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 September 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 September 30, 2002, is
21,052,005.
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 which are
based on management's current expectations. The Company has identified risk
factors which 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 nine months ended September 30, 2002 and 2001.
Item 2. Management's Discussion and Analysis or Plan of Operation:
Financial Results of Operations:
Sales for the three months ended September 30, 2002 were $754,826,
compared to $283,167 for the period ending September 30, 2001, an increase of
$471,659 or 167%. This increase of 167% is due primarily to an increase in
booked sales in the second quarter of 2002 and subsequent, invoiced sales
resulting in the third quarter of 2002. Operating expenses were $382,810, or 51%
of sales for the period ending September 30, 2002 compared to 321,151, or 113%
of sales for the period ending September 30, 2001. The decrease in operating
expenses as a percent of sales from 2001 to 2002, respectively for the three
months ending September 30, is in line with management's attention to increasing
product and job margins.
Selling, general and administrative expenses were $475,154, or 63% of
sales for the three months ending September 30, 2002, compared to $525,630 or
186% of sales for the same period ended September 30, 2001. The decrease in
selling, general and administrative expenses of $50,476 reflects management's
attempts to control overhead expenditures.
Net loss for the three months ended September 30, 2002 was ($141,817),
compared to a net loss of ($583,016) for the same period ended September 30,
2001. The decrease in net loss is primarily attributable to increases in gross
margins on jobs.
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
September 30, 2002 and September 30, 2001.
Current assets were $849,510 for the period ending September 30, 2002,
compared to $558,943 for the period ending December 31, 2001, an increase of
$290,567, or 52%, respectively. The increase in current assets of $290,567 is
attributable primarily to an increase in accounts receivable of $291,987, for
the periods respectively. As of September 30, 2002, current liabilities were
$1,006,592 compared to $394,734 for the same period 2001. The increase in
current liabilities resulted in a current ratio as of September 30, 2002 of
0.84. The decrease in the current ratio from 1.42 at September 30, 2001 to 0.84
at September 30, 2002 is due primarily to an increase in short term borrowing of
approximately $558,922 on convertible notes with maturity dates of one year or
less, from September 30, 2001 to 2002 respectively. Accounts payable, accrued
expenses, current portions of leases payable, and billings in excess of costs
and estimated earnings on uncompleted contracts, increased by $52,936, September
30, 2001 to 2002 respectively.
Liquidity:
Management is aware that insufficient liquidity exists in the short term
and is seeking alternative methods of rebuilding strength in the short term
liquidity ratios. The current ratio was 0.84 at September 30, 2002, as
previously discussed. Although the short term liquidity ratio weakness is due in
part to the significant increase in short term note borrowings, management
recognizes the importance of initiating planning efforts now to deal with the
retirement of the notes as they become due.
Funding and Capital Resources:
Adequate funding of capital resources continues to remain a major focus of
management's efforts. As the Company's stock price has continued to decline
through recent quarters, management has sought alternative, temporary methods of
funding using convertible debt instruments, or notes, as described previously.
The convertible notes allow for either a repayment of the face value of the note
or a conversion at the option of the holder to the Company's stock for 75% of
the stock price on the date of maturity. Interest is paid monthly at the rate of
12% per annum of the face value of the note. The premise for using these types
of debt instruments is to replace them with a conversion to equity as the
Company's stock increases in price by the maturity date of the instruments. To
the extent the Company's stock price has increased at the maturity date of the
instruments, and the holders of the instruments convert to equity at a higher
stock price than current stock price levels, management feels it will have
minimized the cost of capital for current funding needs. At the time of filing,
the Company's stock is trading in the relative range of $.13 per share of common
stock with nominal volatility and small volumes of trading.
Of the capital funding sought in recent quarters, approximately $475,879
has been used for the research and development and construction of a production
facility for the manufacture of Interconnect products, including the patented
GCI(TM) testing interface for the Integrated Circuit industry. As of the date of
filing, all major construction, including leasehold improvements has been
completed and the Company does not expect any additional, significant funding
needs for construction to bring "on-line" the new production facility. As the
new facility comes on line, and sales increase, it is anticipated that some
ancillary equipment will need to be purchased to
handle increased production volumes. The major equipment items will be
additional micro-machining equipment, also know as lasers.
Plan of Operation:
One of the top priorities of management is the objective to achieve
profitability as quickly as is reasonable given the current market environment.
In the automation product sectors, management is reviewing alternative
automation sectors such as the food, agricultural, medical, and governmental
markets to help diversify sales and stabilize the cyclical nature of automation
sales to the "high tech" markets. It is believed by management that with the
contraction within the high tech markets, many high tech companies in seeking to
reduce budgetary expenditures, look at capital budget expenditures as one of the
first areas that can be reduced. Many of the automation products the Company
currently designs and manufactures, fall into this category. It is believed that
a diversification into other automation sectors as mentioned above, will help
stabilize the cyclical nature of automation sales within the Company.
In the interconnect product markets for the IC industry, the Company is
anticipating that with the capabilities of its new production facility, sales
will increase within the first quarter of 2003 due to increased production
capability, better quality, greater control over timeliness of delivery,
enhanced product variety, and more aggressive pricing structures. It is
anticipated that although some additional working capital will be needed to fund
this production facility, that by the second quarter of 2003, the facility will
have begun to return a positive return on investment.
The Company continues to seek marketing and production opportunities in
China and has established some strategic contacts as it pursues this strategy. A
division within the Company's current structure has been created to oversee this
development. Emory Christensen, formerly the Engineering Manager for the
Company, has been assigned as the general manager for the China development. Mr.
Christensen has established contacts in China and is fluent in Mandarin Chinese.
Product introduction for both automation and interconnect products is
being pursued in China as well as possible production opportunities for labor
intensive products. In addition, the Company is reviewing possible strategic
partnerships in China that will enable a faster market penetration by utilizing
established partners.
Management is currently seeking additional funding to increase capital
resources. It is anticipated that some additional funding will be needed for
operating costs in the short term. The Company is continuing to work with
various funding partners as needs arise. Although the Company will aggressively
seek to provide adequate capital funding for ongoing operations, no guarantee
exists that such funding will be obtained.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings: None
Item 2. Changes in Securities:
Stock Option Plan:
The Company has a stock option plan, which allows employees, directors and
consultants of the Company to receive stock options. The Board of Directors set
aside 2,000,000 shares of common stock for issuance upon exercise of the
options. The Company has awarded 316,920 stock options to employees and
directors during the period ending September 30, 2002. The stock options vest
100% on the first anniversary of the grant notice at a strike price of $0.50 per
share.
The stock options are exercisable by the optionee as to all or any part of
the stock then vested by delivery to the Company of written notice of exercise
and payment of the purchase price as provided by the plan.
The Board of Directors maintains the right to change, suspend or terminate
the plan at any time, without notice, and in its sole discretion as provided by
the plan.
Item 3: Defaults Upon Senior Securities: None
Item 4: Submission of Matters to a Vote of Security Holders: None
Item 5: Other Information: None
Item 6: Exhibits and Reports on form 8-K: None
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of R-Tec Holding, Inc., (the
"Company") on Form 10-QSB, and supplemental filing on Form 10-QSB/A for the
period ending June 30, 2002 as filed with the Securities and Exchange Commission
on the date hereof (the "Report"), I, Michael T. Montgomery, Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. Code Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) of 15(d)
of the Securities Act of 1934; and
(2) To the best of my knowledge, based upon a review of the Report, and,
except as corrected or supplemented in a subsequent covered Report, the
Report does not contain any untrue statements of a material fact as of the
period covered by the Report, nor has any statement of a material fact
been omitted from said Report; and
(3) I have reviewed the contents of the Report with the Company's audit
committee.
/s/ Michael T. Montgomery
--------------------------
Michael T. Montgomery
Chief Financial Officer
August 15, 2002
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of R-Tec Holding, Inc., (the
"Company") on Form 10-QSB and supplemental filing on Form 10-QSB/A for the
period ending June 30, 2002 as filed with the Securities and Exchange Commission
on the date hereof (the "Report"), I, Douglas G. Hastings, Chief Executive
Officer of the Company, certify, pursuant to 18 U.S.C. Code Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) of 15(d)
of the Securities Act of 1934; and
(2) To the best of my knowledge, based upon a review of the Report, and,
except as corrected or supplemented in a subsequent covered Report, the
Report does not contain any untrue statements of a material fact as of the
period covered by the Report, nor has any statement of a material fact
been omitted from said Report; and
(3) I have reviewed the contents of the Report with the Company's audit
committee.
/s/ Douglas G. Hastings
--------------------------
Douglas G. Hastings
President and Chief Executive Officer
August 15, 2002
SIGNATURES
In accordance with requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
R-Tec Holding, Inc.
(Registrant)
Date: November 12, 2002
Principal Executive Officer By /s/ _________________________________
Douglas G. Hastings, President
and CEO
Principal Financial Officer By /s/ _________________________________
Michael T. Montgomery, CFO
Majority of Board of Directors By /s/ _________________________________
Rulon L. Tolman, Director
By /s/ _________________________________
Gary A. Clayton, Director
By /s/ _________________________________
Douglas G. Hastings, Director
By /s/ _________________________________
David R. Stewart, Director
R-TEC HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
As of September 30, 2002 (Unaudited) and December 31, 2001
September 30, 2002 December 31, 2001
------------------ -----------------
Current assets
Cash $ 289,561 $ 330,044
Accounts receivable (net of $23,445 and $26,295
allowance for doubtful accounts at September 30,
2002 and December 31, 2001, respectively) 442,835 150,848
Costs and estimated earnings in excess
of billings on uncompleted contracts 31,481 52,027
Income taxes receivable 15,295 15,295
Inventory 54,129 --
Prepaid expenses 11,765 3,094
Notes receivable, current portion 4,444 7,635
----------- -----------
Total current assets 849,510 558,943
Equipment and leasehold improvements, at cost,
net of accumulated depreciation 900,701 628,957
Intangible assets, at cost, net of accumulated
amortization 251,608 320,228
Goodwill 201,218 201,218
Other assets, at cost, net of accumulated
amortization 30,076 44,075
Notes receivable, less current portion -- 7,475
----------- -----------
Total assets $ 2,233,113 $ 1,760,896
=========== ===========
Current liabilities
Accounts payable $ 200,373 $ 204,808
Accrued expenses 89,814 28,491
Billings in excess of costs and estimated
earnings on uncompleted contracts 778 --
Leases payable, current portion 56,705 61,435
Notes payable, current portion 658,922 100,000
----------- -----------
Total current liabilities 1,006,592 394,734
Accrued preferred dividends payable 138,945 95,116
Lease payable, less current portion 13,645 56,510
Notes payable to related parties, less current portion 200,000 369,295
----------- -----------
Total liabilities 1,359,182 915,655
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 September 30, 2002
and December 31, 2001, respectively 2,872,915 2,132,755
Additional paid-in capital 440,780 358,540
Accumulated deficit (3,090,864) (2,297,154)
----------- -----------
Total shareholders' equity 873,931 845,241
----------- -----------
Total liabilities and shareholders' equity $ 2,233,113 $ 1,760,896
=========== ===========
See accompanying notes
- 1 -
R-TEC HOLDING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Period Ended September 30, 2002 and September 30, 2001
Three Months Ended September 30, Nine Months Ended September 30,
2002 2001 2002 2001
------------- ------------- ------------- ------------
Revenues $ 754,826 $ 283,167 $ 2,063,748 $ 2,129,554
Operating costs 382,810 321,151 1,193,933 1,430,504
------------ ------------ ------------ ------------
Gross profit (loss) 372,016 (37,984) 869,815 699,050
Selling, general and administrative expenses 475,154 525,630 1,523,611 1,143,165
Research and development 10,668 2,955 44,696 3,150
------------ ------------ ------------ ------------
Operating loss (113,806) (566,569) (698,492) (447,265)
Interest expense (13,241) (3,722) (53,711) (12,272)
Interest income -- 1,885 2,341 5,847
------------ ------------ ------------ ------------
(13,241) (1,837) (51,370) (6,425)
------------ ------------ ------------ ------------
Loss before income taxes (127,047) (568,406) (749,862) (453,690)
Income taxes -- -- 20 652
------------ ------------ ------------ ------------
Net loss (127,047) (568,406) (749,882) (454,342)
Preferred stock dividends 14,770 14,610 43,829 43,669
------------ ------------ ------------ ------------
Net loss available to common shareholders $ (141,817) $ (583,016) $ (793,711) $ (498,011)
============ ============ ============ ============
Net loss per common share $ (0.01) $ (0.03) $ (0.04) $ (0.03)
Weighted average shares outstanding 21,052,005 18,300,012 20,525,895 17,950,635
See accompanying notes
- 2 -
R-TEC HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Periods Ended September 30, 2002 and September 30, 2001 (Unaudited)
Nine Months Ended September,
2002 2001
----------- -----------
Cash flows from operating activities
Net loss $ (749,882) $ (454,342)
Adjustments to reconcile net loss to net
cash used by operating activities
Depreciation and amortization $ 194,965 129,205
Common stock issued for services $ -- --
Common stock bonuses $ -- --
Changes in assets and liabilities
Accounts receivable $ (291,987) 197,771
Costs and estimated earnings in excess
of billings on uncompleted contracts $ 20,546 38,609
Inventory $ (54,129) (1,400)
Prepaid expenses $ (8,671) 1,399
Accounts payable $ (4,435) (74,281)
Accrued expenses $ 61,323 144,764
Billings in excess of costs and estimated
earnings on uncompleted contracts $ 778 (94,663)
----------- -----------
Net cash used by operating activities $ (831,492) (112,938)
Cash flows from investing activities
Purchase of equipment and other assets $ (384,089) (282,596)
----------- -----------
Net cash used by investing activities $ (384,089) (282,596)
Cash flows from financing activities
Collections on loans $ 10,666 3,369
Proceeds from common stock and options $ 822,400 1,116,184
Proceeds from debt $ 658,922 --
Payments on debt $ (316,890) (145,186)
----------- -----------
Net cash provided by financing activities $ 1,175,098 974,367
----------- -----------
Net increase (decrease) in cash $ (40,483) 578,833
Beginning cash $ 330,044 76,634
----------- -----------
Ending cash $ 289,561 $ 655,467
=========== ===========
Supplemental disclosures of cash flow information
Interest paid $ 37,118 $ 9,936
Noncash investing and financing activities
Equipment acquired through note payable $ -- $ 123,639
Preferred stock dividends payable $ 43,829 $ 43,669
Acquisition of assets, net of liabilities of $113,806
with common stock $ -- $ 537,426
Notes payable related party converted to common stock $ -- $ 65,000
Accrued expenses converted to common stock $ -- $ 168,166
See accompanying notes
- 3 -
R-TEC HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 $ 643,653
Vehicles 33,804
Office equipment and furnishings 96,082
Leasehold improvements 112,376
Construction in progress 284,127
-----------
1,170,042
Accumulated depreciation and amortization (269,341)
-----------
$ 900,701
===========
NOTE C - INTANGIBLE ASSETS
Intangible assets consist of:
Customer lists $ 365,975
Accumulated amortization (114,367)
---------
$ 251,608
=========
The estimated useful life of customer lists is four years.
- 4 -
R-TEC HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 and 2001
NOTE D - OTHER ASSETS
Other assets consist of:
Software $ 76,327
Accumulated amortization (46,251)
--------
$ 30,076
========
The estimated useful life of software is three years.
NOTE E - INVENTORY
Parts inventory is stated at the lower of cost (first-in, first-out method) or
market.
Inventories consist of:
GCI inventory $26,900
Parts inventory 27,229
-------
$54,129
=======
NOTE F - DEBT
Debt issuances for the quarter ended September 30, 2002 are as follows:
Convertible note payable to Benjamin Coleman,
monthly interest only payments at 12%,
principal due July 2003, convertible to
common stock, unsecured $ 95,900
Convertible note payable to Janice Baumer,
monthly interest only payments at 12%,
principal due August 2003, convertible to
common stock, unsecured 25,000
Convertible note payable to Gordon Johnson,
monthly interest only payments at 12%,
principal due August 2003, convertible to
common stock, unsecured 100,000
Convertible note payable to James Haney,
monthly interest only payments at 12%,
principal due August 2003, convertible to
common stock, unsecured 30,000
Convertible note payable to Fe Juachon,
monthly interest only payments at 12%,
principal due July 2003, convertible to
common stock, unsecured 50,022
--------
$300,922
========
- 5 -
R-TEC HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 and 2001
The debt issuances listed above contain a conversion feature that allows the
principal and accrued interest to be converted within thirty days prior to the
maturity date, at the option of the holder, into shares of common stock of the
Company. The conversion price equals 75% of the fair market value of the
Company's common stock, determined as of the date of the conversion notice.
NOTE G - EMPLOYEE STOCK OPTIONS
Effective December 12, 2000, the Board of Directors of Company adopted a stock
option plan which allows for the grant of options for up to 2,000,000 shares of
the Company's Common Stock to officers, directors or key employees of the
Company, consultants of the Company or employees of companies that do business
with the Company. The plan allows for granting incentive stock options to
employees and non-qualified stock options to all other parties. The plan
provides for the options to be granted on incentive stock options at a price
equal to the market price of the stock and at a price of not less than 85% of
the market price of the stock for non-qualified stock options. The plan further
allows for the option period to not exceed five years for the incentive stock
options and not to exceed ten years for the non-qualified stock options. During
2002, a total of 331,920 employee stock options were granted. These options have
exercise prices at $.50.
- 6 -