UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended
March 31, 2003
Commission File Number : 0-30463
R-Tec Holding, Inc.
(Exact name of registrant as specified in its charter)
IDAHO 82-0515707
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1471 E. Commercial Ave., Meridian, ID 83542
(Address of principal executive offices)
(208) 887-0953
(Issuer's telephone number)
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At March 31, 2003, the registrant had
22,090,021 shares of common stock outstanding.
R-TEC HOLDING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
As of March 31, 2003 (Unaudited) and December 31, 2002
March 31, 2003 December 31, 2002
------------- -----------------
Current assets
Cash $ 109,250 $ 172,572
Accounts receivable (net of $20,177
allowance for doubtful accounts) 199,394 478,529
Costs and estimated earnings in excess
of billings on uncompleted contracts 21,792 72,723
Income taxes receivable 15,295 15,295
Inventory 45,325 35,941
Prepaid expenses 57,081 98,457
----------- -----------
Total current assets 448,137 873,517
Equipment and leasehold improvements, at cost,
net of accumulated depreciation 827,767 888,247
Other assets, at cost, net of accumulated
amortization 19,926 24,775
----------- -----------
Total assets $ 1,295,830 $ 1,786,539
=========== ===========
Current liabilities
Accounts payable $ 90,328 $ 107,569
Accrued expenses 91,570 84,797
Billings in excess of costs and estimated
earnings on uncompleted contracts 76,011 61,594
Notes and leases payable, current portion 924,578 925,005
----------- -----------
Total current liabilities 1,182,487 1,178,965
Accrued preferred dividends payable 167,422 161,780
Notes and leases payable, less current portion 107,422 110,013
Notes payable to related parties 200,000 200,000
----------- -----------
Total liabilities 1,657,331 1,650,758
Shareholders' equity
Series A cumulative convertible preferred stock, par value
$0.23437 per share, 5,000,000 authorized, 2,646,094
and 2,781,564 shares issued and outstanding 619,350 651,100
Common stock, no par value per share,
60,000,000 authorized, 22,090,021 and 21,742,189
shares issued and outstanding 2,874,854 2,834,082
Additional paid-in capital 514,123 514,123
Accumulated deficit (4,369,828) (3,863,524)
----------- -----------
Total shareholders' equity (deficit) (361,501) 135,781
----------- -----------
Total liabilities and shareholders' equity $ 1,295,830 $ 1,786,539
=========== ===========
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R-TEC HOLDING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the periods ended March 31, 2003 and March 31, 2002 (Unaudited)
Three months ended March 31,
2003 2002
------------ ------------
Revenues
Automation revenues $ 142,948 $ 586,260
Interconnect revenues 157,683 164,972
------------ ------------
Total revenue 300,631 751,232
Operating costs
Automation operating costs 272,306 493,309
Interconnect operating costs 106,735 88,359
------------ ------------
Total operating costs 379,041 581,668
------------ ------------
Gross profit (loss) (78,410) 169,564
Selling, general and administrative expenses 310,309 382,476
Research and development 25,071 3,305
------------ ------------
Operating loss (413,790) (216,217)
Interest expense (77,850) (7,859)
Interest income -- 982
------------ ------------
Loss before income taxes (491,640) (223,094)
Income taxes expense -- 20
------------ ------------
Net loss (491,640) (223,114)
Preferred stock dividends 14,664 14,449
------------ ------------
Net loss available to common shareholders $ (506,304) $ (237,563)
============ ============
Net loss per common share $ (0.02) $ (0.01)
Weighted average shares outstanding 21,997,339 19,855,996
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R-TEC HOLDING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Periods Ended March 31, 2003 and March 31, 2002 (Unaudited)
Three months ended March 31,
2003 2002
--------- ---------
Cash flows from operating activities
Net loss $(491,640) $(223,114)
Adjustments to reconcile net loss to net
cash used by operating activities
Depreciation and amortization 65,509 69,700
Changes in assets and liabilities
Accounts receivable 279,135 (495,492)
Costs and estimated earnings in excess
of billings on uncompleted contracts 50,931 (101,929)
Prepaid expenses 41,376 (1,950)
Inventory (9,384) (28,125)
Accounts payable (17,241) 99,934
Accrued expenses 6,773 62,255
Billings in excess of costs and estimated
earnings on uncompleted contracts 14,417 12,016
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Net cash used by operating activities (60,124) (606,705)
Cash flows from investing activities
Purchase of equipment and other assets (180) (49,146)
Cash flows from financing activities
Collections on loans -- 5,793
Proceeds from common stock -- 623,400
Payments on debt (3,018) (114,773)
--------- ---------
Net cash provided (used) by financing activities (3,018) 514,420
--------- ---------
Net decrease in cash (63,322) (141,431)
Beginning cash 172,572 330,044
--------- ---------
Ending cash $ 109,250 $ 188,613
========= =========
Supplemental disclosures of cash flow information
Interest paid $ 46,354 $ 4,876
Noncash investing and financing activities
Preferred stock dividends payable $ 14,664 $ 14,449
Common stock issued through conversion of preferred
stock and accrued preferred dividends $ 40,772 $ --
Accrued preferred stock dividends payable converted
to common stock $ 9,022 $ --
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R-TEC HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003 and 2002
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
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 effects previously recorded net loss.
Revenue
The Company recognizes revenue when it is realized or realizable and earned. The
Company considers revenue realized or realizable and earned when it has
persuasive evidence of an arrangement, the product has been shipped or the
services have been provided to the customer, the sales price is fixed or
determinable and collectibility is reasonable assured. In addition to the
aforementioned general policy, the following are specific revenue recognition
policies for each category of revenue.
Contracts are reported using the percentage-of-completion method of revenue
recognition. Under the percentage-of-completion method, earnings are recognized
based on the ratio of costs incurred to total estimated costs. Costs include
direct materials, direct labor, subcontractors and job related overhead. Assets
and liabilities relating to the "costs and estimated earnings in excess of
billings on uncompleted contracts" and "billings in excess of costs and
estimated earnings on uncompleted contracts" are recorded as current assets and
current liabilities on the balance sheet as they will be liquidated in the
normal course of contract completion. Revisions in cost and profit estimates
during the course of the work are reflected in the accounting period in which
the facts requiring revision become known. The entire amount of an estimated
ultimate loss is accrued at the time such a loss becomes known.
Revenue from Interconnect inventory sales is recognized when the product is
shipped to the customer and when there are no unfulfilled company obligations
that affect the customer's final acceptance of the arrangement. Any cost of
these obligations is accrued when the corresponding revenue is recognized.
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
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R-TEC HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003 and 2002
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.
The Company did not issue any stock options under the plan during the quarter
ended March 31, 2003. As of March 31, 2003, 1,245,980 shares of stock were
available for future option grants.
The Company accounts for its stock options under Accounting Principles Board
(APB) Opinion No. 25 using the intrinsic value method. In accordance with
Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, pro-forma net income, stock-based
compensation expense, and earnings per share using the fair value method are
stated as follows:
Three Month Ended
---------------------------
March 31, March 31,
2003 2002
----------- -----------
Net loss, as reported $ (506,304) $ (237,563)
Deduct: stock-based employee compensation
expense determined under fair value based
method, net of tax (7,419) (11,076)
----------- -----------
Pro forma net income (513,723) (248,639)
=========== ===========
Earnings per share
Basic - as reported $ (.02) $ (.01)
Basic - pro forma $ (.02) $ (.01)
NOTE B - EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consists of:
Equipment $ 946,212
Vehicles 33,804
Office equipment and furnishings 96,082
Leasehold improvements 118,484
-----------
1,194,582
Accumulated depreciation and amortization (366,815)
-----------
$ 827,767
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R-TEC HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003 and 2002
NOTE C - OTHER ASSETS
Intangible assets consist of:
Software $ 76,327
Accumulated amortization (56,401)
---------
$ 19,926
=========
The estimated useful life of software is three years
NOTE D - INVENTORY
Inventory is stated at the lower of cost (last-in, first-out method) or market.
Inventories consist of:
Finished goods $ 8,900
Work in process 7,150
Raw materials 29,275
---------
$ 45,325
=========
NOTE E - EQUITY TRANSACTIONS
Pursuant to the Company's Preferred Stock Amendment, 135,470 Series A cumulative
convertible preferred shares and the associated accrued preferred dividends were
converted to 347,932 shares of unrestricted common stock.
NOTE E - SEGMENT DISCLOSURE
The Company operates in two business segments: Custom Automation and
Interconnect. These segments have been determined by evaluating the company's
internal reporting structure and nature of products offered.
Custom Automation: The Company, under contracts with various customers,
develops, engineers and fabricates High-Tech custom manufacturing equipment and
parts to be incorporated into
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R-TEC HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003 and 2002
customer owned and operated manufacturing equipment and manufactured products.
Interconnect: The Company manufactures a line of high performance sockets and
interconnecting devices used in the testing of IC chips.
Custom
Automation Interconnect Total
------------ -------------- -----------
Three months ended March 31, 2003
Operating revenue 142,948 157,683 300,631
Operating income (loss) (129,358) 50,948 (78,410)
Depreciation and amortization 30,838 24,138 54,976
Three months ended March 31, 2002
Operating revenue 586,260 164,972 751,232
Operating income (loss) 92,951 76,613 169,564
Depreciation and amortization 39,863 -- 39,863
The Company does not assign interest income, interest expense, other income or
income taxes to operating segments. Identifiable assets and related capital
expenditures are assigned to operating segments, with depreciation and
amortization allocated to the segments.
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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, economic
viability of our customers and vendors, changes in legislation, the ability to
obtain adequate capital funding for product development and expansion, the
availability of qualified employees, and the volatile nature of the technology
sector in general.
Item 1. Financial Statements:
The following financial statements are filed as part of this report:
1) Consolidated Balance Sheet for the periods ending March 31, 2003
(unaudited) and December 31, 2002
2) Consolidated Statement of Operations for the periods ending March
31, 2003 and March 31, 2002 (unaudited)
3) Consolidated Statement of Cash Flows for the periods ending March
31, 2003 and March 31, 2002 (unaudited)
4) Notes to Financial Statements
Item 2. Management's Discussion and Analysis or Plan of Operation:
The Company has two major product segments, i.e., automation and
interconnect. Automation sales are comprised mostly of custom engineered
automation solutions, custom programmed software for mechanical control of the
automated solutions, engineered prototype designs, small part standard product
sales, and retail machine shop sales. Interconnect sales are primarily comprised
of sockets and interconnects designed and manufactured for testing of integrated
circuits.
Composition of sales for the quarters ended March 31, 2003 and 2003
respectively are as follows:
Segment 2003 2002
- ------------------------------------------------------------------------
Automation $ 142,948 48% $ 586,260 78%
Interconnect $ 157,683 52% $ 164,972 28%
--------- --- --------- ---
Total Sales $ 300,631 100% $ 751,232 100%
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Financial Results of Operations
Sales continue to be impacted by the sluggish economy and are particularly
aggravated within the high tech industry, which represents most of the Company's
major customers. Sales decreased from $751,232 to $300,631, or 60%, for the
quarters ending March 31, 2002 to March 31, 2003. Both major product segments
experienced decreases in sales with the automation segment experiencing the
greatest decrease.
Management believes the decrease in automation sales is due in part to the
reduction in its customers' reduced allocations to capital expenditures budgets.
For interconnect sales, a downturn in the number of IC chip shipments and
corresponding decrease in number of chip tests, has slowed the growth of product
introduction of the Company's proprietary IC testing products. In addition, the
Company is experiencing longer than expected delays in getting its interconnect
products through testing and into target markets.
Management does believe that the Company has several new "quoting
opportunities" with potentially significant customers for its proprietary
GCI(TM) interconnect products. If accepted, the new opportunities would provide
substantial growth near the end of the second quarter or early in the third
quarter 2003. Management also believes it has received preliminary commitments
for several orders of new standard automation products within the wood products
industry. The preliminary commitments represent substantial revenue
opportunities, but will be delayed until late in the fourth quarter of 2003, or
first quarter of 2004, before actual purchase orders may be received.
Gross profit for the period ending March 31, 2003 was ($78,410) or (26%),
compared to $169,564 or 23%, for the period ending March 31, 2002. The decrease
was attributable primarily to a decrease in sales of 60% and a fixed base of
unallocated manufacturing expenses. Underutilized fixed plant and manufacturing
expenses resulted in an increased percentage of cost of goods sold.
Selling, General, and Administrative expenses were $310,309, or 103% of
sales, compared to $382,476, or 51% of sales, for quarters ended March 31, 2003
and 2002 respectively. Selling, General and Administrative expenses decreased by
19% quarter-to-quarter, years 2003 to 2002, due in part to management's efforts
to cut expenses through layoffs and facility cost reductions. As a percent of
sales, expenses, though 103% of sales, did not increase, but were a greater
percent due to a significant decrease in sales revenues.
Net loss for the quarter was $506,304, or $.02 per share for the period ending
March 31, 2003, compared to a net loss of $237,563 or $.01 per share for the
period ending March 31, 2002. The increase in losses is due primarily to a
decrease in sales revenues.
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 March
31, 2003 and December 31, 2002.
Current assets were $448,137 for the period ending March 31, 2003,
compared to $873,517, for the period ending December 31, 2002, a decrease of
$425,380, or 49%,
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respectively. Current liabilities were $1,182,487 and $1,178,965, for the same
respective periods. The resulting current ratio was .38 at March 31, 2003,
compared to .74 at December 31, 2002. The two primary factors affecting the
current ratio are the decrease in accounts receivable and the short-term
convertible debentures.
Liquidity:
Management recognizes that additional capital funding will be required for
the foreseeable future. First, additional operating capital will be needed for
ongoing operations due to slower than expected sales, and secondly, management
is in the process of attempting to make arrangements for retiring the
convertible notes payable to the extent that note holders do not convert to
equity positions.
Funding and Capital Resources:
In the period ending March 31, 2003, the Company did not receive any
additional funding. However, the Company is in ongoing negotiations with several
groups to provide funding and IR services. Management is hopeful that funding
efforts will be fruitful but cannot guarantee that additional funding will be
acquired
Plan of Operation:
Management is working diligently with several funding groups to augment
capital resources to provide for ongoing operations, including work in process,
research and development, and marketing efforts.
Continued progress has been made on the development of the company's
GCI(TM) interconnect products. Market penetration has taken longer than
management originally expected. Current testing is ongoing on product
refinements to meet specific market segment needs. As final testing is completed
on the products, the Company expects to increase marketing presence to increase
sales in the interconnect sector.
To increase marketing strength, the Company is attempting to align itself
with strategic partners that may have existing distribution channels in place to
facilitate a more rapid entry into existing markets. Some of the potential
customers of the Company have suggested that a more developed distribution
channel would be helpful in turning their processes over to newer technologies.
Management believes that several, potential strategic partners represent these
opportunities.
To the extent management is unsuccessful in acquiring additional funding
for ongoing operations, it may consider additional cuts in operating cuts to
match revenue streams.
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Item 3. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Based on their evaluation as of a date within 90 days of the filing date of this
Report on Form 10-Q, the Company's principal executive officer and principal
financial officer have concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act") are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect the controls subsequent to the date of
their evaluation. There were no significant deficiencies or material weaknesses,
and therefore there were no corrective actions taken.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings: Nothing to Report
Item 2. Changes in Securities:
During the first quarter of 2003, the Company authorized the conversion of
preferred stock and respective accrued preferred dividends to common stock
pursuant to the conversion provisions of the Company's "Series A Convertible
Preferred Shares".
Date Preferred Shares Accrued Preferred Dividends Common Shares
- ---- ---------------- --------------------------- -------------
01/25/03 135,470 $ 9,022.29 347,932
The described stock transactions were free of restricted legends under the
provisions of Section 4(2) of the Securities Act of 1933, as amended or Rule
144K of the Securities and Exchange Commission thereunder.
Other Security Transactions: Nothing to Report
Item 3: Defaults Upon Senior Securities: Nothing to Report
Item 4: Submission of Matters to a Vote of Security Holders: Nothing to Report
Item 5: Other Information.
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Changes in Officers and Personnel:
Effective March 11, 2003, Victor Morse, sales manager at the Company,
terminated his employment. His position has been filled by Rulon Tolman, a
member of the board of directors and senior management team.
Item 6: Exhibits and Reports on form 8-K.
a) Exhibit 99.1 Certification Pursuant to 18 U.S.C Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
b) No reports on Form 8-K were filed during the quarter ended March 31,
2003.
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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: May 14, 2003 By /s/ Douglas G. Hastings
--------------------------------------
Douglas G. Hastings, President and CEO
By /s/ Michael T. Montgomery
--------------------------------------
Michael T. Montgomery, CFO
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