R-TEC HOLDING INC (RTHG) - Description of business

Company Description
OVERVIEW & DEVELOPMENT OF BUSINESSR-Tec Holding, Inc. (the “Company”)          R-Tec Corporation began operations in 1995 as a privately held corporation. In August 1999, R-Tec Holding, Inc., which previously operated as a wholly owned subsidiary of Biogan International, Inc., began operating as a totally independent and separate entity. In order to bring the operating entity, R-Tec Corporation, under the umbrella of the holding corporation, R-Tec Holding, Inc., on September 27, 1999, the two corporations entered into a definitive agreement under which the shareholders of R-Tec Corporation transferred 80% of their common stock holdings of R-Tec Corporation in exchange for 4,266,797 shares of R-Tec Holding, Inc.  R-Tec Holding, Inc. also agreed to contribute its investment of IntorCorp to R-Tec Corporation (IntorCorp was dissolved prior to year end 2002).  The transaction closed on November 3, 1999.  On November 4, 1999, R-Tec Corporation redeemed the remaining 20% ownership from the shareholders.  The redemption resulted in recording a $100,000 note payable to the former shareholders.  The stock redemption resulted in R-Tec Corporation being a wholly owned subsidiary of R-Tec Holding, Inc.           On July 2, 2001,  R-Tec Holding, Inc.’s stock, with the symbol of RTHG, started trading publicly on the OTC.BB exchange, having previously registered and received approval from the Securities and Exchange Commission (SEC).          R-Tec Holding, Inc., and its wholly owned subsidiary, R-Tec Corporation, (collectively “the Company”) has been a developer and supplier to the high-tech industry of custom automation solutions, including prototype development, tooling and manufacturing; and high performance test sockets and IC (integrated circuit) interconnect devices for the testing of IC chips.          On December 1, 1999, the Company formed a new, wholly owned subsidiary, R-Tec Interconnect, Inc. (hereinafter referred to as “Interconnect”) to focus on its IC Testing Interface products. The Company has been developing testing interface products since 1998 believing that product development and maturity were at a stage to justify a separate divisional focus. However, effective September 1, 2001, Interconnect was merged into R-Tec Corporation to create one operational company under the umbrella ownership of R-Tec Holding, Inc.  The merger was also effected to reduce common overhead expenses; both Interconnect and R-Tec Corp are located in the same facilities and receive managerial support from the same individuals.          On July 17, 2001, the Company acquired certain assets of Browland, LaMeire & Associates, (B.L.&A.), previously a Manufacturer’s Representative firm, in order to increase distribution and marketing capabilities. B.L.&A. maintained sales representative agents in the US, Europe and Asia. B.L.& A. had four representative firms in the U.S. with twelve sales persons, three European agents for Germany, France and England, and five Asian agents for Singapore, Malaysia, Taiwan and Japan. In December of 2000, the principals of B.L.&A. were hired as management employees to oversee the internal development of marketing efforts. Effective July 17, 2001, the Company acquired certain assets of B.L.&A., primarily customers contact lists, in exchange for 380,000 shares of R-Tec Holding, Inc. stock valued at $1.00 per share, and continued to solidify its position of bringing the marketing and distribution expertise of B.L.&A. in-house.          Prior to July 3, 2001, certain functions of some projects were, when needed, contracted to R-Tec Machine Tools, Inc., an Idaho corporation, in which Doug Hastings and Gary Clayton owned a combined 50% interest. R-Tec Machine Tools, Inc conducted business as a machine shop in the same building as R-Tec Corporation. However, some machine work was also contracted with other machine shops depending on time of delivery constraints. R- Tec Machine Tools, Inc. exclusively machined raw metal into custom parts on contract with its customers, one of which was R-Tec Corporation. Effective July 3, 2001, R-Tec Machine Tools, Inc. was acquired by R-Tec Corporation in a stock for stock acquisition. Joe Hawkins, Walter Hinkle, Gary Clayton, and Doug Hastings, each 25% owners of R-Tec Machine Tools, Inc., received an aggregate 291,248 shares of R-Tec Holding, Inc. stock valued at $1.00 per share.          On November 1, 2003, due to continuing general economic challenges, and specific, weak economic performance in the high-tech industry relating to future bookings of automation projects, custom automation operations were terminated. The automation operations have been included with a group of revenues consisting of custom automation, machine tooling, and other sales. The Company elected to focus on the development of its interconnect technologies for the IC industries. As of year end, December 31, 2003, the Company was continuing its efforts to expand sales and operations for its interconnect products and was continuing its retail sales of machine shop contract work.          In terminating its operations for custom automation projects, the Company did not dispose of any material properties or assets, nor did it write down or obsolete any material amounts of inventory. For custom automation projects, the Company generally purchased parts and supplies on as needed basis only and did not stock material parts, other than smaller quantities of hardware, i.e., bolts, nuts, and screws, etc. It is anticipated that the smaller quantities of hardware will be used in the normal course of business and issued to projects in the Company’s remaining operations. For its interconnect products and machine shop sales, the Company does not anticipate any additional, material additions to plant or equipment in the next quarter. The interconnect production line was constructed and placed into operation beginning January 1, 2003 and it is believed that excess capacity still exists to handle additional sales for the foreseeable future. PRODUCTS          For its interconnect technology sales, the Company relies primarily on two product types, i.e., sockets and interconnects. For testing IC chips, testing laboratories and facilities rely on sockets as a connection device that attach to a DUT (device under test). Sockets are designed in various configurations, sizes, and functionalities. The Company’s primary socket designs consist of clamshell designs with variable pressure adjustments, or pneumatic pressure design, fixed socket design with bolt down bases and lids, and smaller precisor designs intended for use with other socket configurations. Interconnects are designed using the Company’s proprietary technology GCI™ for providing the electrical connection between the DUT board and the chip or device being tested. The socket provides the physical apparatus to connect the DUT board and the chip or device under test, the interconnect provides the electrical connection that allows electrical performance testing of the chip or device under test.          The Company’s sockets do not present new technological advances in general industry design, nor do they represent proprietary products, but instead are in conformance with designs commonly accepted by testing engineers and technicians within the industry. Specific to the Company’s socket designs however, are engineering specifications that allow the Company’s proprietary GCI™ technology to perform at maximum functionality. It is believed that the Company’s proprietary GCI™ technology represents leading edge technology in the IC testing industry, especially where testing criteria demands performance above 7GHz.          Sales by product groups are listed below for the preceding three years. With the discontinuation of automation sales, it is anticipated that interconnect sales will represent approximately 75% of sales in the near term and machine shop sales will represent approximately 25% of sales for the same periods. Longer term, it is anticipated that interconnect sales will grow in greater proportion to machine shop sales. Year InterconnectProducts Automation and Other Products  Sales % Totals 19% 81% 100% 23% 77% 100% 43% 57% 100%          Raw materials do not appear to present a problem for ongoing sales or operations. Of the materials used in the manufacturing of interconnect products, specific suppliers’ products are preferred, but it is believed that substitute products are available through multiple suppliers with reasonable lead times. For machine shop sales, raw materials of plastics, and various metals are common to most machine shop operations and the supply appears to be available in sufficient supply.          Seasonality does not affect either interconnect sales or machine shop sales. However, some nominal cyclical fluctuations may exist due to production cycles at IC testing facilities. IC testing may ramp up at either the beginning or end of a testing quarter or may be affected by the scheduled introduction of new products to be tested. With multiple customers, each having different product introduction schedules and testing quarters, R-Tec has not identified trends that would substantially affect overall sales. PATENTS          R-Tec has received four patents for designs completed by its engineering staff. The first patent issued was #6,064,195, dated May 16, 2000, and expires May 11, 2018, for a “Test Probe Positioning Device.” The patent is for a self-aligning device for positioning a test probe in a socket of a printed circuit board to be tested. The second patent issued was #6,194,904 B1, dated Feb 27, 2001, and expires May 19, 2018, for a “Socket Test Probe and Method of Making.” The patent is for a probe used with the process defined by the first patent and also relates to the process of testing a B.I.B. (burn-in board). The third patent issued was #6,527,563 B2, dated March 4, 2003, and expires October 4, 2020, for a “Grid Interposer and Method of Making.” This third patent represents the design and manufacturing process of the Company’s GCI™ products which are used in testing of integrated circuit chips. The fourth patent issued was #6,564,455, dated May 20, 2003, and expires May 19, 2018, for a “Socket Test Probe and Method of Making,” international class. The patent is for the socket and method of making which includes flat plates which serve as electrodes encased in resin.          The first two patents listed represent products sold within the Company’s automation group, which has had its operations terminated.  Going forward, it is not known, if these patents will have any significant impact on the Company’s future revenues. The third patent for the Grid Interposer, represents the major design and manufacturing procedure for the interconnect group’s products. This patent will be critical to the continued revenues and growth of the Company as it has been restructured to focus on the sales of interconnect products. CUSTOMERS AND COMPETITION          With the closure of the automation division in November of 2003, the customer base that remains significant to R-Tec’s revenues are those who purchase interconnect products. Significant customers for  testing products include Aries Electronics, Inc., Maxim, Amkor, RF Micro Devices, Gamma Technology, Anadigics, Micron System Integration, Celeritek, Teradyne, Cisco Systems, Inc., Transmeta,  P.T. Products & Services, 3Com, Motorola, Vitesse Semiconductor, and RS Tech. It is anticipated that customer usage will become broad based and that the Company will not become dependent or at risk for a concentration of its interconnect products within one or several customers.          The Company has determined that its target markets include those customers within qualification and testing segments. Many of these customers require a high performance interconnect solution. The GCI™ products represent a viable solution for these high performance requirements. R-Tec also is attempting to develop more customers who would use its products in the production testing sales area. These applications would represent  “automated testing” of IC chips where larger quantities of testing occur. As a longer-term market opportunity, R-Tec is also exploring the viability of product solutions for the burn-in market. The burn-in market is characterized by large volumes and low prices for interconnect solutions. With the Company’s current production processes, the burn-in market is probably not a good fit for current product designs.          Competitors for the testing product interface market include the following companies: 3M, Aries Electronics, Cerprobe, ECT, Gold Tech, John Tech, Loranger International, Primeyield, and Tecknit. Among these competitors, which it is believed by management represent a combined market share of approximately 75% to 80% of the $247,000,000 testing product interface market, four utilize spring probe technology.          Management feels that spring probe technologies, while a mainstay in the market for many years, will begin to become obsolete for the market segments represented by high performance requirements. As a basis for this belief, management feels that future testing applications will have mechanical and electrical requirements beyond the range of spring probe technologies. Spring probe technology is an older technology that fills the market segment of lower pricing and lower performance requirements. As future iterations of chip designs become smaller and have higher testing requirements, particularly above 7GHz, management feels that GCI™ products may represent a leading edge challenge to other competitors in this same market.          Pricing in the target markets the Company is focusing on is a factor but not the major factor. As the performance requirements for IC testing are becoming more challenging, pricing has taken a second position to the challenge for testing engineers and personnel to find a “socket solution” that will ensure the throughput of the testing process. Management believes that some older technologies that are less expensive than the Company’s GCI™ products are facing technological obsolescence in the high performance testing segments, while other direct segment competitors’ products are struggling with performance issues. Performance and technical support, appear to be the most important criteria for the current market segments the Company is focusing on, with pricing as a lesser concern. The Company is aware however, that pricing is a factor, but does not foresee disruption of revenue growth due to pricing pressure from competitors. OTHER INFORMATION          Research and Development          In 2003, the Company spent $84,932 on research and development, compared to $64,525 in 2002 and $3,150 in 2001.  Most of the expense in 2003 was directed towards interconnect products. Since the inception of sales of the Company’s GCI™ products in the fourth quarter of 2000 it has relied heavily on feedback from customers to support its research and development. This information however, was difficult to obtain due to the inherent secretive nature of the IC chip manufacturing and testing industry.          The parameters affecting successful research and development and ultimately, successful product design, of the Company’s interconnect products center in three main areas of functionality, i.e., 1) mechanical performance, 2) electrical performance, and 3) thermal performance. In 2003, the Company was able to engage the services of GIGA Test Laboratories to validate the electrical performance characteristics of  the GCI™. The test results did validate what Company engineers had proposed, that the GCI™ performance represented leading edge technology possibilities. In the fourth quarter of 2003, Company engineers have designed testing procedures to validate additional mechanical performance, with potential thermal performance tests to follow within the first and second quarters of 2004. It is believed by management, that these additional testing data as supportive documentation, will enhance marketing efforts of the GCI™ products.          Government Regulations          The Company is not aware of any government regulations that would materially impact its operations. Since the GCI™ product line became operational in January 2003, the Company has strictly adhered to environmental regulations at both the local and federal levels. Regular tests are conducted by Company personnel and validated by qualified third party sources to ensure compliance with any discharge or environmental standards.          Employment          Following the termination of operations within the automation group, the Company employs 16 individuals.          Other          The Company does not have any operations within foreign countries. It does not have any long-lived assets in foreign countries or foreign corporations, and does not have any material amounts of revenues from foreign corporations or countries. As the GCI™ products move into the production market segment as previously defined in “Customers and Competition”, it is possible the Company will develop material amounts of revenues in the future with foreign corporations or at least sales may be consummated with U.S. owned entities who have foreign production testing operations.          The Company files annual, quarterly, and current reports, proxy statements, and other information with the Commission. You may read and copy any reports, statements, or other information that the Company files at the Commission’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the Commission at 1-800-SEC-0330 for further information on the Public Reference Room. The Commission also maintains an Internet site (http://www.sec.gov) that makes available to the public, reports, proxy statements and other information regarding issuers, such as the Company, that file electronically with the Commission.          The Company’s web site is (http://www.rtec.com). The Company does not currently post its filings with the Commission on its web site but is preparing to do so. The Company will make its filings available free of charge in electronic format upon request.