UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2002.
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________________ to _________________
Commission file number: 0-30463
R-Tec Holding, Inc.
[Exact name of business issuer in its charter]
Idaho 82-0515707
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
1471 E. Commercial Ave., Meridian, Idaho 83642
(Address of principal executive offices) (Zip Code)
Issuers Telephone Number: (208) 887-0953 Fax : (208) 888-1757
The number of shares of common stock outstanding as of June 30, 2002, is
21,025,005
Transitional Small Business Disclosure Format (Check one): Yes [_] No [X]
PART I - FINANCIAL INFORMATION
Forward Looking Statements and Risk Factors
This form 10-QSB contains certain forward-looking statements that are
based on management's current expectations. The Company has identified risk
factors that could cause actual results to differ substantially from the
forward-looking statements. These risk factors include, but are not limited to:
general economic conditions, current industry specific trends, variability in
time line of new product developments, new product acceptance, difficulties in
manufacturing new products in large volume, economic viability of our customers
and vendors, changes in legislation, the ability to obtain adequate capital
funding for product development and expansion, and the availability of qualified
employees.
Item 1. Financial Statements:
The following financial statements are filed as part of this report:
The Consolidated Financial Statements of the Company for the three months
and six months ended June 30, 2002 and 2001.
Item 2. Management's Discussion and Analysis or Plan of Operation:
Financial Results of Operations:
Revenues have remained static as the technology markets continue to be
sluggish through the second quarter of 2002. The Company's major customers are
technology based. For engineered automation sales, reductions in capital
equipment budgets among the Company's customers have impacted larger dollar
orders for new designs and repeat orders for existing designs. The Company does
feel that quoting opportunities have increased marginally in the second quarter
of 2002 from the first quarter of 2002. To the extent this trend in quoting
continues, the Company would expect increases in revenues showing up in the
third quarter as most engineered automation projects extend from one month to
six months. The Company has not seen a substantial change in quoting
opportunities or booked sales for its IC technologies, including the proprietary
GCI(TM) product lines and corresponding sockets from the first quarter of 2002
to the second quarter respectively.
Sales for the three months ended June 30, 2002 were $557,690, compared to
$1,147,216 for the period ending June 30, 2001, a decrease of $589,526 or 51%.
This decrease of 51% is attributable to continued softness in capital purchases
from the Company's principal customers in the technology sector. Operating
expenses of $351,235 were 63% of sales compared to $661,688 or 58% of sales
respectively for the periods June 30, 2002 and June 30, 2001. The increase in
operating expenses as a percent of sales is primarily due to an increase in the
number of projects in work in process, but which have smaller sales dollar
amounts. Resource allocation to handle increased project data flow is
disproportionate to the same sales dollar value with fewer, but larger projects.
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Selling, general and administrative expenses were $544,201, or 98% of
sales for the three months ending June 30, 2002, compared to $332,382 or 29% of
sales for the same period ended June 30, 2001. This increase of $211,819 is
attributable to the addition of essential technical personnel to accelerate the
research and development of the Company's interconnect technologies, including
the construction of a production facility to bring the manufacturing of the
GCI(TM) products in-house.
Net loss for the three months ended June 30, 2002 was $399,721, compared
to a net income of $151,768 for the same period ended June 30, 2001. Management
feels the net loss is due primarily to the decrease in recognized sales from
shipped products and work in process.
Changes in Financial Condition:
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto appearing elsewhere herein for June
30, 2002 and June 30, 2001.
Current assets were $1,224,242 for the period ending June 30, 2002,
compared to $558,943 for the period ending December 31, 2001, an increase of
$665,299, or 119%, respectively. The current ratio was 1.04 at June 30, 2002,
compared to 1.42 at December 31, 2001. The net increase in current assets at
June 30, 2002, over December 31, 2001, was due primarily to an increase in
accounts receivable of $641,521 and an increase in work in process recognized as
underbillings of $193,369. Cash accounts decreased by $208,946.
Management feels the net increase in current asset accounts without a
corresponding increase in sales is related to an increase in time-to-collection
of receivables and other collectibles. The Company has experienced a shift in
payment terms with several of its larger customers as they have proposed
extended payment terms of 45 days to 60 days. While recognized as an unfavorable
shift in cash flows, the Company has not been able in some negotiations with key
customers to demand more aggressive payment terms.
Liquidity:
Management recognizes that with consecutive period losses, it must rely on
supplemental external funding. It is the opinion of management that, to the
extent current asset accounts, primarily receivables, can be collected in a
timely manner, and some supplemental operating capital can be acquired, adequate
resources exist to fund current operations for the short term. The Company is
continuing to pursue the construction of its GCI(TM) production facility, and
recognizes that additional, external funding will be necessary to complete this
facility. In addition, management recognizes that increases in sales will
require increases in funding needs to adequately support work in process
purchasing.
Funding and Capital Resources:
For the period ending June 30, 2002, management has continued to seek
capital infusion through equity funding opportunities. In the near future
however, it is the decision of management to seek additional funding for
operations, continued construction of the GCI(TM) production facility, and work
in process, with debt instruments. Given the current market price of the
Company's stock, the cost of capital has been determined by management to be too
costly,
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through equity funding. The dilution of shareholder equity is of concern to
management and weighs heavily against an equity funding approach in the near
term. The funding instruments currently being used are convertible notes;
convertible at the holders' determination, at a percent of the Company's market
price of stock at the time of maturity. It would be management's goal to retire
these convertible notes with equity funding instruments in future periods when
the stock price of the Company is at a higher value than current market prices,
resulting in less dilution to shareholders.
Plan of Operation:
Management is aware of the importance of increasing sales within both the
short and long term. In an effort to accomplish this, new markets are being
analyzed for product introduction. Plans are underway to consider introduction
of several of the Company's pre-designed and manufactured products into China.
Several key personnel within the Company's existing structure have prior
experience in China, including speech fluency. In addition, the Company has
refocused the sales team by product line, with key inside sales personnel
assigned to product lines, as contrasted with prior geographical assignments. It
is management's opinion that this refocusing will allow key sales personnel to
develop greater expertise in product understanding and more direct relationships
with key customers.
Completion of the GCI(TM) production line is also a primary goal of the
Company in the near term. Scheduled completion is the end of September, 2002. It
is believed by management that with the completion and fine-tuning of the
GCI(TM) manufacturing process, consistency of product will enable additional
sales increases. The in-house manufacturing process will also enable the Company
to explore additional product niches within the interconnect sectors, including
but not limited to, silicone wafer testing, known good die testing, and flex
circuit manufacturing.
In order to maximize operating margins, the Company is continuing to
pursue a broadening of its standard products where engineering support and
costing data are known. It is also believed by management that additional
standardized products will enable the sales team to penetrate new markets.
Standardization of some existing products may enable pricing reductions to help
increase market share in price sensitive markets and with specific customers who
are particularly price sensitive in the current, tight economic environment.
In an effort to reduce time-to-collection of receivables, management is
testing the viability of more aggressive terms on sales of products to
counterbalance the longer payment terms being negotiated by existing, larger
customers. In situations where the Company is not able to negotiate more
favorable net terms, customers are being offered the alternative of discounts
for shorter payment cycles.
As specified previously in the Funding and Capital Resources section, the
Company is continuing to pursue capital infusions. Primarily, the Company is
continuing in its relationship with the Olympus Group, which represents the
Company in seeking funding and in investor relations. It is management's belief,
that with representations to the Company by the Olympus Group, sufficient
capital resources will be available in the near term. These funds will be used
in three areas, i.e., operating expenses, capital asset expansions (mostly
comprised of the GCI(TM)
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production facility), and work in process funding. The Company cannot guarantee
however, that these funds will be available as expected due to factors beyond
its control.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings: None
Item 2. Changes in Securities:
During the second quarter of 2002, the Company received cash from common
stock through private placements, as follows:
Cash
Date Shares Options Consideration Shareholder
- ---- ------ ------- ------------- -----------
04/27/02 200,000 200,000 @ $ .50 $50,000 Karl A. Schurter
05/14/02 400,000 400,000 @ $ .50 $100,000 Emory C. Christensen
06/13/02 196,000 196,000 @ $ .50 $ 49,000 Kent Mason
- -------- ------- --------------- --------
Totals 796,000 796,000 $199,000
Stock Option Plan to Employees:
The Company issued no stock options to employees during the second quarter
of 2002.
Item 3: Defaults Upon Senior Securities: None
Item 4: Submission of Matters to a Vote of Security Holders: None
Item 5: Other Information.
Item 6: Exhibits and Reports on form 8-K.
(a) No exhibits
(b) Form 8K filings
-5-
R-Tec HOLDING, INC.
(Registrant)
August 13, 2002
Principal Executive Officer: By /s/________________________________
Douglas G. Hastings, President
Principal Financial Officer: By /s/________________________________
Michael T. Montgomery, CFO
Majority of Board of Directors: /s/________________________________
Rulon L. Tolman, Director
/s/________________________________
Gary A. Clayton, Director
/s/________________________________
Douglas G. Hastings, Director
/s/________________________________
David R. Stewart, Director
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R-TEC HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
As of June 30, 2002 (Unaudited) and December 31, 2001
June 30, December 31,
2002 2001
----------- -----------
Current assets
Cash $ 121,098 $ 330,044
Accounts receivable (net of $26,295 and $25,000
allowance for doubtful accounts at June 30, 2002 and
December 31, 2001, respectively) 792,369 150,848
Costs and estimated earnings in excess
of billings on uncompleted contracts 245,396 52,027
Income taxes receivable 15,295 15,295
Inventory 37,565 --
Prepaid expenses 5,044 3,094
Notes receivable, current portion 7,475 7,635
----------- -----------
Total current assets 1,224,242 558,943
Equipment and leasehold improvements, at cost,
net of accumulated depreciation 681,736 628,957
Intangible assets, at cost, net of accumulated
amortization 274,482 320,228
Goodwill 201,218 201,218
Other assets, at cost, net of accumulated
amortization 33,604 44,075
Notes receivable, less current portion -- 7,475
----------- -----------
Total assets $ 2,415,282 $ 1,760,896
=========== ===========
Current liabilities
Accounts payable $ 360,618 $ 204,808
Accrued expenses 91,686 28,491
Leases payable, current portion 70,251 61,435
Notes payable, current portion 358,000 100,000
Notes payable related parties, current portion 169,295 --
Accrued preferred dividends payable 124,175 --
----------- -----------
Total current liabilities 1,174,025 394,734
Accrued preferred dividends payable -- 95,116
Lease payable, less current portion 25,510 56,510
Notes payable to related parties, less current portion 200,000 369,295
----------- -----------
Total liabilities 1,399,535 915,655
Shareholders' equity
Series A cumulative convertible preferred stock, par value
$0.23437 per share, 5,000,000 authorized, 2,781,564
shares issued and outstanding 651,100 651,100
Common stock, no par value per share,
30,000,000 authorized, 21,052,005 and 19,009,205
shares issued and outstanding at June 30, 2002
and December 31, 2001, respectively 2,872,915 2,132,755
Additional paid-in capital 440,780 358,540
Accumulated deficit (2,949,048) (2,297,154)
----------- -----------
Total shareholders' equity 1,015,747 845,241
----------- -----------
Total liabilities and shareholders' equity $ 2,415,282 $ 1,760,896
=========== ===========
See accompanying notes.
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R-TEC HOLDING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Period Ended June 30, 2002 and June 30, 2001
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues $ 557,690 $ 1,147,216 $ 1,308,922 $ 1,846,387
Operating costs 351,235 661,688 811,123 1,109,353
------------ ------------ ------------ ------------
Gross profit 206,455 485,528 497,799 737,034
Selling, general and administrative expenses 544,201 332,382 1,048,457 617,535
Research and development 30,723 195 34,028 195
------------ ------------ ------------ ------------
Operating income (loss) (368,469) 152,951 (584,686) 119,304
Interest expense (32,611) (3,708) (40,470) (8,550)
Interest income 1,359 2,527 2,341 3,962
------------ ------------ ------------ ------------
(31,252) (1,181) (38,129) (4,588)
------------ ------------ ------------ ------------
Income (loss) before income taxes (399,721) 151,770 (622,815) 114,716
Income taxes -- 2 20 652
------------ ------------ ------------ ------------
Net income (loss) (399,721) 151,768 (622,835) 114,064
Preferred stock dividends 14,610 14,610 29,059 29,059
------------ ------------ ------------ ------------
Net income (loss) available
to common shareholders $ (414,331) $ 137,158 $ (651,894) $ 85,005
============ ============ ============ ============
Net income (loss) per common share $ (0.02) $ 0.01 $ (0.03) $ 0.00
Weighted average shares outstanding 20,644,138 18,116,471 20,256,994 17,881,100
See accompanying notes.
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R-TEC HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Periods Ended June 30, 2002 and June 30, 2001 (Unaudited)
Six Months Ended June,
2002 2001
----------- -----------
Cash flows from operating activities
Net income (loss) $ (622,835) $ 114,064
Adjustments to reconcile net income (loss) to net
cash provided used by operating activities
Depreciation and amortization 134,817 35,048
Common stock issued for services -- 3,334
Common stock bonuses -- 15,000
Changes in assets and liabilities
Accounts receivable (641,521) (322,904)
Costs and estimated earnings in excess
of billings on uncompleted contracts (193,369) (131,374)
Inventory (37,565) (19,678)
Prepaid expenses (1,950) 1,464
Accounts payable 155,810 (137,380)
Accrued expenses 63,195 123,402
Billings in excess of costs and estimated
earnings on uncompleted contracts -- (94,134)
----------- -----------
Net cash used by operating activities (1,143,418) (413,158)
Cash flows from investing activities
Purchase of equipment and other assets (131,379) (144,491)
----------- -----------
Net cash used by investing activities (131,379) (144,491)
Cash flows from financing activities
Collections on loans 7,635 876
Proceeds from common stock and options 822,400 875,900
Proceeds from debt 358,000 --
Payments on debt (122,184) (22,923)
----------- -----------
Net cash provided by financing activities 1,065,851 853,853
----------- -----------
Net increase (decrease) in cash (208,946) 296,204
Beginning cash 330,044 76,634
----------- -----------
Ending cash $ 121,098 $ 372,838
=========== ===========
Supplemental disclosures of cash flow information
Interest paid $ 25,785 $ 8,550
Noncash investing and financing activities
Equipment acquired through note payable $ -- $ 123,639
Preferred stock dividends payable $ 29,059 $ --
See accompanying notes.
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R-TEC HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
NOTE A - UNAUDITED INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting solely of normal recurring adjustments)
necessary to present fairly the financial position of R-Tec Holdings, Inc. (the
Company) and the results of operations and cash flows. Certain reclassifications
of prior quarter amounts were made to conform with current quarter presentation,
none of which affects previously recorded net loss.
NOTE B - EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consists of:
Equipment $ 745,798
Vehicles 33,804
Office equipment and furnishings 93,917
Leasehold improvements 45,720
---------
919,239
Accumulated depreciation and amortization (237,503)
---------
$ 681,736
=========
NOTE C - INTANGIBLE ASSETS
Intangible assets consist of:
Customer lists $ 365,975
Accumulated amortization (91,493)
---------
$ 274,482
=========
The estimated useful life of customer lists is four years.
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R-TEC HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
NOTE D - OTHER ASSETS
Other assets consist of:
Software $ 74,421
Accumulated amortization (40,817)
--------
$ 33,604
========
The estimated useful life of software is three years.
NOTE D - INVENTORY
Parts inventory is stated at the lower of cost (last-in, first-out method) or
market.
Inventories consist of:
GCI inventory $ 13,265
Parts inventory 24,300
--------
$ 37,565
========
NOTE E - DEBT
Debt issuances for the quarter ended June 30, 2002 are as follows:
Convertible note payable to Jill Marshall,
monthly interest only payments at 12%,
principal due June 2003, convertible to
common stock, unsecured. $ 100,000
Convertible note payable to Benjamin Coleman,
monthly interest only payments at 12%,
principal due June 2003, convertible to
common stock, unsecured. 50,000
Convertible note payable to Paul Miller,
monthly interest only payments at 12%,
principal due June 2003, convertible to
common stock, unsecured. 50,000
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R-TEC HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
Note payable to BFS Group Ltd.,
10% interest, due on demand,
secured by certain assets of the Company. 108,000
Note payable to BFS Group Ltd.,
10% interest, due April 2002,
secured by $252,000 Department of
Defense contract. 50,000
---------
$ 358,000
=========
NOTE F - OPTIONS
During the three months ended June 30, 2002, Rule 144 restricted stock and
options were sold to investors. The Company estimated the value assigned to the
options based on an estimated stock trading price of $.25 per share and a 10%
discount factor for the stock restriction. The value assigned to the options for
the six months ended June 30, 2002, was estimated at $19,900.
NOTE G - SUBSEQUENT EVENT
In July 2002, a related party note payable of $169,295 was repaid with current
assets. The note payable is included in the balance sheet caption: Notes payable
to related parties, current portion.
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