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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 June 30, 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
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WTC INDUSTRIES, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 38-2308668
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(State or Other Jurisdiction (IRS Employer
of Incorporation) Identification No.)
14405 - 21ST AVENUE NORTH, MINNEAPOLIS, MINNESOTA 55447
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(Address of Principal Executive Offices) (Zip Code)
(612) 473-1625
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(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 .
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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.
10,691,698 shares of Common Stock as of August 26 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:
Consolidated Condensed Unaudited Balance Sheets
June 30, 1996 and December 31, 1995 3
Consolidated Condensed Unaudited Statements of Operations
Three Months Ended June 30, 1996 and 1995 4
Consolidated Condensed Unaudited Statements of Operations
Six Months Ended June 30, 1996 and 1995 5
Consolidated Condensed Unaudited Statements of Cash Flows
Six Months Ended June 30, 1996 and 1995 6
Notes to Consolidated Condensed Unaudited Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operation 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 16
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1996 1995
------------ -----------
<S> <C> <C>
CURRENT ASSETS
Cash $ 62,469 $ 33,489
Restricted Cash 148,000 148,000
Accounts receivable, net of allowance for doubtful accounts
of $173,000 and $149,000, respectively 862,356 787,775
Inventories 917,881 845,543
Prepaid expenses 48,614 63,062
------------ ------------
TOTAL CURRENT ASSETS 2,039,320 1,877,869
PROPERTY AND EQUIPMENT 869,172 935,420
Less accumulated depreciation 397,474 422,380
------------ ------------
471,698 513,040
OTHER ASSETS
Restricted cash 12,408 85,729
Loan acquisition costs, net of accumulated amortization
of $28,176 and $19,614, respectively 49,949 58,511
Patents and trademarks, net of accumulated amortization
of $46,481 and $36,678, respectively 51,532 61,335
Other 13,613 14,647
------------ ------------
127,502 220,222
------------ ------------
$ 2,638,520 $ 2,611,131
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable and current maturities of long-term obligations $ 695,643 $ 608,904
Accounts payable 592,242 903,974
Accrued expenses - other 321,893 430,014
------------ ------------
TOTAL CURRENT LIABILITIES 1,609,778 1,942,892
LONG-TERM OBLIGATIONS, net of current maturities 1,469,430 1,474,466
INDEBTEDNESS REFINANCED IN MARCH 1996 800,000
STOCKHOLDERS' 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 (11,569,545) (9,735,084)
------------ ------------
(440,688) (1,606,227)
------------ ------------
$ 2,638,520 $ 2,611,131
------------ ------------
------------ ------------
</TABLE>
See notes to consolidated condensed unaudited financial statements.
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WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended June 30,
-----------------------------
1996 1995
----------- -----------
NET SALES $ 811,445 $ 726,800
COST OF GOODS SOLD 1,008,851 591,347
------------ ------------
GROSS PROFIT (LOSS) (197,406) 135,453
EXPENSES
Selling, general and administrative 702,997 526,017
Research and development 39,156 55,300
------------ ------------
742,153 581,317
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LOSS FROM OPERATIONS (939,559) (445,864)
OTHER EXPENSE, NET (54,920) (93,686)
LOSS ON DISPOSAL FIXED ASSETS (66,368) 0
------------ ------------
(121,288) (93,686)
------------ ------------
NET LOSS $ (1,060,847) $ (539,550)
------------ ------------
------------ ------------
NET LOSS PER COMMON SHARE $ (0.10) $ (0.08)
------------ ------------
------------ ------------
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 10,689,773 6,443,055
------------ ------------
------------ ------------
See notes to consolidated condensed unaudited financial statements.
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WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months ended June 30,
------------------------------
1996 1995
----------- -------------
NET SALES $ 1,338,483 $ 1,168,588
COST OF GOODS SOLD 1,518,699 1,056,250
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GROSS PROFIT (LOSS) (180,216) 112,338
EXPENSES
Selling, general and administrative 1,357,752 1,048,595
Research and development 81,493 188,489
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1,439,245 1,237,084
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LOSS FROM OPERATIONS (1,619,461) (1,124,746)
OTHER EXPENSE, NET (148,632) (168,361)
LOSS ON DISPOSAL FIXED ASSETS (66,368) 0
----------- -------------
(215,000) (168,361)
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NET LOSS $(1,834,461) $(1,293,107)
----------- -------------
----------- -------------
NET LOSS PER COMMON SHARE $ (0.19) $ (0.20)
----------- -------------
----------- -------------
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 9,608,455 6,443,055
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----------- -------------
See notes to consolidated condensed unaudited financial statements.
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WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------------
1996 1995
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,834,461) $(1,293,107)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 127,496 105,655
Provision for obsolete inventory 250,000
Provision for doubtful accounts 24,000 (10,000)
Loss on disposal of property & equipment 66,368
Changes in operating assets and liabilities:
Accounts receivable (98,581) (269,417)
Inventories (322,338) (13,293)
Prepaid expenses 15,482 (39,988)
Accounts payable (311,732) 88,652
Accrued expenses - other 78,486 159,233
----------- -----------
Net cash used in operating activities (2,005,280) (1,272,265)
----------- -----------
----------- -----------
INVESTING ACTIVITIES
Restricted cash 73,321 55,065
Purchases of property and equipment (134,157) (142,905)
----------- -----------
Net cash used in investing activities (60,836) (87,840)
----------- -----------
FINANCING ACTIVITIES
Proceeds from loans by director/shareholder 400,000 625,000
Proceeds from sale of Common Stock to dirctor/shareholder 1,800,000
Proceeds from bank lines of credit 82,000
Payments on long-term obligations (104,904) (2,827)
----------- -----------
Net cash provided by financing activities 2,095,096 704,173
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 28,980 (655,932)
CASH AND CASH EQUIVALENTS:
Beginning of period 33,489 671,638
----------- -----------
End of period $ 62,469 $ 15,706
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----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid during the period for interest $ 167,577 $ 93,409
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES -
Common stock issued on conversion of debt $ 1,200,000
-----------
-----------
Note payable issued on conversion of accrued expenses $ 186,807
-----------
-----------
</TABLE>
See notes to consolidated condensed unaudited financial statements.
6
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WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED UNAUDITED
FINANCIAL STATEMENTS
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). Prior to 1996, 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. In 1996, the Company has
seen increased sales activities in the United States representing 33% of total
Net Sales.
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.
The Company incurred a net loss of $1,834,461 for the six month period ended
June 30, 1996. Cash used in operating activities was $2,013,843. In addition, at
June 30, 1996, the Company had an accumulated deficit of $11,569,545 and a
stockholders' deficit of $440,688.
These factors, among others, create the possibility that the Company may not be
able to continue as a going concern. Management's plans to continue as a going
concern 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) raise additional
capital, b) implement a new organizational structure and management team by the
end of the third quarter, c) identify a core business line to achieve short term
profitability, d) complete new product introductions scheduled for the fall of
1996, e) develop and execute a long-term strategic plan. There is no
assurance that these plans can be successfully carried out.
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 entity to which the Chairman is affiliated.
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
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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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The accompanying 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 condensed 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.
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. INVENTORIES
INVENTORIES CONSIST OF THE FOLLOWING: June 30, 1996 December 31, 1995
- ------------------------------------- ------------- -----------------
Raw Materials $ 486,477 $ 473,960
Work-in-process 12,500 16,424
Finished Goods 418,904 355,159
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$ 917,881 $ 845,543
---------- ----------
---------- ----------
4. 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
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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. On March 22, 1996, the Chairman of the Board also purchased
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. On April 13, 1996 Mr. Klas was
appointed as the Company's Chief Executive Officer.
Since December 31, 1993, Mr. Klas and entities affiliated with him, have
invested a total of $5,968,399 in 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.
5. COMMON AND PREFERRED STOCK
COMMON STOCK - On June 30, 1996 and December 31, 1995, the Company had
20,000,000 and 10,000,000 shares of $.01 par value common stock authorized,
respectively, and 10,689,773 and 8,289,773 shares issued and outstanding,
respectively.
PREFERRED STOCK - On June 30, 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.
6. 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 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 $37,500 for the six month periods ended June
30, 1996 and 1995.
7. CONTINGENCIES
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
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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 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's motion for summary judgment
on Porous Media's claims has been denied.
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 Company has entered into negotiations with Porous Media in an effort to
settle the lawsuit. While the consolidated financial statements at June 30, 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 - In February of 1996, the Company was named a
defendant in a lawsuit brought in United States District Court by EBCO
Manufacturing alleging that the Company infringed upon several of its trademark
registrations for use of the name "Oasis". As of August 5, 1996, the parties
have agreed to a consent judgment whereby the Company will cease to manufacture
products bearing the name and mark Oasis-TM- on its products on or before
December 31, 1996. The Company will have until July 31, 1997 to liquidate any
inventory of Oasis-TM- products manufactured on or before December 31, 1996.
There will be no other compensatory damages due either party and each party
shall bear its own costs, expenses, and attorney fees regarding this matter.
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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 six month period ended June 30, 1996, the Company incurred a net loss of
$1,834,461 and cash used by operating activities was $2,013,843. In addition,
at June 30, 1996, the Company has an accumulated deficit of $11,569,545 and a
stockholders deficit of $440,688.
These factors, among others, create the possibility that the Company may not be
able to continue as a going concern. Management's plans to continue as a going
concern 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) raise additional
capital b) implement a new organizational structure and management team by the
end of the third quarter, c) identify a core business line to achieve short term
profitability, d) complete new product introductions scheduled for the fall of
1996, e) develop and execute a long-term strategic plan. There is no
assurance that these plans can be successfully carried out.
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.
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RESULTS OF OPERATIONS
NET SALES. The Company had net sales of $811,445 and $1,338,483 for the three
and six month periods ended June 30, 1996, respectively. These results
represent increases of 12% and 15%, respectively, from the net sales of $726,800
and $1,168,588 for the same periods in 1995. 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.
Management believes that the Company will continue to experience a positive
trend in sales throughout 1996 and into 1997 due to the introduction of new
products in the fall of 1996, along with new market opportunities for
Spring-Registered Trademark- and Oasis-TM- in the domestic and international
markets. While the Company believes that 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, may cause sales to fluctuate
significantly from quarter to quarter.
International sales (including domestic sales destined for foreign markets)
represented 67% of the Company's sales for the first six months. 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 could 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 and six month periods ended June 30, 1996,
the cost of goods sold were $1,008,851 and $1,518,699, respectively,
representing 124% and 113% of net sales, respectively. The cost of goods sold
for the same periods in 1995 were $591,347 and $1,056,250 respectively,
representing 81% and 90% of net sales, respectively. The Company increased its
obsolete inventory reserve during the second quarter of 1996 by $250,000 to
reflect product design changes and lack of inventory management. The Company is
pursuing alternative uses for this inventory. The Company is currently
evaluating its cost components for each product, establishing inventory
controls, and upgrading information systems. In addition, more stringent
controls will be enforced in the areas of product development, manufacturing and
quality assurance.
GROSS PROFIT/LOSS. For the three and six month periods ended June 30, 1996,
the Company recognized negative gross profit of ($197,406) and ($180,216),
respectively, representing (24%) and (13%), respectively, of net sales. The
gross profit for the same periods in 1995 was $135,453 and $112,338,
respectively, representing 19% and 10% of net sales, respectively. If the
second quarter inventory obsolescence reserve adjustment of $250,000 is
excluded, gross profit as a percentage of sales would have been 7% and 5%,
for the three and six months ended June 30, 1996, respectively.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three and six month
periods ended June 30, 1996, selling, general and administrative expenses were
$702,997 and $1,357,752, respectively, representing 87% and 101%, respectively,
of net sales. The selling, general and administrative expenses for the same
periods in 1995 were $526,017 and $1,048,595, representing 72% and 90 % of
net sales, respectively.
SALES AND MARKETING EXPENSES - For the three and six month periods ended June
30, 1996, sales and marketing expenses were $379,058 and $725,963
respectively, representing 47% and 54% 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 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, promotions 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.
The Company makes extensive use of independent sales representatives in
marketing its products. Management intends to evaluate the independent sales
representative's market penetration effectiveness, expense reimbursement, and
commission rate structures by year-end. It is management's intentions to have
new compensation and commission agreements in place by January 1, 1997. The
resulting agreements will reduce the marketing expenses mentioned above.
GENERAL AND ADMINISTRATIVE EXPENSES - For the three and six month periods ended
June 30, 1996, general and administrative expenses were $323,939 and $631,789,
respectively, representing 40% and 47% of net sales, respectively.
General and administrative expenses continue to be high due to professional fees
associated with various litigation matters and the Company's efforts to raise
capital during the first quarter of 1996. Currently, management is reviewing all
general and administrative expense items.
RESEARCH AND DEVELOPMENT EXPENSES. For the three and six month periods ended
June 30, 1996, research and development expenses were $39,156 and $81,494,
respectively, representing 5% and 6% of net sales, respectively. The
research and development expenses for the same period in 1995 were $55,300
and $188,489, respectively, representing 8% and 16% of net sales,
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
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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;
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.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996 the Company had working capital of $429,542 compared with a
working capital deficit (total current liabilities in excess of total current
assets) of $213,023 as of December 31, 1995. The improvement in the Company's
working capital is primarily attributable to new financing which the Company
received during the first quarter of 1996. 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 which was paid 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 and $900,000 in the
first and second quarters, respectively.
For the six month period ended June 30, 1996; a) net cash used in operating
activities consisted primarily of the Company's $1,834,461 net loss, a $322,338
increase in inventories, and a decrease in accounts payable of $311,732 b) net
cash used in investing activities consisted primarily of purchases of property
and equipment of $134,157 offset by applications of restricted cash of $73,321
and c) net cash provided by financing activities consisted primarily of
$2,200,000 net proceeds from loans and the sale of common stock to a
director/stockholder offset by payments on long-term obligations of $104,904.
For the six month period ended June 30, 1995; a) net cash used in operating
activities consisted primarily of the Company's $1,293,107 net loss, b) net cash
used in investing activities consisted primarily of purchases of property and
equipment of $142,905 offset by applications of restricted cash of $55,065, and
c) net cash provided by financing activities consisted primarily of $625,000
proceeds from loans by a director/shareholder and $82,000 proceeds from bank
lines of credit.
The Company estimates that it will have working capital needs of
approximately $5 million for the next 6 to 12 months to fund its operations
and to continue market introduction of its OASIS-TM-, SPRING-Registered
Trademark-, PUREit-Registered Trademark-, and InLINE product lines. The
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Company also anticipates that it will have to fund growth in inventories and
accounts receivable.
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 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 expand its market presence in retail stores and
consumer catalogs with the OASIS-TM- and SPRING-Registered Trademark-. In
addition, new product launches scheduled for the fall of 1996 include the
PUREit-Registered Trademark-, an OEM product line, and the InLINE product line
in both the domestic and international markets. The Company will continue to
develop new marketing and distribution channels in international markets 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 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's motion for summary judgment on Porous Media's claims has been
denied.
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
15
<PAGE>
that such non-conformance caused the Company to suffer unnecessary testing
costs and substantial delays in product testing and delivery.
The Company has entered into negotiations with Porous Media in an effort to
settle the lawsuit. While the consolidated condensed financial statements at
June 30, 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 condensed financial statements.
EBCO MANUFACTURING COMPANY - In February of 1996, the Company was named a
defendant in a lawsuit brought in United States District Court by
EBCO Manufacturing alleging that the Company infringed upon several of its
trademark registrations for use of the name "Oasis." As of August 19, 1996, the
parties have reached an agreement in principal in which the Company will cease
to manufacture products bearing the name and mark "Oasis" on its products on or
before December 31, 1996. The Company will have until July 31, 1997 to liquidate
any inventory of Oasis-TM- products manufactured on or before December 31,
1996. There will be no other compensatory damages due either party and each
party shall bear its own costs, expenses, and attorney fees regarding this
matter
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
- -------- -------------------------------------- ----------------
27 Financial Data Schedule Filed Herewith
16
<PAGE>
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: August 29,1996 WTC Industries, Inc.
By: /s/ Robert C. Klas, Sr.
------------------------------
Robert C. Klas, Sr.
Chief Executive Officer
By: /s/ Gregory P. Jensen
-------------------------------
Gregory P. Jensen
Chief Financial Officer
(Principal Accounting Officer)
17
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 62,469
<SECURITIES> 0
<RECEIVABLES> 862,356
<ALLOWANCES> 172,536
<INVENTORY> 917,881
<CURRENT-ASSETS> 2,039,320
<PP&E> 869,172
<DEPRECIATION> 397,474
<TOTAL-ASSETS> 2,638,520
<CURRENT-LIABILITIES> 1,609,778
<BONDS> 1,469,430
0
6,800
<COMMON> 106,898
<OTHER-SE> (554,386)
<TOTAL-LIABILITY-AND-EQUITY> 2,638,520
<SALES> 1,338,483
<TOTAL-REVENUES> 1,338,483
<CGS> 1,518,699
<TOTAL-COSTS> 1,439,245
<OTHER-EXPENSES> 215,000
<LOSS-PROVISION> 24,000
<INTEREST-EXPENSE> 140,654
<INCOME-PRETAX> (1,834,461)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,834,461)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,834,461)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
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