U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________
Commission file number 0-5887
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RTI INC.
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(Exact name of small business issuer as specified in its charter)
NEW YORK 11-2163152
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O.BOX 3048, 301 ANTONE, SUNLAND PARK, NEW MEXICO 88063
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(Address of principal executive offices) (Zip Code)
(505) 589-5431
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(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section l3 or l5(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No [
]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
JULY 23, 1999 - 1,611,166 shares of common stock
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Transitional Small Business Disclosure Form Yes [ ] No [X]
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
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RTI INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BALANCE SHEET
ASSETS JUNE 30 , DECEMBER 31,
1999 1998
CURRENT ASSETS
Cash and cash equivalents $ - 0% $ 9,361 0%
Accounts receivable, net of allowance
of $10,072 in 1999, and $13,214 in 1998 842,365 15% 191,497 4%
Inventory 1,647,859 29% 1,317,649 28%
Prepaid expenses and other
248,278 4% 54,228 1%
Total current assets 2,738,502 48% 1,572,735 34%
PROPERTY, PLANT AND EQUIPMENT, NET 1,727,005 30% 1,787,312 39%
DUE FROM RELATED PARTIES 102,505 2% 111,206 2%
INTANGIBLE ASSETS, net of accumulated
Amortization of $34,250 in 1999, and $21,687 1998 1,052,877 19% 1,135,057 24%
OTHER ASSETS 48,428 1% 31,635 1%
Total assets $ 5,669,317 100% $ 4,637,945 100%
The Notes to Financial Statements are an integral part of these
consolidated statements.
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BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
JUNE 30 DECEMBER 31,
1999 1998
1999 CURRENT LIABILITIES
1 Notes payable to related parties * $ 632,648 7.6% $ 627,811 9.2% *
2 Due to related parties BII * $ 231,749 2.8% $ 174,469 2.6% *
3 Notes payable TCC * $ 1,910,890 23.0% $ 606,861 8.9% *
4 Due to customer * $ 185,000 2.2% $ 404,207 6.0% *
5 Accounts payable * $ 1,367,045 16.4% $ 1,088,297 16.0% *
6 Accrued expenses * $ 353,508 4.3% $ 387,208 5.7% *
7 Accrued warranty * $ 377,611 4.5% $ 621,312 9.2% *
8 Accrued interest * $ 257,343 3.1% $ 139,578 2.1% *
9 Capital lease obligation * $ 68,452 0.8% $ 19,987 0.3% *
10 Other current liabilities * $ 216,341 2.6% $ 180,000 2.7% *
11 Bridge loan * $ 564,002 6.8% $ 566,502 8.3% *
12 Current portion of long term debt * $ 682,364 8.2% $ 667,926 9.8% *
Total current liabilities $ 6,846,953 82.4% $ 5,484,158 80.8%
LONG-TERM DEBT
13 SBA & Norwest net from current portion $ 454,248 5.5% $ 209,858 3.1% *
14 Provision for future Environmental Cost $ 888,955 10.7% $ 927,140 13.7% *
15 Convertible notes $ 76,000 0.9%
16 Trio deposit ( ACE ) $ 23,590 0.3% $ -
17 Rock away Property Tax net of the current portion $ 23,558 0.3% $ 167,258 2.5%
Total liabilities $ 8,313,304 100.0% $ 6,788,414 100.0%
STOCKHOLDERS' EQUITY
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, issued and
outstanding 1,611,166 at year-end 1998
and 1,611,166 at March 31, 1999 $ 128,894 $ 128,493
Additional paid-in capital $18,115,261 $18,115,261
Accumulated deficit $ (20,893,142) $ (20,399,223)
Total stockholders' equity $ (2,643,987) $ (2,150,469)
Total liabilities and stockholders' equity $ 5,669,317 $ 4,637,945
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CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30,
1999 1998
Net sales $ 2,011,897 $ 2,308,945
Cost of sales 1,424,108 71% 2,468,338 107%
Gross profit (loss) 587,789 29% (159,393) -7%
Selling and Marketing 162,604 8% 264,338 11%
General and administrative expenses 511,964 25% 643,369 28%
Research and development expenses 42,864 2% 97,007 4%
Total operating expenses 717,432 36% 1,004,714 44%
Loss from operations (129,643) -6% (1,164,107) -50%
Other income (expense)
Rental income 19,510 1% 10,625 0%
Expenses of Rockaway Industrial Park,
including interest expense of $5,500
in every year (19,510) -1%
Interest income (expense) (385,152) -19% (145,965) -6%
Other income
-
Total other income (expenses) (385,152) -19% (135,340) -6%
Loss from continuing operations (514,795) -26% (1,299,447) -56%
EXTRAORDINARY INCOME 113,064 6% 0%
- -
Net loss before income taxes
Income taxes
Net loss $ (401,731) -20% $ (1,299,447) -56%
Weighted Average Shares 1,611,166 1,565,599
Net loss per share ($0.25) ($0.83)
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CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE30 ,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (401,731) $ (1,299,447)
Adjustments to reconcile net loss to net cash applied to
operating activities:
Depreciation and amortization 223,266 158,782
Allowance for doubtful accounts 10,072 13,727
Allowance for warranty expense - 22,757
Imputed interest on note payable - -
(Increase) decrease in:
Accounts receivable (650,868) (170,285)
Restricted deposits - -
Due from affiliate - (1,445)
Inventories (330,210) 351,588 (330,210)
Other assets (16,793) 16,793
Prepaid expenses and other (194,050) (167,833) (194,050)
Increase (decrease) in:
Due relatives parties (8,701) 69,158
Due to customers (219,207) 219,207
Accrued warranty (243,701) 243,701
Accounts payable 278,748 180,707 (278,748)
Accrued interest 117,765 (117,765)
Accrued expenses 65,580 17,770
Other liabilities 36,341 (41,442) 36,341
TOTAL ADJUSTMENTS (931,758) 433,484
Net cash applied to operating
activities (1,333,489) (865,917)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (86,899) (158,330)
Reduction in notes receivable - -
Purchase of business, net of cash acquired
Purchases of other assets - (23,315)
Net cash (applied to) provided by
investing activities (86,899) (181,645)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock - 490,439
Proceeds from notes payable 1,403,619
Proceeds from related party notes 4,837 48,405
Payments on related party notes (26,511)
Changes in short-term borrowing 541,502
Payments on short-term loans -
Payments on long term debt
- (15,011)
Net cash provided by (applied to) 1,408,456 1,038,824
financing activities
Net increase (decrease) in cash and cash equivalents (9,361) (8,738)
Cash and cash equivalents, beginning of period 9,361 11,712
Cash and cash equivalents, end of period $ - $ 2,974
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RTI INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 1999 and 1998, for the three months then ended and
for the six-months then ended is unaudited).
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following "Management's Discussion and Analysis of Financial Condition and
Results of Operations "includes" forward-looking statements "within the meaning
of the Private Securities Litigation Reform Act of 1995. This Act provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about themselves so long as they identify these
statements as forward-looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. All statements other than statements of historical fact we
make in this Form 10-Q are forward-looking. In particular, the statements herein
regarding industry prospects and our future results of operations or financial
position are forward-looking statements. Forward-looking statements reflect our
current expectations and are inherently uncertain. Our actual results may differ
significantly from our expectations. The section entitled "Additional Factors
That May Affect Future Results" describes some, but not all, of the factors that
could cause these differences.
OVERVIEW
1. BASIS OF PRESENTATION
In the opinion of management of RTI Inc. (with its Subsidiaries, the "Company"),
the accompanying unaudited consolidated financial statements include all
adjustments necessary to present fairly, in all material respects, the company's
financial position as of June 30, 1999, its results of operations and its cash
flows for the six months ended June 30, 1999 and 1998. Results of operations for
the six-month period ended June 30, 1999 are not necessarily indicative of the
results to be expected for the year ending December 31, 1999.
Information included in the consolidated balance sheet as of December 31, 1998
has been derived from the Company's audited consolidated financial statements in
its Annual Report on Form 10-KSB for the year ended December 31, 1998, to which
reference is made. Certain information included in the audited consolidated
financial statements and related notes prepared in accordance with generally
accepted accounting principles may have been condensed or omitted.
2. AIR CONDITIONING AND COOLER OPERATIONS
With its acquisition of the business of Quality Air Inc. in February
1997, the Company engaged in the manufacture, marketing and selling of
residential coolers and of central air conditioning equipment. The AC2 utilizes
patented evaporative technologies to air condition homes and small businesses
with reduced electricity usage when compared to standard air conditioners. The
AC2 is assembled in the Company's Westway, Texas factory. In 1997, this factory
was purchased, equipped for producing the AC2, and a work force trained to
manufacture the AC2. During the first half of 1999 the company was focused on
recovering confidence in the "AC2" central air conditioner and pushing the
Aireze product line as hard as possible.
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3. ROCKAWAY INDUSTRIAL PARK (Superfund Site)
For a more detailed description of the Rockaway "Superfund" site please see the
companies 10K report for the year ended December 1998.
The Company owns a 248 acre parcel of land ("Parcel I") in Rockaway, New Jersey
(47 acres of which have been leased to SteriGenics International), that is
contiguous to a 15 acre operating parcel that is the site of an irradiation
processing facility leased to SteriGenics International("Parcel II" and, with
Parcel I, the "Rockaway Industrial Park"). Since 1985, the Company has been
seeking a buyer for Parcel I. However, the Company's ability to sell Parcel I is
impaired until the completion of an environmental cleanup and remediation
program, and its ability to recover its current book value of $50,000 in 201
acres of Parcel I is impaired by unpaid outstanding non-recourse property taxes
for the years 1993,1994,1995,1996,1997,1998 and the first half of 1999 totaling
$323,558, which have been accrued in the financial statements under "current
portion of long term debt $300,000 and Rockaway property tax $23,558.
As a result of engineering tests that commenced in 1981, the property has been
named an EPA "Superfund Site" and there have been ongoing cleanup operations.
There is a remediation proposal to complete the cleanup over the next eight
years.
Rockaway sales commitment
On April 20, 1999 the Company signed an agreement to sell the property. The sale
will provide no funds to RTI and is essentially an assumption of liabilities in
exchange for the property, with no cash to RTI. The buyer will assume
liabilities, including the environmental and taxes. As the sale of the Rockaway
industrial park is consumated the responsibility of cleaning the contamination
will be at the expense of the buyer. The buyer is in a due diligence period and
the Company believes the sale will close during the third quarter of 1999.
RTI did not generate the contamination and has not been charged with
contributing to the contamination of the property. RTI has suffered the expense
of this superfund site because it purchased the property from Thiokol and RTI
was the legal owner when the contamination was discovered. Some of the major
expenses associated with RTI owning the facility have been:
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Rockaway Property (including improvements @ current book value)
$485,532 August 1996 payment to the New Jersey Department of
Environmental Protection (NJDEP) $575,000
Non Recourse Property Tax Accrued $323,558
Note to Thiokol (interest included) $318,004
Accrued for environmental provision (as of June 30, 1999) $888,955
Listed Items $2,016,624
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There have also been other expenses for studies, consultants, and other cleaning
expenses that have been borne by RTI.
Some of the major liabilities RTI may be relieved of by the sale are:
Cash to be realized by RTI $0
Non Recourse Property Tax Accrued $323,558
Note to Thiokol (interest included) $318,004
Accrued for environmental provision (as of March 31, 1999) $888,954
Less: Rockaway Book Value net of Depreciation ($366,130)
Listed Items $1,164,386
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An oral status update was requested from the buyer on July 27, 1999, and the
buyer indicated that to that date the "due diligence" has uncovered no problems
that will block the closing of the sale. The property is a lush forested area of
New Jersey that the buyer plans to develop. There is current income from the
property tenants and the buyer has met with local officials to obtain permission
for additional tenants. A second potential buyer has expressed interest in the
property if the present sales commitment is not closed. The signing of the sales
commitment does not provide assurance that the transaction will be completed or
that all or all parts of the above liabilities will be removed. No effect has
been given to the pending sale in the company's financial records.
5. SHORT TERM BORROWINGS
The Company had a related party note outstanding at June 30, 1999, for
$588,383 with its former Chairman and CEO, Theo W. Muller (Muller Note), and
another for $26,511 with Frellum Corporation (Frellum Note), which is owned 51%
by Mr. Muller. These notes, which were due on February 20, 1998, were
renegotiated effective February 21, 1998. The terms of the Muller Note was
increasing to a 12% annual interest rate up to August 20 of 1998 and an 18% rate
thereafter. The terms of the Frellum Note are 12% annual interest, the balance
along with accrued interest are due and payable on February 20, 2000.
The company has a related party note outstanding at June 30, 1999, for
$17,754.08 with its President Rick Bacchus( Rick's note). The interest rate of
Rick's Note is 16%, the balance along with accrued interest are due upon
request.
The Company entered into a factoring arrangement with Texas Capital Corporation
(TCC) of Austin, Texas in February 1998. The terms are for interest of 2.75% for
the first 30 days, with an additional charge of 1% for each additional 15 days
the invoice is outstanding. As of June 30, 1999, the Company had factored
accounts receivable in the approximate amount of $579,517.
The Company also obtained a credit line of up to $1.81 million with TCC, using
the inventory as collateral, As of June 30, 1999 the Company had used $1,340,749
of the credit line.
On June 16, 1999 the Company issued a convertible note offering for up to
$800,000, in $25,000 convertible notes. As of June 30 of 1999 the company
received funds of $76,000. The company has 3 notes outstanding that will accrue
12% annual interest rate for 18 months and the notes are convertible into shares
during this time or at the end of the period.
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6. STATEMENT OF CASH FLOWS
Supplemental disclosures of cash flow information are as follows:
Six months ended June 30,
1999 1998
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Interest $385,152 $64,564
Income taxes -- --
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RTI is a developer and manufacturer of high efficiency air conditioning
equipment. RTI has patented technology and patents pending. RTI has the highest
efficiency air conditioning equipment rated under ARI Standard 210 (Air
Conditioning and Refrigeration Institute). RTI's AC2 technology has achieved an
efficiency increase that Pacific Gas & Electric Company measured as being an
average of 102% better than 10 SEER "High Efficiency" air cooled air
conditioners (70% plus of US sales). The AC2 technology is cost efficient to
manufacture and AC2's initial price is competitive with premium performance air
conditioners from the existing manufacturers.
RTI defines five market segments: 1) Residential Evaporative {Aireze & Trio}, 2)
Residential Split Systems 2 - 8 ton capacity {AC2 & S1}, 3) E2Pak and E3Pak
Systems (commercial Trio), 4) Industrial/ Institutional 50 - 300 ton capacity
{Water Chiller Venture} and, 5) Commercial 3 - 30 ton capacity {primarily
package units}. Please note that E3Pak, Water Chillers, and Commercial Package
units are all in various stages of development and are not yet being sold. RTI
does not currently include window air conditioners or motel units in its market
segments. The following table shows the sales by market segment.
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$ in Apr- Apr- % Change Jan Jan- % Change Jan Jan- % Change
thousands Jun 99 Jun 98 -Mar 99 Mar 98 -Jun 99 Jun 98
- ------------ --------- --------- ----------- --------- --------- ----------- --------- -------------- --------------
AC2/EvapCon 462 655 -29.47 136 637 -78.65 598 1,292 -53.72
Aireze 602 621 -3.06 694 323 114.86 1,296 944 37.29
E2Pak 78 52 50 0 36 -100 78 88 -11.36
Trio 12 0 NA 0 0 NA 12 0 NA
Misc. 25 1 2,400 1 20 -95 26 21 23.81
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In 1997 the AC2 was certified for performance (by ARI) and safety (by ETL to UL
standard 1995), just after the cooling season. For this reason there was
essentially no field installation experience on the newly designed AC2 units. In
1998 the AC2 product line had substantial field problems primarily related to a
freeze protection control system. The problems emerged at the beginning of the
1998 cooling season after nearly 3,000 AC2 units had been built. The AC2
controls problems would shut units down erratically and a series of five recalls
were made to attempt to correct the flaws with "immediately available" alternate
controls components. The recalls and the associated re-manufacturing of the AC2
units to attempt rushed corrections during the 1998 summer cooling season led to
a severe loss in 1998. The controls malfunctions were primarily caused by a
water level sensing device and a submerged temperature sensing device.
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Since the summer of 1998, RTI has redesigned the AC2 unit controls to eliminate
problems experienced in 1998, insure high reliability in the controls, and
simplify the controls system. RTI has taken field experience to enhance the
total AC2 reliability and these enhancements were laboratory verified with good
results. A 1999 AC2 unit Field test program to check operation was briefly field
verified, and then the units in inventory were upgraded. A Field Upgrade Program
is being implemented and units are being upgraded in the field. During 1998 the
repeated controls failures were happening in the field within a few weeks. At
this point the field results have been very good with half a season of use, but
the controls have not yet been field proven for a full season, and the field
upgrades are still in progress.
Feedback from AC2 dealers (installing contractors) indicated that the energy
efficiency goals had been achieved in the field, but that AC2 reliability had to
substantially improve in order for AC2 sales to grow instead of declining. The 2
- - 5 ton size air conditioning market in the United States is approximately 5
billion dollars per year. Management desires to achieve a substantial market
share (5% plus) over the next five years and Management's main goal for 1999 is
to overcome the problems related to the AC2 units and prove the reliable
operation of AC2 units in the field. As a consequence of achieving the
reliability goal in 1999, marketing efforts were cut and an overhead reduction
plan was implemented to keep the operating loss for 1999 below 1 million dollars
verses a nearly 4.5 million loss in 1998. The AC2 portion of marketing
expenditures were dramatically cut while efforts were focused on solving product
problems and proving the solutions with field results. The Aireze Marketing was
slightly increased and refocused to increase sales strength in the local market
and begin expanding sales into the Southwest market area. The net total Selling
and Marketing expenditures were cut by almost 40% for the first six months of
1999 verses the same period in 1998. Accordingly the AC2 sales were down 53%
while Aireze sales were up 37% for the same period. Aireze sales increases were
primarily from strengthening sales in the New Mexico & El Paso market. E2Pak
sales were down 11% for the first six months because the major customer had a
sales slump in its business such that there were no E2Pak sales in the first
quarter and the second quarter E2Pak sales were up 50% verses the same period in
1998.
Management is pleased with the AC2 field results and is working to achieve field
results that can enable the Company to raise much needed capital and become
profitable in 2000.
The company signed an agreement with the EPA to be an EPA "Energy Star Partner"
and RTI is now listed on the EPA Energy Star Web page under the manufacturer's
section for "labeled heating & cooling equipment" for the "Air Source Heat Pump
and Central Air Conditioning Manufacturers". RTI's AC2, EvapCon and new products
which meet the Energy Star guidelines can now receive favorable financing and
other advantages of the "Energy Star" program.
The company's development department achieved laboratory performance results
indicating an efficiency of approximately 40 EER at the SEER efficiency test
conditions on a new product line trade named "Trio". This efficiency level is
more than double that of the companies' AC2 product line and believed to be a
substantial advance. The Trio product line has been field tested in the El Paso
area and begun sales in the El Paso market only.
The gross profit of 29% for the first six months of 1999 verses the negative 7%
for the same period in 1998 reflects a dramatic turnaround. Cost of sales
dropped from $1,315,255 in the second quarter of 1998 to $886,927 for the same
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period in 1999. Better material usage on Aireze and standard production of the
AC2 helped make that possible. The primary reason for the improvement in gross
margin is the AC2 units were not having new field problems that required
redesigns of components in 1999. The 1999 costs to upgrade prior year units were
applied to Warranty reserve, and the company upgraded approximately 350 units in
the second quarter with a cost of $173,033 (~$494 each). During the first six
months the company upgraded approximately 950 units with a cost of $244,385
(~$257 each) which includes labor, materials, freight and overhead.
The company has manufacturing facilities in Sunland Park, New Mexico, Westway
Texas, and Juarez Mexico. These facilities are operating far under capacity with
the present sales level and management is working on several programs to cut
costs and increase gross margins to a target of 30% - 40% (depending on product
line). The plans being considered include keeping all the facilities to have
available plant space for future growth, and plans to sell the Westway facility
and consolidate operations into Juarez. The Westway plant has been listed for
sale in accordance with the planning.
The General and Administrative expenses were cut from $643 thousand for the
first half of 1998 to $512 thousand for the same period in 1999. This $131
thousand reduction reflects substantial improvements in the utilization of
accounting information to make overhead cuts and the combination of jobs to
reduce costs.
Research and development costs totaled $4,161 in the quarter ending June 30,1999
while they were $49,140 in the same quarter of 1998. The expense decrease in
Research and development compares favorably because the company capitalized
$34,580 for plugs and molds for the new "Trio" product, also the company
capitalized $15,052 from Selling, general & administration for the same purpose.
Research and development costs totaled $42,864 in the first six months of 1999,
while they were $97,007 in the same period of 1998.
For the first quarter of 1999 rental income from the Rockaway Industrial Park,
was offset by its expenses compared with the net income of $8,147 in 1998 for
the same period. For the first half of 1999 rental income from the Rockaway
Industrial Park, was offset by its expenses compared with the net income of
10,625 in 1998.
The biggest negative factor is the increase in interest expense. For the three
months ending June 30,1999 the Company incurred net interest expense of $230,570
as compared with net interest expenses of $82,960 in the second quarter of 1998.
The interest expense increased from $146 thousand for the first half of 1998 (6%
of sales) to $385 thousand for the same period in 1999 (19% of sales). Interest
expense has increased due to the Company factoring its receivables and obtaining
inventory loans to fund operations, the buildup of accounts receivable, and
inventory. These additional financings to fund working capital, in addition to
the previous notes caused the interest expense to go up. See 5-Short term
borrowings
Because of the costs described above, the Company incurred a loss before
interest, other income and extraordinary income of $69,926 for the second
quarter compared to a loss of $314,583 for the same period in 1998.
Extraordinary income of $113,064 was posted during May and June of 1999. Bacchus
industries (a Related company) and RTI agreed that Bacchus Industries would
assume the Spec Air Lease and pay for the equipment that was directly leased.
The $113,064 charge is for the lease amounts from February of 1997 to June of
1999. Bacchus Industries will pay $4,000 a month with no cash-in for the
company, Bacchus industries will pay this payment with future royalties accrued.
<PAGE>
The net loss of $187,332 or $0.12 per share for the second quarter of 1999,
compares with a loss of $390,148 or $0.25 per share in the second quarter of
1998.
Because of the costs described above, the Company incurred a loss before
interest, other income and extraordinary income of $129,643 for the first half
of 1999 compared to a loss of $1,164,107 for the same period of 1998. The net
loss of $1,299,447, or $0.83 per share for the first half of 1998, compares with
a loss of $401,731 or $0.25 per share in the same period in 1999.
The air cooling and air conditioning business is highly seasonal, and the second
quarter is not an indicator of results for the year.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 1999, the Company generated $1,408,456 in cash
from its notes payable to TCC, notes from related parties, and convertible
notes, and applied that primarily to operations such as building inventory,
accounts receivables and interest.
The net cash of zero as of June 30,1999 was decreased compared to $11,712 at the
end of the second quarter of 1998.
The Company has significant equity capital and working capital needs in 1999.
The anticipated sales levels require the infusion of additional equity capital,
as well as a line of credit to meet the working capital needs due to the
seasonality of the air cooling and air conditioning business.
On June 26, 1999 the company issued a convertible notes offering for 800,000. As
June 30, 1999 the company had received $76,000. The company has received
$230,000 as of July 27, 1999. The company has received notice that another
$300,000 is committed. The term of the convertible notes are as follow: a 12 %
promissory note in the principal amount of $25,000 at the purchase price of
$25,000 per convertible note. Each note is due and payable upon the earlier of
eighteen (18) months from the day of the signing or the initial closing of the
company's contemplated equity financing. The principal amount of each note may,
at the option of the holder, be rolled over into the equity financing, or
converted at 5 shares per dollar of the principal. At the time of the conversion
any accrued interest will be forfeited. The convertible notes are secured by a
second mortgage on the Westway facility and the Mexican corporation.
The Company is presently seeking financing through capital investment regarding
a private placement of common stock in which the company intends to include all
the convertible notes already outstanding and other notes the company expects to
have from the recent offering.
There can be no assurance that such private placement will be consummated.
Should the Company be unable to obtain any financing, it may have to limit its
operations and inventories, and therefore its future sales volume.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the first half of 1999 several vendors started legal action to collect
their payments. The Company has accrued $20,000 since September 1998 for legal
fees. The renegotiations of the debt were largely accomplished with about 65% of
the vendors but the majority of the agreements have not been funded due to lack
of cash to make payments.
The original agreement that the Company had with the Internal Revenue Service
(for the payment of back taxes) had too high of payment requirements to
accomplish, therefore the company started a new negotiation to make lower
payments and have a longer period to pay. As of June 30, 1999 the total debt to
IRS is for $212,926. As of June 30, 1999 the company has not been able to make
payments on back taxes since March 1999.
The company received a bridge loan in April of 1998 for $540,000 payable on
January 22 of 1999 which is in default, as well as another bridge loan received
in September 1998 for $25,000, payable on June 22, 1999 which is in default. The
bridge loan notes have not been renegotiated, the note holders can take legal
action, convert into common stock, and exercise the warrants of $4.50 each ,
which will expire on April 22, 2003.
Since the Third quarter of 1998 Officers of the company including Rick Bacchus,
Ron Bacchus and Rocky Bacchus have not received their full salaries. Total
payroll accrued for them as of June 30, 1999 is $86,983.
Since the third quarter of 1998 the company has made only partial payment to the
New Mexico State Tax Departments. As of June 1999 the delinquent taxes accrued
are $30,054. The State of New Mexico has an amnesty plan that will start on
August 16 of 1999 and conclude on November 4, 1999. The company hopes to pay all
New Mexico taxes from 1998 without penalties, interest or late fees during the
amnesty period.
In May 1999 the Company started to review transactions related with the TCC
financing, in order to have the proper interest, discounts and fees. As of June
30, 1999 the company has not recognized in its books fees, discounts and
interest for $91,000. The company believes that those charges are out of
contract. In addition, the company already recognized in its books about $49,500
which will be in dispute because the company believes those charges are out of
contract. The company believes that the overcharges can be solved without legal
action during the third quarter of 1999.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the factors discussed in the "Overview" and "Liquidity" and
"Capital Resources" sections of this "Management Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Annual Report
on Form 10-K for the year ended December 31, 1998 the following additional
factors may affect the company's future results:
In analyzing this 10-Q prospective investors should consider all of the matters
set forth below and in the 1998 10-K, and the March 1999 10-Q and read such
documents in full.
<PAGE>
When used in this report, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend" and similar
expressions are intended to identify forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E
of the Securities Exchange Act of 1934, as amended regarding events, conditions
and financial trends that may affect the Company's future plans of operations,
business strategy, operating results and financial position. Prospective
investors are cautioned that any forward-looking statements are not guarantees
of future performance and are subject to risks and uncertainties and that actual
results may differ materially from those included within the forward-looking
statements as a result of various factors. Such factors are described in the
Company's 1998 10-K, March 1999 10-Q, and in the risk factors set forth below.
All references to "Items" refer to the 1998 10-K.
#1 Going Concern Opinion; Significant Losses; Pressing Need to Complete the
Convertible Note Offering and a Stock Offering. The report accompanying the
audited Financial Statements for the year ended December 31, 1998 contains a
"going concern" qualification, the results for such year reflect a loss of
$4,492,352 or ($2.88) per share and a stockholders deficit of $2,150,469. The
Company posted a loss of $2,667,385 in the year ended 12/31/97 or $1.92 per
share. The Company posted a loss of $214,399 or ($0.13) per share for the first
quarter ended March 31, 1999 verses a loss of $909,299 or $.60 per share for the
first quarter ended March 31, 1998. No assurances can be given that the Company
will be able to continue its operations if it does not complete its Convertible
Note Offering and a subsequent Equity Financing.
#2 Likely Competition. Although, to the best of management's knowledge there are
as yet no competitors offering a water cooled central air conditioning unit, it
must be assumed that if the Company's efforts are successful other companies
will begin to offer competing systems. These future competitors may well be
companies which have substantially greater research, development, marketing and
financial resources than the Company. See "Risk factor 1."
#3 Potential Environmental Liability. The Company is involved in environmental
proceedings regarding an EPA Superfund Site in the State of New Jersey owned by
the Company. While the Company believes that sufficient reserves have been
provided for in the accrued $888,955 reported in this June 30, 1999 10Q, no
assurances can be given that the Company's actual liability will not exceed such
estimates. See "Risk factor 1."
#4 EPA Superfund Site Sale Commitment Signed but not Closed. While a commitment
to sell the land in Rockaway (which contains the Superfund Site) has been
signed. A closing on the sale is projected for the third quarter and a possible
recovery of up to 1.1 million in previously recognized expenses associated with
the Superfund site is projected to take multiple years. No assurances can be
given that the Company will close on the sale or that the buyer will complete
the clean up. If the buyer closes on the sales transaction and at some point
defaults on the clean up the Company could still be liable for the clean up.
#5 No Assurance of Acceptance of Novel Technology. The Company's primary
product, the AC2 Water Cooled Central Air Conditioning unit, uses water rather
than air as a cooling medium. Such technology requires the installation of both
a water supply line and a water waste line with direct access to the cooling
unit. No assurances can be given that contractors or the public will accept such
technology even if they believe that the Company's product offers advantages
over its competitors products. See "Risk factor 1."
<PAGE>
#6 Concentration on a Single Product. While the Company produces evaporative
coolers and heat exchangers as well as the AC2, it intends to concentrate a
significant portion of its marketing and distribution efforts on the AC2. The
Company's success will therefore be substantially dependent upon the success of
the AC2, which is only being marketed in certain geographical areas. No
assurances can be given that the Company's marketing efforts will be successful.
See "Risk factor 1."
#7 Uncertainty of Patent Protection. The Company holds patents on its
evaporative coolers, has a patent on the AC2, and other patents are pending.
While the Company's patent counsel has received notice that an application has
been approved and that another patent relating to the AC2 may be issued in the
near future, no assurances can be given that additional patents will be issued
regarding the AC2 or that if issued, such patent, or the Company's subsisting
patents, will provide adequate protection from its competitors, which may either
devise alternate technological solutions to accomplish the purpose of such
patents or obtain patents of their own which would require the Company to either
obtain a license from such patent holders or to redesign its products. In
addition, no assurances can be given that the Company will have the necessary
funds to either commence an action against parties who may be infringing the
Company's patents or to defend against any patent infringement actions which may
be commenced by others. See "Risk factor 1."
#8 Development Stage of the Company's Primary Product. The Company's sales and
marketing efforts regarding the AC2 are not sufficiently established to fully
evaluate or forecast their prospects. The Company is thus subject to all the
risks associated with the launching of a new product and there is no assurance
that such efforts will be successful. See "Risk factor 1."
The efficiency and comfort achieving capability of the AC2 have received
favorable responses during the 1998 season, however the reliability in the field
has been unacceptable. The high volume, large, and well established air
conditioning contractors are not expected to buy AC2 units until they believe
the reliability issues have been solved, and that is not expected to occur until
after 1999. The smaller more aggressive air conditioning contractors that are
looking for an advantage to increase sales, may sell AC2 units in 1999, but they
want assurances that they will get factory support if they have problems.
The Company is dependent on equity offerings to continue to provide field
support. Management considers it crucial that AC2 units operate reliably in
1999. The Company needs to quickly put together "field upgrade kits" that solve
past operating problems and reassure customers. Some of the major problems are:
1. AC2 units had reliability problems in 1998 (the first year for widespread
units to operate with freeze protection controls).
2. The 1999 AC2 unit Upgrades
based on field evaluations have not been field proven for a full season.
3. RTI has not been able to purchase all the materials required to upgrade all
AC2 units in the field.
4. Customers are cautious in making sales commitments (both in making purchases
from RTI & in offering AC2 units to their customers) because of concerns about
a) RTI's financial strength, b) AC2 field corrections not yet being made, and c)
possible future AC2 product problems.
5. RTI has not automated manufacturing and this creates concern for the quality
of production (since it is largely hand built) and the cost is high because the
labor content is high and the material utilization efficiency is less than an
automated process would generate.
<PAGE>
6. Relations with Suppliers & Sales
Representatives have been strained by failure to make timely payments.
No assurances can be given that the Company will resolve AC2 product problems or
solve customer and supplier relationship problems.
#9 Dependence on Certain Suppliers. The Company is dependent upon its suppliers
of plastics, motors, pumps and compressors. The Company has failed to pay many
of its suppliers in accordance with the terms of sale. Certain of such
components may have long lead order times and the Company does not have a strong
relationship with such suppliers. Should the Company lose any of such suppliers,
it would cause manufacturing and assembly delays which would have a material
adverse effect on its business. No assurance can be given that the Company will
be able to adequately replace such suppliers in the event of a termination of
their services to the Company. See "Risk factor 1."
#10 Seasonality. The air conditioning business is highly seasonal and the
Company expects to earn the majority of its revenues in the summer months when
the demand for cooling equipment is greatest. No assurances can be given that
the Company will be able to maintain sufficient cash flow. See "Risk factor 1."
#11 Need for Highly Qualified Personnel. The success of the Company's business
will depend upon its ability to attract and retain personnel with a wide range
of technical capabilities. Competition for such personnel is intense, and is
expected to increase in the future. No assurance can be given that the Company
will be able to attract and retain such personnel.
#12 Dependence on Management; No Key Man Insurance. The Company is substantially
dependent upon the services of Messrs. Richard, Ronald and Rockney Bacchus (ages
45, 41, and 43 respectively) for the success of its business. The loss of any of
their services would have a material adverse effect on the Company. While the
Company proposes to obtain Key Man Insurance in the amount of approximately
$500,000 on the lives of each of the Bacchus brothers, no such insurance has yet
been obtained.
#13 Significant Common Stock Holdings by Current Officers and Directors. As of
the date hereof, the management of the Company beneficially owns 258,705 shares
of Common Stock, or approximately 16% of the Company's issued and outstanding
Common Stock. There are no cumulative voting rights and directors must be
elected by a plurality of the outstanding voting securities entitled to vote.
Management will therefore be in a position to significantly influence the
actions of the Company.
#14 Absence of Dividends on Common Stock. The Company has not paid any dividends
on its Common Stock since its incorporation and anticipates that, for the
foreseeable future, working capital and earnings, if any, will be retained for
use in the Company's business operations and in the expansion of its business.
The Company has no present intention to pay cash dividends on its Common Stock.
#15 Possible Adverse Effects of Authorization of Preferred Stock; Anti-Takeover
Effects. The Company's Certificate of Incorporation authorizes the issuance of a
maximum of 2,000,000 shares of preferred stock, $.05 par value ("Preferred
Stock"), on terms which may be fixed by the Company's Board of Directors without
further stockholder action. The terms of any series of Preferred Stock, which
may include priority claims to assets and dividends, and special voting rights,
<PAGE>
could adversely affect the rights of holders of the Common Stock. The issuance
of Preferred Stock could make the possible takeover of the Company or the
removal of management of the Company more difficult, discourage hostile bids for
control of the Company in which stockholders may receive premiums for their
shares of Common Stock or otherwise dilute the rights of holders of Common Stock
and the market price of the Common Stock. . #16 Shares Eligible for Future Sale.
Sales of the Common Stock in the public market could adversely affect the market
price of the Common Stock. As of June 30, 1999, the Company had 1,611,166 shares
of Common Stock outstanding. Of these shares, 1,065,773 are freely tradable
without restriction under the Securities Act and 545,393 shares are "Restricted
Securities" within the meaning of Rule 144 promulgated under the Securities Act.
#17 No Assurance of Public Market. The Company was delisted from the Nasdaq
Small Cap Market and is now traded on the Nasdaq Bulletin Board. There may be a
greater difficulty in selling stock on the Nasdaq Bulletin Board than when the
stock was listed on the Nasdaq Small Cap Market.
#18 Risk of "Penny Stock" Regulations The Commission has adopted regulations
which define a "penny stock" to be any equity security that has a market price
(as defined) of less than $5.00 per share, subject to certain exceptions. The
Common Stock was listed for quotation on the Nasdaq SmallCap Market and was
therefore not deemed to be a "penny stock." Since the Common Stock has been
delisted from the Nasdaq Small Cap Market the Stock may be deemed a "penny
stock" as defined by the Exchange Act and the rules and regulations promulgated
thereunder. For any transaction involving a penny stock, unless exempt, the
rules require the delivery, prior to the transaction, of a disclosure schedule
prepared by the Commission relating to the penny stock market. The broker-dealer
also must disclose the commissions payable to both the broker-dealer and the
registered representative, current quotations for the securities, information on
the limited market in penny stocks and, if the broker-dealer is the sole
market-maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market. In addition, the broker-dealer must obtain a
written acknowledgment from the customer that such disclosure information was
provided and must retain such acknowledgment from the customer for at least
three years. Finally, monthly statements must be sent to the customer disclosing
current price information for the "penny stock" held in the account.
While many Nasdaq listed securities would otherwise be covered by the definition
of penny stock, transactions in a Nasdaq listed security would be exempt from
all but the sole market-maker provision for: (i) issuers who have $2,000,000 in
tangible assets ($5,000,000 if the issuer has not been in continuous operation
for three years); (ii) transactions in which the customer is an institutional
accredited investor; and (iii) transactions that are not recommended by the
broker-dealer. In addition, transactions in a Nasdaq listed security directly
with a Nasdaq market-maker for such securities would be subject only to the sole
market-maker disclosure, and the disclosure with respect to commissions to be
paid to the broker-dealer and the registered representative.
The above described rules may materially adversely affect the liquidity for the
market of the Company's Common Stock. Such rules may also affect the ability of
broker-dealers to sell the Company's Common Stock and may impede the ability of
holders (including, specifically, purchasers in this offering) of the Common
Stock to sell their shares in the secondary market.
<PAGE>
#19 Indemnification of Directors and Officers. The Company's By-laws provide for
indemnification against losses that they may incur in legal proceedings
resulting from rendering services to the Company in such capacities to the
fullest extent permitted by law.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended ("Act") may be sought by directors, officers and
controlling persons of the Company pursuant to such indemnity (or otherwise),
the Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any such action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the Common Stock
being registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 2. CHANGES IN SECURITIES
None.
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
RTI INC.
Date: August 4, 1999 By: /s/ RICK E. BACCHUS
---------------------------
Rick E. Bacchus
Acting Chief Executive Officer
And Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS A SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S AUDITED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998 AND
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS THEN ENDED
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
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<RECEIVABLES> 842,365
<ALLOWANCES> 23,286
<INVENTORY> 1,647,859
<CURRENT-ASSETS> 2,738,502
<PP&E> 2,346,428
<DEPRECIATION> 619,473
<TOTAL-ASSETS> 5,669,317
<CURRENT-LIABILITIES> 6,846,953
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<COMMON> 128,493
<OTHER-SE> 18,115,261
<TOTAL-LIABILITY-AND-EQUITY> 5,669,317
<SALES> 2,011,897
<TOTAL-REVENUES> 2,011,897
<CGS> 1,424,108
<TOTAL-COSTS> 2,141,540
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<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (385,152)
<INCOME-PRETAX> (514,795)
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<EXTRAORDINARY> 113,064
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