U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the fiscal year ended December 31, 1997.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______
Commission file number 0-5887
RTI INC.
(Exact name of small business issuer as specified in its charter)
NEW YORK 11-2163152
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 3048, 301 Antone, Sunland Park, New Mexico 88063
(Address of principal executive offices) (Zip Code)
(505) 589-5431
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange
Act:
Common Stock, $.08 par value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section l3 or l5(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check is there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to the Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year - $3,161,861
State the aggregate value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specific date within the past 60
days.
Approximately $5,184,100, based on the published sale price ($3 1/2 )
on The NASDAQ Small-Cap Market on March 23, 1998
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of
March 25, 1998 - 1,606,166
Documents Incorporated by Reference: Exhibits 3.1, 3.2, 4.1, 10.1, 10.2, 10.3,
10.4, 10.5, 10.7
Transitional Small Business Disclosure Form Yes [ ] No [x]
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PART I
Item 1. Description of Business
General
RTI Inc., a New York corporation ("RTI"), was incorporated in August
1968. Since February 24, 1997, RTI, through its wholly owned Delaware
subsidiary, Refrigeration Technology Inc. ("RefTech"; and collectively with RTI
the "Company"), has been engaged in the manufacture and sale of evaporative
coolers, commercial heat exchange modules and high-efficiency air conditioners.
Prior to August 8, 1996, the Company was engaged in the contract irradiation
business and operated two irradiation business facilities in New Jersey and one
irradiation facility in North Carolina.
During 1997, the company engaged in the production and sale of each of
its air conditioning and cooling products (See "Industry Background" and
"Company Products"). This included significant dedication of resources in 1997
to 1) product development for the Company's new "AC2" central air conditioner,
including obtaining safety and energy efficiency certifications, 2) development
of production capacity at a factory purchased and equipped for production of the
AC2 in Westway, Texas, and 3) the development of an air conditioner distribution
network, currently limited to the southern states of the US. The AC2 utilizes
patented evaporative technologies to cool homes and small businesses with air
conditioning with reduced electricity usage when compared to standard air
conditioners. The AC2 is assembled in the Company's Westway, Texas factory. In
1997, this factory was purchased, equipped for producing the AC2, and a work
force trained to manufacture the AC2.
In preparation for the production and sale of the AC2, the Company
applied for and received "ETL" safety certification, and an energy efficiency
rating (EER) rating in late July, 1997. The EER of "15" received from the Air
Conditioning and Refrigeration Institute (ARI) exceeded (per ARI standard 210)
all previous ratings awarded by ARI, and confirmed the anticipated energy
efficiency of the AC2 prototype. Although these certifications were received
late in the air conditioning season, a moderate level of AC2 sales were achieved
for the year. However, 1997 was a product development year, and approximately
50% of the units delivered in 1997 are to be replaced in 1998 with the newer
1998 model, reflecting product refinements and enhancements. The older
production year units are being returned to the factory to be retrofitted with
the 1998 product refinements and enhancements for a nominal cost.
Sale of Irradiation Business and Acquisition of QAI
The Company in 1996 ceased its contract irradiation business,
consummating a transaction with SteriGenics International (SteriGenics), as has
been reported previously,.
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On February 24, 1997 ("Closing"), the Company consummated the
transactions ("QAI Transaction") contemplated by the agreement ("Acquisition
Agreement"), among (i) RefTech, (ii) Quality Air, Inc., a New Mexico corporation
(QAI"), and (iii) Rick E. Bacchus, Rockney D. Bacchus, Ronald A. Bacchus, Margie
J. Bacchus, Phillis Bacchus and Opal Simmons, the officers and principal owners
of QAI, pursuant to which, among other things, RefTech purchased the business
and substantially all of the assets of QAI. QAI, commencing in January 1996, was
a manufacturer of evaporative coolers and commercial heat exchangers
manufactured in Sunland Park, New Mexico and, through an affiliated Mexican
company, Industries QAI, S.A. de C.V. ("Industries QAI"), in Ciudad Juarez,
Mexico. In addition, QAI had developed, and done limited manufacturing of a
high-efficiency, residential central air conditioner. QAI was the successor to
certain business and operations of Bacchus industries, Inc. ("BII"), an
affiliated company, which had been engaged in the air coolant business from 1977
until December 1995. (See "Company Products").
In the QAI Transaction, RefTech acquired substantially all of the
tangible and intangible assets of QAI. The tangible assets of QAI, as of
February 23, 1997, consisted primarily of approximately (i) $170,000 of
inventory (a portion of which was at Industrias QAI), (ii) $159,000 of
furniture, equipment and vehicles, (ii)$229,000 of loans to and receivables
from, Industrias QAI, (iv) $348,000 of third party receivables, (v) $123,000 of
other assets, and (vi) $17,000 of cash. The intangible assets of QAI consisted
primarily of a pending US patent application, know-how and other good will. The
patent was assigned to QAI by Rockney D. Bacchus, relating to high-efficiency
central air conditioners.
In the QAI Transaction, RefTech assumed certain specified liabilities
of QAI, consisting of QAI's (i) indebtedness to the Company aggregating $690,000
plus accrued interest, which was incurred by QAI prior to its December 1996
letter of intent with the Company, (ii) indebtedness to Theo W. Muller, Chief
Executive Officer and Chairman of the Company during 1997, and his affiliated
companies aggregating $830,000 plus accrued interest, which loans were made in
contemplation of, and to facilitate, the Closing, (iii) QAI purchase commitments
incurred in the ordinary course of QAI's business for inventories, supplies and
services aggregating approximately $1,300,000, and (iv) other QAI scheduled
liabilities incurred in the ordinary course of QAI's business aggregating
approximately $276,000.
As part of the QAI Transaction, on February 19, 1997, RefTech entered
into a sale and purchase agreement with Industrias QAI and its two nominal
shareholders, Opal Simmons and Robert Given (the "Industrias QAI Agreement"),
for the business and assets of Industrias QAI, at RefTech's election at any time
on or before April 20, 1997. The acquisition of Industrias QAI was consummated
on April 14, 1997, for the price of 1000 Mexican pesos, or approximately $125 US
dollars, recording goodwill of approximately $32,000 for the negative owners'
equity at the time of the purchase. Industrias QAI was renamed Industrias RTI in
1997.
During 1997, the Company's officers were Theo W. Muller, Chairman and CEO, Rick
E. Bacchus, President, Rockney D. Bacchus, Vice President, and Ronald A.
Bacchus, Vice President. Jim Caylor was elected Controller in 1997. On January
26, 1998, Theo W. Muller the Chairman and
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CEO resigned from all positions with RTI. Also, the three outside directors
Sanders Davies, C.W. McMillan, and George M. Whitmore, Jr., resigned on January
28, 1998, January 29, 1998 and January 31, 1998, respectively. The Company
acquired the business of QAI in February 1997, which changed the business
emphasis of the Company, and disagreements occurred between the operating
management and the outside directors as to the direction of the Company and the
manner in which it should be financed.
On January 31, 1998, Dr. Lanny Snodgrass was elected as director for
the Company to fill the vacancy created by the resignation of one of the outside
directors. Dr. Snodgrass is a practicing psychiatrist and psychologist currently
on the staff of VA Puget Sound Health Care System, Faculty of the University of
Washington School of Medicine, Department of Behavioral Sciences.
The Acquisition Agreement provides that, during the period through
December 31, 2001, the QAI Principals, as a group, have the non-assignable right
to nominate three of the seven directors constituting the Company's Board of
Directors. (See Item 9 - "Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act"). RefTech (i) has
agreed to lend up to an aggregate of $240,000 to the QAI Principals, and (ii)has
the right to purchase from BII certain equipment and vehicles previously leased
to QAI for an amount equal to their fair market value. (See Item 12 - "Certain
Relationships and Related Transactions"). In 1997, the QAI Principals borrowed
collectively a total of $80,000 from the Company. RefTech is leasing from BII
the factory building in Sunland Park, New Mexico, which had been occupied by QAI
and certain transportation equipment previously leased by Quality Air from BII.
(See Item 2 "Description of Properties").
Industry Background
Evaporative Coolers. Evaporative coolers operate by forcing
air through a water saturated filter media. Although the technology of cooling
by evaporation is mature, the efficiency of an evaporative cooler is determined
by, among other things, the thickness and type of filter media used, the amount
of air which can be forced through the filter media and the surface area of the
filter media from which water can be evaporated into the surrounding air.
Evaporative coolers do not have refrigerating capacity and are limited in the
amount which they can cool; however, in an arid climate evaporative coolers can
be up to 70% more efficient than traditional refrigerated air conditioning. The
market for evaporative coolers in the United States, which is concentrated in
the arid areas of the Southwest, is seasonal and totals over $100 million
annually. Over 75% of the market consists of replacement units, which are
generally purchased by the homeowners in retail home centers and hardware and
building supply stores. The largest retailers are serviced directly by
manufacturers, while smaller retailers buy from distributors. The remainder of
the market, generally serviced by distributors, consists of HVAC and plumbing
contractors, and includes new construction, home building and manufactured
housing.
Air to Air Heat Exchangers. Heat exchangers are utilized primarily for
heat or cool energy recovery from systems that would otherwise discard the
energy. In a heat exchanger, the heat is transferred from one medium (i.e. a gas
mixture, such as air) to another medium, without such
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mediums coming into direct contact with each other. Heat exchangers are used for
among other things, recycling heat generated from an air conditioning system to
other uses within a building where different temperatures are needed. The market
for air to air heat exchangers historically has been small and undeveloped
because of the high initial cost of the product. However, compliance with more
stringent requirements of indoor air quality ventilation codes, based on
American Society of Heating, Refrigeration and Air Conditioning Engineers, Inc.
("ASHRAE") standard 62- "Ventilation for Acceptable Indoor Air Quality", has
broadened the market for the product.
Central Air Conditioners. The market for residential central air
conditioning equipment is approximately 5.5 million units per year, including
both new construction and replacement demand. Central air conditioning had been
in common use with standard tests used to establish performance, expressed as an
"energy efficiency rating" ("EER") or as a "seasonal energy efficiency rating"
("SEER") and are certified by the Air Conditioning and Refrigeration Institute
("ARI"), an industry association. In 1992, the US government mandated a minimum
SEER of 10. (See "Government Regulations").
Company Products
Evaporative Coolers. The Company's evaporative coolers are manufactured
of fiberglass and plastic. They are circular in design, and compete against
square metal coolers. The circular design allows for greater airflow and a
longer contact time with the evaporative media, which results in a more
efficient cooler, and delivering colder air. The fiberglass housing, unlike
metal units, will never rust. This allows the Company to offer a 15-year limited
warranty on the Aireze compared to typical 5-year warranty offered by
manufacturers of other coolers..
The Aireze cooler has been continuously marketed since 1978, initially
by BII until December 1995 and from January 1996 until the Closing by QAI. QAI
and BII had been marketing the Aireze Cooler primarily for new construction,
including factory-built homes, and had less than a 5% share of the evaporative
cooler market. Sales of Aireze coolers were approximately $1.8 million during
the year ended December 31, 1997. One customer, Rocky Mountain Awning, accounted
for approximately 27% of Aireze sales, but no other customer exceeded 10% of
sales..
The Company introduced an innovative "thru-the-wall" evaporative cooler
in the fall of 1997, which eliminates the necessity of using precious window
space and allows the cooler to be mounted at ground level compared to roof-top
requirements of competing coolers. The Company intends to vigorously market this
product in the Salt Lake City and Denver markets, along with surrounding
markets. The thru-the-wall unit has overcome restrictions by city and county
covenants against rooftop installations. This simplicity of installation has
produced acceptance by distributors and contractors alike. The product promises
to be an attractive addition to the Aireze product line, and patent protection
will be sought.
Heat Exchangers. The heat exchanger built by the Company, primarily
sold under the E2Pak trade name, are custom made and are used to retrofit
sub-assemblies used in commercial and industrial large central air conditioning
units to give them improved or specialized performance such
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as increased energy recovery. In 1997, the Company sold the E2Pak to four
specialized contractors, including Spec-Air, Trico Manufacturing, ABB Mexico
Fans S.A. de C.V. and Cannon Fabrication Inc. The units are installed by these
contractors in large commercial Carrier, Trane and McQuay systems. (See
"Manufacturing").
The Company believes that the E2Pak has a lower initial cost and higher
performance than other similar heat exchangers, but the company has not yet
initiated any program to expand sales beyond its present customers, and there
can be no assurance as to when, if ever, that the Company will be successful in
expanding such sales. Sales of E2Pak units totaled $0.28 million in 1997.
Central Air Conditioners. The Company commenced manufacture of the AC2
central air conditioner for sale beginning in August 1997, after receiving its
"ETL" safety certification and its EER rating of 15 as anticipated. (See
"Government Regulations").
Unlike traditional central air conditioners that have condenser coils
that are air cooled, the condenser coils in the AC2 air conditioner utilize
water-cooled coils. The Company sold a moderate number of AC2 units in 1997
after receiving its safety and energy efficiency certifications late in the
cooling season. In 1997, the Company developed a network of distributors with
presence in the major markets in the states of California, Arizona, Nevada, New
Mexico, Texas, Oklahoma, Louisiana, Arkansas, North Carolina and South Carolina.
These distributors also represent the major brand names in the air conditioning
industry. However, although the Company was able to attract the major
distributors of air conditioners in each market, there can be no assurance that
the AC2 will gain sufficient market acceptance to generate significant sales
within a reasonable period. Furthermore, the suggested annual maintenance,
including cleaning of the water medium, may cause the market to initially
encounter resistance from builders and homeowners.
In 1997, the Company sold the AC2 to distributors, who market the AC2
to "authorized" dealers. In order to facilitate the AC2 water supply
requirement, the Company has provided installation classes for distributors to
train their dealers who install the units. Sales to two distributors, Century
and Familian accounted for 19% and 15% of 1997 AC2 sales, respectively.
Company personnel have limited sales, marketing and distribution
experience with central air conditioners. The Company is devoting a material
portion of its available resources to the commercialization of the AC2, and this
will have a material adverse effect on the Company's financial condition, if not
successful. While significant progress was made in 1997 in developing a
distribution network for the AC2 in the southeast, south central, and
southwestern states, the Company in 1998 will present the AC2 for its first full
season of sales in the market place. There can be no assurance that the Company
will be successful in gaining market success during this first full year of
production and marketing.
The Company continues to sell the EvapCon, a central air conditioner
and related heat pump using unpatented technology (related to the technology in
the AC2). Sales of these units were not significant in 1997, and the Company
does not intend to emphasize this product line.
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Marketing
The Company markets its products mainly through independent
manufacturers' representatives (REPS). Working through its REPS, during 1997,
the Company has enlisted 15 primary distributors in the key air conditioning
markets in California, Arizona, Nevada, Texas, Oklahoma, Arkansas, Louisiana,
North Carolina, and South Carolina. As of March 17, 1998, the Company employed 3
full time sales persons, and had 8 independent manufacturers' representatives
from the southeast, southcentral, and southwest regions of the US.
The Company offers a limited warranty on its manufactured fiberglass
enclosures, housings and condenser coils for 15 years, on its purchased
compressors for 10 years, and on the other components in its products for 1
year.
Backlog and Seasonality
The Market for evaporative coolers and, to a slightly lesser extent,
for air conditioners is highly seasonal. Backlogs for these products are
limited, as they are shipped from stock upon demand. When these units are
shipped out of season to distributors, the industry generally defers the payment
obligations to the beginning of the following cooling and air conditioning
season. As of March 17, 1998, backlogs for the Aireze evaporative cooler and AC2
air conditioner were approximately $320,000, and $891,000, respectively compared
to backlogs on March 21, 1997 of approximately $593,000, and $0, respectively,
The E2Pak is less seasonal and, contrary to the Company's residential products,
these units are made to order. As of March 17, 1998, the E2Pak backlog was
approximately $69,000, compared to a March 21, 1997 backlog of $160,000.
Manufacturing
The Company manufactures all fiberglass components, such as the
enclosures for the AC2, as well as the entire Aireze evaporative cooler in its
Ciudad Juarez, Mexico facility. Manufacturing operations include fiberglass
spray up molding to manufacture tops, bases and blower housing, and fiberglass
weaving to manufacture pad frames for the AC2 and Aireze. Final assembly of
purchased motors, pumps and other components, with manufactured molded parts and
complete fiberglass baskets, for the Aireze also takes place in this facility.
As of March 17, 1998, this facility had a combined production capacity of
approximately 120 enclosures and/or Aireze evaporative coolers per day.
The thermoforming and assembly of louvers for all of the Company's
residential products, as well as the manufacturing of the E2Pak, is performed at
the Company's Sunland Park, New Mexico facility. As of March 17, 1998,
production capacity was approximately 90 louvers and 20 feet of E2Pak heat
exchanger plates per shift.
The assembly of purchased motors, pumps and other components, with
manufactured enclosures and housings, for the AC2 is performed at the Company's
facility in Westway, Texas. Production presently is 50 units. The plant capacity
is calculated to be in excess of 200 units per
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shift.
The equipment used by the Company for the manufacture of its E2Pak was
sold by BII to Spec-Air in 1994, and leased back to BII pursuant to a 5 years
lease expiring in October 1998. With the anticipated completion of the purchase
of BII assets, this lease is expected to be assigned by BII to the Company.
Until the Company is assigned the lease, the Company is making the payments
thereunder and BII is permitting the Company to use the leased equipment. The
lease required annual payments of $48,010 and gives the lessee the first right
to purchase the equipment if Spec-Air determines to sell or relocate the
equipment. In accordance with the lease, Spec-Air (which is the Company's
largest heat exchanger customer) has the first right to purchase all E2Pak units
manufactured by the Company, and the Company is required to deliver a minimum
number of such units to Spec-Air monthly. The lease also requires the lessee to
pay Spec-Air a royalty on all E2Pak units sold by the Company to third parties
and requires that any such sales be at a price at least 25% in excess of the
price that the units are sold to Spec-Air.
While in 1997 the Company developed the facilities to produce the AC2
in its factories, the Company has not yet completed a season with higher
production volumes needed for commercial success with acceptable profit margins.
In addition, since the Company will manufacture the AC2 for the first full
season this year, there can be no assurance that unforeseen technical or other
difficulties will not arise which could interfere with the manufacture of such
product.
Sources of Supply
The fiberglass and resin raw materials used in all of the Company's
products, as well as the copper coils used in the AC2, are commodity products
that have historically been readily available from multiple suppliers. However,
the Company relies on a small number of manufacturers for the motors, and
compressors, and has not had a long-standing relationship with any of such
manufacturers. In addition, some of these components have long lead order times
and shortages could develop, which could hamper the ability of the Company to
produce its products, particularly the AC2, which would have a material adverse
effect on the Company's operations.
Competition
In the evaporative cooler market, the Company believes that the
principal competitive factors are appearance, name recognition, efficiency and
price. The Company is attempting to compete on the basis of efficiency and
price. The Company's competitors include three metal enclosed evaporative cooler
manufacturers, Adobe Air Inc., Champion and Phoenix Manufacturing, and one
plastic enclosed evaporative cooler manufacturer, Tradewinds. These competitors
collectively control approximately 95% of the US evaporative cooler market and
all of who have significantly greater financial manufacturing and marketing
resources than the Company and benefit from greater market recognition.
In the heat exchanger market, the Company believes that the principal
competitive factors are efficiency and price. However, as the Company's units
are custom made and sold primarily to
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a few customers, the Company does not have reliable information as to the
competitive factors, which are relevant to this product line.
The air conditioning industry is highly competitive and the Company
believes that the principal competitive factors in the central air conditioning
market are price, brand recognition and energy efficiency ratings. The Company's
major competitors included Carrier, Rheem/Ruud, Goodman (Janitrol), Trane, and
Lennox, each of which has a 10% or higher market share. All of the Company's
competitors have substantially greater manufacturing, marketing and financial
resources that the Company and benefit from greater market recognition. In
addition, since the AC2 is technically distinct from the equipment offered by
all of the Company's competitors, and there is no assurance that the marketplace
will accept the AC2. The AC2 is water cooled, compared to air cooling by
competitors. While this provides more efficient cooling capacity, it requires
the installation of a water line. This requires additional training for the
installer.
Patents and Trademarks
The Aireze evaporative cooler is patented under U.S. Patent No.
4,440,000. The Company has been notified by the U.S. Patent Office that a patent
has been awarded on the heat exchanger of the AC2 air conditioner, and that the
issuance of the patent number is imminent. Due to changes in technology, the
Company contemplates that alternative technological solutions may be devised to
accomplish the purpose of its patents, but that such patents may offer
short-term protection from third parties. There can be no assurance that other
parties have not applied for or will not obtain patents under which the Company
would need to be granted a license or around which the Company would be forced
redesign its products. The Company seeks to protect its intellectual property
rights through a combination of trade secret, nondisclosure and other
contractual arrangements, and patent, copyright and trade confidentiality
agreements with its employees, consultants, and sales representatives and limits
access to and distribution of its proprietary information; however, there can be
no assurance that these actions will be adequate to deter misappropriation of
the Company's proprietary information, or that the Company will be able to
detect unauthorized use of its intellectual property rights, or that the Company
can afford the high cost required to enforce its intellectual property rights.
Furthermore, there can be no assurance that a claim that the Company's products
infringe on the intellectual property rights of others will not be asserted
successfully against the Company in the future.
Government Regulations
Various federal and state statutes, including the National Appliance
Energy Conservation Act of 1987 (which superseded certain then existing state
requirements) and the Energy Policy Act of 1992, impose energy efficiency
standards for certain of the Company's products. Although the Company's products
are believed to meet or exceed such standards to date, stricter standards in the
future could require substantial research and development expense and capital
expenditures to maintain compliance. If the Company is unable to maintain
compliance or if it otherwise determines that the cost of compliance is too
expensive, it may be required to discontinue some or all of the affected
products, which could have a material adverse effect on the Company.
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Employees
As of March 17, 1998 the Company had 154 employees (including 104
persons employed by Industrias RTI), of whom 129 were hourly employees. None of
the Company's employees are represented by a labor union, and the Company
believes that its employee relations are good.
Impact of Mexican Operations
The Company acquired Industrias QAI (a Mexican company, all of whose
operations are conducted in Mexico) on April 14, 1997, changing the name to
Industrias RTI. (See "Acquisition of QAI"). Industrias RTI, as of March 17,
1998, had 104 employees and manufacturers all fiberglass enclosures and housings
used by the Company, as well as the Company's Aireze evaporative cooler, in its
Ciudad Juarez, Mexico facility. The ability to have manufacturing operations in
Mexico is a critical component of the Company's current business plan. (See
"Manufacturing" and Item 2 "Description of Properties"). Accordingly any event
which has a material adverse impact on the operations of Industrias RTI should
be expected to have a material adverse impact on the operation of the Company as
a whole.
Industrias RTI operates as a "maquiladora" under the Mexican
government's Border Industrialization Program. A maquiladora is a company formed
to assemble components into finished products or to carry out particular
labor-intensive manufacturing operations, primarily for export, and are normally
formed to take advantage of the inexpensive labor available in Mexico. Under the
program, machinery, equipment, parts, raw materials and other components are
allowed to be imported duty-free into Mexico, provided that they are used in the
assemble or manufacture of semi-finished or finished products for export. In
addition, under current US law, the Company does not pay any import duties on
finished goods shipped to it by Industrias RTI.
Substantially all of the cost of operations and operating expenses of
Industrias RTI, which constitute more than an insignificant percentage of the
Company's total cost of operations and operating expenses, are peso-denominated.
The Company does not use foreign currency forward contracts to offset exposure
to US dollar/Mexican peso exchange rates and, as a result, any significant
appreciation of the peso against the dollar would have an adverse effect on the
Company's operating results. Although there has been significant fluctuation in
the US dollar/Mexican peso exchange rate, the Company does not expect the peso
to appreciate significantly against the dollar in the near term.
Pursuant to Mexican Federal Labor Law, employees who have served
Industrias RTI for 15 years of more and who voluntarily end their association
with it (whether upon retirement or otherwise) are entitled to a one-time
seniority based payment currently equal to three months' salary plus 20 days
salary multiplied by the number of years of service. Industrias RTI, which has
been in existence for less than two years, has not yet established any accrual
for such liability, based on its estimate that any such liability, given its
historic employee turn-over rates, would not be material. Mexican law also
required certain other payments to be made to employees in the event of
dismissal without serious cause, disability or death. Mexican Industrias RTI had
taxable income in 1997 of
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892,000 pesos, or approximately $112,000.
Over the last few years, a program of reform has begun to modify the
nature of the Mexican government's role in the Mexican economy. Nevertheless,
the Mexican government continues to exercise significant influence over many
aspects of the Mexican economy. Accordingly, Mexican government actions
concerning the economy could have significant effects on private sector
entities, including Industrias RTI. The Company cannot assure that future
Mexican governmental actions or future developments in the Mexican economy,
including a continued slowdown of the Mexican economy or development of any
social unrest, over which the Company has no control, will not impair the
operations of Industrias RTI or the operations and financial condition of the
Company.
Pursuant to temporary regulations issued by Mexican tax authorities in
March 1995, the Company's Mexican assets may be subject to tax, if the Company
does not comply with certain transfer pricing criteria. The Company believes
that QAI previously was in compliance with such rules and that the Company,
since the QAI transaction, has been in compliance with such rules. In the event
that the Company is found to be in non-compliance with regulations, compliance
standards could have a materially adverse effect on the Company.
In 1993, Mexico, the United States and Canada approved the North
American Free Trade Agreement ("NAFTA"). NAFTA has, among other things, removed
and will continue to remove, over the transition period, most normal custom
duties imposed on goods traded among the three countries. In addition, NAFTA
will remove or limit many investment restrictions, liberalize trade in services,
provide a specialized means for settlement of, and remedies for, trade disputes
arising under NAFTA, and will result in new laws and regulations to further
these goals. With the enactment of NAFTA, the maquiladora program is expected to
be phased out. It is uncertain what ultimate effect, if any, that the phase-out
of the maquiladora program will have on the Company's future results of
operations.
Environmental Considerations
The Company's operations are subject to various US and Mexican
environmental statutes and regulations. In addition, certain of the Company's
operations are subject to US federal, state and local and Mexican environmental
laws and regulations that impose limitations on the discharge of pollutants into
the air and water and establish standards for the treatment, storage and
disposal of solid and hazardous wastes. Although the Company believes that its
present operations, and the operations of Industrias RTI, comply in all material
respects with existing laws and regulations, compliance standards change.
Unforeseen significant expenditures required to maintain such compliance could
have a material adverse effect on the Company's business and financial
condition.
The Company presently is the subject of administrative proceedings
relating to environmental matters arising from its previous operations. (See
Item 3 - "Legal Proceedings").
Item 2. Description of Properties.
11
<PAGE>
The following sets forth, as of March 23, 1998, information concerning
the real property owned, leased or managed by the Company in the operations of
the air cooling and air conditioning business:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Location Function Square Feet Ownership
Sunland Park, New Mexico Corporate Offices, Development, 28,000 Leased
E2Pak Manufacturing Warehouse
Westway, Texas Factory and Warehouse 54,700 Owned
Ciudad Juarez, Mexico Fiberglass cabinet & Aireze 22,800 Leased
Manufacturing
</TABLE>
The property in Sunland Park, New Mexico, located on a 1.3 acre parcel,
is leased by RefTech from Bacchus Industries, Inc., pursuant to a three year
triple-net lease expiring March 1, 2000, at a monthly rental of $6,500, with a
right of RefTech to extend the lease for an additional five year term. The
purchase of the property was financed by the US Small Business Administration,
and RefTech has the right to terminate the lease on 120 days prior notice in the
event of a foreclosure of the property. (See Item 1 - "Business- Acquisition of
QAI").
The property in Westway, Texas, located on a 6.5-acre parcel, was
purchased in April 1997 for $450,000. RefTech has renovated the property to
conduct AC2 manufacturing operations thereon, for approximately $125,000. There
were also expenditures of approximately $200,000 for machinery and equipment
used in manufacturing operations. The purchase of the property, renovation, and
machinery and equipment were paid by the Company from its available cash
resources, and the Company in October obtained a $600,000 interim short-term
loan from Norwest Bank, until an SBA ($250,000) / Norwest Bank ($350,000) 10
year loan was obtained and finalized on January 14, 1998. The rates on these
notes are 8.38% and 9.25% interest on an annual basis, respectively.
The property in Ciudad Juarez, Mexico, located on a 1.8 acre parcel, is
leased by Industrias RTI from an unaffiliated third party, for the sole purpose
of manufacturing fiberglass articles, pursuant to a five year triple-net lease
expiring in January 2001, at an annual rental increasing from approximately
$102,500 in 1997 to approximately $123,500 in the fifth year of the term, plus
the amount of value-added taxes thereon.
The Company believes that its properties are adequately covered by
insurance and are suitable and adequate for their present use, and that such
properties offer the Company the appropriate capacity for its anticipated
operations.
In addition to the properties used by the Company in the operations of
the air cooling and air conditioning business, the Company owns approximately
263 acres of property in Rockaway
12
<PAGE>
Township, New Jersey, all of which property (collectively, the "Rockaway
property") was acquired from a predecessor of Morton Thiokol, Inc. ("Thiokol").
The Company has leased a 62 acre parcel (the "SteriGenics parcel"), which
includes the Company's former 30,600 square foot irradiation facility, to
SteriGenics East Corporation ("SteriGenics East") pursuant to a lease, for an
initial six year term expiring in August 2002, with a five year renewal option,
at a base rent of approximately $77,000. In addition, as part of the lease, the
Company has granted SteriGenics East an option, during the initial term of the
lease, to purchase the SteriGenics parcel at a price decreasing from
approximately $405,000 on or after August 1997 to $138,000 in August 2002. If
the environmental redemption on the SteriGenics parcel (see Item 3 - "Legal
Proceedings -- New Jersey Environmental Proceedings") has been substantially
completed and the SteriGenics parcel has been removed from the national
Properties List by the expiration of the initial term of the lease, the Company
has the right to require SteriGenics East to purchase the SteriGenics parcel in
August 2002 at a price of approximately $138,000. In order to obtain certain
assurances form the New Jersey Department of Environmental Protection (the
"NJDEP"), SteriGenics provided the NJDEP with $500,000 letter of credit (the
"L/C") to secure certain obligations of the Company to complete the
environmental remediation on the SteriGenics parcel. In connection therewith,
the Company has agreed that if the NJDEP has not voluntarily reduced the L/C by
at least $40,000 by August 1, 1998, and by at least such amount by each
anniversary thereafter through the end of the initial term of the lease, the
Company will provide a letter of credit to the NJDEP in the amount of such
deficiency. The Company also has granted SteriGenics East a right to set off the
rental payments on the lease in the event that the NJDEP draws down on the L/C
and the Company fails to reimburse SteriGenics therefore or if the Company
otherwise commits certain defaults on its obligations to complete the
environmental remediation on the site. In the event that SteriGenics East elects
not to renew the lease, SteriGenics has agreed to continue to provide to the
NJDEP a letter of credit in an amount of up to $300,000 and the Company has
agreed to the to keep in effect its letter of credit for up to the lesser of
$200,000 or the amount then required by the NJDEP.
The remaining 201 acres of the Rockaway property, which adjoins the
SteriGenics parcel, includes a 65-acre former industrial park and has a book
value of $50,000. The Company is delinquent in the payment of local real estate
tax on this property; such delinquency, with penalties and interest, aggregated
approximately $231,000 as of December 31, 1997 and has been accrued by the
Company in its financial statements. The failure to make this tax payment is
non-recourse to Company's remaining Rockaway property and other assets.
A substantial portion of the Rockaway property has been pledged to
secure certain obligations of the Company. Item 6 - "Management's Discussion and
Analysis or Plan of Operation" and Note 8 to Consolidated Financial Statements
included under Item 7 - "Financial Statements".
See also Notes 7, 9, 10, and 13 to Consolidated Financial Statements
included under Item 7 - "Financial Statements".
13
<PAGE>
Item 3. Legal Proceedings
In 1982, the New Jersey Department of Environmental Protection (the
"NJDEP") commenced an action in the Superior Court of New Jersey, Chancery
Division, Morris County (Docket No. C-2463-81E) against the Company and Dr.
Martin A. Welt (the Company's then President), individually, alleging coalitions
of the New Jersey Spill Compensation and Control Act and the New Jersey Water
Pollution Control Act and sought injunctive relief, by way of clean-up of the
Company's Rockaway property (which had been purchased from Thiokol), penalties
and damages.
In 1983, a Consent Order was entered into requiring the installation of
monitoring wells, groundwater sampling and analysis. As a result of the analysis
of data showing the presence of halogenated hydrocarbons in the groundwater,
submitted by the NJDEP to the United States Environmental Protection Agency
during this period, a portion of the Rockaway property was placed on the
National Priorities List as a "superfund site". Such listing was based on a 1984
evaluation of a 15-acre portion of the Rockaway property; however, the exact
boundaries of the "superfund site" were not determined. The Company believes
that the Boundaries encompass approximately 80 acres of the 263 acres that
comprise the Rockaway property.
In 1986, the NJDEP issued a directive ordering the Company and Dr.
Welt, individually, to fund the cost of a Phase I Remedial
Investigation/Feasibility Study (the "Phase I Study") to determine the nature
and extent of contamination detected primarily on the 15 acre operating portion
of the Rockaway property. Since failure to comply with the directive could have
subjected the Company to triple damages, the Company agreed to fund the Phase I
Study and to pay the administrative costs of the NJDEP. As a result of such
agreement, in 1987, a Stipulation of Dismissal regarding the Company, only, was
filed in the 1982 action.
In 1989, the NJDEP issued a second directive to the Company and Thiokol
for a Phase II Remediation/ Investigation Feasibility Study (the "Phase II
Study") primarily with respect to an additional 65-acre portion of the Rockaway
property. According to the directive, both the Company and Thiokol were jointly
and severally liable for all costs of the clean up and removal of hazardous
substances discharged on the Rockaway property. In 1991, the Phase II Study was
completed and the NJDEP advised the Company and Thiokol that it intended to
perform additional groundwater studies in order to delineate the extent of
groundwater contamination. In 1992, the Company and Thiokol entered into an
administrative consent order ("ACO") with the NJDEP, pursuant to which the
Company (i) agreed to pay all costs incurred in connection with the Phase II
Study, and (ii) agreed to implement appropriate actions to complete the
remediation of the Rockaway property under the supervision of the NJDEP. In
connection with the ACO, the Company, in 1992, established an accrual for its
estimated costs associated with the Phase II Study and the remediation of the
Rockaway property. During 1993, the Company was assessed additional costs
related to the Phase II study, and the Company completed the surface cleanup of
the Rockaway property, which included, among other things, excavating soils with
PCB levels above NJDEP non-residential standards. In August 1996, the Company
made a payment of $575,000 to the NJDEP as full settlement of all then
outstanding financial claims asserted under the ACO, as well as all such claims
14
<PAGE>
which could be asserted for the period ended October 31,1996 and, as a result,
the NJDEP released the lien it had placed on the Rockaway property.
During 1994, the NJDEP issued a Record of Decision ("ROD") with respect
to approximately 80 acres of the Rockaway property, which proposed remedial
action involving hydrofracturing of the cracked bedrock and the installation of
a system to pump and treat the groundwater under a portion of the Rockaway
property. During 1995, the Company conducted a three-well pilot study, using the
"Clean-Ox" hydrogen peroxide-based remedial system, to test its effectiveness in
decreasing contaminant levels in the deep aquifer. Based upon the results of the
study, in February 1996, the Company petitioned the NJDEP for a change in the
Remedial Action Work Plan under the ROD to permit broader use of the "Clean-Ox"
system. In April 1996, the NJDEP responded to the Company's petition and advised
the Company that the pilot test of the "Clean-Ox" remediation program was not
considered conclusive. In September 1996, the Company completed a second
"Clean-Ox" test, which further reduced the contamination; however, on March 7,
1997, the NJDEP reaffirmed its requirement that the Company comply with the ROD
and submit a revised Remedial Action Work Plan proposal in accordance with the
ROD.
In November of 1997, the Company submitted a Proposed Remedial Action
Work Plan to the NJDEP. This plan, which required the installation of a single
recovery well, rather than three wells as was previously required, was reviewed
by the NJDEP and accepted in February 1998, subject to certain modifications.
Under the modified plan, the "Clean-Ox" technology was permitted, and required
RTI to begin implementing the plan according to the proposed schedule. In 1998,
the installation of the ground water recovery system was to occur, with ground
water remediation to follow for a five-year time frame, subject to regulatory
concurrence based upon favorable results as groundwater is monitored. RTI has
accepted the modified plan, but requested a 90 delay to the original schedule
for administrative purposes. RTI recorded a charge to earnings in 1997 of
$215,285 to reflect the revised cost estimate of the program approved by the
NJDEP.
Nascolite Site
In August 1994, the US Environmental Protection Agency ("EPA") issued
an Administrative Order (No. II-CERCLA-94-0124) ("Order") naming the Company as
a respondent in a proceeding under Section 106(a) of CERCLA, alleging that the
Company, along with two other respondent and eight previously identified
potentially responsible parties (collectively the "PRP Group"), arranged for the
disposal or transport for disposal of one or more hazardous substances to
property owned by Nascolite Corporation (a manufacturer of polymethy1
methacrylate ("MMA") plastic sheet) in Millville and Vineland, New Jersey
("Nascolite Site"). The Nascolite Site was operated by Nascolite as a scrap
acrylic reclamation facility from 1953 to 1980 and was placed on the National
Priorities List in 1984. Subsequently, a Remedial Investigation and Feasibility
Study was conducted and various hazardous materials were found to be on the
Nascolite Site. In 1988, the EPA issued a Record of Decision for operative unit
1 ("OU1"), which addressed ground water remediation on the Nascolite Site and,
in 1991, the EPA issued a Record of Decision for operative unit 2 ("OU2"), which
addressed contaminated soils and structures on the Nascolite Site. A Preliminary
Waste-In-List prepared in 1990 by the EPA indicated that 5,468,455 pounds of
hazardous materials, primarily
15
<PAGE>
liquid waste MMA, was sent to the Nascolite Site. The Company has no current
record of any such shipments, except for a 1978 invoice reflecting that 4,400
pounds of "sludge" was picked up by Nascolite from the Company for transport to
the Nascolite Site. The Company's operations have not used MMA or generated MMA
sludge for more than the past six years.
The Order requires that each of the respondents named therein undertake
and complete all response actions to implement the Record of Decision for OU1
(estimated to cost between $7 million and $30 million) as a joint effort and
that the Company and the PRP Group are to be jointly and severally responsible
for carrying out all of the requirements of the Order; and that if the EPA
incurs any future response costs due to a failure by the named respondents to
comply with the offer, each of the named respondents will be responsible for
triple damages, penalties of up to $25,000 per day and other penalties under
CERCLA. The EPA has not yet asserted any claims against the Company in
connection with the Record of Decision for OU2. On January 26, 1995, the EPA
also notified the Company that it had incurred previous response costs
aggregating in excess of $3.9 million with respect to the Nascolite Site,
demanded payment thereof plus interest and offered the Company the right to
enter into negotiations with the PRP Group to lead to reimbursement to the EPA
of Response Costs. On February 9, 1995, the Company, without admitting any
liability, notified the EPA that it elected to participate in good faith
negotiations with the PRP Group. Simultaneously, the Company entered into a
Tolling Agreement with the United States on behalf of the EPA, pursuant to which
the EPA agreed not to institute the alleged cause of action against the Company
prior to September 1, 1995 in order to permit the Company to pursue good faith
efforts to settle with the PRP Group the claims alleged against the Company in
the Order.
In 1996, the Company entered into a Partial Consent Decree with the EPA
pursuant to which the Company agreed to pay the EPA, upon court approval of the
Partial Consent Decree, $32,247 in settlement of all OU1 claims. This settlement
of $32,247 was paid by the Company in 1997.
By letter dated October 1, 1996 the NJDEP advised the Company and the
other members of the PRP Group that the NJDEP is seeking approximately $285,000
from the PRP Group for its response costs at the Nascolite Site. The Company has
agreed to allow the PRP Group to represent it in negotiations with the NJDEP as
long as the PRP Group agrees that the "de minims" parties, such as the Company,
contribute pro-rata on the same basis as the EPA settlement involving OU1 (in
which instance, the Company's pro-rata share was fixed at 0.09% of the total
cost, or approximately $257.00).
General
As of December 31, 1997, the Company had accrued $962,600 for the
possible implementation of a groundwater remediation plan required by the ROD on
the Rockaway property. While the groundwater remediation plan calls for a five
year remediation time frame using one well, testing at that time will determine
if the remediation will be deemed adequate, and discontinue, or if the
remediation will continue beyond the five year period. As a result of ongoing
remediation and NJDEP involvement on these matters, there can be no assurance
that the cleanup, remediation and
16
<PAGE>
NJDEP oversight accruals will represent the Company's ultimate liability. See
Note 10 to Consolidated Financial Statements included under Item 7 - "Financial
Statements."
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to vote of securities holders of the Company
during the fourth quarter of its 1997 fiscal year.
17
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's Common Stock is traded on The NASDAQ Small-Cap Market
under the symbol "RTII". The following table sets forth the high and low bid
quotations for each quarterly period during the two calendar years ended
December 31, 1997 for the Company's Common Stock, as reported by The NASDAQ
Small-Cap Market.
High Bid Low Bid
1st Quarter 1996 $2-11/16 $1-11/16
2nd Quarter 1996 3-1/4 2-1/4
3rd Quarter 1996 3-3/8 2-4/8
4th Quarter 1996 3-7/8 3-1/4
1st Quarter 1997 3-1/2 2-9/16
2nd Quarter 1997 3-3/4 1-1/2
3rd Quarter 1997 8-3/8 3-3/4
4th Quarter 1997 8-5/8 2-5/8
As of March 23, 1998, the Company had approximately 1,800 holders of
record of its Common Stock. During the fiscal year ended December 31, 1997,
there were transactions in the Company's Common Stock on approximately 77% of
all trading days.
The Company has not paid any common dividends. The payment of cash
dividends the Company, if any, will be made only from assets legally available
therefore and will depend generally upon the Company's short-term and long-term
cash availability, current and anticipated capital requirements, restrictions
under any then existing credit and other debt instruments and arrangements and
other factors deemed relevant by the Company's Board of Directors. The Company's
Board of Directors does not anticipate the payments of cash dividends on the
Company's Common Stock as long as the Company's Rockaway property remains on the
National Priorities List as a "superfund site".
In 1997, the Company closed on a private placement of 100,000
authorized but unissued shares of Series B Preferred Stock at $5.80 per share,
with gross proceeds of $580,000. The dividends on such preferred stock are 9%,
or $52,200 annually, payable at the end of each quarter. After the sale of the
preferred stock, the Company inadvertently entered into the note with Norwest
Bank that prohibited the payment of the preferred dividends. Because of this
conflict, the Board of Directors did not declare dividends for the quarters
ended December 31, 1997 and March 31, 1998. However, for the preferred
shareholders, dividends are cumulative, whether or not declared. The Company has
requested that Norwest Bank waive the prohibition of dividend payments with
respect to the preferred stock, but has not yet received a response from Norwest
at this date. The Company
18
<PAGE>
cannot be assured that Norwest Bank will waive the restriction on the payment of
dividends.
Item 6. Management's Discussion and Analysis or Plan of Operation.
IN REVIEWING MANAGEMENT'S DISCUSSION AND ANALYSIS, REFERENCE IS MADE TO
THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED AS ITEM 7 -
"FINANCIAL STATEMENTS" IN THIS ANNUAL REPORT ON FORM 10-KSB. AS DISCUSSED IN
SUCH NOTES, THE COMPANY OWNS PROPERTY WHICH HAS BEEN THE SUBJECT OF AN
ENVIRONMENTAL INVESTIGATION. SUCH FINANCIAL STATEMENTS, AS STATED IN THE REPORT
OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS INCLUDED THEREIN, HAVE MADE
PROVISION FOR THE COSTS OF SUCH INVESTIGATION AND RESULTING MONITORING, CLEANUP
AND REMEDIATION OBLIGATIONS IN ACCORDANCE WITH EXISTING STUDIES AND CLEANUP
PLANS. HOWEVER THERE CAN BE NO ASSURANCE THAT SUCH PROVISION CONSTITUTES THE
ULTIMATE LIABILITY THAT MAY RESULT UPON THE FINAL DISPOSITION OF THE
ENVIRONMENTAL INVESTIGATION, CLEANUP AND REDEMPTION PROGRAMS.
Disclosure Concerning Forward-Looking Statements
Certain statements contained in this Annual Report on Form 10-KSB under
Item 1 "Description of Business " and this Item 6 - "Management's Discussion and
Analysis or Plan of Operation" may be considered forward-looking statements.
Such statements relate, among other things, to the plans and objectives of
management for future operations, including plans or objectives relating to the
products of the Company, management's estimate of certain future costs and
expenses and the future performance of the Company. Such forward-looking
statements are subject to risks, uncertainties, and other factors which could
cause the Company's actual results to differ materially from any projected
results expressed or implied by such forward looking statements. These risks,
uncertainties and other factors include, but are not limited to, the
uncertainties accompanying new product marketing, including market resistance
and the timing and ability to establish the necessary sale, marketing and
distribution network, the impact of current and future government regulations,
the seasonal nature of the industry in which the Company operates, the risks
associated with a transition from limited production volume, the impact of
competitive products, the ability to have available projected cash and other
resources on a timely basis, if at all, the risks involved with a manufacturing
operation in Mexico, as well as the other facts discussed in Item 1 -
"Description of Business" and elsewhere in this Annual Report on Form 10-KSB.
Results of Operations
1997 Results of Operations Compared to 1996 Results of Operations
1997 revenues consisted primarily of cooler and air conditioning
business sales of $3,161,811, interest and rental income of $45,773 and $83,611
respectively. This is compared to 1996 interest and rental income of $79,199 and
$42,930, respectively. Rental income increased due
19
<PAGE>
to the Rockaway property being leased for the full year of 1997, but only a
partial year in 1996. Other income in 1997 consisted of $46,179 predominantly
from a third party settlement, while in 1996, the other income of $580,000
represented a settlement of prior environmental insurance claims.
In 1997, the Company recorded cost of sales of $3,242,829 and Research
& Development expense of $774,720. These expenses, which may not be reflective
of ongoing operations, were the result of a heavy emphasis in 1997 on
modification of the AC2, including fine tuning the unit for efficiency in the
Air Conditioning and Refrigeration Institute energy efficiency test, preparing
for and passing the ETL safety certification test, development of product
assembly lines, training of production personnel, change out of components on
units for safety, efficiency, or product appearance purposes. Additionally,
while moderate levels of sales were achieved in 1997, receiving ETL and ARI
certificates in the last week of July 1997, permitted sales to begin only as of
August 1, 1997, which was substantially past the peak selling season for air
conditioning products. The company provided facilities, personnel and other
overheads to support higher production levels than were achieved in 1997.
General & Administrative (G&A) expenses were $963,817 in 1997 compared
to $217,005 in 1996. The increased costs are primarily attributable to the
start-up of air-cooling and air conditioning business expenses. Major components
of the air-cooling and air conditioning operations G&A include administrative
salaries of $405,000, office supplies and communications of $150,000, legal and
professional fees of $89,000, depreciation and amortization of $140,000,
transportation expenses of $52,000, and interest expense increases of $55,000.
Selling expenses in 1997 were $655,824 consisting primarily of
advertising of $281,000, sales salaries of $133,000, sales travel expenses of
$49,000, and $47,000 to construct AC2 displays units. There were no selling
expenses in 1996 related to the irradiation business.
Expenses for Rockaway Industrial Park declined by approximately
$12,000. Environmental investigation, remediation and related expense decreased
from $610,559 in 1996 to $249,855 in 1997, primarily due to a lower reserve for
future remediation cost recorded for the Rockaway property.
As a result of the foregoing, the Company sustained a loss from
continuing operations of $2,667,385, or $1.92 per share in 1997, compared to a
loss from continuing operation of $0.18 per share in 1996.
In 1996, the Company sustained a loss of $72,000 from discontinued
irradiation operations before the final decision to sell such operations and an
additional loss of $24,242 from the disposal of such operations. As a result,
the Company reported a net loss of $297,182, of $0.27 per share in 1996. The
1997 net loss is $1.92 per share.
Uncertainty of Future Operating Results
20
<PAGE>
Until August 1996, the company was engaged primarily in the business of
supplying irradiation services, which operations were sold on August 8, 1996. On
February 24, 1997, the Company purchased an air-cooling and air conditioning
manufacturing business. Prior to such time, the Company had no experience in
manufacturing, marketing and selling air-cooling and air conditioning products
or in marketing and selling any products through retail channels. Thus, any
discussion of the Company's results of operations for the periods through
December 31, 1996 are not a meaningful indication of the results of operations
which may be expected subsequent to such date and should not be relied upon for
such purpose. Furthermore, while the Company produced and sold a moderate level
of its AC2 air conditioners in 1997, operations were centered, not fully on
production, but rather on development. In 1997, the Company refined the AC2
product, obtained necessary government certifications for safety and energy
efficiency, developed production capacity (both physical production capacity at
its Westway plant, and training of a workforce of approximately 15 employees) in
anticipation of full production in 1998, and development of a distribution
network in the southeast, middle south, and southwestern regions of the US. Thus
the results of operations in 1997 may not be a meaningful indicator of the
subsequent results of operations, and should not be relied upon for that
purpose.
The Company expects that its future operating results may fluctuate as
the Company gains further manufacturing, sales marketing experience in its new
business. The cooling and air conditioner business is highly seasonal, and the
Company anticipates that approximately half of its annual sales will be obtained
during a three-month period from late spring to early summer. The Company
believes that its future success, if any, will be largely dependent on its
ability to market its AC2 air conditioner, of which there can be no assurance.
In addition, the Company's operating results will be significantly dependent on
a number of factors, many of which are outside the Company's control. See Item
1- "Description of Business". These factors include, among others, highly
competitive market conditions and possible new product introductions by the
Company's competitors, most of whom are substantially better known with
substantially greater financial and other resources and offer trade named
products which already have received significant market acceptance; changes in
market demand; ability to maintain adequate working capital and cash resources
to purchase necessary raw materials and components for the manufacture of
sufficient finished products, to carry its anticipated accounts receivable and
to carry out its marketing plans; the ability to anticipate the mix of customer
orders which may be received and to manufacture products in advance thereof; the
timing of receipt of customer orders and the ability to ship such orders on a
timely basis; market acceptance of the Company's products the ability to
successfully carry our its marketing plans; continued compliance with industry
standards and governmental regulations; the ability to continue to maintain
certain manufacturing operations in Mexico at a reasonable cost; and general
economic conditions. A significant portion of the Company's business may be
derived from orders placed by a limited number of larger customers, and the
timing of such orders can cause significant fluctuations in the Company's
operating results. In addition, if anticipated customer orders fail to timely
materialize and/or delivery schedules are deferred or canceled, the Company may
not be able to timely and adequately adjust its commitments to compensate
therefor.
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<PAGE>
Liquidity and Capital Resources
Information with respect to total assets, long-term debt (net of
current portion and discount), working capital (deficiency) and certain related
ratios, as of December 31, 1997, 1996, 1995, follows. However, as a result of
the sale to SteriGenics International ("SteriGenics") of the Company's former
irradiation business in August 1996 (the "SteriGenics Transaction) and the
acquisition of the business of Quality Air, Inc. ("QAI") in February of 1997 and
its affiliated Mexican company, Industrias QAI, S.A. de C.V. ("Industrias QAI")
in April of 1997 (the "QAI Transaction"), the information set forth herein and
in "Results of Operations" below may be of only limited analytical value:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1997 1996 1995
Total assets (in thousands) $5,670 $4,244 $ 7,882
Long-term debt, net of discount
(in thousands) $257 $ 265 $ 2,024
Working capital (deficiency)
(in thousands) ($113) $2,994 ($1,116)
Working capital ratio .95 to 1 .32 to 1 .38 to 1
Percentage of total liabilities to
stockholders' equity 199% 45% 149%
</TABLE>
The Company had cash and cash equivalents of $2,578,180 and working capital of
$2,994,640 at December 31, 1996, primarily as a result of the SteriGenics
Transaction. At December 31, 1997, the Company had cash and cash equivalents of
$11,712 and working capital of ($112,745). The decrease in cash and working
capital can be attributed to assumption of air cooling and air conditioning
operations in 1997, including purchase of fixed assets, operating expenses, and
research and development expenses, offset by cash generated from operations and
financing activities. (See Consolidated Statements of Cash Flows included under
Item 7 - "Financial Statements).
In 1997, the net cash used in operating activities was $2,925,540.
Investing activities used net cash of $986,422 primarily for the purchase of
fixed assets of $1,250,013 and loans to related parties of $129,857, offset by
proceeds received in 1997 from the sale of irradiation operations. In 1996,
investing activities provided net cash of $2,580,568, mainly from the sale by
the Company of its irradiation business, offset by purchases of fixed and other
assets and the $670,000 loan to QAI in contemplation of the QAI Transaction. Net
cash used in financing activities in 1996 was $1,800, (which resulted from the
sale of preferred stock that was subsequently returned to the Company in the
SteriGenics Transaction and retired) and the exercise of warrants, offset by the
repayment of debt. In 1997 net cash provided by financing activities was
$1,345,494 including proceeds from the sale of 145,000 shares of common stock of
$420,500 and 100,000 shares of preferred stock for a total of $580,000. Proceeds
from notes payable provided cash of $603,633 and two related party
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<PAGE>
loans totaling $593,000 were offset by the payment for the earlier $830,000 note
to related parties.
The Company had two related party notes outstanding at December 31, 1997, one
for $543,000 with its former Chairman and CEO, Theo W. Muller (Muller Note), and
another for $50,000 with Frellum Corporation (Frellum Note), which is owned 51%
by Mr. Muller. These notes, which were due on February 20, 1998, were
renegotiated effective February 21, 1998, for principal and accrued interest in
the amounts of $588,383, and $53,022, respectively. The terms of the Muller Note
are 12% annual interest payable quarterly, and installments of $100,000 each six
months beginning August 20, 1998, until principal is fully paid. The terms of
the Frellum Note are 12% annual interest, with a payment of $26,511 due on
August 20, 1998, and the balance along with accrued interest due and payable on
February 20, 1999. Should the Company complete a private placement of equity
securities, the Company will prepay $143,000 principal on the Muller Note but be
relieved of the first payment due August 20, 1998. Should the Company receive a
bridge loan pursuant to a private placement of equity securities, it will prepay
principal of $26,511 plus accrued interest.
The Company expects to fund its 1998 operations and budgeted
expenditures, including budgeted capital expenditures of approximately
$1,300,000 and substantial seasonal buildup of inventory by (i) forecasted
sales, (ii) working capital, (iii) available cash and cash equivalents, (iv) the
first close on a private placement memorandum to for authorized but unissued
common stock of $500,000, with net proceeds of $460,000, (v) the negotiation of
a private placement of $1,500,000 subject to shareholder approval, (vi) asset
financing by RefTech, and (vii) asset based financing line of credit currently
under negotiation. There is no assurance that the Company will achieve fore-
casted sales or obtain either shareholder approval for the $1.5 million private
placement, or be successfule in obtaining the desired financing.
On March 11, 1998, the Company consummated a private placement of 25
Units at a purchase price of $20,000 per Unit. Each Unit consisted of 5,000
shares of Common Stock and a Warrant to purchase 2,500 shares of Common Stock at
a price of $4.50 per share for a period of five years from such date. The
$460,000 of net proceeds were applied to the Company's general working capital.
The Company is also contemplating, subject to shareholder approval, a
private placement of approximately 577,000 shares of 10% convertible preferred
stock at a price of $2.60 per share. If consummated, such offering would yield
gross proceeds of approximately $1,500,000. No assurances can be given that such
offering will be consummated upon such terms, if at all. The Company is also
negotiating with a finance company to establish an asset based line of credit
for up to $4,000,000 plus an additional $500,000 for the purchase of machinery
and equipment. There is no assurance that such negotiations will be successful.
The Company has obtained audited financial statements of QAI for the
period of January 1, 1997 to February 23, 1997, the date QAI was acquired by
RTI. However, the Company has not obtained audited financial statements of QAI
for 1996. The Company is presently considering whether to have QAI complete 1996
financial statements and have them audited. However, there is no assurance that
sufficient documentation exists to prepare the financial statements, or that
such financial statements are auditable. Such lack of audited financial
statements will prevent the Company from fulfilling certain requirements of the
Securities and Exchange Commission under the Securities Act of 1933 ("1933
Act"), which are a precondition to the registration for public offering and sale
of the Company's securities and, under certain circumstances, for the private
placement of its securities if the Company avails itself of Regulation D under
the 1933 Act ("Regulation D"). As a result, the Company will not be able to
raise funds from the public sale of its securities, until after receiving
audited financial statements for the year ending December 31,
23
<PAGE>
1998 and the Company has filed its 1998 Form 10-KSB with the Securities and
Exchange Commission. In addition, since the Company was not able to obtain and
file such audited financial statements with the Securities and Exchange
Commission under the Securities Exchange Act of 1934 ("1934 Act") by no later
than May 13, 1997, the Company became delinquent in its flings under the 1934
Act, the principal consequent of which was that the holders of the Company's
Common Stock, whose shares are characterized as "restricted securities" (as such
term is defined in Rule 144 promulgated under the 1933 Act), cannot avail
themselves of certain provisions of such Rule to publicly resell such restricted
securities until after a two-year holding period (assuming such holders are not
deemed to be affiliates of the Company).
The Company's operations conducted at Industrias RTI are labor
intensive but, due to the prevailing wages paid in Mexico, the Company does not
expect inflation to have a material impact on the Company's business. Except for
the hiring of seasonal employees for its manufacturing operations, and 6-10
additional employees in Sales, Marketing, Production Management, and Accounting,
the Company does not expect any significant changes in the number of its
employees during 1998.
The February 24, 1997 acquisition of the air cooling and air
conditioning business of Quality Air, Inc. has effected a substantial change in
the Company's consolidated balance sheet from the Company's consolidated balance
sheet as of December 31, 1996, which is included in Item 7 "Financial
Statements". The QAI Transaction increased the Company's property, plant and
equipment and added an intangible asset (air conditioning and related patents
and patent application) of over one million dollars which, in the aggregate and
when combined with the increase in liabilities arising form the QAI Transaction,
will result in a reduction in working capital and a reduced working capital
ratio.
As described in Note 10 to Consolidated Financial Statements included
under Item 7 "Financial Statements", the Company is obligated to remediate a
portion of its Rockaway property. Costs relating to such activity have been
provided for in accordance with existing environmental studies and approved
cleanup plans. There can be no assurance that such provisions will constitute
the ultimate liability of the Company, although the Company believes that such
provisions are adequate. In addition, the Company has been named a respondent in
an environmental proceeding relating to a deposit site, to which the Company
shipped a relatively small amount of materials during a period prior to 1982.
The Company in 1997 paid the $32,247 amount reserved at December 31,1996. Based
upon all available information, the Company is of the opinion that the accrual
is adequate, although there can be no absolute assurance that it will be
adequate. (See Item 3 - "Legal Proceedings").
New Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123 "Accounting
for Stock-Based Compensation". The Company adopted this pronouncement by
Company's results of operation or financial condition. Effective for the year
ended December 31, 1997, the Company adopted SFAS 128, "Earnings Per
24
<PAGE>
Share". In adopting this pronouncement, the company computed the loss per share
on the basis of the weighted-average number of common shares outstanding during
the year and did not include the effect of potential common stock, which were
antidilutive. The Company has not yet adopted SFAS 130, Reporting Comprehensive
Income, SFAS 131, Disclosures About Segments of an Enterprise and Related Infor-
mation, or SFAS 132, Employers Disclosures about Pensions and Other Postretire-
ment Benefits which will be effective for the year ended December 31, 1998. The
Company does not expect any material change in the financial statements as a
result of adopting these statements.
Item 7. Financial Statements.
Attached hereto and made a part hereof.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
In 1997, RTI Inc. reported a change in its certifying accountant. The
change was not due to disagreements between BDO Seidman, LLP and the Company,
but one based on geographical convenience and expense. The Company had relocated
its principal base of operations from Rockaway, New Jersey to Sunland Park, New
Mexico. BDO Seidman, LLP has and had no office from which the audit work could
be accomplished any more inexpensively than from its Woodbridge, New Jersey
office, which both parties agreed could be done on a temporary or emergency
basis, but was not practical for the extended future. Consequently, the Company
engaged Neff & Company, LLP, an Albuquerque, New Mexico based accounting firm, a
strong regional accounting firm with experience in auditing small public
companies.
25
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Directors and Executive Officers of the Company
The directors and the Executive Officers of the Company are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Name Age Position with the Company
Rick E. Bacchus 44 Director, President and Chief Financial Officer
Rockney D. Bacchus 42 Director, Vice President of Development and
Secretary
Ronald A. Bacchus 40 Director and Vice President of Manufacturing
Dr. Lanny Snodgrass 57 Director
</TABLE>
Each director holds his office until the next Annual Meeting of
shareholders and until his successor is elected or until his earlier
resignation.
Executive officers are appointed by, and serve at the discretion of,
the Board of Directors for a term beginning on the date of their respective
appointments and until their respective successors are duly appointed and
qualified.
Rick E. Bacchus has been a Director of the Company since February 24,
1997 and was elected President of the Company effective February 24, 1997. From
November 1996 until February 24, 1997, Mr. Bacchus was president of QAI, and for
the ten months prior thereto was employed by QAI as an independent consultant.
Mr Bacchus has been president of Bacchus Industries, Inc. ("BII"), a predecessor
of QAI, since 1977, although BII discontinued its active business operations in
December 1995.
Rockney D. Bacchus has been a Director of the Company since February
24, 1997 and was elected Vice President-Development and Secretary of the Company
effective February 24, 1997. From November 1996 until February 24, 1997, Mr.
Bacchus was vice president of QAI, and for the ten months prior thereto was
employed by QAI as an independent consultant. Mr. Bacchus was a vice president
of BII from 1977 until January 1996.
Ronald A. Bacchus has been a Director of the Company since February 24,
1997 and was elected Vice President of the Company and Vice
President-Manufacturing of RefTech effective February 24, 1997. From November
1996 until February 24, 1997, Mr. Bacchus was vice president
26
<PAGE>
of QAI, and for the ten months prior thereto was employed by QAI as an
independent consultant.Mr. Bacchus was a vice president of BII from 1978
until January 1996.
Dr. Lanny Snodgrass was elected a director of the Company on January
31, 1998. Dr. Snodgrass has been a practicing psychiatrist and physician with
chief status at the VA Puget Sound Health Care System since 1996, and on
the faculty of the University of Washington School of Medicine, Department
of Behavioral Sciences since 1997. Prior to 1996, Dr. Snodgrass was an
Assistant Professor at the UCLA School of Medicine.
Pursuant to the Acquisition Agreement in which the Company acquired the
business of QAI, the Company agreed that, during the period ending December 31,
2001, Rick E. Bacchus, Rockney D. Bacchus and Ronald A. Bacchus, as a group,
will have the non-assignable right to nominate three members the Company's Board
of Directors, which consisted of seven members at the time such agreement was
entered into. Rick E. Bacchus, Rockney D. Bacchus and Ronald A. Bacchus are
currently serving as directors pursuant to such agreement.
The Company pays its directors (other than full-time employees of the
Company) at the rate of $6,000 per year and reimburses its directors for their
out-of-pocket expenses incurred in connection with their services to the
Company.
No family relationship exists among the directors of the Company or
between any of such persons and the executive officers of the Company, except
that Rick E. Bacchus, Rockney D.
Bacchus and Ronald A. Bacchus are brothers.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16 (a) of the Securities Exchange Act of 1934 requires
executive officers, directors and persons who own more than 10% of the Company's
Common Stock to file within prescribed periods initial statements of beneficial
ownership and statements of changes in beneficial ownership of their shares of
Common Stock with the Securities and Exchange Commission and The Nasdaq
Small-Cap Market, on which the Company's Common Stock is traded. Such persons
also are required to furnish the Company with copies of all such statements they
file. Based on its review of the copies of such statements received by it and
written representations from certain of such persons, the Company believes that,
during 1997, all such filing requirements applicable to such persons were duly
complied with.
Item 10. Executive Compensation.
The following table sets forth the cash and cash equivalents paid
during the fiscal year ended December 31, 1997 to the Company's Acting Chief
Executive Officer. No other officer is compensated at a rate in excess of
$100,000 per year.
27
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Name and Principal Year Annual Compensation long-term
Position Compensation
Awards Payouts
Salary Bonus ($) Other ($) Restricted Options/ LTIP All
($) Stock SARS OTHER
Awards
------------------ ---------------
Rick E. Bacchus / CEO 1997 80,000 3,077 (1)
(2)
</TABLE>
- ------------------------
(1) Mr. Bacchus has the use of Company owned vehicle having a value of
approximately $3,500.
(2) Mr. Bacchus is serving as the Company's acting Chief Executive Officer
since the resignation of Theo W. Muller.
Mr. Bacchus is currently being compensated at the rate of $95,000 per year. The
Company's prior Chief Executive Officer, Theo W. Muller, was paid cash
compensation of $6,000 per year for the fiscal years ended December 31, 1996 and
1995.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
Pursuant to employment agreements between RefTech and each of Rick E.
Bacchus, Rockney D. Bacchus and Ronald A. Bacchus, such persons have been
employed as President, Vice President-Development and Vice
President-Manufacturing, respectively, of RefTech for a five year term
commencing February 24, 1997 at an annual base salary of $80,000, which was
subsequently increased to $95,000 per year by the Board of Directors on March
31, 1998, with Messrs Rick, Rockney and Ronald Bacchus abstaining. In his
employment agreement, Rick E. Bacchus also has been employed as President of the
Company for the term of his employment agreement, and the Company has agreed
that, subject to its fiduciary duties, as the sole shareholder of RefTech, it
will encourage the directors of RefTech to elect Mr. Bacchus as the president of
RefTech during such term. Each of the employment agreements provides that upon a
termination of employment thereunder without cause, the terminated employee is
entitled to a continuation of salary for a period of two months in lieu of any
other entitlements.
As set forth above under Item I - "Business - Acquisition of QAI", on
February 24, 1997, RefTech acquired the business and substantially all of the
assets of QAI. In connection therewith, RefTech agreed to deliver to QAI up to
an additional 225,000 shares of the Company's Common Stock at such time as
certain operating results are achieved, if such results are achieved prior to
January 1, 2002. The Company has agreed that, in the event of an unsolicited
bona-fide tender offer for a majority of the Company's then outstanding Common
Stock initiated prior to January 1, 2002, which the Company's Board of Directors
determines not to recommend to the Company's shareholders, such shares will be
delivered even if such results have not yet been achieved. Rick E.
28
<PAGE>
Bacchus, Rockney D. Bacchus and Ronald A. Bacchus currently own substantially
all of the capital stock of QAI.
The Company does not have any other employment agreement or termination
or change in control arrangement with any of its executive officers.
1987 Stock Option Plan
The Company's 1987 Stock Option Plan ("1987 Plan") was adopted by the
Board of Directors of the Company on November 4, 1987 and approved by the
shareholders of the Company on May 25, 1988. The 1987 Plan, as amended,
authorized the issuance, of options covering up to 90,625 shares of Common Stock
(subject to adjustment in certain circumstances) to such key employees or other
individuals (including executive officers and directors of and consultants to
the Company) who have performed, or reasonably may be expected to perform,
services of special importance to the management, operation or development of
the business of the Company. The 1987 Plan expired by its terms on November 3,
1987 and as of December 31, 1997, had 5,500 options outstanding.
Item II. Security Ownership of Certain Beneficial Owners and Management.
As of March 25, 1998, the Company had 1,606,166 shares of Common Stock
outstanding. Set forth below is information, as of such date, with respect to
(i) each person who is known by the Company to be the beneficial owner of more
than 5% of the Common Stock, (ii) each of the current directors of the Company,
and (iii) the beneficial ownership of Common Stock of all current directors and
all executive officers of the Company, as a group.
Number of Shares Percent
Name and Address of Owner of Common Stock of Class
Quality Air, Inc. 235,000 (a) 14.63%
c/o Rick E, Bacchus
301 Antone Street
Sunland Park, NM 88063
Rick E. Bacchus 84,568 (b) 5.26%
301 Antone Street
Sunland Park, NM 88063
Rockney D. Bacchus 84,567 (c) 5.26%
301 Antone Street
Sunland Park, NM 88063
Ronald A. Bacchus 84,566 (d) 5.26%
301 Antone Street
Sunland Park, NM 88063
29
<PAGE>
Dr. Lanny Snodgrass 38,250 (e) 2.36%
8227 Juanita Drive
Kirkland, WA 98034
Theo W. Muller 155,393 (f) 9.67%
20 Peach Hill Road
Darien, CT 06820
All directors and executive 291,951 (g) 18.14%
officers, as a group (four persons)
(a) Includes 50,000 shares of Common Stock held in escrow to cover possible
indemnifications claims, but excludes up to 225,000 additional shares which may
be issued to QAI if the Company achieves certain operating results. See Item I -
"Business -- Acquisition of QAI" Rick E. Bacchus, Rockney D. Bacchus and Ronald
A. Bacchus, directors and executive officers of the Company, are stockholders of
QAI. Each of such persons claims beneficial ownership in approximately 33.2% of
the shares held by QAI, and although he may be deemed to beneficially own the
remaining shares held of record by QAI, disclaims beneficial ownership in such
remaining shares.
(b) Consists of approximately 33.17% of the shares of Common Stock held by
QAI (see note (a) to this table), 4,417 shares of Common Stock and a
Redeemable Warrant to purchase 2,209 shares of Common Stock at a price
of $4.50 per share expiring in March 2003.
(c) Consists of approximately 33.17% of the shares of Common Stock held by
QAI (see note (a) to this table), 4,417 shares of Common Stock and a
Redeemable Warrant to purchase 2,208 shares of Common Stock at a price
of $4.50 per share expiring in March 2003.
(d) Consists of approximately 33.17% of the shares of Common Stock held by
QAI (see note (a) to this table), 4,416 shares of Common Stock and a
Redeemable Warrant to purchase 2,208 shares of Common Stock at a price
of $4.50 per share expiring in March 2003.
(e) Consists of 25,500 shares of Common Stock and a Redeemable Warrant to
purchase 12,750 shares of Common Stock at a price of $4.50 per share
expiring in March 2003.
(f) Consists of (i) 130,393 shares directly owned by Theo W. Muller, the
Company's former Chairman and (ii) 25,000 shares directly owned by
Frellum, which is 50.1% owned by Mr. Muller. See Item 12 - "Certain
Relationships and Related Transactions."
(g) Includes the shares referenced in notes (b), (c), (d) and (e) above.
The Company does not know of any arrangements, including any pledge by
any person of securities of the Company, the operation of which at a subsequent
date may result in a change in control of the Company.
30
<PAGE>
Item 12. Certain Relationships and Related Transactions.
As set forth above under Item 1 - "Business -- Acquisition of QAI", on
February 24, 1997, the Company's wholly-owned subsidiary, RefTech, in the QAI
Transaction, acquired the business and substantially all of the assets of QAI
for the consideration set forth therein. The Company has been advised by QAI
that the stockholders of QAI had a basis in their investment in QAI of
approximately $150,000 and that the stockholders of QAI's affiliate, Industrias
QAI, had a nominal basis in their investment in such company. The tangible
assets of QAI, as of February 23, 1997, consisted primarily of approximately (i)
$170,000 of inventory (a portion of which was at Industrias QAI), (ii) $159,000
of furniture, equipment and vehicles, (ii)$229,000 of loans to and receivables
from, Industrias QAI, (iv) $348,000 of third party receivables, (v) $123,000 of
other assets, and (vi) $17,000 of cash. The intangible assets of QAI consisted
primarily of a pending US patent application, know-how and other good will. The
patent was assigned to QAI by Rockney D. Bacchus, relating to high-efficiency
central air conditioners.
In the QAI Transaction, RefTech assumed certain specified liabilities
of QAI, consisting of QAI's (i) indebtedness to the Company aggregating $690,000
plus accrued interest, which was incurred by QAI prior to its December 1996
letter of intent with the Company, (ii) indebtedness to Theo W. Muller, Chief
Executive Officer and Chairman of the Company during 1997, and his affiliated
companies aggregating $830,000 plus accrued interest, which loans were made in
contemplation of, and to facilitate, the Closing, (iii) QAI purchase commitments
incurred in the ordinary course of QAI's business for inventories, supplies and
services aggregating approximately $1,300,000, and (iv) other QAI scheduled
liabilities incurred in the ordinary course of QAI's business aggregating
approximately $276,000.
As part of the QAI Transaction, RefTech entered into employment
agreements with Rick E. Bacchus, Rockney D. Bacchus and Ronald A. Bacchus, each
of whom became a director and executive officer of the Company upon the
consummation of the QAI Transaction. See Item 10 "Executive Compensation --
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements" for the material terms of such employment agreements. In addition,
RefTech continued the employment of Phillis Bacchus, the wife of Rick E.
Bacchus, who handled personnel administration and certain bookkeeping functions
for QAI and who has assumed similar responsibilities for RefTech, at a salary of
$28,730 per annum.
RefTech also agreed to lend Rick E. Bacchus, Rockney D. Bacchus and
Ronald A. Bacchus, collectively, up to an aggregate of $240,000, repayable with
interest at 1% over prime during the period ending December 31, 2001, which
loans are to be secured by their respective shares of the Company's Common Stock
received by QAI in the QAI Transaction upon distribution of such shares to them
by QAI in liquidation of QAI. As of December 31, 1997, an aggregate of $60,506
(in four separate transactions) had been loaned to Rick E. Bacchus and Phillis
Bacchus, jointly, pursuant to such arrangement, except that repayment thereof is
over the five year period from the date of the respective loan and the loans are
to be secured by the makers' shares of QAI stock until such time as the
Company's Common Stock is distributed to them by QAI. In addition, each of
Rockney and Ronald Bacchus borrowed $9,747 from the Company on substantially the
same terms.
As described under Item 2 - "Description of Properties', RefTech leases
its Sunland Park, New
31
<PAGE>
Mexico facility from Bacchus Industries, Inc. As part of the QAI Transaction,
Bacchus Industries, Inc. granted the right to RefTech to acquire, at fair market
value (which is less than acquisition cost), certain equipment and vehicles
which had been used by QAI. At the present time, RefTech has the use of such
equipment and vehicles, without any cost, until it determines whether to make
such acquisition. The Board of Directors now believes that it is in the
Company's best interest to purchase such assets and plans to propose at the
Company's 1998 Annual Meeting that the Company purchase such assets in exchange
for 350,000 shares of the Company's Common Stock.
In contemplation of the consummation of the QAI Transaction, Theo W.
Muller, the Company's former Chairman and Chief Executive Officer and a former
director of the Company, and his affiliated companies, lent QAI an aggregate of
$870,000 with interest thereon at the rate of 8.5% per annum. Upon consummation
of the QAI Transaction, such indebtedness was assumed by RefTech, the principal
amount was repaid in full on February 24, 1997, and approximately $5,650 of
accrued interest thereon remains outstanding. See Item 1 - "Business --
Acquisition of QAI".
Item 13. Exhibits and Reports on Form 8-K.
The Company filed a Report on Form 8-K dated February 2, 1998
regarding Item 6, Resignation of Registrant's Directors (File No. 0-5887)
(a) Exhibits.
All financial statements required to be filed as part of this Annual
Report on Form 10-KSB are filed under Item 7 of this Form l0-KSB. A listing of
such financial statements is set forth in Item 7, which listing is incorporated
herein by reference.
3. Articles of Incorporation and By-laws.
3.1 (a) Certificate of Incorporation, as filed by the New
York Department of State on August 27, 1968. (1)
(b) Certificate of Amendment of Certificate of Incorporation, as filed by the
New York Department of State on December 18, 1968. (1)
(c) Certificate of Change, as filed by the New York Department of State on
September 28, 1970. (1)
(d) Certificate of Amendment of Certificate of Incorporation, as filed by the
New York Department of State on October 15, 1971. (1)
32
<PAGE>
(e) Certificate of Amendment of Certificate of Incorporation, as filed by the
New York Department of State on July 9, 1983. (1)
(f) Certificate of Amendment to Certificate of Incorporation, as filed by the
New York Department of State on June 6, 1988. (2)
(g) Certificate of Merger of Process Technology (NC), Inc. into RTI Inc., as
filed by the New York Department of State on December 20, 1991. (5)
(h) Certificate of Amendment to Certificate of Incorporation, as filed by the
New York Department of State on May 25, 1995. (8)
(i) Certificate of Amendment to Certificate of Incorporation, as filed by the
New York Department of State on February 27, 1996. (9)
(j) Certificate of Amendment to Certificate of Incorporation, as filed by the
New York Department of State on June 13, 1997
3.2 (a) By-laws, as in effect on February 16, 1997. (7)
(b) Amendment of Sections 5.6 and 5.7 of the By-Laws, effective February 17,
1997. (11)
4. Instruments defining the rights of security holders, including indentures.
4.1 Form of Common Stock certificate. (1)
4.2 Form of Preferred Stock certificate
4.3 Form of Redeemable Warrant
10. Material contracts.
10.1 (a) Administration Consent Order in the Matter of Radiation Technology,
Inc., dated March 10, 1987, of the State of New Jersey Department of
Environmental Protection Division of Hazardous Waste Management. (1)
33
<PAGE>
(b) Directive II, dated June 30, 1989, from the State of New Jersey Department
of Environmental Protection in the Matter of the Radiation Technology Site and
Morton Thiokol, Inc. and RTI Inc. respondents. (4)
(c) (i) Administrative Consent Order, dated December 7, 1992, of the State of
New Jersey Department of Environmental Protection and Energy, in the Matter of
RTI Inc. Site, RTI Inc. and Thiokol Corporation. (6)
(c) (ii) Amendment to Administrative Consent Order, dated
August 2, 1994, of the State of New Jersey Department
of Environmental Protection and Energy.
(7)
(d) Record of Decision - Radiation Technology
Incorporated (RTI) with respect to a site in Rockaway
Township, Morris County, New Jersey, issued in 1994
by the New Jersey Department of Environmental
Protection and Energy. (7)
10.2 (a) Credit Agreement, dated as of December 1, 1978, among New Jersey
Economic Development Authority, Radiation Technology, Inc. and New Jersey
National Bank. (1)
(b) Bond Purchase Agreement, dated as of December 1, 1978, among New Jersey
Economic Development Authority, Radiation Technology, Inc. and Thiokol
Corporation. (1)
(c) Promissory Note, dated December 14, 1978, from Radiation Technology, Inc. to
New Jersey Economic Development Authority in the principal amount of $820,000.
(1)
(d) Mortgage, dated December 14, 1978, between Radiation Technology, Inc. and
New Jersey Economic Development Authority. (1)
(e) Assignment of Leases and Rents, dated December 14, 1978, from Radiation
Technology, Inc. (1)
(f) Settlement Agreement, dated December 18, 1992, between RTI Inc. and Thiokol
Corporation. (6)
(g) Mortgage, dated December 18, 1992, between RTI Inc. and Thiokol Corporation.
(6)
34
<PAGE>
(h) Escrow Agreement, dated January 18, 1993, among RTI Inc., Thiokol
Corporation and Archer & Greiner, a Professional Corporation. (6)
(i) Assignment of Mortgage, Note, Assignment of Leases and Rents, Credit
Agreement and Pledge of Revenues, dated January 29, 1993, by New Jersey National
Bank. (6)
10.3 (a) Administrative Order of the United States Environmental Protection
Agency (Index No. II- CERCLA-94-0 124), dated August 9, 1994, In the Matter of
the Nascolite Corporation Site. (7)
(b) Nascolite Corporation Superfund Site Tolling Agreement, dated February 2,
1995, between the United States of America and RTI Inc. (7)
(c) Partial Consent Decree in the Matter of United States of America, plaintiff,
v. American Optical Company, B. Jadow and Sons, Inc., Bethlehem Steel
Corporation, CPS Chemical Company, Inc., Cyro Industries Inc., Cytec Industries,
Dentsply International, Inc., E.I. DuPont de Nemours & Co., and RTI, inc.,
defendants.
10.4 (a) Asset Acquisition Agreement, dated as of February 26, 1996, between
SteriGenics International and RTI Inc. (9)
(b) Lease Agreement between SteriGenics International and RTI Inc. (10)
10.5 (a) Acquisition Agreement, dated February 24, 1997, by and among
Refrigeration Technology, Inc., Quality Air, Inc., Margie J. Bacchus, Philis
Bacchus, Rick E. Bacchus, Rockney D. Bacchus, Ron Bacchus and Opal Simmons. (11)
(b) Escrow Agreement, dated as of February 24, 1997, by and among Refrigeration
Technology, Inc., Quality Air, Inc., Margie J. Bacchus, Philis Bacchus, Rick E.
Bacchus, Rockney D. Bacchus, Ron Bacchus and Opal Simmons, and Warshaw Burstein
Cohen Schlesinger & Kuh, LLP, as escrow agent (11)
(c) Lease, dated February , 1997, between Stanley Jobe and Quality Air, Inc.
and/or assigns. (11)
(d) Employment Agreement, dated February 24, 1997, between Refrigeration
Technology, Inc. and Rick E. Bacchus. (11)
35
<PAGE>
(e) Employment Agreement, dated February 24, 1997, between Refrigeration
Technology, Inc. and Rockney D. Bacchus. (11)
(f) Employment Agreement, dated February 24, 1997, between Refrigeration
Technology, Inc. and Ron Bacchus.(1 1)
(g) Conditional Sale and Purchase Agreement, dated February 19, 1997, by and
between Industrias Q.A.I., S.A. de C.V., Opal Elizabeth Simmons Wheeler, Robert
Harvey Given Trackman and Refrigeration Technology, Inc. (11)
(h) Contract of Lease, dated February 1, 1996, between Polifibras de Chihuahua,
S.A. de C.V. and Industrias Q.A.I., S.A. de C.V.
(i) Revolving Credit Note, dated December 2, 1996, in the principal aggregate
amount of $720,000, between RTI, Inc. and Quality Air, Inc. (11)
(j) Form of Promissory Note from Quality Air, Inc. to Theo W. Muller and his
assigns. (11)
(k) Contract of Sale, dated February 11, 1997, between Quality Air, Inc. and/or
assigns and Stanley P. Jobe. (12)
(l) Sales Agreement and Lease (Invoice #028019), dated October 21, 1994, between
Bacchus Industries Inc. and Spec-Air. (12)
(m) Lease of Real Property; Improvements; Other Assets; and Miscellaneous
Respective Agreements, dated March 13, 1997, between Bacchus Industries, Inc.
and Refrigeration Technology, Inc. (12)
10.6 (a) Promissory Note, dated January 12, 1998, from Rick Bacchus and Philis
Bacchus to Refrigeration Technology Inc. in the principal amount of $60,506.
(b) Promissory Note, dated January 12, 1998, from Rocky Bacchus to Refrigeration
Technology Inc. in the principal amount of $9,747.
(c) Promissory Note, dated January 12, 1998, from Ronald Bacchus
to Refrigeration Technology Inc. in the principal amount of
$9,747.
(d) Loan Agreement dated October 8, 1997 between Refrigeration
Technology, Inc. and Norwest Bank in the principal amount of
up to $600,000.
(e) Authorization for Debenture Guarantee 504 Program dated August 7,1 997
between Refrigeration Technology, Inc. and the U.S. Small Business
Administration in the amount of $261,000.
10.7 (a) 1987 Stock Option Plan of Radiation Technology, Inc. (3)
11. Statement re computation of per share earnings - not required since
such computation can be determined clearly from the material contained
in this Annual Report on Form l0-KSB.
21. Subsidiaries of the small business issuer.
23.1 Consent of Neff & Company, LLP
23.2 Consent of BDO Seidman, LLP.
27. Financial Data Schedule
(1) Incorporated by reference; filed as an Exhibit to the Company's Annual
Report on Form 10-KSB for its fiscal year ended December 31. 1986.
(2) Incorporated by reference; filed as an Exhibit to the Company's
Quarterly Report on Form 10-Q for its fiscal quarter ended September
30, 1987.
(3) Incorporated by reference; filed as an Exhibit to the Company's Annual
Report on Form 10-K for its fiscal year ended December 31, 1987.
(4) Incorporated by reference; filed as an Exhibit to the Company's
Quarterly Report on Form 10-Q for its fiscal quarter ended June 30.
1989.
(5) Incorporated by reference; filed as an Exhibit to the Company's Annual
Report on Form 10-K for its fiscal year ended December 31, 1991.
(6) Incorporated by reference; filed as an Exhibit to the Company's Annual
Report on Form 10-KSB for its fiscal year ended December 31, 1992.
(7) Incorporated by reference; filed as an Exhibit to the Company's Annual
Report on Form l0-KSB for its fiscal year ended December 31, 1994.
36
<PAGE>
(8) Incorporated by reference; filed as an Exhibit to the Company's
Quarterly Report on Form 10-QSB for its fiscal quarter ended June 30,
1995.
(9) Incorporated by reference; filed as an Exhibit to the Company's Annual
Report on Form 10-KSB for its fiscal year ended December 31, 1995.
(10) Incorporated by reference; filed as an Exhibit to the Company's Current
Report on Form 8-K, dated August 23, 1996.
(11) Incorporated by reference; filed as an Exhibit to the Company's Current
Report on Form 8-K, dated March 6, 1997.
(12) Incorporated by reference; filed as an Exhibit to the Company's Annual
Report on Form 10-KSB for its fiscal year ended December 31, 1996
37
<PAGE>
RTI Inc. and Subsidiaries
CONTENTS
Page
INDEPENDENT AUDITORS' REPORT 1
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
FINANCIAL STATEMENTS
Consolidated Balance Sheets 4
Consolidated Statements of Operations 6
Consolidated Statements of Stockholders' Equity 7
Consolidated Statements of Cash Flows 9
Notes to Consolidated Financial Statements 11
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders of
RTI Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of RTI Inc. and
subsidiaries (the Company) as of December 31, 1997, and the related consolidated
statement of operations, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As discussed in Note 6 to the consolidated financial statements, the Company
leases the building and certain equipment used in production from a company with
common management. In addition, the Company uses certain molds and other
production equipment owned by the same company. There is no formal contract to
continue the use of these assets.
As discussed in Notes 7 and 10 to the consolidated financial statements, the
Company owns property which is the subject of continuing significant
environmental investigation and remediation.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RTI Inc. and
subsidiaries at December 31, 1997, and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
F-1
<PAGE>
Board of Directors and Stockholders of
RTI Inc. and Subsidiaries
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 6 to the
financial statements, the Company uses production equipment without a formal
contract for its continued use.
Also, as discussed in Note 18 to the consolidated financial statements, the
Company has suffered losses from operations and has current liabilities in
excess of current assets available for payment. These matters raise substantial
doubt about its ability to continue as a going concern. Management's plans
regarding these matters also are described in Note 18. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Albuquerque, New Mexico
March 2, 1998
F-2
<PAGE>
Independent Auditors' Report
Board of Directors and Stockholders
RTI Inc.
Rockaway, New Jersey
We have audited the accompanying consolidated balance sheet of RTI Inc. and
subsidiaries as of December 31, 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As discussed in Notes 5 and 8 to the consolidated financial statements, the
Company owns property which is the subject of continuing significant
environmental investigation and remediation.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RTI Inc. and
subsidiaries as December 31, 1996, and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
Woodbridge, New Jersey
March 20, 1997
F-3
<PAGE>
RTI INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
ASSETS
1997 1996
CURRENT ASSETS
Cash and cash equivalents $ 11,712 $ 2,578,180
Accounts receivable, net of allowance
of $ 234,993 -
Inventory (Note 3) 1,979,893 -
Prepaid expenses and other 163,357 27,760
Escrow deposit (Note 1) - 407,944
Certificate of financial assurance -
restricted (Note 4) - 75,000
Total current assets 2,389,955 3,088,884
PROPERTY, PLANT AND EQUIPMENT,
net (Notes 5, 7, and 9) 1,902,066 476,235
NOTE RECEIVABLE (Note 17) - 670,000
DUE FROM RELATED PARTIES (Note 6) 135,605 -
INTANGIBLE ASSETS, net of accumulated
amortization of $72,353 in 1997 1,204,193 -
OTHER ASSETS 38,111 9,565
Total assets $ 5,669,930 $ 4,244,684
============== =========
The Notes to Financial Statements are an integral part of these consolidated
statements.
</TABLE>
F-4
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1997 1996
CURRENT LIABILITIES
Notes payable to related parties (Note 6) $ 593,000 -
Due to related parties (Note 6) 94,900 -
Accounts payable 796,521 $19,811
Accrued expenses (Note 8) 133,886 74,433
Accrued interest 49,780 -
Other current liabilities (Notes 8 and 10) 180,000 -
Current portion of long-term debt (Note 9) 654,613 -
Total current liabilities 2,502,700 94,244
LONG-TERM DEBT, net of $22,000
discount in 1996 (Note 9) 257,344 265,000
OTHER LIABILITIES (Notes 8 and 10) 1,014,085 970,935
Total liabilities 3,774,129 1,330,179
COMMITMENTS AND CONTINGENCIES
(Notes 6, 7, 9, 10, and 11)
STOCKHOLDERS' EQUITY (Note 12)
Preferred stock, $.05 par value - shares
authorized 2,000,000; shares issued
and outstanding 100,000 in 1997 5,000 -
Common stock; $.08 par value - shares
authorized 15,000,000, issued and
outstanding 1,481,166 in 1997 and
1,101,166 in 1996 118,494 88,094
Additional paid-in capital 17,679,579 16,053,542
Accumulated deficit (15,907,272) (13,227,131)
Total stockholders' equity 1,895,801 2,914,505
Total liabilities and stockholders' equity$ 5,669,930 $4,244,684
============= =========
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
RTI INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1997 and 1996
1997 1996
Net sales $3,161,861 -
Cost of sales 3,242,829 -
Gross margin (80,968 ) -
Selling expenses 655,824 -
General and administrative expenses 963,837 $217,005
Research and development expenses 774,720 -
Total operating expenses 2,394,381 217,005
Loss from operations (2,475,349) (217,005)
Other income (expense)
Interest income 45,973 79,199
Rental income 83,611 42,930
Expenses of Rockaway Industrial Park,
including interest expense of $22,000
in both years (Notes 7 and 9) (62,913) (75,505)
Environmental investigation, remediation
and related legal expenses (Note 10) (249,855) (610,559)
Interest expense (55,031) -
Other income (Note 13) 46,179 580,000
Total other income (expenses) (192,036) 16,065
Loss from continuing operations (2,667,385) (200,940)
Discontinued operations (Note 2)
Loss from irradiation operations - (72,000)
Loss on disposal of irradiation operations - (24,242)
Net loss before income taxes (2,667,385) (297,182)
Income taxes (Note 14) - -
Net loss (2,667,385) (297,182)
Net loss per share
Loss from continuing operations (1.92) (.18)
Loss from irradiation operations - (.07)
Loss on disposal of irradiation operations - (.02)
Basic and diluted net loss per share $ (1.92) $ (.27)
Weighted average number of
common shares outstanding 1,405,749 1,090,627
The Notes to Financial Statements are an integral part of these consolidated
statements.
</TABLE>
F-6
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Year Ended December 31,
1997 and 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Preferred Stock Common Stock
Number Number
of Shares Amount of Shares Amount
Balance, January 1, 1996 - $ - 1,076,907 $ 86,153
Purchase of partial shares - - (741) (59)
Exercise of warrants - - 25,000 2,000
Sale of preferred stock 118,000 5,900 - -
Preferred stock cancelled in
connection with sale (Note 12) (118,000) (5,900) - -
Net loss - - - -
Balance, December 31, 1996 - - 1,101,166 88,094
Issuance of common stock - - 380,000 30,400
Sale of preferred stock 100,000 5,000 - -
Dividends on preferred stock - - - -
Net loss - - - -
Balance, December 31, 1997 100,000 $ 5,000 1,481,166 $ 118,494
The Notes to Financial Statements are an integral part of these consolidated
statements.
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Additional
Paid-in Accumulated
Capital Deficit Total
$ 16,013,851 $(12,929,949) $3,170,055
(2,059) - (2,118)
41,750 - 43,750
230,100 - 236,000
(230,100) - (236,000)
- (297,182) (297,182)
16,053,542 (13,227,131) 2,914,505
1,051,037 - 1,081,437
575,000 - 580,000
- (12,756) (12,756)
- (2,667,385) (2,667,385)
$ 17,679,579 $(15,907,272) $1,895,801
</TABLE>
F-8
<PAGE>
RTI INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,667,385) $(297,182)
Adjustments to reconcile net loss to net cash
applied to operating activities:
Depreciation and amortization 277,091 529,276
Write-down of other assets - 60,000
Imputed interest on note payable 22,000 22,000
Loss on sale of irradiation operations - 24,242
(Increase) decrease in:
Accounts receivable 31,612 1,832
Inventory (1,565,844) -
Certificate of financial assurance - restricted 75,000 75,000
Prepaid expenses and other (10,909) (21,863)
Restricted deposits - 15,771
Increase (decrease) in:
Due to related parties 94,900 -
Accounts payable 485,612 (54,254)
Accrued expenses 109,233 (320,172)
Other liabilities 223,150 (112,869)
Total adjustments (258,155) 218,963
Net cash applied to operating activities (2,925,540) (78,219)
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of irradiation operations 407,944 3,975,781
Purchases of fixed assets (1,250,013) (634,971)
Purchase of intangible assets (28,184) -
Purchases of other assets (2,936) (90,242)
Cash purchased with business
acquisitions (Note 17) 16,624 -
Loans and related party receivables (129,857) (670,000)
Net cash (applied to) provided by
investing activities (986,422) 2,580,568
The Notes to Financial Statements are an integral part of these consolidated
statements.
</TABLE>
F-9
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) For the Years Ended December
31, 1997 and 1996
1997 1996
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the sale of common stock 420,500 -
Proceeds from the sale of preferred stock 580,000 -
Proceeds from notes payable 603,633 -
Proceeds from related party notes 593,000 -
Payments on long-term debt (8,882) (279,432)
Payments on related party notes (830,000) -
Payment of dividends (12,757) -
Proceeds from exercise of warrant - 43,750
Payments for partial shares of common stock - (2,118)
Proceeds from exercise of preferred stock - 236,000
Net cash provided by (applied to)
financing activities 1,345,494 (1,800)
Net increase (decrease) in cash and
cash equivalents (2,566,468 ) 2,500,549
Cash and cash equivalents, beginning
of year 2,578,180 77,631
Cash and cash equivalents, end of year $ 11,712 $2,578,180
The Notes to Financial Statements are an integral part of these consolidated
statements.
</TABLE>
F-10
<PAGE>
RTI INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Principles of Consolidation. The consolidated financial statements include the
accounts of RTI Inc. and its wholly owned subsidiaries (the Company). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Business Activities. Prior to August 8, 1996, the Company was engaged in
supplying gamma irradiation services to the producers of a variety of products,
primarily medical devices and disposable medical supplies. In addition, the
Company irradiated, to a lesser extent, cosmetics and other consumer products.
The Company operated two facilities in New Jersey and one in North Carolina and
performed the majority of its irradiation services for customers in the
respective areas of the facilities.
On August 8, 1996, the Company consummated a transaction (the "SteriGenics
Transaction") with SteriGenics International ("SteriGenics"), pursuant to which,
among other things, SteriGenics acquired substantially all the assets of the
Company, other than cash and cash equivalents and the Company's Rockaway, New
Jersey property and the irradiation facility located thereon, and assumed
substantially all of the liabilities of the Company (other than liabilities
(including environmental liabilities) related to the Rockaway property and
liabilities to certain affiliates of the Company). A balance of $407,944
remained in escrow relating to this transaction, which was received by the
Company in the first quarter of 1997.
Since February 24, 1997, the Company through its subsidiary, Refrigeration
Technology, Inc., has been engaged in the manufacturing and sale of evaporative
coolers, commercial heat exchange modules and high-efficiency, water-cooled
central air conditioners as a result of the acquisition of the business and
operations of Quality Air, Inc. ("QAI") (see Note 17).
The Company markets its products primarily through manufacturing representatives
and distributors in the Southern U.S. and Mexico. The Company operates one
manufacturing plant in Sunland Park, New Mexico and one in Westway, Texas. In
addition, the Company, through its subsidiary Industrias RTI S.A. de C.V.,
operates a maquiladora manufacturing plant in Ciudad Juarez, Mexico which
performs substantially all the manufacturing of residential coolers and produces
fiberglass components for the water cooled central air conditioners.
Cash and Cash Equivalents. Cash and cash equivalents include all cash balances
and highly liquid debt instruments with an original maturity of three months or
less.
Inventory. Inventory, which consists principally of coolers and air conditioners
and related component parts, is stated at the lower of cost or market value.
Cost is determined using the average cost method. Market value is based on the
lower of replacement cost or net realizable value. Inventory costs include
material, labor and manufacturing overhead.
F-11
<PAGE>
NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Property, Plant and Equipment. Equipment purchased through corporate acquisition
is recorded at the estimated fair market value at the time of acquisition.
Property, plant and equipment purchased is recorded at cost. Depreciation
expense is calculated using the straight-line method over the estimated useful
lives of the respective assets. The Company amortizes property under lease using
the straight-line method over the term of the related lease. The Company
capitalizes expenditures that materially increase asset useful lives and charges
ordinary maintenance and repairs to operations as incurred.
Intangible Assets. Intangible assets consist principally of patents, trademarks,
organizational costs, and goodwill. The Company evaluates its intangible assets
to determine potential impairment by comparing the carrying value to the
undiscounted future cash flows from the related products. Intangible assets are
amortized using the straight-line method over periods of 5 to 15 years.
Income Taxes. The Company accounts for its income taxes in accordance with
Financial Accounting Standards Statement No. 109, Accounting for Income Taxes
(SFAS 109). SFAS 109 requires a company to recognize deferred tax liabilities
and assets for the expected future tax consequences of events that have been
recognized in a company's financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and tax basis of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse. The Company has provided a valuation
allowance to offset the benefit of any net operating loss carryforwards or
deductible temporary differences.
Notes Payable and Long-Term Debt. The recorded value of the Company's notes
payable and long-term debt approximates fair value based on the current rates
available to the Company for debt of the same remaining maturities.
Revenue Recognition. Sales of air conditioning products are recorded when
shipped, net of sales returns and allowances.
Environmental Expenditures. Environmental expenditures that relate to an
existing condition caused by past operations and which do not contribute to
current or future revenues are expensed. Liabilities are recorded when
environmental assessments and/or remediation are probable and such costs to the
Company can be reasonably estimated.
Research and Development Costs. Research and development costs are expensed as
incurred. These costs include design, development of products through the
prototype phase and development of the related manufacturing processes.
F-12
<PAGE>
NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Advertising Costs. The Company expenses advertising costs as incurred. License
rights that are paid in advance are considered prepaid until the related
advertising is aired. Advertising costs, all of which were expensed in 1997,
amounted to $201,000.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Long-Lived Assets. Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of (SFAS 121), was adopted as of January 1, 1996. SFAS 121
standardized the accounting practices for the recognition and measurement of
impairment losses on certain long-lived assets. The adoption of SFAS 121 had no
effect on the results of operations or financial position.
Effect of New Accounting Pronouncements. Effective January 1, 1996, the Company
adopted SFAS No. 123, Accounting for Stock-Based Compensation. The Company
adopted this pronouncement by making the required pro forma note disclosure
only. Accordingly, the adoption of SFAS No. 123 did not impact the Company's
results of operation or financial condition.
Effective for the year ended December 31, 1997, the Company adopted SFAS 128,
Earnings Per Share. In adopting this pronouncement, the Company computed the
loss per share on the basis of the weighted average number of common shares
outstanding during the year and did not include the effect of potential common
stock, which were antidilutive. This pronouncement was adopted for both 1997 and
1996, however, there was no impact on the loss per share previously reported for
1996.
Reclassification. Certain items in the 1996 financial statements have been
reclassified to conform to the 1997 presentation.
NOTE 2. DISCONTINUED OPERATIONS
On February 26, 1996, the Company entered into an asset acquisition agreement
with SteriGenics. In connection with this agreement, the Company sold to
SteriGenics substantially all of the assets and SteriGenics assumed certain
liabilities for an aggregate purchase price of $4,601,725. As a result,
consolidated financial statements for 1996 give effect to the classification of
the irradiation operations as discontinued operations.
The sale, which was completed on August 8, 1996, resulted in a $24,242 loss.
F-13
<PAGE>
NOTE 2. DISCONTINUED OPERATIONS (CONTINUED)
The land and fixed assets of the New Jersey location are being leased to
SteriGenics for a base annual rent of $77,400. The sale agreement contains a
purchase option under which SteriGenics could purchase the property under lease
for a price of $405,000 through February 26, 1998, declining to approximately
$138,000 on February 26, 2002. The sale agreement also contains a "put" option
under which the Company could require SteriGenics to purchase this property for
approximately $138,000 on February 26, 2002, if the Company completes the
required environmental remediation (see Note 10).
Operating results of the irradiation operations for 1996 are summarized as
follows:
Revenues $ 2,684,565
Operating loss (72,000)
Net loss (72,000)
NOTE 3. INVENTORY
Inventory at December 31, 1997, consists of the following:
Raw materials $ 390,159
Work-in-Process 91,448
Finished goods 1,498,286
Total $ 1,979,893
Inventory in the amount of $128,804 is located in Ciudad Juarez, Mexico.
NOTE 4. CERTIFICATES OF FINANCIAL ASSURANCE
During 1990 and 1994, the Company was required by the Nuclear Regulatory
Commission (NRC) to post $75,000 Certificates of Financial Assurance (CFA) in
accordance with NRC regulations applicable to companies with similar NRC
licenses. The CFA was intended to provide assurance that funds would be
available if needed for decommissioning activities and removal of Cobalt 60 used
in the former irradiation operation. The Company had elected to use trust funds
to provide such financial assurance. The funds were on deposit in restricted
bank accounts. During 1996, the NRC released one CFA and the other was released
in February 1997.
F-14
<PAGE>
NOTE 5. PROPERTY PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31:
1997 1996
Property under lease $ 2,131,735 2,131,735
Land 154,773 -
Building 420,817 -
Leasehold improvements 294,521 -
Equipment and vehicles 768,568 -
3,770,414 2,131,735
Less accumulated depreciation
and amortization (1,868,348) (1,655,500)
--------------- ----------
$ 1,902,066 476,235
=============== ==========
Leasehold improvements and equipment with a cost of $285,025 are utilized at the
maquiladora plant in Ciudad Juarez, Mexico.
NOTE 6. RELATED PARTY TRANSACTIONS
The following is a summary of balances with related parties as of December 31,
1997:
ASSETS
Due from related parties:
Bacchus Industries, Inc. $ 55,605
Notes receivable from officers, interest at prime
plus 1% (8.75% at December 31, 1997) payable monthly with principal
payable in five years, secured by stock in Quality Air, Inc.
Rick Bacchus 60,506
Rockney Bacchus 9,747
Ron Bacchus 9,747
--------------
$ 135,605
================
LIABILITIES
Notes payable to related parties, interest at 8.5% due
February 20, 1998, unsecured
Theo W. Muller $ 543,000
Frellum Corporation 50,000
----------------
$ 593,000
================
F-15
<PAGE>
NOTE 6. RELATED PARTY TRANSACTIONS (CONTINUED)
Theo W. Muller is a major shareholder of the Company and until January 1998 was
its Chairman and Chief Executive Officer. Mr. Muller is also a shareholder in
Frellum Corporation. Interest expense on these notes was $41,038 in 1997. The
Company is in the process of negotiating the extension of these notes payable.
Due to related parties:
Contingent liability due to Bacchus Industries, Inc. $94,900
The Company acquired Quality Air, Inc. on February 24, 1997. Quality Air, Inc.
assumed the operations of Bacchus Industries, Inc. on January 2, 1996. Bacchus
Industries, Inc. has common management with the Company. Key management within
both companies includes Rick, Rockney and Ron Bacchus.
As noted in Note 11 the Company leases its Sunland Park facility from Bacchus
Industries, Inc. In addition, when the Company acquired Quality Air, Inc., it
did not acquire production assets, including production fixturing, fiberglass
molds and other assets necessary for the production of its products that are
owned by Bacchus Industries, Inc. While no formal agreement exists, based on
preliminary negotiations, management of the Company has recorded a contingent
rental fee of $94,900, (calculated as three percent of related sales) which
management expects to pay if the assets are not purchased. If the assets are
purchased, this charge will be considered depreciation expense.
The Company has also informally assumed, on a month-to-month basis, their
obligations of equipment leased by Bacchus Industries, Inc. from another
company. In addition to the monthly lease payment of $4,001, the lease contains
certain restrictions on sales to third parties.
NOTE 7. ROCKAWAY INDUSTRIAL PARK
The Company owns a 248 acre parcel of land and several buildings (Parcel I) in
Rockaway, New Jersey. Parcel I is composed of two pieces, Parcel IA and Parcel
IB. Parcel IA, 47 acres, is contiguous to the 15 acre operating parcel that is
the site of one of its irradiation processing facilities, which is currently
leased to SteriGenics. In January 1997 the Company entered into a 10 year lease
agreement for a portion of the property to be used for a radio tower. Minimum
monthly lease payments are $1,000, increasing by three percent each year.
Since 1985, the Company has been seeking a buyer for Parcel IB; however, the
Company's ability to sell Parcel IB is impaired until an environmental cleanup
and remediation program is completed (see Note 8). This property has a net book
value of $50,000.
F-16
<PAGE>
NOTE 8. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses consist of the following at December 31:
1997 1996
Remedial investigation and environmental
cleanup costs (Note 10) $ - 7,749
Accrued payroll and payroll taxes 40,588 -
Professional fees 61,031 51,625
Accrued warranty 14,294 -
Other 17,973 15,059
------ --------
Total $ 133,886 74,433
============= =======
Other liabilities consist of the following at December 31:
1997 1996
Remedial investigation and environmental
cleanup costs - non-current (Note 10) $ 962,600 747,315
Real estate taxes on Rockaway property (Note 10) 231,485 191,373
Environmental proceedings (Note 10) - 32,247
Long-term portion 1,194,085 970,935
Less current portion (180,000) -
--------- --------
Total $ 1,014,085 970,935
=========== =======
NOTE 9. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
1997 1996
Notepayable to bank with interest at prime
plus 1.75% (9.25 at December 31,
1997) subsequently converted to a note
payable due in 120 monthly installments
of $8,233, secured by the Westway plant and
certain equipment $ 603,633 -
Note payable to unrelated company with interest
at 10.61% due quarterly and annual principal
payments of $41,000, secured by Rockaway property 287,000 265,000
Other installment notes 21,324 -
-------- -------
Total long-term debt 911,957 265,000
Less current portion (654,613) -
-------- --------
$ 257,344 265,000
========= ========
F-17
<PAGE>
NOTE 9. LONG-TERM DEBT (CONTINUED)
The note payable to the bank requires the Company to maintain a current ratio of
at least 1.6 to 1, a maximum liabilities to total net worth ratio of 1.5 to 1,
and a debt coverage ratio of 1 to 1.25. In addition, the loan agreement does not
permit the payment of dividends until the environmental remediation requirements
of the State of New Jersey have been completed and restricts stock transactions
of its subsidiary, Refrigeration Technology, Inc. As of December 31, 1997, the
Company did not meet the financial ratios required. The bank has not granted
a waiver for any default by the Company; as a result, the note payable has
been classified as current.
In connection with the Company's settlement of certain litigation (see Note 10),
New Jersey Economic Development Authority (the Authority) bonds were cancelled,
the owner thereof acquired for the Authority the Company's note in an amount
equal to the cancelled bonds and such owner agreed to suspend, for a period of
five years, the Company's obligation to make principal and interest payments. As
a result, a $287,000 obligation was discounted by $110,000 to $177,000 at
December 31, 1992. The resulting credit from this discounting was applied to
reduce the Company's net environmental clean up expense. The debt will be
increased annually by $22,000 during the five year period the Company is not
obligated to make principal and interest payments. Commencing January 1, 1998,
the note will bear interest at a rate of 10.61 percent per annum and principal
payments will be made in annual installments of $41,000 through January 1, 2004.
The Company did not make its scheduled note payment due January 1, 1998.
Principal amounts due in connection with long-term debt for each of the five
years subsequent to December 31, 1997 are as follows:
1998 $ 654,613
1999 47,506
2000 45,838
2001 41,000
2002 41,000
Thereafter 82,000
-------------
$ 911,957
==============
NOTE 10. ENVIRONMENTAL INVESTIGATION, REMEDIATION AND
RELATED LITIGATION
As a result of engineering tests that commenced in 1981, the New Jersey
Department of Environmental Protection (the DEP) issued a directive in 1986
ordering the Company and its former Chief Executive Officer (Dr. Martin A.
Welt), individually, to fund the cost of a remedial investigation and
feasibility study (the Study) designed to determine the nature and extent of
contamination detected primarily on the Rockaway, New Jersey operating Parcel II
(see Note 7). The Company agreed to pay the costs of the Study and entered into
an Administrative Consent Order (ACO) with the DEP, The Company accrued the
estimated cost of the Study as of December 31, 1986. In accordance with the
terms of the
F-18
<PAGE>
NOTE 10. ENVIRONMENTAL INVESTIGATION, REMEDIATION AND
RELATED LITIGATION (CONTINUED)
ACO, the Company posted a $825,000 letter of credit which was an amount equal to
the estimated costs of the Study and the DEP administrative costs. As of
December 31, 1996, all amounts due had been paid and the letter of credit
returned.
In June 1989, the DEP issued a Second Directive (Directive II) seeking payment
from the Company and the prior owner of the property (the Prior Owner) for
approximately $1,200,000 to pay for a Phase II Remedial Investigation (Phase
II). According to Directive II, both the Company and the Prior Owner were
jointly and severally liable for all costs to investigate and clean up hazardous
substances on the property. The Phase II investigation was designed to conduct
further studies on Parcel II and evaluate the nature of and extent of
contamination, if any, on the 65-acre area of the property where the Prior Owner
conducted its various testing activities. In November 1991, the DEP issued its
"Remedial Investigation Report".
In 1989, the Company filed a lawsuit against the Prior Owner under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or
Superfund), seeking contribution for all costs incurred by the Company in
connection with on-site investigation and clean up activities. In 1992, the
Company released the Prior Owner from any liability under the Phase I and Phase
II investigations and the Prior Owner paid the Company $900,000 (the Settlement
Agreement) as a partial payment against the DEP's claims for reimbursement of
expenditures for the Phase II investigation. A portion of these funds was
permitted to be used to support the surface cleanup required by the DEP. The
Prior Owner will only become subject to further liability in the event that the
Company becomes unable to perform the cleanup action(s) required by the DEP. In
addition, the Prior Owner suspended for five years the Company's obligation to
make principal and interest payments on the note issued to support the purchase
of a portion of the Rockaway Industrial Park (see Note 7).
The Company has agreed to indemnify the Prior Owner against generally all claims
for past or future costs associated with studies, cleanups and/or other
remediation activities to the Rockaway Industrial Park. The Company has executed
a mortgage (Mortgage) on the Rockaway Industrial Park in the amount of $900,000
securing the Prior Owner to the extent the Company does not meet its obligations
under the Settlement Agreement. After the development of an acceptable cost
estimate for the implementation of remedial actions, the Prior Owner has agreed
to adjust the Mortgage to the amount of the cost estimate. If the cost estimate
exceeds the actual fair value of the mortgaged property (minus any other liens
on the mortgaged property), then the Company will execute an additional mortgage
for the difference which will be secured by the Company's personal property. If
the cost estimate is less than $900,000, then the Mortgage will be reduced to
the estimated amount.
F-19
<PAGE>
NOTE 10. ENVIRONMENTAL INVESTIGATION, REMEDIATION AND
RELATED LITIGATION (CONTINUED)
In 1993 , and in conjunction with the Settlement Agreement, the Company and the
Prior Owner entered into an Administrative Consent Order (ACO II) with the DEP.
In accordance with ACO II, the Company agreed to pay DEP's investigation and
oversight costs for the Phase II investigation, estimated to be $1.2 million,
which was charged to operations in 1992. An initial payment of $600,000 was made
in 1993 under ACO II. The remaining liability for the Phase II study was being
paid in quarterly installments to be completed in June 1997. In 1993, the
Company charged approximately $200,000 to operations for additional costs
related to the Phase II study and deposited $100,000 in a segregated
interest-bearing account. Funds in this account were withdrawn after certain
provisions of ACO II were met by the Company.
Both ACO II and the Settlement Agreement provided that the Company was
responsible for all further cleanup actions required by the DEP. Estimated costs
under ACO II and the Settlement Agreement were recorded by the Company in 1992.
The Company and the DEP have entered into a Memorandum of Agreement (MOA) which
stipulated the responsibilities for an approved work plan for the surface
cleanup and remediation required to be performed by the Company. The Company
accrued and charged to operations approximately $200,000 in 1992 for surface
cleanup which was completed in 1994 and additional costs are not expected.
In connection with the Phase II investigation, the DEP filed a First Priority
Lien against Parcel II and 65 acres of Parcel I. A general lien was placed on
all Company properties in the State of New Jersey and all revenues of the
Company. Each lien was in the amount of $329,670. In February 1995, the DEP
discharged all of its liens except for its liens on the revenues of the Company,
on Parcel II and on the Company's property located on Parcel II, and reset its
liens in the aggregate amount of $560,490. In August 1996, the Company made a
payment of $575,000 to the DEP as full settlement of all then outstanding
financial claims asserted under the ACO II, as well as all such claims which
could be asserted for the period ended October 31, 1996, and, as a result, the
DEP released the lien it had placed on Parcel II.
In 1994, the DEP issued its Record of Decision (ROD) for the Rockaway Industrial
Park. The Company is required by the DEP to perform certain groundwater
remediation actions and implement a groundwater monitoring program. A remedial
Action Work Plan (RAWP) to implement the ROD was submitted by the Company in
1996. Based on that RAWP, the Company had accrued approximately $747,315 for the
anticipated costs of the groundwater programs as of December 31, 1996.
This RAWP was not accepted by the DEP and the Company submitted a new plan in
1997. This plan was found acceptable to DEP, subject to certain conditions, in
its letter dated February 2, 1998. Based on this new RAWP, the Company increased
its accrual for anticipated costs of groundwater remediation to $962,600 which
resulted in an additional expense of $215,285 being recognized. The RAWP
includes the
F-20
<PAGE>
NOTE 10. ENVIRONMENTAL INVESTIGATION, REMEDIATION AND
RELATED LITIGATION (CONTINUED)
design, construction, operation, monitoring, and closeout of the groundwater
remediation program over approximately a ten year period. The estimate of
anticipated costs is based on estimated future cost which are expected to be
lower than current costs and does not include certain government oversight and
potential legal fees as these cost could not be reasonably estimated. In
addition, until the groundwater remediation operation is completed, it is not
possible to determine with certainty if the remediation planned will be
successful.
Parcel II and a portion of Parcel I (see Note 7) have been placed on the
National Priorities List (the List). The Company believes its ability to dispose
of Parcel I acreage will be impaired until it has been remediated and removed
from the List. Additionally, there can be no assurances that the cleanup and
remediation efforts provided for by the Company will represent its ultimate
liability.
The Company is delinquent in the payment of local real estate taxes on 201 acres
of Parcel IB. Accordingly, $231,485 and $191,373 were accrued at December 31,
1997 and 1996, respectively.
In addition, in 1994, the Company was named a respondent in an environmental
proceeding relating to a disposal site, which the Company shipped a small amount
of material during 1982. The Company has recorded an accrual for the estimated
liability of $32,247 as of December 31, 1996 which it paid in 1997. The Company,
based upon all available information, is of the opinion that the accrual is
adequate and that the ultimate disposition of this environmental proceeding will
not have a material adverse effect on these financial statements.
Environmental accruals at December 31, 1997 are:
1997 1996
Groundwater remediation $ 962,600 747,315
Nascolite site - 32,247
----------------- --------
Total liability $ 962,600 779,562
================== ========
F-21
<PAGE>
NOTE 11. CONCENTRATIONS AND CONTINGENCIES
As the Company markets its products through distributors, it has a small number
of significant customers. For the year ended December 31, 1997, the Company's
five largest customers accounted for approximately 45 percent of its total
sales. In addition, 6 percent of its sales were to Mexican distributors.
The Company has an agreement to purchase celebrity license rights over the next
two years at $36,000 per year. This contract is currently in dispute.
The Company has received a letter from NASDAQ stating that it believed that RTI
did not meet the new minimum net tangible assets requirements for continued
listing on the NASDAQ Small Cap Market which went into effect February 23, 1998.
The Company has elected to receive an expedited, written hearing in accordance
with NASDAQ rules. The ultimate outcome of the hearing is not known, nor is the
impact of having its common stock delisted from the NASDAQ Small Cap Market
known, should the Company be delisted.
As a result of the Company's inability to obtain audited financial statements of
Quality Air, Inc. (See Note 7) for the year ended December 31, 1996, among other
things, the Company is not in compliance with the requirements of the Securities
and Exchange Commission. Until after the Company's audited financial statements
for the year ended December 31, 1998 become available and its annual report on
Form 10-KSB is filed with the Securities and Exchange Commission, it will not be
permitted to undertake a public offering of its securities under the Securities
Act of 1933.
The Company leases it Sunland Park facility from Bacchus Industries, Inc. under
a three year operating lease which expires on March 1, 2000. The lease may be
terminated by either party with 120 days notice. The Company has the option to
extend this lease for an additional five years. Monthly lease payments are
$6,500 and the Company paid $58,500 in 1997.
The Company leases its Ciudad Juarez facility under a noncancelable lease that
expires on February 1, 2001. The Company paid $61,806 on this lease in 1997.
Minimum annual lease payments are as follows:
1998 $ 106,126
1999 112,402
2000 119,464
2001 20,112
In February 1998, the Company entered into an agreement to factor up to $500,000
of its receivables at the rate of 2.75 percent for the first 30 days and 1
percent for each subsequent 15 days.
F-22
<PAGE>
NOTE 12. STOCKHOLDERS' EQUITY
Common and Preferred Stock Authorized, Issued and Outstanding. Effective May 25,
1995, the Company's Certificate of Incorporation was amended to effect a one for
eight reverse stock split of common stock and authorize 2,000,000 shares of
preferred stock. In connection with the SteriGenics transaction, the Company
sold SteriGenics, on March 11, 1996, 118,000 shares of Series A Preferred Stock
for $236,000 in cash. The preferred stock was surrendered on August 8, 1996, in
payment of a portion of the purchase price.
On June 12, 1997, the Company amended its Certificate of Incorporation to
provide for the authorization of 100,000 shares of Series B preferred stock. The
shares are to be issued for $5.80 per share and are fully paid and
non-assessable. Dividends, when declared by the Board of Directors, are at $.522
per share per anum, will accumulate and are payable quarterly. The stock has
liquidation preference over any other stock issued by the Company and has voting
rights similar to common stockholders. The preferred stock is convertible into
two shares of common stock, subject to certain adjustments. The Company may
redeem the preferred stock at any time for $10 per share ($1,000,000 for the
shares outstanding at December 31, 1997), or after June 15, 1999 for $5.80
($580,000 for the shares outstanding at December 31, 1997) per share if the bid
price for common shares has equaled or exceeded $4.75 for 10 consecutive
business days.
During 1997, the Company issued 100,000 shares of the Series B preferred stock
for $580,000, including 15,000 shares to Theo W. Muller, a major shareholder and
CEO of the Company. The Company declared and paid $12,756 in dividends on this
stock for the quarter ending September 30, 1997. There are $12,756 in cumulative
dividends that had not been declared as of December 31, 1997. As noted in Note 9
the note payable agreement with the bank does not permit the payment of
additional dividends.
Also in 1997, the Company issued 145,000 shares of its common stock at $2.90 per
share to a private investor.
Stock Options. The Company's 1987 stock option plan (the Plan) authorized the
issuance of options for common stock until November 31, 1997. The options
granted were either incentive stock options, which are exercisable one year or
more from the date of grant or non-qualified stock options, which may be
exercisable immediately. Pro forma disclosure of the effects of the options in
accordance with SFAS 123, have not been
F-23
<PAGE>
NOTE 12. STOCKHOLDERS' EQUITY (CONTINUED)
provided, as the effect was not material. Details of stock option transactions
under the 1987 Plan for the two years are as follows:
Range of
Option Price
Options Per Share Exercisable
Outstanding, January 1, 1996 4,936 $ 4.00-7.76 3.686
Granted - - -
Cancelled (4,936 ) 4.00-7.76 -
Outstanding, December 31, 1996 - - -
Granted 5,500 7.375 -
Cancelled - - -
------- ------------ -------
Outstanding December 31, 1997 5,500 $ 7.375 -
======== ========== ========
NOTE 13. OTHER INCOME
Executive Termination Agreements and Litigation. The Company and its former
Chief Executive Officer (CEO), had been in litigation since 1987, arising from
the Company failing to pay the CEO under a consulting agreement and the
Company's claims against the CEO for damages arising out of actions of the CEO.
In 1995, the Company and the CEO settled all litigation. In 1997, the Company
received an additional $43,500 in a related settlement from a third party.
Insurance Claim Settlement. On January 29, 1996, the Company and Birmingham Fire
Insurance Company (Birmingham) entered into a Settlement Agreement and Release
(Agreement) for environmental claims primarily relating to the Company's
Rockaway, New Jersey property covered under Birmingham's insurance policy for
the period May 30, 1980 to May 30, 1983. On February 20, 1996, the Company
received a total of $580,000 for settlement in accordance with the Agreement.
NOTE 14. INCOME TAXES
At December 31, 1997 and 1996, the Company had deferred tax assets amounting to
approximately $3,800,000 and $4,600,000, respectively. The deferred tax assets
consist primarily of the tax benefit of net operating loss carryforwards and
temporary differences resulting from environmental and property tax accruals
(see Notes 8 and 10) and are fully offset by a valuation allowance of the same
amount.
F-24
<PAGE>
NOTE 14. INCOME TAXES (CONTINUED)
The net change in the valuation allowance for deferred tax assets was a decrease
of approximately $800,000 and $500,000 in 1997 and 1996, respectively. The net
change is primarily due to the recording of certain environmental liabilities
(see Note 10) and the reduction of net operating loss carryforwards.
Recoveries for income taxes differs from the amount of income tax recoveries
determined by applying the applicable U.S. statutory Federal income tax rate to
the pretax loss as a result of the decrease in the valuation allowance to offset
the decrease in the deferred tax assets.
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $9,000,000 available to offset future Federal taxable income.
These carryforwards will expire from 1999 through 2017. The deductibility of the
net operating loss carryforwards is subject to an annual limitation estimated to
be between $90,000 and $160,000.
For state income tax purposes, primarily related to New Jersey, the Company has
net operating loss carryforwards of approximately $1,300,000, which will expire
from 1998 through 2002. In addition, the Company has net operating loss
carryforwards relating to Texas and New Mexico totaling approximately $2,200,000
that will expire in 2002 and 2012, respectively.
NOTE 15. LOSS PER SHARE
Basic loss per share is computed by dividing the loss plus preferred stock
dividends by the weighted average number of shares outstanding during the
period. Diluted loss per share reflects per share amounts that would have
resulted if dilutive potential common stock had been converted to common stock.
For 1996 and 1997, basic and dilutive loss per share are the same as potential
common stock is anti-dilutive. The following reconciles amounts reported in the
financial statements:
For the year ended December 31, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
Net loss $ (2,667,385)
Less preferred
stock dividends (25,512)
------------
Loss to common stockholders-
basic and diluted loss per share $ (2,692,897) 1,405,749 $ (1.92)
============= ========= ===========
F-25
<PAGE>
NOTE 15. LOSS PER SHARE (CONTINUED)
For the year ended December 31, 1996
Income Shares Per-Share
(Numerator) (Denominator) Amount
Loss from continuing operations $ (297,182)
------------
Loss to common stockholders -
basic and diluted loss per share $ (297,182) 1,090,627 $ (.18)
============ =========== =========
As discussed in Note 12 and 17 the Company has convertible preferred stock,
stock options and contingently issuable shares of common stock. This potential
common stock was not included in computation of diluted loss per share because
the effect of conversion would be antidilutive.
In March 1998, the Company closed on a private placement of 25 units at an
offering price of $20,000 per unit of 5,000 shares of common stock, aggregating
to $500,000, for a total of 125,000 shares and warrants to purchase 62,500
shares of common stock at a price of $4.50 per share for a period of 5 years
from the closing date. Net proceeds to the Company were $460,000, and the
Company applied the proceeds for general working capital purposes.
NOTE 16. STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information are as follows:
1997 1996
Interest paid $ 5,251 122,725
======== =======
NOTE 17. BUSINESS ACQUISITIONS
On February 24, 1997, the Company acquired, through its newly established
subsidiary Refrigeration Technology Inc. (RefTech), substantially all of the
assets and assumed certain liabilities of Quality Air, Inc. (QAI) in a business
combination accounted for as a purchase. The initial purchase price was $660,938
and consisted of 235,000 shares of the Company's common stock for net
liabilities of $571,000 with the excess of the purchase price over net
liabilities allocated to intangibles. In addition, the Company has agreed to
deliver to QAI an additional 100,000 shares of common stock, if and when the
Company's pretax fiscal year earnings from operations exceed $800,000 and an
additional 125,000 shares of common stock, if and when such earnings exceed
$1,200,000 or in the event of an unsolicited bonafide tender offer for a
majority of the Company's outstanding common stock. The additional shares are
also contingent on the earnings levels or tender offer occurring prior to
January 1, 2002.
F-26
<PAGE>
NOTE 17. BUSINESS ACQUISITIONS (CONTINUED)
In connection with the acquisition, RefTech assumed QAI's purchase commitments
for inventories, supplies and services aggregating $1,300,000. RefTech has
agreed to lend up to $240,000 to the QAI Principals and has the right to
purchase certain equipment and vehicles previously leased to QAI from a related
entity for an amount equal to their fair market value. RefTech entered into
employment agreements with three of the QAI Principals for a five year term at
annual compensation of $80,000 each.
The proforma results of operations for the year ended December 31, 1996 as
though the companies had been combined at the beginning of the period is as
follows:
(Unaudited)
Net sales $ 2,428,000
=============
Loss from continuing operations $ 806,288
==============
Net loss $ 902,530
==============
Basic and diluted loss per share from
continuing operations $ .61
==============
Basic and diluted loss per share $ .68
==============
Weighted average shares outstanding $ 1,325,627
=============
Proforma results for 1997 are not presented since the acquisition took place
near the beginning of the year.
RefTech also acquired the outstanding stock of Industrias QAI S.A de C.V
(Industrias QAI), a related entity in Ciudad Juarez, Mexico, on April 14, 1997
for a nominal amount. Because Industrias QAI sells only to its parent and its
costs are considered manufacturing costs, it has no material impact on total
sales or net income.
During the fourth quarter of 1996, in contemplation of the QAI acquisition, the
Company advanced $690,000 to QAI to fund its operations. The Company's chairman
also advanced $830,000 to QAI, which amount was repaid to the chairman by the
Company at the closing.
F-27
<PAGE>
NOTE 17. BUSINESS ACQUISITIONS (CONTINUED)
As a result of the acquisition of RefTech and Industrias QAI, the Company had
the following non-cash activity:
Assets acquired:
Accounts receivable, net $ 266,605
Inventory 414,049
Fixed assets 380,556
Intangible assets 1,248,362
Other 176,046
----------
2,485,618
Liabilities assumed:
Accounts payable and accrued liabilities (291,098)
Notes payable to related parties (830,000)
Note payable to the Company (690,000)
Long-term debt (30,206)
---------
(1,841,304)
Value of common stock issued (660,938)
----------
Cash acquired $ (16,624)
============
NOTE 18. GOING CONCERN CONSIDERATIONS
At December 31, 1997, the Company had recorded a loss for the year of
approximately $2,667,000. Cash and accounts receivable were inadequate to pay
accounts payable and accrued expenses. In addition, the cooling and air
conditioner business is highly seasonal, and the Company anticipates that
approximately half of its annual sales will be obtained during a three-month
period from late spring to early summer. The Company believes that its future
success, if any, will be largely dependent on its ability to market its new
high-efficiency water cooled air conditioner, of which there can be no
assurance. In addition, the Company's operating results will be significantly
dependent on a number of factors, such as, possible new product introductions by
competitors, the ability to carry out its market plans and meet sales demands
and the Company's dependence on a small number of large distributors. The
Company is presently negotiating to extend notes payable to a stockholder of
$593,000, which were originally due in February. The Company's common stock,
presently listed on the NASDAQ Small Cap Market, could potentially be delisted
pursuant to an expedited, written hearing which has been requested by the
Company in accordance with NASDAQ rules. The Company also cannot
F-28
<PAGE>
NOTE 18. GOING CONCERN CONSIDERATIONS (CONTINUED)
undertake a public offering of its stock until the 1998 financial statements are
audited (see Note 11). These matters raise substantial doubt about the Company's
ability to continue as a going concern.
Management's plan to generate profits and develop adequate working capital for
the Company's needs is as follows. Increased sales of the new high-efficiency,
water cooled air conditioners as well as evaporative coolers are estimated to
produce a break even year for operations in 1998. Management is negotiating with
an asset based lender for a line of credit. In addition, RTI is seeking the sale
of additional equity securities in a private placement offering to provide
needed working capital until a public offering is feasible.
There can be no assurance that management will reach its goals and that the plan
will be successful in generating adequate working capital or sufficient profits
to allow the Company to continue as a going concern.
F-29
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: April 14, 1998
RTI INC.
By:_____________________________
Rick E. Bacchus, President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Signature Title Date
_________________ Director / CEO / CFO April 14, 1998
Rick E. Bacchus
__________________ Director / VP / Secretary April 14, 1998
Rockney D. Bacchus
__________________ Director / VP April 14, 1998
Ronald A. Bacchus
__________________ Principal Accounting Officer April 14, 1998
James Caylor
__________________ Director April 14, 1998
Lanny Snodgrass
38
</TABLE>
<PAGE>
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE '1933 ACT') OR QUALIFIED
UNDER ANY APPLICABLE STATE SECURITIES LAWS. THESE SHARES MAY NOT BE OFFERED,
SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED iN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AND QUALIFICATION IN EFFECT WITH RESPECT
THERETO UNDER THE 1933 ACT AND UNDER ANY APPLICABLE STATE SECURITIES LAWS OR
WITHOUT AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO RTI INC. THAT SUCH
REGISTRATION AND QUALIFICATION IS NOT REQUIRED UNDER APPLICABLE FEDERAL AND
STATE SECURITIES LAWS, OR AN EXEMPTION THEREFROM.
SERIES B PREFERRED STOCK CERTIFICATE
Shares
No. B-
RTI INC.
(Incorporated under the laws of the Slate of New York)
THIS IS TO CERTIFY THAT
is the registered owner of
fully paid and nonassessable shares of Series B Preferred Stock, $.05 par
value, of RTI INC., transferable on the books of the Corporation by the
registered owner in person or by duly authorized at~omey upon surrender of
this certificate properly endorsed.
WITNESS the seal of the Corporation and the signatures of its duly
authorized officers.
Dated: July
1997
Theo W. Muller Chief Executive
Officer
(SEAL]
Rockney D. Bacchus
Secretary
The Corporation will furnish to any shareholder, upon request and without
charge, a full statement of the designations, relative rights, preferences
and limitations of each series of preferred shares so far as the same
<PAGE>
have been fixed and the authority of the board of directors of the
Corporation to designate and fix the relative rights, preferences and
limitations of other series of preferred shares.
THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON THE EXERCISE THEREOF HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") AND MAY
NOT BE EXERCISED WITHOUT REGISTRATION UNDER THE ACT OR AN EXEMPTION THEREFROM.
ANY PERSON EXERCISING THIS WARRANT WILL BE REQUIRED TO GIVE EITHER AN OPINION OF
COUNSEL TO THE EFFECT THAT THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON ITS
EXERCISE HAVE BEEN REGISTERED UNDER THE ACT OR ARE EXEMPT FROM SUCH
REGISTRATION.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME, FEBRUARY ___, 2003
No. W- Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that
__________________________________ or registered assigns, is the
registered holder of _________ Warrants to purchase initially, at any time
from RTI Inc., a New York corporation until 5:00 P.M. New York time on
February ___, 2003 ("Expiration Date"), one (1) share (individually a
"Share," collectively "Shares") of Common Stock, $.08 par value, of RTI
Inc., a New York corporation ("Company"), per warrant, at the initial
exercise price of $4.50 per Share ("Exercise Price") subject to adjustment
in certain events, upon surrender of this warrant Certificate and payment
of the Exercise Price at the principal offices of the Company (presently
located at 300 Antone Rd., Sunland Park, NM, 88063). Payment of the
Exercise Price shall be made by certified or official bank check payable
to the order of the Company.
No Warrant may be exercised after 5:00 p.m., New York time, on
the Expiration Date, at which time all Warrants evidenced hereby, unless
exercised prior thereto, shall thereafter be void.
Upon surrender of this Warrant Certificate with the annexed
Form of Election to Purchase duly executed, together with payment of the
Exercise Price for the Shares, the registered holder of this Warrant
Certificate ("Holder") shall be entitled to receive a certificate or
certificates for the shares of Common Stock. The purchase rights
represented by each Warrant Certificate are exercisable at the option of
the Holder thereof, in whole or in part (but not as to fractional shares
of Common Stock). In case of purchase of less than all of the securities
purchasable under this Warrant Certificate, the Company shall cancel this
Warrant Certificate upon the surrender thereof and shall execute and
deliver a new Warrant Certificate of like tenor for the balance of the
securities purchasable thereunder.
For the purpose of this Warrant Certificate, the term "Common
Stock" shall mean (i) the class of stock designated as Common Stock in the
Certificate of Incorporation of the Company as it may be amended as of the
date hereof, or (ii) any other class of stock resulting
<PAGE>
from successive changes or reclassifications of such Common Stock
consisting solely of changes in par value, or from par value to no par
value, or from no par value to par value.
Upon the exercise of the Warrants, the issuance of certificate
evidencing the shares of Common Stock or other securities, properties or
rights underlying such Warrants shall be made forthwith (and in any event
within fifteen (15) business days thereafter) without charge to the Holder
hereof including, without limitation, any tax which may be payable in
respect of the issuance thereof, and such certificates shall (subject to
the provisions set forth below) be issued in the name of, or in such names
as may be directed by, the Holder thereof; provided, however, that the
Company shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of any such
certificates in a name other than that of the holder and the Company shall
not be required to issue or deliver such certificates unless or until the
person or persons requesting the issuance thereof shall have paid to the
Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
The term "Exercise Price" herein shall mean the initial
exercise price or the adjusted exercise price, depending upon the context.
In case the Company shall at any time subdivide or combine the outstanding
shares of Common Stock, the Exercise Price shall forthwith be
proportionately decreased in the case of subdivision or increased in the
case of combination. Upon each adjustment of the Exercise Price, the
number of Shares issuable upon the exercise of each Warrant shall be
adjusted to the nearest full amount by multiplying a number equal to the
Exercise Price in effect immediately prior to such adjustment by the
number of Shares issuable upon exercise of the Warrants immediately prior
to such adjustment and dividing the product so obtained by the adjusted
Exercise Price.
In case of any consolidation of the Company with, or merger of
the Company with, or merger of the Company into, another corporation
(other than a consolidation or merger which does not result in any
reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and
deliver to the Holder a supplemental warrant certificate providing that
the Holder of each Warrant then outstanding or to be outstanding shall
have the right thereafter (until the expiration of such Warrant) to
receive, upon exercise of such Warrant, the kind and amount of shares of
Common Stock and other securities and property receivable upon such
consolidation or merger, by a holder of the number of shares of Common
Stock of the Company for which such warrant might have been exercised
immediately prior to such consolidation, merger, sale or transfer.
Such supplemental warrant certificate shall provide for adjustments
which shall be identical to the adjustments provided herein. The
provisions of this paragraph shall similarly apply to successive
consolidations or mergers.
Each Warrant Certificate is exchangeable without expense, upon
the surrender thereof by the registered Holder at the principal offices of
the Company, for a new Warrant Certificate of like tenor and date
representing in the aggregate the right to purchase the same number of
Shares in such denominations as shall be designated by the Holder thereof
at the time of such
<PAGE>
surrender.
Upon receipt by the Company of evidence reasonably satisfactory
to it of the loss, theft, destruction or mutilation of this Warrant
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and reimbursement to the Company
of all reasonable expenses incidental thereto, and upon surrender and
cancellation of the Warrants, if mutilated, the Company will make and
deliver a new Warrant Certificate of like tenor, in lieu thereof.
The Company shall not be required to issue certificates
representing fractions of shares of Common Stock upon the exercise of the
Warrants, nor shall it be required to issue scrip or pay cash in lieu of
fractional interests, it being the intent of the parties that all
fractional interests shall be limited by rounding any fraction up to the
nearest whole number of shares of Common Stock or other securities,
properties or rights as the case may be.
The Holder shall have registration rights with respect to the
Shares issuable upon the exercise of this Warrant as set forth in that
certain Registration Rights Agreement of even date herewith.
This Warrant shall be redeemable by the Company, upon thirty
(30) days written notice to the Holder, at a price of $0.10 per Warrant,
if the closing price of the Common Stock as reported by Nasdaq (or, if the
Common Stock is not quoted on Nasdaq, than as reported by the National
Quotation Bureau) exceeds $9.00 for twenty consecutive trading days prior
to the notice of redemption.
The Company shall at all times reserve and keep available out
of its authorized shares of Common Stock, solely for the purpose of
issuance upon the exercise of the Warrants.
Nothing contained in this Warrant Certificate shall be
construed as conferring upon the Holder the right to vote or to consent or
to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as
having any rights whatsoever as a stockholder of the Company. If, however,
at any time prior to the expiration of the Warrants and their exercise,
any of the following events shall occur:
(a) the Company shall take a record of the holders of its
shares of Common Stock for the purpose of entitling them to receive a
dividend or distribution payable otherwise than in cash or a cash dividend
or distribution payable otherwise than out of current or retained
earnings, as indicated by the accounting treatment of such dividend or
distribution on the books of the Company; or
(b) the Company shall offer to all the holders of its Common
Stock any additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the
Company, or any option, right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company (other than in
connection
<PAGE>
with a consolidation or merger) or a sale of all or substantially all of its
property, assets and business as an entirety shall be proposed;
then in any one or more of said events, the Company shall give written
notice of such event at least fifteen (15) days prior to the date fixed as
a record date or the date of closing the transfer books for the
determination of the stockholders entitled to such dividend, distribution,
convertible or exchangeable securities or subscription rights, or entitled
to vote on such proposed dissolution, liquidation, winding up or sale.
Such notice shall specify such record date or the date of closing the
transfer books, as the case may be. Failure to give such notice or any
defect therein shall not affect the validity of any action taken in
connection with the declaration or payment of any such dividend, or the
issuance of any convertible or exchangeable securities, or subscription
rights, options or warrants, or any proposed dissolution, liquidation,
winding up or sale.
All notices, requests, consents and other communications
hereunder shall be in writing and shall deemed to have been duly made when
delivered, or mailed by registered or certified mail, return receipt
requested:
(a) If to the registered Holder of the Warrants, to the address of
such Holder as shown on the books of the Company; or
(b) If to the Company, to 300 Antone Rd., Sunland Park, NM,
88063 or to such other address as the Company may designate by notice to
the Holders.
The Company and the Holders representing a majority of the
Shares underlying the outstanding warrants may from time to time
supplement or amend this Warrant Certificate.
All the covenants and provisions of this Warrant Certificate
shall be binding upon and inure to the benefit of the Company, the Holders
and their respective successors and assigns hereunder.
This Warrant Certificate shall be deemed to be a contract made
under the laws of the State of New York and for all purposes shall be
construed in accordance with the laws of said State without giving effect
to the rules of said State governing the conflicts of laws. The Company
and the Holders hereby agree that any action, proceeding or claim between
them arising out of, or relating in any way to, this Agreement shall be
brought and enforced in the courts of the State of New York or of the
United States District Court for the Southern District of New York, and
irrevocably submits to such jurisdiction, which jurisdiction shall be
exclusive. The Company and the Holders hereby irrevocably waive any
objection to such exclusive jurisdiction or inconvenient forum. Any such
process or summons to be serve upon the Company or Holders (at the option
of the party bringing such action, proceedings or claim) may be served by
transmitting a copy thereof, by registered or certified mail, return
receipt requested, postage prepaid, addressed to them at the address set
forth above. Such mailing shall be deemed personal service and shall be
legal and binding upon the party so served in any action, proceeding or
claim. The Company and the Holders agree that the prevailing party(ies) in
any such action
<PAGE>
or proceeding shall be entitled to recover from the other party(ies) all
of its/their reasonable legal costs and expenses relating to such action,
proceeding, appellate procedures and/or incurred in connection with the
preparation therefor, including, but not limited to, reasonable attorney's
fees.
This Warrant Certificate contains the entire understanding
between the parties hereto with respect to the subject matter hereof and
may not be modified or amended except by a writing duly signed by the
party against whom enforcement or the modification or amendment is sought.
If any provision of this Warrant Certificate shall be held to
be invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provision of this Warrant Certificate.
Nothing in this Warrant Certificate shall be construed to give
any person or corporation other than the Company and the registered Holder
of this Warrant Certificate or the securities purchasable thereunder any
legal or equitable right, remedy or claim under this Warrant Certificate;
and this Warrant Certificate shall be for the sole and exclusive benefit
of the Company and the Holder of this Warrant Certificate or the
securities purchasable thereunder.
The Company may deem and treat the registered holder(s) hereof
as the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the
purpose of any exercise hereof, and of any distribution to the holder(s)
hereof, and for all other purposes, and the Company shall not be affected
by any notice to the contrary.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate
to be duly executed under its corporate seal.
Dated as of February ____, 1998
RTI INC.
By:_________________________________
Rick Bacchus, President
<PAGE>
ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase shares of Common Stock of
RTI INC. and herewith tenders in payment for such securities a certified or
official bank check payable to the order of RTI INC. in the amount of $ all in
accordance with the terms hereof. The undersigned requests that each of the
certificates evidencing such securities be registered in the name of
whose address is and that such certificates be
delivered to whose address is
.
The undersigned hereby represents that they are exercising this
Warrant solely for the account of the undersigned, for investment, not with the
view of public distribution and not for the account of any other person or
entity.
Ded: Signature:____________
(Signature must conform in all respects to the name of the Holder as specified
in the face of the Warrant Certificate.)
ID # of the Holder:
<PAGE>
ASSIGNMENT OF WARRANTS
(To be exercised by the registered holder if
such holder desires to transfer the Warrant
Certificate.)
FOR VALUE RECEIVED hereby sells,
assigns and transfers unto
(Please print name and address of
transferee)
this Warrant Certificate, together with all rights, title and interest therein,
and does hereby irrevocably constitute and appoint Attorney, to transfer the
within Warrant Certificate on the books of the within-named Company, and full
power of substitution.
Dated: Signature:
(Signature must conform in all respects to name
of Holder as specified on the face of the
Warrant Certificate.)
(Insert Identifying Number of Holder
PROMiSSORY NOTE
$60,506 DATE: JANUARY 12, 1998
For value received, the undersigned Rick Bacchus and Philis Bacchus
(collectively the "Promisor") each as principal, jointly and severally,
promise to pay to the order of Refrigeration Technology Inc. (the
"payee"), at P.O. BOX 3046, Sunland Park, New Mexico 88063, (or at such
other place as the Payee may designate in writing) the sum of $60,506
with interest. This promissory note consolidates four separate payments
received as follows:
Amount Date of Loan
$ 5,000 January 1,1997
$47,172 March 12,1997
$ 3,334 May 9, 1997
August 5, 1997
$60,506
Interest will be paid on the unpaid principal at the rate of 1.0 percent
over prime published in the Wall Street Journal, Eastern Edition,
annually. The unpaid principal shall be payable over five years and
accrued interest shall be payable monthly. All payments on this Note
shall be applied first in payment of accrued interest and remainder in
payment of principal.
If any installment is not paid when due, the remaining unpaid balance
and accrued interest shall become due immediately at the option of the
Payee.
The promisor reserves the right to prepay this Note (in whole or in
part) prior to the Due Date with no prepayment penalty.
If any payment obligation under this Note is not paid when due, the
Promisor promises top pay all costs of collection, including reasonable
attorney fees, whether or not a lawsuit is commenced as part of
collection process.
If any of the following events of default occur, this Note and any other
obligations of the Promisor to the Payee, shall become due immediately,
without demand of notice:
1) the failure of the Promisor to pay the principal and any accrued interest in
full on or before the Due Date;
2) the death of the Promisor(s) or Payee(s);
M~R 30 '98 22:57
<PAGE>
~98 17:53 505589071.0 REFTECH
[GRAPHIC OMITTED]
3) the filing of bankruptcy proceedings involving the Promisor as a Debtor;
4) the application for appointment of a receiver for the Promisor;
5) the making of general assignment for the benefit of the Promisor's
creditor's;
6) the insolvency of the Promisor; or
7) the misrepresentation by the Prom isor to the Payee for the purpose of
obtaining or extending credit.
This Note is secured by Quality Air stock owned by promisor and,
when converted, RTI stock. The Payee is not required to rely on
the above security for the payment of this Note in the case of
default, but may proceed directly against the Promisor.
If any one or more of the provisions of this Note are determined
to be unenforceable, in whole or in part, for and reason, the
remaining provisions shall remain fully operative.
All payments of principal and interest on this Note shall be
paid in the legal currency of the United States. Promisor waives
presentment for payment, protest, and notice of protest and
nonpayment of this Note.
No renewal of extension of this note, delay in enforcing and
right of the Payee under this Note, or assignment by Payee of
this Note shall affect the liability of the Promisor. All rights
of the Payee under this Note are cumulative and may be exercised
concurrently or consecutively at the Payee's option.
This note will be replaced with a promissory note after
distribution of RTI shares.
This Note shall be constructed in accordance with the laws of the
State of New Mexico.
Signed this -- day of _______,1995, at
By
Philis Bacchus
<PAGE>
PROMiSSORY NOTE
$9,747 DATE: JANUARY 12, 1998
For value received, the undersigned Rocky Bacohus ( "Promisor") as
principal, promises to pay to the order of Refrigeration Technology Inc.
(the "payee"), at P.O. BOX 3048, Suntand Park, New Mexico 88063, (or at
such other place as the Payee may designate tn wilting) the sum of $9,747
with interest. These moneys were received on March 12,1997 ($1,414), May
9. 1997 ($3,333) and on August 5,1997 ($5,000).
Interest will be paid on the unpaid principal at the rate of 1.0 percent
over prime published in the Wall Street Journal, Eastern Edition,
annually.
The unpaid principal shall be payable over five years and accrued
interest shall be payable monthly. All payments on thi9 Note shall be
applied first in payment of accrued interest and remainder in payment of
principal.
If any installment is not paid when due, the remaining unpaid balance and
accrued interest shall become due immediately at the option of the Payee.
The promisor reserves the right to prepay this Note (in whole or in part)
prior to the Due Date with no prepayment penalty.
If any payment obligation under this Note is not paid when due, the
Promisor promises top pay all costs of collection, including reasonable
attorney fees, whether or not a lawsuit is commenced as part of
collection process.
If any of the following events of default occur, this Note and any other
obligations of the Promisor to the Payee, shall become due immediately,
without demand of notice:
1) the failure of the Promisor to pay the principal and any accrued interest in
full on or before the Due Date;
2) the death of the Promisor(s) or Payee(s);
3) the filing of bankruptcy proceedings involving the Promiser as a Debtor;
4) the application for appointment of a receiver for the Promisor;
5) the making of general assignment for the benefit of the Promisor's
<PAGE>
creditor's;
6) the insolvency of the Promisor; or
MRR 30 '98 22:58
<PAGE>
7) the misrepresentation by the Promisor to the Payee for the purpose of
obtaining or extending credit. This Note is secured by Quality Air stock
owned by promisor and, when converted, RTI stock. The Payee is not
required to rely on the above security for the payment of this Note in
the case of default, but may proceed directly against the Promisor.
If any one or more of the provisions of this Note are determined to be
unenforceable, in whole or in part, for and reason, the remaining
provisions shall remain fully operative.
All payments of principal and interest on this Note shall be paid in the
legal currency of the United States. Promisor waives presentment for
payment, protest, and notice of protest and nonpayment of this Note.
No renewel of extension of this note, delay in enforcing and right of the
Payee under this Note, or assignment by Payee of this Note shall affect
the liability of the Promisor. All rights of the Payee under this Note
are cumulative and may be exercised concurrently or consecutively at the
Payee's option.
This note will be replaced with a promissory note after distribution of
RTI shares.
This Note shall be constructed in accordance with the laws of the State
of New Mexico.
Signed this day of _______,1998, at
8y:____________________________
Rocky Bacchus
<PAGE>
PROMISSORY NOTE
$9,747 DATE: JANUARY 12, 1998
For value received, the undersigned Ron Bacchus ( "Promisor") as
principal, promises to pay to the order of Refrigeration Technology Inc.
(the "payee"), at P.O. BOX 3048, Sunland Park, New Mexico 88063, (or at
such other place as the Payee may designate in writing) the sum of $9,747
with interest. These moneys were received on March 12, 1997 ($1,414.00),
May 9,1997 ($3,333) and on August 5,1997 ($5,000.00).
Interest will be paid on the unpaid principal at the rate of 1.0 percent
over prime published in the Wall Street Journal, Eastern Edition,
annually.
The unpaid principal shall be payable over five years and accrued
interest shall be payable monthly. All payments on this Note shall be
applied first in payment of accrued interest and remainder in payment of
principal.
If any installment is not paid when due, the remaining unpaid balance and
accrued interest shall become due immediately at the option of the Payee.
The promisor reserves the right to prepay this Note (in whole or in part)
prior to the Due Date with no prepayment penalty.
If any payment obligation under this Note is not paid when due, the
Promisor promises top pay all costs of collection, including reasonable
attorney fees, whether or not a lawsuit is commenced as part of
collection process.
If any of the following events of default occur, this Note and any other
obligations of the Promisor to the Payee, shall become due immediately,
without demand of notice:
1) the failure of the Promisor to pay the principal and any accrued interest in
full on or before the Due Date;
2) the death of the Promisor(s) or Payee(s);
3) the filing of bankruptcy proceedings involving the Promisor as a Debtor;
4) the application for appointment of a receiver for the Promisor;
5) the making of general assignment for the benefit of the Promisor's
creditor's;
6) the insolvency of the Promisor; or
<PAGE>
7) the misrepresentation by the Promisor to the Payee for the purpose of
obtaining or extending credit. This Note is secured by Quality Air stock owned
by promisor and, when converted, RIl stock. The Payee is not required to rely on
the above security for the payment of this Note in the case of default, but may
proceed directly against the Promisor.
If any one or more of the provisions of this Note are determined to be
unenforceable, in whole or in part for and reason, the remaining provisions
shall remain fully operative.
All payments of principal and interest on this Note shall be paid in the legal
currency of the United States. Promisor waives presentment for payment, protest,
and notice of protest and nonpayment of this Note.
No renewal of extension of this note, delay in enforcing and right of the Payee
under this Note, or assignment by Payee of this Note shall affect the liability
of the Promisor. All rights of the Payee under this Note are cumulative and may
be exercised concurrently or consecutively at the Payee's option.
This note will be replaced with a promissory note after distribution of RTI
shares.
This Note shall be constructed in accordance with the laws of the State of New
Mexico.
Signed this 1998, at
October 8, 1997
Refrigeration Technology Inc.
Attn: Mr. Theo Muller, Chairman and CEO
301 Antone, P.O. Box 3048
Sunland Park, New Mexico 88063
Re: $600,000 loan between Norwest Bank El Paso, N.A., a national banking
association ("Lender" or "Bank") and Refrigeration Technology Inc., a Delaware
corporation (the "Borrower")
Gentlemen:
This will evidence Lender's agreement to make Borrower that certain
loan (the "Loan") in an amount not to exceed SIX HUNDRED THOUSAND AND NO/00
DOLLARS ($600,000), said Loan to be secured in part by the foregoing
(collectively, the "Collateral"): (i) a security interest in and to the
furniture, fixtures and equipment now owned or hereafter acquired by Borrower
and described on Exhibit "A" attached hereto and made a part hereof (the
"Equipment") and all proceeds derived therefrom, as evidenced by a Security
Agreement of even date herewith, (ii) by the assignment by RTI INC., a New York
corporation ("RTI" or "Guarantor") of l00' of the issued and outstanding shares
of all classes of stock of Borrower, as evidenced by a Pledge and Security
Agreement of even date herewith, and (iii) by a first lien Deed of Trust,
Security Agreement and Financing Statement ("Deed of Trust") and Assignment of
Rents and Leases and Security Agreement ("Assignment"), both of even date
herewith, covering the following described real property together with all
permanent improvements thereon or to be constructed thereon, to wit:
Lots 3 through 20 and 41 through 58, Block 15, WESTWAY UNIT II, an
addition to El Paso County, Texas, according to the plat thereof on
file in Volume 17, Page 35, Real Property Records, El Paso County,
Texas (the "Property")
The Loan shall be additionally secured by the absolute and
unconditional guaranty agreement of RTI.
The Loan shall be evidenced by a Promissory Note in substantially the
form attached hereto as Exhibit "B" in the amount of $600,000.00 (the "Note"),
representing funds to be advanced to reimburse Borrower for acquisition costs
associated with the Property, the costs incurred by Borrower in the renovation
of the Property and the expenses associated with the purchase and installation
of the Equipment.
1. Closing Documents. At the time of closing of the Loan, Borrower and
Guarantor shall furnish the following (collectively, the "Closing Documents") in
form satisfactory to Lender:
(a) This Loan Agreement;
(b) The Note executed by Borrower;
<PAGE>
___________________, 1997
Page 2
(c) The Deed of Trust covering the Property, executed by Borrower;
(d) The Assignment covering the Property, executed by Borrower and Lender;
(e) The Security Agreement covering the Personal Property, executed by Borrower
and Lender;
(f) The Pledge and Security Agreement covering the stock of
Borrower, executed by Guarantor and Lender;
(g) UCC-1 Financing Statement(s) for recording in the
County Clerk's office of El Paso County, Texas, Secretary of State's
offices in Austin, Texas and Secretary of State's Office of Santa Fe,
New Mexico;
(h) Guaranty Agreement executed by Guarantor;
(i) Statutory Notice of No Oral Agreements;
(j) Acknowledgment of Non-Representation by Lender's Counsel;
(k) A Mortgagee's Policy issued by Lawyers Title of El
Paso, Inc. (the "Title Company"), in the amount of $450,000.00,
containing only such exceptions as may be approved in writing by
Lender, insuring the liens of Lender as first and prior liens with
respect to the Property;
(1) A Plat based on a survey by a licensed engineer or
surveyor satisfactory to Lender, showing the boundaries of the
Property, locations of all improvements and all easements, containing
only those exceptions approved in writing by Lender;
(in) Unanimous Consent of the Board of Directors and
Shareholders of Borrower evidencing the authorization of Borrower to
obtain the Loan from Lender and to execute the documents contemplated
herein to be signed between Borrower and Lender with respect to the
Loan and the transactions contemplated hereby;
(n) Evidence of the approval by the Small Business
Administration ("SBA") and the Upper Rio Grande Development Company
("CDC") of the terms of this Loan, the loan documents to be executed
in connection herewith, and the proposed permanent financing in an
amount not to exceed $350,000.00 to be provided by the Bank to
Borrower (the "Bank Permanent Loan"), which Bank Permanent Loan is to
be funded in conjunction with that certain loan to be provided to the
Borrower (the "SBA Loan") under the terms of the SEA Loan
Authorization and Guaranty Agreement (as hereinafter defined);
(o) Unless waived in writing by Bank at the time of
Closing, an executed SBA Loan Authorization and Guaranty Agreement
for the United States Small Business Administration Upper Rio Grande
Development Company, Loan Program 504 of the Small Business
Investment Act of 1958, signed on behalf of the SEA (the "Loan
Authorization and Guaranty Agreement"), pertaining to a permanent,
partial takeout commitment with respect to the Loan in an amount not
less than $250,000.00;
<PAGE>
___________________, 1997
Page 3
(p) An appraisal of the Property prepared by an MAI
certified appraiser licensed to do business in the State of Texas,
approved by Lender, opining that the Property has a fair market value
of at least $775,000.00;
(q) An executed Environmental Indemnity Agreement in the
form attached hereto as Exhibit "C" dated concurrently with this
Agreement, duly executed by the Borrower in favor of Bank, whereby
such parties agree to indemnify and hold harmless Bank from the
consequences of any Hazardous Materials (as defined in the
Environmental Indemnity Agreement), in, on, under or about the
Property;
(r) Such evidence as Bank may require to confirm receipt by
Borrower of a satisfactory efficiency and safety rating from
Electronics Testing Lab and the American Refrigeration Institute;
(s) All documentation that may be reasonably requested by
Bank with respect to the ongoing environmental proceedings relating to
the property owned by Guarantor in Rockaway, New Jersey (the "New
Jersey Property") and with respect to the environmental condition of
the Property;
(t) Such UCC lien searches with respect to Borrower and Guarantor as Lender may
reasonably require;
(u) Unanimous Consent of the Board of Directors of Guarantor
evidencing the approval of the guaranty and pledge of stock by the
Guarantor of the Loan and that the execution and delivery of such
Guaranty Agreement and Pledge and Security Agreement will benefit
Guarantor, either directly or indirectly;
(v) Evidence satisfactory to Bank of the corporate existence
and current corporate good standing of Borrower and Guarantor in the
States of Delaware and New York, respectively, and the qualification
and good standing of Borrower to transact business in the State of
Texas;
(w) Evidence satisfactory to Bank of the injection of
capital by the Borrower into the Property in an amount greater than or
equal to $108,785.00;
(x) Evidence satisfactory to Bank that any remodeling of any
improvements on the Property or any additional improvements
constructed thereon conform with the National Earthquake Hazards
Reduction Program; and
(y) Such other information and/or documents as Lender may reasonably require.
2. Covenants. Re~Representations and Warranties. As an inducement to Lender to
make the Loan herein contemplated, Borrower and Guarantor make the following
representations, warranties and covenants:
(a) Other than the existence of that certain Utility and
Drainage Easement recorded in Book 17, Page 35, Real Property Records
of El Paso, County, Texas (the "utility easement") which in part is
located underneath the building and other improvements situated on the
Property, there is no significant material fact or
<PAGE>
Page 4
condition relating to the financial condition of Borrower, Guarantor
or to the Collateral which has not been disclosed in writing to
Lender.
(b) No Deed of Trust, Security Agreement or other security
instrument covering the Property has been executed, no Financing
Statement filed, and no lien, security interest, mechanic's lien or
materialmen's lien, has attached to or been perfected against the
Collateral.
(c) Borrower represents and warrants that Borrower is a
Delaware corporation, duly organized, validly existing and in good
standing under the laws of the State of Delaware and is duly
qualified and in good standing under the laws of the State of Texas.
Guarantor represents and warrants that Guarantor is a New
York corporation duly organized, validly existing and in good standing
under the laws of the State of New York.
(d) During the term of the Loan, Borrower, at its sole cost
and expense, will maintain or cause to be maintained policies of
insurance, each with a standard mortgagee's clause, with loss payable
to the Lender, providing that no cancellation, reduction in amount or
material change in coverage shall be effective until at least ten (10)
days after receipt by Lender and Borrower of written notice thereof,
issued by such insurers with such types of coverage (including
worker's compensation, flood insurance, casualty/hazard insurance and
public liability insurance) and in such amounts as shall be
satisfactory to Lender. Borrower covenants and agrees to deliver to
Lender the original of any and all policies or renewal policies
required hereunder, bearing the notations evidencing the payment of
premiums.
(e) During the term of the Loan, Borrower will pay before
the same become delinquent all taxes, assessments and special
assessments (including paving) of every kind that may be assessed or
levied against the Property or any part thereof. Upon request,
Borrower will provide to Lender evidence of such payment which shall
be either (i) photo copy (front and back) of the canceled check or
(ii) a duplicate tax receipt showing that payment has been made.
(f) Borrower shall pay all costs and expenses incurred in
connection with the transaction herein contemplated, including,
without limitation, the fees of attorneys for Lender for their
services in connection with the preparation of this Agreement and
related loan documents and in connection with the closing of the Loan
as well as all title insurance and other insurance premiums.
(g) Borrower will not permit any of the Property to become
subject to any liens or encumbrances other than those herein
referenced, including specifically the SEA Loan.
(h) Borrower and Guarantor will promptly notify Lender of
any material adverse changes in the facts or circumstances represented
or warranted by Borrower or Guarantor in this Agreement or in any of
the Closing Documents or other documents or certificates or reports
furnished to Lender in connection with this Agreement.
<PAGE>
Page 5
(i) The transaction contemplated hereby and the execution
and delivery of the loan documents contemplated herein, have been
duly authorized by all requisite corporate action required on behalf
of Borrower and Guarantor, and such loan documents constitute the
legal, binding and enforceable obligations of the such parties
thereto in accordance with their terms.
(j) Borrower and Guarantor shall each furnish to Bank (i)
within forty-five (45) days after the end of each fiscal quarter,
beginning with the quarter ending September 30, 1997, internally
prepared financial statements for the preceding quarter, consisting
of at least a balance sheet, income statement and profit and loss
statement and a statement of compliance with each of the financial
covenants and ratios set forth in Section 2 (1), together with such
supporting information with regards thereto as Bank may require and
(ii) by April 30 each year during the term of the Loan, or within 30
days from the date of filing thereof, copies of the respective
federal income tax returns with all schedules appended thereto for
each of Borrower and Guarantor.
All of the financial statements to be provided hereunder
shall be prepared in accordance with generally accepted accounting
principles, consistently applied, and shall be certified as true and
correct by the President or chief financial officer of each of
Borrower and Guarantor. Each of Borrower and Guarantor shall furnish
to Bank such additional financial information as Bank may from time to
time request.
(k) Guarantor shall provide to Bank copies of each of its
quarterly l0-Q reports and annual 10-K reports within thirty (30) days
of the date of filing thereof with the Securities and Exchange
Commission;
(1) During the term of this Loan, Guarantor and Borrower
shall maintain, on a consolidated basis, the following financial
covenants and ratios, to wit:
(i) A ratio of current assets to current
liabilities (the "Minimum Current Ratio") of at least 1.6 to
1, at all times.
(ii) A maximum total liabilities to total net worth ratio of 1.5 to 1, at all
times.
(iii) Commencing as of December 31, 1998 and
continuing thereafter during the term of the Loan, an
aggregate minimum cash flow to prior years current maturities
of long term debt ratio of one hundred and twenty-five
percent (l25%), calculated as a fraction, the numerator of
which shall be the sum of (x) the aggregate net income plus
depreciation less (y) distributions and dividends to
partners, managers and members, and shareholders of Borrower
and Guarantor, and the denominator of which shall be the sum
of current maturities of long term debt for the year just
ending. This ratio shall be tested on an annual basis using
the consolidated fiscal year end audited financial
statements.
<PAGE>
Page 6
For the purpose of determining compliance with each of the
financial covenants set forth in this Agreement, all covenants shall
be defined and determined in accordance with GAAP, based upon the
consolidated financial statements of Guarantor.
At the time Guarantor and Borrower provide to Bank the
quarterly financial statements described in Section 2(j) above,
Borrower and Guarantor shall provide evidence of the compliance with
the financial ratios and covenants set forth above, or if not in
compliance the amount of variation therefrom, and in connection
therewith provide all supporting information, reports and financial
data (both present and historical) as Bank may require.
(in) Neither Borrower nor Guarantor shall pay any dividends
until the remediation proceedings relating to the New Jersey Property
have been completed and a no further action letter has been issued by
the State of New Jersey and any other governmental, administrative or
regulatory agency having jurisdiction with respect thereto and
evidence satisfactory in all respect to Bank has been provided to
Bank.
(n) During the term of the Loan, each of Borrower and
Guarantor will comply with all covenants, conditions and restrictions
set forth in the Loan Authorization and Guaranty Agreement.
(o) During the term of the Loan, each of Borrower and
Guarantor will do all things necessary to preserve and maintain their
respective corporate existences in good standing and duly qualified to
conduct its businesses in the States of New York and Delaware,
respectively, and with respect to Borrower, the State of Texas; will
not enter into any corporate mergers, reorganizations, restructures or
liquidations without the prior written consent of Bank; not make any
amendments to its articles of incorporation or bylaws without the
prior written consent of Bank, which consent shall not be unreasonably
withheld or delayed; and except for issuance of authorized shares of
stock to shareholders other than RTI which does not result in a change
of more than 20~ of the ownership of Borrower, not allow or consent to
a transfer of any of its shares of stock without the prior written
consent of Bank. Borrower covenants to give thirty (30) days prior
written notice of any change in stock ownership allowed under this
Section 2 (a). As of the date hereof, the shareholders, officers and
directors of Borrower and Guarantor are as set forth in Exhibit D
attached hereto and made a part hereof.
(p) As of the date hereof, the Articles of Incorporation of
Borrower allow for the issuance of three THOUSAND (3,000) shares of
stock and one hundred (100) shares are issued and outstanding. During
the term of the Loan, no additional shares of stock will be authorized
or issued.
(s) During the term of this Loan, Borrower and Guarantor
will insure that Borrower maintains a satisfactory efficiency and
safety rating from Electronics Testing lab and an American
Refrigeration Institute listing, and contemporaneously with providing
the quarterly financial statements to Bank as required hereunder will
provide such evidence thereof as Bank may require.
<PAGE>
Page 7
3. Loan Funding. The proceeds of the Loan shall be funded as follows,
to wit:
(a) Interim Loan. At the time of closing of the Loan and
subject to the satisfaction of each of the terms and conditions
hereof and the delivery of each of the Closing Documents and the
other items described in Section 1 hereof required to be delivered by
Borrower and Guarantors, Bank will advance to Borrower the principal
amount of Three Hundred Fifty THOUSAND and No/100 Dollars
($350,000.00) under the Note. The principal balance of the funds
available for advance under the Note in the amount of Two Hundred
Fifty THOUSAND and No/100 Dollars ($250,000.00) shall not be
disbursed and Bank shall have no obligation to disburse the same
unless within one hundred twenty (120) days from the date of closing
Borrower has (i) secured all required municipal, regulatory,
governmental and third party approvals necessary to vacate those
portions of the utility easement which are situated underneath the
building and other improvements on the Property and otherwise located
on the Property in such a manner as may create an impediment to the
use and operation of the Property, (ii) caused such utility easement
to be vacated of record in the County Clerk's Records of El Paso
County, Texas, and (iii) to the extent required by applicable law,
ordinance or regulation, has filed an amended plat of the Westway
Unit II subdivision to reflect the vacation thereof. Once Borrower
has satisfied the foregoing requirements with respect to the utility
easement and provided such evidence with regards thereto as may be
required by Bank, and provided that at such time no Event of Default
has occurred hereunder and no condition exists which with the giving
of notice, lapse of time, or both or otherwise would constitute such
an Event of Default, the balance of the principal available for
advance under the Note will be disbursed to Borrower. Failure of
Borrower to satisfy the foregoing requirements with respect to
vacation of the utility easement shall constitute and Event of
Default under the terms of this Loan Agreement and the terms of the
Loan.
(b) Minipermanent Loan. One hundred and twenty (120) days
from the date hereof (the "Conversion Date"), provided Borrower has
complied with all of the terms and conditions set forth herein, and
provided further that no Event of Default then exists and no condition
then exists which with the giving of notice, lapse of time or both or
otherwise would constitute such an Event of Default, Bank agrees to
convert the interim loan to a mini-permanent loan. Following the
Conversion Date, the Loan shall continue to be secured by the Loan
Documents and such other security documents as Bank may require, and
shall be renewed, extended and modified in accordance with either
subparagraph (i) or (ii) below.
(i) With SBA. Having obtained the approval of the
SEA and CDC and received the executed Loan Authorization and Guaranty
Agreement, and having received from the SEA a payment of $250,000 in
reduction of the principal amount of the Loan, the Bank shall convert
the Loan to a $350,000 mini-permanent loan, which $350,000
mini-permanent loan will bear interest from the Conversion Date,
prior to default or maturity at the rate or rates set forth below.
Commencing as of the Conversion Date and continuing through and
including ten (10) years from the date thereof, the Loan shall bear
interest on the principal balance from time to time remaining unpaid
under the Loan, prior to default or maturity, at the Prime Rate (as
hereinafter defined), plus one and three quarters percent (l.75'~)
per annum (the "Applicable Rate provided, however, that
<PAGE>
Page 8
if at any time the rate of interest which the Loan would otherwise
bear exceeds the highest interest rate permitted by applicable law
(the "Maximum Rate"), the rate of interest which the Loan bears shall
be limited to the Maximum Rate. Interest shall be computed on a 360
day year basis, as if each year consisted of twelve (12) months of
thirty (30) days each, but to the extent such computation of interest
might cause the rate of interest to exceed the Maximum Rate, such
interest shall be computed on the basis of a 365 day or 366 day year,
as the case may be.
All past due principal or interest of the Loan (compounded
monthly) shall bear interest from default or maturity thereof until
paid at the Maximum Rate, or in the absence of a Maximum Rate, at the
rate of l8% per annum.
The Prime Rate shall be the rate of interest per annum
quoted on a daily basis in The Wall Street Journal (Southwest Edition)
as the base rate on corporate loans at large U.S. money center
commercial banks (or as "Prime Rate" may be similarly therein
defined). In the event more than one rate is quoted, or if a range or
"spread" of rates is quoted, then, in such case, the highest rate
quoted shall be the "Prime Rate" for the purposes hereof. Such Prime
Rate is currently quoted under the "Money Rates" column for the prior
business day; provided, however, for the purpose of the Loan, the
quoted Prime Rate shall be effective as of and for the date of
publication of the issue of The Wall Street Journal in which the Prime
Rate is quoted, and not such prior business day, and shall remain in
effect until the Prime Rate is reset in accordance with the foregoing.
In the event that The Wall Street Journal should cease quoting such
Prime Rate, then Lender may refer to another similar source that
identifies the prime rate.
THE PRIME RATE IS USED AS A DEVICE TO SET THE RATE OF
INTEREST ONLY; IN NO EVENT IS IT TO BE CONSTRUED AS A WARRANTY OR
REPRESENTATION OF FAVORABILITY OF RATE OR A REPRESENTATION THAT LOANS
WILL NOT BE MADE AT LOWER RATES.
Principal and interest shall be payable in monthly
installments (determined as hereinafter provided), with the first
installment of principal and interest to be due and payable one (1)
month from the Conversion Date and subsequent installments of
principal and interest being due and payable on the same day of each
successive month thereafter until ten (10) years from the Conversion
Date, when the entire balance of principal and accrued and unpaid
interest shall be due and payable.
The initial monthly installment (the "Initial Monthly
Installment") payable hereunder shall be determined on the Conversion
Date and shall equal the monthly payment required to repay the unpaid
principal amount of the Note on the basis of a ten (10) year
amortization schedule (with year one (1) of the amortization schedule
beginning on the Conversion Date) at an interest rate equal to the
Applicable Rate on the Conversion Date. The Initial Monthly
Installment shall be payable for twelve (12) consecutive months,
commencing one (1) month from the Conversion Date. Thereafter, on each
anniversary of the Conversion Date (each a "Change Date"), Bank shall
redetermine the Applicable Rate as provided above and recalculate the
amount of the monthly principal and interest installments based upon
the then unpaid principal
<PAGE>
Page 9
balance hereof, at the Applicable Rate per annum on such Change Date,
with the monthly payments then being calculated based on a ten (10)
year amortization, less the number of years lapsed from the
Conversion Date to such Change Date. The adjusted monthly
installments as determined on each Change Date shall be payable for
the next twelve (12) months, commencing one (1) month from the date
of each Change Date.
(ii) Without SEA. In the event that the approval of
the SEA and CDC is not received and the SBA loan contemplated by the
Loan and Authorization Agreement does not close and result in a
principal reduction of the Loan in the amount of $250,000, the Bank
will convert the interim construction loan to a mini-permanent loan
in the maximum amount of $350,000 (the "Maximum Bank Mini-Perm
Amount") upon receipt, within fifteen (15) days following the
Conversion Date, of a principal reduction on the Loan in the amount
of $250,000.00, plus accrued interest thereon; it being understood
and agreed that the difference as of the Conversion Date between the
principal amount outstanding under the Loan and the Maximum Bank
Mini-Perm Amount (should this option (ii) be exercised) shall be paid
in cash by Borrower as provided herein as a condition precedent to
Bank's obligations herein.
Thereafter, the remaining unpaid principal balance of the
Loan (which in no event shall exceed the Maximum Bank Mini-Perm
Amount) shall bear interest as provided in subparagraph (i) above and
shall be payable in consecutive principal and interest installments as
determined in subparagraph (i) above.
In connection with the conversion of the Loan to a
mini-permanent loan, whether in accordance with the provisions of
subparagraph (i) or subparagraph (ii) above, Borrower and Guarantor
hereby covenant and agree to execute any and all renewal, extension
and modification agreements, guaranty agreements, affidavits, deeds of
trust, assignments, security agreements and other collateral documents
to further secure the Loan as Bank may require.
In the event that neither the SEA approval and principal reduction nor the
principal reduction and interest repayment as described in Section 3(b) (i) or
(ii) herein are received within fifteen (15) days of the Conversion Date, the
Bank's commitment with regards to the mini-permanent loan shall be deemed
terminated and of no force and effect and the Note shall be deemed to have
matured as of the Conversion Date.
4. Default. The term "default" as used herein shall mean the occurrence of any
one or more of the following events:
(a) Failure to pay any installment of principal or interest within ten (10) days
when due under the Note;
(b) Breach of any of the covenants (other than the covenant
to pay the Loan, the financial covenants or the covenant to vacate the
utility easement), agreements or obligations contained herein or in
any instrument or document mentioned herein other than the obligation
to repay the Loan in accordance with its terms, and the continuance of
such breach for a period of fifteen (15) days after written notice
from Lender to Borrower specifying such breach;
<PAGE>
Page 10
(c) Breach of any one of the financial covenants contained
herein or failure to vacate the utility easement within one hundred
twenty (120) days from the date of closing of the Loan;
(d) Finding by Lender that any statement, representation or
warranty in this Agreement or in any certificate or document herein
mentioned is untrue or incorrect in any material respect and the
failure and refusal of Borrower or Guarantor to render the same
immaterial or remedy it within fifteen (15) days after written notice
from Lender to Borrower specifying such breach;
(e) Any assignment for the benefit of creditors by the Borrower or the
Guarantor, or any one of them, or the adjudication of any one of the Borrower or
the Guarantor as an involuntary bankrupt;
(f) A material adverse change in the financial condition or the operation of
Borrower or Guarantor;
(g) Any event which results in acceleration of the SEA Loan;
(h) Filing by Borrower or Guarantor of a voluntary petition in bankruptcy;
(i) Breach of any of the covenants, agreements or obligations contained in the
Loan Authorization and Guaranty Agreement; or
(j) The dissolution or other business failure of Borrower or Guarantor. Any sums
expended by Lender pursuant to the exercise of any remedy provided in this
Paragraph 4 shall be part of the indebtedness owing by Borrower to Lender.
Should a default occur and be continuing, Lender may, at its election,
do any one or more of the following:
(a) Without notice or grace (except as expressly provided
for above), notice of intent to accelerate, notice of acceleration,
demand, notice of intent to demand, notice of demand or presentment,
which are all hereby expressly waived, declare the unpaid principal
balance and accrued interest of the indebtedness immediately due and
payable.
(b) So far as Borrower and Guarantor are concerned, and
without notice to Borrower or Guarantors, which is hereby expressly
waived, take possession of the Property, and at Lender's option, in
the name and on behalf of Borrower and Guarantor, do any one or more
of the following: (i) assume the rights, powers and duties of Borrower
and Guarantor under any contract entered into by them and (ii) pay all
bills of, and settle or compromise any claims against Borrower and
Guarantor.
(c) Pursue any remedy available to Lender at law or in
equity, including without limitation foreclosure of the Vendor's and
Deed of Trust liens against the Property, institute collection of the
Loan against Guarantor or exercise any and all other rights and
remedies afforded Lender under the terms of the collateral documents
executed in connection with the Loan.
<PAGE>
Inc.
Page 11
5. Miscellaneous.
(a) Any notice required or permitted hereunder shall be in
writing, addressed to the party to be notified at the address stated
below (or at such other address as may have been designated by
written notice), properly stamped, and deposited in the United States
mail, as certified mail, return receipt requested. The address of
each party for the purpose of this section is as follows:
Borrower: Refrigeration Technology, Inc. Attn: Mr. James Caylor, Controller 301
Antone, P.O. Box 3048 Sunland Park, New Mexico 88063
Lender: Norwest Bank El Paso, N.A. Attn: Mr. Joe Chavez Vice President 221 North
Kansas El Paso, Texas 79901
Guarantor: RTI, Inc. Attn: Mr. Theo Muller, President 20 Peach Hill Road Darien,
Connecticut 06820
Any notice given in accordance with this Paragraph 5(a)
shall be deemed received upon delivery if by hand delivery or two (2)
days after deposit in the U.S. Mail, certified mail;- return receipt
requested.
(b) This Agreement has been made, and the Note and all other
security documents shall be made and executed in El Paso, Texas; and
all advances in respect of the Loan, and all payments thereon, shall
be made in Texas. This Agreement, the Note and all other security
documents shall be governed by the laws of the State of Texas in all
respects, including matters of construction, validity and performance.
(c) This Agreement shall not be assignable by operation of
law or otherwise without written consent of Lender.
(d) This Agreement shall be binding upon, and shall inure to
the benefit of Lender, its successors and assigns and shall be binding
upon Borrower and Guarantor and their respective heirs,
representatives, successors and assigns.
(e) Time is of the essence with respect to performance of this Agreement.
(f) Should Borrower fail to perform any covenant, duty or
agreement in accordance with the terms hereunder, Lender may, at its
election, perform or attempt to perform such covenant, duty or
agreement on behalf of Borrower. Borrower shall, at the request of
Lender, promptly pay any amount expended by Lender in such performance
or attempted performance to Lender, together with interest thereon at
the rate of eighteen percent (18%) per annum from the date of such
expenditure by Lender until paid, provided, however, that Lender does
not assume and shall never have, except
<PAGE>
Page 12
by written agreement of Lender, any liability for the performance of
any duties of Borrower under or in connection with all or any part of
the Property described above.
(g) Failure by Lender to exercise any right or power
accruing hereunder shall not impair such right or power or be
construed to be a waiver of any other breach or any other covenant,
condition or agreement herein contained.
(h) Anything herein contained to the contrary, Borrower does
not agree and shall not be obligated to pay any amount which would
render this obligation usurious. It is the intention of Lender to
conform strictly to applicable usury laws now in force and any
agreement for interest shall be held to be subject to the reduction
to the amount allowed under such usury laws so that if from any
circumstances any interest is in excess of the maximum permitted by
law such excess shall be canceled automatically and if thereto fore
paid shall be refunded or credited on the principal amount
outstanding. The Loan has been made on the assumption that all
scheduled payments will be made when due, and in the event of
prepayment and/or accelerated maturity from any cause, any interest
paid on account of the Loan in excess of the Maximum Rate shall be
considered for all purposes as payment on principal. All sums paid or
agreed to be paid for the use, forbearance, or detention of the
indebtedness evidenced by the Loan shall, to the extent permitted by
applicable law, be amortized, prorated, allocated, and spread
throughout the full term of the Loan until payment in full.
(i) It is understood and agreed that all approvals given by
Lender to any instruments or documents and all inspections made by
Lender shall be given and made solely to protect Lender's collateral.
IN NO EVENT SHOULD BORROWER RELY ON LENDER'S APPROVALS OR INSPECTIONS
FOR PROTECTION OF BORROWER, OR THE PROPERTY.
(j) This Loan Agreement and all documents to be executed in
connection herewith are to be governed by and construed in accordance
with the laws of the State of Texas and the United States of America.
The jurisdiction and venue of all litigation, bankruptcy actions and
other legal proceeding involving the Property or any of the Loan
Documents shall be in El Paso County, Texas.
(k) Except for "Core Proceedings" as such term is defined
under the United States Bankruptcy Code, Lender and Borrower agree to
submit to binding arbitration all claims, disputes and controversies
between or among them, whether in tort, contract or otherwise (and
their respective employees, officers, directors, attorneys, and other
agents) arising out of or relating to in any way (i) the Loan, this
Loan Agreement and the related loan and security documents which are
the subject of the Note and its negotiation, execution,
collateralization, administration, repayment, modification, extension,
substitution, formation, inducement, enforcement, default or
termination; or (ii) requests for additional credit. Any arbitration
proceeding will (i) proceed in El Paso, Texas; (ii) be governed by the
Federal Arbitration Act (Title 9 of the United States Code); and (iii)
be conducted in accordance with the Commercial Arbitration rules of
the American Arbitration Association ("AAA")
<PAGE>
Page 13
The arbitration requirement does not limit the right of
either party to Ci) foreclose against real or personal property
collateral; (ii) exercise self-help remedies relating to collateral
or proceeds of collateral such as setoff or repossession; or (iii)
obtain provisional ancillary remedies such as replevin, injunctive
relief, attachment or the appointment of a receiver, before during or
after the pendency or any arbitration proceeding. This exclusion does
not constitute a waiver of the right or obligation of either party to
submit any dispute to arbitration, including those arising from the
exercise of the actions detailed in section Ci), (ii) and (iii) of
this paragraph.
Any arbitration proceeding will be before a single arbitrator
selected according to the Commercial Arbitration Rules of the AAA. The
arbitrator will determine whether or not an issue is arbitratable and
will give effect to the statutes of limitation in determining any
claim. Judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction.
In any arbitration proceeding the arbitrator will decide (by
documents only or with a hearing at the arbitrator's discretion) any
pre-hearing motions which are similar to motions to dismiss for
failure to state a claim or motions for summary adjudication.
In any arbitration proceeding discovery will be permitted
and will be governed by the Texas Rules of Civil Procedure. All
discovery must be completed no later than 20 days before the hearing
date and within 180 days of the commencement of arbitration
proceedings. Any requests for an extension of the discovery periods,
or any discovery disputes, will be subject to final determination by
the arbitrator.
If the foregoing terms are acceptable to Borrower and Guarantor,
please indicate your acceptance below by your signature.
Yours very truly,
NORWEST BANK EL PASO, N.A.
By: Joe Chaver, Vice President
Accepted this 8th day of October, 1997.
REFRIGERATION TECHNOLOGY INC., a Delaware corporation
By: Rick Bacchus, President
RTI Inc., a New York corporation
by: Rick Bacchus, President, Guarantor
U.S. SMALL BUSINESS ADMINISTRATION
EL PASO DISTRICT OFFICE
10737 GATEWAY BLVD. WEST, SUITE 320
EL PASO, TEXAS 79935
AUTHORIZATION FOR DEBENTURE GUARANTEE
504 PROGRAM
Date: August 7, 1997
Borrower: Refrigeration Technology Inc.
SBA Loan Number: CDC-147-053-4000-EP
Upper Rio Grande Development Corporation
(Certified Development Company) (CDC)
11 00 North Stanton - Suite 61 0
(Address)
El Paso. Texas 79901
(City, State, Zip Code)
The Small Business Administration (SBA) authorizes the guarantee of a Debenture
to be issued by CDC to assist Borrower Refrigeration Technology Inc., a small
business, pursuant to Title V of the Small Business Investment Act of 1 958, as
amended (the "Act"), subject to the following terms and conditions:
1. Project: The proceeds of the Debenture shall be used only towards financing
the purchase or lease, and/or improvement or renovation by Borrower of: (i)
SUBJECT ADDRESS IS A 8909 KINGSWAY STREET. ANTHONY. TEXAS. REAL ESTATE AND
IMPROVEMENTS ARE LEGALLY DESCRIBED As:
PARCEL 1: LOTS 3 THROUGH 1 8. LOTS 43 THROUGH 54. AND LOTS 57 AND 58. BLOCK 1 5
WESTWAY UNIT II. AN ADDITION TO THE CITY OF EL PASO, EL PASO COUNTY. TEXAS.
ACCORDING TO THE MAP THEREOF ON FILE IN BOOK 1 7. PAGE 35. PLAT RECORDS. EL
PASO. COUNTY TEXAS:
PARCEL 2: LOTS 1 9. 20. 41 AND 42. BLOCK 1 5. WESTWAY UNIT II. AN ADDITION TO
THE CITY OF EL PASO, EL PASO COUNTY. TEXAS. ACCORDING TO THE MAP THEREOF ON FILE
IN BOOK 1 7. PAGE 35. PLAT RECORDS. EL PASO. COUNTY TEXAS:
PARCEL 3: LOTS 55 AND 56. BLOCK 1 5. WESTWAY UNIT II. AN ADDITION TO THE CITY OF
EL PASO. EL PASO COUNTY. TEXAS, ACCORDING TO THE MAP THEREOF ON FILE IN BOOK 1
7. PAGE 35. PLAT RECORDS. EL PASO, COUNTY TEXAS:
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(ii) General description of machinery, equipment (NONE).
2. Terms of the Debenture and Note: At a time agreed upon by SBA, CDC,
and Borrower prior to funding of the 504 loan ("Closing"), the Borrower
shall execute a Promissory Note ("Note") in favor of CDC, which shall
issue a Debenture, all reflecting the following terms:
(a) Amount: $261 .000.00.
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(c) Repayment Terms: At the date the Debenture is sold, the interest
rate Will be set and the amount of the monthly principal and interest
installment for the term of the Note and the semiannual principal and
interest installment for the term of the Debenture will be
established.
(d) Prepayment: Borrower may prepay the entire outstanding balance of
the Note prior to the maturity date, but may not make partial
prepayments. If Borrower prepays during the first half of the stated
term, there will be a prepayment premium, calculated by applying a
declining percentage of the Debenture interest rate to the
outstanding principal balance of the Note. A schedule of the dollar
amount of the premium will be provided after the sale of the
Debenture.
(e) Borrower Guaranty Fee: Borrower agrees to pay an ongoing guaranty
fee equal to 7/8th of I percent per annum of the principal balance as
calculated at five year intervals beginning with the first payment.
This payment shall be made until the loan is terminated and shall be
included with the payment made each month to the Central Servicing
Agent.
(f) Participation Fee: SBA's approval of this loan is conditioned
upon the receipt by SBA of a onetime fee equal to one-half of one
percent of the principal amount of the senior mortgage associated
with this 504 loan. The payment shall be submitted in the form of a
certified check or a guaranteed funds check which shall be sent to
the Central Servicing Agent by the CDC along with other documentation
related to this loan.
(g) Development Company Fee: The CDC agrees that it shall pay an
ongoing guaranty fee on a monthly basis equal to one-eighth of one
percent per annum. This fee shall be calculated on the balance
outstanding at five year Intervals and shall be deducted from the
servicing fee collected by the GSA for the CDC. The CDC shall retain
a minimum servicing fee of 0.5 percent (50 basis points), not
Including the ongoing guaranty fee.
Project Cost: The Project Cost shall include only the specific components set
forth below. Project Cost does not include
Administrative Costs.
Purchase of land and/or building $452,002.00
Construction (building, remodeling) $54,517.00
Machinery, equipment and other personalty
(purchase, installation) $204,268.00
Professional fees $ 0.00
Other expenses: (construction contingencies) $ 0.00
(Interim interest and points) $708,785.00
Total Project Cost
Borrower's Injection: At or prior to Closing, Borrower must contribute to the
Project from its own resources, CDC or any other source the sum of $108,785.00
In cash (or oilier property acceptable to SBA obtained with the cash) or land.
If any of the contribution Is borrowed and secured by any of the Project
Property, the resulting obligation must be expressly subordinate to the liens
securing the Note and may not be repaid at a faster rate than the Note unless
prior written approval is obtained from SRk A copy of any debt Instrument
Mencing such obligation must be supplied to CDC at or prior to Closing.
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(a) Interim Lender: NORWEST BANK will provide an interim loan in the principal
amount of $600.000.00 (Interim Lender).
(b) Application of Net Debenture Proceeds to Interim Loan: Upon
sale of the Debenture, the Net Debenture Proceeds (the portion
of Debenture Proceeds that finance Project Cost) will be
applied to pay off the balance of the interim loan, or, if the
Interim Lender is the Third-Party Lienholder, to reduce the
balance to the amount specified in Paragraph six below.
(C) Required Certifications Before Debenture Is Issued: CDC
must cause Interim Lender to certify that it has no knowledge
of any unremedied substantial adverse change in the condition
of the Borrower [and/or Operating Company] since the date of
the loan application to the Interim Lender, and that the
interim loan has been disbursed in reasonable compliance with
this Authorization. [CDC must certify that construction has
been completed in accordance with the final plans and
specifications. CDC may rely upon a certification by the
Interim Lender.1
6. Permanent Prior Financing: NORWEST BANK ("Third-Party Lienholder")
will provide permanent financing in the amount of $350.000.00 for a
term of TEN (10) years ("Third-Party Lienholder Loan"). The Third-Party
Lienholder's Note must not be open-ended or cross-collateralized with
other financing provided by Third-Party Lienholder; nor shall it have
an early call feature, any demand provisions (unless the Note is in
default), or any requirement for a balloon payment prior to the end of
the above term or ten years (in the case of a Project involving real
estate) or seven years (in the case of a Project not involving real
estate with a ten year Debenture), whichever is earlier. Third-Party
Lienholder must subordinate to the CDC/SBA lien all future advances in
excess of the Third-Party Lienholder Loan except those for the
reasonable costs of collection, maintenance, and protection of the
Third-Party Lienholder's lien position.
7. Costs in Excess of Project Cost: Borrower must pay any costs in
excess of the total Project Cost referred to in Paragraph 3 which
Borrower incurs in completing the Project.
8. Use of Debenture Proceeds: The Debenture Proceeds shall be used to
pay Administrative Costs and the final 35.3 percent of the total
Project Cost.
(a) CDC Share (35.3%) of Project cost $250,000.00
(b) Administrative coats
1. SBA Guarantee Fee (A x .00875) $2,187.50
2. Funding Fee CA x 0.0025) $ 625.00
3. cDc Processing Fee (A x 0.015) $3,750.00
4. closing costs $2,500.00
5. Subtotal (B.1 through B.4) $1,631.25
6. Underwriters Fee* $10,693.75
7. Total CB.5 plus B.6)
(c) Total Debenture Amount
(A plus B.7, rounded up to next thousand) $261.000.00
(d) Balance to Borrower c minus (A plus 8.7)) $ 306.25
Underwriters fee calculated as follows: Sum of A and B.5
divided by 0.99375; round this number up to the highest
thousand; multiply this number by 0.00625.
(a) The Note.
(b) A Second Deed of Trust or Mortgage on the Project Property
creating a valid lien at the time of Debenture funding, subject
only to a prior lien held by Third-Party Lienholder in the
amount of the Third-Party Lienholder Loan. In this regard:
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(1) Mortgagee's Title Insurance: For all Project real
property required as collateral, Borrower shall provide
title insurance issued by a reputable title insurance
company in an amount equal to the Note [or the Note
less personal property costs insuring that CDC and SBA
hold a valid second lien on the Project Property
subject only to the liens expressly permitted by this
Authorization. At the time of Closing, either (1) there
shall be no contractor's, mechanic's or materialman's
liens on the Property, and none which might possibly be
filed after Closing which would impair the priority of
the Development Company/SBA lien and no exception for
same in the title insurance commitment/policy, or (2)
the title insurance company shall provide affirmative
coverage to CDC and SBA over any such exceptions,
affording reasonably adequate protection against
material loss arising from such exceptions. In
addition, the title insurance company shall provide
such endorsements as CDC or SBA deems necessary to
protect CDC and SBA reasonably against material loss
arising from any other exceptions. In states where a
survey is customarily provided for title insurance
coverage, Borrower shall also provide a survey
certified to SBA/CDC, or a prior survey acceptable to
SBA/CDC and the title insurer and a satisfactory survey
affidavit of no change. Further, Mortgagee's Title
Insurance shall contain no exception as to homestead
and no exceptions to survey or any other exceptions
save and except standard easements that do not affect
the value of the realty. Any "Arbitration Provisions"
must be deleted prior to the issuance of the policy.
(2) Subordination Agreements: CDC shall obtain [in recordable form] written
subordination agreements from any tenants occupying any of the Project real
property required as collateral. [Appropriate subordination language may be
included in the Lease as an alternative.]
(3) Vendor's Lien: Seller of real estate shall retain a
Vendor's Lien in the Warranty Deed to the Borrower in
the approximately amount of $452,002.00 and the Vendor's
Lien shall be renewed and extended in the Deed of Trust
in favor of the CDC.
(4) Mechanic's Lien: Assignment of Mechanic's Lien Note
and Mechanic's and Materialman's Lien Contract in the
total amount of the construction, which Note and Lien
shall be renewed and extended in the Deed of Trust in
favor of the CDC, for the amount of construction funds
so furnished.
(C) A Security Agreement and Financing Statement executed by
Borrower [and Operating Company] on all machinery, equipment,
furniture, fixtures, and other personal property (the
"Personalty") financed as part of the Project, and all proceeds
therefrom, subject only to a prior lien held by Third-Party
Lienholder in the amount of the Third-Party Lienholder Loan.
Borrower must provide an itemized list of the Personalty to be
attached as an exhibit to the Security Agreement and any
accompanying Financing Statements, describing each item of
collateral by number and type, including brand
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name and serial number, if applicable, sufficient to identify
it. A Uniform Commercial Code lien search showing CDC/SBA in
proper lien position (state and county) is required for all
such Personalty.
(d) A Guarantee on SBA Form 148 executed by RTI Inc. (A New
York Corporation), a recourse guarantee of Borrower's entire
obligation under the Note (a "148 Guarantee"). If the Guarantor
is a corporation then a Corporate Resolution will be required
from the guarantor stating that, "the guaranty may reasonably
be expected to benefit directly or indirectly the guarantor
corporation."
(e) A Guarantee on SBA Form 148 executed by Industrias RTI.
S.A. de C.V. (A Mexico Corporation), a recourse guarantee of
Borrower's entire obligation under the Note (a "148
Guarantee"). If the Guarantor is a corporation then a Corporate
Resolution will be required from the guarantor stating that,
"the guaranty may reasonably be expected to benefit directly or
indirectly the guarantor corporation."
(f) A Collateral Assignment of Life Insurance on the life of
Theo W. Muller in the amount of $ $200,000.00, properly
acknowledged by the Home Office of the insurer. [The original
life insurance policy shall be delivered to CDC or SBA.] CDC
and SBA must be named as collateral assignees, not
beneficiaries. Borrower shall cause the owner/insured to
maintain the policy for FIVE (5) years.
(g) Third-Party Lienholder's Agreement: Third-Party Lienholder
must execute and deliver at Closing an agreement tin recordable
form] that (a) confirms the extent to which the Third-Party
Lienholder Loan has been fully advanced [itemizing any
escrows]; (b) confirms that no future advances shall be made
that are collateralized by the Third-Party Lienholder's deed of
trust [mortgage] or security agreement, except advances to
preserve and protect the collateral or the Third-Party
Lienholder's interest in the collateral (including foreclosure
costs); (c) waives as to the CDC/SBA lien any provisions in its
deed of trust, mortgage, or security agreement prohibiting
further encumbrances; and (d) gives CDC and SBA written notice
of an event of default and the opportunity to purchase the
Third-Party Lienholder's note and lien prior to foreclosure.
Such notice must be given within 30 days after the event of
default and at least 60 days prior to the date of any proposed
sale.
(h) Assignment to SBA. CDC must execute a satisfactory written
assignment to SBA of its interest in the Note, lease and all
collateral documents executed by the Borrower and guarantors.
10. Insurance Requirements:
(a) Flood Insurance. Borrower must provide a completed Standard
Flood Hazard Determination (FEMA Form 8 1-93). Borrower must
obtain flood insurance in an amount equal to the lesser of the
insurable value of the property or the maximum limit of
coverage available if any portion of the collateral is located
in a flood hazard zone. (Borrower will be ineligible for any
future disaster assistance or SBA business loan assistance if
such flood insurance is not maintained for the entire term of
the loan.) Lender, upon learning that suitable flood insurance
coverage is not in place, shall notify Borrower that such
coverage shall be obtained and the cost added to the amount of
the loan unless such coverage is provided by Borrower within
forty-five (45) days and shall force place such coverage if
Borrower fails to comply.
<PAGE>
The services of record of the subject loan, whether Lender or
SBA shall notify the issuing insurance carrier or its agent of
record in writing within sixty (60) days of occurrence of the
change of the servicer of record of the loan to endorse the
flood policy to change the mortgagee or servicer. The
notification shall include the borrower's full name; the policy
number; the property address (including city and state); the
name of the lender or servicer reporting the change; the name
and telephone number of a contact person; the name, address and
contact person of the new mortgagee or servicer.
(b) Hazard Insurance on Real Property: Borrower [and Operating
Company] must acquire and maintain (from a carrier with a Best
rating of A or better) hazard insurance, including fire,
lightning, extended coverage, vandalism, and malicious
mischief, on all of the Project Property and non-Project
Property collateral, in favor of CDC and SBA as "mortgagees" as
their interests may appear (under a New York Standard Mortgage
clause) for the full replacement cost, unless a lesser amount
is approved by SBA in writing.
(c) Liability Insurance: Borrower and/or Operating Company must
acquire and maintain (from a carrier with a Best rating of A or
better) liability insurance coverage covering business
operations in an amount satisfactory to CDC. CDC and SBA are to
be named as "additional insureds" on liability insurance.
(d) Workers' Compensation Coverage: Borrower and/or Operating
Company must acquire and maintain (and provide evidence of the
acquisition and maintenance) on an ongoing basis for the full
term of the Debenture all required workers' compensation
coverage.
11. Environmental Requirements:
(a) Environmental Inspections.
CDC must satisfy SBA that all real estate to be taken as
collateral is free from environmental contamination. For each
such property, CDC must provide SBA with reports or findings of
any environmental inspection known to have been performed. For
commercial and industrial sites, if no inspection has been
done, CDC must complete an on-site inspection and environmental
questionnaire satisfactory to SBA.
A Phase I Environmental Audit must be performed by a reputable
private concern satisfactory to CDC and SBA if: (a) the on-site
inspection and environmental questionnaire do not satisfy SBA
as to the absence of the potential for environmental
contamination; or (2) as determined by SBA, EPA or CDC, the
Borrower [and/or Operating Company] or a prior occupant of the
property is a member of a frequently polluting business sector
or the property is located in an area known to have a pollution
problem.
A Phase II Environmental Audit must be performed by a reputable
private concern satisfactory to CDC and SBA if: (a) the on-site
inspection and environmental questionnaire or the Phase I audit
indicates the presence or potential of contamination; or (b)
the Phase I audit does not satisfy SBA that the property is
free from environmental contamination.
<PAGE>
SBA reserves the right to modify terms and conditions or cancel
this Authorization prior to loan disbursement if environmental
contamination is discovered on any of the real estate to be
taken as collateral to an extent sufficient to have a material,
adverse effect on the value of any of such property as
collateral, or if the cost of restoring the contaminated site
would have a material, adverse financial impact on Borrower [or
Operating Company.
(b) Warranty.
With respect to each piece of real estate collateral, the property owner must
warrant,
effective at Closing and during the term of the Note, that:
1) it is and shall continue to be in full compliance with all applicable local,
State and Federal environmental laws and regulations;
2) no proceedings alleging violations of environmental laws or regulations are
pending;
3) it either has no knowledge of any contamination from
hazardous substances or the current or former presence
of hazardous substances stored or used on the property
in violation of any local, State or Federal health or
environmental law or regulation, or any violation of
which it has knowledge has been fully corrected or is
the subject of an existing mitigation plan approved by
SBA;
4) it shall assume all responsibility and all liability
for hazardous substance cleanup resulting from any
contamination, past, present, or future (during its
period of ownership), and shall indemnify CDC and SBA
for any and all resulting liabilities or costs (CDC or
SBA may require a separate indemnification agreement);
and
5) it shall promptly notify CDC and SBA if it obtains
any information which causes it to know, believe or
reasonably suspect that there may be any hazardous
substance in or around any of the real estate.
12. Other Conditions.
The following terms also must be agreed to by Borrower [and Operating
Company]:
(a) No Adverse Change: Prior to Closing, the Borrower [and
Operating Company] must certify to CDC that since the date of
application there has been no unremedied substantial adverse
change in the financial condition of Borrower [and/or Operating
Company] or its ability to repay the Project financing,
including the Note. Borrower must also supply to CDC accurate
financial statements, [reviewed by a CPA,] [of the Operating
Company], current within 90 days of Closing.
(b) Change of Ownership or Control: There shall be no change in
the ownership or control of the Borrower [or Operating
Company], during the term of the Note, without the prior
written consent of SBA; provided, that, commencing six months
after the Closing, Borrower [or Operating Company may have one
or more changes in ownership without approval of SBA so long as
the cumulative change over the term of the Note is less than
five percent (5%).
<PAGE>
(1) Corporate Documents: At or prior to Closing,
Borrower and all corporate guarantors shall submit to
CDC a [certified] copy of their Articles or Certificate
of Incorporation (with amendments), Certificate of Good
Standing, Certificate to Do Business (if applicable),
[Bylaws] and Corporate Borrowing Resolution.
(d) Opinion Letter from Borrower's Counsel: At or prior to
Closing, Borrower's counsel shall submit an acceptable legal
opinion verifying that all Borrower or guarantor entities
(other than natural persons) are properly organized, in good
standing, validly existing, and have the authority to borrow or
guarantee; and that the documents executed by the Borrower and
guarantors have been authorized, executed, and delivered by an
authorized officer, and are valid and binding obligations,
enforceable in accordance with their respective terms; and
opinions as to such other matters as SBA or CDC may require.
(e) Occupancy Certificate: At or prior to Closing, Borrower
shall submit to CDC a copy of its Occupancy Certificate or
final inspection report or other evidence satisfactory to CDC,
that: (i) the Project has been substantially completed; (ii)
all elements of the Project Cost have been paid in full; (iii)
Borrower [or the Operating Company] occupies (or will shortly
occupy in the case of an escrow closing) at least 67% of the
Project Property; and (iv) the Project complies with all zoning
and necessary governmental permit and licensing requirements.
(f) Payments and Disbursements: The Central Servicing Agent
(CSA) shall handle all payments and disbursements under the
Debenture. CDC, Borrower [and Operating Company~ shall execute
the Servicing Agent Agreement (SBA Form 1 506). In addition to
the Project Cost and Administrative Costs referred to in
Paragraphs 3 and 8, the Servicing Agent Agreement requires a
servicing charge on the outstanding loan balance. Such charge
will be included in the monthly loan installment as determined
by the CSA. Payments shall be made by Automated Clearing House
(ACH) or wire transfer. Borrowers must pay a late fee of five
percent of the late payment or $100.00, whichever is greater,
for payments received by the CSA after the 1 5th day of any
month.
(g) Books. Records and Reports: Borrower [and Operating
Company] must comply with all SBA requirements, including those
regarding inspections, audits, appraisals, SBA access to books
and records, and submission of financial statements. Borrower
[and/or Operating Company] will keep proper books and records
in a manner acceptable to CDC and SBA at all times. CDC and SBA
may make inspections, audits, and examinations of the books,
records and assets of the business at the expense of Borrower
[and/or Operating Company]. Borrower [and/or Operating Company]
will furnish financial statements to CDC and/or SBA for the
period ending December 31, 1997 and annually. thereafter.
Borrower [and/or Operating Company] authorizes all Federal,
state and municipal authorities to disclose and furnish any
information regarding Borrower [and/or Operating Company] to
CDC and/or SBA upon the request of the CDC and/or SBA.
<PAGE>
(h) Earthquake Hazards: In the construction of a new building
or an addition to a building, Borrower must submit evidence,
acceptable to CDC and SBA, that the construction conforms with
the "National Earthquake Hazards Reduction Program (NEHRP)
Recommended Provisions for the Development of Seismic
Regulations for New Buildings", or a substantially equivalent
standard in those jurisdictions which have not enacted NEHRP.
(i) Compliance with Federal Equal Opportunity Standards:
Borrower and Operating Company must not discriminate in their
employment practices. Borrower or [Operating Company] must
display SBA Form 722, "Equal Opportunity Poster" at its place
of business in a location where it is clearly visible to
employees, applicants for employment and the general public.
(j) Completion of Debenture Terms: Borrower 1, Operating
Company] and CDC authorize CDC, SBA and/or CSA to date and
otherwise complete any terms of the Debenture or Loan Documents
which were incomplete at the time of their execution as soon as
such terms become known to them.
(k) Closing Costs: At or prior to Closing, Borrower must pay
all closing costs, including but not limited to title insurance
premiums, recording costs, and premiums for insurance required
by this Authorization.
(i) American-Made Products: Borrower agrees, to the extent feasible, to purchase
only American-made equipment and products with the proceeds of the 504 loan.
(in) Child Support. By executing this Authorization, Borrower
[and Operating Company] certifies that no person who owns at
least 50% of the voting interest of the Borrower [or Operating
Company is delinquent more than 60 days under the terms of any
(a) administrative order, (b) court order, or (c) repayment
agreement requiring payment of child support.
(n) IRS Authorization. Borrower [or Operating Company must sign
IRS Form 4506 authorizing the IRS to send to CDC Borrower's [or
Operating Company' si tax return transcripts for the last three
years preceding the application. The tax verification must be
received by CDC prior to loan disbursement.
(o) Tax Certification. Borrower [and Operating Company must
certify to CDC that its taxes are current and that no tax liens
or judgments exist which would result in a lien attaching to
any of the collateral securing the Note.
(p) Use of Proceeds. At Closing, Borrower [and Operating
Company and CDC must certify as to the actual use of the
Debenture Proceeds.
(q) Compensation Agreement. At Closing, CDC and Borrower must
provide an SBA Form 1 59 from each agent (including an
attorney, accountant, consultant, manufacturer's
representative, packager, lender service provider, or any other
person representing a Borrower) that assisted the Borrower to
obtain the 504 loan, indicating the amount of each fee.
(r) Other Conditions. Borrower must comply with such other
conditions, not inconsistent with the provisions of the
Authorization, as reasonably may be imposed by CDC.
<PAGE>
(s) Appraisal. Prior to closing, CDC shall furnish SBA with a
certified appraisal of the Project property. Should the
appraisal show a value of less than $ 620.000.00, Borrower
shall provide additional investment, additional collateral, or
reduce the size of the Project, as appropriate.
(t) Permanent Financing Takeout: If the 504 loan is part of
permanent takeout financing of a Project involving
construction, closing shall take place only after (a)
completion of construction; (b) execution by Borrower and
Contractor of an affidavit that construction is complete in
accordance with final plans and specification and that all
bills have been paid; (C) written final inspection made by
interim lender, CDC, and qualified architect/engineer to
certify that the project was completed within the scope of the
construction plans and specifications; (d) transfer of all
liens (Mechanic's Lien Note and/or Mechanic's and Materialman's
Lien Contract, etc.) by the interim Lender to the CDC/SBA; and
(e) receipt by Lender of a satisfactory information letter from
the Mortgagee Title policy insurer.
(u) At or prior to closing, CDC is to be in receipt of evidence
of injection of at least $108.785.00 by Principals for use
solely in business. Borrower agrees that this investment will
remain in the business until this SBA debenture guaranty loan
is fully repaid. This injection is to be used as follows:
$108,785.00 toward eligible real estate purchase costs
contingency costs.
13. General Conditions:
(a) Borrower must cooperate fully with CDC and SBA, and must
execute all documents required by CDC and SBA. All documents
required to be produced by the Borrower must be satisfactory to
SBA in form and substance. They also must be submitted to CDC
counsel sufficiently in advance of Closing (as directed by CDC
counsel).
(b) Disbursements of Debenture Proceeds shall be made no later
than twelve (12) months from the date of this Authorization
unless such time is extended by prior written consent of CDC
and SBA.
(c) If during the term of the Debenture, Borrower or any of its
affiliates acquire, directly or indirectly, in excess of a 1 0%
ownership or interest in CDC, the Debenture shall immediately
become due and payable in full.
(d) The terms and conditions of this Authorization shall survive Closing.
<PAGE>
CDC and Borrower [and Operating Company] shall confirm their acceptance of
these terms and conditions by signing this Authorization and returning it to
this District Office within ten (10) days after receive it.
Aida Alvarez, Adminstrator
BY: Phillip C. Silva, Assistant District Director Approval Date 8/14/97
for Economic Development
ACCEPTANCE BY BORROWER AND CDC: In consideration for the provision by SBA of
financial assistance to CDC for the benefit of Borrower, and intending to be
bound, Borrower, [Operating Company,] and CDC accept and agree to comply
fully with the terms and conditions of this Authorization For Debenture
Guarantee. Each person signing below represents and warrants that he or she
is fully authorized to execute this Authorization in the capacity indicated.
Refrigeration Technology, Inc. Guarantor: RTI Inc.
By: Theo Muller, Chairman & CEO 12/1/0/97 Rick Bacchus, President
12/10/97
Attetst: James Caylor 12/10/97 Rocky Bacchus 12/10/97
Secretary Secretary
Guarantor: Industria RTI, S.A. de C.V.
By: Philis Bacchus 12/10/97
Sole Director Refrigeration Technology, Inc.
Attest N/A By: Rockney D. Bacchus 12/17/97
Vice President
Upper Rio Grande Certified Development Company (CDC)
By: Justin Ormsey, Executive Director 12/10/97
Attest: Michelle Weaver 12/10/97
Secretary
<PAGE>
NAME AFFIDAVIT
STATE 0F Texas )
)
COUNTY OF El Paso )
BEFORE ME, the undersigned, a Notary Public in and for the State
of Texas on this day personally appeared PHILIS BACCHUS, who after being duly
sworn according to law, stated under oath as follows:
1. Affiant is also known as PHILIS MOLLAN BROMFMAN.
2. Afflant, a/k/a PHILIS MOLLAN BROMFMAN, is one and the same
person as the Philis Mollan Bromfman authorized to act on behalf of and to
execute such documents as are required of Industrias RTI, S.A. de C.V., a
company duly organized and incorporated under the laws of the Republic of
Mexico.
3. Affiant makes this Affidavit on her own personal knowledge and
states under oath that the facts stated herein are true.
PHILIS BACCILUS, a/k/a
PHILIS MOLLAN BROMTMAN
SUBSCRIBED AND SWORN to before me this 17th day of December, 1997,
by PHILIS BACCHUS, a/k/a Philis MOLLAN BROMFMAN.
Notary's Official Seal:
NOTARY PUBLIC IN AND FOR
THE STATE OF TEXAS
Subsidiaries of the Registrant
1. Refrigeration Technology, Inc. (Delaware)
2. Process Technology, Inc. (Arkansas - inactive)
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