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 June 30, 1997, 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.
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(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 _____.
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.
10,960,180 shares of Common Stock as of July 31, 1997
Transitional Small Business Disclosure Format (check one):
Yes _____; No __x__
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Unaudited Balance Sheets
June 30, 1997 and December 31, 1996 3
Condensed Consolidated Unaudited Statements of Operations
Three Months Ended June 30, 1997 and 1996 4
Condensed Consolidated Unaudited Statements of Operations
Six Months Ended June 30, 1997 and 1996 5
Condensed Consolidated Unaudited Statements of Cash Flows
Six Months Ended June 30, 1997 and 1996 6
Notes to Condensed Consolidated Unaudited Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
<PAGE>
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 1997 1996
- ------ ------------ ------------
CURRENT ASSETS
<S> <C> <C>
Cash $ 2,268 $ 53,324
Accounts receivable, net of allowance for doubtful accounts
of $16,000 and $19,000, respectively 471,468 632,011
Inventories (Note 3) 777,459 651,895
Prepaid expenses 25,005 31,651
------------ ------------
TOTAL CURRENT ASSETS 1,276,200 1,368,881
PROPERTY AND EQUIPMENT 907,933 887,369
Less accumulated depreciation 588,576 499,382
------------ ------------
319,357 387,987
OTHER ASSETS
Restricted cash 12,948 86,823
Loan acquisition costs, net of accumulated amortization
of $45,302 and $36,739, respectively 32,823 41,386
Patents and trademarks, net of accumulated amortization
of $84,019 and $95,492, respectively 1,330 2,522
Other 13,613 13,613
------------ ------------
60,714 144,344
------------ ------------
$ 1,656,271 $ 1,901,212
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- --------------------------------------
CURRENT LIABILITIES
Notes payable and current maturities $ 1,252,542 $ 945,716
of long-term obligations (Note 7)
Accounts payable 425,049 624,045
Accrued expenses 287,746 512,273
------------ ------------
TOTAL CURRENT LIABILITIES 1,965,337 2,082,034
LONG-TERM OBLIGATIONS, net of current maturities 1,461,638 1,463,941
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' DEFICIT (Note 4)
Common stock 109,602 106,917
Additional paid-in capital 11,273,388 11,021,940
Receivable from officer on issuance of common stock (15,000)
Accumulated deficit (13,138,694) (12,773,620)
------------ ------------
(1,770,704) (1,644,763)
------------ ------------
$ 1,656,271 $ 1,901,212
============ ============
</TABLE>
See notes to consolidated condensed unaudited financial statements.
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended June 30,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
NET SALES $ 1,341,652 $ 811,445
COST OF GOODS SOLD 982,468 1,008,851
------------ ------------
GROSS PROFIT (LOSS) 359,184 (197,406)
EXPENSES
Selling, general and administrative 389,335 702,997
Research and development 45,139 39,156
------------ ------------
434,474 742,153
------------ ------------
LOSS FROM OPERATIONS (75,290) (939,559)
OTHER EXPENSE, NET (61,675) (54,920)
LOSS ON DISPOSAL FIXED ASSETS (66,368)
------------ ------------
(61,675) (121,288)
------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (136,965) (1,060,847)
EXTRAORDINARY ITEM (LOSS ON EXTINGUISHMENT
OF DEBT) (NOTE 7) 38,899
------------ ------------
NET LOSS $ (175,864) $ (1,060,847)
============ ============
NET LOSS PER COMMON SHARE:
LOSS BEFORE EXTRAORDINARY ITEM $ (0.02) $ (0.10)
EXTRAORDINARY ITEM (LOSS ON EXTINGUISHMENT
OF DEBT) 0.00 0.00
NET LOSS $ (0.02) $ (0.10)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 10,786,000 10,690,000
============ ============
</TABLE>
See notes to consolidated condensed unaudited financial statements.
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
NET SALES $ 2,398,951 $ 1,338,483
COST OF GOODS SOLD 1,775,547 1,518,699
------------ ------------
GROSS PROFIT (LOSS) 623,404 (180,216)
EXPENSES
Selling, general and administrative 735,953 1,357,752
Research and development 89,034 81,493
------------ ------------
824,987 1,439,245
------------ ------------
LOSS FROM OPERATIONS (201,583) (1,619,461)
OTHER EXPENSE, NET (124,592) (148,632)
LOSS ON DISPOSAL FIXED ASSETS (66,368)
------------ ------------
(124,592) (215,000)
------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (326,175) (1,834,461)
EXTRAORDINARY ITEM (LOSS ON EXTINGUISHMENT
OF DEBT) 38,899
------------ ------------
NET LOSS $ (365,074) $ (1,834,461)
============ ============
NET LOSS PER COMMON SHARE:
LOSS BEFORE EXTRAORDINARY ITEM $ (0.03) $ (0.19)
EXTRAORDINARY ITEM (LOSS ON EXTINGUISHMENT
OF DEBT) 0.00 0.00
NET LOSS $ (0.03) $ (0.19)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 10,753,000 9,608,000
============ ============
</TABLE>
See notes to consolidated condensed unaudited financial statements.
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------
1997 1996
----------- -----------
OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (365,074) $(1,834,461)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 98,948 127,496
Loss on settlement of note payable 38,899
Provision for obsolete inventory 250,000
Provision for doubtful accounts 24,000
Loss on disposal of property & equipment 66,368
Changes in operating assets and liabilities:
Accounts receivable 160,543 (98,581)
Inventories (125,564) (322,338)
Prepaid expenses and other 7,837 15,482
Accounts payable (198,996) (311,732)
Accrued expenses (174,528) 78,486
----------- -----------
Net cash used in operating activities (557,935) (2,005,280)
----------- -----------
INVESTING ACTIVITIES
Restricted cash 73,875 73,321
Purchases of property and equipment (21,754) (134,157)
----------- -----------
Net cash provided by (used) in investing activities 52,121 (60,836)
----------- -----------
FINANCING ACTIVITIES
Proceeds from loans by director/shareholder 400,000
Proceeds from sale of Common Stock to dirctor/shareholder 1,800,000
Proceeds from issuance of Common Stock 15,000
Proceeds from affliated company 500,000
Payments on bank line of credit (4,500)
Payments on settlement of note payable to Former CEO (51,372)
Payments on long-term obligations (4,370) (104,904)
----------- -----------
Net cash provided by financing activities 454,758 2,095,096
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (51,056) 28,980
CASH AND CASH EQUIVALENTS:
Beginning of period 53,324 33,489
----------- -----------
End of period $ 2,268 $ 62,469
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid during the period for interest $ 119,797 $ 167,577
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES -
Common stock issued on conversion of accrued expenses $ 50,000
===========
Receivable from officer for common stock issued
from exercise of non-cash stock option $ 15,000
===========
Common stock issued on settlement of note payable/debt $ 174,134 $ 1,200,000
=========== ===========
Note payable issued on conversion of accrued expenses $ 186,807
===========
</TABLE>
See notes to consolidated condensed unaudited financial statements
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED
FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND MANAGEMENT'S PLANS REGARDING OPERATING
LOSSES AND LIQUIDITY
BUSINESS - WTC Industries, Inc. and its wholly-owned subsidiaries (collectively
the "Company" or "WTC") develop, manufacture, and market water filtration and
purification products for commercial and personal use. Filtration products
remove or reduce many undesirable contaminants found in water including lead,
chlorine, bad taste and odor. Purification products have the added benefit of
devitalizing or removing viruses, bacteria and parasites.
Many of the Company's purification products contain PentaPure(R) iodinated resin
("PentaPure(R)") and other patented and proprietary technology and
configurations. The PentaPure(R) technology was originally developed by Kansas
State University and has been licensed to the Company by the Kansas State
University Research Foundation ("KSURF") on an exclusive basis. PentaPure(R) and
other state of the art technologies, when applied in the Company's unique
purification products, devitalize bacteria and viruses, remove protozoa and
reduce other targeted contaminants in drinking water. Such systems are capable
of making virtually any source water microbiologically fit to drink and better
tasting. The Company's products fall into the following categories: portable
systems, systems and cartridges for use by original equipment manufacturers
(OEMs), point-of-use systems, point-of-entry systems, mobile purification
systems and commercial/industrial systems and components. The Company's products
are suitable for a broad range of applications including: home, personal travel,
recreation, military, emergency use, commercial and industrial.
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 six month period ended June 30, 1997, the Company incurred a net loss of
$365,074, and cash used in operating activities was $557,935. In addition, as of
June 30, 1997, the Company has a deficiency in working capital of $689,137 and
an accumulated deficit of $13,138,694.
These factors, among others, indicate that the Company may not be able to
continue as a going concern for a reasonable period of time. The Company's
working capital requirements for the first six months of 1997 were met
principally through the issuance of promissory notes of $500,000 to Tapemark
Company, a company affiliated with the Chairman of the Board. In July 1997, the
Company issued a promissory note to Mr. Klas, Sr. for $500,000 to fund
operations for the last six months of 1997.
<PAGE>
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) raising additional capital through private or public
placements of debt or equity securities or through other sources, b) increasing
sales of the new PentaPure(R) InLine point-of-use filtration and purification
systems to niche market OEM customers and international distributors, c)
developing new and expanding existing strategic relationships for marketing
representation and distribution through direct sales organizations for both the
domestic and international markets, and d) continuing to evaluate and manage
costs and expenses and utilizing resources effectively to increase gross profit
margins. There is no assurance that these plans can be successfully
accomplished.
The consolidated condensed 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, 1996, which are included in the Company's Annual Report on Form
10-KSB.
INCOME PER SHARE - In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Standards No. 128, "Earnings per Share". This
Statement specifies the computation, presentation, and disclosure requirements
for earnings per share. This Statement is effective for financial statements
issued for periods after December 15, 1997, including interim periods. Adoption
by the Company in 1997 is not expected to have a material impact on the earnings
per share computation.
<PAGE>
3. INVENTORIES
Inventories consist of the following: June 30, 1997 December 31, 1996
- ------------------------------------- ------------- -----------------
Raw Materials $ 648,273 $ 459,724
Work-in-process 39,843 33,408
Finished Goods 89,343 158,763
---------- ----------
$ 777,459 $ 651,895
========== ==========
4. COMMON STOCK
COMMON STOCK - At June 30, 1997 and December 31, 1996, the Company had
20,000,000 shares of $.01 par value common stock authorized, and 10,960,180 and
10,691,698 shares issued and outstanding, respectively.
5. 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, 1997 and 1996.
6. ARRANGEMENTS WITH SUPPLIERS
BOWMAN INDUSTRIES, INC.
Bowman Industries, Inc. ("Bowman") provides production and assembly services
exclusively to the Company. The Company pays Bowman an amount equal to all costs
and operating expenses incurred by Bowman. The Company treats its arrangement
with Bowman as an independent contractor relationship. During the three and six
month periods ended June 30, 1997, the Company paid Bowman a total of $78,000
and $148,000, respectively, compared to $60,000 and $104,000 in the comparable
periods in the prior year.
HYBRID TECHNOLOGIES CORP.
The Company utilizes the services of Hybrid Technologies Corp. ("Hybrid"), an
independent contractor, to manufacture the PentaPure(R) resins. Certain
techniques used to manufacture the PentaPure(R) resins were developed by and are
the property of Hybrid.
<PAGE>
Under the terms of an agreement, the Company has agreed that if it elects to buy
iodinated resin from an outside vendor, it will buy iodinated resin only from
Hybrid. Hybrid has agreed to sell the PentaPure(R) resin only to the Company and
DentalPure Corp. DentalPure Corp. is developing water purification products for
dental uses and does not compete with the Company in any of its product
applications.
TAPEMARK COMPANY
Tapemark Company ("Tapemark"), of West St. Paul, Minnesota, provides assembly
and related support services to the Company for the Amana(R) and PureIt(R)
InLine point-of-use systems. Mr. Robert C. Klas, Sr., the Company's CEO,
Chairman and largest stockholder, is the CEO and Chairman of the Board for
Tapemark. Tapemark also provides auxiliary support services for these product
lines in the areas of packaging, function-testing of the systems, inventory
control, quality support, receiving, warehouse and shipping. During the three
and six month periods ended June 30, 1997 the Company paid Tapemark a total of
$31,000 and $81,000, respectively.
POROUS MEDIA CORPORATION
On February 4, 1997, the Company entered into a five year requirements contract
with Porous Media under which the Company will purchase all of its cyst filter
requirements for the PentaPure(R) Sport Purification System and Spring(R)
Filtration System beginning April 1, 1997. The Company agreed to purchase a
minimum of 100,000 filters per year throughout the term (each such 12-month
period is a year). The Company's performance under the contract is personally
guaranteed, up to $100,000, by the Company's Chairman.
7. NOTES PAYABLE AND BANK LINE OF CREDIT
The Company has issued two promissory notes of $250,000 each for loans from
Tapemark which matured on June 30, 1997 and have been extended to mature on
December 31, 1997. On July 7, 1997, the Company issued an additional $500,000
promissory note to Mr. Klas, Sr., which also matures on December 31, 1997.
On June 22, 1997, the Company paid $51,372 in cash and issued 193,482 shares of
the Company's Common Stock valued at $.90 in full settlement of a promissory
note dated March 22, 1996 in the face amount of $186,607 held by the Company's
former CEO. The Company realized an extraordinary loss of $38,899 related to the
extinguisment of the promissory note.
The Company maintains a $750,000 bank line of credit which is not secured by the
Company, but has been guaranteed by the Chairman of the Board. The amount
outstanding at June 30, 1997 is $745,500. Unless it is extended or renewed, the
line of credit will expire on May 31, 1998.
<PAGE>
8. LONG TERM OBLIGATIONS
The Company has outstanding $1,450,000 in principal of promissory notes that
mature May 31, 1999 and were issued by the Company under its Private Placement
Memorandum dated May 25, 1994. On June 2, 1997, the Company offered the note
holders the right to exchange these notes for newly issued shares of the
Company's Common Stock and a three year redeemable warrant. Each holder who
accepts the Company's offer would receive, for each $100,000 in principal
indebtedness so converted, 80,000 shares of Common Stock and a three year
redeemable Warrant to purchase 20,000 shares of Common Stock at an exercise
price of $1.25 per share.
The Company's offer is subject to the condition that the holders of at least
$1,000,000 in principal amount of 1994 notes accept the Company's offer.
Management believes that the Company will reach the minimum benchmark and that
the offering will close in the third quarter.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 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 six month period ended June 30, 1997, the Company incurred a net loss of
$365,074, and cash used in operating activities was $557,935. In addition, as of
June 30, 1997, the Company has a deficiency in working capital of $689,137 and
an accumulated deficit of $13,138,694.
These factors, among others, indicate that the Company may not be able to
continue as a going concern for a reasonable period of time. The Company's
working capital requirements for the first six months of 1997 were met
principally through the issuance of promissory notes of $500,000 to Tapemark
Company, a company affiliated with Mr. Robert C. Klas, Sr., Chairman of the
Board. In July 1997, the Company issued a promissory note to Mr. Klas, Sr. for
$500,000 to fund operations for the last six months of 1997.
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
<PAGE>
sufficient operating cash flows can be generated to support the Company's cost
structure: a) raising additional capital through private or public placements of
debt or equity securities or through other sources, b) increasing sales of the
new PentaPure(R) InLine point-of-use filtration and purification systems to
niche market OEM customers and international distributors, c) developing new and
expanding existing strategic relationships for marketing representation and
distribution through direct sales organizations for both the domestic and
international markets, and d) continuing to evaluate and manage costs and
expenses and utilize resources effectively to increase gross profit margins and
reduce selling and general and administrative expenses. There is no assurance
that these plans can be successfully accomplished.
The consolidated condensed 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.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE AND SIX MONTHS ENDED
JUNE 30, 1996
NET SALES. The Company had net sales of $1,341,652 and $2,398,951 for the three
and six month periods ended June 30, 1997, respectively. These results represent
increases of 65% and 79%, respectively, from the net sales of $811,445 and
$1,338,483 for the same periods in 1996. Net sales for the three months ended
June 30, 1997 reflect an increase of 27% from the three months ended March 31,
1997.
For the three and six month periods ended June 30, 1997 international sales were
$1,021,000 and $1,751,000 of total net sales respectively, compared to $544,000
and $897,000 in the comparable periods in the prior year. The increase in
international sales is primarily due to new international marketing and
distribution relationships that were developed in the fourth quarter of 1996
which have begun to generate sales activities in their respective countries. In
addition, the Company's relationship with Ekonet, an existing international
distributor, continues to expand in Poland and Russia.
International sales, by their nature, tend to consist of a limited number of
high-value shipments. While the Company believes that the positive trend in
international 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 possibility, if not the probability, that sales could
fluctuate significantly from quarter to quarter.
To date, the Company has required all payments from international customers to
be in U.S. dollars, therefore, the Company has not been subject to currency
exchange rate
<PAGE>
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.
The Company's domestic sales increased compared to the same period last year
because of shipments to Amana(R) Refrigeration and shipments of the PentaPure(R)
Sport Bottle to new retail and catalog customers. Domestic sales accounted for
27% of total net sales for the first six months of 1997. In the domestic market,
the Company is focusing on OEM and direct sales organizations customers that do
not require large advertising and sales promotion expenditures.
During 1997 and 1996, the average selling prices of the Company's products have
generally remained unchanged, therefore, the increase in sales reflects
increases in the number of units sold.
COST OF GOODS SOLD. For the three and six month periods ended June 30, 1997, the
cost of goods sold were $982,468 and $1,775,547, respectively, representing
73.2% and 74.0% of net sales, respectively. The cost of goods sold for the same
periods in 1996 were $1,008,851 and $1,518,699, respectively, representing
124.3% and 113.5% of net sales, respectively. The decrease in cost of goods sold
from 1996 to 1997 is primarily due to the Company taking a reserve for obsolete
inventory of $250,000 in second quarter 1996.
GROSS PROFIT. For the three and six month periods ended June 30, 1997, the
Company recognized a gross profit of $359,184 and $623,404, respectively,
representing 26.8% and 26.0% of net sales, respectively. In 1996, the Company
recognized a gross loss of ($197,406) and ($180,216), respectively, representing
(24.3%) and (13.5%) of net sales, respectively. The increase in gross profit is
due primarily to the increase in net sales, improvements in manufacturing
efficiency and the reduction in obsolete inventory. The Company is evaluating
whether it can further improve its gross profit margin through enhanced pricing
strategies, outsourcing assembly operations, improved procurement management and
revised sales representatives commission structures.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three and six month
periods ended June 30, 1997, selling, general and administrative expenses were
$389,335 and $735,953, respectively, representing 29.0% and 30.7% of net sales,
respectively. Selling, general and administrative expenses were $702,997 and
$1,357,752, representing 86.6% and 101.4% of net sales, respectively, for the
same periods in 1996.
SALES AND MARKETING EXPENSES - For the three and six month periods ended June
30, 1997, sales and marketing expenses were $248,827 and $409,840, representing
18.5% and 17.1% of net sales, respectively. The sales and marketing expenses for
the same periods in 1996 were $379,058 and $725,963, respectively. During the
first six months of 1997, the
<PAGE>
Company has reduced its sales and marketing expenses by $316,000 primarily due
to lower personnel expenses and reduced promotional expenses. During 1996, in
connection with the introduction of the Spring(R), PentaPure(R) Sport Bottle and
PureIt(R) product lines, the Company made significant expenditures for sales
brochures, marketing materials, packaging, trade shows, promotion and selling
expenses.
GENERAL AND ADMINISTRATIVE EXPENSES - For the three and six month periods ended
June 30, 1997, general and administrative expenses were $140,508 and $326,113,
representing 10.5% and 13.6% of total net sales, respectively. The general and
administrative expenses for the same periods in 1996 were $323,939 and $631,789,
respectively. The reduction in general and administrative expenses was due
primarily to reductions in professional fees, outside services and payroll
related expenses. During first quarter 1996, the Company incurred large
professional fees associated with various litigation matters and the Company's
unsuccessful efforts to raise capital from new investors.
RESEARCH AND DEVELOPMENT EXPENSES. For the three and six month periods ended
June 30, 1997, research and development expenses were $45,139 and $89,034,
respectively. The research and development expenses for the same periods in 1996
were $39,156 and $81,493, respectively. Such expenses, by their nature, tend to
fluctuate in amount and as a percentage of sales. The Company's current research
and development focus is to complete filtration and purification cartridge
configurations for the new PureIt(R) InLine product line.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, the Company had a working capital deficit (total current
liabilities in excess of total current assets) of $689,137 compared with a
working capital deficit of $713,153 as of December 31, 1996. During the six
month period ended June 30, 1997, the Company used short-term loans from an
affiliated company as a source of working capital to fund its operations.
For the six month period ended June 30, 1997, cash decreased $51,056 primarily
due to cash used in operations of $557,935, which was essentially offset by cash
provided by financing activities of $454,758. Significant cash uses by
operations included decreases in accounts payable of $198,996 and accrued
expenses of $174,528 and an increase in inventory of $125,564, partially offset
by a decrease in accounts receivable of $160,543. Net cash provided by investing
activities consisted of applications of restricted cash of $73,875 for payment
of interest, less purchases of property and equipment of $21,754. Net cash
provided by financing activities was from issuance of notes payable of $500,000
and issuance of common stock for $15,000, partially offset by payments on
long-term debt of $4,370, payment on the bank line of credit of $4,500 and
payments on notes payable of $51,372.
<PAGE>
During the same six month period in 1996, cash increased $28,980, primarily due
to $2,095,096 from financing activities, which were essentially offset by cash
used in operations of $2,005,280. Significant cash used by operations included a
increase in accounts receivable of $98,581 and inventory of $322,338, exclusive
of the provision for obsolete inventory, and a decrease in accounts payable of
$311,732, partially offset by an increase in accrued expenses of $78,486. Net
cash used in investing activities consisted of purchases of property and
equipment of $134,157 less applications of restricted cash of $73,321. Net cash
provided by financing activities consisted primarily of $2,200,00 net proceeds
from cash advances and the sale of common stock to the Chairman of the Board
offset by payments on long-term debt of $104,904.
The Company estimates that it will have additional working capital needs of
approximately $500,000 to $1 million during the remainder of 1997 to fund its
operations and continue market introduction of the PentaPure(R) Sport Bottle and
the PureIt(R) InLine product line. The Company also anticipates that it will
have to fund growth in inventories and accounts receivable. The Company does not
anticipate that it will have significant capital expenditures in 1997.
The Company has issued two promissory notes of $250,000 each for loans from
Tapemark which matured on June 30, 1997 and have been extended to mature on
December 31, 1997. On July 7, 1997, the Company issued an additional $500,000
promissory note to Mr. Klas, Sr., which also matures on December 31, 1997.
On June 22, 1997, the Company paid $51,372 in cash and issued 193,482 shares of
the Company's Common Stock in full settlement of a promissory note dated March
22, 1996 in the face amount of $186,607 held by the Company's former CEO. The
Company realized an extraordinary loss of $38,899 related to the extinguisment
of the promissory note.
The Company maintains a $750,000 bank line of credit which is unsecured by the
Company, but has been guaranteed by the Chairman of the Board. The amount
outstanding at June 30, 1997 is $745,500. Unless it is extended or renewed, the
line of credit will expire on May 31, 1998. If the line of credit expires, and
the Company is required to pay off the $750,000 balance, the Company's liquidity
will be adversely affected.
The Company has outstanding $1,450,000 in principal of promissory notes that
mature May 31, 1999 and were issued by the Company under its Private Placement
Memorandum dated May 25, 1994. On June 2, 1997, the Company offered the note
holders the right to exchange these notes for newly issued shares of the
Company's Common Stock and a three year redeemable warrant. Each holder who
accepts the Company's offer would receive, for each $100,000 in principal
indebtedness so converted, 80,000 shares of Common Stock and a three year
redeemable Warrant to purchase 20,000 shares of Common Stock at an exercise
price of $1.25 per share.
<PAGE>
The Company's offer is subject to the condition that the holders of at least
$1,000,000 in principal amount of 1994 notes accept the Company's offer.
Management believes that the Company will reach the minimum benchmark and that
the offering will close in the third quarter.
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 OEM customer base and its sales of
the PureIt(R) InLine point-of-use systems and increase sales of the PentaPure(R)
Sport Purification Bottle to niche markets such as outdoor recreation, military,
and emergency relief. 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. These
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. 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.
EFFECTS OF INFLATION
The Company believes that, during the periods discussed above, inflation has not
had a material impact on the Company's business.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On June 22, 1997, the Company issued 193,482 shares of Common Stock and paid
$51,372 in full settlement of a promissory Note dated March 22, 1996 in the face
amount of $186,607. There were no underwriters or placement agents involved in
this issuance and no commissions paid. The shares were issued to one person who
acquired the shares as an investment for his own account and not with a view to
a distribution. Based on these facts the Company relied on the exemption
provided by section 4(2) of the Securities Act of 1933, as amended.
<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
- ------- ----------------------------------- ----------------
27 Financial Data Schedule Filed Herewith
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the second quarter of 1997.
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 31, 1997 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)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM WTC
INDUSTRIES, INC. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF
JUNE 30, 1997 AND 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,268
<SECURITIES> 0
<RECEIVABLES> 471,468
<ALLOWANCES> 16,000
<INVENTORY> 777,459
<CURRENT-ASSETS> 1,276,200
<PP&E> 907,933
<DEPRECIATION> 588,576
<TOTAL-ASSETS> 1,656,271
<CURRENT-LIABILITIES> 1,965,337
<BONDS> 1,461,638
0
0
<COMMON> 109,602
<OTHER-SE> (1,880,306)
<TOTAL-LIABILITY-AND-EQUITY> 1,656,271
<SALES> 2,398,951
<TOTAL-REVENUES> 2,398,951
<CGS> 1,775,547
<TOTAL-COSTS> 824,987
<OTHER-EXPENSES> 163,491
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 126,401
<INCOME-PRETAX> (365,074)
<INCOME-TAX> 0
<INCOME-CONTINUING> (365,074)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (365,074)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
