Filed Pursuant to Rule 424(b)(3)
Registration No. 333-120047
PROSPECTUS
The information in this Prospectus is not complete, and it may be changed.
These securities will not be publicly resold until the registration statement,
of which this Prospectus is a part, is filed with the Securities and Exchange
Commission and has become effective. This Prospectus is not an offer to sell
these securities and is not soliciting an offer to buy these securities in any
state where such offer or sale is not permitted.
RCG COMPANIES INCORPORATED
14,052,474
COMMON STOCK
This Prospectus relates to the resale of up to 14,052,474 shares of our
Common Stock, par value $.04 per share, by certain stockholders. The shares that
may be resold pursuant to this Prospectus include 690,000 shares of Common
Stock, 4,574,468 shares of Common Stock underlying shares of Series A 6%
Convertible Preferred Stock, 910,588 shares issuable as dividends for three
years if Company elects to, and is permitted to, pay such dividends in kind;
1,186,617 shares of Common Stock underlying Common Stock Purchase Warrants
exercisable at $1.20, 200,000 shares of Common Stock underlying a Common Stock
Purchase Warrant exercisable at $0.94, 50,000 shares of Common Stock underlying
Warrants to Purchase Common Stock exercisable at $2.44, 3,430,851 shares of
Common Stock underlying Additional Investment Rights exercisable at $1.03 per
share and 3,009,950 additional shares are being registered in order to register
130% of the total registrable securities as required by the Registration rights
Agreement.
Our Common Stock is traded on the American Stock Exchange under the symbol
"RCG." The closing sales price of our Common Stock on October 25, 2004, was
$1.15 per share.
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 1 FOR INFORMATION THAT YOU SHOULD CONSIDER.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION, HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is November 12, 2004.
______________
TABLE OF CONTENTS
Risk Factors..................................................................1
Forward-Looking Statements....................................................7
Offering Summary..............................................................8
About the Company.............................................................8
Use of Proceeds..............................................................13
Description of Common Stock..................................................13
Selling Stockholders.........................................................13
Plan of Distribution.........................................................30
Legal Matters................................................................32
Experts......................................................................32
Where You Can Find More Information..........................................32
Information Incorporated by Reference........................................33
RISK FACTORS
You should carefully consider the risk factors set forth below, as well as
the other information in this Prospectus, in evaluating whether to invest in our
Shares.
WE RECEIVED A GOING CONCERN OPINION FROM OUR INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM.
We received from our independent registered public accounting firm and
included in this report an opinion on our consolidated financial statements that
raises substantial doubt as to our ability to continue as a going concern as a
result of recurring losses from operations and a deficiency in working capital
at June 30, 2004.
WE MAY NEED TO RAISE ADDITIONAL FUNDS IN ORDER TO CONTINUE TO OPERATE AND
GROW OUR BUSINESS.
If we are unable to grow our business or improve our operating cash flows
as expected; If we suffer significant losses on our investments; or if we are
unable to realize adequate proceeds from those investments, we will then need to
secure alternative equity or debt financing to provide us with additional
working capital. However, there can be no assurance that we will be able to
complete such financing if required. If we raise funds through debt financing,
then we will incur additional interest expense going forward. If we raise
additional funds by issuing additional equity securities, then the percentage
ownership of our current stockholders will be diluted. We cannot be certain that
additional financing will be available when and to the extent required, or that,
if available, it will be on acceptable terms. In addition, our ability to
complete future financings may be affected by the market price of our Common
Stock. If adequate funds are not available on acceptable terms, then we will be
unable to continue to fund our existing businesses or planned expansion, or take
other steps necessary to enhance our business or continue our operations.
WE HAVE BEEN INCURRING OPERATING LOSSES AND THERE CAN BE NO ASSURANCE THAT
WE WILL ACHIEVE OR SUSTAIN PROFITABILITY.
We have incurred operating losses since inception. Certain of our
operating businesses have incurred and continue to incur operating losses. We
expect to continue to incur significant operating costs in connection with our
efforts to expand our existing businesses and to grow through acquisitions. As a
result of these costs and uncertain revenue growth, there can be no assurance
that we will achieve or be able to sustain profitability.
THE PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE AND IF THE MARKET PRICE OF
OUR COMMON STOCK DECREASES, STOCKHOLDERS MAY NOT BE ABLE TO SELL THEIR SHARES OF
COMMON STOCK AT A PROFIT.
The trading price of our Common Stock during our last fiscal year, as
reported by the American Stock Exchange, fluctuated from a high of $3.16 to a
low of $0.46. Fluctuations in the price of our Common Stock may occur, among
other reasons, in response to:
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o operating results;
o regulatory changes;
o economic changes;
o market valuation of firms in related businesses; and
o general market conditions.
In addition, the volume of shares of our Common Stock bought and sold on
any trading day has been subject to wide fluctuations which also contribute to
fluctuations in the trading price of our Common Stock. The trading price of our
Common Stock could continue to be subject to wide fluctuations in response to
these or other factors, many of which are beyond our control.
WE MAY BE UNABLE TO MAINTAIN OUR LISTING ON THE AMERICAN STOCK EXCHANGE
AND IF WE ARE DELISTED THE TRADING OF OUR COMMON STOCK COULD BE MORE DIFFICULT.
Our Common Stock is presently listed and trading on the American Stock
Exchange. We believe that we meet the standards for continued listing but such a
determination is subjective and the Exchange may not agree. If our Common Stock
is delisted from the Exchange trading in our securities could be more difficult
and trading of our Common Stock could be subject to the "penny stock" rules. The
U.S. Securities and Exchange Commission (the "SEC") has adopted regulations that
generally define a penny stock to be any equity security that has a market price
of less than $5.00 per share, subject to certain exceptions (including trading
on the American Stock Exchange). These rules require that any broker-dealer who
recommends our securities to persons other than prior customers and accredited
investors must, prior to the sale, make a special written suitability
determination for the purchaser and receive the purchaser's written agreement to
execute the transaction. Unless an exception is available, the regulations
require the delivery, prior to any transactions involving a penny stock, of a
disclosure schedule explaining the penny stock market and the risks associated
with trading in the penny stock market. In addition, broker-dealers must
disclose commissions payable to both the broker-dealer and the registered
representative and current quotations for the securities they offer. The
additional burdens imposed upon broker-dealers by such requirements may
discourage broker-dealers from recommending transactions in our securities,
which could severely limit the liquidity of our securities and consequently
adversely affect the market price for our securities.
IF WE CANNOT INTEGRATE OUR RECENT OR FUTURE ACQUISITIONS, WE MAY BE UNABLE
TO SUCCESSFULLY EXECUTE OUR STRATEGY.
We anticipate that a portion of our future growth will be accomplished
through acquisitions. The success of our plan depends upon our ability to:
o identify suitable acquisition opportunities;
o effectively integrate acquired personnel, operations, products and
technologies into our organization;
o retain and motivate the personnel of acquired businesses;
o retain customers of acquired business; and
o obtain necessary financing on acceptable terms or use our securities
as consideration for acquisitions.
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Turbulence in financial markets and the current U.S. economy may result in
a diminished pool of companies that meet our criteria for acquisition. Even if
we are successful in acquiring companies, we may be unable to integrate them
into our business model or achieve the expected synergies.
WE FACE COMPETITION FROM OTHER ACQUIRORS AND INVESTORS, WHICH MAY PREVENT
US FROM REALIZING STRATEGIC OPPORTUNITIES.
We plan to acquire or invest in existing companies to fulfill our business
plan. In pursuing these opportunities, we face competition from other capital
providers and operators of companies, including publicly traded companies,
venture capital companies and large corporations. Some of these competitors have
greater financial, operational and human resources than we do. This competition
may limit our opportunity to acquire interests in companies that we believe
could help us fulfill our business plan and increase our value.
OUR ACQUISITION STRATEGY HAS AND WILL CONTINUE TO DILUTE OUR CURRENT
STOCKHOLDERS' OWNERSHIP.
Our acquisition strategy contemplates that we may issue our securities to
make strategic acquisitions and attempt to grow our business. Each of the
acquisitions that we complete in the future, involving the issuance of
securities, will further dilute our current stockholders' ownership interest in
the Company.
OUR GROWTH PLACES STRAIN ON OUR MANAGERIAL, OPERATIONAL AND FINANCIAL
RESOURCES.
Our growth has placed, and is expected to continue to place, a significant
strain on our managerial, operational and financial resources. Further growth
will increase this strain on our managerial, operational and financial
resources, which may inhibit our ability to successfully implement our business
plan.
WE DEPEND ON CERTAIN IMPORTANT EMPLOYEES, AND THE LOSS OF ANY OF THOSE
EMPLOYEES MAY HARM OUR BUSINESS.
Our performance is substantially dependent on the performance of our
executive officers and other key employees. The familiarity of these key
employees with their respective industries makes those employees especially
critical to our success. In addition, our success is dependent on our ability to
attract, train, retain and motivate high quality personnel, especially for our
management team. The loss of the services of any of our executive officers or
key employees may harm our business. Our success also depends on our continuing
ability to attract, train, retain and motivate other highly qualified technical
and managerial personnel. Competition for such personnel is intense and our
limited resources are likely to make it more difficult for us to attract and
retain such personnel.
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WE DEPEND ON CERTAIN AIRLINE CONTRACTS.
Our travel services business generally contracts with three carriers for
charter tour operator contracts. While this concentration generally reduces the
costs of the carrier service, if one or more of these carriers are unable to
perform under its contract, our travel services business may experience service
interruptions that could reduce its revenue. Additionally, our travel services
business may be forced to replace such a carrier, which could result in higher
operating costs for the carrier services, thereby reducing profitability.
INCREASES IN FUEL COSTS AFFECT OUR OPERATING COSTS AND COMPETITIVENESS.
Fuel is a major component of our operating expenses. Both the cost and
availability of fuel are influenced by many economic and political factors and
events occurring in oil producing countries throughout the world, and fuel costs
fluctuate widely. Recently the price per barrel of oil is as at an all-time high
and has significantly impacted our results of operations. We cannot predict our
future cost and availability of fuel, which affects our ability to compete. The
unavailability of adequate fuel supplies could have a material adverse effect on
our operations and profitability. In addition, larger airlines may have a
competitive advantage because they pay lower prices for fuel. We generally
follow industry trends by imposing a fuel surcharge in response to significant
fuel price increases. However, our ability to pass on increased fuel costs is
limited by economic and competitive conditions.
PURSUANT TO THE TERMS OF OUR ACQUISITION OF VACATION EXPRESS WE HAVE
INCURRED SUBSTANTIAL DEBT WHICH IS SECURED BY CERTAIN OF OUR INVESTMENT
HOLDINGS.
Under the terms of our acquisition of Vacation Express we issued a
$10,000,000 seven-year promissory note which is secured by certain of our
investment holdings. In addition, under the terms of the acquisition we have
made a commitment to purchase $4,500,000 of travel related services. If we are
unable to repay the note or satisfy the commitment, we may forfeit certain of
our investment holdings. In addition, the debt may put a strain on our working
capital. If we are unable to repay the debt, our financial position will be
negatively impacted.
FUTURE EVENTS SIMILAR TO THOSE OF SEPTEMBER 11, 2001 MAY HAVE AN ADVERSE
EFFECT ON OUR BUSINESSES.
The terrorist attack against the United States on September 11, 2001
produced great uncertainty in the economy in general and in the aviation
industry in particular. These events are still having a negative impact on the
air travel industry. These events may drastically alter the long-term demand for
charter services. In addition, these events may lead the Federal Aviation
Administration to place additional restrictions on charter flight operators,
which may increase the cost of private charter services. The long-term impact of
these events on the aviation industry and the chartered services segment of that
industry are not known. These events could have a material adverse effect on our
aviation travel services business.
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GOVERNMENT REGULATION OF THE TRAVEL INDUSTRY COULD IMPACT OUR AVIATION
TRAVEL SERVICES' BUSINESS OPERATIONS.
Certain segments of the travel industry are regulated by the United States
Government and, while we are not currently required to be certified or licensed
under such regulation, certain services offered by our aviation travel services
business are affected by such regulation. Charter flights operators, upon which
our aviation travel services business depends, are subject to vigorous and
continuous certification requirements by the Federal Aviation Administration.
Changes in the regulatory framework for charter aviation travel could adversely
affect our aviation travel services business' operations and financial
condition.
OUR AVIATION TRAVEL SERVICES BUSINESS FACES INTENSE COMPETITION FROM
COMMERCIAL AIRLINERS AND OTHER TOUR OPERATORS FOR CUSTOMERS.
We provide leisure charter jet travel and tour services and face intense
competition from commercial airlines and other tour operators for the potential
customers who travel to these locations and other locations that we may serve in
the future. These commercial airlines have greater resources, marketing efforts
and brand equity than we do and they also offer a potential customer more
flights to these locations. Furthermore, travelers have numerous choices of
location when choosing travel destinations. Since we offer only limited travel
destinations, we face intense competition from travel agents, commercial
airlines, hotels, resorts, casinos and other organizations in the travel
industry that offer alternative travel destinations to those offered by us. Many
competitors possess far greater capital and human resources, marketing efforts
and brand equity than we do. If we are unable to compete effectively with these
various competitors in the travel industry, we may not be able to achieve and
maintain profitability.
OUR TECHNOLOGY SOLUTIONS BUSINESS MAY NOT BE ABLE TO KEEP UP WITH THE
CONTINUOUS TECHNOLOGICAL CHANGE IN ITS MARKET.
The success of our technology solutions business will depend, in part, on
its ability to respond to technological advances. This business may not be
successful in responding quickly, cost-effectively and sufficiently to these
developments. Many of the competitors of our technology solutions business are
larger than we are and have significantly more financial resources to invest in
advances in technology, products and other areas central to providing technology
and Internet solutions. Our technology solutions business will not be able to
compete effectively or meet its growth objectives if it is unable, for
technical, financial or other reasons, to adapt in a timely manner in response
to technological advances. In addition, employee time allocated to responding to
technological advances will not be available for client engagements.
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THE SUCCESS OF OUR TECHNOLOGY SOLUTIONS BUSINESS IS LARGELY DEPENDENT UPON
ITS ABILITY TO RETAIN ITS MANUFACTURER AUTHORIZATIONS THAT ALLOW IT TO SELL
SOFTWARE TO EDUCATIONAL CUSTOMERS AT DISCOUNTED PRICING AND ITS LINES OF CREDIT.
Our technology solutions business has been accumulating authorizations
from key software manufacturers that allow it to sell products to educational
facilities at deep discounts. If our technology solutions business were to lose
any of these authorizations, its ability to sell computer products to
educational customers would be adversely impacted, which could have a similar
impact on its sales, profitability and ability to expand within this business
line. In addition, this business uses credit lines extended by banks, software
and hardware manufacturers and distributors. The loss of any of these credit
lines would limit the ability of our technology solutions business to meet
customer demand, thereby reducing sales and profits.
THE EXERCISE OF OUTSTANDING OPTIONS, WARRANTS AND CONVERTIBLE PREFERRED
STOCK COULD SUBSTANTIALLY DILUTE EXISTING STOCKHOLDERS AND COULD HAVE A NEGATIVE
EFFECT ON OUR STOCK PRICE.
We have adopted the RCG Companies Incorporated Stock Option Plan (the
"Plan") and our stockholders have authorized the issuance of options to acquire
up to 20,000,000 shares of Common Stock under the Plan. As of June 30, 2004, we
have outstanding options for 2,261,657 shares, under the Plan that have been
granted to our officers, directors, employees and other service providers of
which options for 1,820,229 shares are vested. There have been zero options
exercised for fiscal year 2004 of Common Stock that were issued under the Plan.
In addition to options issued under the Plan, we currently have outstanding
warrants as of June 30, 2004 for 6,421,963 shares, including 6,000 that were
exercised during this fiscal year. Our outstanding options and warrants have
exercise prices ranging from $0.28 to $28.00. As of the filing date, we
currently have outstanding convertible preferred shares for 4,574,468 common
shares at a conversion price of $.94 per share, none of which have been
converted as of the filing date. The exercise of these options, warrants or
preferred shares will dilute the percentage ownership of our current
stockholders and the potential sale of shares issued upon the exercise of these
warrants, options or preferred shares could have a negative impact on the market
price of our Common Stock.
THE FUTURE SALES OF RESTRICTED SECURITIES COULD HAVE A NEGATIVE EFFECT ON
OUR STOCK PRICE.
The market price of our Common Stock could be negatively affected by the
future sale of shares of restricted Common Stock, including shares of restricted
Common Stock underlying options and warrants that have been or will be issued by
us. As of June 30, 2004 and June 30, 2003, approximately 4,800,000 of our
21,289,004, and 2,100,000 of our 13,948,160, respectively, issued and
outstanding shares of Common Stock are believed to be restricted securities as
defined in Rule 144 promulgated under the Securities Act of 1933, as amended
(the "Securities Act") or otherwise not available for trading by the public.
Rule 144 provides generally that restricted securities must be held for a
one-year period prior to resale and provides certain additional limitations on
the sale of such shares, including limitations on the volume of such shares that
a beneficial owner may sell in any three-month period thereafter. Generally,
non-affiliated stockholders may sell restricted shares that have been held for
at least two years without any limitations. In addition, Rule 145 permits the
sale by non-affiliates of restricted securities issued in connection with
certain business combinations one year after such shares are issued. As
restricted shares become eligible for resale pursuant to Rule 144 or Rule 145,
the number of sellers of our Common Stock could increase significantly and, as a
result, the market price of our Common Stock could decrease.
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IF WE ARE NOT ABLE TO PROTECT OUR INTELLECTUAL PROPERTY, PROPRIETARY
RIGHTS AND TECHNOLOGY, WE COULD LOSE THOSE RIGHTS AND INCUR SUBSTANTIAL COSTS
POLICING AND DEFENDING THOSE RIGHTS.
We rely primarily on a combination of intellectual property laws and
contractual provisions to protect our proprietary rights and technologies, brand
and marks. These laws and contractual provisions provide only limited protection
of proprietary rights and technology. Our means of protecting our intellectual
property, proprietary rights and technology may not be adequate.
IF THE SELLING STOCKHOLDERS SELL A SUBSTANTIAL AMOUNT OF THEIR SHARES,
THESE SALES COULD HAVE AN ADVERSE IMPACT ON OUR STOCK PRICE.
If some or all of the Selling Stockholders sell a substantial amount of
their Common Stock under this Prospectus, such sales could have a significant
negative impact on the market price of our Common Stock. This Prospectus could
result in a large number of shares of our Common Stock being sold in the market
which, in turn, could result in a reduction in the market price of our Common
Stock.
FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT MAY PROVE NOT TO
BE ACCURATE. This Prospectus (including information included or incorporated by
reference herein) contains certain "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), which represent our
expectations or beliefs concerning future events that involve risks and
uncertainties. All statements other than statements of historical facts included
in this Prospectus (including, without limitation, the statements under the
section of this document titled "About the Company" and elsewhere herein) and in
our filings that are incorporated by reference herein are forward-looking
statements. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, we can give no assurance that such
expectations will prove to be correct. Such forward-looking statements are
subject to risks, uncertainties and other factors which could cause actual
future results or trends to differ materially from future results or trends
expressed or implied by such forward-looking statements. The most significant of
such risks, uncertainties and other factors are discussed under the section of
this document titled "Risk Factors," beginning on page 1 of this Prospectus.
Prospective investors are urged to consider carefully such factors.
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OFFERING SUMMARY
We entered into a Securities Purchase Agreement effective as of September
13, 2004 (the "Securities Purchase Agreement") with institutional and accredited
investors (collectively the "Investors"). Pursuant to the terms of the
Securities Purchase Agreement, we are to initially issue the following
securities to the Investors in consideration for the Investors making payment to
us in the aggregate amount of $4,300,000: (i) 4,300 shares of Series A 6%
Convertible Preferred Stock, (ii) Warrants to purchase approximately 1,143,617
shares of Common Stock at an exercise price of $1.20 per share, and (iii)
Additional Investment Rights to purchase approximately 3,430,851 shares of
Common Stock at an exercise price of $1.03 per share.
We have agreed to file a registration statement (the "Registration
Statement") with the SEC registering for resale 130% of all shares of Common
Stock underlying the Series A Preferred Stock, the Warrants, and the Additional
Investment Rights, and shares issuable as dividends for 3 years.
The transaction was approved by our Board of Directors on August 24, 2004,
and closed on September 14, 2004. The shares of Series A Preferred Stock, the
Warrants, and the Additional Investment Rights, the shares of Common Stock
underlying such securities, and shares issuable as dividends will be issued
pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act.
ABOUT THE COMPANY
WHO WE ARE
RCG Companies Incorporated and its subsidiaries ("RCG", "We" or the
"Company") is a network of travel and technology services companies brought
together under one operating company to benefit from synergistic relationships
and the infusion of intellectual and capital resources. We are engaged in the
operation of travel services and technology solutions businesses. Incorporated
in 1982, RCG is a Delaware corporation headquartered in Charlotte, North
Carolina. Our fiscal year ends on June 30.
On November 14, 2003, we changed our name from eResource Capital Group,
Inc. to RCG Companies Incorporated to better reflect the nature and evolution of
our business strategy. In fiscal year 2001, we brought in new executive
management and modified our business plan to focus on acquiring and enhancing
travel and technology services companies. We also brought in new management to
our aviation business and completed the acquisition of an aviation services
company that, together, have expanded that business into a highly specialized
travel organization that delivers a unique turnkey air service. We have
increased our focus on the travel and entertainment sector and plan to continue
to operate, enhance and acquire substantial interests in the value of expansion
phase companies operating in the travel and entertainment sector.
Through our wholly owned subsidiary, Flightserv, Inc. ("Flightserv"), we
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. These acquired companies were
integrated into Flightserv, our existing travel services business, to form our
largest operating segment. We had previously provided services to the Acquired
Companies.
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The Acquired Companies provide specialized distribution of leisure travel
products and services. Vacation Express, based in Atlanta, Georgia, sells air
and hotel packages to Mexican and Caribbean destinations. SunTrips, based in San
Jose, California, sells air and hotel packages for Mexico, the Dominican
Republic, Costa Rica, Hawaii and the Azores. The flights originate in Oakland,
California and/or Denver, Colorado.
Logisoft Corp. ("Logisoft"), our technology solutions business, provides
integrated products and services to assist customers in meeting their strategic
technology initiatives. Our products and services include distribution of
third-party-published software titles for the educational market and corporate
customers, full-service Internet development, Internet Web site hosting and
co-location, and Internet business development services encompassing
partner-site management and marketing. In our Internet business development and
marketing services business, we generally participate in the development and
implementation of the business plan in exchange for revenue sharing and/or
equity-based arrangements.
On November 5, 2003, Logisoft completed the acquisition of SchoolWorld
Software, a Pittsburgh, Pennsylvania-based educational software company.
During the third quarter of 2004, our Board of Directors (the "Board")
authorized the disposition of our investment in Lifestyle Innovations, Inc.
("LFSI"), a full-service home technology integration company. Accordingly, the
operations of LFSI were reclassified to "discontinued operations" for all
periods presented. During the fourth quarter, we contributed approximately 4
million shares to the treasury of LFSI, a substantial portion of which were
reissued to certain LFSI investors to settle certain contingent claims. LFSI
also issued other shares, which resulted in our 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 forth quarter.
OUR ADDRESS AND PHONE NUMBER
Our principal executive offices are located at 6836 Morrison Boulevard,
Suite 200, Charlotte, North Carolina 28211. Our telephone number is (704)
366-5054.
OUR BUSINESSES
GENERAL
In fiscal 2001, we brought in new executive management and modified our
business plan to focus on acquiring and enhancing travel and entertainment and
technology services companies and, as a result, acquired companies in the
telecommunications call center, home technology and technology solutions
business segments. We also brought in new management to our aviation business
and completed the acquisition of an aviation services company that, together,
have expanded that business into a highly specialized travel organization that
9
delivers a unique turnkey air service. This aviation travel services business
generated $165 million and $62 million in revenue in fiscal years 2004 and 2003,
respectively. As a result of this growth, we have increased our focus on the
travel and entertainment sector and plan to continue to acquire substantial
interests in, operate and enhance the value of companies operating in the travel
and entertainment sectors. We are in the early phases of our expanded strategy
and continue to focus on existing operations as well as our efforts to implement
this strategy.
At different times prior to fiscal 2000, we operated businesses in several
industries including drug screening, computer software and residential and
commercial real estate development, all of which have now been discontinued.
During fiscal 2000, our Company, under the name flightserv.com, Inc. was engaged
in the development of an Internet website to provide access to private aviation
travel services. In March 2000, we launched our private aviation program, called
Private SeatsTM. We were able to generate only minimal customer bookings through
the Private SeatsTM program and did not book any flights under this program
after June 2000.
AVIATION TRAVEL SERVICES
We acquired Internet Aviation Services, Ltd. ("IASL"), a leisure and
business travel services company which provided charter aviation services, in
August 2000. IASL was integrated into our aviation travel services business
through our Flightserv subsidiary.
Flightserv, headquartered in Atlanta, GA, is a nationally recognized
airline and travel program management company providing tour operators,
corporate travel departments, sports teams and casinos with cost effective and
reliable charter air transportation on a scheduled and ad-hoc basis. Flightserv
acts as a program manager by providing turnkey charter services including
aircraft and related services such as ground support and aircraft fueling,
passenger service and support, and real-time flight tracking. Flightserv
differentiates itself in the charter travel industry by focusing on full program
management services, which combines the functions of aircraft brokerage, flight
operations, airport operations, contract negotiation between clients and air
service providers, airport subsidy negotiations and consumer marketing.
Flightserv does not own or operate any aircraft.
Flightserv had an agreement with Vacation Express, a member of the
MyTravel Group, ending in December 2004, to operate a passenger hub at Atlanta
Hartsfield Airport. Pursuant to the terms of the agreement, six commercial jet
aircraft originate in six eastern and mid-western cities and serve six Caribbean
destinations. Also, in July 2002, Flightserv entered into a three-year agreement
with SunTrips, Inc., a sister company of Vacation Express in the MyTravel Group,
to operate scheduled weekly flights between three west coast cities and two
Mexican destinations. The majority of the revenue of Flightserv was historically
generated pursuant to these contracts.
On October 31, 2003, VE Holdings, Inc. and SunTrips, Inc. both
wholly-owned subsidiaries of MyTravel USA Holdings, Inc., entered into an
amended and restated asset purchase agreement with FS Tours, Inc. and FS
SunTours, Inc., which are wholly-owned direct subsidiaries of Flightserv.
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Under the terms of the asset purchase agreement, FS Tours and FS SunTours
acquired substantially all of the assets and certain liabilities of Vacation
Express and SunTrips, except for certain excluded items, for $12 million, of
which $10 million is in the form of a seven-year non interest bearing promissory
note from Flightserv secured by certain of our investment holdings.
In conjunction with the asset purchase, we entered into a three-year
agreement with MyTravel Canada Holidays, Inc., for certain services, including
the purchasing of hotel accommodations for our company on an exclusive basis.
Under the asset purchase agreement we are required to pay MyTravel Canada
approximately $4.5 million over three years.
Additionally, we were required to obtain replacement letters of credit in
the aggregate principal amount of $3 million.
With the closing of these acquisitions, SunTrips and Vacation Express will
continue to operate from their current locations, with FS Tours and FS SunTours
assuming operational control. Air and hotel vacation packages will continue to
be marketed and sold under the SunTrips and Vacation Express brands.
SunTrips, based in San Jose, California, sells air and hotel vacation
packages to Mexico, Dominican Republic, Costa Rica, Hawaii and the Azores out of
Oakland, California and/or Denver, Colorado. Vacation Express, based in Atlanta,
Georgia, sells air and hotel packages to Mexico and Caribbean destinations,
including Aruba, Bahamas, Costa Rica, Dominican Republic, Jamaica, and St.
Martin. SunTrips and Vacation Express together generated revenues of
approximately $200 million for the twelve months ended September 30, 2003. Both
companies were air charter customers of Flightserv.
In fiscal 2002 and 2003, Flightserv developed and implemented a trial
scheduled charter flight operation d/b/a Interstate Jet. Initial service began
between Allentown PA/ Newburgh NY and Las Vegas NV and Los Angeles CA. The
origination cities were chosen as a result of direct cash subsidies and
marketing support from the respective airport authorities. The trials of these
cities did not yield adequate passenger loads and yields to break even and were
discontinued.
TECHNOLOGY SOLUTIONS
Our technology solutions business is the result of our acquisition of
Logisoft Corp. (f/k/a Logisoft Computer Products Corp.), and its wholly-owned
subsidiary eStorefronts.net Corp. in June 2001.
Our technology solutions business provides integrated products and
services to assist customers in meeting their strategic technology initiatives.
Our 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 co-location and Internet business
development services encompassing partner site management and marketing. In our
Internet business development and marketing services business, we generally
participate in the development and implementation of the business plan in
exchange for revenue sharing and/or equity-based arrangements.
11
On June 6, 2001, we acquired Logisoft in exchange of 785,714 shares of
Common Stock pursuant to that certain agreement and plan of merger. The total
purchase price aggregated $5,504,879 and the transaction was recorded 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
$4,146,000 was allocated to goodwill. The aggregate purchase price and goodwill
were both adjusted in fiscal 2002 by $42,000 to reflect the issuance of earn-out
shares to certain members of Logisoft's management.
On June 10, 2003 eStorefronts.net Corporation, 100% owned by Logisoft,
purchased a 75% interest in Premier Shoe Group, LLC for $187,000. A one-year 10%
note of $147,000 was signed at closing and $40,000 cash was paid. Premier Shoe
Group operates a website named 123Shoes.com which sells brand name shoes. The
results of Premier Shoe Group are consolidated on Logisoft's financial
statements and the portion of income or loss attributable to the minority
interest as an increase or decrease to the minority interest recorded.
On October 31, 2003, Logisoft acquired substantially all of the assets of
Computer Inventory Control, Inc. ("CIC"), a Pittsburgh, Pennsylvania based
educational software company, in consideration of up to 225,000 shares of the
Company's Common Stock valued at $380,000. On October 31, 2003, the purchase
price was 174,312 shares of the Company's Common Stock, which was determined by
dividing $380,000 by the average closing price of the Company's Common Stock on
the American Stock Exchange for the previous three consecutive business days
ending on the day prior to the closing of the acquisition agreement. Since the
gross sales price from the sale of the 174,312 shares of the Company's Common
Stock was less than $380,000, the Company issued to CIC 50,000 additional shares
of Company Common Stock which equaled the difference between $380,000 and the
aggregate sales price. Pursuant to the acquisition agreement, Logisoft acquired
the "SchoolWorld Software" trademark, software licenses as well as all of the
accounts, databases and related inventory of CIC. CIC is a full service source
for educational software.
TELECOMMUNICATIONS CALL CENTER
We operated our telecommunications call center which provided
telemarketing, help desk and other services to companies through our subsidiary
DM Marketing, Inc. ("DMM"). In December 2002, our aviation travel services
business assumed operational responsibility of the call center operations
located in Pensacola FL. The call center provided support to aviation travel
services as a reservations and customer care center for airlines, tour operators
and for internal programs for which the Company took reservations from
travelers. On September 1, 2003, we closed our Pensacola, FL call center
facility.
In January 2003, DMM was operated and managed by Flightserv and provided
in-bound reservations call center services to Southeast Airlines and
Flightserv's Interstate Jet. From January through June 2003 DMM booked
approximately 65,000 passenger segment reservations for Southeast Airlines and
Interstate Jet.
12
USE OF PROCEEDS
All of the shares of our Common Stock offered hereby are being sold by the
Selling Stockholders. We will not receive any of the proceeds from the sale of
the shares. However, this Prospectus includes 1,186,617 shares of Common Stock
underlying Common Stock Purchase Warrants exercisable at $1.20 per share,
200,000 shares of Common Stock underlying a Common Stock Purchase Warrant
exercisable at $0.94, 50,000 shares of Common Stock underlying Warrants to
Purchase Common Stock exercisable at $2.44 per shares, and 3,430,851 shares of
common stock underlying Additional Investment Rights exercisable at $1.03 per
share. If any of the Common Stock Purchase Warrants or Additional Investment
Rights are exercised and no cashless exercise is available, we would receive the
gross proceeds from payment of the exercise price. We intend to use these
proceeds for working capital.
DESCRIPTION OF COMMON STOCK
We are authorized to issue 200,000,000 shares of Common Stock, par value
$.04. As of the date of this Prospectus, 21,169,038 shares are issued and
outstanding. The outstanding shares of Common Stock are fully paid and
non-assessable. The holders of our Common Stock are entitled to one vote per
share for the election of directors and with respect to all other matters
submitted to a vote of shareholders. Shares of our Common Stock do not have
cumulative voting rights, which means that the holders of more than 50% of such
shares voting for the election of directors can elect 100% of the directors if
they choose to do so and, in such event, the holders of the remaining shares so
voting will not be able to elect any directors.
Upon any liquidation, dissolution or winding-up, our assets, after the
payment of our debts and liabilities and any liquidation preferences of, and
unpaid dividends on, any class of preferred stock then outstanding, will be
distributed pro-rata to the holders of our Common Stock. The holders of our
Common Stock do not have preemptive or conversion rights to subscribe for any of
our securities and have no right to require us to redeem or purchase their
shares. The holders of our Common Stock are entitled to share equally in
dividends if, as and when declared by our board of directors, out of funds
legally available therefore, subject to the priorities accorded any class of
preferred stock which may be issued. A consolidation or merger, or a sale,
transfer or lease of all or substantially all of our assets, which does not
involve distribution by us of cash or other property to the holders of our
Common Stock, will not be a liquidation, dissolution or winding up of our
Company.
SELLING STOCKHOLDERS
DESCRIPTION OF FINANCING TRANSACTION
On September 13, 2004, we entered into a Securities Purchase Agreement
with the Investors. Pursuant to the terms of the Securities Purchase Agreement,
we are to initially issue the following securities to the Investors in
consideration for the Investors making payment to us in the aggregate amount of
$4,300,000: (i) 4,300 shares of Series A 6% Convertible Preferred Stock, (ii)
Warrants to purchase approximately 1,143,617 shares of our Common Stock at an
exercise price of $1.20 per share, and (iii) Additional Investment Rights to
purchase approximately 3,430,851 shares of our Common Stock at an exercise price
of $1.03 per share.
13
The Securities Purchase Agreement provides the Investors with certain
rights to participate in our future financings, and contains negative covenants
limiting our rights to engage in certain types of future financings.
The Company has agreed to file the Registration Statement with the SEC
registering for resale 130% of all shares of our Common Stock underlying the
Series A Preferred Stock, the Warrants, and the Additional Investment Rights,
and shares issuable as dividends for 3 years.
The transaction was approved by our Board of Directors on August 24, 2004,
and closed on September 14, 2004. The shares of Series A Preferred Stock, the
Warrants, and the Additional Investment Rights, the shares of our Common Stock
underlying such securities, and shares issuable as dividends will be issued
pursuant to the exemption from registration provided by Section 4(2) of the
Securities Act.
DESCRIPTION OF SERIES A PREFERRED STOCK
The following is a summary of the material terms of the Series A Preferred
Stock and is qualified by its entirety by the Certificate of Designation of
Preferences, Rights and Limitations of Series A 6% Convertible Preferred Stock
(the "Certificate") filed as an exhibit to Form 8-K filed by the Company with
the U.S. Securities and Exchange Commission on September 16, 2004.
AMOUNT, STATED VALUE, AND DEFINITIONS
The number of shares of Series A Preferred Stock designated was 6,000.
Each share of Series A Preferred Stock shall have a stated value equal to $1,000
(the "Stated Value"). Capitalized terms not otherwise defined in this
Description of Series A Preferred Stock section shall have the meaning given
such terms in the Certificate.
DIVIDENDS
Holders shall be entitled to receive and the Company shall pay, cumulative
dividends at the rate per share (as a percentage of the Stated Value per share)
of 6% per annum from the date of issuance, payable quarterly on March 1, June 1,
September 1 and December 1, beginning with December 1, 2004 and on any
Conversion Date pursuant to the terms of the Certificate ("Dividend Payment
Date"). The form of dividend payments to each Holder shall be made in the
following order: (i) if funds are legally available for the payment of dividends
and the Equity Conditions (which Equity Conditions include the following: (a)
all conversions have been honored or cured; (b) the registration statement
covering the shares is effective; (c) the Common Stock is listed on the
Company's trading market; (d) all liquidated damages and other amounts owing
including dividends in respect of the preferred stock shall have been paid or
will be paid; (e) there is a sufficient number of authorized and unissued shares
to cover all conversions; (f) no Triggering Event has occurred and is
continuing; (g) the issuable conversion shares won't violate the applicable
ownership limitations; and (h) no public announcement of a pending Fundamental
14
Transaction or Change of Control Transaction has occurred that hasn't been
consummated) have not been met, in cash only, (ii) if funds are legally
available for the payment of dividends and the Equity Conditions have been met,
at the sole election of the Company, in cash or shares of Common Stock which
shall be valued solely for such purpose at 90% of the average of the 5 VWAPs
immediately prior to the Dividend Payment Date; (iii) if funds are not legally
available for the payment of dividends and the Equity Conditions have been met,
in shares of Common Stock which shall be valued at 90% of the average of the 5
VWAPs immediately prior to the Dividend Payment Date; (iv) if funds are not
legally available for the payment of dividends and the Equity Conditions
relating to registration have been waived by such Holder, as to such Holder
only, in unregistered shares of Common Stock which shall be valued at 90% of the
average of the 5 VWAPs immediately prior to the Dividend Payment Date; and (v)
if funds are not legally available for the payment of dividends and the Equity
Conditions have not been met, then, at the election of such Holder, such
dividends shall accrue to the next Dividend Payment Date or shall be accreted to
the outstanding Stated Value. As of the Closing Date, the Company shall pay the
dividends in shares of Common Stock. Dividends on the Series A Preferred Stock
shall be calculated on the basis of a 360-day year, shall accrue daily
commencing on the Original Issue Date, and shall be deemed to accrue from such
date whether or not earned or declared and whether or not there are profits,
surplus or other funds of the Company legally available for the payment of
dividends.
So long as any Series A Preferred Stock shall remain outstanding, neither
the Company nor any subsidiary thereof shall redeem, purchase or otherwise
acquire directly or indirectly any Junior Securities. So long as any Series A
Preferred Stock shall remain outstanding, neither the Company nor any subsidiary
thereof shall directly or indirectly pay or declare any dividend or make any
distribution (other than a dividend or distribution described in the Section
titled "Conversion" below or dividends due and paid in the ordinary course on
Series A Preferred Stock of the Company at such times when the Company is in
compliance with its payment and other obligations) upon, nor shall any
distribution be made in respect of, any Junior Securities so long as any
dividends currently due on the Series A Preferred Stock remain unpaid, nor shall
any monies be set aside for or applied to the purchase or redemption (through a
sinking fund or otherwise) of any Junior Securities or shares pari passu with
the Series A Preferred Stock.
VOTING RIGHTS
Except as otherwise provided in the Certificate and as otherwise required
by law, the Series A Preferred Stock shall have no voting rights. However, so
long as any shares of Series A Preferred Stock are outstanding, the Company
shall not, without the affirmative vote of the Holders of the shares of the
Series A Preferred Stock then outstanding, (a) alter or change adversely the
powers, preferences or rights given to the Series A Preferred Stock or alter or
amend this Certificate of Designation, (b) authorize or create any class of
stock ranking as to dividends, redemption or distribution of assets upon a
Liquidation senior to the Series A Preferred Stock, (c) amend its certificate of
incorporation or other charter documents so as to affect adversely any rights of
the Holders, (d) increase the authorized number of shares of Series A Preferred
Stock, or (e) enter into any agreement with respect to the foregoing.
15
LIQUIDATION
Upon any liquidation, dissolution or winding-up of the Company, whether
voluntary or involuntary (a "Liquidation"), the Holders shall be entitled to
receive out of the assets of the Company, whether such assets are capital or
surplus, for each share of Series A Preferred Stock an amount equal to the
Stated Value per share plus any accrued and unpaid dividends thereon and any
other fees or liquidated damages owing thereon before any distribution or
payment shall be made to the holders of any Junior Securities, and if the assets
of the Company shall be insufficient to pay in full such amounts, then the
entire assets to be distributed to the Holders shall be distributed among the
Holders ratably in accordance with the respective amounts that would be payable
on such shares if all amounts payable thereon were paid in full.
CONVERSION
Conversions at Option of Holder. Each share of Series A Preferred Stock
shall be convertible into that number of shares of Common Stock (subject to the
limitations set forth below) determined by dividing the Stated Value of such
share of Series A Preferred Stock by the Set Price.
Beneficial Ownership Limitation. The Company shall not effect any
conversion of the Series A Preferred Stock, and the Holder shall not have the
right to convert any portion of the Series A Preferred Stock to the extent that
after giving effect to such conversion, the Holder (together with the Holder's
affiliates), as set forth on the applicable Conversion Notice, would
beneficially own in excess of 4.99% of the number of shares of the Common Stock
outstanding immediately after giving effect to such conversion.
Limitation on Number of Shares Issuable. Notwithstanding anything herein
to the contrary, the Company shall not issue to any Holder any shares of Common
Stock, including pursuant to any rights herein, including, without limitation,
any conversion rights or right to issue shares of Common Stock in payment of
dividends, to the extent such shares, when added to the number of shares of
Common Stock previously issued upon conversion of any shares of Series A
Preferred Stock would exceed 3,875,188, or such greater or lesser number of
shares of Common Stock permitted pursuant to the corporate governance rules of
the Trading Market that is at the time the principal trading exchange or market
for the Common Stock (the "Maximum Aggregate Share Amount"), unless the Company
first obtains shareholder approval permitting such issuances in accordance with
the Trading Market rules ("Shareholder Approval").
Forced Conversion. If after the date that the registration statement which
registers for resale all of the Conversion Shares (the "Conversion Shares
Registration Statement") is declared effective (the "Effective Date") the VWAP
for each of any 10 consecutive Trading Days ("Threshold Period"), which 10
consecutive Trading Day period shall have commenced only after the Effective
Date, exceeds 200% of the then effective Set Price (defined below), the Company
may, within 2 Trading Days after any such Threshold Period, deliver a notice to
all Holders (a "Forced Conversion Notice" and the date such notice is received
by the Holders, the "Forced Conversion Notice Date") to cause the Holders to
immediately convert all or part of the then outstanding shares of Series A
Preferred Stock pursuant to Section 5 of the Certificate and the Holders shall
surrender (if all Series A Preferred Stock is converted) their respective shares
of Series A Preferred Stock to the Company for conversion within 5 Trading Days
of the Forced Conversion Notice Date. The Company may only effect a Forced
Conversion Notice if all of the Equity Conditions have been met during the
Threshold Period through the Forced Conversion Notice Date.
16
The conversion price shall equal $0.94 (the "Set Price"), subject to the
following adjustments.
* if the Company, at any time while the Series A Preferred Stock is
outstanding: (A) shall pay a stock dividend or otherwise make a distribution or
distributions on shares of its Common Stock or any other equity or equity
equivalent securities payable in shares of Common Stock, (B) subdivide
outstanding shares of Common Stock into a larger number of shares, (C) combine
(including by way of reverse stock split) outstanding shares of Common Stock
into a smaller number of shares, or (D) issue by reclassification of shares of
the Common Stock any shares of capital stock of the Company, then the Set Price
shall be multiplied by a fraction of which the numerator shall be the number of
shares of Common Stock Outstanding before such event and of which the
denominator shall be the number of shares of Common Stock Outstanding after such
event. Any adjustment made pursuant to the section of the Certificate shall
become effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision,
combination or reclassification.
* if the Company, at any time while the Series A Preferred Stock is
outstanding, shall issue rights, options or warrants to all holders of Common
Stock (and not to Holders) entitling them to subscribe for or purchase shares of
Common Stock at a price per share less than the VWAP at the record date
mentioned below, then the Set Price shall be multiplied by a fraction, of which
the denominator shall be the number of shares of the Common Stock Outstanding on
the date of issuance of such rights or warrants plus the number of additional
shares of Common Stock offered for subscription or purchase, and of which the
numerator shall be the number of shares of the Common Stock Outstanding on the
date of issuance of such rights or warrants plus the number of shares which the
aggregate offering price of the total number of shares so offered (assuming
receipt by the Company in full of all consideration payable upon exercise of
such rights, options or warrants) would purchase at such VWAP. Such adjustment
shall be made whenever such rights or warrants are issued, and shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such rights, options or warrants.
* if the Company or any subsidiary thereof at any time while any of
the Series A Preferred Stock is outstanding, shall sell, grant any option or
warrant to purchase or sell or grant any right to reprice its securities, or
otherwise dispose of or issue any Common Stock or any equity or equity
equivalent securities (including any equity, debt or other instrument that is at
any time over the life thereof convertible into or exchangeable for Common
17
Stock) (collectively, "Common Stock Equivalents") entitling any Person to
acquire shares of Common Stock, at an effective price per share less than the
Set Price (a "Dilutive Issuance"), as adjusted (if the holder of the Common
Stock or Common Stock Equivalent so issued shall at any time, whether by
operation of purchase price adjustments, reset provisions, floating conversion,
exercise or exchange prices or otherwise, or due to warrants, options or rights
per share which are issued in connection with such issuance, be entitled to
receive shares of Common Stock at a price per share which is less than the Set
Price, such issuance shall be deemed to have occurred for less than the Set
Price), then the Set Price shall be reduced to equal the effective conversion,
exchange or purchase price for such Common Stock or Common Stock Equivalents
(including any reset provisions thereof) at issue. Such adjustment shall be made
whenever such Common Stock or Common Stock Equivalents are issued. The Company
shall notify the Holder in writing, no later than the second Trading Day
following the issuance of any Common Stock or Common Stock Equivalent,
indicating therein the applicable issuance price, or of applicable reset price,
exchange price, conversion price and other pricing terms. For purposes of this
subsection, a Dilutive Issuance shall be deemed to have occurred when binding
agreements have been closed by the Company and any purchaser therein.
* if the Company, at any time while the Series A Preferred Stock is
outstanding, shall distribute to all holders of Common Stock (and not to
Holders) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security other than the Common Stock (which shall
be subject to Section 5(c)(iii) of the Certificate), then in each such case the
Set Price shall be adjusted by multiplying the Set Price in effect immediately
prior to the record date fixed for determination of stockholders entitled to
receive such distribution by a fraction of which the denominator shall be the
VWAP determined as of the record date mentioned above, and of which the
numerator shall be such VWAP on such record date less the then per share fair
market value at such record date of the portion of such assets or evidence of
indebtedness so distributed applicable to one outstanding share of the Common
Stock as determined by the Board of Directors in good faith. In either case the
adjustments shall be described in a statement provided to the Holders of the
portion of assets or evidences of indebtedness so distributed or such
subscription rights applicable to one share of Common Stock. Such adjustment
shall be made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.
No adjustment shall be made in connection with an Exempt Issuance.
REDEMPTION UPON TRIGGERING EVENTS
Upon the occurrence of a Triggering Event, each Holder shall have the
right to require the Company to redeem all of the Series A Preferred Stock then
held by such Holder for a redemption price, in cash, equal to the Triggering
Redemption Amount. The Triggering Redemption Amount shall be due and payable
within 5 Trading Days of the date on which the notice for the payment therefor
is provided by a Holder (the "Triggering Redemption Payment Date"). If the
Company fails to pay the Triggering Redemption Amount in full the Company will
pay interest thereon at a rate of 18% per annum, accruing daily from such date
until the Triggering Redemption Amount, plus all such interest thereon, is paid
in full.
18
"Triggering Event" means any one or more of the following events:
* the failure of a Conversion Shares Registration Statement to be
declared effective by the Commission on or prior to the 180th day after the
Original Issue Date;
* if, during the Effectiveness Period, the effectiveness of the
Conversion Shares Registration Statement lapses for any reason for more than an
aggregate of 60 calendar days (which need not be consecutive days) during any 12
month period, or the Holder shall not be permitted to resell Registrable
Securities under the Conversion Shares Registration Statement other than as a
result of any action or inaction of a Holder for more than an aggregate of 60
calendar days (which need not be consecutive days) during any 12 month period
(the Effectiveness Period is that period commencing with the Effectiveness Date
and continuing until all securities covered by the Conversion Shares
Registration Statement have been sold or may be sold without volume restrictions
pursuant to Rule 144(k));
* the Company shall fail to deliver certificates representing
Conversion Shares issuable upon a conversion prior to the 10th Trading Day after
such shares are required to be delivered, or the Company shall provide written
notice to any Holder, including by way of public announcement, at any time, of
its intention not to comply with requests for conversion of any shares of Series
A Preferred Stock in accordance with the terms hereof;
* if either of the following events shall not have been cured to the
satisfaction of the Holders prior to the expiration of 15 days from the Event
Date (as defined in the Registration Rights Agreement) relating thereto (other
than an Event resulting from a failure of a Conversion Shares Registration
Statement to be declared effective by the Commission on or prior to the 180th
day after the Original Issue Date, which is covered above): (i) a Registration
Statement is not filed on or prior to its Filing Date (as defined in the
Registration Rights Agreement), or (ii) the Company fails to file with the
Commission a request for acceleration in accordance with Rule 461 promulgated
under the Securities Act, within five Trading Days of the date that the Company
is notified (orally or in writing, whichever is earlier) by the Commission that
a Registration Statement will not be "reviewed," or not subject to further
review;
* the Company shall fail for any reason to pay in full the amount of
cash due pursuant to a Buy-In within 5 Trading Days after notice therefor is
delivered or shall fail to pay all amounts owed on account of an Event within
five days of the date due (for purposes hereof an Event includes the following
events: (i) a registration statement is not timely filed, (ii) the Company fails
to timely file with the Commission a request for acceleration after being
notified that a Registration Statement will not be "reviewed," or is not subject
to further review, (iii) prior to its Effectiveness Date, the Company fails to
file a pre-effective amendment and otherwise respond in writing to comments made
by the Commission in respect of such Registration Statement within 20 Trading
Days after the receipt of comments by or notice from the SEC that such amendment
is required in order for a Registration Statement to be declared effective, (iv)
a registration statement filed or required to be filed is not declared effective
by the Commission by its Effectiveness Date, or (v) after the Effectiveness
Date, a registration statement ceases for any reason to remain continuously
effective as to all registrable securities for which it is required to be
effective, or the Holders are not permitted to utilize the prospectus therein to
resell such registrable securities for 15 consecutive days or an aggregate of 25
days during any 12-month period, which need not be consecutive days);
19
* the Company shall fail to have available a sufficient number of
authorized and unreserved shares of Common Stock to issue to such Holder upon a
conversion unless the Company has complied with Section 4.10(b) of the Purchase
Agreement (which section provides the Company an opportunity to amend the
Company's certificate of incorporation to increase the number of shares the
Company is authorized to issue);
* the Company shall fail to observe or perform any other material
covenant, agreement or warranty contained in, or otherwise commit any breach of
the Transaction Documents, and such material failure or breach shall not, if
subject to the possibility of a cure by the Company, have been remedied within
30 calendar days after the date on which written notice of such failure or
breach shall have been given;
* the Company shall be a party to any Change of Control Transaction
or the Company shall redeem more than a deminimis number of Junior Securities;
* there shall have occurred a Bankruptcy Event;
* any breach of the officer's/director's voting agreement delivered
to the initial Holders at the Closing; or
* the Common Stock shall fail to be listed or quoted for trading on
a Trading Market for more than 5 consecutive Trading Days.
FUNDAMENTAL TRANSACTIONS
If a Fundamental Transaction occurs, then upon any subsequent conversion
of shares of Series A Preferred Stock, the Holder shall have the right to
receive, for each Conversion Share that would have been issuable upon such
conversion absent such Fundamental Transaction, the Alternate Consideration. For
purposes of any such conversion, the determination of the Set Price shall be
appropriately adjusted to apply to such Alternate Consideration based on the
amount of Alternate Consideration issuable in respect of one share of Common
Stock in such Fundamental Transaction, and the Company shall apportion the Set
20
Price among the Alternate Consideration in a reasonable manner reflecting the
relative value of any different components of the Alternate Consideration. If
holders of Common Stock are given any choice as to the securities, cash or
property to be received in a Fundamental Transaction, then the Holder shall be
given the same choice as to the Alternate Consideration it receives upon any
conversion of shares of Series A Preferred Stock following such Fundamental
Transaction. To the extent necessary to effectuate the foregoing provisions, any
successor to the Company or surviving entity in such Fundamental Transaction
shall issue to the Holder new Series A Preferred Stock consistent with the
foregoing provisions and evidencing the Holder's right to convert such Series A
Preferred Stock into Alternate Consideration. The terms of any agreement
pursuant to which a Fundamental Transaction is effected shall include terms
requiring any such successor or surviving entity to comply with the provisions
of this provision and insuring that the Series A Preferred Stock (or any such
replacement security) will be similarly adjusted upon any subsequent transaction
analogous to a Fundamental Transaction.
DESCRIPTION OF WARRANTS
The following is a summary of the material terms of the Warrants and is
qualified by its entirety by the form of Warrant filed as an exhibit to Form 8-K
filed by the Company with the U.S. Securities and Exchange Commission on
September 16, 2004.
NUMBER, TERM, AND DEFINITIONS
The Warrants entitle the holders thereof to initially purchase up to a
total of approximately 1,186,617 shares of the Common Stock of the Company.
The Warrants are exercisable at any time on or after the Initial Exercise
Date and on or prior to the close of business on the three-year anniversary of
the Initial Exercise Date. The Exercise Period shall be extended for the number
of Trading Days during such period in which (x) trading in the Common Stock is
suspended by any Trading Market, or (y) following the Effective Date, the
Registration Statement is not effective or the prospectus included in the
Registration Statement may not be used by the Purchasers for the resale of the
Warrant Shares.
Capitalized terms used and not otherwise defined in this Description of
Warrants Section shall have the meanings set forth in Section 1 of the Warrant.
EXERCISE
t 6 0 Exercise of Warrant. Exercise of the Warrants may be made at any
time or times on or after the Initial Exercise Date and on or before the
Termination Date by delivery to the Company of a duly executed facsimile copy of
the Notice of Exercise Form annexed to the Warrant.
Exercise Price. The exercise price of each share of Common Stock under the
Warrants shall be $1.20, subject to adjustment (the "Warrant Exercise Price").
Cashless Exercise. If at any time after one year from the date of issuance
of the Warrants there is no effective Registration Statement registering the
resale of the Warrant Shares by the Holder, then the Warrants may also be
exercised at such time by means of a "cashless exercise."
Holder's Restrictions. Each Holder shall not have the right to exercise
any portion of their Warrant, pursuant to Section 2(c) of the Warrants or
otherwise, to the extent that after giving effect to such issuance after
exercise, the Holder (together with the Holder's affiliates), as set forth on
the applicable Notice of Exercise, would beneficially own in excess of 4.99% of
the number of shares of the Common Stock outstanding immediately after giving
effect to such issuance.
21
Call Provision. Subject to the provisions of Section 2(f) of the Warrants,
if after the Effective Date the Measurement Price exceeds 200% of the then
Warrant Exercise Price (subject to adjustment as set forth herein) (the
"Threshold Price), then the Company may, within ten Trading Days of such period,
call for cancellation of all or any portion of the Warrants for which a Notice
of Exercise has not yet been delivered (such right, a "Call"). To exercise this
right, the Company must deliver to the Holder an irrevocable written notice (a
"Call Notice"), indicating therein the portion of unexercised portion of the
Warrants to which such notice applies. If the conditions set forth below for
such Call are satisfied from the period from the date of the Call Notice through
and including the Call Date (as defined below), then any portion of the Warrant
subject to such Call Notice for which a Notice of Exercise shall not have been
received from and after the date of the Call Notice will be cancelled at 6:30
p.m. (New York City time) on the tenth Trading Day after the date the Call
Notice is received by the Holder (such date, the "Call Date"). Any unexercised
portion of the Warrant to which the Call Notice does not pertain will be
unaffected by such Call Notice. Notwithstanding anything to the contrary set
forth in the Warrant, the Company may not deliver a Call Notice or require the
cancellation of the Warrant (and any Call Notice will be void), unless, from the
beginning of the 20 consecutive Trading Days used to determine whether the
Common Stock has achieved the Threshold Price through the Call Date, the Equity
Conditions (as defined in the Certificate of Designation) have been met. The
Company's right to Call the Warrant shall be exercised ratably among the
Purchasers based on each Purchaser's initial purchase of Common Stock pursuant
to the Purchase Agreement.
CERTAIN ADJUSTMENTS.
Stock Dividends and Splits. If the Company, at any time while the Warrants
are outstanding: (A) pays a stock dividend or otherwise make a distribution or
distributions on shares of its Common Stock or any other equity or equity
equivalent securities payable in shares of Common Stock (which, for avoidance of
doubt, shall not include any shares of Common Stock issued by the Company
pursuant to the Warrants), (B) subdivides outstanding shares of Common Stock
into a larger number of shares, (C) combines (including by way of reverse stock
split) outstanding shares of Common Stock into a smaller number of shares, or
(D) issues by reclassification of shares of the Common Stock any shares of
capital stock of the Company, then in each case the Warrant Exercise Price shall
be multiplied by a fraction of which the numerator shall be the number of shares
of Common Stock (excluding treasury shares, if any) outstanding before such
event and of which the denominator shall be the number of shares of Common Stock
outstanding after such event and the number of Warrant Shares issuable upon
exercise of the Warrants shall be proportionately adjusted. Any adjustment made
pursuant to Section 3(a) of the Warrants shall become effective immediately
after the record date for the determination of stockholders entitled to receive
such dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or re-classification.
22
Subsequent Equity Sales. If the Company or any Subsidiary thereof, as
applicable, at any time while the Warrants are outstanding, shall sell, grant
any option to purchase, sell or grant any right to reprice its securities, or
otherwise dispose of or issue any Common Stock or Common Stock Equivalents
entitling any Person to acquire shares of Common Stock, at an effective price
per share less than the then Warrant Exercise Price (such lower price, the "Base
Share Price" and such issuances collectively, a "Dilutive Issuance"), as
adjusted (if the holder of the Common Stock or Common Stock Equivalents so
issued shall at any time, whether by operation of purchase price adjustments,
reset provisions, floating conversion, exercise or exchange prices or otherwise,
or due to warrants, options or rights per share which is issued in connection
with such issuance, be entitled to receive shares of Common Stock at an
effective price per share which is less than the Warrant Exercise Price, such
issuance shall be deemed to have occurred for less than the Warrant Exercise
Price), then, the Warrant Exercise Price shall be reduced to equal the Base
Share Price; provided, however, in no event shall the Warrant Exercise Price be
less than $1.00, subject to adjustment for reverse and forward stock splits,
stock dividends, stock combinations and other similar transactions of the Common
Stock that occur after the date of the Securities Purchase Agreement. Such
adjustment shall be made whenever such Common Stock or Common Stock Equivalents
are issued. The Company shall notify the Holder in writing, no later than the
second Trading Day following the issuance of any Common Stock or Common Stock
Equivalents, indicating therein the applicable issuance price, or of applicable
reset price, exchange price, conversion price and other pricing terms.
Pro Rata Distributions. If the Company, at any time prior to the
Termination Date, shall distribute to all holders of Common Stock (and not to
Holders of the Warrants) evidences of its indebtedness or assets or rights or
warrants to subscribe for or purchase any security other than the Common Stock
(which shall be subject to Section 3(b) of the Warrants), then in each such case
the Warrant Exercise Price shall be adjusted by multiplying the Warrant Exercise
Price in effect immediately prior to the record date fixed for determination of
stockholders entitled to receive such distribution by a fraction of which the
denominator shall be the VWAP determined as of the record date mentioned above,
and of which the numerator shall be such VWAP on such record date less the then
per share fair market value at such record date of the portion of such assets or
evidence of indebtedness so distributed applicable to one outstanding share of
the Common Stock as determined by the Board of Directors in good faith. In
either case the adjustments shall be described in a statement provided to the
Holders of the portion of assets or evidences of indebtedness so distributed or
such subscription rights applicable to one share of Common Stock. Such
adjustment shall be made whenever any such distribution is made and shall become
effective immediately after the record date mentioned above.
Fundamental Transaction. If, at any time while the Warrants are
outstanding, (A) the Company effects any merger or consolidation of the Company
with or into another Person, in which the Company is not the surviving entity,
or the Company's then existing shareholders will own less than 51% of the
surviving entity, (B) the Company effects any sale of all or substantially all
of its assets in one or a series of related transactions, (C) any tender offer
or exchange offer (whether by the Company or another Person) is completed
pursuant to which holders of Common Stock are permitted to tender or exchange
their shares for other securities, cash or property, or (D) a Fundamental
Transaction, then, upon any subsequent conversion of the Warrant, the Holder
shall have the right to receive, for each Warrant Share that would have been
issuable upon such exercise absent such Fundamental Transaction, at the option
of the Holder, (a) upon exercise of the Warrants, the number of shares of Common
Stock of the successor or acquiring corporation or of the Company, if it is the
surviving corporation, and Alternate Consideration receivable upon or as a
23
result of such reorganization, reclassification, merger, consolidation or
disposition of assets by a Holder of the number of shares of Common Stock for
which the Warrants are exercisable immediately prior to such event or (b) only
in the event the Company is acquired in an all cash acquisition, cash equal to
the value of the Warrants as determined in accordance with the Black-Scholes
option pricing formula. For purposes of any such exercise, the determination of
the Warrant Exercise Price shall be appropriately adjusted to apply to such
Alternate Consideration based on the amount of Alternate Consideration issuable
in respect of one share of Common Stock in such Fundamental Transaction, and the
Company shall apportion the Warrant Exercise Price among the Alternate
Consideration in a reasonable manner reflecting the relative value of any
different components of the Alternate Consideration. If holders of Common Stock
are given any choice as to the securities, cash or property to be received in a
Fundamental Transaction, then the Holder shall be given the same choice as to
the Alternate Consideration it receives upon any exercise of the Warrant
following such Fundamental Transaction. To the extent necessary to effectuate
the foregoing provisions, any successor to the Company or surviving entity in
such Fundamental Transaction shall issue to the Holder a new warrant consistent
with the foregoing provisions and evidencing the Holder's right to exercise such
warrant into Alternate Consideration upon the payment thereof. The terms of any
agreement pursuant to which a Fundamental Transaction is effected shall include
terms requiring any such successor or surviving entity to comply with the
provisions of this paragraph and insuring that the Warrant (or any such
replacement security) will be similarly adjusted upon any subsequent transaction
analogous to a Fundamental Transaction.
DESCRIPTION OF ADDITIONAL INVESTMENT RIGHTS
The following is a summary of the material terms of the Additional
Investment Rights and is qualified by its entirety by the form of Additional
Investment Rights Agreement filed as an exhibit to Form 8-K filed by the Company
with the U.S. Securities and Exchange Commission on September 16, 2004.
NUMBER, TERM, AND DEFINITIONS
The Additional Investment Rights entitle the holders thereof to initially
purchase up to a total of approximately 3,430,851 shares of the Common Stock of
the Company.
The Additional Investment Rights are exercisable at any time on or after
the Initial Exercise Date and on or prior to the close of business on the
earlier of (a) the later of (i) the 181st day after the Effective Date and (ii)
the 181st day after the Initial Exercise Date and (b) the 2nd year anniversary
of the date of the Purchase Agreement (the "Termination Date" and the period
from the Initial Exercise Date until the Termination Date
Capitalized terms used and not otherwise defined in this Description of
Additional Investment Rights Section shall have the meanings set forth in
Section 1 of the Additional Investment Rights.
24
EXERCISE.
Exercise of Additional Investment Right. Exercise of the purchase rights
represented by the Additional Investment Rights may be made at any time or times
on or after the Initial Exercise Date and on or before the Termination Date by
delivery to the Company of a duly executed facsimile copy of the Notice of
Exercise Form annexed to the Additional Investment Rights agreement.
Exercise Price. The exercise price of each share of Common Stock under the
Additional Investment Rights shall be $1.03, subject to adjustment (the "AIR
Exercise Price").
Holder's Restrictions. The Holder shall not have the right to exercise any
portion of the Additional Investment Rights, pursuant to Section 2(c) of the
Additional Investment Rights thereof or otherwise, to the extent that after
giving effect to such issuance after exercise, the Holder (together with the
Holder's affiliates), as set forth on the applicable Notice of Exercise, would
beneficially own in excess of 4.99% of the number of shares of the Common Stock
outstanding immediately after giving effect to such issuance.
Call Provision. Subject to the provisions of Section 2(f) of the
Additional Investment Rights, if after the Effective Date the Measurement Price
is greater than or equal to the Threshold Price, then the Company may, in its
sole discretion, within ten Trading Days of such period, exercise its Call
right. To exercise this right, the Company must deliver to the Holder an
irrevocable Call Notice, indicating therein the portion of unexercised portion
of the Additional Investment Rights to which such notice applies. If the
conditions set forth below for such Call are satisfied from the period from the
date of the Call Notice through and including the Call Date (as defined below),
then any portion of the Additional Investment Rights subject to such Call Notice
for which a Notice of Exercise shall not have been received from and after the
date of the Call Notice will be cancelled at 6:30 p.m. (New York City time) on
the Call Date. Any unexercised portion of the Additional Investment Rights to
which the Call Notice does not pertain will be unaffected by such Call Notice.
Notwithstanding anything to the contrary set forth in the Additional Investment
Rights, the Company may not deliver a Call Notice or require the cancellation of
the Additional Investment Rights (and any Call Notice will be void), unless,
from the beginning of the 20 consecutive Trading Days used to determine whether
the Common Stock has achieved the Threshold Price through the Call Date, the
Equity Conditions have been met. The Company's right to Call the Additional
Investment Right shall be exercised ratably among the Purchasers based on each
Purchaser's initial purchase of Common Stock pursuant to the Securities Purchase
Agreement.
CERTAIN ADJUSTMENTS.
Stock Dividends and Splits. If the Company, at any time while the
Additional Investment Rights are outstanding: (A) pays a stock dividend or
otherwise make a distribution or distributions on shares of its Common Stock or
any other equity or equity equivalent securities payable in shares of Common
Stock (which, for avoidance of doubt, shall not include any shares of Common
Stock issued by the Company pursuant to the Additional Investment Rights), (B)
subdivides outstanding shares of Common Stock into a larger number of shares,
(C) combines (including by way of reverse stock split) outstanding shares of
Common Stock into a smaller number of shares, or (D) issues by reclassification
of shares of the Common Stock any shares of capital stock of the Company, then
in each case the AIR Exercise Price shall be multiplied by a fraction of which
the numerator shall be the number of shares of Common Stock (excluding treasury
shares, if any) outstanding before such event and of which the denominator shall
25
be the number of shares of Common Stock outstanding after such event and the
number of Additional Investment Right Shares issuable upon exercise of the
Additional Investment Rights shall be proportionately adjusted. Any adjustment
made pursuant to Section 3(a) of the Additional Investment Rights shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision,
combination or re-classification.
Pro Rata Distributions. If the Company, at any time prior to the
Termination Date, shall distribute to all holders of Common Stock (and not to
Holders of the Additional Investment Rights) evidences of its indebtedness or
assets or rights or Additional Investment Rights to subscribe for or purchase
any security other than the Common Stock (which shall be subject to Section 3(b)
of the Additional Investment Rights), then in each such case the AIR Exercise
Price shall be adjusted by multiplying the AIR Exercise Price in effect
immediately prior to the record date fixed for determination of stockholders
entitled to receive such distribution by a fraction of which the denominator
shall be the VWAP determined as of the record date mentioned above, and of which
the numerator shall be such VWAP on such record date less the then per share
fair market value at such record date of the portion of such assets or evidence
of indebtedness so distributed applicable to one outstanding share of the Common
Stock as determined by the Board of Directors in good faith. In either case the
adjustments shall be described in a statement provided to the Holders of the
portion of assets or evidences of indebtedness so distributed or such
subscription rights applicable to one share of Common Stock. Such adjustment
shall be made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.
Fundamental Transaction. If, at any time while the Additional Investment
Rights are outstanding, (A) the Company effects any merger or consolidation of
the Company with or into another Person, in which the Company is not the
surviving entity, or the Company's then existing shareholders will own less than
51% of the surviving entity, (B) the Company effects any sale of all or
substantially all of its assets in one or a series of related transactions, (C)
any tender offer or exchange offer (whether by the Company or another Person) is
completed pursuant to which holders of Common Stock are permitted to tender or
exchange their shares for other securities, cash or property, or (D) a
Fundamental Transaction, then, upon any subsequent conversion of the Additional
Investment Rights, the Holder shall have the right to receive, for each
Additional Investment Right Share that would have been issuable upon such
exercise absent such Fundamental Transaction, at the option of the Holder, (a)
upon exercise of the Additional Investment Rights, the number of shares of
Common Stock of the successor or acquiring corporation or of the Company, if it
is the surviving corporation, and Alternate Consideration receivable upon or as
a result of such reorganization, reclassification, merger, consolidation or
disposition of assets by a Holder of the number of shares of Common Stock for
which the Additional Investment Rights are exercisable immediately prior to such
event or (b) only in the event the Company is acquired in an all cash
acquisition, cash equal to the value of the Additional Investment Rights as
determined in accordance with the Black-Scholes option pricing formula. For
purposes of any such exercise, the determination of the AIR Exercise Price shall
be appropriately adjusted to apply to such Alternate Consideration based on the
amount of Alternate Consideration issuable in respect of one share of Common
Stock in such Fundamental Transaction, and the Company shall apportion the AIR
Exercise Price among the Alternate Consideration in a reasonable manner
26
reflecting the relative value of any different components of the Alternate
Consideration. If holders of Common Stock are given any choice as to the
securities, cash or property to be received in a Fundamental Transaction, then
the Holder shall be given the same choice as to the Alternate Consideration it
receives upon any exercise of the Additional Investment Rights following such
Fundamental Transaction. To the extent necessary to effectuate the foregoing
provisions, any successor to the Company or surviving entity in such Fundamental
Transaction shall issue to the Holder a new Additional Investment Right
consistent with the foregoing provisions and evidencing the Holder's right to
exercise such Additional Investment Right into Alternate Consideration upon the
payment thereof. The terms of any agreement pursuant to which a Fundamental
Transaction is effected shall include terms requiring any such successor or
surviving entity to comply with the provisions of paragraph and insuring that
the Additional Investment Rights (or any such replacement security) will be
similarly adjusted upon any subsequent transaction analogous to a Fundamental
Transaction.
DESCRIPTION OF ADDITIONAL ISSUANCES
In addition we are registering 690,000 shares of our Common Stock,
including 200,000 shares of Common Stock underlying a Common Stock Purchase
Warrant exercisable at $0.94, 50,000 shares of Common Stock underlying Warrants
to Purchase Common Stock exercisable at $2.44 per share, 400,000 shares of
Common Stock issued pursuant to an Independent Consulting Agrement with The Del
Mar Consulting Group, and 125,000 shares of Common Stock issued to the Jonathan
Chase Gordon Educatinal Trust and 125,000 shares of Common Stock issued to the
David Christopher Gordon Educatinal Trust in connection with a private
placement. The terms of the agreements with respect to the Common Stock and the
Warrants provided the investors with piggy-back registration rights.
The table below identifies each Selling Stockholder and sets forth
information, to the best of our knowledge, regarding each Selling Stockholders'
beneficial ownership of shares of our Common Stock. This information is based
upon information provided by each respective Selling Stockholder and public
accounts filed with the SEC.
The shares offered by this Prospectus may be offered for sale from time to
time by the Selling Stockholders. Because the Selling Stockholders may offer
all, some or none of the shares pursuant to this Prospectus, and because there
are currently no agreements, arrangements or understandings with respect to the
sale of any Shares, no estimate can be given as to the number of shares of
Common Stock that will be held by the Selling Stockholders after the completion
of this offering, unless it is assumed that all the Shares offered pursuant to
this and any other effective Prospectus are sold.
The number of shares of Common Stock beneficially owned by the Selling
Stockholders includes the shares of Common Stock beneficially owned by the
Selling Stockholders as of the date of this Prospectus and shares of Common
Stock underlying warrants or options held by Selling Stockholders that are
exercisable within sixty (60) days of the date of this Prospectus. Except as
otherwise indicated, to our knowledge, the Selling Stockholders have sole voting
and investment power with respect to all shares of Common Stock beneficially
owned by them, or with respect to the shares underlying options or warrants,
will have sole voting and investment power at the time such shares are sold. The
percentages shown in the table below are based upon 21,289,004 shares of our
Common Stock outstanding as of June 30, 2004.
27
NUMBER OF SHARES NUMBER OF SHARES PERCENTAGE OF
NUMBER OF SHARES THAT MAY BE BENEFICIALLY SHARES
BENEFICIALLY OWNED OFFERED PURSUANT OWNED AFTER BENEFICIALLY
SELLING STOCKHOLDERS BEFORE OFFERING TO THIS PROSPECTUS OFFERING OWNED AFTER
OFFERING
-------------------------------------------------------------------------------------------------------------------------------
Alpha Capital AG
Pradafat 7, Furstentums 9490
Vaduz, Liechtenstein 250,000 1,520,626(1) 250,000 1.17%
-------------------------------------------------------------------------------------------------------------------------------
Bristol Investment Fund, Ltd.
c/o Bristol Capital Advisors, LLC
10990 Wilshire Blvd., Suite 1410
Los Angeles, CA 90024 312,500 3,041,252(2) 312,500 1.47%
-------------------------------------------------------------------------------------------------------------------------------
Crescent International Ltd.
c/o GreenLight (Switzerland) SA
84 Avenue Louis-Casai
CH 1216 Cointrin, Geneva
Switzerland 468,750 2,280,938(3) 468,750 2.20%
-------------------------------------------------------------------------------------------------------------------------------
Palisades Master Fund, L.P.
C/o Beacon Fund Advisors, Ltd.
Harbour House, Waterfront Drive
Road Town, Tortola, British Virgin 2.14%
Islands 456,250 5,322,190(4) 456,250
-------------------------------------------------------------------------------------------------------------------------------
Perfect Timing, LLC
4390 River Bottom Drive
Norcross, GA 30092 300,000 904,468(5) 300,000 1.41%
-------------------------------------------------------------------------------------------------------------------------------
The Del Mar Consulting Group, Inc.
2455 El Amigo Rd
Del Mar, CA 92014 501,000 400,000(6) 101,000 .47%
-------------------------------------------------------------------------------------------------------------------------------
PEF Advisors Ltd.
C/o Beacon Fund Advisors, Ltd.
Harbour House, Waterfront Drive
Road Town, Tortola, British Virgin
Islands 40,000 40,000(7) 0 *
-------------------------------------------------------------------------------------------------------------------------------
Jonathan Chase Gordon Educational
Trust
7633 E 63rd Place, Suite 220
Tulsa, OK 74133 325,000 125,000(8) 200,000 .94%
-------------------------------------------------------------------------------------------------------------------------------
David Christopher Gordon
Educational Trust
7633 E 63rd Place Suite 220
Tulsa, OK 74133 325,000 125,000(9) 200,000 .94%
-------------------------------------------------------------------------------------------------------------------------------
K. Wesley M. Jones Sr.
6945 N Baltusrol Lane
Charlotte, NC 28210 241,072 12,500(10) 203,572 .96%
-------------------------------------------------------------------------------------------------------------------------------
Aubrey John Elam Jr.
c/o Five Oaks Capital Partners,
LLC 4201 Congress Street, Suite
145 Charlotte, North Carolina
28209 13,450 12,500(10) 0 *
-------------------------------------------------------------------------------------------------------------------------------
Stefano Piraino
c/o Five Oaks Capital Partners,
LLC 4201 Congress Street, Suite
145 Charlotte, North Carolina
28209 12,500 12,500(10) 0 *
-------------------------------------------------------------------------------------------------------------------------------
Greg Currie
c/o Five Oaks Capital Partners,
LLC 4201 Congress Street, Suite
145 Charlotte, North Carolina
28209 12,500 12,500(10) 0 *
-------------------------------------------------------------------------------------------------------------------------------
HPC Capital Management
200 Mansell Court East, Suite 550
Roswell, GA 30076 200,000 243,000(11) 0 *
-------------------------------------------------------------------------------------------------------------------------------
TOTAL: 14,052,474
* Indicates no remaining beneficial ownership of the outstanding shares of
Common Stock.
(1) Konrad Ackerman has investment and voting control over the securities held
by Alpha Capital AG. Includes 531,915 shares issuable upon conversion of
shares of 6% Convertible Preferred Stock; 105,882 shares issuable as
dividends for three years if Company elects to, and is permitted to, pay
such dividends in kind; 132,979 shares issuable upon exercise of Common
Stock Purchase Warrants exercisable at $1.20 per share; 398,936 shares
issuable upon exercise of Additional Investment Rights exercisable at
$1.03 per share; and 350,914 additional shares are being registered in
order to register 130% of the total registrable securities as required by
the Registration Rights Agreement.
28
(2) Paul Kessler has investment and voting control over the securities held by
Bristol Investment Fund, Ltd. Includes 1,063,830 shares issuable upon
conversion of shares of 6% Convertible Preferred Stock; 211,765 shares
issuable as dividends for three years if Company elects to, and is
permitted to, pay such dividends in kind; 265,957 shares issuable upon
exercise of Common Stock Purchase Warrants exercisable at $1.20 per share;
797,872 shares issuable upon exercise of Additional Investment Rights
exercisable at $1.03 per share; and 701,827 additional shares are being
registered in order to register 130% of the total registrable securities
as required by the Registration rights Agreement.
(3) Maxi Brezzi and Mel Craw, in their capacity as managers of GreenLight
(Switzerland) SA, the investment advisor to Crescent International Ltd.,
have investment and voting control over the securities held by Crescent
International Ltd. Includes 797,872 shares issuable upon conversion of
shares of 6% Convertible Preferred Stock; 158,824 shares issuable as
dividends for three years if Company elects to, and is permitted to, pay
such dividends in kind; 199,468 shares issuable upon exercise of Common
Stock Purchase Warrants exercisable at $1.20 per share; 598,404 shares
issuable upon exercise of Additional Investment Rights exercisable at
$1.03 per share; and 526,370 additional shares are being registered in
order to register 130% of the total registrable securities as required by
the Registration Rights Agreement.
(4) Murray Todd has investment and voting control over the securities held by
Palisades Master Fund, L.P. Includes 1,861,702 shares issuable upon
conversion of shares of 6% Convertible Preferred Stock; 370,588 shares
issuable as dividends for three years if Company elects to, and is
permitted to, pay such dividends in kind; 465,426 shares issuable upon
exercise of Common Stock Purchase Warrants exercisable at $1.20 per share;
1,396,276 shares issuable upon exercise of Additional Investment Rights
exercisable at $1.03 per share; and 1,228,198 additional shares are being
registered in order to register 130% of the total registrable securities
as required by the Registration Rights Agreement.
(5) Lisa E. Mannion has investment and voting control over the securities held
by Perfect Timing, LLC. Includes 319,149 shares issuable upon conversion
of shares of 6% Convertible Preferred Stock; 63,529 shares issuable as
dividends for three years if Company elects to, and is permitted to, pay
such dividends in kind; 79,787 shares issuable upon exercise of Common
Stock Purchase Warrants exercisable at $1.20 per share; 239,362 shares
issuable upon exercise of Additional Investment Rights exercisable at
$1.03 per share; and 202,641 additional shares are being registered in
order to register 130% of the total registrable securities as required by
the Registration Rights Agreement.
(6) Robert B. Prag has investment and voting control over the securities held
by The Del Mar Consulting Group. Includes 400,000 shares of Common Stock
issued pursuant to an Independent Consulting Agreement.
(7) Paul Mannion or Andy Reckles have investment and voting control over the
securities which were issued as a finders' fee in connection with The Del
Mar Consulting Group Independent Consulting Agreement referenced above.
(8) James R. Ross has investment and voting control over the securities which
were issued pursuant to a private placement.
(9) Susan Willis has investment and voting control over the securities which
were issued pursuant to a private placement.
(10) Shares issuable upon exercise of Warrants to purchase Common Stock
exercisable at $2.44 per share issued in connection with a Letter of
Credit transaction entered into on March 1, 2004 whereby 4 investors
provided Flightserv, Inc. with two letters of credit to replace existing
letters of credit.
(11) Vince Sbarra has investment and voting control over the securities,
200,000 of which were issued as placement fees in connection with the
October 2003 private placement and 43,000 of which were issued as
placement fees in connection with the September 2004 private placement.
29
None of the selling security holders has, or within the past three years
has had, any position, office or other material relationship with us or any of
our predecessors or affiliates other than as set forth above. Paul Mannion, Jr.
is a principal of PEF Advisors Ltd. and of HPC Capital Management, which serves
as our investment bank and acted as placement agent in connection with our
recent financings. HPC Capital Management is a registered broker-dealer. Mr.
Mannion's wife is the principal of Perfect Timing, LLC, which purchased the
securities being registered under this Prospectus as disclosed under footnote 5.
To our knowledge, neither Mr. Mannion, nor HPC Capital Management has any
arrangement with any person to participate in the distribution of such
securities. The Del Mar Consulting Group is the Company's investor
communications and public relations consultant. K. Wesley M. Jones Sr. was
appointed a Director of the Company on April 15, 2004. Mr. Jones was 1 of 4
investors in a March 1, 2004 Letter of Credit transaction which benefited a
subsidiary of the Company. Mr. Jones received 12,500 Warrants in connection with
this transaction.
We have agreed to pay the full costs and expenses in connection with the
issuance, offer, sale and delivery of the shares, including all fees and
expenses in preparing, filing and printing the registration statement and
Prospectus and related exhibits, amendments and supplements thereto and mailing
of those items. We will not pay selling commissions and expenses associated with
any sale by the Selling Stockholders.
PLAN OF DISTRIBUTION
Each Selling Stockholder (the "Selling Stockholders") of our Common Stock
and any of their pledgees, assignees and successors-in-interest may, from time
to time, sell any or all of their shares of Common Stock on the Trading Market
or any other stock exchange, market or trading facility on which the shares are
traded or in private transactions. These sales may be at fixed or negotiated
prices. A Selling Stockholder may use any one or more of the following methods
when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o settlement of short sales entered into after the date of this
prospectus;
o broker-dealers may agree with the Selling Stockholders to sell a
specified number of such shares at a stipulated price per share;
30
o a combination of any such methods of sale;
o through the writing or settlement of options or other hedging
transactions, whether through an options exchange or otherwise; or
o any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. Each Selling Stockholder does not expect these commissions and
discounts relating to its sales of shares to exceed what is customary in the
types of transactions involved.
In connection with the sale of our Common Stock or interests therein, the
Selling Stockholders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
Common Stock in the course of hedging the positions they assume. The Selling
Stockholders may also sell shares of our Common Stock short and deliver these
securities to close out their short positions, or loan or pledge the Common
Stock to broker-dealers that in turn may sell these securities. The Selling
Stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
The Selling Stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Each Selling Stockholder has
informed the Company that it does not have any agreement or understanding,
directly or indirectly, with any person to distribute the Common Stock.
The Company is required to pay certain fees and expenses incurred by it
incident to the registration of the shares. The Company has agreed to indemnify
the Selling Stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.
Because Selling Stockholders may be deemed to be "underwriters" within the
meaning of the Securities Act, they will be subject to the prospectus delivery
requirements of the Securities Act. In addition, any securities covered by this
prospectus which qualify for sale pursuant to Rule 144 under the Securities Act
may be sold under Rule 144 rather than under this prospectus. Each Selling
Stockholder has advised us that they have not entered into any agreements,
understandings or arrangements with any underwriter or broker-dealer regarding
the sale of the resale shares. There is no underwriter or coordinating broker
acting in connection with the proposed sale of the resale shares by the Selling
Stockholders.
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We agreed to use our commercially reasonable efforts to keep this
prospectus effective until the earlier of (i) the date on which the shares may
be resold by the Selling Stockholders without registration and without regard to
any volume limitations by reason of Rule 144(k) under the Securities Act or any
other rule of similar effect or (ii) all of the shares have been sold pursuant
to the prospectus or Rule 144 under the Securities Act or any other rule of
similar effect. The resale shares will be sold only through registered or
licensed brokers or dealers if required under applicable state securities laws.
In addition, in certain states, the resale shares may not be sold unless they
have been registered or qualified for sale in the applicable state or an
exemption from the registration or qualification requirement is available and is
complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the resale shares may not simultaneously engage
in market making activities with respect to our Common Stock for a period of two
business days prior to the commencement of the distribution. In addition, the
Selling Stockholders will be subject to applicable provisions of the Exchange
Act and the rules and regulations thereunder, including Regulation M, which may
limit the timing of purchases and sales of shares of our Common Stock by the
Selling Stockholders or any other person. We will make copies of this prospectus
available to the Selling Stockholders and have informed them of the need to
deliver a copy of this prospectus to each purchaser at or prior to the time of
the sale.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for us
by the law firm of Adorno & Yoss, P.A, Fort Lauderdale, Florida.
EXPERTS
BDO Seidman LLP, our independent registered public accounting firm, have
audited our consolidated financial statements included in our Annual Report on
Form 10-K for the years ended June 30, 2004, 2003, and 2002, as set forth in
their report, which is incorporated by reference in this Prospectus. Our
financial statements are incorporated by reference in reliance on BDO Seidman
LLP's report, given on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You can inspect and copy the registration statement of
which this Prospectus is a part, as well as such reports, proxy statements and
other information, at the public reference room maintained by the SEC at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549.
Copies of such material can be obtained from the public reference room of the
SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. You may obtain information on the operation of the public
reference room by calling the SEC at 1-800-SEC-0330. We are also required to
file electronic versions of these documents with the SEC, which may be accessed
through the SEC's Web site at http://www.sec.gov. You may also inspect reports,
proxy and information statements and other information about us at the American
Stock Exchange at 86 Trinity Place, New York, New York 10006.
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INFORMATION INCORPORATED BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file
with it, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this Prospectus, and later information that we file
with the SEC will automatically update and supercede this information. We
incorporate by reference the documents listed below and any future filings made
with the SEC under Sections 13(a), 13(c), 14, or 15(d) of the Exchange Act until
the earlier of the date the Selling Stockholders sell all the Shares or such
other date as the offering is terminated and any unsold Shares are deregistered
by the filing of a post-effective amendment:
o Our Annual Report on Form 10-K for the year ended June 30, 2004;
o Our Current Reports and Amendments thereto on Form 8-K and Form
8-K/A, respectively, filed with the SEC on:
August 18, 2004;
September 3, 2004;
September 16, 2004; and
September 27, 2004
o Our Definitive Proxy Statement for our Annual Meeting of
Stockholders held on November 14, 2003, filed with the SEC on
October 20, 2003; and
o The description of our Common Stock contained in our Registration
Statement on Form 8-A filed with the SEC on July 19, 1996.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address and telephone number:
RCG Companies Incorporated
6836 Morrison Boulevard
Suite 200
Charlotte, NC 28211
Attention: Controller
Telephone: (704) 366-5054
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This Prospectus provides you with a general description of the securities
that may be offered for sale, but does not contain all of the information that
is in the registration statement that we filed with the SEC. Statements
contained herein concerning the provisions of certain documents filed with, or
incorporated by reference in, the registration statement are not necessarily
complete and each such statement is qualified in its entirety by references to
the applicable document filed with the SEC.
You should rely only on the information incorporated by reference or
provided in this Prospectus or any supplement. We have not authorized anyone
else to provide you with different information. The Selling Stockholders will
not make an offer of these Shares in any state where the offer is not permitted.
You should not assume that the information in this Prospectus or any supplement
is accurate as of any date other than the date on the front of the respective
document.
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