-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GWdBM/sKJM2/9Z0K7VcfL93dNO8rstDHqLUzkUVr9utvRRw+AkGQPe9qosG1WtEd FEoIlthsehQHFRuX0BdlKA== 0001144204-04-020127.txt : 20041122 0001144204-04-020127.hdr.sgml : 20041122 20041122165623 ACCESSION NUMBER: 0001144204-04-020127 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041122 DATE AS OF CHANGE: 20041122 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RCG COMPANIES INC CENTRAL INDEX KEY: 0000722839 STANDARD INDUSTRIAL CLASSIFICATION: LAND SUBDIVIDERS & DEVELOPERS (NO CEMETERIES) [6552] IRS NUMBER: 232265039 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08662 FILM NUMBER: 041161316 BUSINESS ADDRESS: STREET 1: 6836 MORRISON BOULEVARD STREET 2: SUITE 200 CITY: CHARLOTTE STATE: NC ZIP: 28211 BUSINESS PHONE: 7043665054 MAIL ADDRESS: STREET 1: 6836 MORRISON BLVD STREET 2: SUITE 200 CITY: CHARLOTTE STATE: NC ZIP: 28211 FORMER COMPANY: FORMER CONFORMED NAME: ERESOURCE CAPITAL GROUP INC DATE OF NAME CHANGE: 20001113 FORMER COMPANY: FORMER CONFORMED NAME: FLIGHTSERV COM DATE OF NAME CHANGE: 19990716 FORMER COMPANY: FORMER CONFORMED NAME: PROACTIVE TECHNOLOGIES INC DATE OF NAME CHANGE: 19950921 10-Q 1 v09188_10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549-0001 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED: SEPTEMBER 30, 2004. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 From the Transition Period From to . Commission File Number: 1-8662 RCG COMPANIES INCORPORATED - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 23-2265039 - --------------------------------- ----------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 6836 MORRISON BOULEVARD, SUITE 200, CHARLOTTE, NC 28211-2668, (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 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES |X| NO [ ] Check whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X] The number of shares outstanding of the Registrant's common stock ("Common Stock") as of November 18, 2004: 21,170,290 - ------------------------------------------------------------------------------- TABLE OF CONTENTS - -------------------------------------------------------------------------------
Page PART I. FINANCIAL INFORMATION.....................................................................................2 Item 1. Condensed Consolidated Financial Statements.....................................................2 Condensed Consolidated Balance Sheets at September 30, 2004 (Unaudited) and June 30, 2004...........................................................................................2 Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2004 and September 30, 2003 (Unaudited).................................................3 Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2004 and September 30, 2003 (Unaudited).................................................4 Notes to the Condensed Consolidated Financial Statements....................................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..........14 Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................21 Item 4. Controls and Procedures........................................................................21 PART II. OTHER INFORMATION.......................................................................................22 Item 1. Legal Proceedings..............................................................................22 Item 2. Changes in Securities..........................................................................22 Item 3. Defaults Upon Senior Securities................................................................22 Item 4. Submission of Matters to a Vote of Security Holders............................................22 Item 5. Other Information..............................................................................23 Item 6. Exhibits.......................................................................................23 Signatures.......................................................................................................23
1 - -------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION - -------------------------------------------------------------------------------- ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS RCG COMPANIES INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
Sept. 30, 2004 June 30, (Unaudited) 2004 -------------- -------------- ASSETS Cash and cash equivalents ....................................................... $ 2,640 $ 6,596 Restricted cash ................................................................. 19,210 40,387 Accounts receivable, net of allowance of doubtful accounts of $328 and $332, respectively .................................................................. 3,679 4,532 Due from affiliates ............................................................. 6 69 Inventory ....................................................................... 73 72 Investments ..................................................................... 322 327 Prepaid expenses ................................................................ 3,371 5,824 -------------- -------------- Total current assets .................................................. 29,301 57,807 Property and equipment, net ..................................................... 1,751 1,527 Deferred costs and other assets ................................................. 459 508 Goodwill and other intangible assets ............................................ 24,394 24,452 -------------- -------------- Total assets ........................................................... $ 55,905 $ 84,294 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Notes payable and other obligations-current portion ............................. $ 2,148 $ 1,942 Accounts payable and accrued expenses ........................................... 21,857 28,466 Unearned income ................................................................. 20,914 38,519 -------------- -------------- Total current liabilities .............................................. 44,919 68,927 Warrant obligations ............................................................. 2,802 1,520 Notes payable and other obligations ............................................. 7,279 7,657 -------------- -------------- Total liabilities ...................................................... 55,000 78,104 -------------- -------------- Commitments and Contingencies Shareholders' equity: Preferred stock, $.01 par value, 10,000,000 shares authorized, 4,300 and -0- issued, respectively ..................................................... -- -- Common stock, $.04 par value, 200,000,000 shares authorized, 21,301,504 and 21,289,004 issued, 21,170,290 and 21,157,790 outstanding, respectively ... 850 849 Additional paid-in capital ................................................. 123,832 121,386 Accumulated deficit ........................................................ (122,869) (115,137) Accumulated other comprehensive loss ....................................... (276) (276) Treasury stock at cost (131,214 shares) .................................... (632) (632) -------------- -------------- Total shareholders' equity ............................................. 905 6,190 -------------- -------------- Total liabilities and shareholders' equity ............................. $ 55,905 $ 84,294 ============== ==============
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 2 RCG COMPANIES INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited, in thousands, except share data)
Three months ended September 30, 2004 2003 -------------- -------------- Revenue: Services ................................... $ 52,283 $ 15,701 Product sales .............................. 4,517 3,412 -------------- -------------- Total revenue ..................... 56,800 19,113 -------------- -------------- Cost of revenue: Services ................................... 53,484 14,822 Product sales .............................. 4,016 3,024 -------------- -------------- Total cost of revenue ............. 57,500 17,846 -------------- -------------- Gross (loss) profit ............... (700) 1,267 -------------- -------------- Selling, general and administrative expenses 6,791 1,493 Depreciation and amortization .............. 213 102 -------------- -------------- Operating costs and expenses ...... 7,004 1,595 -------------- -------------- Operating loss .................... (7,704) (328) Interest expense, net ...................... (278) (49) Gain on investments, net ................... -- 119 Other income ............................... 250 97 -------------- -------------- Loss from continuing operations ... (7,732) (161) Loss from discontinued operations, net ..... -- (729) -------------- -------------- Net loss ................................... $ (7,732) $ (890) ============== ============== Basic and diluted net loss per share: Loss from continuing operations ....... $ (0.37) $ (0.02) Loss from discontinued operations ..... -- (0.05) -------------- -------------- Net loss .......................... $ (0.37) $ (0.07) ============== ============== Weighted average shares outstanding ........ 21,166,198 14,292,798
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 3 RCG COMPANIES INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands)
Three months ended September 30, 2004 2003 ------------ ------------ Cash flows from operating activities: Net loss .................................................................. $ (7,732) $ (890) Loss on discontinued operations ........................................... -- 729 ------------ ------------ Loss from continuing operations ....................................... (7,732) (161) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ......................................... 213 93 Gain on sale of investments ........................................... -- (119) Amortization of unfavorable airline contract .......................... (1,205) -- Change in fair value of warrants ...................................... (256) -- Deferred debt cost amortization ....................................... 256 9 Changes in operating assets and liabilities: Restricted cash .................................................. 21,177 1,235 Accounts receivable .............................................. 853 375 Inventory ........................................................ (1) (19) Prepaid expenses ................................................. 2,453 946 Deferred costs and other assets .................................. 49 (12) Accounts payable and accrued expenses ............................ (6,081) (1,143) Due to affiliates ................................................ 63 -- Unearned income .................................................. (17,605) (1,844) ------------ ------------ Net cash used in continuing operating activities ............. (7,816) (640) Net cash used in discontinued operations ..................... -- (239) ------------ ------------ Net cash used in operating activities .................... (7,816) (879) Cash flows from investing activities: Purchase of property and equipment ........................................ (120) (24) Sale of investments ....................................................... -- 135 ------------ ------------ Net cash provided by (used in) continuing investing activities ........ (120) 111 Net cash used in discontinued operations .............................. -- (11) ------------ ------------ Net cash provided by (used in) investing activities .............. (120) 100 Cash flows from financing activities: Notes payable proceeds .................................................... -- 5 Principal debt repayments ................................................. (185) (4) Net change in line of credit .............................................. 168 (259) Issuance of RCG equity securities ......................................... 3,997 988 ------------ ------------ Net cash provided by continuing financing activities .................. 3,980 730 Net cash provided by discontinued operations .......................... -- 233 ------------ ------------ Net cash provided by financing activities ........................ 3,980 963 ------------ ------------ Net increase (decrease) in cash and cash equivalents ...................... (3,956) 184 Cash and cash equivalents at beginning of period .......................... 6,596 808 ------------ ------------ Cash and cash equivalents at end of period ..................................... $ 2,640 $ 992 ============ ============
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 4 RCG COMPANIES INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (Unaudited, in thousands)
Three months ended September 30, 2004 2003 ------------ ------------ Supplemental disclosure of cash flow information Cash paid during the period for: Interest .................................................. $ 83 $ 40 Income taxes .............................................. -- -- Non-cash investing and financing activities: Common stock and warrants issued for conversion of debt ... -- 810 Common stock and warrants issued for conversion of accounts payable and accrued expenses ......................... -- 70 Conveyance of RCG's LFSI Common Stock for services ........ -- 119
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 5 RCG COMPANIES INCORPORATED AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The Condensed Consolidated Financial Statements are unaudited and include the accounts of RCG Companies Incorporated and its subsidiaries ("RCG" or the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by such generally accepted accounting principles for complete financial statements. In the opinion of the management of the Company, the unaudited Condensed Consolidated Financial Statements contain all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair statement of the results of operations for the interim periods presented, with no material retroactive adjustments. The results of operations for interim periods are not indicative of the results that may be expected for a full year due to the seasonality of the business. These interim unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto for the year ended June 30, 2004 included in the Company's Annual Report on Form 10-K. OPERATIONS AND LIQUIDITY Certain reclassifications have been made to data from the previous period to conform to the presentation of the current period. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has suffered recurring losses from operations and as of September 30, 2004 had a working capital deficit of $15,618,000. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management recognizes that in order to meet the Company's capital requirements, and continue to operate, additional funding is necessary. The Company is exploring additional sources of liquidity, through debt and equity financing alternatives. Additionally the Company is negotiating the restructure of its long-term debt. If the Company is (i) unable to grow its business or improve its operating cash flows as expected, (ii) unsuccessful in extending a substantial portion of the debt repayments currently past due, or (iii) unable to raise additional funds through sales of debt and equity securities or sale of certain assets or portions of the business, then the Company may be unable to continue as a going concern. There can be no assurance that additional financing will be available when needed or, if available, that it will be on terms favorable to the Company and its 6 RCG COMPANIES INCORPORATED AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) stockholders. If the Company is not successful in generating sufficient cash flows from operations, or in raising additional capital when required in sufficient amounts and on terms acceptable to the Company, these failures would have a material adverse effect on the Company's business, results of operations and financial condition. If additional funds are raised through the issuance of equity securities, the percentage ownership of the Company's current shareholders would be diluted. These Consolidated Financial Statements do not include any adjustments that may result from the outcome of these uncertainties. SIGNIFICANT ACCOUNTING POLICIES WARRANT OBLIGATION In accordance with Emerging Issues Task Force Issue 00-19, or EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock", the fair value of warrants issued in certain private placements has been initially accounted for as a liability because the Company will incur a substantial penalty if it cannot comply with the warrant holders' registration rights or have other net-cash settlement features. As of the closing date of the private placements, the fair value of the warrants was approximately $3,058,000, calculated utilizing the Black-Scholes option pricing model. Changes in the market value of the Company's common stock from the closing date until the warrants are exercised or expire will result in non-cash charges or credits to operations to reflect the change in fair value of the warrants during this period. To reflect the change in market value of the warrants, the Company recorded a credit to operations of approximately $256,000 during the three-month period ended September 30, 2004. STOCK-BASED COMPENSATION The Company has elected to continue to follow the intrinsic value method of accounting as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), to account for employee stock options. Under APB 25, no compensation expense is recognized unless the exercise price of the Company's employee stock options is less than the market price of the underlying stock on the date of grant. The Company's pro forma net loss and net loss per share assuming compensation cost was determined under FASB No. 123 for all options would have been the following for the three months ended September 30, 2004 and September 30, 2003 (in thousands, except share amounts).
2004 2003 -------------- -------------- Net loss, as reported ................................................ $ (7,732) $ (890) Stock-based employee compensation credit included in reported net loss -- -- -------------- -------------- (7,732) (890) Deduct: Stock-based compensation expense determined under FAS 123 .... (31) (45) -------------- -------------- Pro forma net loss ................................................... $ (7,763) $ (935) ============== ============== Earnings per share: Basic and diluted loss per share, as reported ........................ $ (0.37) $ (0.07) ============== ============== Basic and diluted loss per share, pro forma .......................... $ (0.37) $ (0.07) ============== ==============
7 RCG COMPANIES INCORPORATED AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The Company's other significant accounting policies are the same as those applied at June 30, 2004 and disclosed in the Company's audited Consolidated Financial Statements and notes thereto for the year ended June 30, 2004, included in the Company's Annual Report on Form 10-K. NOTE 2. ACQUISITIONS Through its wholly owned subsidiary, Flightserv, Inc. ("Flightserv"), RCG concluded the acquisition of substantially all of the assets and liabilities of VE Holdings, Inc. ("Vacation Express") and SunTrips, Inc. ("SunTrips") (the "Acquired Companies"), effective October 31, 2003. The Acquired Companies were integrated into the Company's existing Travel Services business to form its largest operating segment. The Company had previously provided services to the Acquired Companies. The Acquired Companies provide specialized distribution of leisure travel products and services. Vacation Express, based in Atlanta, Georgia, sells air and hotel packages to Mexico and Caribbean destinations, and SunTrips, based in San Jose, California, sells air and hotel packages to Mexico, Dominican Republic, Costa Rica, Hawaii and the Azores out of Oakland, California and/or Denver, Colorado. In connection with the acquisition, the Company issued a $10 million non-interest bearing seven-year promissory note discounted to $5.3 million at 12.00% per annum for imputed interest (the "Promissory Note") from Flightserv, secured by certain RCG investment holdings. Additionally, the Acquired Companies entered into a three-year agreement with MyTravel Canada Holidays, Inc. ("MyTravel Canada") for certain services, including the purchasing of hotel accommodations on an exclusive basis. MyTravel Canada will be paid approximately $4.5 million over three years under this agreement, discounted to $3.8 million at 12.00% per annum for imputed interest (the "Service Agreement Obligation"). Effective November 12, 2004, the Company entered into an agreement to amend the terms and amount of both the Promissory Note and the Service Agreement Obligation (see Note 8, "Subsequent Events"). The acquisition was accounted for under the purchase method of accounting in accordance with Statement of Financial Accounting Standards ("SFAS") No.141, "Business Combinations". The purchase price was allocated to the net assets acquired, including the liabilities assumed as of October 31, 2003, based upon their estimated fair values as of that date with the remainder being recorded as goodwill, which is deductible for tax purposes. The consideration, which included acquisition costs of $314,091, was allocated as follows (in thousands). Current assets....................................... $ 25,116 Property and equipment............................... 629 Goodwill............................................. 15,050 Other intangible assets.............................. 702 ------------ Total assets acquired........................... 41,497 Current liabilities.................................. 32,646 ------------ Net assets acquired............................. $ 8,851 ============ 8 RCG COMPANIES INCORPORATED AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) On November 5, 2003, the Technology Solutions business completed the acquisition of SchoolWorld Software, a Pittsburgh, Pennsylvania-based educational software company. The consideration, which included acquisition costs of $48,702 and the issuance of 224,312 shares valued at $380,000, was allocated as follows (in thousands). Property and equipment.................................... $ 14,500 Goodwill and other intangible assets...................... 414,202 -------------- Total assets acquired................................ $ 428,702 ============== NOTE 3. DISCONTINUED OPERATIONS During the third quarter of 2004, the Board authorized the disposition of the Company's investment in Lifestyle Innovations, Inc. ("LFSI"). Accordingly, the operations of LFSI were reclassified to discontinued operations for all periods presented. During the fourth quarter of 2004, the Company contributed approximately 4 million shares to the treasury of LFSI, of which a substantial portion of the contributed shares were reissued to certain LFSI investors to settle certain contingent claims. LFSI also issued other shares, which resulted in RCG's interest in LFSI being reduced to an effective 45.5% beneficial ownership. Considering the substantial reduction in ownership and the lack of control over LFSI, the investment in LFSI is now recorded using the equity method and is no longer a consolidated subsidiary. The change resulted in RCG restoring its negative carrying value during the fourth quarter, which was recognized as a gain on deconsolidation of LFSI. The loss from discontinued operations for the three months ended September 30, 2003 is summarized as follows (in thousands). Gross revenues.......................................$ 480 Cost of revenues and operating expenses.............. (1,493) ------------- Net loss per LFSI financials......................... (1,013) Minority interest.................................... 284 ------------- Loss from discontinued operations....................$ (729) ============= 9 RCG COMPANIES INCORPORATED AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 4. NOTES PAYABLE AND OTHER OBLIGATIONS Notes payable and other obligations consisted of the following at September 30, 2004 (unaudited, in thousands) and June 30, 2004 (in thousands).
Sept. 30, June 30, 2004 2004 -------------- -------------- Note payable - in the amount of $9,850, less unamortized discount of $4,109, imputed at 12%, secured by certain investment holdings (1) .................................. $ 5,741 $ 5,724 Service agreement obligation - in the amount of $3,000, less unamortized discount of $445 imputed at 12% and unsecured (2) ............................................... 2,655 3,129 Revolving credit facility (maximum borrowing $1 million)- secured by substantially all assets of the Technology Solutions business with interest at prime-plus-2% (6.75% at September 30, 2004) ................................................................. 601 433 Capital lease obligations at interest rates ranging from 4.2% to 17.1%, due in monthly installments through November 2007 ................................................. 285 153 Note payable - due July 27, 2003 and unsecured (3) .................................... 145 160 -------------- -------------- 9,427 9,599 Less current maturities, including demand notes ....................................... (2,148) (1,942) -------------- -------------- Long-term portion ..................................................................... $ 7,279 $ 7,657 ============== ==============
(1) On October 31, 2003, Flightserv purchased two businesses (see Note 2) for a $10 million non-interest-bearing seven-year note. Payments commence quarterly beginning June 30, 2004. See Note 8, "Subsequent Events", for amended amounts and terms, effective November 12, 2004. (2) On October 31, 2003, Flightserv agreed to pay $4.5 million to MyTravel Canada for certain services over a three-year period beginning November 1, 2003. See Note 8, "Subsequent Events", for amended amounts and terms, effective November 12, 2004. (3) The Company currently is negotiating with the debt holder to extend the term or agree on a payment schedule. NOTE 5. SECURITIES PURCHASE AGREEMENT The Company entered into a Securities Purchase Agreement, dated September 13, 2004, with institutional and accredited investors (collectively the "Investors"). Pursuant to the terms of the Securities Purchase Agreement, the Company issued the following securities to the Investors in consideration for the Investors making payment to the Company in the aggregate amount of $4,300,000: (i) 4,300 shares of Series A 6% Convertible Preferred Stock, with a stated value of $1,000 per share; the shares are initially convertible into shares of Common Stock of the Company at a fixed price of $0.94 per share, subject to adjustment ("Set Price") and that are, subject to certain conditions, subject to forced conversion by the Company at any time the common shares of the Company have a volume weighted average price ("VWAP") which exceeds 200% of the Set Price for the preceding ten trading days, (ii) Warrants to purchase approximately 1,143,617 shares of Common Stock of the Company at an exercise 10 RCG COMPANIES INCORPORATED AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) price of $1.20 per share, exercisable commencing six months after the closing date (September 14, 2004) until the date that is three years after such date, with anti-dilution provisions subject to a $1.00 floor, and that are subject to certain conditions, callable by the Company at any time the common shares of the Company have a VWAP that exceeds 200% of the exercise price for the preceding 20 trading days, and (iii) Additional Investment Rights to purchase approximately 3,430,851 shares of Common Stock of the Company at an exercise price of $1.03 per share, exercisable commencing six months after the closing date until the earlier of (a) the later of the date that is six months after the effective date of the registration statement covering the shares and the date that is one year after the closing date, and (b) September 13, 2006, with standard anti-dilution, and that are, subject to certain conditions, callable by the Company at any time the common shares of the Company have a VWAP greater than or equal to 160% of the exercise price for the preceding 20 trading days. On September 14, 2004, the Company filed an amended Certificate of Incorporation with the Secretary of the State of Delaware. The Certificate amends the Company's Certificate of Incorporation to fix the preferences, rights and limitations of the Series A 6% Convertible Preferred Stock, as described above. In connection with the aforementioned Securities Purchase Agreement, the Exercise Price to holders of 2.5 million Common Stock Purchase Warrants (dated October 31, 2003) has been reduced from $2.442 per share to $0.94 per share, pursuant to the Warrant Agreement. NOTE 6. RELATED-PARTY TRANSACTIONS The Company's Travel Services business entered into a one-year public relations contract. The wife of a former president of the Travel Services business is an employee of the public relations firm. This contract was terminated on August 26, 2004. During three months ended September 30, 2004, $14,730 was paid for services rendered. G. David Gordon, a Company stockholder, also occasionally acts as legal counsel to the Company. On April 19, 2004, Robert H. Brooks, Chairman of Hooters of America, Inc., Hooters Air and Pace Airlines, Inc. joined the Company's Board of Directors. In addition, Mr. Brooks made a $1,000,000 cash investment in the Company, and provided a waiver of the requirement of delivery of a letter of credit in the amount of $1,000,000 to Pace Airlines, Inc., a charter airline company that charters planes to the Company's Travel Services division. In exchange, the Company issued 1,250,000 restricted shares of Common Stock and a warrant to purchase 1,250,000 restricted shares of Common Stock at an exercise price of $2.44 per share. On August 2, 2004, Mr. Brooks resigned from the Company's Board of Directors. Company Director K. Wesley M. Jones, Sr. has a 25% ownership stake in a private investment group that has secured certain letters of credit issued by the Company in the amount of $2 million. During the three months ended September 30, 2004, the Company paid the private investment group $60,000. 11 RCG COMPANIES INCORPORATED AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 7. BUSINESS SEGMENT INFORMATION Information related to business segments is as follows (in thousands).
Corporate Total Three months ended September 30, 2004: Travel Technology Services Solutions - ------------------------------------------------- ------------ --------------- ------------- ------------ Revenue....................................... $ 52,178 $ 4,622 $ -- $ 56,800 Gross margin.................................. (1,302) 602 -- (700) Loss from continuing operations............... (7,175) (68) (489) (7,732) Three months ended September 30, 2003: - ------------------------------------------------- Revenue....................................... $ 15,578 $ 3,535 $ -- $ 19,113 Gross margin.................................. 828 439 -- 1,267 Income (loss) from continuing operations...... 157 (9) (309) (161)
NOTE 8. SUBSEQUENT EVENTS In connection with the acquisition of substantially all of the assets and liabilities of VE Holdings, Inc. ("Vacation Express") and SunTrips, Inc. ("SunTrips") (the "Acquired Companies") (as described in Note 2), the Company issued a $10 million non-interest bearing seven-year promissory note discounted to $5.3 million at 12.00% per annum for imputed interest (the "Promissory Note") from Flightserv. Additionally, the Acquired Companies entered into a three-year agreement with MyTravel Canada Holidays, Inc. ("MyTravel Canada") for certain services, including the purchasing of hotel accommodations on an exclusive basis. MyTravel Canada will be paid approximately $4.5 million over three years under this agreement, discounted to $3.8 million at 12.00% per annum for imputed interest (the "Service Agreement Obligation"). Effective November 12, 2004, the Company entered into an agreement to amend the terms and amounts of both the Promissory Note and the Service Agreement Obligation as follows. (1) Reduced the non-interest-bearing Promissory Note to $1 million, discounted to $555,000 at 12.00% per annum for imputed interest payable in: (i) four (4) equal yearly payments of $100,000, commencing on October 31, 2006 and continuing on the last day of each October through October 31, 2009, and (ii) a final balloon payment in the amount of $600,000 on October 31, 2010. (2) Extended the Service Agreement Obligation four additional years to now expire on October 31, 2010. The Agreement provides for additional payments of $4.9 million, discounted to $3.0 million at 12.00% per annum for imputed interest over the new term of the agreement. 12 RCG COMPANIES INCORPORATED AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 9. COMMITMENTS AND CONTINGENCIES GUARANTEE OBLIGATION The Company's Travel Services segment has certain guarantees with an airline provider that agrees to a minimum number of hours during each program year and is required to pay any shortage to the provider. The segment does not anticipate a shortage and accordingly no amount has been accrued. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's business, results of operations and financial condition are subject to many risks. In addition, statements in this report relating to matters that are not historical facts are forward-looking statements based on management's belief and assumptions based on currently available information. Such forward-looking statements include statements relating to estimates of future revenue and operating income, cash flow and liquidity. Words such as "anticipates", "expects", "intends", "believes", "may", "will", "future" or similar expressions are intended to identify certain forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it cannot give any assurances that these expectations will prove to be correct. Such statements involve a number of risks and uncertainties, including, but not limited to, those discussed herein or included in the Company's Annual Report on Form 10-K, filed registration statements, and other documents filed by the Company with the SEC. OVERVIEW Effective October 31, 2003, the Company's Travel Services subsidiary concluded the acquisition of substantially all of the assets and liabilities, except for certain excluded items, of Vacation Express and SunTrips. Also effective November 5, 2003, the Company's Technology Solutions subsidiary completed the acquisition of substantially all of the assets and liabilities of SchoolWorld, except for certain excluded items. Accordingly, the operating results of these subsidiaries (the "Acquired Businesses") have been included in the reported results of the Company subsequent to that date. The results of the Company, excluding the results of the Acquired Businesses, are referred to herein as the existing business (the "Existing Business"). Refer to Note 2 to the financial statements for more detail on the specifics of the transactions. 14 The following table summarizes the consolidated results of operations (in thousands).
Three Months Ended Sept. Three Months Ended Sept. 30, 2004 30, 2003 % of % of Amount Revenue Amount Revenue -------------- -------------- -------------- -------------- Revenues: Services .............................. $ 52,283 92.0% $ 15,701 82.1% Product sales ......................... 4,517 8.0% 3,412 17.9% -------------- -------------- -------------- -------------- Total revenue ..................... 56,800 100.0% 19,113 100.0% -------------- -------------- -------------- -------------- Cost of revenue: Services .............................. 53,484 94.1% 14,822 75.6% Product sales ......................... 4,016 7.1% 3,024 15.8% -------------- -------------- -------------- -------------- Total cost of revenue ............. 57,500 101.2% 17,846 93.4% -------------- -------------- -------------- -------------- Gross profit (loss) ....................... (700) (1.2%) 1,267 6.6% -------------- -------------- -------------- -------------- Selling, general and administrative expenses 6,791 12.0% 1,493 7.8% Depreciation and amortization .............. 213 0.4% 102 0.5% -------------- -------------- -------------- -------------- Operating cost and expenses ....... 7,004 12.4% 1,595 8.3% -------------- -------------- -------------- -------------- Operating loss .................... (7,704) (13.6%) (328) (1.7%) Interest expense, net ...................... (278) (0.4%) (49) (0.2%) Gain on investments, net ................... -- -- 119 0.6% Other income ............................... 250 0.4% 97 0.5% - -------------------------------------------- -------------- -------------- -------------- -------------- Loss from continuing operations ............ $ (7,732) (13.6%) $ (161) (0.8%) ============== ============== ============== ==============
Information related to business segments is as follows (in thousands).
Travel Technology Three months ended September 30, 2004 Services Solutions Corporate Total - ------------------------------------------- -------------- -------------- ------------ -------------- Revenue ................................... $ 52,178 $ 4,622 $ -- $ 56,800 Gross margin .............................. (1,302) 602 -- (700) Loss from continuing operations ........... (7,175) (68) (489) (7,732) Three months ended September 30, 2003: - ------------------------------------------------- Revenue ................................... $ 15,578 $ 3,535 $ -- $ 19,113 Gross margin .............................. 828 439 -- 1,267 Income (loss) from continuing operations .. 157 (9) (309) (161)
15 THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2004 COMPARED TO THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2003 OPERATIONS OF BUSINESS SEGMENTS Travel Services The following table summarizes results of continuing operations of the Travel Services segment (in thousands).
Three Months Ended: September 30, 2004 September 30, 2003 % of % of Amount Revenue Amount Revenue -------------- -------------- -------------- -------------- Revenues ................................... $ 52,178 100.0% $ 15,578 100.0% Cost of revenue ............................ 53,480 102.5% 14,750 94.7% -------------- -------------- -------------- -------------- Gross (loss) profit ................... (1,302) (2.5%) 828 5.3% Selling, general and administrative expenses 5,435 10.4% 617 4.0% Depreciation and amortization .............. 175 0.3% 34 0.2% -------------- -------------- -------------- -------------- Operating cost and expenses ........... 5,610 10.7% 651 4.2% -------------- -------------- -------------- -------------- Operating (loss) profit ............... $ (6,912) (13.2%) $ 177 1.1% ============== ============== ============== ==============
For the three months ended September 30, 2004, the revenues of the Company's Travel Services business were $52,178,000 compared to $15,578,000 for in the same period a year before, which is an increase of $36,600,000. The increase from the prior year is primarily attributable to the acquisition of Vacation Express and SunTrips; however, revenues were less than expected. The Travel Services business is in an intensely competitive market with adverse market conditions due significantly to excess capacity of available passenger's seats. Increased competition has created aggressive sales promotions with significantly discounted fares. The implementation of SunTrips' new online reservation system has severely hindered bookings for the quarter. We estimate that $6,000,000 of revenues were missed as a direct result of implementation problems and delays. For the three months ended September 30, 2004, the gross loss for the Company's Travel Services business was ($1,302,000) compared to $828,000 for the same period a year before. Gross margins declined as a direct result of the reduced revenues and not being able to absorb air cost. The majority of our air cost is fixed and is difficult to reduce when bookings decline. The price of jet fuel continues to increase. Competitive market conditions have prevented us from passing increases, in the form of surcharges, to our customers. Even though none of our destinations were significantly impacted by the severe Caribbean hurricane season, we incurred significant costs associated with the hurricanes, in the form of delays, temporary hub relocations, and re-routing of passengers.. 16 For the three months ended September 30, 2004, selling, general and administrative ("SGA") expenses was $6,791,000, or 12.0% of sales, compared to $1,493,000, or 7.8%, for the same period a year before. The increase from the prior year is primarily attributable to the acquisition of Vacation Express and SunTrips. Technology Solutions The following table summarizes results of continuing operations of the Technology Solutions segment (in thousands).
Three Months Ended: September 30, 2004 September 30, 2003 % of % of Amount Revenue Amount Revenue -------------- -------------- -------------- -------------- Revenues: Services .............................. $ 106 2.3% $ 124 3.5% Product sales ......................... 4,516 97.7% 3,411 96.5% -------------- -------------- -------------- -------------- Total revenue ..................... 4,622 100.0% 3,535 100.0% -------------- -------------- -------------- -------------- Cost of revenue: Services .............................. 4 0.1% 72 2.0% Product sales ......................... 4,016 86.9% 3,024 85.6% -------------- -------------- -------------- -------------- Total cost of revenue ............. 4,020 87.0% 3,096 87.6% -------------- -------------- -------------- -------------- Gross profit .............................. 602 13.0% 439 12.4% -------------- -------------- -------------- -------------- Selling, general and administrative expenses 613 13.2% 464 13.1% Depreciation and amortization .............. 36 0.8% 61 1.7% -------------- -------------- -------------- -------------- Operating cost and expenses ....... 649 14.0% 525 14.8% -------------- -------------- -------------- -------------- Operating loss .................... $ (47) (1.0%) $ (86) (2.4%) ============== ============== ============== ==============
For the three months ended September 30, 2004, the Company's Technology Solutions business recorded revenues of $4,622,000, compared to $3,535,000 for the same period a year before. The increase in revenues is primarily due to the acquisition of SchoolWorld, partially offset by a decrease in revenues from the Existing Business because of the timing of two large contract renewals during fiscal year 2004. In the three months ended September 30, 2004, gross profit for the Company's Technology Solutions business was $602,000, compared to $439,000 in the same period a year before. The increase in gross profit is attributable to an increase from the acquisition, as well as an increase in gross profit percentage from 12.4% to 13%. In the three months ended September 30, 2004, selling, general and administrative expenses for the Company's Technology Solutions business was 17 $613,000, compared to $464,000 in the same period a year before. The increase in SGA is primarily attributable to the acquisition. Overall, the percentage of SGA to revenue remained relatively unchanged. DEPRECIATION AND AMORTIZATION In the three-month period ended September 30, 2004, the Company's depreciation and amortization expense was $213,000, compared to $102,000 in the same period a year before. The increase is primarily due to depreciation of the fixed-asset additions of the Acquired Companies. INTEREST EXPENSE, NET In the three-month period ended September 30, 2004, the Company incurred $278?,000 of net-interest expense related to its debt portfolio, compared to $49,000 in the same period a year before. This increase is primarily from the Travel Services debt discussed in Note 5 of the Consolidated Financial Statements. OTHER INCOME For the three-month period ended September 30, 2004, the Company's other income was $250,000, compared to $97,000 in the same period a year before. The three-month period ended September 30, 2004 includes $256,000 credit relating to the change in market value of the warrant obligation offset by other costs. In the three months ended September 30, 2003, the Company's Technology Solutions business recorded a $100,000 amount to other income in the prior quarter related to a prior project offset by other costs. Corporate For the three months ended September 30, 2004, Corporate incurred losses of $489,000, compared to losses of $309,000 in the same period a year before. The increase in loss is due primarily to increases in insurance, public relations, professional fees, salaries and benefits. SEASONALITY The Company experiences significant seasonality in its Travel Services and Technology Solutions businesses. The seasonality in the 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 recognized in the fourth quarter, due to the Company's fiscal year end coinciding 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 fiscal year. GUARANTEE OBLIGATION The Company's Travel Services segment has certain guarantees with an airline provider that agrees to a minimum number of hours during each program year and is required to pay any shortage to the provider. The segment does not anticipate a shortage, and accordingly, no amount has been accrued. 18 LIQUIDITY AND CAPITAL RESOURCES Assuming the Company will continue as a going concern, the accompanying financial statements have been prepared. The Company has suffered recurring losses from operations, and as of September 30, 2004, had a working capital deficit of $15,618,000. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management recognizes that additional funding is necessary in order to meet the Company's capital requirements and continue to operate. The Company is exploring additional sources of liquidity through debt and equity financing alternatives. Additionally, the Company is negotiating the restructure of its long-term debt. If the Company is (i) unable to grow its business or improve its operating cash flows as expected, (ii) unsuccessful in extending a substantial portion of the debt repayments currently past due, or (iii) unable to raise additional funds through sales of debt and equity securities or sale of certain assets or portions of the business, then the Company may be unable to continue as a going concern. There can be no assurance that additional financing will be available when needed or, if available, that it will be on terms favorable to the Company and its stockholders. If the Company is not successful in generating sufficient cash flows from operations, or in raising additional capital when required in sufficient amounts and on terms acceptable to the Company, these failures would have a material adverse effect on the Company's business, results of operations and financial condition. If additional funds are raised through the issuance of equity securities, the percentage ownership of the Company's current shareholders would be diluted. These Consolidated Financial Statements do not include any adjustments that may result from the outcome of these uncertainties. Cash and cash equivalents were $2,640,000 and $6,596,000 at September 30, 2004 and September 30, 2003, respectively. At September 30, 2004, the Company had current assets of $29,301,000, as compared to $44,801,000 of total current liabilities at September 30, 2003, resulting in a working capital deficit of $15,500,000. At June 30, 2004, the Company had current assets of $57,807,000, as compared to $68,927,000 of total current liabilities at September 30, 2004, resulting in a working capital deficit of $11,120,000. For the three months ended September 30, 2004, cash and cash equivalents decreased by $3,956,000. Cash of $3,980,000, primarily from the sale of Preferred Stock, was provided by financing activities. This amount is offset by $7,816,000 used in operating activities and $120,000 used in investing activities. During the three months ended September 30, 2004, $7,816,000 in cash was used in operating activities. The net loss of $7,732,000 for the quarter was offset by other non-cash credits of $992,000 and an increase of $908,000 from the net operating assets and liabilities. Non-cash credits of $992,000 consist primarily of $213,000 in depreciation and amortization charges, offset by $1,205,000 of amortization of an unfavorable airline contract. The net increase of $908,000 in operating assets and liabilities is due primarily to a decrease of $17,605,000 in unearned income and a decrease of $6,081,000 in accounts payable and accrued expenses, offset by an increase of $21,177,000 in restricted cash. 19 DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS The following table summarizes contractual obligations as of September 30, 2004 (in thousands).
Prior to 10/1/05- 10/1/07- 10/1/09 & Total 9/30/05 9/30/07 9/30/09 thereafter ------------ ------------ ------------ ------------ ------------ Purchase obligations .................. $ 83,161 $ 33,251 $ 43,507 $ 6,403 $ -- Long-term notes payable ............... 7,183 -- 1,673 198 5,312 Operating and capital lease obligations 7,238 1,556 2,935 2,247 500 ------------ ------------ ------------ ------------ ------------ $ 97,582 $ 34,807 $ 48,115 $ 8,848 $ 5,812 ============ ============ ============ ============ ============
CRITICAL ACCOUNTING POLICIES Determination of certain amounts in the Company's financial statements requires the use of estimates. These estimates are based upon the Company's historical experiences combined with management's understanding of current facts and circumstances. Although the estimates are considered reasonable, actual results could differ from the estimates. Discussed below are the accounting policies considered by management to require the most judgment and to be critical in the preparation of the financial statements. ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company maintains an allowance for customer accounts that reduces receivables to amounts that are expected to be collected. In estimating the allowance, management considers factors such as current overall economic conditions, industry-specific economic conditions, historical and anticipated customer performance, historical experience with write-offs and the level of past-due amounts. Changes in these conditions may result in additional allowances. The allowance for doubtful accounts was $328,000 and $332,000 at September 30, 2004 and June 30, 2004, respectively. GOODWILL Goodwill is tested for impairment annually or more frequently if changes in circumstances or the occurrence of events suggest impairment exists. The test for impairment requires the Company to make several estimates about fair value, most of which are based on projected future cash flows. The estimates associated with the goodwill impairment tests are considered critical due to the judgments required in determining fair value amounts, including projected future cash flows. Changes in these estimates may result in the recognition of an impairment loss. 20 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk generally represents the risk of loss that may result from the potential change in value of a financial instrument as a result of fluctuations in interest rates and market prices. We do not currently have any trading derivatives nor do we expect to have any in the future. We have established policies and internal processes related to the management of market risks, which we use in the normal course of our business operations. INTANGIBLE ASSET RISK We have a substantial amount of intangible assets. We are required to perform goodwill impairment tests at least on an annual basis and whenever events or circumstances indicate that the carrying value may not be recoverable from estimated future cash flows. As a result of our annual and other periodic evaluations, we may determine that the intangible asset values need to be written down to their fair values, which could result in material charges that could be adverse to our operating results and financial position. Although at September 30, 2004, we believe our intangible assets are recoverable, changes in the economy, the business in which we operate and our own relative performance could change the assumptions used to evaluate intangible asset recoverability. We continue to monitor those assumptions and their consequent effect on the estimated recoverability of our intangible assets. COMMODITY PRICE RISK We do not enter into contracts for the purchase or sale of commodities. As a result, we do not currently have any direct commodity price risk. ITEM 4. CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES The Company has established and currently maintains controls and other procedures designed to ensure that material information required to be disclosed in its reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified by the Securities and Exchange Commission. In conjunction with the close of each fiscal quarter, the Company conducts an update and a review and evaluation of the effectiveness of the Company's disclosure controls and procedures. It is the opinion of the Company's principal executive officer and principal accounting officer, based upon an evaluation as of the end of the period, that the Company's disclosure controls and procedures are sufficiently effective to ensure that any material information relating to the Company is recorded, processed, summarized and reported to its principal officers to allow timely decisions regarding required disclosures. CHANGES IN INTERNAL CONTROLS There were no significant changes in the Company's internal controls over financial reporting procedures during the quarter that materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting. 21 - -------------------------------------------------------------------------------- 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 For the three months ended September 30, 2004, 12,500 shares of Common Stock were issued upon exercise of previously granted options. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 22 ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS (a) Exhibits 31.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification of Principal Financial 31.2 Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certifications of Chief Executive Officer and Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - -------------------------------------------------------------------------------- SIGNATURES - -------------------------------------------------------------------------------- In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RCG COMPANIES INCORPORATED Date: November 22, 2004 By: /s/ Michael D. Pruitt ---------------------------------------- Michael D. Pruitt President and Chief Executive Officer (principal executive officer) Date: November 22, 2004 By: /s/ William W. Hodge ---------------------------------------- William W. Hodge Chief Financial Officer (principal accounting officer) 23 EX-31.1 2 v09188_ex31-1.txt EXHIBIT 31.1 302 CERTIFICATION I, Michael D. Pruitt, certify that: 1. I have reviewed this quarterly report on Form10-Q of RCG Companies Incorporated; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditor and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 22, 2004 /s/ Michael D. Pruitt - ------------------------- Michael D. Pruitt Chief Executive Officer EX-31.2 3 v09188_ex31-2.txt EXHIBIT 31.2 302 CERTIFICATION I, William W. Hodge, certify that: 1. I have reviewed this quarterly report on Form10-Q of RCG Companies Incorporated; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditor and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 22, 2004 /s/ William W. Hodge - ----------------------------- William W. Hodge Chief Financial Officer EX-32.1 4 v09188_ex32-1.txt EXHIBIT 32.1 SECTION 1350 CERTIFICATIONS CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of RCG Companies Incorporated (the "Company") on Form 10-Q for the period ended September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Michael D. Pruitt, Chief Executive Officer of the Company and William W. Hodge, Chief Financial Officer of the Company, each hereby certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge and belief: 1. 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 Company. /s/ Michael D. Pruitt - ------------------------------------- Michael D. Pruitt President and Chief Executive Officer /s/ William W. Hodge - ------------------------------------- William W. Hodge Chief Financial Officer This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. -----END PRIVACY-ENHANCED MESSAGE-----