SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT
UNDER SECTION 14(d)(4) OF THE
SECURITIES EXCHANGE ACT OF 1934
RSI HOLDINGS, INC.
(Name of Subject Company)
RSI HOLDINGS, INC.
(Name of Person Filing Statement)
Common Stock, par value $0.01 per share
(Title of Class of Securities)
749723 10 2
(CUSIP Number of Class of Securities
Buck A. Mickel
President
28 East Court Street
P.O. Box 6847
Greenville, South Carolina 29606
(864) 271-7171
(Name, Address and Telephone Number of Person Authorized to Receive Notices
and Communications on Behalf of the Person Filing
Statement)
with a copy to:
Lawson M. Vicario, Esq.
Wyche, Burgess, Freeman & Parham, P.A.
44 East Camperdown Way (29601)
P.O. Box 728
Greenville, South Carolina 29602
(864) 242-8203
[ ] Check the box if the filing relates solely to preliminary communications
made before the commencement of a tender offer.
ITEM 1. SUBJECT COMPANY INFORMATION.
The name of the subject company is RSI Holdings, Inc., a North Carolina
corporation (the "Company" or "RSI"). The principal executive offices of the
Company are located at 28 East Court Street, Greenville, South Carolina, 29601.
Its telephone number is (864) 271-7171.
The class of equity securities to which this Solicitation/Recommendation
Statement on Schedule 14D-9 (this "Statement") relates is the Company's common
stock, par value $.01 per share (the "Shares"). As of January 27, 2005, there
were 7,846,455 shares issued and outstanding.
ITEM 2. IDENTITY AND BACKGROUND OF FILING PERSON.
The name, business address and business telephone number of the Company, which
is the person filing this statement, are set forth above in ITEM 1.
This statement relates to a Tender Offer by BCM Acquisition Corp. ("BCM") as
disclosed in the Tender Offer Statement on Schedule TO (the "Schedule TO") filed
with the Securities and Exchange Commission (the "SEC") by BCM and by its three
shareholders, Buck A. Mickel, Charles C. Mickel and Minor Mickel Shaw, on
January 28, 2005. These three shareholders (the "Mickel siblings") are siblings;
Buck A. Mickel is RSI's President and Chief Executive Officer, Charles C. Mickel
is RSI's Vice President, and they are two of RSI's four directors.
According to the Schedule TO, BCM is offering to purchase up to all of the
Shares, at a cash purchase price of $0.10 per share, upon the terms and subject
to the conditions set forth in the Offer to Purchase dated January 28, 2005, and
in the related Letter of Transmittal (which together with any amendments or
supplements thereto, collectively constitute the "Offer"). According to the
Schedule TO, the Mickel siblings owned 5,934,856, or approximately 76%, of the
outstanding Shares at January 27, 2005. The 1,911,599 Shares sought to be
purchased by BCM pursuant to the Offer represent approximately 24% of the
outstanding Shares.
As stated in the Schedule TO, the purpose of the Offer is to acquire Shares from
a sufficient number of holders of record of RSI's common stock such that, after
those Shares are purchased pursuant to the Offer and the BCM shareholders have
contributed their Shares to BCM as described in the Schedule TO, BCM would own
at least 90% of RSI's voting stock. With such ownership, BCM will be able under
provisions of the North Carolina Business Corporation Act (the "NC Corporate
Act") to cause a merger of RSI into BCM without action by the Board of Directors
or shareholders of RSI (the "Merger"). The Schedule TO states that upon
successful completion of the Offer without acquiring all of the outstanding
Shares, BCM will proceed to consummate the Merger and provide the remaining RSI
shareholders with cash for each of their Shares in the same amount as paid in
the Offer.
1
Based on information in the Schedule TO, the business address and telephone
number of BCM is as follows:
28 East Court Street
Greenville, South Carolina, 29601
(864) 271-7171
ITEM 3. PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS.
Except as described below, there is no material agreement, arrangement or
understanding or any material actual or potential conflict of interest between
RSI, its executive officers, directors, or affiliates, and BCM or any of its
executive officers, directors, or affiliates.
Certain Affiliates. The financial interests of the BCM shareholders are adverse,
as to the Offer price, to the financial interests of RSI's other public
stockholders. BCM's shareholders are three siblings, Buck A. Mickel, Charles C.
Mickel and Minor Mickel Shaw. Buck A. Mickel is RSI's President and Chief
Executive Officer, Charles C. Mickel is RSI's Vice President, and they are two
of RSI's four directors. The Mickel siblings beneficially own approximately 76%
of RSI's common stock. In the event the Offer is completed, as equity owners of
RSI (or of the surviving company upon completion of the Merger of RSI into BCM),
the Mickel siblings would benefit to the extent RSI pays less consideration for
the Shares. Further, if the Offer is completed, they would possess a substantial
interest in RSI's future earnings and growth insofar as such earnings and growth
are realized.
Joe F. Ogburn serves as a director of RSI and also as RSI's Secretary and Chief
Financial Officer. Following the Merger, he will continue to serve as a director
and as Secretary and Chief Financial Officer of the surviving company.
C.C. Guy, another director of RSI, will continue to serve as a director of the
surviving company upon the Merger.
Michael J. Bolt serves as President of Employment Solutions, Inc., RSI's
subsidiary. His father, Charles M. Bolt, was on RSI's Board. Mr. Charles M. Bolt
participated in past Board discussions relating to a going-private transaction
for RSI, but was unable to serve for health reasons after September 1, 2004.
Charles M. Bolt passed away on November 3, 2004.
Net Operating Loss Carryforwards. RSI had approximately $12.8 million in net
operating loss carryforwards for income tax purposes at August 31, 2004. Because
RSI has a consistent history of losses, we believe that it is more likely than
not that RSI will be unable to utilize these carryforwards, which expire in 2006
through 2024. In our 2004 10-KSB, we indicated that we did not record a deferred
tax asset because we did not believe that it was more likely than not that we
would be able to utilize these carryforwards. If we had recorded the full net
deferred tax asset on our balance sheet at August 31, 2004, the amount of the
net deferred tax asset would have been $4.8 million. We have not prepared any
projections that utilize any carryforwards, and we do not foresee RSI's present
operation utilizing any substantial amount of this carryforward. In addition,
2
under applicable U.S. tax regulations RSI would lose its carryforwards if the
percentage of stock owned by a 5% or greater shareholder increased by more than
50 percentage points during any three-year period.
If, through improvements in the operating results of its current business or
through the acquisition of profitable businesses, we were to become profitable
before our carryforwards expire or are otherwise lost, we would be able to
utilize them to offset future taxable income, reducing our income tax expense
and increasing our future net earnings, and any offset would only be realized by
continuing shareholders.
Control of RSI. The Mickel siblings beneficially own 76% of the Shares, and
accordingly have supermajority voting control over RSI. As a result of their
voting interest, the Mickel siblings have the power to control the vote
regarding such matters as the election of RSI's directors, amendments to RSI's
charter and other fundamental corporate transactions.
Treatment of Stock Options. As stated in the Schedule TO, in connection with the
Merger, all options with respect to RSI stock would be canceled, and options
with per share exercise prices less than $0.10 would be converted into the right
to receive $0.10 minus the per share exercise price of the option, multiplied by
the number of shares of common stock issuable upon exercise of the option. The
following insiders have the following number of options with respect to RSI
stock with exercise prices under $0.10 and, as part of the Merger, would receive
the following amounts of option-related Merger consideration:
Name Options Amount
---- ------- ------
Buck A. Mickel 300,000 $ 6,900
Charles C. Mickel 10,000 $ 300
C.C. Guy 10,000 $ 300
Joe F. Ogburn 120,000 $ 3,600
======= ==========
TOTAL 440,000 $ 11,100
Directors and Officers of RSI. See Schedule A to this Offer to Purchase for a
listing of the positions that the shareholders and other executive officers and
directors of BCM hold with RSI and for a listing of the shares of our common
stock owned by such persons.
Salary and Other Compensation Arrangements. As compensation for his services as
RSI's President and Chief Executive Officer, Buck A. Mickel received $81,000 in
fiscal 2004 and $90,083 in 2003.
Mr. C.C. Guy retired as an officer of RSI on January 17, 1995. RSI paid him $100
per month in consulting fees during the years ended August 2003 and August 2004.
3
The Board of RSI determined that these payments were appropriate in light of Mr.
Guy's long record of service to RSI and value as a consultant to RSI.
Loan Arrangement. During August 2001, Minor H. Mickel loaned RSI $250,000 under
the terms of an unsecured note payable bearing interest at 8.0% per year with
the principal balance and all unpaid interest due in August 2006. Mrs. Mickel is
the mother of the Mickel siblings.
During February 2002, Minor H. Mickel loaned RSI $1,200,000 and Buck A. Mickel,
Charles C. Mickel and Minor Mickel Shaw, each loaned RSI $20,000 under unsecured
promissory notes bearing interest at 7.0% per year with the principal balances
and all unpaid interest due in February 2007. Proceeds from these notes
aggregating $1,260,000 were used to purchase the assets of RSI's wholly-owned
subsidiary, Employment Solutions, Inc.
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, 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 on these notes
since the notes' issuance. Since November 2003, these creditors have also
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 these notes until July 2005 at the earliest. Management of RSI 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 RSI. As of August 31, 2004, the aggregate
accrued unpaid interest with respect to these notes was $231,833.
Corporate Office Arrangement. During fiscal 2003 and 2004, RSI's executive
offices were located in a facility consisting of approximately 3,000 square feet
of floor space located at 28 East Court Street, Greenville, South Carolina. This
lease continues in effect. Rental expense of $30,600 was incurred by RSI during
the year ended August 31, 2004 for RSI's executive offices under a
month-to-month lease arrangement. The lease at 28 East Court Street, Greenville,
South Carolina includes office furniture and equipment. The office space at 28
East Court Street, Greenville, South Carolina was leased from CTST, LLC, which
is owned by three shareholders: Buck A. Mickel, Charles C. Mickel and Minor
Mickel Shaw. We believe that this lease contains provisions as favorable to RSI
as could be obtained from a third-party landlord.
ITEM 4. THE SOLICITATION OR RECOMMENDATION
Of the four members of the Board of Directors of RSI, three are affiliated with
BCM. (Buck A. Mickel is RSI's President and Chief Executive Officer, Charles C.
Mickel is RSI's Vice President, and they are two of RSI's four directors. Joe F.
Ogburn serves as a director of RSI and also as RSI's Secretary and Chief
4
Financial Officer and, following the Merger, he will continue to serve as a
director and as Secretary and Chief Financial Officer of the surviving company.)
The only other director of RSI, C.C. Guy, has no affiliation with BCM other than
continuing to serve as a director in the surviving company.
Because three of the four directors of RSI have substantial conflicts of
interest with respect to the Offer, and because the Board deems it unfair to
expect the single unaffiliated director to take a position with respect to the
Offer, RSI's Board unanimously adopted the following resolution:
THE BOARD OF DIRECTORS OF RSI HOLDINGS, INC. HAS DETERMINED THAT IT IS UNABLE TO
TAKE A POSITION AND ACCORDINGLY WILL TAKE NO POSITION ON THE TERMS OF THE TENDER
OFFER MADE BY BCM ACQUISITION CORP. TO PURCHASE THE SHARES OF RSI HOLDINGS, INC.
The Board of Directors of RSI is unable to take a position and is accordingly
taking "no position" regarding the tender offer for the following reasons: (1)
three of the four directors have substantial conflicts of interest with respect
to the Offer; and (2) it does not expect the single unaffiliated director to
take on the substantial responsibility of making a recommendation with respect
to the Offer.
Two of the four directors (Buck A. Mickel and Charles C. Mickel) are filing
persons with respect to the Schedule TO, and in that capacity they have taken
personal positions in support of the fairness of the offer as described in the
Schedule TO. In addition, the Board is aware that with the passage of the
Sarbanes-Oxley Act of 2002, the costs in terms of expense and management time of
maintaining the status of RSI as a public company have significantly increased.
In addition, the Board is aware that the shares are thinly traded. The
determination by the Board to take "no position" means that the shareholders
should consider these factors, among other matters, in deciding whether to
tender Shares in response to the Offer.
RSI's directors have, on behalf of the unaffiliated shareholders, retained
Economic Evaluations to prepare a report concerning the fairness of the Offer,
which is described in more detail in Item 8 below; a copy of the report is
attached as Schedule C, and Economic Evaluations' summary and supporting
analysis are attached as Schedule B. The directors did not engage Economic
Evaluations on RSI's behalf and did not consider this opinion or its underlying
analysis in reaching its conclusion to take no position with respect to the
Offer. RSI's directors have not retained an unaffiliated representative to act
on behalf of unaffiliated security holders for purposes of the Offer.
As of the date hereof and after making a reasonable inquiry, the Company has
been advised that Buck A. Mickel and Charles C. Mickel intend to contribute
their Shares to BCM upon satisfaction or waiver of the terms of the Offer, and
each of the other directors and executive officers of RSI presently intends to
tender his Shares in the Offer.
5
ITEM 5. PERSON/ASSETS, RETAINED, EMPLOYED, COMPENSATED OR USED.
The Company has not directly or indirectly employed, retained, or compensated
anyone to make solicitations or recommendations in connection with the Offer.
ITEM 6. INTEREST IN SECURITIES OF THE SUBJECT COMPANY.
To the knowledge of the Company, neither the Company nor any of its executive
officers, directors, affiliates or subsidiaries have effected any transactions
in the Shares during the past 60 days.
ITEM 7. PURPOSES OF THE TRANSACTION AND PLANS OR PROPOSALS.
The Company has not undertaken or engaged in any negotiations in response to the
Offer that relates to: (i) a tender offer or other acquisition of the Shares by
the Company, any of its subsidiaries, or any other person; (ii) any
extraordinary transaction, such as a merger, reorganization, or liquidation,
involving the Company or any of its subsidiaries; (iii) any purchase, sale, or
transfer of a material amount of assets by the Company or any of its
subsidiaries; or (iv) any material change in the present dividend rate or
policy, or indebtedness or capitalization of the Company.
There are no transactions, resolutions of the Board, agreements in principle, or
signed contracts that have been entered into in response to the Offer that
relate to or would result in one or more of the events referred to in the
previous paragraph.
ITEM 8. ADDITIONAL INFORMATION.
Fairness Opinion. RSI's board of directors engaged R.E. Gregory & Co., LLC, dba
Economic Evaluations, on behalf of RSI's unaffiliated shareholders to assist
them in determining the fairness, from a financial point of view, of the
proposed consideration to be received by RSI's shareholders in the Offer. The
Schedule TO provides some of the background with respect to this engagement in
the section entitled "Special Factors - Background" of the Offer to Purchase.
Economic Evaluations was selected because it had previously been engaged by a
special committee of the board to evaluate a going-private transaction prior to
the committee's dissolution. RSI did not determine the amount of consideration
to be paid in the Offer.
To the Company's knowledge, Economic Evaluations has substantial experience in
establishing corporate valuations, and no material relationship has existed
during the past two years or is mutually understood to be contemplated between
Economic Evaluations and its affiliates and RSI or its affiliates. As stated in
Economic Evaluations' fairness opinion, attached as Schedule C, Ronald E.
Gregory of Economic Evaluations regularly offers business valuation services and
specializes in ownership consulting for the closely held business enterprise. He
has over thirty five years experience in the financial field, an MBA (1974) and
a Ph.D. (1989) from Clemson University, and is engaged full time as a financial
consultant. He has served as an expert witness in state and federal courts. In
addition to ongoing research in the ownership of private and public companies,
6
Dr. Gregory regularly participates in valuation industry activities and has
extensive training in accounting, legal, and financial market topics related to
valuation.
The fairness opinion is attached as Schedule C. A summary of the fairness
opinion, including underlying analysis, is attached as Schedule B. The summary
was provided to the Company by Economic Evaluations and, as described in the
Schedule TO, it has been reviewed only by Joe F. Ogburn, RSI's Chief Financial
Officer, for the limited purpose of reviewing it for factual or typographical
errors.
Antitrust. The acquisition of Shares by BCM in accordance with the offer is
exempt from the reporting and waiting period requirements imposed by the
Hart-Scott-Rodino Antitrust Improvements Acts of 1976, as amended.
Appraisal Rights. Holders of Shares do not have dissenters' rights as a result
of the Offer. However, if the Merger is consummated, each holder of Shares who
has not tendered his Shares in the Offer and has neither voted in favor of the
Merger nor consented thereto in writing and who properly exercises his or her
dissenters' rights under Article 13 of the NC Corporate Act will be entitled to
demand a proceeding by the North Carolina Superior Court to determine the fair
value of his or her Shares. If the Merger is approved by BCM, RSI shall notify
all of its shareholders entitled to assert dissenters' rights, in writing,
within 10 days thereafter, that the Merger has been approved by BCM and will
send each such RSI shareholder a dissenters' notice as required under Section
55-13-22 of the NC Corporate Act. An RSI shareholder to whom a dissenters'
notice has been mailed as described above, in order to preserve its dissenters'
rights, must follow precisely the requirements of Article 13 of the NC Corporate
Act in order to perfect the shareholder's rights to dissent and seek appraisal
by judicial action of the value of such shareholder's Shares. The Schedule TO
outlines in more detail the requirements of Article 13 and includes a copy of
such Article.
Effect of the Offer on the Market for Shares and Stock Market Listing. Prior to
the Offer, the Shares were thinly traded and the consummation of the Offer will
exacerbate the limitations on the ability of a shareholder to sell his shares.
Exchange Act Registration. The Shares are currently registered under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). RSI does not
intend to file a request to terminate the registration, but, upon consummation
of the Offer, a decision could be made to deregister the Shares. Termination of
registration would substantially reduce the amount of information required to be
furnished by RSI to its Shareholders and to the SEC.
State Takeover Laws. Pursuant to the North Carolina Shareholder Protection Act
of the North Carolina Corporate Act, no business combination involving a
corporation which has a class of securities registered under Section 12 of the
Exchange Act and any entity that is the beneficial owner, directly or
indirectly, of more than 20% of the corporation's voting shares may be
consummated unless the holders of 95% of the outstanding voting shares approve
the business combination. Under the North Carolina law, the 95% voting
7
requirement does not apply if there is an applicable exemption. As stated in the
Schedule TO, BCM and the Mickel siblings believe that an exemption applies
although, because the factual situation is complicated and there is no
interpretive caselaw with respect to this exemption, there is some uncertainty
as to the application of this statute to RSI. If this uncertainty were to be
resolved to require receipt of 95% approval of RSI's outstanding shares for a
business combination between BCM and RSI, BCM might not be able to effect the
Merger (or any similar merger). BCM and the Mickel siblings have stated in the
Schedule TO that in that event, they would pursue alternative strategies,
including deregistration of RSI's common stock, if possible, and liquidation.
The North Carolina Control Share Acquisition Act of the North Carolina Corporate
Act applies to a corporation that is incorporated in North Carolina and that has
substantial assets in North Carolina, its principal place of business or a
principal office within North Carolina, a class of securities registered under
Section 12 of the Exchange Act, and more than 10.0% of its shareholders are
residents of North Carolina or more than 10.0% of its shares held by North
Carolina residents. The North Carolina Control Share Acquisition Act restricts
the voting rights of a person who acquires "control shares" in a covered
corporation. Control shares are shares that, when added to all other shares of
the covered corporation beneficially owned by a person, would entitle that
person to voting power equal to or greater than one-fifth, one-third or a
majority of all voting power. Without shareholder approval by "disinterested
shareholders," the shares acquired by the acquiror have no voting rights. RSI
has its principal place of business and principal office in South Carolina
rather than North Carolina, and is therefore not subject to, the North Carolina
Control Share Acquisition Act.
ITEM 9. EXHIBITS
None.
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify that the
information set forth in this statement is true, complete and correct.
/s/ Buck A. Mickel
----------------------------------
Name: Buck A. Mickel
Title: President and CEO
Date: January 28, 2005
8
SCHEDULE A
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the ownership by BCM and its BCM
shareholders and by the other directors and executive officers of RSI shares of
RSI common stock, representing current beneficial ownership of RSI. It also
lists the positions that the shareholders and other executive officers and
directors of BCM hold with RSI.
-----------------------------------------------------------------------------------------------------------
Amount and
Nature of
Name of Beneficial Percent
Beneficial Owner Ownership of Class (4)
-----------------------------------------------------------------------------------------------------------
BCM Acquisition Corp. 6,368,188 (1) 76.0
Buck A. Mickel 6,368,188 (1) 76.0
President, CEO and director, RSI and BCM and Shareholder, BCM
Charles C. Mickel 6,368,188 (1) 76.0
Vice President and director, RSI and BCM and Shareholder, BCM
Minor Mickel Shaw 6,368,188 (1) 76.0
Shareholder, BCM
Joe F. Ogburn 201,990 (2) 2.4
Secretary, Treasurer and director, RSI and BCM
C.C. Guy 50,962 (3) 0.6
Director, RSI
(1) The number of shares shown includes all shares currently beneficially
owned by each of Buck A. Mickel, Charles C. Mickel and Minor Mickel Shaw.
Shares currently beneficially owned by Mr. Buck A. Mickel include
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 him which are currently exercisable. The number of shares
shown also includes 50,000 shares held by Mr. Buck A. Mickel's wife, as to
which shares he disclaims beneficial ownership. As a result of the Offer
and Merger, Buck A. Mickel's interest in RSI's (negative) net book value
as of August 31, 2004 will increase from 41.9% or ($138,973) to 52.0% or
($172,473), and his interest in RSI's net loss for the fiscal year ended
August 31, 2004 will increase from 41.9% or ($57,873) to 52.0% or
($71,823).
Shares currently beneficially owned by Mr. Charles C. Mickel include
1,467,185 shares directly owned by him and 6,666 unissued shares subject
to stock options held by him which are currently exercisable. As a result
of the Offer and Merger, Charles C. Mickel's interest in RSI's (negative)
net book value as of August 31, 2004 will increase from 17.6% or ($58,375)
to 24.7% or ($81,925), and his interest in RSI's net loss for the fiscal
year ended August 31, 2004 will increase from 17.6% or ($24,309) to 24.7%
or ($34,116).
As a result of the Offer and Merger, Minor M. Shaw's interest in RSI's
(negative) net book value as of August 31, 2004 will increase from 16.5%
or ($54,727) to 23.3% or ($77,281), and her interest in RSI's net loss for
the fiscal year ended August 31, 2004 will increase from 16.5% or
($22,790) to 23.3% or ($32,182).
(2) The number of shares shown as currently 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.
9
(3) The number of shares shown as currently beneficially owned by Mr. Guy
includes 26,307 shares directly owned by him and 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) Pursuant to Rule 13d-3 promulgated under 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.
10
SCHEDULE B
SUMMARY AND ANALYSIS OF ECONOMIC EVALUATIONS
Overview
RSI Holdings, Inc ("RSIH" or the "Company") is a North Carolina corporation
headquartered in Greenville SC and operates one subsidiary, Employment
Solutions, Inc., which is engaged in the business of employee leasing. Prior to
2000 the Company operated other businesses but incurred substantial operating
losses as a result of increased competition in the major product lines and
discontinued all regular operations - all business activities were concluded by
February 2000. The Company changed its accounting from a going concern basis to
a liquidation basis on January 31, 2000 and on January 1, 2001, changed back
from a liquidation basis to a going concern basis. In 2002, RSIH acquired
Employment Solutions with a combination of seller financing and an infusion of
capital from the Mickel family (see SEC Form 8-K dated March 4, 2002).
On December 20, 2000, the Company issued an 8% Convertible Note to Minor Mickel,
mother of the siblings making the subject offer; the terms were a maturity of
2005 with a principal amount of $500,000, plus accrued interest, said note
convertible into common shares at $0.075 per share. Company operations continued
to show losses, and interest payments were accrued, and the note was converted
into 6,666,666 shares on January 21, 2002 (before adjusting for a 3:1 reverse
split). After this transaction Ms. Mickel owned 64.9% of the outstanding common
stock of RSIH.
On January 28, 2002 Ms. Mickel sold the bulk of her holding to the three
siblings who are making the current Offer at a price of $0.005 per share (SEC
Form 8-K March 1, 2002), giving the siblings approximately 78% of the
outstanding common stock. As of the Offer date the siblings & their families own
approximately 78% of the outstanding shares.
Economic Evaluations was originally engaged by a Special Committee of the Board
to render an opinion as to the fairness, from a financial point of view, of the
Offer consideration of $0.10 per share. Due to the health of a Committee member,
the Special Committee was unable to complete its original task, and the Board
elected to modify the engagement to an opinion to the Board on behalf of the
unaffiliated shareholders of the fairness, from a financial point of view, of
the same $0.10 per share consideration.
There are no special financial conditions to the Offer as the Mickel siblings
will provide all necessary financing. For purposes of this analysis all employee
stock options are ignored as they would operate to further dilute any per share
values estimates. In this analysis we assume 7,846,455 shares outstanding (Form
10-Q dated May 31, 2004).
Scope of Analysis
Since the Company has a negative net worth, continues to operate at a loss, and
has a balance sheet supported by a large intangible asset and substantial debt,
many of the standard methods of valuing the shares are not easily applied. In
11
determining the fairness of the cash consideration, we chose to focus on the (1)
financial performance, (2) adjusted balance sheet, (3) a discounted cash flow
model based on subjective estimates of future cash flows, (4) market
transactions in the Company's common stock, and (5) data from comparable
companies. Due to the size & performance of the Company and thin trading in the
Company's shares, the comparable company data was of only limited use.
Financial performance
Historical results
The Company continues to operate at a loss and operating results have declined
slightly from the prior year due to weakness in the overall employment picture.
For the nine months ended May 31, 2004, the net loss was $108,000 rounded of
which approximately $75,000 was interest expense accrued for the period. If the
Company were required to pay these interest costs in cash it could have severe
negative impact of the Company's ability to operate. The Company has not been
able to show an operating profit from its investment in employee leasing, and
its projections (see below) do not project an operating profit for the next
fiscal year.
Pro forma - no public company expense
If the Company were to operate as a private entity and avoid the necessary
expense of being a public company, there could be significant cost savings that
would reduce the operating loss but not necessarily create a profit. Management
estimates, in one scenario, that there is potential cost savings of up to
$110,000. By further reducing expenses for offices and certain management costs,
we estimate the results for the year ending August 31, 2004 would still show an
operating loss. It will require a combination of an improving market for the
Company's services plus the cost savings resulting from operating as a private
company to show any positive operating results. Therefore there is no net income
to value, and a basic comparison between standard industry ratios or comparable
company data and the Company's recent performance are not meaningful.
Adjusted book value
On the balance sheet dated May 31, 2004, the Company had an accumulated
operating deficit of $5,331,858 and negative shareholders' equity of $301,653.
The Company also has a significant intangible asset from the acquisition of
Employment Solutions. This intangible asset is carried on the books, net of
amortization, at $1,646,277. Ignoring this intangible value, the Company would
have a tangible net worth of negative $1,947,930 or a per share tangible net
worth of negative $0.248.
Net operating Loss
As of August 31, 2003 the Company had accumulated a net operating loss
carryforward ("NOL") of $12,731,000, which expires from 2006 through 2022.
12
The Company estimated a potential net deferred tax asset resulting from this NOL
of $4,765,000. However, current accounting standards require that since the
Company has net operating losses for the fiscal years 2002 and 2003, it cannot
show this deferred tax asset as of August 31, 2003. If the Company's auditors,
and management, do not believe based on the balance of evidence that is more
likely than not that the Company can fully utilize its NOL, no deferred tax
assets would be shown even if accounting standards did not require it. (See SEC
Form 10-K for August 31, 2003).
The Company's ability to utilize any significant portion of this net operating
loss is highly dependent on its ability to secure additional financing to expand
and improve its operations. Restrictions such as change of control limitations
severely limit the Company's ability to sell or merge its operations with other
profitable businesses. Any hypothetical projections for future profitable
operations that might utilize some portion of the net operating loss must take
into account the additional funding required to expand or acquire new business,
and the resulting dilution of existing shareholders' equity. For purposes of
this Opinion the Company is deemed to have a negative shareholders equity and
minimal prospects for realizing a positive tangible net worth without
substantial additional financing which the Company is not likely to secure in
its present financial condition
Discounted cash flow model
Management has created a series of projections to show what the Company might be
able to produce, on a net operating basis, under certain assumptions about
future business. All these plans show a net operating loss for the year ending
August 31, 2005. We used a five year discounted cash flow model based on the net
cash flow, where net cash flow is defined as after tax operating profits plus
non cash charges such as depreciation plus any net changes in working capital
minus capital expenditures. Adjusting the projection results for depreciation
and amortization, which are non-cash expenses, and further adjusting for
minimizing headquarters cost and the reduction of expenses from being a private
company, and acknowledging that the NOL removes the need for any income tax
assumption for the near future, it is possible that the Company might show net
cash flow of $25,000 to $75,000 under the range of assumptions.
Using a net cash flow of $75,000, increasing 3% per year and a discount rate of
25% and a sale at the end of five years using a capitalization of net cash flow
method to determine the terminal value, the net present value of the Company
under one discounted cash flow model is $366,400 or $0.047 per share. This is
not a forecast of results but simply an estimate based on combining various
subjective data and utilizing the net loss carryforwards and assuming a
significant reduction in operating expenses.
Stock transactions - RSIH
Most of the transactions in the Company's stock reported in the public
marketplace during the 12 months ended August, 2004 were at $0.08 per share. The
13
last company transaction in its shares was issuance of the $500,000 Convertible
note based on a conversion price of $0.075 per share in December, 2000. The most
significant recent transaction in the Company's shares was the sale of a
majority of Minor Mickel's stock to her children as described above for $0.005
per share in January, 2002.
Based on the cash consideration of $0.10 per share in the current Offer, the
offer price represents a 25 percent premium to the typical public price over the
prior 12 months. The Offer price represents a premium of 33% over the conversion
price of the Convertible Note described above. The Offer price of $0.10 per
share represents a premium of 2000% over the transaction of January, 2002.
There is no liquid market in the Company's shares, no market maker or sponsor
for the stock, and the thin trading makes other market comparisons meaningless.
Comparable companies
The lack of positive operating results and negative net worth makes detailed
comparisons with comparable companies' performance difficult. A search of
similar business in the same SIC code with negative earnings provided a list of
companies with a wide range of values for performance ratios and capital
structure ratios.
One source of useful information from this group was the SEC filings of JOULE,
Inc., which completed a similar "going private" transaction in August, 2004. The
research presented in the filing reflects, for a group of similar companies,
operating results, stock performance, and ratios of financial strength and
profitability. None of these firms were found to be directly comparable to the
Company.
Summary of Analysis
Our analysis focused on the operating profitability of the Company, both in the
recent past and projected, the adjusted book value, a five year discounted cash
flow model, the market transactions in the Company's stock, and a review of
comparable companies, in the same SIC code industry, with recent operating
losses.
The Company has operated at a loss for some years, and its ability to become
profitable or continue as a viable operation is highly dependent on additional
financing on favorable terms, the continued deferral of interest on its debt,
and/or reduction in expensed resulting from becoming private rather than being
public traded. The most significant potential asset is the deferred tax asset
that may be realized if the Company is successful in securing sufficient
financing to acquire or expand its business so as to achieve profitability.
Consequently, the value of the Company as a going concern, and the market value
of the common stock, is highly speculative, and a meaningful comparison with
similar companies is difficult. The analysis provides the basis for our opinion
that the proposed Offer of $0.10 cash per share is fair, from a financial point
of view, to the unaffiliated shareholders.
14
Table 1
RSIH Market Transactions
------------------ -- ------------------------ -----------------
Date Price Per Share Volume
------------------ -- ------------------------ -----------------
8/14/2003 0.08 1,000
8/21/2003 0.08 600
8/27/2003 0.08 1,600
9/3/2003 0.08 400
9/9/2003 0.10 1,000
9/11/2003 0.08 300
9/17/2003 0.08 300
9/22/2003 0.08 1,600
10/10/2003 0.08 200
10/16/2003 0.09 5,000
10/20/2003 0.08 100
10/21/2003 0.08 300
10/28/2003 0.08 1,100
10/31/2003 0.09 7,000
11/3/2003 0.10 13,000
11/5/2003 0.10 5,000
11/14/2003 0.08 15,000
11/24/2003 0.08 111
12/9/2003 0.08 3,333
12/10/2003 0.08 182
12/15/2003 0.09 5,000
12/30/2003 0.08 236
1/23/2004 0.09 1,535
1/29/2004 0.09 114
2/19/2004 0.15 200
2/27/2004 0.09 100
3/10/2004 0.09 333
3/11/2004 0.15 1,200
4/15/2004 0.09 10,897
5/19/2004 0.08 333
5/26/2004 0.08 286
5/28/2004 0.08 1,145
6/4/2004 0.08 5,000
7/13/2004 0.08 1,666
7/14/2004 0.09 10,000
------------------ -- ------------------------ -----------------
15
SCHEDULE C
FAIRNESS OPINION OF ECONOMIC EVALUATIONS
Greenville, S.C. 29603
Tel 864-242-0190
Fax 864-254-0312
regregory@att.net
September 10, 2004
Board of Directors of RSI Holdings, Inc.
On behalf of the Unaffiliated Shareholders of
RSI Holdings, Inc.
28 East Court Street
Post Office Box 6847
Greenville, SC 29606
RE: Fairness Opinion for RSIH Holdings, Inc.
Dear Sirs,
You have retained R. E. Gregory & Co., LLC, dba Economic Evaluations to assist
the unaffiliated shareholders of RSI Holdings, Inc. ("RSIH" or the "Company"), a
North Carolina corporation, in determining the fairness, from a financial point
of view, of the proposed consideration to be received by holders of RSIH's
common stock in the following transaction:
a tender offer (the "Offer") for all outstanding shares of RSIH common
stock by a newly-formed company owned by Buck A. Mickel, Charles C.
Mickel and Minor Mickel Shaw for $0.10 per share in cash. If 90% of
RSIH's voting stock is tendered, the offerors would effect a short-form
merger of RSIH into the newly-formed company for merger consideration
of $0.10 per share.
The standard of value for purposes of this financial advisory engagement,
including the Opinion, is "Fair Value" - assumed here to mean the share price to
which owners of the Company's common stock are entitled under the North Carolina
statute regulating tender offer and merger transactions of the type proposed.
The engagement involves determining the fairness, from a financial point of
view, in a specific transaction between the offerors and the other unaffiliated
parties with respect to the Offer.
The effective date of the Opinion is September 10, 2004. This is a Financial
Advisory service and not an Appraisal Report as defined in the Business
Valuation Standards of the American Society of Appraisers. This Opinion includes
a summary of the analysis used and review process followed. The scope of work
was determined by the purpose of the engagement, the size and scale of the
subject Company's operations and the Company's overall financial condition.
We are relying on RSIH's representations as to the Offer terms, that no
significant changes will be made to the terms without notifying us and that the
Offer will be completed as proposed. We are relying solely on the financial
information furnished by you or your advisers, and public data, and give no
opinion on such data. This is not an accounting document and no opinion is
expressed except an opinion as to the fairness, from a financial point of view,
as described below.
16
The Opinion is intended for use only in connection with the proposed Offer and
the Opinion and the analysis that supports it may be included in documents sent
to RSIH shareholders and or filed with the Securities and Exchange Commission in
connection with the Offer. It is intended for use by unaffiliated shareholders
of RSIH in making their decision with respect to the Offer. Nothing in the
valuation process or reporting the Opinion is intended to imply that the Company
can or will be sold for the range of value discussed. The final Opinion is not
expected to be relied on by RSIH's Board as a fairness opinion in connection
with the Offer, because the Board members are likely to be unable to take a
position with respect to the Offer.
Neither R. E. Gregory & Co., LLC dba "Economic Evaluations" nor Ronald E.
Gregory is required to update the report for subsequent events or render any
future opinions. The Company has agreed to hold us harmless from any liability
resulting from our acceptance and performance under this Agreement. If testimony
is required at any legal proceedings including depositions, the Company has
agreed to compensate us at our then current rate for expert testimony and
reasonable out of pocket expenses.
This engagement does not reflect questions of legal title, survey or physical or
environmental attributes of the assets, accounting or tax issues or other
factors beyond the normal scope of our work as business valuation consultants.
No inspection was made of the Company's facilities or assets, and no appraisal
was made of any specific asset or class of asset.
We certify that the fee for this work is in no way contingent on any specified
result or value, and that we are independent as to you and your affiliated
employees, officers and related companies.
In the past we have provided services to the Mickel family and to business
ventures in which they were investors, all unrelated to the proposed Offer, and
have provided no such services within the past four years, and have never
provided any services related specifically to RSIH.
Ronald E. Gregory, Ph.D., regularly offers business valuation services and
specializes in ownership consulting for the closely held business enterprise. He
has over thirty five years experience in the financial field, an MBA (1974) and
a Ph.D. (1989) from Clemson University, and is engaged full time as a financial
consultant. He has served as an expert witness in state and federal courts. In
addition to ongoing research in the ownership of private and public companies,
Dr. Gregory regularly participates in valuation industry activities and has
extensive training in accounting, legal, and financial market topics related to
valuation.
In arriving at our Opinion, we:
A. reviewed audited financial statements of RSIH for the fiscal years
ended August 31, 2001, August 31, 2002 , August 31, 2003 and financial
statements of the Company for the quarters ended November 30, 2003, and
February 29 and May 31, 2004;
B. reviewed financial forecasts and estimates relating to RSIH which were
provided to or discussed with us by the management of RSIH;
C. held discussions with the senior management of RSIH with respect to the
business and prospects of RSIH;
D. reviewed and analyzed certain publicly available financial data for
companies in the general industry group as RSIH;
17
E. reviewed and analyzed certain publicly available information for
transactions in RSIH stock that we deemed relevant in evaluating the
Offer;
F. reviewed the potential impact of the net operating loss carry forward,
the reduction in operating expense as a private company, and the
potential need for additional capital;
G. performed such other analyses and reviewed such other information as we
deemed appropriate.
We express no view as to, and our Opinion does not address, the underlying
business decision of the offerors to make the Offer (including the anticipated
subsequent short-form merger) nor does our Opinion address the relative merits
of the Offer as compared to any alternative business strategies that might exist
for the offerors or for RSIH or the effect of any other transaction in which any
of them might engage. Our Opinion is necessarily based on the information
available to us and general economic, financial and stock market conditions and
circumstances as they exist and can be evaluated by us on the date hereof. It
should be understood that, although subsequent developments may affect this
Opinion, we do not have any obligation to update, revise or reaffirm the
Opinion.
Based upon and subject to the items discussed above, and such other factors as
we deemed relevant, it is our opinion that, as of the date hereof, the Offer
price is fair, from a financial point of view, to the unaffiliated holders of
RSIH Common Stock. This Opinion is intended for use by unaffiliated shareholders
of RSIH in making their decision with respect to the Offer, but it does not
constitute a recommendation as to whether any shareholder should tender shares
or take any other act with respect to any matters relating to the Offer.
Sincerely,
Economic Evaluations
(sig) /s/ Ronald E. Gregory Date September 10, 2004
--------------------------------
Ronald E. Gregory, Ph.D.
18