SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
(MARK ONE)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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.
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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
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(Address of Principal Executive Offices) (Zip Code)
(612) 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.
11,035,180 shares of Common Stock as of May 4, 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
March 31, 1998 and December 31, 1997 3
Condensed Consolidated Unaudited Statements of Operations
Three Months Ended March 31, 1998 and 1997 4
Condensed Consolidated Unaudited Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997 5
Notes to Condensed Consolidated Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1998 1997
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<S> <C> <C>
CURRENT ASSETS
Cash $ 19,276 $ 5,241
Accounts receivable, net of allowance for doubtful accounts
of $16,000 126,552 153,303
Inventories (Note 4) 951,311 1,084,448
Prepaid expenses and other 42,839 8,120
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TOTAL CURRENT ASSETS 1,139,978 1,251,112
PROPERTY AND EQUIPMENT 993,333 926,159
Less accumulated depreciation 711,912 680,500
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281,421 245,659
OTHER ASSETS 35,975 38,407
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$ 1,457,374 $ 1,535,178
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LIABILITIES AND STOCKHOLDERS' DEFICIT
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CURRENT LIABILITIES
Notes payable and current maturities of long-term obligations $ 2,586,647 $ 2,355,729
Accounts payable 295,541 199,355
Accrued expenses - other 388,418 364,829
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TOTAL CURRENT LIABILITIES 3,270,606 2,919,913
LONG-TERM OBLIGATIONS, net of current maturities 1,457,065 1,458,654
STOCKHOLDERS' DEFICIT (Note 5)
Common stock 110,352 110,352
Additional paid-in capital 11,385,315 11,347,639
Receivable from officer on issuance of common stock (15,000) (15,000)
Accumulated deficit (14,750,964) (14,286,380)
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(3,270,297) (2,843,389)
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$ 1,457,374 $ 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 March 31,
---------------------------------
1998 1997
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<S> <C> <C>
NET SALES $ 527,406 $ 1,057,299
COST OF GOODS SOLD 513,130 793,080
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GROSS PROFIT 14,276 264,219
EXPENSES
Selling, general and administrative 283,827 346,618
Research and development 93,554 43,894
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377,381 390,512
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LOSS FROM OPERATIONS (363,105) (126,293)
OTHER EXPENSE, NET (101,479) (62,917)
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NET LOSS $ (464,584) $ (189,210)
============== ==============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.04) $ (0.02)
============== ==============
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 11,035,000 10,721,000
============== ==============
</TABLE>
See notes to consolidated condensed unaudited financial statements.
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
-----------------------------
1998 1997
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<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (464,584) $ (189,210)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 36,215 49,306
Changes in operating assets and liabilities:
Accounts receivable 26,751 42,090
Inventories 133,137 (148,378)
Current and other assets (6,568) 752
Accounts payable 96,186 (106,157)
Accrued expenses - other 61,938 (125,513)
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Net cash used in operating activities (116,925) (477,110)
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INVESTING ACTIVITIES
Restricted cash 37,239
Purchases of property and equipment (67,696) (7,790)
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Net cash provided by (used in) investing activities (67,696) 29,449
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FINANCING ACTIVITIES
Proceeds from loans by director/shareholder 200,000
Proceeds from affliated company 500,000
Payments on long-term obligations (1,344) (2,521)
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Net cash provided by financing activities 198,656 497,479
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NET INCREASE IN CASH AND CASH EQUIVALENTS 14,035 49,818
CASH AND CASH EQUIVALENTS:
Beginning of period 5,241 53,324
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End of period $ 19,276 $ 103,142
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid during the period for interest $ 68,134 $ 53,823
============ ============
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 $ 5,000
============
Stock options issued for services $ 7,676
============
Stock options issued for rent $ 30,000
============
Accrued interest payable converted to a note payable $ 30,673
============
</TABLE>
See notes to consolidated condensed unaudited financial statements.
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED UNAUDITED
FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
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 ("KSU") 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:
systems and cartridges for use by original equipment manufacturers (OEMs),
portable systems, point-of-use systems, point-of-entry systems, mobile
purification systems and commercial systems. 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 three month period ended March 31, 1998, the Company incurred a net loss
of $464,584, and cash used in operating activities was $116,925. In addition, as
of March 31, 1998, the Company has a deficiency in working capital of $2,130,628
and an accumulated deficit of $14,750,964.
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 first quarter 1998 were met principally through
borrowings of $200,000 from the Chairman of the Board.
<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) converting
existing short term and long term debt into equity securities; c) pursuing and
obtaining National Sanitation Foundation (NSF) and Environmental Protection
Agency (EPA) approval for the new PentaPure(R) InLine filtration and
purification systems to increase sales to OEM customers in both the domestic and
international markets; d) identifying alternative uses for the PentaPure(R)
technology in other industry segments, such as the medical filtration and
medical devices segments, to maximize the Company's technology to its
competitive advantage; e) continuing to reduce non-valued added selling, general
and administrative expenses; and f) improving the Company's production processes
and quality controls to increase gross profit margins. There is no assurance
that these plans can be successfully accomplished.
The condensed consolidated unaudited 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 STANADARDS
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: March 31, 1998 December 31, 1997
- ------------------------------------- -------------- -----------------
Raw Materials $ 643,577 $ 670,943
Work-in-process 48,997 118,557
Finished Goods 258,737 294,948
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$ 951,311 $1,084,448
=========== ==========
5. COMMON AND PREFERRED STOCK
COMMON STOCK - At March 31, 1998 and December 31, 1997, the Company had
20,000,000 shares of $.01 par value common stock authorized, and 11,035,180
shares issued and outstanding.
PREFERRED STOCK - At March 31, 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 March 31, 1998, the Company purchased 15,000 units ($36,000)
of inventory pursuant to this contract. Management has accrued the unfulfilled
pro rata commitment of approximately $95,000 in connection with this agreement
as of March 31, 1998.
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 $18,750 for the three
month periods ended March 31, 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
<PAGE>
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 month period ended March 31, 1997 the Company paid Bowman a total of
$70,000 under the previous arrangement.
Hybrid Technologies - 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 PARTYS TRANSACTIONS
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
month period ended March 31, 1998 and 1997, the Company paid Tapemark a total of
$14,000 and $50,000, respectively, for these services.
8. NOTES PAYABLE AND LONG TERM OBLIGATIONS
At March 31, 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, 1998, and is secured by substantially all of the
Company's assets in addition to a guarantee by the Chairman.
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 April 8, April 23, and May 1, 1998, the Company received an additional
$150,000, $100,000 and $100,000, respectively, in advances from the Chairman of
the Board. These
<PAGE>
advances bear interest at the prime rate plus 1% and both interest and principal
are due on June 30, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
GOING CONCERN. The accompanying condensed consolidated unaudited financial
statements have been prepared on a going-concern basis which contemplates the
realization of assets and the satisfaction of liabilities and commitments in the
normal course of business. For the three month period ended March 31, 1998, the
Company incurred a net loss of $464,584, and cash used in operating activities
was $116,925. In addition, as of March 31, 1998, the Company has a deficiency in
working capital of $2,130,628 and an accumulated deficit of $14,750,964.
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 first quarter 1998 were met principally through
borrowings of $200,000 from the Chairman of the Board.
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) converting
existing short term and long term debt into equity securities; c) pursuing and
obtaining NSF and EPA approval for the new PentaPure(R) InLine filtration and
purification systems to increase sales to OEM customers in both the domestic and
international markets; d) identifying alternative uses for the PentaPure(R)
technology in other industry segments, such as the medical filtration and
medical devices segments, to maximize the Company's technology to its
competitive advantage; e) continuing to reduce non-valued added selling, general
and administrative expenses; and f) improving the Company's production processes
and quality controls to increase gross profit margins. There is no assurance
that these plans can be successfully accomplished.
The condensed consolidated unaudited 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.
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
NET SALES. The Company had net sales of $527,406 for the three month period
ended March 31, 1998. This was a decrease of 50.1% from sales of $1,057,299 for
the same period in 1997.
The decrease in total net sales is primarily due to lower sales to the Company's
three largest customers in 1997, Amana (located in the United States), Ekonet (a
Polish distributor), and U.S. Pacific (a distributor to Asian markets), which
was partially offset by increased sales to Ekodar (a Russian distributor).
First quarter sales to Amana were $120,000 and $207,000 in 1998 and 1997,
respectively. In first quarter 1997, the Company began shipping to Amana water
filtration systems and in the first quarter of 1998 completed shipping the
balance of the order. The Company anticipates that sales to Amana will begin to
increase in the second quarter due to the new water filtration system designed
to be in the Amana refrigerator which is currently in pre-production. The
Company estimates that total sales to Amana in 1998 will exceed total 1997
sales.
Sales to Ekonet were $48,000 and $145,000 in 1998 and 1997, respectively. In
late 1997, the Company made arrangements with Ekonet to sell direct to Ekodar,
their largest distributor in Russia. As a result, sales to Ekonet will be
significantly less than in prior years. The Company anticipates sales to Ekodar
in 1998 will more than offset the decline in sales to Ekonet. Sales to Ekodar in
the first quarter were $134,000.
Beginning in the third quarter of 1997 and continuing through the first quarter
of 1998, the deterioration of the Asian economy had a material negative impact
on the demand for the Company's products in foreign markets, especially in the
Asian market. U.S. Pacific, the Company's third largest customer in 1997,
provided no sales in the first quarter 1998, compared to sales of $223,000 in
1997.
The Company's international sales 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, will, at the current sales levels, cause sales to fluctuate
significantly from quarter to quarter.
To date, the Company has required all payments from customers to be in U.S.
dollars. Thus, the Company has not been subject to currency exchange rate
fluctuations directly. To the extent that a foreign customer's currency weakens
against the U.S. dollar, the Company's products will become more expensive in
the foreign market, and the resulting relative price increase would be expected
to affect the demand for the Company's products.
<PAGE>
COST OF GOODS SOLD. For the three month periods ended March 31, 1998 and 1997,
the cost of goods sold was $513,130 and $793,080, representing 97.3% and 75.0%
of net sales, respectively. The Company reserved $41,000 or 7.8% of net sales
for a minimum purchase commitment with Porous Media. The Company agreed to
purchase a minimum of 100,000 filters per year throughout the five year term of
the agreement at an average price of $1.72 per filter. At March 31, 1998 the
Company has accrued a total of $95,000 for the prorated first year obligation
ending June 15, 1998.
GROSS PROFIT. For the three month periods ended March 31, 1998 and 1997, the
Company recognized a gross profit of $14,276 and $264,219, respectively,
representing 2.7% and 25.0%, respectively, of net sales. The decrease in gross
profit was due primarily to the decrease in net sales.
In addition to its efforts to increase sales, the Company is attempting to
evaluate and improve its raw material component costs and further reduce its
production overhead expenses. However, margins may be negatively impacted if the
Company is successful in increasing sales to OEMs such as Amana.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three month periods ended
March 31, 1998 and 1997, selling, general and administrative expenses were
$283,827 and $346,618, representing 53.8% and 32.8% of net sales, respectively.
SALES AND MARKETING EXPENSES - For the three month periods ended March 31, 1998
and 1997, sales and marketing expenses were $147,706 and $203,776, representing
28.0 % and 19.3% of net sales, respectively. The Company has reduced its sales
and marketing expenses by $56,000 primarily due to lower personnel expenses,
travel, and reduced promotional expenses. Because the Company has limited
capital, the Company is implementing sales strategies that utilize the brand
recognition of the OEM and the sales and distributions networks of the OEM. The
Company expects sales and marketing expenses to continue to decrease in 1998 due
to increased sales to OEM customers, which absorb their own sales and marketing
expenses.
GENERAL AND ADMINISTRATIVE EXPENSES - For the three month periods ended March
31, 1998 and 1997, general and administrative expenses were $136,121 and
$142,842, representing 25.8% and 13.5% of total net sales, respectively.
On March 1, 1998, the Company relocated it's corporate offices to the Tapemark
Company. The lease term is for one year with rent consisting of providing
Tapemark an option to buy 112,000 shares of the Company's common stock at a
price of $0.3125 per share. Management believes this is approximately the fair
market value of the lease arrangement. The Company will make no cash payments to
Tapemark for rent, general utilities, pro rata taxes and special assessments, or
build-out costs. The Company anticipates that it will significantly reduce it's
operating expenses as a result of this lease. In addition, Management continues
to evaluate other general and administrative expenses that can be either reduced
or eliminated to help the Company reach profitability.
<PAGE>
The Company incurred approximately $31,000 of moving expenses which was
partially offset by a relocation incentive of $12,500 offered by the new tenant
for the old facility.
RESEARCH AND DEVELOPMENT EXPENSES. For the three month periods ended March 31,
1998 and 1997, research and development expenses were $93,554 and $43,894,
respectively. In first quarter 1998, the Company incurred expenses of
approximately $65,000 for NSF testing and development efforts for its
PentaPure(R) InLine Filtration Systems product line. While the Company is
committed to its long-term investment in research and development, such expenses
tend to fluctuate related to, in part, the Company's available resources.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company had a working capital deficit (total current
liabilities in excess of total current assets) of $2,130,628 compared with a
working capital deficit of $1,668,801 as of December 31, 1997. During the three
month period ended March 31, 1998, the Company used short term loans from the
Chairman of the Board as a source of working capital to fund its operations.
For the three month period ended March 31, 1998, cash increased $14,035,
primarily due to $198,656 from financing activities, which were essentially
offset by cash used in operations of $116,925 and cash used in investing
activities of $67,696. Significant cash uses by operations included the net loss
which was offset by a decrease in accounts receivable of $26,751,a decrease in
inventory of $133,137, an increase in accounts payable of $96,186, and an
increase in accrued expenses of $61,938. Net cash used by investing activities
consisted primarily of purchases of property and equipment of $67,696. Net cash
provided by financing activities was from issuance of notes payable of $200,000,
partially offset by payments on long-term debt of $1,344.
During the same three month period in 1997, cash increased $49,818 primarily due
to $497,479 from financing activities, essentially offset by cash used in
operations of $477,110. Significant cash uses by operations included a decrease
in accounts payable of $106,157, a decrease in accrued expenses of $125,513 and
an increase in inventory of $148,378, partially offset by a decrease in accounts
receivable of $42,090. Net cash provided by investing activities consisted of
applications of restricted cash of $37,239 less purchases of property and
equipment of $7,790. Net cash provided by financing activities was from issuance
of notes payable of $500,000, partially offset by payments on long-term debt of
$2,521.
The Company estimates that it will have working capital needs of approximately
$1,000,000 during 1998 to fund its operations and continue market introduction
of the PentaPure(R) InLine systems product line. The Company also anticipates
that it will have to fund growth in inventories and accounts receivable. The
Company anticipates that it will have capital expenditures for equipment and
computer hardware and software enhancements of approximately $150,000 in 1998.
<PAGE>
At March 31, 1998, the Company has a $750,000 note payable to a financial
institution which is secured by a security interest in the Company's assets, is
guaranteed by the Chairman of the Board, and is due on May 31, 1998. If the note
is not renewed, and the Company is required to pay off the $750,000 balance, the
Company's liquidity will be adversely affected.
On January 1, 1998, the Company entered into an agreement to extend the
$1,100,000 demand note payable to the Chairman through June 30, 1998. In
addition, $30,673 of interest accrued at December 31, 1997 was included in the
new note payable. Interest accrues at a rate of prime plus 1% payable at
maturity.
On January 1, 1998, the Company entered into an agreement to extend the $500,000
demand note payable to a company affiliated with the Chairman through June 30,
1998. Interest accrues at a rate of prime plus 2% payable at maturity.
On January 7, 1998, the Company entered into an agreement to borrow an
additional $500,000 from the Chairman. The loan matures on June 30, 1998 and
interest accrues at a rate of prime plus 1%. Through March 31, 1998, $200,000
had been advanced under this agreement.
The Company's plan of operations over the next 12 months is to further develop
its OEM customer base and its sales of the PureIt(R) InLine point-of-use systems
in both the domestic and international markets. In addition, the Company will
continue to develop new marketing and distribution channels in international
markets and will attempt to increase sales 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. In addition, the
Company will evaluate the possibility of converting to equity some or all of its
outstanding short term and long term debt. 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.
FOREIGN CURRENCY EFFECTS
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, the
deterioration of the Asian economy had a material negative impact on the demand
for the Company's products in certain foreign markets, especially in the Asian
market.
<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.
YEAR 2000 COMPLIANCE
The Company has begun evaluating its computer hardware and software for
compliance with Year 2000 requirements, and believes that expected costs for
compliance will not be material to its results of operations or liquidity. The
Company is in the process of becoming Year 2000 compliant at an initial
estimated cost of $10,000. In addition, the Company is proactively requiring key
suppliers to certify their compliance.
NOTIFICATION REGARDING FORWARD LOOKING INFORMATION
Except for historical information contained herein, certain statements are
forward looking statements that involve risks and uncertainties, including, but
not limited to, the results of financing efforts and sufficiency of working
capital requirements, product demand and market acceptance risks, customer mix,
the effect of economic conditions including the Asian economic downturn, the
impact of competitive products and pricing, product development,
commercialization and technological difficulties, supply constraints or
difficulties, and actual purchases under agreements. The actual results that the
Company achieves may differ materially from these forward looking statements due
to such risks and uncertainties. Readers are urged to carefully review and
consider the various disclosures made by the Company's other filings with the
Securities and Exchange Commission that advise interested parties of the risks
and uncertainties that may effect the Company's financial condition and results
of operations.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On February 9, 1998, the Company issued to Tapemark a stock option for 112,000
shares of the Company's Common Stock at an exercise price of $0.3125 which is
vested immediately and expires on December 31, 2000. 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.
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.
<PAGE>
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 first
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: May 4, 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 consolidated financial statements as of
March 31, 1998 and 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 19,276
<SECURITIES> 0
<RECEIVABLES> 142,552
<ALLOWANCES> 16,000
<INVENTORY> 951,311
<CURRENT-ASSETS> 1,139,978
<PP&E> 993,333
<DEPRECIATION> 711,912
<TOTAL-ASSETS> 1,457,374
<CURRENT-LIABILITIES> 3,270,606
<BONDS> 1,457,065
0
0
<COMMON> 110,352
<OTHER-SE> (3,380,649)
<TOTAL-LIABILITY-AND-EQUITY> 1,457,374
<SALES> 527,406
<TOTAL-REVENUES> 527,406
<CGS> 513,130
<TOTAL-COSTS> 377,381
<OTHER-EXPENSES> 101,479
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97,200
<INCOME-PRETAX> (464,584)
<INCOME-TAX> 0
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (464,584)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
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