UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transaction period from _______ to _______
0-9295
-------------------------
Commission File Number
RCS HOLDINGS, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
COLORADO 84-0794604
- ------------------------------ --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation of organization)
8136 S. GRANT WAY
LITTLETON, COLORADO 80122
---------------------------------------- ------------
(Address of principle executive offices) (Zip Code)
(303) 798-6136
----------------------------------------------------
(Registrant's telephone number. Including area code)
WINCO PETROLEUM CORPORATION
- ------------------------------------------------------------------------
(Former name, former address, former fiscal year, if changed since last
report)
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 13,717,534
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ ]
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONTENTS
Consolidated Balance Sheets as of October 31, 2001
(unaudited) and April 30, 2001 2
Consolidated Statements of Operations and Comprehensive
Income (Loss) for the six months and three months ended
October 31, 2001 and 2000 (unaudited) 4
Consolidated Statements of Stockholders' Deficit for the
six months ended October 31, 2001 (unaudited) 6
Consolidated Statements of Cash Flows the six months
ended October 31, 2001 and 2000 (unaudited) 7
Notes to Consolidated Financial Statements (unaudited) 9
RCS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
=================================================================================================
OCTOBER 31, 2001
(UNAUDITED) APRIL 30, 2001
- -------------------------------------------------------------------------------------------------
ASSETS
CURRENT:
Cash and cash equivalents $ 57,426 $ 127,867
Investment in equity securities 3,250 2,938
Accounts receivable, less allowance of $700,000 and $450,000
for doubtful accounts 1,149,602 1,788,197
Prepaid expenses and other current assets 114,370 202,219
Income tax refund receivable 28,425 323,104
Deferred income tax asset 45,219 142,854
- -------------------------------------------------------------------------------------------------
Total current assets 1,398,292 2,587,179
- -------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT:
Office and computer equipment 1,436,361 1,505,208
Leasehold improvements 286,194 285,619
- -------------------------------------------------------------------------------------------------
1,722,555 1,790,827
Less accumulated depreciation and
amortization 787,182 628,719
- -------------------------------------------------------------------------------------------------
Net property and equipment 935,373 1,162,108
- -------------------------------------------------------------------------------------------------
OTHER ASSETS:
Cash surrender value 52,225 28,225
Deposits and other assets 68,183 118,825
- -------------------------------------------------------------------------------------------------
120,408 147,050
- -------------------------------------------------------------------------------------------------
$ 2,454,073 $ 3,896,337
=================================================================================================
See accompanying notes to consolidated financial statements.
2
RCS HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
=================================================================================================
OCTOBER 31, 2001
(UNAUDITED) APRIL 30, 2001
- -------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,075,616 $ 1,479,978
Accrued payroll, commissions and compensated absences 469,149 715,178
Payroll taxes and employee benefit plans payable 41,941 71,012
Deferred revenue 915,171 930,004
Note payable (Note 3) 720,000 1,200,000
Note payable - related party (Note 6) 352,531 -
Income taxes payable 14,168 131,374
- -------------------------------------------------------------------------------------------------
Total current liabilities 4,588,576 4,527,546
DEFERRED INCOME TAX LIABILITY 45,219 142,854
- -------------------------------------------------------------------------------------------------
Total liabilities 4,633,795 4,670,400
- -------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 5)
STOCKHOLDERS' DEFICIT:
Common stock, no par value, 50,000,000 shares authorized;
13,717,534 and 12,688,719 shares issued and
outstanding (Note 4) 366,811 358,352
Related party receivables (104,509) (272,366)
Accumulated other comprehensive income 349 38
Accumulated deficit (2,442,373) (860,087)
- -------------------------------------------------------------------------------------------------
Total stockholders' deficit (2,179,722) (774,063)
- -------------------------------------------------------------------------------------------------
$ 2,454,073 $ 3,896,337
=================================================================================================
See accompanying notes to consolidated financial statements.
3
RCS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(LOSS) FOR THE SIX MONTHS AND THREE MONTHS ENDED OCTOBER 31, 2001
AND 2000 (UNAUDITED)
==============================================================================================================
SIX MONTHS Six Months THREE MONTHS Three Months
ENDED Ended ENDED Ended
OCTOBER 31, 2001 October 31, 2000 OCTOBER 31, 2001 October 31, 2000
REVENUES:
Support, update, configuration
and training $ 5,038,723 $ 7,266,956 $ 2,525,860 $ 3,581,144
Broadband sales 970,849 4,227,565 363,235 2,641,158
Commissions - 1,049,473 - -
System sales - 1,739,414 - -
Other income 10,692 200 9,622 200
- --------------------------------------------------------------------------------------------------------------
Total revenues 6,020,264 14,283,608 2,898,717 6,222,502
COST OF REVENUES 3,898,338 10,304,862 1,826,173 4,135,300
- --------------------------------------------------------------------------------------------------------------
GROSS PROFIT 2,121,926 3,978,746 1,072,544 2,087,202
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 3,666,607 4,585,898 1,846,560 2,048,098
- --------------------------------------------------------------------------------------------------------------
OPERATING (LOSS) INCOME (1,545,681) (607,152) (774,016) 39,104
OTHER INCOME (EXPENSE):
Interest and investment income 4,307 21,793 327 10,886
Interest expense (40,912) (68,780) (19,740) (37,919)
- --------------------------------------------------------------------------------------------------------------
Total other income (expense) (36,605) (46,987) (19,413) (27,033)
- --------------------------------------------------------------------------------------------------------------
(LOSS) INCOME BEFORE INCOME TAX
(BENEFIT) EXPENSE (1,582,286) (654,139) (793,429) 12,071
INCOME TAX (BENEFIT) EXPENSE - (185,300) - 17,400
- --------------------------------------------------------------------------------------------------------------
NET LOSS (1,582,286) (468,839) (793,429) (5,329)
Other comprehensive income (loss),
net of income tax:
Unrealized holding gains 349 38 (115) 22
- --------------------------------------------------------------------------------------------------------------
COMPREHENSIVE LOSS $(1,581,937) $ (468,801) $ (793,544) $ (5,307)
==============================================================================================================
4
RCS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(LOSS) FOR THE SIX MONTHS AND THREE MONTHS ENDED OCTOBER 31, 2001
AND 2000 (UNAUDITED)
==============================================================================================================
Loss per common share -
basic and diluted:
Net loss $ (0.12) $ (0.04) $ (0.06) $ (0.01)
Weighted average common shares and
equivalents:
Basic 13,717,534 12,688,719 13,717,534 12,688,719
===========================================================================
Diluted 13,717,534 12,688,719 13,717,534 12,688,719
===========================================================================
See accompanying notes to consolidated financial statements.
5
RCS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(UNAUDITED)
============================================================================================================================
Accumulated
Common Stock Related Other
-------------------- Party Comprehensive Accumulated
SIX MONTHS ENDED OCTOBER 31, 2001 Shares Amount Receivables Income Deficit Total
============================================================================================================================
BALANCE, April 30, 2001 12,688,719 $ 358,352 $ (272,366) $ 38 $ (860,087) $ (774,063)
Net change in related party receivables - - 167,857 - - 167,857
Effect of merger with Winco Petroleum
Corporation (Note 4) 1,028,815 8,459 - - - 8,459
Comprehensive income (loss):
Net loss for the three months - - - - (1,582,286) (1,582,286)
Unrealized holding gains - - - 311 - 311
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, October 31, 2001 13,717,534 $ 366,811 $ (104,509) $ 349 $(2,442,373) $(2,179,722)
============================================================================================================================
See accompanying notes to consolidated financial statements.
6
RCS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
=================================================================================================
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
SIX MONTHS ENDED OCTOBER 31, 2001 2000
- -------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net loss $ (1,582,286) $ (468,839)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 183,578 159,195
Increase in reserve for doubtful accounts 250,000 -
Stock issued for services 8,459 -
Realized gain on investment holdings - 30
Loss on sale of property and equipment 2,895 -
Interest income recorded as note receivable - (7,544)
Deferred income taxes - (34,160)
Changes in operating assets and liabilities:
Accounts receivable 388,595 796,170
Commissions receivable - 593,827
Related party receivables - 980
Inventories - 90,575
Income taxes refundable and payable 177,473 (151,200)
Prepaid expenses and other current assets 87,849 542
Other assets 50,000 -
Accounts payable and accrued expenses 595,636 (600,405)
Accrued payroll, commissions, compensated absences, payroll
taxes and employee benefit plans payable (275,100) (500,335)
Deferred revenue (14,833) (298,541)
- -------------------------------------------------------------------------------------------------
Net cash used in operating activities (127,734) (419,705)
- -------------------------------------------------------------------------------------------------
7
RCS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)(CONTINUED)
=================================================================================================
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
SIX MONTHS ENDED OCTOBER 31, 2001 2000
- -------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 53,442 -
Purchase of property and equipment (12,538) (439,329)
Increase in cash surrender value (24,000) -
Additions to deposits and other assets - (58,636)
- -------------------------------------------------------------------------------------------------
Net cash provided by (used in) innvesting activities 16,904 (497,965)
- -------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from note payable - 700,000
Payments on note payable (480,000) -
Proceeds from note payable - related party 372,531 -
Payments on note payable - related party (20,000) -
Advances to related parties - (140,500)
Payments received from related parties 167,858 200,000
- -------------------------------------------------------------------------------------------------
Net cash provided by financing activities 40,389 759,500
- -------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (70,441) (158,170)
CASH AND CASH EQUIVALENTS, at beginning of period 127,867 441,318
- -------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, at end of period $ 57,426 $ 283,148
=================================================================================================
See accompanying notes to consolidated financial statements.
8
RCS HOLDINGS, INC.
NOTES
=========================================================================
1. BASIS OF The accompanying consolidated financial
PRESENTATION statements of RCS Holdings, Inc. (f/k/a Winco
Petroleum Corporation the "Company") include the
accounts of Rush Creek Solutions, Inc. (f/k/a
Business Products, Inc.), and its wholly-owned
subsidiary, and have been prepared pursuant to
the rules of the Securities and Exchange
Commission for Quarterly reports on Form 10-QSB
and do not include all of the information and
footnotes required by accounting principles
generally accepted in the United States of
America. These statements should be read in
conjunction with the Company's audited financial
statements and notes thereto for the year ended
April 30, 2001 included in the Form 8-K/A filed
with the Securities and Exchange Commission on
October 16, 2001.
In the opinion of management, all adjustments
considered necessary for a fair presentation have
been included consisting only of normal recurring
accruals. Operating results for the six-month
period ended October 31, 2001 are not necessarily
indicative of the results that may be expected
for the year ended April 30, 2002.
Certain reclassifications have been made to the
prior period presentations in order to conform to
the current presentation.
2. GOING CONCERN The consolidated financial statements have been
AND MANAGEMENT prepared assuming the Company will continue as a
PLANS going concern. The Company incurred losses
totaling $1,707,132 during the year ended April
30, 2001, and has incurred losses of $1,582,286
for the six months ended October 31, 2001,
resulting in an accumulated stockholders' deficit
of $2,442,373 at October 31, 2001. As of October
31, 2001, the Company had a working capital
deficiency of $3,190,284.
Management has established plans to improve the
Company's operating performance in fiscal 2002.
These plans include the reduction of labor costs
through layoffs and increased utilization of
remaining resources. The Company has also
discontinued operations in specific activities
determined to be unprofitable. In addition, the
Company has terminated operating equipment leases
related to unprofitable activities.
As of October 31, 2001, the Company has reduced
its short-term bank debt by $480,000 to an
outstanding balance of $720,000. The Company is
exploring additional sources of debt financing to
satisfy its current operational requirements, and
is currently contemplating additional private
placements of debt and equity, under the most
favorable terms available.
9
RCS HOLDINGS, INC.
NOTES
(CONTINUED)
=========================================================================
There can be no assurance that the operating
funds required during the next twelve months or
thereafter can be generated from operations or
that if such required funds are not internally
generated, that funds will be available from
external sources such as debt or equity
financings or other potential sources. The lack
of additional capital resulting from the
inability to generate cash flow from operations
or the inability to raise capital from external
sources would force the Company to substantially
curtail or cease operations and would, therefore,
have a material adverse effect on its business.
Further, there can be no assurance that any such
required funds, if available, will be available
on acceptable terms or that they will not have a
significantly dilutive effect on the Company's
existing stockholders.
These conditions raise substantial doubt about
the Company's ability to continue as a going
concern as expressed in the Report of Independent
Auditors included in the Company's audited
financial statements for the fiscal year ended
April 30, 2001. The Consolidated Financial
Statements do not contain any adjustments that
might result from the outcome of this
uncertainty.
3. NOTE PAYABLE The Company's short-term obligation consists of a
bank promissory note payable for borrowings. The
amount payable under the note agreement was
$720,000 at October 31, 2001 and $1,200,000 at
April 30, 2001. The maximum availability under
the note is $1,500,000. The original note
matured and was renewed and extended most
recently until July 31, 2001. The Company is
currently in negotiations with the bank to renew
the promissory note, which was paid down to
$630,550 as of December 7, 2001. It is expected
that the note will be renewed as a three-year
term loan, reviewed every six months by the bank.
The loan is expected to require monthly payments
of principal and interest under a three-year
payment schedule, with a second deed of trust on
the building at 8136 S. Grant Way pledged as
collateral support for the loan. However, there
can be no assurance that the bank debt will be
renewed or that these will be the terms upon
which the bank debt will be renewed.
Under the current note agreement, interest is
payable monthly at the prime rate charged by
Wells Fargo Bank Colorado, N.A, 7.50% at April
30, 2001 and 9.00% at April 30, 2000. The note
is secured by accounts receivable and general
intangibles of the Company and is guaranteed by
the Company's President.
The current agreement contains loan covenants
that require the Company to provide monthly
accounts receivable aging, annual and quarterly
Company financial statements, and annual personal
financial statements and tax returns of the
guarantor. The loan requires the Company to
annually "rest" the loan for 60 days with a zero
balance. The Company was in compliance with
these covenants, except for the covenant to
"rest" the line for 60 days by April 30, 2001,
which the Company was in violation of at April
30, 2001. The Company is currently in
negotiations with the bank to obtain a waiver for
the loan covenant violation.
10
RCS HOLDINGS, INC.
NOTES
(CONTINUED)
=========================================================================
4. WINCO MERGER On August 18, 2000, Business Products, Inc.
("BPI") and its stockholders entered into a
merger agreement with Winco Petroleum Corporation
("Winco"). The merger closed on July 31, 2001.
Under the terms of the merger agreement, Winco
created Winco Merger Corporation ("WMC") as a
wholly owned subsidiary of Winco. In order to
complete the merger, BPI merged into WMC and WMC
became the surviving entity. Winco changed its
name on August 13, 2001 to RCS Holdings, Inc.
(the "Company"). WMC changed its name to Rush
Creek Solutions, Inc. on September 6, 2001.
BPI's stockholders received approximately 92.5%
of the outstanding Winco common stock (12,688,719
shares). The merger has been accounted for as a
reverse acquisition. Under this accounting
treatment, BPI is deemed, for accounting
purposes, to be the acquirer and Winco the
acquired entity. Stockholders of Winco have
retained 1,028,815 shares of the outstanding
common stock of 13,717,534 shares after the
merger.
As Winco was a public shell, the transaction was
accounted for as a recapitalization.
Accordingly, the pro forma disclosures required
by APB No. 16 are not presented.
5. LITIGATION The Company may be engaged in various litigation
matters from time to time in the ordinary course
of business. A lawsuit has been filed for
discrimination and wrongful termination
employment issues against the Company for
incidents, which arose, in the normal course of
business. In the opinion of management and legal
counsel, the outcome of the lawsuit now pending
is not likely to have a material adverse effect
on the Company's financial position, liquidity or
operating results.
On September 18, 2001, a complaint was filed
against the Company that alleges destruction of
personal property, breach of warranty, negligent
performance of services and violation of the
Washington Consumer Protection Act. The Company
intends to vigorously contest the complaint. In
addition, the Company's insurance carrier has
agreed to defend the Company in the matter under
a full reservation of rights. In the opinion of
management and legal counsel, the outcome of this
matter is not likely to have a material adverse
effect on the Company's financial position,
liquidity or operating results.
6. RELATED PARTY ADVANCES AND RECEIVABLES
TRANSACTIONS
The Company has receivables from two entities
with common ownership, E3SI, Inc. (46% owned by
the Company's President) and 8136 S. Grant Way,
LLC (80% owned by the Company's President) for
legal expenses paid on behalf of these entities.
The amounts receivable which are classified for
financial reporting purposes in stockholders'
equity are as follows:
11
RCS HOLDINGS, INC.
NOTES
(CONTINUED)
=========================================================================
OCTOBER 31, 2001 April 30, 2001
-------------------------------------------------------------------
Advances to Officers $ - $ 166,230
Related Party Receivables:
E3SI, Inc. 77,869 77,869
8136 S. Grant Way, LLC 4,834 4,834
Interest Receivable: 21,806 23,433
-------------------------------------------------------------------
Total related party receivables $ 104,509 $ 272,366
===================================================================
On August 16, 2001, the President repaid the
advances of $166,230 plus interest in the amount
of $6,299.
NOTES PAYABLE
On August 3, 2001, the Company borrowed $190,000
from the Company's President, evidenced by a note
payable on demand bearing interest at 8%.
Payments on the note were made to the Company's
President on October 5, 2001 in the amount of
$10,000 and October 21, 2001 in the amount of
$10,000. The remaining balance on the note is
$170,000 at October 31, 2001.
On August 16, 2001, the Company borrowed $102,531
from the Company's President, evidenced by a note
payable on demand bearing interest at 8%.
On October 12, 2001, the Company borrowed $80,000
from the Company's President, evidenced by a note
payable on demand bearing interest at 8%.
Included in accounts payable and accrued expenses
at October 31, 2001 is $5,687 of accrued interest
due under these notes payable.
7. SEGMENT Results of operations of the two segments,
INFORMATION consulting services and broadband services, for
the six and three months ended October 31, 2001
and 2000 are shown below.
12
RCS HOLDINGS, INC.
NOTES
(CONTINUED)
=========================================================================
CONSULTING SERVICES The Company provides a wide
variety of interrelated services to its
customers, including customer relationship
management, web development, project management
services, engineering, staffing services and life
cycle services, which previously included sales
of systems to those customers and currently is
directed toward assisting the customer obtain the
right technology products from outside vendors
with Company assistance in the acquisition
process, (procurement services) and also includes
configuration, deployment, maintenance and
disposal services.
BROADBAND SERVICES The Company provides various
services to its customers related to commercial
and residential installation of high-speed
internet access through cable and DSL lines.
The Company's reportable operating segments have
been determined in accordance with the Company's
internal management structure, which is organized
based on operating activities. The Company
evaluates performance based upon several factors,
of which the primary financial measure is
segment-operating income.
SIX MONTHS ENDED OCTOBER 31, 2001 2000
-------------------------------------------------------------------
Revenues:
Consulting services $ 5,049,415 $10,056,043
Broadband services 970,849 4,227,565
-------------------------------
$ 6,020,264 $14,283,608
===============================
Operating loss:
Consulting services $ (207,860) $ (378,627)
Broadband services (1,337,821) (228,525)
-------------------------------
$(1,545,681) $ (607,152)
===============================
Depreciation and amortization:
Consulting services $ 159,221 $ 147,480
Broadband services 24,357 11,715
-------------------------------
$ 183,578 $ 159,195
===============================
Expenditures for additions and long-
lived assets:
Consulting services $ 12,538 $ 363,641
Broadband services - 75,688
-------------------------------
$ 12,538 $ 439,329
===============================
13
RCS HOLDINGS, INC.
NOTES
(CONTINUED)
=========================================================================
THREE MONTHS ENDED OCTOBER 31, 2001 2000
-------------------------------------------------------------------
Revenues:
Consulting services $2,535,482 $3,581,344
Broadband services 363,235 2,641,158
-------------------------------
$2,898,717 $6,222,502
===============================
Operating income (loss):
Consulting services $ (137,195) $ 195,434
Broadband services (636,821) (156,330)
-------------------------------
$ (774,016) $ 39,104
===============================
Depreciation and amortization:
Consulting services $ 76,669 $ 80,326
Broadband services 12,179 5,858
-------------------------------
$ 88,848 $ 86,184
===============================
Expenditures for additions and long-
lived assets:
Consulting services $ 5,515 $ 109,747
Broadband services - -
-------------------------------
$ 5,515 $ 109,747
===============================
8. SUPPLEMENTAL SIX MONTHS ENDED OCTOBER 31, 2001 2000
DISCLOSURE OF ===================================================================
CASH FLOW
INFORMATION
Cash paid during the period for:
Interest $ 18,816 $ 64,704
===================================================================
Income tax refund, net of income
taxes paid $ (185,244) $ -
===================================================================
14
RCS HOLDINGS, INC.
NOTES
(CONTINUED)
=========================================================================
Non-Cash Investing and Financing Activities:
Accrued rent due officer applied
against officers advances $ - $ 111,500
===================================================================
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.
RESULTS OF OPERATIONS.
SIX MONTHS ENDED OCTOBER 31, 2001 COMPARED TO THE SIX MONTHS ENDED
OCTOBER 31, 2000.
For the six months ended October 31, 2001, the Company reported a net
loss of approximately $1,582,300 as compared to a net loss for the six
months ended October 31, 2000 of $468,800.
Revenue related to support, configuration and training sales decreased
from $7,267,000 for the six months ended October 31, 2000 to $5,038,700 for
the six months ended October 31, 2001. The Company has experienced a
reduction in demand for consulting services as a result of general economic
conditions in the six months ended October 31, 2001. Broadband revenue
decreased from $4,227,600 for the six months ended October 31, 2000 to
$970,800 for the six months ended October 31, 2001. The Company provided
broadband services for a major customer under a contract, which was
cancelled in August 2001.
In the six months ended October 31, 2000, the Company reported
approximately $2,788,900 from hardware sales and related commissions.
During the six months ended October 31, 2000, the Company made a strategic
decision to discontinue the business of hardware sales, and consequently
had no revenue from this business for the six months ended October 31,
2001.
Cost of revenue decreased from $10,304,900 for the six months ended
October 31, 2000 to $3,898,300 for the six months ended October 31, 2001,
primarily due to reductions in labor costs of $3,726,800 and resale
merchandise of $2,121,540. Gross margins increased from 28% to 35% for
the respective periods. The increase in gross margin results from the
Company's shifting its strategic focus from lower margin hardware sales to
higher margin consulting services and increased utilization of remaining
personnel.
Selling, general and administrative expenses decreased from $4,585,900
for the six months ended October 31, 2000 to $3,666,600 for the six months
ended October 31, 2001. Although administrative salaries increased by
$192,100 from the six months ended October 31, 2000 for the same period in
2001, the increase was more than offset by decreases in sales labor costs
of $770,900, office and telephone expenses of $378,400, and employer 401(k)
contributions of $116,100.
For the six months ended October 31, 2001, the Company recognized no
income tax benefit from the reported operating loss due to the uncertainty
of future profits necessary to realize the income tax benefit. The Company
reported an income tax benefit of $185,300 for the six months ended October
31, 2000.
THREE MONTHS ENDED OCTOBER 31, 2001 COMPARED TO THE THREE MONTHS ENDED
OCTOBER 31, 2000.
For the three months ended October 31, 2001, the Company reported a
net loss of approximately $793,400 as compared to a net loss of $5,300 for
the three months ended October 31, 2000.
Total revenue decreased from approximately $6,222,500 for the three
months ended October 31, 2000 to $2,898,700 for the three months ended
October 31, 2001. The decrease was a result of a reduction in broadband
revenues of $2,277,900 and a reduction in consulting services revenue of
$1,125,300. The Company was providing broadband services under a contract
with a major customer which terminated in August of 2001. General economic
turndown in the technology consulting industry was the major cause of the
reduction in consulting service revenue.
16
Cost of revenues decreased from $4,135,300 to $1,826,200 for the three
months ended October 31, 2000 to the three months ended October 31, 2001
due to reductions in labor costs of $2,159,300. Gross margins increased
from 34% to 37% for the respective periods due to personnel reductions and
increased utilization of remaining personnel resources.
For the three months ended October 31, 2001, selling, general and
administrative expenses were $1,846,600 compared to $2,048,100 for the
three months ended October 31, 2000. The decrease resulted from reductions
in sales salaries of $321,700, office and telephone expenses of $141,200,
and outside professional services of $115,700, along with increases in bad
debt expense of $250,000 and administrative salaries of $138,100. Due to
deteriorating economic conditions during the three months ended October 31,
2001, the Company increased its allowance for uncollectible accounts
receivable by $250,000 which was reflected in the increased bad debt
expense.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 2001, the Company had $57,426 of cash and cash
equivalents and had a working capital deficiency of $3,190,284.
For the six months ended October 31, 2001 net cash used in operations
was $127,700 compared to net cash used in operations of $419,700 for the
six months ended October 31, 2000. In the six months ended October 31,
2001, cash was used to decrease payroll-related liabilities in the amount
of $275,100 and cash was provided by a reduction in accounts receivable of
$388,600 and an increase in accounts payable of $595,600. For the six
months ended October 31, 2000, cash was used primarily to decrease accounts
payable by $600,400, to decrease payroll-related liabilities by $500,300
and to reduce deferred revenue by $298,500.
Net cash provided by investing activities for the six months ended
October 31, 2001 was $16,900, primarily the result of sales of property and
equipment of $53,400, purchases of property and equipment of $12,500, and
increases in insurance cash value of $24,000. In the six months ended
October 31, 2000, net cash used in investing activities was $498,000,
primarily to purchase fixed assets.
In the six months ended October 31, 2001, financing activities
provided net cash of $40,400, resulting primarily from cash provided by
proceeds of notes to the Company's president of $372,500, payments received
on related party advances of $167,900, and payments made on the bank note
payable of $480,000. During the six months ended October 31, 2000,
financing activities provided net cash of $759,500 from bank note proceeds
of $700,000, payments received on related party advances of $200,000,
offset by advances made to related parties of $140,500.
The Company is currently in negotiations with the Wells Fargo Bank to
restructure the remaining balance on the bank loan. Since October 31,
2001, additional payments have been made to reduce the loan balance to
approximately $630,000. It is anticipated that the loan will be extended
in six-month increments and amortized with monthly payments over a three-
year term.
FINANCIAL CONDITION
The consolidated financial statements have been prepared assuming the
Company will continue as a going concern. The Company incurred losses
totaling $1,707,132 during the year ended April 30, 2001, and has incurred
losses of $1,582,286 for the six months ended October 31, 2001, resulting
in an accumulated stockholders' deficit of $2,442,373 at October 31, 2001.
As of October 31, 2001, the Company had a working capital deficiency of
$3,190,284.
Management has established plans to improve the Company's operating
performance in fiscal 2002. These plans include the reduction of labor
costs through layoffs and increased utilization of remaining resources.
The
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Company has also discontinued operations in specific activities determined
to be unprofitable. In addition, the Company has terminated operating
equipment leases related to unprofitable activities.
As of October 31, 2001, the Company has reduced its short-term bank
debt by $480,000 to an outstanding balance of $720,000. The Company is
exploring additional sources of debt financing to satisfy its current
operational requirements, and is currently contemplating additional private
placements of debt and equity, under the most favorable terms available.
There can be no assurance that the operating funds required during the
next twelve months or thereafter can be generated from operations or that
if such required funds are not internally generated, that funds will be
available from external sources such as debt or equity financings or other
potential sources. The lack of additional capital resulting from the
inability to generate cash flow from operations or the inability to raise
capital from external sources would force the Company to substantially
curtail or cease operations and would, therefore, have a material adverse
effect on its business. Further, there can be no assurance that any such
required funds, if available, will be available on acceptable terms or that
they will not have a significantly dilutive effect on the Company's
existing stockholders.
These conditions raise substantial doubt about the Company's ability
to continue as a going concern as expressed in the Report of Independent
Auditors included in the Company's audited financial statements for the
fiscal year ended April 30, 2001. The Consolidated Financial Statements do
not contain any adjustments that might result from the outcome of this
uncertainty.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB")
finalized Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 requires the use of the purchase method of
accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS
No. 141 also requires that companies recognize acquired intangible assets
apart from goodwill if the acquired intangible assets meet certain criteria
and, upon adoption of SFAS No. 142, that companies reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS No.
141. SFAS No. 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least
annually. In addition, SFAS No. 142 requires that companies identify
reporting units for the purposes of assessing potential future impairments
of goodwill, reassess the useful lives of other existing recognized
intangible assets, and cease amortization of intangible assets with and
indefinite useful life. An intangible asset with an indefinite useful life
should be tested for impairment in accordance with the guidance in SFAS No.
142. This Statement is effective May 1, 2002 for the Company. The Company
has not assessed the impact of these Statements on its consolidated
financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires the fair value of a
liability for an asset retirement obligation to be recognized in the period
in which it is incurred if a reasonable estimate of fair value can be made.
The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. SFAS No. 143 is effective June
30, 2003 for the Company. The Company believes the adoption of this
statement will have no material impact on its consolidated financial
statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair
value, less cost to sell, whether reported in continuing operations or in
discontinued operations. Therefore, discontinued operations will no longer
be measured at net realizable value or include amounts for operating losses
that have not yet occurred. SFAS 144 is effective for financial statements
issued for fiscal years beginning after December 15, 2001 and, generally,
are to be applied prospectively.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In September 2001, Sweet Entertainment filed a complaint against the
Company's subsidiary, Rush Creek Solutions, Inc. that alleges that Rush
Creek Solutions tortuously damaged a number of Sweet Entertainment's
internet servers in the course of packaging and shipping those servers to
Seattle, Washington. Sweet Entertainment states various causes of action
against Rush Creek Solutions, including destruction of property, breach of
warranty, negligence and violations of the Washington Consumer Protection
Act. Sweet Entertainment claims actual damages of approximately $150,000
and consequential damages (due to lost business from unavailability of the
servers) of $3,000,000. Rush Creek Solutions' insurance carrier, St. Paul
Mercury Insurance Company, is defending this action under a reservation of
rights.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of October 31, 2001, the Company was in default on its payments
to a bank under a promissory note payable. The Company is currently in
negotiations with the bank to renew the note as a term loan and to obtain
a waiver for the loan covenant violation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
On November 1, 2001, the Company held a special meeting of its
shareholders. At this meeting Michael G. St. John, David A. Zeleniak,
William Dews and Scott Swenson were elected as directors to hold office
until the next annual meeting. Also at the meeting, the shareholders voted
on proposals regarding an amendment and restatement to the Company's
articles of incorporation, an employee stock option plan and the
appointment of independent auditors. The vote on these proposals was as
follows:
PROPOSAL FOR AGAINST ABSTAIN
- -------- --- ------- -------
Slate of directors 12,596,932 2,011 1,353
Amendment and Restatement of 12,443,698 2,735 1,040
Articles of Incorporation
Employee Stock Option Plan 12,417,619 6,904 2,950
Appointment of BDO Seidman, LLP 12,596,928 1,133 2,235
as independent auditors
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) None
(b) During the quarter for which this Quarterly Report on Form 10-QSB
is being filed, the following Current Reports on Form 8-K were filed:
* Form 8-K dated August 15, 2001 reporting Item 1, Changes in
Control of Registrant, Item 2, Acquisition or Disposition of
Assets, Item 4, Changes in Registrant's Certifying
Accountant, Item 7, Financial Statements and Exhibits, and
Item 8. Change in Fiscal Year.
* Form 8-KA dated October 16, 2001 reporting Item 5, Other
Events and Item 7, Financial Statements and Exhibits. The
financial statements include: Business Products, Inc. d/b/a
Rush Creek Solutions, Inc. (i) Report of Independent
Auditors, (ii) Consolidated Balance Sheets as of April 30,
2001 and 2000, (iii) Consolidated Statements of Operations
for the years ended April 30, 2001, 2000 and 1999, (iv)
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended April 30, 2001, 2000 and 1999, (v)
Consolidated Statements of Cash Flows for the years ended
April 30, 2001, 2000 and 1999, and (vi) Notes to
Consolidated Financial Statements.
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Also filed were the following unaudited interim financial
statements: Winco Petroleum Corporation (i) Consolidated
Balance Sheet as of July 31, 2001, (ii) Consolidated
Statements of Operations for the three months ended July 31,
2001 and 2000, (iii) Consolidated Statement of Stockholders'
Deficit for the three months ended July 31, 2001, (iv)
Consolidated Statements of Cash Flows for the three months
ended July 31, 2001 and 2000, and (v) Notes to the
Consolidated Financial Statements.
Also filed were RCS Holdings Inc.'s (f/k/a Winco Petroleum
Corporation) Unaudited Pro Forma Condensed Combined Balance
Sheet as of July 31, 2001, Unaudited Pro Forma Condensed
Combined Statements of Operations for the three months ended
July 31, 2001 and the years ended April 30, 2001 and the
notes thereto.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RCS HOLDINGS, INC.
Date: December 14, 2001 /s/ MICHAEL G. ST. JOHN
-------------------------------------------
Michael G. St. John, President
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