UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Fiscal Year Ended August 31, 2004
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ______ to ______
COMMISSION FILE NUMBER: 0-18091
RSI HOLDINGS, INC.
(Name of small business issuer in its charter)
North Carolina 56-1200363
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
28 East Court Street, Post Office Box 6847, Greenville, South Carolina 29606
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (864) 271-7171
Securities registered under Section 12(b) of the Exchange Act:
(Name of each exchange on
(Title of each class) which registered)
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.01
(Title of Class)
Check whether the issuer: (1) 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 [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues from operations during fiscal year 2004 were
$5,055,245.
The aggregate market value of the common equity held by non-affiliates
as of November 17, 2004 was $134,393.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date (November 17, 2004).
Common Stock, par value $.01 per share 7,846,455 shares outstanding
Transitional Small Business Disclosure Format: Yes [ ] No [X]
PART I.
Item 1. Description of Business
THE COMPANY
RSI Holdings, Inc. (the "Company") was incorporated in North Carolina
in 1978. The Company's executive offices are located at 28 East Court Street,
Greenville, South Carolina, 29601. Its telephone number is (864) 271-7171.
From January 2000 to March 2002, the Company did not conduct any
business other than seeking acquisition opportunities and liquidating assets of
its prior business. On January 18, 2002, the Company executed a letter of intent
to acquire substantially all of the assets of Employment Solutions, LLC, a South
Carolina limited liability company. On March 4, 2002, the Company acquired
substantially all of the assets of Employment Solutions, LLC, through a
newly-formed, wholly-owned subsidiary, Employment Solutions, Inc., a South
Carolina corporation ("Employment Solutions"). Employment Solutions is in the
business of locating and providing labor to industrial companies.
SERVICES
The Company operates through its wholly-owned subsidiary, Employment
Solutions, and is in the business of locating and providing labor to industrial
companies from its facility in Greenwood, South Carolina. The Company makes
arrangements with its client companies to provide the client companies with
manual labor. The Company's client companies request workers according to their
needs and the Company fills the vacancies from a pool of available labor. The
client companies pay the Company for the hours worked at a negotiated hourly
rate and the Company is responsible for paying the workers for the hours worked
plus the related payroll taxes, insurance and other payroll costs. The workers
work at the client company's job site under the direction of the client
company's personnel.
CLIENT CUSTOMERS
The Company is in the business of locating and providing labor to
industrial companies. Normally experience or skill in a particular industry is
not required for the labor. Revenues from each of the Company's four largest
client companies exceeded 10% of net revenues during the fiscal year ended
August 31, 2004. Revenues from these four client companies accounted for a
substantial majority of the net revenues of the Company during the 2003-2004
fiscal year.
BILLING PRACTICES
The Company collects from its client companies and the workers are paid
each week for work performed during the previous week. Typically at the
beginning of each week the Company invoices its client companies for the hours
worked during the previous week and the client companies typically pay during
that same week.
COMPETITION
The manual labor sector of the staffing industry is highly fragmented
and highly competitive. The Company's competitors include a large number of sole
proprietorships, as well as regional and national organizations. Many of them
are large corporations with substantially greater resources than the Company.
The Company believes that its reputation for trustworthiness, overall business
experience, connections to the labor market and ability to respond quickly to
client requests allow it to compete in this sector of the staffing industry.
1
REGULATIONS
The Company is required to comply with applicable state and federal
wage and hour laws. These laws require payment of employees at minimum wage and
overtime rates. The Company is also required to comply with laws regulating the
employer/employee relationship, such as tax withholding or reporting social
security, antidiscrimination and workers' compensation. In addition, the Company
must comply with all immigration laws, including the Immigration Reform and
Control Act.
EMPLOYEES
At August 31, 2004, the Company's total employees consisted of four (4)
full time employees and 250 full time employees who are joint employees of the
Company's subsidiary, Employment Solutions, and Quality H. R. Services, Inc., an
unrelated professional employer organization. Most of the Company's laborers are
foreign nationals; however, the Company is an equal opportunity employer and
does not discriminate on the basis of race, religion, color, age, sex, national
origin or handicapping conditions. The Company's primary sources of laborers are
(1) recruiters, who are not employees of the Company and who are paid on
commission, and (2) individuals who contact Employment Solutions seeking work.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local environmental laws
and regulations, however, due to the nature of the Company's current activities,
such laws and regulations do not have a direct, substantial impact on the
Company's business operations.
SUBSEQUENT EVENT
During August 2004, the Company announced that Buck A. Mickel,
President, the Company's Chief Executive Officer and a director, Charles C.
Mickel, the Company's Vice President and a Director, and their sibling, Minor
Mickel Shaw (collectively, the "Mickel siblings") intended to initiate a
going-private transaction with respect to the Company. The Mickel siblings
beneficially own approximately 76% of the Company's stock. In October 2004, BCM
Acquisition Corp. ("BCM"), a South Carolina corporation newly formed by the
Mickel siblings, made a filing with the Securities and Exchange Commission (the
"SEC") that included an Offer to Purchase (a tender offer statement) for the
SEC's review. In November 2004, BCM filed a revised Offer to Purchase with the
SEC, again for review only. This document is accessible at the SEC's website
(www.sec.gov).
NO TENDER OFFER HAS COMMENCED, AND THIS DESCRIPTION OF THE PLANS AND
PROPOSALS OF THE MICKEL SIBLINGS IS NOT INTENDED TO BE LEGALLY BINDING IN ANY
WAY. IF A TENDER OFFER IS COMMENCED, IT WILL BE MADE IN ACCORDANCE WITH ALL
APPLICABLE SECURITIES LAWS AND WILL INCLUDE THE FILING OF APPROPRIATE MATERIALS
WITH THE SEC AND THE MAILING OF APPROPRIATE MATERIALS TO THE STOCKHOLDERS OF THE
COMPANY. THE COMPANY'S STOCKHOLDERS AND OTHER INTERESTED PARTIES ARE URGED TO
READ BCM'S TENDER OFFER STATEMENT AND RELATED EXHIBITS MAILED TO THEM AND FILED
WITH THE SEC WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT
INFORMATION. COMPANY STOCKHOLDERS WILL ALSO BE ABLE TO OBTAIN SUCH DOCUMENTS
FREE OF CHARGE AT THE COMMISSION'S WEBSITE, WWW.SEC.GOV,
The Offer to Purchase filed with the SEC describes BCM's potential
offer to purchase all the outstanding shares of the common stock of the Company
at a price of $.10 per share, subject to certain terms and conditions. The offer
as described in the Offer to Purchase is conditioned on, among other things,
there being validly tendered and not withdrawn sufficient shares of the
Company's common stock such that, after those shares are purchased pursuant to
the offer and the Mickel siblings have contributed their shares to BCM, BCM
would own at least 90% of the Company's common stock. Upon satisfaction or
waiver of the conditions of the offer, the Mickel siblings would contribute
their Company shares to BCM and, if BCM owned at least 90% of the common stock
of the Company upon consummation of the offer and contribution by the Mickel
siblings, BCM would effect a short-term merger of the Company into BCM. Assuming
completion of the tender offer and the merger, the Mickel siblings would own
100% of the Company's stock.
2
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 3,000 square feet of floor space
located at 28 East Court Street, Greenville, South Carolina on a month-to-month
basis to serve as its principal executive offices. The Company believes that the
property is adequate and suitable for executive office space. The monthly rental
expense is $2,550. This lease includes office furniture and equipment. The
lessor for this office space is CTST, LLC which is owned by the Mickel siblings.
The Company believes that this lease contains provisions as favorable to the
Company as could be obtained from a third-party landlord.
Employment Solutions leases a warehouse and office facility in
Greenwood, South Carolina containing approximately 3,000 square feet under a one
year lease arrangement that expires April 4, 2005 and requires rent of $1,200
per month plus an additional common maintenance fee of $75 per month.
The Company carries such insurance as it considers reasonable and
necessary to cover its casualty and liability exposures. The Lessors provide the
insurance on the facilities described above.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party from time to time to routine litigation in the
ordinary course of its business, including but not limited to various regulatory
proceedings, employment disputes, workers compensation and personal injury
claims, contract breach litigation and the like. Such litigation is incidental
to the Company's business and does not depart from the normal kind of such
actions. The Company believes that no such actions should have a material
adverse effect on its results of operations or financial condition taken as a
whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of securities holders during the
fourth quarter of the Company's 2004 fiscal year.
3
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES.
The Company's Common Stock is thinly traded on the NASDAQ
over-the-counter bulletin board. The high and low bid quotations of the
Company's Common Stock are set forth below for the fiscal quarters indicated, as
reported by NASDAQ for such periods. These quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions.
2004 2003
Fiscal High Low High Low
First Quarter .10 .08 .19 .03
Second Quarter .15 .08 .38 .10
Third Quarter .15 .08 .23 .13
Fourth Quarter .09 .08 .13 .08
As of November 17, 2004, the Company had approximately 526 shareholders
of record.
See the section entitled "Description of Business - Subsequent Event"
for a description of a potential tender offer for the Company's stock by the
Mickel siblings (though BCM, their wholly-owned subsidiary).
The Company paid no cash dividends with respect to its Common Stock
during fiscal 2004 and 2003, and does not intend to pay cash dividends in the
foreseeable future.
4
EQUITY COMPENSATION PLAN INFORMATION
--------------------------------------------- ------------------------- ----------------------- --------------------
Number of
securities
remaining
available for
future issuance
under equity
compensation
Number of securities to Weighted average plans (excluding
be issued upon exercise exercise price of securities
Plan category of outstanding options, outstanding options, reflected in
as of August 31, 2004 warrants and rights warrants and rights column (a))
(a) (b) (c)
--------------------------------------------- ------------------------- ----------------------- --------------------
Equity compensation plans approved by 642,774 $.1433 2,010,000
security holders
--------------------------------------------- ------------------------- ----------------------- --------------------
Equity compensation plans not approved by 75,000 $.1067 0
security holders
--------------------------------------------- ------------------------- ----------------------- --------------------
Total 717,774 $.1395 2,010,000
--------------------------------------------- ------------------------- ----------------------- --------------------
The equity compensation plans not approved by security holders consist
of options to purchase Common Stock of the Company and expire five years from
date of issuance. The options generally give the optionee the right to purchase
a specified number of shares of Common Stock of the Company at the market value
on the date of the issuance.
5
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS.
This Report on Form 10-KSB contains forward-looking statements within
the meaning of Section 27A of the Securities Act and 21E of the Exchange Act.
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-KSB. All written or oral forward-looking statements
attributable to the Company are expressly qualified in their entirety by the
Cautionary Statements.
GOING CONCERN
The accompanying financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
that apply to established operating enterprises on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. As shown in the financial statements during the
years ended August 31, 2004 and 2003, the Company incurred losses of $138,123
and $15,635, respectively. At August 31, 2004, the Company's liabilities
exceeded its assets by $331,679 and it had a working capital deficit of
$202,265. The outstanding unpaid interest that has been deferred at August 31,
2004 was $231,833. These conditions raise substantial doubt about the Company's
ability to continue as a going concern.
In the Offer to Purchase filed with the SEC by the Mickel siblings
(which is described in more detail in the section entitled "Description of
Business - Subsequent Event" and in Note 11 to the accompanying finanical
statements), the Mickel siblings indicated that they do not intend to continue
to support the Company financially, including advancing any future funds or
extending their deferral of interest payments beyond July 2005, unless the
Company becomes a private company through a going-private transaction. The
Mickel siblings expect the Company to become a private company before July 2005;
however, if the Company does not become a private company and the Mickel
siblings demand payment of the unpaid accrued interest the Company would in all
likelihood not be able to pay the previously deferred interest and be able to
continue operations. Accordingly, the Company has classified the unpaid accrued
interest as a current liability.
Management of the Company believes that it is highly likely that the
Company will be a private company prior to July 2005 and that the Mickel
siblings will not demand payment of previously deferred interest with respect to
the Company notes they hold.
There are no assurances that the Company will be a private company
prior to July 2005 or that the Mickel siblings will not demand payment with
respect to the Company notes they hold. The accompanying financial statements do
not include any adjustments that might be necessary if the Company is unable to
continue as a going concern.
6
RESULTS OF OPERATIONS
During the year ended August 31, 2004 the Company's revenues were
$5,055,245 as compared to revenues during the year ended August 31, 2003 of
$5,314,156. The decrease in revenues during the year ended August 31, 2004 as
compared to the year ended August 31, 2003 can be attributed to a decrease in
the number of workers provided. The decrease resulted from reduced demand for
the Company's services from existing customers. Although the Company experienced
a decrease in revenues during fiscal 2004, the Company does not believe that
this represents a trend of decreasing revenues.
Employment Solutions incurred cost of services of $4,201,137 during the
year ended August 31, 2004 as compared to $4,307,446 during the year ended
August 31, 2003. These costs include wages paid directly to the employees,
payroll taxes, workers compensation insurance and other costs directly
associated with employment of the workers. The decrease in cost of services
provided primarily results from the decrease in the number of workers provided.
General and administrative expenses were $851,669 during the year ended
August 31, 2004 as compared to $873,441 during the year ended August 31, 2003.
The table below sets forth the breakdown of these expenses.
Year Year
Ended Ended
August 31, August 31,
2004 2003
----- ----
Exclusive of Employment Solutions Operations
Salaries and related costs $347,172 $347,333
Legal, accounting and shareholder related expense 69,455 62,263
Rent 35,700 35,600
Other administrative expense 59,814 69,468
Employment Solutions Expenses
Selling and administrative expense 210,408 229,898
Amortization of customer-related intangibles 129,120 128,879
------- -------
$ 851,669 $ 873,441
========= =========
Interest expense incurred during the year ended August 31, 2004 was
$140,658 as compared to $149,760 during the year ended August 31, 2003. The
decrease in interest expense resulted primarily from reduction in principal
balances outstanding on borrowings relating to the acquisition of Employment
Solutions.
INCOME TAXES
During fiscal year 2004 and 2003, net deferred tax benefits and a
valuation allowance equal to the deferred tax benefits relating to temporary
differences were recorded since the Company is not assured that the resulting
additional deferred tax assets will be realized. See "Critical Accounting
Policies" below.
LEASED PROPERTIES
For a description of the Company's arrangements with respect to its
current lease obligations, reference is made to Part I, Item 2 - "Description of
Property," which is incorporated herein by reference.
7
LIQUIDITY AND CAPITAL RESOURCES
ANTICIPATED LIQUIDITY REQUIREMENTS
Employment Solutions collects from its customers and pays the related
workers each week for work performed during the previous week. Typically at the
beginning of each week Employment Solutions invoices its customers for the hours
worked during the previous week and the customers typically pay during that same
week. Although the Company's customers have paid for services provided as
described above since the Company's acquisition of the Employment Solutions
business in March 2002, the Company is dependent upon a few customers and can
give no assurance that these customers will continue to pay in a timely manner.
At August 31, 2004, the Company's liabilities exceeded its assets by
$331,679. The Mickel siblings (and, in the past, their mother) have advanced
funds and deferred payment of interest expense under the debt arrangements
discussed below under "Debt Arrangements". In the Offer to Purchase filed with
the SEC by the Mickel siblings (see "Description of Business - Subsequent
Event"), the Mickel siblings indicated that they do not intend to continue to
support the Company financially, including advancing any future funds or
extending their deferral of interest payments beyond July 2005, unless the
Company becomes a private company through a going-private transaction.
Management expects the Company to become a private company before July 2005,
and, accordingly does not believe that the Mickel siblings will require payment
of interest during the next twelve months. However, if the Company does not
become a private company and the Mickel siblings demand payment of the unpaid
accrued interest the Company would in all likelihood not be able to pay the
previously deferred interest and to continue operations.
The Company anticipates that its cash balances and cash generated by
the operations of Employment Solutions will be sufficient to fund its cash
requirements during the next twelve months.
CASH
The Company had cash in the amount of $182,540 at August 31, 2004 as
compared to $233,055 as of August 31, 2003.
DEBT ARRANGEMENTS
On August 31, 2001, Minor H. Mickel, the mother of the Mickel siblings
(Buck A. Mickel, President and Chief Executive Officer and a director and
significant shareholder of the Company, Charles C. Mickel, Vice President and a
director and significant shareholder of the Company, and Minor Mickel Shaw, a
significant shareholder of the Company), loaned the Company $250,000 under the
terms of an unsecured note payable bearing interest at 8% per year with the
principal balance due on August 14, 2006.
On February 14, 2002, Minor H. Mickel loaned the Company $1,200,000
under the terms of an unsecured note payable bearing interest at 7% per year
with the principal balance due on February 14, 2007. On February 25, 2002, each
of the Mickel siblings loaned the Company $20,000 under the terms of unsecured
notes payable bearing interest at 7% per year with the principal balance due on
February 25, 2007. Total proceeds of these loans, aggregating $1,260,000, were
used in the purchase of Employment Solutions.
On March 4, 2002, the Company's subsidiary, Employment Solutions,
issued a note in the principal amount of $800,000 to Employment Solutions, LLC
as part of the purchase price of Employment Solutions' business. The note is
payable in equal monthly installments of $15,466 over five years at an interest
at the rate of 6% per year and is secured by the Company's pledge of the common
stock of Employment Solutions. At August 31, 2004, the outstanding balance on
this note was $429,870.
On March 25, 2004, Minor H. Mickel gave the two notes described above
having principal unpaid balances of $250,000 and $1,200,000 and the unpaid
interest in equal parts to Buck A. Mickel, Charles C. Mickel and Minor M. Shaw.
8
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
predecessor 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 on any of the notes held by them until
July 2005 at the earliest, but they have indicated in the Offer to Purchase
filed with the SEC that they do not intend to extend this payment deadline
beyond then unless the Company becomes a private company through a going-private
transaction. As noted above in "Anticipated Liquidity Requirements", management
expects it is highly likely that the Company will be a private company prior to
July 2005 and accordingly, that the Mickel siblings will not demand payment with
respect to the Company notes they hold.
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.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no significant off-balance sheet arrangements.
CRITICAL ACCOUNTING POLICIES
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, 2004.
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.
VALUATION ALLOWANCE ON DEFERRED TAXES
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 for
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 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.
At August 31, 2004, the Company had net operating loss carryforwards
("NOLs") available for income tax purposes of approximately $12,800,000. Such
9
carryforwards expire in 2006 through 2024. The Company's ability to use its
existing net operating loss carryforward 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 believes that it is more likely than not that the
realization of the deferred tax assets will not be realized, SFAS No. 109
required that the Company not carry any net deferred tax asset on its balance
sheet at August 31, 2004 or record any net deferred tax benefit on its income
statements for the years ended on such date. 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, 2004, the amount of the net deferred tax asset would have been
$4,816,000, and if the Company had similarly been permitted to show a full net
deferred tax benefit on its income statement for the year ended August 31, 2004,
the amount of the benefit would have been $51,000.
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. If the Company does become profitable and utilize its NOLs, any recordable
deferred tax asset could be substantially different from the August 31, 2004
amount set forth in the preceding paragraph.
CUSTOMER BASED INTANGIBLE ASSET
In accordance with SFAS No. 141, Business Combinations, the Company has
determined that the intangible portion of the purchase price in conjunction with
the acquisition described in Note 2 is customer related intangible assets and
consists of customer list, customer contracts and related customer
relationships, and noncontractual customer relationships. The Company is
amortizing this asset over its estimated fifteen year life, and reviews the
asset for impairment in accordance with SFAS 144, Accounting for the Impairment
or Disposal of Long-Lived Assets.
The Company evaluates the recoverability of its identifiable intangible
assets whenever events or changes in circumstances indicate that an intangible
asset's carrying value may not be recoverable. The evaluation of asset
impairment requires the Company to make assumptions and estimations about the
future cash flows of the asset being evaluated. Differing future cash flow
assumptions and estimations could result in different conclusions as to the
recoverability of the asset's carrying value. The Company's evaluation of its
intangible assets completed during the year resulted in no impairment loss.
RISK FACTORS
The Company is dependent on a few customers in that the majority of its
revenues are from four customers. During the year ended August 31, 2004, these
customers accounted for a substantial majority of the Company's revenues. The
contracts that the Company has with its customers are generally short-term and
the Company can give no assurance that these customers will continue to need the
services that it provides.
The Company is continually subject to the risk of new regulations that
could materially impact its business.
The Company must continually attract reliable workers to fill positions
and may from time to time experience shortages of available temporary workers.
10
The Company can give no assurance that its supply of labor will continue to be
available.
ITEM 7. FINANCIAL STATEMENTS
The response to this Item is set forth on page F-2 and submitted as a
separate section of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 8A. 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, is processed, summarized and reported within the time periods
specified in the rules and forms of the SEC. 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-15d--15(e)) as of August 31, 2004, and based on such evaluation, our
Chief Executive Officer and Chief Executive Officer concluded that such controls
and procedures were effective as of August 31, 2004.
There were no significant changes in our internal controls over
financial reporting that occurred during the fiscal year ended August 31, 2004
that have materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.
ITEM 8B. OTHER INFORMATION.
None.
11
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
DIRECTORS OF THE COMPANY
Name, Age and Tenure as
Director Principal Occupation and Background
----------------------- ----------------------------------------------------------------------
C.C. Guy (72) Director of the Company. Mr. Guy served as President of the Company
Director since 1978 (1)(2) from July 1989 until his retirement in January 1995. Since his
retirement, he has served as a consultant to the Company on an
as-needed basis. Mr. Guy was Vice President-Administration of the
Company from 1978 to July 1989. Mr. Guy served from October 1979 to
November 1989 as President, Treasurer and a director of RSI
Corporation. Mr. Guy currently serves as a director of Delta Woodside
Industries, Inc. and served as a director of Delta Apparel, Inc. until
November, 2004.
Charles M. Bolt (74) Director of the Company until his death on November 3, 2004. Mr. Bolt
Director from 1982 to was President and Chief Executive Officer of the Company from 1984 to
November 2004 (1)(2) July 1989, when he was elected President of Distribution, a position
that he held until his retirement in January 1995. Following his
retirement, he served as a consultant to the Company on an as-needed
basis. Mr. Bolt was Vice President-Marketing of the Company from 1978
to 1984.
Buck A. Mickel (49) Director of the Company. Mr. Mickel was elected President and Chief
Director from 1988 to 1992 Executive Officer of the Company on July 28, 1998 following the death
and 1997 to present (1) of his father, Mr. Buck Mickel. Mr. Mickel was Vice President of the
Company from 1989 to January 1995 and from September 1996 to July
1998. Mr. Mickel served as a consultant to the Company from January
1995 to September 1996. Mr. Mickel served as a director of the
Company or its former parent corporation from 1987 until December
1992. Mr. Mickel currently serves as a director of Delta Woodside
Industries, Inc. and Delta Apparel, Inc.
Charles C. Mickel (47) Director of the Company. Mr. Mickel was elected Vice President of the
Director since 2001 (1)(2) Company on September 1, 2003. Mr. Mickel served as vice president of
U. S. Shelter Corporation from 1981 to 1990 and vice president of
asset management of Insigna Financial Group, Inc., the successor of U.
S. Shelter Corporation, from 1990 to 1992. Since July 1992 Mr. Mickel
has been a private investor in commercial real estate. Mr. Mickel is
Buck A. Mickel's brother.
Joe F. Ogburn (66) Director of the Company. Mr. Ogburn has served as Secretary,
Director since 2001 Treasurer and Chief Financial Officer of the Company since January
2001. Mr. Ogburn has served as Treasurer of the Company since
September 1988 and served as Vice President of the Company from May
1995 to January 2001. Mr. Ogburn also served as Controller of the
Company from 1981 to September 1988. Mr. Ogburn served as a Director
of the Company from September 1987 to July 1989.
(1) Member of Compensation Committee.
(2) Member of Audit Committee.The Board of Directors of the Company met one
time in person and four times by telephone conference call during the
fiscal year ended August 31, 2004. The Compensation Committee of the
Company met once during the fiscal year. The Audit Committee of the
Company met four times during the fiscal year. Each Director attended
at least 75% of the meetings of the Board and of any committee of which
he was a member. The Board does not have a standing nominating
committee.
The Compensation Committee reviews and submits to the Board of
Directors suggested salaries and other compensation for officers of the Company
and its subsidiaries for the ensuing year.
The Audit Committee selects the independent public accountants, reviews
the independence of such accountants, approves the scope of the annual audit,
approves the rendering of any material non-audit services by the independent
accountants, approves the fee payable to the independent accountants, and
reviews the audit results.
Although the Board of Directors has determined that the Company's Audit
Committee does not have an "audit committee financial expert" as that term is
defined by applicable SEC rules, the Board believes that the current members of
the Audit Committee are fully capable of satisfying their audit committee
responsibilities, based on their experience and background.
12
EXECUTIVE OFFICERS
The following table provides certain information regarding the
executive officers of the Company:
Name and Age Position
----------------------------------------- ------------------------------------------------
Buck A. Mickel (49) President and Chief Executive Officer
Charles C. Mickel (47) Vice President (appointed September 1, 2003)
Joe F. Ogburn (66) Secretary, Treasurer and Chief Financial Officer
The Company's executive officers are appointed by the Board of
Directors and serve at the pleasure of the Board. Buck A. Mickel and Charles C.
Mickel are brothers.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of Forms 3, 4 and 5 and amendments
thereto furnished to the Company during and with respect to its most recent
fiscal year, the Company believes that all of its executive officers, directors
and persons who may have been deemed to be greater than 10% stockholders during
the year have timely made all filings required to be made under Section 16(a) of
the Securities Exchange Act of 1934, as amended.
The Company has not adopted a code of ethics and does not intend to do
so because its supermajority shareholders, the Mickel siblings intend to pursue
a going private transaction and the Company is attempting to minimize the
Company's expense of being a public company.
13
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding
compensation paid by the Company during the last three fiscal years to the
Company's Chief Executive Officer (the "Named Executive Officer"). The salary
and bonuses of each other executive officer of the Company was less than
$100,000 during fiscal years 2002 through 2004.
Summary Compensation Table
Annual Long-Term Compensation Awards
Compensation Awards
------------- ------------------------------
Name and Principal Position Fiscal Year Salary $ Securities Underlying Options
------------------------------------- --------------------------------------------------------------------
Buck A. Mickel, President and Chief 2004 81,000
Executive Officer 2003 90,083
2002 55,333 300,000
Most of the Company's employees, as well as its executive officers, are
eligible to participate in the Company's medical and health benefit plan.
During the year ended August 31, 2004, the Company did not pay any
other compensation to its directors except as set forth in "Retirement
Contracts" below.
The following table sets forth the number of shares underlying the Named
Executive Officer's exercisable and unexercisable stock options. There were no
stock options granted to the Named Executive Officer and the Named Executive
Officer did not exercise any stock options during the year ended August 31,
2004.
AGGREGATE EXERCISABLE AND UNEXERCISABLE STOCK OPTIONS AT FISCAL YEAR-END
------------------------------------- ------------------------------------ --------------------------
Number Of Unexercised Securities Value of Unexercised
Underlying Options/SARs at Fiscal In-the-Money
Year-End (#) Options/SARS at Fiscal
Name Exercisable/ Year-End ($)
Unexercisable Exercisable/
Unexercisable
------------------------------------- ------------------------------------ --------------------------
Buck A. Mickel, President and Chief 226,666/100,000 $600/$300
Executive Officer
------------------------------------- ------------------------------------ --------------------------
RETIREMENT CONTRACTS
Messrs. C.C. Guy and Charles M. Bolt retired as officers of
the Company on January 17, 1995. The Company paid each of these two retired
officers $100 per month during the year ended August 2004. The Board determined
that these payments were appropriate in light of these officers' long records of
service to the Company and value as consultants to the Company. The Company
anticipates that Mr. Guy will continue to serve as a consultant during fiscal
year 2005. Mr. Bolt continued to serve as a consultant until his death on
November 3, 2004.
14
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
The following table sets forth certain information as of November 17,
2004, regarding the beneficial ownership of the Common Stock by: (i) persons
beneficially owning more than five percent of the Common Stock; (ii) the
directors and executive officers of the Company; and (iii) all directors and
executive officers of the Company, as a group. Unless otherwise indicated in the
notes to the table, the Company believes that the persons named in the table
have sole voting and investment power with respect to all the shares of Common
Stock shown as beneficially owned by them.
Amount and
Nature of
Name and Address of Beneficial Percent
Beneficial Owner Ownership of Class (7)
----------------------------------------------------------------------------
BCM Acquisition Corp. 6,368,188 (1) 75.9
28 East Court Street
P. O. Box 6847
Greenville, SC 29606
Buck A. Mickel 3,513,975 (2) 41.9
28 East Court Street
P. O. Box 6847
Greenville, SC 29606
C.C. Guy 50,962 (3) 0.6
1405 Stonegate Lane
Shelby, NC 28150
Charles C. Mickel 1,473,851 (4) 17.6
28 East Court Street
P. O. Box 6847
Greenville, SC 29606
Minor Mickel Shaw 1,380,362 16.5
P. O. Box 795
Greenville, SC 29602
Joe F. Ogburn 201,990 (5) 2.4
208 Belvedere Avenue
Shelby, NC 28150
All Directors and Executive Officers 5,240,778 (6) 62.5
of the Company as a Group (4 persons)
(1) The number of shares includes all shares shown as beneficially owned by each
of Buck A. Mickel, Charles C. Mickel and Minor M. Shaw. These three Mickel
siblings are the sole shareholders of BCM and, through BCM, are intending to
pursue a going-private tender offer for the Company's stock. See the section
entitled "Description of Business - Subsequent Event" for a description of this
potential tender offer.
(2) Mr. Buck A. Mickel is the President, Chief Executive Officer and a director
of the Company. The number of shares shown as beneficially owned by Mr. Buck A.
Mickel includes 3,087,309 shares directly owned by him, 150,000 shares owned by
him as custodian for his minor child and 226,666 unissued shares subject to
stock options held by Mr. Mickel which are currently exercisable. The number of
shares shown also includes 50,000 shares held by Mr. Mickel's wife, as to which
shares Mr. Mickel disclaims beneficial ownership.
(3) Mr. C.C. Guy is a director of the Company. The number of shares shown as
beneficially owned by Mr. Guy includes 26,307 shares directly owned by him and
15
6,666 unissued shares subject to stock options held by Mr. Guy which are
currently exercisable. The number of shares shown also includes 17,989 shares
held by Mr. Guy's wife, as to which shares Mr. Guy disclaims beneficial
ownership.
(4) Mr. Charles C. Mickel was elected Vice President effective on September 1,
2003 and is a director of the Company. The number of shares shown as
beneficially owned by Mr. Charles C. Mickel includes 1,467,185 shares directly
owned by him and 6,666 unissued shares subject to stock options held by Mr.
Mickel which are currently exercisable.
(5) Mr. Joe F. Ogburn is the Secretary, Treasurer and Chief Financial Officer of
the Company. The number of shares shown as beneficially owned by Mr. Ogburn
includes 45,142 shares directly owned by him and 156,665 unissued shares subject
to stock options held by Mr. Ogburn which are currently exercisable. Such number
also includes 183 shares held by Mr. Ogburn's wife, as to which shares Mr.
Ogburn disclaims beneficial ownership.
(6) This number includes all shares included in the table above with respect to
any director or executive officer.
(7) Pursuant to Rule 13d-3 promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), percentages of total outstanding shares
have been computed on the assumption that shares that can be acquired within 60
days upon the exercise of options by a given person are outstanding, but no
other shares similarly subject to acquisition by other persons are outstanding.
Equity compensation plan information is included in part II, Item 5 of this Form
10-KSB.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain information concerning related party transactions respecting
the members of the Compensation Committee, members of their families, and other
executive officers, directors and owners of 5% or more of the outstanding Common
Stock of the Company is set forth below.
SALARY AND OTHER COMPENSATION ARRANGEMENTS
As described herein under Part III, Item 10 - Executive Compensation
-"Retirement Contracts", the Company paid consulting fees to Messrs. C.C. Guy
and Charles M. Bolt.
LOAN ARRANGEMENT
The disclosure in "Liquidity and Capital Resources - Debt Arrangements"
is incorporated by reference.
CORPORATE OFFICE ARRANGEMENT
For a description of the Company's arrangements with respect to its
current corporate office arrangements, reference is made to Part I, Item 2 -
"Description of Property," which is incorporated herein by reference.
PROPOSED GOING-PRIVATE TRANSACTION
For a description of the going-private transaction proposed by the
Mickel siblings, reference is made to Part I, Item 1 - "Description of Business
- Subsequent Event," which is incorporated herein by reference.
16
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits
2.1 Agreement for Sale and Purchase of Assets dated March 4, 2002, by and between the Company, Employment Solutions, Inc.
(then known as Employment Solutions Acquisition, Inc.), Employment Solutions, LLC, Eadon Solutions, Inc. and Marion L.
Eadon, Jr.: Incorporated by reference to Exhibit 10.11 to the Current Report on Form 8-K of the Company dated March 4,
2002 and filed with the Commission on March 18, 2002 (the "March 4, 2002 Form 8-K").
3.1 Articles of Incorporation of RSI Holdings, Inc., as amended: Incorporated by reference to Exhibit 3.2 and 3.2.2 to the
Registration Statement on Form S-4 of RSI Corporation and Porter Brothers, Inc., File No. 33-30247 (the "Form S-4").
3.1.1 Articles of Amendment and Certificate of Reduction of Capital of Porter Brothers, Inc.: Incorporated by reference to
Exhibit 4.1 to the Form 8-K of the Registrant filed with the Securities and Exchange Commission on November 28, 1989,
File No. 0-7067.
3.2.1 By-laws of RSI Holdings, Inc., as amended: Incorporated by reference to Exhibit 3.1.1 to the Form S-4.
3.2.2 Amendments to By-laws: Incorporated by reference to Exhibit 3.2.2 to the Form 10-KSB of the Registrant filed with the
Securities and Exchange Commission for the fiscal year ended August 31, 1996, File No. 0-18091.
4.1 See Exhibits 3.1, 3.1.1, 3.2.1 and 3.2.2.
4.2 Specimen of Certificate for RSI Holdings, Inc., common stock: Incorporated by reference to Exhibit 4.1.2 to the Form
S-4.
*10.1 RSI Holdings, Inc., Stock Option Plan, including an amendment: Incorporated by reference to Exhibit 10.9 to the Form
10-K of the Registrant filed with the Securities and Exchange Commission for the fiscal year ended August 31, 1990,
File No. 0-18091 (the "1990 Form 10-K").
*10.1.1 Amendment No. 2 to Stock Option Plan: Incorporated by reference to Exhibit 10.9.1 to the Form 10-K of the Registrant
filed with the Securities and Exchange Commission for the fiscal year ended August 31, 1992, as amended, File No.
0-18091 (the "1992 Form 10-K").
*10.1.2 Amendment No. 3 to Stock Option Plan: Incorporated by reference to Exhibit 99.1 to the Company's Registration
Statement on Form S-8 filed with the Securities and Exchange Commission on September 9, 1998 (Commission File No.
333-63109).
*10.1.3 Amendment No. 4 to Stock Option Plan: Incorporated by reference to Exhibit 99.1 to the Company's Registration
Statement on Form S-8 filed with the Securities and Exchange Commission on February 10, 1999 (Commission File No.
333-72101).
*10.1.4 Amendment No. 5 to Stock Option Plan: Incorporated by reference to Exhibit A to the Company's Definitive Proxy
Statement filed with the Securities and Exchange Commission on December 30, 1999 (Commission File No. 333-72101).
17
*10.2 RSI Holdings, Inc., 2002 Stock Option Plan: Incorporated by reference to Exhibit 10.12 to the Form 10-KSB of the
Registrant filed with the Securities and Exchange Commission for the year ended August 31, 2002, File No. 0-18091.
*10.3 Stock Option Agreement by and between the Registrant and Charles C. Mickel dated as of June 10, 2002: Incorporated by
reference to Exhibit 10.13 to the Form 10-KSB of the Registrant filed with the Securities and Exchange Commission for
the year ended August 31, 2002, File No. 0-18091.
*10.4 Stock Option Agreement by and between the Registrant and C. C. Guy dated as of June 10, 2002: Incorporated by
reference to Exhibit 10.14 to the Form 10-KSB of the Registrant filed with the Securities and Exchange Commission for
the year ended August 31, 2002, File No. 0-18091.
*10.5 Stock Option Agreement by and between the Registrant and Charles M. Bolt dated as of June 10, 2002: Incorporated by
reference to Exhibit 10.15 to the Form 10-KSB of the Registrant filed with the Securities and Exchange Commission for
the year ended August 31, 2002, File No. 0-18091.
10.10.1 Promissory Note dated March 4, 2002 in the principal amount of $800,000 from Employment Solutions, Inc. to Employment
Solutions, LLC: Incorporated by reference to Exhibit A to Exhibit 10.11 of the March 4, 2002 Form 8-K.
10.10.2 Pledge & Security Agreement dated March 4, 2002 by and between the Company and Employment Solutions, LLC: Incorporated
by reference to Exhibit B to Exhibit 10.11 of the March 4, 2002 Form 8-K.
10.10.3 Employment Agreement dated March 4, 2002 by and between Employment Solutions, Inc. and Marion L. Eadon, Jr.:
Incorporated by reference to Exhibit C to Exhibit 10.11 for the March 4, 2002 Form 8-K.
10.12 Promissory Note in the principal amount of $250,000 from the Company to Minor H. Mickel dated August 14, 2001:
Incorporated by reference to Exhibit 10.12 to the Form 10-KSB of the Registrant filed with the Securities and Exchange
Commission for the year ended August 31, 2003, File No. 0-18091.
10.13 Promissory Note in the principal amount of $1,200,000 from the Company to Minor H. Mickel dated February 14, 2002:
Incorporated by reference to Exhibit 10.13 of the March 4, 2002 Form 8-K.
10.14.1 Promissory Note in the principal amount of $20,000 from the Company to Buck A. Mickel dated February 25, 2002:
Incorporated by reference to Exhibit 10.14.1 to the Form 10-KSB of the Registrant filed with the Securities and
Exchange Commission for the year ended August 31, 2003, File No. 0-18091.
10.14.2 Promissory Note in the principal amount of $20,000 from the Company to Charles C. Mickel dated February 25, 2002:
Incorporated by reference to Exhibit 10.14.2 to the Form 10-KSB of the Registrant filed with the Securities and
Exchange Commission for the year ended August 31, 2003, File No. 0-18091.
10.14.3 Promissory Note in the principal amount of $20,000 from the Company to Minor Mickel Shaw dated February 25, 2002:
Incorporated by reference to Exhibit 10.14.3 to the Form 10-KSB of the Registrant filed with the Securities and
Exchange Commission for the year ended August 31, 2003, File No. 0-18091.
18
10.15.1 Promissory Note in the principal amount of $400,000 from the Company to Buck A. Mickel dated March 25, 2004.
10.15.2 Promissory Note in the principal amount of $400,000 from the Company to Minor M. Shaw dated March 25, 2004.
10.15.3 Promissory Note in the principal amount of $400,000 from the Company to Charles C. Mickel dated March 25, 2004.
10.16.1 Promissory Note in the principal amount of $83,333.34 from the Company to Buck A. Mickel dated March 25, 2004.
10.16.2 Promissory Note in the principal amount of $83,333.33 from the Company to Charles C. Mickel dated March 25, 2004.
10.16.3 Promissory Note in the principal amount of $83,333.33 from the Company to M. Mickel Shaw dated March 25, 2004.
21. Subsidiaries of the Registrant.
23. Consent of Registered Public Accounting Firm.
31.1 Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by Buck A. Mickel, dated November 24,
2004.
31.2 Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by Joe F. Ogburn, dated November 24,
2004.
32.1 Certificate Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Buck A. Mickel, dated November 24,
2004.
32.2 Certificate Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Joe F. Ogburn, dated November 24,
2004.
* Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 13 of Form 10-KSB.
(b) Reports on Form 8-K:
Form 8-K dated August 16, 2004.
Item 5. Other events
Item 7. Financial Statements and Exhibits.
(c) Exhibits.
99.1 Press release issued by RSI
Holdings, Inc. on August 17,
2004.
19
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following is a summary of the fees incurred by RSI from Elliott Davis,
LLC for professional services rendered for the fiscal years ending August 31,
2004 and 2003:
FISCAL FISCAL
FEE CATEGORY 2004 FEES (1) 2003 FEES
------------- ----------
Audit fees $ 12,500 $ 11,200
Audit-related fees -- --
Tax fees 11,950 9,800
All other fees -- --
----------- ----------
Total fees $ 24,450 $ 21,000
=========== =========
(1)Includes fees billed and estimated to be billed by Elliott Davis, LLC in 2004
for the 2004 audit and tax return.
AUDIT FEES. Consists of fees incurred for professional services rendered
for the audit of RSI's consolidated financial statements and for reviews of the
interim consolidated financial statements included in our quarterly reports on
Form 10-QSB and consents for filings with the SEC.
AUDIT-RELATED FEES. Consists of fees billed for professional services that
are reasonably related to the performance of the audit or review of RSI's
consolidated financial statements, but are not reported under "Audit Fees." No
such fees were incurred during the past two years.
TAX FEES. Consists of fees billed for professional services relating to
tax compliance, tax reporting, tax advice and tax planning.
ALL OTHER FEES. Consists of fees billed for all other services.
AUDIT COMMITTEE PRE-APPROVAL
The Audit Committee's policy is to pre-approve all audit and permissible
non-audit services provided by the independent auditors. These services may
include audit services, audit-related services, tax services and other services.
Pre-approval is generally provided for up to one year and any pre-approval is
detailed as to the particular service or category of services and is generally
subject to a specific budget. The independent auditors and management
periodically report to the Audit Committee regarding the extent of services
provided by the independent auditors in accordance with this pre-approval, and
the fees for the services performed to date. The Audit Committee may also
pre-approve particular services on a case-by case basis. During fiscal 2004, no
services were provided to RSI from Elliott Davis, LLC or any other accounting
firm other than in accordance with the pre-approval policies and procedures
described above.
20
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
RSI HOLDINGS, INC.
By: /s/ Buck A. Mickel
-----------------------------------------
Buck A. Mickel
President and Chief Executive Officer
Date: November 24, 2004
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
/s/ Buck A. Mickel November 24, 2004 Director, President and
Buck A. Mickel (Date) Chief Executive Officer
(Principal Executive Officer)
/s/ Charles C. Mickel November 24, 2004 Director and Vice President
Charles C. Mickel (Date)
/s/ C. C. Guy November 24, 2004 Director
C. C. Guy (Date)
/s/ Joe F. Ogburn November 24, 2004 Director, Secretary,
Joe F. Ogburn (Date) and Treasurer (Principal
Financial and Accounting Officer)
21
INDEX OF EXHIBITS
10.15.1 Promissory Note in the principal amount of $400,000 from the Company to Buck A. Mickel dated March 25, 2004.
10.15.2 Promissory Note in the principal amount of $400,000 from the Company to Minor M. Shaw dated March 25, 2004.
10.15.3 Promissory Note in the principal amount of $400,000 from the Company to Charles C. Mickel dated March 25, 2004.
10.16.1 Promissory Note in the principal amount of $83,333.34 from the Company to Buck A. Mickel dated March 25, 2004.
10.16.2 Promissory Note in the principal amount of $83,333.33 from the Company to Charles C. Mickel dated March 25, 2004.
10.16.3 Promissory Note in the principal amount of $83,333.33 from the Company to Minor M. Shaw dated March 25, 2004.
21. Subsidiaries of the Registrant.
23. Consent of Independent Registered Public Accounting Firm.
31.1 Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by Buck A. Mickel, dated November 24,
2004.
31.2 Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by Joe F. Ogburn, dated November 24,
2004.
32.1 Certificate Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Buck A. Mickel, dated November 24,
2004.
32.2 Certificate Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Joe F. Ogburn, dated November 24,
2004.
ANNUAL REPORT ON FORM 10-KSB
ITEM 7, ITEM 14(A)(1) AND (2), (C) AND (D)
LIST OF FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
YEAR ENDED AUGUST 31, 2004
RSI HOLDINGS, INC.
GREENVILLE, SOUTH CAROLINA
F-1
RSI HOLDINGS, INC.
FORM 10-KSB-ITEM 14(A)(1) AND (2)
INDEX OF FINANCIAL STATEMENTS
The following consolidated financial statements of RSI Holdings, Inc. are
included in Item 7:
Consolidated balance sheet - August 31, 2004
Consolidated statements of operations - For the years ended August 31,
2004 and 2003
Consolidated statements of shareholders' deficit - For the years ended
August 31, 2004 and 2003
Consolidated statements of cash flows - For the years ended August 31,
2004 and 2003
Notes to consolidated financial statements - August 31, 2004
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
RSI HOLDINGS, INC.
Greenville, South Carolina
We have audited the consolidated balance sheet of RSI HOLDINGS, INC.
AND SUBSIDIARIES as of August 31, 2004 and the related consolidated statements
of operations, shareholders' deficit and cash flows for the years ended August
31, 2004 and 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to in
the first paragraph present fairly, in all material respects, the consolidated
financial position of RSI HOLDINGS, INC. AND SUBSIDIARIES as of August 31, 2004,
and the related consolidated results of operations and cash flows for the year
ended August 31, 2004 and 2003 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and its total liabilities exceeds its total assets by $331,679 and it has a
working capital deficit of $202,265. This raises substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Elliott Davis, LLC
Greenville, South Carolina
October 21, 2004
F-3
RSI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
AUGUST 31, 2004
ASSETS
CURRENT ASSETS
Cash $ 182,540
Accounts receivable 150,936
Prepaid expenses and other 26,551
-----------
Total current assets 360,027
Property and equipment:
Cost 80,244
Less accumulated depreciation 48,058
----------
Property and equipment - net 32,186
Other assets:
Customer related intangible assets, net of
amortization of $322,291 1,613,998
---------
$2,006,211
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 86,286
Accrued expenses 311,734
Current maturities of long-term debt 164,272
----------
Total current liabilities 562,292
LONG-TERM DEBT 1,775,598
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 (5,361,884)
-----------
Total shareholders' deficit (331,679)
-----------
$2,006,211
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
RSI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED AUGUST 31, 2004 AND 2003
For the For the
Year Year
Ended Ended
August 31 August 31
2004 2003
---------- ---------
REVENUES FROM SERVICES $ 5,055,245 $ 5,314,156
COST OF SERVICES 4,201,137 4,307,446
----------- -----------
GROSS PROFIT 854,108 1,006,710
EXPENSES:
Selling, general and administrative 851,669 873,441
------------ -------------
Income from operations 2,439 133,269
OTHER INCOME (EXPENSE):
Interest income and other 96 856
Interest expense (140,658) (149,760)
------------ --------------
Total other (140,562) (148,904)
------------ --------------
NET LOSS $ (138,123) $ (15,635)
============ ==============
NET LOSS PER SHARE - BASIC AND DILUTED $ (.02) $ (.00)
============ ==============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 7,846,455 7,836,592
============ ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
RSI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE YEARS ENDED AUGUST 31, 2004 AND 2003
ADDITIONAL
COMMON STOCK PAID-IN
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------- ------- -----
BALANCE, AUGUST 31, 2002 7,821,455 $ 78,214 $4,945,491 $(5,208,126) $ (184,421)
Exercise of stock options 25,000 250 6,250 6,500
Net loss (15,635) (15,635)
--------- -------- --------- -------------- ----------
BALANCE, AUGUST 31, 2003 7,846,455 78,464 4,951,741 (5,223,761) (193,556)
Net loss (138,123) (138,123)
--------- --------- ---------- ------------ ------------
BALANCE, AUGUST 31, 2004 7,846,455 $ 78,464 $4,951,741 $(5,361,884) $(331,679)
========= ========= ========== ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
RSI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31, 2004 AND 2003
For the For the
Year Year
Ended Ended
August 31 August 31
2004 2003
---------- ----------
OPERATING ACTIVITIES
Net loss $ (138,123) $ (15,635)
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation and amortization 150,657 151,615
Loss on disposal of property and equipment 10,038 -
Changes in operating assets and liabilities
Accounts receivable (31,248) 11,212
Prepaid expenses and other (8,599) 3,267
Accounts payable, accrued expenses and other liabilities 128,906 71,789
----------- ---------
Net cash provided by operating activities 111,631 222,248
----------- ---------
INVESTING ACTIVITIES
Purchase of property and equipment (3,716) (34,604)
Net cash paid for acquired business - (7,519)
----------- ----------
Net cash (used for) investing activities (3,716) (42,123)
------------ ----------
FINANCING ACTIVITIES
Proceeds from long-term notes payable - 30,393
Payment of long-term debt and other (158,430) (149,230)
Proceeds from exercise of stock options - 6,500
----------- ----------
Net cash (used for) financing activities (158,430) (112,337)
------------ -----------
Net (decrease) increase in cash (50,515) 67,788
CASH, BEGINNING OF PERIOD 233,055 165,267
----------- ----------
CASH, END OF PERIOD $ 182,540 $ 233,055
=========== ==========
SUPPLEMENTAL DISCLOSURE
Cash paid for interest $ 44,492 $ 70,190
=========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
RSI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES
NATURE OF BUSINESS
On January 18, 2002, RSI Holdings, Inc. (the "Company"), executed a
letter of intent to acquire substantially all of the assets of Employment
Solutions, LLC, a South Carolina limited liability company.
On March 4, 2002, the Company through a newly-formed, wholly-owned
subsidiary, Employment Solutions, Inc., a South Carolina corporation
("Employment Solutions"), acquired substantially all of the assets of Employment
Solutions, LLC, a South Carolina limited liability company. Employment
Solutions, the only business, is in the business of locating and providing labor
to industrial companies in the United States. Prior to the asset purchase, the
Company had not conducted any business since January 31, 2000 other than seeking
acquisition opportunities and liquidating the assets of its prior business.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America that apply to established operating enterprises on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements during the years ended August 31, 2004 and 2003, the Company incurred
losses of $138,123 and $15,635, respectively. At August 31, 2004, the Company's
liabilities exceeded its assets by $331,679 and it has a working capital deficit
of $202,265. These conditions raise substantial doubt about the Company's
ability to continue as a going concern.
In the Offer to Purchase filed with the SEC by the Mickel siblings
(Note 11 - Subsequent Event"), the Mickel siblings indicated that they do not
intend to continue to support the Company financially, including advancing any
future funds or extending their deferral of interest payments beyond July 2005,
unless the Company becomes a private company through a going-private
transaction. The Mickel siblings expect the Company to become a private company
before July 2005, however, if the Company does not become a private company and
the Mickel siblings demand payment of the unpaid accrued interest the Company
would in all likelihood not be able to pay the previously deferred interest and
be able to continue operations. Accordingly, the Company has classified the
unpaid accrued interest as a current liability.
Management of the Company believes that it is highly likely that the
Company will be a private company prior to July 2005 and that the Mickel
siblings will not demand payment with respect to the Company notes they hold.
There are no assurances that the Company will be a private company
prior to July 2005 or that the Mickel siblings will not demand payment with
respect to the Company notes they hold. The accompanying financial statements do
not include any adjustments that might be necessary if the Company is unable to
continue as a going concern.
F-8
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries (all of which are wholly-owned). All significant
intercompany balances and transactions have been eliminated in consolidation.
CASH
Cash consists of highly liquid investments, which are readily convertible
into cash and have maturities of three months or less at date of acquisition.
The Company places temporary cash investments in high quality financial
institutions. At times such investments may be in excess of FDIC insurance
limits.
PROPERTY AND EQUIPMENT
Property and equipment consists of office furniture and equipment and is
stated at cost. Depreciation is computed principally by the straight-line method
over the estimated useful life of the assets. The life of the furniture and
office equipment when the asset is acquired is estimated to be five years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash and cash
equivalents, accounts receivable, accounts payable and notes payable approximate
their fair values.
NET LOSS PER COMMON SHARE
Basic net 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 loss, the effect of stock options on the treasury stock
method is anti-dilutive.
REVENUE RECOGNITION
Revenues are considered earned and recorded during the period in which
the service is provided.
INTANGIBLE ASSETS
In accordance with SFAS No. 141, Business Combinations, the Company has
determined that the intangible portion of the purchase price in conjunction with
an acquisition as defined in Note 2 is customer related intangible assets and
consists of customer list, customer contracts and related customer
relationships, and noncontractual customer relationships. The Company is
amortizing this asset over its estimated fifteen year life, and reviews the
asset for impairment in accordance with SFAS 144, Accounting for the Impairment
or Disposal of Long-Lived Assets.
F-9
The Company evaluates the recoverability of its identifiable intangible assets
whenever events or changes in circumstances indicate that an intangible asset's
carrying value may not be recoverable. The evaluation of asset impairment
requires the company to make assumptions about the future cash flows of the
asset being evaluated. The Company's evaluation of its intangible assets
completed during the year resulted in no impairment loss.
INCOME TAXES
The consolidated financial statements have been prepared on the accrual
basis. When income and expenses are recognized in different periods for
financial reporting purposes than for purposes of computing income taxes
currently payable, deferred taxes 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.
STOCK OPTIONS
The Company accounts for and will continue to account for stock options
under Accounting Principles Board Opinion 25, Accounting for Stock Issued to
Employees. Applying SFAS No. 123, Accounting for Stock-Based Compensation, would
not materially affect net loss and loss per share for fiscal 2004 and 2003. The
Company provides disclosures for stock based compensation in accordance with the
disclosure provisions required under SFAS No. 148, Accounting for Stock Based
Compensation.
USE OF ESTIMATES
The preparation of the financial statements of the Company in accordance
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect reported
amounts. These estimates are based on information available as of the date of
the financial statements. Therefore, actual results could differ from those
estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS
Additional accounting standards that have been issued or proposed by
the FASB that do not require adoption until a future date are not expected to
have a material impact on the consolidated financial statements upon adoption.
F-10
NOTE 2 - CUSTOMER RELATED INTANGIBLE ASSETS
On March 4, 2002, the Company effected the business combination with
Employment Solutions solely through the distribution of cash and by incurring
liabilities. The transaction had no effect on equity or the outstanding shares
of the Company or Employment Solutions. For these reasons, the Company was
considered the acquirer in this business combination. In accordance with SFAS
No. 141, Business Combinations, intangible assets of $1,936,289 have been
recorded as customer related intangible assets.
The transaction also includes a provision that will be accounted for as
a contingency in the purchase transaction based on the future earnings of
Employment Solutions. The provision provides for the payment of an annual bonus
of up to 20% of earnings in excess of $630,000. The bonus is to be paid to a
former executive of Employment Solutions who has no significant ongoing
responsibilities and is additional consideration for the customer related
intangible assets. The amount to be paid cannot be determined beyond a
reasonable doubt and adjustments to the purchase price will be made annually.
Earnings of Employment Solutions during the year ended August 31, 2004 were less
than $630,000 and no bonus was accrued. The bonus paid based on the earnings
during the year ended August 31, 2003 under this contingency was $3,246.
NOTE 3 - ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities at August 31, 2004 are as follows:
Interest $231,833
Payroll taxes 8,199
Legal and accounting 23,275
Other 48,427
-----------
$311,734
The accrued interest consists of interest that has been accrued on the
unsecured notes of $1,510,000 payable to the President and Chief Executive
Officer of the Company, the Vice President of the Company and their sister. Over
the past several years these noteholders have agreed to defer interest payments
and have agreed that they will not require payment of interest before July 2005.
F-11
NOTE 4 - LONG-TERM DEBT
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. 429,870
---------------
1,939,870
Less current portion 164,272
--------------
$ 1,775,598
The Company incurred interest cost as follows during years ended August
31, 2004 and 2003.
2004 2003
---- ----
Interest incurred during years ended August 31
Notes payable to the President and
Chief Executive Officer and his family $ 108,299 $ 108,200
Note payable to Eadon Solutions, LLC 30,867 39,856
Note payable to bank 1,492 1,704
-------- --------
$140,658 $149,760
======== ========
On March 25, 2004, Minor H. Mickel gave the two notes above having
unpaid principal balances of $250,000 and $1,200,000 and the unpaid interest 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.
F-12
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
predecessor 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. Over the past several years these
creditors have allowed the Company to defer interest payments and agreed that
they will not require payment of interest before July 2005. Management of the
Company could decide at any time to pay all or part of the accrued interest if
it determines 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.
NOTE 5 - LEASES
During fiscal 2004, the Company entered into lease arrangements under
which the Company sold and leased back its two vehicles. The initial terms under
this lease arrangement was one year for one of the vehicle and two years for the
other vehicle.
Total rent expense incurred under these lease arrangements during
fiscal 2004 was $1,148. Property taxes, insurance, maintenance and operating
expenses applicable to the leased property are obligations of the Company.
The future minimum lease payments under the operating leases at August
31, 2004 were as follows:
Fiscal year
2005 $ 8,584
2006 2,549
-------
$11,133
=======
The Company leases its office and warehouse facilities under various lease
arrangements not exceeding one year. The expense incurred under such
arrangements was $51,000 and $50,900 during the fiscal years ended August 31,
2004 and 2003, respectively.
F-13
NOTE 6 - STOCK OPTION PLAN
During June 2002, the Company adopted the 2002 Stock Option Plan that
authorized the Board of Directors to grant options of up to 1,500,000 shares of
the Company's common stock. On January 30, 2003, the 2002 Stock Option Plan was
amended to increase the aggregate number of shares that may be granted from
1,500,000 to 2,500,000.
The Company's previous Stock Option Plan was adopted during 1991 and
was amended on January 27, 2000, January 21, 1999 and January 15, 1998. The
previous Stock Option Plan terminated on June 27, 2000 and no options of the
Company's common stock can be granted thereafter, but this termination does not
affect the options previously granted to the plan participants. As of August 31,
2004, 490,000 shares have been awarded to plan participants and are outstanding
under the 2002 Stock Option Plan and 152,774 shares have been awarded and are
outstanding to plan participants under the previous Stock Option Plan. These
options vest over a three year period. During the 2004 year, the holder of
options for 966,667 shares terminated his employment and forfeited his options.
The Company also has an informal stock option plan under which stock
options can be granted to certain non-employee officers and directors. During
the 2004 year, such options for 19,998 shares expired and were forfeited. As of
August 31, 2004, such options to purchase 75,000 shares have been granted and
are outstanding.
All options under the plans were granted at not less than fair market
value at dates of grant. Stock option transactions during the two years ended
August 31 were as follows:
2004 2003
-------------- ------------
Options outstanding at September 1 1,704,439 1,679,439
Options granted - 60,000
Options exercised - (25,000)
Options forfeited (986,665) (10,000)
-------------- --------------
Options outstanding at August 31 717,774 1,704,439
============= =============
Options exercisable at August 31 541,107 706,661
============= =============
Outstanding options issued under Stock Option Plan at August 31 642,774 1,609,439
============= =========
Outstanding options issued under informal Stock Option Plan 75,000 95,000
============= =============
Options available for grant under Stock Option Plan at August 31 2,010,000 1,043,333
============= =============
Option price ranges per share:
Granted - $.10 - $.26
Exercised - 0.26
Forfeited $.07 - $.33 0.57
Weighted average option price per share:
Granted - 0.149
Exercised - 0.26
Forfeited 0.24 .57
Outstanding at August 31 0.14 0.101
The options at August 31, 2004 had a weighted average remaining
contractual life of approximately 4.4 years. There were 541,107 options
currently exercisable with option prices ranging from $0.07 to $1.125 with a
weighted average exercise price of $0.16.
F-14
NOTE 7 - INCOME TAXES
During fiscal years 2004 and 2003, net deferred tax benefits were
fully offset by a valuation allowance relating to temporary differences since
the Company believes that it is more likely than not that the realization of
deferred tax assets will not be realized. Significant components of the
Company's deferred tax assets and liabilities are as follows:
ASSETS
Net operating loss carryforward $ 4,723,000
Other 97,000
---------------
4,820,000
Valuation allowance 4,816,000
---------------
Deferred tax assets 4,000
LIABILITIES
Depreciation 4,000
---------------
Net deferred taxes $ -
===============
At August 31, 2004, the Company has net operating loss
carryforwards available for income tax purposes of approximately $12,800,000.
Such carryforwards expire in 2006 through 2024. The Company's ability to use its
existing net operating loss carryforward may be jeopardized or lost if the
Company undergoes an "ownership change" as defined by the Internal Revenue Code.
The valuation allowance increased $51,000 during 2004 due to the
continued uncertainty of the Company's ability to generate taxable income and
realize the benefits of deferred tax assets. The recognition of a net deferred
tax asset is dependent upon a "more likely than not" expectation of the
realization of the deferred tax asset, based upon the analysis of the available
evidence. A valuation allowance is required to sufficiently reduce the deferred
tax asset to the amount that is expected to be realized through future
realization of profits on a "more likely than not" basis. The analysis of
available evidence is performed on an ongoing basis utilizing the "more likely
than not" criteria to determine the amount, if any, of the deferred tax asset to
be realized. Adjustments to the valuation allowance are made accordingly. There
can be no assurance that additional valuation allowances may not be recorded in
the future periods.
F-15
NOTE 8 - SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses consisted of the following
for the years ended August 31, 2004 and 2003:
2004 2003
----------- ----------
Salaries, wages and benefits $ 435,161 $ 464,444
Legal and professional 57,571 55,785
Rent 51,000 50,900
Telephone and utilities 35,829 35,485
Office expense 31,411 33,825
Travel expense 19,732 9,725
Insurance 17,828 26,353
Shareholder relations 13,236 13,263
Depreciation 21,537 22,735
Amortization - intangible assets 129,120 128,879
Loss on disposal of property and equipment 10,038 -
Other 29,206 32,047
----------- -----------
$ 851,669 $873,441
=========== ===========
NOTE 9 - MAJOR CUSTOMER INFORMATION
Sales to each of four major customers exceeded 10% of net sales
during the fiscal year ended August 31, 2004. Sales to each of three major
customers exceeded 10% of net sales during the fiscal year ended August 31,
2003. Sales to these customers accounted for over 50% of net sales during the
years ended August 31, 2004 and 2003.
NOTE 10 - AFFILIATED PARTY TRANSACTIONS
See Note 4 concerning notes payable with affiliated parties.
The Company leases its principal executive offices under a
month-to-month lease arrangement from a limited liability company that is owned
by the President, Chief Executive Officer and a director of the Company and his
two adult siblings, one of whom is also the vice president and a director of the
Company. Under the lease arrangement, the monthly rent during the fiscal years
ended August 31, 2004 and August 31, 2003 was $2,550 per month. Accounts
receivable at August 31, 2004 included an amount for the reimbursement of
expenses in the amount of $1,051 that were incurred during August 2004 by a
company that is owned by the President of the Company, his mother and his two
adult siblings, one of whom is also the vice president and a director.
NOTE 11 - SUBSEQUENT EVENT (UNAUDITED)
During August 2004, the Company announced that Buck A. Mickel,
President, the Company's Chief Executive Officer and a director, Charles C.
Mickel, the Company's Vice President and a Director, and their sibling, Minor
Mickel Shaw (collectively, the "Mickel siblings") intended to initiate a
going-private transaction with respect to the Company. The Mickel siblings
beneficially own approximately 76% of the Company's stock. In October 2004, BCM
Acquisition Corp. ("BCM"), a South Carolina corporation newly formed by the
Mickel siblings, made a filing with the Securities and Exchange Commission (the
"SEC") that included an Offer to Purchase (a tender offer statement) for the
SEC's review. In November 2004, BCM filed a revised Offer to Purchase with the
SEC, again for review only. F-16
The Offer to Purchase filed with the SEC describes BCM's potential
offer to purchase all the outstanding shares of the common stock of the Company
at a price of $.10 per share, subject to certain terms and conditions. The offer
as described in the Offer to Purchase is conditioned on, among other things,
there being validly tendered and not withdrawn sufficient shares of the
Company's common stock such that, after those shares are purchased pursuant to
the offer and the Mickel siblings have contributed their shares to BCM, BCM
would own at least 90% of the Company's common stock. Upon satisfaction or
waiver of the conditions of the offer, the Mickel siblings would contribute
their Company shares to BCM and, if BCM owned at least 90% of the common stock
of the Company upon consummation of the offer and contribution by the Mickel
siblings, BCM would effect a short-term merger of the Company into BCM. Assuming
completion of the tender offer and the merger, the Mickel siblings would own
100% of the Company's stock.
F-17