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
June 30, 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)
----------
At June 30, 2003, the registrant had
22,090,021 shares of common stock outstanding.
R-TEC HOLDING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
As of June 30, 2003 (Unaudited) and December 31, 2002
June 30, 2003 December 31, 2002
------------- -----------------
Current assets
Cash $ 47,866 $ 172,572
Accounts receivable (net of $12,952 and $20,177
allowance for doubtful accounts, respectively) 107,633 478,529
Costs and estimated earnings in excess
of billings on uncompleted contracts 106,184 72,723
Income taxes receivable 15,295 15,295
Inventory 51,247 35,941
Prepaid expenses 29,703 98,457
----------- -----------
Total current assets 357,928 873,517
Equipment and leasehold improvements, at cost,
net of accumulated depreciation 767,091 888,247
Other assets, at cost, net of accumulated
amortization 15,078 24,775
----------- -----------
Total assets $ 1,140,097 $ 1,786,539
=========== ===========
Current liabilities
Accounts payable $ 281,278 $ 107,569
Accrued expenses 67,458 84,797
Billings in excess of costs and estimated
earnings on uncompleted contracts -- 61,594
Notes and leases payable, current portion 893,265 925,005
----------- -----------
Total current liabilities 1,242,001 1,178,965
Accrued preferred dividends payable 182,048 161,780
Notes and leases payable, less current portion 179,071 110,013
Notes payable to related parties 200,000 200,000
----------- -----------
Total liabilities 1,803,120 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 538,123 514,123
Accumulated deficit (4,695,350) (3,863,524)
----------- -----------
Total shareholders' equity (deficit) (663,023) 135,781
----------- -----------
Total liabilities and shareholders' equity (deficit) $ 1,140,097 $ 1,786,539
=========== ===========
See accompanying notes
-2-
R-TEC HOLDING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Period Ended June 30, 2003 and June 30, 2002 (Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenues
Automation revenues $ 377,836 $ 404,477 $ 520,784 $ 990,737
Interconnect revenues 113,461 153,213 271,144 318,185
----------- ----------- ----------- -----------
Total revenue 491,297 557,690 791,928 1,308,922
Operating costs
Automation operating costs 272,639 403,206 544,945 896,515
Interconnect operating costs 90,801 95,785 197,536 184,144
----------- ----------- ----------- -----------
Total operating costs 363,440 498,991 742,481 1,080,659
----------- ----------- ----------- -----------
Gross profit 127,857 58,699 49,447 228,263
Selling, general and administrative expenses 321,523 396,445 631,832 778,921
Research and development 33,992 30,723 59,063 34,028
----------- ----------- ----------- -----------
Operating loss (227,658) (368,469) (641,448) (584,686)
Interest expense (83,237) (32,611) (161,087) (40,470)
Interest income -- 1,359 -- 2,341
----------- ----------- ----------- -----------
(83,237) (31,252) (161,087) (38,129)
----------- ----------- ----------- -----------
Income (loss) before income taxes (310,895) (399,721) (802,535) (622,815)
Income taxes -- -- -- 20
----------- ----------- ----------- -----------
Net loss (310,895) (399,721) (802,535) (622,835)
Preferred stock dividends 14,627 14,610 29,291 29,059
----------- ----------- ----------- -----------
Net loss available to
common shareholders $ (325,522) $ (414,331) $ (831,826) $ (651,894)
=========== =========== =========== ===========
Net loss per common share $ (0.01) $ (0.02) $ (0.04) $ (0.03)
Weighted average shares outstanding 22,090,121 20,644,138 22,043,986 20,256,994
See accompanying notes
-3-
R-TEC HOLDING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Periods Ended June 30, 2003 and June 30, 2002 (Unaudited)
Six Months Ended June,
2003 2002
---------- ----------
Cash flows from operating activities
Net loss $ (802,535) $ (622,835)
Adjustments to reconcile net loss to net
cash used by operating activities
Depreciation and amortization 131,034 134,817
Options issued for consulting services 24,000 --
Changes in assets and liabilities
Accounts receivable 370,896 (641,521)
Costs and estimated earnings in excess
of billings on uncompleted contracts (33,461) (193,369)
Prepaid expenses 68,754 (1,950)
Inventory (15,306) (37,565)
Accounts payable 173,709 155,810
Accrued expenses (17,339) 63,195
Billings in excess of costs and estimated
earnings on uncompleted contracts (61,594) --
---------- ----------
Net cash used by operating activities (161,842) (1,143,418)
Cash flows from investing activities
Purchase of equipment and other assets (182) (131,379)
Cash flows from financing activities
Collections on loans -- 7,635
Proceeds from common stock and options -- 822,400
Proceeds from debt 75,000 358,000
Payments on debt (37,682) (122,184)
---------- ----------
Net cash provided by financing activities 37,318 1,065,851
---------- ----------
Net decrease in cash (124,706) (208,946)
Beginning cash 172,572 330,044
---------- ----------
Ending cash $ 47,866 $ 121,098
========== ==========
Supplemental disclosures of cash flow information
Interest paid $ 72,897 $ 25,785
Noncash investing and financing activities
Preferred stock dividends payable $ 29,290 $ 29,059
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 $ --
See accompanying notes
-4-
R-TEC HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 reasonably 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 the 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
-5-
R-TEC HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
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. The Company issued 2,410,000 stock options under the plan during the
six months ended June 30, 2003.
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:
Six Month Ended
--------------------------
June 30, June 30,
2003 2002
----------- -----------
Net loss, as reported $ (831,826) $ (651,894)
Deduct: stock-based employee compensation
expense determined under fair value based
method, net of tax (7,525) (11,801)
----------- -----------
Pro forma net income $ (839,351) $ (663,695)
=========== ===========
Earnings per share
Basic - as reported $ (.04) $ (.03)
Basic - pro forma $ (.04) $ (.03)
NOTE B - EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consists of:
Equipment $ 946,212
Vehicles 2,633
Office equipment and furnishings 96,082
Leasehold improvements 118,484
-----------
1,163,411
Accumulated depreciation and amortization (396,320)
-----------
$ 767,091
===========
-6-
R-TEC HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
NOTE C - OTHER ASSETS
Intangible assets consist of:
Software $ 76,327
Accumulated amortization (61,249)
-----------
$ 15,078
===========
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 $ 8,600
Work in process 12,951
Raw materials 29,696
-----------
$ 51,247
===========
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 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
---------- ------------ ----------
Six months ended June 30, 2003
Operating revenue $ 520,784 $ 271,144 $ 791,928
Operating income (loss) (24,261) 73,608 49,447
Depreciation and amortization 61,412 48,289 109,701
-7-
R-TEC HOLDING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003 and 2002
Custom
Automation Interconnect Total
---------- ------------ ----------
Six months ended June 30, 2002
Operating revenue $ 990,737 $ 318,185 $1,308,922
Operating income loss 94,222 134,041 228,263
Depreciation and amortization 68,055 -- 68,055
Three months ended June 30, 2003
Operating revenue $ 377,836 $ 113,461 $ 491,297
Operating income (loss) 105,197 22,660 127,857
Depreciation and amortization 30,577 24,151 54,725
Three months ended June 30, 2002
Operating revenue $ 404,477 $ 153,213 $ 557,690
Operating income loss 1,271 57,428 58,699
Depreciation and amortization 28,192 -- 68,055
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.
NOTE F - COMMITTMENTS
On June 16, 2003, the Company entered into a consulting agreement that provides
for the payment of 600,000 shares of common stock. The liability of $36,000 has
been included in accounts payable.
NOTE G - GOING CONCERN CONSIDERATIONS
The Company's recurring losses from operations in current and prior years raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments to reflect the possible
effects on the recoverability and classification of assets or amounts and
classifications of liabilities that may result from the possible inability of
the Company to continue as a going concern. The Company is attempting to
increase sales and raise additional capital to sustain operations. However,
there can be no assurance that these plans will be successful.
-8-
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 June 30, 2003
(unaudited) and December 31, 2002
2) Consolidated Statement of Operations for the periods ending June 30,
2003 and June 30, 2002 (unaudited)
3) Consolidated Statement of Cash Flows for the periods ending June 30,
2003 and June 30, 2002 (unaudited)
4) Notes to Financial Statements
Item 2. Management's Discussion and Analysis or Plan of Operation:
Revenues for the Company in its two main product groups are listed below
for the quarters ending June 30, 2003 and 2002 respectively. The automation
group experienced a slight decrease in revenues of 7%, or $26,641, from June 30
of 2002 to June 30 of 2003. The interconnect group experienced a decrease in
revenues of 26%, or $39,752, for the same respective periods.
3 Months ending June 30, 2003
Segment 2003 2002
- ------------------------------------------------------------------
Automation $377,836 77% $ 404,477 73%
Interconnect $113,461 23% $ 153,213 27%
-------- --- ---------- ---
Total Sales $491,297 100% $ 557,690 100%
6 Months ending June 30, 2003
Segment 2003 2002
- ------------------------------------------------------------------
Automation $520,784 66% $ 990,737 76%
Interconnect $271,144 34% $ 318,185 24%
-------- --- ---------- ---
Total Sales $791,928 100% $1,308,922 100%
Financial Results of Operations
Management believes the decrease in the Company's sales are mostly
attributable to general economic conditions. Automation sales are particularly
sensitive to fluctuations in the capital asset purchasing budgets of the
Company's customers. Acceptance of previously quoted automation projects within
the wood products market continue to be delayed by the Company's customers until
later quarters. Interconnect sales are sensitive to production volume
fluctuations for integrated circuit manufactures. Currently, integrated circuit
production volumes continue to remain sluggish and have impacted the growth of
the Company's interconnect sales. Management does feel there has been a slight
increase in quoting opportunities in the first part of the third quarter of 2003
for both product groups, i.e., automation and interconnect. It is hoped that
this trend will continue and result in positive sales growth by the fourth
quarter of 2003.
Gross profit for the period ending June 30, 2003 was $127,857 or 26%,
compared to $58,699 or 11%, for the period ending June 30, 2002. The increase in
gross profit was attributable primarily to a decrease in operating costs of
$135,551 or 27%. The decrease in operating costs is in line with management's
goals of reducing both operating and overhead expenses and minimizing
unallocated manufacturing expenses.
Selling, General, and Administrative expenses were $321,523 for the period
ending June 30, 2003, compared to $396,445 for the period ending June 30, 2002,
a decrease of $74,922 or 19%. Through layoffs, pay cuts, and consolidation of
functions, management has continued to make efforts to reduce expenses.
Net loss for the quarter was $310,895, or $.01 per share for the period
ending June 30, 2003, compared to a net loss of $399,721 or $.02 per share for
the period ending June 30, 2002. The decrease in net loss resulted from a
decrease in operating loss from $368,469, for the period ending June 30, 2002,
to $227,658, for the period ending June 30, 2003, a decrease of $140,811 or 38%.
Interest expense increased from $32,611 to $83,237 for the same respective
periods. The increased interest expense is largely due to the beneficial
conversion features of the convertible debt.
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, 2003 and December 31, 2002.
Current assets were $357,928 for the period ending June 30, 2003, compared
to $873,517, for the period ending December 31, 2002, a decrease of $515,589, or
59%, respectively. Current liabilities were $1,242,001 and $1,178,965, for the
same respective periods. The resulting current ratio was .29 at June 30, 2003,
compared to .74 at December 31, 2002. The decrease in current assets from
December 31, 2002 to June 30, 2003 was primarily due to a decrease of $124,706
in cash, a decrease of $370,896 in accounts receivable, and a decrease in
prepaid expenses of $68,754. Significant changes in current liabilities included
an increase in accounts payable of $173,709 or 161%, from December 31, 2002, to
June 30, 2003, and a decrease in billings in excess of costs and estimated
earnings on uncompleted contracts, from $61,594 to $0.00 for the same respective
periods.
Liquidity:
Management is aware that continued losses and resulting drains on the
Company's resources have caused a weakening of the Company's liquidity.
Management does not feel that current sales will be sufficient to reverse the
liquidity position and feels the Company will need to seek additional funding to
support ongoing operations. Negotiations have continued with holders of
short-term notes that have matured to move those notes to either a conversion to
equity or extension of terms. However, the Company cannot guarantee that the
holders of these notes will exercise the option to convert to equity or will
grant extension terms. Currently the Company has notes payable that have or will
mature as follows: January $83,500, June $295,000, July $50,022, and August
$155,000.
Funding and Capital Resources:
In the period ending June 30, 2003, the Company received an additional
$75,000 in funding in the form of a convertible note payable. The Company
presently does not have additional capital resources to augment cash needs for
ongoing operations, but has entered into an agreement with 1st SB Partners Ltd.,
located in New York, New York, to represent the Company in negotiations with
capital funding opportunities. The Company is currently seeking $1.5 million to
augment capital resources. Management is working diligently to secure additional
capital funding but cannot guarantee that additional funding will be obtained.
The Company also entered into a lock-up agreement with several significant
shareholders on May 29, 2003; representing approximately 15,350,000 shares.
Plan of Operation:
The Company has also entered into an agreement with MediaOne Marketing,
Inc. to represent the Company with investor relations. It is hoped that MediaOne
will be able to bring additional stockholder interest to the company and its
products and operations. The Company will work with MediaOne to prepare and
distribute timely notices of significant events for public awareness.
To support the public image and augment efforts by MediaOne, the Company
has re-designed its web site to create a broader informational data base and
easier access to current events and public announcements. The web site address
has also been changed to an easier-to-access address, i.e., "rtec.com". The
Company feels the new web site design also give a stronger portrayal of the
Company's high-tech image and capabilities.
In order to strengthen its sales efforts, the Company is negotiating with
several mature companies to represent its products, to explore possible
strategic alliances and partnering arrangements. The Company believes that while
it is developing its own internal sales relationships, it will benefit from the
experience and contacts of these more established business partners.
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: Nothing to Report
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.
Changes in Officers and Personnel: Nothing to Report
Item 6: Exhibits and Reports on form 8-K.
a) Exhibit 31.1 Certification Pursuant to 18 U.S.C Section 1350, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
b) Exhibit 32.1 Certification Pursuant to Sections 13(a) or 15(d) of
the 1934 Act, and as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.2 Certification Pursuant to Sections 13(a) or 15(d) of
the 1934 Act, and as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
c) No reports on Form 8-K were filed during the quarter ended
June 30, 2003.
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: August 6, 2003 By /s/ Douglas G. Hastings
---------------------------------------
Douglas G. Hastings, President and CEO
By /s/ Michael T. Montgomery
---------------------------------------
Michael T. Montgomery, CFO