United States
Securities and Exchange Commission
Washington, D. C. 20549
FORM 10 - QSB
(MARK ONE)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended May 31, 2004 or
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[ ] Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period From to
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COMMISSION FILE NUMBER 0-18091
RSI HOLDINGS, INC.
(Exact name of small business issuer as specified in its charter)
NORTH CAROLINA 56-1200363
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(State or other jurisdiction of (I.R.S.
Employer incorporation or organization)
Identification No.)
28 East Court Street, P. O. Box 6847
Greenville, South Carolina 29606
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(Address of principal executive offices)
(864) 271-7171
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(Issuer's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: Common Stock, $.01 Par Value -
7,846,455 shares outstanding as of July 13, 2004
Transitional Small Business Disclosure Format (check one):Yes [ ] No [X]
INDEX
RSI HOLDINGS, INC.
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheet - May 31, 2004 1
Condensed consolidated statements of operations - Three and nine months
ended May 31, 2004 and May 31, 2003 2
Condensed consolidated statements of cash flows - Nine months ended
May 31, 2004 and May 31, 2003 3
Notes to condensed consolidated financial statements - May 31, 2004 4
Item 2. Management's discussion and analysis of financial condition and results of operations 7
Item 3. Controls and Procedures 10
PART II. OTHER INFORMATION 11
Item 1. Legal Proceedings 11
Item 2. Changes in Securities and Small Business Issuer
Purchases of Equity Securities 11
Item 3. Defaults upon senior securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
RSI HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)
MAY 31, 2004
Assets
Current Assets
Cash $ 115,533
Accounts receivable 152,965
Prepaid expenses and other 48,701
-----------
Total current assets 317,199
Property and equipment
Cost 134,517
Less accumulated depreciation 64,891
-----------
Property and equipment - net 69,626
Other assets:
Customer related intangible assets, net of
amortization of $290,012 1,646,277
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$ 2,033,102
===========
Liabilities and Shareholders' Deficit
Current liabilities
Accounts payable $ 90,431
Accrued expenses 36,562
Current maturities of long-term debt 166,545
-----------
Total current liabilities 293,538
Long-term debt and other liabilities
Long-term debt 1,836,459
Accrued interest 204,758
Commitments and contingencies
Shareholders' deficit:
Common Stock, $.01 par value-authorized
25,000,000 shares, issued and outstanding
7,846,455 shares 78,464
Additional paid-in capital 4,951,741
Deficit (5,331,858)
-----------
Total shareholders' deficit (301,653)
-----------
$ 2,033,102
===========
The accompanying notes are an integral part of these consolidated financial
statements.
1
RSI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE THREE AND NINE MONTHS ENDED MAY 31, 2004 AND MAY 31, 2003
For the For the For the For the
Three months Nine months Three months Nine months
Ended Ended Ended Ended
May 31 May 31 May 31 May 31
2004 2004 2003 2003
------------- ------------ ------------ ------------
Revenues from services $1,230,643 $ 3,685,443 $ 1,277,132 $ 3,965,220
Cost of services 1,025,957 3,057,736 1,039,860 3,210,512
---------- ----------- ----------- -----------
Gross profit 204,686 627,707 237,272 754,708
Expenses:
Selling, general and administrative 190,196 629,279 203,020 657,448
---------- ----------- ----------- -----------
Income (loss) from operations 14,490 (1,572) 34,252 97,260
Other income (expense):
Interest income and other 20 75 88 735
Interest expense (35,135) (106,600) (37,477) (112,856)
---------- ----------- ----------- -----------
Total other income (expense) (35,115) (106,525) (37,389) (112,121)
---------- ----------- ----------- -----------
Loss before income taxes $ (20,625) $ (108,097) $ (3,137) $ (14,861)
Income tax expense - - - -
---------- ----------- ----------- -----------
Net (loss) $ (20,625) $ (108,097) $ (3,137) $ (14,861)
========== =========== =========== ===========
Basic and diluted (loss) per share $ - $ (0.01) $ - $ -
========== =========== =========== ===========
Shares used in computing basic and
diluted (loss) per share 7,846,455 7,846,455 7,846,455 7,833,268
========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
2
RSI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED MAY 29, 2004 AND MAY 28, 2003
For the For the
Nine months Nine months
Ended Ended
May 31 May 31
2004 2003
----------- -----------
OPERATING ACTIVITIES
Net loss $ (108,097) $ (14,861)
Adjustments to reconcile net loss to net
cash (used for) provided by operating activities:
Depreciation 17,335 16,947
Amortization 96,840 96,660
Changes in current assets and liabilities (76,579) 48,101
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Net cash (used for) provided by operating activities (70,501) 146,847
INVESTING ACTIVITIES
Purchase of property and equipment (3,716) (34,604)
Purchase of customer intangible assets - (4,273)
---------- ---------
Net cash used for investing activities (3,716) (38,877)
FINANCING ACTIVITIES
Proceeds from long-term debt borrowings - 30,393
Increase in accrued interest 75,191 -
Payment of long-term debt (118,496) (110,904)
Proceeds from issuance of common stock - 6,500
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Net cash used for financing activities (43,305) (74,011)
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Net (decrease) increase in cash (117,522) 33,959
CASH, BEGINNING OF PERIOD 233,055 165,267
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CASH, END OF PERIOD $ 115,533 $ 199,226
========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
3
RSI Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES
NATURE OF BUSINESS
The Company's wholly-owned subsidiary, Employment Solutions, Inc., a
South Carolina corporation ("Employment Solutions"), conducts the Company's only
business, which is the business of locating and providing labor to industrial
companies.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
at May 31, 2004 have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-QSB and Item 310(b) of
Regulation S-B. Accordingly, they do not include all the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments including normal recurring accruals considered
necessary for a fair presentation have been included. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's annual report on Form 10-KSB for the year ended August 31, 2003.
NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is computed on the basis of
the weighted average number of common shares outstanding in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share.
The treasury stock method is used to compute the effect of stock options on the
weighted average number of common shares outstanding for the diluted method.
Since the Company incurred a net loss during the three and nine months ended May
31, 2004 and three and nine months ended May 31, 2003, the effect of the stock
options on the treasury stock method was anti-dilutive in all periods presented
herein.
4
NOTE 2 - LONG-TERM DEBT AND OTHER LIABILITIES
Long-term debt consists of the following:
Unsecured notes payable to Buck A. Mickel, Charles C. Mickel and Minor M. Shaw
in the amount of $83,333 each with interest payable quarterly at 8.0 percent
per year. The unpaid principal balance is due on August 14, 2006. $ 250,000
Unsecured notes payable to Buck A. Mickel, Charles C. Mickel and Minor M. Shaw
in the amount of $400,000 each with interest payable quarterly at 7.0
percent per year. The unpaid principal balance is due on February 14, 2007. 1,200,000
Unsecured notes payable to Buck A. Mickel, Charles C. Mickel and Minor M. Shaw
in the amount of $20,000 each with interest payable quarterly at 7.0
percent per year. The unpaid principal balance is due on February 25, 2007. 60,000
Note payable in the original principal amount of $800,000 to Eadon Solutions,
LLC (formerly Employment Solutions, LLC) in monthly installments of $15,466
including interest at 6.0% per year through March 4, 2007 secured by the
outstanding common stock of Employment Solutions, Inc. 469,424
Note payable in the original principal amount of $30,393 to First Citizens Bank
in monthly installments of $520 including interest at an annual rate of
approximately 7.0% through October 24, 2008 and is secured by a vehicle. 23,580
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2,003,004
Less current portion 166,545
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$ 1,836,459
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On March 25, 2004, Minor H. Mickel gave the two notes above having
principal unpaid balances of $250,000 and $1,200,000 and the unpaid interest at
February 29, 2004 of $177,485 in equal parts to Buck A. Mickel, Charles C.
Mickel and Minor M. Shaw.
Buck A. Mickel is the President and Chief Executive Officer and a
director of the Company. Charles C. Mickel is a Vice President and director of
the Company. Buck A. Mickel, Charles C. Mickel and Minor M. Shaw are siblings
and Minor H. Mickel is their mother.
Buck A. Mickel, Charles C. Mickel and Minor M. Shaw (and, before March
25, 2004, Minor H. Mickel), the creditors of the three notes payable aggregating
$1,200,000, have permitted the deferral of payment of interest since the note's
issuance. Since November 2003, these creditors have permitted the deferral of
payment of interest under the other notes payable held by them, in the aggregate
principal amount of $310,000. These creditors have agreed that they will not
require payment of interest in the next twelve months. Management of the Company
could decide at any time to pay all or part of the accrued interest if they
determine that cash balances are sufficient to pay the interest without a
detrimental effect on the future operations of the Company. The accrued interest
portion of long-term debt and other liabilities consists of interest that has
been accrued on the unsecured notes aggregating $1,510,000 payable to Buck A.
Mickel, Charles C. Mickel and Minor M. Shaw.
5
NOTE 3 - INCOME TAXES
A 100% valuation allowance has been recorded relating to temporary
differences since the Company believes that it is more likely than not that the
realization of the deferred income tax assets will not be realized. The
valuation allowance relates primarily to future income tax benefits of net
operating loss carryforward. Management continues to assess the likelihood of
the future realization of the deferred tax assets on a quarterly basis. Such
carryforwards expire in 2006 through 2022.
NOTE 4 - RECENTLY ISSUED ACCOUNTING STANDARDS
No recently issued accounting standards have been proposed or adopted
that are anticipated to have a material effect.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Special Cautionary Notice Regarding Forward-Looking Statements.
This Report on Form 10-QSB contains various forward-looking statements.
Forward-looking statements are indicated by such terms as "expects", "plans",
"anticipates", and words to similar effect. Such forward-looking statements are
subject to known and unknown risks, uncertainties and other factors that may
cause the actual results, performance or achievements of the Company to be
materially different from future results, performance or achievements expressed
or implied by such forward-looking statements. Important factors ("Cautionary
Statements") that could cause the actual results, performance or achievements of
the Company to differ materially from the Company's expectations are disclosed
in this Report on Form 10-QSB. All written or oral forward-looking statements
attributable to the Company are expressly qualified in their entirety by the
Cautionary Statements.
Results of operations
During the three months and nine months ended May 31, 2004 the
Company's revenues were $1,230,643 and $3,685,443, respectively, all of which
were generated by its wholly-owned subsidiary, Employment Solutions, Inc. (which
we refer to as "Employment Solutions"). Employment Solutions operates from an
office facility in Greenwood, South Carolina. Revenues generated during the
three and nine months ended May 31, 2003 were $1,277,132 and $3,965,220,
respectively. The decrease in revenues during the three and nine months ended
May 31, 2004 as compared to the similar periods of fiscal year 2003 can be
attributed to a decrease in the number of workers provided. The decrease in
average number of workers of 8% during the nine months ended May 31, 2004 as
compared to the nine months ended May 31, 2003 accounts for a 10% decrease in
hours worked. This decrease resulted from reduced demand for Employment
Solutions' services from existing customers. The Company believes that this
reduction in demand is associated with relatively high unemployment levels in
the areas served by Employment Solutions (compared to unemployment levels in
recent years), which increases the availability of alternatives to the services
provided by Employment Solutions. The number of workers employed is determined
on a daily basis based on requests from the customers of Employment Solutions.
Unless unemployment levels are reduced in the areas served by the Company, the
Company expects reduced demand for its services to continue, which will continue
to adversely affect the Company's revenues and income from operations.
Employment Solutions incurred cost of services during the three and
nine months ended May 31, 2004 of $1,025,957 and $3,057,736, respectively. Cost
of services during the three and nine months ended May 31, 2003 were $1,039,860
and $3,210,512, respectively. These costs include wages paid directly to the
workers, payroll taxes, workers compensation insurance and other costs directly
associated with employment of the workers. The decrease in cost of services
during the three and nine months ended May 31, 2004 as compared to the similar
period of fiscal year 2003 can be attributed to a decrease in number of workers
provided and hours worked.
7
Selling, general and administrative expenses during the three and nine
months ended May 31, 2004 were $190,196 and $629,279, respectively, as compared
to $203,020 and $657,448, respectively, during the three and nine months ended
May 31, 2003. The table below sets forth the breakdown of these expenses.
3 MONTHS 9 MONTHS 3 MONTHS 9 MONTHS
ENDED ENDED ENDED ENDED
MAY 31, 2004 MAY 31, 2004 MAY 31, 2003 MAY 31, 2003
--------------- --------------- --------------- ----------------
Exclusive of Employment Solutions Operations
Salaries & Related Costs $82,628 $250,383 $76,296 $248,218
Legal, Accting & Shareholder-Related Expense 9,208 61,743 10,033 49,358
Rent 8,925 26,775 8,925 26,675
Other Administrative Expense 11,918 40,204 16,349 58,693
Employment Solutions Expenses
Selling & Administrative Expense 45,237 153,334 59,197 177,844
Amortization of Customer-Related Intangibles 32,280 96,840 32,220 96,660
--------------- --------------- --------------- ----------------
Total $190,196 $629,279 $203,020 $657,448
=============== =============== =============== ================
Interest expense incurred during the nine months ended May 31, 2004 was
$106,600 as compared to $112,856 during the nine months ended May 31, 2003. The
reduction in interest expense results from monthly principal reductions of the
note payable to Eadon Solutions, LLC. Interest expense includes interest accrued
but not paid during the nine months of $75,191 on the notes payable to Buck A.
Mickel, Charles C. Mickel and Minor M. Shaw in the aggregate principal amount of
$1,510,000.
Critical Accounting Policy -- Income taxes
The Company has adopted various accounting policies which govern the
application of accounting principles generally accepted in the United States of
America in the preparation of our financial statements. The significant
accounting policies of the company are described in the footnotes to the
consolidated financial statements at August 31, 2003 contained in the Company's
Annual Report on Form 10-KSB for the year ended on such date.
Certain accounting policies involve significant judgments and
assumptions by management which have a material impact on the carrying value of
certain assets and liabilities; management considers such accounting policies to
be critical accounting policies. The judgments and assumptions used by
management are based on historical experience and other factors, which are
believed to be reasonable under the circumstances. Because of the nature of the
judgments and assumptions made by management, actual results could differ from
these judgments and estimates which could have a material impact on the carrying
values of assets and liabilities and the results of operations of our company.
The Company believes that the valuation allowance related to the
deferred tax asset is a critical accounting policy that requires the most
significant judgments and estimates used in preparation of our consolidated
financial statements. When income and expenses are recognized in different
periods for financial reporting purposes than for purposes of computing income
taxes currently payable, deferred tax assets or liabilities are provided on such
temporary differences. The Company accounts for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax
assets and liabilities are recognized for the expected future tax consequences
of events that have been recognized in the consolidated financial statements or
tax return. Deferred tax assets and liabilities are measured using the enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be realized or settled.
8
At August 31, 2003, the Company had net operating loss carryforwards
("NOLs") available for income tax purposes of approximately $12,731,000. Such
carryforwards expire in 2006 through 2022. The Company's ability to use its
existing NOLs may be jeopardized or lost if the Company undergoes an "ownership
change" as defined by the Internal Revenue Code. Under SFAS No. 109, the Company
can record a net deferred tax asset on its balance sheet and a net deferred tax
benefit on its income statement related to its NOLs if it believes that it is
more likely than not that it will be able to utilize its NOLs to offset future
taxable income utilizing certain criteria required by SFAS No. 109. If the
Company does not believe, based on the balance of the evidence, that it is more
likely than not that it can fully utilize its NOLs, it must reduce its deferred
tax asset to the amount that is expected to be realized through future
realization of profits.
Because the Company did not have net income in fiscal 2003 and 2002,
the Company determined that it was more likely than not that it would not be
able to realize all of the deferred tax benefits prior to the expiration of the
related NOL's and that the Company would not carry any net deferred tax asset on
its balance sheets for August 31, 2003 or record any net deferred tax benefit on
its income statements for the years ended on such dates. If the Company had been
permitted under SFAS No. 109 to record a full net deferred tax asset on its
balance sheet at August 31, 2003, the amount of the net deferred tax asset that
would have been recorded was $4,765,000, and if the Company had not recorded a
valuation allowance the Company would have recorded a net deferred tax benefit
of $4,000 on its income statement for the year ended August 31, 2003.
The analysis of available evidence is performed on an ongoing basis.
Adjustments to the valuation allowance are made accordingly. Were the Company to
become profitable before its NOLs expire or are otherwise lost, it would be able
to utilize them to offset future taxable income, reducing its income tax expense
and increasing its net earnings, and the Company would be able to record a net
deferred tax asset on its balance sheet. There can be no assurance that the
Company will become profitable or that it will be able to utilize any of its
NOLs.
Liquidity and Capital Resources
At May 31, 2004, the Company's total liabilities exceeded its assets by
$301,653 as compared to $193,556 at August 31, 2003. The Company's cash balances
decreased from $233,055 at August 31, 2003 to $115,533 at May 31, 2004, a
decrease of $117,522. The decrease in cash includes cash used by an increase in
accounts receivable of $33,277 and an increase in prepaid expenses of $30,749.
All accounts receivable at May 31, 2004 were collected subsequent to May 31,
2004. The increase in prepaid expenses primarily consist of a premium paid on
the Company's workers compensation insurance policy that will be amortized over
the policy period that expires on September 30, 2004. The Company's working
capital (current assets less current liabilities) decreased $48,290 during the
nine months ended May 31, 2004 to $23,661.
The Company is dependent upon the cash generated by Employment
Solutions, Inc. to meet its cash liquidity requirements. Please refer to the
discussion of the decrease in revenues under "Results of operations".
Buck A. Mickel, Charles C. Mickel and Minor M. Shaw (and, before March
25, 2004, Minor H. Mickel), the creditors of notes payable aggregating
$1,200,000, have permitted the deferral of payment of interest since the notes
issuance. Buck A. Mickel is the President and Chief Executive Officer and a
director of the Company. Charles C. Mickel is a Vice President and director of
the Company. Buck A. Mickel, Charles C. Mickel and Minor M. Shaw are siblings.
Since November 2003, these creditors have permitted the deferral of payment of
interest under the other notes payable held by them, in the aggregate principal
amount of $310,000. These creditors have agreed that they will not require
payment of interest in the next twelve months. Management of the Company could
decide at any time to pay all or part of the accrued interest if they determine
that cash balances are sufficient to pay the interest without a detrimental
effect on the future operations of the Company.
Subject to the continued deferral of payment of interest on the
$1,510,000 in aggregate principal amount of notes payable to Buck A. Mickel,
Charles C. Mickel and Minor M. Shaw, the Company expects that its existing cash
balances and cash generated by the operations of Employment Solutions will be
sufficient to fund its cash requirements during the next twelve months, though
9
the deferral of payment of interest on these notes and the continued
amortization of intangibles are expected to cause negative shareholders' equity
to continue to increase unless results of operations improve substantially. If
the Company is able to continue to defer the payment of interest on these notes
and if business conditions do not worsen, the Company expects its existing cash
balances and cash generated by operations to be similarly sufficient to fund its
cash requirements beyond the next twelve months; however, results of operations
will have to improve substantially, or the Company will have to obtain capital
from other sources, in order to be able to pay off the $1,510,000 principal plus
the accrued interest on the Mickel notes at maturity, which become due in 2006
and 2007. There can be no assurance that results of operations will improve
substantially or that alternative sources of capital will be available at such
times.
OFF BALANCE SHEET ARRANGEMENTS
The Company has no material off-balance sheet arrangements.
Item 3. Controls and procedures.
Our disclosure controls and procedures are our controls and other
procedures that are designed to ensure that information required to be disclosed
by us in the reports we file or submit under the Securities Exchange Act of
1934, as amended, are recorded, processed, summarized and reported, within the
time periods specified in the rules and forms of the Securities and Exchange
Commission. Disclosure controls and procedures include without limitation,
controls and procedures designed to ensure that information required to be
disclosed by us in the reports we file or submit under the Exchange Act is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
Our management, with the participation of our Chief Executive Officer
and our Chief Financial Officer has evaluated the effectiveness of our
disclosure controls and procedures (as defined in 17 C.F.R. Sections
240.13a-15(e) and 240.15d-15(e)) as of May 31, 2004, and based on such
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that such controls and procedures were effective as of May 31, 2004.
There were no changes in our internal controls over financial reporting
that occurred during the three months ended May 31, 2004 that have materially
affected, or are reasonably likely to materially affect, our internal controls
over financial reporting.
10
PART II. Other information
ITEM 1. LEGAL PROCEEDINGS*
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES*
ITEM 3. DEFAULTS UPON SENIOR SECURITIES*
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS*
ITEM 5. OTHER INFORMATION*
*Items 1, 2, 3, 4 and 5 are not presented as they are not applicable or the
information required thereunder is substantially the same as information
previously reported.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibit
31.1 Section 302 Certification of Chief Executive Officer
31.2 Section 302 Certification of Chief Financial Officer
32.1 Section 906 Certification of Chief Executive Officer
32.2 Section 906 Certification of Chief Financial Officer
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the fiscal
quarter ended May 31, 2004.
11
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
RSI HOLDINGS, INC.
---------------------------------
July 13, 2004 /s/ Joe F. Ogburn
----------------------- ------------------------------
(Date) Joe F. Ogburn,
Treasurer and Chief
Financial Officer
(Principal Accounting Officer)
12