TO OUR SHAREHOLDERS
The year ended August 31, 2003 marks the completion of the first full
year of operations of our newly-formed, wholly-owned subsidiary, Employment
Solutions, Inc., a South Carolina corporation ("Employment Solutions"). RSI
Holdings, Inc. (the "Company") has no other business. Employment Solutions
acquired the assets of Employment Solutions, LLC, an existing business, on March
4, 2002. Employment Solutions is in the business of locating and providing labor
to industrial companies.
The number of employees provided to industrial companies varies from
week to week depending on the labor requirements of the customers of Employment
Solutions. During the approximately six months from March 4, 2002 through August
31, 2002 the total average number of employees provided to industrial companies
increased to a higher number, but the total average number of employees remained
relatively constant during fiscal 2003. During fiscal 2003 the increase in the
number of employees provided to new customers was generally offset by a decrease
in employees provided to a certain major customer.
At August 31, 2003 the liabilities of the Company exceeded its assets
by $193,556. The liabilities include long-term debt to various family members of
the President and Chief Executive Officer of the Company (the "Mickel Family")
in the amount of $1,510,000. The terms of the Mickel Family debt do not require
any current payments and one of the Mickel Family members has allowed the
Company to defer payment of interest on debt in the amount of $1,200,000. The
accrued interest on this debt at August 31, 2003 was $129,567. The Mickel Family
own approximately 80% of the outstanding common stock of the Company.
The liabilities of the Company at August 31, 2003 also include a note
payable in the original principal amount of $800,000 issued to Employment
Solutions, LLC as part of the purchase price of Employment Solutions' business
on March 4, 2002. The Company paid $15,466 each month for a total of $185,592
including interest during the fiscal year 2003. The unpaid principal balance at
August 31, 2003 was $584,598.
In closing, I thank the shareholders for their support. We believe that
industrial companies will continue to need dependable labor and this will
represent continued opportunity for the business of Employment Solutions. While
there are many risks in the business of Employment Solutions, we believe that
continued efforts of the management of the Company will result in operations
that provide the necessary cash flow to pay its liabilities and ultimately build
shareholder value. We enlist your patience in our efforts.
Buck A. Mickel
President and Chief Executive Officer
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
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 after giving effect to the 3:1 reverse stock split
effective June 10, 2002 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.
2003 2002
Fiscal High Low High Low
First Quarter .19 .03 .03 .03
Second Quarter .38 .10 .06 .03
Third Quarter .23 .13 .33 .03
Fourth Quarter .13 .08 .41 .06
As of November 17, 2003, the Company had approximately 538 shareholders
of record.
The Company paid no cash dividends with respect to its Common Stock
during fiscal 2003, 2002 and 2001, and does not intend to pay cash dividends in
the foreseeable future.
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS.
This Report on Form 10-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.
ACQUISITION OF BUSINESS
On March 4, 2002, the Company, through Employment Solutions, its
newly-formed, wholly-owned subsidiary, acquired substantially all of the assets
of Employment Solutions, LLC, a South Carolina limited liability company.
Employment Solutions 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.
RESULTS OF OPERATIONS
During the year ended August 31, 2003 the Company's revenues were
$5,314,156 as compared to revenues during the year ended August 31, 2002 of
$2,265,342. The Company's revenues increased from fiscal 2002 to fiscal 2003
primarily because the Company did not have revenue-generating operations in the
year ended August 31, 2002 until March 4, 2002 and therefore generated revenue
for only approximately half of that fiscal year. The increase in revenues from
2002 to 2003 was also the result, to a lesser extent, of an increase during
fiscal 2002 in the average number of workers employed by the Company to a higher
level that then remained relatively constant in 2003.
Employment Solutions incurred cost of services of $4,307,446 during the
year ended August 31, 2003 as compared to $1,813,228 during the year ended
August 31, 2002. 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 cost of services for fiscal 2003
were higher than for fiscal 2002 primarily because the Company had
revenue-generating operations for only approximately half of fiscal 2002 and to
a lesser extent because of the higher average number of workers employed in
fiscal 2003 as discussed above.
General and administrative expenses were $873,441 during the year ended
August 31, 2003 as compared to $538,595 during the year ended August 31, 2002.
The expenses, exclusive of Employment Solutions, during the year ended August
31, 2003 include salaries and related costs of $347,333; legal, accounting, and
shareholder related expenses of $62,263; rent of $35,600 and other
administrative expenses of $69,468. The expenses during the year ended August
31, 2003 also include selling and administrative expenses incurred by Employment
Solutions of $229,898 and the amortization of customer related intangible assets
of $128,879. The expenses, exclusive of Employment Solutions, during the year
ended August 31, 2002 include salaries and related costs of $216,723; legal,
accounting, and shareholder related expenses of $66,482; rent of $29,100 and
other administrative expenses of $45,901. The expenses during the year ended
August 31, 2002 also include selling and administrative expenses incurred by
3
Employment Solutions during the year ended August 31, 2002 of $116,097 and the
amortization of customer related intangible assets of $64,292. General and
administrative expenses increased from fiscal 2002 to fiscal 2003 because the
Company had twelve months of operations in fiscal 2003 and only approximately
six months of operations in fiscal 2002.
Interest expense incurred during the year ended August 31, 2003 was
$149,760 as compared to $105,483 during the year ended August 31, 2002. The
increase in interest expense resulted primarily from interest incurred on
borrowings relating to the acquisition of Employment Solutions. Interest income
and other income (primarily from earnings on cash investments) during the year
ended August 31, 2003 was $856 as compared to $3,471 during the year ended
August 31, 2002.
INCOME TAXES
During fiscal year 2003 and 2002, net deferred tax benefits were not
recorded relating to temporary differences 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.
LIQUIDITY AND CAPITAL RESOURCES
ANTICIPATED LIQUIDITY REQUIREMENTS
Certain of the Company's shareholders have advanced funds under the
debt arrangements discussed below under "Debt Arrangements". At August 31, 2003,
the Company's liabilities exceeded its assets by $193,556.
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.
Employment Solutions collects from its customers and pays the 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 customers have paid for services provided as described above
during the period since March 4, 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.
CASH
The Company had cash in the amount of $233,055 at August 31, 2003 as
compared to $165,267 as of August 31, 2002.
DEBT ARRANGEMENTS
On August 31, 2001, Minor H. Mickel, the mother of Buck A. Mickel,
President and Chief Executive Officer and a director and significant shareholder
of the Company, and Charles C. Mickel, Vice President and a director and
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.
4
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, Buck
A. Mickel, Charles C. Mickel and their adult sister, (who is a significant
shareholder of the Company) each 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 through its wholly-owned 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.
On October 10, 2002, the Company through its wholly-owned subsidiary,
Employment Solutions, incurred long-term debt in the amount of $30,393 payable
in equal monthly installments of $520 over six years at an interest at the rate
of 7% per year. The note is secured by a truck.
DEBT CONVERTED INTO COMMON STOCK
On December 20, 2000, Minor H. Mickel loaned the Company $500,000 under
an 8% convertible note payable on December 20, 2005. Under the terms of this
note all principal and interest was convertible at the conversion rate of $.075
per share at the option of either the Company or holder of the convertible note.
Effective January 21, 2002, the entire principal amount of $500,000 was
converted into 6,666,666 shares of the Company's common stock.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no significant off-balance sheet arrangements.
CRITICAL ACCOUNTING POLICY
The Company has adopted various accounting policies which govern the
application of accounting principles generally accepted in the United States of
America in the preparation of our financial statements. The significant
accounting policies of the company are described in the footnotes to the
consolidated financial statements at August 31, 2003.
Certain accounting policies involve significant judgments and
assumptions by management which have a material impact on the carrying value of
certain assets and liabilities; management considers such accounting policies to
be critical accounting policies. The judgments and assumptions used by
management are based on historical experience and other factors, which are
believed to be reasonable under the circumstances. Because of the nature of the
judgments and assumptions made by management, actual results could differ from
these judgments and estimates which could have a material impact on the carrying
values of assets and liabilities and the results of operations of our company.
The Company believes that the valuation allowance related to the
deferred tax asset is a critical accounting policy that requires the most
significant judgments and estimates used in preparation of our consolidated
financial statements. When income and expenses are recognized in different
periods for financial reporting purposes than for purposes of computing income
taxes currently payable, deferred tax assets or liabilities are provided on such
temporary differences. The Company accounts for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax
5
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.
At August 31, 2003, the Company has net operating loss carryforwards
("NOLs") available for income tax purposes of approximately $12,731,000. Such
carryforwards expire in 2006 through 2022. The Company's ability to use its
existing 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 did not have net income in fiscal 2003 and 2002,
SFAS No. 109 required that the Company not carry any net deferred tax asset on
its balance sheets for August 31, 2003 or record any net deferred tax benefit on
its income statements for the years ended on such dates. If the Company had been
permitted under SFAS No. 109 to record a full net deferred tax asset on its
balance sheet at August 31, 2003, the amount of the net deferred tax asset would
have been $4,765,000, 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, 2003, the amount of the benefit would have been $4,000.
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, 2003
amount set forth in the preceding paragraph.
RISK FACTORS
The Company is dependent on a few customers in that the majority of its
revenues are from three customers. During the year ended August 31, 2003, these
customers accounted for over 50% 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.
The Company can give no assurance that its supply of labor will continue to be
available.
6
INDEPENDENT AUDITOR'S REPORT
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, 2003 and the related consolidated statements
of operations, shareholders' deficit and cash flows for the years ended August
31, 2003 and 2002. 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 auditing standards generally
accepted in the United States of America. 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, 2003,
and the related consolidated results of operations and cash flows for the year
ended August 31, 2003 and 2002 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Elliott Davis, LLC
Greenville, South Carolina
September 30, 2003
7
RSI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
AUGUST 31, 2003
ASSETS
CURRENT ASSETS
Cash $ 233,055
Accounts receivable 119,688
Prepaid expenses and other 17,952
-----------
Total current assets 370,695
Property and equipment:
Cost 130,801
Less accumulated depreciation 47,556
----------
Property and equipment - net 83,245
Other assets:
Customer related intangible assets, net of
amortization of $193,172 1,743,117
---------
$2,197,057
==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 88,455
Accrued expenses 51,091
Current maturities of long-term debt 159,198
----------
Total current liabilities 298,744
LONG-TERM DEBT AND OTHER LIABILITIES
Long-term debt 1,962,302
Accrued interest 129,567
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 (5,223,761)
-----------
Total shareholders' deficit (193,556)
-----------
$2,197,057
===========
The accompanying notes are an integral part of these consolidated financial
statements.
8
RSI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED AUGUSTS 31, 2003 AND 2002
For the For the
Year Ended Year Ended
August 31 August 31
2003 2002
---------- ----------
REVENUES FROM SERVICES $ 5,314,156 $ 2,265,342
COST OF SERVICES 4,307,446 1,813,228
---------- ----------
GROSS PROFIT 1,006,710 452,114
EXPENSES:
Selling, general and
administrative 873,441 538,595
---------- ----------
Income (loss) from operations 133,269 (86,481)
OTHER INCOME (EXPENSE):
Interest income and other 856 3,471
Interest expense (149,760) (105,483)
----------- -----------
Total other income (expense) (148,904) (102,012)
----------- -----------
NET LOSS $ (15,635) $ (188,493)
=========== ===========
NET LOSS PER SHARE - BASIC AND DILUTED $ (.00) $ (.03)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING* 7,836,592 6,950,983
=========== ===========
* The weighted average number of shares outstanding have been retroactively
adjusted for the three-to-one reverse stock split. See Note 5.
The accompanying notes are an integral part of these consolidated financial
statements.
9
RSI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE YEARS ENDED AUGUST 31, 2003 AND 2002
ADDITIONAL
COMMON STOCK PAID-IN
SHARES AMOUNT CAPITAL DEFICIT TOTAL
-------- -------- ----------- -------- ---------
BALANCE, AUGUST 31, 2001 16,798,154 $167,981 $4,355,733 $(5,019,633) $(495,919)
Conversion of debt to
common stock 6,666,666 66,666 433,334 500,000
Three-to-one reverse
stock split (15,643,365) (156,433) 156,424 ( 9)
Net loss (188,493) (188,493)
-------- -------- --------- --------- ---------
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)
============ ========== ============= ============= ==========
The accompanying notes are an integral part of these consolidated
financial statements.
10
RSI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31, 2003 AND 2002
For the For the
Year Ended Year Ended
August 31 August 31
2003 2002
----------- ------------
OPERATING ACTIVITIES
Net loss $ (15,635) $ (188,493)
Adjustments to reconcile net loss to net
cash provided by (used for) operating activities
Depreciation and amortization 151,615 71,701
Loss on disposal of property and equipment - 1,266
Changes in operating assets and liabilities
Accounts receivable 11,212 (54,177)
Prepaid expenses and other 3,267 (18,131)
Accounts payable, accrued expenses and other liabilities 71,789 48,100
----------- -----------
Net cash provided by (used for) operating activities 222,248 (139,734)
----------- -----------
INVESTING ACTIVITIES
Proceeds from sale of property and equipment - 4,923
Purchase of property and equipment (34,604) (36,659)
Net cash paid for acquired business (7,519) (1,168,192)
----------- -----------
Net cash (used for) investing activities (42,123) (1,199,928)
------------ ----------
FINANCING ACTIVITIES
Proceeds from long-term notes payable 30,393 1,260,000
Payment of long-term debt and other (149,230) (69,663)
Proceeds from exercise of stock options 6,500 -
----------- -----------
Net cash (used for) provided by financing activities (112,337) 1,190,337
------------ -----------
Net increase (decrease) in cash 67,788 (149,325)
CASH, BEGINNING OF PERIOD 165,267 314,592
----------- -----------
CASH, END OF PERIOD $ 233,055 $ 165,267
=========== ==========
SUPPLEMENTAL DISCLOSURE
Cash paid for interest $ 70,190 $ 47,682
========== ==========
NON-CASH TRANSACTION
Conversion of note payable to common stock $ - $ 500,000
=========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
11
RSI HOLDINGS, INC.
NOTES TO CONDENSED 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 consolidated financial statements at August 31, 2003
have been prepared in accordance with accounting principles generally accepted
in the United States of America that apply to established operating enterprises.
Refer to the discussion below regarding the period from September 1, 2001
through February 28, 2002 that were reported under those standards that apply to
a development stage enterprise.
DEVELOPMENT STAGE
As of January 1, 2001, the Company had completed the liquidation of its
prior business and adopted the accounting principles generally accepted in the
United States of America that apply to established operating enterprises. During
the period from January 1, 2001 through February 28, 2002, the Company devoted
substantially all its efforts to locating and establishing a new business, but
had no operating business or revenues. As a result, on January 1, 2001 the
Company began reporting under those accounting principles that apply to
development stage enterprises. Accounting principles generally accepted in the
United States of America that apply to established operating enterprises govern
the recognition of revenue by a development stage enterprise and determine
whether a cost incurred by a development stage enterprise is to be charged to
expense when incurred or is to be capitalized or deferred.
Effective with the purchase of Employment Solutions on March 4, 2002
the Company began operations which generated revenues. As a result the Company
ceased to report under those standards that apply to a development stage
enterprise.
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.
12
CASH
Cash consist 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
trucks 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 and trucks 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
the acquisition during March 2002 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.
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.
13
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 2003 and 2002.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure provisions of SFAS
No. 123 to require disclosure in the summary of significant accounting policies
of the effects of an entity's accounting policy with respect to stock-based
employee compensation on the reported net income and earnings per share in
annual and interim financial statements. SFAS No. 148's amendment of the
transition and annual disclosure requirements of SFAS No. 123 are effective for
fiscal years beginning after December 15, 2002. If the Company does not adopt
the disclosure requirements of SFAS No. 123 and expenses the stock-based
employee compensation, the Company will be required to adopt the disclosure
provisions of SFAS No. 148 for interim periods beginning after December 15,
2002. Accordingly, the company was required to adopt the disclosure provisions
of SFAS No. 148 for the year ended August 31, 2003. The Company adoption of this
statement did not have a material impact on the Company's financial position and
results of operations.
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.
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 an
14
executive 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. During the year ended August 31, 2003 it was agreed
that the bonus for the period from March 4, 2002 through August 31, 2002 would
be paid based on 20% of earnings in excess of $315,000. Although no bonus was
required to be paid, a bonus of $4,273 was paid in January 2003 for the year
ended August 31, 2002. The bonus to be paid based on the earnings during the
year ended August 31, 2003 under this contingency is $3,246.
In accordance with SFAS No. 141, Business Combinations, the Company has
determined that the intangible portion of the purchase price is customer related
intangible assets and consists of customer lists, customer contracts and related
customer relationships, and noncontractual customer relationships. The Company
is amortizing this asset over its estimated fifteen year life.
NOTE 3 - ACCRUED EXPENSES AND OTHER LIABILITIES
-----------------------------------------------
Accrued expenses and other liabilities at August 31, 2003 are as
follows:
Payroll taxes $ 8,958
Interest 135,667
Legal and accounting 13,350
Other 22,683
-----------
180,658
Less current portion 51,091
-----------
Non-current portion $ 129,567
=========
The non-current portion of accrued expenses and other liabilities
consists of interest that has been accrued on the unsecured note of
$1,200,000 payable to the mother of the President and Chief Executive
Officer of the Company and the Vice President of the Company. The
noteholder does not intend to require payment of interest during the next
year.
15
NOTE 4 - LONG-TERM DEBT
-----------------------
Unsecured note payable to the mother of the President and Chief
Executive Officer of the Company with interest payable quarterly
at 8.0 percent per year. The unpaid principal balance is due on
August 14, 2006. $ 250,000
Unsecured note payable to the mother of the President and Chief
Executive Officer of the Company with interest payable annually
at 7.0 percent per year. The unpaid principal balance is due on
February 14, 2007. 1,200,000
Unsecured notes payable to the President and Chief Executive Officer
of the Company, the Vice President of the Company and their adult
sister in the amount of $20,000 each with interest payable
annually at 7.0 percent per year. The unpaid principal balance is
due on February 25, 2007. 60,000
Note payable in the original amount of $800,000 to Eadon Solutions,
LLC (formerly Employment Solutions, LLC) in monthly installments
of $15,466 including interest at 6% per year through March 4,
2007 secured by the outstanding common stock of Employment
Solutions, Inc. 584,598
Note payable in the original amount of $30,393 to First Citizens Bank
in monthly installments of $520 including interest at an annual rate
of approximately 7.0% through October 24, 2008 and is secured by a
vehicle. 26,902
-----------
2,121,500
Less current portion 159,198
-----------
$ 1,962,302
===========
The Company incurred interest cost as follows during years ended August
31, 2003 and 2002.
2003 2002
---- ----
Interest incurred during years ended August 31
Notes payable to the President and Chief Executive
Officer and his family $ 108,200 $ 82,349
Note payable to Eadon Solutions, LLC 39,856 23,134
Note payable to bank 1,704 0
-------- --------
$149,760 $105,483
16
NOTE 5 - SHAREHOLDERS' EQUITY
-----------------------------
REVERSE STOCK SPLIT
On June 10, 2002, the Company's shareholders approved an amendment to
the Company's Articles of Incorporation to effect a 3:1 reverse stock split. The
Company paid cash in lieu of any fractional shares. The total number of
authorized shares of common stock and the par value of the common stock remain
the same and were unaffected by the reverse split.
All shares and per share amounts have been retroactively restated in
connection with the reverse stock split.
CONVERSION OF DEBT TO COMMON STOCK
The Company issued 2,222,222 shares of its common stock (6,666,666 on a
pre-split basis) on January 21, 2002 to the mother of the President and Chief
Executive Officer of the Company in exchange for convertible debt in the
principal amount of $500,000 at the conversion rate of $0.225 per share ($.075
on a pre-split basis).
NOTE 6 - STOCK OPTION PLAN
--------------------------
All option shares and per share amounts have been retroactively
restated in connection with the 3:1 reverse stock split effected during the 2002
year.
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,
2003, 1,456,667 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.
The Company also has an informal stock option plan under which stock
options can be granted to certain non-employee officers and directors. Under
this plan 60,000 options were granted during the 2003 year. These options were
fully vested on the date of the grant and 25,000 options were exercised. During
the 2003 year, 10,000 options expired and were forfeited. As of August 31, 2003,
options to purchase 95,000 shares have been granted and are outstanding.
17
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:
2003 2002
------------- -------------
Options outstanding at September 1 1,679,439 217,772
Options granted 60,000 1,496,667
Options exercised (25,000) -
Options forfeited (10,000) (35,000)
-------------- --------------
Options outstanding at August 31 1,704,439 1,679,439
============= =============
Options exercisable at August 31 706,661 182,772
============= =============
Outstanding options issued under Stock Option Plan at August 31 1,609,439 1,609,439
============= =========
Outstanding options issued under informal Stock Option Plan 95,000 70,000
============= =============
Options available for grant under Stock Option Plan at August 31 43,333 43,333
============= =============
Option price ranges per share:
Granted .10 - $.26 $.07 - $.077
Exercised 0.26 -
Forfeited 0.57 .0375-1.125
Weighted average option price per share:
Granted 0.149 0.071
Exercised 0.26 -
Forfeited 0.57 0.518
Outstanding at August 31 0.101 0.102
The options at August 31, 2003 had a weighted average remaining
contractual life of approximately 7.0 years. There were 706,660 options
currently exercisable with option prices ranging from $0.07 to $1.125 with a
weighted average exercise price of $0.143.
NOTE 7 - INCOME TAXES
---------------------
During fiscal years 2003 and 2002, net deferred tax benefits were fully
offset by a valuation allowance relating to temporary differences since the
Company is not assured that the resulting additional deferred tax assets will be
realized. Significant components of the Company's deferred tax assets and
liabilities are as follows:
ASSETS
Net operating loss carryforward $ 4,710,000
Other 60,000
---------------
4,770,000
Valuation allowance 4,765,000
---------------
Deferred tax assets 5,000
LIABILITIES
Depreciation 5,000
---------------
Net deferred taxes $ -
===============
At August 31, 2003, the Company has net operating loss carryforwards
available for income tax purposes of approximately $12,731,000. Such
carryforwards expire in 2006 through 2022. The Company's ability to use its
existing net operating loss carryforward may be jeopardized or lost if the
Company undergoes an "ownership change" as defined by the Internal Revenue Code.
18
The valuation allowance increased $4,000, during 2003 due to the
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.
NOTE 8 - SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
-----------------------------------------------------
Selling, general and administrative expenses consisted of the following
for the years ended August 31, 2003 and 2002:
2003 2002
------------- -------------
Salaries, wages and benefits $ 464,444 $ 277,382
Legal and professional 55,785 38,745
Rent 50,900 36,775
Telephone and utilities 35,485 25,451
Office expense 33,825 23,168
Travel expense 9,725 17,475
Insurance 26,353 7,042
Shareholder relations 13,263 27,737
Depreciation 22,735 7,409
Amortization - intangible assets 128,879 64,292
Other 32,047 13,119
----------- -----------
$ 873,441 $ 538,595
========= =========
NOTE 9 - MAJOR CUSTOMER INFORMATION
-----------------------------------
Sales to each of three major customers exceeded 10% of net sales during
the fiscal years ended August 31, 2003 and 2002. Sales to these customers
accounted for over 50% of net sales during the years ended August 31, 2003 and
2002.
NOTE 10 - AFFILIATED PARTY TRANSACTIONS
---------------------------------------
See Note 4 concerning notes payable with affiliated parties and Note 5
concerning conversion of debt to common stock.
The Company leases its principal executive offices under a
month-to-month lease arrangement from a corporation 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 a director of the Company. Under the lease
arrangement, the monthly rent during the fiscal year ended August 31, 2003 and
the last five months of the fiscal year ended August 31, 2002 was $2,550 per
month and $1,500 per month during the first seven months of the fiscal year
ended August 31, 2002. Accounts receivable at August 31, 2003 included the
reimbursement of expenses in the amount of $1,003 that were incurred during
August 2003 by a company that is owned by the President of the Company, his
mother and his two adult siblings, one of whom is also a director.
19
--------------------------------------------------------------------------------
DIRECTORS EXECUTIVE OFFICERS
BUCK A. MICKEL BUCK A. MICKEL
President and President and
Chief Executive Officer Chief Executive Officer
RSI Holdings, Inc. RSI Holdings, Inc.
C. C. GUY JOE F. OGBURN
Retired Secretary and Treasurer
RSI Holdings, Inc Chief Financial Officer
RSI Holdings, Inc
CHARLES M. BOLT
Retired CHARLES C. MICKEL
RSI Holdings, Inc. Vice President
RSI Holdings, Inc.
CHARLES C. MICKEL
Vice President
RSI Holdings, Inc.
JOE F. OGBURN
Secretary and Treasurer
Chief Financial Officer
RSI Holdings, Inc.
--------------------------------------------------------------------------------
ANNUAL MEETING
The Annual Meeting of Shareholders will be held on Thursday,
January 29, 2004 at 10:00 A. M. at 28 East Court Street,
Greenville, South Carolina
FORM 10-KSB
UPON WRITTEN REQUEST THE COMPANY WILL FURNISH WITHOUT
CHARGE, TO ANY PERSON WHO IS A SHAREHOLDER OF RSI HOLDINGS,
INC. BENEFICIALLY OR OF RECORD AS OF NOVEMBER 28, 2003, A
COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE
YEAR ENDED AUGUST 31, 2003, INCLUDING THE FINANCIAL
STATEMENTS BUT EXCLUDING THE EXHIBITS. UPON PAYMENT OF THE
REASONABLE COPYING COST THEREOF, THE COMPANY WILL MAKE
AVAILABLE THE EXHIBITS TO THE COMPANY'S FISCAL 2003 ANNUAL
REPORT ON FORM 10-KSB. REQUESTS SHOULD BE DIRECTED TO
INVESTOR RELATIONS, RSI HOLDINGS, INC., P. O. BOX 6847,
GREENVILLE, SOUTH CAROLINA 29606.
RSI HOLDINGS, INC. 28 East Court Street
Greenville, South Carolina 29601
20