<PAGE> 1
U. S. Securities and Exchange Commission
Washington, D. C. 20549
FORM 10 - QSB
(MARK ONE)
X Quarterly Report pursuant to Section 13 or 15 (d) of the
- -----
Securities Exchange Act of 1934
For the Quarterly Period Ended November 30, 1998 or
-----------------
Transition Report pursuant to Section 13 or 15 (d) of the
- -----
Securities Exchange Act of 1934
For the Transition Period From to
-------------- ---------------
COMMISSION FILE NUMBER 0-18091
RSI HOLDINGS, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
NORTH CAROLINA 56-1200363
- ---------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
28 East Court Street, P. O. Box 6847
Greenville, South Carolina 29606
- ---------------------------------------------------------------------------
(Address of principal executive offices)
(864) 271-7171
----------------------------------------------------------------------
Issuer's telephone number
Not Applicable
-----------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
<PAGE> 2
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Common Stock, $.01 Par Value - 7,903,322 shares outstanding as of January 8,
1999
Transitional Small Business Disclosure Format (check one):
Yes No X
------- -------
<PAGE> 3
INDEX
RSI HOLDINGS, INC.
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheet -- November 30, 1998 4
Condensed consolidated statement of operations -- Three
months ended November 30, 1998 and 1997 5
Condensed consolidated statement of cash flows -- Three
months ended November 30, 1998 and 1997 6
Notes to condensed consolidated financial statements --
November 30, 1998 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION 16
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Default 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 18
</TABLE>
3
<PAGE> 4
RSI Holdings, Inc.
Condensed Consolidated Balance Sheet (Unaudited)
November 30, 1998
<TABLE>
<S> <C>
Assets
Current Assets:
Cash $ 99,000
Notes receivable 591,000
Accounts receivable 28,000
Prepaid expenses 23,000
-----------
Total current assets 741,000
Property and equipment
Cost 254,000
Less accumulated depreciation 62,000
-----------
192,000
Other assets
Certificate of deposit 500,000
Other 12,000
-----------
512,000
-----------
$ 1,445,000
===========
Liabilities and shareholders' equity
Current liabilities:
Trade accounts payable $ 113,000
Accrued expenses 98,000
Notes payable 565,000
-----------
776,000
Deferred compensation 45,000
Long-term debt 80,000
Shareholders' equity:
Common Stock, $.01 par value-authorized
25,000,000 shares, issued and outstanding
7,903,322 shares at November 30, 1998 79,000
Excess of paid-in capital over par value 3,777,000
Deficit (3,312,000)
-----------
544,000
Contingencies (Note D)
-----------
$ 1,445,000
===========
</TABLE>
See accompanying notes.
4
<PAGE> 5
RSI Holdings, Inc.
Condensed Consolidated Statement of Operations (Unaudited)
Three Months ended November 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
Revenues:
Origination fees $ 238,000 $ 117,000
Gain on sale of loans 72,000 26,000
---------- -----------
Total revenues $ 310,000 $ 143,000
Expenses
Selling, general and administrative 481,000 $ 408,000
---------- -----------
Loss from operations (171,000) (265,000)
Other income (expense)
Interest income 29,000 15,000
Rental income on asset held for sale 0 6,000
Gain on sale of real estate 71,000 74,000
Interest expense (11,000) (4,000)
Cost to settle lawsuit 0 (42,000)
---------- -----------
Total other income (expense) 89,000 49,000
---------- -----------
Net loss $ (82,000) $ (216,000)
========== ===========
Net loss per share - basic and diluted $ (.01) $ (.03)
========== ===========
Weighted average number of shares outstanding 7,902,910 7,900,822
========== ===========
</TABLE>
See accompanying notes.
5
<PAGE> 6
RSI Holdings, Inc.
Condensed Consolidated Statement of Cash Flows (Unaudited)
Three Months ended November 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash provided by (used in) operating activities $ 50,000 $ (502,000)
Investing activities
Proceeds from sale of property 85,000 321,000
Purchase of equipment (25,000) (153,000)
Other 1,000 9,000
----------- -----------
Net cash provided by investing activities 61,000 177,000
----------- -----------
Financing activities
Advances under bank lines of credit 3,066,000 1,327,000
Payments on bank line of credit (3,236,000) (1,059,000)
Borrowings under long-term debt arrangements 80,000 0
Payment of deferred compensation (15,000) (14,000)
----------- -----------
Net cash (used in) provided by financing activities (105,000) 254,000
----------- -----------
Increase (decrease) in cash and cash equivalents 6,000 (71,000)
Cash and cash equivalents at beginning of year 93,000 759,000
----------- -----------
Cash and cash equivalents at end of quarter $ 99,000 $ 688,000
=========== ===========
</TABLE>
See accompanying notes.
6
<PAGE> 7
RSI Holdings, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note A - Going Concern
The accompanying condensed consolidated financial statements have been prepared
in conformity with generally accepted accounting principles, which contemplates
continuation of the Company as a going concern. The Company has incurred
operating losses and has a working capital deficit at November 30, 1998. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern.
The Company's ability to continue as a going concern is dependent upon
generating sufficient cash flow and obtaining additional sources of capital or
financing. The Estate of Buck Mickel, the former Chairman of the Board, loaned
the Company $80,000 during the three months ended November 30, 1998 and an
additional $170,000 during December 1998. In addition, the President and CEO
and his two adult siblings have guaranteed working capital lines of credit with
two banks aggregating $225,000. If the Company meets its business plan, it
believes that it will have sufficient funds to finance its operations through
the year ending August 31, 1999. The current business plan assumes that the
Company will meet certain of its operating goals, however there can be no
assurance that the Company will meet its operating goals through the year ended
August 31, 1999.
The condensed consolidated financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result
should the Company be unable to continue as a going concern.
Note B - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements at
November 30, 1998 have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10 - QSB and Item 310(b) of Regulation S-B. Accordingly,
they do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments including normal recurring accruals considered
necessary for a fair presentation have been included. Operating results for the
three months ended November 30, 1998 are not necessarily indicative of the
results that may be expected for the year ended August 31, 1999. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10 - KSB for the year
ended August 31, 1998.
Note C - Sale of Real Property
On November 19, 1997, the Company sold a parcel of real estate that was located
in Tampa, Florida for $425,000 less selling expenses of approximately $28,000.
The depreciated cost of the property was $248,000. The purchase price was paid
in a combination of cash and a $75,000 promissory note. The note was secured by
a second mortgage with interest computed at 8.5% per annum payable by the
purchaser over ten years. The gain on the sale was recognized under the cost
recovery method during fiscal 1998. The gain on sale that was recognized during
the three months ended November 30, 1997 was $74,000.
7
<PAGE> 8
During the first quarter of fiscal 1999 the remaining principal
balance of $71,000 was collected and accordingly the total principal balance
collected is included in the results of operations for the three months ended
November 30, 1998.
Note D - Contingencies
The Company is one of several defendants in a lawsuit filed in July
1993 claiming indemnification with respect to payments due and the cost of
performing certain covenants and obligations under a land lease agreement
allegedly in default. This agreement relates to a motel property previously
operated by the Company. During fiscal 1998, the Company recognized $42,000 in
connection with a settlement agreement and this case is now resolved in its
entirety.
8
<PAGE> 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
Special Cautionary Notice Regarding Forward-Looking Statements.
This Report on Form 10-QSB contains 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-QSB including, without limitation, those
factors discussed in the paragraph immediately preceding the heading "Liquidity
and Capital Resources" on pages 12 and 13 and otherwise herein. All written or
oral forward-looking statements attributable to the Company are expressly
qualified in their entirety by the Cautionary Statements.
Results of Operations
The Company currently conducts its consumer loan business through its
wholly-owned subsidiary, HomeAdd Financial Corporation ("HomeAdd"). The Company
has no other business operations. The following discussion of the results of
operations during the three months ended November 30, 1998 as compared to the
three months ended November 30, 1997 primarily relates to the consumer loan
business. This business was commenced during December of 1996. The goal of the
Company is to increase the loan volume of business throughout the Southeastern
United States to a profitable level. The Company can offer no assurance that
its goals will be accomplished.
Revenues were $310,000 during the three months ended November 30, 1998
and consisted of loan origination fees and gain from the sale of the loans
made. Comparable revenues during the three months ended November 30, 1997 were
$143,000. The increase in quarterly revenues during fiscal 1999 as compared to
fiscal 1998 is the result of the increase in loans originated.
Selling, general and administrative expenses were $481,000 during the
three months ended November 30, 1998 as compared to $408,000 during the three
months ended November 30, 1997. These expenses include expenses incurred by
HomeAdd of $394,000 during the three months ended November 30, 1998 as compared
to $293,000 during the three months ended November 30, 1997. The HomeAdd
expenses primarily relate to advertising, salaries, and various administrative
expenses of HomeAdd. The remaining general and administrative expenses
primarily consist of salaries, legal, audit and other administrative expenses
incurred by the Company. The increase in expenses of fiscal 1999 as compared to
fiscal 1998 were the result of HomeAdd's attempt to increase the volume of its
loan originations.
9
<PAGE> 10
The real property located in Tampa, Florida was sold during November
1997 for $425,000 less selling expenses of $28,625. The depreciated cost of the
property was $248,000. The purchase price was paid in a combination of cash and
a $75,000 promissory note. The note was secured by a second mortgage on the
property. The property was subject to a first mortgage with a bank that was
payable by the purchaser of the property in the amount of approximately
$303,000 at August 31, 1998. Because of the purchaser's relatively small equity
in the property, there was no assurance that the Company would be able to
recover the principal amount of the note if the purchaser were to default on
the note. Neither could there be any assurance that the Company would receive
timely payments on the note. Accordingly, gain to the extent of the proceeds
represented by the note receivable was deferred. The remaining gain on sale of
the property of $74,000 is included in the results of operations for the period
ended November 30, 1997.
During the three months ended November 30, 1998 the remaining
principal balance of $71,000 was collected and accordingly the total principal
balance collected is included in the results of operations for the period then
ended.
The results of operations for the three months ended November 30, 1997
included $42,000 accrued to settle the lawsuit relating to Holiday Inns, Inc.
litigation involving RSI Corporation and Sparjax Corporation. Under the terms
of an agreement in principle that was reached during December 1997, the Company
paid $42,000 during the three months ended November 30, 1998 to end claims by
all parties to this litigation against the Company, RSI Corporation or Sparjax
Corporation. For further discussion of the settlement of the lawsuit, reference
is made to Part II, Item 1, "Legal Proceedings," which is incorporated herein
by reference.
HomeAdd offers high loan-to-value loans ("HLTV Loans") to certain
qualified borrowers that permit the loan proceeds to be used for debt
consolidation and home improvements. Under the terms of these HLTV loans,
HomeAdd will make loans secured by a second or third mortgage in which the
total loans can be up to 125% of the estimated fair value of the real property.
A qualified borrower is required to be a homeowner with acceptable levels of
income and have an acceptable credit history. Substantially all of the loan
volume during the three months ended November 30, 1998 consisted of HLTV Loans.
The Company expects that most of the loans made during fiscal 1999 will be HLTV
Loans.
HomeAdd also offers Title I home improvement loans ("Title I Loans")
under the Title I program administrated by the Federal Housing Administration
("FHA"). HomeAdd was approved by FHA as a Title I lender during 1995. The Title
I program was established by Title I of the National Housing Act of 1934. Loans
made under the Title I program are 90% guaranteed by the United States
Department of Housing and Urban Development ("HUD"). In addition to the FHA
Title I license, HomeAdd has to apply for licenses to operate under the banking
laws of each State in which this business intends to operate. None of HomeAdd's
loan volume during the three months ended November 30, 1998 were Title I home
improvement loans. The Company does not expect Title I home improvement loans
to be a material portion of its business during fiscal 1999.
HomeAdd is currently authorized to operate under the laws of South
Carolina, North Carolina, Georgia, Kentucky and Florida. HomeAdd is subject to
ongoing monitoring by state banking authorities and the failure to comply with
applicable regulations could result in the forfeiture of licenses on which the
business is dependent.
10
<PAGE> 11
The Company sells substantially all of the loans it originates on a
non-recourse basis in the secondary market. The non-recourse basis means that
the Company represents that loans were properly documented and made in
accordance with applicable lending criteria, but that the purchaser of the
loans assumes the full credit risk. The Company's credit guidelines for the
Company's loans currently meet the underwriting criteria of the current loan
purchasers. During the three months ended November 30, 1998, the Company made
loans aggregating $2,931,000 as compared to loans aggregating $1,461,000 during
the three months ended November 30, 1997. Substantially all of the loans
outstanding at November 30, 1998 were sold on a non-recourse basis in the
secondary market during December of 1998.
As of November 30, 1998, HomeAdd had sixteen employees located in its
office in Greenville, South Carolina that includes sales, underwriting and
administrative personnel. During the three months ended November 30, 1998 the
Company solicited loans in South Carolina, North Carolina, Georgia, Kentucky
and the northern counties of Florida. The Company faces stiff competition in
these markets. The future plans of HomeAdd include plans to attempt to increase
its volume of loans through direct mail and other solicitations in certain
other Southeastern States. HomeAdd will apply for authorization to operate
under the banking laws of those states. Management of the Company has
determined that additional sales personnel should be added if it is to meet its
growth objectives. If HomeAdd achieves its budgeted operating goals, the
Company estimates that 23 employees will be required by HomeAdd at August 31,
1999. There is no assurance, however, that its direct mail and other
advertising will solicit sufficient responses in order for its operating goals
to be accomplished.
The consumer finance market is highly competitive and fragmented.
HomeAdd competes with a number of finance companies that provide financing to
individuals who may not have sufficient equity in their homes to qualify for
traditional second mortgage financing. HomeAdd also competes with established
home improvement lenders, other Title I lenders (many of whom are now making
HLTV Loans), existing mortgage brokers and bankers that offer multi-purpose
second mortgages. To a lesser extent, HomeAdd competes with commercial banks,
savings and loan associations, credit unions, insurance companies, and captive
finance arms of major manufacturing companies that may apply more traditional
lending criteria and require greater equity in the underlying real property
assets. Almost all of these competitors or potential competitors are
substantially larger and have significantly greater capital, experience and
other resources than the Company.
The Company expects that during the next twelve months the increase in
its business, if any, will be in HLTV Loans. Title I home improvement loans are
not expected to be a material factor in its business during the next twelve
months.
Debt consolidation and home equity loan volume generally are not
materially impacted by seasonal climate changes and, with the exclusion of
slowdowns during the holiday and vacation seasons, tends to be relatively
stable throughout the year.
HomeAdd attempts to sell, on a non-recourse basis, all of its loans on
the secondary market to wholesale buyers. HomeAdd does not have the capital
that would be necessary to make a significant volume of loans unless it is able
promptly to sell its loans on the secondary market. There can be no
11
<PAGE> 12
assurance that the secondary market for loans will continue to be available to
HomeAdd. Adverse changes in the secondary market could materially impair
HomeAdd's ability to originate and sell loans on a favorable or timely basis.
Delays in the sale of a loan pool beyond a quarter-end could result in greater
losses for such quarter. If HomeAdd is unable to sell its loans on the
secondary market, its ability to grow could be materially impaired and its
results of operations and financial condition could be materially adversely
affected.
During the three months ended November 30, 1998, many of the wholesale
buyers in this industry, including certain of the buyers of HomeAdd's loans,
have announced that they will no longer purchase loans on the secondary market.
The Company continues to have a secondary market in which to sell its loans,
but this adverse change in the secondary market has affected the amount of gain
that HomeAdd realized on its loans during the first quarter of 1999. See
Liquidity and Capital Resources - Capital Requirements for HomeAdd.
The Company had previously expected, based on its business plan, that
HomeAdd would operate at a modest profit during fiscal year 1999, however,
HomeAdd has experienced a decline in the response rate to its advertising
during the first quarter of fiscal 1999. Although HomeAdd is experiencing some
increase in the response rate during the second quarter of fiscal 1999,
HomeAdd's profitability depends upon a continued and dramatic increase in the
response rate during the remainder of fiscal 1999 over the response rate
experienced during the three months ended November 30, 1998. Management expects
that the Company as a whole will operate at a loss during fiscal 1999. The
foregoing are forward-looking statements and the Company cautions that there
can be no assurance that the goal of profitability can be achieved.
An important factor which could cause the Company's results to differ
materially from these current estimates is the adverse effect of the
deteriorating resale market for its loans as described in the preceding
paragraph. At this time, the Company is not aware of any reliable indications
regarding how long this adverse trend in the secondary market will continue, or
whether and when this trend may either improve or become more severe. Another
important factor which would cause the Company's results to differ materially
from these current estimates include lower origination volume due to real
estate market conditions that might affect the appraised values of the real
property that would be used as collateral for the loans that HomeAdd plans to
originate. HomeAdd's business might be reduced if values of the collateral
increase and HomeAdd's customers thereby qualify for more traditional sources
of credit such as banks. Rising property values also might lead to an increase
in prepayments which would reduce the profitability in the secondary market for
HomeAdd's loans and might have a negative impact on the ability of HomeAdd to
sell its loans. Another important factor is the adverse consequences of changes
in interest rate environment such as increases in rates that might reduce the
number of customers that would be willing to execute loans.
Other factors that could cause the Company's results to differ
materially from the forward-looking statement include, but are not limited to,
the following: changes in economic conditions which could (i) increase the
default rate for loans originated by the Company and adversely affect the
Company's ability to sell its loans and (ii) reduce the Company's potential
customer base by decreasing the credit worthiness of potential customers below
the minimum levels at which it is profitable for the Company to make and sell
loans; the limited operating history of HomeAdd (which has been in business
12
<PAGE> 13
only since November of 1995) available for reference in attempting to gauge the
prospects of the Company's lending business; inability to sell loans or the
loss of outside funding sources (see "Liquidity and Capital Resources" below),
either of which could severely and adversely affect the lending operations
because the Company does not have sufficient internal resources to finance a
substantial number of loans until their maturity; the adverse effects of
competition, particularly in light of the existing customer relationships and
greater capital, experience and other resources of the Company's competitors
and potential competitors, especially banks; changes in substance, enforcement
or interpretation of applicable federal and state laws and regulations, which
could impose requirements which the Company would be unable to meet; and the
loss of key executives which the Company might be unable to replace due its
limited number of personnel.
The accompanying consolidated financial statements have been prepared
assuming that RSI Holdings, Inc. will continue as a going concern. As more
fully described in Note 1 to the condensed consolidated financial statements,
the Company has incurred operating losses and has a working capital deficiency.
These conditions raise substantial doubt about the Company's ability to
continue as a going concern and it is apparent that the Company's ability to
continue as a going concern is dependent upon generating sufficient cash flow.
As discussed below in "Liquidity and Capital Resources - Debt Arrangements" the
Estate of Buck Mickel loaned the Company $80,000 during the three months ended
November 30, 1998 and an additional $170,000 during December 1998. In addition,
Buck A. Mickel, Charles C. Mickel and Minor M. Shaw have guaranteed working
capital lines of credit with two banks aggregating $225,000. If the Company
meets its business plan, it believes that it will have sufficient funds to
finance its operations through the year ending August 31, 1999. The current
business plan assumes that the Company will meet certain of its operating
goals, however there can be no assurance that the Company will meet its
operating goals.
Liquidity and Capital Resources
Anticipated Liquidity Requirements
As discussed below under "Cash and Cash Equivalents" and "Debt
Arrangements," the Company currently has substantial cash liquidity and,
although there can be no assurance in this regard, anticipates that such
capital resources will be sufficient to enable the Company to meet its
liquidity requirement during the next twelve months.
Refer to Item 1 of Part II, "Legal Proceedings" for a discussion of
the Company's contingent liabilities which discussion is incorporated herein by
reference.
Cash and Cash Equivalents
The Company had cash and cash equivalents in the amount of $99,000 as
of November 30, 1998. Cash and cash equivalents in excess of amounts required
for operations are invested in interest bearing accounts with a bank and may be
liquidated by the Company to meet its cash needs on a daily basis. The Company
earned $8,000 and $7,000 on its cash and cash equivalents and the restricted
investment described in the following paragraph during the three months ended
November 30, 1998 and 1997, respectively.
13
<PAGE> 14
Restricted Investment
The Company is required, as described in the following paragraph, to
maintain an investment in HomeAdd of $500,000. In compliance with this
agreement, at November 30, 1998, the assets of the Company included a
certificate of deposit with a face value of $500,000. The certificate of
deposit bears interest at 5.77% and matures on June 22, 1999.
Debt Arrangements
HomeAdd finances the loans made to third parties in connection with
its consumer finance business with borrowings from a warehouse line of credit
with a bank in the amount of $1,500,000. The loans made to third parties by
HomeAdd are collateral for this line of credit. This line of credit bears
interest at the bank's prime rate. Under the terms of the agreement the
aggregate amount outstanding on the line of credit may not exceed 90% of the
aggregate amount of customer loans disbursed and outstanding by HomeAdd. Also,
HomeAdd is required to repay any advances within 25 days of the date of the
advance and HomeAdd is required to maintain tangible net worth of at least
$500,000. See the paragraph below under "Capital Requirements for HomeAdd" for
the amount of net worth required by HUD. The bank also requires that this
tangible net worth include certain specified assets with maturity of five years
or less in the amount of $500,000. This line expires on December 31, 1999.
During August 1998 the Company executed a $75,000 working capital line
of credit with a bank and during December 1998 executed an additional working
capital line of credit with another bank in the amount of $150,000. These credit
facilities bear interest at the prime rate of the bank. The $75,000 credit
facility matures during August 1999 and the $150,000 credit facility matures in
January 2000. The terms of the $75,000 facility require that the principal
balance outstanding be reduced to zero for a period of at least 30 consecutive
days during the year, but the $150,000 facility contains no such provision. The
President and Chief Executive Officer of the Company and his two adult siblings
guarantee these credit facilities. These credit facilities have not been used as
of January 8, 1999.
The Estate of Buck Mickel, the former Chairman of the Board and Chief
Executive Officer of the Company, loaned the Company $250,000 bearing interest
at 8.5% per year payable quarterly ($80,000 during the three months ended
November 30, 1998 and $170,000 during December 1998). Proceeds from the loan
have been used for working capital and the principal is payable in ten years
from the date of the loan.
Capital Requirements for HomeAdd
HUD requires that HomeAdd have an adjusted net worth of at least
$250,000. The Company executed working capital lines of credit with two banks
and has received proceeds from the loans from the Estate of Buck Mickel as
described above. These sources of capital were executed in order to provide the
additional working capital that will be required by HomeAdd during fiscal 1999.
During the first quarter of fiscal 1999, HomeAdd has experienced a
decline in its loan originations as the result of the decline in the response
rate to its direct mail advertising efforts. It also has experienced a decline
in the revenues generated from the sale of its loans because of
14
<PAGE> 15
adverse market conditions. HomeAdd has experienced some improvements in the
response rate to its direct mail and other advertising efforts during December
of 1998 and early January of 1999, but there is no assurance that the present
demand for its loans will continue. HomeAdd is also unable to predict when or
if the adverse market conditions for the sale of its loans might improve
sufficiently to allow the Company to improve the amount of gains realized on
the sale of its loans. HomeAdd is dependent on the Company for additional
funding. The Company's resources are described in the preceding paragraphs.
Year 2000
Many existing hardware and software computer systems were designed to
accept only two-digit date entries for the year, assuming that the first two
digits of every year are "19." When confronted with a date in the year 2000 or
beyond, such systems may react by malfunctioning or failing entirely. The
Company has assessed key financial, informational and operational systems.
Management does not anticipate that the Company will encounter significant
operational issues relating to the Year 2000 problem for the following reasons.
Substantially all of the hardware and software computer systems as well as the
telephone systems of the Company and its operating subsidiary were purchased
during the fiscal year ended August 31, 1998. Because these systems were
developed or manufactured after the Year 2000 problem was recognized, the
Company currently believes that its hardware and software computer systems as
well as its telephone system are Year 2000 compliant. In order to assess and
evaluate its exposure to the Year 2000 problem, the Company has contacted most
of its suppliers of equipment and software described above for confirmation
that these systems are Year 2000 compliant. The Company has also contacted its
vendors for customer credit information and also the purchasers of its loans
for confirmation that they are or will be Year 2000 compliant.
The Company has not incurred any substantive Year 2000 cost and does
not anticipate any substantive Year 2000 costs in the future.
The Company has received assurances from many of its vendors and the
purchasers of its loans that no interruption will occur. While the Company can
receive assurances that no interruption will occur, the Company cannot ensure
that third parties will become compliant when promised and that the flow of
credit information or continued market for its loans will not be interrupted.
The inability of the Company to obtain credit information or to sell its loans
could have a material impact on the Company's operations.
In the event that the possible interruptions described above were to
occur, the Company would look to continue its operations by working with credit
information vendors and financial institutions not substantially affected by
the Year 2000 problem. In addition to the vendors and institutions with which
it currently does business, the Company is constantly looking at other vendors
that supply credit information and financial institutions to which it may sell
its loans.
15
<PAGE> 16
PART II. Other information
ITEM 1. Legal Proceedings
Holiday Inns, Inc. Litigation
On July 29, 1993, Holiday Inns, Inc. filed suit in the Circuit Court
of the Fourth Judicial Circuit for Duval County, Florida against several
defendants, including RSI Corporation (now known as Delta Woodside), the former
parent corporation of the Company, and Sparjax Corporation, a now-dissolved
subsidiary of RSI Corporation. In connection with the distribution of the
Company's common stock to the shareholders of RSI Corporation in 1989, the
Company agreed to indemnify RSI Corporation against certain potential
liabilities, including liability arising in connection with this lawsuit.
Holiday Inns seeks indemnification from RSI Corporation, Sparjax and other
subsequent lessees for potential liability arising from Holiday Inns'
obligations relating to a lease agreement allegedly in default under which
Holiday Inns was the original lessee.
All the parties to the litigation have agreed to a settlement pursuant
to which the Company agreed to pay $42,000 for complete release of any and all
claims relating to the subject property. The Company paid the $42,000
settlement in September 1998 and is currently awaiting final dismissal of the
lawsuit with prejudice.
ITEM 2. CHANGES IN SECURITIES*
ITEM 3. DEFAULTS UPON SENIOR SECURITIES*
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS*
ITEM 5. OTHER INFORMATION*
*Items 2, 3, 4 and 5 are not presented as they are not applicable or the
information required thereunder is substantially the same as information
previously reported.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits
<TABLE>
<S> <C>
3.1 Articles of Incorporation of RSI Holdings, Inc., as amended:
Incorporated by reference to Exhibit 3.2 and 3.2.2 to the
Registration Statement on Form S-4 of RSI Corporation and Porter
Brothers, Inc., File No. 33-30247 (the "Form S-4").
3.1.1 Articles of Amendment and Certificate of Reduction of Capital of
Porter Brothers, Inc.: Incorporated by reference to Exhibit 4.1
to the Form 8-K of the Registrant filed with the Securities and
Exchange Commission on November 28, 1989, File No. 0-7067.
3.2.1 By-laws of RSI Holdings, Inc., as amended: Incorporated by
reference to Exhibit 3.1.1 to the Form S-4.
3.2.2 Amendments to By-laws: Incorporated by reference to Exhibit 3.2.2
to the Form 10-KSB of the Registrant filed with the Securities
and Exchange Commission for the fiscal year ended August 31,
1996, File No. 0-18091.
</TABLE>
16
<PAGE> 17
<TABLE>
<S> <C>
4.1 See Exhibits 3.1, 3.1.1, 3.2.1 and 3.2.2.
4.1.1 Specimen of Certificate for RSI Holdings, Inc., common stock:
Incorporated by reference to Exhibit 4.1.2 to the Form S-4.
10.1 Loan commitment for line of credit dated August 25, 1998 by and
between the Company and Centura Bank.
10.2 Subordinated Promissory Notes numbered 1 through 25 issued by RSI
Holdings, Inc. payable to the order of the Estate of Buck Mickel.
The terms of each Note are identical to those set forth in the
exhibit except as to the date of the Note and the date of the
first interest payment, which are as set forth in the
accompanying schedule.
27 Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K
</TABLE>
There were no reports on Form 8-K filed during the fiscal quarter
ended November 30, 1998.
17
<PAGE> 18
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
RSI HOLDINGS, INC.
-----------------------------
January 14, 1999 /s/ Joe F. Ogburn
- ----------------- ------------------------------
(Date) Joe F. Ogburn,
Vice President and Treasurer
(Principal Accounting Officer)
18
<PAGE> 19
INDEX OF EXHIBITS
<TABLE>
<S> <C>
3.1 Articles of Incorporation of RSI Holdings, Inc., as amended:
Incorporated by reference to Exhibit 3.2 and 3.2.2 to the
Registration Statement on Form S-4 of RSI Corporation and Porter
Brothers, Inc., File No. 33-30247 (the "Form S-4").
3.1.1 Articles of Amendment and Certificate of Reduction of Capital of
Porter Brothers, Inc.: Incorporated by reference to Exhibit 4.1
to the Form 8-K of the Registrant filed with the Securities and
Exchange Commission on November 28, 1989, File No. 0-7067.
3.2.1 By-laws of RSI Holdings, Inc., as amended: Incorporated by
reference to Exhibit 3.1.1 to the Form S-4.
3.2.2 Amendments to By-laws: Incorporated by reference to Exhibit 3.2.2
to the Form 10-KSB of the Registrant filed with the Securities
and Exchange Commission for the fiscal year ended August 31,
1996, File No. 0-18091.
4.1 See Exhibits 3.1, 3.1.1, 3.2.1 and 3.2.2.
4.1.1 Specimen of Certificate for RSI Holdings, Inc., common stock:
Incorporated by reference to Exhibit 4.1.2 to the Form S-4.
10.1 Loan commitment for line of credit dated August 25, 1998 by and
between the Company and Centura Bank.
10.2 Subordinated Promissory Notes numbered 1 through 25 issued by RSI
Holdings, Inc. payable to the order of the Estate of Buck Mickel.
The terms of each Note are identical to those set forth in the
exhibit except as to the date of the Note and the date of the
first interest payment, which are as set forth in the
accompanying schedule.
27 Financial Data Schedule (electronic filing only)
</TABLE>
<PAGE> 1
EXHIBIT 10.1
<PAGE> 2
EXHIBIT 10.1
Centura
The Money Managers(R)
August 25, 1998
Mr. Buck A. Mickel
RSI Holdings, Inc.
102 West Marion Street
Shelby, North Carolina 28150
RE: LOAN COMMITMENT FOR LINE OF CREDIT
Dear Mr. Mickel:
Centura Bank (hereinafter referred to as the "Bank") is pleased to offer you
and your Corporation (hereinafter referred to as the "Borrower") this loan
commitment. The terms and conditions of this Commitment are as follows:
BORROWER: RSI Holdings, Inc.
LOAN AMOUNT: $75,000.00
LOAN FEE: $250.00 payable at closing.
TYPE OF LOAN: Revolving Line of Credit
INTEREST RATE: Interest will accrue on the outstanding principal balance of the
loan at the Bank's Prime Rate, with changes becoming effective on the day the
Prime Rate changes. Interest will be calculated on the basis of actual days
lapsed divided by 360 days.
PAYOUT REQUIREMENT: The principal balance on the loan must be reduced to a zero
balance for a period of at least 30 consecutive days during the year.
REPAYMENT TERMS: Interest on the outstanding principal balance will be due and
payable monthly. At maturity, the twelfth month from the note date, all unpaid
principal and all unpaid accrued interest will be due and payable in full.
COLLATERAL: This loan will be unsecured.
GUARANTY: As offered by you and accepted by us, a limited continuing guaranty
in the amount of $25,000.00 will be signed by: Buck A. Mickel, Charles C.
Mickel and Minor Mickel Shaw.
ASSIGNMENT: Neither this commitment, nor any interest in it may be assigned by
the Borrower nor by the Guarantor without the Bank's prior written approval.
The terms of this commitment are confidential. The Borrower and the Guarantor
agree not to disclose the contents of this loan commitment to any other lender.
LOAN APPLICATION: The issuance of this commitment is based upon the accuracy of
your representations and statements, any loan application and all additional
information, representations, exhibits and other matters submitted to the Bank
for its consideration. The Bank shall have the option to declare this
Commitment to be breached if there is a material adverse change in the business
or affairs of the Borrower or of the Guarantor.
<PAGE> 3
EXPIRATION OF COMMITMENT: This commitment will expire on September 18, 1998. If
not accepted by the Borrower and by the Guarantor in writing and received by
the undersigned by the expiration date, this Commitment expires with no further
obligation of the Bank.
LOAN CLOSING DATE: If the loan is not closed within 60 days from the date of
your acceptance, the Bank's obligation to fund the loan shall terminate.
LOAN DOCUMENTS: The terms of this commitment are conditioned upon the execution
of loan documentation in form and substance acceptable to the Bank's counsel.
Should the parties fail to agree on the terms of said documentation, neither
party shall have any further obligation to the other and this commitment shall
be null and void.
LOAN CLOSING COSTS: Whether or not the loan closes, the Borrower will be
responsible and liable for, and shall hold the Bank harmless from, and shall
pay, all costs and expenses incurred in conjunction with the loan
(pre-and-post-closing) including but not limited to: loan fees, title, hazard
and other insurance premiums, surveys, appraisals, brokerage commissions and
claims of brokerage, property, documentary stamps and intangible taxes,
attorney's fees and recording charges. The Borrower shall reimburse the Bank
for all such costs and expenses paid by the Bank.
FINANCIAL INFORMATION OF THE BORROWER AND THE GUARANTOR:
Until the loan is repaid in full, the Borrower and the Guarantor will be
obligated on a continuing basis to provide the Bank with such financial
information concerning the Borrower and the Guarantor as the Bank may request
from time to time.
Within 90 days following the Borrower's fiscal year end, the Borrower will
deliver to the Bank its financial statements (to include a balance sheet,
income statement and supporting schedules) prepared according to generally
accepted accounting principles.
The Guarantor will provide a verified personal financial statement to the Bank
when requested by the Bank, but at least annually.
The Borrower and the Guarantor will immediately inform the Bank of any material
change in the condition, financial or otherwise, of the Borrower or of the
Guarantor and of any actual or threatened litigation which might substantially
affect the condition, financial or otherwise, of the Borrower or of the
Guarantor.
LOAN PROVISION - YEAR 2000:
As a condition of this commitment, the Borrower represents and warrants (1)
that it is aware of the potential problems in computer hardware and software
systems relating to time and date coding, commonly referred to as Year 2000
vulnerability, and (2) that it has a plan or program in place under which all
of its systems will be designed to be used without loss or reduction of
capabilities prior to, during, and after the calendar year 2000, and (3) that
the Borrower's management and directors are aware of and have approved the
Borrower's plan. Closing of the loan under this commitment is conditioned upon
(1) a satisfactory evaluation by the Bank of the Borrower's Year 2000
compliance plan, (2) evidence of satisfactory progress toward timely completion
of that plan, (3) proof to the Bank's satisfaction that the Borrower's systems
will be Year 2000 compliant prior to January 1, 2000, and (4) receipt by the
Bank of such additional representations, warranties and documentation as the
Bank may deem necessary to ensure that the Borrower's systems will be and
remain Year 2000 compliant. In the event the Bank agrees to close the loan
before the Borrower is fully Year 2000 compliant, the
<PAGE> 4
Borrower shall continue satisfactory progress toward full compliance. At any
time during the term of the loan, if the Borrower fails to maintain progress
toward full Year 2000 compliance in a manner and on a schedule satisfactory to
the Bank, in its sole discretion, the Bank may declare the loan to be in
default and require the immediate payment of the outstanding principal,
interest and other amounts due.
OTHER CONDITIONS: While we intend to conform to our customary requirements for
this type of loan, this loan commitment letter is not intended to include all
of the requirements for the loan. We reserve the right to require additional
information, documentation, and the satisfaction of conditions we consider
appropriate or required to consummate the loan transaction.
If the terms and conditions outlined in this letter are acceptable, please
evidence your acceptance by signing and returning the original copy of this
letter to me. Unless I receive your written acceptance within the time
specified in this letter, your application and our loan approval will be
considered withdrawn.
I appreciate the opportunity to extend this lending commitment to you and I
hope you will permit me to assist you in satisfying your other financial goals.
I look forward to working with you in connection with this loan transaction and
please feel free to give me a call should you have any questions concerning
this loan commitment. My direct line is 704-480-5216.
Sincerely,
/s/ Phil Blanton
Phil Blanton
Financial Services Officer
ACCEPTANCE OF LOAN COMMITMENT:
Each of the undersigned hereby accepts the Loan Commitment set forth above,
subject to the terms and conditions set forth therein of, this 25th day of
August, 1998.
CORPORATE BORROWER
By: /s/ Buck A. Mickel, President
(CORPORATE SEAL)
Attest by: /s/ Joe F. Ogburn
Asst. Secretary
INDIVIDUAL GUARANTOR:
/s/ Buck A. Mickel
/s/ Charles C. Mickel
/s/ Minor Mickel Shaw
<PAGE> 1
EXHIBIT 10.2
<PAGE> 2
EXHIBIT 10.2
SUBORDINATED PROMISSORY NOTE
Note Number 1
Date of Note: October 15, 1998 Greenville, SC
Amount of Note: $10,000.00
For value received, RSI Holdings, Inc. promises to pay to the order of
the Estate of Buck Mickel the principal sum of TEN THOUSAND DOLLARS AND
NO/100THS ($10,000.00), together with interest on the outstanding principal
balance of this note from the date hereof at the rate of eight and one-half
percent (8.5%) per annum.
Interest only on the outstanding principal balance of this Note shall
be due and payable quarterly on the last day of each fiscal quarter beginning
on November 30, 1998 and continuing until that date which is ten years from the
date of this Note (the "Maturity Date"), at which time the entire outstanding
principal balance, together with all accrued and unpaid interest, shall be
immediately due and payable in full.
Payment of principal shall be due on the Maturity Date; provided,
however that RSI Holdings, Inc. may prepay the debt evidenced by this Note
without penalty, in whole or in part, at any time. Any such prepayments shall
be credited first to any accrued and unpaid interest and then to the
outstanding principal balance of this Note.
The principal amount of this Note is subject to the relevant terms of
the warehouse line of credit payable by HomeAdd Financial Corporation to First
Union National Bank, Greenville, South Carolina.
This Note may not be changed orally, but only by an agreement in
writing signed by the party against whom enforcement of any waiver, change,
modification or discharge is sought. This Note is intended as a contract under
and shall be construed and enforceable in accordance with the laws of the State
of South Carolina. The terms of this Note shall bind and inure to the benefit
of the respective successors, legal representatives and assigns, whether by
voluntary action of the parties or by operation of law, of RSI Holdings, Inc.
and the Estate of Buck Mickel.
RSI Holdings, Inc.
By: /s/ Joe F. Ogburn
Joe F. Ogburn, Treasurer
<PAGE> 3
Schedule A to Exhibit 10.2
<TABLE>
<CAPTION>
Note Date Date of First Interest Payment
<S> <C> <C>
1 October 15, 1998 November 30, 1998
2 October 15, 1998 November 30, 1998
3 October 15, 1998 November 30, 1998
4 November 13, 1998 November 30, 1998
5 November 13, 1998 November 30, 1998
6 November 13, 1998 November 30, 1998
7 November 13, 1998 November 30, 1998
8 November 13, 1998 November 30, 1998
9 December 15, 1998 February 28, 1999
10 December 15, 1998 February 28, 1999
11 December 15, 1998 February 28, 1999
12 December 15, 1998 February 28, 1999
13 December 15, 1998 February 28, 1999
14 December 15, 1998 February 28, 1999
15 December 15, 1998 February 28, 1999
16 December 15, 1998 February 28, 1999
17 December 15, 1998 February 28, 1999
18 December 15, 1998 February 28, 1999
19 December 15, 1998 February 28, 1999
20 December 15, 1998 February 28, 1999
21 December 15, 1998 February 28, 1999
22 December 15, 1998 February 28, 1999
23 December 15, 1998 February 28, 1999
24 December 15, 1998 February 28, 1999
25 December 15, 1998 February 28, 1999
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT NOVEMBER 30, 1998 AND THE CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED NOVEMBER 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 99,000
<SECURITIES> 0
<RECEIVABLES> 619,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 741,000
<PP&E> 254,000
<DEPRECIATION> 62,000
<TOTAL-ASSETS> 1,445,000
<CURRENT-LIABILITIES> 776,000
<BONDS> 80,000
0
0
<COMMON> 79,000
<OTHER-SE> 465,000
<TOTAL-LIABILITY-AND-EQUITY> 1,445,000
<SALES> 0
<TOTAL-REVENUES> 310,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 381,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,000
<INCOME-PRETAX> (82,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (82,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (82,000)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
