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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 1-8662
ERESOURCE CAPITAL GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 23-2265039
(State of Incorporation) (IRS Employer Identification No.)
5935 CARNEGIE BOULEVARD
SUITE 101
CHARLOTTE, NC 28209
(704) 553-9330
(Address of registrant's principal executive
offices including zip code and telephone number, including area code)
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
twelve months (or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
Check whether the issuer filed all reports required to be filed by Section 12,
13 or 15(d) of the Exchange Act after the distribution of securities under a
plan confirmed by a court. Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock as of May 14,
2002: 85,673,715
Transitional Small Business Disclosure Format: Yes [ ] No [X]
ERESOURCE CAPITAL GROUP, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page No
-------
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at March 31, 2002 and June 30, 2001.....................3
Condensed Consolidated Statements of Operations for the three and nine months ended
March 31, 2002 and 2001.....................................................................4
Condensed Consolidated Statements of Cash Flows for the nine months ended
March 31, 2002 and 2001.....................................................................5
Notes to Condensed Consolidated Financial Statements..........................................6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........19
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings............................................................................22
ITEM 2. Changes in Securities........................................................................22
ITEM 3. Defaults Upon Senior Securities..............................................................23
ITEM 4. Submission of Matters to a Vote of Security Holders..........................................23
ITEM 5. Other Information............................................................................23
ITEM 6. Exhibits and Reports on Form 8-K.............................................................23
2
ERESOURCE CAPITAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
March 31, June 30,
2002 2001
--------- ---------
(Unaudited)
ASSETS
Cash and cash equivalents ....................................... $ 1,398 $ 1,286
Accounts receivable, net ........................................ 2,321 2,018
Inventory ....................................................... 188 126
Investments ..................................................... 2,274 1,592
Prepaid expenses ................................................ 3,315 1,858
--------- ---------
Total current assets ....................................... 9,496 6,880
Deferred costs and other assets ................................ 442 319
Property and equipment, net ..................................... 1,527 1,645
Goodwill, net ................................................... 18,420 17,898
--------- ---------
Total assets ............................................... $ 29,885 $ 26,742
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable - current portion ................................. $ 2,491 $ 489
Notes and amounts due to affiliates ............................. 263 336
Accounts payable and accrued expenses ........................... 5,052 4,730
Deposits and other liabilities .................................. 41 658
Unearned income ................................................. 1,487 1,161
--------- ---------
Total current liabilities .................................. 9,334 7,374
Notes payable ................................................... 962 179
Net liabilities of discontinued operations ...................... -- 201
--------- ---------
Total liabilities .......................................... 10,296 7,754
--------- ---------
Shareholders' equity:
Common stock, $.04 par value, 200,000,000 shares authorized,
85,673,715 and 75,833,728 issued, respectively ................ 3,428 3,033
Additional paid-in capital .................................... 110,919 109,357
Accumulated deficit ........................................... (95,472) (93,479)
Accumulated other comprehensive income ........................ 722 88
Treasury stock at cost (24,502 and 35,930 shares, respectively) (8) (11)
--------- ---------
Total shareholders' equity ................................ 19,589 18,988
--------- ---------
Total liabilities and shareholders' equity ................ $ 29,885 $ 26,742
========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
ERESOURCE CAPITAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Three months ended March 31 Nine months ended March 31
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenue
Services .................................................. $ 7,330 $ 4,170 $ 19,031 $ 6,547
Product sales ............................................. 2,417 -- 7,485 --
------------ ------------ ------------ ------------
Total revenue ..................................... 9,747 4,170 26,516 6,547
Cost of Revenue
Services .................................................. 6,018 3,519 16,029 6,020
Product sales ............................................. 2,185 -- 6,351 --
------------ ------------ ------------ ------------
Gross profit ...................................... 1,544 651 4,136 527
Selling, general and administrative expenses - compensation
related to issuance of stock options and warrants ..... 7 220 19 6,923
Selling, general and administrative expenses - other ...... 1,580 1,277 5,511 3,666
Provision for bad debts ................................... 20 -- 85 --
Depreciation and amortization ............................. 101 554 285 1,215
Interest expense (income), net ............................ 93 (13) 186 (37)
(Gain) loss on investments, net ........................... (282) 156 97 156
Gain on sale of assets .................................... -- -- (171) --
Write-off of web site development costs ................... -- -- -- 754
Write-off of predevelopment costs ......................... -- -- -- 1,164
------------ ------------ ------------ ------------
Income (loss) from continuing operations .......... 25 (1,543) (1,876) (13,314)
Loss of discontinued operations ........................... -- (313) -- (580)
Gain on disposal of discontinued operations ............... -- -- 576 --
------------ ------------ ------------ ------------
Income (loss) before cumulative effect of change in
accounting principle ...................... 25 (1,856) (1,300) (13,894)
Cumulative effect of change in accounting principle ....... -- -- (693) --
------------ ------------ ------------ ------------
Net income (loss) ................................. $ 25 $ (1,856) $ (1,993) $ (13,894)
============ ============ ============ ============
Basic and diluted net loss per share:
Income (loss) from continuing operations .............. $ -- $ (0.03) $ (0.02) $ (0.27)
Loss of discontinued operations ....................... -- (0.01) -- (0.01)
Gain on disposal of discontinued operations ........... -- -- 0.01 --
Cumulative effect of change in accounting principle ... -- -- (0.01) --
------------ ------------ ------------ ------------
Net income (loss) ................................. $ -- $ (0.04) $ (0.02) $ (0.28)
============ ============ ============ ============
Weighted average shares outstanding ....................... 83,062,659 56,822,579 78,943,358 48,740,469
============ ============ ============ ============
Weighted average shares outstanding, assuming dilution .... 87,179,002 56,822,579 78,943,358 48,740,469
============ ============ ============ ============
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
2002 2001
------- --------
Cash flows from operating activities:
Loss from continuing operations ...................................... $(1,876) $(13,314)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization .................................... 285 1,215
Bad debt expense ................................................. 85 --
Common stock issued for services ................................. 36 --
Stock purchase warrants received for services .................... (279) (128)
Affiliate balance converted on sale of home technology franchises (80) --
Unrealized loss on stock purchase warrants ....................... 191 156
(Gain) loss on sale of assets .................................... (171) 5
Compensation expense related to stock options and warrants ....... 19 6,923
Deferred debt amortization ....................................... -- 13
Write-off of Web site development costs .......................... -- 754
Write-off of predevelopment costs ................................ -- 1,164
Changes in operating assets and liabilities:
Accounts and notes receivables ................................ (300) (80)
Inventory ..................................................... (145) --
Prepaid expenses .............................................. (1,424) (92)
Deferred costs and other assets ............................... (73) (624)
Accounts payable and accrued expenses ......................... 738 196
Due to affiliates ............................................. 7 193
Deposits and other liabilities ................................ (399) 289
Unearned income ............................................... 326 --
------- --------
Cash used in continuing operations ............................ (3,060) (3,330)
Discontinued operations, net ..................................... 150 (343)
------- --------
Net cash used in operations ................................... (2,910) (3,673)
Cash flows from investing activities:
Purchase of property, plant and equipment ........................ (225) (71)
Sale of investments .............................................. 189 --
Sale of assets ................................................... (53) --
Cash (paid) acquired in connection with business acquisitions, net (263) 378
------- --------
Net cash (used in) provided by investing activities ........... (352) 307
Cash flows from financing activities:
Notes payable proceeds ........................................... 2,553 --
Principal debt repayments ........................................ (30) --
Capital contribution by shareholder .............................. 50 --
Sale of common stock ............................................. 801 3,314
------- --------
Net cash provided by financing activities ..................... 3,374 3,314
Net increase (decrease) in cash and cash equivalents ................. 112 (52)
Cash and cash equivalents at beginning of period ..................... 1,286 420
------- --------
Cash and cash equivalents at end of period ........................... $ 1,398 $ 368
======= ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
ERESOURCE CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
These financial statements include the operations of eResource Capital
Group, Inc., a Delaware Corporation ("RCG"), and its subsidiaries (collectively
- "the Company"). In October 2000, RCG changed its name from flightserv.com to
reflect the new business direction of the Company. Prior to June 30, 2000, the
Company was engaged in the development of its private aviation business and
limited commercial real estate activities. In fiscal 2001, the Company acquired
several companies and businesses. The Company currently operates aviation travel
services, telecommunications call center, consulting, home technology services,
and Internet/technology solutions businesses in the United States.
All significant intercompany balances and transactions have been
eliminated. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to the rules of the Securities and
Exchange Commission (the "SEC"). Certain prior period amounts have been
reclassified to conform to the current period presentation and to reflect the
commercial real estate business segment as a discontinued operation. In the
opinion of management, all adjustments considered necessary for a fair
presentation of the financial position of the Company as of March 31, 2002 and
of the results of operations for the periods presented have been included. The
financial data at June 30, 2001 is derived from audited financial statements
which are included in the Company's Annual Report on Form 10-KSB for the year
ended June 30, 2001 and should be read in conjunction with the audited financial
statements and notes thereto. Interim results are not necessarily indicative of
results for the full year.
The Company experienced net losses in recent fiscal years and a net
loss of $1,993,000 during the nine months ended March 31, 2002. The Company used
cash of $3,060,000 in continuing operations during the nine months ended March
31, 2002 and has cash and cash equivalents and investments totaling $3,672,000
at March 31, 2002. While its operations continue to improve, the Company
continues to monitor costs in relation to revenues, and if necessary, to
undertake cost reduction measures. In addition, the Company has obtained debt
and equity financing in the nine months ended March 31, 2002 and is actively
pursuing debt and equity financing alternatives to provide additional cash to
support operations and growth.
CASH AND CASH EQUIVALENTS
The Company classifies as cash equivalents any investments which can be
readily converted to cash and have an original maturity of less than three
months. At times cash and cash equivalent balances at a limited number of banks
and financial institutions may exceed insurable amounts. The Company believes it
mitigates its risks by depositing cash or investing in cash equivalents in major
financial institutions.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, accounts receivable,
investments, and notes payable. The Company places its temporary cash with high
credit quality 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.
6
The Company used the following methods and assumptions in estimating
its fair value disclosures for financial instruments:
- Cash and cash equivalents: The carrying amount reported in the
balance sheet for cash approximates its fair value.
- Accounts receivable and accounts payable: Due to their short
term nature, the carrying amounts reported in the balance
sheet for accounts receivable and accounts payable approximate
their fair value.
- Marketable Securities: The fair values for available-for-sale
equity securities are based on quoted market prices.
- Notes Payable: The carrying amount of the Company's notes
payable approximates its fair value.
During the three month period ended March 31, 2002, sales to Vacation
Express ("VEX"), a customer of the Company's Aviation Travel Services business,
represented 66% of the Company's consolidated revenue. For the nine month period
then ended, sales to VEX 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 is stated at cost using the first-in, first-out method.
Inventory consists primarily of finished goods.
INVESTMENTS
The Company's investments, including certificates of deposit with
maturities of greater than three months, not readily marketable equity
securities, and other marketable securities, are classified as available for
sale. Investment securities that are not readily marketable include securities
(a) for which there is no market on a securities exchange or no independent
publicly quoted market, (b) that cannot be publicly offered or sold unless
registration has been effected under the Securities Act of 1933 as amended (the
"Securities Act"), or (c) that cannot be offered or sold because of other
arrangements, restrictions, or conditions applicable to the securities or the
Company. Certificates of deposit are recorded at cost plus accrued interest.
Marketable equity securities are recorded at estimated values based on quoted
market values for marketable securities of the investee. If there is no quoted
market value, the recorded values are based on the most recent transactions in
the securities discounted for lack of marketability. Investment securities
transactions are recorded on a trade date basis. The difference between cost and
fair value for available for sale securities is recorded as unrealized gain or
loss on available for sale securities as a component of comprehensive income.
Investments also include stock purchase warrants, which the Company
periodically receives as part of its compensation for services. Stock purchase
warrants from companies with publicly traded common stock are considered
derivatives in accordance with FAS 133 "Accounting for Derivative Investments
and Hedging Activities". The Company recognizes revenue at the fair value of
such stock purchase warrants when earned based on the Black - Scholes valuation
model. The Company recognizes unrealized gains or losses in the statement of
operations based on the changes in value in the stock purchase warrants as
determined by the Black - Scholes valuation model subsequent to the date
received. The Company recorded an unrealized gain on these warrants of $166,000
in the quarter ended March 31, 2002 and an unrealized loss of $191,000 for the
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, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated
depreciation. Depreciation is computed on the straight-line basis over the
assets' estimated useful lives. Expenditures for maintenance and repairs are
expensed as incurred. Expenditures for improvements that extend the useful life
or add value to the asset are capitalized and then expensed over the asset's
remaining useful life.
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.
7
The carrying value of property and equipment is reviewed for impairment
whenever events or changes in circumstances indicate that such amounts may not
be recoverable. If such an event occurred, the Company would prepare projections
of future results of operations for the remaining useful lives of such assets.
If such projections indicated that the expected future net cash flows
(undiscounted and without interest) are less than the carrying amounts of the
property and equipment, the Company would record an impairment loss in the
period it made such determination.
GOODWILL AND INTANGIBLE ASSETS
The Company records goodwill and intangible assets arising from
business combinations in accordance with Financial Accounting Standards Board
Statement ("FAS") No. 141 "Business Combinations" ("FAS 141") which requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. FAS 141 also specifies the criteria applicable to
intangible assets acquired in a purchase method business combination to be
recognized and reported apart from goodwill.
The Company accounts for goodwill and intangible assets in accordance
with FAS No. 142 "Goodwill and Other Intangible Assets" ("FAS 142"). The Company
adopted FAS 142 effective July 1, 2001. In completing the adoption of FAS 142,
the Company has allocated its previously existing goodwill as of July 1, 2001 to
its reporting units, as defined in FAS 142, and performed an initial test for
impairment as of that date. The results of the initial impairment test are
summarized in Note 5 to these financial statements.
In accordance with FAS 142, the Company no longer amortizes goodwill.
FAS 142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead be tested at least annually for
impairment. FAS 142 also requires that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and be reviewed for impairment.
REVENUE RECOGNITION
Aviation Travel Services
Revenue related to the Company's aviation travel services consists of
fees for charter flights and is recognized upon completion of the related
flight.
Home Technology
The Company's home technology business completes work in two phases -
wiring, then hardware installation. The Company invoices its customers and
records revenue as work is completed on each project. Also, the Company sells
contracts to customers for alarm monitoring services. The Company recognizes
revenue from alarm monitoring contracts when it sells contracts to third parties
or monthly over the contract term when the Company retains these contracts.
Sales of franchise licenses are recognized as revenue when the
Company's obligations under the franchise agreement are "substantially
complete." The Company generally defines "substantially complete" as the
completion of training by the franchisee's General Manager and the approval by
the Company of the franchise location plan.
Internet/Technology Solutions
Internet services project revenue is recognized on a percentage of
completion basis for fixed fee contracts, based on the ratio of costs incurred
to total estimated costs for individual projects. Revenue is recognized as
services are performed for time and material contracts at the applicable billing
rates.
Unbilled revenue represents revenue earned under contracts in advance
of billings. Such amounts are normally converted to accounts receivable within
90 days. Unearned income represent amounts billed or cash received in advance of
services performed or cost incurred under contracts. Any anticipated losses on
contracts are charged to earnings when identified.
8
The Company provides e-commerce, marketing and business development
services to clients pursuant to contracts with varying terms. The contracts
generally provide for monthly payments and, in some cases, advance deposits.
Revenue is recognized over the respective contract period as services are
provided.
Revenue from uncollateralized e-commerce sales or sales of hardware and
software is recognized upon passage of title of the related goods to the
customer.
NET LOSS PER SHARE
The Company computes net loss per share in accordance with FAS No. 128,
"Earnings per Share" ("FAS 128") which requires dual presentations of basic
earnings per share ("EPS") and diluted EPS.
Basic earnings per share is computed using the weighted average number
of common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common shares and potentially
dilutive shares outstanding during the period. Options and warrants to purchase
26,569,043 and 27,380,120 shares of the Company's common stock, par value $0.04
per share (the "Common Stock"), were outstanding at March 31, 2002 and 2001,
respectively. A portion of such outstanding options and warrants were dilutive
to earnings per share in the quarter ended March 31, 2002, but with respect to
the nine month period ended March 31, 2002 and the three and nine month periods
ended March 31, 2001, these potentially dilutive options and warrants have not
been included in the computation of diluted net loss per share as the impact
would have been anti-dilutive.
Three months ended March 31 Nine months ended March 31
2002 2001 2002 2001
---------- ---------- ---------- ----------
Basic average shares 83,062,659 56,822,579 78,943,358 48,740,469
Potential dilutive shares 4,116,343 -- -- --
---------- ---------- ---------- ----------
Diluted average shares 87,179,002 56,822,579 78,943,358 48,740,469
========== ========== ========== ==========
ADVERTISING
The Company expenses advertising costs as incurred. Advertising expense
aggregated approximately $39,000 and $62,000, respectively, for the three month
periods ended March 31, 2002 and 2001 and $220,000 and $501,000 for the nine
month periods then ended.
COMPREHENSIVE INCOME (LOSS)
Components of comprehensive income are net income (loss) and all other
non-owner changes in equity. The only component of other comprehensive income
consists of unrealized holding gains/losses on securities available for sale.
Total comprehensive income for the quarter ended March 31, 2002 was $659,000 and
total comprehensive loss for the nine month period ended March 31, 2002 was
$1,230,000. Total comprehensive loss for the three and nine month periods ended
March 31, 2001 was $1,920,000 and $13,958,000, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with the liability
method as provided under FAS No. 109, "Accounting for Income Taxes" ("FAS 109")
Accordingly, deferred income taxes are recognized for the tax consequences of
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities. The measurement of deferred tax assets is
reduced, if necessary, by the amount of any benefits that, based on available
evidence, are not expected to be realized.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of
9
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 2001, the Financial Accounting Standards Board issued FAS
144 "Accounting for the Impairment or Disposal of Long-Lived Assets". FAS 144
addresses financial accounting and reporting for the disposal of long-lived
assets. FAS 144 becomes effective for financial statements issued for fiscal
years beginning after December 15, 2001 and interim periods within those fiscal
years. The Company is currently evaluating the potential impact, if any, the
adoption of FAS 144 will have on its financial position and results of
operations.
NOTE 2. CONTINUING OPERATIONS
Aviation Travel Services
In fiscal 2000, the Company introduced its Private Seats charter flight
program to provide Internet access to private jet flight and related travel
services and operated the business from March 2000 through June 30, 2000. Due to
limited capital availability, the Company did not actively pursue development of
the Private Seats program and, as a result, did not realize any revenue from
this business after June 30, 2000. In fiscal 2001, the Company determined that
it would not pursue further development or marketing of the Private Seats
program.
In August 2000, the Company completed the acquisition of Internet
Aviation Services, Ltd. ("IASL"). IASL was a new leisure and business travel
services company, which offered charter services. The Company now operates its
charter aviation services as part of its aviation travel services business
through the Company's subsidiary, flightserv.com, Inc., a Delaware corporation
("FSW").
In October 2000, FSW entered into a contract with Southeast Airlines to
charter two jet aircraft to provide jet shuttle service between Norfolk,
Virginia and New York City, New York and between Norfolk and Orlando, Florida.
Due to low consumer demand for this service FSW suspended its jet shuttle
operations in January 2001 and terminated its contract with Southeast for the
two aircraft.
Since December 2000, FSW has operated charter aircraft for tour
operators. In July 2001, FSW entered into an agreement with Vacation Express to
create a passenger hub in Orlando-Sanford International Airport. Pursuant to the
terms of the agreement, six commercial jet aircrafts originate in six eastern
and midwestern cities and serve five Caribbean destinations and Orlando. The
Company began operating the service in November 2001 and at December 31, 2001
four (4) aircraft were in operation and two (2) additional aircraft began
operating during the quarter ended March 31, 2002.
Telecommunications Call Center
In September 2000, the Company completed the acquisition of DM
Marketing, Inc. ("DMM"), which operates a telecommunications call center
providing telemarketing, help desk and other services for Internet related and
other companies.
Home Technology
In April 2001, the Company acquired LST, Inc. d/b/a Lifestyle
Technologies ("LST"), which is a full service home technology integration
company providing builders, homeowners, and commercial customers with complete
installation and equipment for structured wiring, security, personal computer
networking, audio, video, home theater, central vacuum and accent lighting. LST
also provides similar products and services to the commercial market. LST has
also secured relationships with product manufacturers, distributors and service
providers (cable, Internet service, broadband and security).
On July 10, 2001, the Company acquired certain net assets, liabilities
and the business of a home technology company located in Atlanta, GA for an
aggregate purchase price of $1,255,000, which was paid by delivery of a cash
payment ($275,000), Common Stock (975,556 shares) and a four-year term
promissory note ($250,000). Including direct acquisition costs, the total
purchase price aggregated $1,259,857 and the transaction was accounted for using
the purchase method of accounting. The excess value of the purchase price over
the fair value of the net assets on the acquisition date aggregated
approximately $1,184,184 which was allocated to goodwill.
10
In September 2001, LST commenced its national franchising program. In
connection with the franchising program, LST has completed the sale of franchise
licenses in 13 markets located primarily in the south and southeastern United
States. In addition, LST owns and operates the Charlotte, NC and Atlanta, GA
markets.
On April 17, 2002 the Company signed a letter of intent to raise $4.35
million in cash and other assets through the sale of a 25% interest in its home
technology business to Princeton Mining Company ("PRNM"). The transaction is
expected to close no later than June 30, 2002, at which time LST will become a
wholly-owned subsidiary of PRNM. Under the terms of the letter of intent, at
closing, the Company will receive 16,000,000 shares of PRNM common stock, which
is expected to represent approximately 75% of the outstanding stock of PRNM.
Upon assuming control of PRNM through this transaction, RCG anticipates changing
PRNM's name to reflect the new corporate direction. The transaction is
contingent upon PRNM having no more than 5.5 million shares outstanding at
closing. The transaction is expected to add approximately $1.3 million of cash
and $3.05 million of other assets to the existing assets of LST.
Internet/Technology Solutions
The Company's Internet/Technology Solutions business is the result of
the acquisitions of Avenel Alliance, Inc. ("Alliance") in February 2001 and
Logisoft Corp. (formerly 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. ("Ventures"), which was also acquired by the Company in February 2001.
The Company's Internet/Technology Solutions business provides
integrated products and services to assist customers in meeting their strategic
technology initiatives. The Company's products and services include software
distribution to the educational market and corporate customers, full service
Internet development, Internet site hosting and co-location and Internet
business development services encompassing partner site management and
marketing. In its Internet business development and marketing services, the
Company generally participates in the development and implementation of the
business plan in exchange for revenue-sharing and/or equity-based arrangements.
The Company's consolidated results of operations include the results of
operations of each of the acquired companies discussed above for the period from
each respective purchase date through March 31, 2002 and 2001.
Pro Forma Results of Operations
Following is selected pro forma consolidated financial information
reflecting the Company's acquisitions of IASL, DMM, Ventures, LST and Logisoft
as if such acquisitions had occurred as of the beginning of the nine month
period ended March 31, 2001 (in thousands, except share amounts):
Revenue............................................. $ 13,712
Net loss from continuing operations................. $ (22,014)
Net loss............................................ $ (22,595)
Net loss per share.................................. $ (.32)
Weighted average shares............................. 70,292,464
NOTE 3. DISCONTINUED OPERATIONS
Commercial Real Estate
In fiscal 2001, the Company discontinued its commercial real estate
business, which consisted of two strip-mall shopping centers in the Atlanta, GA
area. In August 2001, the Company completed the sale of all of the outstanding
shares of the capital stock of the Company's subsidiary which owned the
commercial real estate business in exchange for cash ($312,500) and a 60-day
note receivable ($62,500), which was collected in October 2001. The Company
realized a gain of approximately $576,000 on the sale in the quarter ended
September 30, 2001. The Company's financial statements for the periods ended
March 31, 2001 have been reclassified to reflect the commercial real estate
business as a discontinued operation.
Residential Real Estate
11
In fiscal 1999, the Company discontinued its residential real estate
development operations. Residential real estate operations included developed
lots, undeveloped land, and equity investments in residential real estate
development companies, partnerships, and joint ventures. The Company completed
the disposal of its residential real estate business in fiscal 2001.
NOTE 4. INVESTMENTS
Investments consist of the following (in thousands):
March 31, 2002 June 30, 2001
-------------- -------------
Gross Gross
Unrealized Fair Unrealized Fair
Cost Gains Value Cost Gains Value
------ ------ ------ ------ ------ ------
Equity securities $1,079 $ 722 $1,801 $1,020 $ 88 $1,108
Certificates of deposit 50 -- 50 99 -- 99
------ ------ ------ ------ ------ ------
$1,129 $ 722 $1,851 $1,119 $ 88 $1,207
====== ====== ====== ====== ======
Stock purchase warrants 423 385
------ ------
$2,274 $1,592
====== ======
The Company's certificates of deposit at March 31, 2002 are pledged as
collateral security for the Company's letters of credit for office space leases.
As of March 31, 2002, $1,494,000 of the Company's equity securities and
$300,000 of its stock purchase warrants related to Team Sports Entertainment,
Inc.
NOTE 5. GOODWILL
The changes in goodwill, by segment, for the nine month period ended
March 31, 2002, are as follows:
Aviation Internet/
Travel Technology Home
Services Solutions Technology Corporate Total
-------- --------- ---------- --------- -----
Balance at June 30, 2001 $939 $ 8,263 $7,696 $1,000 $ 17,898
Cumulative effect of change in accounting --
principle (adoption of FAS 142) -- (693) -- -- (693)
---- ------- ------ ------ --------
Balance on July 1, 2001 939 7,570 7,696 1,000 17,205
Goodwill acquired during period -- -- 1,184 -- 1,184
Other goodwill adjustments -- 16 15 -- 31
---- ------- ------ ------ --------
Balance at March 31, 2002 $939 $ 7,586 $8,895 $1,000 $ 18,420
==== ======= ====== ====== ========
Goodwill was reduced by $693,000 in the Internet/Technology Solutions
segment as a result of the implementation of FAS 142. This adjustment relates
primarily to the discounting of the future net cash flows in the segment's
Internet business development activity that was acquired as a part of the
purchase of Alliance.
Goodwill allocated to the Corporate segment relates to investment
banking activities that were acquired by the Company as a part of the
acquisition of Ventures in February 2001 and integrated into Corporate.
12
In July 2001, the Company acquired a home technology business in the
Atlanta, GA market, which resulted in the recording of $1,184,000 in goodwill.
The other goodwill adjustments relate to resolutions of contingencies that
existed as of the dates that the related businesses were acquired by the
Company.
Reported net income (loss) adjusted for the amounts of goodwill amortization
recorded by the Company prior to the adoption of FAS 142 is as follows:
Three months ended March 31, Nine months ended March 31,
2002 2001 2002 2001
----- --------- --------- ----------
Reported income (loss) before cumulative effect of change
in accounting principle ......................................... $ 25 $ (1,856) $ (1,300) $ (13,894)
Add back: Goodwill amortization .................................... -- 543 -- 1,182
----- --------- --------- ----------
Adjusted income (loss) before cumulative effect of change in
accounting principle ....................................... 25 (1,313) (1,300) (12,712)
Cumulative effect of change in accounting principle ................ -- -- (693) --
----- --------- --------- ----------
Adjusted net income (loss) .................................... $ 25 $ (1,313) $ (1,993) $ (12,712)
===== ========= ========= ==========
Basic and diluted net income (loss) per share:
Reported income (loss) before cumulative effect of change in
accounting principle ............................................ $ -- $ (0.04) $ (0.01) $ (0.28)
Add back: Goodwill amortization .................................... -- 0.01 -- 0.02
----- --------- --------- ----------
Adjusted income (loss) before cumulative effect of change in
accounting principle ....................................... -- (0.03) (0.01) (0.26)
Cumulative effect of change in accounting principle ................ -- -- (0.01) --
----- --------- --------- ----------
Adjusted net income (loss) .................................... $ -- $ (0.03) $ (0.02) $ (0.26)
===== ========= ========= ==========
The effect of the adoption of FAS 142 on the quarter ended September 30,
2001 was to increase the Company's reported net loss of $724,000 ($.01 per
share) by the amount of the cumulative effect of change in accounting principle
measured as of July 1, 2001, $693,000 ($.01 per share), to $1,417,000 ($.02 per
share).
13
NOTE 6. NOTES PAYABLE
Notes payable consists of the following (in thousands):
March 31, June 30,
2002 2001
------- -----
Notes payable - due on demand with an interest rate of 12% and unsecured $ 310 $ 425
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 --
Notes payable - due on demand with interest imputed at 8% and unsecured 488 57
Mortgage payable to a bank in monthly installments of $1,751, including interest
at 7.96% through October 2015 and collateralized by a building 179 186
Note payable - due in monthly installments of $3,000 and a balloon payment in July 2005
with monthly interest at 8.00% and collateralized by home technology accounts receivable 226 --
Note payable - due in July 2002 with interest at 10% and collateralized by certain home technology assets 300 --
Note payable - due in July 2002 with interest at 12% and unsecured 200 --
Note payable - due in July 2002 with interest at 10% and unsecured 200 --
Note payable - due in September 2002 with interest at 12% and collateralized by certain home technology
accounts receivable and inventory (1) 650 --
Note payable - $200,000 due December 31, 2002 and $600,000 due December 31, 2003 with interest at 12% and
collateralized by certain aviation travel service business assets (2) 800 --
------- -----
3,453 668
Less current maturities (2,491) (489)
------- -----
Long-term portion $ 962 $ 179
======= =====
(1) At the option of the noteholder, this note can be converted into RCG's
Common Stock at a ratio of one (1) share of Common Stock for each $0.65
of outstanding principal and interest.
(2) In connection with this note, the Company issued 500,000 shares of
restricted stock and 300,000 warrants to purchase its Common Stock at a
price of $0.35 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 $0.30
or a 25% discount. The Company can force the debt holder to convert to
stock at $1.00 per share under certain conditions.
NOTE 7. INCOME TAXES
As of March 31, 2002, the Company had approximately $36,800,000 of net
operating loss carry forwards ("NOLs") for federal income tax purposes, which
expire between 2019 through 2021. A deferred income tax asset valuation
allowance has been established against all deferred income tax assets as
management is not certain that the deferred income tax assets will be realized.
In addition, due to the substantial limitations placed on the utilization of net
operating losses following a change in control, utilization of such NOLs could
be limited.
In January 2002, the Company received an Internal Revenue Service
report on the Company's 1996 and 1997 and one of its subsidiary's 1994 and 1995
tax returns, which the Company has appealed. At March 31, 2002 and June 30,
2001, the Company had recorded a federal tax liability of $305,830 related to
such assessment.
NOTE 8. ISSUANCE OF COMMON STOCK
In July 2001, the Company issued 975,556 shares of restricted Common
Stock in connection with the acquisition of a home technology business.
In September 2001, the Company issued 11,428 shares of restricted
Common Stock from treasury stock in connection with the payment of certain legal
fees.
In December 2001, the Company issued 795,599 shares of Common Stock
with an aggregate market value of approximately $165,000 in connection with the
payment of a loan origination fee, legal expenses, investor relation services
and general and
14
administrative expenses. Of the $165,000, the Company recorded approximately
$133,000 as deferred debt expense, which is being amortized over two years, the
term of the note.
The Company's purchase agreements for LST and Logisoft provide for
2,000,000 and 500,000 additional shares of Common Stock, respectively, to be
issued to certain parties, contingent upon operating performance criteria for
each company acquired. In October 2001 and March 2002, the Company issued 20,834
and 62,500 shares of Common Stock, respectively, representing additional shares
earned in accordance with the Logisoft purchase agreement. No additional shares
have been earned in accordance with the LST purchase agreements.
In December 2001, the Company's Board of Directors approved a private
placement of up to 10,000,000 shares of the Company's restricted Common Stock at
a price of $0.10 per share. The Company is managing the private placement
directly and, as a result, will not incur any investment banking fees. The
Company sold 2,500,000 shares under the private placement in December 2001,
5,510,000 shares in the quarter ended March 31, 2002, and expects to complete
the sale of the remaining 1,990,000 shares on or before May 31, 2002.
NOTE 9. STOCK OPTIONS AND WARRANTS
The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting For Stock Issued To
Employees" ("APB 25") and options and warrants issued to non-employees under FAS
No. 123, "Accounting For Stock Based Compensation" ("FAS 123"). For the options
and warrants issued to non-employees, the fair value of each award has been
calculated using the Black-Scholes Model in accordance with FAS 123.
In fiscal 2001, the Company adopted a stock compensation plan (the
"Option Plan"). The Option Plan provides for the granting of either incentive
stock options or non-qualified options to purchase shares of the Company's
Common Stock to provide incentives to employees, directors and other individuals
or companies at the discretion of the Board of Directors. The Option Plan allows
participants to purchase Common Stock of the Company at prices set by the Board
of Directors, but in the case of incentive stock options not less than fair
market value at the date the option is granted. Unexercised options expire 10
years after the date of grant unless otherwise specified by the Board of
Directors. There are 20,000,000 shares authorized for the granting of incentive
stock options under the Option Plan. In the nine months ended March 31, 2002,
the Company issued qualified and non-qualified options to certain employees
under the Option Plan to purchase 1,775,000 shares of Common Stock and cancelled
options of terminated employees to purchase 2,049,625 shares of Common Stock.
The following table summarizes the Company's outstanding options:
March 31, 2002 June 30, 2001
-------------- -------------
Vesting Vesting
Exercise Term Period Exercise Term Period
Shares Price (Years) (Months) Shares Price (Years) (Months)
------ ----- ------- -------- ------ ----- ------- --------
705,000 $ 0.18 10 * 48 * -- $ -- -- --
3,370,000 0.25 to .28 10 12 to 48 2,940,000 0.25 10 12
2,300,000 0.70 10 12 3,100,000 0.70 10 12 to 48
1,000,000 0.75 10 -- 1,000,000 0.75 10 --
123,069 0.78 10 18 220,628 0.78 10 18
257,500 0.84 10 36 to 42 480,000 0.84 10 36 to 42
738,354 0.85 10 12 to 38 1,027,650 0.85 10 12 to 38
270,000 0.95 10 12 to 46 270,000 0.95 10 12 to 46
100,000 1.00 10 46 100,000 1.00 10 46
500,000 1.44 10 -- 500,000 1.44 10 --
125,000 3.00 10 -- 125,000 3.00 10 --
--------- ---------
9,488,923 9,763,278
========= =========
* 250,000 non-qualified options issued to an employee in December 2001 have a
three-year term and are fully vested.
15
Of the outstanding options at March 31, 2002, 7,746,539 are exercisable.
The Company has issued warrants to purchase shares of its Common Stock
in exchange for consulting and legal services and for strategic vendor alliances
provided by outside third parties. In addition, the Company has issued warrants
in connection with Common Stock private placement and term loan financing
transactions. Certain of the warrants issued contained registration rights
provisions.
The following table summarizes the Company's outstanding warrants:
March 31, 2002 June 30, 2001
----------------------------------- ----------------------------------
Exercise Term Exercise Term
Shares Price (Months) Shares Price (Months)
------ ----- -------- ------ ----- --------
5,556,377 $ 0.04 54 5,556,377 $ 0.04 54
300,000 0.35 36 -- -- --
400,000 0.50 120 400,000 0.50 120
4,753,743 0.75 120 4,753,743 0.75 120
100,000 0.81 48 100,000 0.81 48
10,000 1.00 -- 10,000 1.00 --
50,000 1.10 36 50,000 1.10 36
675,000 1.75 -- 600,000 1.75 --
575,000 3.00 * 575,000 3.00 *
3,625,000 4.00 120* 3,625,000 4.00 120*
---------- ----------
16,045,120 15,670,120
========== ==========
* All of the $3.00 warrants and 575,000 of the $4.00 warrants in the above
table have a term that is variable, subject to the market value of the
Common Stock and other conditions.
At March 31, 2002, all of the above warrants are exercisable, except
for 555,638 with an exercise price of $0.04 which vest on December 31, 2002,
100,000 with an exercise price of $0.81 that vest over 36 months, and 50,000
with an exercise price of $1.75 that vest upon performance of certain services.
The total compensation cost recognized during the nine month periods
ended March 31, 2002 and 2001 for these awards was $19,000 and $6,923,000,
respectively. Compensation costs were $7,000 and $220,000, respectively, for the
three month periods ended on March 31, 2002 and 2001, respectively.
16
NOTE 10: 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 Ended March 31,
---------------------------- ---------------------------
2002 2001 2002 2001
Compensation expense $ 831 $ 584 $3,048 $1,314
Legal and professional fees 130 160 380 623
Public and investor relations (46) 67 28 148
Marketing and advertising 39 62 220 501
Rent expense 136 68 465 164
Insurance 84 57 280 137
Telecommunications 51 60 230 106
Office and printing expense 145 85 352 329
Travel and entertainment 60 66 220 156
Other 150 68 288 188
------- ------ ------ ------
$ 1,580 $1,277 $5,511 $3,666
======= ====== ====== ======
Public and investor relations expenses were reduced by $90,000 during
the quarter ended March 31, 2002 as a result of the favorable settlement of a
contract with a service provider.
NOTE 11. RELATED PARTY TRANSACTIONS
In fiscal 2001, Michael D. Pruitt, the President, Chief Executive
Officer and a director of the Company, and a company owned by Mr. Pruitt made
loans to the Company. Also, in the quarter ended December 31, 2001, Mr. Pruitt
loaned the Company $50,000 which was repaid to Mr. Pruitt in December 2001. At
March 31, 2002, notes and advances due to affiliates of the Company consist of
the following (in thousands):
Note payable to Mr. Pruitt $ 100
Advance payable to Mr. Pruitt 45
Notes payable to a company owned by Mr. Pruitt 118
------
$ 263
======
The note payable to Mr. Pruitt indicated in the above table bears
interest at 12% per annum and is due on demand. The advance to Mr. Pruitt and
notes payable to the company owned by Mr. Pruitt bear imputed interest at 8% and
are due on demand.
Mr. Pruitt has pledged certain of his personal assets to secure a
$100,000 bank credit facility for the Company's home technology business. At
March 31, 2002, the balance outstanding on this bank facility was $100,000.
Mr. Pruitt is also a minority investor in a company that has purchased
franchise licenses and business operations of the Company's home technology
business in three markets in South Carolina and in another company that is a
franchisee of the Company's home technology business in three locations in the
state of Maryland. During the quarter ended March 31, 2002, $80,000 of the notes
payable to a company owned by Mr. Pruitt was used as payment for the purchase
price of two Maryland franchise locations of the Company's home technology
business.
Paul B. Johnson, a director of the Company, is an investor in a
company, which in November 2001 became a franchisee of the Company's home
technology business in the Dallas, Texas market.
17
NOTE 12. BUSINESS SEGMENT INFORMATION
Information related to business segments for the Company's continuing
operations is as follows (in thousands):
Three months ended March 31, 2002: Aviation Internet/
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 300 (14) (69) (359) 160 25
Identifiable assets 5,006 380 10,445 10,361 3,693 29,885
Capital expenditures 10 -- 28 61 -- 99
Depreciation and amortization 25 4 58 21 4 101
Three months ended March 31, 2001: Aviation Internet/
Travel Call Technology Home
Services Center Solutions Technology Corporate Total
-------- ------ --------- ---------- --------- -----
Revenue $3,905 $ 68 $ 67 $ -- $ 130 $ 4,170
Income (loss) from continuing operations (67) (319) (256) -- (901) (1,543)
Identifiable assets 1,796 5,120 5,524 -- 2,369 14,809
Capital expenditures -- -- -- -- -- --
Depreciation and amortization 72 291 191 -- -- 554
Nine months ended March 31, 2002: Aviation Internet/
Travel Call Technology Home
Services Center Solutions Technology Corporate Total
-------- ------ --------- ---------- --------- -----
Revenue $17,021 $ 50 $ 6,800 $ 2,366 $ 279 $26,516
Income (loss) from continuing operations 621 (85) (575) (660) (1,177) (1,876)
Identifiable assets 5,006 380 10,445 10,361 3,693 29,885
Capital expenditures 11 -- 65 148 1 225
Depreciation and amortization 37 13 170 57 8 285
Nine months ended March 31, 2001: Aviation Internet/
Travel Call Technology Home
Services Center Solutions Technology Corporate Total
-------- ------ --------- ---------- --------- -----
Revenue $6,181 $ 169 $ 67 $ -- $ 130 $ 6,547
Income (loss) from continuing operations (1,429) (779) (256) -- (10,850) (13,314)
Identifiable assets 1,796 5,120 5,524 -- 2,369 14,809
Capital expenditures 41 22 -- -- 8 71
Depreciation and amortization 344 680 191 -- -- 1,215
Corporate includes certain investment banking activities that were
acquired by the Company as a part of the acquisition of Ventures in February
2001.
The Company's sales are primarily to customers in the United States of
America. International sales are minimal.
18
Item 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
In the quarter ended September 30, 2000, the Company acquired its
leisure aviation travel services and telecommunications call center businesses.
In the third and fourth quarters of fiscal 2001, the Company acquired its home
technology and Internet/technology solutions businesses. Also, in the quarter
ended September 30, 2001, the Company acquired an additional home technology
business.
The following table summarizes results of operations by business
segment for the Company's continuing operations (in thousands):
Three Months Ended March 31, 2002 Three Months Ended March 31, 2001
--------------------------------- ---------------------------------
Gross Income Gross Income
Revenue Profit (Loss) Revenues Profit (Loss)
------- ------ ------ -------- --------- ------
Aviation Travel Services $6,669 $ 707 $ 306 $ 3,905 $ 386 $ (67)
Telecommunications Call Center 14 14 (14) 68 68 (319)
Home Technology 2,233 210 (359) -- -- (256)
Internet/Technology Solutions 629 411 (69) 67 67 --
Corporate 202 202 161 130 130 (901)
------ ----- -------- -------- ------ -------
$9,747 $1,544 $ 25 $ 4,170 $ 651 $(1,543)
====== ====== ======== ======== ====== =======
Nine Months Ended March 31, 2002 Nine Months Ended March 31, 2001
-------------------------------- --------------------------------
Gross Income Gross Income
Revenue Profit (Loss) Revenues Profit (Loss)
------- ------ ------ -------- --------- ------
Aviation Travel Services $17,021 $1,500 $ 621 $ 6,181 $ 161 $(1,429)
Telecommunications Call Center 50 50 (85) 169 169 (779)
Home Technology 6,800 844 (660) -- -- --
Internet/Technology Solutions 2,366 1,463 (575) 67 67 (256)
Corporate 279 279 (1,177) 130 130 (10,850)
------ ----- -------- -------- ------ -------
$26,516 $4,136 $ (1,876) $ 6,547 $ 527 $(13,314)
======= ====== ======== ======== ====== ========
Results of Continuing Operations
The Company's revenues in the three and nine months ended March 31,
2002 were $9,747,000 and $26,516,000, respectively, compared to $4,170,000 and
$6,547,000, respectively, in the same periods a year ago. The increase in the
current period is due to the newly acquired businesses and the expanded charter
aviation business. These increases were partially offset by the termination of
the jet shuttle services and a decline in the call center operations. Revenue
reported in the Corporate segment relates primarily to fees received for
investment banking services.
During the three month period ended March 31, 2002, sales to Vacation
Express ("VEX"), a customer of the Company's Aviation Travel Services business,
represented 66% of the Company's consolidated revenue. For the nine month period
then ended, sales to VEX 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, 2002 was
$1,544,000 and $4,136,000 compared to $651,000 and $527,000, respectively, in
the same periods a year ago. The increases in the current period are due to the
newly acquired businesses, the expanded charter aviation business and
elimination of the jet shuttle business, which operated at a gross margin
deficit.
In the three and nine months ended March 31, 2001, the Company
recognized $220,000 and $6,923,000, respectively, of non-cash expense related to
the issuance of stock options and warrants. The Company incurred only $7,000 and
$19,000 of any such
19
expense in the three and nine months ended March 31, 2002, respectively, because
the Company granted fewer compensatory options and warrants in the current year.
Selling, general and administrative expenses-other in the three and
nine months ended March 31, 2002 was $1,580,000 and $5,511,000, respectively,
compared to $1,277,000 and $3,666,000, respectively, in the comparable periods a
year ago. These increases are due to expenses of the newly acquired businesses
and increased staff in the aviation travel services business to support its
expanded charter operations partially offset by reduced corporate expenses,
settlement of a contract with a service provider that reduced expenses during
the quarter ended March 31, 2002 by $90,000, and by lower marketing expenses,
particularly in the nine month period, due to the termination of the jet shuttle
service.
Bad debt expense in the three and nine months ended March 31, 2002 was
$20,000 and $85,000, respectively, and is related to the newly acquired
businesses.
The Company's depreciation and amortization expense in the three and
nine month periods ended March 31, 2002 was $101,000 and $285,000, respectively,
compared to $554,000 and $1,215,000, respectively, in the same periods a year
ago. The decrease is due primarily to the discontinuance of goodwill
amortization ($1,182,000 for the nine months ended March 31, 2001) in accordance
with FAS 142 offset partially by depreciation of the fixed assets of newly
acquired businesses.
In the three and nine month periods ended March 31, 2002, the Company
incurred $93,000 and $186,000, respectively, of net interest expense related to
its debt portfolio, which increased from $668,000 at June 30, 2001 to $3,453,000
at March 31, 2002. During the three and nine months ended March 31, 2001, the
Company recorded net interest income of $13,000 and $37,000.
In the quarter ended March 31, 2002, the Company recorded a net gain on
investments of $282,000 of which $166,000 relates to market adjustments of
warrants and $116,000 represents realized gains on sales of securities. For the
nine month period ended March 31, 2002, the Company recognized a net loss on
investments of $97,000. These results are reported primarily in the Corporate
segment results. 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.
The Company realized a gain of $576,000 on the sale of its discontinued
commercial real estate business in the three months ended September 30, 2001.
In fiscal 2002, the Company recorded the cumulative effect of a change
in accounting principle of $693,000, increasing the Company's reported net loss,
as a result of its implementation of FAS 142. This adjustment was recorded as of
July 1, 2001.
Liquidity and Capital Resources
The net loss in the nine months ended March 31, 2002 of $1,993,000 was
offset by increases to shareholders' equity related to a business acquisition, a
capital contribution, unrealized gains on marketable securities of $634,000 and
sale of common stock resulting in a net increase in shareholders' equity of
$601,000. This increase was $1,294,000 excluding the impact of the adoption of
FAS 142.
In the nine months ended March 31, 2002, continuing operations used
$3,060,000 of cash and discontinued operations provided $150,000 of cash. Note
payable proceeds of $2,553,000 and sale of common stock offset this decrease
resulting in a net cash increase of $112,000 for the nine months ended March 31,
2002. At March 31, 2002, the Company had working capital of $162,000, including
cash and cash equivalents of $1,398,000 and investments of $2,274,000.
The Company's aviation travel service business was cash flow positive
in the current quarter, as it has been for the entire fiscal year. The Company
expects cash flow from this business to increase again in the fourth quarter of
fiscal 2002 when the full schedule of flights under its leisure charter contract
are in place for the entire quarter. This contract is expected to generate
$32,000,000 in annual revenues and $1,500,000 to $2,000,000 of annual cash flow.
Six (6) aircraft were in operation under the contract at March 31, 2002. The
Company continues to service its existing contracts and to market complementary
flights to further utilize the aircraft it has under contract.
The Company is in the process of re-establishing the operations of its
35-seat telecommunication call center, which will also provide support to its
aviation travel services business as a reservations and customer care center for
airlines, tour operators and
20
for internal programs for which the Company will take reservations from
travelers. The Company expects the call center to break even during the second
quarter of fiscal 2003.
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 13 geographic markets to franchisees, primarily in the
south and southeastern United States. During the three and nine month periods
ended March 31, 2002, the Company recognized revenue for the sale of five and 12
franchises sold, respectively. Total revenue from franchise sales and royalties
was $253,000 and $591,000, respectively, for the three and nine month periods
ended March 31, 2002. For the nine months ended March 31, 2002, the Company's
home technology business reported a loss of $660,000 due primarily to
investments made in the establishment and growth of the franchising program and
losses in the two markets that the Company presently operates, Charlotte, NC and
Atlanta, GA. For the quarter ended March 31, 2002 the home technology business
reported a loss of $359,000 due to increased staffing to support franchisor
operations and lower sales in its two owned markets. Sales in the Company's two
owned markets for the March 31, 2002 quarter decreased by $272,000 from the
previous quarter due to seasonality and the impact of a customer selectivity
program in which certain builder relationships were terminated, to allow the
Company to focus on building relationships with higher end builders and in the
commercial market. The continued implementation of the franchise plan and the
development of its owned markets are expected to result in reduced, but
continued operating losses for the near term. In April 2002, the Company signed
a binding letter of intent to sell a 25% interest in its home technology
business for cash of $1,300,000 and other assets of approximately $3,050,000
(the "Princeton Transaction"). The Princeton Transaction is expected provide the
business additional capital to continue implementing its business plan to build
a national operation.
In fiscal 2002, the Company has proceeded with the development of its
Internet/technology solutions business through the expansion of its products,
services and its sales force while reducing its operating expenses. The
Company's Internet/Technology solutions business has reduced its loss from
operations in each of the last three (3) quarters as a result of revenue growth
and cost control. During the quarter ended March 31, 2001, the
Internet/Technology Solutions business reported a loss of $69,000 and achieved a
break-even result excluding depreciation, interest and taxes (EBITDA), versus a
loss of $168,000 in the quarter ended December 31, 2001. The Company expects
these improvements in operating results to continue.
Also, the Company's corporate expense in the current nine months
decreased from a year ago due to the issuance of fewer stock options and
warrants, staff reductions, favorable settlement of a contract with a service
provider and other costs saving measures. The Company expects to realize
additional corporate savings during the last quarter of fiscal 2002. In
addition, The Company recorded $202,000 in revenue from advisory services during
the quarter ended March 31, 2002.
In addition to the operational improvements and the funding transaction
for the home technology business discussed above, the Company in December, 2001
obtained an $800,000 term loan and commenced a $1,000,000 private placement sale
of Common Stock. Through March 31, 2002, the Company had received $801,000 from
the private placement program and expects to receive the remaining $199,000 on
or before May 31, 2002. The Company continues to actively pursue debt and equity
financing alternatives to provide additional cash to support operations and
growth. The Company believes its existing balances of cash and cash equivalents
and investments combined with operating cash flows, funds to be raised as a
result of the Princeton Transaction and the proceeds from the private placement
sale of Common Stock will be sufficient to meet working capital and capital
expenditure requirements of our continuing operations. The Company may need
additional debt or equity financing depending upon its ability to grow its
businesses or improve cash flow from operations or if the Princeton Transaction
is delayed or does not close. There can be no assurance that additional
financing will be available when needed or, if available, that it will be on
terms favorable to the Company and its stockholders. If the Company is not
successful in generating sufficient cash flow from operations, or in raising
additional capital when required in sufficient amounts and on terms acceptable
to the Company, these failures would have a material adverse effect on the
Company's business, results of operations and financial condition. If additional
funds are raised through the issuance of equity securities, the percentage
ownership of its then-current stockholders would be diluted.
The Company's business, results of operations, and financial condition
are subject to many risks. In addition, statements in this quarterly report
relating to matters that are not historical facts are forward-looking statements
based on management's belief and assumptions based on currently available
information. Such forward-looking statements include statements relating to
estimates of future revenue and operating income, cash flow and liquidity. Words
such as "expects", "intends", "believes", "may", "will" or similar expressions
are intended to identify certain forward-looking statements. In addition, any
statements that refer to expectations, projections or other characterizations of
future events or circumstances are forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it cannot give any
21
assurances that these expectations will prove to be correct. Such statements
involve a number of risks and uncertainties, including, but not limited to those
discussed herein or in other documents filed by the Company with the SEC,
including the Company's Annual Report on Form 10-KSB filed on October 4, 2001.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company and its subsidiaries are involved from time to time in
various claims and legal actions in the ordinary course of business. In the
opinion of management, the Company and its subsidiaries are not party to any
legal proceedings, the adverse outcome of which, would have any material adverse
effect on the Company's business, its assets, or results of operations.
ITEM 2. CHANGES IN SECURITIES
Since July 1, 2001, the Company has issued 9,875,917 shares of
restricted Common Stock in connection with the following transactions:
(i) In July 2001, the Company issued 975,556 shares of restricted
Common Stock in connection with the acquisition of a home
technology business located in Atlanta, GA;
(ii) In September 2001, the Company issued 11,428 shares of
restricted Common Stock from treasury stock in exchange for
legal services rendered to the Company;
(iii) In October 2001, the Company issued 20,834 shares of
restricted Common Stock to former shareholders of Logisoft in
exchange for Logisoft reaching certain performance criteria
set forth in the purchase agreement governing the Company's
acquisition of Logisoft;
(iv) In December 2001, the Company issued 129,630 shares of
restricted Common Stock in exchange for investor relations
services rendered to the Company;
(v) In December 2001, the Company issued 100,000 shares of
restricted Common Stock in exchange for legal services
rendered to the Company;
(vi) In December 2001, the Company issued 500,000 shares of
restricted Common Stock as a loan origination fee;
(vii) In December 2001, the Company issued 65,969 shares of
restricted Common Stock to an employee as reimbursement of
general and administrative expenses;
(viii) In the period from December 2001 to May 14, 2002, the Company
issued an aggregate of 8,010,000 shares of restricted Common
Stock in connection with a private placement sale of Common
Stock; and
(ix) In March 2002, the Company issued 62,500 shares of restricted
Common Stock to former shareholders of Logisoft in exchange
for Logisoft reaching certain performance criteria set forth
in the purchase agreement governing the Company's acquisition
of Logisoft.
The securities issued in connection with the Company's acquisition of
Logisoft, the home technology businesses and the private placement of Common
Stock referenced above were issued without registration under the Securities Act
in reliance upon the exemption in Regulation D promulgated under Section 4(2) of
the Securities Act. The Company based such reliance on factual representations
made to the Company by the recipients of such securities as to such recipients'
investment intent and sophistication, among other things.
The securities issued in connection with the legal services, investor
services, loan fees and other general and administrative services rendered to
the Company were issued without registration under the Securities Act in
reliance upon Section 4(2) of the
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Securities Act. The Company based such reliance on representations made to the
Company by the recipient of such securities as to such recipient's investment
intent and sophistication, among other things.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Stock Purchase Agreement between the Company and
the majority of the stockholders of LST
(incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed on April
18, 2001).
2.2 Stock Purchase Agreement dated as of March 16, 2001
between the Company and Glenn Barrett, Jr.
(incorporated by reference to Exhibit 2.2 to the
Company's Current Report on Form 8-K filed on April
18, 2001).
2.3 Stock Purchase Agreement dated as of March 31, 2001
between the Company and Brandon Holdings, Inc.
(incorporated by reference to Exhibit 2.3 to the
Company's Current Report on Form 8-K filed on April
18, 2001).
2.4 Agreement and Plan of Merger dated as of June 5,
2001 between the Company, Logisoft Acquisition
Corporation and the individuals listed on Exhibit A
thereto (the "Logisoft Merger Agreement")
(incorporated by reference to Exhibit 2.1 the
Company's Current Report on Form 8-K filed on June
13, 2001).
2.5 Joinder to the Logisoft Merger Agreement executed
by Logisoft (incorporated by reference to Exhibit
2.2 to the Company's Current Report on Form 8-K
filed on June 13, 2001).
2.6 Asset Purchase Agreement dated as of June 20, 2001,
by and among Greater Atlanta Alarm Services, Inc.,
the Company, a wholly-owned subsidiary of the
Company, Glenda Watson and David Watson
(incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed on
August 14, 2001).
2.7 Stock Purchase Agreement dated as of May 15, 2001
between the Company and Brikor, Inc. (incorporated
by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K filed on September 17,
2001).
(b) Financial Reports on Form 8-K
The Company has filed the following reports on Form 8-K and
8-K/A with the SEC since December 31 , 2001:
23
(i) The Company filed a Current Report on Form 8-K
with the SEC on February 7, 2002 reporting
under Item 4 of such report the change in the
Company's certifying accountant. The Company
amended this filing with the Form 8/KA filing
on February 22, 2002.
(ii) The Company filed a Current Report on Form 8-K
with the SEC on April 22, 2002 reporting under
Item 5 that the Company signed of a letter of
intent to raise $4,350,000 in cash and other
assets through the sale of a minority interest
of approximately 25% in the Company's home
technology business.
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 14, 2002 By: /s/ John W. Van Heel
-----------------------------
John W. Van Heel
Vice President, Treasurer
24
Exhibit Index
2.1 Stock Purchase Agreement between the Company and the majority
of the stockholders of LST (incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K filed
on April 18, 2001).
2.2 Stock Purchase Agreement dated as of March 16, 2001 between
the Company and Glenn Barrett, Jr. (incorporated by reference
to Exhibit 2.2 to the Company's Current Report on Form 8-K
filed on April 18, 2001).
2.3 Stock Purchase Agreement dated as of March 31, 2001 between
the Company and Brandon Holdings, Inc. (incorporated by
reference to Exhibit 2.3 to the Company's Current Report on
Form 8-K filed on April 18, 2001).
2.4 Agreement and Plan of Merger dated as of June 5, 2001 between
the Company, Logisoft Acquisition Corporation and the
individuals listed on Exhibit A thereto (the "Logisoft Merger
Agreement") (incorporated by reference to Exhibit 2.1 the
Company's Current Report on Form 8-K filed on June 13, 2001).
2.5 Joinder to the Logisoft Merger Agreement executed by Logisoft
(incorporated by reference to Exhibit 2.2 to the Company's
Current Report on Form 8-K filed on June 13, 2001).
2.6 Asset Purchase Agreement dated as of June 20, 2001, by and
among Greater Atlanta Alarm Services, Inc., the Company, a
wholly-owned subsidiary of the Company, Glenda Watson and
David Watson (incorporated by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed on August 14,
2001).
2.7 Stock Purchase Agreement dated as of May 15, 2001 between the
Company and Brikor, Inc. (incorporated by reference to Exhibit
2.1 to the Company's Current Report on Form 8-K filed on
September 17, 2001).
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