UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549-0001
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended: March 31, 2005.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
From the Transition Period from _________ to _________.
Commission File Number: 1-8662
RCG COMPANIES INCORPORATED
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(Exact name of registrant as specified in its charter)
DELAWARE 23-2265039
------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
6836 MORRISON BOULEVARD, SUITE 200, CHARLOTTE, NC 28211-2668, (704) 366-5054
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(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
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. YES |X| NO [ ]
Check whether the Registrant is an accelerated filer (as defined in Rule 12b-2
of the Exchange Act). YES [ ] NO |X|
The number of shares outstanding of the Registrant's common stock ("Common
Stock") as of April 28, 2005: 29,219,112
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TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION.................................................2
Item 1. Condensed Consolidated Financial Statements..........................2
Condensed Consolidated Balance Sheets at March 31, 2005 (unaudited)
and June 30, 2004..........................................................3
Condensed Consolidated Statements of Operations for the Three
and Nine Months Ended March 31, 2005 and 2004 (unaudited)..................4
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended March 31, 2005 and 2004 (unaudited)..................................5
Notes to the Condensed Consolidated Statements (unaudited).................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................19
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........27
Item 4. Controls and Procedures.............................................27
PART II. OTHER INFORMATION...................................................29
Item 1. Legal Proceedings...................................................29
Item 2. Changes in Securities...............................................29
Item 3. Defaults Upon Senior Securities.....................................29
Item 4. Submission of Matters to a Vote of Security Holders.................29
Item 5. Other Information...................................................29
Item 6. Exhibits............................................................29
Signatures...................................................................30
1
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PART I. FINANCIAL INFORMATION
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ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
RCG Companies Incorporated and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31,
2005 June 30,
(Unaudited) 2004
----------- -----------
ASSETS
Cash and cash equivalents ......................................................... $ 212 $ 777
Restricted cash ................................................................... 13,780 18,697
Accounts receivable, net of allowance of doubtful accounts of $45 and $44,
respectively ................................................................... 1,078 309
Prepaid expenses and other assets ................................................. 2,917 2,937
----------- -----------
Total current assets .................................................... 17,987 22,720
Property and equipment, net ....................................................... 1,430 354
Deferred costs and other assets ................................................... 2,700 6
Net non-current assets of discontinued operations ................................. 2,739 15,839
Goodwill and other intangible assets .............................................. 42,878 10,147
----------- -----------
Total assets ................................................................ $ 67,734 $ 49,066
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable and other obligations-current portion ............................... $ 9,931 $ 1,509
Accounts payable and accrued expenses ............................................. 14,405 9,132
Net current liabilities of discontinued operations ................................ 4,757 5,865
Unearned income ................................................................... 13,496 17,346
----------- -----------
Total current liabilities ................................................... 42,589 33,852
Warrant obligations ............................................................... 1,593 1,520
Notes payable and other obligations ............................................... 5,644 7,504
----------- -----------
Total liabilities ........................................................... 49,826 42,876
----------- -----------
Commitments and Contingencies
Shareholders' equity:
Convertible Preferred stock, $.01 par value, 10,000,000 shares authorized
Convertible Series A Preferred stock, 1,570 and -0- issued, respectively ...... -- --
Convertible Series B Preferred stock, 1,527,389 and -0- issued, respectively .. 15 --
Common stock, $.04 par value, 200,000,000 shares authorized, 29,350,326 and
21,289,004 issued, 29,219,112 and 21,157,790 outstanding, respectively ...... 1,172 849
Additional paid-in capital ..................................................... 157,630 121,386
Accumulated deficit ............................................................ (140,277) (115,137)
Accumulated other comprehensive loss ........................................... -- (276)
Treasury stock at cost (131,214 shares) ........................................ (632) (632)
----------- -----------
Total shareholders' equity .................................................. 17,908 6,190
----------- -----------
Total liabilities and shareholders' equity .................................. $ 67,734 $ 49,066
=========== ===========
The accompanying notes are an integral part of these
Condensed Consolidated Financial Statements.
2
RCG Companies Incorporated and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except share data)
Three months ended Nine months ended
March 31, March 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenue ........................................ $ 16,448 $ 19,769 $ 57,677 $ 36,691
Cost of Revenue ................................ 16,687 19,437 57,983 34,507
------------ ------------ ------------ ------------
Gross (loss) profit ...................... (239) 332 (306) 2,184
------------ ------------ ------------ ------------
Selling, general and administrative expenses ... 3,447 3,446 9,992 5,913
Goodwill impairment ............................ -- -- -- 1,000
Depreciation and amortization .................. 351 92 495 159
------------ ------------ ------------ ------------
Operating costs and expenses ............. 3,798 3,538 10,487 7,072
------------ ------------ ------------ ------------
Operating loss ........................... (4,037) (3,206) (10,793) (4,888)
Interest expense, net .......................... (700) (120) (993) (220)
Warrant expense ................................ -- -- (73) --
Other income (expense) ......................... (259) -- (519) 119
------------ ------------ ------------ ------------
Loss from continuing operations before ......... (4,996) (3,326) (12,378) (4,989)
extraordinary items
Gain on debt restructuring ..................... -- -- 2,257 --
------------ ------------ ------------ ------------
Loss from continuing operations ................ (4,996) (3,326) (10,121) (4,989)
Loss from discontinued operations, net ......... (6,141) (4,845) (14,790) (12,109)
Gain on sale of assets of discontinued
operations ................................... -- -- 1,000 --
------------ ------------ ------------ ------------
Net loss ....................................... (11,137) (8,171) (23,911) (17,098)
Preferred stock dividends ...................... (39) -- (1,229) --
------------ ------------ ------------ ------------
Net loss attributable to common stock
shareholders ................................... $ (11,176) $ (8,171) $ (25,140) $ (17,098)
============ ============ ============ ============
Basic and diluted net loss per share:
Loss from continuing operations ............. $ (0.18) $ (0.18) $ (0.43) $ (0.29)
Loss from discontinued operations ........... (0.23) (0.25) (0.60) (0.72)
------------ ------------ ------------ ------------
Net loss ................................. $ (0.41) $ (0.43) $ (1.03) $ (1.01)
============ ============ ============ ============
Net loss attributable to common stock
shareholders ........................... $ (0.41) $ (0.43) $ (1.08) $ (1.01)
============ ============ ============ ============
Weighted average shares outstanding ............ 27,222,447 18,993,724 23,325,513 16,938,530
============ ============ ============ ============
The accompanying notes are an integral part of these
Condensed Consolidated Financial Statements.
3
RCG Companies Incorporated and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine months ended March 31,
2005 2004
------------ ------------
Cash flows from operating activities:
Net loss ...................................................................... $ (23,911) $ (17,098)
Loss on discontinued operations, net .......................................... 14,790 12,109
Gain on sale of assets of discontinued operations ............................. (1,000) --
------------ ------------
Loss from continuing operations ............................................ (10,121) (4,989)
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on debt restructuring .................................................... (2,257) --
Depreciation and amortization .............................................. 495 159
Loss (gain) on sale of investments ......................................... 519 (119)
Amortization of unfavorable airline contract ............................... (1,834) (1,132)
Stock purchase warrants issued for services ................................ 146 773
Change in fair value of warrant obligation ................................. 73 --
Goodwill impairment ........................................................ -- 1,000
Deferred debt cost amortization 660 190
Changes in operating assets and liabilities:
Restricted cash .......................................................... 4,917 5,347
Accounts receivable ...................................................... (573) (146)
Prepaid expenses and other assets ........................................ (2,353) (544)
Accounts payable and accrued expenses .................................... 4,529 1,491
Unearned income .......................................................... (3,851) 3,990
------------ ------------
Net cash provided by (used in) continuing operating activities ........ (9,650) 6,020
Net cash used in discontinued operations .............................. (1,883) (10,062)
------------ ------------
Net cash used in operating activities .............................. (11,533) (4,042)
Cash flows from investing activities:
Purchase of property and equipment ............................................ (324) (94)
Sale of investments ........................................................... 16 --
Cash acquired (paid) in connection with business acquisitions, net ............ 86 (363)
------------ ------------
Net cash used in continuing investing activities ........................... (222) (457)
Net cash used in discontinued operations ................................... (157) (35)
------------ ------------
Net cash used in investing activities .................................... (379) (492)
Cash flows from financing activities:
Notes payable proceeds ........................................................ 7,599 --
Principal debt repayments ..................................................... (706) (325)
Issuance of RCG equity securities ............................................. 4,212 5,023
------------ ------------
Net cash provided by continuing financing activities ....................... 11,105 4,698
Net cash provided by discontinued operations ............................... 242 342
------------ ------------
Net cash provided by financing activities ................................ 11,347 5,040
------------ ------------
Net change in cash and cash equivalents ....................................... (565) 506
Cash and cash equivalents at beginning of period .............................. 777 90
------------ ------------
Cash and cash equivalents at end of period ....................................... $ 212 $ 596
============ ============
The accompanying notes are an integral part of these
Condensed Consolidated Financial Statements.
4
RCG Companies Incorporated and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(Unaudited, in thousands)
Nine months ended
March 31,
2005 2004
--------- ---------
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest .......................................................................... $ 510 $ 38
Income taxes ...................................................................... -- --
Non-cash investing and financing activities:
Equity securities issued for acquired businesses .................................. 24,064 380
Notes and Service Agreement Obligation issued for acquired businesses ............. 6,038 9,068
Preferred dividends paid in common stock in lieu of cash .......................... 96 --
Preferred stock beneficial conversion feature...................................... 1,133 --
Common stock and warrants issued for conversion of debt ........................... -- 810
Common stock and warrants issued for conversion of accounts payable and accrued
expenses ........................................................................ -- 70
Conveyance of RCG's LFSI Common Stock for services ................................ -- 119
The accompanying notes are an integral part of these
Condensed Consolidated Financial Statements.
5
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Condensed Consolidated Financial Statements are unaudited and include the
accounts of RCG Companies Incorporated and its subsidiaries ("RCG" or the
"Company"). All significant intercompany accounts and transactions have been
eliminated in consolidation. These financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and the instructions of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by such generally accepted accounting principles for complete financial
statements.
In the opinion of the management of the Company, the unaudited Condensed
Consolidated Financial Statements contain all adjustments, consisting only of
normal recurring adjustments, considered necessary for a fair statement of the
results of operations for the interim periods presented, with no material
retroactive adjustments. The results of operations for interim periods are not
indicative of the results that may be expected for a full year due to the
seasonality of the business. These interim unaudited Condensed Consolidated
Financial Statements should be read in conjunction with the audited Consolidated
Financial Statements and notes thereto for the year ended June 30, 2004 included
in the Company's Annual Report on Form 10-K/A.
Certain reclassifications have been made to data from the previous period to
conform to the presentation of the current period.
Operations and Liquidity
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has suffered recurring losses from
operations and as of March 31, 2005 had a working capital deficit of
$24,602,000. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management recognizes that in order to
meet the Company's capital requirements, and continue to operate, additional
funding is necessary. During the quarter ended March 31, 2005, the Company
raised approximately $6,300,000 by issuing Original Issue Discount Debentures.
Additionally, subsequent to March 31, 2005, the Company raised approximately
$31,000,000 by issuing Convertible Preferred Series C shares. The proceeds were
used to acquire OneTravel, Inc. (see Note 8) and for additional working capital.
The Company is exploring additional sources of liquidity, through debt and
equity financing alternatives and further restructuring of its long-term debt.
If the Company is (i) unable to grow its business or improve its operating cash
flows as expected, (ii) unsuccessful in negotiating balances owed to trade
creditors, or (iii) unable to raise additional funds through sales of debt and
equity securities or sale of certain assets or portions of the business, then
the Company may be unable to continue as a going concern. 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
flows 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 Company's current
shareholders would be diluted. These Condensed Consolidated Financial Statements
do not include any adjustments that may result from the outcome of these
uncertainties.
6
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Revenue Recognition
Effective February 2, 2005, RCG concluded the acquisition of 100% of the common
stock of Farequest Holdings, Inc. ("Farequest" or "1-800-CHEAPSEATS"). Farequest
is a travel agency and consolidator selling and distributing travel products
including airline tickets, lodging, car rentals, cruises and vacation packages
to consumers, corporations and travel agencies through on-line sales on the
Internet and telephone sales through call center agents (see Note 2 for further
discussion of the acquisition).
Farequest derives revenues from multiple sources including:
o Sales of nonpublished airline fares: Farequest has agreements with certain
airlines to purchase travel inventory generally at a discount to published
rates available to consumers and other travel agencies. Farequest is
generally the merchant of record and determines the price to the customer.
o Supplier transaction fees: Farequest receives commissions on the sale of
travel at published rates from suppliers of travel, which include
airlines, hotels, cruise lines, car rental firms and other wholesalers of
travel services.
o Consumer service fees: Consumers pay a service fee per ticket on air
transactions and other additional fees in certain cases.
o Reservation system booking incentives: Farequest receives booking
incentives under contracts with certain Global Distribution Systems
(GDSs). GDSs are networks that facilitate the making of reservations with
airlines, hotels, cruise lines and car rental companies. GDSs pay
Farequest an incentive for each reservation above a minimum threshold
level that is made using their network, depending on certain factors
primarily related to the volume of transactions.
Revenues for Farequest are recognized when all of the following have occurred:
persuasive evidence of an agreement with the customer exists, services have been
performed, the fees for services performed are fixed or determinable and
collectibility of the fees is reasonably assured. Generally, these criteria have
been met as follows:
o For direct sale of airline travel and consumer service fees, when
reservations are made and secured by a credit card or other form of
payment;
o For supplier transaction fees, when the commissions are received from the
supplier; and/or
o For reservation system booking incentives, when the reservations are made
on the GDS network.
Farequest presents revenue derived from the sale of nonpublished airline fares
at the net amount collected - meaning the amount charged to the customer less
the amount paid to the supplier - in accordance with Emerging Issues Task Force
Issue No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an
Agent." Similarly, commissions and transaction fees derived from the sale of
published airline fares are also recorded at the net amount realized. Revenue is
recognized at the time of ticketing, net of an allowance for cancellations and
refunds. However, due to the restrictive nature of most airline ticket sales,
such cancellations or refunds are generally immaterial. Commissions from the
sale of published fares other than airline travel are recognized upon collection
from the supplier.
7
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Warrant Obligation
In accordance with Emerging Issues Task Force Issue 00-19, or EITF 00-19,
"Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock", the fair value of warrants issued in certain
private placements has been initially accounted for as a liability because the
Company will incur a substantial penalty if it cannot comply with the warrant
holders' registration rights or have other net-cash settlement features. As of
the closing date of the private placements, the fair value of the warrants was
approximately $1,520,000, calculated utilizing the Black-Scholes option-pricing
model. Changes in the market value of the Company's common stock from the
closing date until the warrants are exercised or expire will result in non-cash
charges or credits to operations to reflect the change in fair value of the
warrants during this period. To reflect the change in market value of the
warrants, the Company recorded an expense to operations of approximately $73,000
during the nine-month period ended March 31, 2005.
Stock-Based Compensation
The Company has elected to continue to follow the intrinsic value method of
accounting as prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), to account for employee
stock options. Under APB 25, no compensation expense is recognized unless the
exercise price of the Company's employee stock options is less than the market
price of the underlying stock on the date of grant.
The Company's pro forma net loss and net loss per share assuming compensation
cost was determined under FASB No. 123 for all options would have been the
following (in thousands, except share amounts).
For the three months For the nine months
ended March 31, ended March 31,
2005 2004 2005 2004
-------- -------- -------- --------
Net loss attributable to common stock
shareholders, as reported $(11,176) $ (8,171) $(25,140) $(17,098)
Deduct: Total stock-based compensation expense
determined under SFAS 123 for all awards (65) (45) (122) (136)
-------- -------- -------- --------
Pro forma net loss $(11,241) $ (8,216) $(25,262) $(17,234)
======== ======== ======== ========
Earnings per share:
Basic and diluted loss per share, as reported $ (0.41) $ (0.43) $ (1.03) $ (1.01)
======== ======== ======== ========
Basic and diluted loss per share, pro forma $ (0.41) $ (0.43) $ (1.08) $ (1.02)
======== ======== ======== ========
8
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company's other significant accounting policies are the same as those
applied at June 30, 2004 and disclosed in the Company's audited Consolidated
Financial Statements and notes thereto for the year ended June 30, 2004,
included in the Company's Annual Report on Form 10-K/A.
New Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 151, Inventory Costs,
an amendment of ARB No. 43, Chapter 4. This Statement amends the guidance in ARB
No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). This Statement requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of "so
abnormal" as defined in ARB No. 43. In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. This Statement is effective
for companies at the beginning of the first interim or annual period beginning
after June 15, 2005. The Company is in the process of reviewing SFAS 151 and has
not determined the effects on the consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based
Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows.
Generally, the approach to accounting for share-based payments in Statement
123(R) is similar to the approach described in Statement 123. However, Statement
123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values. Statement 123(R) is effective for companies at the beginning
of the first interim or annual period beginning after December 15, 2005. The
Company is in the process of reviewing SFAS 123 and has not determined the
effects on the consolidated financial statements.
NOTE 2. ACQUISITIONS
Effective February 2, 2005, RCG concluded the acquisition of 100% of the common
stock of Farequest Holdings, Inc. ("Farequest"). Farequest is a travel agency
and consolidator that sells and distributes travel products including airline
tickets, lodging, car rentals, cruises and vacation packages to consumers,
corporations and travel agencies through on-line sales on the Internet and
telephone sales through call center agents.
Farequest maintains its operations and accounting offices in Atlanta, Georgia,
and its call center operations are located in Las Vegas, Nevada, with an
additional corporate travel service office in Los Angeles, California. Farequest
markets its call center travel services under the trade name of 1-800-CHEAPSEATS
and its on-line travel website to distribute travel products and services to
consumers under the brand name of 1800cheapseats.com.
In connection with the acquisition, the Farequest Stockholders received: (i)
4,779,196 shares of common stock of RCG; (ii) 1,527,389 shares of RCG Series B
6% Senior Participating Preferred Stock ("Series B Preferred Stock"); and (iii)
a promissory note payable within one year of the effective time of the merger,
at the option of RCG, in either (a) an amount in cash equal to lesser of (x)
$6,037,872 or (y) 19% of the value of the total maximum consideration payable or
(b) 3,018,936 shares of RCG common stock. The promissory note bears interest at
4% per annum and the interest is payable at maturity at RCG's option in either
cash or shares of RCG common stock valued at the greater of $2.00 per share or
the market value at the maturity date.
9
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As an anti-dilution mechanism, if and when holders of the RCG's Series A 6%
Convertible Preferred Stock (the "Series A Preferred Stock") convert shares of
Series A Preferred Stock into shares of RCG common stock, the Farequest
stockholders shall be entitled to receive up to 185,821 additional shares of RCG
Series B Preferred Stock (if the RCG Series B Preferred Stock has not yet been
converted), or 1,858,212 additional shares of RCG common stock (if the RCG
Series B Preferred Stock has been converted), pursuant to a formula designed to
prevent the dilution of the Farequest stockholders' equity interest in RCG.
The Series B Preferred Stock has a stated value of $8.18 per share and shall be
automatically converted on a 1-for-10 basis into shares of RCG common stock at
such time as (i) RCG stockholders have approved the issuance of greater than
19.9% of RCG's issued and outstanding stock in the merger transaction, (ii)
there is an effective registration statement covering the resale of the
conversion shares, (iii) the conversion shares are listed on RCG's primary
trading market, (iv) all dividends owed have or will be paid at conversion, and
(v) certain triggering events have not occurred. Dividends are payable on the
Series B Preferred Stock at the rate of 6% per annum, provided, however, that in
the event of conversion within 270 days of issuance no dividends shall be due or
payable. Dividend payments may be made at the option of RCG, either in cash or
in additional shares of Series B Preferred Stock. Upon the occurrence of certain
fundamental transactions or change in control events, the holders of the Series
B Preferred Stock shall have the right to require RCG to redeem the outstanding
shares of Series B Preferred Stock. At the effective time of the merger, the RCG
board of directors was expanded to eight (8) members. William A. Goldstein, a
director and executive officer of Farequest, was appointed the Chairman of the
Board of Directors, and Ronald L. Attkisson, was appointed as a director of RCG.
For a period of three years, RCG's board of directors will nominate and
recommend for election by the stockholders Mr. Goldstein as Chairman of the
Board, and, provided that Mr. Goldstein shall have continued to own at least 10%
of the outstanding common stock of RCG, two additional directors named by Mr.
Goldstein. Such nominees shall be independent directors and shall be reasonably
acceptable to the then existing board of directors. Mr. Goldstein has agreed to
vote his shares of RCG common stock (i) during such three year period for
Michael Pruitt as a member of the RCG board of directors, provided that Mr.
Pruitt holds at least 750,000 shares of RCG common stock at the time of the
nomination, and (ii) for the remaining nominees nominated by the RCG board for a
one-year term beginning with the effective time.
The value assigned to the consideration paid to the Farequest shareholders was
approximately $30,102,000 based on the average closing stock price of RCG over
the period from the date the acquisition was announced on November 30, 2004 to
the closing date of February 1, 2005. The primary objective of acquiring
Farequest was to gain access to its supplier relationships principally in the
form of airline contracts as well as to incorporate its call center operations
with those of RCG in order to realize cost efficiencies and increase sales
capacity.
10
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The acquisition was accounted for under the purchase method of accounting in
accordance with Statement of Financial Accounting Standards ("SFAS") No.141
"Business Combinations". The purchase price was allocated to the net assets
acquired, including the liabilities assumed as of February 1, 2005, based upon
their estimated fair values as of that date with the remainder being recorded as
goodwill. The consideration was allocated as follows (in thousands):
Current assets ........................ $ 346
Property and equipment ................ 984
Goodwill and other intangible assets .. 33,045
--------
Total assets acquired ............ 34,375
Current liabilities ................... (3,214)
Long-term liabilities ................. (1,059)
--------
Net assets acquired .............. $ 30,102
========
Operations of the acquired business is included in the condensed consolidated
financial statements from the date of acquisition. The following sets forth
unaudited pro forma consolidated financial information as if the acquisition had
taken place at the beginning of the periods presented (in thousands, except per
share data):
Three Months Ended Nine Months Ended
March 31, March 31,
2005 2004 2005 2004
-------- -------- -------- --------
Revenues .......................... $ 16,747 $ 20,581 $ 60,370 $ 38,535
Net loss .......................... $(11,521) $ (9,146) $(27,756) $(19,814)
Basic and diluted loss per share
from operaions.................... $ (0.40) $ (0.45) $ (1.03) $ (0.93)
NOTE 3. DISCONTINUED OPERATIONS
On December 9, 2004, RCG entered into an agreement to sell the assets of FS
Tours, Inc. d/b/a Vacation Express, ("FS Tours") to Vacation Acquisition, LLC
("Purchaser"). Under the terms and conditions of the Asset Purchase Agreement,
FS Tours sold to Purchaser assets of FS Tours and the Purchaser agreed to assume
$8,000,000 in trade payables, consisting principally of hotel payables, and
certain liabilities and obligations arising under contracts and other agreed
matters. FS Tours had contracted with an affiliate of the Purchaser to purchase
hotel rooms, such payable was part of the assumed liabilities. Under the terms
of the Agreement RCG has agreed to guaranty the payment and performance of the
remaining obligations of FS Tours. Accordingly, the operations of FS Tours as
well as Flightserv, Inc., which provided charter management operations for FS
Tours, were reclassified to discontinued operations.
During the third quarter of fiscal year 2005, the Board directed management to
investigate the possible sale of its Technology Segment to provide the Company
with additional liquidity and allow the Company to focus on its core business,
the Travel Segment. Based on Management's evaluation of the fair value of its
Technology Segment, which included external market data, the Company recorded a
charge of approximately $5,800,000, which is included in Loss from Discontinued
Operations, net on the Condensed Consolidated Statement of Operations. On April
27, 2005, RCG, pursuant to the terms of an Asset Purchase Agreement dated April
26, 2005 (the "APA"), closed a transaction through which its wholly owned
subsidiary Logisoft Corp. ("Logisoft") and Logisoft's wholly owned subsidiary
eStorefronts.net Corp.("eStorefronts" and together with Logisoft the "Sellers")
sold substantially all of the assets of Sellers to RMK Holdings, LLC ("Buyer"),
in consideration for which Buyer paid Sellers $699,000 and assumed $2,083,000 of
Sellers' liabilities. The purchase price paid is subject to a post closing
adjustment, as set forth in the APA, once the closing date financial statements
have been finalized. Accordingly, the operations of the Technology Segment were
reclassified to discontinued operations.
11
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During the third quarter of fiscal year 2004, the Board authorized the
disposition of the Company's investment in Lifestyle Innovations, Inc. ("LFSI").
Accordingly, the operations of LFSI were reclassified to discontinued operations
for all periods presented. During the fourth quarter of 2004, the Company
contributed approximately 4,000,000 shares to the treasury of LFSI, of which a
substantial portion of the contributed shares were reissued to certain LFSI
investors to settle certain contingent claims. LFSI also issued other shares,
which resulted in RCG's interest in LFSI being reduced to an effective 45.5%
beneficial ownership. Considering the substantial reduction in ownership and the
lack of control over LFSI, the investment in LFSI is now recorded using the
equity method and is no longer a consolidated subsidiary.
The loss from discontinued operations is summarized as follows (in thousands).
For the three months ended For the nine months ended
March 31, March 31,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Gross revenues ........................... $ 3,116 $ 32,475 $ 50,712 $ 73,546
Cost of revenues and operating expenses .. 9,257 37,320 65,502 85,655
----------- ----------- ----------- -----------
Net loss ................................. (6,141) (4,845) (14,790) (12,109)
Gain on sale of assets ................... -- -- 1,000 --
----------- ----------- ----------- -----------
Loss from discontinued operations ........ $ (6,141) $ (4,845) $ (13,790) $ (12,109)
=========== =========== =========== ===========
Net non-current assets of discontinued operations consisted of the following (in
thousands):
Mar. 31, June 30,
2005 2004
----------- -----------
Goodwill .................................................. $ 2,146 $ 14,306
Property and equipment .................................... 376 1,173
Deferred costs and other assets ........................... 289 512
----------- -----------
Non-currents assets .................................... 2,811 15,991
Long-term debt and capital leases, less current portion ... (72) (152)
----------- -----------
Net non-currents assets ................................ $ 2,739 $ 15,839
=========== ===========
12
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Net current liabilities of discontinued operations consisted of the following
(in thousands):
Mar. 31, June 30,
2005 2004
-------- --------
Cash ................................................. $ 65 $ 5,819
Restricted cash ...................................... 769 21,691
Accounts receivable, net ............................. 1,874 4,222
Prepaid expenses and other current assets ............ 23 3,344
-------- --------
Current assets .................................... 2,731 35,076
Accounts payable and accrued expenses ................ (6,220) (19,335)
Notes payable ........................................ (768) (433)
Unearned income ...................................... (500) (21,173)
-------- --------
Current liabilities ............................... (7,488) (40,941)
-------- --------
Net current liabilities ........................... $ (4,757) $ (5,865)
======== ========
NOTE 4. NOTES PAYABLE AND OTHER OBLIGATIONS
Notes payable and other obligations consisted of the following (in thousands).
Mar. 31, June 30,
2005 2004
-------- --------
Note payable - in the amount of $1,000, less unamortized discount of $417, imputed at
12%, secured by certain investment holdings (1) ...................................... $ 583 $ 5,724
Service agreement obligation - in the amount of $7,788 less unamortized discount of
$1,940 imputed at 12% and unsecured (1) .............................................. 5,848 3,129
Note payable - in the amount of $1,300 with interest at 9%, secured by certain assets ... 1,300 --
Notes payable - in the amount of $999, less debt discount of $130 with interest at 7%
(2) .................................................................................. 869 --
Note payable - due February 1, 2006 at interest rate of 4% (3) .......................... 6,038 --
Convertible debentures - in the amount of $7,969, less discounts of $7,659 (4) .......... 310 --
Notes payable - bearing interest at 5.89% to 11.49%, payable in monthly
installments between $313 and $372 through 2009, secured by vehicles ................... 418 --
Capital lease obligations at interest rate of 4.2%, due in monthly installments of $3
through April 2007 ................................................................... 74 --
Note payable - due July 27, 2003 and unsecured (5) ...................................... 135 160
-------- --------
........................................................................................ 15,575 9,013
Less current maturities, including demand notes ......................................... (9,931) (1,509)
-------- --------
Long-term portion ....................................................................... $ 5,644 $ 7,504
======== ========
------------------
(1) On October 31, 2003, Flightserv purchased two businesses for a $10,000,000
non-interest-bearing seven-year note. Payments commence quarterly
beginning June 30, 2004. Effective November 12, 2004, the Company entered
into an amendment which reduced the Promissory Note to $1,000,000 payable
in (i) four (4) equal yearly payments of $100,000, commencing on October
31, 2006, and continuing on the last day of each October through October
31, 2009, and (ii) a final balloon payment in the amount of $600,000 on
October 31, 2010. In addition, on October 31, 2003, Flightserv agreed to
pay $4,500,000 to MyTravel Canada for certain services over a three-year
period beginning November 1, 2003. Effective November 12, 2004, the
agreement was the amended to extend the agreement through October 31,
2010. The services agreement originally provided for payments of
$4,500,000; it now provides for additional payments of $4,875,000 over the
new term of the agreement. The impact of the amendments resulted in an
extraordinary gain of $2,257,000.
13
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2) On January 25, 2005, the terms of the $1,100,000 were finalized--term 180
days, interest rate 7%, secured by 100% of the FS SunTours common stock.
In addition, warrants to purchase 549,250 shares of common stock of the
Company at an exercise price of $1.25 per share, exercisable until the
date that is three years after the closing date, were issued. On March 3,
2005, $100,000 of principal was repaid. On April 15, 2005, the remaining
$1,000,000 was repaid.
(3) In connection with the acquisition of Farequest, in addition to other
consideration the Company a promissory note payable within one year of the
effective time of the merger, at the option of RCG, in either (a) an
amount in cash equal to lesser of (x) $6,037,872 or (y) 19% of the value
of the total maximum consideration payable or (b) 3,018,936 shares of RCG
common stock. The promissory note bears interest at 4% per annum and the
interest is payable at maturity at RCG's option in either cash or shares
of RCG common stock valued at the greater of $2.00 per share or the market
value at the maturity date.
(4) On February 8, 2005, RCG closed a private placement offering with eight
accredited investors for $7,968,700. On April 14, 2005 principal plus 10%
was repaid, which amounted to $8,765,570.
(5) The Company currently is negotiating with the debt holder to extend the
term or agree upon a payment schedule.
NOTE 5. SHAREHOLDER TRANSACTIONS
Effective September 14, 2004, the Company entered into a Securities Purchase
Agreement with institutional and accredited investors (collectively the
"Investors"). Pursuant to the terms of the Securities Purchase Agreement, the
Company issued the following securities to the Investors in consideration for
the Investors making payment to the Company in the aggregate amount of
$4,300,000: (i) 4,300 shares of Series A 6% Convertible Preferred Stock, with a
stated value of $1,000 per share; the shares are initially convertible into
shares of Common Stock of the Company at a fixed price of $0.94 per share,
subject to adjustment ("Set Price") and that are, subject to certain conditions,
subject to forced conversion by the Company at any time the common shares of the
Company have a volume weighted average price ("VWAP") which exceeds 200% of the
Set Price for the preceding ten trading days, (ii) Warrants to purchase
approximately 1,143,617 shares of Common Stock of the Company at an exercise
price of $1.20 per share, exercisable commencing six months after the closing
date until the date that is three years after such date, with anti-dilution
provisions subject to a $1.00 floor, and that are subject to certain conditions,
callable by the Company at any time the common shares of the Company have a VWAP
that exceeds 200% of the exercise price for the preceding 20 trading days, and
(iii) Additional Investment Rights to purchase approximately 3,430,851 shares of
Common Stock of the Company at an exercise price of $1.03 per share, exercisable
commencing six months after the closing date until the earlier of (a) the later
of the date that is six months after the effective date of the registration
statement covering the shares and the date that is one year after the closing
date, and (b) September 13, 2006, with standard anti-dilution, and that are
subject to certain conditions, callable by the Company at any time the common
shares of the Company have a VWAP greater than or equal to 160% of the exercise
price for the preceding 20 trading days. As of March 31, 2005, 2,730 of the
4,300 Series A Preferred Stock shares have been converted. As of the filing
date, no subsequent shares have been converted.
14
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In connection with the aforementioned Securities Purchase Agreement, the
Exercise Price to holders of 2,500,000 Common Stock Purchase Warrants (dated
October 31, 2003) has been reduced from $2.442 per share to $0.94 per share,
pursuant to the Warrant Agreement.
On January 25, 2005, the Company closed a private placement with five (5)
accredited investors, including the Company's then-Chief Executive
Officer/President, and a then-Director (collectively, the "Investors"). Pursuant
to the terms of the Loan Agreement, the Company is to initially issue the
following securities to the Investors in consideration for the Investors making
payment to the Company in the total amount of $1,098,500: (i) Secured Promissory
Notes in the total principal amount of $1,098,500, with interest accruing at the
7.0% per annum, payable in one lump sum of principal and interest on the date
that is six (6) months after issuance (with an option to extend the term if the
Company and the Investors mutually agree), secured by 100% of the issued and
outstanding common stock of FS SunTours, d/b/a SunTrips; and (ii) Warrants to
purchase 549,250 shares of common stock of the Company at an exercise price of
$1.25 per share, exercisable until the date that is three years after the
closing date. The Notes were repaid on April 15, 2005.
As more fully described in Note 2, on February 2, 2005, RCG closed a transaction
through which its wholly owned subsidiary WTI Acquisition, Inc. ("Sub") merged
with and into Farequest.
On February 8, 2005, RCG closed a private placement offering with eight
accredited investors. Pursuant to the terms of the Securities Purchase
Agreement, the Company sold and the purchasers purchased an aggregate of
$7,968,700 of two-year senior secured convertible debentures (the "Debentures").
The Debentures are original issue discount notes, discounted to $6,294,392. If
not converted earlier, the Debentures are due on February 8, 2007. The initial
conversion price of the Debentures is $1.30 per share and the Debentures are not
convertible into shares of the Company's common stock until the shareholders of
the Company have approved the transaction pursuant to the rules of the American
Stock Exchange. The Company has a right to redeem the Debentures for cash any
time after the issuance date at 130% of the principal amount of the Debentures.
The purchasers are granted a senior security interest in the assets of the
Company, subject to carve-outs for certain existing indebtedness.
In addition, the Company issued a total of 10,177,140 Warrants, exercisable for
the Company's common stock. Fifty percent (50%) of the Warrants are exercisable
at $1.55 per share and the remaining 50% of the Warrants are exercisable at
$1.87 per share. The shares underlying the Warrants are not issuable for 180
days from the closing date of the offering. The Warrants have full ratchet
anti-dilution provisions, but only after the shareholders approve the issuance
in excess of 20% of the outstanding common stock of RCG to the purchasers of the
Debentures.
The Company agreed to hold a shareholders meeting to approve the issuance in
excess of 20% of its common stock no later than May 31, 2005, which was
subsequently extended to June 30, 2005, and to file a registration statement
underlying the common stock in both the Debentures and Warrants within 45 days
of the closing date and to make its reasonable best efforts to have such
registration declared effective at the earliest date. If the registration
statement is not timely filed or declared effective within 120 days following
the closing, additional cash payments equal to 1.5% per month shall be owed on
the Debentures.
15
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company paid a placement fee equal to 10% in cash of the aggregate number of
dollars raised and issued Warrants in substantially the same form as issued to
the purchasers in the amount of 50,000 Warrants for each $1,000,000 aggregate
principal amount of dollars raised.
NOTE 6. RELATED-PARTY TRANSACTIONS
G. David Gordon, a Company stockholder, also occasionally acts as legal counsel
to the Company.
On April 19, 2004, Robert H. Brooks, Chairman of Hooters of America, Inc.,
Hooters Air and Pace Airlines, Inc. joined the Company's Board of Directors. In
addition, Mr. Brooks made a $1,000,000 cash investment in the Company, and
provided a waiver of the requirement of delivery of a letter of credit in the
amount of $1,000,000 to Pace Airlines, Inc., a charter airline company that
charters planes to the Company's Travel Services division. In exchange, the
Company issued 1,250,000 restricted shares of Common Stock and a warrant to
purchase 1,250,000 restricted shares of Common Stock at an exercise price of
$2.44 per share. The $1,000,000 investment was allocated $800,000 to the Common
Stock and $200,000 to the warrants using the Black-Scholes option-pricing model.
On August 2, 2004, Mr. Brooks resigned from the Company's Board of Directors,
citing time constraints.
On February 8, 2005, K. Wesley M. Jones, Sr. resigned as a member of the
Company's Board of Directors, citing time constraints. Mr. Jones has an
ownership stake in a private investment group that has secured certain letters
of credit issued by the Company in the amount of $2,000,000. During the nine
months ended March 31, 2005, the Company paid the private investment group
approximately $180,000. On December 14, 2004, the Company granted the
aforementioned private investment group, for one time release of collateral and
a term extension to the letters of credit, 215,000 three-year common stock
warrants at an exercise price of $1.25. The common stock warrants were valued at
$125,000 using the Black-Scholes option pricing model and the expenses is
included in selling, general and administrative expenses.
Mr. Jones and Michael D. Pruitt, RCG's then-CEO, as with other accredited
investors, each advanced the Company $250,000 of the total $1,100,000 advanced
(see Note 3).
Farequest licenses an Internet-based travel-booking engine from a company
majority owned by the founder of Farequest. Farequest is obligated to pay a
monthly license fee for support and maintenance based on the number of
reservations booked on-line. Monthly fees charged by the company to Farequest
during the period from the date of the Farequest acquisition to March 31, 2005
totaled $41,489.
During the calendar year ended December 31, 2004, Farequest purchased several
automobiles, which were financed through notes payable. Certain notes were
personally guaranteed by two stockholders of Farequest. In exchange for the
guarantees, during the period from the date of the Farequest acquisition to
March 31, 2005, the Company paid the stockholders fees that totaled $6,000. The
fees are expected to be paid through the term of the notes, which mature in
2009.
16
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7. BUSINESS SEGMENT INFORMATION
As discussed in Note 3, during the third quarter of fiscal year 2005 the Board
directed management to investigate the possible sale of its Technology Segment
to provide the Company with additional liquidity and allow the Company to focus
on its core business, the Travel Segment. On April 27, 2005, RCG closed the sale
of the Technology Segment. Accordingly, the operations of the Technology Segment
have been reclassified to discontinued operations.
As a result of the sale of the Logisoft assets, RCG no longer owns or operates
any entities in the Technology Segment and only has operations in the Travel
Segment. Hence, the Company no longer reports operating results by business
segment.
NOTE 8. SUBSEQUENT EVENTS
On April 14, 2005, RCG entered into and closed a Securities Purchase Agreement
with 12 institutional investors for a private placement of Series C Convertible
Preferred Stock totaling $30,910,165, and associated warrants. Total proceeds
after offering expenses will be approximately $27,128,946.
In conjunction with the placement, RCG repaid the promissory notes issued in
January 2005 and redeemed all of its outstanding convertible debentures issued
in February 2005 for aggregate consideration of $8,765,570. Remaining proceeds
of the placement will be used to finance the previously announced planned
acquisition of 100% of the outstanding stock of OneTravel, Inc. and for general
working capital. The Company will record approximately $9,543,000 of expense
attributable to the repayment of the January and February 2005 debt in the
fourth quarter of fiscal year 2005, of which approximately $8,746,000 is
non-cash.
On April 15, 2005, RCG closed the acquisition of OneTravel, Inc. ("OneTravel"),
pursuant to the previously announced Agreement and Plan of Merger, dated
February 10, 2005, by and among OneTravel, OT Acquisition Corporation, Terra
Networks Asociadas, S.L., Amadeus Americas, Inc. and Avanti Management, Inc.
(collectively, the "Shareholders"). The terms of the acquisition provide for a
total purchase price of $26,827,000 including estimated working capital
adjustment of $827,488, of which $2,500,000 of the total consideration was paid
by the Registrant as a deposit upon signing. On February 10, 2005, $10,500,000
of the total consideration was paid in cash at closing, and the remaining
$12,500,000 was paid at closing by the issuance of six-month, interest-free,
convertible promissory notes to the Shareholders. The notes are convertible into
common stock at a conversion price of $0.6875 of the Registrant at the option of
the holder... This conversion price will be adjusted to equal 125% of the market
price of the Registrant's common stock in the event that the Registrant's
contemplated one for ten reverse stock split is approved by its stockholders,
and the average market value of the Registrant's common stock is lower that the
split adjusted conversion price for the twenty trading days immediately
following the effectuation of the reverse stock split. The Registrant has agreed
to file a registration statement with the Securities and Exchange Commission in
order to register the resale of the shares issuable upon conversion of the
convertible promissory notes. The Registrant has the right to extend the
maturity of the convertible note by up to five months upon payment of an
extension fee to the note-holders of an aggregate of $125,000 per each one-month
extension.
17
RCG Companies Incorporated and Subsidiaries
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
OneTravel is a privately held provider of online and offline discount-travel
products and services, offering its customers the ability to search for and book
a full range of travel products. OneTravel also has proprietary
dynamic-packaging search-engine technology that allows its customers to
customize their own vacations by combining air, hotel and land options.
OneTravel operates a direct-to-consumer business through a variety of Web sites.
In addition to OneTravel.com, it operates 11thHour.com, CheapSeats.com and
DiscountHotels.com. OneTravel also provides technology solutions and support
services that enable other businesses to operate in the online travel arena.
Through OneTravel's long-standing partner program, OneTravel has developed
turnkey solutions for organizations such as The Travel Channel, Sam's Club and
SideStep.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Guarantee Obligation
The Company has certain guarantees with airline providers that agrees to a
minimum number of hours during each program and is required to pay any shortage
to the provider. The segment does not anticipate a shortage and, accordingly, no
amount has been accrued. However, the Company has been notified by a prior
airline provider claiming $1,400,000 for a program that was cancelled during the
year. The Company believes such claim is completely without merit.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 included in the Company's Annual Report on Form 10-K, filed
registration statements, and other documents filed by the Company with the SEC.
Management's Discussion and Analysis should be read with the Condensed
Consolidated Financial Statements.
OVERVIEW
Effective February 1, 2005, RCG concluded the acquisition of 100% of the common
stock of Farequest Holdings, Inc. ("Farequest"). Farequest is a travel agency
and consolidator that sells and distributes travel products including airline
tickets, lodging, car rentals, cruises and vacation packages to consumers,
corporations and travel agencies through on-line sales on the Internet and
telephone sales through call center agents.
Farequest maintains its operations and accounting offices in Atlanta, Georgia,
and its call center operations are located in Las Vegas, Nevada, with an
additional corporate travel service office in Los Angeles, California. Farequest
markets its call center travel services under the trade name of 1-800-CHEAPSEATS
and its on-line travel website to distribute travel products and services to
consumers under the brand name of 1800cheapseats.com. RCG's continuing results
from continuing operations include the results of Farequest beginning from the
date of acquisition.
RCG's continuing operations also include a travel company based in San Jose,
California specializing in the distribution of leisure travel products and
services under the SunTrips brand. SunTrips sells air and hotel packages for
Mexico, the Dominican Republic, Costa Rica, Hawaii and the Azores. The flights
originate in Oakland, California and/or Denver, Colorado.
During the third quarter of fiscal year 2005, the Board directed management to
investigate the possible sale of its Technology Segment to provide the Company
with additional liquidity and allow the Company to focus on its core business,
the Travel Segment. On April 27, 2005, RCG closed the sale of its Technology
Segment (See Note 3 of the Company's Condensed Consolidated Financial Statements
for further details). As a result of the sale of the Logisoft assets RCG no
longer owns or operates any entities in the Technology Segment and only operates
within the Travel Segment. Hence, the Company no longer reports operating
results by business segment.
19
On December 9, 2004, the Company sold the assets of FS Tours. Accordingly, the
operations of FS Tours as well as Flightserv, Inc., which provided charter
management operations for FS Tours, were reclassified to discontinued
operations. Both the operations of FS Tours and Flightserv were included with
the Travel Services Segment.
On April 14, 2005, the Company raised $31,110,165 from the issuance of Series C
Preferred Stock and associated warrants. A portion of these proceeds were used
to fund the acquisition of OneTravel.
On April 15, 2005, RCG closed the acquisition by merger of OneTravel (See Note 8
of the Company's Condensed Consolidated Financial Statements for further
details).
OneTravel is a privately held provider of online and offline discount-travel
products and services, offering its customers the ability to search for and book
a full range of travel products. OneTravel also has proprietary dynamic
packaging search engine technology that allows its customers to customize their
own vacations by combining air, hotel and land options.
OneTravel operates a direct-to-consumer business through a variety of Web sites.
In addition to OneTravel.com, it operates 11thHour.com, CheapSeats.com and
DiscountHotels.com. OneTravel also provides technology solutions and support
services that enable other businesses to operate in the online travel arena.
Through OneTravel's long-standing partner program, OneTravel has developed
turnkey solutions for organizations such as The Travel Channel, Sam's Club and
SideStep.
20
Results of Operations
The following table summarizes the consolidated results of operations (in
thousands).
Nine Months Ended March Nine Months Ended March
31, 2005 31, 2004
% of % of
Amount Revenue Amount Revenue
----------- ----------- ----------- -----------
Revenue ...................................... $ 57,677 100.0% $ 36,691 100.0%
Cost of revenue .............................. 57,983 100.5% 34,507 94.0%
----------- ----------- ----------- -----------
Gross profit (loss) ............................ (306) (0.5%) 2,184 6.0%
----------- ----------- ----------- -----------
Selling, general and administrative expenses .... 9,992 17.3% 5,913 16.2%
Goodwill impairment ............................. -- 0.0% 1,000 2.7%
Depreciation and amortization ................... 495 0.9% 159 0.4%
----------- ----------- ----------- -----------
Operating costs and expenses .............. 10,487 18.2% 7,072 19.3%
----------- ----------- ----------- -----------
Operating loss ............................ (10,793) (18.7%) (4,888) (13.3%)
Interest expense, net ........................... (993) (1.7%) (220) (0.6%)
Warrant expense ................................. (73) (0.1%) -- 0.0%
Other (loss) income ............................. (519) (0.9%) 119 0.3%
----------- ----------- ----------- -----------
Loss from continuing operations before
extraordinary items ........................... $ (12,378) (21.4%) $ (4,989) (13.6%)
=========== =========== =========== ===========
21
Three Months Ended Mar. Three Months Ended Mar.
31, 2005 31, 2004
% of % of
Amount Revenue Amount Revenue
----------- ----------- ----------- -----------
Revenue ...................................... $ 16,448 100.0% $ 19,769 100.0%
Cost of revenue .............................. 16,687 101.5% 19,437 98.3%
----------- ----------- ----------- -----------
Gross profit (loss) ............................ (239) (1.5%) 332 1.7%
----------- ----------- ----------- -----------
Selling, general and administrative expenses .... 3,447 21.0% 3,446 17.4%
Depreciation and amortization ................... 351 2.1% 92 0.5%
----------- ----------- ----------- -----------
Operating costs and expenses .............. 3,798 23.1% 3,538 17.9%
----------- ----------- ----------- -----------
Operating loss ............................ (4,037) (24.6%) (3,206) (16.2%)
Interest expense, net ........................... (700) (4.2%) (120) (0.6%)
Other loss ...................................... (259) (1.6%) -- 0.0%
----------- ----------- ----------- -----------
Loss from continuing operations before
extraordinary items ........................... $ (4,996) (30.4%) $ (3,326) (16.8%)
=========== =========== =========== ===========
NINE-MONTH PERIOD ENDED MARCH 31, 2005 COMPARED TO NINE-MONTH PERIOD ENDED MARCH
31, 2004
For the nine months ended March 31, 2005, Revenue was $57,677,000 compared to
$36,691,000 in the same period a year before, which is an increase of
$20,986,000 or 57%. SunTrips was acquired on October 31, 2003, therefore only
five months of revenues were included for the period ended March 31, 2004 as
compared to a full nine months for the period end March 31, 2005. Also,
Farequest was acquired on February 2, 2005 resulting in two months of its
revenues totaling $1,114,000 being included in the current year. Revenues were
less than expected as increased competition has created aggressive sales
promotions resulting in deeply discounted fares. The implementation of SunTrips'
new online reservation system in the first quarter of fiscal year 2005 severely
hindered bookings. It is estimated that $6,000,000 of revenues were lost due to
implementation problems and delays.
For the nine months ended March 31, 2005, the Gross loss was $306,000 compared
to a Gross profit of $2,184,000 for the same period in the prior year. Gross
margins declined as a direct result of the reduced revenues and being unable to
absorb the air cost. The majority of our air cost is fixed and is difficult to
reduce when bookings decline. The price of jet fuel continues to increase.
Competitive market conditions have prevented us from passing increases, in the
form of surcharges, to our customers.
For the nine months ended March 31, 2005, Selling, general and administrative
("SGA") expenses were $9,992,000, or 17.3% of revenues, compared to $5,913,000,
or 16.2% of revenues, for the same period a year before. SunTrips was acquired
on October 31, 2003, therefore only five months of expenses were included for
the period ended March 31, 2004 as compared to a full nine months for the period
end March 31, 2005. Additionally, the acquisition of Farequest on February 2,
2005 resulted in two months of Farequest's SGA expenses being included in the
period ended March 31, 2005.
22
For the nine months ended March 31, 2005, Depreciation and amortization was
$495,000 compared to $159,000 for the same period a year before, an increase of
$336,000 or 211%. The increase was primarily due to the acquisition of
Farequest, which resulted in two months of its depreciation expenses and
intangibles amortization being included in the current period.
For the nine-month period ended March 31, 2005, the Company incurred $993,000 of
Net-interest expense compared to $220,000 in the same period in the prior year,
an increase of $773,000 or 351%. The primary reasons for the increase was
interest associated with the amortization of the original issue discount on the
securities issued February 8, 2005 as well as interest associated with the
Promissory Notes issued in January 2005 to accredited investors and in February
2005 to the Farequest shareholders.
For the nine-month period ended March 31, 2005, the Company incurred $519,000 of
Other losses compared to Other income of $119,000 in the same period a year
before. The primary reason for the losses was the write-down of an investment.
THREE-MONTH PERIOD ENDED MARCH 31, 2005 COMPARED TO THREE-MONTH PERIOD ENDED
MARCH 31, 2004
For the three months ended March 31, 2005, Revenue was $16,448,000 compared to
$19,769,000 in the same period a year before, which is a decrease of $3,321,000
or 16.8%. The decrease is primarily due to lower than expected revenues of
SunTrips, which operates in an intensely competitive market with adverse, market
conditions including a significant excess capacity of available passenger seats.
Increased competition has created aggressive sales promotions with deeply
discounted fares.
For the three months ended March 31, 2005, the Gross loss was $239,000 compared
to a Gross profit of $332,000 for the same period a year before. Gross margins
declined as a direct result of the reduced revenues and not being able to absorb
air cost. The majority of our air cost is fixed and is difficult to reduce when
bookings decline. The price of jet fuel continues to increase. Competitive
market conditions have prevented us from passing increases, in the form of
surcharges, to our customers.
For the three months ended March 31, 2005, SGA expenses were $3,447,000, or
21.0% of sales, compared to $3,446,000, or 17.4%, for the same period a year
before. A decrease in the operating expenses of SunTrips was offset by the
inclusion of two months of Farequest's expenses in the current period.
For the three months ended March 31, 2005, Depreciation and amortization was
$351,000 compared to $92,000 for the same period a year before, an increase of
$259,000. The increase was primarily due to the Farequest acquisition, which
resulted in two months of its depreciation expenses and intangibles amortization
being included in the current period.
23
For the three-month period ended March 31, 2005, the Company incurred $700,000
of Net-interest expense compared to $120,000 in the same period a year before.
The primary reason for the increase was the amortization of the original issue
discount on the securities issued February 8, 2005 as well as interest
associated with the Promissory Notes issued in January 2005 to accredited
investors and in February 2005 to the Farequest shareholders.
For the three-month period ended March 31, 2005, the Company incurred $259,000
of Other losses related to the write-down of an investment.
SEASONALITY
The Company experiences significant seasonality in its SunTrips tour operation
due to the higher level of demand for charter travel to Mexican and Hawaiian
destinations from SunTrips' departure cities during the vacation season, which
coincides with the Company's first and fourth fiscal quarters. Although there is
some seasonality in 1-800-CHEAPSEATS' and OneTravel's businesses that mirrors
travel seasonality, generally, in the same first and fourth quarters, the
seasonality in these two businesses is not as pronounced as in SunTrips' tour
business.
GUARANTEE OBLIGATION
The Company has certain guarantees with an airline provider that agrees to a
minimum number of hours during each program year and is required to pay any
shortage to the provider. The Company does not anticipate a shortage, and
accordingly, no amount has been accrued.
LIQUIDITY AND CAPITAL RESOURCES
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has suffered recurring losses from
operations and as of March 31, 2005 had a working capital deficit of
$24,602,000. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management recognizes that in order to
meet the Company's capital requirements, and continue to operate, additional
funding is necessary.
In September 2004, the Company entered into a Securities Purchase Agreement with
institutional and accredited investors who purchased Series A Convertible
Preferred Stock and associated warrants and other investment rights for an
aggregate amount of $4,300,000.
In January 2005, the Company closed a private placement with accredited
investors who received Secured Promissory Notes and associated warrants for an
aggregate amount of $1,098,000.
In February 2005, the Company entered into a Securities Purchase Agreement with
certain accredited investors to issue senior secured convertible debentures,
associated warrants and other investment rights for a principal amount of
$7,968,700. The securities were original issue discount debentures and were
discounted to $6,294,392.
On April 14, 2005, RCG Companies Incorporated (the "Registrant") entered into
and closed a Securities Purchase Agreement with 12 institutional investors for a
private placement of Series C Convertible Preferred Stock totaling $30,910,165,
and associated warrants. Total proceeds after offering expenses were
$27,128,946.
24
In conjunction with the placement, the Registrant repaid the Secured Promissory
Notes issued in January 2005 for $1,023,775 and redeemed all of its outstanding
convertible debentures issued in February 2005 for aggregate consideration of
$8,765,570. Remaining proceeds of the placement were used to finance the
acquisition of 100% of the outstanding stock of OneTravel, Inc.
Therefore, the remaining proceeds of the April 14, 2005 private placement -
subsequent to repayment of the January 2005 Secured Promissory Notes, redemption
of the February 2005 Original Issue Discount Debentures, the acquisition of
OneTravel and payment of closing and transaction costs - was approximately
$4,500,000, which is available for working capital needs.
The Company is exploring additional sources of liquidity through debt and equity
financing alternatives further restructuring of its long-term debt and seeking
to restructure trade creditor obligations of certain subsidiaries. If the
Company is (i) unable to grow its business or improve its operating cash flows
as expected, (ii) unsuccessful in negotiating balances owed to trade creditors,
or (iii) unable to raise additional funds through sales of debt and equity
securities or sale of certain assets or portions of the business, then the
Company may be unable to continue as a going concern. 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 flows 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 Company's current shareholders would be diluted.
These Condensed Consolidated Financial Statements do not include any adjustments
that may result from the outcome of these uncertainties.
Cash and cash equivalents were $212,000 and $777,000 at March 31, 2005 and June
30, 2004, respectively. Cash and cash equivalents were approximately $4,330,000
at May 18, 2005. At March 31, 2005, the Company had current assets of
$17,987,000, as compared to $42,589,000 of total current liabilities at March
31, 2005, resulting in a working capital deficit of $24,602,000. At June 30,
2004, the Company had current assets of $22,720,000, as compared to $33,852,000
of total current liabilities at June 30, 2004, resulting in a working capital
deficit of $11,132,000.
For the nine months ended March 31, 2005, cash and cash equivalents decreased by
$565,000. Cash flow of $11,105,000 was provided from financing activities,
primarily from the sale of Series A Convertible Preferred Stock in September
2004 of $4,300,000, from the proceeds of a Loan Agreement in January 2005 in the
amount of $1,099,000, and the proceeds of a private placement of secured
convertible debentures in the amount of $6,294,000. These amounts were offset by
$11,533,000 used in operations and $379,000 used in investing activities.
Cash of $11,533,000 was used in operations, primarily resulted from a cash
operating loss of $14,202,000 offset by $2,669,000 in the change in net
operating assets and liabilities.
25
Disclosures About Contractual Obligations and Commercial Commitments
The following table summarizes contractual obligations as of March 31, 2005 (in
thousands).
Prior to 4/1/06- 4/1/08- 4/1/10 &
Total 3/31/06 3/31/08 3/31/10 thereafter
----------- ----------- ----------- ----------- -----------
Purchase obligations ...................... $ 71,406 $ 29,723 $ 37,927 $ 3,756 $ --
Long-term notes payable ................... 26,652 18,808 4,181 2,932 731
Operating and capital lease obligations ... 4,646 1,327 2,390 929 --
----------- ----------- ----------- ----------- -----------
$ 102,704 $ 48,858 $ 44,498 $ 7,617 $ 731
=========== =========== =========== =========== ===========
CRITICAL ACCOUNTING POLICIES
Determination of certain amounts in the Company's financial statements requires
the use of estimates. These estimates are based upon the Company's historical
experiences combined with management's understanding of current facts and
circumstances. Although the estimates are considered reasonable, actual results
could differ from the estimates. Discussed below are the accounting policies
considered by management to require the most judgment and to be critical in the
preparation of the financial statements.
REVENUE RECOGNITION
The Company's tour operator, SunTrips, sells tour packages either to travel
agents or directly to passengers. Revenue is recognized on the departure date of
the trip. Direct air and hotel costs, other related direct costs and commissions
associated with the tour package are also recognized on the departure date. Cash
received in advance of the departure date is deposited into escrow accounts and
recorded as unearned income. Substantially all of the unearned income on the
Company's balance sheet is from the SunTrips tour business.
As discussed in Note 1 of the Company's Condensed Consolidated Financial
Statements, Farequest derives revenues from multiple sources including: a) the
sale of nonpublished airline fares under agreements with certain airlines in
which Farequest is generally the merchant of record; b) commissions from
suppliers such as airlines, hotels, car rental companies, etc.; c) service fees
charged to consumers; and d) reservation booking system incentives.
Due to most airline reservations made by Farequest being noncancellable and
nonrefundable, as well as the associated service fees being nonrefundable,
revenue for each of Farequest's sources of revenue other than commissions is
recognized when the reservations are made and secured by a credit card or other
form of payment. Commission revenues are recognized when received from the
supplier.
Farequest presents revenue derived from the sale of nonpublished airline fares
at the net amount collected in accordance with Emerging Issues Task Force Issue
No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent."
Commissions and service fees derived from the sale of published airline fares
are also recorded at the net amount realized.
26
GOODWILL
Goodwill is tested for impairment annually or more frequently if changes in
circumstances or the occurrence of events suggest impairment exists. The test
for impairment requires the Company to make several estimates about fair value,
most of which are based on projected future cash flows. The estimates associated
with the goodwill impairment tests are considered critical due to the judgments
required in determining fair value amounts, including projected future cash
flows. Changes in these estimates may result in the recognition of an impairment
loss.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk of loss that may result from the
potential change in value of a financial instrument as a result of fluctuations
in interest rates and market prices. We do not currently have any trading
derivatives nor do we expect to have any in the future. We have established
policies and internal processes related to the management of market risks, which
we use in the normal course of our business operations.
INTANGIBLE ASSET RISK
We have a substantial amount of intangible assets. We are required to perform
goodwill impairment tests at least on an annual basis and whenever events or
circumstances indicate that the carrying value may not be recoverable from
estimated future cash flows. As a result of our annual and other periodic
evaluations, we may determine that the intangible asset values need to be
written down to their fair values, which could result in material charges that
could be adverse to our operating results and financial position. Although at
March 31, 2005 we believe our intangible assets are recoverable, changes in the
economy, the business in which we operate and our own relative performance could
change the assumptions used to evaluate intangible asset recoverability. We
continue to monitor those assumptions and their consequent effect on the
estimated recoverability of our intangible assets.
COMMODITY PRICE RISK
We do not enter into contracts for the purchase or sale of commodities. As a
result, we do not currently have any direct commodity price risk.
ITEM 4. 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 as of the end of the period, 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.
27
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Company's internal controls over
financial reporting procedures during the quarter that materially affected, or
are reasonably likely to materially affect, the Company's internal controls over
financial reporting.
28
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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, except for any reported on Form 8-K.
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
(a) Exhibits
31.1 Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certifications of Chief Executive Officer and Chief Financial
Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
29
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SIGNATURES
--------------------------------------------------------------------------------
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
RCG Companies Incorporated
Date: May 23, 2005 By: /s/ William A. Goldstein
-------------------------------------
William A. Goldstein
Chief Executive Officer
(principal executive officer)
Date: May 23, 2005 By: /s/ Philip A. Ferri
-------------------------------------
Philip A. Ferri
Chief Financial Officer
(principal financial officer)
30