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 September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 1-8662
eResource Capital Group, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 23-2265039
(State of Incorporation) (IRS Employer Identification No.)
5935 CARNEGIE BOULEVARD
SUITE 101
CHARLOTTE, NC 28209
(704) 553-9330
(Address of registrant's principal executive
offices including zip code and telephone number, including area code)
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
twelve months (or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
Check whether the issuer filed all reports required to be filed by Section 12,
13 or 15(d) of the Exchange Act after the distribution of securities under a
plan confirmed by a court. Yes [X] No [ ]
The number of shares outstanding of the Registrant's common stock ("Common
Stock") as of November 14, 2002: 12,569,803
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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 September 30, 2002 and June 30, 2002.........................3
Condensed Consolidated Statements of Operations for the three months ended
September 30, 2002 and 2001.........................................................................4
Condensed Consolidated Statements of Cash Flows for the three months ended
September 30, 2002 and 2001.........................................................................5
Notes to Condensed Consolidated Financial Statements..................................................6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................19
ITEM 3. Controls and Procedures..............................................................................24
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings....................................................................................25
ITEM 2. Changes in Securities................................................................................25
ITEM 3. Defaults Upon Senior Securities......................................................................25
ITEM 4. Submission of Matters to a Vote of Security Holders..................................................25
ITEM 5. Other Information....................................................................................25
ITEM 6. Exhibits and Reports on Form 8-K.....................................................................26
Signatures......................................................................................................26
Certifications
Section 302 Certification of the Principal Executive Officer.........................................27
Section 302 Certification of the Principal Accounting Officer........................................28
Exhibit Index...................................................................................................29
Section 906 Certification.......................................................................................30
2
eResource Capital Group, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
September 30, June 30,
2002 2002
------------ ------------
ASSETS
Cash and cash equivalents ............................................ $ 1,839 $ 1,511
Accounts receivable, net of allowance of doubtful accounts of $197
and $258, respectively ........................................ 2,499 3,135
Inventory ............................................................ 249 211
Investments .......................................................... 534 814
Prepaid expenses ..................................................... 2,322 2,918
------------ ------------
Total current assets ................................. 7,443 8,589
Deferred costs and other assets ..................................... 349 321
Property and equipment, net .......................................... 1,488 1,472
Goodwill, net ........................................................ 18,555 18,490
------------ ------------
Total assets ......................................... $ 27,835 $ 28,872
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable - current portion ...................................... $ 2,185 $ 407
Notes and amounts due to affiliates, net ............................. 50 144
Accounts payable and accrued expenses ................................ 5,709 6,147
Unearned income ...................................................... 2,518 3,329
------------ ------------
Total current liabilities ............................ 10,462 10,027
Notes payable ........................................................ 1,015 2,854
------------ ------------
Total liabilities .................................... 11,477 12,881
------------ ------------
Minority interest .................................................... 601 --
------------ ------------
Shareholders' equity:
Common stock, $.04 par value, 200,000,000 shares authorized,
12,558,606 and 12,381,463 issued, respectively ................. 502 495
Additional paid-in capital .................................... 114,055 114,040
Accumulated deficit ........................................... (97,924) (97,774)
Accumulated other comprehensive (loss) income ................. (268) (51)
Treasury stock at cost (78,357 and 92,643 shares, respectively) (608) (719)
------------ ------------
Total shareholders' equity ........................... 15,757 15,991
------------ ------------
Total liabilities and shareholders' equity ........... $ 27,835 $ 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 September 30,
2002 2001
------------- -------------
Revenue:
Services ................................................... $ 15,361 $ 6,675
Product sales .............................................. 3,467 2,931
------------- -------------
Total revenue ....................................... 18,828 9,606
------------- -------------
Cost of revenue:
Services ................................................... 14,186 7,040
Product sales .............................................. 3,046 2,468
------------- -------------
Total cost of revenue ............................... 17,232 9,508
------------- -------------
Gross profit ........................................ 1,596 98
------------- -------------
Selling, general and administrative expenses - compensation
related to issuance of stock options and warrants ...... 33 --
Selling, general and administrative expenses - other ....... 1,992 2,228
Provision for bad debts .................................... 4 59
Depreciation and amortization .............................. 107 87
------------- -------------
Operating costs and expenses ........................ 2,136 2,374
------------- -------------
Operating loss ...................................... (540) (2,276)
Interest expense, net ...................................... 102 9
(Gain) loss on investments, net ............................ (175) 211
(Gain) on sale of assets ................................... -- (171)
Other (income) ............................................. (263) --
Minority interest .......................................... (54) --
------------- -------------
Loss from continuing operations ..................... (150) (2,325)
Gain on disposal of discontinued operations ................ -- 576
------------- -------------
Loss before cumulative effect of change in accounting
principle ...................................... (150) (1,749)
Cumulative effect of change in accounting principle ........ -- (693)
------------- -------------
Net loss ................................................... $ (150) $ (2,442)
============= =============
Basic and diluted net loss per share:
Loss from continuing operations ........................ $ (0.01) $ (0.21)
Gain on disposal of discontinued operations ............ $ -- $ 0.05
Cumulative effect of change in accounting principle .... -- (0.06)
------------- -------------
Net income (loss) ................................... $ (0.01) $ (0.22)
============= =============
Weighted average shares outstanding ........................ 12,319,907 10,954,006
============= =============
Weighted average shares outstanding, assuming dilution ..... 12,319,907 10,954,006
============= =============
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)
Three months ended September 30,
2002 2001
---------- ----------
Cash flows from operating activities:
Loss from continuing operations ................................. $ (150) $ (2,325)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization .............................. 107 87
Bad debt expense ........................................... 4 59
Common stock issued for services ........................... -- 7
Stock purchase warrants received for services .............. -- (25)
Unrealized loss on stock purchase warrants ................. 33 211
(Gain) loss on sale of investments ......................... (208) --
(Gain) loss on sale of assets .............................. -- (171)
Compensation expense related to stock options and warrants . 33 --
Deferred debt cost amortization ............................ 17 --
Minority interest .......................................... (54) --
Changes in operating assets and liabilities:
Accounts and notes receivables ......................... 632 (269)
Inventory .............................................. (25) (100)
Prepaid expenses ....................................... 756 550
Deferred costs and other assets ........................ (52) 7
Accounts payable and accrued expenses .................. (502) 950
Due to affiliates ...................................... (48) --
Unearned income ........................................ (811) (667)
---------- ----------
Cash used in continuing operations ..................... (268) (1,686)
Discontinued operations, net ............................... -- 150
---------- ----------
Net cash used in operating activities .................. (268) (1,536)
Cash flows from investing activities:
Purchase of property, plant and equipment .................. (76) (124)
Sale of investments ........................................ 131 23
Sale of assets ............................................. -- (53)
Cash (paid) in connection with business acquisitions, net .. (50) (290)
---------- ----------
Net cash provided (used in) by investing activities .... 5 (444)
Cash flows from financing activities:
Notes payable proceeds ..................................... -- 1,740
Principal debt repayments .................................. (62) (6)
Capital contribution by shareholder ........................ -- 50
Cash raised through LFSI transaction ....................... 274 --
LFSI private placement sale of common stock ................ 260 --
Sale of RCG common stock ................................... 119 --
---------- ----------
Net cash provided by financing activities .............. 591 1,784
Net increase (decrease) in cash and cash equivalents ............ 328 (196)
Cash and cash equivalents at beginning of period ................ 1,511 1,286
---------- ----------
Cash and cash equivalents at end of period ...................... $ 1,839 $ 1,090
========== ==========
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 September 30,
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 September 30, 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
September 30, 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
$150,000 during the three months ended September 30, 2002. The Company used cash
of $268,000 in operations during the three months ended September 30, 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 September 30, 2002, the Company had cash and cash equivalents of
$1,839,000 and investments of $534,000.
The Company's significant working capital deficit is due primarily to $2,185,000
of current debt, of which $2,007,000 is due in the quarter ended September 30,
2003 and $139,000 is due on demand. The Company has a commitment for $750,000 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. 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 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 will be diluted.
6
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 common
stock, which represented approximately 79% of the outstanding stock of LFSI at
the closing date. LFSI has agreed to complete a registration statement within 90
days of closing to register the shares of LFSI common stock received by the
Company in the LFSI Transaction. The transaction added approximately $320,000 of
cash, $50,000 of which was received in the 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 $260,000 in equity funding from its private placement program.
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.
CASH AND CASH EQUIVALENTS
The Company classifies as cash equivalents any investments which can be readily
converted to cash and have an original maturity of less than three months. At
times cash and cash equivalent balances at a limited number of banks and
financial institutions may exceed insurable amounts. The Company believes it
mitigates its risks by depositing cash or investing in cash equivalents in major
financial institutions.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash, accounts receivable, investments, and
notes payable. The Company places its temporary cash with high credit quality
financial institutions. The Company performs periodic credit evaluations of its
customers' financial condition and generally does not require collateral.
Although due dates of receivables vary based on contract terms, credit losses
have been within management's estimates in determining the level of allowance
for doubtful accounts. Overall financial strategies are reviewed periodically.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
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 month period ended September 30, 2002, sales to Vacation
Express and Suntrips, both members of the MyTravel Group, customers of the
Company's aviation travel services business, represented 69% 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 quarter ended September 30, 2001, sales to Vacation
Express and Aviation Network Services, also a customer of the Company's aviation
travel services business, represented 42% and 22%, 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.
7
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
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 quarter ended
September 30, 2002 aggregated $33,000 versus $211,000 for the quarter ended
September 30, 2001.
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.
8
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.
In September 2002, the Company acquired the assets of eGolf.com, an internet web
site specializing in the retail of golf equipment, which resulted in the
recording of $65,000 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
Internet website development services project revenue is recognized on a
percentage of completion basis for fixed fee contracts, based on the ratio of
costs incurred to total estimated costs for individual projects. Revenue is
recognized as services are performed for time and material contracts at the
applicable billing rates.
Unbilled revenue represents revenue earned under contracts in advance of
billings. Such amounts are normally converted to accounts receivable within 90
days. Unearned income 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.
9
The Company provides e-commerce marketing and business development services to
clients pursuant to contracts with varying terms. The contracts generally
provide for monthly payments and, in some cases, advance deposits. Revenue is
recognized over the respective contract period as services are provided.
Revenue from uncollateralized e-commerce sales or sales of hardware and software
is recognized upon passage of title of the related goods to the customer.
NET LOSS PER SHARE
The Company computes net loss per share in accordance with FAS No. 128,
"Earnings per Share" 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
3,757,449 and 3,697,628 shares of Common Stock were outstanding at September 30,
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 months ended
September 30, 2002 and 2001 as the impact would have been anti-dilutive.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising expense
aggregated $74,000 and $120,000 for the three months ended September 30, 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.
10
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.
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 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.
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
11
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.
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.
NOTE 3. INVESTMENTS
Investments consist of the following (in thousands):
September 30, 2002 June 30, 2002
------------------ -------------
Net Net
Unrealized Fair Unrealized Fair
Cost (Loss) Value Cost (Loss) Value
---------- ---------- ---------- ---------- ---------- ----------
Equity securities $ 709 $ (268) $ 441 $ 712 $ (51) $ 661
Certificates of deposit 25 -- 25 52 -- 52
---------- ---------- ---------- ---------- ---------- ----------
$ 734 $ (268) $ 466 $ 764 $ (51) $ 713
========== ========== ========== ==========
Stock purchase warrants 68 101
---------- ----------
$ 534 $ 814
========== ==========
The Company's certificate of deposit at September 30, 2002 is pledged as
collateral security for the Company's letter of credit for a trade credit line.
As of September 30, 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 September 30, 2002 and June 30, 2002,
respectively.
12
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
September 30, June 30,
2002 2002
------------ ------------
Land, buildings and improvements 431 382
Furniture and fixtures 431 430
Computers and office equipment 1,144 1,155
Software 306 252
Showroom (home technology) 131 102
Vehicles (home technology) 12 12
------------ ------------
2,455 2,333
Accumulated depreciation (967) (861)
------------ ------------
$ 1,488 $ 1,472
============ ============
NOTE 5. NOTES PAYABLE
Notes payable consists of the following (in thousands):
September 30, 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 the 10% and secured by certain real estate 34 --
Note payable - unsecured and due on demand 5 55
Note payables - due in August 2003 with interest imputed at 8% and unsecured (3) 463 463
Note payable - due in August 2003 with interest at 10% and collateralized by certain home
technology assets (3) 300 300
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 (3) 200 200
Note payable - due in August 2003 with interest at 12% and collateralized by certain home
technology accounts receivable and inventory (1) 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 208 217
Capital lease obligation at 12% due in monthly installments of $710 through September 2004 10 11
Mortgage payable to a bank in monthly installments of $1,751, including interest at 7.96%
through October 2015 and collateralized by the assets of the internet/technology
solutions business 178 179
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 $96,399 (2) 670 704
---------- ----------
3,200 3,261
Less current maturities, including demand notes (2,185) (407)
---------- ----------
Long-term portion $ 1,015 $ 2,854
---------- ----------
(1) At the option of the noteholder, this note can be converted into RCG's
Common Stock at a ratio of one (1) share of Common Stock for each $4.55
of outstanding principal and interest.
(2) 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.
(3) 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.
13
NOTE 6. INCOME TAXES
As of September 30, 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 and one of its subsidiary's 1994 and 1995
tax returns, which the Company has appealed. At September 30, 2002 and June 30,
2002, the Company had recorded a federal tax liability of $305,830 related to
such assessment.
NOTE 7. COMMON STOCK AND PAID IN CAPITAL
In the quarter ended 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 September 30,
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.
14
The following table summarizes the outstanding options at September 30, 2002 and
June 30, 2002:
September 30, 2002 June 30, 2002
------------------ -------------
Vesting Vesting
Exercise Term Period Exercise Term Period
Shares Price (Years) (Months) Shares Price (Years) (Months)
------ ----- ------- -------- ------ ----- ------- --------
87,857 $ 1.26 10 * 48 * 87,857 $ 1.26 10 * 48 *
476,428 1.75 to 1.96 10 12 to 48 479,286 1.75 to 1.96 10 12 to 48
328,571 4.90 10 12 328,571 4.90 10 12
142,857 5.25 10 -- 142,857 5.25 10 --
6,940 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
94,779 5.95 10 12 to 38 96,476 5.95 10 12 to 38
38,571 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 --
----------- -----------
1,315,289 1,321,232
=========== ===========
* 35,714 non-qualified options issued to an employee in December 2001 have a
three-year term and are fully vested.
Of the options outstanding at September 30, 2002, 1,136,175 are exercisable.
The following table summarizes the outstanding warrants at September 30, 2002
and June 30, 2002:
September 30, 2002 June 30, 2002
------------------ -------------
Exercise Term Exercise Term
Shares Price (Years) Shares Price (Years)
------ ----- ------- ------ ----- -------
793,768 $ 0.28 54 793,768 $ 0.28 54
150,000 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*
----------- -----------
2,442,160 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 79,377
with an exercise price of $0.28 that vest in December 2002, 9,523 with an
exercise price of $5.67 that vest over 3 years, 112,500 that vest in equal
quarterly amounts in December 2002, March 2003 and June 2003 and 7,143 that vest
upon the holder meeting the requirements of a capital raise commitment.
15
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 at
combined total of approximately 794,000 shares of the Company's Common Stock at
$0.28 per share, which are reflected in the warrant table above. The vesting
dates related to these warrants were December 31, 2000, 2001 and 2002. Due to
the termination of its Private Seats(TM) program, during fiscal 2001, the
Company expensed $5.2 million in connection with these warrants. The Company has
questioned whether the supplier has actually vested in the warrants due to the
fact that the program was terminated and the supplier was not required to
perform the services among other considerations. The Company is presently in
negotiations with this supplier to terminate these agreements and eliminate the
related warrants. At this time, the Company cannot predict what the outcome of
these negotiations will be.
NOTE 9. GENERAL AND ADMINISTRATIVE EXPENSE - OTHER
Following is a summary of the Company's general and administrative expenses (in
thousands):
Three months Ended September 30,
--------------------------------
2002 2001
---- ----
Compensation expense $ 1,121 $ 1,220
Legal and professional fees 194 173
Public and investor relations 23 57
Marketing and advertising 74 120
Rent expense 144 174
Insurance 58 99
Telecommunications 69 100
Office and printing expense 112 104
Travel and entertainment 101 68
Other 96 113
----------- -----------
$ 1,992 $ 2,228
=========== ===========
NOTE 10. RELATED PARTY TRANSACTIONS
Amounts due to affiliates consisted of the following (in thousands):
September 30, June 30,
2002 2002
---------- ----------
Note payable to Mr. Pruitt $ 11 11
Advance payable to Mr. Pruitt 27 25
Note payable to a company owned by Mr. Pruitt 65 108
Advance payable to a company owned by a director (24) --
Advance receivable from a director (29) --
---------- ----------
$ 50 $ 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 September 30,
2002, the balance outstanding on this bank facility was $100,000.
16
Mr. Pruitt is also a minority investor in a company that has purchased franchise
licenses and business operations of the Company's home technology business in
three markets in South Carolina, including Hilton Head, where he is a director
of a company that owns 100% of the franchise, and in another company that is a
franchisee of the Company's home technology business in three locations in the
state of Maryland.
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 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., which acquired the
Company's home technology business in September 2002 as further described in
Note 2 to these financial statements. Mr. Johnson has submitted his resignation
to the Company as a director effective October 31, 2002 due to his being
appointed the CEO of LFSI. The advance receivables from a director and a company
owned by a director above represent advances to Paul Johnson and a company owned
by Mr. Johnson during the quarter ended September 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
$196,000 and $227,000 at September 30, 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 September 30, 2002 and June 30,
2002, total debt outstanding to Mr. Gordon and this company was $1,450,000 and
$1,500,000, respectively. Mr. Gordon has an ownership interest in seven 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.
17
NOTE 11. BUSINESS SEGMENT INFORMATION
Information related to business segments is as follows (in thousands):
Three months ended September 30, 2002: Aviation
Travel Call Technology Home
Services Center Solutions Technology Corporate Total
--------- --------- --------- --------- --------- ---------
Revenue $ 15,060 $ 9 $ 3,219 $ 540 $ -- $ 18,828
Income (loss) from continuing operations 670 (42) (27) (508) (243) (150)
Identifiable assets 5,008 106 10,445 10,340 1,936 27,835
Capital expenditures 2 1 39 34 -- 76
Depreciation and amortization 14 4 59 26 4 107
Three months ended September 30, 2001: Aviation
Travel Call Technology Home
Services Center Solutions Technology Corporate Total
--------- --------- --------- --------- --------- ---------
Revenue $ 6,042 $ 20 $ 2,770 $ 744 $ 30 $ 9,606
Income (loss) from continuing operations (965) (45) (548) (309) (458) (2,325)
Identifiable assets 2,659 261 13,389 10,533 859 27,701
Capital expenditures -- -- 55 69 -- 124
Depreciation and amortization 11 5 55 16 -- 87
The Company's sales are primarily to customers in the United States of America.
International sales are minimal.
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 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 September 30, 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.
18
Item 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
The following table summarizes results of operations for the quarters ended
September 30, 2002 and 2001 (in thousands):
Three Months Ended Three Months Ended
September 30, 2002 September 30, 2001
--------------------------- ---------------------------
% of % of
Revenue Revenue
Revenue:
Services $ 15,361 81.6% $ 6,675 69.5%
Product sales 3,467 18.4% 2,931 30.5%
--------------------------- ---------------------------
Total revenue 18,828 100.0% 9,606 100.0%
--------------------------- ---------------------------
Cost of revenue:
Services 14,186 75.3% 7,040 73.3%
Product sales 3,046 16.2% 2,468 25.7%
--------------------------- ---------------------------
Total cost of revenue 17,232 91.5% 9,508 99.0%
--------------------------- ---------------------------
Gross profit 1,596 8.5% 98 1.0%
--------------------------- ---------------------------
Selling, general and administrative expenses - compensation
related to issuance of stock options and warrants 33 0.2% -- 0.0%
Selling, general and administrative expenses - other 1,992 10.6% 2,228 23.2%
Provision for bad debts 4 0.0% 59 0.6%
Depreciation and amortization 107 0.6% 87 0.9%
--------------------------- ---------------------------
Operating costs and expenses 2,136 11.3% 2,374 24.7%
--------------------------- ---------------------------
Operating loss (540) -2.9% (2,276) -23.7%
Interest expense, net 102 0.5% 9 0.1%
(Gain) loss on investments, net (175) -0.9% 211 2.2%
(Gain) on sale of assets -- 0.0% (171) -1.8%
Other (income) (263) -1.4% -- 0.0%
Minority interest (54) -0.3% -- 0.0%
--------------------------- ---------------------------
Loss from continuing operations (150) -0.8% (2,325) -24.2%
Gain on disposal of discontinued operations -- 0.0% 576 6.0%
--------------------------- ---------------------------
Loss before cumulative effect of change in accounting
principle (150) -0.8% (1,749) -18.2%
Cumulative effect of change in accounting principle -- 0.0% (693) -7.2%
--------------------------- ---------------------------
Net loss $ (150) -0.8% $ (2,442) -25.4%
=========================== ===========================
The Company's revenues in the three months ended September 30, 2002 were
$18,828,000 compared to $9,606,000 in the same period 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
decrease in revenues from the home technology business due to a focused
reduction of business with certain unprofitable customers, partially offset by
increased revenues from franchise fees and royalties.
19
During the three month period ended September 30, 2002, sales to Vacation
Express and Suntrips, both members of the MyTravel Group, customers of the
Company's aviation travel services business, represented 69% of the Company's
consolidated revenue. For the quarter ended September 30, 2001, sales to
Vacation Express and Aviation Network Services, also a customer of the Company's
aviation travel services business, represented 42% and 22%, respectively, of the
Company's consolidated revenue.
Gross profit in the three months ended September 30, 2002 was $1,596,000
compared to $98,000 in the same period a year ago. The increase in the current
period is 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 8.5% overall gross margin in the quarter ended
September 30, 2002 compared to 1.0% 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 quarter ended September 30, 2002, the Company reported $33,000 of
non-cash expense related to the issuance of options and warrants. No such
amounts were recognized in the three months ended September 30, 2001 because
there were no compensatory warrants vesting for service providers.
Selling, general and administrative expenses-other in the three months ended
September 30, 2002 was $1,992,000 compared to $2,228,000 in the comparable
period a year ago. This decrease is due to lower staff costs and
telecommunications costs resulting from reduced number of employees, lower
marketing and advertising costs and lower rent costs. Selling, general and
administrative expenses-other were reduced to 11% of revenue in the three months
ended September 30, 2002 from 23% of revenue in the same period a year ago.
Provision for bad debts decreased to $4,000 in the three months ended September
30, 2002 compared to $59,000 in the same period 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 month period
ended September 30, 2002 was $107,000 compared to $87,000 in the same period a
year ago. The increase is due to depreciation of the fixed asset additions.
In the three month period ended September 30, 2002, the Company incurred
$103,000 of net interest expense related to its debt portfolio, which increased
from approximately $690,000 at June 30, 2001 to $3,200,000 at September 30,
2002.
In the quarter ended September 30, 2002, the Company recorded a net gain on
investments of $175,000 of which $208,000 relates to Company's sale of LFSI
stock obtained in the LFSI Transaction. In September 2002, the Company completed
the private sale of 125,000 shares of LFSI 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. The net gain on
all investment activity during the quarter is net of losses of approximately
$33,000 related to non-cash market adjustments of common stock purchase
warrants. For the quarter ended September 30, 2001, the Company recognized a net
loss on investments of $211,000 representing non-cash market adjustments of
warrants. The results for the three months ended September 30, 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 quarter ended September 30, 2002.
20
The Company realized a gain of $576,000 on the sale of its discontinued
commercial real estate business in the three months ended September 30, 2001.
In 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.
Continuing Operations of Business Segments
The following table summarizes results of continuing operations by business
segment for the quarters ended September 30, 2002 and 2001 (in thousands):
Three Months Ended September 30, 2002 Three Months Ended September 30, 2001
------------------------------------- -------------------------------------
Gross
Gross Income Profit
Revenue Profit (Loss) Revenues (Deficit) (Loss)
-------- -------- -------- -------- -------- --------
Aviation Travel Services $15,060 $ 987 $ 670 $ 6,042 $ (700) $ (965)
Telecommunications Call Center 9 9 (42) 20 20 (45)
Home Technology 540 183 (508) 744 152 (309)
Technology Solutions 3,219 417 (27) 2,770 596 (548)
Corporate -- -- (243) 30 30 (458)
-------- -------- -------- -------- -------- --------
$18,828 $ 1,596 $ (150) $ 9,606 $ 98 $(2,325)
-------- -------- -------- -------- -------- --------
Aviation Travel Services
The Company's aviation travel services business revenues in the three months
ended September 30, 2002 were $15,060,000 compared to $6,042,000 in the same
period 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 quarter
ended September 30, 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 has reduced
its scheduled flights program between August 2002 and December 2002 from six
planes to four. Total revenues with Vacation Express, a member of the MyTravel
Group, were $7,426,000 in the quarter ended September 30, 2002 compared to
$3,999,000 in the same period 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, also a member of
the MyTravel Group, which provides service between several western cities and
destinations in Mexico. The Company recognized revenues of $5,570,000 from this
program during the quarter ended September 30, 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.
Gross profit for the Company's aviation travel services business in the three
months ended September 30, 2002 was $987,000 compared to a gross profit deficit
of $700,000 in the same period a year ago. This business generated income of
$670,000 for the quarter ended September 30, 2002 compared to a loss of $965,000
in the same period 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 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 quarter ended September 30, 2001 was
adversely affected by losses incurred on a jet shuttle business, which operated
at a gross margin deficit.
21
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 $540,000 for the quarter ended September 30,
2002 compared to $744,000 for the same period 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 14
geographic markets to franchisees, primarily in the southern and southeastern
United States. 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 months
ended September 30, 2002 was $183,000, or 34%, compared to $152,000, or 20%, in
the same period a year ago. The increase in gross profit percentage was the
result of higher franchise fees and royalties, staff reductions and the positive
result of eliminating certain unprofitable customers.
This business generated a loss of $508,000 in the three months ended September
30, 2002, compared to a loss of $309,000 in the same period a year ago. The
prior year results 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 $54,000 of losses to the minority
shareholders.
Technology Solutions
The Company's technology solutions business recorded revenues of $3,219,000 for
the quarter ended September 30, 2002 compared to $2,770,000 for the same period
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 months
ended September 30, 2002 was $417,000 compared to a gross profit of $596,000 in
the same period a year ago. The reduction in gross profits was due primarily to
a change in revenue mix from internet and data networking consulting, which are
relatively higher margin businesses in comparison to its lower margin software
resale activities.
This business incurred a loss of $27,000 for the quarter ended September 30,
2002 compared to a loss of $548,000 in the same period 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 a loss from continuing operations of $243,000 for the quarter
ended September 30, 2002 compared to a loss of $458,000 in the same period a
year ago. Excluding the net gain on investments, Corporate's loss would have
been $417,000 for the current year period. The reduction in loss from continuing
operations is due primarily to staff reductions, lower public and investor
relations costs, lower legal and professional fees and other costs saving
measures. The prior year loss includes $30,000 of business advisory services
revenue recorded in the three months ended September 30, 2001.
22
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 product 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 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 September 30, 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 three months ended September 30, 2002 of $150,000
and unrealized losses on marketable securities of $217,000, were partially
offset by an increase to shareholders' equity related to the sale of Common
Stock, with net proceeds of $119,000 and an increase in shareholders' equity of
$14,000, as a result of the a final settlement of a contract with an service
provider, resulting in a net decrease in shareholders' equity of $234,000 for
the quarter.
Minority interest increased due to the LFSI transaction described above which
resulted in net funding of $613,000 and the Company's sale of LFSI stock
obtained in the LFSI transaction, which resulted in an increase in minority
interest of $42,000. These increases were slightly offset by the minority
shareholders' portion of LFSI's losses of $54,000.
For the quarter ended September 30, 2002, operations used $268,000 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 quarter ended September
30, 2002, net cash flow from investing activities was $5,000 due primarily to
cash received from the sale of investments of $131,000, offset by net property
and equipment purchases of $76,000 and the 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. The Company received $100,000 related to private
sale of 125,000 shares of LFSI common stock to a private investor during the
three months ended September 30, 2002. An additional $150,000 in proceeds was
received in October 2002. For the quarter ended September 30, 2002, net cash
flow from financing activities was $591,000 as a result of $274,000 raised
through the LFSI transaction, $260,000 raised through LFSI's private placement
sale of common stock and $119,000 raised through the sale of the Company's
Common Stock. These amounts were offset slightly by principal debt repayments of
$62,000. At September 30, 2002, the Company had a working capital deficit of
$3,019,000. At September 30, 2002 the Company held cash and cash equivalents of
$1,839,000 and investments of $534,000.
The Company's significant working capital deficit is due primarily to $2,185,000
of current debt, of which $2,007,000 is due in the quarter ended September 30,
2003 and $139,000 is due on demand. The Company has a commitment for $750,000 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. 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
23
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 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.
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.
24
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.
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
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
Effective August 28, 2002, Sylvia de Leon resigned from the Company's Board in
order to dedicate more time to other Boards on which she presently serves.
Effective September 30, 2002, Eric Black resigned from the Company's Board in
order to accept a full time consulting position with a publicly traded company.
Both of these former directors have confirmed that they had no disagreements
with the Board, the Company or Company management prior to their resignations.
On October 17, 2002, the Company's Board appointed Jeffrey F. Willmott, most
recently the Chairman and Chief Executive Officer of EKN Asset Management, a
registered investment advisory firm in New York City, to the Board to fill the
vacancy on the Board created by Ms. de Leon's resignation. Also on October 17,
2002, the Company's Board appointed Dr. Randolph A. Pohlman, the Dean of the H.
Wayne Huizenga School of Business at Nova Southeastern University in Fort
Lauderdale, Florida to the Board to fill the vacancy on the Board created by Mr.
Black. Both Mr. Willmott and Mr. Pohlman were elected unanimously with all
directors present and voting.
Effective October 16, 2002, the Company's Board appointed Mr. Willmott the
Chairman of the Compensation Committee to fill the vacancy created by the
resignation of Melinda Morris Zanoni as a member of the Compensation Committee.
Paul Johnson submitted his resignation to the Company as a director effective
October 31, 2002 due to his being appointed the CEO of LFSI. It is not currently
anticipated that Mr. Johnson will be replaced.
On September 30, 2002, John Van Heel, the Company's Vice President, of Finance,
resigned in order to pursue another employment opportunity. In September 2002,
the Company hired a Senior Vice President, Finance, Eric Burgess, who is
assuming the responsibilities previously held by Mr. Van Heel and who commenced
employment September 30, 2002.
25
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).
99.1 Cetification 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.
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: November 14, 2002 By: /s/ Michael D. Pruitt
--------------------------------------------
Michael D. Pruitt
Chairman of the Board
(principal executive officer)
Date: November 14, 2002 By: /s/ Eric D. Burgess
--------------------------------------------
Eric D. Burgess
Senior Vice President, Finance; Treasurer
(principal financial and accounting officer)
26
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
November 14, 2002
27
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
November 14, 2002
28
Exhibit Index
-------------
Exhibit No. Description Page No.
----------- ----------- --------
99.1 Certification Pursuant to 18 U.S.C Section 1350 30
29