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, 1998, 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
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(State or Other Jurisdiction (IRS Employer
of Incorporation) Identification No.)
150 MARIE AVENUE EAST, WEST ST. PAUL, MINNESOTA 55118
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(Address of Principal Executive Offices) (Zip Code)
(651) 450-4913
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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.
11,400,180 shares of Common Stock as of August 12, 1998
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, 1998 and December 31, 1997 3
Condensed Consolidated Unaudited Statements of Operations
Three Months Ended June 30, 1998 and 1997 4
Condensed Consolidated Unaudited Statements of Operations
Six Months Ended June 30, 1998 and 1997 5
Condensed Consolidated Unaudited Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997 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>
ASSETS June 30, December 31,
- ------ 1998 1997
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 34,330 $ 5,241
Accounts receivable, net of allowance for doubtful accounts
of $11,000 and $16,000, respectively 542,740 153,303
Inventories (Note 4) 823,810 1,084,448
Prepaid expenses and other 18,024 8,120
------------- -------------
TOTAL CURRENT ASSETS 1,418,904 1,251,112
PROPERTY AND EQUIPMENT 817,216 926,159
Less accumulated depreciation 538,648 680,500
------------- -------------
278,568 245,659
OTHER ASSETS 20,365 38,407
------------- -------------
$ 1,717,837 $ 1,535,178
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- --------------------------------------
CURRENT LIABILITIES
Current maturities of long-term obligations $ 1,456,230 $ 5,729
Notes payable 3,175,915 2,350,000
Accounts payable 639,085 199,355
Accrued Interest 43,447 87,896
Accrued expenses - other 291,815 276,933
------------- -------------
TOTAL CURRENT LIABILITIES 5,606,492 2,919,913
LONG-TERM OBLIGATIONS, net of current maturities 5,408 1,458,654
STOCKHOLDERS' DEFICIT (Note 5)
Common stock 114,002 110,352
Additional paid-in capital 11,711,665 11,347,639
Receivable from officer on issuance of common stock (15,000) (15,000)
Accumulated deficit (15,704,730) (14,286,380)
------------- -------------
(3,894,063) (2,843,389)
------------- -------------
$ 1,717,837 $ 1,535,178
============= =============
</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,
---------------------------------
1998 1997
------------ ------------
<S> <C> <C>
NET SALES $ 1,170,535 $ 1,341,652
COST OF GOODS SOLD 1,265,989 982,468
------------ ------------
GROSS (LOSS) PROFIT (95,454) 359,184
EXPENSES
Selling, general and administrative 276,080 389,335
Research and development 111,108 45,139
Other 350,000
------------ ------------
737,188 434,474
------------ ------------
LOSS FROM OPERATIONS (832,642) (75,290)
OTHER EXPENSE, NET (110,861) (61,675)
LOSS ON DISPOSAL OF FIXED ASSETS (10,263)
------------ ------------
(121,124) (61,675)
------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (953,766) (136,965)
EXTRAORDINARY ITEM (LOSS ON EXTINGUISHMENT
OF DEBT) 38,899
------------ ------------
NET LOSS $ (953,766) $ (175,864)
============ ============
NET LOSS PER COMMON SHARE - BASIC & DILUTED
LOSS BEFORE EXTRAORDINARY ITEM $ (0.08) $ (0.02)
EXTRAORDINARY ITEM (LOSS ON EXTINGUISHMENT
OF DEBT) 0.00
NET LOSS $ (0.08) $ (0.02)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC & DILUTED 11,252,000 10,786,000
============ ============
</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,
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
NET SALES $ 1,697,942 $ 2,398,951
COST OF GOODS SOLD 1,779,118 1,775,547
----------- -----------
GROSS (LOSS) PROFIT (81,176) 623,404
EXPENSES
Selling, general and administrative 559,909 735,953
Research and development 204,662 89,034
Other 350,000
----------- -----------
1,114,571 824,987
----------- -----------
LOSS FROM OPERATIONS (1,195,747) (201,583)
OTHER EXPENSE, NET (212,340) (124,592)
LOSS ON DISPOSAL OF FIXED ASSETS (10,263)
----------- -----------
(222,603) (124,592)
----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM (1,418,350) (326,175)
EXTRAORDINARY ITEM (LOSS ON EXTINGUISHMENT
OF DEBT) 38,899
----------- -----------
NET LOSS $(1,418,350) $ (365,074)
=========== ===========
NET LOSS PER COMMON SHARE - BASIC & DILUTED
LOSS BEFORE EXTRAORDINARY ITEM $ (0.13) $ (0.03)
EXTRAORDINARY ITEM (LOSS ON EXTINGUISHMENT
OF DEBT) 0.00
NET LOSS $ (0.13) $ (0.03)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC & DILUTED 11,144,000 10,753,000
=========== ===========
</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,
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,418,350) $ (365,074)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 72,515 98,948
Provision for obsolete inventory 40,000
Other - royalty impairment writedown 350,000
Loss on settlement of note payable 38,899
Loss on disposal of property & equipment 10,263
Changes in operating assets and liabilities:
Accounts receivable (389,437) 160,543
Inventories 220,638 (125,564)
Prepaid expenses and other (946) 7,837
Accounts payable 439,730 (198,996)
Accrued expenses 114,025 (174,528)
----------- -----------
Net cash used in operating activities (561,562) (557,935)
----------- -----------
INVESTING ACTIVITIES
Restricted cash 73,875
Purchases of property and equipment (106,604) (21,754)
----------- -----------
Net cash provided by (used) in investing activities (106,604) 52,121
----------- -----------
FINANCING ACTIVITIES
Proceeds from loans by director/shareholder 700,000
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 (2,745) (4,370)
----------- -----------
Net cash provided by financing activities 697,255 454,758
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 29,089 (51,056)
CASH AND CASH EQUIVALENTS:
Beginning of period 5,241 53,324
----------- -----------
End of period $ 34,330 $ 2,268
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid during the period for interest $ 123,991 $ 119,797
=========== ===========
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
===========
Stock options issued for services $ 17,677
===========
Stock options issued for rent $ 30,000
===========
Accrued interest payable converted to a note payable $ 125,915
===========
Common stock issued for royalty agreement amendment $ 350,000
===========
</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, light 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, 1998, the Company incurred a net loss of
$1,418,350, and cash used in operating activities was $561,562. In addition, as
of June 30, 1998, the Company has a deficiency in working capital of $4,187,588
and an accumulated deficit of $15,704,730.
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 1998 were met
principally through the issuance of demand notes payable of $700,000 to Mr.
Klas, Sr., Chairman of the Board. In addition, on June 30, 1998, the Company
converted $95,242 of accrued interest payable into demand note payables to Mr.
Klas, Sr. and Tapemark Company ("Tapemark"), a company affiliated with Mr. Klas,
Sr., for $69,208 and $26,034, respectively. On July 1, 1998, the
<PAGE>
Company issued an additional demand note payable to Mr. Klas, Sr. for $500,000
to fund operations for the last six months of 1998.
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, 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. BASIS OF PRESENTATION
The accompanying condensed consolidated unaudited 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, 1997, which are included in the Company's Annual Report on Form
10-KSB.
3. NEW ACCOUNTING STANDARDS
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 130, Comprehensive Income. SFAS No. 130 requires reporting
of comprehensive income, which is defined as the change in equity during the
period from transactions and other events from non-owner sources. The Company
had no such transactions during the period presented.
<PAGE>
4. INVENTORIES
Inventories consist of the following: June 30, 1998 December 31, 1997
- ------------------------------------- ------------- -----------------
Raw Materials $ 532,337 $ 670,943
Work-in-process 39,843 118,557
Finished Goods 251,630 294,948
------------ -----------
$ 823,810 $ 1,084,448
============ ===========
5. COMMON STOCK
COMMON STOCK - The Company had 20,000,000 shares of $.01 par value common stock
authorized, with 11,400,180 and 11,035,180 shares issued and outstanding on June
30, 1998 and December 31, 1997, respectively.
PREFERRED STOCK - At June 30, 1998 and December 31, 1997, there were 2,000,000
shares of the Company's 9% convertible, cumulative, nonvoting, $1 par value
preferred stock authorized and 0 shares issued and outstanding.
6. COMMITMENTS AND CONTINGENCIES
MINIMUM PURCHASE COMMITMENT - Effective June 15, 1997, the Company entered into
a five-year requirement contract with Porous Media under which the Company will
purchase all of its cyst filters required for the PentaPure(R) Sport
Purification System and Spring(R) Filtration System (Systems). The Company
agreed to purchase a minimum of 100,000 filters per year throughout the term of
the agreement at an average price of $1.72 per filter. The Company's performance
under the contract is personally guaranteed by the Company's Chairman, up to
$100,000. Through June 30, 1998, the Company purchased 35,800 units ($64,000) of
inventory pursuant to this contract. The Company has accrued the unfulfilled pro
rata commitment of approximately $108,500 in connection with this agreement as
of June 30, 1998.
LICENSE AGREEMENT - The Company manufactures and markets certain of its products
pursuant to a license agreement 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 cash 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 (March 2008). 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. In May 1998, the Company amended its royalty agreement
with KSURF retroactive to January 1, 1998. The amendment consisted of the
Company issuing 365,000 shares of Company common stock in exchange for reducing
the annual minimum cash payment from $75,000 to $25,000 for the remainder of
the license agreement. The Company incurred a one-time charge of $350,000
related to
<PAGE>
this transaction due to the uncertainty of the future realization of its value.
Exclusive of the one-time charge, royalty expenses were $12,500 and $37,500,
respectively, for the six month periods ended June 30, 1998 and 1997.
ARRANGEMENTS WITH SUPPLIERS - Bowman Industries, Inc. - On January 1, 1998, the
Company changed its relationship with Bowman Industries, Inc. (Bowman) to that
of an employer-employee. As a result, the Company now pays operating expenses as
incurred, and individuals formerly employed by Bowman are employees of the
Company. During 1997, Bowman provided production and assembly services
exclusively to the Company as an independent contractor. The Company paid Bowman
an amount equal to all costs and operating expenses incurred by Bowman. During
the three and six month periods ended June 30, 1997, the Company paid Bowman a
total of $78,000 and $148,000,respectively, under the previous arrangement.
Hybrid Technologies, Corp. - The Company utilizes the services of Hybrid
Technologies Corp. (Hybrid), an independent contractor, to 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 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. DentalPure Corp. is developing water
purification products for dental applications and does not compete with the
Company in any of its product applications.
7. RELATED PARTY TRANSACTIONS
Tapemark Company, 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. During
1997, Tapemark provided 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, whereas in 1998, Tapemark
only provides raw material components. During the three and six month periods
ended June 30, 1998, the Company paid Tapemark a total $16,000 and $30,000,
respectively, compared to $31,000 and $81,000 in the comparable periods in 1997.
8. NOTES PAYABLE AND LONG TERM OBLIGATIONS
At June 30, 1998 and December 31, 1997, the Company had a $750,000 note payable
to a financial institution. The note payable to the bank accrues interest at
prime, is due on May 31, 1999, and is secured by substantially all of the
Company's assets in addition to a guarantee by the Chairman of the Board.
On June 30, 1998, the Company replaced a $500,000 demand note payable to
Tapemark with a new demand note payable for $526,034, which includes the
original principal of
<PAGE>
$500,000 and accrued interest payable through June 30,
1998 of $26,034. The new loan matures on December 31, 1998. Interest accrues at
a rate of prime plus 2% payable at maturity.
On June 30, 1998, the Company replaced demand notes payable totally $1,830,673
payable to Mr. Klas, Sr. with a new demand note payable of $1,899,881, which
includes the original principal of $1,830,673 and accrued interest payable
through June 30, 1998 of $69,208. The new loan matures on December 31, 1998.
Interest accrues at a rate of prime plus 1% payable at maturity.
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. The notes bear interest at the prime rate plus 2%
and interest is payable quarterly.
9. SUBSEQUENT EVENT
On July 1, 1998, the Company issued a new demand note payable to Mr. Klas, Sr.
for $500,000 of which the Company received $125,000 on July 13, 1998. The note
payable accrues interest at the prime rate plus 1% and both interest and
principal are due on December 31, 1998.
On July 1, 1998, the Company modified the amended license agreement with KSURF
(NOTE 6) whereby the Company issued an additional 60,000 shares of Company
common stock in consideration for a one-year restriction on the sale of all
425,000 shares of common stock (May 9, 1999). No additional value was attributed
to the incremental shares due to the restriction placed on all 425,000 shares.
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, 1998, the Company incurred a net loss of
$1,418,350, and cash used in operating activities was $561,562. In addition, as
of June 30, 1998, the Company has a deficiency in working capital of $4,187,588
and an accumulated deficit of $15,704,730.
<PAGE>
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 1998 were met
principally through the issuance of promissory notes of $700,000 to Mr. Klas,
Sr. In addition, on June 30, 1998, the Company converted $95,242 of accrued
interest payable into demand note payables to Mr. Klas, Sr. and Tapemark, a
company affliated with Mr. Klas, Sr., for $69,208 and $26,034, respectively. On
July 1, 1998, the Company issued a demand note payable to Mr. Klas, Sr. for
$500,000 to fund operations for the last six months of 1998.
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, 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, 1998 COMPARED TO THREE AND SIX MONTHS ENDED
JUNE 30, 1997
NET SALES. The Company had net sales of $1,170,535 and $1,697,942 for the three
and six month periods ended June 30, 1998, respectively. These results represent
decreases of 12.8% and 29.2%, respectively, from the net sales of $1,341,652 and
$2,398,951 for the same periods in 1997.
International sales were approximately $462,000 and $802,000 for the three and
six month periods ended June 30, 1998, respectively. This represents a decrease
of 54.8% and 54.2%, respectively, from international sales of approximately
$1,021,000 and $1,751,000 for the same periods in 1997. International sales are
substantially lower primarily due to the Asian financial crisis and lower demand
for products in Poland and Russia.
<PAGE>
The Company's transactions are denominated in U.S. dollars; as such,
fluctuations in foreign currency exchange rates have historically had little
impact on the Company. However, beginning in third quarter 1997, foreign
currency exchange rate fluctuations had a material impact on the demand for the
Company's products in certain foreign markets, especially in the Asian market.
International sales, by their nature, tend to consist of a limited number of
high-value shipments. 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, cause sales to fluctuate significantly from quarter to quarter.
The Company's domestic sales were approximately $708,000 and $896,000 for the
three and six month periods ended June 30, 1998. This represents an increase of
120.6% and 38.3%, respectively, from the domestic sales of approximately
$321,000 and $648,000 for the same periods in 1997. The increase in domestic
sales is primarily attributed to increased sales to Amana Appliances ("Amana").
In the second quarter, the Company began shipping a new built-in refrigerator
filtration system exclusively designed for Amana's ice-and-water refrigerator
units. The Company anticipates sales to Amana to continue to be strong for the
remainder of 1998 because of this new refrigerator product.
COST OF GOODS SOLD. For the three and six month periods ended June 30, 1998, the
cost of goods sold were $1,265,989 and $1,779,118, respectively, representing
108.2% and 104.8% of net sales, respectively. The cost of goods sold for the
same periods in 1997 were $982,468 and $1,775,547, respectively, representing
73.2% and 74.0% of net sales, respectively. The increase in cost of goods sold
from 1997 to 1998 is primarily due to start up production costs for the new
Amana refrigerator project, increased inventory reserves of $40,000 for slow
moving inventory, and $82,500 related to the cyst filter requirements contract
with Porous Media. Going forward, the Company anticipates Amana production costs
to be lower because of lower material and labor costs and improved manufacturing
processes. The Company will continue to reserve for the Porous Media cyst filter
requirements contract of approximately $14,000 per month.
GROSS PROFIT. For the three and six month periods ended June 30, 1998, the
Company recognized a gross loss of ($95,454) and ($81,176), respectively,
representing (8.2%) and (4.8%) of net sales, respectively. In 1997, the Company
recognized a gross profit of $359,184 and $623,404, respectively, representing
26.8% and 26.0% of net sales, respectively. The decrease in gross profit is due
primarily to decrease in international sales, the Amana refrigerator project
start up production costs and the reserve for slow moving inventory. The Company
believes it will improve its gross profit margin. However, margins may continue
to be negatively impacted if the Company is successful in increasing sales to
OEMs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three and six month
periods ended June 30, 1998, selling, general and administrative expenses were
$276,080 and
<PAGE>
$559,909, respectively, representing 23.6% and 33.0% of net sales, respectively.
Selling, general and administrative expenses were $389,335 and $735,953,
representing 29.0% and 30.7% of net sales, respectively, for the same periods in
1997.
SALES AND MARKETING EXPENSES - For the three and six month periods ended June
30, 1998, sales and marketing expenses were $173,321 and $320,448, representing
14.8% and 18.9% of net sales, respectively. The sales and marketing expenses for
the same periods in 1997 were $248,827 and $409,840, respectively. The reduction
in sales and marketing expenses is primarily due to lower expenses associated
with trade shows, sales commissions, marketing brochures and advertising. In
addition, the Company is focusing on other OEM opportunities that do not require
large advertising and sales promotion expenditures.
Beginning in 1997, the Company began a new marketing strategy that focuses the
Company's sales and distribution efforts on OEM customers. Because the Company
has limited capital, the Company is implementing sales strategies that utilize
the brand recognition and the sales and distribution networks of the OEM
customer. The Company anticipates sales and marketing expenses to remain at
current levels for the remainder of 1998.
GENERAL AND ADMINISTRATIVE EXPENSES - For the three and six month periods ended
June 30, 1998, general and administrative expenses were $102,759 and $239,461,
representing 8.8% and 14.1% of total net sales, respectively. The general and
administrative expenses for the same periods in 1997 were $140,508 and $326,113,
respectively. The reduction in general and administrative expenses is due
primarily to reductions in professional fees, outside services and building
related expenses.
OTHER - For the three and six month periods ended June 30, 1998, other
operating expense was $350,000 representing 29.9% and 20.6% of total net sales,
respectively. In May 1998, the Company agreed to issue 365,000 shares of Company
common stock in exchange for reducing the annual minimum cash payment from
$75,000 to $25,000 for the remainder of the license agreement. A one-time charge
of $350,000 was incurred related to this transaction due to the uncertainty of
the future realization of its value.
RESEARCH AND DEVELOPMENT EXPENSES. For the three and six month periods ended
June 30, 1998, research and development expenses were $111,108 and $204,662,
respectively. The research and development expenses for the same periods in 1997
were $45,139 and $89,034, respectively. Research and development costs are
higher in 1998 as compared to 1997 due primarily to National Sanitation
Foundation (NSF) testing and certification efforts related to the new Amana
refrigerator product and the PentaPure(R) Inline Filtration Systems product
line. The Company's current research and development focus is to complete and
expand NSF certification for the above products in 1998.
OTHER EXPENSE (INCOME). For the three and six month periods ended June 30,
1998, other expenses were $121,124 and $222,603, respectively. Other expenses
for the same
<PAGE>
periods in 1997 were $61,675 and $124,592, respectively. The majority portion of
other expense is interest expense. Interest expense for the three and six months
ended June 30, 1998 is $106,580 and $203,775, respectively. Interest expense for
the same periods in 1997 were $67,394 and $126,107, respectively. In May 1998,
the Company retired fixed assets resulting in a loss on disposal of $10,263.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company had a working capital deficit (total current
liabilities in excess of total current assets) of $4,187,588 compared with a
working capital deficit of $1,668,801 as of December 31, 1997. This
deterioration is related to the Private Placement Debt that is now due in less
than twelve months and is classified as a current liability. During the six
month period ended June 30, 1998, the Company used short-term loans of $700,000
from Mr. Klas, Sr. as a source of working capital to fund its operations.
For the six month period ended June 30, 1998, cash increased $34,330 primarily
due to cash provided by financing activities of $697,255, which was essentially
offset by cash used in operations of $561,562 and cash used in investing
activities of $106,604. Significant cash uses by operations included the net
loss and increases in accounts receivable of $389,437, partially offset by
increases in accounts payable of $439,730 and accrued expenses of $114,025 and
an decrease in inventory of $220,638. Net cash used by investing activities
consisted of purchases of property and equipment of $106,604. Net cash provided
by financing activities was from issuance of notes payable of $700,000,
partially offset by payments on long-term debt of $2,745.
During the same six month period in 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.
The Company estimates that it will have additional working capital needs of
approximately $500,000 to $1 million during the remainder of 1998 to fund its
operations. The Company also anticipates that it will have to fund growth in
inventories and accounts receivable. The Company does anticipate that it will
have additional capital expenditures of $100,000 for the remainder of 1998.
<PAGE>
At June 30, 1998 and December 31, 1997, the Company had a $750,000 note payable
to a financial institution. The note payable to the bank accrues interest at
prime, is due on May 31, 1999, and is secured by substantially all of the
Company's assets in addition to a guarantee by the Chairman. If the note payable
is not renewed and the Company is required to pay off the $750,000 balance, the
Company's liquidity could be adversely affected.
On June 30, 1998, the Company replaced a $500,000 demand note payable to
Tapemark with a new demand note payable for $526,034, which includes the
original principal of $500,000 and accrued interest payable through June 30,
1998 of $26,034. The new loan matures on December 31, 1998. Interest accrues at
a rate of prime plus 2% payable at maturity.
On June 30, 1998, the Company replaced demand notes payable totaling $1,830,673
payable to Mr. Klas, Sr. with a new demand note payable of $1,899,881, which
includes the original principal of $1,830,673 and accrued interest payable
through June 30, 1998 of $69,208. The new loan matures on December 31, 1998.
Interest accrues at a rate of prime plus 1% payable at maturity.
On July 1, 1998, the Company issued an additional note payable to Mr. Klas, Sr.
for $500,000 of which the Company received $125,000 in advances on July 13,
1998. The note payable accrues interest at the prime rate plus 1% and both
interest and principal are due on December 31, 1998.
The Company has outstanding $1,450,000 in principal of promissory notes that
mature May 31, 1999 and were issued by the Company in a private placement in May
1994. The notes bear interest at the prime rate plus 2% and interest is payable
quarterly.
The Company's plan of operations over the next 12 months is to continue to
implement its OEM sales and marketing strategy to expand its OEM customer base
and increase domestic sales. In addition, the Company will attempt to enhance
its Amana production line capabilities to improve gross profit margins. The
Company will continue to pursue NSF registration and certification for the Amana
and PentaPure(R) InLine Filtration Systems product lines.
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.
<PAGE>
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 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 1998.
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 12, 1998 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 COMSOLIDATED FINANCIAL STATEMENTS AS OF
JUNE 30, 1998 AND 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 34,330
<SECURITIES> 0
<RECEIVABLES> 553,740
<ALLOWANCES> 11,000
<INVENTORY> 823,810
<CURRENT-ASSETS> 1,418,904
<PP&E> 817,216
<DEPRECIATION> 538,648
<TOTAL-ASSETS> 1,717,837
<CURRENT-LIABILITIES> 5,606,492
<BONDS> 5,408
0
0
<COMMON> 114,002
<OTHER-SE> (4,008,065)
<TOTAL-LIABILITY-AND-EQUITY> 1,717,837
<SALES> 1,697,942
<TOTAL-REVENUES> 1,697,942
<CGS> 1,779,118
<TOTAL-COSTS> 1,114,571
<OTHER-EXPENSES> 222,603
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 203,775
<INCOME-PRETAX> (1,418,350)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,418,350)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,418,350)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
