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 September 30, 1998, or
( ) TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF TH
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.)
150 MARIE AVENUE EAST, WEST ST. PAUL, MINNESOTA 55118-4002
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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.
11,460,180 shares of Common Stock as of October 29, 1998
Transitional Small Business Disclosure Format (check one):
Yes ____; No __x__
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WTC INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Unaudited Balance Sheets
September 30, 1998 and December 31, 1997 3
Condensed Consolidated Unaudited Statements of Operations
Three Months Ended September 30, 1998 and 1997 4
Condensed Consolidated Unaudited Statements of Operations
Nine Months Ended September 30, 1998 and 1997 5
Condensed Consolidated Unaudited Statements of Cash Flows
Nine Months Ended September 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
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
- ------ ------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 29,021 $ 5,241
Accounts receivable, net of allowance for doubtful accounts
of $11,000 and $16,000, respectively 506,951 153,303
Inventories (Note 4) 857,554 1,084,448
Prepaid expenses and other 347 8,120
------------- -------------
TOTAL CURRENT ASSETS 1,393,873 1,251,112
PROPERTY AND EQUIPMENT 842,820 926,159
Less accumulated depreciation 572,283 680,500
------------- -------------
270,537 245,659
OTHER ASSETS 16,493 38,407
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$ 1,680,903 $ 1,535,178
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
CURRENT LIABILITIES
Current maturities of long-term obligations $ 1,456,497 $ 5,729
Notes payable 3,425,915 2,350,000
Accounts payable 504,117 199,355
Accrued Interest 106,258 87,896
Accrued expenses - other 191,442 276,933
------------- -------------
TOTAL CURRENT LIABILITIES 5,684,229 2,919,913
LONG-TERM OBLIGATIONS, net of current maturities 3,681 1,458,654
STOCKHOLDERS' DEFICIT (Note 5)
Common stock 114,602 110,352
Additional paid-in capital 11,711,065 11,347,639
Receivable from officer on issuance of common stock (15,000) (15,000)
Accumulated deficit (15,817,674) (14,286,380)
------------- -------------
(4,007,007) (2,843,389)
------------- -------------
$ 1,680,903 $ 1,535,178
============= =============
</TABLE>
See notes to consolidated condensed unaudited financial statements.
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WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended September 30,
--------------------------------
1998 1997
------------ ------------
<S> <C> <C>
NET SALES $ 1,481,609 $ 517,362
COST OF GOODS SOLD 1,172,614 477,838
------------ ------------
GROSS PROFIT 308,995 39,524
EXPENSES
Selling, general and administrative 288,808 316,087
Research and development 11,144 48,108
------------ ------------
299,952 364,195
------------ ------------
INCOME (LOSS) FROM OPERATIONS 9,043 (324,671)
OTHER EXPENSES
Interest Expense (117,708) (77,296)
Other (4,278) (4,243)
Gain on disposal of fixed assets 2,000
------------ ------------
(121,986) (79,539)
------------ ------------
NET LOSS $ (112,943) $ (404,210)
============ ============
NET LOSS PER COMMON SHARE - BASIC & DILUTED
NET LOSS $ (0.01) $ (0.04)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC & DILUTED 11,452,000 11,035,000
============ ============
</TABLE>
See notes to consolidated condensed unaudited financial statements.
4
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WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
NET SALES $ 3,179,550 $ 2,916,313
COST OF GOODS SOLD 2,951,822 2,253,385
------------ ------------
GROSS PROFIT 227,728 662,928
EXPENSES
Selling, general and administrative 848,627 1,052,040
Research and development 215,806 137,142
Other 350,000
------------ ------------
1,414,433 1,189,182
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LOSS FROM OPERATIONS (1,186,705) (526,254)
OTHER EXPENSES
Interest Expense (321,496) (203,696)
Other (12,830) (2,435)
Gain (loss) on disposal of fixed assets (10,263) 2,000
------------ ------------
(344,589) (204,131)
------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (1,531,294) (730,385)
EXTRAORDINARY ITEM (LOSS ON EXTINGUISHMENT
OF DEBT) 38,899
------------ ------------
NET LOSS $ (1,531,294) $ (769,284)
============ ============
NET LOSS PER COMMON SHARE - BASIC & DILUTED
LOSS BEFORE EXTRAORDINARY ITEM $ (0.14) $ (0.07)
EXTRAORDINARY ITEM (LOSS ON EXTINGUISHMENT
OF DEBT) 0.00
------------ ------------
NET LOSS $ (0.14) $ (0.07)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC & DILUTED 11,248,000 10,848,000
============ ============
</TABLE>
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>
Nine months ended September 30,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,531,294) $ (769,284)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 110,432 148,539
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 (353,648) 356,363
Inventories 186,894 (623,678)
Prepaid expenses and other 16,321 17,973
Accounts payable 304,762 (114,075)
Accrued expenses 76,463 (228,901)
----------- -----------
Net cash used in operating activities (789,807) (1,174,164)
----------- -----------
INVESTING ACTIVITIES
Restricted cash 86,822
Purchases of property and equipment (132,208) (40,858)
----------- -----------
Net cash provided by (used) in investing activities (132,208) 45,964
----------- -----------
FINANCING ACTIVITIES
Proceeds from loans by director/shareholder 950,000 650,000
Proceeds from issuance of Common Stock 15,000
Proceeds from affliated company 500,000
Payments on settlement of note payable to Former CEO (51,372)
Payments on long-term obligations (4,205) (7,803)
----------- -----------
Net cash provided by financing activities 945,795 1,105,825
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 23,780 (22,375)
CASH AND CASH EQUIVALENTS:
Beginning of period 5,241 53,324
----------- -----------
End of period $ 29,021 $ 30,949
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid during the period for interest $ 177,219 $ 181,197
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES -
Common stock issued on conversion of accrued expenses $ 125,000
===========
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
===========
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.
6
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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, travel,
recreation, military, emergency and disaster relief, 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 nine month period ended September 30, 1998, the Company incurred a net
loss of $1,531,294, and cash used in operating activities was $789,807. In
addition, as of September 30, 1998, the Company has a deficiency in working
capital of $4,290,356 and an accumulated deficit of $15,817,674.
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 nine months of 1998 were met
principally through the issuance of notes payable of $950,000 to Mr. Klas, Sr.,
Chairman of the Board. In addition, on January 1, 1998 and June 30, 1998, the
Company converted $30,673 and
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$95,242, respectively, of accrued interest payable into note payables to Mr.
Klas, Sr. and Tapemark Company ("Tapemark"), a company affiliated with Mr. Klas,
Sr., for a total of $99,881 and $26,034, respectively.
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 c) developing new and expanding
existing strategic relationships for marketing representation and distribution
through direct sales organizations for both the domestic and international
markets. 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.
8
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4. INVENTORIES
Inventories consist of the following: September 30, 1998 December 31, 1997
- ------------------------------------- ------------------ -----------------
Raw Materials $ 540,690 $ 670,943
Work-in-process 44,328 118,557
Finished Goods 272,536 294,948
---------- ----------
$ 857,554 $1,084,448
========== ==========
5. COMMON STOCK
COMMON STOCK - The Company had 20,000,000 shares of $.01 par value common stock
authorized, with 11,460,180 and 11,035,180 shares issued and outstanding on
September 30, 1998 and December 31, 1997, respectively.
PREFERRED STOCK - At September 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 zero (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. 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 September 30, 1998, the Company completed its' first year
commitment of $172,500 of which $136,500 has been included in the reserve for
slow moving inventory. In addition, the Company has begun to accrue its second
year unfulfilled pro rata commitment of $43,125.
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
9
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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. In the second quarter, the Company incurred
a one-time charge of $350,000 related to this transaction due to the uncertainty
of the future realization of its value. On July 1, 1998, the Company modified
the amended license agreement with KSURF whereby the Company issued 60,000
additional shares of Company common stock in consideration for a one-year
restriction on the sale of all 425,000 shares of common stock. No additional
value was attributed to the incremental shares due to the restriction placed on
all 425,000 shares. Royalty expenses were $18,750 and $56,250, respectively, for
the nine-month periods ended September 30, 1998 and 1997.
ARRANGEMENTS WITH SUPPLIERS - 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 raw materials 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. In 1998,
Tapemark provides raw material components for the above product lines. Whereas
in 1997, Tapemark provided auxiliary support services in the areas of packaging,
inventory control, quality support, receiving, warehouse and shipping. During
the three and nine month periods ended September 30, 1998, the Company paid
Tapemark a total $34,000 and $64,000, respectively, compared to $15,000 and
$103,000 in the comparable periods in 1997.
8. NOTES PAYABLE AND LONG TERM OBLIGATIONS
At September 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.
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At September 30, 1998, the Company had a $526,034 note payable to Tapemark. The
loan matures on December 31, 1998 and interest accrues at a rate of prime plus
2% payable at maturity.
At September 30, 1998, the Company had notes payable totally $2,149,881 payable
to Mr. Klas, Sr. The loan matures on December 31, 1998 and 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 October 14, 1998, the Company received $50,000 cash advance from Mr. Klas,
Sr. on a note payable of $500,000. The note payable accrues interest at the
prime rate plus 1% and both interest and principal are due on December 31, 1998.
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 nine month period ended September 30, 1998, the Company incurred a net
loss of $1,531,294, and cash used in operating activities was $789,807. In
addition, as of September 30, 1998, the Company has a deficiency in working
capital of $4,290,356 and an accumulated deficit of $15,817,674.
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 nine months of 1998 were met
principally through the issuance of promissory notes of $950,000 to Mr. Klas,
Sr. In addition, on January 1, 1998 and June 30, 1998, the Company converted
$30,673 and $95,242, respectively, of accrued interest payable into demand note
payables to Mr. Klas, Sr. and Tapemark, a company affliated with Mr. Klas, Sr.,
for a total of $99,881 and $26,034, respectively.
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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 c) developing new and expanding
existing strategic relationships for marketing representation and distribution
through direct sales organizations for both the domestic and international
markets. 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 NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1997
NET SALES. The Company had net sales of $1,481,609 and $3,179,550 for the three
and nine month periods ended September 30, 1998, respectively. These results
represent increases of 186.4% and 9.0%, respectively, from the net sales of
$517,362 and $2,916,313 for the same periods in 1997.
For the three and nine month periods ended September 30, 1998, domestic sales
were approximately $979,000 and $1,875,000, respectively. These results
represent increases of 345% and 116%, respectively, compared to the 1997
domestic sales of $220,000 and $868,000, respectively. The increase in domestic
sales is primarily due to increased sales to Amana Appliances ("Amana").
Beginning 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 in the fourth quarter.
For the three months ended September 30, 1998, international sales were
approximately $503,000, an increase of 69% from the net sales of $297,000 for
the same period in 1997. The increase in international sales in the third
quarter is due primarily to increase sales of outdoor products to military and
relief organizations. For the nine months ended September 30, 1998,
international sales were approximately $1,305,000, a decrease of 36% compared to
1997 international sales of $2,048,000. International sales continue to be lower
compared to last year due primarily to the Asian financial crisis and lower
demand for products in Eastern Europe.
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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 and deteriorating economic conditions had a
material impact on the demand for the Company's products in certain foreign
markets, especially in the Asian market. In addition, beginning in the third
quarter of 1998, foreign currency exchange rate fluctuations and deteriorating
economic conditions in Russia had a material impact on sales to the Company's
largest distributor. The Company anticipates these trends to continue for the
remainder of 1998 and into the first half of 1999.
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.
COST OF GOODS SOLD. For the three month period ended September 30, 1998, the
cost of goods sold were $1,172,614, representing 79.1% of net sales, compared to
1997 cost of goods sold of $477,838 or 92.4% of net sales. In the third quarter,
as compared to the first six months of 1998, the Company was able to
significantly reduce its cost of goods sold because of reduced labor and
material costs related to Amana production. During the start-up phase for Amana
in the second quarter, the Company had incurred higher than budgeted costs for
both labor and materials that generated cost of goods sold in excess of net
sales. The Company anticipates it can further reduce its Amana production costs
through improved production efficiencies and semi-automation.
For the nine month period ended September 30, 1998, the cost of goods sold were
$2,951,822 or 92.8% of net sales, compared to 1997 cost of goods sold of
$2,253,385, or 77.3% of net sales. The increase in cost of goods sold as a
percentage of sales is primarily due to higher than budgeted production costs
for the Amana refrigerator project during the second quarter, the Porous Media
cyst filter requirements contract reserve of $126,525, and the increase of
$40,000 for slow moving inventory. The Company is pursuing other alternative
uses for the cyst filters.
GROSS PROFIT. For the three month period ended September 30, 1998, the Company
recognized a gross profit of $308,995 representing 20.9% of net sales. For the
same period in 1997, the Company recognized a gross profit of $39,524
representing 7.6% of net sales. The Company improved its gross profit in the
third quarter primarily due to increased sales to Amana combined with improved
production efficiencies. In addition, the Company increased sales of its outdoor
product line, which has higher gross profit margins as compared to other product
lines, to military and emergency relief organizations.
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For the nine month period ended September 30, 1998, the Company recognized a
gross profit of $227,728 representing 7.2% of net sales. For the same period in
1997, the Company recognized a gross profit of $662,928 representing 22.7% of
net sales. The decrease in gross profit for the nine months ended September 30,
1998 is attributed to lower international sales, the Amana refrigerator project
start up production costs in second quarter, and the reserve for both the cyst
filters requirements contract and slow moving inventory.
The Company believes it will continue to improve its gross profit margin.
However, if the Company is successful in increasing sales to OEMs margins may
continue to be negatively impacted.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three and nine month
periods ended September 30, 1998, selling, general and administrative expenses
were $288,808 and $848,627, respectively, representing 19.5% and 26.7% of net
sales, respectively. Selling, general and administrative expenses were $316,087
and $1,052,040, representing 61.1% and 36.1% of net sales, respectively, for the
same periods in 1997.
The reduction in selling, general and administrative expenses is primarily due
to lower expenses associated with trade shows, sales commissions, professional
fees, outside services and building related expenses.
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 selling, general and administrative expenses
to remain at current levels for the remainder of 1998.
OTHER - For the nine month period ended September 30, 1998, other operating
expense was $350,000. In May 1998, the Company agreed to issue 365,000 shares of
Company common stock to KSURF under its license agreement in exchange for
reducing the annual minimum cash payment from $75,000 to $25,000 for the
remainder of the license agreement. This resulted in recognizing $350,000 of
prepaid royalties. In the second quarter, the Company incurred a one-time charge
of $350,000 related to writing off the prepaid royalties due to the uncertainty
of the future realization of its value.
RESEARCH AND DEVELOPMENT EXPENSES. For the three and nine month periods ended
September 30, 1998, research and development expenses were $11,144 and $215,806,
respectively. The research and development expenses for the same periods in 1997
were $48,108 and $137,142, 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.
14
<PAGE>
The Company received NSF listings under standards 42 and 53 for the above
product lines during the third quarter. Going forward, the Company anticipates
that this will have a positive impact for both domestic and international sales.
The Company's current research and development focus will be to obtain NSF
certification for other products in 1999.
OTHER EXPENSE (INCOME). For the three and nine month periods ended September 30,
1998, other expenses, primarily interest expense, were $121,986 and $344,589,
respectively compared to $79,539 and $204,131, respectively, for the same
periods in 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had a working capital deficit (total
current liabilities in excess of total current assets) of $4,290,356 compared
with a working capital deficit of $1,668,801 as of December 31, 1997. This
change is principally due to the reclassification from a long-term liability to
a current liability of the Company's outstanding promissory notes in the
principal amount of $1,450,000, which mature May 1999. During the nine month
period ended September 30, 1998, the Company used short-term loans of $950,000
from Mr. Klas, Sr. as a source of working capital to fund its operations.
For the nine month period ended September 30, 1998, cash increased $23,780,
primarily due to cash provided by financing activities of $945,795, which was
essentially offset by cash used in operations of $789,807 and cash used in
investing activities of $132,208. Significant cash uses by operations included
the net loss and increases in accounts receivable of $353,648, partially offset
by increases in accounts payable of $304,762 and accrued expenses of $76,463 and
an decrease in inventory of $186,894. Net cash used by investing activities
consisted of purchases of property and equipment of $132,208. Net cash provided
by financing activities was from issuance of notes payable of $950,000,
partially offset by payments on long-term debt of $4,205.
During the same nine month period ended September 30, 1997, cash decreased
$22,375, primarily due to cash used in operations of $1,174,164, which was
essentially offset by cash provided by financing activities of $1,105,825.
Significant cash uses by operations included decreases in accounts payable of
$114,075 and accrued expenses of $228,901 and an increase in inventory of
$623,678, partially offset by a decrease in accounts receivable of $356,363. Net
cash provided by investing activities consisted of applications of restricted
cash of $86,822 for payment of interest, less purchases of property and
equipment of $40,858. Net cash provided by financing activities was from
issuance of notes payable totaling $1,150,000 and issuance of common stock for
$15,000, partially offset by payments on long-term debt of $7,803 and payments
on notes payable of $51,372.
15
<PAGE>
The Company estimates that it will have additional working capital needs of
approximately $250,000 during the remainder of 1998 to fund its operations. The
Company does anticipate that it will have additional capital expenditures of
$50,000 for the remainder of 1998. The Company intends to fund these
requirements through continued timely collection of accounts receivable and
further advances from the Chairman of the Board.
At September 30, 1998, 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.
At September 30, 1998, the Company had a $526,034 note payable to Tapemark. The
loan matures on December 31, 1998 and interest accrues at a rate of prime plus
2% payable at maturity.
At September 30, 1998, the Company had notes payable totaling $2,149,881 payable
to Mr. Klas, Sr. The loans mature on December 31, 1998 and interest accrues at a
rate of prime plus 1% payable at maturity.
The Company is attempting to re-negotiate the maturity date for the notes
payable to Mr. Klas, Sr. and Tapemark.
The Company has $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 listings for other product lines.
The Company is 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.
16
<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 third 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: October 29, 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)
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from WTC
Industries, Inc. unaudited condensed consolidated financial statements as of
September 30, 1998 and 1997 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 29,021
<SECURITIES> 0
<RECEIVABLES> 517,951
<ALLOWANCES> 11,000
<INVENTORY> 857,554
<CURRENT-ASSETS> 1,393,873
<PP&E> 842,820
<DEPRECIATION> 572,283
<TOTAL-ASSETS> 1,680,903
<CURRENT-LIABILITIES> 5,684,229
<BONDS> 3,681
0
0
<COMMON> 114,602
<OTHER-SE> (4,121,609)
<TOTAL-LIABILITY-AND-EQUITY> 1,680,903
<SALES> 3,179,550
<TOTAL-REVENUES> 3,179,550
<CGS> 2,951,822
<TOTAL-COSTS> 1,414,433
<OTHER-EXPENSES> 344,589
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 321,496
<INCOME-PRETAX> (1,531,294)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,531,294)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,531,294)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
