U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB/A
(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, 1998.
[ ] 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 - $2,929,535
<PAGE>
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 $821,694.66 based on the published sale price ($8/16 )
on The NASDAQ Small-Cap Market on March 25, 1999
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, 1999 - 1,611,166
Documents Incorporated by Reference: Exhibits 3.1, 3.2, 4.1
Transitional Small Business Disclosure Form Yes [ ] No [x]
<PAGE>
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 1998, 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 1998
to 1) product development for the Company's new "AC2" central air conditioner,
including the rework , redesign process on the field ,and retrofitted process 2)
the development and support 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 1998 ,this factory main focus was to
rework and reprocess the AC2 and not a significant new units ware produced.
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, 1998 was a product development and redesign year, and
approximately 50% of the units delivered in 1997 ware replaced in 1998 with the
newer 1998 units , 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. As March 26,1999 still are
missing about 385 units to replace and 1200 units already installed that need to
be retrofitted. The company has establish an accrued for its estimates cost of
upgraded and warranty expenses. .
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.
<PAGE>
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,as has been reported previously,.
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 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.
On November 15 of 1998 Jim Caylor resigned from his position as
Controller, Jorge A. Felix was elected on a temporary basis; he has worked as a
accountant for RTI since September of 1997.
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. In 1998 the QAI Principals
borrowed collectively other $20,000 from company to come up with a total of
$100,000 . As December 31 of 1998 company accrued a total of $53,300 payroll
not paid to the principal QAI for the fiscal year of 1998. 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").
<PAGE>
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. About
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 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.
<PAGE>
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 $1.6 million during
the year ended December 31, 1998 compere with $1.8 of 1997. One customer, Rocky
Mountain Awning, accounted for approximately 31% of Aireze sales compere with
27% of 1997, 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. In 1998 sales for this line was approximately for $13,200.00 ,AS
March 26,of 1999 there is a backlog of $35,000 .
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 as increased energy
recovery. In 1998, the Company sold the E2Pak to two
specialized contractors, including Spec-Air, Trico Manufacturing. 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 $0.205 million in 1998.
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.
<PAGE>
In 1998, the Company sold the AC2 to distributors, who market the AC2
to "authorized" dealers. Net sales for AC2 on 1998 was approximately
$1.1 million.
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.Sales for EvaopCon
on 1998 was for $45,014 and the Company will emphasize this product line during
1999 expecting sales more than double of 1998 . As March 26,of 1999 sales and
backlog are for $10,778.86 and $20,800.00 .
Marketing
The Company markets its products mainly through independent
manufacturers' representatives (REPS). Working through its REPS, during 1997 &
1998, 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 26, 1999, the Company
employed 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 Seasonally
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 30, 1999, backlogs for the Aireze evaporative cooler and AC2
air conditioner were approximately $250,000, and $485,000(most ac2 units are
1998 customer returns than company owe), respectively compared to backlogs on
March 21, 1998 of approximately $320,000 and $891,000 and 0n March 21, of 1997
$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 30,
1999, the E2Pak backlog was approximately $59,000, compared to a March 17, 1998
backlog of $69,000.The sales of E2pak for 1997 was for $211,243.83 compare with
$205,898.83 on 1998.
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 30, 1999, this facility had a combined production capacity of
approximately 120 enclosures and/or Aireze evaporative coolers per day.
<PAGE>
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 30, 1999,
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. The plant capacity is calculated to be in excess of
200 units per 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 1999. 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.
Since 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.
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 , price
and since 1998 quality is priority one. 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.
<PAGE>
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 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 patent on the AC2 air conditioner was issued on November 10,1998
under number 5,832,739 and patents are pending. 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
to 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.
<PAGE>
Employees
As of March 27, 1999 the Company had 210 employees (including 166
persons employed by Industrias RTI), of whom 151 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. Industrias RTI, as of March 26, 1999, had 166 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 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 three 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.
<PAGE>
Mexican law also required certain other payments to be made to employees in the
event of dismissal without serious cause, disability or death which
are also not considered material.
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 on Rockaway New
Jersey. (See Item 3 - "Legal Proceedings").
<PAGE>
On Juarez plant at Mexico is the SEMARNAP (Mexican Department of
Ecology) which under the Mexican Ecology Law is making than company realize
studies and investments for about $10,000 and $25,000 American dollars during
1999 in order to accomplish with it. Item 2. Description of Properties.
The following sets forth, as of March 30, 1999, 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
Ownership Feet
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
</TABLE>
Manufacturing
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 5.90% 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 31 ,of 2001, at an annual rental increasing from
approximately $109,003 in 1998 to approximately $123,500 in the fifth year of
the term, plus the amount of value-added taxes 10% for 1998.
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.
<PAGE>
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 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 $306,598 as of December 31, 1998 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".
<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
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.
<PAGE>
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 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.
<PAGE>
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, 1998, the Company had accrued $927,139.72 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 NJDEP oversight accruals will represent the Company's
ultimate liability. See Note 10 to Consolidated Financial Statements included
under Item 7 - "Financial Statements."
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
This information has been reported on the third quarter 1998 report.
Annual Meeting Dates - RTI held an annual meeting of its stockholders
in 1998. Shareholders of record on July 27, 1998 were notified of the Annual
Meeting to be held on August 27, 1998. The meeting on August 27 was called to
order and postponed until September 1 to allow sufficient shareholder votes to
be recorded by the transfer agent. By September 1, sufficient votes were
received and the annual meeting was held accepting the votes of those present,
and accepting the votes by proxy for those not present. Each matter voted upon
will be described below. Because of a material change in proposal 3, the meeting
was continued until September 10, so that shareholders could be notified of the
change, and either be present for the continued Annual Shareholders Meeting or
file votes by proxy on that matter separately.
The Company has 1,611,166 shares outstanding, plus 100,000 shares of
preferred stock with equal voting rights, for a total of 1,711,166 votes. Total
shares voted were 1,488,303, which exceeded the 50% required for a quorum. All
proposals passed, except proposal 3, which is discussed below in greater detail.
There were no other business matters brought before the shareholders at the
annual meeting.
Matters voted on:
1. To elect five directors for a one-year term expiring in 1999.
Broker
Director For Against Abstain Non-vote
Rick E. Bacchus 1,441,495 46,808
Rockney D. Bacchus 1,451,449 36,854
Ronald A. Bacchus 1,441,449 46,854
Dr. Lanny Snodgrass 1,451,399 36,904
Joel S. Kanter 1,451,495 36,808
Mr. Kanter is elected as a new director, and the remaining nominees are elected
as continuing directors.
2. To ratify the purchase of certain assets from Bacchus, Industries, Inc., an
affiliated company, in exchange for 450,000 shares of the Company's Common
Stock.
This issue passed with a 55% vote.
Broker
For Against Abstain Non-vote
736,547 40,672 151,078 560,006
To approve a private placement of Units (each Unit to consist of two (2) shares
of Common Stock and one (1) five (5) year Common Stock Purchase Warrant to
purchase one (1) share of Common Stock at an exercise price of $3.00) on the
revised terms set forth in the Revised Proxy Statement.
This issue failed for insufficient votes (see discussion below).
Broker
For Against Abstain Non-vote
546,873 11,583 1,399 928,448
<PAGE>
3. To approve the granting of performance options for up to 1,564,000 shares
of Common Stock to certain members of management of the Company on the
terms set forth in the Proxy Statement.
This issue passed with a 55% vote.
Broker
For Against Abstain Non-vote
819,465 98,706 10,126 560,006
4. To approve an amendment to the Company's Certificate of Incorporation to
increase the authorized number of shares of Common Stock from 15,000,000 to
25,000,000.
This issue passed with a 96% vote.
Broker
For Against Abstain Non-vote
1,420,480 58,488 9,355
Proposal No. 3 was to approve a private placement of Common Stock to
generate minimum gross proceeds of $2,000,000 and maximum gross proceeds of
$5,000,000. The investment banking firm revised the terms of the private
placement prior to the August 27 shareholders' meeting, requiring a revised
proposal No. 3 to be voted on separately. A revised notice of Annual Meeting of
Stockholders to be held on September 10, 1998 was distributed to shareholders,
with a proxy for shareholders to return to the stock transfer agent.
Unfortunately, insufficient votes on this separate issue were returned to the
stock transfer agent by September 15th, the last day of voting.
RTI believes that there is a need for an additional capital injection,
and although Proposal No. 3 did not pass because of logistics, the vote tally
from those shareholders that were able to vote indicates strong shareholder
support for such a capital injection. RTI intends to resubmit a revised proposal
similar to Proposal No. 3 when it successfully obtains a firm commitment from an
investment-banking firm. RTI is presently negotiating such an agreement, but has
not finalized the terms. There is no guarantee that such terms will be reached,
that the proposal will be passed by the shareholders, or that the marketplace
will subscribe to the private placement.
<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, 1998 for the Company's Common Stock, as reported by The NASDAQ
Small-Cap Market.
High Bid Low Bid
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
1st Quarter 1998 6-1/4 3-3/16
2nd Quarter 1998 3-5/8 1-1/4
3rd Quarter 1998 2-0/0 0-1/3
4th Quarter 1998 0-9/16 0-3/16
As of March 30, 1999, the Company had approximately 1,300 holders of
record of its Common Stock. During the fiscal year ended December 31, 1998,
there were transactions in the Company's Common Stock on approximately 50% of
all trading days.
In September 1998,RTI was delisted from the NASDAQ small Cap Market
pursuant to a requirement to maintain tangible net assets in excess of $4.0
million. This action by NASDAQ will result in greater difficulty in obtaining
equity funding for the company.
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, March 31, 1998, June 30 of 1998, September 30 of 1998
and December 31 of 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 been revoke and as March 30 of 1999 has not approved.
<PAGE>
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
1998 Results of Operations Compared to 1997 Results of Operations
1998 revenues consisted primarily of cooler and air conditioning business sales
of $2,929,535 interest and rental income of $7,621 and $77,832 respectively.
This is compared to 1997 interest and rental income of $45,773 and $83,611,
respectively. Cooler and air conditioning for 1997 was $3,161,811. Other income
in 1998 consisted of $40,870 compared with $46,179 of 1997.
In 1998, the Company recorded cost of sales of $3,636,942 and Research
& Development expense of $1,243,913 compare with $3,242,829 and $774,720 of
1997. The R & D expenses, which may not be reflective of ongoing operations,
were the result of a heavy emphasis in 1998 & 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 (for AC2 units ),most of those units came back in
1998 for modifications .
<PAGE>
General & Administrative (G&A) expenses were $970,099 in 1998
compared to $963,817 in 1997. The increased costs are primarily attributable to
the expectation of the first complete AC2 season and increase of the overhead
and support for sales and production. Major components of the air-cooling and
air conditioning operations G&A include administrative salaries of $451,069 in
1998 compare with $405,000 of 1997 office supplies and communications of
$182,093 in 1998 compare with $150,000, 1997 legal and professional fees of
$115,876 in 1998 compare with $89,000 of 1997, depreciation and amortization of
$157,768 in 1998 compare with $140,000 1997, transportation expenses of
$35,971,in 1998 compare with $52,000 of 1997 and interest expense from $386,797
of 1998 to $55,000 of 1997 .
Selling expenses in 1998 were $1,247,546 compared with $655,824 in 1997
consisting primarily of advertising of $193,549 in 1998 and $281,000 in 1997;
sales salaries of $123,100 in 1998 and $133,000 in 1997; sales travel expenses
of $35,293 in 1998 and $49,000 in 1997. The mayor component of this increase is
related to the warranty reserve for AC2 due to the improper operation of the new
"fill and drain" model for $722,000 , As December 31 of 1998 $96,131 from this
reserve was used, $625,869 reserve to applied on the following six month, As
March 28 of 1999 still missing about 450 units to payback to customers and about
1200 units which may need replace the fill and drain kit. Management thinks the
reserve is enough to pay all expenses related with the "fill & drain" model and
will not happen more failures on the model during 1999.The replaced design has
been implemented and simplified, however can be no assurance .
Expenses for Rockaway Industrial Park ware for 35,460 in 1998, compare 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 $4,492,352, or loss of $2.88 per share in 1998, compared to a loss
from continuing operation of $1.92 per share in 1997.
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. The 1998 net loss is $2.88 per share.
<PAGE>
Uncertainty of Future Operating Results
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 & 1998, operations were centered, not fully
on production, but rather on development. In 1997 & 1998, 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 & support of a workforce of
approximately 15 employees) in anticipation of full production in 2000, and
development of a distribution network in the southeast, middle south, and
southwestern regions of the US. Thus the results of operations in 1997 & 1998
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. A significant
portion of the Company's business may be derived from orders placed by a limited
number of larger customers, one of the main goals for 1999 is to increase the
number of customer including the export to Mexico and Saudi Arabia but none is
for sure. 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.
<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, 1998,1997, 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"), limited sources of capital which
limited the purchases of asset in 1998, the information set forth herein and in
"Results of Operations" below may be of only limited analytical value:
1998 1997 1996 1995
Total assets (in thousands) $4,637 $5,670 $4,244 $ 7,882
Long-term debt, net of discount
(in thousands) $209 $257 $ 265 $ 2,024
Working capital (deficiency)
(in thousands) ($3,911) ($113) $2,994 ($1,116)
Working capital ratio .28 to 1 .95 to 1 .32 to 1 .38 to 1
Percentage of total liabilities to
stockholders' equity 315% 199% 45% 149%
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 company has cash and cash
equivalents of $9,361 and working capital of $(3,911,,423) at December 31, 1998.
The decrease in cash and working capital can be attributed to assumption of air
cooling and air conditioning operations in 1997 & 1998, including purchase of
fixed assets, operating expenses, and research and development expenses,. (See
Consolidated Statements of Cash Flows included under
In 1998, the net cash used in operating activities was $1,322,104.
Investing activities used net cash of $361,018 primarily for the purchase of
fixed assets of $268,546 and loans to related parties of $74,649. In 1997,
the net cash used in operating activities was $2,925,540 investing activities
used net cash of $986,422 primarily for the purchases of fixed asset of
$1,250,013 offset by the sale of irradiation operation . In 1998 net cash
provided by financing activities was $1,680,771 including proceeds from the sale
of 130,000 shares of common stock of $446,082 and Note payables of $1,173,363
compare with 1997 net cash provided by financing activities was $1,345,494
proceeds from the sale of 145,000 common share for $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 loans totaling $593,000 were
offset by the payment for the earlier $830,000 note to related parties.
The Company had one related party note outstanding at December 31, 1998, 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
<PAGE>
renegotiated effective February 21, 1998. The terms of the Muller Note are 12%
annual interest up to August 20 of 1998 and 18% thereafter. The terms of the
Frellum Note are 12% annual interest, the balance along with accrued interest
due and payable on February 20, 2000.
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
$446,082 of net proceeds was applied to the Company's general working capital.
The company received a bridge loan on April of 1998 for $540,000 payable on
January 22 of 1999 which is in default, other bridge loans was received on
September 1998 for $25,000 ,payable on June 22 of 1999. The first bridge loan
notes have not been renegotiated , the note holders can sue the company or
exercise the warrant of $4.50 each ,which will expire on April 22 of 2003.
The Company also obtained a credit line up to $1.80 million with a
financing company, using as collateral its inventory ,As December 31 of 1998
company used $606,861 of the credit line. The company has a expectations that in
the following months based on how the 1999 business plan is met the company can
rise money from the stock market. No assurances can be given that it can happen.
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 and for 1996. The Company now has two years audited statements which allows
greater access to equity markets. The Company also received audited financial
statement for RTI for the year 1997 missing only 1998 audited finmacial
statements. Such audited financial statements will enable 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 31,1998.
The Company's operations conducted at Industrias RTI are labor
intensive but, due to the prevailing wages paid and 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 , the
turnover which is around 20 % monthly on production area, 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 1999.
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.
<PAGE>
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. As March 28 of 1999 company received a proposal from Crist Nelson a
New jersey company to buy Rockaway property and assume all liabilities existing.
The proposal has received on formal basis and on the following weeks
negotiations will start, the accepted would result in a substantial profit for
the company. (See Item 3 - "Legal Proceedings").
New Accounting Pronouncements
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. The Company has adopted SFAS 130, Reporting
Comprehensive Income, SFAS 131, Disclosures About Segments of an Enterprise and
Related Information, or SFAS 132, Employers Disclosures about Pensions and Other
Postretirement Benefits effective for the year ended December 31, 1998. There
was no 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.
Not Applicable.
<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 45 Director, President and Chief
Financial Officer, CEO , CFO.
Rockney D. Bacchus 43 Director, Vice President of Development and
Secretary
Ronald A. Bacchus 41 Director and Vice President of Manufacturing
Dr. Lanny Snodgrass 58 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 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.
<PAGE>
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 1998, all such filing requirements applicable to such persons were duly
complied with.
<PAGE>
Item 10. Executive Compensation.
The following table sets forth the cash and cash equivalents paid
during the fiscal year ended December 31, 1998 to the Company's Acting Chief
Executive Officer. No other officer is compensated at a rate in excess of
$100,000 per year.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
SUMMARY COMPENSATION TABLE
Long Term
Compensation
Awards Payouts
Salary Bonus ($) Other ($) Restricted Options/ LTIP ALL
($) Stock SARS OTHER
Awards
Rick E. Bacchus / CEO 1998 95,000
(2)
</TABLE>
(1) Mr. Bacchus has the use of Company owned vehicle having a value of
approximately $2,500.
(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.
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
<PAGE>
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. 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.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
As of March 25, 1999, the Company had 1,611,166 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. 50,000 (a) 3.10%
c/o Rick E, Bacchus
301 Antone Street
Sunland Park, NM 88063
Rick E. Bacchus 86,235 (b) 5.29%
301 Antone Street
Sunland Park, NM 88063
Rockney D. Bacchus 86,235 (c) 5.29%
301 Antone Street
Sunland Park, NM 88063
Ronald A. Bacchus 86,235 (d) 5.29%
301 Antone Street
Sunland Park, NM 88063
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 296,955 (g) 18.43%
officers, as a group (four persons)
<PAGE>
(a) Includes 50,000 shares of Common Stock held in escrow to cover possible
indemnifications claims, As March 29 of 1999 there are no claims against QAI by
RTI . On September 14 of 1998 185,000 shares ware transfer from Quality Air Inc.
to individuals as follow:
Shareholder Shares
William A Chamness 2,478
Ted Mills 1,215
James N. Whitworth 243
Chriss Liden 10,204
Mary Gunter Beeman 1,215
Charles Alvis Gunter 1,215
John Rohne Wright 7,289
Linda H. Ryan 364
Allison K. Ryan 364
Robert McKee Ryan 364
Bob Stewart 4,854
M. J. Bacchus 5,536
Rick E. Bacchus 49,887
Rocky D. Bacchus 49,886
Ronald A. Bacchus 49,886
------
Total 185,000
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 51,554 shares plus 33% of QAI Shares, 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 51,554 shares plus 33% of QAI Shares, 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.
(d) Consists of 51,554 shares plus 33% of QAI Shares, 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.
(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.
<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.
<PAGE>
As described under Item 2 - "Description of Properties', RefTech leases
its Sunland Park, New 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 ratify the
purchase of Bacchus Industries assets in exchange for 450,000 shares of the
Company's Common stock, but the Bacchus Industries stockholder have not accepted
the offered at this time.
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.
<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, 1998, 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. The financial statements as of December 31, 1997,
were audited by Neff & Company LLP, who merged with Ricci & Ricci LLP as of
January 1, 1999.
Except as discussed in the following paragraph, 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.
We were unable to audit the Environmental Remediation Liability as discussed in
Note 10 because we were unable to review current consultant status reports. We
were unable to satisfy ourselves about the amount of the Environmental
Remediation Liability by means of other auditing procedures.
As discussed in Note 4 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 5 and 10 to the consolidated financial statements, the
Company owns property which is the subject of continuing significant
environmental investigation and remediation.
F-1
<PAGE>
Board of Directors and Stockholders of
RTI Inc. and Subsidiaries
In our opinion, except for the effect of such adjustments, if any, as might have
been determined to be necessary had we been able to satisfy ourselves about the
Environmental Remediation Liability, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of RTI Inc. and subsidiaries at December 31, 1998, and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 4 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, has current liabilities in excess of current assets available for
payment, and has a stockholders' deficit. 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
February 24, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
RTI INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
ASSETS
1998 1997
CURRENT ASSETS
Cash and cash equivalents $ 9,361 11,712
Accounts receivable, net of allowance
of $18,020 in 1998 and $8,068 in 1997 191,497 234,993
Inventory 1,317,649 1,979,893
Prepaid expenses and other 54,228 163,357
---------------------------------
Total current assets 1,572,735 2,389,955
PROPERTY, PLANT AND EQUIPMENT,
net 1,787,312 1,902,066
DUE FROM RELATED PARTIES 111,206 80,000
INTANGIBLE ASSETS, net of accumulated
amortization of $158,857 in 1998 and
$72,353 in 1997 1,135,057 1,204,193
OTHER ASSETS 31,635 38,111
Total assets $ 4,637,945 5,614,325
=================================
The Notes to Financial Statements are an integral part of these consolidated
statements.
F-3
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1998 1997
CURRENT LIABILITIES
Notes payable to related parties $ 627,811 593,000
Notes payable 1,173,363 -
Due to related parties 174,469 39,295
Due to customers 404,207 -
Accounts payable 1,088,297 796,521
Accrued expenses 387,208 119,592
Accrued warranty 621,312 14,294
Accrued interest 139,578 49,780
Other current liabilities 180,000 180,000
Current portion of long-term debt 667,926 654,613
Current portion of capital lease obligation 19,987 -
---------------------------------
Total current liabilities 5,484,158 2,447,095
LONG-TERM DEBT, net of $22,000
discount in 1997 209,858 257,344
CAPITAL LEASE OBLIGATION, net of
current portion 40,660 -
OTHER LIABILITIES 1,053,738 1,014,085
Total liabilities 6,788,414 3,718,524
---------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.05 par value - shares
authorized 2,000,000; shares issued
and outstanding 100,000 5,000 5,000
Common stock; $.08 par value - shares
authorized 25,000,000 in 1998 and
15,000,000 in 1997; shares issued and
outstanding 1,611,166 in 1998 and
1,481,166 in 1997 128,894 118,494
Additional paid-in capital 18,115,261 17,679,579
Accumulated deficit (20,399,624) (15,907,272)
---------------------------------
Total stockholders' equity (deficit) (2,150,469) 1,895,801
---------------------------------
Total liabilities and stockholders' equity
(deficit) $ 4,637,945 5,614,325
=================================
F-4
<PAGE>
RTI INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1998 and 1997
1998 1997
Net sales $ 2,929,535 3,161,861
Cost of sales 3,636,942 3,242,829
Gross margin (707,407) (80,968)
Selling expenses 1,247,546 655,824
General and administrative expenses 970,099 963,837
Research and development expenses 1,243,913 774,720
---------------------------------
Total operating expenses 3,461,558 2,394,381
---------------------------------
Loss from operations (4,168,965) (2,475,349)
---------------------------------
Other income (expense)
Interest income 7,621 45,973
Rental income 77,832 83,611
Expenses of Rockaway Industrial Park,
including interest expense of $22,000
in 1998 and 1997 (62,913) (62,913)
Environmental investigation, remediation
and related legal expenses - (249,855)
Interest expense (386,797) (55,031)
Other income 40,870 46,179
Total other income (expenses) (323,387) (192,036)
---------------------------------
Net loss before income taxes (4,492,352) (2,667,385)
Income taxes - -
Net loss $ (4,492,352) (2,667,385)
=================================
Basic and diluted net loss per share $ (2.88) (1.92)
=================================
Weighted average number of
common shares outstanding 1,578,666 1,405,749
=================================
The Notes to Financial Statements are an integral part of these consolidated
statements.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) For the Year Ended
December 31, 1998 and 1997
Preferred Stock Common Stock
Number Number
of Shares Amount of Shares Amount
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
Issuance of common stock 130,000 10,400
Net loss - - - -
Balance, December 31, 1998 100,000 $ 5,000 1,611,166 $ 128,894
===========================================================
The Notes to Financial Statements are an integral part of these consolidated
statements.
F-6
<PAGE>
Additional
Paid-in Accumulated
Capital Deficit Total
$ 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
435,682 - 446,082
- (4,492,352) (4,492,352)
--------------------------------------------------
$ 18,115,261 (20,399,624) (2,150,469)
==================================================
F-7
<PAGE>
RTI INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998 and 1997
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (4,492,352) (2,667,385)
---------------------------------
Adjustments to reconcile net loss to net cash applied to operating
activities:
Depreciation and amortization 470,259 277,091
Imputed interest on note payable - 22,000
(Increase) decrease in:
Accounts receivable 43,497 31,612
Inventory 662,244 (1,565,844)
Prepaid expenses and other 109,129 64,091
Other assets 6,476 (2,936)
Increase (decrease) in:
Due to related parties 178,576 94,900
Due to customers 404,207 -
Accounts payable 306,070 485,612
Accrued expenses 343,119 94,939
Accrued warranty 607,018 14,294
Other liabilities 39,653 223,150
---------------------------------
Total adjustments 3,170,248 (261,091)
---------------------------------
Net cash (applied to) operating activities (1,322,104) (2,928,476)
---------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of irradiation operations - 407,944
Purchases of fixed assets (268,546) (1,250,013)
Purchase of intangible assets (17,823) (28,184)
Cash purchased with business
acquisitions - 16,624
Loans and related party receivables (74,649) (129,857)
---------------------------------
Net cash (applied to) investing
activities (361,018) (983,486)
---------------------------------
The Notes to Financial Statements are an integral part of these consolidated
statements.
F-8
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) For the Years Ended December
31, 1998 and 1997
1998 1997
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the sale of common stock $ 446,082 420,500
Proceeds from the sale of preferred stock - 580,000
Proceeds from notes payable 1,173,363 603,633
Proceeds from capital lease 60,648 -
Proceeds from related party notes 70,633 593,000
Payments on long-term debt (34,134) (8,882)
Payments on related party notes (35,821) (830,000)
Payment of dividends - (12,757)
---------------------------------
Net cash provided by financing
activities 1,680,771 1,345,494
---------------------------------
Net (decrease) in cash and
cash equivalents (2,351) (2,566,468)
Cash and cash equivalents, beginning of year 11,712 2,578,180
---------------------------------
Cash and cash equivalents, end of year $ 9,361 11,712
=================================
The Notes to Financial Statements are an integral part of these consolidated
statements.
F-9
<PAGE>
RTI INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
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.
F-10
<PAGE>
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.
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 recognizes 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.
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-11
<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 amounted to
$173,171 in 1998 and $201,000 in 1997.
Reclassifications. Certain amounts in 1997 have been reclassified to conform
with the 1998 presentation.
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.
NOTE 2. INVENTORY
Inventory at December 31, 1998 and 1997, consists of the following:
1998 1997
Raw materials $ 578,330 390,159
Work-in-Process 41,790 91,448
Finished goods 697,529 1,498,286
Total $ 1,317,649 1,979,893
=============================
Inventory in the amount of $143,884 and $128,804 is located in Ciudad Juarez,
Mexico at December 31, 1998 and 1997, respectively.
F-12
<PAGE>
NOTE 3. PROPERTY PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31:
1998 1997
Property under lease $ 2,131,735 2,131,735
Land 154,773 154,773
Building 429,723 420,817
Leasehold improvements 330,019 294,521
Equipment and vehicles 906,825 768,568
---------------------------------
3,953,075 3,770,414
Less accumulated depreciation and amortization (2,165,763) (1,868,348)
---------------------------------
$ 1,787,312 1,902,066
=================================
Leasehold improvements and equipment with a cost of $285,025 are utilized at the
maquiladora plant in Ciudad Juarez, Mexico.
NOTE 4. RELATED PARTY TRANSACTIONS
The following is a summary of balances with related parties as of December 31:
1998 1997
ASSETS
Due from related parties:
Accounts receivable, Rick Bacchus $ 9,762 -
Notes receivable from officers, interest at prime
plus 1% (8.75% at December 31, 1998) payable monthly with principal
payable in five years, secured by stock in Quality Air, Inc.
Rick Bacchus 67,654 60,506
Rockney Bacchus 16,895 9,747
Ron Bacchus 16,895 9,747
---------------------------------
$ 111,206 80,000
=================================
Rick, Rockney, and Ron Bacchus are officers of the Company. Interest income on these notes was $7,621 in 1998 and
$5,085 in 1997.
F-13
<PAGE>
LIABILITIES
Notes payable to related parties
Theo W. Muller, interest at 8.5% through
January 20, 1998, increasing to 12% through August 20, 1998, and
to 18% thereafter, due in semi annual installments of $100,000
with balance due February 20, 2000, secured by
patents and patents pending. Note is past due. $ 588,383 543,000
Frellum Corporation, interest at 8.5% through February 20, 1998,
increasing to 12% through October 29, 1998, and 18% thereafter,
unsecured. Note is past due. 26,511 50,000
Rick Bacchus, interest at 16%, payable on
demand, unsecured. 12,917 -
---------------------------------
$ 627,811 593,000
=================================
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 $82,790 in 1998 and
$41,038 in 1997.
Due to related parties (no stated terms):
Bacchus Industries, Inc. $ 121,169 39,295
Accrued wages payable to officers 53,300 -
---------------------------------
$ 174,469 39,295
=================================
F-14
<PAGE>
NOTE 4. RELATED PARTY TRANSACTIONS (CONTINUED)
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 $189,817, (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. On September 15,
1998, a proposal was passed at the annual shareholders meeting to purchase these
assets from Bacchus Industries, Inc., in exchange for 450,000 shares of the
Company's common stock. As of December 31, 1998, this transaction had not been
completed and the Company continued to accrue the contingent rental fee.
The Company has also informally assumed, on a month-to-month basis, the
obligations of Bacchus Industries, Inc. for equipment leased from another
company. In addition to the monthly lease payment of $4,001, the lease contains
certain restrictions on sales to third parties.
NOTE 5. 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 for a base annual rent of $77,400. The 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 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).
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.
F-15
<PAGE>
NOTE 5. ROCKAWAY INDUSTRIAL PARK (CONTINUED)
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 10). This property has a net book
value of $50,000.
NOTE 6. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses consist of the following at December 31:
1998 1997
Accrued payroll and payroll taxes $ 200,662 40,588
Professional fees 60,468 61,031
Termination of contract 75,000 -
Other 51,078 17,973
-----------------------------
Total $ 387,208 119,592
=============================
Other liabilities consist of the following at December 31:
1998 1997
Remedial investigation and environmental
cleanup costs (Note 10) $ 927,140 962,600
Real estate taxes on Rockaway property (Note 10) 306,598 231,485
-----------------------------
Total 1,233,738 1,194,085
Less current portion (180,000) (180,000)
-----------------------------
Long-term portion $ 1,053,738 1,014,085
=============================
NOTE 7. NOTES PAYABLE
Notes payable consist of the following at December 31:
1998 1997
Promissory notes payable at 10% due
January 22, 1999, secured by an interest
in the Company's assets $ 541,502 -
Promissory note payable at 10% due
September 15, 1999 25,000 -
Finance agreement with financing company,
secured by an interest in the Westway plant 606,861 -
-----------------------------
$ 1,173,363 -
=============================
F-16
<PAGE>
NOTE 7. NOTES PAYABLE (CONTINUED)
On April 22, 1998, the Company entered into a bridge financing package for
$541,502 in the form of nine-month promissory notes to individuals bearing 10%
interest and five-year warrants to purchase an aggregate of 108,300.40 shares of
common stock at an exercise price of $4.50 per share for a period of five years.
The bridge notes are secured by an interest in the Company's assets with the
understanding that should the Company enter into a borrowing with a financial
institution, then the security interest would be converted to a junior and
subordinate lien to the lien of such financial institution. The notes were not
paid when due on January 22, 1999.
On February 13, 1998, the Company entered into a financing agreement with a
financing company to finance the following eligible accounts: Receivables,
inventory, purchase orders, and future inventory. The financing agreement
includes purchasing the eligible accounts at a purchase price equal to the face
amount of such eligible account less a discount equal to two and three-quarters
percent of the face amount the first 30 days the eligible account is outstanding
and one percent for each additional 15 days. Interest expense on the financing
agreement for the year ended December 31, 1998, was $175,033. The agreement has
an initial term which expires February 13, 2000. Financing at December 31, 1998
related to the following:
Accounts receivable $ 30,235
Purchase orders 280,568
Inventory 190,538
Future inventory 105,520
-------------
$ 606,861
F- 17
<PAGE>
NOTE 8. LONG-TERM DEBT
Long-term debt consists of the following at December 31:
1998 1997
Notepayable to bank with interest at prime plus 1.75% (9.50% at December 31,
1998) due in 120 monthly installments of $4,701, secured
by the Westway plant and certain equipment $ 335,004 603,633
Notepayable to Small Business Administration with interest at 5.19% due in
120 monthly installments of $3,246, secured by Westway
plant and certain equipment 243,902 -
Note payable to unrelated company with interest at
10.61% due quarterly and annual principal payments
of $41,000, secured by Rockaway property 287,000 287,000
Other installment notes 11,878 21,324
-----------------------------
Total long-term debt 877,784 911,957
Less current portion (667,926) (654,613)
-----------------------------
$ 209,858 257,344
=============================
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, 1998, 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.
The note payable to the Small Business Administration is past due; 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 was increased
annually by $22,000 during the five year period the Company was not obligated to
make principal and interest payments. Commencing January 1, 1998, the note bears
interest at a rate of 10.61 percent per annum and principal payments will be
made in annual installments of $41,000 through
F-18
<PAGE>
NOTE 8. LONG-TERM DEBT (CONTINUED)
January 1, 2004. The Company did not make its scheduled note payments due
January 1, 1998 and January 1, 1999.
Principal amounts due in connection with long-term debt for each of the five
years subsequent to December 31, 1998 are as follows:
1999 $ 667,926
2000 45,858
2001 41,000
2002 41,000
2003 41,000
Thereafter 41,000
-----------
$ 877,784
NOTE 9. CAPITAL LEASE
The Company acquired computer equipment under the provisions of a long-term
lease. For financial reporting purposes, minimum lease payments relating to the
office equipment have been capitalized. The lease expires April 2001. The leased
property under capital lease as of December 31, 1998, has a cost of $60,647 and
accumulated amortization of approximately $6,065.
The future minimum lease payments under capital lease and the net present value
of the future minimum lease payments at December 31, 1998, are as follows:
Total minimum lease payments $ 81,255
Amount representing interest (20,608)
-------------
Presenting value of net minimum lease payments 60,647
Current portion (19,987)
-------------
Long-term capital lease obligation $ 40,660
=============
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
F-19
<PAGE>
NOTE 10. ENVIRONMENTAL INVESTIGATION, REMEDIATION AND
RELATED LITIGATION (CONTINUED)
Parcel II (see Notes 5 and 8). 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 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 Notes 5 and 8).
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
F-20
<PAGE>
NOTE 10. ENVIRONMENTAL INVESTIGATION, REMEDIATION AND
RELATED LITIGATION (CONTINUED)
(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.
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
F-21
<PAGE>
(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 in 1997. The RAWP
includes the design, construction, operation, monitoring, and closeout of the
groundwater remediation program over approximately a ten year period that was to
begin in 1998. Ground water remediation operations did not begin in 1998 as
planned and have been deferred until 1999. 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 5) 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
for 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, $306,598 and $231,485 were accrued at December 31,
1998 and 1997, respectively.
Environmental accruals at December 31 are:
1998 1997
Groundwater remediation $ 927,140 962,600
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, 1998 and 1997, the
Company's five largest customers accounted for approximately 51 and 45 percent
of its total sales, respectively.
The Company leases it Sunland Park, New Mexico facility from Bacchus Industries,
Inc. under a three year operating lease which expires on March 1, 2000. The
lease may be
F-22
<PAGE>
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 $78,000 in 1998 and $58,500 in 1997.
As a result of the Company's inability to obtain audited financial statements of
Quality Air, Inc. (see Note 17) 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 its Ciudad Juarez, Mexico facility under a noncancelable
lease that expires on February 1, 2001. The Company paid $106,126 on this lease
in 1998 and $61,806 in 1997. Minimum annual lease payments are as follows:
1999 $ 112,402
2000 119,464
2001 20,112
NOTE 12. STOCKHOLDERS' EQUITY
Common and Preferred Stock Authorized, Issued and Outstanding. 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, 1998), or after June 15, 1999 for $5.80 ($580,000 for the shares
outstanding at December 31, 1998) 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
former 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
F-23
<PAGE>
dividends that had not been declared as of December 31, 1997. No preferred stock
dividends were declared or paid during the year ended December 31, 1998.
Cumulative undeclared and unpaid preferred stock dividends at December 31, 1998,
are $64,956. As noted in Note 8 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.
In March 1998, the Company closed on a private placement of 26 units at an
offering price of $20,000 per unit of 5,000 shares of common stock, aggregating
to $520,000, for a total of 130,000 shares and warrants to purchase 65,000
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 $446,482.
Effective September 15, 1998, the Company amended its Certificate of
Incorporation to increase the authorized number of shares of common stock from
15,000,000 shares to 25,000,000 shares.
Stock Authorized but not Issued. On September 10, 1998, the shareholders
authorized the issuance of 450,000 shares to Bacchus Industries, Inc. in
exchange for certain assets. The transaction was not completed at December 31,
1998.
Stock Options. The Company's 1987 stock option plan (the Plan) authorized the
issuance of options for common stock until November 30, 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 provided, as the effect was not
material. Details of stock option transactions under the 1987 Plan are as
follows:
Option Price
Options Per Share Exercisable
Outstanding, January 1, 1997 - -
Granted 5,500 7.375
Cancelled - -
Outstanding, December 31, 1997 5,500 7.375 -
============
Granted - -
Cancelled - -
Outstanding December 31, 1998 5,500 $ 7.375 5,500
==============================================
F-24
<PAGE>
Contingent Stock Options. On September 10, 1998, two sets of performance options
were granted the officers of the Company.
The first set of options grants the officers one option for every $3.86 of net
earnings (in a given fiscal year) up to a maximum of 782,000 shares of common
stock in the event the Company achieves net after-tax income of at least
$1,969,275 by December 31, 2000. No options shall be earned if the Company's net
income is less than $1,969,275. The options expire after December 31, 2000 if
not earned.
The second set of options grants the officers one option for every $10.46 of
earnings (in any given fiscal year) up to a maximum of 782,000 shares of common
stock in the event the Company achieves net after-tax income of at least
$7,110,600 by December 31, 2002.
No options shall be earned if the Company's net income is less than $7,110,600.
The options expire after December 31, 2002, if not earned.
Warrants for Common Stock. The following warrants are outstanding at December
31, 1998:
Number
of Shares
Covered by Exercise Date Date of
Warrants Price Exercisable Expiration
65,000 $ 4.50 Presently February 12, 2003
108,300 4.50 Presently April 22, 2003
50,000 4.50 Presently December 31, 2003
Each warrant allows the holder to purchase one share of common stock at the
warrant price.
NOTE 13. INCOME TAXES
At December 31, 1998 and 1997, the Company had deferred tax assets amounting to
approximately $5,600,000 and $3,800,000, 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 6 and 10) and are fully offset by a valuation allowance of the same
amount.
F-25
<PAGE>
The net change in the valuation allowance for deferred tax assets was a increase
of approximately $1,800,000 and decrease of $800,000 in 1998 and 1997,
respectively. The current year's net change is primarily due to the recording of
certain warranty accruals and the increase of net operating loss carryforwards.
No tax benefit is presented in the accompanying statements of operations, as
would be expected by applying the applicable U.S. statutory Federal income tax
rate to the pretax loss, as a result of the increase in the valuation allowance.
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $13,000,000 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 $1,400,000, which will expire
from 1999 through 2002. In addition, the Company has net operating loss
carryforwards relating to Texas and New Mexico totaling approximately $6,100,000
that will expire in 2002 to 2003 and 2012 to 2013, respectively.
NOTE 14. 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 1997 and 1998, 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:
F-26
<PAGE>
For the year ended December 31, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
Net loss $ (4,492,352) -
Preferred stock dividends (52,200) -
-----------------------------------------------------
Loss to common stockholders-
basic and diluted loss per share $ (4,544,552) 1,578,666 $ (2.88)
=====================================================
For the year ended December 31, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
Net loss $ (2,667,385)
Preferred stock dividends (25,512)
Loss to common stockholders-
basic and diluted loss per share $ (2,692,897) 1,405,749 $ (1.92)
=====================================================
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.
NOTE 15. STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information are as follows:
1998 1997
Interest paid $ 292,510 5,251
==============================
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following are the carrying amounts and methods used by the Company in
estimating its fair value of financial instruments.
Cash and Cash Equivalents. The carrying amounts reported in the balance sheet
approximate fair value.
Due from Related Parties. Management estimates the fair value of notes
receivable approximates the carrying value due to their short terms.
F-27
<PAGE>
Notes Payable to Related Parties. Management estimates the fair value of
notes payable approximates the carrying value due to their short terms.
Capital Lease and Long-Term Debt. Management estimates the fair value of
capital lease obligations and notes payable approximates the carrying value
due to their short terms and the fact that they were entered into recently.
The carrying amounts and fair values of the Company's financial instruments are
as follows at December 31, 1998:
Estimated
Carrying Fair
Amount value
Cash and cash equivalents $ 9,361 9,361
Due from related parties 111,206 111,206
Notes payable 1,173,363 1,173,363
Notes payable to related parties 627,811 627,811
Long-term debt and capital lease obligation 270,505 270,505
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 and 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.
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. In 1998, the amounts were increased to
$95,000.
Proforma results for 1997 are not presented since the acquisition took place
near the beginning of the year.
F-28
<PAGE>
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.
As a result of the acquisition of RefTech and Industrias QAI, the Company had
the following non-cash activity in 1997:
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, 1998, the Company had recorded a loss for the year of
approximately $4,492,000 and a stockholders' deficit of $2,150,469. The loss in
1998 was largely attributable to certain difficulties introducing the AC-2 in
other regions of the country which required the Company to reengineer the
product, replace units already sold and accrue for future warranty costs. Cash
and accounts receivable were inadequate to pay accounts payable and accrued
expenses. The Company does not meet certain debt covenants, is past due on its
notes payable and, if foreclosed upon, could lose assets required for
operations. 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.
F-29
<PAGE>
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. 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. During 1999, management intends to focus
production efforts on its Aireeze line of evaporative coolers in order to
stabilize cash flows. At the same time, management plans to remedy the problems
with the AC-2 water cooled air conditioner and begin a new marketing campaign
for the year 2000. Based on these efforts, management expects the Company to
break even in 1999. These plans include negotiating extended payment terms with
lendors, and for the customer and vendor liabilities along with obtaining
additional asset based loans.
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-30
<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, 1999
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.
Signature Title Date
_________________ Director/CEO/CFO April 14, 1999
Rick E. Bacchus
__________________ Director/VP/Secretary April 14, 1999
Rockney D. Bacchus
__________________ Director/VP April 14, 1999
Ronald A. Bacchus
__________________ Principal Accounting Officer April 14, 1999
James Caylor
__________________ Director April 14, 1999
Lanny Snodgrass
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS THEN ENDED
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 191,497
<ALLOWANCES> 26,088
<INVENTORY> 1,317,649
<CURRENT-ASSETS> 1,572,735
<PP&E> 1,787,312
<DEPRECIATION> 470,259
<TOTAL-ASSETS> 4,637,945
<CURRENT-LIABILITIES> 5,484,158
<BONDS> 0
0
0
<COMMON> (2,150,469)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,637,945
<SALES> 2,929,535
<TOTAL-REVENUES> 3,014,988
<CGS> 3,636,942
<TOTAL-COSTS> 4,168,965
<OTHER-EXPENSES> 323,387
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 386,717
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,492,352)
<EPS-PRIMARY> (2.88)
<EPS-DILUTED> (2.88)
</TABLE>
