure a Strong
Competitive Airline Industry and the White House Conference on Travel and
Tourism, where she co-chaired the infrastructure and investment committee.
MICHAEL D. PRUITT (age 40) 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 the revenues in excess of $50 million per year.
DR. JAMES A. VERBRUGGE (age 60) 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 was elected to
the Board at the April 21, 1999 Stockholders meeting. Dr. Verbrugge is a
Professor of Finance and Chairman, Department of Banking and Finance of 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 teaches executive education programs at the University of
Washington, University of Florida and University of Colorado. Since July 2001,
Dr. Verbrugge has been a director of Crown Crafts, Inc.
WILLIAM L. WORTMAN (age 54) has served as Vice President and Chief Financial
Officer of the Company since June 24, 1999. For the year prior to joining the
Company, Mr. Wortman was a partner and general manager of a new car automobile
dealership. From prior
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to 1996 through 1998, Mr. Wortman was Vice President and Chief Financial Officer
of A.F.A. Services Corporation, a marketing services company.
MELINDA MORRIS ZANONI (age 31) 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.
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.
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, 2001, except that with
respect to the following reports filed by Mr. Pruitt:
(i) Mr. Pruitt reported his commencement as an insider in October
2000 on a Form 3 filed November 18, 2000;
(ii) Mr. Pruitt reported his acquisition of 1,797 shares of Common
Stock (through direct ownership) and 2,000 shares of Common
Stock (through indirect ownership) in December 2000 on a Form
4 filed February 24, 2001; and
(iii) Mr. Pruitt reported his acquisition of 49,500 shares of Common
Stock (through indirect ownership) in March 2001 on a Form 4
filed May 10, 2001.
ITEM 10. EXECUTIVE AND DIRECTOR COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth for the fiscal years ended 1999, 2000
and 2001 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 2001 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 2001 (collectively, the "Named Executives").
Long-Term
Fiscal Compensation Other Annual
Name and Principal Position Year Salary Bonus Stock Options(7) Compensation
--------------------------- ------ --------- -------- ---------------- ------------
Michael D. Pruitt, Chairman/President/CEO 2001 $ --(1) 600,000 $ --
2000 -- -- -- --
Todd Bottorff, President and Chief Executive Officer 2001 $ 160,000 -- 500,000 --
2000 23,333 -- -- --
C. Beverly Lance, Chief Executive Officer (2) 2001 -- -- -- --
2000 $ 198,333 -- (6) $57,530(3)
Melinda Morris Zanoni, Executive Vice President
and Secretary(4) 2001 $ 93,333 -- 600,000 $ --
2000 -- -- -- --
William L. Wortman, Chief Financial Officer (5) 2001 $ 150,000 -- 500,000 $ 1,800
2000 $ 133,750 $10,000 (6) $ 1,125
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(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.
(2) Mr. Lance was President from February 10, 1999 thru May, 2000 and CEO
from February 10, 1999 until his resignation in July 2000. Mr. Lance's
annual base salary was $170,000. The salary amount above includes Mr.
Lance's base salary and $28,333 of paid vacation.
(3) Includes $29,452 of life and long-term disability insurance premiums.
(4) Ms. Zanoni's employment contract dated November 8, 2000, provides for
an annual base salary of $160,000.
(5) Mr. Wortman has been Vice President and Chief Financial Officer of the
Company since June 24, 1999. Mr. Wortman's annual base salary is
$150,000.
(6) In fiscal 2000, the Company's Board approved nonqualified options to
purchase Common Stock for Messrs. Lance and 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 of Mr. Lance were cancelled. The options to purchase 300,000
shares of Common Stock approved by the Board for Mr. Wortman were
cancelled in connection with the grant of 500,000 options to Mr.
Wortman in fiscal 2001.
(7) 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.
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, 2001:
Number of % of Total
Securities Options Granted
Underlying to Employees Exercise Expiration
Options Granted in Fiscal 2001 Price Date
--------------- ---------------- -------- ----------
Michael D. Pruitt 600,000(1) 7.8% $0.70 12/27/2010
Melinda Morris Zanoni 600,000(1) 7.8% $0.70 12/27/2010
Todd Bottorff 500,000 6.5% $1.44 1/16/2004
William L. Wortman 500,000 6.5% $0.70 12/27/2010
(1) Represents options granted for serving as a director of the Company.
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,
2001.
Number of Securities
Underlying Value Of Unexercised
Unexercised Options In-The-Money
Shares Acquired Value At 6/30/01 Options At 6/30/01
Name On Exercise Realized(1) Exercisable/Unexercisable Exercisable/Unexercisable(2)
--------------------- --------------- ----------- ------------------------- ----------------------------
Michael D. Pruitt 100,000 $ 10,000 100,000/400,000 $14,000/$56,000
Melinda Morris Zanoni 0 0 200,000/400,000 $28,000/$56,000
Todd Bottorff 0 0 500,000/-0- -0-/-0-
William L. Wortman 0 0 200,000/300,000 $28,000/$42,000
(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.
(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, 2001.
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COMPENSATION OF DIRECTORS
Directors of the Company who are not employees of the Company receive
compensation of $1,000 per month plus $1,000 for each quarterly Board meeting.
Directors are also entitled to reimbursement of reasonable out-of-pocket
expenses incurred by them in attending Board meetings. In fiscal 2001, the
Company expensed $37,709 for director fees. Also, in fiscal 2001, the Company
paid Mr. Arthur G. Weiss, who served as Chairman of the Company from January 21,
1999 to June 2001, $16,000 in lieu of director fees.
In December 2000, the Company approved options to purchase 3,000,000
shares of Common Stock at an exercise price of $0.70 per share. These options
were granted as follows: options for 600,000 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 one (1) year unless 60 day
written notice is given by either party.
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 one (1) year unless 60 day
written notice is given by either party.
On May 2, 2000, the Company entered an employment agreement ("the
Bottorff Agreement") with Mr. Bottorff, which provided for an annual base salary
of $160,000, an option to purchase 500,000 shares of the Company's Common Stock
at $1.4375 per share, and a term of one year. On December 8, 2001, Mr. Bottorff
resigned as President of the Company and the Company entered into a consulting
agreement with Mr. Bottorff, which provides for the termination of the Bottorff
Agreement and monthly consulting fees of $13,333 payable to Mr. Bottorff through
August 7, 2001.
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 28, 2001 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 executive officers included in the Summary Compensation
Table included elsewhere herein; and (iv) all of the Company's 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 Beneficially Owned(1)
--------------------------------------------
Name Number Percent
---- --------- -------
Michael D. Pruitt + ++(2) 5,157,597 6.7%
Wendell M. Starke Trust(3) 4,800,000 6.3
Four Corners Capital, LLC(4) 3,999,866 5.0
Eric A. Black ++(5) 50,000 *
Paul B. Johnson ++(5) 50,000 *
Sylvia A. deLeon ++(6) 200,000 *
Dr. James A. Verbrugge ++(7) 295,833 *
Melinda Morris Zanoni + ++(8) 2,200,000 2.8
William L. Wortman +(9) 200,000 *
All Current Executive Officers and Directors as a
Group (7 Persons)(10) 8,153,430 10.5
+ Executive Officer of the Company
++ Director of the Company
* Less than 1%
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(1) Information as to beneficial ownership of Common Stock has either been
furnished to the Company by or on behalf of the indicated person or is
taken from reports on file with the SEC.
(2) Includes 4,250,000 shares issued in connection with the Company's
acquisition of DMM of which 2,000,000 shares are now held by Avenel
Financial, Inc., which is owned by Mr. Pruitt. Also includes 325,000
shares issued in each of the LST and Avenel acquisitions. Excludes
400,000 shares issuable upon exercise of options that are not
exercisable on or within 60 days of October 4, 2001. Mr. Pruitt's
address is 5935 Carnegie Boulevard, Suite 101, Charlotte, North
Carolina, 28209.
(3) Based upon its Schedule 13D/A filed on July 2, 1999, Wendell M. Starke
is the trustee of the Wendell M. Starke Trust, which owns 4,800,000
shares. The trust's address is 4300 Paces Ferry Road, Suite 500,
Atlanta, Georgia, 30339.
(4) Includes 3,799,866 shares issuable upon exercise of warrants. The
address of Four Corners Capital, LLC is 10 Burton Hills Boulevard,
Suite 120, Nashville, Tennessee, 37215.
(5) Represents shares issuable upon exercise of options. Excludes 150,000
shares issuable upon exercise of options that are not exercisable on or
within 60 days of October 4, 2001.
(6) Represents 200,000 shares issuable upon the exercise of options.
Excludes 400,000 shares issuable upon exercise of options that are not
exercisable on or within 60 days of October 4, 2001.
(7) Includes 200,000 shares issuable upon exercise of options. Excludes
400,000 shares issuable upon exercise of options that are not
exercisable on or within 60 days of October 4, 2001.
(8) Consists of 200,000 shares issuable upon exercise of options and
2,000,000 shares issued in connection with the acquisition of Avenel.
Excludes 400,000 shares issuable upon exercise of options that are not
exercisable on or within 60 days of October 4, 2001.
(9) Represents 200,000 shares issuable upon exercise of options. Excludes
300,000 shares issuable upon exercise of options that are not
exercisable on or within 60 days of October 4, 2001.
(10) Excludes 2,300,000 shares issuable upon exercise of options that are
not exercisable on or within 60 days of October 4, 2001.
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 1,600,000 and
400,000 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
250,000 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.
On or about January 29, 1999, the Wendell M. Starke Trust (the "Starke
Trust") purchased 2,500,000 shares of restricted Common Stock for $1,000,000 and
on June 29, 1999 another 2,300,000 shares for $1,725,000. In connection with the
sale of the shares, the Company entered into a Registration Rights Agreement
with the trust.
On or about March 18, 1999, the Godley Morris Group, LLC (the "GMG")
purchased 2,500,000 shares of restriction Common Stock for $1,000,000 and on
June 29, 1999 another 2,300,000 shares for $1,725,000. In connection with the
sale of the shares, the Company entered into a Registration Rights Agreement
with the GMG.
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 million, 165,070 shares of restricted Common
Stock, and warrants to purchase up to 2,723,668 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.
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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 a series of transactions consummated during the 1999 fiscal year,
Mr. Conner, a former President and Chief Executive Officer of the Company, and
another former officer of the Company purchased real property assets used in
connection with certain discontinued operations of the Company with an aggregate
book value of $16 million and assumed all related mortgage indebtedness. The
Company received cash, notes receivable or Common Stock in these transactions.
As of June 30, 1999, the Company held notes receivable for $465,000 with respect
to these transactions, and received payment in full subsequent thereto. In
fiscal 2000, the Company sold additional assets of discontinued operations with
a carrying value of $400,000 for cash and other assets of discontinued
operations for $1 million in notes receivable plus assumption of approximately
$2.2 million in mortgage indebtedness. At June 30, 2000, the aggregate note
balance was $900,000 which amount was fully reserved as uncollectible by the
Company due to Mr. Conner's inability to obtain financing to complete the plan
development of property. These transactions were entered into with entities in
which the former chief executive officer and former officer are investors. All
such transactions were the result of arms' length negotiations.
In December 1999, the Company issued 400,000 shares of restricted
Common Stock from treasury to certain parties including Langdon Flowers, Jr. (a
former director of the Company), Mr. Flower's father and a former officer of the
Company. The shares were issued pursuant to an agreement that resolved
outstanding issues related to certain transactions involving the Company's
discontinued real estate operations, which reduced the related asset valuations,
by $193,000. The transaction was the result of arms' length negotiations. In
connection therewith, the Company entered into a Registration Rights Agreement
providing the holders of such shares with certain registration rights.
In fiscal 2000, the Company advanced $275,100 in anticipation of an
equity investment in a newly formed entity that would acquire private jets for
use in connection with flights arranged thru the Company's Private Seats(TM)
program. The entity was formed and managed by Four Corners. Due to the Company's
inability to raise adequate capital to complete the planned acquisition of
aircraft, these advances were written off as of June 30, 2000.
Mr. Pruitt and a company owned by Mr. Pruitt have loaned money to the
Company. At June 30, 2001, $120,000 and $216,052 were due to Mr. Pruitt and a
company owned by Mr. Pruitt, respectfully. Of the $120,000 due to Mr. Pruitt,
$100,000 is a demand note payable to Mr. Pruitt bearing interest at 12%. The
other $20,000 from Mr. Pruitt is an advance bearing imputed interest of 8% and
payable upon demand. The $216,052 is notes payable that bears computed interest
of 8% and are due on demand.
In September 2000, the Company acquired all of the issued and
outstanding shares of capital stock of DM Marketing, Inc. ("DMM") for 8,450,000
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.
In February 2001, the Company acquired all of the issued and
outstanding capital stock of Avenel Ventures, Inc. ("Avenel") for 6,700,000
shares of the Company's Common Stock. Mr. Pruitt was an officer, director and
4.9% stockholder of Avenel. Melinda Morris Zanoni was a director, officer and
29.9% stockholder of Avenel. 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 acquisition was approved by the Company's Board
of Directors. The consideration paid was the result of negotiations between the
Company and the Avenel 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 LST, Inc. ("LST") for 8,074,575 shares of the Company's Common
Stock excluding 2,000,000 shares issuable based on certain performance goals.
Mr. Pruitt was a 3.2% stockholder of LST at the time of the acquisition and sold
his shares for the same per share consideration received by the other LST
stockholders.
Mr. Johnson, a director of the Company, is an investor in a company
which intends to become a franchisee of the Company's home technology business
in the Dallas, Texas market upon regulatory approval of the Company's
franchising program.
Mr. Pruitt, President/CEO and director of the Company, is a minority
investor in the two companies that intend to become franchisees of the
Company's home technology business in Baltimore, Maryland and three markets in
South Carolina upon regulatory approval of the Company's franchising program.
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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 LST (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).
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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).
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 LST(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).
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
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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).
10.10 Employment Agreement between the Company and Ms.
Melinda Morris Zanoni dated as of November 8, 2000
(represents a compensatory plan or arrangement)
(incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-QSB for the
quarter ended December 31, 2000 filed on February 14,
2001).
10.11 General Release and Settlement Agreement between the
Company and Four Corners Capital, LLC and DC
Investment Partners Exchange Fund, L.P. dated as of
January 23, 2001 (incorporated by reference to
Exhibit 10.4 to the Company's Quarterly Report on
Form 10-QSB for the quarter ended December 31, 2000
filed on February 14, 2001).
10.12 General Release and Settlement Agreement between the
Company and Acqua Wellington Value Fund, Ltd. dated
as of January 23, 2001 (incorporated by reference to
Exhibit 10.5 to the Company's Quarterly Report on
Form 10-QSB for the quarter ended December 31, 2000
filed on February 14, 2001).
10.13 Employment Agreement between the Company and Glenn I.
Barrett, Jr. dated as of March 16, 2001 (incorporated
by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K filed on April 18, 2001).
16.1 Change in Accountants - Letter from Jones and Kolb
dated February 17, 2000 (incorporated herein by
reference to Exhibit 16.1 to the Company's Current
Report on Form 8-K filed on February 17, 2000).
21.1 Subsidiaries of the Company
23.1 Consent of Independent Auditors
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).
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(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, 2001:
a) Current Report on Form 8-K filed April 18, 2001 reporting
under Item 2 of such Report the acquisition of LST. (the "LST
8-K");
b) Current Report on Form 8-K filed April 26, 2001 reporting
under Item 5 of such Report the Company's execution of a
non-binding letter of intent to acquire Logisoft;
c) Current Report on Form 8-K/A filed on May 15, 2001 amending
Item 7 of the LST 8-K to set forth the (i) audited financial
statements of LST as of December 31, 2000, and (ii) unaudited
pro forma condensed consolidated financial statements as of
December 31, 2000 (the "Amended LST 8-K);
d) Current Report on Form 8-K filed June 12, 2000 reporting under
Item 5 of such Report the Company's execution of an Agreement
and Plan of Merger to acquire Logisoft;
e) Current Report on Form 8-K/A filed June 18, 2001 amending Item
7 of the Current Report on Form 8-K filed with the SEC on
September 22, 2000 and November 12, 2000, respectively,
reporting under Item 2 of such Report the Company's
acquisition of DMM, to set forth the (i) audited financial
statement of DMM as of June 30, 2000, and (ii) unaudited pro
forma condensed consolidated financial statements as of June
30, 2000;
f) Current Report on Form 8-K/A filed on June 18, 2001 amending
Item 7 of the Current Report on Form 8-K filed with the SEC on
February 12, 2001 and March 28, 2001, respectively, reporting
under Item 2 of such Report the Company's acquisition of
Avenel, to set forth (i) the audited financial statements of
Avenel as of December 31, 2000; and
g) Current Report on Form 8-K filed June 29, 2001 reporting under
Item 2 of such Report the acquisition of Logisoft (the
"Logisoft 8-K").
(ii) The Company filed a Current Report on Form 8-K/A with the SEC on July
13, 2001 amending Item 7 of the LST 8-K and the Amended LST 8-K to set
for the (i) audited financial statements of LST as of December 31,
2000, (ii) the unaudited condensed financial statements as of March 31,
2001, and (iii) unaudited pro forma condensed consolidated financial
information as of March 31, 2001.
(iii) The Company filed a Current Report on Form 8-K/A with the SEC on August
10, 2001 amending Item 7 of the Logisoft 8-K to set forth the (i)
audited financial statements of Team Sports Entertainment, Inc.
formerly known as Logisoft Corp. ("TSE"), for the years ended December
31, 2000 and 1999, (ii) unaudited financial statements of TSE and
subsidiary for the three months ended March 31, 2001 and 2000, and
(iii) unaudited pro forma condensed consolidated financial statements
as of March 31, 2001.
(iv) The Company filed a Current Report on Form 8-K with the SEC on August
14, 2001 reporting under Item 5 of such Report the Company's
acquisition of certain assets, liabilities and the business of a home
technology company.
(v) The Company filed a Current Report on Form 8-K with the SEC on
September 17, 2001 reporting under Item 2 of such Report the sale of
its commercial real estate business.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
eResource Capital Group, Inc.
Date: October 4, 2001 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: October 4, 2001 By: /s/ Michael D. Pruitt
--------------------------------------------
Michael D. Pruitt
President, Chief Executive Officer and
Chairman of the Board (principal executive
officer)
Date: October 4, 2001 By: /s/ Melinda Morris Zanoni
--------------------------------------------
Melinda Morris Zanoni
Executive Vice President, Secretary and
Director
Date: October 4, 2001 By: /s/ William L. Wortman
--------------------------------------------
William L. Wortman
Vice President, Treasurer
and Chief Financial Officer
(principal financial and accounting officer)
Date: October 4, 2001 By: /s/ Sylvia A. de Leon
--------------------------------------------
Sylvia A. de Leon
Director
Date: October 4, 2001 By: /s/ Dr. James A. Verbrugge
--------------------------------------------
Dr. James A. Verbrugge
Director
Date: October 4, 2001 By: /s/ Eric A. Black
--------------------------------------------
Eric A. Black
Director
Date: October 4, 2001 By: /s/ Paul B. Johnson
--------------------------------------------
Paul B. Johnson
Director
46