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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________________
FORM 10-QSB
(MARK ONE)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996, or
( ) TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
COMMISSION FILE NUMBER 0-19622
WTC INDUSTRIES, INC.
- ------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 38-2308668
(State or Other Jurisdiction (IRS Employer
of Incorporation) Identification No.)
14405 - 21ST AVENUE NORTH, MINNEAPOLIS, MINNESOTA 55447
- ------------------------------------------------------------------------------
(Address of Principal Executive Offices)(Zip Code)
(612) 473-1625
- ------------------------------------------------------------------------------
(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(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 required for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
10,689,773 shares of Common Stock as of June 28, 1996
Transitional Small Business Disclosure Format (check one):
Yes ; No X
----- -----
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WTC INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Unaudited Balance Sheets
March 31, 1996 and December 31, 1995 3
Condensed Consolidated Unaudited Statements of Operations
Three Months Ended March 31, 1996 and 1995 4
Condensed Consolidated Unaudited Statements of Cash Flows
Three Months Ended March 31, 1996 and 1995 5
Notes to Condensed Consolidated Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of Operation 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1996 1995
------------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 44,475 $ 33,489
Accounts receivable, net of allowance for doubtful accounts
of $161,000 and $149,000, respectively 746,662 787,775
Receivable from director/stockholder 900,000
Inventories 951,051 845,543
Prepaid expenses 89,633 63,062
----------- ----------
TOTAL CURRENT ASSETS 2,731,821 1,729,869
PROPERTY AND EQUIPMENT 1,023,037 935,420
Less accumulated depreciation (472,983) (422,380)
----------- ----------
550,054 513,040
OTHER ASSETS
Restricted cash 197,078 233,729
Loan acquisition costs, net of accumulated amortization
of $23,895 and $19,614, respectively 54,230 58,511
Patents and trademarks, net of accumulated amortization
of $41,580 and $36,678, respectively 56,433 61,335
Other 14,647 14,647
----------- ----------
322,388 368,222
----------- ----------
$3,604,263 $2,611,131
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable and current maturities of long-term obligations $ 502,804 $ 608,904
Accounts payable 585,989 903,974
Accrued expenses - other 417,288 430,014
----------- ----------
TOTAL CURRENT LIABILITIES 1,506,081 1,942,892
LONG-TERM OBLIGATIONS, net of current maturities 1,478,024 1,474,466
COMMITMENTS AND CONTINGENCIES
INDEBTEDNESS REFINANCED IN MARCH 1996 800,000
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock 6,800 6,800
Common stock 106,898 82,898
Additional paid-in capital 11,015,159 8,039,159
Accumulated deficit (10,508,699) (9,735,084)
----------- ----------
620,158 1,606,227
----------- ----------
$ 3,604,263 $ 2,611,131
----------- ----------
----------- ----------
</TABLE>
See notes to condensed consolidated unaudited financial statements.
3
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WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
--------------------------------
1996 1995
------------ ------------
<S> <C> <C>
NET SALES $ 527,038 $ 441,788
COST OF GOODS SOLD 509,848 464,903
------------ ------------
GROSS PROFIT (LOSS) 17,190 (23,115)
EXPENSES:
General and administrative 307,849 265,944
Sales and marketing 346,906 256,634
Research and development 42,337 133,189
------------ ------------
697,092 655,767
------------ ------------
LOSS FROM OPERATIONS (679,902) (678,882)
OTHER EXPENSE, NET (93,713) (74,674)
------------ ------------
NET LOSS ($ 773,615) ($ 753,556)
------------ ------------
------------ ------------
NET LOSS PER COMMON SHARE $ (0.09) $ (0.12)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 8,527,000 6,443,000
</TABLE>
See notes to condensed consolidated unaudited financial statements.
4
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WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ($ 773,615) ($ 753,556)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 59,786 52,678
Provision for doubtful accounts 12,000 7,500
Changes in operating assets and liabilities:
Accounts receivable 29,113 (70,129)
Inventories (105,508) 112,844
Prepaid expenses (26,571) (41,970)
Accounts payable (317,985) (60,492)
Accrued expenses - other (12,726) 40,298
------------ ------------
Net cash used in operating activities (1,135,506) (712,827)
INVESTING ACTIVITIES
Restricted cash 36,651 21,801
Purchases of property and equipment (87,617) (34,216)
------------ ------------
Net cash used in investing activities (50,966) (12,415)
FINANCING ACTIVITIES
Proceeds of loans from director/stockholder 400,000
Proceeds from sale of common stock to director/stockholder 900,000
Payments on long-term obligations (102,542) (1,390)
Proceeds from bank lines of credit 70,000
------------ ------------
Net cash provided by financing activities 1,197,458 68,610
------------ ------------
NET INCREASE (DECREASE) IN CASH 10,986 (656,632)
CASH AT BEGINNING OF PERIOD 33,489 671,638
------------ ------------
CASH AT END OF PERIOD $ 44,475 $ 15,006
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid during the period for interest $ 116,353 $ 58,030
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES:
Common stock issued on conversion of indebtedness $ 1,200,000
Common stock issued in exchange for promissory note 900,000
</TABLE>
See notes to condensed consolidated unaudited financial statements.
5
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WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED
FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
1. DESCRIPTION OF BUSINESS AND MANAGEMENT'S PLANS REGARDING OPERATING
LOSSES AND LIQUIDITY
BUSINESS - WTC Industries, Inc. (WTC), formerly Water Technologies
Corporation, was incorporated in Delaware in April 1978. WTC and its
subsidiaries (the Company) manufacture and market water filtration and
purification products for commercial and personal use. Many of the Company's
purification products are based on an iodinated resin technology that was
originally developed by Kansas State University and has been licensed to the
Company by Kansas State University Research Foundation (KSURF). The majority
of the Company's sales have been to foreign customers or to customers in the
United States who ultimately resold the products to foreign customers.
GOING CONCERN - The accompanying financial statements have been prepared on a
going-concern basis which contemplates the realization of assets and the
satisfaction of liabilities and commitments in the normal course of business.
For the three month period ended March 31, 1996, the Company incurred a net
loss of $773,615, and cash used in operating activities was $1,135,506. In
addition, at March 31, 1996, the Company had an accumulated deficit of
$10,508,699.
These factors, among others, indicate that the Company may not be able to
continue as a going concern. Management's plans to continue as a going
concern, in addition to the advances made or committed to by the Chairman of
the Board of Directors, include the following efforts to generate the
necessary cash flow to meet the Company's working capital needs until
sufficient operating cash flows can be generated to support the Company's
cost structure: (a) aggressively managing cash collections and disbursements;
(b) promoting sales of the Company's existing products, including those
recently registered with the U.S. Environmental Protection Agency; (c)
completing the introduction of new products currently under development; and
(d) raising additional capital through private or public placements of debt
or equity securities or through other sources.
The Company's working capital requirements for 1995 were met principally
through the issuance of interest-bearing notes, aggregating $1,950,000, to
the Chairman of the Board and an affiliated entity. Of the amounts advanced
in 1995, $1,150,000, plus accrued interest of $58,399, was converted into
common stock of the Company in 1995 and $800,000 was converted into common
stock of the Company in March 1996. Also in 1995, the Chairman of the Board
assumed $1,100,000 of Company debt in exchange for
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common stock. During 1996, the Chairman of the Board advanced an additional
$2,200,000 to the Company for additional shares of the Company's common
stock, of which $1,300,000 was advanced during the quarter ended March 31,
1996, and $900,000 was advanced during the quarter ended June 30, 1996.
The consolidated financial statements do not include any adjustments related
to the recoverability and classification of recorded asset amounts or the
amounts and classifications of liabilities that might be necessary should the
Company be unable to continue as a going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The accompanying condensed consolidated financial
statements of WTC Industries, Inc. and Subsidiaries have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission, and reflect all adjustments, consisting
of normal recurring accruals, which are, in the opinion of management,
necessary for a fair presentation of financial position, results of
operations, and cash flows for the periods shown. These statements are
condensed and do not include all information required by generally accepted
accounting principles. It is recommended that these financial statements be
read in conjunction with the Company's audited financial statements and notes
thereto for the year ended December 31, 1995, which are included in the
Company's Annual Report on Form 10-KSB.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of WTC and, since the dates of their acquisition, its wholly
owned subsidiaries, Water Pollution Control Systems, Inc. and WTC/Ecomaster
Corp. All significant inter-company balances and transactions have been
eliminated in consolidation.
ESTIMATES - The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect 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 these
estimates.
RECLASSIFICATIONS - Certain reclassifications were made to the 1995
consolidated financial statements to present them on a basis comparable with
the current period. The reclassifications had no effect on previously
reported net loss or stockholders' equity (deficit).
3. MERGER
On December 30, 1994, WTC Acquisition Corp. (WTCAC), a newly formed, wholly
owned subsidiary of WTC, merged with Ecomaster Corporation (Ecomaster).
WTCAC exchanged 2,134,149 shares of WTC common stock for all of the issued
and outstanding common stock of Ecomaster. Immediately thereafter, certain
assets and liabilities of
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Water and Air Purification Corporation (WAPCO), which had been distributed to
its principal owner, were transferred to WTCAC in exchange for 1,035,851
shares of WTC common stock. Upon the completion of these transactions, the
principal owner of WAPCO and Ecomaster became the Chief Executive Officer of
the Company, and effective April 12, 1996, this officer (the "Former CEO")
resigned from the Company. These transactions have been accounted for under
the purchase method of accounting, and thus, the consolidated statements of
operations do not include the results of operations for Ecomaster or WAPCO
for any period prior to December 30, 1994. There was no goodwill recorded as
a result of the transactions. WTCAC's name has since been changed to
WTC/Ecomaster Corp.
4. INVENTORIES
<TABLE>
<CAPTION>
INVENTORIES CONSIST OF THE FOLLOWING: MARCH 31, 1996 DECEMBER 31, 1995
- ------------------------------------- -------------- -----------------
<S> <C> <C>
Raw Materials $681,234 $473,960
Work-in-process 9,661 16,424
Finished Goods 260,156 355,159
-------- --------
$951,051 $845,543
-------- --------
-------- --------
</TABLE>
5. INVESTMENT BY DIRECTOR/SHAREHOLDER
On March 22, 1996, the Company issued to the Company's Chairman of the Board,
Robert C. Klas, Sr., 2,400,000 shares of common stock and a five-year warrant
to purchase an additional 2,400,000 shares of common stock at an exercise
price of $2.00 per share for a purchase price of $3,000,000 which consisted
of: (a) conversion of $1,200,000 of debt, ($800,000 of which was outstanding
at December 31, 1995); (b) $900,000 of cash; and (c) a $900,000
noninterest-bearing promissory note which was paid in equal monthly
installments in April, May, and June of 1996. Also on March 22, 1996, the
Chairman of the Board acquired 1,600,000 shares of restricted common stock
from the Former CEO in a private transaction. As a result of these
transactions, the Chairman owns more than 50% of the outstanding stock of the
Company.
Since December 31, 1993, Mr. Klas and entities affiliated with him, have
invested, or have committed to invest, a total of $5,968,399 in debt and
equity securities of the Company. These funds have represented a critical
source of cash to fund the Company's operations and working capital needs.
There is no assurance that Mr. Klas will be willing or able to make any
additional cash investment in the Company in the future, and there is no
agreement or requirement for him to do so.
6. COMMON AND PREFERRED STOCK
COMMON STOCK - At March 31, 1996 and December 31, 1995, the Company had
20,000,000 and 10,000,000 shares of $.01 par value common stock authorized,
and 10,689,773 and 8,289,773 shares issued and outstanding, respectively.
8
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PREFERRED STOCK - At March 31, 1996 and December 31, 1995, there were
2,000,000 shares of the Company's 9% convertible, cumulative, nonvoting, $1
par value preferred stock authorized and 6,800 shares issued and outstanding.
As of December 31, 1994, each of the shareholders holding preferred shares
had agreed to waive all accrued but unpaid dividends and convert their
preferred shares into a total of 1,925 shares of common stock. As a result,
the Company has not accrued dividends on its preferred stock subsequent to
December 31, 1994. The Company is in the process of issuing stock
certificates in connection with the conversion of the remaining preferred
shares into common stock.
7. LICENSE AGREEMENT
The Company manufactures and markets certain of its products pursuant to a
license agreement, amended on January 1, 1990 with KSURF. The Company's
products contain iodinated resins which were developed by Kansas State
University and patented by KSURF. The Company pays a royalty on annual sales
of certain products equal to 3% of the first $1,000,000 of net sales and 2%
of the excess, due quarterly, subject to a minimum annual royalty of $75,000
per year. The license agreement will expire on or before the final expiration
date of the last patent or patent application contained in the patent rights.
The Company is also obligated to pay KSURF 40% of any royalties or payments
received for sublicensing the patent rights contained in the license
agreement. Royalty expenses were $18,750 for the three month periods ended
March 31, 1996 and 1995.
8. CONTINGENCIES
DELINQUENT FILINGS - The Company is delinquent in certain of its filings with
the Securities and Exchange Commission.
POROUS MEDIA CORPORATION - On September 21, 1995, the Company was named a
defendant in a lawsuit brought in Hennepin County District Court in
Minneapolis, Minnesota by Porous Media Corporation (Porous Media), a former
supplier of one of the Company's component parts. In the lawsuit, the
plaintiff seeks a cash payment of approximately $32,000 pertaining to
invoices being disputed by the Company and has asked the court to interpret
certain terms and provisions of a contract between the plaintiff and the
Company. The plaintiff further claims to have the right, under certain
circumstances, to be granted a royalty-free license to make, use, and sell
water purifiers incorporating certain technologies of the Company.
The Company believes that this lawsuit is without merit and intends to defend
its position vigorously. Further, the Company has filed a countersuit
against Porous Media alleging, among other things, that the component parts
supplied by the vendor were not as specified in the contract and that such
nonconformance caused the Company to suffer unnecessary testing costs and
substantial delays in product testing and delivery.
9
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The litigation with Porous Media is at an early stage, and the outcome cannot
presently be determined. While the consolidated financial statements at
March 31, 1996 and December 31, 1995 include the accrual of $32,000
pertaining to the disputed Porous Media invoices, no other costs or expenses
associated with this litigation, other than legal fees incurred to date, have
been recorded in the consolidated financial statements.
EBCO MANUFACTURING COMPANY - On February 22, 1996, the Company was named a
defendant in a lawsuit brought in United States District Court, District of
Minnesota, by EBCO Manufacturing Company, a manufacturer of drinking water
fountains and coolers. In the suit, the plaintiff alleges that the Company
infringed upon several of its trademark registrations for use of the name
"Oasis" for various products marketed by the plaintiff. The plaintiff is
seeking damages and an injunction to prevent the Company from using the
"Oasis" name. The Company believes that its use of the "Oasis" name for its
product does not infringe upon the plaintiff's trademark rights. The
litigation is at an early stage and management believes that the outcome
cannot presently be predicted.
9. ARRANGEMENTS WITH SUPPLIERS
BOWMAN INDUSTRIES, INC. - The Company utilizes the services of Bowman
Industries, Inc. (Bowman) to manufacture and assemble certain components of
the Company's products using the Company's production equipment. Pursuant to
an arrangement with Bowman, the Company pays Bowman an amount equal to all
costs and operating expenses incurred by Bowman. In return, Bowman provides
its services exclusively to the Company. The Company treats its arrangement
with Bowman as an independent contractor relationship. During the three
month period ended March 31, 1996, the Company paid Bowman a total of $44,401
under this arrangement.
HYBRID TECHNOLOGIES CORP. - The Company utilizes the services of Hybrid
Technologies Corp. (Hybrid), an independent contractor, to oversee and
manufacture iodinated resins which are incorporated into some of the
Company's products. Certain techniques used to manufacture the iodinated
resins were developed by and are the property of Hybrid. Under the terms of
an agreement, the Company has agreed that if it elects to buy iodinated resin
only from an outside vendor, it will buy iodinated resin only from Hybrid.
Hybrid has agreed to sell iodinated resin only to the Company and DentalPure
Corp. The Company and DentalPure Corp. have a separate royalty arrangement.
DentalPure Corp. is owned by the Former CEO and does not compete with the
Company in any of its product applications.
10. BANK LINE OF CREDIT
The Company maintains a $500,000 bank line of credit which is not secured by
the Company, but has been guaranteed by the Chairman of the Board. Unless it
is extended or renewed, the line of credit will expire on May 31, 1997.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
OVERVIEW
This Form 10-QSB contains forward looking statements within the meaning of
Section 21E of the Securities and Exchange Commission Act of 1934. Actual
results could differ significantly from those projected in the forward
looking statements as a result, in part, from changes in conditions and
factors encountered by the Company.
GOING CONCERN. The Company's consolidated financial statements are prepared
on a going concern basis which contemplates the realization of assets and the
satisfaction of liabilities and commitments in the normal course of business.
For the three month period ended March 31, 1996, the Company incurred a net
loss of $773,615, and cash used by operating activities was $1,135,506. In
addition, at March 31, 1996, the Company has an accumulated deficit of
$10,508,699.
These factors, among others, indicate that the Company may not be able to
continue as a going concern. Management's plans to continue as a going
concern, in addition to the advances committed to by the Chairman of the
Board of Directors, include the following efforts to generate the necessary
cash flow to meet the Company's working capital needs until sufficient
operating cash flows can be generated to support the Company's cost
structure: a) aggressively managing cash collections and disbursements, b)
promoting sales of the Company's existing products, including those recently
registered with the U.S. Environmental Protection Agency, c) completing the
introduction of new products currently under development, and d) raising
additional capital through private or public placements of debt or equity
securities, or through other sources.
The Company's working capital requirements for 1995 were met principally
through the issuance of interest bearing notes aggregating $1,950,000 to the
Chairman of the Board and an affiliated entity. Of the amounts advanced in
1995, $1,150,000, plus accrued interest of $58,399, was converted into common
stock of the Company in 1995, and $800,000 was converted into common stock of
the Company in March 1996. Also in 1995, the Chairman of the Board assumed
$1,100,000 of Company debt in exchange for common stock. During 1996, the
Chairman of the Board advanced an additional $2,200,000 to the Company for
additional shares of the Company's common stock, of which $1,300,000 was
advanced during the quarter ended March 31, 1996, and $900,000 was advanced
during the quarter ended June 30, 1996.
The consolidated financial statements do not include any adjustments related
to the recoverability and classification of recorded asset amounts or the
amounts and classifications of liabilities that might be necessary should the
Company be unable to continue as a going concern.
11
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MERGER. On December 30, 1994, WTC Acquisition Corp. (WTCAC), a
newly-formed, wholly-owned subsidiary of the Company, merged with Ecomaster
Corporation (Ecomaster). WTCAC exchanged 2,134,149 shares of WTC common stock
for all of the issued and outstanding common stock of Ecomaster. Immediately
thereafter, certain assets and liabilities of Water & Air Purification
Corporation (WAPCO), which had been distributed to its principal owner, were
transferred to WTCAC in exchange for 1,035,851 shares of WTC common stock.
Upon the completion of these transactions the principal owner of WAPCO and
Ecomaster became the Chief Executive Officer of the Company, and effective
April 12, 1996, this officer (the "Former CEO") resigned from the Company.
These transactions have been accounted for under the purchase method of
accounting and thus, the consolidated statements of operations do not include
the results of operations for Ecomaster or WAPCO for any period prior to
December 30, 1994. There was no goodwill recorded as a result of the
transactions. WTCAC's name has since been changed to WTC/Ecomaster Corp.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995
NET SALES. The Company had net sales of $527,038 for the three month period
ended March 31, 1996. During 1995 and 1996, the average selling prices of
the Company's products have generally remained unchanged or decreased,
therefore, the increase in sales reflects increases in the number of units
sold.
Although these results represent an increase of 19.3% from net sales of
$441,788 for the same period in 1995, they were below management's goals and
expectations for the quarter. Management believes that a significant factor
affecting net sales for the period was the Company's limited working capital
available during the quarter. In some instances, the Company's ability to
obtain certain raw materials and components was hampered by the lack of
working capital. In addition, certain expenditures or commitments that would
have been expected to promote sales or benefit production capabilities were
not made due to the lack of available funds. As discussed in Note 5 under
Item 1 above, the Company's working capital position was improved on March
22, 1996 through a $3,000,000 equity investment by the Chairman of the Board.
Management believes that on a general basis, the Company will continue to
experience a positive trend in sales throughout 1996. This expectation is
attributable, in part, to the Company's significant investment in sales and
marketing over the past 18 months, as well as recent and pending
introductions of new products. In addition, several of the Company's
international marketing and distribution relationships are maturing to higher
levels of shipment activity. These international sales, by their nature,
tend to consist of a limited number of high-value shipments. While the
Company believes that on a general basis the positive trend in sales will
continue, the Company's dependence on a limited number of high-value
transactions, and the inability to control the timing of some of those
transactions, as well as various other factors, will, at the current sales
levels, create the
12
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possibility, if not the probability, that sales could fluctuate significantly
from quarter to quarter.
International sales (including domestic sales destined for foreign markets)
represented the majority of the Company's sales. To date, the Company has
required all payments from customers to be in U.S. dollars, therefore, the
Company has not been subject to currency exchange rate fluctuations directly.
To the extent that a foreign customer's currency weakens against the U.S.
dollar, the Company's products will become more expensive in the foreign
market, and the resulting relative price increase would be expected to affect
the demand for the Company's products. To date, management believes that
foreign currency exchange rate fluctuations have not had a material negative
effect on the demand for the Company's products in foreign markets.
COST OF GOODS SOLD. For the three month periods ended March 31, 1996 and
1995, the cost of goods sold was $509,848 and $464,903, representing 96.7%
and 105.2% of net sales, respectively. One of the factors contributing to
the Company's current high cost of goods sold relative to sales is that the
Company's three newest products, the SPRING-Registered Trademark-, OASIS-TM-,
and PUREIT-Registered Trademark-, which represent a significant portion of
the current sales volume, have been priced to facilitate market penetration.
To reduce the future cost of sales of these products, the Company has
redesigned them to achieve a lower manufacturing cost and has also made
substantial investments in production tooling and equipment necessary to
produce lower cost components.
Since early 1994, through direct investment and through the transactions with
Ecomaster and WAPCO, the Company has made a significant investment in its
production tooling, equipment and facilities. As a result of this
investment, management believes that its current production capacity is
substantially greater than its current sales volume, which has resulted in
the costs associated with this excess production capacity contributing to the
Company's current high cost of goods sold.
In addition, as a result of the December 30, 1994 acquisition transactions
discussed above, the Company had to consolidate two similar product lines and
their related inventories during 1995. This process resulted in certain
production inefficiencies and inventory obsolescence.
GROSS PROFIT/LOSS. For the three month period ended March 31, 1996, the
Company recognized gross profit of $17,190, representing 3.3% of net sales.
For the three month period ended March 31, 1995, the Company recognized a
gross loss of $23,115, representing 5.2% of net sales. Management believes
that in addition to the items included in the above discussion of cost of
goods sold, an additional factor affecting gross margin is that the higher
sales level in 1996 allowed for greater absorption of production overhead.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three month periods
ended March 31, 1996 and 1995, selling, general and administrative expenses
were $654,755 and $522,578, representing 124.2% and 118.3% of net sales,
respectively.
SALES AND MARKETING EXPENSES - For the three month periods ended March 31,
1996 and 1995, sales and marketing expenses were $346,906 and $256,634,
representing 65.8% and 58.1% of net sales, respectively.
As part of the Company's business development strategy, the Company has
elected to invest heavily in sales and marketing activities associated with
new product introductions. During 1995 and 1996, in connection with the
introduction of the SPRING-Registered Trademark-, OASIS-TM-,
PUREIT-Registered Trademark- and INLINE product lines, the Company
significantly increased its expenditures for sales brochures, marketing
materials, packaging, trade shows, promotion and selling expenses. The
Company recognizes that these expenses represent an up front cost associated
with the introduction of new products to new markets, however, the Company
believes that such an investment is necessary if the Company's new product
introductions are to be successful. The Company expects sales and marketing
expenses to continue at significant levels, or increase as new products are
introduced.
GENERAL AND ADMINISTRATIVE EXPENSES - For the three month periods ended March
31, 1996 and 1995, general and administrative expenses were $307,849 and
$265,944, representing 58.4% and 60.2% of net sales, respectively.
While general and administrative expenses remained relatively constant as a
percent of sales from 1995 to 1996, the 1995 balance includes certain direct
and indirect transitional expenses associated with the December 30, 1994
acquisitions, and the 1996 balance includes certain professional fees and
other costs associated with various litigation matters and the Company's
unsuccessful efforts to raise capital from new investors during the first
quarter of 1996.
RESEARCH AND DEVELOPMENT EXPENSES. For the three month periods ended March
31, 1996 and 1995, research and development expenses were $42,337 and
$133,189, respectively. The high level of research and development expense
in 1995 was due, in part, to the substantial costs associated with the
development and testing of the SPRING-Registered Trademark-, OASIS-TM- and
PUREIT-Registered Trademark- product lines. While the Company is committed
to its long-term investment in research and development, such expenses, by
their nature, tend to fluctuate in amount and as a percentage of sales. The
Company's current research and development activities include: redesigning
existing products to improve quality and lower manufacturing costs;
designing, developing and testing the new INLINE product line; and designing
and developing new products in connection with OEM (original equipment
manufacturer) and private label arrangements.
14
<PAGE>
THREE MONTHS ENDED MARCH 31, 1995 COMPARED TO THREE MONTHS ENDED MARCH 31,
1994
NET SALES. The Company had net sales of $441,788 the three month period
ended March 31, 1995. These results represent an increase of 163.2% from the
net sales of $167,831 for the same period in 1994. Management believes the
increase in net sales from 1994 to 1995 is principally attributable to the
acquisition of Ecomaster and certain net assets of WAPCO on December 30,
1994. As these transactions were accounted for under the purchase method of
accounting, the Company's consolidated financial statements do not include
any results of operations of Ecomaster or WAPCO for any period prior to
December 30, 1994.
COST OF GOODS SOLD. As a percentage of net sales, cost of goods sold was
105.2% for the three month period ended March 31, 1995, compared with 98.1%
for the same period in 1994. The Company's high cost of goods sold in 1995
and 1994 was due, in part, to: a) an aggressive pricing strategy for the
introduction of three new products, b) the Company's inability to absorb
fixed production costs at the current sales level, and c) the Company's use
of certain expensive component parts already in inventory with the
expectation that sources of lower cost components would be located and used
in the future.
GROSS PROFIT/LOSS. The gross loss for the three month period ended March 31,
1995 was $23,115, representing 5.2% of net sales. Gross profit for the three
month period ended March 31, 1994 was $3,154, representing 1.9% of net sales.
The gross loss for 1995 was due, in part, to the adoption of an aggressive
pricing strategy for the introduction of certain new products, and the
Company's inability to absorb fixed production costs at the existing sales
level.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $522,577 and $263,342, representing 118.3% and
156.9% of net sales for the three month periods ended March 31, 1995 and
1994, respectively. After a period in which management focused its efforts
on cash conservation and expense reduction, commencing in the first quarter
of 1994, and continuing throughout 1994 and 1995, management began hiring
personnel and increasing selling and marketing expenses as part of its
strategy to rebuild distributor relationships and begin pre-marketing
promotion of the OASIS-TM-product line.
RESEARCH AND DEVELOPMENT EXPENSES. For the three month periods ended March
31, 1995 and 1994, research and development expenses were $133,189 and
$29,297, respectively. During the first quarter of 1995, the Company focused
its research and development activities on redesigning existing products to
improve quality and comply with EPA requirements for registration and sale in
the United States, and on development and continued testing of the OASIS-TM-
and SPRING-Registered Trademark- product lines.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996 the Company had working capital of $1,225,740 compared
with a working capital deficit (total current liabilities in excess of total
current assets) of $213,023 as of December 31, 1995. During the quarter
ended March 31, 1996, the Company used accounts receivable collections and
trade accounts payable as sources of capital to fund its operations.
In addition, on March 22, 1996, the Company issued to the Chairman of the
Board 2,400,000 shares of common stock and a five-year warrant to purchase an
additional 2,400,000 shares of common stock at an exercise price of $2.00 per
share for a purchase price of $3,000,000 which consisted of: (a) conversion
of $1,200,000 of debt, ($800,000 of which was outstanding at December 31,
1995); (b) $900,000 of cash; and (c) a $900,000 noninterest-bearing
promissory note payable in equal monthly installments in April, May, and June
of 1996. This investment by the Chairman of the Board had the result of
increasing working capital by $1,300,000 during the quarter ended March 31,
1996.
For the three month period ended March 31, 1996; a) net cash used in
operating activities consisted primarily of the Company's $773,615 net loss,
a $105,508 increase in inventories, and a decrease in accounts payable of
$317,985, b) net cash used in investing activities consisted primarily of
purchases of property and equipment of $87,617 offset by applications of
restricted cash of $36,651, and c) net cash provided by financing activities
consisted primarily of $1,300,000 net proceeds from loans and the sale of
common stock to a director/stockholder offset by payments on long-term
obligations of $102,542.
For the three month period ended March 31, 1995; a) net cash used in
operating activities consisted primarily of the Company's $753,556 net loss,
a $70,129 increase in accounts receivable, and a $60,492 decrease in accounts
payable, offset by a $112,844 decrease in inventories, b) net cash used in
investing activities consisted primarily of purchases of property and
equipment of $34,216 offset by applications of restricted cash of $21,801,
and c) net cash provided by financing activities consisted primarily of
$70,000 proceeds from bank lines of credit.
The Company estimates that it will have working capital needs of
approximately $2-4 million during 1996 to fund its operations and continue
market introduction of its OASIS-TM-, SPRING-Registered Trademark-, and
PUREIT-Registered Trademark-product lines. The Company also anticipates that
it will have to fund growth in inventories and accounts receivable. As
discussed above and in Part I, Item 1, on March 22, 1996, the Company raised
a portion of this estimated capital requirement through the sale of
securities to the Chairman of the Board.
The Company maintains a $500,000 bank line of credit which is not secured by the
Company, but has been guaranteed by the Chairman of the Board. Unless it is
extended or renewed, the line of credit will expire on May 31, 1997. If the
line of credit expires, and
16
<PAGE>
the Company is required to pay off the $500,000 balance, the Company's
liquidity will be adversely affected.
The Company's plan of operations over the next 12 months is to increase sales
and further develop its domestic and international markets. In the U.S.
market, the Company's efforts will be to establish an initial market presence
in retail stores and consumer catalogs with the OASIS-TM-, SPRING-Registered
Trademark-and PUREIT-Registered Trademark- products. Although the Company's
OASIS-TM-product received EPA registration for sale in the U.S. in August
1995, due to the seasonal nature of the product, meaningful sales are not
expected until mid-1996. In international markets, the Company will continue
to develop new marketing and distribution channels and will attempt to
increase sales of all products through existing channels.
The Company is also evaluating its available options to raise capital. Such
options include, but are not limited to, private placements of debt or equity
securities to accredited investors, registered offerings of the Company's
common stock, and strategic partnership or joint venture arrangements.
While additional capital would provide the Company with greater flexibility
in executing its business plan, the Company recognizes that due to
competition, the uncertainties of the capital markets, and other factors
beyond the Company's control, there is no assurance that the Company will be
able to obtain additional financing, or that the terms of any such financing
will be acceptable to the Company. If the Company's efforts to raise
additional capital are not successful, the Company's operations may be
negatively impacted.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
POROUS MEDIA CORPORATION - On September 21, 1995, the Company was named a
defendant in a lawsuit brought in Hennepin County District Court in
Minneapolis, Minnesota by Porous Media Corporation ("Porous Media"), a former
supplier of one of the Company's component parts. In the lawsuit, the
plaintiff seeks a cash payment of approximately $32,000 pertaining to
invoices being disputed by the Company and has asked the court to interpret
certain terms and provisions of a contract between the plaintiff and the
Company. The plaintiff further claims to have the right, under certain
circumstances, to be granted a royalty-free license to make, use and sell
water purifiers incorporating certain technologies of the Company.
The Company believes that this lawsuit is without merit and intends to defend
its position vigorously. Further, the Company has filed a countersuit
against Porous Media alleging, among other things, that the component parts
supplied by the vendor were not as specified in the contract, and that such
non-conformance caused the Company to suffer unnecessary testing costs and
substantial delays in product testing and delivery. The litigation with
Porous Media is at an early stage and the outcome cannot presently be
determined.
17
<PAGE>
EBCO MANUFACTURING COMPANY - On February 22, 1996, the Company was named a
defendant in a lawsuit brought in United States District Court, District of
Minnesota, by EBCO Manufacturing Company, a manufacturer of drinking water
fountains and coolers ("EBCO"). In the suit, EBCO alleges that the Company
infringes several of EBCO's trademark registrations for use of the name
"Oasis" for various products marketed by EBCO. EBCO is seeking damages and
an injunction to prevent the Company from using the "Oasis" name.
The Company believes that its use of the "Oasis" name for its product does
not infringe EBCO's trademark rights. Prior to marketing products under the
name "Oasis", the Company's trademark legal counsel conducted a trademark
search, and based on the results of that search, applied for registration
with the United States Patent and Trademark Office ("PTO") of the mark
"Oasis" for use with the Company's product. In June 1995, PTO published the
mark for public comment. The litigation with EBCO is at an early stage and
the outcome cannot presently be predicted.
AMERICAN PRODUCT SALES - On March 26, 1996, the Company settled a lawsuit
which had been brought on September 20, 1995 in Federal District Court,
Northern District of California, by American Product Sales, a division of
S.J. Battery X-Change, Inc. In the lawsuit, the plaintiff alleged that the
Company had breached a contract and it had suffered certain damages as a
result. Under the terms of the settlement, the Company agreed to pay the
plaintiff $30,000 in return for a full release of all claims associated with
the legal action.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF
SECURITY HOLDERS
On January 30, 1996, the Company obtained the authorization of the Board of
Directors and the consent of Robert C. Klas, Sr. and Jan H. Magnusson (the
"Majority Shareholders") to amend the Company's Certificate of Incorporation
to increase the number of authorized shares of the Company's common stock,
$0.01 par value per share, from 10,000,000 to 20,000,000. Pursuant to Rule
14c-5(b), on February 21, 1996, the Company prepared an Information Statement
on this matter and sent a copy to each shareholder and filed it with the
Commission. The Company's Information Statement is hereby incorporated by
reference.
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are filed as part of the report:
(a) EXHIBITS. The following exhibits are being filed as part of this
Form 10-QSB.
EXHIBIT
NO. TITLE METHOD OF FILING
- -----------------------------------------------------------------------------
22.1 Information Statement dated February 21, 1996 (A)
27 Financial Data Schedule Filed Herewith
(A) Incorporated by reference to the Information Statement filed by the
Company on February 21, 1996.
(b) REPORTS ON FORM 8-K.
A Report on Form 8-K was filed by the Company on March 22, 1996.
SIGNATURES
----------
In accordance with the Exchange Act, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: July 3, 1996 WTC Industries, Inc.
By: /s/ ROBERT C. KLAS, SR.
-----------------------------------
Robert C. Klas, Sr.
Chief Executive Officer
By: /s/ TODD JOHNSON
-----------------------------------
Todd Johnson
Chief Financial Officer
(Principal Accounting Officer)
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM WTC
INDUSTRIES, INC. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF
MARCH 31, 1996 AND 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 44,475
<SECURITIES> 0
<RECEIVABLES> 907,662
<ALLOWANCES> 161,000
<INVENTORY> 951,051
<CURRENT-ASSETS> 2,731,821
<PP&E> 1,023,037
<DEPRECIATION> 472,983
<TOTAL-ASSETS> 3,604,263
<CURRENT-LIABILITIES> 1,506,081
<BONDS> 1,478,024
0
6,800
<COMMON> 106,898
<OTHER-SE> 506,460
<TOTAL-LIABILITY-AND-EQUITY> 3,604,263
<SALES> 527,038
<TOTAL-REVENUES> 527,038
<CGS> 509,848
<TOTAL-COSTS> 697,092
<OTHER-EXPENSES> 93,713
<LOSS-PROVISION> 12,000
<INTEREST-EXPENSE> 89,280
<INCOME-PRETAX> (773,615)
<INCOME-TAX> 0
<INCOME-CONTINUING> (773,615)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (773,615)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
