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 December 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.)
6836 Morrison Boulevard
Suite 200
Charlotte, NC 28211
(704) 366-5054
(Address of registrant's principal
executive offices including zip code and telephone
number, including area code)
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
twelve months (or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
Check whether the issuer filed all reports required to be filed by Section 12,
13 or 15(d) of the Exchange Act after the distribution of securities under a
plan confirmed by a court. Yes [X] No [ ]
The number of shares outstanding of the Registrant's common stock ("Common
Stock") as of February 13, 2003: 12,569,803
Transitional Small Business Disclosure Format: Yes [ ] No [X]
1
eResource Capital Group, Inc.
Table of Contents
.................................................................................................... Page No
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at December 31, 2002 and June 30, 2002...................3
Condensed Consolidated Statements of Operations for the three and six months ended
December 31, 2002 and 2001.....................................................................4
Condensed Consolidated Statements of Cash Flows for the six months ended
December 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................22
ITEM 3. Controls and Procedures..............................................................................30
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings....................................................................................30
ITEM 2. Changes in Securities................................................................................30
ITEM 3. Defaults Upon Senior Securities......................................................................31
ITEM 4. Submission of Matters to a Vote of Security Holders..................................................31
ITEM 5. Other Information....................................................................................31
ITEM 6. Exhibits and Reports on Form 8-K.....................................................................31
Signatures................................................................................................... 32
Certifications
Section 302 Certification of the Principal Executive Officer..................................33
Section 302 Certification of the Principal Accounting Officer.................................34
Exhibit Index................................................................................................. 35
Employment Agreement between the Company and Mr. Michael D. Pruitt dated November 7, 2002.......................36
Employment Agreement between the Company and Ms. Melinda Morris Zanoni dated November 7, 2002...................49
Section 906 Certification.......................................................................................62
2
eResource Capital Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except share amounts)
December 31, June 30,
2002 2002
----------- ---------
ASSETS
Cash and cash equivalents ................................................ $ 1,893 $ 1,511
Accounts receivable, net of allowance of doubtful accounts of $165
and $258, respectively ............................................. 2,925 3,135
Inventory ................................................................ 207 211
Investments .............................................................. 470 814
Prepaid expenses ......................................................... 1,584 2,918
--------- ---------
Total current assets ....................................... 7,079 8,589
Deferred costs and other assets ......................................... 331 321
Property and equipment, net .............................................. 1,417 1,472
Goodwill, net ............................................................ 18,565 18,490
--------- ---------
Total assets ............................................... $ 27,392 $ 28,872
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable - current portion .......................................... $ 2,282 $ 407
Notes and amounts due to affiliates, net ................................. 86 144
Accounts payable and accrued expenses .................................... 6,110 6,147
Unearned income .......................................................... 2,260 3,329
--------- ---------
Total current liabilities .................................. 10,738 10,027
Notes payable ............................................................ 772 2,854
--------- ---------
Total liabilities .......................................... 11,510 12,881
--------- ---------
Minority interest ........................................................ 637 --
--------- ---------
Shareholders' equity:
Common stock, $.04 par value, 200,000,000 shares authorized,
12,648,160 and 12,381,463 issued, respectively .................... 506 495
Additional paid-in capital .......................................... 114,056 114,040
Accumulated deficit ................................................. (98,455) (97,774)
Accumulated other comprehensive (loss) income ....................... (254) (51)
Treasury stock at cost (78,357 and 92,643 shares, respectively) ..... (608) (719)
--------- ---------
Total shareholders' equity ................................. 15,245 15,991
--------- ---------
Total liabilities and shareholders' equity ................. $ 27,392 $ 28,872
========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
eResource Capital Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except share amounts)
Three months ended December 31, Six months ended December 31,
2002 2001 2002 2001
------------ ------------ ------------- ------------
Revenue:
Services .................................................... $ 14,064 $ 5,026 $ 29,425 $ 11,701
Product sales ............................................... 2,712 2,138 6,179 5,069
------------ ------------ ------------ ------------
Total revenue ....................................... 16,776 7,164 35,604 16,770
------------ ------------ ------------ ------------
Cost of revenue:
Services .................................................... 13,024 4,228 27,210 11,268
Product sales ............................................... 2,342 1,698 5,388 4,166
------------ ------------ ------------ ------------
Total cost of revenue ............................... 15,366 5,926 32,598 15,434
------------ ------------ ------------ ------------
Gross profit ........................................ 1,410 1,238 3,006 1,336
------------ ------------ ------------ ------------
Selling, general and administrative expenses - compensation
related to issuance of stock options and warrants ....... 31 12 64 12
Selling, general and administrative expenses - other ........ 1,947 1,703 3,939 3,931
Provision for bad debts ..................................... 2 7 6 66
Depreciation and amortization ............................... 128 97 235 184
------------ ------------ ------------ ------------
Operating costs and expenses ........................ 2,108 1,819 4,244 4,193
------------ ------------ ------------ ------------
Operating loss ...................................... (698) (581) (1,238) (2,857)
Interest expense, net ....................................... 94 84 196 93
(Gain) loss on investments, net ............................. (179) 169 (354) 380
Loss (gain) on disposal of assets ........................... 30 -- 30 (171)
Other (income) .............................................. (3) -- (266) --
Minority interest ........................................... (109) -- (163) --
------------ ------------ ------------ ------------
Loss from continuing operations ..................... (531) (834) (681) (3,159)
Gain on disposal of discontinued operations ................. -- -- -- 576
------------ ------------ ------------ ------------
Loss before cumulative effect of change in accounting
principle ...................................... (531) (834) (681) (2,583)
Cumulative effect of change in accounting principle ......... -- -- -- (693)
------------ ------------ ------------ ------------
Net loss .................................................... $ (531) $ (834) $ (681) $ (3,276)
============ ============ ============ ============
Basic and diluted net loss per share:
Loss from continuing operations ......................... $ (0.04) $ (0.08) $ (0.05) $ (0.29)
Gain on disposal of discontinued operations ............. $ -- $ -- -- 0.05
Cumulative effect of change in accounting principle ..... -- -- -- (0.06)
------------ ------------ ------------ ------------
Net loss ............................................ $ (0.04) $ (0.08) $ (0.05) $ (0.30)
============ ============ ============ ============
Weighted average shares outstanding ......................... 12,548,388 11,025,560 12,443,775 10,989,783
============ ============ ============ ============
Weighted average shares outstanding, assuming dilution ...... 12,548,388 11,025,560 12,443,775 10,989,783
============ ============ ============ ============
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)
Six months ended December 31,
2002 2001
---------- --------
Cash flows from operating activities:
Loss from continuing operations ................................. $ (681) $(3,159)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization ............................ 235 184
Bad debt expense ......................................... 6 66
Common stock issued for services ......................... -- 36
Stock purchase warrants received for services ............ -- (73)
Unrealized loss on stock purchase warrants ............... 67 357
(Gain) on sale of investments ............................ (421) --
Loss (gain) on disposal of assets ........................ 30 (171)
Compensation expense related to stock options and warrants 64 12
Deferred debt cost amortization .......................... 33 3
Minority interest ........................................ (163) --
Changes in operating assets and liabilities:
Accounts and notes receivables ....................... 205 222
Inventory ............................................ 6 (113)
Prepaid expenses ..................................... 1,233 195
Deferred costs and other assets ...................... (1) (460)
Accounts payable and accrued expenses ................ (42) 646
Due to affiliates .................................... (63) --
Unearned income ...................................... (1,068) (142)
------- -------
Cash used in continuing operations ................... (560) (2,397)
Discontinued operations, net ............................. -- 150
------- -------
Net cash used in operating activities ................ (560) (2,247)
Cash flows from investing activities:
Purchase of property, plant and equipment ................ (237) (171)
Sale of investments ...................................... 425 87
Sale of assets ........................................... 111 (53)
Cash (paid) in connection with business acquisitions, net (50) (272)
------- -------
Net cash provided (used in) by investing activities .. 249 (409)
Cash flows from financing activities:
Notes payable proceeds ................................... 75 2,560
Principal debt repayments ................................ (187) (124)
Capital contribution by shareholder ...................... -- 50
Cash raised through LFSI transaction ..................... 274 --
LFSI private placement sale of common stock .............. 412 --
Sale of RCG common stock ................................. 119 250
------- -------
Net cash provided by financing activities ............ 693 2,736
Net increase in cash and cash equivalents ....................... 382 80
Cash and cash equivalents at beginning of period ................ 1,511 1,286
------- -------
Cash and cash equivalents at end of period ...................... $ 1,893 $ 1,366
======= =======
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
eResource Capital Group, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
These financial statements include the operations of eResource Capital Group,
Inc. ("RCG") and its subsidiaries (collectively the "Company"). At December 31,
2002, the Company operated businesses in the aviation travel services, home
technology, technology solutions and telecommunications call center segments in
the United States. In October 2001, the Company changed its name from
flightserv.com, Inc. to eResource Capital Group, Inc. to better reflect its plan
to acquire substantial interests in, operate and enhance the value of expansion
phase companies operating in the travel, entertainment and technology services
sectors. Prior to that time, the Company was engaged in the development of its
private aviation business and limited commercial real estate activities.
The Company's consolidated financial statements include the assets and
liabilities and results of operations of RCG and each business acquired by RCG
from the date of its acquisition through December 31, 2002. All significant
intercompany balances and transactions have been eliminated. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to the rules of the Securities and Exchange Commission (the "SEC").
Certain prior period amounts have been reclassified to conform to the current
period presentation. In the opinion of management, all adjustments considered
necessary for a fair presentation of the financial position of the Company as of
December 31, 2002 and of the results of operations for the periods presented
have been included. The financial data at June 30, 2002 is derived from audited
financial statements which are included in the Company's Annual Report on Form
10-KSB for the year ended June 30, 2002 and should be read in conjunction with
the audited financial statements and notes thereto. Interim results are not
necessarily indicative of results for the full year.
The Company experienced net losses in recent fiscal years and a net loss of
$681,000 during the six months ended December 31, 2002. The Company used cash of
$560,000 in operations during the six months ended December 31, 2002. The
raising of equity financing and the sales of investments, as well as the sale of
its subsidiary LST, Inc., as more fully described below, partially offset this
cash loss. At December 31, 2002, the Company had cash and cash equivalents of
$1,893,000 and investments of $470,000.
The Company's significant working capital deficit is due primarily to $2,282,000
of current debt, of which $1,867,000 is due in the quarter ended September 30,
2003 and $214,000 is due on demand. As of December 31, 2002, the Company had a
commitment for $615,000 of additional funding from a private investor to draw
upon throughout the remainder of its fiscal 2003, however, this availability and
expected operating cash flows is not sufficient to meet obligations currently
due in the next 12 months. $80,000 of this amount was drawn upon during January
and February 2003, leaving a remaining commitment of $535,000. During January
2003 the Company secured a loan in the amount of $250,000. Also, on January 31,
2003 the Company contracted with one accredited investor to sell up to 196,641
shares of restricted LFSI stock at $2.00 per share. The agreement noted the
closing may occur in traunches but shall be no later than March 31, 2003, unless
extended uon mutual written consent. There can be no assurance that such closing
will actually take place.
The Company is currently exploring additional sources of liquidity, including
debt and equity financing alternatives and potential sales of additional shares
of LFSI, a portion of which may or may not be sold from time to time depending
on market conditions and the effectiveness of a LFSI registration statement, to
provide additional cash to support operations, working capital and capital
expenditure requirements for the next 12 months and to meet the scheduled debt
repayments in August 2003 totaling approximately $1.9 million. Additionally, the
Company plans on negotiating with its debt holders to extend some or all of this
debt. If (i) we are unable to grow our business or improve our operating cash
flows as expected, (ii) we suffer significant losses on our investments, (iii)
we are unable to realize adequate proceeds from investments, including our
6
holdings of LFSI restricted stock, (iv) the investor is not able to meet its
funding obligation to the Company, or (v) we are unsuccessful in extending a
substantial portion of the debt repayments scheduled for August 2003, then we
will need to secure alternative debt or equity financing to provide us with
additional working capital. There can be no assurance that additional financing
will be available when needed or, if available, that it will be on terms
favorable to the Company and its stockholders. If the Company is not successful
in generating sufficient cash flow from operations, or in raising additional
capital when required in sufficient amounts and on terms acceptable to the
Company, these failures would have a material adverse effect on the Company's
business, results of operations and financial condition. If additional funds are
raised through the issuance of equity securities, the percentage ownership of
the current stockholders will be diluted.
On September 5, 2002 the Company closed the sale (the "LFSI Transaction") of its
subsidiary LST, Inc. ("LST") to Lifestyle Innovations, Inc. ("LFSI"). LFSI is a
fully reporting company whose common stock is publicly traded on the over the
counter market. Pursuant to this transaction, LST became a wholly-owned
subsidiary of LFSI and the Company received 16,000,000 shares of LFSI restricted
common stock, which represented approximately 79% of the outstanding stock of
LFSI at the closing date. LFSI agreed to complete a registration statement
within 90 days of closing (the "Triggering Date") to register the shares of LFSI
common stock received by the Company in the LFSI Transaction. LFSI issued an
option to the Company for 1,000,000 shares of LFSI common stock at 20% of the
last bid price for the LFSI common stock on the Triggering Date. Such option was
exercisable only if the registration statement was not filed by the Triggering
Date. As a result of the potential acquisition of FutureSmart Systems, Inc. by
LFSI (See Note 13), the Company and LFSI have agreed to extend the deadline for
the registration statement to May 31, 2003, or a later date consistent with any
registration rights associated with the potential acquisition of FutureSmart, or
as the parties mutually agree. The registration statement has not been completed
and therefore the LFSI common stock held by the Company remains restricted. The
transaction added approximately $320,000 of cash, $50,000 of which was received
in fiscal 2002, and $65,000 of other assets to the existing assets of LST.
Additionally, in September 2002 and subsequent to the closing of the LFSI
Transaction, LFSI received approximately an additional $412,000 in equity
funding from its private placement.
Minority interest represents the minority shareholders' share of income or
losses of LFSI, a consolidated subsidiary. The minority interest in the
consolidated balance sheet reflect the original investment by these minority
shareholders in this consolidated subsidiary, along with their proportional
share of the losses of the subsidiary. Minority interest also reflects the
Company's cost basis in LFSI stock sold.
The Company's aviation travel services business owns 50% of Flightfuel, Inc.
("Flightfuel"), which was created in November 2002 to perform fuel management
services to a select group of clients. Flightfuel negotiates directly with
suppliers and other providers of aviation fuel on behalf of their clients and
arranges for fueling of the clients charter aircraft at both domestic and
international destinations. Flightfuel charges a per gallon agency fee for their
services. Flightfuel purchases the fuel on behalf of the client, coordinates
with ground fueling agents, remits funds to the suppliers and ground handlers
and invoices the client. Currently, Flightfuel clients include the Company's
aviation travel services business and Southeast Airlines. The Company's
investment in Flightfuel is accounted for using the equity method of accounting.
The Company records its investment in Flightfuel on the condensed consolidated
balance sheet in "Deferred costs and other assets" and its share of Flightfuel's
earnings, net of taxes, as "Other (income) on the condensed consolidated
statements of operations. The Company's investment Flightfuel at December 31,
2002 was $6,000. The Company's share of Flightfuel's earnings for the quarter
ended December 31, 2002 was $1,000.
CASH AND CASH EQUIVALENTS
The Company classifies as cash equivalents any investments that can be readily
converted to cash and have an original maturity of less than three months. The
Company also classifies as cash equivalents deposits received from customers of
its aviation travel services business for travel not yet taken. Such deposits
are generally received two weeks prior to the scheduled departure. At times cash
and cash equivalent balances at a limited number of banks and financial
institutions may exceed insurable amounts. The Company believes it mitigates its
risks by depositing cash or investing in cash equivalents in major financial
institutions.
7
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash, accounts receivable, investments, and
notes payable. The Company places its temporary cash with high credit quality
financial institutions. The Company performs periodic credit evaluations of its
customers' financial condition and generally does not require collateral.
Although due dates of receivables vary based on contract terms, credit losses
have been within management's estimates in determining the level of allowance
for doubtful accounts. Overall financial strategies are reviewed periodically.
The Company in estimating its fair value disclosures for financial instruments
used the following methods and assumptions:
o Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
o Accounts receivable and accounts payable: Due to their short term nature,
the carrying amounts reported in the balance sheet for accounts receivable
and accounts payable approximate their fair value. The Company provides for
any estimated losses through its allowance for doubtful accounts.
o Investments: The fair values for available-for-sale equity securities are
based on quoted market prices.
o The carrying amount of the Company's notes payable approximate their fair
value.
During the three months ended December 31, 2002, sales to Vacation Express Inc.
("Vacation Express") and Suntrips, Inc. ("Suntrips"), both subsidiaries of
MyTravel Group, plc ("MyTravel Group"), customers of the Company's aviation
travel services business, represented 70% of the Company's consolidated revenue.
For the six-months then ended, sales to these customers represented 70% of the
Company's consolidated revenue. The Vacation Express and Suntrips programs are
three year programs with termination dates of December 30, 2004 and June 30,
2005, respectively. The Vactaion Express contract allows for a three year
externsion based on the mutual consent of both parties and the Suntrips contract
allows for two consecutive one year renewals at the option of Suntrips. For the
three months ended December 31, 2001, sales to Vacation Express and Aviation
Network Services, also a customer of the Company's aviation travel services
business, represented 39% and 20%, respectively, of the Company's consolidated
revenue. For the six-months then ended, sales to these customers represented 40%
and 21%, respectively, of the Company's consolidated revenue.
INVENTORY
Inventory consists mainly of purchased components used in the Company's home
technology business. Inventory is recorded at the lower of cost or market with
cost being determined on a first-in, first-out basis.
INVESTMENTS
Investments, including certificates of deposit with maturities of greater than
three months, not readily marketable equity securities and other marketable
securities are classified as available for sale. Investment securities that are
not readily marketable include securities (a) for which there is no market on a
securities exchange or no independent publicly quoted market, (b) that cannot be
publicly offered or sold unless registration has been effected under the
Securities Act of 1933, or (c) that cannot be offered or sold because of other
arrangements, restrictions, or conditions applicable to the securities or the
Company. Certificates of deposit are recorded at cost plus accrued interest.
Marketable equity securities are recorded at estimated values based on quoted
market values for marketable securities of the issuer discounted for trading
restrictions. If there is no quoted market value, the recorded values are based
on the most recent transactions in the securities discounted for lack of
marketability. Investment securities transactions are recorded on a trade date
basis. The difference between cost and fair value is recorded as unrealized gain
or loss on available for sale securities as a component of comprehensive income.
Investments also include stock purchase warrants, which the Company periodically
receives as part of its compensation for services. Stock purchase warrants from
companies with publicly traded common stock are considered derivatives in
accordance with Statement of Financial Accounting Standards ("FAS") No. 133
"Accounting for Derivative Investments and Hedging Activities". The Company
recognizes revenue at the fair value of such stock purchase warrants when earned
8
based on the Black - Scholes valuation model. The Company recognizes unrealized
gains or losses in the statement of operations based on the changes in value in
the stock purchase warrants as determined by the Black - Scholes valuation model
subsequent to the date received. Unrealized losses for the three months and six
months ended December 31, 2002 aggregated $34,000 and $67,000, respectively,
versus $146,000 and $357,000 for the three and six months ended December 31,
2001, respectively.
PREPAID EXPENSES
Prepaid expenses include insurance, deferred costs, certain taxes, and charter
flight costs. Depending upon the volume and timing of charter flight activity,
the amount of prepaid charter flight costs can fluctuate significantly.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed on the straight-line basis over the assets' estimated
useful lives. Expenditures for maintenance and repairs are expensed as incurred.
Expenditures for improvements, which extend the useful life or add value to the
asset are capitalized and then expensed over that asset's remaining useful life.
Sales and disposals of assets are recorded by removing the related cost and
accumulated depreciation amounts with any resulting gain or loss reflected in
the statement of operations.
The carrying value of property and equipment is reviewed for impairment whenever
events or changes in circumstances indicate that such amounts may not be
recoverable. If such an event occurred, the Company would prepare projections of
future results of operations for the remaining useful lives of such assets. If
such projections indicated that the expected future net cash flows (undiscounted
and without interest) are less than the carrying amounts of the property and
equipment and the predevelopment costs, the Company would record an impairment
loss in the period such determination is made.
In October 2001, the FASB issued FAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This standard
harmonizes the accounting for impaired assets and resolves some of the
implementation issues of FAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". It retains the
fundamental provisions of FAS No. 121 for (a) recognition and measurement of the
impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. It also retains the basic
provisions for presenting discontinued operations in the income statement but
broadens the scope to include a component of an entity rather than a segment of
a business. The Company adopted this standard effective July 1, 2002. This
pronouncement did not have a material impact on the Company's financial
position, results of operations or cash flows.
GOODWILL AND INTANGIBLE ASSETS
The Company records goodwill and intangible assets arising from business
combinations in accordance with FAS No. 141 "Business Combinations" which
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. FAS No. 141 also specifies the
criteria applicable to intangible assets acquired in a purchase method business
combination to be recognized and reported apart from goodwill.
The Company accounts for goodwill and intangible assets in accordance with FAS
No. 142 "Goodwill and Other Intangible Assets" ("FAS 142"). The Company adopted
FAS 142 effective July 1, 2001. In completing the adoption of FAS 142, the
Company has allocated its previously existing goodwill as of July 1, 2001 to its
reporting units, as defined in FAS 142, and performed an initial test for
impairment as of that date.
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.
9
In September 2002, the Company acquired the assets of eGolf.com, an internet web
site specializing in the retail sales of golf equipment, which resulted in the
recording of $75,000 in goodwill.
REVENUE RECOGNITION
Charter Travel Aviation
Revenue related to the Company's aviation travel services consists of fees for
charter flights and is recognized upon completion of the related flight. Amounts
received in advance for future flights are reflected in unearned income.
Home Technology
The Company's home technology services work is completed in three phases -
pre-wiring, trim-out and hardware installation. The Company invoices its
customers and records revenue as work is completed on each project. For alarm
monitoring service contracts sold by the Company, revenue is recognized only
when the contracts are sold to third party finance companies or as billed if the
Company holds and services the contract. The Company sells substantially all of
its alarm monitoring contracts immediately subsequent to the date the contracts
are signed by the customer.
Sales of franchise licenses are recognized as revenue when the Company's
obligations under the franchise agreement are "substantially complete". The
Company generally defines "substantially complete" as the completion of training
by the franchisee's General Manager and the approval by the Company of the
franchise location plan.
Royalties are based on a percentage of the sales recorded by franchisees and are
recorded as earned. Procurement fees charged to franchisees are recorded in the
month that the related product is shipped to the franchisee.
Technology Solutions
Revenue from website development projects is recognized on a percentage of
completion basis for fixed fee contracts, based on the ratio of costs incurred
to total estimated costs for individual projects. Revenue is recognized as
services are performed for time and material contracts at the applicable billing
rates.
Unbilled revenue represents revenue earned under contracts in advance of
billings. Such amounts are normally converted to accounts receivable within 90
days. Unearned income represents amounts billed or cash received in advance of
services performed or cost incurred under contracts. Any anticipated losses on
contracts are charged to earnings when identified.
The Company provides e-commerce marketing and business development services to
clients pursuant to contracts with varying terms. The contracts generally
provide for monthly payments and, in some cases, advance deposits. Revenue is
recognized over the respective contract period as services are provided.
Revenue from e-commerce sales or sales of hardware and software is recognized
upon passage of title of the related goods to the customer.
10
NET LOSS PER SHARE
The Company computes net loss per share in accordance with FAS No. 128,
"Earnings per Share" which requires dual presentations of basic and diluted
earnings per share.
Basic earnings per share is computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per share is computed
using the weighted average number of common shares outstanding and potentially
dilutive shares outstanding during the period. Options and warrants to purchase
4,191,772 and 3,785,117 shares of Common Stock were outstanding at December 31,
2002 and 2001, respectively. Such outstanding options and warrants could
potentially dilute earnings per share in the future but have not been included
in the computation of diluted net loss per share for the three and six months
ended December 31, 2002 and 2001 as the impact would have been anti-dilutive.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising expense
aggregated $79,000 and $61,000 for the three months ended December 31, 2002 and
2001, respectively, and $153,000 and $181,000 for the six months ended December
31, 2002 and 2001, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with the liability method as
provided under FAS No. 109, "Accounting for Income Taxes." Accordingly, deferred
income taxes are recognized for the tax consequences of differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. The measurement of deferred tax assets is reduced, if necessary, by
the amount of any benefits that, based on available evidence, are not expected
to be realized.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board issued FAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities" ("FAS 146").
FAS 146 addresses the financial accounting and reporting for costs associated
with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". FAS 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when it is incurred and measured initially as fair value.
The new guidance will impact the timing of recognition and the initial
measurement of the amount of liabilities the Company recognizes in connection
with exit or disposal activities initiated after December 31, 2002, the
effective date of FAS 146.
11
NOTE 2. GROUP BUSINESSES AND ACQUISITIONS
AVIATION TRAVEL SERVICES
The Company's aviation travel services business provides tour operators,
corporate travel departments, sports teams and casinos cost effective and
reliable charter air transportation. The Company acts as a program manager for
these customers by providing turnkey aircraft services including ground support
and aircraft fueling, passenger service and support, and real-time flight
tracking.
As discussed above, during the quarter ended December 31, 2002, the Company's
aviation travel services business invested in Flightfuel as a 50% owner.
HOME TECHNOLOGY
On April 3, 2001, the Company acquired LST, Inc. d/b/a Lifestyle Technologies
("Lifestyle") in exchange for 1,153,525 shares of Common Stock pursuant to
certain stock purchase agreements. Including direct acquisitions costs, the
total purchase price aggregated $7,695,586 and the transaction was recorded
using the purchase method of accounting. The excess value of the purchase price
over the fair value of Lifestyle's net assets on the acquisition date
aggregating $8,069,669 was allocated to goodwill.
The Company's home technology business is a full service home technology
integration company providing builders, homeowners, and commercial customers
with complete installation and equipment for structured wiring, security,
personal computer networking, audio, video, home theater, central vacuum and
accent lighting. The home technology business has also secured relationships
with product manufacturers, distributors and service providers (cable, Internet
service, broadband and security). The Company launched a national franchising
program in the fourth quarter of fiscal 2001 and sold 14 franchises in fiscal
2002. The Company has sold one franchise during fiscal 2003. The Company also
owns and operates locations in the Charlotte, NC and Atlanta, GA markets.
Michael D. Pruitt, President, CEO and Chairman of the Company, was a 3.2%
shareholder of Lifestyle prior to the acquisition by the Company. Avenel
Ventures, Inc., then a subsidiary of the Company, was a 3.5% shareholder of
Lifestyle prior to the acquisition by the Company.
On July 10, 2001, the Company acquired certain net assets and the business of a
home technology company in Atlanta, GA, now operated as Lifestyle Technologies
Atlanta, Inc. ("LSTA") for $1,255,000 which was paid in cash ($275,000), Common
Stock (139,365 shares) and a four - year term note ($250,000). Including direct
acquisition costs, the total purchase price aggregated $1,259,857 and the
transaction was accounted for using the purchase method of accounting. The
excess value of the purchase price over the fair value of the net assets on the
acquisition date aggregated $1,207,669 which was allocated to goodwill.
TECHNOLOGY SOLUTIONS
The Company's technology solutions business is the result of the acquisitions of
Avenel Alliance, Inc. ("Avenel Alliance") in February 2001 and Logisoft Corp.
(f/k/a Logisoft Computer Products Corp.), and its wholly-owned subsidiary
eStorefronts.net Corp. (together with Logisoft Corp., "Logisoft") in June 2001.
Avenel Alliance was a wholly-owned subsidiary of Avenel Ventures, Inc. ("Avenel
Ventures"), which was also acquired by the Company in February 2001.
The Company's technology solutions business provides integrated products and
services to assist customers in meeting their strategic technology initiatives.
The Company's products and services include distribution of third-party
published software titles to the educational market and corporate customers,
full service Internet development, Internet site hosting and Internet business
development services encompassing partner site management and marketing. In its
Internet business development and marketing services, the Company generally
participates in the development and implementation of the business plan in
exchange for revenue-sharing.
12
On February 13, 2001, the Company acquired all of the common stock of Avenel
Ventures in exchange for 957,143 shares of Common Stock pursuant to a share
exchange purchase agreement dated as of November 8, 2000. The total purchase
price aggregated $6,834,000 and the transaction was accounted for using the
purchase method of accounting. The excess value of the purchase price over the
fair value of Avenel Ventures' net assets on the acquisition date aggregating
$5,610,144 was allocated to goodwill. The Avenel Ventures business forms the
core of the Company's current corporate staff, which incorporates its business
advisory activities. Michael D. Pruitt, the Company's current President, CEO and
Chairman, was an officer, director, and 4.9% shareholder of Avenel Ventures
prior to the acquisition. Melinda Morris Zanoni, the Company's Executive Vice
President, was an officer, director and 29.9% shareholder of Avenel Ventures at
the time of acquisition.
On June 19, 2001, the Company acquired Logisoft in exchange of 785,714 shares of
Common Stock pursuant to an Agreement and Plan of Merger. Also, during fiscal
2002, the Company issued an additional 32,738 shares of Common Stock in
connection with the acquisition because Logisoft met certain performance goals
from September 30, 2001 through June 30, 2002. Including direct acquisition
costs, the total purchase price aggregated $5,504,879 and the transaction was
accounted for using the purchase method of accounting. The excess value of the
purchase price over the fair value of Logisoft's net assets on the acquisition
date aggregating $4,146,489 was allocated to goodwill. The aggregate purchase
price and goodwill were both adjusted in fiscal 2002 by $42,000 to reflect the
issuance of the earn-out shares.
TELECOMMUNICATIONS CALL CENTER
The Company operates a thirty-five (35) seat telecommunications call center
providing telemarketing, help desk and other services for companies. The call
center provides support to aviation travel services businesses as a reservations
and customer care center for airlines, tour operators and for internal programs
for which the Company takes reservations from travelers.
In December 2002, the Company's aviation travel services business assumed
operational responsibility of the call center operations located in Pensacola
FL. Investments have been made in new reservations software, related computer
equipment, and additional employees in preparation for increased call volumes
associated with the Company's Interstate Jet program. In addition, call volumes
associated with the Southeast Airlines "Club 59" program have increased due to
Southeast shifting a higher percentage of "overflow" call to the call center
further increasing staffing requirements.
DISCONTINUED OPERATIONS
In August 2001, the Company completed the sale of all of the outstanding shares
of capital stock of the Company's subsidiary which owned a commercial real
estate business in exchange for cash ($312,500) and a 60-day note receivable
($62,500), which was collected in October 2001. The Company realized a gain of
approximately $576,000 on the sale in the quarter ended September 30, 2001.
13
NOTE 3. INVESTMENTS
Investments consist of the following (in thousands):
December 31, 2002 June 30, 2002
----------------- -------------
Net Net
Unrealized Fair Unrealized Fair
Cost (Loss) Value Cost (Loss) Value
----- ----- ------ ----- ------ -----
Equity securities ..... $ 664 $(254) $ 410 $ 712 $ (51) $ 661
Certificates of deposit 26 -- 26 52 -- 52
----- ----- ----- ----- ----- -----
$ 690 $(254) $ 436 $ 764 $ (51) $ 713
===== ===== ===== =====
Stock purchase warrants 34 101
----- -----
$ 470 $ 814
===== =====
The Company's certificate of deposit at December 31, 2002 is pledged as
collateral security for the Company's letter of credit for a trade credit line.
As of December 31, 2002, $300,000 of the Company's equity securities relate to a
privately held company that provides high speed internet access to the hotel
industry. The president of the Company's aviation travel services business is a
director and shareholder of this company.
The net unrealized loss on equity securities included $0 and $45,000 of gross
unrealized accumulated gains at December 31, 2002 and June 30, 2002,
respectively.
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
December 31, June 30,
2002 2002
---- ----
Land, buildings and improvements 317 382
Furniture and fixtures ......... 411 430
Computers and office equipment . 1,265 1,155
Software ....................... 345 252
Showroom (home technology) ..... 133 102
Vehicles (home technology) ..... 12 12
------- -------
2,483 2,333
Accumulated depreciation ....... (1,066) (861)
------- -------
$ 1,417 $ 1,472
======= =======
14
NOTE 5. NOTES PAYABLE
Notes payable consists of the following (in thousands):
December 31, June 30,
2002 2002
---- ----
Note payable - due on demand bearing interest at the prime rate plus 1.0% and
secured by assets pledged by an affiliate of the Company $ 100 $ 100
Note payable - due on demand bearing interest at 10% and secured by certain real estate 34 -
Note payable - unsecured and due on demand 5 55
Note payable - due on demand bearing interest at 8% and unsecured 75 -
Note payables - due in August 2003 with interest imputed at 8% and unsecured (1) 268 413
Note payables - due in August 2003 with interest imputed at 8% and unsecured 50 50
Note payable - due in August 2003 with interest at 10% and collateralized by certain home 300 300
technology assets (1)
Note payables - due in August 2003 with interest at 12% and unsecured 382 382
Note payable - due in August 2003 with interest at 10% and unsecured (1) 200 200
Note payable - due in August 2003 with interest at 12% and collateralized by certain home
technology accounts receivable and inventory (2) 650 650
Note payable - due in monthly installments of $3,000 and a balloon payment in July 2005, interest
payable at 8% and collateralized by home technology accounts receivable 199 217
Capital lease obligation at 12% due in monthly installments of $710 through September 2004 8 11
Capital lease obligation at 8.5% due in monthly installments of $1,007 through November 2005 31 -
Mortgage payable to a bank in monthly installments of $1,751, including interest
at 7.96% through June 2006 and collateralized by the assets of the internet/technology
solutions business 65 179
Note payable - $150,000 due December 31, 2003 and $600,000 due December 31, 2004 with interest
at 12% and collateralized by certain aviation travel service business assets, less
discount of $63,000 687 704
------------ -------
(3)
3,054 3,261
Less current maturities, including demand notes (2,282) (407)
------------ --------
Long-term portion $ 772 $2,854
============ =======
(1) The principal and accrued interest on this note payable are convertible to
shares of Common Stock at the greater of (i) $1.12 per share or (ii) a 20%
discount to the average closing price of the Common Stock for the ten days
immediately preceeding the conversion date.
(2) At the option of the noteholder, this note can be converted into RCG's
Common Stock at a ratio of one (1) share of Common Stock for each $4.55 of
outstanding principal and interest.
(3) In connection with this note, the Company issued 71,429 shares of
restricted stock and 42,857 warrants to purchase its Common Stock at a
price of $2.45 and for a term of three years, both as loan origination
fees. This note is convertible into the Company's Common Stock at the
option of the debt holder at a per share price of the lesser of $2.10 or a
25% discount. The Company can force the debt holder to convert to stock at
$7.00 per share under certain conditions.
NOTE 6. INCOME TAXES
As of December 31, 2002, the Company had approximately $38 million of net
operating loss carry forwards ("NOLs") for federal income tax purposes, which
expire between 2019 through 2022. A deferred income tax asset valuation
allowance has been established against all deferred income tax assets as
management is not certain that the deferred income tax assets will be realized.
In addition, due to the substantial limitations placed on the utilization of net
operating losses following a change in control, utilization of such NOLs could
be limited.
In fiscal 2001, the Company received a preliminary Internal Revenue Service
report on the Company's 1996 and 1997 tax returns and one of its subsidiary's
1994 and 1995 tax returns, which the Company has appealed. At December 31, 2002
and June 30, 2002, the Company had recorded a federal tax liability of $305,830
related to such assessment.
15
NOTE 7. COMMON STOCK AND PAID IN CAPITAL
In the quarter ended December 31, 2002, the Company issued 89,554 shares of
restricted Common Stock in payment of certain services.
In the quarter ended December 31, 2002, the Company terminated an agreement with
a service provider. The Company had granted warrants to the service provider
that vested over a year resulting in additional paid-in capital of $98,000. Upon
the cancellation of the agreement, the Company reversed the unvested warrants
resulting in a reduction of additional paid-in capital of $45,000.
In the quarter ended September 30, 2002, the Company issued an aggregate of
177,143 shares of restricted Common Stock in connection with the Company's
private placement sale of Common Stock at $0.70 per share. In fiscal 2002 the
Company issued an aggregate of 1,251,429 shares of restricted Common Stock in
connection with this private placement at $0.70 per share. Through December 31,
2002, the total proceeds raised in this private placement were $977,500 net of
direct expenses.
In July 2002, the Company issued 14,286 shares of restricted Common Stock from
treasury stock with the termination of a contract with a service provider.
NOTE 8. STOCK OPTIONS AND WARRANTS
The Company accounts for stock option grants in accordance with APB Opinion No.
25, "Accounting For Stock Issued To Employees" and options and warrants issued
to non-employees under FAS No. 123, "Accounting For Stock Based Compensation".
For the options and warrants issued to non-employees, the fair value of each
award has been calculated using the Black-Scholes Model in accordance with FAS
No. 123.
The following table summarizes the outstanding options at December 31, 2002 and
June 30, 2002:
December 31, 2002 June 30, 2002
----------------- -------------
Vesting Vesting
Exercise Term Period Exercise Term Period
Shares Price (Years) (Months) Shares Price (Years) (Months)
------- ------ ------- -------- ------- ------ ------- --------
580,000 $ 0.55 10 12
350,000 0.75 7 48
3,000 1.15 7 48
87,857 1.26 10 * 48 * 87,857 $ 1.26 10 * 48 *
436,428 1.75 to 1.96 10 12 to 48 479,286 1.75 to 1.96 10 12 to 48
242,857 4.90 10 12 328,571 4.90 10 12
142,857 5.25 10 -- 142,857 5.25 10 --
6,477 5.46 10 18 8,328 5.46 10 18
35,714 5.88 10 36 to 42 35,714 5.88 10 36 to 42
63,350 5.95 10 12 to 38 96,476 5.95 10 12 to 38
10,000 6.65 10 12 to 46 38,571 6.65 10 12 to 46
14,286 7.00 10 46 14,286 7.00 10 46
71,429 10.08 10 -- 71,429 10.08 10 --
17,857 21.00 10 -- 17,857 21.00 10 --
- ------------ ------------
2,062,112 1,321,232
============ ===========
Of the options outstanding at December 31, 2002, 1,016,457 are exercisable.
16
The following table summarizes the outstanding warrants at December 31, 2002 and
June 30, 2002:
December 31,2002 June 30, 2002
---------------- -------------
Exercise Term Exercise Term
Shares Price (Months) Shares Price (Months)
------ ----- -------- ------ ----- --------
793,768 $ 0.28 54 793,768 $ 0.28 54
37,500 1.05 to 1.75 36 150,000 1.05 to 1.75 36
42,857 2.45 36 42,857 2.45 36
57,143 3.50 120 57,143 3.50 120
679,106 5.25 120 679,106 5.25 120
14,286 5.67 48 14,286 5.67 48
1,429 7.00 -- 1,429 7.00 --
7,143 7.70 36 7,143 7.70 36
96,428 12.25 -- 96,428 12.25 --
82,143 21.00 * 82,143 21.00 *
517,857 28.00 120* 517,857 28.00 120*
- ------------ -----------
2,329,660 2,442,160
============ ==========
* All of the $21.00 warrants and 82,143 of the $28.00 warrants in the above
table have a term that is variable, subject to the market value of the
Common Stock and other conditions.
All of the warrants issued by the Company are exercisable, except for 8,333 with
an exercise price of $5.67 that vest over 3 years and 7,143 with an exercise
price of $12.25 that vest upon the holder meeting the requirements of a capital
raise commitment.
On June 26, 2000, the Company entered into a series of agreements with a
supplier of technical, marketing and programming services for the provision of
services related to the development of its Private Seats(TM) program. These
agreements provided that the supplier was to vest in warrants to purchase a
combined total of 793,768 shares of the Company's Common Stock at $0.28 per
share, which are reflected in the warrant table above. The vesting dates related
to these warrants were December 31, 2000, 2001 and 2002. Due to the termination
of its Private Seats(TM) program, during fiscal 2001, the Company expensed $5.2
million in connection with these warrants. The Company has questioned whether
the supplier has actually vested in the warrants due to the fact that the
program was terminated and the supplier was not required to perform the services
among other considerations. The Company is presently in negotiations with this
supplier to terminate these agreements and eliminate the related warrants. At
this time, the Company cannot predict what the outcome of these negotiations
will be.
17
NOTE 9: GENERAL AND ADMINISTRATIVE EXPENSE - OTHER
Following is a summary of the Company's general and administrative expenses (in
thousands):
Three months ended December 31, Six months ended December 31,
------------------------------ ----------------------------
2002 2001 2002 2001
---- ---- ---- ----
Compensation expense ........ $1,178 $ 932 $2,299 $2,152
Legal and professional fees . 84 77 278 250
Public and investor relations 24 17 47 74
Marketing and advertising ... 79 61 153 181
Rent expense ................ 134 154 278 328
Insurance ................... 61 97 119 196
Telecommunications .......... 110 79 179 179
Office and printing expense . 109 57 221 161
Travel and entertainment .... 101 73 202 141
Other ....................... 67 156 163 269
------ ------ ------ ------
$1,947 $1,703 $3,939 $3,931
====== ====== ====== ======
NOTE 10. RELATED PARTY TRANSACTIONS
Amounts due to affiliates consisted of the following (in thousands):
December 31, June 30,
2002 2002
---- ----
Note payable to Mr. Pruitt .................. $ 11 11
Advance payable to Mr. Pruitt ............... 25 25
Note payable to a company owned by Mr. Pruitt 35 108
Advance payable to Mr. Gordon ............... 15 --
---- ----
$ 86 $144
==== ====
The note payable to Mr. Pruitt indicated in the above table bears interest at
12% per annum and is due on demand. The advance payable 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 December 31,
2002, the balance outstanding on this bank facility was $100,000.
Mr. Pruitt is also a minority investor in a company that he is a director of
that has purchased franchise licenses and business operations of the Company's
home technology business in three markets in South Carolina, and in another
company that is a franchisee of the Company's home technology business in three
locations in the state of Maryland. The franchise locations in South Carolina
owed the Company and its subsidiaries $139,000 and $107,000 at December 31, 2002
and June 30, 2002. The franchise locations in Maryland owed the Company and its
subsidiaries $12,000 and $16,000 at December 31, 2002 and June 30, 2002.
As noted in Note 3 above, the Company owns an equity interest in a privately
held company in which the president of the Company's aviation travel services
business is a director and shareholder. Avenel Ventures owned this equity
interest prior to being acquired by the Company.
Paul B. Johnson, a previous director of the Company, is an investor in a
company, which in November 2001 became a franchisee of the Company's home
technology business in the Dallas, Texas market. In addition, Mr. Johnson was
named Chief Executive Officer and a board member of Lifestyle Innovations, Inc.,
18
which acquired the Company's home technology business in September 2002 as
further described in Note 2 to these financial statements. Mr. Johnson resigned
as a director of the Company effective October 31, 2002 due to his being
appointed the CEO of LFSI. The Dallas franchise location owed the Company and
its subsidiaries $98,000 and $14,000 at December 31, 2002 and June 30, 2002.
During fiscal 2002, Glenn Barrett resigned as President of Lifestyle and began
LVA Technologies LLC ("LVA"), a low voltage wiring business that operates as a
Lifestyle franchisee headquartered in Charlotte, NC to service the commercial
market. The Company waived LVA's initial franchise fee for the commercial
franchise. LVA also owns the Greenville and Columbia, SC franchises. LVA's low
voltage wiring business pays royalties on products purchased from the Company at
the same rate as the Company's other franchisees, however, it does not pay
royalties on revenue generated from products purchased elsewhere as required of
the Company's other franchisees, including the Greenville and Columbia, SC
franchises. LVA and its subsidiaries owed the Company and its subsidiaries
$265,000 and $235,000 at December 31, 2002 and June 30, 2002, respectively.
During fiscal 2002, G. David Gordon, an RCG shareholder, and a company in which
he is the president and a shareholder, loaned the Company and its subsidiaries
$1,144,000 at interest rates of 8% to 12%. At December 31, 2002 and June 30,
2002, total debt outstanding to Mr. Gordon and this company was $1,450,000 and
$1,500,000, respectively. During the quarter ended December 31, 2002, Mr. Gordon
advanced $15,000 to the Company. This amount is payable upon demand. Mr. Gordon
has an ownership interest in eight of the Company's home technology business
franchises, including two locations that were purchased from the Company during
fiscal 2002 and for which the Company recorded a gain on sale of $119,000, and
acts as special legal counsel to the Company from time to time. Mr. Gordon has
an ownership interest in the three markets in South Carolina along with Mr.
Pruitt as discussed, the Dallas market along with Mr. Johnson, and four
additional markets in Houston, Tx, Raleigh, NC, Wilmington, NC and Greensboro,
NC. These four additional markets owed the Company and its subsidiaries $112,000
and $167,000 at December 31, 2002 and June 30, 2002.
19
NOTE 11. BUSINESS SEGMENT INFORMATION
Information related to business segments is as follows (in thousands):
Three months ended December 31, 2002:
Aviation
Travel Call Technology Home
Services Center Solutions Technology Corporate Total
-------- ------ --------- ---------- --------- -----
Revenue ................................................ $ 13,718 $ 14 $ 2,486 $ 558 $ -- $ 16,776
Income (loss) from continuing operations ............... 183 (85) (80) (376) (173) (531)
Identifiable assets .................................... 4,963 58 10,439 10,350 1,582 27,392
Capital expenditures ................................... 117 12 24 8 -- 161
Depreciation and amortization .......................... 7 18 63 38 2 128
Three months ended December 31, 2001:
Aviation
Travel Call Technology Home
Services Center Solutions Technology Corporate Total
- -------------------------------------------------------- -------- -------- -------- -------- -------- --------
Revenue ................................................ $ 4,311 $ 16 $ 1,795 $ 994 $ 48 $ 7,164
Income (loss) from continuing operations ............... 23 (26) (168) 7 (670) (834)
Identifiable assets .................................... 3,116 291 10,353 10,280 2,617 26,657
Capital expenditures ................................... 6 -- -- 41 -- 47
Depreciation and amortization .......................... 11 4 57 21 4 97
Six months ended December 31, 2002:
Aviation
Travel Call Technology Home
Services Center Solutions Technology Corporate Total
- -------------------------------------------------------- -------- -------- -------- -------- -------- --------
Revenue ................................................ $ 28,778 $ 23 $ 5,705 $ 1,098 $ -- $ 35,604
Income (loss) from continuing operations ............... 853 (127) (107) (884) (416) (681)
Identifiable assets .................................... 4,963 58 10,439 10,350 1,582 27,392
Capital expenditures ................................... 119 13 63 42 -- 237
Depreciation and amortization .......................... 21 22 122 64 6 235
Six months ended December 31, 2001:
Aviation
Travel Call Technology Home
Services Center Solutions Technology Corporate Total
- -------------------------------------------------------- -------- -------- -------- -------- -------- --------
Revenue ................................................ $ 10,353 $ 36 $ 4,565 $ 1,738 $ 78 $ 16,770
Income (loss) from continuing operations ............... (942) (71) (506) (301) (1,339) (3,159)
Identifiable assets .................................... 3,116 291 10,353 10,280 2,617 26,657
Capital expenditures ................................... 6 -- 55 110 -- 171
Depreciation and amortization .......................... 22 9 112 37 4 184
The Company's sales are primarily to customers in the United States of America.
International sales are minimal.
20
NOTE 12. CONTINGENCIES
Legal Proceedings
During the normal course of business, the Company is subject to various
lawsuits, which may or may not have merit. Management intends to vigorously
pursue and/or defend such suits, as applicable, and believes that they will not
result in any material loss to the Company.
Guarantee Obligation
The Company's aviation travel services business (the "Aviation Business") has
certain guarantees outstanding with an airline provider that indicate if the
Aviation Business does not utilize a minimum number of hours during each program
year, then the Aviation Business would be required to pay the shortage to the
provider. The Aviation Business has a similar arrangement with Vacation Express
whereby Vacation Express has guaranteed a certain number of travel hours to the
Aviation Business. The parties are in the process of preparing and reviewing
certain items that the Aviation Business believes are due to offset the
guarantee due the airline provider for the first contractual year end. In the
event the parties cannot agree on the guarantee amount, the contract calls for
disputes of this nature to be arbitrated.
The Aviation Business does not anticipate incurring a net loss on these
guarantees and has not accrued any such loss on its balance sheet as of December
31, 2002. In the event there is a shortfall in the Aviation Business's guarantee
to the airline provider, then Vacation Express will be obligated to compensate
the Aviation Business for similar shortfalls exceeding the amount due to the
airline provider.
NOTE 13. LETTER OF INTENT
On November 27, 2002 LFSI executed a non-binding Letter of Intent ("LOI") to
acquire FutureSmart Systems, Inc. ("FutureSmart"), a privately held Delaware
corporation. The LOI was amended on January 15, 2003, primarily to extend the
Closing Date to February 15, 2003. FutureSmart is a manufacturer of structured
wiring and home networking systems. FutureSmart develops and distributes home
technology products designed to meet the current and future needs of homeowners
for computer networking, audio/video distribution and home automation. Their
products include: distribution panels, computer networking components, security
systems, telephone distribution systems, and wiring for home technologies. A
condition to closing is that LFSI obtain financing for delivery to FutureSmart.
LFSI is currently attempting to raise such financing and there can be no
assurance that such financing will be raised or that the acquisition will be
consummated.
21
Item 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
The following table summarizes results of operations for the three and six
months ended December 31, 2002 and 2001 (in thousands):
Three Months Ended Three Months Ended
December 31, 2002 December 31, 2001
---------------------- --------------------
% of % of
Revenue Revenue
------- -------
Revenue:
Services ............................................ $ 14,064 83.8% $ 5,026 70.2%
Product sales ....................................... 2,712 16.2% 2,138 29.8%
-------- ----- -------- -----
Total revenue ................................ 16,776 100.0% 7,164 100.0%
-------- ----- -------- -----
Cost of revenue:
Services ............................................ 13,024 77.6% 4,228 59.0%
Product sales ....................................... 2,342 14.0% 1,698 23.7%
-------- ----- -------- -----
Total cost of revenue ........................ 15,366 91.6% 5,926 82.7%
-------- ----- -------- -----
Gross profit ................................. 1,410 8.4% 1,238 17.3%
-------- ----- -------- -----
Selling, general and administrative expenses -
compensation
related to issuance of stock options and warrants 31 0.2% 12 0.2%
Selling, general and administrative expenses - other 1,947 11.6% 1,703 23.8%
Provision for bad debts ............................. 2 0.0% 7 0.1%
Depreciation and amortization ....................... 128 0.8% 97 1.4%
-------- ----- -------- -----
Operating costs and expenses ................. 2,108 12.6% 1,819 25.4%
-------- ----- -------- -----
Operating loss ............................... (698) -4.2% (581) -8.1%
Interest expense, net ............................... 94 0.6% 84 1.2%
(Gain) loss on investments, net ..................... (179) -1.1% 169 2.4%
Loss on disposal of assets .......................... 30 0.2% -- 0.0%
Other (income) ...................................... (3) 0.0% -- 0.0%
Minority interest ................................... (109) -0.6% -- 0.0%
-------- ----- -------- -----
Loss from continuing operations .............. (531) -3.2% (834) -11.6%
Gain on disposal of discontinued operations ......... -- 0.0% -- 0.0%
-------- ----- -------- -----
Loss before cumulative effect of change in
accounting
principle ............................... (531) -3.2% (834) -11.6%
Cumulative effect of change in accounting principle . -- 0.0% -- 0.0%
-------- ----- ------- -----
Net loss ............................................ $ (531) -3.2% $ (834) -11.6%
======== ===== ======== =====
(Continued on next page)
22
Six Months Ended Six Months Ended
December 31, 2002 December 31, 2001
---------------------- --------------------
% of % of
Revenue Revenue
------- -------
Revenue:
Services ............................................ $ 29,425 82.6% $ 11,701 69.8%
Product sales ....................................... 6,179 17.4% 5,069 30.2%
-------- ----- -------- -----
Total revenue ................................ 35,604 100.0% 16,770 100.0%
-------- ----- -------- -----
Cost of revenue:
Services ............................................ 27,210 76.4% 11,268 67.2%
Product sales ....................................... 5,388 15.1% 4,166 24.8%
-------- ----- -------- -----
Total cost of revenue ........................ 32,598 91.6% 15,434 92.0%
-------- ----- -------- -----
Gross profit ................................. 3,006 8.4% 1,336 8.0%
-------- ----- -------- -----
Selling, general and administrative expenses -
compensation
related to issuance of stock options and warrants 64 0.2% 12 0.1%
Selling, general and administrative expenses - other 3,939 11.1% 3,931 23.4%
Provision for bad debts ............................. 6 0.0% 66 0.4%
Depreciation and amortization ....................... 235 0.7% 184 1.1%
-------- ----- -------- -----
Operating costs and expenses ................. 4,244 11.9% 4,193 25.0%
-------- ----- -------- -----
Operating loss ............................... (1,238) -3.5% (2,857) -17.0%
Interest expense, net ............................... 196 0.6% 93 0.6%
(Gain) loss on investments, net ..................... (354) -1.0% 380 2.3%
Loss on disposal of assets .......................... 30 0.1% (171) -1.0%
Other (income) ...................................... (266) -0.7% -- 0.0%
Minority interest ................................... (163) -0.5% -- 0.0%
-------- ----- -------- -----
Loss from continuing operations .............. (681) -1.9% (3,159) -18.8%
Gain on disposal of discontinued operations ......... -- 0.0% 576 3.4%
-------- ----- -------- -----
Loss before cumulative effect of change in
accounting
principle ............................... (681) -1.9% (2,583) -15.4%
Cumulative effect of change in accounting principle . -- 0.0% (693) -4.1%
-------- ----- ------- -----
Net loss ............................................ $ (681) -1.9% $ (3,276) -19.5%
======== ===== ======== =====
The Company's revenues in the three and six months ended December 31, 2002 were
$16,776,000 and $35,604,000, respectively, compared to $7,164,000 and
$16,770,000, respectively, in the same periods a year ago. The increase in the
current period is due to the aviation travel services expanded charter aviation
business as well as the technology solutions expanded sales activity in the
computer software business. These increases were partially offset by the
23
decrease in revenues from the home technology business due to a reduction in the
sale of franchises from seven for the six months ended December 31, 2001 to one
for the six months ended December 31, 2002 and a focused reduction of business
with certain unprofitable customers, partially offset by increased revenues from
franchise royalties.
During the three months ended December 31, 2002, sales to Vacation Express and
Suntrips, customers of the Company's aviation travel services business,
represented 70% of the Company's consolidated revenue. For the six-months then
ended, sales to these customers represented 70% of the Company's consolidated
revenue. The Vacation Express and Suntrips programs are three year programs with
termination dates of December 30, 2004 and June 30, 2005, respectively. For the
three months ended December 31, 2001, sales to Vacation Express and Aviation
Network Services, also a customer of the Company's aviation travel services
business, represented 39% and 20%, respectively, of the Company's consolidated
revenue. For the six-months then ended, sales to these customers represented 40%
and 21%, respectively, of the Company's consolidated revenue.
Gross profit in the three and six months ended December 31, 2002 was $1,410,000
and $3,006,000, respectively, compared to $1,238,000 and $1,336,000,
respectively, in the same periods a year ago. The increases in the current
period are primarily due to the expanded charter aviation business and
elimination of the jet shuttle business, which operated at a gross margin
deficit. The Company reported an 8.4% overall gross margin in the quarter ended
December 31, 2002 compared to 17.3% in the same period a year ago. The decrease
in gross margin percentage is primarily due to the aviation travel services
division, which operates at lower gross margin percentages than the Company's
other business segments, representing 82% of the Company's revenues during the
three months ended December 31, 2002, compared to 60% a year ago, while the
technology solutions division, which operated at margins of 25% in the prior
year quarter, represented 25% of the Company's consolidated revenues in the
prior year. The Company reported an 8.4% overall gross margin during the six
months ended December 31, 2002 compared to 8.0% in the same period a year ago.
The increase in margin was due to an increase in revenues from the Vacation
Express program which operated at a gross margin of approximately 12%, as well
as the termination of the unprofitable jet shuttle business.
In the three and six months ended December 31, 2002, the Company reported
$31,000 and $64,000, respectively, of non-cash expense related to the issuance
of options and warrants. The Company incurred $12,000 of such expense in the
three and six months ended December 31, 2001.
Selling, general and administrative expenses-other in the three and six months
ended December 31, 2002 was $1,947,000 and $3,939,000, respectively, compared to
$1,703,000 and $3,931,000, respectively, in the comparable periods a year ago.
The increase in current year quarter is primarily due to an increase in
compensation expense of approximately $246,000. This increase was primarily due
to aviation travel services business having an increase in headcount as a result
of an increased revenue base resulting from the Vacation Express contract which
began on December 20, 2001. The prior year compensation expense for the aviation
travel services business was also reduced from a normal level due to the events
of September 11, 2001, as employees voluntarily reduced their wages due to the
slowdown in business.
Provision for bad debts in the three and six months ended December 31, 2002 was
$2,000 and $6,000, respectively, compared to $7,000 and $66,000, respectively,
in the comparable periods a year ago. The prior year amount was primarily the
result of a bad debt incurred in the Company's technology solutions business.
The Company's depreciation and amortization expense in the three and six months
ended December 31, 2002 was $128,000 and $235,000, respectively, compared to
$97,000 and $184,000, respectively, in the same periods a year ago. The increase
is due to depreciation of fixed asset additions.
In the three and six months ended December 31, 2002, the Company incurred
$94,000 and $196,000, respectively, of net interest expense, compared to $84,000
and $93,000, respectively. The increase was due to the Company's debt portfolio
which increased from approximately $690,000 at June 30, 2001 to $3,054,000 at
December 31, 2002.
In the three and six months ended December 31, 2002, the Company recorded net
gains on investments of $179,000 and $354,000, respectively, of which $233,000
and $441,000, respectively, relate to Company's sale in the corresponding
periods of LFSI restricted stock obtained in the LFSI Transaction. In September
2002, the Company completed the private sale of 125,000 shares of LFSI
24
restricted common stock to a private investor. The Company sold these shares at
$2.00 per share and received $250,000 in proceeds as a result of this sale.
$150,000 of the proceeds was received in September 2002 with the balance being
received in October 2002. During the three months ended December 31, 2002 the
Company completed the private sales of an additional 60,000 shares of the LFSI
restricted stock to the same private investor. These shares were also sold for
$2.00 per share, resulting in proceeds to the Company of $120,000. During the
quarter ended December 31, 2002 the Company issued 78,359 shares of the LFSI
restricted stock to a debt holder of the Company in satisfaction of outstanding
principal and interest totaling $156,718. The net gain on all investment
activity during the three and six months ended December 31, 2002 is net of
losses of approximately $34,000 and $67,000, respectively, related to non-cash
market adjustments of common stock purchase warrants. For the three and six
months ended December 31, 2001, the Company recognized a net loss on investments
of $169,000 and $380,000, respectively. The results for the six months ended
December 31, 2001 also include a gain of $171,000 on the sale of certain home
technology net assets to companies that are operating these businesses as
franchises.
In the quarter ended September 30, 2002, the Company's aviation travel services
business received $263,000 in grant proceeds from a government assistance
program designed to provide grants to companies whose businesses were directly
impacted by the events of September 11, 2001. This amount is recorded as other
income in the consolidated statements of operations.
Minority interest represents the minority shareholders' share of losses of LFSI
for the three and six months ended December 31, 2002.
The Company realized a gain of $576,000 on the sale of its discontinued
commercial real estate business in the six months ended December 31, 2001.
In the quarter ended September 30, 2001, the Company recorded the cumulative
effect of a change in accounting principle of $693,000, increasing the Company's
reported net loss, as a result of its implementation of FAS 142. This adjustment
was recorded as of July 1, 2001.
25
Continuing Operations of Business Segments
The following table summarizes results of continuing operations by business
segment for the three and six months ended December 31, 2002 and 2001 (in
thousands):
Three Months Ended December 31, 2002 Three Months Ended December 31, 2001
------------------------------------ ------------------------------------
Gross Income Gross Income
Revenue Profit (Loss) Revenues Profit (Loss)
------- ------ ------ -------- ------ ------
Aviation Travel Services ..... $13,718 $ 808 $ 183 $ 4,311 $ 236 $ 23
Telecommunications Call Center 14 14 (85) 16 16 (26)
Home Technology .............. 558 349 (376) 994 481 7
Technology Solutions ......... 2,486 239 (80) 1,795 457 (168)
Corporate .................... -- -- (173) 48 48 (670)
------- ------- ------- ------- ------- -------
$16,776 $ 1,410 $ (531) $ 7,164 $ 1,238 $ (834)
======= ======= ======= ======= ======= =======
Six Months Ended December 31, 2002 Six Months Ended December 31, 2001
------------------------------------ ------------------------------------
Gross Income Gross Income
Revenue Profit (Loss) Revenues Profit (Loss)
------- ------ ------ -------- ------ ------
Aviation Travel Services ..... $ 28,778 $ 1,795 $ 853 $ 10,353 $ (464) $ (942)
Telecommunications Call Center 23 24 (127) 36 36 (71)
Home Technology .............. 1,098 765 (884) 1,738 633 (301)
Technology Solutions ......... 5,705 422 (107) 4,565 1,053 (506)
Corporate .................... -- -- (416) 78 78 (1,339)
-------- -------- -------- -------- -------- --------
$ 35,604 $ 3,006 $ (681) $ 16,770 $ 1,336 $ (3,159)
======== ======== ======== ======== ======== ========
Aviation Travel Services
The Company's aviation travel services business revenues in the three and six
months ended December 31, 2002 were $13,718,000 and $28,778,000, respectively,
compared to $4,311,000 and $10,353,000, respectively, in the same periods a year
ago. The increase in revenues is due primarily to the Company's expanded charter
aviation business as a result of the commencement of the Company's hub operation
in Sanford, FL in conjunction with Vacation Express. The Vacation Express
program covered from four to six cities during the six months ended December 31,
2002 compared to two cities in the same period a year ago. Due in part to the
slowdown and uncertainty in the economy in general, and in the air travel
industry in particular, the Sanford, FL Hub operation was reduced between August
2002 and December 2002 from six planes to four. Total revenues with Vacation
Express were $6,404,000 and $13,830,000, respectively, in the three and six
months ended December 31, 2002 compared to $2,797,000 and $6,796,000,
respectively, in the same periods a year ago. The Vacation Express program is a
three-year contract with a termination date of December 20, 2004. The contract
allows for a three year extension based on the mutual consent of both parties.
During July 2002, the Company launched a program with Suntrips which provides
service between several western cities and destinations in Mexico. The Company
recognized revenues of $5,352,000 and $10,922,000, respectively, from this
program during the three and six months ended December 31, 2002. The Suntrips
program is a three-year contract with a termination date of June 30, 2005. The
contract allows for two consecutive one year renewals at the option of Suntrips.
The Company intends to pursue an extension of both programs, however, there can
be no assurance that such extensions will occur. Other new flight programs
included charter service for the Trump Marina and Plaza casinos in Atlantic
City, NJ, and a program with Turismo tours with charter service from Orlando to
San Juan. These programs generated $461,000 and $250,000, respectively, in
revenues during the quarter ended December 31, 2002. The Trump program is
contracted through April 2003 and the Company has submitted a proposal to extend
the program for two years. The Turismo program is an annual two-month program
that runs during December and January.
26
Gross profit for the Company's aviation travel services business in the three
and six months ended December 31, 2002 was $808,000 and $1,795,000,
respectively, compared to a gross profit (deficit) of $236,000 and $(464,000),
respectively, in the same periods a year ago. This business generated income of
$183,000 and $853,000, respectively, for the three and six months ended December
31, 2002 compared to income (loss) of $23,000 and $(942,000), respectively, in
the same periods a year ago. The improved results were due primarily to the
Company's expanded hub operation in Sanford, FL as well as the receipt of
$263,000 in the quarter ended September 30, 2002 in grant proceeds from a
government assistance program designed to provide grants to companies whose
businesses were directly impacted by the events of September 11, 2001. Also, the
prior year periods were adversely affected by losses incurred on a jet shuttle
business, which operated at a gross margin deficit.
Home Technology
The Company's home technology business represents the activities of LFSI. The
Company is a majority owner of LFSI and consolidates the business while
recording minority interests for the percentage of income and equity of LFSI
owned by other shareholders.
This business recorded revenues of $558,000 and $1,098,000, respectively, for
the three and six months ended December 31, 2002 compared to $994,000 and
$1,738,000, respectively, for the same periods a year ago. In the quarter ended
September 30, 2001, the Company implemented a national franchising program for
its home technology business. Since its launch, the Company has sold 15
geographic markets to franchisees, primarily in the southern and southeastern
United States. The Company sold one such franchise during the quarter ended
December 31, 2002, compared to seven in the prior year quarter. No such sales
were recognized during the quarters ended September 30, 2002 and 2001. The
overall decrease in revenues is the result of the Company's sale in the second
quarter of fiscal 2002 of three branches previously operated as Company owned
locations and a focused reduction of business with certain unprofitable
customers in the Company's two owned markets, Charlotte, NC and Atlanta, GA,
partially offset by increased revenues from royalties generated from franchises.
Gross profit for the Company's home technology business in the three and six
months ended December 31, 2002 was $349,000, or 63%, and $765,000, or 70%,
respectively, compared to $481,000, or 48%, and $633,000, or 36%, respectively,
in the same periods a year ago. The increase in gross profit percentage was the
result of higher franchise royalties, staff reductions and the positive result
of eliminating certain unprofitable customers, partially offset by a reduction
in the sale of franchise licenses.
This business generated a loss of $376,000 and $884,000, respectively, in the
three and six months ended December 31, 2002, compared to income (loss) of
$7,000 and $(301,000), respectively, in the same periods a year ago. The results
for the six months ended December 31, 2001 include a gain of $171,000 on the
sale of certain home technology net assets to companies that are operating these
businesses as franchises. The current year net loss is also higher due to
increased operating costs and interest expense, offset by the improved gross
profit discussed above as well as the attribution of approximately $109,000 and
$163,000, respectively, of losses to the minority shareholders for the three and
six months ended December 31, 2002.
Technology Solutions
The Company's technology solutions business recorded revenues of $2,486,000 and
$5,705,000, respectively, for the three and six months ended December 31, 2002
compared to $1,795,000 and $4,565,000, respectively, for the same periods a year
ago. The increase in revenues is the result of the expansion of products,
services and its sales force, primarily in the computer software business,
offset by a reduction in sales of data networking product and consulting sales.
The Company discontinued offering these services during its third fiscal quarter
in 2002.
Gross profit for the Company's technology solutions business in the three and
six months ended December 31, 2002 was 239,000, or 10%, and $422,000, or 7%,
respectively, compared to $457,000, or 25%, and $1,053,000, or 23%,
respectively, in the same periods a year ago. The reduction in gross profits was
due primarily to a change in revenue mix from internet and data networking
consulting, which are relatively higher margin businesses in comparison to its
lower margin software resale activities.
27
This business incurred losses of $80,000 and $107,000, respectively, for the
three and six months ended December 31, 2002 compared to losses of $168,000 and
$506,000, respectively, in the same periods a year ago. The improved results
were due primarily to the significant reduction in selling, general and
administrative expenses resulting from staff reductions, lower advertising and
marketing costs, and lower rent expenses.
Corporate
Corporate incurred losses from continuing operations of $173,000 and $416,000,
respectively, for the three and six months ended December 31, 2002 compared to
losses of $670,000 and $1,339,000, respectively, in the same periods a year ago.
Excluding the net gain on investments, Corporate's losses would have been
$372,000 and $789,000, respectively, for the three and six months ended December
31, 2002. Excluding the net loss on investments, Corporate's losses would have
been $502,000 and $960,000, respectively, for the three and six months ended
December 31, 2001. The reduction in loss from continuing operations is due
primarily to staff reductions, lower legal and professional fees and other costs
saving measures. The prior year losses include $48,000 and $78,000,
respectively, of business advisory services revenue recorded in the three and
six months ended December 31, 2001.
Seasonality
The Company experiences some seasonality in its aviation travel services and
technology solutions businesses. The seasonality in the aviation travel services
business is due to the higher level of charter travel to Caribbean and Mexican
destinations during the vacation season, which coincides with the Company's
first and fourth fiscal quarters. The Company's technology solutions business
generally experiences higher revenue in the first and fourth fiscal quarters,
with the largest amount being recognized in the fourth quarter, due to the fact
that the Company's year end coincides with the year end of most schools and
universities. These customers are tied to strict budgets and normally purchase
more software at the start and the end of their year end.
Guarantee Obligation
The Company's aviation travel services business (the "Aviation Business") has
certain guarantees outstanding with an airline provider that indicate if the
Aviation Business does not utilize a minimum number of hours during each program
year, then the Aviation Business would be required to pay the shortage to the
provider. The Aviation Business has a similar arrangement with Vacation Express
whereby Vacation Express has guaranteed a certain number of travel hours to the
Aviation Business. The parties are in the process of preparing and reviewing
certain items that the Aviation Business believes are due to offset the
guarantee due the airline provider for the first contractual year end. In the
event the parties cannot agree on the guarantee amount, the contract calls for
disputes of this nature to be arbitrated.
The Aviation Business does not anticipate incurring a net loss on these
guarantees and has not accrued any such loss on its balance sheet as of December
31, 2002. In the event there is a shortfall in the Aviation Business's guarantee
to the airline provider, then Vacation Express will be obligated to compensate
the Aviation Business for similar shortfalls exceeding the amount due to the
airline provider.
Liquidity and Capital Resources
The Company's net loss for the six months ended December 31, 2002 of $681,000,
unrealized losses on marketable securities of $203,000 and termination of an
agreement with a service provider resulting in the cancellation of unvested
options and a reduction in additional paid-in capital of $45,000, were partially
offset by an increase to shareholders' equity related to the sale of Common
Stock, with net proceeds of $119,000 and a net increase in shareholders' equity
of $64,000, as a result of the final settlements of contracts with two service
providers, resulting in a net decrease in shareholders' equity of $720,000 for
the six months ended December 31, 2002.
Minority interest increased due to the LFSI transaction described above which
resulted in net funding of $561,000, LFSI sales of stock under its private
28
placement resulting in an increase in minority interest of $153,000 and the
Company's sale of LFSI restricted stock obtained in the LFSI transaction, which
resulted in an increase in minority interest of $86,000. These increases were
slightly offset by the minority shareholders' portion of LFSI's losses of
$163,000.
For the six months ended December 31, 2002, operations used $560,000 of cash.
This amount includes $263,000 received in grant proceeds from a government
assistance program designed to provide grants to companies whose businesses were
directly impacted by the events of September 11, 2001. For the six months ended
December 31, 2002, net cash flow from investing activities was $249,000 due
primarily to cash received from the sale of investments of $425,000 and from the
sale of a portion of the Company's technology solutions prior office space
resulting in net proceeds of $111,000, offset by net property and equipment
purchases of $237,000 and the $50,000 cash portion of the Company's acquisition
of the assets of eGolf.com, an internet web site specializing in the retail
sales of golf equipment.
In September 2002, the Company completed the private sale of 125,000 shares of
LFSI restricted common stock to an accredited investor. The Company sold these
shares at $2.00 per share and received $250,000 in proceeds as a result of this
sale. $150,000 of the proceeds was received in September 2002 with the balance
being received in October 2002. During the three months ended December 31, 2002
the Company completed the private sale of an additional 60,000 shares of the
LFSI restricted stock to the same private investor. These shares were also sold
for $2.00 per share, resulting in proceeds to the Company of $120,000. During
the quarter ended December 31, 2002 the Company issued 78,359 shares of the LFSI
restricted stock to a debt holder of the Company in satisfaction of outstanding
principal and interest totaling $156,718; or $2.00 per share.
For the six months ended December 31, 2002, net cash flow from financing
activities was $693,000 as a result of $274,000 raised through the LFSI
transaction, $412,000 raised through LFSI's private placement sale of common
stock, $75,000 of debt proceeds and $119,000 raised through the sale of the
Company's Common Stock. These amounts were offset slightly by principal debt
repayments of $187,000. At December 31, 2002, the Company had a working capital
deficit of $3,625,000. At December 31, 2002 the Company held cash and cash
equivalents of $1,893,000 and investments of $470,000.
The Company's significant working capital deficit is due primarily to $2,282,000
of current debt, of which $1,867,000 is due in the quarter ended September 30,
2003 and $214,000 is due on demand. As of December 31, 2002, the Company had a
commitment for $615,000 of additional funding from a private investor to draw
upon throughout the remainder of its fiscal 2003, however, this availability and
expected operating cash flows is not sufficient to meet obligations currently
due in the next 12 months. $80,000 of this amount was drawn upon during January
and February 2003, leaving a remaining commitment of $535,000. During January
2003 the Company secured a loan in the amount of $250,000. Also, on January 31,
2003 the Company contracted with one accredited investor to sell up to 196,641
shares of restricted LFSI stock at $2.00 per share. The agreement noted the
closing may occur in traunches but shall be no later than March 31, 2003, unless
extended uon mutual written consent. There can be no assurance that such closing
will actually take place.
The Company is currently exploring additional sources of liquidity, including
debt and equity financing alternatives and potential sales of additional shares
of LFSI, a portion of which may or may not be sold from time to time depending
on market conditions and the effectiveness of a LFSI registration statement, to
provide additional cash to support operations, working capital and capital
expenditure requirements for the next 12 months and to meet the scheduled debt
repayments in August 2003 totaling approximately $2 million. Additionally, the
Company plans on negotiating with its debt holders to extend some or all of this
debt. If (i) we are unable to grow our business or improve our operating cash
flows as expected, (ii) we suffer significant losses on our investments, (iii)
we are unable to realize adequate proceeds from investments, including our
holdings of LFSI restricted stock, (iv) the investor is not able to meet its
funding obligation to the Company, or (v) we are unsuccessful in extending a
substantial portion of the debt repayments scheduled for August 2003, then we
will need to secure alternative debt or equity financing to provide us with
additional working capital. There can be no assurance that additional financing
will be available when needed or, if available, that it will be on terms
favorable to the Company and its stockholders. If the Company is not successful
in generating sufficient cash flow from operations, or in raising additional
capital when required in sufficient amounts and on terms acceptable to the
Company, these failures would have a material adverse effect on the Company's
business, results of operations and financial condition. If additional funds are
raised through the issuance of equity securities, the percentage ownership of
its then current stockholders would be diluted.
29
The Company's Board of Directors had previously considered distributing a
portion of the LFSI shares to the shareholders of the Company. The Board of
Directors and its advisors currently believe the most prudent use of these
shares is the sale of LFSI shares to external parties and does not currently
intend to distribute any shares as a dividend.
The Company's business, results of operations, and financial condition are
subject to many risks. In addition, statements in this report relating to
matters that are not historical facts are forward-looking statements based on
management's belief and assumptions based on currently available information.
Such forward-looking statements include statements relating to estimates of
future revenue and operating income, cash flow and liquidity. Words such as
"anticipates", "expects", "intends", "believes", "may", "will", "future" or
similar expressions are intended to identify certain forward-looking statements.
In addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it cannot give any assurances
that these expectations will prove to be correct. Such statements involve a
number of risks and uncertainties, including, but not limited to, those
discussed herein or in other documents filed by the Company with the SEC.
ITEM 3. CONTROLS AND PROCEDURES:
Disclosure controls and procedures
The Company has established and currently maintains controls and other
procedures designed to ensure that material information required to be disclosed
in its reports filed under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified by the
Securities and Exchange Commission. In conjunction with the close of each fiscal
quarter, the Company conducts an update and a review and evaluation of the
effectiveness of the Company's disclosure controls and procedures. It is the
opinion of the Company's principal executive officer and principal accounting
officer, based upon an evaluation completed within 90 days prior to the filing
of this report, that the Company's disclosure controls and procedures are
sufficiently effective to ensure that any material information relating to the
Company is recorded, processed, summarized and reported to its principal
officers to allow timely decisions regarding required disclosures.
Changes in internal controls
There were no significant changes in the Company's internal accounting processes
and control procedures during the quarter.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
During the normal course of business, the Company is subject to various
lawsuits, which may or may not have merit. Management intends to vigorously
pursue and/or defend such suits, as applicable, and believes that they will not
result in any material loss to the Company.
ITEM 2. CHANGES IN SECURITIES
Since July 1, 2002, the Company has issued 177,143 shares of restricted Common
Stock in connection with Company's private placement sale of Common Stock at
$0.70 per share.
Since July 1, 2002, the Company issued 14,286 shares of restricted Common Stock
from treasury stock with the termination of a contract with a service provider.
Since July 1, 2002, the Company issued 89,554 shares of restricted Common Stock
in connection with the payment of certain services.
The securities issued in connection with the private placement and those issued
in connection with the termination of the service provider contract were issued
without registration under the Securities Act in reliance upon Section 4(2) of
30
the Securities Act. The Company based such reliance on representations made to
the Company by the recipient of such securities as to such recipient's
investment intent and sophistication, among other things.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.11 Agreement and Plan of Merger dated as of August 30, 2002 by and among
the Company, LST, Inc., Lifestyle Innovations, Inc. and LFSI Merger Corportion
(incorporated by reference to Exhibit 2.1 of the Company's Current Report on
Form 8-K filed on September 30, 2002).
10.1 Employment Agreement between the Company and Mr. Michael D. Pruitt
dated November 7, 2002.
10.2 Employment Agreement between the Company and Ms. Melinda Morris Zanoni
dated November 7, 2002.
99.1 Certification Pursuant to 18 U.S.C. Section 1350
(b) Financial Reports on Form 8-K
The Company has filed the following reports on Form 8-K 8-K/A
with the Securities and Exchange Commission ("SEC") during the
quarter ended September 30, 2002:
On September 20, 2002, reporting under Item 2 of such
report that the Company completed its sale of an interest
is its home technology business to Lifestyle Innovations,
Inc.
31
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: February 13, 2003 By: /s/ Michael D. Pruitt
-------------------------------------
Michael D. Pruitt
Chairman of the Board
(principal executive officer)
Date: February 13, 2003 By: /s/ Eric D. Burgess
-------------------------------------
Eric D. Burgess
Senior Vice President, Finance; Treasurer
(principal financial and accounting officer)
32
CERTIFICATION PURSUANT TO
18 U.S.C. Section 1350
(SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)
I, Michael D. Pruitt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of eResource Capital
Group, Inc. (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
By: /s/ Michael D. Pruitt
Michael D. Pruitt
Principal Executive Officer
February 13, 2003
33
CERTIFICATION PURSUANT TO
18 U.S.C. Section 1350
(SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)
I, Eric D. Burgess, certify that:
1. I have reviewed this quarterly report on Form 10-Q of eResource Capital
Group, Inc. (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
By: /s/ Eric D. Burgess
Eric D. Burgess
Principal Accounting Officer
February 13, 2003
34
Exhibit Index
Exhibit No. Description Page No.
- ----------- ----------- --------
10.1 Employment Agreement between the Company and Mr. Michael D. Pruitt Dated November 7, 2002 36
10.2 Employment Agreement between the Company and Ms. Melinda Morris Zanoni Dated November 7, 2002 49
99.1 Certification Pursuant to 18 U.S.C Section 1350 62
35
Exhibit 10.1 Employment Agreement
This Employment Agreement (this "Agreement") is made as of the 7th day
of November, 2002, by and between eResource Capital group, Inc., a Delaware
corporation ("RCG") and MICHAEL D. PRUITT, an individual resident of the State
of North Carolina (the "Executive"), and is effective as of the date hereof (the
"Effective Date").
WHEREAS, RCG intends to employ Executive, and Executive desires to be
employed by RCG; and
WHEREAS, RCG and Executive desire to set forth the terms and conditions
on which Executive shall be employed and provide services to RCG.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by Executive and RCG including,
without limitation, the promises and covenants described herein, the parties
hereto, intending to be legally bound, hereby agree as follows:
ARTICLE I
EMPLOYMENT
Section 1.1 Duties and Responsibilities. RCG hereby employs Executive full
time as the Chief Executive Officer and President of RCG. Executive shall do and
perform all reasonable services and acts necessary or advisable to fulfill the
duties of such office, and shall conduct and perform such additional services
and activities as may be reasonably determined from time to time by the Board of
Directors of RCG (the "Board"). During the term of this Agreement, Executive
shall devote his full time, energy and skill to the business of RCG and to the
promotion of RCG's interests, and Executive acknowledges that he has a duty of
loyalty to RCG and shall not, during the term hereof, engage in, directly or
indirectly, any other business or activity whether or not for pecuniary gain,
that could materially and adversely affect RCG's business or Executive's ability
to perform his duties under this Agreement. The foregoing shall not, however,
preclude Executive from serving on the boards of directors of other entities.
In his capacity as an officer of RCG, Executive shall report to the Board
and abide by all rules and regulations established from time to time by the
Board. Executive's authority and responsibility in RCG shall at all times be
subject to the review and discretion of the Board, which shall have the final
authority to make decisions regarding the business of RCG.
Section 1.2 Term of Employment. The term of Executive's employment
hereunder shall continue for a period of two (2) years from the Effective Date,
unless earlier terminated as provided in this Agreement. At the end of the
initial two (2) year term, and at the end of each renewal term, this Agreement
shall automatically be extended for an additional one (1) year terms unless
either party hereto shall give written notice of its or his intent to terminate
for any or no reason sixty (60) days prior to the end of the initial term or any
subsequent renewal term.
36
Section 1.3 Benefits. During the term of Executive's employment hereunder,
Executive will be entitled to the following:
(a) Vacation. Executive shall be entitled to four (4) weeks
paid vacation annually. Any unused vacation time will accumulate and carryover
to subsequent years. Any unused vacation time at the date of termination of this
Agreement (for any reason) will be paid to Executive in cash. Executive shall
also be entitled to reasonable holidays and sick days in accordance with RCG's
policy as may be established and modified from time to time.
(b) Employee Benefit Plans. Executive shall be entitled to
participate in all employee benefit plans, including any life insurance,
disability insurance, profit sharing and retirement plans that are generally
offered to or provided for the senior executives of RCG, said plans to be
approved by the Board. Executive shall be entitled to participate in such group
health and dental insurance plans (including family coverage) on the same basis,
including cost provisions, as may from time to time be offered generally to the
other senior executives of RCG.
Section 1.4 Compensation. For all services to be rendered by Executive
under this Agreement, RCG shall pay Executive as follows:
(a) Base Salary. Executive shall be paid an annual gross
salary of One Hundred Eighty Thousand Dollars ($180,000) payable in accordance
with the normal payroll practices of RCG, which policies may be changed by RCG
from time to time, and shall be subject to appropriate withholding taxes. In any
event, Executive's salary shall be paid no less frequently than monthly. At the
sole discretion of the Board, Executive's annual gross salary may be increased,
from time to time, throughout the term of this Agreement, the amount of any such
increase to be determined by the Board (or by the Compensation Committee
thereof).
(b) Annual Bonus. If the Board shall so authorize, Executive
shall be paid an annual bonus in an amount and in the manner approved by the
Board in its sole discretion (or by the Compensation Committee thereof), within
ninety (90) days of the end of each calendar year, provided Executive is still
employed by RCG.
Section 1.5 Stock Options. Executive shall be a participant in the 2000
Stock Option Plan of RCG. RCG shall grant Executive One Hundred and Seventy-Five
Thousand (175,000) options to purchase shares of stock of RCG at an exercise
price of Fifty-Five Cents ($.55) per share vesting quarterly over one (1) year
(the "Option Shares") pursuant to the terms and conditions of a stock option
agreement to be entered into between RCG and Executive (the "Stock Option
Agreement").
Section 1.6 Business Expenses. Executive shall be entitled to reimbursement
of all ordinary and necessary business expenses reasonably incurred for business
travel, lodging, communications (including cell phone and pager), entertainment
and meals in connection with the performance of Executive's duties under this
Agreement, upon submission of sufficient documentation evidencing same and in
accordance with RCG's established policies for reimbursement of business
expenses. RCG expects Executive to attend and participate in continuing
education seminars and courses with respect to venture capital, mergers and
acquisitions and business management related to his duties, and RCG will
reimburse all ordinary and necessary expenses of such attendance and
participation.
37
Section 1.7 Place of Employment. RCG agrees to provide an office for
Executive in Charlotte, North Carolina. RCG will provide at the Charlotte office
a computer and other equipment and assistance necessary in order for Executive
to complete his duties under this Agreement. Executive shall be entitled to
reside and perform his duties in Charlotte, North Carolina.
Section 1.8 Line of Credit. In order to facilitate the ability of Executive
to pay his federal, state and local income tax liabilities, RCG will provide
Executive with a line of credit equal to Executive's additional federal, state
and local tax liabilities, if any, resulting from Executive's ownership of stock
in RCG, including the receipt of the shares pursuant to Section 1.5 hereof, or
otherwise. Any amounts borrowed under this line of credit will be available to
Executive prior to the date that Executive must pay his federal and state income
taxes. This line of credit will bear interest at the rate of five percent
(5.00%) per annum. The interest attributable to the borrowed funds will be due
and payable yearly. The principal will be due on the earlier of: (i) termination
of this Agreement and (ii) sale of stock in RCG by Executive (but only to the
extent of sale proceeds).
ARTICLE II
COVENANTS OF EXECUTIVE
Section 2.1 Confidentiality. Executive recognizes the interest of RCG in
maintaining the confidential nature of its proprietary and other business and
commercial information. In connection therewith, Executive covenants that during
the term of his employment with RCG under this Agreement, and for a period of
two (2) years thereafter (except as set forth in Section 2.2 hereof), Executive
shall not, directly or indirectly, except as authorized in writing by the Board,
publish, disclose or use for his own benefit or for the benefit of a business or
entity other than RCG or otherwise, any secret or confidential matter, or
proprietary or other information not in the public domain that was acquired by
Executive during his employment, relating to RCG or any of its affiliates' or
subsidiaries' businesses, operations, customers, suppliers, products, employees,
financial information, budgets, practices, strategies, prices, methods,
technology, know-how, intellectual property, documentation, concepts,
improvements, plans, research and development, leads and/or marketing materials,
38
records, files, databases, accounting journals, accounts receivable records,
business plans and other similar information (the "Confidential Information");
provided, however, Confidential Information does not include information that
(i) is or becomes generally available to the public other than as a result of a
breach of this Agreement; (ii) is disclosed with the prior written consent of
RCG; (iii) at the time of such disclosure, was already known or in the
possession of Executive; (iv) becomes available to a competitor of RCG on a
non-confidential basis from a source other than Executive, which source is not
prohibited from disclosing such Confidential Information by a legal, contractual
or fiduciary obligation to RCG; or (v) is independently developed by a
competitor of RCG. Executive will abide by RCG's policies and regulations, as
established from time to time, for the protection of its Confidential
Information.
Section 2.2 Trade Secrets. Executive shall not, at any time, either during
or after the term of his employment with RCG under this Agreement, use or
disclose any "Trade Secrets" (as defined by the Delaware Uniform Trade Secrets
Act) of RCG or its affiliates or subsidiaries, except in fulfillment of his
duties during his employment, for so long as the pertinent information or data
remain Trade Secrets, whether or not the Trade Secrets are in written or
tangible form. Notwithstanding anything to the contrary contained herein,
Executive shall not be prohibited hereunder from disclosing Trade Secrets if, in
the written opinion of counsel for Executive, such disclosure is required by
applicable law, in which event Executive shall provide RCG with prompt written
notice of such request and shall take all reasonable action requested by RCG to
obtain confidential treatment of such Trade Secrets.
Section 2.3 Surrender of Records. Executive shall provide RCG with notice
of any inadvertent disclosure of Confidential Information. Executive
acknowledges that all Confidential Information is and shall remain the sole
property of RCG and/or such affiliated entity or subsidiary and shall, upon
termination of Executive's employment with RCG for any reason whatsoever, or
upon the request of RCG, turn over to RCG all Confidential Information, without
retaining notes or copies thereof (together with a written statement certifying
as to his compliance with the foregoing).
Section 2.4 Non-Solicitation of Clients/Employees. During the term of
Executive's employment with RCG, and for the one (1) year period following the
termination of Executive's employment with RCG for any reason, Executive shall
not, directly or indirectly:
(a) solicit or accept, or attempt to solicit or accept any
business from any individual or entity that was a customer or client of RCG
during the one (1) year period ending on the date of termination of Executive's
employment with RCG, or actively sought after prospective clients, for the
purpose of providing services or products to such customer or client which are
competitive with the services or products offered or provided by RCG; provided,
however, nothing herein shall preclude Executive from holding not more than
one-percent (1%) of the outstanding equity of any company, so long as Executive
does not, in fact, have the power to participate in controlling or directing the
management of such company other than by such voting equity; or
(b) employ, induce, solicit or attempt to solicit for
employment, or assist others in employing, inducing or soliciting for
employment, any individual who is or was an employee or independent contractor
of RCG at any time during the one (1) year period ending or the date of
termination of Executive's employment with RCG in an attempt to have any such
individual work for Executive, or any other individual or entity in the business
of raising venture capital for, and the development, operation and management
of, travel and technology-related companies.
39
Section 2.5 Acknowledgment of Reasonableness/Enforcement/Tolling.
(a) The existence of any claim or cause of action by Executive
against RCG predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by RCG of these covenants. Executive acknowledges and
confirms (i) that the restrictions contained herein are fair and reasonable and
not the result of overreaching, duress, or coercion of any kind, and (ii) that
Executive's full, uninhibited, and faithful observance of each of the covenants
contained in this Agreement will not cause Executive any undue hardship,
financial or otherwise. In the event that any court shall formally hold that the
restrictions in this Article II are unreasonable, Executive hereby expressly
agrees that the restrictions shall not be rendered void, but shall apply to the
extent that such court may judicially determine or indicate constitutes a
reasonable restriction.
(b) Executive acknowledges that the services to be rendered by
Executive hereunder are extraordinary and unique and are vital to the success of
RCG, and that damages at law would be an inadequate remedy for any breach or
threatened breach of this Agreement by Executive. Therefore, in the event of a
breach or threatened breach by Executive of any provision of this Agreement, RCG
shall be entitled, in addition to all other rights or remedies, to injunctions
restraining such breach, without being required to show any actual damage or to
post any bond or other security. No remedy herein conferred upon any party is
intended to be exclusive of any other remedy, and each and every such remedy
shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law, in equity or otherwise. No single
or partial exercise by any party of any right, power or remedy hereunder shall
preclude any other or further exercise thereof.
(c) In the event RCG should bring any legal action or other
proceeding for the enforcement of the Agreement, the time for calculating the
non-solicitation period, or terms of any other restriction herein shall not
include the period of time commencing with the filing of the legal action or
other proceeding to enforce the terms of the Agreement through the date of final
judgment or final resolution, including all appeals, if any, of such legal
action or other proceeding.
ARTICLE III
REPRESENTATIONS OF EXECUTIVE/INDEMNIFICATION
Section 3.1 Representations and Warranties of Executive/Indemnification.
Executive represents and warrants to RCG that he is fully empowered to enter and
perform his obligations under this Agreement and, without limitation, that he is
under no restrictive covenants to any person or entity that will be violated by
his entering into and performing this Agreement, and that this Agreement
constitutes the valid and legally binding obligation of Executive enforceable in
accordance with its terms. Executive shall indemnify RCG upon demand for and
against any and all judgments, losses, claims, damages, costs (including,
without limitation, all legal fees and costs, even if incident to appeals)
incurred or suffered by RCG as a result of the breach of the representations and
warranties made in this Article 3.
40
ARTICLE IV
TERMINATION OF EMPLOYMENT
Section 4.1 Termination by RCG. Executive's employment may be
terminated by RCG during the term of this Agreement upon the occurrence of one
or more of the following events:
(a) Termination For Death. Immediately upon Executive's death.
(b) Termination For Disability. Upon the effective date of written notice from
RCG (which shall not be prior to the date on which such notice is sent) in the
event of Executive's disability which renders Executive incapable of performing
his duties for more than one hundred eighty (180) calendar days in one calendar
year or within consecutive calendar years.
(c) Termination Without Cause. After the second (2nd)
anniversary of the Effective Date, RCG can terminate Executive's employment
without cause for any or no reason (other than those set forth in Section 4.1(d)
hereof), sixty (60) days after written notice (including a notice of nonrenewal
sent by RCG pursuant to Section 1.2 hereof) sent to Executive following a
determination by the Board to so terminate Executive's employment.
(d) Termination For Cause. Upon the effective date of written
notice sent to Executive (which shall not be prior to the date on which such
notice is sent) stating RCG's determination that it is terminating Executive for
"Cause", which for purposes of this Agreement shall mean:
(i) any intentional act of fraud, embezzlement or
theft of funds or property of RCG or any of its
clients/customers;
(ii) any gross and willful misconduct having a
substantial, adverse effect upon RCG;
(iii) any intentional wrongful disclosure of
Confidential Information or Trade Secrets of RCG
or its affiliates or any intentional form of
self-dealing detrimental to the interests of RCG;
(iv) conviction of a felony or any similar crime
causing material harm to the reputation of RCG as
determined by the Board (for these purposes,
conviction shall include a plea of no contest or
plea to any lesser charges predicated on the same
underlying conduct);
(v) the habitual and debilitating use of alcohol or
drugs; or
(vi) failure to comply in any material respect with
the terms of this Agreement, which failure has a
material adverse effect on RCG and has not been
cured by Executive within thirty (30) days after
written notice from the Board of any such act or
omission.
41
Section 4.2 Resignation by Executive. Executive's employment may be
terminated by Executive during the term of this Agreement upon the occurrence of
one or more of the following events:
(a) Voluntary Resignation. Executive may terminate his
employment under this Agreement by giving sixty (60) days' prior written notice
to RCG (including a notice of nonrenewal sent by Executive pursuant to Section
1.2 hereof) stating Executive's election to terminate his employment with RCG.
RCG may accept such resignation effective as of any date during such sixty (60)
day period as RCG deems appropriate; provided, however, Executive shall receive
from RCG his base salary and be entitled to participate in any RCG benefit plans
in which he was a participant as of the effective date of his resignation for
the duration of such sixty (60) day period (as further provided in Section
4.4(a) hereof).
(b)Resignation With Cause. Upon the effective date of written
notice sent to RCG stating Executive's determination of "Constructive
Termination" (hereinafter defined) by RCG; provided, however, if the
Constructive Termination is curable, then RCG shall have thirty (30) days after
Executive's written notice to cure such condition and if RCG fails to cure such
condition to the reasonable satisfaction of Executive, then Executive may
immediately terminate his employment with RCG, such termination to be
conclusively deemed to be a resignation with cause. For purposes of this
Agreement, "Constructive Termination" shall mean:
(i) Such change in duties or position as:
(A) the assignment (other than an occasional
temporary assignment) to Executive of any duties notcommensurate with
Executive's position, duties, responsibilities and status with RCG;
(B) a material change in Executive's reporting
responsibilities, (i.e., reporting to a lower tier)
or a diminution in Executive's titles or offices; or
(C) a material diminution of Executive's authority or
responsibilities.
(ii) A reduction in Executive's base salary specified in
Section 1.4(a) hereof for the calendar year 2003, or a reduction in Executive's
base salary in effect for the prior calendar year for all succeeding years
(other than pro rata reductions in compensation for all senior executives of
RCG).
(iii) The requirement that Executive be based anywhere other
than within 30 miles of RCG's current office in Charlotte, North Carolina.
(iv) RCG's failure to comply in any material respect with the
terms of this Agreement.
42
Section 4.3 Change of Control. Upon (i) the effective date of a written
notice sent to Executive by RCG stating that a "Change of Control" (hereinafter
defined) has occurred or will occur and Executive's employment will be
terminated in connection therewith (despite RCG's best efforts to the contrary
as set forth in Section 5.8 hereof), which notice must be given no later than
sixty (60) days following such Change of Control, (ii) the date of termination
if Executive is terminated without cause or resigns with cause within eighteen
(18) months of a Change of Control, or (iii) the date of termination if
Executive voluntarily resigns within ninety (90) days following a Change of
Control. A "Change of Control" shall be deemed to have occurred if (A) as a
result of any merger, consolidation, sale, assignment, transfer or other
transaction, any person, other than those persons who are shareholders of RCG or
its affiliates (within the meaning of Rule 501 of the Securities Act of 1933) on
the date hereof, becomes the "beneficial owner" (as defined in Rule 13d-3 and
13d-5 under the Securities Exchange Act of 1934, as amended) of more than 50% of
the outstanding voting securities of RCG or the surviving entity or becomes
entitled to elect more than one-half (1/2) of the Board or other governing body
of RCG or the surviving entity; (B) a tender offer shall be made and consummated
of the ownership of 50% or more of the outstanding voting securities of RCG; or
(C) RCG sells, assigns or otherwise transfers all or substantially all of the
assets of the RCG, to persons other than those persons who are shareholders of
RCG, its subsidiaries or affiliates; provided, however, in no event shall a
financing transaction (such as additional rounds of venture capital), which is
approved by the Board and entered into by RCG be deemed to be a "Change of
Control" .
Section 4.4 Effect of Termination/Change of Control.
(a) Termination for Death or Voluntary Resignation. In the
event of termination of Executive's employment pursuant to Sections 4.1(a) or
4.2(a) hereof:
(i) RCG shall pay to Executive the base salary and expenses otherwise payable to
Executive under Sections 1.4(a) and 1.6 hereof through the date of termination
(provided that in the event of Executive's death, RCG shall also pay to
Executive's estate his base salary for a period of three (3) months after the
date of Executive's death), as well as any accrued but unpaid vacation time. For
purposes of this Agreement, one (1) week of vacation shall be deemed to accrue
each calendar quarter. Executive shall not be entitled to receive any severance
pay except to the extent the Board, in its sole discretion, elects to authorize
severance pay in the event of Executive's voluntary resignation.
(ii) Executive's rights under RCG's benefit plans of general application shall
be determined under the provisions of those plans.
(iii) Executive shall not be entitled a bonus under Section 1.4(b) hereof for
the year of termination except to the extent the Board, in its sole
discretion, elects to authorize a bonus in the event of Executive's voluntary
resignation.
(iv) Executive's rights with respect to Option Shares shall be determined under
the provisions of the Stock Option Agreement.
43
(b) Termination For Disability; Termination Without Cause; Resignation With
Cause; Termination in Connection with a Change of Control. In the event of
termination of Executive's employment pursuant to Sections 4.1(b), 4.1(c),
4.2(b) or 4.3 hereof:
(i) RCG shall pay to Executive the base salary and expenses otherwise payable to
Executive under Sections 1.4(a) and 1.6 hereof through the date of termination
as well as any accrued but unpaid vacation time (provided that in the event of
Executive's disability, the base salary payable to Executive shall be less any
disability benefits provided by RCG). In addition, Executive shall be entitled
to twelve (12) months' salary continuation at the then current rate, payable
in accordance with the normal payroll practices of RCG. Such severance
payments are to be considered compensation for services previously rendered
hereunder.
(ii) Executive shall continue to participate in RCG's group health plan for
twelve (12) months following the date of termination upon the timely periodic
payment of any amount required for employees to maintain family coverage for
such plan, and rights under other benefit plans shall be determined under the
provisions of those plans.
(iii) Executive shall be entitled to a bonus under Section 1.4(b) hereof for the
year of termination in an amount as determined by the Board (or by the
Compensation Committee thereof) in its sole discretion.
(iv) Executive's rights with respect to the Option Shares shall be determined
under the provisions of the Stock Option Agreement.
(c) Termination For Cause. In the event of termination of Executive's employment
prior to Section 4.1(d) hereof:
(i) RCG shall pay to Executive the base salary and expenses otherwise payable
pursuant to Sections 1.4(a) and 1.6 hereof through the date of termination.
Executive shall not be entitled to receive any severance pay whatsoever.
(ii) Executive's rights under RCG's benefit plans of general application shall
be determined under the provisions of those plans.
(iii) Executive shall not be entitled to a bonus under Section 1.4(b) hereof
for the year of termination.
(iv) Executive's rights with respect to the Option Shares shall be determined
under the provisions of the Stock Option Agreement.
44
Section 4.5 Gross Up Payment.If RCG or its accountants determine that
any payments called for under this Agreement or any other payments or benefits
made available to Executive by RCG or its affiliates will result in Executive
being subject to an excise tax ("Excise Tax") under Section 4999 of the Internal
Revenue Code of 1986, as amended, or any successor statute thereto, or if an
Excise Tax is assessed against Executive as a result of such payments or other
benefits, RCG shall make a "Gross-Up Payment" (hereinafter defined) to or on
behalf of Executive as and when such determination(s) and assessment(s), as
appropriate, are made, subject to the conditions of this Section 4.5. A
"Gross-Up Payment" shall mean a payment to or on behalf of Executive that shall
be sufficient to pay (i) any Excise Tax in full, (ii) any federal, state and
local income tax and Social Security or other employment tax on the payment made
to pay such Excise Tax as well as any additional Excise Tax on the Gross-Up
Payment, and (iii) any interest or penalties assessed by the Internal Revenue
Service on the Executive if such interest or penalties are attributable to
eRGC's failure to comply with its obligations under this Section 4.5 or
applicable law. Any determination under this Section 4.5 by RCG or its
accountants shall be made in accordance with Section 280G of the Code and any
applicable related regulations (whether proposed, temporary or final) and any
related Internal Revenue Service rulings and related case law. Executive shall
take such action (other than waiving Executive's right to any payments or
benefits) as RCG may reasonably request under the circumstances to mitigate or
challenge such tax. If RCG reasonably requests that Executive take action to
mitigate or challenge any such tax or assessment and Executive complies with
such request, RCG shall provide Executive with such information and such expert
advice and assistance from RCG's accountants, lawyers and other advisors as
Executive may reasonably request and shall pay for all expenses incurred in
effecting such compliance and any related fines, penalties, interest and other
assessments.
ARTICLE V
GENERAL PROVISIONS
Section 5.1 Survival. Notwithstanding anything to the contrary herein,
the provisions of this Agreement shall survive and remain in effect in
accordance with their respective terms in the event Executive's employment is
terminated for any reason.
Section 5.2 Enforcement Costs. If any civil action, arbitration, or
other legal proceeding is brought for the enforcement of the Agreement, or
because of an alleged dispute, breach, default or misrepresentation in
connection with any provision of the Agreement, the successful or prevailing
party or parties shall be entitled to recover reasonable attorneys' fees, sales
and use taxes, court costs, and all expenses (including, without limitation, all
such fees, taxes, costs, and expenses incident to arbitration, appellate and
post-judgment proceedings), incurred in that civil action, arbitration, or legal
proceeding, in addition to any other relief to which such party or parties may
be entitled.
Section 5.3 Notices. For purposes of this Agreement, all communications
including, without limitation, notices, consents, requests or approvals,
provided for herein shall be in writing and shall be deemed to have been duly
given (a) when personally delivered, (b) on the day of transmission when given
by facsimile transmission with confirmation of receipt, (c) on the following day
45
if submitted to a nationally recognized courier service, or (d) five (5)
business days after having been mailed by United States registered mail or
certified mail, return receipt requested, postage prepaid, addressed to:
If to RCG: If to Executive:
eResource Capital Group, Inc. Michael D. Pruitt
5935 Carnegie Boulevard, Suite 101 11502 Stonebriar Drive
Charlotte, NC 28209 Charlotte, North Carolina 28277
Attn: Melinda Morris Zanoni, Esq. Facsimile: (704) 341-7961
Facsimile: (704) 553-7136
or to such other address as a party may have furnished to the other in writing
and in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
Section 5.4 Governing Law. The validity, interpretation, construction,
performance and enforcement of this Agreement shall be governed by the laws of
the State of North Carolina, without giving effect to the principles of
conflicts of law of such State.
Section 5.5 Severability. If any provision of this Agreement or the
application of any provision hereof to any person or circumstances is held
invalid, unenforceable or otherwise illegal, under applicable law or regulation,
the remainder of this Agreement and the application of such provision to any
other person or circumstances shall not be affected, and the provision so held
to be invalid, unenforceable or otherwise illegal shall be reformed to the
extent (and only to the extent) necessary to make it valid, enforceable and
legal; provided, however, if the provision so held to be invalid, unenforceable
or otherwise illegal constituted a material inducement to a party's execution
and delivery of this Agreement, such provision shall not be reformed unless
prior to any reformation that party agrees to be bound by the reformation.
Section 5.6 Entire Agreement. This Agreement supersedes any other
agreements, oral or written, between the parties with respect to the subject
matter hereof, and contains all of the agreements and understandings between the
parties with respect to the employment of Executive by RCG.
Section 5.7 Amendments. Any amendment or modification of any term of
this Agreement shall be effective only if it is set forth in writing signed by
the parties hereto.
Section 5.8 Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective administrators,
executors, representatives, heirs, successors and permitted assigns. "Successor"
shall mean any successor in interest, pursuant to a Change of Control as set
forth in Section 4.3 hereof. RCG shall use its best efforts to cause any
Successor which is not obligated to assume RCG's contracts to agree at the time
of becoming a Successor to perform this Agreement to the same extent as the
original parties would be required if no succession had occurred.
46
Section 5.9 Assignment. This Agreement is personal in nature and the
parties shall not, without written consent, assign, transfer or delegate this
Agreement or any rights or obligations hereunder.
Section 5.10 Waivers. No provision of this Agreement may be waived or
discharged unless such waiver or discharge is agreed to in writing signed by the
party to be bound. No waiver by a party hereto at any time of any breach or
noncompliance with any provision or condition of this Agreement to be performed
by such other party shall be deemed a waiver of any other provisions or
conditions at the same or at any prior or subsequent time.
Section 5.11 Captions. The captions in this Agreement are solely for
convenience of reference and shall not be given any effect in the construction
or interpretation of this Agreement.
Section 5.12 Counterparts/ Facsimile Signatures. This Agreement may be
executed in one or more counterparts (whether by facsimile or otherwise), each
of which shall be deemed to be an original, but all of which together will
constitute one and the same Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
47
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the date first above written.
RCG:
ERESOURCE CAPITAL GROUP, INC.
By:
-------------------------------
Melinda Morris Zanoni
Its: Executive Vice President
APPROVED BY THE COMPENSATION COMMITTEE:
-----------------------
Dr. James A. Verbrugge
-----------------------------
Jeffrey F. Willmott (Chairman)
EXECUTIVE:
----------------------
Michael D. Pruitt
48
Exhibit 10.2 Employment Agreement
This Employment Agreement (this "Agreement") is made as of the 7th day
of November, 2002, by and between EResource Capital group, Inc., a Delaware
corporation ("RCG") and MELINDA MORRIS ZANONI, an individual resident of the
State of North Carolina (the "Executive"), and is effective as of the date
hereof (the "Effective Date").
WHEREAS, RCG intends to employ Executive, and Executive desires to be
employed by RCG; and
WHEREAS, RCG and Executive desire to set forth the terms and conditions
on which Executive shall be employed and provide services to RCG.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by Executive and RCG including,
without limitation, the promises and covenants described herein, the parties
hereto, intending to be legally bound, hereby agree as follows:
ARTICLE I
EMPLOYMENT
Section 1.1 Duties and Responsibilities. RCG hereby employs Executive full
time as the Executive Vice President of RCG. Executive shall do and perform all
reasonable services and acts necessary or advisable to fulfill the duties of
such office, and shall conduct and perform such additional services and
activities as may be reasonably determined from time to time by the Board of
Directors of RCG (the "Board"). During the term of this Agreement, Executive
shall devote her full time, energy and skill to the business of RCG and to the
promotion of RCG's interests, and Executive acknowledges that she has a duty of
loyalty to RCG and shall not, during the term hereof, engage in, directly or
indirectly, any other business or activity whether or not for pecuniary gain,
that could materially and adversely affect RCG's business or Executive's ability
to perform her duties under this Agreement. The foregoing shall not, however,
preclude Executive from serving on the boards of directors of other entities.
In her capacity as an officer of RCG, Executive shall report to the
Board and abide by all rules and regulations established from time to time by
the Board. Executive's authority and responsibility in RCG shall at all times be
subject to the review and discretion of the Board, which shall have the final
authority to make decisions regarding the business of RCG.
Section 1.2 Term of Employment. The term of Executive's employment
hereunder shall continue for a period of two (2) years from the Effective Date,
unless earlier terminated as provided in this Agreement. At the end of the
initial two (2) year term, and at the end of each renewal term, this Agreement
shall automatically be extended for an additional one (1) year terms unless
either party hereto shall give written notice of its or her intent to terminate
for any or no reason sixty (60) days prior to the end of the initial term or any
subsequent renewal term.
49
Section 1.3 Benefits. During the term of Executive's employment hereunder,
Executive will be entitled to the following:
(a) Vacation. Executive shall be entitled to four (4) weeks
paid vacation annually. Any unused vacation time will accumulate and carryover
to subsequent years. Any unused vacation time at the date of termination of this
Agreement (for any reason) will be paid to Executive in cash. Executive shall
also be entitled to reasonable holidays and sick days in accordance with RCG's
policy as may be established and modified from time to time.
(b) Employee Benefit Plans. Executive shall be entitled to
participate in all employee benefit plans, including any life insurance,
disability insurance, profit sharing and retirement plans that are generally
offered to or provided for the senior executives of RCG, said plans to be
approved by the Board. Executive shall be entitled to participate in such group
health and dental insurance plans (including family coverage) on the same basis,
including cost provisions, as may from time to time be offered generally to the
other senior executives of RCG.
Section 1.4 Compensation. For all services to be rendered by Executive
under this Agreement, RCG shall pay Executive as follows:
(a) Base Salary. Executive shall be paid an annual gross
salary of One Hundred Sixty Thousand Dollars ($160,000) payable in accordance
with the normal payroll practices of RCG, which policies may be changed by RCG
from time to time, and shall be subject to appropriate withholding taxes. In any
event, Executive's salary shall be paid no less frequently than monthly. At the
sole discretion of the Board, Executive's annual gross salary may be increased,
from time to time, throughout the term of this Agreement, the amount of any such
increase to be determined by the Board (or by the Compensation Committee
thereof).
(b) Annual Bonus. If the Board shall so authorize, Executive
shall be paid an annual bonus in an amount and in the manner approved by the
Board in its sole discretion (or by the Compensation Committee thereof), within
ninety (90) days of the end of each calendar year, provided Executive is still
employed by RCG.
Section 1.5 Stock Options. Executive shall be a participant in the 2000
Stock Option Plan of RCG. RCG shall grant Executive One Hundred and Twenty-Five
Thousand (125,000) options to purchase shares of stock of RCG at an exercise
price of Fifty-Five Cents ($.55) per share vesting quarterly over one (1) year
(the "Option Shares") pursuant to the terms and conditions of a stock option
agreement to be entered into between RCG and Executive (the "Stock Option
Agreement").
Section 1.6 Business Expenses. Executive shall be entitled to reimbursement
of all ordinary and necessary business expenses reasonably incurred for business
travel, lodging, communications (including cell phone and pager), entertainment
and meals in connection with the performance of Executive's duties under this
Agreement, upon submission of sufficient documentation evidencing same and in
accordance with RCG's established policies for reimbursement of business
50
expenses. RCG expects Executive to attend and participate in continuing
education seminars and courses with respect to venture capital, mergers and
acquisitions, the legal industry and business management related to her duties,
and RCG will reimburse all ordinary and necessary expenses of such attendance
and participation.
Section 1.7 Place of Employment. RCG agrees to provide an office for
Executive in Charlotte, North Carolina. RCG will provide at the Charlotte office
a computer and other equipment and assistance necessary in order for Executive
to complete her duties under this Agreement. Executive shall be entitled to
reside and perform her duties in Charlotte, North Carolina.
Section 1.8 Line of Credit. In order to facilitate the ability of Executive
to pay her federal, state and local income tax liabilities, RCG will provide
Executive with a line of credit equal to Executive's additional federal, state
and local tax liabilities, if any, resulting from Executive's ownership of stock
in RCG, including the receipt of the shares pursuant to Section 1.5 hereof, or
otherwise. Any amounts borrowed under this line of credit will be available to
Executive prior to the date that Executive must pay her federal and state income
taxes. This line of credit will bear interest at the rate of five percent
(5.00%) per annum. The interest attributable to the borrowed funds will be due
and payable yearly. The principal will be due on the earlier of: (i) termination
of this Agreement and (ii) sale of stock in RCG by Executive (but only to the
extent of sale proceeds).
ARTICLE II
COVENANTS OF EXECUTIVE
Section 2.1 Confidentiality. Executive recognizes the interest of RCG in
maintaining the confidential nature of its proprietary and other business and
commercial information. In connection therewith, Executive covenants that during
the term of her employment with RCG under this Agreement, and for a period of
two (2) years thereafter (except as set forth in Section 2.2 hereof), Executive
shall not, directly or indirectly, except as authorized in writing by the Board,
publish, disclose or use for her own benefit or for the benefit of a business or
entity other than RCG or otherwise, any secret or confidential matter, or
proprietary or other information not in the public domain that was acquired by
Executive during her employment, relating to RCG or any of its affiliates' or
subsidiaries' businesses, operations, customers, suppliers, products, employees,
financial information, budgets, practices, strategies, prices, methods,
technology, know-how, intellectual property, documentation, concepts,
improvements, plans, research and development, leads and/or marketing materials,
records, files, databases, accounting journals, accounts receivable records,
business plans and other similar information (the "Confidential Information");
provided, however, Confidential Information does not include information that
(i) is or becomes generally available to the public other than as a result of a
breach of this Agreement; (ii) is disclosed with the prior written consent of
RCG; (iii) at the time of such disclosure, was already known or in the
possession of Executive; (iv) becomes available to a competitor of RCG on a
non-confidential basis from a source other than Executive, which source is not
prohibited from disclosing such Confidential Information by a legal, contractual
or fiduciary obligation to RCG; or (v) is independently developed by a
competitor of RCG. Executive will abide by RCG's policies and regulations, as
established from time to time, for the protection of its Confidential
Information.
51
Section 2.2 Trade Secrets. Executive shall not, at any time, either during
or after the term of her employment with RCG under this Agreement, use or
disclose any "Trade Secrets" (as defined by the Delaware Uniform Trade Secrets
Act) of RCG or its affiliates or subsidiaries, except in fulfillment of her
duties during her employment, for so long as the pertinent information or data
remain Trade Secrets, whether or not the Trade Secrets are in written or
tangible form. Notwithstanding anything to the contrary contained herein,
Executive shall not be prohibited hereunder from disclosing Trade Secrets if, in
the written opinion of counsel for Executive, such disclosure is required by
applicable law, in which event Executive shall provide RCG with prompt written
notice of such request and shall take all reasonable action requested by RCG to
obtain confidential treatment of such Trade Secrets.
Section 2.3 Surrender of Records. Executive shall provide RCG with notice
of any inadvertent disclosure of Confidential Information. Executive
acknowledges that all Confidential Information is and shall remain the sole
property of RCG and/or such affiliated entity or subsidiary and shall, upon
termination of Executive's employment with RCG for any reason whatsoever, or
upon the request of RCG, turn over to RCG all Confidential Information, without
retaining notes or copies thereof (together with a written statement certifying
as to her compliance with the foregoing).
Section 2.4 Non-Solicitation of Clients/Employees. During the term of
Executive's employment with RCG, and for the one (1) year period following the
termination of Executive's employment with RCG for any reason, Executive shall
not, directly or indirectly:
(a) solicit or accept, or attempt to solicit or accept any
business from any individual or entity that was a customer or client of RCG
during the one (1) year period ending on the date of termination of Executive's
employment with RCG, or actively sought after prospective clients, for the
purpose of providing services or products to such customer or client which are
competitive with the services or products offered or provided by RCG; provided,
however, nothing herein shall preclude Executive from holding not more than
one-percent (1%) of the outstanding equity of any company, so long as Executive
does not, in fact, have the power to participate in controlling or directing the
management of such company other than by such voting equity; or
(b) employ, induce, solicit or attempt to solicit for
employment, or assist others in employing, inducing or soliciting for
employment, any individual who is or was an employee or independent contractor
of RCG at any time during the one (1) year period ending or the date of
termination of Executive's employment with RCG in an attempt to have any such
individual work for Executive, or any other individual or entity in the business
of raising venture capital for, and the development, operation and management
of, travel and technology-related companies.
52
Section 2.5 Acknowledgment of Reasonableness/Enforcement/Tolling.
----------------------------------------------------
(a) The existence of any claim or cause of action by Executive
against RCG predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by RCG of these covenants. Executive acknowledges and
confirms (i) that the restrictions contained herein are fair and reasonable and
not the result of overreaching, duress, or coercion of any kind, and (ii) that
Executive's full, uninhibited, and faithful observance of each of the covenants
contained in this Agreement will not cause Executive any undue hardship,
financial or otherwise. In the event that any court shall formally hold that the
restrictions in this Article II are unreasonable, Executive hereby expressly
agrees that the restrictions shall not be rendered void, but shall apply to the
extent that such court may judicially determine or indicate constitutes a
reasonable restriction.
(b) Executive acknowledges that the services to be rendered by
Executive hereunder are extraordinary and unique and are vital to the success of
RCG, and that damages at law would be an inadequate remedy for any breach or
threatened breach of this Agreement by Executive. Therefore, in the event of a
breach or threatened breach by Executive of any provision of this Agreement, RCG
shall be entitled, in addition to all other rights or remedies, to injunctions
restraining such breach, without being required to show any actual damage or to
post any bond or other security. No remedy herein conferred upon any party is
intended to be exclusive of any other remedy, and each and every such remedy
shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law, in equity or otherwise. No single
or partial exercise by any party of any right, power or remedy hereunder shall
preclude any other or further exercise thereof.
(c) In the event RCG should bring any legal action or other
proceeding for the enforcement of the Agreement, the time for calculating the
non-solicitation period, or terms of any other restriction herein shall not
include the period of time commencing with the filing of the legal action or
other proceeding to enforce the terms of the Agreement through the date of final
judgment or final resolution, including all appeals, if any, of such legal
action or other proceeding.
ARTICLE III
REPRESENTATIONS OF EXECUTIVE/INDEMNIFICATION
Section 3.1 Representations and Warranties of
Executive/Indemnification. Executive represents and warrants to RCG that she is
fully empowered to enter and perform her obligations under this Agreement and,
without limitation, that she is under no restrictive covenants to any person or
entity that will be violated by her entering into and performing this Agreement,
and that this Agreement constitutes the valid and legally binding obligation of
Executive enforceable in accordance with its terms. Executive shall indemnify
RCG upon demand for and against any and all judgments, losses, claims, damages,
costs (including, without limitation, all legal fees and costs, even if incident
to appeals) incurred or suffered by RCG as a result of the breach of the
representations and warranties made in this Article 3.
53
ARTICLE IV
TERMINATION OF EMPLOYMENT
Section 4.1 Termination by RCG. Executive's employment may be
terminated by RCG during the term of this Agreement upon the occurrence of one
or more of the following events:
(a) Termination For Death. Immediately upon Executive's death.
(c) Termination For Disability. Upon the effective date of written notice from
RCG (which shall not be prior to the date on which such notice is sent) in the
event of Executive's disability which renders Executive incapable of performing
her duties for more than one hundred eighty (180) calendar days in one calendar
year or within consecutive calendar years.
(c) Termination Without Cause. After the second (2nd)
anniversary of the Effective Date, RCG can terminate Executive's employment
without cause for any or no reason (other than those set forth in Section 4.1(d)
hereof), sixty (60) days after written notice (including a notice of nonrenewal
sent by RCG pursuant to Section 1.2 hereof) sent to Executive following a
determination by the Board to so terminate Executive's employment.
(d) Termination For Cause. Upon the effective date of written
notice sent to Executive (which shall not be prior to the date on which such
notice is sent) stating RCG's determination that it is terminating Executive for
"Cause", which for purposes of this Agreement shall mean:
(i) an intentional act of fraud, embezzlement or theft of funds or property of
RCG or any of its clients/customers;
(ii) any gross and willful misconduct having a substantial, adverse effect upon
RCG;
(iii)any intentional wrongful disclosure of Confidential Information or Trade
Secrets of RCG or its affiliates or any intentional form of self-dealing
detrimental to the interests of RCG;
(iv) conviction of a felony or any similar crime causing material harm to the
reputation of RCG as determined by the Board (for these purposes,
conviction shall include a plea of no contest or plea to any lesser charges
predicated on the same underlying conduct);
(v) the habitual and debilitating use of alcohol or drugs; or
(vi) failure to comply in any material respect with the terms of this Agreement,
which failure has a material adverse effect on RCG and has not been cured
by Executive within thirty (30) days after written notice from the Board of
any such act or omission.
54
Section 4.2 Resignation by Executive. Executive's employment may be
terminated by Executive during the term of this Agreement upon the occurrence of
one or more of the following events:
(a) Voluntary Resignation. Executive may terminate her
employment under this Agreement by giving sixty (60) days' prior written notice
to RCG (including a notice of nonrenewal sent by Executive pursuant to Section
1.2 hereof) stating Executive's election to terminate her employment with RCG.
RCG may accept such resignation effective as of any date during such sixty (60)
day period as RCG deems appropriate; provided, however, Executive shall receive
from RCG her base salary and be entitled to participate in any RCG benefit plans
in which she was a participant as of the effective date of her resignation for
the duration of such sixty (60) day period (as further provided in Section
4.4(a) hereof).
(b)Resignation With Cause. Upon the effective date of written
notice sent to RCG stating Executive's determination of "Constructive
Termination" (hereinafter defined) by RCG; provided, however, if the
Constructive Termination is curable, then RCG shall have thirty (30) days after
Executive's written notice to cure such condition and if RCG fails to cure such
condition to the reasonable satisfaction of Executive, then Executive may
immediately terminate her employment with RCG, such termination to be
conclusively deemed to be a resignation with cause. For purposes of this
Agreement, "Constructive Termination" shall mean:
(i) Such change in duties or position as:
(A) the assignment (other than an occasional
temporary assignment) to Executive of any duties not
commensurate with Executive's position, duties, responsibilities and status
with RCG;
(B) a material change in Executive's reporting
responsibilities, (i.e., reporting to a lower tier)
or a diminution in Executive's titles or offices; or
(C) a material diminution of Executive's authority or
responsibilities.
(ii) A reduction in Executive's base salary specified in
Section 1.4(a) hereof for the calendar year 2003, or a reduction in Executive's
base salary in effect for the prior calendar year for all succeeding years
(other than pro rata reductions in compensation for all senior executives of
RCG).
(iii) The requirement that Executive be based anywhere other
than within 30 miles of RCG's current office in Charlotte, North Carolina.
(iv) RCG's failure to comply in any material respect with the
terms of this Agreement.
55
Section 4.3 Change of Control. Upon (i) the effective date of a written
notice sent to Executive by RCG stating that a "Change of Control" (hereinafter
defined) has occurred or will occur and Executive's employment will be
terminated in connection therewith (despite RCG's best efforts to the contrary
as set forth in Section 5.8 hereof), which notice must be given no later than
sixty (60) days following such Change of Control, (ii) the date of termination
if Executive is terminated without cause or resigns with cause within eighteen
(18) months of a Change of Control, or (iii) the date of termination if
Executive voluntarily resigns within ninety (90) days following a Change of
Control. A "Change of Control" shall be deemed to have occurred if (A) as a
result of any merger, consolidation, sale, assignment, transfer or other
transaction, any person, other than those persons who are shareholders of RCG or
its affiliates (within the meaning of Rule 501 of the Securities Act of 1933) on
the date hereof, becomes the "beneficial owner" (as defined in Rule 13d-3 and
13d-5 under the Securities Exchange Act of 1934, as amended) of more than 50% of
the outstanding voting securities of RCG or the surviving entity or becomes
entitled to elect more than one-half (1/2) of the Board or other governing body
of RCG or the surviving entity; (B) a tender offer shall be made and consummated
of the ownership of 50% or more of the outstanding voting securities of RCG; (C)
Michael D. Pruitt is no longer the Chief Executive Officer of RCG; or (D) RCG
sells, assigns or otherwise transfers all or substantially all of the assets of
the RCG, to persons other than those persons who are shareholders of RCG, its
subsidiaries or affiliates; provided, however, in no event shall a financing
transaction (such as additional rounds of venture capital), which is approved by
the Board and entered into by RCG be deemed to be a "Change of Control" .
Section 4.4 Effect of Termination/Change of Control.
(a) Termination for Death or Voluntary Resignation. In the
event of termination of Executive's employment pursuant to Sections 4.1(a) or
4.2(a) hereof:
(i) RCG shall pay to Executive the base salary and expenses otherwise payable
to Executive under Sections 1.4(a) and 1.6 hereof through the date of
termination (provided that in the event of Executive's death, RCG shall
also pay to Executive's estate her base salary for a period of three (3)
months after the date of Executive's death), as well as any accrued but
unpaid vacation time. For purposes of this Agreement, one (1) week of
vacation shall be deemed to accrue each calendar quarter. Executive shall
not be entitled to receive any severance pay except to the extent the
Board, in its sole discretion, elects to authorize severance pay in the
event of Executive's voluntary resignation.
(ii) Executive's rights under RCG's benefit plans of general application shall
be determined under the provisions of those plans.
(iii)Executive shall not be entitled a bonus under Section 1.4(b) hereof for
the year of termination except to the extent the Board, in its sole
discretion, elects to authorize a bonus in the event of Executive's
voluntary resignation.
56
(iv) Executive's rights with respect to Option Shares shall be determined under
the provisions of the Stock Option Agreement.
(b) Termination For Disability; Termination Without Cause; Resignation With
Cause; Termination in Connection with a Change of Control. In the event of
termination of Executive's employment pursuant to Sections 4.1(b), 4.1(c),
4.2(b) or 4.3 hereof:
(i) RCG shall pay to Executive the base salary and expenses otherwise payable
to Executive under Sections 1.4(a) and 1.6 hereof through the date of
termination as well as any accrued but unpaid vacation time (provided that
in the event of Executive's disability, the base salary payable to
Executive shall be less any disability benefits provided by RCG). In
addition, Executive shall be entitled to twelve (12) months' salary
continuation at the then current rate, payable in accordance with the
normal payroll practices of RCG. Such severance payments are to be
considered compensation for services previously rendered hereunder.
(ii) Executive shall continue to participate in RCG's group health plan for
twelve (12) months following the date of termination upon the timely
periodic payment of any amount required for employees to maintain family
coverage for such plan, and rights under other benefit plans shall be
determined under the provisions of those plans.
(iii)Executive shall be entitled to a bonus under Section 1.4(b) hereof for the
year of termination in an amount as determined by the Board (or by the
Compensation Committee thereof) in its sole discretion.
(iv) Executive's rights with respect to the Option Shares shall be determined
under the provisions of the Stock Option Agreement.
(c) Termination For Cause. In the event of termination of Executive's
employment prior to Section 4.1(d) hereof:
(i) RCG shall pay to Executive the base salary and expenses otherwise payable
pursuant to Sections 1.4(a) and 1.6 hereof through the date of termination.
Executive shall not be entitled to receive any severance pay whatsoever.
(ii) Executive's rights under RCG's benefit plans of general application shall
be determined under the provisions of those plans.
(iii)Executive shall not be entitled to a bonus under Section 1.4(b) hereof for
the year of termination.
(iv) Executive's rights with respect to the Option Shares shall be determined
under the provisions of the Stock Option Agreement.
57
Section 4.5 Gross Up Payment.If RCG or its accountants determine that
any payments called for under this Agreement or any other payments or benefits
made available to Executive by RCG or its affiliates will result in Executive
being subject to an excise tax ("Excise Tax") under Section 4999 of the Internal
Revenue Code of 1986, as amended, or any successor statute thereto, or if an
Excise Tax is assessed against Executive as a result of such payments or other
benefits, RCG shall make a "Gross-Up Payment" (hereinafter defined) to or on
behalf of Executive as and when such determination(s) and assessment(s), as
appropriate, are made, subject to the conditions of this Section 4.5. A
"Gross-Up Payment" shall mean a payment to or on behalf of Executive that shall
be sufficient to pay (i) any Excise Tax in full, (ii) any federal, state and
local income tax and Social Security or other employment tax on the payment made
to pay such Excise Tax as well as any additional Excise Tax on the Gross-Up
Payment, and (iii) any interest or penalties assessed by the Internal Revenue
Service on the Executive if such interest or penalties are attributable to
eRGC's failure to comply with its obligations under this Section 4.5 or
applicable law. Any determination under this Section 4.5 by RCG or its
accountants shall be made in accordance with Section 280G of the Code and any
applicable related regulations (whether proposed, temporary or final) and any
related Internal Revenue Service rulings and related case law. Executive shall
take such action (other than waiving Executive's right to any payments or
benefits) as RCG may reasonably request under the circumstances to mitigate or
challenge such tax. If RCG reasonably requests that Executive take action to
mitigate or challenge any such tax or assessment and Executive complies with
such request, RCG shall provide Executive with such information and such expert
advice and assistance from RCG's accountants, lawyers and other advisors as
Executive may reasonably request and shall pay for all expenses incurred in
effecting such compliance and any related fines, penalties, interest and other
assessments.
ARTICLE V
GENERAL PROVISIONS
Section 5.1 Survival. Notwithstanding anything to the contrary herein,
the provisions of this Agreement shall survive and remain in effect in
accordance with their respective terms in the event Executive's employment is
terminated for any reason.
Section 5.2 Enforcement Costs. If any civil action, arbitration, or
other legal proceeding is brought for the enforcement of the Agreement, or
because of an alleged dispute, breach, default or misrepresentation in
connection with any provision of the Agreement, the successful or prevailing
party or parties shall be entitled to recover reasonable attorneys' fees, sales
and use taxes, court costs, and all expenses (including, without limitation, all
such fees, taxes, costs, and expenses incident to arbitration, appellate and
post-judgment proceedings), incurred in that civil action, arbitration, or legal
proceeding, in addition to any other relief to which such party or parties may
be entitled.
Section 5.3 Notices. For purposes of this Agreement, all communications
including, without limitation, notices, consents, requests or approvals,
provided for herein shall be in writing and shall be deemed to have been duly
given (a) when personally delivered, (b) on the day of transmission when given
by facsimile transmission with confirmation of receipt, (c) on the following day
if submitted to a nationally recognized courier service, or (d) five (5)
business days after having been mailed by United States registered mail or
certified mail, return receipt requested, postage prepaid, addressed to:
58
If to RCG: If to Executive:
eResource Capital Group, Inc. Melinda Morris Zanoni
5935 Carnegie Boulevard, Suite 101 1565 Stanford Place
Charlotte, NC 28209 Charlotte, North Carolina 28207
Attn: Michael D. Pruitt
Facsimile: (704) 553-7136
or to such other address as a party may have furnished to the other in writing
and in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
Section 5.4 Governing Law. The validity, interpretation, construction,
performance and enforcement of this Agreement shall be governed by the laws of
the State of North Carolina, without giving effect to the principles of
conflicts of law of such State.
Section 5.5 Severability. If any provision of this Agreement or the
application of any provision hereof to any person or circumstances is held
invalid, unenforceable or otherwise illegal, under applicable law or regulation,
the remainder of this Agreement and the application of such provision to any
other person or circumstances shall not be affected, and the provision so held
to be invalid, unenforceable or otherwise illegal shall be reformed to the
extent (and only to the extent) necessary to make it valid, enforceable and
legal; provided, however, if the provision so held to be invalid, unenforceable
or otherwise illegal constituted a material inducement to a party's execution
and delivery of this Agreement, such provision shall not be reformed unless
prior to any reformation that party agrees to be bound by the reformation.
Section 5.6 Entire Agreement. This Agreement supersedes any other
agreements, oral or written, between the parties with respect to the subject
matter hereof, and contains all of the agreements and understandings between the
parties with respect to the employment of Executive by RCG.
Section 5.7 Amendments. Any amendment or modification of any term of
this Agreement shall be effective only if it is set forth in writing signed by
the parties hereto.
Section 5.8 Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective administrators,
executors, representatives, heirs, successors and permitted assigns. "Successor"
shall mean any successor in interest, pursuant to a Change of Control as set
forth in Section 4.3 hereof. RCG shall use its best efforts to cause any
Successor which is not obligated to assume RCG's contracts to agree at the time
of becoming a Successor to perform this Agreement to the same extent as the
original parties would be required if no succession had occurred.
59
Section 5.9 Assignment. This Agreement is personal in nature and the
parties shall not, without written consent, assign, transfer or delegate this
Agreement or any rights or obligations hereunder.
Section 5.10 Waivers. No provision of this Agreement may be waived or
discharged unless such waiver or discharge is agreed to in writing signed by the
party to be bound. No waiver by a party hereto at any time of any breach or
noncompliance with any provision or condition of this Agreement to be performed
by such other party shall be deemed a waiver of any other provisions or
conditions at the same or at any prior or subsequent time.
Section 5.11 Captions. The captions in this Agreement are solely for
convenience of reference and shall not be given any effect in the construction
or interpretation of this Agreement.
Section 5.12 Counterparts/ Facsimile Signatures. This Agreement may be
executed in one or more counterparts (whether by facsimile or otherwise), each
of which shall be deemed to be an original, but all of which together will
constitute one and the same Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
60
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the date first above written.
RCG:
ERESOURCE CAPITAL GROUP, INC.
By:
-------------------------------------------
Michael D. Pruitt
Its: President
APPROVED BY THE COMPENSATION COMMITTEE:
---------------------
Dr. James A.Verbrugge
-------------------
Jeffrey F. Willmott
EXECUTIVE:
---------------------
Melinda Morris Zanoni
61
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)
Pursuant to, and solely for purposes of, 18 U.S.C. Section 1350 (Section 906 of
the Sarbanes-Oxley Act of 2002), each of the undersigned hereby certifies in the
capacity and on the date indicated below that:
1. The Quarterly Report of eResource Capital Group, Inc. (the "Registrant") on
Form 10-QSB for the period ended December 31, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the "Report") fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Registrant.
/s/ Michael D. Pruitt Dated: February 13, 2003
- --------------------------------------------
Michael D. Pruitt
Principal Executive Officer
/s/ Eric D. Burgess Dated: February 13, 2003
- --------------------------------------------
Eric D. Burgess
Principal Accounting Officer
62