U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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[ ] 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
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RTI INC.
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(Exact name of small business issuer as specified in its charter)
NEW YORK 11-2163152
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(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
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(Address of principal executive offices) (Zip Code)
(505) 589-5431
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(Issuer's telephone number, including area code)
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 [ ] No [X]
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
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RTI INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BALANCE SHEET
ASSETS SEPTEMBER 30, DECEMBER 30,
1999 1998
CURRENT ASSETS
Cash and cash equivalents 0 9361
Accounts receivable, net of allowance 997856 191497
of $ 12,966 in 1999, and $13,214 in 1998
Inventory 1468595 1317649
Prepaid expenses and other 232773 54228
Total current assets 2699224 1572735
PROPERTY, PLANT AND EQUIPMENT, NET 1647768 1787312
DUE FROM RELATED PARTIES 102505 111206
INTANGIBLE ASSETS, net of amortization
of $63,721 1999 and $72,000 in 1998 1032868 1135057
OTHER ASSETS 54053 31635
Total assets 5536418 4637945
The Notes to Financial Statements are an integral part of these consolidated
statements.
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BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
SEPTEMBER 30, DECEMBER 31,
1999 1998
CURRENT LIABILITIES
1 Notes payable to related parties * 633008.08 0.072486284 627811 0.092482721
2 Due to related parties BII * 215083 0.024629334 174469 0.025700996
3 Notes payable TCC * 2151793 0.246403613 606861 0.089396581
4 Due to customer * 47145 0.005398613 404207 0.059543658
5 Accounts payable * 1465788 0.167848608 1088297 0.160316828
6 Accrued expenses * 406499 0.04654854 387208 0.057039538
7 Accrued warranty * 267196 0.030596837 621312 0.091525355
8 Accrued interest * 315144 0.036087403 139578 0.020561209
9 Capital lease obligation * 72317 0.00828108 19987 0.002944281
10 Other current liabilities * 280000 0.032063034 180000 0.026515766
11 Bridge loan * 564002 0.06458434 566502 0.083451304
12 Current portion of long term debt * 682364 0.078138071 667926 0.098392054
Total current 7100339.08 0.813065757 5484158 0.807870292
liabilities
LONG-TERM DEBT
13 SBA & Norwest net from current portion 447356 0.051227109 209858 0.030914143
14 Provision for future Environmental Cost 888955 0.101794979 927140 0.13657682
15 Convertible notes 240000 0.0274826
16 Trio deposit ( ACE ) 23590 0.002701311 0
17 Rock away Property Tax net of the current portion 32558 0.003728244 167258 0.024638745
Total liabilities 8732798.08 1 6788414 1
STOCKHOLDERS' EQUITY
Preferred stock, $.05 par value - shares
authorized 2,000,000; shares issued
and outstanding 100,000 5000 5000
Common stock; $.08 par value - shares
authorized 25,000,000, issued and
outstanding 1,611,166 at year-end
1998
and 1,611,166 at March 31, 128894 128493.28
1999
Additional paid-in capital 18115261.1 18115261
Accumulated deficit -21445536 -20399223
Total stockholders' equity -3196380.9 -2150468.72
Total liabilities and stockholders' equity 5536417.18 4637945.28
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RTI INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30,
1999 1998
Net sales 583424 -12354
Cost of sales 537895 998402.6828
Gross profit (loss) 45529 -1010756.683
Selling, general and administrative expenses 259450 1320368.934
Research and development expenses 41630 28660
Total operating expenses 301080 1349028.934
Loss from operations -255551 -2359785.616
Other income (expense)
Rental income for Rockaway Industrial Park, net 9755 7926
of expenses
in both years -11904 0
Interest income (expense) -156452 -87498.11248
Other income 0 0
Total other income -158601 -79572.11248
(expenses)
Loss from continuing -414152 -2439357.729
operations
EXTRAORDINARY INCOME 12000
0 0
Net loss before income taxes 0 -2439357.729
Income taxes
Net loss -402152 -2439357.729
Weighted Average Shares 1611166 1577356.476
Net loss per share -0.249603082 -1.546484746
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RTI INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
Net sales 2595321 2296591
Cost of sales 1962003 3365740.683
Gross profit (loss) 633318 -1069149.683
Selling, general and administrative expenses 934018 2234107.934
Research and development expenses 84494 226667
Total operating expenses 1018512 2460774.934
Loss from operations -385194 -3529924.616
Other income (expense)
Rental income for Rockaway Industrial Park, net -2149 23830
of expenses
Interest income (expense) -541604 -233463.1125
Other income 0 753
Total other income -543753 -208880.1125
(expenses)
Loss from continuing -928947 -3738804.729
operations
EXTRAORDINARY INCOME 125064
Net loss before income taxes 0 -3738804.729
Income taxes 0 0
Net loss -803883 -3738804.729
Weighted Average Common Shares Outstanding 1611166 1577356.476
Net loss per share -0.498944864 -2.370297891
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RTI INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss -803883 -3738804.729
Adjustments to reconcile net loss to
net cash applied to operating activities:
Depreciation and amortization 373539 226043.3976
Allowance for doubtful accounts 12966 12092
Allowance for warranty expense 746175
Imputed interest on note payable 0
(Increase) decrease in:
Accounts receivable -806359 163808
Restricted deposits 0
Due from affiliate 0 34160
Inventories -150946 763299.6
Other assets -16793
Prepaid expenses and other -161752 -198198.5
Increase (decrease) in:
Due to relative parties 45811 85485
Due to customer -357062
Accrued warranty -354116
Accounts payable 377491 806717
Accrue interest 175566
Accrue expenses 19291 127938
Other liabilities 100000 899
TOTAL ADJUSTMENTS -742364 2768418.698
Net cash applied to operating -1546247 -970386.0313
activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets -230825.47 -134217.6
Reduction in notes receivable 0 0
Purchase of business, net of cash acquired 0 0
Purchases of other assets -22418 21742.9
Net cash applied to
investing activities -253243.47 -112474.7
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 0 490439
Proceeds from notes payables 1784932 68000
Increase in notes to related parties 5197 -4617
Payments on notes to related parties 0 -26511
Changes in short-term borrowings 0 579502
Payments on long term debt -35664
Net cash provided by financing 1790129 1071149
activities
Net increase (decrease) in cash and cash equivalents -9361 -11711.7313
Cash and cash equivalents, beginning of period 9361 11712
Cash and cash equivalents, end of period 0 0
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RTI INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1999 and 1998, for the three months then ended
and for the six-months then ended is unaudited).
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following "Management's Discussion and Analysis of Financial Condition and
Results of Operations "includes" forward-looking statements "within the meaning
of the Private Securities Litigation Reform Act of 1995. This Act provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about themselves so long as they identify these
statements as forward-looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements other than statements of historical fact we
make in this Form 10-Q are forward-looking. In particular, the statements herein
regarding industry prospects and our future results of operations or financial
position are forward-looking statements. Forward-looking statements reflect our
current expectations and are inherently uncertain. Our actual results may differ
significantly from our expectations. The section entitled "Additional Factors
That May Affect Future Results" describes some, but not all, of the factors that
could cause these differences.
OVERVIEW
1. BASIS OF PRESENTATION
In the opinion of management of RTI Inc. (with its Subsidiaries, the "Company"),
the accompanying unaudited consolidated financial statements include all
adjustments necessary to present fairly, in all material respects, the company's
financial position as of September 30, 1999, its results of operations and its
cash flows for the nine months ended September 30, 1999 and 1998. Results of
operations for the nine-month period ended September 30, 1999 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1999.
Information included in the consolidated balance sheet as of December 31, 1998
has been derived from the Company's audited consolidated financial statements in
its Annual Report on Form 10-KSB for the year ended December 31, 1998, to which
reference is made. Certain information included in the audited consolidated
financial statements and related notes prepared in accordance with generally
accepted accounting principles may have been condensed or omitted.
2. AIR CONDITIONING AND COOLER OPERATIONS
With its acquisition of the business of Quality Air Inc. in February
1997, the Company engaged in the manufacture, marketing and selling of
residential coolers and of central air conditioning equipment. The AC2 utilizes
patented evaporative technologies to air condition homes and small businesses
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
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force trained to manufacture the AC2. During the first half of 1999 the company
was focused on recovering confidence in the "AC2" central air conditioner and
pushing the Aireze product line as hard as possible. In April of 1999 the
company finally prested its new product," The Trio" which is an upgraded of an
evaporative unit and give the service as a refrigeration unit with the advantage
of the cost service and maintance of an evaporative unit.
3. ROCKAWAY INDUSTRIAL PARK (Superfund Site)
For a more detailed description of the Rockaway "Superfund" site please see the
companies 10K report for the year ended December 1998.
The Company owns a 248 acre parcel of land ("Parcel I") in Rockaway, New Jersey
(47 acres of which have been leased to SteriGenics International), that is
contiguous to a 15 acre operating parcel that is the site of an irradiation
processing facility leased to SteriGenics International("Parcel II" and, with
Parcel I, the "Rockaway Industrial Park"). Since 1985, the Company has been
seeking a buyer for Parcel I. However, the Company's ability to sell Parcel I is
impaired until the completion of an environmental cleanup and remediation
program, and its ability to recover its current book value of $50,000 in 201
acres of Parcel I is impaired by unpaid outstanding non-recourse property taxes
for the years 1993,1994,1995,1996,1997,1998 and the nine months of 1999 totaling
$332,558, which have been accrued in the financial statements under "current
portion of long term debt $300,000 and Rockaway property tax $32,558.
As a result of engineering tests that commenced in 1981, the property has been
named an EPA "Superfund Site" and there have been ongoing cleanup operations.
There is a remediation proposal to complete the cleanup over the next eight
years.
Rockaway sales commitment
On April 20, 1999 the Company signed an agreement to sell the property. The sale
will provide no funds to RTI and is essentially an assumption of liabilities in
exchange for the property, with no cash to RTI. The buyer will assume
liabilities, including the environmental and taxes. As the sale of the Rockaway
industrial park is consumated the responsibility of cleaning the contamination
will be at the expense of the buyer. The buyer is in a due diligence period and
the Company believes the sale will close during the fourth quarter of 1999, no
anssurance of it.
RTI did not generate the contamination and has not been charged with
contributing to the contamination of the property. RTI has suffered the expense
of this superfund site because it purchased the property from Thiokol and RTI
was the legal owner when the contamination was discovered. Some of the major
expenses associated with RTI owning the facility have been:
Rockaway Property (including improvements @ current book value)
$485,532 August 1996 payment to the New Jersey Department of
Environmental Protection (NJDEP) $575,000
Non Recourse Property Tax Accrued $332,558
Note to Thiokol (interest included) $318,004
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Accrued for environmental provision (as of September 30, 1999)
$888,955
Listed Items $2,016,624
There have also been other expenses for studies, consultants, and other cleaning
expenses that have been borne by RTI.
Some of the major liabilities RTI may be relieved of by the sale are:
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Cash to be realized by RTI $0
Non Recourse Property Tax Accrued $332,558
Note to Thiokol (interest included) $318,004
Accrued for environmental provision (as of Sept. 30, 1999) $888,955
Less: Rockaway Book Value net of Depreciation ($354,598)
Listed Items $1,184,919
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An writing request to buy the property has been presented from a potential buyer
and the board of directos approved the sale , as November 8,1999 the sale has
not close yet. The property is a lush forested area of New Jersey that the buyer
plans to develop. There is current income from the property tenants and the
buyer has met with local officials to obtain permission for additional tenants.
A second potential buyer has expressed interest in the property if the present
sales commitment is not closed. The signing of the sales commitment does not
provide assurance that the transaction will be completed or that all or all
parts of the above liabilities will be removed. No effect has been given to the
pending sale in the company's financial records.
5. SHORT TERM BORROWINGS
The Company had a related party note outstanding at September 30, 1999,
for $588,383 with its former Chairman and CEO, Theo W. Muller (Muller Note), and
another for $26,511 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. The terms of the Muller Note was
increasing to a 12% annual interest rate up to August 20 of 1998 and an 18% rate
thereafter. The terms of the Frellum Note are 12% annual interest, the balance
along with accrued interest are due and payable on February 20, 2000.
The company has a related party note outstanding at September 30, 1999, for
$18,114 with its current President Rick Bacchus( Rick's note). The interest rate
of Rick's Note is 16%, the balance along with accrued interest are due upon
request.
The Company entered into a factoring arrangement with Texas Capital Corporation
(TCC) of Austin, Texas in February 1998. The terms are for interest of 2.75% for
the first 30 days, with an additional charge of 1% for each additional 15 days
the invoice is outstanding. As of September 30, 1999, the Company had factored
accounts receivable in the approximate amount of $594,508.
The Company also obtained a credit line of up to $1.81 million with TCC, using
the inventory as collateral, As of September 30, 1999 the Company had used
$1,338,749 of the credit line.
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On June 16, 1999 the Company issued a convertible note offering for up to
$800,000, in $25,000 convertible notes. As of September 30 of 1999 the company
received funds of $240,000. The company has 8 notes outstanding that will accrue
12% annual interest rate for 18 months and the notes are convertible into shares
during this time or at the end of the period.
6. STATEMENT OF CASH FLOWS
Supplemental disclosures of cash flow information are as follows:
Nine months ended Septemmber 30,
1999 1998
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Interest $541,604 $64,564
Income taxes -- --
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RTI is a developer and manufacturer of high efficiency air conditioning
equipment. RTI has patented technology and patents pending. RTI has the highest
efficiency air conditioning equipment rated under ARI Standard 210 (Air
Conditioning and Refrigeration Institute). RTI's AC2 technology has achieved an
efficiency increase that Pacific Gas & Electric Company measured as being an
average of 102% better than 10 SEER "High Efficiency" air cooled air
conditioners (70% plus of US sales). The AC2 technology is cost efficient to
manufacture and AC2's initial price is competitive with premium performance air
conditioners from the existing manufacturers.
RTI defines five market segments: 1) Residential Evaporative {Aireze & Trio}, 2)
Residential Split Systems 2 - 8 ton capacity {AC2 & S1}, 3) E2Pak and E3Pak
Systems (commercial Trio), 4) Industrial/ Institutional 50 - 300 ton capacity
{Water Chiller Venture} and, 5) Commercial 3 - 30 ton capacity {primarily
package units}. Please note that E3Pak, Water Chillers, and Commercial Package
units are all in various stages of development and are not yet being sold. RTI
does not currently include window air conditioners or motel units in its market
segments. The following table shows the sales by market segment.
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$ in thousands of US
Dollars
sales of the mayor
segments
April-Jun April-Jun % Jan-March Jan-March %
1999 1998 Change 1999 1998 Change
AC2/Evapco 462 655 -29% 136 637 468%
Aireze 620 621 -0.20% 694 323 115%
E2pk 76 52 50% 0 36 100%
Trio 12 0 N/A 0
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Jul-Sep Jul-Sep % Jan-Sep Jan-Sep %
1999 1998 Change 1999 1998 Change
AC2/Evapco 115 -267 232% 713 1025 -30%
Aireze 230 225 2% 1544 1169 32%
E2pk 17 30 -43% 95 118 -19%
Trio 225 0 N/A 237 0 N/A
2589 2312
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In 1997 the AC2 was certified for performance (by ARI) and safety (by ETL to UL
standard 1995), just after the cooling season. For this reason there was
essentially no field installation experience on the newly designed AC2 units. In
1998 the AC2 product line had substantial field problems primarily related to a
freeze protection control system. The problems emerged at the beginning of the
1998 cooling season after nearly 3,000 AC2 units had been built. The AC2
controls problems would shut units down erratically and a series of five recalls
were made to attempt to correct the flaws with "immediately available" alternate
controls components. The recalls and the associated re-manufacturing of the AC2
units to attempt rushed corrections during the 1998 summer cooling season led to
a severe loss in 1998. The controls malfunctions were primarily caused by a
water level sensing device and a submerged temperature sensing device.
Since the summer of 1998, RTI has redesigned the AC2 unit controls to eliminate
problems experienced in 1998, insure high reliability in the controls, and
simplify the controls system. RTI has taken field experience to enhance the
total AC2 reliability and these enhancements were laboratory verified with good
results. A 1999 AC2 unit Field test program to check operation was briefly field
verified, and then the units in inventory were upgraded. A Field Upgrade Program
is being implemented and units are being upgraded in the field. During 1998 the
repeated controls failures were happening in the field within a few weeks. At
this point the field results have been very good with more than half of season
of use, but the controls have not yet been field proven for a full season, and
the field upgrades are still in progress.
Feedback from AC2 dealers (installing contractors) indicated that the energy
efficiency goals had been achieved in the field, but that AC2 reliability had to
substantially improve in order for AC2 sales to grow instead of declining. The 2
- - 5 ton size air conditioning market in the United States is approximately 5
billion dollars per year. Management desires to achieve a substantial market
share (5% plus) over the next five years and Management's main goal for 1999 is
to overcome the problems related to the AC2 units and prove the reliable
operation of AC2 units in the field. As a consequence of achieving the
reliability goal in 1999, marketing efforts were cut and an overhead reduction
plan was implemented to keep the operating loss for 1999 below 1 million dollars
verses a nearly 4.5 million loss in 1998. The AC2 portion of marketing
expenditures were dramatically cut while efforts were focused on solving product
problems and proving the solutions with field results. The Aireze Marketing was
slightly increased and refocused to increase sales strength in the local market
and begin expanding sales into the Southwest market area. The net total Selling
and marketing expenses were cut by almost 35% for the period Janaury to
September of 1999 verses the same period in 1998. Accordingly the AC2 sales were
down 31% while Aireze sales were up 48% for the same period. Aireze sales
increases were primarily from strengthening sales in the New Mexico & El Paso
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market. E2Pak sales were down 19% for the first nine months because the major
customer had a sales slump in its business such that there were no E2Pak sales
in the first quarter and the second quarter E2Pak sales were up 50% verses the
same period in 1998 for the third quarter the sales were down 56 % compare with
the same period of last year.
Management is pleased with the AC2 field results and is working to achieve field
results that can enable the Company to raise much needed capital and become
profitable in 2000.
The company signed an agreement with the EPA to be an EPA "Energy Star Partner"
and RTI is now listed on the EPA Energy Star Web page under the manufacturer's
section for "labeled heating & cooling equipment" for the "Air Source Heat Pump
and Central Air Conditioning Manufacturers". RTI's AC2, EvapCon and new products
which meet the Energy Star guidelines can now receive favorable financing and
other advantages of the "Energy Star" program.
The company's development department achieved laboratory performance results
indicating an efficiency of approximately 40 EER at the SEER efficiency test
conditions on a new product line trade named "Trio". This efficiency level is
more than double that of the companies' AC2 product line and believed to be a
substantial advance. The Trio product line has been field tested in the El Paso
area and begun sales in the El Paso market only. The sales for the second
quarter account $11,905,However for the third quarter the sales reach $225,489
which represt for the third quarter almost 39% of company net sales, the company
plan is to keep the trio in the El Paso area and New Mexico for year 2000 and
start a regional campain in early 2001 for the Southwest states of the union.
The gross profit of 24% for the nine months of 1999 verses the negative 47% for
the same period in 1998 reflects a dramatic turnaround. Cost of sales dropped
from $998,403 in the third quarter of 1998 to $537,895 for the same period in
1999. Better material usage on Aireze and standard production of the AC2 helped
make that possible. The primary reason for the improvement in gross margin is
the AC2 units were not having new field problems that required redesigns of
components in 1999 and the 1999 costs to upgrade prior year units were applied
to Warranty reserve, and the company upgraded approximately 250 units in the
third quarter with a cost of $110,418 (~$441 each). During the nine months the
company upgraded approximately 1,150 units with a cost of $354,116 (~$307 each)
which includes labor, materials, freight and overhead.
The company has manufacturing facilities in Sunland Park, New Mexico, Westway
Texas, and Juarez Mexico. These facilities are operating far under capacity with
the present sales level and management is working on several programs to cut
costs and increase gross margins to a target of 30% - 40% (depending on product
line). The plans being considered include keeping all the facilities to have
available plant space for future growth, and plans to sell the Westway facility
and consolidate operations into Juarez. The Westway plant has been listed for
sale in accordance with the planning, As November 8,1999 the company has not
received a formal resonable offer to buy West way plant.
The General and Administrative expenses were cut from $2,234,108 for nine months
of 1998 to $934,018 thousand for the same period in 1999. This $1,300,090
reduction reflects substantial improvements in the utilization of accounting
information to make overhead cuts and the combination of jobs to reduce costs,
plus the warranty accrued in 1998 for $727,000 that did not happen in 1999.
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For the quarte ending in September 30, 1999 the totaled expenes were 259,450
compares with 1,320,369 of same period of 1998.
Research and development costs totaled $84,494 in the nine months period ending
September 30,1999 while they were $226,667 in the same quarter of 1998. The
expense decrease in Research and development compares favorably because the
company capitalized $34,580 for plugs and molds for the new "Trio" product in
the second quarter,but also because the wise utilization of the human resources
in double function and recycling of material. The company capitalized $15,052
from Selling, general & administration for the same purpose in the same period.
Research and development costs totaled $41,630 in the quarter endend in
September 30, 1999 compare with 28,660 of the same period of 1998.
For the third quarter of 1999 rental income from the Rockaway Industrial Park,
was $2,149 negative compared with the net income of $7,926 in 1998 for the same
period. For the nine months period of 1999 rental income from the Rockaway
Industrial Park, was $2,149 negative compared with the net income of 23,830 in
1998.
The biggest negative factor is the increase in interest expense. For the three
months ending September 30,1999 the Company incurred net interest expense of
$156,452 as compared with net interest expenses of $87,498 in the third quarter
of 1998. The interest expense increased from $233 thousand for the nine months
period of 1998 (10% of sales) to $541 thousand for the same period in 1999 (21%
of sales). Interest expense has increased due to the Company factoring its
receivables and obtaining inventory loans to fund operations, the buildup of
accounts receivable, and inventory. These additional financings to fund working
capital, in addition to the previous notes caused the interest expense to go up.
See 5-Short term borrowings
Because of the costs described above, the Company incurred a loss before
interest, other income and extraordinary income of $255,551 for the third
quarter compared to a loss of 2,359,786 for the same period in 1998.
Extraordinary income of $12,000 was posted during September of 1999. Bacchus
industries (a Related company) and RTI agreed that Bacchus Industries would
assume the Spec Air Lease and pay for the equipment that was directly leased.
The $12,000 charge is for the lease amounts from July,August and September of
1999. Bacchus Industries will pay $4,000 a month with no cash-in for the
company, Bacchus industries will pay this payment with future royalties accrued.
The net loss of $402,152 or $0.25 per share for the third quarter of 1999,
compares with a loss of $2,439,358 or $1.55 per share in the third quarter of
1998.
Because of the costs described above, the Company incurred a loss before
interest, other income and extraordinary income of $385,194 for the nine months
period of 1999 compared to a loss of $3,529,925 for the same period of 1998. The
net loss of $3,738,805 or $2.37 per share for the nine months period of 1998,
compares with a loss of $803,883 or $0.50 per share in the same period in 1999.
The air cooling and air conditioning business is highly seasonal, and the third
quarter is not an indicator of results for the year.
LIQUIDITY AND CAPITAL RESOURCES
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During the nine months period ending in September 30 of 1999, the Company
generated $1,784,932 in cash from its notes payable to TCC, notes from related
parties, and convertible notes, and applied that primarily to operations such as
building inventory, accounts receivables and interest.
The net cash of zero as of September 30,1999 was decreased compared to $11,712
at the end of the Third quarter of 1998.
The Company has significant equity capital and working capital needs in 1999.
The anticipated sales levels require the infusion of additional equity capital,
as well as a line of credit to meet the working capital needs due to the
seasonality of the air cooling and air conditioning business.
On June 26, 1999 the company issued a convertible notes offering for 800,000. As
September 30, 1999 the company had received $240,000. The term of the
convertible notes are as follow: a 12 % promissory note in the principal amount
of $25,000 at the purchase price of $25,000 per convertible note. Each note is
due and payable upon the earlier of eighteen (18) months from the day of the
signing or the initial closing of the company's contemplated equity financing.
The principal amount of each note may, at the option of the holder, be rolled
over into the equity financing, or converted at 5 shares per dollar of the
principal. At the time of the conversion any accrued interest will be forfeited.
The convertible notes are secured by a second mortgage on the Westway facility
and the Mexican corporation.
The Company is presently seeking financing through capital investment regarding
a private placement of common stock in which the company intends to include all
the convertible notes already outstanding and other notes the company expects to
have from the recent offering.
There can be no assurance that such private placement will be consummated.
Should the Company be unable to obtain any financing, it may have to limit its
operations and inventories, and therefore its future sales volume.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During 1999 several vendors started legal action to collect their payments. The
Company has accrued $20,000 since September 1998 for legal fees. The
renegotiations of the debt were largely accomplished with about 65% of the
vendors but the majority of the agreements have not been funded due to lack of
cash to make payments.
The original agreement that the Company had with the Internal Revenue Service
(for the payment of back taxes) had too high of payment requirements to
accomplish, therefore the company started a new negotiation to make lower
payments and have a longer period to pay. As of September 30, 1999 the total
debt to IRS is for $261,183. As of September 30, 1999 the company has not been
able to make payments on back taxes since March 1999.
The company received a bridge loan in April of 1998 for $540,000 payable on
January 22 of 1999 which is in default, as well as another bridge loan received
in September 1998 for $25,000, payable on June 22, 1999 which is in default. The
bridge loan notes have not been renegotiated, the note holders can take legal
action, convert into common stock, and exercise the warrants of $4.50 each ,
which will expire on April 22, 2003.
<PAGE>
Since the Third quarter of 1998 Officers of the company including Rick Bacchus,
Ron Bacchus and Rocky Bacchus have not received their full salaries. Total
payroll accrued for them as of September 30, 1999 is $104,796.
Since the third quarter of 1998 the company has made only partial payment to the
New Mexico State Tax Departments. As of September 30, 1999 the delinquent taxes
accrued are $34,950.Legal action can be taken at any moment.
In May 1999 the Company started to review transactions related with the TCC
financing, in order to have the proper interest, discounts and fees. As of
September 30, 1999 the company has not recognized in its books fees, discounts
and interest for $91,000. The company believes that those charges are out of
contract. In addition, the company already recognized in its books about $49,500
which will be in dispute because the company believes those charges are out of
contract. The company believes that the overcharges can be solved without legal
action during 1999.
Year 2000
The company believes its accounting systems and other computer comply properly
with the year 2000 necessary and estimate will not be any major problem to
affect the records and operability of the company.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the factors discussed in the "Overview" and "Liquidity" and
"Capital Resources" sections of this "Management Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Annual Report
on Form 10-K for the year ended December 31, 1998 the following additional
factors may affect the company's future results:
In analyzing this 10-Q prospective investors should consider all of the matters
set forth below and in the 1998 10-K, and the March 1999 10-Q and read such
documents in full.
When used in this report, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend" and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E
of the Securities Exchange Act of 1934, as amended regarding events, conditions
and financial trends that may affect the Company's future plans of operations,
business strategy, operating results and financial position. Prospective
investors are cautioned that any forward-looking statements are not guarantees
of future performance and are subject to risks and uncertainties and that actual
results may differ materially from those included within the forward-looking
statements as a result of various factors. Such factors are described in the
Company's 1998 10-K, March 1999 10-Q, and in the risk factors set forth below.
All references to "Items" refer to the 1998 10-K.
#1 Going Concern Opinion; Significant Losses; Pressing Need to Complete the
Convertible Note Offering and a Stock Offering. The report accompanying the
audited Financial Statements for the year ended December 31, 1998 contains a
"going concern" qualification, the results for such year reflect a loss of
$4,492,352 or ($2.88) per share and a stockholders deficit of $2,150,469. The
Company posted a loss of $2,667,385 in the year ended 12/31/97 or $1.92 per
share. The Company posted a loss of $214,399 or ($0.13) per share for the first
<PAGE>
quarter ended March 31, 1999 verses a loss of $909,299 or $.60 per share for the
first quarter ended March 31, 1998. No assurances can be given that the Company
will be able to continue its operations if it does not complete its Convertible
Note Offering and a
subsequent Equity Financing.
#2 Likely Competition. Although, to the best of management's knowledge there are
as yet no competitors offering a water cooled central air conditioning unit, it
must be assumed that if the Company's efforts are successful other companies
will begin to offer competing systems. These future competitors may well be
companies which have substantially greater research, development, marketing and
financial resources than the Company. See "Risk factor 1."
#3 Potential Environmental Liability. The Company is involved in
environmental proceedings regarding an EPA Superfund Site in the State of New
Jersey owned by the Company. While the Company believes that sufficient
reserves have been provided for in the accrued $888,955 reported in this Sept.
30, 1999 10Q, no assurances can be given that the Company's actual liability
will not exceed such estimates. See "Risk factor 1."
#4 EPA Superfund Site Sale Commitment Signed but not Closed. While a commitment
to sell the land in Rockaway (which contains the Superfund Site) has been
signed. A closing on the sale is projected for the third quarter and a possible
recovery of up to 1.1 million in previously recognized expenses associated with
the Superfund site is projected to take multiple years. No assurances can be
given that the Company will close on the sale or that the buyer will complete
the clean up. If the buyer closes on the sales transaction and at some point
defaults on the clean up the Company could still be liable for the clean up.
#5 No Assurance of Acceptance of Novel Technology. The Company's primary
product, the AC2 Water Cooled Central Air Conditioning unit, uses water rather
than air as a cooling medium. Such technology requires the installation of both
a water supply line and a water waste line with direct access to the cooling
unit. No assurances can be given that contractors or the public will accept such
technology even if they believe that the Company's product offers advantages
over its competitors products. See "Risk factor 1."
#6 Concentration on a Single Product. While the Company produces evaporative
coolers and heat exchangers as well as the AC2, it intends to concentrate a
significant portion of its marketing and distribution efforts on the AC2. The
Company's success will therefore be substantially dependent upon the success of
the AC2, which is only being marketed in certain geographical areas. No
assurances can be given that the Company's marketing efforts will be successful.
See "Risk factor 1."
#7 Uncertainty of Patent Protection. The Company holds patents on its
evaporative coolers, has a patent on the AC2, and other patents are pending.
While the Company's patent counsel has received notice that an application has
been approved and that another patent relating to the AC2 may be issued in the
near future, no assurances can be given that additional patents will be issued
regarding the AC2 or that if issued, such patent, or the Company's subsisting
patents, will provide adequate protection from its competitors, which may either
devise alternate technological solutions to accomplish the purpose of such
patents or obtain patents of their own which would require the Company to either
obtain a license from such patent holders or to redesign its products. In
addition, no assurances can be given that the Company will have the necessary
funds to either commence an action against parties who may be infringing the
<PAGE>
Company's patents or to defend against any patent infringement actions which may
be commenced by others. See "Risk factor 1."
#8 Development Stage of the Company's Primary Product. The Company's sales and
marketing efforts regarding the AC2 are not sufficiently established to fully
evaluate or forecast their prospects. The Company is thus subject to all the
risks associated with the launching of a new product and there is no assurance
that such efforts will be successful. See "Risk factor 1."
The efficiency and comfort achieving capability of the AC2 have received
favorable responses during the 1998 season, however the reliability in the field
has been unacceptable. The high volume, large, and well established air
conditioning contractors are not expected to buy AC2 units until they believe
the reliability issues have been solved, and that is not expected to occur until
after 1999. The smaller more aggressive air conditioning contractors that are
looking for an advantage to increase sales, may sell AC2 units in 1999, but they
want assurances that they will get factory support if they have problems.
The Company is dependent on equity offerings to continue to provide field
support. Management considers it crucial that AC2 units operate reliably in
1999. The Company needs to quickly put together "field upgrade kits" that solve
past operating problems and reassure customers. Some of the major problems are:
1. AC2 units had reliability problems in 1998 (the first year for widespread
units to operate with freeze protection controls). 2. The 1999 AC2 unit Upgrades
based on field evaluations have not been field proven for a full season. 3. RTI
has not been able to purchase all the materials required to upgrade all AC2
units in the field. 4. Customers are cautious in making sales commitments (both
in making purchases from RTI & in offering AC2 units to their customers) because
of concerns about a) RTI's financial strength, b) AC2 field corrections not yet
being made, and c) possible future AC2 product problems. 5. RTI has not
automated manufacturing and this creates concern for the quality of production
(since it is largely hand built) and the cost is high because the labor content
is high and the material utilization efficiency is less than an automated
process would generate. 6. Relations with Suppliers & Sales Representatives have
been strained by failure to make timely payments.
No assurances can be given that the Company will resolve AC2 product problems or
solve customer and supplier relationship problems.
#9 Dependence on Certain Suppliers. The Company is dependent upon its suppliers
of plastics, motors, pumps and compressors. The Company has failed to pay many
of its suppliers in accordance with the terms of sale. Certain of such
components may have long lead order times and the Company does not have a strong
relationship with such suppliers. Should the Company lose any of such suppliers,
it would cause manufacturing and assembly delays which would have a material
adverse effect on its business. No assurance can be given that the Company will
be able to adequately replace such suppliers in the event of a termination of
their services to the Company. See "Risk factor 1."
#10 Seasonality. The air conditioning business is highly seasonal and the
Company expects to earn the majority of its revenues in the summer months when
the demand for cooling equipment is greatest. No assurances can be given that
<PAGE>
the Company will be able to maintain sufficient cash flow. See "Risk factor
1."
#11 Need for Highly Qualified Personnel. The success of the Company's business
will depend upon its ability to attract and retain personnel with a wide range
of technical capabilities. Competition for such personnel is intense, and is
expected to increase in the future. No assurance can be given that the Company
will be able to attract and retain such personnel.
#12 Dependence on Management; No Key Man Insurance. The Company is substantially
dependent upon the services of Messrs. Richard, Ronald and Rockney Bacchus (ages
45, 41, and 43 respectively) for the success of its business. The loss of any of
their services would have a material adverse effect on the Company. While the
Company proposes to obtain Key Man Insurance in the amount of approximately
$500,000 on the lives of each of the Bacchus brothers, no such insurance has yet
been obtained.
#13 Significant Common Stock Holdings by Current Officers and Directors. As of
the date hereof, the management of the Company beneficially owns 258,705 shares
of Common Stock, or approximately 16% of the Company's issued and outstanding
Common Stock. There are no cumulative voting rights and directors must be
elected by a plurality of the outstanding voting securities entitled to vote.
Management will therefore be in a position to significantly influence the
actions of the Company.
#14 Absence of Dividends on Common Stock. The Company has not paid any dividends
on its Common Stock since its incorporation and anticipates that, for the
foreseeable future, working capital and earnings, if any, will be retained for
use in the Company's business operations and in the expansion of its business.
The Company has no present intention to pay cash dividends on its Common Stock.
#15 Possible Adverse Effects of Authorization of Preferred Stock; Anti-Takeover
Effects. The Company's Certificate of Incorporation authorizes the issuance of a
maximum of 2,000,000 shares of preferred stock, $.05 par value ("Preferred
Stock"), on terms which may be fixed by the Company's Board of Directors without
further stockholder action. The terms of any series of Preferred Stock, which
may include priority claims to assets and dividends, and special voting rights,
could adversely affect the rights of holders of the Common Stock. The issuance
of Preferred Stock could make the possible takeover of the Company or the
removal of management of the Company more difficult, discourage hostile bids for
control of the Company in which stockholders may receive premiums for their
shares of Common Stock or otherwise dilute the rights of holders of Common Stock
and the market price of the Common Stock. . #16 Shares Eligible for Future Sale.
Sales of the Common Stock in the public market could adversely affect the market
price of the Common Stock. As of June 30, 1999, the Company had 1,611,166 shares
of Common Stock outstanding. Of these shares, 1,065,773 are freely tradable
without restriction under the Securities Act and 545,393 shares are "Restricted
Securities" within the meaning of Rule 144 promulgated under the Securities Act.
#17 No Assurance of Public Market. The Company was delisted from the Nasdaq
Small Cap Market and is now traded on the Nasdaq Bulletin Board. There may be a
greater difficulty in selling stock on the Nasdaq Bulletin Board than when the
stock was listed on the Nasdaq Small Cap Market.
<PAGE>
#18 Risk of "Penny Stock" Regulations The Commission has adopted regulations
which define a "penny stock" to be any equity security that has a market price
(as defined) of less than $5.00 per share, subject to certain exceptions. The
Common Stock was listed for quotation on the Nasdaq SmallCap Market and was
therefore not deemed to be a "penny stock." Since the Common Stock has been
delisted from the Nasdaq Small Cap Market the Stock may be deemed a "penny
stock" as defined by the Exchange Act and the rules and regulations promulgated
thereunder. For any transaction involving a penny stock, unless exempt, the
rules require the delivery, prior to the transaction, of a disclosure schedule
prepared by the Commission relating to the penny stock market. The broker-dealer
also must disclose the commissions payable to both the broker-dealer and the
registered representative, current quotations for the securities, information on
the limited market in penny stocks and, if the broker-dealer is the sole market-
maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market. In addition, the broker-dealer must obtain a
written acknowledgment from the customer that such disclosure information was
provided and must retain such acknowledgment from the customer for at least
three years. Finally, monthly statements must be sent to the customer disclosing
current price information for the "penny stock" held in the account.
While many Nasdaq listed securities would otherwise be covered by the definition
of penny stock, transactions in a Nasdaq listed security would be exempt from
all but the sole market-maker provision for: (i) issuers who have $2,000,000 in
tangible assets ($5,000,000 if the issuer has not been in continuous operation
for three years); (ii) transactions in which the customer is an institutional
accredited investor; and (iii) transactions that are not recommended by the
broker-dealer. In addition, transactions in a Nasdaq listed security directly
with a Nasdaq market-maker for such securities would be subject only to the sole
market-maker disclosure, and the disclosure with respect to commissions to be
paid to the broker-dealer and the registered representative.
The above described rules may materially adversely affect the liquidity for the
market of the Company's Common Stock. Such rules may also affect the ability of
broker-dealers to sell the Company's Common Stock and may impede the ability of
holders (including, specifically, purchasers in this offering) of the Common
Stock to sell their shares in the secondary market.
#19 Indemnification of Directors and Officers. The Company's By-laws provide for
indemnification against losses that they may incur in legal proceedings
resulting from rendering services to the Company in such capacities to the
fullest extent permitted by law.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended ("Act") may be sought by directors, officers and
controlling persons of the Company pursuant to such indemnity (or otherwise),
the Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any such action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the Common Stock
being registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
<PAGE>
ITEM 2. CHANGES IN SECURITIES
None.
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
RTI INC.
Date: December 6, 1999 By: /s/ RICK E. BACCHUS
---------------------------
Rick E. Bacchus
Acting Chief Executive Officer
And Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS A SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S AUDITED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30,1999 AND
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS THEN ENDED
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 997,856
<ALLOWANCES> 26,180
<INVENTORY> 1,468,595
<CURRENT-ASSETS> 2,699,224
<PP&E> 1,647,768
<DEPRECIATION> 819,473
<TOTAL-ASSETS> 5,536,418
<CURRENT-LIABILITIES> 7,100,339
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5,000
<COMMON> 128,493
<OTHER-SE> 18,115,261
<TOTAL-LIABILITY-AND-EQUITY> 5,536,417
<SALES> 2,595,321
<TOTAL-REVENUES> 2,595,321
<CGS> 1,962,003
<TOTAL-COSTS> 2,980,515
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (541,604)
<INCOME-PRETAX> (928,947)
<INCOME-TAX> 0
<INCOME-CONTINUING> (928,947)
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<EXTRAORDINARY> 125,064
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