U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-8662
eResource Capital Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 23-2265039
(State of Incorporation) (IRS Employer Identification No.)
6836 Morrison Boulevard
Suite 200
Charlotte, NC 28211
(704) 366-5054
(Address of registrant's principal
executive offices including zip code and telephone
number, including area code)
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
twelve months (or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
Check whether the 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 ("Common
Stock") as of May 15, 2003: 12,516,946
Transitional Small Business Disclosure Format: Yes [ ] No [X]
1
eResource Capital Group, Inc.
Table of Contents
...................................................................................................... Page No
PART I. FINANCIAL
INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at March 31, 2003 and June 30, 2002...................... 3
Condensed Consolidated Statements of Operations for the three and nine months ended
March 31, 2003 and 2002......................................................................... 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
March 31, 2003 and 2002......................................................................... 5
Notes to Condensed Consolidated Financial Statements........................................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 24
ITEM 3. Controls and Procedures.............................................................................. 32
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.................................................................................... 32
ITEM 2. Changes in Securities................................................................................ 32
ITEM 3. Defaults Upon Senior Securities...................................................................... 32
ITEM 4. Submission of Matters to a Vote of Security Holders.................................................. 32
ITEM 5. Other Information.................................................................................... 33
ITEM 6. Exhibits and Reports on Form 8-K..................................................................... 33
Signatures...................................................................................................... 33
Certifications
Section 302 Certification of the Principal Executive Officer.................................. 34
Exhibit Index................................................................................................... 35
Section 906 Certification....................................................................................... 59
2
eResource Capital Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share amounts)
March 31, June 30,
2003 2002
-------- --------
ASSETS
Cash and cash equivalents ................................................ $ 2,980 $ 1,511
Accounts receivable, net of allowance of doubtful accounts of $171
and $258, respectively ............................................. 2,775 3,135
Inventory ................................................................ 873 211
Investments .............................................................. 523 814
Prepaid expenses ......................................................... 2,016 2,918
--------- ---------
Total current assets ....................................... 9,167 8,589
Deferred costs and other assets ......................................... 402 321
Property and equipment, net .............................................. 1,525 1,472
Goodwill, net ............................................................ 21,429 18,490
--------- ---------
Total assets ............................................... $ 32,523 $ 28,872
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable - current portion .......................................... $ 3,257 $ 407
Notes and amounts due to affiliates, net ................................. 293 250
Accounts payable and accrued expenses .................................... 7,985 6,041
Unearned income .......................................................... 3,215 3,329
--------- ---------
Total current liabilities .................................. 14,750 10,027
Notes payable ............................................................ 2,751 2,854
--------- ---------
Total liabilities .......................................... 17,501 12,881
--------- ---------
Minority interest ........................................................ 1,135 -
--------- ---------
Shareholders' equity:
Common stock, $.04 par value, 200,000,000 shares authorized,
12,648,160 and 12,381,463 issued, respectively .................... 506 495
Additional paid-in capital .......................................... 114,056 114,040
Accumulated deficit ................................................. (99,849) (97,774)
Accumulated other comprehensive loss ................................ (194) (51)
Treasury stock at cost (131,214 and 92,643 shares, respectively) .... (632) (719)
--------- ---------
Total shareholders' equity ................................. 13,887 15,991
--------- ---------
Total liabilities and shareholders' equity ................. $ 32,523 $ 28,872
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
eResource Capital Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except share amounts)
Three Months Ended March 31, Nine Months Ended March 31,
2003 2002 2003 2002
------------- ----------- ------------ ------------
Revenue:
Services .................................................... $ 15,892 $ 7,321 $ 45,317 $ 19,022
Product sales ............................................... 2,759 2,426 8,938 7,495
------------ ------------ ------------ ------------
Total revenue ....................................... 18,651 9,747 54,255 26,517
------------ ------------ ------------ ------------
Cost of revenue:
Services .................................................... 14,887 6,225 42,097 17,493
Product sales ............................................... 2,291 2,185 7,679 6,351
------------ ------------ ------------ ------------
Total cost of revenue ............................... 17,178 8,410 49,776 23,844
------------ ------------ ------------ ------------
Gross profit ........................................ 1,473 1,337 4,479 2,673
------------ ------------ ------------ ------------
Selling, general and administrative expenses - compensation
related to issuance of stock options and warrants ....... 468 7 532 19
Selling, general and administrative expenses - other ........ 2,404 1,580 6,343 5,511
Provision for bad debts ..................................... 38 20 44 86
Depreciation and amortization ............................... 113 101 348 285
------------ ------------ ------------ ------------
Operating costs and expenses ........................ 3,023 1,708 7,267 5,901
------------ ------------ ------------ ------------
Operating loss ...................................... (1,550) (371) (2,788) (3,228)
Interest expense, net ....................................... 119 93 315 186
(Gain) loss on investments, net ............................. (8) (282) (362) 98
Loss (gain) on disposal of assets ........................... 36 - 66 (171)
Other (income) .............................................. (23) - (289) -
Minority interest ........................................... (280) - (443) -
------------ ------------ ------------ ------------
Loss from continuing operations ..................... (1,394) (182) (2,075) (3,341)
Gain on disposal of discontinued operations ................. - - - 576
------------ ------------ ------------ ------------
Loss before cumulative effect of change in accounting
principle ...................................... (1,394) (182) (2,075) (2,765)
Cumulative effect of change in accounting principle ......... - - - (693)
------------ ------------ ------------ ------------
Net loss .................................................... $ (1,394) $ (182) $ (2,075) $ (3,458)
============ ============ ============ ============
Basic and diluted net loss per share:
Loss from continuing operations ......................... $ (0.11) $ (0.02) $ (0.17) $ (0.30)
Gain on disposal of discontinued operations ............. $ - $ - - 0.05
Cumulative effect of change in accounting principle ..... - - - (0.06)
------------ ------------ ------------ ------------
Net loss ............................................ $ (0.11) $ (0.02) $ (0.17) $ (0.31)
============ ============ ============ ============
Weighted average shares outstanding ......................... 12,540,438 11,866,094 12,475,526 11,277,623
============ ============ ============ ============
Weighted average shares outstanding, assuming dilution ...... 12,540,438 11,866,094 12,475,526 11,277,623
============ ============ ============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
eResource Capital Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
Nine months ended
March 31,
2003 2002
----------- ----------
Cash flows from operating activities:
Loss from continuing operations ....................................... $(2,075) $(3,341)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization .................................. 348 285
Bad debt expense ............................................... 44 86
Common stock issued for services ............................... - 36
Stock purchase warrants received for services .................. - (279)
Affiliate balance converted on sale of home technology franchise - (80)
Unrealized loss on stock purchase warrants ..................... 50 191
(Gain) on sale of investments .................................. (412) -
Loss (gain) on disposal of assets .............................. 66 (171)
Compensation expense related to stock options and warrants ..... 532 19
Deferred debt cost amortization ................................ 50 -
Minority interest .............................................. (443) -
Changes in operating assets and liabilities:
Accounts and notes receivables ............................. 716 (60)
Inventory .................................................. (10) (145)
Prepaid expenses ........................................... 847 (602)
Deferred costs and other assets ............................ (46) (472)
Accounts payable and accrued expenses ...................... (42) 933
Due to affiliates .......................................... 37 7
Unearned income ............................................ (114) 326
------- -------
Cash used in continuing operations ......................... (452) (3,267)
Discontinued operations, net ................................... - 150
------- -------
Net cash used in operating activities ...................... (452) (3,117)
Cash flows from investing activities:
Purchase of property, plant and equipment ...................... (291) (225)
Sale of investments ............................................ 439 189
Sale of assets ................................................. 221 (53)
Cash (paid) in connection with business acquisitions, net ...... (414) (263)
------- -------
Net cash used in investing activities ...................... (45) (352)
Cash flows from financing activities:
Notes payable proceeds ......................................... 1,055 2,553
Principal debt repayments ...................................... (352) (30)
Capital contribution by shareholder ............................ - 50
Cash raised through LFSI transaction ........................... 274 -
LFSI private placement sale of common stock .................... 870 -
Sale of RCG common stock ....................................... 119 801
------- -------
Net cash provided by financing activities .................. 1,966 3,374
Net increase (decrease) in cash and cash equivalents .................. 1,469 (95)
Cash and cash equivalents at beginning of period ...................... 1,511 1,286
------- -------
Cash and cash equivalents at end of period ............................ $ 2,980 $ 1,191
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
eResource Capital Group, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
These financial statements include the operations of eResource Capital Group,
Inc. ("RCG") and its subsidiaries (collectively the "Company"). At March 31,
2003, the Company operated businesses in the aviation travel services, home
technology, technology solutions and telecommunications call center segments in
the United States. In October 2001, the Company changed its name from
flightserv.com, Inc. to eResource Capital Group, Inc. to better reflect its plan
to acquire substantial interests in, operate and enhance the value of expansion
phase companies operating in the travel, entertainment and technology services
sectors. Prior to that time, the Company was engaged in the development of its
private aviation business and limited commercial real estate activities.
The Company's consolidated financial statements include the assets and
liabilities and results of operations of RCG and each business acquired by RCG
from the date of its acquisition through March 31, 2003. All significant
intercompany balances and transactions have been eliminated. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to the rules of the Securities and Exchange Commission (the "SEC").
Certain prior period amounts have been reclassified to conform to the current
period presentation. In the opinion of management, all adjustments considered
necessary for a fair presentation of the financial position of the Company as of
March 31, 2003 and of the results of operations for the periods presented have
been included. The financial data at June 30, 2002 is derived from audited
financial statements which are included in the Company's Annual Report on Form
10-KSB for the year ended June 30, 2002 and should be read in conjunction with
the audited financial statements and notes thereto. Interim results are not
necessarily indicative of results for the full year.
The Company experienced net losses in recent fiscal years and a net loss of
$2,075,000 during the nine months ended March 31, 2003. The Company used cash of
$452,000 in operations, had net purchases of property, plant and equipment of
$291,000 and made principal debt repayments of $352,000 during the nine months
ended March 31, 2003. In addition, as more fully described in Note 2 below, LFSI
completed its acquisition of FutureSmart. The raising of debt and equity
financing and the sales of investments, as well as the sale of its subsidiary
LST, Inc., as more fully described below, offset this cash loss. At March 31,
2003, the Company had cash and cash equivalents of $2,980,000 and investments of
$523,000.
The Company's significant working capital deficit is due primarily to $3,257,000
of current debt, of which approximately $1.8 million is due in the quarter ended
September 30, 2003, $720,000 is due on demand and $250,000 is due on demand any
time after July 27, 2003. As of March 31, 2003, the Company had a commitment for
$535,000 of additional funding from a private investor upon mutually acceptable
terms to draw upon throughout the remainder of its fiscal 2003, however, this
availability and expected operating cash flows is not sufficient to meet
obligations currently due in the next 12 months. During the quarter ended March
31, 2003 the Company secured a loan in the amount of $250,000. In January 31,
2003 the Company contracted with one accredited investor to sell up to 196,641
shares of restricted LFSI stock at $2.00 per share. The agreement noted the
closing may occur in traunches but shall be no later than March 31, 2003, unless
extended upon mutual written consent. This transaction was not closed and has
been terminated. In April, 2003 Michael D. Pruitt, President and CEO of the
Company, purchased 500,000 shares of restricted Common Stock at a price of $0.25
per share, or $125,000.
The Company is currently exploring additional sources of liquidity, including
debt and equity financing alternatives and potential sales of additional shares
of LFSI, a portion of which may or may not be sold from time to time depending
on market conditions and the effectiveness of a LFSI registration statement, to
provide additional cash to support operations, working capital and capital
expenditure requirements for the next 12 months and to meet the scheduled debt
repayments in August 2003 totaling approximately $1.8 million. Additionally, the
Company plans on negotiating with its debt holders to extend or convert into
stock some or all of this debt. If (i) we are unable to grow our business or
improve our operating cash flows as expected, (ii) we suffer significant losses
on our investments, (iii) we are unable to realize adequate proceeds from
investments, including our holdings of LFSI restricted stock, (iv) the private
investor is not able to meet its $535,000 funding obligation to the Company, or
(v) we are unsuccessful in extending a substantial portion of the debt
repayments scheduled for August 2003, then we will need to secure alternative
debt or equity financing to provide us with additional working capital. There
6
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 the current stockholders will be
diluted.
On September 5, 2002 the Company closed the sale (the "LFSI Transaction") of its
subsidiary LST, Inc. ("LST") to Lifestyle Innovations, Inc. ("LFSI"). LFSI is a
fully reporting company whose common stock is publicly traded on the over the
counter market. The Company's condensed consolidated financial statements should
be read in conjunction with all publicly available information of LFSI. Pursuant
to this transaction, LST became a wholly-owned subsidiary of LFSI and the
Company received 16,000,000 shares of LFSI restricted common stock, which
represented approximately 79% of the outstanding stock of LFSI at the closing
date. LFSI agreed to complete a registration statement within 90 days of closing
(the "Triggering Date") to register the shares of LFSI common stock received by
the Company in the LFSI Transaction. LFSI issued an option to the Company for
1,000,000 shares of LFSI common stock at 20% of the last bid price for the LFSI
common stock on the Triggering Date. Such option was exercisable only if the
registration statement was not filed by the Triggering Date. As a result of the
acquisition of FutureSmart Systems, Inc. ("FutureSmart") by LFSI (See Note 2),
the Company and LFSI agreed to extend the deadline for the registration
statement to May 31, 2003, or a later date consistent with any registration
rights associated with the acquisition of FutureSmart or otherwise, or as the
parties mutually agree. The registration statement has not been completed and
therefore the LFSI common stock held by the Company remains restricted. The LFSI
Transaction added approximately $320,000 of cash, $50,000 of which was received
in fiscal 2002, and $65,000 of other assets to the existing assets of LST.
Additionally, in September 2002 and subsequent to the closing of the LFSI
Transaction, LFSI received approximately an additional $870,000 in equity
funding from its private placements.
In connection with LFSI's acquisition of FutureSmart as discussed in Note 2
below, the Company agreed that for a period equal to the lesser of (i) March 3,
2005, and (ii) one (1) year from the registration of the shares of common stock
of the FutureSmart shareholders, in the event that the Company proposes to
transfer fifteen percent (15%) or more of the shares of LFSI's capital stock
owned by the Company (other than registered offerings, sales to certain
investors, and related party sales), then certain of the FutureSmart
shareholders shall have the right to participate in such transfer of stock on
the same terms and conditions, and the number of shares of LFSI stock that the
Company may sell in the transaction shall be correspondingly reduced; provided,
however, that the aggregate number of shares that the FutureSmart shareholders
may sell in any proposed sale transaction may not exceed twenty-five percent
(25%) of the total number of shares to be sold by the Company.
LFSI completed its acquisition of FutureSmart effective March 7, 2003 after
which date the results of operations of FutureSmart are included in the results
of LFSI. The acquisition is discussed in Note 2 below.
Minority interest represents the minority shareholders' share of income or
losses of LFSI, a consolidated subsidiary. The minority interest in the
consolidated balance sheet reflect the original investment by these minority
shareholders in this consolidated subsidiary, along with their proportional
share of the losses of the subsidiary. Minority interest also reflects LFSI's
subsequent sales of LFSI common stock, issuance of common stock warrants and
preferred stock, and the Company's cost basis in LFSI stock sold.
The Company's aviation travel services business owns 50% of Flightfuel, Inc.
("Flightfuel"), which was created in November 2002 to perform fuel management
services to a select group of clients. Flightfuel negotiates directly with
suppliers and other providers of aviation fuel on behalf of their clients and
arranges for fueling of the clients charter aircraft at both domestic and
international destinations. Flightfuel charges a per gallon agency fee for their
services. Flightfuel purchases the fuel on behalf of the client, coordinates
with ground fueling agents, remits funds to the suppliers and ground handlers
and invoices the client. Currently, Flightfuel clients include the Company's
aviation travel services business and Southeast Airlines. The Company's
investment in Flightfuel is accounted for using the equity method of accounting.
The Company records its investment in Flightfuel on the condensed consolidated
balance sheet in "Deferred costs and other assets" and its share of Flightfuel's
earnings, net of taxes, as "Other (income)" on the condensed consolidated
statements of operations. The Company's investment in Flightfuel at March 31,
2003 was $22,000. The Company's share of Flightfuel's earnings for the quarter
and nine months ended March 31, 2003 was $17,000 and $18,000, respectively.
7
CASH AND CASH EQUIVALENTS
The Company classifies as cash equivalents any investments that can be readily
converted to cash and have an original maturity of less than three months. The
Company also classifies as cash equivalents deposits received from customers of
its aviation travel services business for travel not yet taken. Such deposits
are generally received two weeks prior to the scheduled departure. 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
financial institutions. The Company performs periodic credit evaluations of its
customers' financial condition and generally does not require collateral.
Although due dates of receivables vary based on contract terms, credit losses
have been within management's estimates in determining the level of allowance
for doubtful accounts. Overall financial strategies are reviewed periodically.
The Company in estimating its fair value disclosures for financial instruments
used the following methods and assumptions:
o Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
o Accounts receivable and accounts payable: Due to their short term nature,
the carrying amounts reported in the balance sheet for accounts receivable
and accounts payable approximate their fair value. The Company provides for
any estimated losses through its allowance for doubtful accounts.
o Investments: The fair values for available-for-sale equity securities are
based on quoted market prices.
o Notes payable: The carrying amount of the Company's notes payable
approximate their fair value.
During the three months ended March 31, 2003, sales to Vacation Express Inc.
("Vacation Express") and Suntrips, Inc. ("Suntrips"), both subsidiaries of
MyTravel Group, plc ("MyTravel Group"), customers of the Company's aviation
travel services business, represented 71% of the Company's consolidated revenue.
For the nine-months then ended, sales to these customers represented 70% of the
Company's consolidated revenue. The Vacation Express and Suntrips programs are
three year programs with termination dates of December 30, 2004 and June 30,
2005, respectively. The Vactaion Express contract allows for a three year
extension based on the mutual consent of both parties and the Suntrips contract
allows for two consecutive one year renewals at the option of Suntrips. For the
three months ended March 31, 2002, sales to Vacation Express represented 66% of
the Company's consolidated revenue. For the nine-months then ended, sales to
Vacation Express and Aviation Network Services, also a customer of the Company's
aviation travel services business, represented 50% and 13%, respectively, of the
Company's consolidated revenue.
INVENTORY
Inventory consists mainly of materials, labor and overhead costs as well as
purchased components used in the Company's home technology business. Inventory
is recorded at the lower of cost or market with cost being determined on a
first-in, first-out basis.
INVESTMENTS
Investments, including certificates of deposit with maturities of greater than
three months, not readily marketable equity securities and other marketable
securities are classified as available for sale. Investment securities that are
not readily marketable include securities (a) for which there is no market on a
securities exchange or no independent publicly quoted market, (b) that cannot be
publicly offered or sold unless registration has been effected under the
Securities Act of 1933, or (c) that cannot be offered or sold because of other
arrangements, restrictions, or conditions applicable to the securities or the
Company. Certificates of deposit are recorded at cost plus accrued interest.
Marketable equity securities are recorded at estimated values based on quoted
market values for marketable securities of the issuer 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.
8
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 Statement of Financial Accounting Standards ("FAS") No. 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 gains and (losses) for the three
months and nine months ended March 31, 2003 aggregated $17,000 and $(50,000),
respectively, versus unrealized gains and (losses) of $166,000 and $(191,000),
respectively, in the three and nine months ended March 31, 2002.
PREPAID EXPENSES
Prepaid expenses include insurance, deferred costs, certain taxes, and charter
flight costs. Depending upon the volume and timing of charter flight activity,
the amount of prepaid charter flight costs can fluctuate significantly.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed on the straight-line basis over the assets' estimated
useful lives. Expenditures for maintenance and repairs are expensed as incurred.
Expenditures for improvements, which extend the useful life or add value to the
asset are capitalized and then expensed over that asset's remaining useful life.
Sales and disposals of assets are recorded by removing the related cost and
accumulated depreciation amounts with any resulting gain or loss reflected in
the statement of operations.
The carrying value of property and equipment 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.
In October 2001, the FASB issued FAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This standard
harmonizes the accounting for impaired assets and resolves some of the
implementation issues of FAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". It retains the
fundamental provisions of FAS No. 121 for (a) recognition and measurement of the
impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. It also retains the basic
provisions for presenting discontinued operations in the income statement but
broadens the scope to include a component of an entity rather than a segment of
a business. The Company adopted this standard effective July 1, 2002. This
pronouncement did not have a material impact on the Company's financial
position, results of operations or cash flows.
GOODWILL AND INTANGIBLE ASSETS
The Company records goodwill and intangible assets arising from business
combinations in accordance with FAS No. 141 "Business Combinations" which
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. FAS No. 141 also specifies the
criteria applicable to intangible assets acquired in a purchase method business
combination to be recognized and reported apart from goodwill.
The Company accounts for goodwill and intangible assets in accordance with FAS
No. 142 "Goodwill and Other Intangible Assets" ("FAS 142"). The Company adopted
FAS 142 effective July 1, 2001. In completing the adoption of FAS 142, the
Company has allocated its previously existing goodwill as of July 1, 2001 to its
reporting units, as defined in FAS 142, and performed an initial test for
impairment as of that date.
9
In accordance with FAS 142, the Company no longer amortizes goodwill. FAS 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead be tested at least annually for impairment. FAS
142 also requires that intangible assets with definite useful lives be amortized
over their respective estimated useful lives to their estimated residual values,
and be reviewed for impairment.
In September 2002, the Company acquired the assets of eGolf.com, an internet web
site specializing in the retail sales of golf equipment, which resulted in the
recording of $75,000 in goodwill.
As more fully described in Note 2, in March 2003, the Company acquired
FutureSmart, which resulted in the recording of $2,864,000 in goodwill.
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. Amounts
received in advance for future flights are reflected in unearned income.
Home Technology
The Company's home technology services work is completed in three phases -
pre-wiring, trim-out and hardware installation. The Company invoices its
customers and records revenue as work is completed on each project. For alarm
monitoring service contracts sold by the Company, revenue is recognized only
when the contracts are sold to third party finance companies or as billed if the
Company holds and services the contract.
Sales of franchise licenses are recognized as revenue when the Company's
obligations under the franchise agreement are "substantially complete". The
Company generally defines "substantially complete" as the completion of training
by the franchisee's General Manager and the approval by the Company of the
franchise location plan.
Royalties are based on a percentage of the sales recorded by franchisees and are
recorded as earned. Procurement fees charged to franchisees are recorded in the
month that the related product is shipped to the franchisee.
Revenues related to FutureSmart product sales are typically recognized at the
time the product is shipped. Generally, FutureSmart transfers the risks and
rewards of the products, including title, at this time. FutureSmart records
reserves for sales returns and uncollectible accounts, at the time the product
is shipped.
Technology Solutions
Revenue from website development projects is recognized on a percentage of
completion basis for fixed fee contracts, based on the ratio of costs incurred
to total estimated costs for individual projects. Revenue is recognized as
services are performed for time and material contracts at the applicable billing
rates.
Unbilled revenue represents revenue earned under contracts in advance of
billings. Such amounts are normally converted to accounts receivable within 90
days. Unearned income represents amounts billed or cash received in advance of
services performed or cost incurred under contracts. Any anticipated losses on
contracts are charged to earnings when identified.
The Company provides e-commerce marketing and business development services to
clients pursuant to contracts with varying terms. The contracts generally
provide for monthly payments and, in some cases, advance deposits. Revenue is
recognized over the respective contract period as services are provided.
Revenue from e-commerce sales or sales of hardware and software is recognized
upon passage of title of the related goods to the customer.
10
NET LOSS PER SHARE
The Company computes net loss per share in accordance with FAS No. 128,
"Earnings per Share" which requires dual presentations of basic and diluted
earnings per share.
Basic earnings per share is computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per share is computed
using the weighted average number of common shares outstanding and potentially
dilutive shares outstanding during the period. Options and warrants to purchase
4,391,310 and 3,647,720 shares of Common Stock were outstanding at March 31,
2003 and 2002, 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 for the three and nine months
ended March 31, 2003 and 2002 as the impact would have been anti-dilutive.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising expense
aggregated $141,000 and $39,000 for the three months ended March 31, 2003 and
2002, respectively, and $294,000 and $220,000 for the nine months ended March
31, 2003 and 2002, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with the liability method as
provided under FAS No. 109, "Accounting for Income Taxes." Accordingly, deferred
income taxes are recognized for the tax consequences of differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. The measurement of deferred tax assets is reduced, if necessary, by
the amount of any benefits that, based on available evidence, are not expected
to be realized.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for stock option grants using the intrinsic value method in
accordance with APB Opinion No. 25, "Accounting For Stock Issued To Employees"
and options and warrants issued to non-employees under FAS No. 123, "Accounting
For Stock Based Compensation". For the options and warrants issued to
non-employees, the fair value of each award has been calculated using the
Black-Scholes Model in accordance with FAS No. 123.
FAS No. 148, "Accounting for Stock-Based Compensation" requires the disclosure
of pro forma information regarding net loss required by FAS No. 123, which also
requires that the information be determined as if the Company had accounted for
its employee stock options granted subsequent to July 1, 1996 under the fair
value method of that statement. The fair value for the Company's options was
estimated at the date of grant using the Black-Scholes Model with the following
weighted average assumptions for fiscal 2002; risk-free interest rate range of
3.62% to 4.76%; no dividend yield; volatility factor of the expected market
price of the Company's Common Stock of .974; and an expected life of the option
of 3 to 5 years. The weighted average grant date fair value of options granted
in 2002 was $0.24 per share. For fiscal 2003 grants, the fair value of these
options was estimated at the date of grant using the Black-Scholes Model with
the following assumptions, risk-free interest rate of 2.72%, no dividend yield,
volatility factor of the expected market price of the Company's Common Stock of
..820, and an expected life of the option of 5 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can naturally affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of the Company's employee stock options.
The following pro forma amounts also include the Company's proportionate share
of LFSI's stock-based compensation that would have been reported under FAS 123
as disclosed in LFSI's consolidated financial statements.
11
The Company's pro forma net loss and net loss per share assuming compensation
cost was determined under FAS No. 123 for all options would have been the
following:
Three months Ended March 31, Nine months Ended March 31,
---------------------------- ---------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net loss as reported ................................. $(1,394) $ (182) $(2,075) $(3,458)
Basic and diluted net loss per share as reported ..... $ (0.11) $ (0.02) $ (0.17) $ (0.31)
Stock-based compensation included in net loss as
reported ........................................... $ 468 $ 7 $ 532 $ 19
Stock-based compensation that would have been reported
under FAS 123 ...................................... $(1,450) $ (235) $(2,164) $(1,128)
Pro forma net loss as if stock-based compensation had
been reported under FAS 123 .......................... $(2,376) $ (410) $(3,707) $(4,567)
Pro forma basic and diluted net loss per share as if
stock-based compensation had been reported under FAS 123 $ (0.19) $ (0.03) $ (0.30) $ (0.40)
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board issued FAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities" ("FAS 146").
FAS 146 addresses the financial accounting and reporting for costs associated
with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". FAS 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when it is incurred and measured initially as fair value.
The new guidance will impact the timing of recognition and the initial
measurement of the amount of liabilities the Company recognizes in connection
with exit or disposal activities initiated after December 31, 2002, the
effective date of FAS 146.
12
NOTE 2. GROUP BUSINESSES AND ACQUISITIONS
AVIATION TRAVEL SERVICES
The Company's aviation travel services business provides tour operators,
corporate travel departments, sports teams and casinos cost effective and
reliable charter air transportation. The Company acts as a program manager for
these customers by providing turnkey aircraft services including ground support
and aircraft fueling, passenger service and support, and real-time flight
tracking.
As discussed above, during the quarter ended December 31, 2002, the Company's
aviation travel services business invested in Flightfuel as a 50% owner.
HOME TECHNOLOGY
On April 3, 2001, the Company acquired LST in exchange for 1,153,525 shares of
Common Stock pursuant to certain stock purchase agreements. Including direct
acquisitions costs, the total purchase price aggregated $7,695,586 and the
transaction was recorded using the purchase method of accounting. The excess
value of the purchase price over the fair value of Lifestyle's net assets on the
acquisition date aggregating $8,069,669 was allocated to goodwill.
The Company's home technology business is a full service home technology
integration company providing builders, homeowners, and commercial customers
with complete installation and equipment for structured wiring, security,
personal computer networking, audio, video, home theater, central vacuum and
accent lighting. The home technology business has also secured relationships
with product manufacturers, distributors and service providers (cable, Internet
service, broadband and security). The Company launched a national franchising
program in the fourth quarter of fiscal 2001 and sold 14 franchises in fiscal
2002. The Company has sold one franchise during fiscal 2003. The Company also
owns and operates locations in the Charlotte, NC and Atlanta, GA markets.
Michael D. Pruitt, President and CEO of the Company, was a 3.2% shareholder of
LST prior to the acquisition by the Company. Avenel Ventures, Inc., then a
subsidiary of the Company, was a 3.5% shareholder of LST to the acquisition by
the Company.
On July 10, 2001, the Company acquired certain net assets and the business of a
home technology company in Atlanta, GA, now operated as Lifestyle Technologies
Atlanta, Inc. ("LSTA") for $1,255,000 which was paid in cash ($275,000), Common
Stock (139,365 shares) and a four - year term note ($250,000). Including direct
acquisition costs, the total purchase price aggregated $1,259,857 and the
transaction was accounted for using the purchase method of accounting. The
excess value of the purchase price over the fair value of the net assets on the
acquisition date aggregated $1,207,669 which was allocated to goodwill.
On March 7, 2003 LFSI completed its acquisition on FutureSmart, a manufacturer
and distributor of structured wiring and home networking distribution panels.
The consolidated financial statements include the results of FutureSmart from
the date of acquisition.
13
The purchase price of $801,910 consisted of the issuance of 1,000,000 shares of
LFSI's $.10 par value preferred stock, a bridge loan by LFSI to FutureSmart of
$224,830 and $477,080 in direct transaction costs.
The acquisition of FutureSmart was accounted for as a purchase in accordance
with SFAS No. 141, and the Company has accordingly allocated the purchase price
of FutureSmart based upon the fair values of the net assets acquired and
liabilities assumed. The excess value of the purchase price over the fair value
of the net assets on the acquisition date aggregated $2,864,000, which was
allocated to goodwill. The allocation of the purchase price has not been
finalized; however, the Company does not expect material changes.
Pursuant to the acquisition agreement, the shareholders of FutureSmart could
receive "Earn out Consideration" of up to 1,200,000 LFSI common shares if
FutureSmart achieves certain "Performance Milestones."
The following table is prepared on a pro forma basis for the three and nine
month periods ended March 31, 2003 and 2002 as though FutureSmart had been
acquired as of the beginning of the period presented (unaudited: in thousands
except per share amounts):
Three Months Ended March 31, Nine Months Ended March 31,
---------------------------- ---------------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues ....................... $ 19,330 $ 11,724 $ 57,390 $ 31,270
Net loss ....................... (1,853) (758) (3,796) (6,781)
Basic and diluted loss per share $ (0.15) $ (0.06) $ (0.30) $ (0.60)
The pro forma results are not necessarily indicative of what would have occurred
if the acquisition had been in effect for the periods presented. In addition,
they are not intended to be a projection of future results and do not reflect
any synergies that might be achieved from combining the operations.
TECHNOLOGY SOLUTIONS
The Company's technology solutions business is the result of the acquisitions of
Avenel Alliance, Inc. ("Avenel Alliance") in February 2001 and Logisoft Corp.
(f/k/a Logisoft Computer Products Corp.), and its wholly-owned subsidiary
eStorefronts.net Corp. (together with Logisoft Corp., "Logisoft") in June 2001.
Avenel Alliance was a wholly-owned subsidiary of Avenel Ventures, Inc. ("Avenel
Ventures"), which was also acquired by the Company in February 2001.
The Company's technology solutions business provides integrated products and
services to assist customers in meeting their strategic technology initiatives.
The Company's products and services include distribution of third-party
published software titles to the educational market and corporate customers,
full service Internet development, Internet site hosting and Internet business
development services encompassing partner site management and marketing. In its
Internet business development and marketing services, the Company generally
participates in the development and implementation of the business plan in
exchange for revenue-sharing.
On February 13, 2001, the Company acquired all of the common stock of Avenel
Ventures in exchange for 957,143 shares of Common Stock pursuant to a share
exchange purchase agreement dated as of November 8, 2000. The total purchase
price aggregated $6,834,000 and the transaction was accounted for using the
purchase method of accounting. The excess value of the purchase price over the
fair value of Avenel Ventures' net assets on the acquisition date aggregating
$5,610,144 was allocated to goodwill. The Avenel Ventures business forms the
core of the Company's current corporate staff, which incorporates its business
advisory activities. Michael D. Pruitt, the Company's current President and CEO,
was an officer, director, and 4.9% shareholder of Avenel Ventures prior to the
acquisition. Melinda Morris Zanoni, the Company's Executive Vice President, was
an officer, director and 29.9% shareholder of Avenel Ventures at the time of
acquisition.
On June 19, 2001, the Company acquired Logisoft in exchange of 785,714 shares of
Common Stock pursuant to an Agreement and Plan of Merger. Also, during fiscal
2002, the Company issued an additional 32,738 shares of Common Stock in
connection with the acquisition because Logisoft met certain performance goals
from September 30, 2001 through June 30, 2002. Including direct acquisition
costs, the total purchase price aggregated $5,504,879 and the transaction was
accounted for using the purchase method of accounting. The excess value of the
purchase price over the fair value of Logisoft's net assets on the acquisition
date aggregating $4,146,489 was allocated to goodwill. The aggregate purchase
price and goodwill were both adjusted in fiscal 2002 by $42,000 to reflect the
issuance of the earn-out shares.
14
TELECOMMUNICATIONS CALL CENTER
The Company operates a thirty-five (35) seat telecommunications call center
providing telemarketing, help desk and other services for companies. The call
center provides support to aviation travel services businesses as a reservations
and customer care center for airlines, tour operators and for internal programs
for which the Company takes reservations from travelers.
In December 2002, the Company's aviation travel services business assumed
operational responsibility of the call center operations located in Pensacola
FL. Investments have been made in new reservations software, related computer
equipment, and additional employees to support increased call volumes associated
with the Company's Interstate Jet programs. The Southeast Airlines "Club 59"
program has been discontinued due to reduced call volumes from Southeast and the
reservations center is now focusing on the Interstate Jet programs.
DISCONTINUED OPERATIONS
In August 2001, the Company completed the sale of all of the outstanding shares
of capital stock of the Company's subsidiary which owned a commercial real
estate business in exchange for cash ($312,500) and a 60-day note receivable
($62,500), which was collected in October 2001. The Company realized a gain of
approximately $576,000 on the sale in the quarter ended September 30, 2001.
15
NOTE 3. INVESTMENTS
Investments consist of the following (in thousands):
March 31, 2003 June 30, 2002
-------------- -------------
Net Net
Unrealized Fair Unrealized Fair
Cost (Loss) Value Cost (Loss) Value
------ ----- ------ ------ ----- ------
Equity securities $ 640 $ (194) $446 $ 712 $ (51) $ 661
Certificates of deposit 26 - 26 52 - 52
-------- -------- ------ ------- ------- ------
$ 666 $ (194) $472 $ 764 $ (51) $ 713
======== ======== ======= =======
Stock purchase warrants 51 101
------ ------
$523 $ 814
====== ======
The Company's certificate of deposit at March 31, 2003 is pledged as collateral
security for the Company's letter of credit for a trade credit line. As of March
31, 2003, $300,000 of the Company's equity securities relate to a privately held
company that provides high speed internet access to the hotel industry. The
executive vice president of the Company's aviation travel services business is a
director and shareholder of this company.
The net unrealized loss on equity securities included $0 and $45,000 of gross
unrealized accumulated gains at March 31, 2003 and June 30, 2002, respectively.
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
March 31, June 30,
2003 2002
---- ----
Land, buildings and improvements 160 382
Furniture and fixtures 423 430
Computers and office equipment 1,495 1,155
Software 379 252
Showroom, trade booths (home technology) 185 102
Vehicles (home technology) 12 12
---------- -----------
2,654 2,333
Accumulated depreciation (1,129) (861)
---------- -----------
$ 1,525 $ 1,472
========== ===========
16
NOTE 5. NOTES PAYABLE
Notes payable consists of the following (in thousands):
March 31, June 30,
2003 2002
---- ----
Convertible notes payable - due on demand after March 5, 2005 bearing interest at 7% (1) ......... $ 1,900 $ -
Note payable - due on demand bearing interest at the prime rate plus 1.0% and secured by assets
pledged by an affiliate of the Company ........................................................... 100 100
Note payable - due on demand bearing interest at 10% and secured by certain real estate .......... 34 -
Note payable - due on demand bearing interest at 6% .............................................. 500 -
Notes payable - unsecured and due on demand ...................................................... 85 55
Note payable - unsecured and due on demand after July 27, 2003 ................................... 250 -
Note payable - due October 1, 2003 bearing interest at 12% ....................................... 225 -
Note payables - due in August 2003 with interest imputed at 8% and unsecured (2) ................. 268 413
Note payables - due in August 2003 with interest imputed at 8% and unsecured ..................... - 50
Note payable - due in August 2003 with interest at 10% and collateralized by certain home
technology assets................................................................................. 300 300
Note payables - due in August 2003 with interest at 12% and unsecured ............................ 352 382
Note payable - due in August 2003 with interest at 10% and unsecured (2) ......................... 200 200
Note payable - due in August 2003 with interest at 12% and collateralized by certain home
technology accounts receivable and inventory (3) ................................................. 650 650
Note payable - due in monthly installments of $3,000 and a balloon payment in July 2005, interest
payable at 8% and collateralized by home technology accounts receivable .......................... 190 217
Note payable - due in monthly installments of $6,500, interest payable at 10.75%, secured by ..... 113
FutureSmart assets
Capital lease obligation at 12% due in monthly installments of $710 through September 2004 ....... 6 11
Capital lease obligation at 8.5% due in monthly installments of $1,007 through November 2005 .... 29 -
Capital lease obligations at 10.5%-21.4% due in monthly installments of $3,487 (4) ............... 103 -
Mortgage payable to a bank in monthly installments of $1,751, including interest at 7.96% and
collateralized by the assets of the internet/technology solutions business ....................... - 179
Note payable - $150,000 due December 31, 2003 and $600,000 due December 31, 2004
with interest at 12% and collateralized by certain aviation travel service business assets,
less discount of $47,000(5)....................................................................... 703 704
------- -------
6,008 3,261
Less current maturities, including demand notes .................................................. (3,257) (407)
------- -------
Long-term portion ................................................................................ $ 2,751 $ 2,854
======= =======
(1) Interest is payable in advance by issuance of LFSI common stock as is
determined by dividing the amount of such interest by $2.50. These notes
are convertible into shares of LFSI common stock at a conversion price of
$2.75.
(2) The principal and accrued interest on this note payable are convertible to
shares of Common Stock at the greater of (i) $1.12 per share or (ii) a 20%
discount to the average closing price of the Common Stock for the ten days
immediately preceeding the conversion date.
(3) At the option of the noteholder, this note can be converted into RCG's
Common Stock at a ratio of one (1) share of Common Stock for each $4.55 of
outstanding principal and interest.
(4) Lease terms range from through March 2006 to November 2006 and are secured
by certain assets of FutureSmart
(5) In connection with this note, the Company issued 71,429 shares of
restricted stock and 42,857 warrants to purchase its Common Stock at a
price of $2.45 and for a term of three years, both as loan origination
fees. This note is convertible into the Company's Common Stock at the
option of the debt holder at a per share price of the lesser of $2.10 or a
25% discount. The Company can force the debt holder to convert to stock at
$7.00 per share under certain conditions.
The $100,000 note payable bearing interest at prime plus 1.0% is currently past
due. The Company is trying to extend the payment of this balance. There can be
no assurance that the Company will be successful in extending the balance due.
17
During the quarter March 31, 2003 the Company's technology solutions business
established a line of credit secured by the accounts receivable of a portion of
the technology solutions business. The line of credit is in the amount of $1
million and bears interest at a rate of prime plus 2%. The facility includes
other administrative costs. As of March 31, 2003 the Company was in violation on
certain financial covenants under this line of credit. The Company obtained a
waiver from the financial institution during May 2003. The Company had no
balances outstanding under this line of credit as of March 31, 2003.
NOTE 6. INCOME TAXES
As of March 31, 2003, the Company had approximately $38 million of net operating
loss carry forwards ("NOLs") for federal income tax purposes, which expire
between 2019 through 2022. A deferred income tax asset valuation allowance has
been established against all deferred income tax assets as management is not
certain that the deferred income tax assets will be realized. In addition, due
to the substantial limitations placed on the utilization of net operating losses
following a change in control, utilization of such NOLs could be limited.
In fiscal 2001, the Company received a preliminary Internal Revenue Service
report on the Company's 1996 and 1997 tax returns and one of its subsidiary's
1994 and 1995 tax returns, which the Company has appealed. At March 31, 2003 and
June 30, 2002, the Company had recorded a federal tax liability of $305,830
related to such assessment.
NOTE 7. COMMON STOCK AND PAID IN CAPITAL
In the quarter ended March 31, 2003, the Company received into treasury 52,857
shares of Common Stock from Glenn Barrett in partial payment of balances owed by
Mr. Barrett to the Company. The shares were valued at $24,000. See related party
disclosures regarding Mr. Barrett in Note 10 below.
In the quarter ended December 31, 2002, the Company issued 89,554 shares of
restricted Common Stock in payment of certain services.
In the quarter ended December 31, 2002, the Company terminated an agreement with
a service provider. The Company had granted warrants to the service provider
that vested over a year resulting in additional paid-in capital of $98,000. Upon
the cancellation of the agreement, the Company reversed the unvested warrants
resulting in a reduction of additional paid-in capital of $45,000.
In the quarter ended September 30, 2002, the Company issued an aggregate of
177,143 shares of restricted Common Stock in connection with the Company's
private placement sale of Common Stock at $0.70 per share. In fiscal 2002 the
Company issued an aggregate of 1,251,429 shares of restricted Common Stock in
connection with this private placement at $0.70 per share. Through March 31,
2003, the total proceeds raised in this private placement were $977,500 net of
direct expenses.
In July 2002, the Company issued 14,286 shares of restricted Common Stock from
treasury stock with the termination of a contract with a service provider.
18
NOTE 8. STOCK OPTIONS AND WARRANTS
The following table summarizes the outstanding options at March 31, 2003 and
June 30, 2002:
March 31, 2003 June 30, 2002
-------------- -------------
Vesting Vesting
Exercise Term Period Exercise Term Period
Shares Price (Years) (Months) Shares Price (Years) (Months)
------- ------ ------- -------- ------- ------ ------- --------
580,000 $ 0.55 10 12
350,000 0.75 7 48
3,000 1.15 7 48
87,857 1.26 10 * 48 * 87,857 $ 1.26 10 * 48 *
436,428 1.75 to 1.96 10 12 to 48 479,286 1.75 to 1.96 10 12 to 48
242,857 4.90 10 12 328,571 4.90 10 12
142,857 5.25 10 -- 142,857 5.25 10 --
6,015 5.46 10 18 8,328 5.46 10 18
35,714 5.88 10 36 to 42 35,714 5.88 10 36 to 42
63,350 5.95 10 12 to 38 96,476 5.95 10 12 to 38
10,000 6.65 10 12 to 46 38,571 6.65 10 12 to 46
14,286 7.00 10 46 14,286 7.00 10 46
71,429 10.08 10 -- 71,429 10.08 10 --
17,857 21.00 10 -- 17,857 21.00 10 --
--------- ---------
2,061,650 1,321,232
========= ==========
* 35,714 non-qualified options issued to an employee in December 2001 have a
three-year term and are fully vested.
Of the options outstanding at March 31, 2003, 1,019,061 are exercisable.
The following table summarizes the outstanding warrants at March 31, 2003 and
June 30, 2002:
March 31,2003 June 30, 2002
----------------- -------------
Exercise Term Exercise Term
Shares Price (Months) Shares Price (Months)
------ ----- -------- ------ ----- --------
793,768 $ 0.28 54 793,768 $ 0.28 54
37,500 1.05 to 1.75 36 150,000 1.05 to 1.75 36
42,857 2.45 36 42,857 2.45 36
57,143 3.50 120 57,143 3.50 120
679,106 5.25 120 679,106 5.25 120
14,286 5.67 48 14,286 5.67 48
1,429 7.00 -- 1,429 7.00 --
7,143 7.70 36 7,143 7.70 36
96,428 12.25 -- 96,428 12.25 --
82,143 21.00 * 82,143 21.00 *
517,857 28.00 120* 517,857 28.00 120*
------------ -------------
2,329,660 2,442,160
============ ============
* All of the $21.00 warrants and 82,143 of the $28.00 warrants in the above
table have a term that is variable, subject to the market value of the
Common Stock and other conditions.
19
All of the warrants issued by the Company are exercisable, except for 3,571 with
an exercise price of $5.67 that vest over 3 years and 7,143 with an exercise
price of $12.25 that vest upon the holder meeting the requirements of a capital
raise commitment.
On June 26, 2000, the Company entered into a series of agreements with a
supplier of technical, marketing and programming services for the provision of
services related to the development of its Private Seats(TM) program. These
agreements provided that the supplier was to vest in warrants to purchase a
combined total of 793,768 shares of the Company's Common Stock at $0.28 per
share, which are reflected in the warrant table above. The vesting dates related
to these warrants were December 31, 2000, 2001 and 2002. Due to the termination
of its Private Seats(TM) program, during fiscal 2001, the Company expensed $5.2
million in connection with these warrants. The Company has questioned whether
the supplier has actually vested in the warrants due to the fact that the
program was terminated and the supplier was not required to perform the services
among other considerations. The Company is presently in negotiations with this
supplier to terminate these agreements and eliminate the related warrants. At
this time, the Company cannot predict what the outcome of these negotiations
will be.
NOTE 9: GENERAL AND ADMINISTRATIVE EXPENSE - OTHER
Following is a summary of the Company's general and administrative expenses (in
thousands):
Three Months Ended March 31, Nine Months Emded March 31,
2003 2002 2003 2002
---- ---- ---- ----
Compensation expense ........ $ 1,396 $ 831 $ 3,695 $ 3,048
Legal and professional fees . 160 130 438 380
Public and investor relations 4 (46) 51 28
Marketing and advertising ... 141 39 294 220
Rent expense ................ 115 136 393 465
Insurance ................... 86 84 205 280
Telecommunications .......... 98 51 277 230
Office and printing expense . 163 145 384 352
Travel and entertainment .... 102 60 304 220
Other ....................... 139 150 302 288
------- ------- ------- -------
$ 2,404 $ 1,580 $ 6,343 $ 5,511
======= ======= ======= =======
NOTE 10. RELATED PARTY TRANSACTIONS
Amounts due to affiliates consisted of the following (in thousands):
March 31, June 30,
2003 2002
---- ----
Note and interest payable to Mr. Pruitt ........ $ 33 28
Advance payable to Mr. Pruitt .................. 26 26
Amounts payable to a company owned by Mr. Pruitt 6 108
Interest payable on balances owed to Mr. Gordon
and a company Mr. Gordon is president of ..... 143 88
Advance payable to Mr. Gordon .................. 85 -
---- ----
$293 $250
==== ====
The note and interest payable to Mr. Pruitt represents principal of $11,000 plus
accrued interest. The note bears interest at 12% per annum and is due on demand.
The advance payable to Mr. Pruitt and amounts payable to the company owned by
Mr. Pruitt bear interest at 8% and are due on demand.
20
Mr. Pruitt has pledged certain of his personal assets to secure a $100,000 bank
credit facility for the Company's home technology business. At March 31, 2003,
the balance outstanding on this bank facility was $100,000. As noted in Note 5
above, the balance is currently past due and the Company is trying to extend the
payment of this balance. There can be no assurance that the Company will be
successful in extending the balance due.
Mr. Pruitt is also a minority investor in a company that he is a director of
that has purchased franchise licenses and business operations of the Company's
home technology business in three markets in South Carolina, and in another
company that is a franchisee of the Company's home technology business in three
locations in the state of Maryland. The franchise locations in South Carolina
owed the Company and its subsidiaries $47,000 and $107,000 at March 31, 2003 and
June 30, 2002. The franchise locations in Maryland owed the Company and its
subsidiaries $13,000 and $16,000 at March 31, 2003 and June 30, 2002.
As noted in Note 1, in April, 2003 Michael D. Pruitt, President and CEO of the
Company, purchased 500,000 shares of restricted Common Stock at a price of $0.25
per share, or $125,000.
As noted in Note 3 above, the Company owns an equity interest in a privately
held company in which the executive vice president of the Company's aviation
travel services business is a director and shareholder. Avenel Ventures owned
this equity interest prior to being acquired by the Company.
Paul B. Johnson, a previous director of the Company, is an investor in a
company, which in November 2001 became a franchisee of the Company's home
technology business in the Dallas, Texas market and purchased franchises for two
additional Dallas, Texas markets during the quarter ended March 31, 2003. In
addition, Mr. Johnson was named Chief Executive Officer and a board member of
Lifestyle Innovations, Inc., which acquired the Company's home technology
business in September 2002 as further described in Note 2 to these financial
statements. Mr. Johnson resigned as a director of the Company effective October
31, 2002 due to his being appointed the CEO of LFSI. Mr. Johnson resigned as
Chief Executive Officer and as a board member from Lifestyle Innovations, Inc.
during March 2003 and remained President and Treasurer. The Dallas franchise
locations owed the Company and its subsidiaries $88,000 and $14,000 at March 31,
2003 and June 30, 2002.
During fiscal 2002, Glenn Barrett resigned as President of LST and began LVA
Technologies LLC ("LVA"), a low voltage wiring business that operates as a
Lifestyle franchisee headquartered in Charlotte, NC to service the commercial
market. The Company waived LVA's initial franchise fee for the commercial
franchise. LVA also owns the Greenville and Columbia, SC franchises. LVA's low
voltage wiring business pays royalties on products purchased from the Company at
the same rate as the Company's other franchisees, however, it does not pay
royalties on revenue generated from products purchased elsewhere as required of
the Company's other franchisees, including the Greenville and Columbia, SC
franchises. LVA and its subsidiaries owed the Company and its subsidiaries
$287,000 and $235,000 at March 31, 2003 and June 30, 2002, respectively. As
noted in Note 7 above, in the quarter ended March 31, 2003, the Company received
into treasury 52,857 shares of Common Stock from Glenn Barrett in partial
payment of balances owed by Mr. Barrett to the Company. The shares were valued
at $24,000.
During fiscal 2002, G. David Gordon, an RCG shareholder, and a company in which
he is the president and a shareholder, loaned the Company and its subsidiaries
$1,144,000 at interest rates of 8% to 12%. At March 31, 2003 and June 30, 2002,
total debt outstanding to Mr. Gordon and this company was $1,370,000 and
$1,500,000, respectively. Interest owed on these balances totaled $143,000 and
$88,000 at March 31, 2003 and June 30, 2002, respectively. During the nine
months ended March 31, 2003, Mr. Gordon advanced $85,000 to the Company. This
amount is payable upon demand. Mr. Gordon has an ownership interest in ten of
the Company's home technology business franchises, including two locations that
were purchased from the Company during fiscal 2002 and for which the Company
recorded a gain on sale of $119,000. He also acts as special legal counsel to
the Company from time to time. Mr. Gordon has an ownership interest in the three
markets in South Carolina along with Mr. Pruitt as discussed, the three markets
in Dallas, Texas along with Mr. Johnson, and four additional markets in Houston,
TX, Raleigh, NC, Wilmington, NC and Greensboro, NC. These four additional
markets owed the Company and its subsidiaries $84,000 and $167,000 at March 31,
2003 and June 30, 2002.
21
NOTE 11. BUSINESS SEGMENT INFORMATION
Information related to business segments is as follows (in thousands):
Three months ended March 31, 2003: Aviation
Travel Call Technology Home
Services Center Solutions Technology Corporate Total
-------- ------ --------- ---------- --------- -----
Revenue ............................................... $ 15,514 $ - $ 2,146 $ 991 $ - $ 18,651
Income (loss) from continuing operations .............. (29) (10) (183) (801) (371) (1,394)
Identifiable assets ................................... 6,217 48 9,554 15,077 1,627 32,523
Capital expenditures .................................. 48 (38) 4 40 - 54
Depreciation and amortization ......................... 22 3 51 33 4 113
Three months ended March 31, 2002: .................... Aviation
Travel Call Technology Home
Services Center Solutions Technology Corporate Total
------------------------------------------------------- -------- -------- -------- -------- -------- --------
Revenue ............................................... $ 6,669 $ 14 $ 2,233 $ 629 $ 202 $ 9,747
Income (loss) from continuing operations .............. 98 (14) (69) (359) 162 (182)
Identifiable assets ................................... 3,737 380 10,445 10,361 3,693 28,616
Capital expenditures .................................. 5 - 10 38 1 54
Depreciation and amortization ......................... 15 4 58 20 4 101
Nine months ended March 31, 2003: ..................... Aviation Internet/
Travel Call Technology Home
Services Center Solutions Technology Corporate Total
------------------------------------------------------- -------- -------- -------- -------- -------- --------
Revenue ............................................... $ 44,292 $ 23 $ 7,851 $ 2,089 $ - $ 54,255
Income (loss) from continuing operations .............. 824 (137) (290) (1,685) (787) (2,075)
Identifiable assets ................................... 6,217 48 9,554 15,077 1,627 32,523
Capital expenditures .................................. 167 (25) 67 82 - 291
Depreciation and amortization ......................... 43 25 173 97 10 348
Nine months ended March 31, 2002: ..................... Aviation Internet/
Travel Call Technology Home
Services Center Solutions Technology Corporate Total
------------------------------------------------------- -------- -------- -------- -------- -------- --------
Revenue ............................................... $ 17,022 $ 50 $ 6,800 $ 2,366 $ 279 $ 26,517
Income (loss) from continuing operations .............. (844) (85) (575) (660) (1,177) (3,341)
Identifiable assets ................................... 3,737 380 10,445 10,361 3,693 28,616
Capital expenditures .................................. 11 - 65 148 1 225
Depreciation and amortization ......................... 37 13 170 57 8 285
The Company's sales are primarily to customers in the United States of America.
International sales are minimal.
22
NOTE 12. CONTINGENCIES
Legal Proceedings
During the normal course of business, the Company is subject to various
lawsuits, which may or may not have merit. Management intends to vigorously
pursue and/or defend such suits, as applicable, and believes that they will not
result in any material loss to the Company.
Guarantee Obligation
The Company's aviation travel services business (the "Aviation Business") has
certain guarantees outstanding with an airline provider that indicate if the
Aviation Business does not utilize a minimum number of hours during each program
year, then the Aviation Business would be required to pay the shortage to the
provider. The Aviation Business has a similar arrangement with Vacation Express
whereby Vacation Express has guaranteed a certain number of travel hours to the
Aviation Business.
For calendar year 2002 the parties are in the process of finalizing an agreed
upon amount of shortfall that would be due the air carrier by the Aviation
Business. Vacation Express agrees that the amount it would owe the Aviation
Business would exceed this amount and therefore is negotiating directly with the
air carrier. Vacation Express would pay this amount directly to the air carrier.
The Aviation Business does not anticipate incurring a net loss on these
guarantees and has not accrued any such loss on its balance sheet as of March
31, 2003.
23
Item 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The following table summarizes results of operations for the three and nine
months ended March 31, 2003 and 2002 (in thousands):
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
March 31, 2003 March 31, 2002 March 31, 2003 March 31, 2002
-------------------- ------------------ ------------------- -----------------
% of % of % of % of
Revenue Revenue Revenue Revenue
------- ------- ------- -------
Revenue:
Services ........................................ $ 15,892 85.2% $ 7,321 71.7% $45,317 83.5% $ 19,022 71.7%
Product sales ................................... 2,759 14.8% 2,426 24.9% 8,938 16.5% 7,495 28.3%
-------- ----- -------- ----- ------- ----- -------- -------
Total revenue ............................ 18,651 100.0% 9,747 100.0% 54,255 100.0% 26,517 100.0%
-------- ----- -------- ----- ------- ----- -------- -------
Services ........................................ 14,887 79.8% 6,225 63.9% 42,097 77.6% 17,493 66.0%
Product sales ................................... 2,291 12.3% 2,185 22.4% 7,679 14.2% 6,351 24.0%
-------- ----- -------- ----- ------- ----- -------- -------
Total cost of revenue .................... 17,178 92.1% 8,410 86.3% 49,776 91.7% 23,844 89.9%
-------- ----- -------- ----- ------- ----- -------- -------
Gross profit ............................. 1,473 7.9% 1,337 13.7% 4,479 8.3% 2,673 10.1%
-------- ----- -------- ----- ------- ----- -------- -------
Selling, general and administrative expenses -
compensation related to issuance of stock options
and warrants .................................... 468 2.5% 7 0.1% 532 1.0% 19 0.1%
Selling, general and administrative expenses -
other ........................................... 2,404 12.9% 1,580 16.2% 6,343 11.7% 5,511 20.8%
Provision for bad debts ......................... 38 0.2% 20 0.2% 44 0.1% 86 0.3%
Depreciation and amortization ................... 113 0.6% 101 1.0% 348 0.6% 285 1.1%
-------- ----- -------- ----- ------- ----- -------- -------
Operating costs and expenses ............. 3,023 16.2% 1,708 17.5% 7,267 13.4% 5,901 22.3%
-------- ----- -------- ----- ------- ----- -------- -------
Operating loss ........................... (1,550) -8.3% (371) -3.8% (2,788) -5.1% (3,228) -12.2%
Interest expense, net ........................... 119 0.6% 93 1.0% 315 0.6% 186 0.7%
(Gain) loss on investments, net ................. (8) 0.0% (282) -2.9% (362) -0.7% 98 0.4%
Loss (gain) on disposal of assets ............... 36 0.2% - 0.0% 66 0.1% (171) -0.6%
Other (income) .................................. (23) -0.1% - 0.0% (289) -0.5% - 0.0%
Minority interest ............................... (280) -1.5% - 0.0% (443) -0.8% - 0.0%
-------- ----- -------- ----- ------- ----- -------- -------
Loss from continuing operations .......... (1,394) -7.5% (182) -1.9% (2,075) -3.8% (3,341) -12.6%
Gain on disposal of discontinued operations ..... - 0.0% - 0.0% - 0.0% 576 2.2%
-------- ----- -------- ----- ------- ----- -------- -------
Loss before cumulative effect of change in
accounting principle .................. (1,394) -7.5% (182) -1.9% (2,075) -3.8% (2,765) -10.4%
Cumulative effect of change in accounting
principle ....................................... - 0.0% - 0.0% - 0.0% (693) -2.6%
-------- ----- -------- ----- ------- ----- -------- -------
Net loss ........................................ $ (1,394) -7.5 $ (182) -1.9% $ (2,075) -3.8% $ (3,458) -13.0%
======== ===== ======== ===== ======= ===== ======== =======
The Company's revenues in the three and nine months ended March 31, 2003 were
$18,651,000 and $54,255,000, respectively, compared to $9,747,000 and
$26,517,000, respectively, in the same periods a year ago. The increase in the
three months ended March 31, 2003 as compared to the prior year is due primarily
to the aviation travel services expanded charter aviation business as well as
revenues recognized by FutureSmart. This increase was partially offset by a
decrease in technology solutions revenues and the prior year amount including
24
corporate revenues generated from fees received for investment banking services.
The increase in the nine months ended March 31, 2003 is also due primarily to
the aviation travel services expanded charter aviation business as well as
revenues recognized by FutureSmart, as well as the technology solutions expanded
sales activity in the computer software business. These increases were partially
offset by the decrease in revenues from the home technology business due to a
reduction in the sale of franchises from twelve for the nine months ended March
31, 2002 to three for the nine months ended March 31, 2003 and a focused
reduction of business with certain unprofitable customers, partially offset by
increased revenues from franchise royalties. The increase for the nine months
ended March 31, 2003 as compared to the prior year was also partially offset by
the prior year amount including corporate revenues generated from fees received
for investment banking services
During the three months ended March 31, 2003, sales to Vacation Express Inc.
("Vacation Express") and Suntrips, Inc. ("Suntrips"), both subsidiaries of
MyTravel Group, plc ("MyTravel Group"), customers of the Company's aviation
travel services business, represented 71% of the Company's consolidated revenue.
For the nine-months then ended, sales to these customers represented 70% of the
Company's consolidated revenue. The Vacation Express and Suntrips programs are
three year programs with termination dates of December 30, 2004 and June 30,
2005, respectively. The Vactaion Express contract allows for a three year
extension based on the mutual consent of both parties and the Suntrips contract
allows for two consecutive one year renewals at the option of Suntrips. For the
three months ended March 31, 2002, sales to Vacation Express represented 66% of
the Company's consolidated revenue. For the nine-months then ended, sales to
Vacation Express and Aviation Network Services, also a customer of the Company's
aviation travel services business, represented 50% and 13%, respectively, of the
Company's consolidated revenue.
Gross profit in the three and nine months ended March 31, 2003 was $1,473,000
and $4,479,000, respectively, compared to $1,337,000 and $2,673,000,
respectively, in the same periods a year ago. The increases in the current
period are primarily due to the expanded charter aviation business and
elimination of the jet shuttle business, which operated at a gross margin
deficit, as well as an increase in the home technology gross profit as a result
of FutureSmart. These increases were partially offset by a reduction in gross
profit of the technology solutions business as a result in the change in revenue
mix from internet and data networking consulting, which are relatively higher
margin businesses in comparison to its lower margin software resale activities.
The Company reported a 7.9% overall gross margin in the quarter ended March 31,
2003 compared to 13.7% in the same period a year ago. The decrease in gross
margin percentage is primarily due to the aviation travel services division,
which operates at lower gross margin percentages than the Company's other
business segments, representing 83% of the Company's revenues during the three
months ended March 31, 2003, compared to 68% a year ago, while the technology
solutions division, which operated at margins of 18.4% in the prior year
quarter, represented 23% of the Company's consolidated revenues in the prior
year. The Company reported an 8.3% overall gross margin during the nine months
ended March 31, 2003 compared to 10.1% in the same period a year ago.
In the three and nine months ended March 31, 2003, the Company reported $468,000
and $532,000, respectively, of non-cash expense related to the issuance of
options and warrants. The Company incurred $7,000 and $19,000 of such expense in
the three and nine months ended March 31, 2002, respectively. The increase in
the current year is primarily due to compensation expense of approximately
$460,000 related to stock options issued by LFSI to its Chief Executive Officer.
Selling, general and administrative expenses-other in the three and nine months
ended March 31, 2003 was $2,404,000 and $6,343,000, respectively, compared to
$1,580,000 and $5,511,000, respectively, in the comparable periods a year ago.
The increase in current year quarter is primarily due to an increase in
compensation expense of approximately $565,000. This increase was primarily due
to aviation travel services business having an increase in headcount as a result
of an increased revenue base resulting from the Vacation Express contract that
began on December 20, 2001. The prior year compensation expense for the aviation
travel services business was also reduced from a normal level due to the events
of September 11, 2001, as employees voluntarily reduced their wages due to the
slowdown in business.
Provision for bad debts in the three and nine months ended March 31, 2003 was
$38,000 and $44,000, respectively, compared to $20,000 and $86,000,
respectively, in the comparable periods a year ago. The prior year amount was
primarily the result of a bad debt incurred in the Company's technology
solutions business.
The Company's depreciation and amortization expense in the three and nine months
ended March 31, 2003 was $113,000 and $348,000, respectively, compared to
$101,000 and $285,000, respectively, in the same periods a year ago. The
increase is due primarily to depreciation of fixed asset additions.
In the three and nine months ended March 31, 2003, the Company incurred $119,000
and $315,000, respectively, of net interest expense, compared to $93,000 and
$186,000, respectively. The increase was due to the Company's debt portfolio
which increased from approximately $668,000 at June 30, 2001 to $6,008,000 at
March 31, 2003.
25
In the three and nine months ended March 31, 2003, the Company recorded net
gains on investments of $8,000 and $362,000, respectively, of which $0 and
$441,000, respectively, relate to Company's sale in the corresponding periods of
LFSI restricted stock obtained in the LFSI Transaction. In September 2002, the
Company completed the private sale of 125,000 shares of LFSI restricted common
stock to a private investor. The Company sold these shares at $2.00 per share
and received $250,000 in proceeds as a result of this sale. $150,000 of the
proceeds was received in September 2002 with the balance being received in
October 2002. During the three months ended December 31, 2002 the Company
completed the private sales of an additional 60,000 shares of the LFSI
restricted stock to the same private investor. These shares were also sold for
$2.00 per share, resulting in proceeds to the Company of $120,000. During the
quarter ended December 31, 2002 the Company issued 78,359 shares of the LFSI
restricted stock to a debt holder of the Company in satisfaction of outstanding
principal and interest totaling $156,718. During the quarter ended March 31,
2003 the Company issued 25,000 shares of the LFSI restricted stock as prepaid
interest on the $250,000 loan secured during January of 2003 and another 20,000
shares of LFSI restricted stock as payment for a certain sponsorship. The net
gain on all investment activity during the three and nine months ended March 31,
2003 is net of gains (losses) of approximately $17,000 and $(50,000),
respectively, related to non-cash market adjustments of common stock purchase
warrants. For the three and nine months ended March 31, 2002, the Company
recognized a net gain (loss) on investments of $282,000 and $(98,000),
respectively. The results for the nine months ended March 31, 2002 also include
a gain of $171,000 on the sale of certain home technology net assets to
companies that are operating these businesses as franchises.
In the quarter ended September 30, 2002, the Company's aviation travel services
business received $263,000 in grant proceeds from a government assistance
program designed to provide grants to companies whose businesses were directly
impacted by the events of September 11, 2001. This amount is recorded as other
income in the consolidated statements of operations.
Minority interest on consolidated statements of operations represents the
minority shareholders' share of losses of LFSI for the three and nine months
ended March 31, 2003.
The Company realized a gain of $576,000 on the sale of its discontinued
commercial real estate business in the nine months ended March 31, 2002.
In the quarter ended September 30, 2001, the Company recorded the cumulative
effect of a change in accounting principle of $693,000, increasing the Company's
reported net loss, as a result of its implementation of FAS 142. This adjustment
was recorded as of July 1, 2001.
26
Continuing Operations of Business Segments
The following table summarizes results of continuing operations by business
segment for the three and nine months ended March 31, 2003 and 2002 (in
thousands):
Three Months Ended March 31, 2003 Three Months Ended March 31, 2002
Gross
Profit Gross Income
Revenues (Deficit) (Loss) Revenues Profit (Loss)
-------- --------- ------ -------- ------ ------
Aviation Travel Services ..... $15,514 $ 788 $ (29) $ 6,669 $ 500 $ 98
Telecommunications Call Center - (18) (10) 14 14 (14)
Home Technology .............. 991 388 (801) 629 210 (359)
Technology Solutions ......... 2,146 315 (183) 2,233 411 (69)
Corporate .................... - - (371) 202 202 162
------- ------- ------- ------- ------- -------
$18,651 $ 1,473 $(1,394) $ 9,747 $ 1,337 $ (182)
======= ======= ======= ======= ======= =======
Nine Months Ended March 31, 2003 Nine Months Ended March 31, 2002
Gross Income Gross
Revenues Profit (Loss) Revenues Profit (Loss)
-------- ------ ------ -------- ------ ------
Aviation Travel Services ..... $ 44,292 $ 2,583 $ 824 $ 17,022 $ 36 $ (844)
Telecommunications Call Center 23 5 (137) 50 50 (85)
Home Technology .............. 2,089 785 (1,685) 2,366 843 (660)
Technology Solutions ......... 7,851 1,106 (290) 6,800 1,464 (575)
Corporate .................... - - (787) 279 280 (1,177)
-------- -------- -------- -------- -------- --------
$ 54,255 $ 4,479 $ (2,075) $ 26,517 $ 2,673 $ (3,341)
======== ======== ======== ======== ======== ========
Aviation Travel Services
The Company's aviation travel services business revenues in the three and nine
months ended March 31, 2003 were $15,514,000 and $44,292,000, respectively,
compared to $6,669,000 and $17,022,000, respectively, in the same periods a year
ago. The increase in revenues is due primarily to the Company's expanded charter
aviation business as a result of the commencement of the Company's hub operation
in Sanford, FL in conjunction with Vacation Express. The Vacation Express
program covered from four to six cities during the nine months ended March 31,
2003 compared to two cities in the same period a year ago. Due in part to the
slowdown and uncertainty in the economy in general, and in the air travel
industry in particular, the Sanford, FL Hub operation was reduced between August
2002 and December 2002 from six planes to four. Total revenues with Vacation
Express were $8,147,000 and $21,977,000, respectively, in the three and nine
months ended March 31, 2003 compared to $6,460,000 and $13,257,000,
respectively, in the same periods a year ago. The Vacation Express program is a
three-year contract with a termination date of December 20, 2004. The contract
allows for a three year extension based on the mutual consent of both parties.
During July 2002, the Company launched a program with Suntrips which provides
service between several western cities and destinations in Mexico. The Company
recognized revenues of $5,176,000 and $16,098,000, respectively, from this
program during the three and nine months ended March 31, 2003. The Suntrips
program is a three-year contract with a termination date of June 30, 2005. The
contract allows for two consecutive one year renewals at the option of Suntrips.
The Company intends to pursue an extension of both programs, however, there can
be no assurance that such extensions will occur. Other new flight programs
included charter service for the Trump Marina and Plaza casinos in Atlantic
City, NJ and a program with Turismo tours with charter service from Orlando to
San Juan. In March 2003, the Company began a trial with scheduled charter air
service D/B/A Interstate Jet ("IJET") with service between Newburgh, NY,
Allentown, Pa, Baltimore, Md., and Atlanta, Ga. These programs generated
$1,201,000, $380,000 and $202,000, respectively, in revenues during the nine
months ended March 31, 2003. The Trump program is contracted through April 2003
and the Company has submitted a proposal to extend the program for two years.
There can be no assurance the program will be extended. The Turismo program is
an annual two-month program that runs during December and January. The IJET
trial program was subsidized by certain airports both in revenue and advertising
and destinations are dependent on yield results. In May 2003, the Company plans
to operate a trial program with service from Newburgh/Allentown to Las Vegas/Los
Angeles.
27
Gross profit for the Company's aviation travel services business in the three
and nine months ended March 31, 2003 was $788,000 and $2,583,000, respectively,
compared to a gross profit of $500,000 and $36,000, respectively, in the same
periods a year ago. This business generated income (loss) of $(29,000) and
$824,000, respectively, for the three and nine months ended March 31, 2003
compared to income (loss) of $98,000 and $(844,000), respectively, in the same
periods a year ago. The losses for the three months ended March 31, 2003 were
due primarily to the Company's start up and operating expenses associated with
the IJET program and the reservations center in Pensacola, Fl. Favorable results
for the nine months ended March 31, 2003 was due partially to the receipt of
$263,000 in the quarter ended September 30, 2002 in grant proceeds from a
government assistance program designed to provide grants to companies whose
businesses were directly impacted by the events of September 11, 2001. Also, the
prior year periods were adversely affected by losses incurred on a jet shuttle
business, which operated at a gross margin deficit.
Home Technology
The Company's home technology business represents the activities of LFSI. The
Company is a majority owner of LFSI and consolidates the business while
recording minority interests for the percentage of income and equity of LFSI
owned by other shareholders.
This business recorded revenues of $991,000 and $2,089,000, respectively, for
the three and nine months ended March 31, 2003 compared to $629,000 and
$2,366,000, respectively, for the same periods a year ago. In the quarter ended
September 30, 2001, the Company implemented a national franchising program for
its home technology business. Since its launch, the Company has sold 17
geographic markets to franchisees, primarily in the southern and southeastern
United States. The Company sold two such franchises during the quarter ended
March 31, 2003, compared to five in the prior year quarter. During the nine
months ended March 31, 2003 the Company sold three such franchises compared to
12 in the prior year. The overall increase in revenues during the quarter ended
March 31, 2003 as compared to the prior year is the result of revenues
recognized by FutureSmart (See Note 2 above) and increased revenues from
royalties generated from franchises, partially offset by the Company's sale in
the second quarter of fiscal 2002 of three branches previously operated as
Company owned locations and a focused reduction of business with certain
unprofitable customers in the Company's two owned markets, Charlotte, NC and
Atlanta, GA, as well as lower revenues recognized from the sale of franchises.
The overall decrease in revenues for the nine months ended March 31, 2003 as
compared to the prior year is the result of the Company's sale in the second
quarter of fiscal 2002 of three branches previously operated as Company owned
locations and a focused reduction of business with certain unprofitable
customers in the Company's two owned markets, Charlotte, NC and Atlanta, GA, as
well as lower revenues recognized from the sale of franchises, partially offset
by increased revenues from royalties generated from franchises and revenues
generated by FutureSmart.
Gross profit for the Company's home technology business in the three and nine
months ended March 31, 2003 was $388,000, or 39.2%, and $785,000, or 37.6%,
respectively, compared to $210,000, or 33.4%, and $843,000, or 35.6%,
respectively, in the same periods a year ago. The increase in gross profit
percentage for the current year as compared to the prior year was the result of
higher franchise royalties, staff reductions and the positive result of
eliminating certain unprofitable customers, partially offset by a reduction in
the sale of franchise licenses.
This business generated a loss of $801,000 and $1,685,000, respectively, in the
three and nine months ended March 31, 2003, compared to a loss of $359,000 and
$660,000, respectively, in the same periods a year ago. The results for the nine
months ended March 31, 2002 include a gain of $171,000 on the sale of certain
home technology net assets to companies that are operating these businesses as
franchises. The current year net loss is also higher due to increased operating
costs and interest expense, as well as operating losses incurred by FutureSmart,
partially offset by the improved gross profit discussed above as well as the
attribution of approximately $280,000 and $443,000, respectively, of losses to
the minority shareholders for the three and nine months ended March 31, 2003.
Technology Solutions
The Company's technology solutions business recorded revenues of $2,146,000 and
$7,851,000, respectively, for the three and nine months ended March 31, 2003
compared to $2,233,000 and $6,800,000, respectively, for the same periods a year
ago. The decrease in the three months ending March 31, 2003 is due to the
closing of the data networking product and consulting business unit. The Company
28
discontinued offering these services during its third fiscal quarter in 2002,
however this business unit accounted for $174,000 in revenue during the March
31, 2002 quarter. The overall increase in year to date revenues is the result of
the expansion of products, services and its sales force, primarily in the
computer software business. This increase offset $892,000 of revenues recognized
during the nine months ended March 31, 2002 in the data networking product and
consulting sales unit. The Company discontinued the data networking product and
consulting business unit as a result of the high selling, general and
administrative costs associated with this unit resulting in an overall loss to
the business.
Gross profit for the Company's technology solutions business in the three and
nine months ended March 31, 2003 was $315,000, or 14.7%, and $1,106,000, or
14.1%, respectively, compared to $411,000, or 18.4%, and $1,464,000, or 21.5%,
respectively, in the same periods a year ago. The reduction in gross profits was
due primarily to a change in revenue mix from internet and data networking
consulting, which are relatively higher margin businesses in comparison to its
lower margin software resale activities.
This business incurred losses of $183,000 and $290,000, respectively, for the
three and nine months ended March 31, 2003 compared to losses of $69,000 and
$575,000, respectively, in the same periods a year ago. The increase in losses
during the current year quarter as compared to the prior year is due primarily
to lower gross profits as discussed above, losses recognized on the sale of a
property and fees incurred on the establishment of a $1 million line of credit.
The improved results for the nine months ended March 31, 2003 as compared to the
prior year were due primarily to the significant reduction in selling, general
and administrative expenses resulting from staff reductions, lower advertising
and marketing costs, and lower rent expenses.
Corporate
Corporate incurred losses from continuing operations of $371,000 and $787,000,
respectively, for the three and nine months ended March 31, 2003 compared to
income (losses) of $162,000 and $(1,177,000), respectively, in the same periods
a year ago. Excluding the net gain on investments, Corporate's losses would have
been $379,000 and $1,168,000, respectively, for the three and nine months ended
March 31, 2003. Excluding the net gains and losses on investments, Corporate's
losses would have been $103,000 and $1,063,000, respectively, for the three and
nine months ended March 31, 2002. The increase in losses for the current year is
due primarily to the prior year results including revenues generated from fees
received for investment banking services and the prior year results including
the positive settlement of a contract with a service provider that reduced
expenses during the period.
Seasonality
The Company experiences some seasonality in its aviation travel services and
technology solutions businesses. The seasonality in the aviation travel services
business is due to the higher level of charter travel to Caribbean and Mexican
destinations during the vacation season, which coincides with the Company's
first and fourth fiscal quarters. The Company's technology solutions business
generally experiences higher revenue in the first and fourth fiscal quarters,
with the largest amount being recognized in the fourth quarter, due to the fact
that the Company's year end coincides with the year end of may schools and
universities. These customers are tied to strict budgets and normally purchase
more software at the start and the end of their fiscal year.
Guarantee Obligation
The Company's aviation travel services business (the "Aviation Business") has
certain guarantees outstanding with an airline provider that indicate if the
Aviation Business does not utilize a minimum number of hours during each program
year, then the Aviation Business would be required to pay the shortage to the
provider. The Aviation Business has a similar arrangement with Vacation Express
whereby Vacation Express has guaranteed a certain number of travel hours to the
Aviation Business.
For calendar year 2002 the parties are in the process of finalizing an agreed
upon amount of shortfall that would be due the air carrier by the Aviation
Business. Vacation Express agrees that the amount it would owe the Aviation
Business would exceed this amount and therefore is negotiating directly with the
air carrier. Vacation Express would pay this amount directly to the air carrier.
The Aviation Business does not anticipate incurring a net loss on these
guarantees and has not accrued any such loss on its balance sheet as of March
31, 2003.
29
Liquidity and Capital Resources
The Company's shareholders' equity decreased $2,104,000 during the nine months
ended March 31, 2003. This decrease was due primarily to a net loss for the nine
months ended March 31, 2003 of $2,075,000, unrealized losses on marketable
securities of $143,000, termination of an agreement with a service provider
resulting in the cancellation of unvested options and a reduction in additional
paid-in capital of $45,000 and the Company's Common Stock receipt into treasury
in partial payment of balances owed to the Company resulting in an increase in
treasury stock of $24,000. These decreases were partially offset by an increase
to shareholders' equity related to the sale of Common Stock, with net proceeds
of $119,000 and a net increase in shareholders' equity of $64,000, as a result
of the final settlements of contracts with two service providers.
Minority interest increased due to the LFSI transaction described above which
resulted in net funding of $561,000, LFSI sales of stock under its private
placements resulting in an increase in minority interest of $611,000, LFSI's
issuance of preferred stock and common stock warrants in connection with its
purchase of FutureSmart, which resulted in increases in minority interest of
$100,000 and $206,000, respectively, and the Company's sale or disposition of
LFSI restricted stock obtained in the LFSI transaction, which resulted in an
increase in minority interest of $100,000. These increases were slightly offset
by the minority shareholders' portion of LFSI's losses of $443,000.
For the nine months ended March 31, 2003, operations used $452,000 of cash. This
amount includes $263,000 received in grant proceeds from a government assistance
program designed to provide grants to companies whose businesses were directly
impacted by the events of September 11, 2001. For the nine months ended March
31, 2003, net cash used in investing activities was $45,000 due primarily to
LFSI's purchase of FutureSmart which used cash of $364,000 and net property and
equipment purchases of $291,000, offset by cash received from the sale of
investments of $439,000 and from the sale of the Company's technology solutions
prior office space resulting in net proceeds of $221,000.
In September 2002, the Company completed the private sale of 125,000 shares of
LFSI restricted common stock to a private investor. The Company sold these
shares at $2.00 per share and received $250,000 in proceeds as a result of this
sale. $150,000 of the proceeds was received in September 2002 with the balance
being received in October 2002. During the three months ended December 31, 2002
the Company completed the private sale of an additional 60,000 shares of the
LFSI restricted stock to the same private investor. These shares were also sold
for $2.00 per share, resulting in proceeds to the Company of $120,000. During
the quarter ended December 31, 2002 the Company issued 78,359 shares of the LFSI
restricted stock to a debt holder of the Company in satisfaction of outstanding
principal and interest totaling $156,718; or $2.00 per share. During the quarter
ended March 31, 2003 the Company issued 25,000 shares of the LFSI restricted
stock as prepaid interest on the $250,000 loan secured during January of 2003
and another 20,000 shares of LFSI restricted stock as payment for a certain
sponsorship.
In connection with LFSI's acquisition of FutureSmart as discussed in Note 2 to
the condensed consolidated financial statements, the Company agreed that for a
period equal to the lesser of (i) March 3, 2005, and (ii) one (1) year from the
registration of the shares of common stock of the FutureSmart shareholders, in
the event that the Company proposes to transfer fifteen percent (15%) or more of
the shares of LFSI's capital stock owned by the Company (other than registered
offerings, sales to certain investors, and related party sales), then certain of
the FutureSmart shareholders shall have the right to participate in such
transfer of stock on the same terms and conditions, and the number of shares of
LFSI stock that the Company may sell in the transaction shall be correspondingly
reduced; provided, however, that the aggregate number of shares that the
FutureSmart shareholders may sell in any proposed sale transaction may not
exceed twenty-five percent (25%) of the total number of shares to be sold by the
Company.
For the nine months ended March 31, 2003, net cash flow from financing
activities was $1,966,000 as a result of $1,055,000 in debt financing, $274,000
raised through the LFSI transaction, $870,000 raised through LFSI's private
placement sale of common stock and $119,000 raised through the sale of the
Company's Common Stock. These amounts were offset slightly by principal debt
repayments of $352,000. At March 31, 2003, the Company had a working capital
deficit of $5,583,000. At March 31, 2003 the Company held cash and cash
equivalents of $2,980,000 and investments of $523,000.
30
The Company's significant working capital deficit is due primarily to $3,257,000
of current debt, of which $1.8 million is due in the quarter ended September 30,
2003, $720,000 is due on demand and $250,000 is due on demand any time after
July 27, 2003. As of March 31, 2003, the Company had a commitment for $535,000
of additional funding from a private investor upon mutually acceptable terms to
draw upon throughout the remainder of its fiscal 2003, however, this
availability and expected operating cash flows is not sufficient to meet
obligations currently due in the next 12 months. During the quarter ended March
31, 2003 the Company secured a loan in the amount of $250,000. In January 2003
the Company contracted with one accredited investor to sell up to 196,641 shares
of restricted LFSI stock at $2.00 per share. The agreement noted the closing may
occur in traunches but shall be no later than March 31, 2003, unless extended
upon mutual written consent. The transaction was not closed and has been
terminated. In April 2003 Michael D. Pruitt, President and CEO of the Company,
purchased 500,000 shares of restricted Common Stock at a price of $0.25 per
share, or $125,000.
The Company is currently exploring additional sources of liquidity, including
debt and equity financing alternatives and potential sales of additional shares
of LFSI, a portion of which may or may not be sold from time to time depending
on market conditions and the effectiveness of a LFSI registration statement, to
provide additional cash to support operations, working capital and capital
expenditure requirements for the next 12 months and to meet the scheduled debt
repayments in August 2003 totaling approximately $1.8 million. Additionally, the
Company plans on negotiating with its debt holders to extend or convert into
stock some or all of this debt. If (i) we are unable to grow our business or
improve our operating cash flows as expected, (ii) we suffer significant losses
on our investments, (iii) we are unable to realize adequate proceeds from
investments, including our holdings of LFSI restricted stock, (iv) the private
investor is not able to meet its $535,000 funding obligation to the Company, or
(v) we are unsuccessful in extending a substantial portion of the debt
repayments scheduled for August 2003, then we will need to secure alternative
debt or equity financing to provide us with additional working capital. There
can be no assurance that additional financing will be available when needed or,
if available, that it will be on terms favorable to the Company and its
stockholders. If the Company is not successful in generating sufficient cash
flow from operations, or in raising additional capital when required in
sufficient amounts and on terms acceptable to the Company, these failures would
have a material adverse effect on the Company's business, results of operations
and financial condition. If additional funds are raised through the issuance of
equity securities, the percentage ownership of the current stockholders will be
diluted.
The Company's Board of Directors had previously considered distributing a
portion of the LFSI shares to the shareholders of the Company. The Board of
Directors currently believe the most present prudent use of these shares is the
sale of LFSI shares to external parties and does not currently intend to
distribute any shares as a dividend.
The Company's business, results of operations, and financial condition are
subject to many risks. In addition, statements in this report relating to
matters that are not historical facts are forward-looking statements based on
management's belief and assumptions based on currently available information.
Such forward-looking statements include statements relating to estimates of
future revenue and operating income, cash flow and liquidity. Words such as
"anticipates", "expects", "intends", "believes", "may", "will", "future" or
similar expressions are intended to identify certain forward-looking statements.
In addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it cannot give any assurances
that these expectations will prove to be correct. Such statements involve a
number of risks and uncertainties, including, but not limited to, those
discussed herein or in other documents filed by the Company with the SEC.
31
ITEM 3. CONTROLS AND PROCEDURES:
Disclosure controls and procedures
The Company has established and currently maintains controls and other
procedures designed to ensure that material information required to be disclosed
in its reports filed under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified by the
Securities and Exchange Commission. In conjunction with the close of each fiscal
quarter, the Company conducts an update and a review and evaluation of the
effectiveness of the Company's disclosure controls and procedures. It is the
opinion of the Company's principal executive officer and principal accounting
officer, based upon an evaluation completed within 90 days prior to the filing
of this report, that the Company's disclosure controls and procedures are
sufficiently effective to ensure that any material information relating to the
Company is recorded, processed, summarized and reported to its principal
officers to allow timely decisions regarding required disclosures.
Changes in internal controls
There were no significant changes in the Company's internal accounting processes
and control procedures during the quarter.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
During the normal course of business, the Company is subject to various
lawsuits, which may or may not have merit. Management intends to vigorously
pursue and/or defend such suits, as applicable, and believes that they will not
result in any material loss to the Company.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIY HOLDERS
None.
32
ITEM 5. OTHER INFORMATION
Effective February 19, 2003, the Company's Board appointed Jeffrey F. Willmott
Chairman of the Board and announced that he will serve in a full time position
on the management team of RCG. Michael Pruitt will remain the President and
Chief Executive Officer of RCG. Melinda Morris Zanoni resigned from the
Company's Board on April 16, 2003 in order for there to be less insider
representation on the Board of Directors. Ms. Zanoni will continue to serve as
Executive Vice President of the Company. Dr. Randy Pohlman resigned from the
Company's Board on May 6, 2003 due to time constraints. Eric D. Burgess, the
Company's Senior Vice President of Finance, resigned effective April 30, 2003 in
order to pursue other opportunities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.12 Shareholder Rights Agreement between Lifestyle Innovations, Inc., the
Company, and each of the FutureSmart Shareholders dated March 3, 2003.
10.3 Employment Agreement between the Company and Mr. Jeffrey F. Willmott dated
April 15, 2003.
99.1 Certification Pursuant to 18 U.S.C. Section 1350
(b) Financial Reports on Form 8-K
The Company has filed the following reports on Form 8-K 8-K/A with the
Securities and Exchange Commission ("SEC") during the quarter ended March 31,
2003:
None.
SIGNATURE
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
eResource Capital Group, Inc.
Date: May 20, 2003 By: /s/ Michael D. Pruitt
---------------------------------
Michael D. Pruitt
President and Chief Executive Officer
(principal executive, financial and accounting officer)
33
CERTIFICATION PURSUANT TO
18 U.S.C. Section 1350
(SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)
I, Michael D. Pruitt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of eResource Capital
Group, Inc. (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
Registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based on my
evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the Registrant's
auditors and the audit committee of Registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
By: /s/ Michael D. Pruitt
Michael D. Pruitt
Principal Executive, Financial and Accounting Officer
May 20, 2003
34
Exhibit Index
Exhibit No. Description Page No.
----------- ----------- --------
2.12 Shareholder Rights Agreement between Lifestyle Innovations, Inc., the Company, and each of the
FutureSmart Shareholder dated March 3,2003 36
10.3 Employment Agreement between the Company and Mr. Jeffrey F. Willmott Dated April 15, 2003 47
99.1 Certification Pursuant to 18 U.S.C Section 1350 59
35
SHAREHOLDER RIGHTS AGREEMENT Exhibit 2.12
THIS SHAREHOLDER RIGHTS AGREEMENT (the "Agreement") is made as of the
March 3, 2003 by and among Lifestyle Innovations, Inc., a Nevada corporation
(the "Company"), eResource Capital Group, Inc., a Delaware corporation ("RCG");
and each of the shareholders of the Company identified on Exhibit A attached
hereto (the "FS Shareholders," and together with RCG, the "Shareholders").
Together, the Company and the Shareholders may be referred to herein as the
"Parties."
RECITALS
WHEREAS, RCG owns a majority of the issued and outstanding Common Stock
of the Company; and
WHEREAS, as a result of a merger pursuant that certain Agreement and
Plan of Merger, dated February 24, 2003 (the "Merger Agreement"), by and among
the Company, its wholly-owned subsidiary, FS Merger Corp., and FutureSmart
Systems, Inc., wherein the surviving corporation shall go by the name of
FutureSmart Systems, Inc. ("FutureSmart"), the FS Shareholders now hold Series A
Preferred Stock of the Company and may receive Common Stock of the Company
pursuant to an earnout provision; and
WHEREAS, the FS Shareholders desire to have the right to participate in
a sale by RCG of a material portion of its Common Stock of the Company and RCG
desires to grant such right to the FS Shareholders; and
WHEREAS, the Shareholders also desire to be governed by certain voting
obligations relating to the election of one or more members of the Company's
board of directors; and
WHEREAS, the Company is willing to grant to the FS Shareholders certain
rights to register their shares for public sale.
NOW, THEREFORE, subject to the terms and conditions set forth herein
and in consideration of the mutual covenants set forth herein, the Parties agree
as follows:
ARTICLE 1
RIGHT OF CO-SALE
1.1Notice of Co-Sale. For a period equal to the lesser of (i) of two (2) years
from the date of this Agreement, and (ii) one (1) year from the registration of
the shares of Common Stock of the FS Shareholders pursuant to the registration
rights contained in this Agreement, in the event that RCG proposes to transfer
(for cash or securities but excluding barter consideration) fifteen percent
(15%) or more of the shares of the Company's capital stock owned by RCG in one
transaction or a series of related transactions, then it shall deliver written
notice (the "Co-Sale Notice") to each of the FS Shareholders. The Co-Sale Notice
shall describe in reasonable detail the proposed transfer, including, without
limitation, the number of shares of capital stock to be transferred, the nature
and terms of such transfer, the consideration to be paid, and the name and
address of each prospective purchaser or transferee. Each FS Shareholder shall
have the right, exercisable upon written notice to RCG within five (5) business
days after the effective date of the Co-Sale Notice, to participate in such
transfer of stock on the same terms and conditions as set forth in the Co-Sale
Notice. Subject to Section 1.2 below, such notice from the FS Shareholder shall
indicate the number of shares of Common Stock and Preferred Stock such FS
Shareholder wishes to sell under his, her, or its right to participate. To the
extent one or more of the FS Shareholders exercise such right of participation
in accordance with the terms and conditions set forth below, the number of
shares of stock that RCG may sell in the transaction shall be correspondingly
reduced.
1.2Level of Participation. Each FS Shareholder may sell all or any part of that
number of shares equal to the product obtained by multiplying (i) the aggregate
number of shares of Common Stock (including shares of Common Stock issuable upon
conversion of Preferred Stock) covered by the Co-Sale Notice by (ii) a fraction,
the numerator of which is the number of shares of Common Stock (including shares
of Common Stock issuable upon conversion of Preferred Stock) owned by the FS
Shareholder on the date of the Co-Sale Notice and the denominator of which shall
be the total number of shares of Common Stock (including shares of Common Stock
issuable upon conversion of Preferred Stock) owned by the Shareholders on the
date of the Co-Sale Notice; provided, however, that the aggregate number of
shares that the FS Shareholders may sell in any one proposed sale transaction or
series of related transactions may not exceed twenty-five percent (25%) of the
total number of shares to be sold in the sale. If the FS Shareholders
oversubscribe their participation in the proposed transaction, then their
participation shall be reduced on a pro rata basis in order to limit the total
participation to 25%. If not all of the FS Shareholders elect to sell their
shares of stock within the five-day period described in Section 1.1 above, then
36
RCG shall promptly notify in writing the FS Shareholders who do so elect and
shall offer such FS Shareholders the additional right to participate in the sale
of such stock proposed to be transferred by RCG on the same percentage basis as
calculated above subject to the 25% limitation. The FS Shareholders shall have
two (2) business days after the effective date of such notice to notify RCG of
its election to sell all or a portion thereof of the unsubscribed shares.
1.3Delivery of Certificates. Each FS Shareholder who elects to participate in
the transfer pursuant to this Article 1 (a "Co-Sale Participant") shall effect
his, her, or its participation in the transfer by promptly delivering to RCG for
transfer to the prospective purchaser one or more certificates, properly
endorsed for transfer, which represent:
(a)the type and number of shares of Common Stock that such
Co-Sale Participant elects to sell; or
(b)that number of shares of Preferred Stock that is at such
time convertible into the number of shares of Common Stock that such
Co-Sale Participant elects to sell, and election by such Co-Sale
Participant to convert such Preferred Stock into Common Stock. The
Company agrees to make any such conversion concurrent with the actual
transfer of such shares to the purchaser.
1.4 Consummation of Sale. The stock certificate or certificates that the Co-Sale
Participant delivers to RCG pursuant to Section 1.3 shall be transferred to the
prospective purchaser in consummation of the sale of the Common Stock pursuant
to the terms and conditions specified in the Co-Sale Notice, and RCG shall
concurrently therewith remit to such Co-Sale Participant that portion of the
sale proceeds to which such Co-Sale Participant is entitled by reason of its
participation in such sale. To the extent that any prospective purchaser or
purchasers prohibit such assignment or otherwise refuses to purchase shares or
other securities from a Co-Sale Participant exercising its rights of co-sale
hereunder, the transferring Shareholder shall not sell to such prospective
purchaser or purchasers any stock unless and until, simultaneously with such
sale, the transferring Shareholder shall purchase such shares or other
securities from such Co-Sale Participant on the same terms and conditions
specified in the Co-Sale Notice or, at the option of the Company, the Company
shall redeem such shares or other securities from the Co-Sale Participant for
cash at the same value as the consideration specified in the Co-Sale Notice.
1.5Non-Waiver. The exercise or non-exercise of the rights of the FS Shareholders
hereunder to participate in one or more transfers of stock made by the
transferring Shareholder shall not adversely affect their rights to participate
in subsequent transfers of stock.
1.6Right to Transfer. If none of the FS Shareholders elect to participate in the
sale of the stock subject to the Co-Sale Notice, RCG may transfer the stock
covered by the Co-Sale Notice at a price and on terms not more favorable to RCG
than those set forth in the Co-Sale Notice. Any such transfer that is not
consummated (at least as to any first tranche or installment) within thirty (30)
days after the expiration of the option periods in Sections 1.1 and 1.2, any
proposed transfer on terms and conditions more favorable to RCG than those
described in the Co-Sale Notice, and any subsequent proposed transfer of any of
the stock by RCG, shall again be subject to the co-sale rights of the FS
Shareholders and shall require compliance by RCG with the procedures described
in this Article 1. Any purported transfer in violation of any provisions of this
Article 1 shall be void and ineffectual, shall not operate to transfer any
interest or title in the purported transferee, and shall give the Company and
the FS Shareholders an option to purchase and/or sell such shares in the manner
and on the terms and conditions provided for herein.
1.7 Transfers Not Subject to Co-Sale Right. Notwithstanding any other provision
of this Agreement, the following transfers by RCG will not be subject to the
restrictions of Article 1:
(a) the sale of any of the Company's capital stock to the public pursuant to a
registration statement filed with, and declared effective by, the Securities and
Exchange Commission under the Securities Act of 1933, as amended (the
"Securities Act"); (b) the sale of any of the Company's capital stock to any of
the following parties pursuant to bona fide investment commitments in place on
the date of this Agreement: D. Mark White, Bruce Goldfarb, Pali Capital, Inc.,
Richmark Capital Corporation, Lakewood Developments Corporation, United
Financial & Reinsurance, Live Oak Capital LLC and Lifestyle Innovation European
Partners LTD, and their affiliated entities; or (c) the sale of any of the
Company's capital stock to a subsidiary, parent, general partner, limited
partner, former partner, member, or retired member of transferor, or an entity
that controls, is controlled by, or is under common control with transferor
(where "control" means the power directly or indirectly to vote a majority of
the voting interests of the entity in question), or is the transferor's
ancestor, descendant, spouse, or a trust for the benefit of an individual
transferor (a "Related Party").
ARTICLE 2
VOTING RIGHTS
2.1Company Board Seats. As of the Closing, Jacqueline E. Soechtig shall be
appointed to the Company's Board of Directors. In addition, the FS Shareholders
shall have the right to appoint one (1) member of the Company's Board of
37
Directors as of the Closing. After the addition of these two board members, the
number of directors on the Company's Board of Directors shall total five (5).
Both such Board representatives shall be entitled to receive the same expense
reimbursements granted to other outside members of the Company's Board of
Directors.
2.2Voting. Each Shareholder agrees to vote all of such Shareholder's shares of
voting stock in the Company to elect Jacqueline E. Soechtig, a designee of the
Company's wholly-owned subsidiary, FutureSmart, to the Company's Board of
Directors, or in the event that Jacqueline E. Soechtig is unwilling or unable,
for any reason, to continue to serve as a member of the Board of Directors of
the Company, the replacement designee as chosen by the Board of Directors of
FutureSmart.
ARTICLE 3
REGISTRATION RIGHTS
3.1 Definitions. For purposes of this Article 3, the following terms shall
have the following meanings:
"Holder" means any person owning of record Registrable Securities that have
not been sold to the public or any assignee of record of such Registrable
Securities in accordance with Section 3.10 hereof.
"Registrable Securities" means (i) the Common Stock of the Company issued
or issuable upon conversion of the Series A Preferred Stock that is owned by the
FS Shareholders; (ii) any Common Stock of the Company issued directly to the FS
Shareholders as earnout consideration in the Merger Agreement; (iii) any Common
Stock of the Company issued under Section 6.16 of the Merger Agreement; and (iv)
any Common Stock issued in place of interest to FS Shareholders who receive
Convertible Notes pursuant to the Merger Agreement.
"Registration Expenses" means all expenses incurred by the Company in
complying with this Article 3, including, without limitation, all registration
and filing fees, printing expenses, fees, disbursements of counsel for the
Company, blue sky fees and expenses, and the expense of any special audits
incident to or required by any such registration.
"Selling Expenses" means all underwriting discounts and selling commissions
applicable to the sale. "Special Registration Statements" means a registration
statement relating to any employee benefit plan or with respect to any corporate
reorganization or other transaction under Rule 145 of the Securities Act.
3.2Piggyback Registrations. The Company shall notify all Holders in writing at
least twenty (20) days prior to the filing of any registration statement under
the Securities Act for purposes of a public offering of securities of the
Company (including, but not limited to, registration statements relating to
secondary offerings of securities of the Company, but excluding Special
Registration Statements) and will afford each such Holder an opportunity to
include in such registration statement all or part of the Registrable Securities
held by such Holder. Each Holder desiring to include in any such registration
statement all or any part of the Registrable Securities held by it shall, within
ten (10) days after the above-described notice from the Company, so notify the
Company in writing. Such notice shall state the intended method of disposition
of the Registrable Securities by such Holder. If a Holder decides not to include
all of its Registrable Securities in any registration statement thereafter filed
by the Company, such Holder shall nevertheless continue to have the right to
include any Registrable Securities in any subsequent registration statement or
registration statements as may be filed by the Company with respect to offerings
of its securities, all upon the terms and conditions set forth herein.
3.3Underwritten Offering. If the registration statement under which the Company
gives notice under this Article 3 is for an underwritten offering, the Company
shall so advise the Holders of Registrable Securities. In such event, the right
of any such Holder to be included in a registration pursuant to this Article 3
shall be conditioned upon such Holder's participation in such underwriting and
the inclusion of such Holder's Registrable Securities in the underwriting to the
extent provided herein. All Holders proposing to distribute their Registrable
Securities through such underwriting shall enter into an underwriting agreement
in customary form with the underwriter or underwriters selected for such
underwriting by the Company (which underwriter or underwriters shall be
reasonably acceptable to the FS Shareholders). Notwithstanding any other
38
provision of the Agreement, if the underwriter determines in good faith that
marketing factors require a limitation of the number of shares to be
underwritten, the number of shares that may be included in the underwriting
shall be allocated: first, to the Company; second, to the Holders on a pro rata
basis based on the number of Registrable Securities requested by each Holder to
be included in such underwriting; and third, to any shareholder of the Company
(other than a Holder) on a pro rata basis. No such reduction shall reduce the
amount of securities proposed by the Holders to be so included in the
registration below twenty-five percent (25%) of the total amount of securities
included in such registration. If any Holder disapproves of the terms of any
such underwriting, such Holder may elect to withdraw therefrom by written notice
to the Company and the underwriter delivered at least ten (10) business days
prior to the effective date of the registration statement. Any Registrable
Securities excluded or withdrawn from such underwriting shall be excluded and
withdrawn from the registration. For any Holder that is a partnership, limited
liability company, or corporation, the partners, retired partners, members,
former members, and shareholders of such Holder, or the estates and family
members of any such individuals and any trusts for the benefit of any of the
foregoing person shall be deemed to be a single "Holder," and any pro rata
reduction with respect to such "Holder" shall be based upon the aggregate amount
of shares carrying registration rights owned by all entities and individuals
included in such "Holder," as defined in this sentence.
3.4 Termination of Registration. The Company shall have the right to terminate
or withdraw any registration initiated by it under this Article 3 prior to the
effectiveness of such registration whether or not any Holder has elected to
include securities in such registration. The Registration Expenses of such
withdrawn registration shall be borne by the Company in accordance with Section
3.5 hereof 3.5Expenses of Registration. Except as specifically provided herein,
all Registration Expenses (including the reasonable fees of one (1) special
counsel to the selling Holders, the identity of whom shall be reasonably
approved by the Company) incurred in connection with any registration,
qualification, or compliance shall be borne by the Company. All Selling Expenses
incurred in connection with any registrations hereunder shall be borne by the
holders of the securities so registered pro rata on the basis of the number of
shares so registered.
3.6 Obligations of the Company. Whenever required to effect the registration of
any Registrable Securities, the Company shall, as expeditiously as reasonably
possible:
39
(c) prepare and file with the SEC a registration statement with respect to such
Registrable Securities and use commercially reasonable efforts to cause such
registration statement to become effective, and, upon the request of the Holders
of a majority of the Registrable Securities registered thereunder, keep such
registration statement effective for up to one hundred twenty (120) days or, if
earlier, until the Holder or Holders have completed the distribution related
thereto; provided, however, that before filing with the SEC a registration
statement or prospectus or any amendments or supplements thereto, the Company
shall furnish to each Holder of Registrable Securities included in such
registration statement copies of such documents proposed to be filed for such
Holder's review; (d) prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement for the period set forth in
paragraph (a) above; (e) furnish to the Holders such reasonable number of copies
of a prospectus, including a preliminary prospectus in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them; (f) use all reasonable efforts to register and qualify
the securities covered by such registration statement under such other
securities or Blue Sky laws of such jurisdictions as shall be reasonably
requested by the Holders; provided that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or jurisdictions
unless the Company is already subject to service in such jurisdiction and except
as may be required by the Securities Act; (g) in the event of any underwritten
public offering, enter into and perform its obligations under an underwriting
agreement, in usual and customary form, with the managing underwriter(s) of such
offering. Each Holder participating in such underwriting shall also enter into
and perform its obligations under such an agreement; (h) notify each Holder of
Registrable Securities covered by such registration statement at any time when a
prospectus relating thereto is required to be delivered under the Securities Act
of the happening of any event as a result of which the prospectus included in
such registration statement, as then in effect, includes an untrue statement of
a material fact or omits to state a material fact required to be stated therein
or necessary to make the statements therein not misleading in the light of the
circumstances then existing. The Company shall amend or supplement such
prospectus in order to cause such prospectus not to include any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in light of
the circumstances then existing; and (i) use all reasonable efforts to furnish
on the date that such Registrable Securities are delivered to the underwriters
for sale, if such securities are being sold through underwriters, (i) an opinion
dated as of such date of the counsel representing the Company for the purposes
of such registration, in form and substance as is customarily given to
underwriters in an underwritten public offering, addressed to the underwriters,
and (ii) a letter dated as of such date from the independent certified public
accountants of the Company, in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering addressed to the underwriters. 3.7Termination of Registration
Rights. All registration rights granted under this Article 3 shall terminate and
be of no further force and effect three (3) years after the date of the this
Agreement. In addition, a Holder's registration rights shall expire if (i) all
Registrable Securities held by and issuable to such Holder may be sold under
Rule 144 during any ninety (90) day period, or (ii) no Registrable Securities
remain outstanding. 3.8Furnishing Information. It shall be a condition precedent
to the obligations of the Company to take any action pursuant to this Article 3
that the selling Holders furnish to the Company such information regarding
themselves, the Registrable Securities held by them and the intended method of
disposition of such securities as shall be required to effect the registration
of their Registrable Securities. 3.9 Indemnification. In the event any
Registrable Securities are included in a registration statement under Section
3.2:
(a)To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, the partners, members, officers and
directors of each Holder, any underwriter (as defined in the Securities
Act) for such Holder, and each person, if any, who controls such Holder
or underwriter within the meaning of the Securities Act or the Exchange
Act against any losses, claims, damages, or liabilities (joint or
several) to which they may become subject under the Securities Act, the
Exchange Act, or other federal or state law, insofar as such losses,
claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any of the following statements, omissions, or
violations (collectively a "Violation") by the Company: (i) any untrue
statement or alleged untrue statement of a material fact contained in
such registration statement including any preliminary prospectus or
final prospectus contained therein or any amendments or supplements
thereto, (ii) the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, any
state securities law, or any rule or regulation promulgated under the
Securities Act, the Exchange Act, or any state securities law in
40
connection with the offering covered by such registration statement;
and the Company will pay as incurred to each such Holder, partner,
member, officer, director, underwriter, or controlling person of such
Holder or underwriter for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such
loss, claim, damage, liability, or action; provided, however, that the
indemnity agreement contained in this Section 3.9 shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability,
or action if such settlement is effected without the consent of the
Company, which consent shall not be unreasonably withheld, nor shall
the Company be liable in any such case for any such loss, claim,
damage, liability, or action to the extent that it arises out of or is
based upon a Violation that occurs in reliance upon and in conformity
with written information furnished expressly for use in connection with
such registration by such Holder, partner, member, officer, director,
underwriter, or controlling person of such Holder or underwriter.
(b)To the extent permitted by law, each Holder will, if
Registrable Securities held by such Holder are included in the
securities as to which such registration, qualification, or compliance
is being effected, indemnify and hold harmless the Company, each of its
directors, its officers, and each person, if any, who controls the
Company within the meaning of the Securities Act, any underwriter (and
any person that controls such underwriter) and any other Holder selling
securities under such registration statement or any of such other
Holder's partners, members, directors, or officers or any person who
controls such Holder, against any losses, claims, damages, or
liabilities (joint or several) to which the Company or any such
director, member, officer, controlling person, underwriter, or other
such Holder or partner, member, director, officer, or controlling
person of such underwriter or other Holder may become subject under the
Securities Act, the Exchange Act, or other federal or state law,
insofar as such losses, claims, damages, or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in each
case to the extent (and only to the extent) that such Violation occurs
in reliance upon and in conformity with written information furnished
by such Holder under an instrument duly executed by such Holder
specifically for use in connection with such registration; and each
such Holder will pay as incurred any legal or other expenses reasonably
incurred by any person intended to be indemnified pursuant to this
Section 3.9 in connection with investigating or defending any such
loss, claim, damage, liability, or action if it is judicially
determined that there was such a Violation; provided, however, that the
indemnity agreement contained in this Section 3.9 shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability,
or action if such settlement is effected without the consent of Holders
representing 51% or more of the Registrable Securities, which consent
shall not be unreasonably withheld; provided further, that in no event
shall any indemnity under this Section 3.9 exceed the net proceeds
received by such Holder for the Shares that were registered in that
offering.
(c)Promptly after receipt by an indemnified party under this
Section 3.9 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in
respect thereof is to be made against any indemnifying party under this
Section 3.9, deliver to the indemnifying party a written notice of the
commencement thereof and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires,
jointly with any other indemnifying party similarly noticed, to assume
the defense thereof with counsel mutually satisfactory to the
indemnifying parties; provided, however, that an indemnified party
shall have the right to retain its own counsel, with the fees and
expenses to be paid by the indemnifying party, if representation of
such indemnified party by the counsel retained by the indemnifying
party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of
the commencement of any such action, if materially prejudicial to its
ability to defend such action, shall relieve such indemnifying party of
any liability to the indemnified party under this Section 3.9, but the
omission so to deliver written notice to the indemnifying party will
not relieve it of any liability that it may have to any indemnified
party otherwise than under this Section 3.9.
(d)If the indemnification provided for in this Section 3.9 is
held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any losses, claims, damages, or
liabilities referred to herein, the indemnifying party, in lieu of
indemnifying such indemnified party thereunder, shall, to the extent
permitted by applicable law, contribute to the amount paid or payable
by such indemnified party as a result of such loss, claim, damage, or
liability in such proportion as is appropriate to reflect the relative
fault of the indemnifying party on the one hand and of the indemnified
party on the other in connection with the Violation(s) that resulted in
such loss, claim, damage, or liability, as well as any other relevant
equitable considerations. The relative fault of the indemnifying party
and of the indemnified party shall be determined by a court of law by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact
relates to information supplied by the indemnifying party or by the
41
indemnified party and the parties' relative intent, knowledge, access
to information, and opportunity to correct or prevent such statement or
omission; provided, that in no event shall any contribution by a Holder
hereunder exceed the net proceeds received by such Holder for the
Shares that were registered in that offering.
(e)The obligations of the Company and Holders under this
Section 3.9 shall survive completion of any offering of Registrable
Securities pursuant to a registration statement and the termination of
this Agreement. No indemnifying party, in the defense of any such claim
or litigation, shall, except with the consent of each indemnified
party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such indemnified party of a release from
all liability in respect to such claim or litigation.
3.10Limitation on Subsequent Registration Rights. After the date of
this Agreement, the Company shall not, without the prior written consent of the
Holders of a majority of all Registrable Securities, enter into any agreement
with any holder or prospective holder of any securities of the Company that
would grant such holder registration rights senior to those granted to the
Holders hereunder; provided, however, that this requirement shall not apply to
any registration rights granted to investors in the Company pursuant to that
certain Confidential Private Offering Memorandum, dated on or about the date of
this Agreement.
3.11"Market Stand-Off" Agreement; Agreement to Furnish Information.
Each Holder hereby agrees that such Holder shall not sell, transfer, make any
short sale of, grant any option for the purchase of, or enter into any hedging
or similar transaction with the same economic effect as a sale with respect to
any Common Stock (or other securities) of the Company held by such Holder (other
than those included in the registration) for a period specified by the
representative of the underwriters of Common Stock (or other securities) of the
Company not to exceed one hundred eighty (180) days following the effective date
of a registration statement of the Company filed under the Securities Act;
provided that all officers and directors of the Company and holders of at least
five percent (5%) of the Company's voting securities enter into similar
agreements.
3.12 Rule 144 Reporting. With a view to making available to the Holders
the benefits of certain rules and regulations of the SEC which may permit the
sale of the Registrable Securities to the public without registration, the
Company agrees to use its commercially reasonable efforts to:
(a)make and keep public information available, as those terms
are understood and defined in SEC Rule 144 or any similar or analogous
rule promulgated under the Securities Act, at all times after the
effective date of the first registration filed by the Company for an
offering of its securities to the general public;
(b)file with the SEC, in a timely manner, all reports and
other documents required of the Company under the Exchange
Act; and (c)so long as a Holder owns any Registrable
Securities, furnish to such Holder forthwith upon reasonable
request: (i) a written statement
by the Company as to its compliance with the reporting requirements of
said Rule 144 of the Securities Act and of the Exchange Act (at any
time after it has become subject to such reporting requirements); (ii)
a copy of the most recent annual or quarterly report of the Company;
and (iii) such other reports and documents as a Holder may reasonably
request in availing itself of any rule or regulation of the SEC
allowing it to sell any such securities without registration. In the
eveny that a Holder requests an opinion from counsel concerning the
transfer of shares, such Holder shall pay all costs, including attorney
fees, related to such opinion.
ARTICLE 4
RESTRICTIONS ON PUBLIC SALE
4.1Leak-Out. For a period equal to the lesser of (i) two (2) years from
the date of this Agreement, and (ii) one (1) year from the registration of
shares of FS Shareholders' Common Stock pursuant to the registration rights
contained in this Agreement, and subject to the Market Stand-off Agreement in
Section 3.11 above, no FS Shareholder shall sell on any one trading day more
than fifteen percent (15%) of the average trading volume of the Company's Common
Stock over the prior ten (10) trading days. These selling restrictions shall
only apply to the extent that the shares of an FS Shareholder are not subject to
more restrictive selling provisions under Rule 144. In the event that an FS
Shareholder transfers its shares of capital stock in the Company to a
third-party, such transferee shall hold such shares subject to the above
percentage restrictions, reduced to reflect the pro rata portion of such
transferee's ownership of the total shares originally held by the transfering FS
Shareholder.
4.2No Short Sales. Each of the FS Shareholders agrees that neither it
nor its affiliates shall, directly or indirectly, engage in any Short Sale (as
defined in Rule 3 of the General Rules and Regulations under the Securities and
Exchange Act of 1934) with respect to the Company's Common Stock.
42
ARTICLE 5
MISCELLANEOUS
5.1 Legend. Each certificate representing Shares now or hereafter owned
by the Shareholders or issued to any person in connection with a transfer
pursuant to the terms of this Agreement shall be endorsed with the following
legend:
THE SALE, PLEDGE, HYPOTHECATION, OR TRANSFER OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS
OF A CERTAIN SHAREHOLDER RIGHTS AGREEMENT BY AND BETWEEN THE
CORPORATION AND CERTAIN HOLDERS OF STOCK OF THE CORPORATION. COPIES OF
SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF
THE CORPORATION.
The Company shall instruct its transfer agent to impose transfer restrictions on
the shares represented by certificates bearing the legend referred to in this
Section 5.1 to enforce the provisions of this Agreement. The legend shall only
be removed upon termination of this Agreement.
5.2Conditions to Exercise of Shareholders' Rights. Exercise of the
Shareholders' rights under this Agreement shall be subject to and conditioned
upon compliance with applicable laws, and the Shareholders and the Company shall
use their best efforts in this regard.
5.3Governing Law. This Agreement shall be governed by and construed
under the laws of State of Delaware without regard to conflicts of law
provisions.
5.4Amendments and Waiver; Consent. Any provision of this Agreement may
be amended or the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively) only by the
written consent of: (i) as to the Company, only by the Company; as to RCG, only
by RCG; (iii) as to the FS Shareholder, only by persons holding more than 51% of
the total number of shares of the Company's capital stock held by the FS
Shareholders or their assignees in the aggregate; and (iv) any single FS
Shareholder whose rights hereunder are affected more adversely by such amendment
or waiver than the FS Shareholders as a group, provided that any Shareholder may
severally waive any rights hereunder without obtaining the consent of any other
Shareholder. Any election or other action on the part of the FS Shareholders
hereunder may be accomplished by the written consent of those FS Shareholders
holding more than 51% of the total number of shares of the Company's capital
stock held by the FS Shareholders or their assignees in the aggregate.
5.5Assignment of Rights. The rights of the FS Shareholders hereunder
may be assigned (together with all related obligations) by a FS Shareholder to a
transferee or assignee of such FS Shareholder's capital stock of the Company
that (a) is a Related Party, or (b) acquires at least five percent (5%) of the
Company's outstanding capital stock; provided, however, (i) the Co-Sale Rights
in Article 1 of this Agreement may only be transferred to one transferee under
provision (a) above and may not be transferred under provision (b) above; (ii)
the transferor shall, within ten (10) days after such transfer, furnish to the
Company written notice of the name and address of such transferee or assignee
and the securities with respect to which the rights hereunder are being
assigned, and (iii) such transferee shall agree in writing to be subject to all
restrictions set forth in this Agreement. This Agreement and the rights and
obligations of the Parties hereunder shall inure to the benefit of, and be
binding upon, the Parties' respective permitted successors, assigns, and legal
representatives ("Successors"), provided that, if such person is a Successor of
an FS Shareholder, such successor must at the same time acquire shares of the
Company's capital stock from that FS Shareholder.
5.6 Notices. Any notice, demand, offer, or other written instrument
required or permitted to be given, made, or sent hereunder shall be in writing
and may be sent by personal delivery, courier, reputable overnight delivery
service offering written confirmation of delivery, telefax with confirmed
delivery, or registered or certified United States mail, postage prepaid, return
receipt requested, to all required Parties simultaneously at their respective
addresses as follows:
If intended for a Shareholder:
The Shareholder's address as listed on the signature
page hereof; If intended for the Company:
The Company's principal place of business.
Any person to receive a notice hereunder shall have the right to change the
place to which any such notice shall be sent by a similar notice sent in like
manner to the Company. Notices sent by courier, telefax, or overnight delivery
shall be deemed given and received on the date of actual delivery. All notices
sent in the United States mail in the manner set forth above shall be deemed
given and received five (5) days after being placed in the United States mail.
5.7 Severability. In the event one or more of the provisions of this
Agreement should, for any reason, be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
43
shall not affect any other provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal, or unenforceable provision had
never been contained herein.
5.8Counterparts; Facsimile Signatures. This Agreement may be executed
in two or more counterparts (whether by facsimile or otherwise), each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
5.9Entire Agreement. This Agreement constitutes the entire agreement
between the Parties relative to the specific subject matter hereof. Any previous
agreement among the Parties relative to the specific subject matter hereof is
superseded by this Agreement.
5.10Remedies. The Parties acknowledge that certain breaches of this
Agreement may result in irreparable harm that cannot be adequately addressed by
monetary damages. Therefore, the Parties agree that in the event of a breach or
threatened breach of this Agreement, a non-breaching Party may seek to enjoin a
breach or threatened breach of this Agreement or seek specific performance of an
obligation under this Agreement in addition to any other remedy available at law
or in equity.
{Signature Page to Follow}
44
IN WITNESS WHEREOF, the Company, RCG and each FS Shareholder listed on
Exhibit A has caused this Agreement to be executed personally or by its duly
authorized representative.
LIFESTYLE INNOVATIONS, INC.
By:/s/ Paul Johnson
-------------------
Name:Paul Johnson
--------------------
Title:President
--------------------
eRESOURCE CAPITAL GROUP, INC.
By:/s/ Michael D. Pruitt
------------------------
Name: Michael D. Pruitt
Title: CEO
45
EXHIBIT A
(SIGNATURE PAGE)
TO SHAREHOLDER RIGHTS AGREEMENT
AMONG LIFESTYLE INNOVATIONS, INC.
AND CERTAIN OF ITS SHAREHOLDERS
(Signature of Shareholder)
(Name of Shareholder)
(Date)
(Number and Description of Stock)
(Address of Shareholder)
(Telephone Number)
46
Employment Agreement Exhibit 10.3
This Employment Agreement (this "Agreement") is made as of the 15th day
of April, 2003, by and between eResource Capital group, Inc., a Delaware
corporation ("RCG") and JEFFREY F. WILLMOTT, an individual resident of the State
of New York (the "Executive"), and is effective as of the date hereof (the
"Effective Date").
WHEREAS, RCG intends to employ Executive, and Executive desires to be
employed by RCG; and
WHEREAS, RCG and Executive desire to set forth the terms and conditions
on which Executive shall be employed and provide services to RCG.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by Executive and RCG including,
without limitation, the promises and covenants described herein, the parties
hereto, intending to be legally bound, hereby agree as follows:
ARTICLE I
EMPLOYMENT
Section 1.1 Duties and Responsibilities. RCG hereby employs Executive full time
as the Chairman of the Board of RCG. Executive shall do and perform all
reasonable services and acts necessary or advisable to fulfill the duties
of such office, and shall conduct and perform such additional services and
activities as may be reasonably determined from time to time by the Board
of Directors of RCG (the "Board"). These duties include, but are not
limited to, raising capital, structuring offerings, sourcing, structuring
and closing acquisitions, disposition transactions, valuation modeling,
investment banking relationships and financial and strategic planning.
During the term of this Agreement, Executive shall devote his full time,
energy and skill to the business of RCG and to the promotion of RCG's
interests, and Executive acknowledges that he has a duty of loyalty to RCG
and shall not, during the term hereof, engage in, directly or indirectly,
any other business or activity whether or not for pecuniary gain, that
could materially and adversely affect RCG's business or Executive's ability
to perform his duties under this Agreement. The foregoing shall not,
however, preclude Executive from serving on the boards of directors of
other entities. In his capacity as an officer of RCG, Executive shall
report to the Board and abide by all rules and regulations established from
time to time by the Board. Executive's authority and responsibility in RCG
shall at all times be subject to the review and discretion of the Board,
which shall have the final authority to make decisions regarding the
business of RCG.
Section 1.2 Term of Employment. The term of Executive's employment hereunder
shall continue for a period of one (1) year from the Effective Date, unless
earlier terminated as provided in this Agreement. At the end of the one (1)
year term, and at the end of each renewal term, this Agreement shall
automatically be extended for an additional one (1) year term unless either
47
party hereto shall give written notice of its or his intent to terminate
for any or no reason thirty (30) days prior to the end of the initial term
or any subsequent renewal term.
Section 1.3 Benefits. During the term of Executive's employment hereunder,
Executive will be entitled to the following:
(a) Vacation. Executive shall be entitled to four (4) weeks
paid vacation annually. One (1) week of unused vacation time will accumulate and
carryover to subsequent years. Executive shall also be entitled to reasonable
holidays and sick days in accordance with RCG's policy as may be established and
modified from time to time.
(b) Employee Benefit Plans. Executive shall be entitled to
participate in all employee benefit plans, including any life insurance,
disability insurance and retirement plans that are generally offered to or
provided for the senior executives of RCG, said plans to be approved by the
Board. Executive shall be entitled to participate in such group health and
dental insurance plans (including family coverage) on the same basis, including
cost provisions, as may from time to time be offered generally to the other
senior executives of RCG.
Section 1.4 Compensation. For all services to be rendered by Executive under
this Agreement, RCG shall pay Executive as follows:
(a) Base Salary. Executive shall be paid an annual gross
salary of One Hundred and Twenty Thousand Dollars ($120,000) payable in
accordance with the normal payroll practices of RCG, which policies may be
changed by RCG from time to time, and shall be subject to appropriate
withholding taxes. In any event, Executive's salary shall be paid no less
frequently than monthly. At the sole discretion of the Board, Executive's annual
gross salary may be increased, from time to time, throughout the term of this
Agreement, the amount of any such increase to be determined by the Board (or by
the Compensation Committee thereof).
(b) Annual Bonus. If the Board shall so authorize, Executive
shall be paid an annual bonus in an amount and in the manner approved by the
Board in its sole discretion (or by the Compensation Committee thereof), within
ninety (90) days of the end of each calendar year, provided Executive is still
employed by RCG.
Section 1.5 Business Expenses. Executive shall be entitled to reimbursement of
all ordinary and necessary business expenses reasonably incurred for
business travel, lodging, entertainment and meals in connection with the
performance of Executive's duties under this Agreement, upon submission of
sufficient documentation evidencing same and in accordance with RCG's
established policies for reimbursement of business expenses.
Section 1.6 Place of Employment. Executive shall be entitled to reside and
perform his duties in New York, New York.
48
ARTICLE II
COVENANTS OF EXECUTIVE
Section 2.1 Confidentiality. Executive recognizes the interest of RCG in
maintaining the confidential nature of its proprietary and other business and
commercial information. In connection therewith, Executive covenants that during
the term of his employment with RCG under this Agreement, and for a period of
two (2) years thereafter (except as set forth in Section 2.2 hereof), Executive
shall not, directly or indirectly, except as authorized in writing by the Board,
publish, disclose or use for his own benefit or for the benefit of a business or
entity other than RCG or otherwise, any secret or confidential matter, or
proprietary or other information not in the public domain that was acquired by
Executive during his employment, relating to RCG or any of its affiliates' or
subsidiaries' businesses, operations, customers, suppliers, products, employees,
financial information, budgets, practices, strategies, prices, methods,
technology, know-how, intellectual property, documentation, concepts,
improvements, plans, research and development, leads and/or marketing materials,
records, files, databases, accounting journals, accounts receivable records,
business plans and other similar information (the "Confidential Information");
provided, however, Confidential Information does not include information that
(i) is or becomes generally available to the public other than as a result of a
breach of this Agreement; (ii) is disclosed with the prior written consent of
RCG; (iii) at the time of such disclosure, was already known or in the
possession of Executive; (iv) becomes available to a competitor of RCG on a
non-confidential basis from a source other than Executive, which source is not
prohibited from disclosing such Confidential Information by a legal, contractual
or fiduciary obligation to RCG; or (v) is independently developed by a
competitor of RCG. Executive will abide by RCG's policies and regulations, as
established from time to time, for the protection of its Confidential
Information.
Section 2.2 Trade Secrets. Executive shall not, at any time, either during or
after the term of his employment with RCG under this Agreement, use or disclose
any "Trade Secrets" (as defined by the Delaware Uniform Trade Secrets Act) of
RCG or its affiliates or subsidiaries, except in fulfillment of his duties
during his employment, for so long as the pertinent information or data remain
Trade Secrets, whether or not the Trade Secrets are in written or tangible form.
Notwithstanding anything to the contrary contained herein, Executive shall not
be prohibited hereunder from disclosing Trade Secrets if, in the written opinion
of counsel for Executive, such disclosure is required by applicable law, in
which event Executive shall provide RCG with prompt written notice of such
request and shall take all reasonable action requested by RCG to obtain
confidential treatment of such Trade Secrets.
Section 2.3 Surrender of Records. Executive shall provide RCG with notice of any
inadvertent disclosure of Confidential Information. Executive acknowledges that
all Confidential Information is and shall remain the sole property of RCG and/or
such affiliated entity or subsidiary and shall, upon termination of Executive's
employment with RCG for any reason whatsoever, or upon the request of RCG, turn
over to RCG all Confidential Information, without retaining notes or copies
thereof (together with a written statement certifying as to his compliance with
the foregoing).
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Section 2.4 Non-Solicitation of Clients/Employees. During the term of
Executive's employment with RCG, and for the one (1) year period following the
termination of Executive's employment with RCG for any or no reason, Executive
shall not, directly or indirectly:
(a) solicit or accept, or attempt to solicit or accept any
business from any individual or entity that was a customer or client of RCG
during the one (1) year period ending on the date of termination of Executive's
employment with RCG, or actively sought after prospective clients, for the
purpose of providing services or products to such customer or client which are
competitive with the services or products offered or provided by RCG or its
affiliates or subsidiaries; provided, however, nothing herein shall preclude
Executive from holding not more than one-percent (1%) of the outstanding equity
of any company, so long as Executive does not, in fact, have the power to
participate in controlling or directing the management of such company other
than by such voting equity; or
(b) employ, induce, solicit or attempt to solicit for employment, or assist
others in employing, inducing or soliciting for employment, any individual who
is or was an employee or independent contractor of RCG or its affiliates or
subsidiaries at any time during the one (1) year period ending or the date of
termination of Executive's employment with RCG in an attempt to have any such
individual work for Executive, or any other individual or entity in the business
of (i) raising venture capital or sourcing acquisitions for, or (ii) the
development, operation and management of travel, home automation or
technology-related companies.
Section 2.5 Acknowledgment of Reasonableness/Enforcement/Tolling.
----------------------------------------------------
(a) The existence of any claim or cause of action by Executive
against RCG predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by RCG of these covenants. Executive acknowledges and
confirms (i) that the restrictions contained herein are fair and reasonable and
not the result of overreaching, duress, or coercion of any kind, and (ii) that
Executive's full, uninhibited, and faithful observance of each of the covenants
contained in this Agreement will not cause Executive any undue hardship,
financial or otherwise. In the event that any court shall formally hold that the
restrictions in this Article II are unreasonable, Executive hereby expressly
agrees that the restrictions shall not be rendered void, but shall apply to the
extent that such court may judicially determine or indicate constitutes a
reasonable restriction.
(b) Executive acknowledges that the services to be rendered by
Executive hereunder are extraordinary and unique and are vital to the success of
RCG, and that damages at law would be an inadequate remedy for any breach or
threatened breach of this Agreement by Executive. Therefore, in the event of a
breach or threatened breach by Executive of any provision of this Agreement, RCG
shall be entitled, in addition to all other rights or remedies, to injunctions
restraining such breach, without being required to show any actual damage or to
post any bond or other security. No remedy herein conferred upon any party is
intended to be exclusive of any other remedy, and each and every such remedy
shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law, in equity or otherwise. No single
or partial exercise by any party of any right, power or remedy hereunder shall
preclude any other or further exercise thereof.
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(c) In the event RCG should bring any legal action or other
proceeding for the enforcement of the Agreement, the time for calculating the
confidentiality or non-solicitation period, or terms of any other restriction
herein shall not include the period of time commencing with the filing of the
legal action or other proceeding to enforce the terms of the Agreement through
the date of final judgment or final resolution, including all appeals, if any,
of such legal action or other proceeding.
ARTICLE III
REPRESENTATIONS OF EXECUTIVE/INDEMNIFICATION
Section 3.1 Representations and Warranties of
Executive/Indemnification. Executive represents and warrants to RCG that he is
fully empowered to enter and perform his obligations under this Agreement and
that he is under no restrictive covenants to any person or entity that will be
violated by his entering into and performing this Agreement, and that this
Agreement constitutes the valid and legally binding obligation of Executive
enforceable in accordance with its terms. Executive shall indemnify RCG upon
demand for and against any and all judgments, losses, claims, damages, costs
(including, without limitation, all legal fees and costs, even if incident to
appeals) incurred or suffered by RCG as a result of the breach of the
representations and warranties made in this Article 3.
ARTICLE IV
TERMINATION OF EMPLOYMENT
Section 4.1 Termination by RCG. Executive's employment may be
terminated by RCG during the term of this Agreement upon the occurrence of one
or more of the following events:
(a) Termination For Death. Immediately upon Executive's death.
(b) Termination For Disability. Upon the effective date of written notice from
RCG (which shall not be prior to the date on which such notice is sent) in the
event of Executive's disability which renders Executive incapable of performing
his duties for more than one hundred and twenty (120) calendar days in one
calendar year or within consecutive calendar years.
(c) Termination Without Cause. After the first (1st)
anniversary of the Effective Date, RCG can terminate Executive's employment
without cause for any or no reason (other than those set forth in Section 4.1(d)
hereof), thirty (30) days after written notice (including a notice of nonrenewal
sent by RCG pursuant to Section 1.2 hereof) sent to Executive following a
determination by the Board to so terminate Executive's employment.
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(d) Termination For Cause. Upon the effective date of written
notice sent to Executive (which shall not be prior to the date on which such
notice is sent) stating RCG's determination that it is terminating Executive for
"Cause", which for purposes of this Agreement shall mean:
(i) any intentional act of fraud, embezzlement or theft of funds or property of
RCG or any of its clients/customers;
(ii) any gross and willful misconduct having an
adverse effect upon RCG;
(iii) any intentional wrongful disclosure of
Confidential Information or Trade Secrets of
RCG or its subsidiaries or affiliates or any
intentional form of self-dealing detrimental
to the interests of RCG or its subsidiaries
or affiliates;
(iv) conviction of a felony or any similar crime
causing harm to the reputation of RCG or its
affiliates or subsidiaries as determined by
the Board (for these purposes, conviction
shall include a plea of no contest or plea
to any lesser charges predicated on the same
underlying conduct);
(v) the habitual and debilitating use of alcohol
or drugs; or
(vi) failure to comply in any material respect
with the terms of this Agreement, which
failure has an adverse effect on RCG and has
not been cured by Executive within thirty
(30) days after written notice from the
Board of any such act or omission.
Section 4.2 Resignation by Executive. Executive's employment may be
terminated by Executive during the term of this Agreement upon the occurrence of
one or more of the following events:
(a) Voluntary Resignation. Executive may terminate his
employment under this Agreement by giving thirty (30) days' prior written notice
to RCG (including a notice of nonrenewal sent by Executive pursuant to Section
1.2 hereof) stating Executive's election to terminate his employment with RCG.
RCG may accept such resignation effective as of any date during such thirty (30)
day period as RCG deems appropriate; provided, however, Executive shall receive
from RCG his base salary and be entitled to participate in any RCG benefit plans
in which he was a participant as of the effective date of his resignation for
the duration of such thirty (30) day period (as further provided in Section
4.4(a) hereof).
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(b)Resignation With Cause. Upon the effective date of written
notice sent to RCG stating Executive's determination of "Constructive
Termination" (hereinafter defined) by RCG; provided, however, if the
Constructive Termination is curable, then RCG shall have thirty (30) days after
Executive's written notice to cure such condition and if RCG fails to cure such
condition to the reasonable satisfaction of Executive, then Executive may
immediately terminate his employment with RCG, such termination to be
conclusively deemed to be a resignation with cause. For purposes of this
Agreement, "Constructive Termination" shall mean:
(i) Such change in duties or position as:
(A) the assignment (other than an occasional temporary
assignment) to Executive of any duties not commensurate with Executive's
position, duties, responsibilities and status with RCG;
(B) a material change in Executive's reporting
responsibilities, (i.e., reporting to a lower tier)
or a diminution in Executive's titles or offices; or
(C) a material diminution of Executive's authority or
responsibilities.
(ii) A reduction in Executive's base salary specified in
Section 1.4(a) hereof for the calendar year 2003, or a reduction in Executive's
base salary in effect for the prior calendar year for all succeeding years
(other than pro rata reductions in compensation for all senior executives of
RCG).
(iii) RCG's failure to comply in any material respect with the
terms of this Agreement, which failure has an adverse effect on Executive.
Section 4.3 Change of Control. Upon (i) the effective date of a written
notice sent to Executive by RCG stating that a "Change of Control" (hereinafter
defined) has occurred or will occur and Executive's employment will be
terminated in connection therewith (despite RCG's best efforts to the contrary
as set forth in Section 5.8 hereof), which notice must be given no later than
thirty (30) days following such Change of Control, (ii) the date of termination
if Executive is terminated without cause or resigns with cause within eighteen
(18) months of a Change of Control, or (iii) the date of termination if
Executive voluntarily resigns within ninety (90) days following a Change of
Control. A "Change of Control" shall be deemed to have occurred if (A) as a
result of any merger, consolidation, sale, assignment, transfer or other
transaction, any person, other than those persons who are shareholders of RCG or
its affiliates (within the meaning of Rule 501 of the Securities Act of 1933) on
the date hereof, becomes the "beneficial owner" (as defined in Rule 13d-3 and
13d-5 under the Securities Exchange Act of 1934, as amended) of more than 50% of
the outstanding voting securities of RCG or the surviving entity or becomes
entitled to elect more than one-half (1/2) of the Board or other governing body
of RCG or the surviving entity; (B) a tender offer shall be made and consummated
of the ownership of 50% or more of the outstanding voting securities of RCG; or
(C) RCG sells, assigns or otherwise transfers all or substantially all of the
assets of the RCG, to persons other than those persons who are shareholders of
RCG or its affiliates; provided, however, in no event shall a financing
transaction (such as additional rounds of funding or venture capital), which is
approved by the Board and entered into by RCG be deemed to be a "Change of
Control".
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Section 4.4 Effect of Termination/Change of Control.
(a) Termination for Death or Voluntary Resignation. In the
event of termination of Executive's employment pursuant to Sections 4.1(a) or
4.2(a) hereof:
(i) RCG shall pay to Executive the base salary and expenses otherwise payable to
Executive under Sections 1.4(a) and 1.5 hereof through the date of termination
(provided that in the event of Executive's death, RCG shall also pay to
Executive's estate his base salary for a period of one (1) month after the date
of Executive's death), as well as any accrued but unpaid vacation time. For
purposes of this Agreement, one (1) week of vacation shall be deemed to accrue
each calendar quarter. Executive shall not be entitled to receive any severance
pay except to the extent the Board, in its sole discretion, elects to authorize
severance pay in the event of Executive's voluntary resignation.
(ii) Executive's rights under RCG's benefit plans of general application shall
be determined under the provisions of those plans.
(iii) Executive shall not be entitled a bonus under Section 1.4(b) hereof for
the year of termination except to the extent the Board, in its sole
discretion, elects to authorize a bonus in the event of Executive's voluntary
resignation.
(iv) Executive's rights with respect to option shares shall be determined under
the provisions of his stock option agreement.
(b) Termination For Disability; Termination Without Cause; Resignation With
Cause; Termination in Connection with a Change of Control. In the event of
termination of Executive's employment pursuant to Sections 4.1(b), 4.1(c),
4.2(b) or 4.3 hereof:
(i) RCG shall pay to Executive the base salary and expenses otherwise payable to
Executive under Sections 1.4(a) and 1.5 hereof through the date of termination
as well as any accrued but unpaid vacation time (provided that in the event of
Executive's disability, the base salary payable to Executive shall be less any
disability benefits provided by RCG). In addition, Executive shall be entitled
to one (1) month's salary continuation at the then current rate, payable in
accordance with the normal payroll practices of RCG. Such severance payments
are to be considered compensation for services previously rendered hereunder.
(ii) Executive shall continue to participate in RCG's group health plan for two
(2) months following the date of termination upon the timely periodic payment
of any amount required for employees to maintain family coverage for such
plan, and rights under other benefit plans shall be determined under the
provisions of those plans.
(iii) Executive shall be entitled to a bonus under Section 1.4(b) hereof for the
year of termination in any amount as may be determined by the Board (or by the
Compensation Committee thereof) in its sole discretion.
(iv) Executive's rights with respect to the option shares shall be determined
under the provisions of his stock option agreement.
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(c) Termination For Cause. In the event of termination of Executive's
employment prior to Section 4.1(d) hereof:
(i) RCG shall pay to Executive the base salary and expenses otherwise payable
pursuant to Sections 1.4(a) and 1.5 hereof through the date of termination.
Executive shall not be entitled to receive any severance pay whatsoever.
(ii) Executive's rights under RCG's benefit plans of general application shall
be determined under the provisions of those plans.
(iii) Executive shall not be entitled to a bonus under Section 1.4(b) hereof
for the year of termination.
(iv) Executive's rights with respect to the option shares shall be determined
under the provisions of his stock option agreement.
ARTICLE V
GENERAL PROVISIONS
Section 5.1 Survival. Notwithstanding anything to the contrary herein,
the provisions of this Agreement shall survive and remain in effect in
accordance with their respective terms in the event Executive's employment is
terminated for any or no reason.
Section 5.2 Enforcement Costs. If any civil action, arbitration, or
other legal proceeding is brought for the enforcement of this Agreement, or
because of an alleged dispute, breach, default or misrepresentation in
connection with any provision of this Agreement, the successful or prevailing
party or parties shall be entitled to recover reasonable attorneys' fees, sales
and use taxes, court costs, and all expenses (including, without limitation, all
such fees, taxes, costs, and expenses incident to arbitration, appellate and
post-judgment proceedings), incurred in that civil action, arbitration, or legal
proceeding, in addition to any other relief to which such party or parties may
be entitled.
Section 5.3 Notices. For purposes of this Agreement, all communications
including, without limitation, notices, consents, requests or approvals,
provided for herein shall be in writing and shall be deemed to have been duly
given (a) when personally delivered, (b) on the following day if submitted to a
nationally recognized overnight courier service as evidenced by a receipt, or
(c) five (5) business days after having been mailed by United States registered
mail or certified mail, return receipt requested, postage prepaid, addressed to:
If to RCG: If to Executive:
eResource Capital Group, Inc. Jeffrey F. Willmott
6836 Morrison Boulevard, Suite 200 170 East 88th Street, Apt. 2B
Charlotte, NC 28211 New York, NY 10128
Attn: Michael D. Pruitt
55
or to such other address as a party may have furnished to the other in writing
and in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
Section 5.4 Governing Law. The validity, interpretation, construction,
performance and enforcement of this Agreement shall be governed by the laws of
the State of Delaware, without giving effect to the principles of conflicts of
law of such State.
Section 5.5 Severability. If any provision of this Agreement or the
application of any provision hereof to any person or circumstances is held
invalid, unenforceable or otherwise illegal, under applicable law or regulation,
the remainder of this Agreement and the application of such provision to any
other person or circumstances shall not be affected, and the provision so held
to be invalid, unenforceable or otherwise illegal shall be reformed to the
extent (and only to the extent) necessary to make it valid, enforceable and
legal; provided, however, if the provision so held to be invalid, unenforceable
or otherwise illegal constituted a material inducement to a party's execution
and delivery of this Agreement, such provision shall not be reformed unless
prior to any reformation that party agrees to be bound by the reformation.
Section 5.6 Entire Agreement. This Agreement supersedes any other
agreements, oral or written, between the parties with respect to the subject
matter hereof, and contains all of the agreements and understandings between the
parties with respect to the employment of Executive by RCG.
Section 5.7 Amendments. Any amendment or modification of any term of
this Agreement shall be effective only if it is set forth in writing signed by
the parties hereto.
Section 5.8 Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective administrators,
executors, representatives, heirs, successors and permitted assigns. "Successor"
shall mean any successor in interest, pursuant to a Change of Control as set
forth in Section 4.3 hereof. RCG shall use its commercially reasonable efforts
to cause any Successor which is not obligated to assume RCG's contracts to agree
at the time of becoming a Successor to perform this Agreement to the same extent
as the original parties would be required if no succession had occurred.
Section 5.9 Assignment. This Agreement is personal in nature and the
parties shall not, without written consent of the other party, assign, transfer
or delegate this Agreement or any rights or obligations hereunder.
Section 5.10 Waivers. No provision of this Agreement may be waived or
discharged unless such waiver or discharge is agreed to in writing signed by the
party to be bound. No waiver by a party hereto at any time of any breach or
noncompliance with any provision or condition of this Agreement to be performed
by such other party shall be deemed a waiver of any other provisions or
conditions at the same or at any prior or subsequent time.
Section 5.11 Captions. The captions in this Agreement are solely for
convenience of reference and shall not be given any effect in the construction
or interpretation of this Agreement.
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Section 5.12 Counterparts/ Facsimile Signatures. This Agreement may be
executed in one or more counterparts (whether by facsimile or otherwise), each
of which shall be deemed to be an original, and all of which together will
constitute one and the same Agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the date first above written.
RCG:
eRESOURCE CAPITAL GROUP, INC.
By: /s/ Michael D. Pruitt
-------------------------------
Michael D. Pruitt
Its: CEO
APPROVED BY THE
COMPENSATION COMMITTEE:
/s/ Dr. James A. Verbrugge
--------------------------
Dr. James A. Verbrugge
[RECUSED] /s/
Jeffrey F. Willmott
---------------------
Jeffrey F. Willmott
(Chairman)
EXECUTIVE:
/s/ Jeffrey F. Willmott
------------------------
Jeffrey F. Willmott
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Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)
Pursuant to, and solely for purposes of, 18 U.S.C. Section 1350 (Section 906 of
the Sarbanes-Oxley Act of 2002), each of the undersigned hereby certifies in the
capacity and on the date indicated below that:
1. The Quarterly Report of eResource Capital Group, Inc. (the "Registrant") on
Form 10-QSB for the period ended March 31, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the "Report") fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Registrant.
/s/ Michael D. Pruitt Dated: May 20, 2003
--------------------------------------------
Michael D. Pruitt
Principal Executive, Financial and Accounting Officer
59