SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999, 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 55118-4002
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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.
1,169,364 shares of Common Stock as of July 23, 1999
Transitional Small Business Disclosure Format (check one):
Yes ___; No _x_
1
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WTC INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Unaudited Balance Sheets
June 30, 1999 and December 31, 1998 3
Condensed Consolidated Unaudited Statements of Operations
Three Months Ended June 30, 1999 and 1998 4
Condensed Consolidated Unaudited Statements of Operations
Six Months Ended June 30, 1999 and 1998 5
Condensed Consolidated Unaudited Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998 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 2. Changes in Securities 16
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>
June 30, December 31,
ASSETS 1999 1998
- ------ ------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 167,118 $ 25,261
Accounts receivable, net of allowance for doubtful accounts
of $10,000 468,527 217,715
Inventories (Note 3) 278,352 430,106
Prepaid expenses and other 21,612 3,691
------------ ------------
TOTAL CURRENT ASSETS 935,609 676,773
PROPERTY AND EQUIPMENT 879,328 798,401
Less accumulated depreciation 650,253 604,562
------------ ------------
229,075 193,839
OTHER ASSETS 4,441 11,792
------------ ------------
$ 1,169,125 $ 882,404
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- --------------------------------------
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,307,356 $ 861,731
Accounts payable 301,278 459,462
Accrued interest payable 92,857 41,248
Accrued expenses - other 332,851 294,585
------------ ------------
TOTAL CURRENT LIABILITIES 2,034,342 1,657,026
LONG-TERM LIABILITIES
Accrued minimum purchase commitments 345,000 345,000
Long-term debt, net of current maturities 4,215,976 4,398,321
------------ ------------
4,560,976 4,743,321
------------ ------------
STOCKHOLDERS' DEFICIT (Note 4)
Common stock 116,937 114,603
Additional paid-in capital 11,800,230 11,711,064
Receivable from officer on issuance of common stock (15,000) (15,000)
Accumulated deficit (17,328,360) (17,328,610)
------------ ------------
(5,426,193) (5,517,943)
------------ ------------
$ 1,169,125 $ 882,404
============ ============
</TABLE>
See notes to consolidated condensed unaudited financial statements.
3
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WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended June 30,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
NET SALES $ 1,483,744 $ 1,170,535
COST OF GOODS SOLD 976,434 1,224,739
----------- -----------
GROSS (LOSS) PROFIT 507,310 (54,204)
EXPENSES
Selling, general and administrative 296,418 276,080
Research and development 42,790 111,108
Loss on minimum purchase contract 41,250
Other 350,000
----------- -----------
339,208 778,438
----------- -----------
INCOME (LOSS) FROM OPERATIONS 168,102 (832,642)
NONOPERATING INCOME (EXPENSE)
Interest expense (82,177) (106,588)
Other income (expense), net (2,839) (4,273)
Gain (loss) on disposal of fixed assets (10,263)
----------- -----------
(85,016) (121,124)
----------- -----------
NET INCOME (LOSS) $ 83,086 $ (953,766)
=========== ===========
PER COMMON SHARE DATA - BASIC & DILUTED
EARNINGS (LOSS) PER SHARE - BASIC & DILUTED $ 0.07 $ (0.85)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
BASIC 1,169,364 1,125,177
=========== ===========
DILUTED 1,169,539 1,125,177
=========== ===========
</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>
Six months ended June 30,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
NET SALES $ 2,665,495 $ 1,697,942
COST OF GOODS SOLD 1,803,230 1,696,618
----------- -----------
GROSS (LOSS) PROFIT 862,265 1,324
EXPENSES
Selling, general and administrative 601,377 559,909
Research and development 90,114 204,662
Loss on minimum purchase contract 82,500
Other 350,000
----------- -----------
691,491 1,197,071
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INCOME (LOSS) FROM OPERATIONS 170,774 (1,195,747)
NONOPERATING INCOME (EXPENSE)
Interest expense (164,506) (203,787)
Other income (expense), net (7,107) (8,553)
Gain (loss) on disposal of fixed assets 1,090 (10,263)
----------- -----------
(170,523) (222,603)
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NET INCOME (LOSS) $ 251 $(1,418,350)
=========== ===========
PER COMMON SHARE DATA - BASIC & DILUTED
EARNINGS (LOSS) PER SHARE
BASIC & DILUTED $ 0.00 $ (1.27)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
BASIC 1,161,758 1,114,408
=========== ===========
DILUTED 1,161,846 1,114,408
=========== ===========
</TABLE>
See notes to consolidated condensed unaudited financial statements.
5
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WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 251 $(1,418,350)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 55,061 72,515
Provision for obsolete inventory 40,000
Other - royalty impairment writedown 350,000
(Gain) Loss on disposal of fixed assets (1,091) 10,263
Accretion of long-term debt discount 9,086
Changes in operating assets and liabilities:
Accounts receivable (250,812) (389,437)
Inventories 151,754 220,638
Current and other assets (205) (946)
Accounts payable (158,184) 439,730
Accrued expenses 89,875 114,025
----------- -----------
Net cash used in operating activities (104,265) (561,562)
----------- -----------
INVESTING ACTIVITIES
Proceeds from sales of equipment 1,091 0
Purchases of property and equipment (83,162) (106,604)
----------- -----------
Net cash provided by (used in) investing activities (82,071) (106,604)
----------- -----------
FINANCING ACTIVITIES
Proceeds from loans by director/shareholder 350,000 700,000
Payments on long-term obligations (21,807) (2,745)
----------- -----------
Net cash provided by financing activities 328,193 697,255
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 141,857 29,089
CASH AND CASH EQUIVALENTS:
Beginning of period 25,261 5,241
----------- -----------
End of period $ 167,118 $ 34,330
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid during the period for interest $ 112,897 $ 123,991
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES -
Stock options issued for services $ 17,677
===========
Accrued interest payable converted to a note payable $ 125,915
===========
Common stock issued for royalty agreement payment $ 350,000
===========
Stock options issued for rent $ 17,500
===========
Warrants issued with debt restructure $ 74,000
===========
</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,
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, 1999, the Company incurred a net income
of $251, and cash used in operating activities was $104,265. In addition, as of
June 30, 1999, the Company has a deficiency in working capital of $1,098,733 and
an accumulated deficit of $17,328,360.
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 1999 were met
principally through the issuance of demand notes payable of $350,000 to Mr.
Klas, Sr., Chairman of the Board and CEO.
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Management's plans for the Company to continue as a going concern include; (a)
seeking further financing from Mr. Klas or other investors, (b) obtaining
Environmental Protection Agency (EPA) approval for the PentPure(R) InLine
purification systems product line, (c) continue developing and increasing sales
to the OEM and water dealer markets in the U.S., and (d) continue increasing
gross profit margins through improved production processes and quality controls.
There is no assurance that these plans will be successful.
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, 1998, which are included in the Company's Annual Report on Form
10-KSB.
3. INVENTORIES
INVENTORIES CONSIST OF THE FOLLOWING: June 30, 1999 December 31, 1998
- ------------------------------------- ------------- -----------------
Raw Materials $ 179,893 $ 283,326
Work-in-process 5,768 3,484
Finished Goods 92,691 143,296
----------- -----------
$ 278,352 $ 430,106
=========== ===========
The total inventory reserve as of June 30, 1999 and December 31, 1998 is
$914,563 and $929,016, respectively.
4. COMMON AND PREFERRED STOCK
COMMON STOCK - The Company had 15,000,000 shares of $.10 par value common stock
authorized, with 1,169,364 and 1,146,031 shares issued and outstanding on June
30, 1999 and December 31, 1998, respectively.
8
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PREFERRED STOCK - At June 30, 1999 and December 31, 1998, 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.
5. COMMITMENTS AND CONTINGENCIES
MINIMUM PURCHASE COMMITMENT - Effective June 15, 1997, the Company entered into
a five year requirements contract with Porous Media under which the Company will
purchase all of its cyst filter requirements for the PentaPure(R) Sport
Purification System and Spring(R) Filtration System. 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. Mr. Klas, personally
guarantees the Company's performance under the contract, subject to a $100,000
limitation on the guaranty.
The Company recorded a liability at December 31, 1998 totaling $517,500, of
which $172,500 is included in current liabilities, for the remaining estimated
commitment not likely to be fulfilled by the Company over the remaining life of
the purchase commitment.
LICENSE AGREEMENT - The Company manufactures and markets certain of its products
pursuant to a license agreement with KSURF, as amended July 1, 1998. 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 $25,000 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 $6,250 and $12,500 for
the three and six month periods ended June 30, 1999 and 1998.
ARRANGEMENTS WITH SUPPLIERS - 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.
6. RELATED-PARTY TRANSACTIONS
Tapemark Company ("Tapemark"), of West St. Paul, Minnesota, provides labels for
the Company's products and office and manufacturing facilities. Mr. Klas, the
Company's
9
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CEO, Chairman and largest stockholder, is also the CEO and Chairman of the Board
for Tapemark. During the three and six month periods ended June 30, 1999, the
Company paid Tapemark a total of $30,000 and $58,000, respectively, compared to
$16,000 and $30,000, respectively, in 1998.
7. NOTES PAYABLE AND LONG TERM OBLIGATIONS
At June 30, 1999 and December 31, 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, 2000, and is secured by substantially all of the
Company's assets in addition to a guarantee by the Chairman.
The Company has $1,450,000 in principal of promissory notes that were issued in
a private placement in 1994 that by their original terms matured on May 31,
1999. On April 13, 1999, the Company received approval from the holders of
$1,400,000 in principal of these notes to extend their maturity date to May 31,
2002. In addition, the holders of $300,000 in principal of these notes agreed to
reduce the interest rate to 5.18% until May 31, 2002. The holders of $1,100,000
in principal of these notes agreed to reduce the interest rate to 1% for the
twelve months ending May 31, 2000 and thereafter to 5.18%. Note holders who
agreed to the 1% interest rate received a four year warrant to purchase 5,000
shares (for every $100,000 in principal) of the Company's common stock at an
exercise price of $1.00 per share. Warrants for a total of 55,000 were issued.
On April 13, 1999, effective January 1, 1999, the Company entered into an
agreement to extend demand notes payable totaling $2,498,807 to the Chairman and
CEO through May 31, 2002. Accrued interest of $98,926 at December 31, 1998 was
included in the new note payable. Interest will accrue at 1.0% for the
seventeen-month period ending May 31, 2000 and then will increase to 5.18% for
the duration of the note. Interest is due and payable semi-annually. In exchange
for the reduced interest rate from January 1, 1999 to May 31, 2000, the Company
issued Mr. Klas a four year warrant to purchase 176,998 shares of the Company's
Common Stock at an exercise price of $1.00 per share.
On April 13, 1999, effective January 1, 1999, the Company entered into an
agreement to extend demand notes payable totaling $553,114 to Tapemark Company
(which is affiliated with the Company's Chairman) through May 31, 2002. Accrued
interest of $27,080 at December 31, 1998 was included in the new note payable.
Interest will accrue at 1.0% for the seventeen-month period ending May 31, 2000
and then will increase to 5.18% for the duration of the note. In exchange for
the reduced interest rate from January 1, 1999 to May 31, 2000, the Company
issued Tapemark a four year warrant to purchase 39,178 shares of the Company's
Common Stock at an exercise price of $1.00 per share.
The Company valued all warrants issued above using the Black-Scholes pricing
model.
On January 1, 1999, the Company entered into an agreement to borrow up to an
additional $500,000 from the Chairman and CEO. The loan matures on December 31,
10
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1999 and accrues interest at prime and is payable on June 30, 1999 and December
31, 1999. As of July 23, 1999, $350,000 had been advanced under this agreement.
Other than the remaining $150,000 covered by an existing agreement with Mr.
Klas, he has no obligation to provide any further financing to the Company, and
there is no assurance that he will provide any further financing to the Company.
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, 1999, the Company incurred a net income
of $251, and cash used in operating activities was $104,265. In addition, as of
June 30, 1999, the Company has a deficiency in working capital of $1,098,733 and
an accumulated deficit of $17,328,360.
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 1999 were met
principally through the issuance of demand notes payable of $350,000 to Mr.
Klas, Sr., Chairman of the Board and CEO.
Management's plans for the Company to continue as a going concern include; (a)
seeking further financing from Mr. Klas or other investors, (b) obtaining
Environmental Protection Agency (EPA) approval for the PentPure(R) InLine
purification systems product line, (c) continue developing and increasing sales
to the OEM and water dealer markets in the U.S., and (d) continue increasing
gross profit margins through improved production processes and quality controls.
There is no assurance that these plans will be successful.
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.
11
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RESULTS OF OPERATIONS
- ---------------------
THREE AND SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE AND SIX MONTHS
ENDED JUNE 30, 1998
NET SALES. For the three month period ended June 30, 1999, the Company had net
sales of $1,483,744, an increase of 26.8% from 1998 sales of $1,170,535. The
increase in sales is attributed to increased sales to the appliance filter
market.
For the six month period ended June 30, 1999, the Company had net sales of
$2,665,495, an increase of 57.0% from 1998 sales of $1,697,942. The Company
anticipates that sales for the last half of the year will be comparable or
slightly lower than the first six months. However, the Company continues to
aggressively pursue new business in the domestic OEM market and anticipates
sales to continue to increase in the year 2000.
International sales for both the three and six months ended June 30, 1999
continue to be lower than 1998 because of the continuing poor economic
conditions in Asia and Eastern Europe and the strong U.S dollar. The Company
anticipates that these trends will continue during the last half of 1999 and
into the early part of the year 2000.
GROSS PROFIT. For the three and six month periods ended June 30, 1999, the
Company recognized a gross profit of $507,310 and 862,265, respectively,
representing 34.2% and 32.3% of net sales, respectively. During the same periods
in 1998, the Company recognized a gross (loss) profit of ($54,204) and $1,324,
respectively, representing (4.6%) and 0.01% of net sales, respectively. The
increase in gross profit during the second quarter is primarily attributed to
increased sales of replacement cartridges to the appliance filter market. For
the year, the increase in gross profit is primarily due to improved
manufacturing processes and cost reduction programs associated with the
appliance filter product line.
OPERATING EXPENSES. Selling, general, and administrative expenses for the three
and six month periods ended June 30, 1999, were $296,418 and $601,377,
respectively, representing 20.0% and 22.6% of net sales, respectively. Selling,
general and administrative expenses were $276,080 and $559,909, representing
23.6% and 33.0% of net sales, respectively, for the same periods in 1998. The
increase in the dollar amount of spending in 1999 is primarily due to an
increase in the number of employees, partially offset by lower travel and
building related expenses.
Research and development expenses are significantly lower in 1999 than 1998 for
both the three and six month periods ended June 30, 1999. In 1998, the Company
had significant expenses for NSF testing and certification of the PentaPure(R)
Inline Filtration Systems product line. The Company does anticipate that
research and development expenses will increase during the last half of 1999
because of new product development for the appliance industry.
12
<PAGE>
In 1998, the Company issued 42,500 shares of Company common stock to Kansas
State University Research Foundation in exchange for reducing the annual minimum
cash payment from $75,000 to $25,000 for the remainder of the PentaPure(R)
technology license agreement. A one-time charge of $350,000 was incurred in the
second quarter of 1998 related to this transaction due to the uncertainty of the
future realization of its value.
NONOPERATING EXPENSES. Interest expense was $82,177 and $164,506, respectively,
for the three and six month period ending June 30, 1999. During the same periods
in 1998, interest expense was $106,588 and $203,787, respectively. The decrease
in interest expense is attributed to the debt restructuring efforts in April
1999 that resulted in a lower effective interest rate as compared to 1998.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's primary source of cash during the first six months in 1999 and
1998 were cash advances provided by Mr. Klas totaling $350,000 and $700,000,
respectively. As of June 30, 1999, the Company had a working capital deficit
(total current liabilities in excess of total current assets) of $1,098,733,
compared with a working capital deficit of $980,253 as of December 31, 1998.
Management believes that its sources of liquidity are sufficient to meet its
current and anticipated requirements for the foreseeable future.
For the six month period ended June 30, 1999, cash increased $141,857, primarily
due to cash provided by financing activities of $328,193, which was essentially
offset by cash used in operating activities of $104,265 and cash used in
investing activities of $82,071. Significant cash uses by operations included an
increase in accounts receivable of $250,812 and a decrease in accounts payable
of $158,184, partially offset by an increase in accrued expenses of $89,875 and
a decrease in inventory of $151,754. Net cash used by investing activities
consisted primarily of purchases of property and equipment of $83,162. Net cash
provided by financing activities was from issuance of notes payable of $350,000,
partially offset by payments on long-term debt of $21,807.
For the six month period ended June 30, 1998, cash increased $29,089, 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.
At June 30, 1999, 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, 2000.
13
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The Company has $1,450,000 in principal of promissory notes that were issued in
a private placement in 1994 that by their original terms matured on May 31,
1999. On April 13, 1999, the Company received approval from the holders of
$1,400,000 in principal of these notes to extend their maturity date to May 31,
2002. In addition, the holders of $300,000 in principal of these notes agreed to
reduce the interest rate to 5.18% until May 31, 2002. The holders of $1,100,000
in principal of these notes agreed to reduce the interest rate to 1% for the
twelve months ending May 31, 2000 and thereafter to 5.18%. Note holders who
agreed to the 1% interest rate received a four year warrant to purchase 5,000
shares (for every $100,000 in principal) of the Company's common stock at an
exercise price of $1.00 per share. Warrants for a total of 55,000 were issued.
On April 13, 1999, effective January 1, 1999, the Company entered into an
agreement to extend through May 31, 2002 demand notes totaling $2,498,807
payable to the Chairman and CEO. Accrued interest of $98,926 at December 31,
1998 was included in the new note payable. Interest will accrue at 1.0% for the
seventeen-month period ending May 31, 2000 and then will increase to 5.18% for
the duration of the note. Interest is due and payable semi-annually. In exchange
for the reduced interest rate from January 1, 1999 to May 31, 2000, the Company
issued Mr. Klas a four year warrant to purchase 176,998 shares of the Company's
Common Stock at an exercise price of $1.00 per share.
On April 13, 1999, effective January 1, 1999, the Company entered into an
agreement to extend through May 31, 2002 demand notes payable totaling $553,114
to Tapemark Company (which is affiliated with the Company's Chairman). Accrued
interest of $27,080 at December 31, 1998 was included in the new note payable.
Interest will accrue at 1.0% for the seventeen-month period ending May 31, 2000
and then will increase to 5.18% for the duration of the note. In exchange for
the reduced interest rate from January 1, 1999 to May 31, 2000, the Company
issued Tapemark a four year warrant to purchase 39,178 shares of the Company's
Common Stock at an exercise price of $1.00 per share.
On January 1, 1999, the Company entered into an agreement to borrow up to an
additional $500,000 from the Chairman and CEO. The loan matures on December 31,
1999 and accrues interest at prime and is payable on June 30, 1999 and December
31, 1999. As of July 23, 1999, $350,000 had been advanced under this agreement.
Other than the remaining $150,000 covered by an existing agreement with Mr.
Klas, he has no obligation to provide any further financing to the Company, and
there is no assurance that he will provide any further financing to the Company.
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
14
<PAGE>
Company's efforts to raise additional capital are not successful, the Company's
operations may be negatively impacted.
Effective June 15, 1997, the Company entered into a cyst filter requirements
contract with Porous Media. The minimum commitment is $172,500 per contract year
beginning June 15. Through December 31, 1998, the Company had fulfilled its
first contract year obligation. The Company is required to purchase an
additional 400,000 cyst filters over the next three (3) years. The Company's
performance is guaranteed by Mr. Klas up to $100,000. Failure of the Company to
perform under this agreement could have a significant negative impact on the
Company's financial resources.
If the Company is able to obtain additional financing to continue operations,
its 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.
FOREIGN CURRENCY EFFECTS
- ------------------------
Beginning in the 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 Asian markets. In addition, beginning in the third
quarter of 1998, foreign currency exchange rate fluctuations and deteriorating
economic conditions in Eastern Europe had a material impact on sales to the
Company's largest distributor. The Company anticipates these trends to continue
for the remainder of 1999 and for the first half of 2000.
EFFECTS OF INFLATION
- --------------------
The Company believes that during 1998 and 1999 inflation has not had a material
impact on the Company's business.
YEAR 2000 COMPLIANCE
- --------------------
The Company continues to implement its company-wide program to prepare the
Company's computer systems, information technology and non-information
technology to be Year 2000 compliant.
The Company continues to communicate with its suppliers, customers and other
service providers to determine the extent of the Company's vulnerability to the
failure of third parties to be Year 2000 complaint. The Company has made
significant progress and has substantially completed its internal program to
remediate the Year 2000 issue. In 1998, the Company upgraded its manufacturing
and financial software, along with personal computers and related software. The
Company's expenditures in 1998 for the upgrade of computer hardware and software
related to Year 2000 issues were approximately
15
<PAGE>
$40,000. The costs of the new equipment and software are being depreciated over
their useful lives. Based on information currently available, the total
remaining maintenance or capital costs to be incurred in 1999 is estimated to be
$15,000.
The risks to the Company resulting from failure of the Company's own information
systems or third parties to attain Year 2000 readiness is similar to other
businesses. These risks include but are not limited to (1) disruptions in
information systems used for transaction processing, (2) disruptions in the
supply of raw materials and other components from major vendors, and (3)
disruptions in facilities used in the manufacturing process.
The Company is in the process of developing a contingency plan to address the
above risks. The contingency plan is expected to be in place by September 30,
1999. While the Company is not aware of any significant Year 2000 issues for
which it will not be adequately prepared, there can be no assurance that the
Company's business, operating results or financial condition will not be
adversely affected by issues surrounding the Year 2000 conversion.
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 April 1, 1999, the Company issued 23,333 shares of Common Stock for payment
of its 1999 rent obligation to the Tapemark Company. The Company leases
approximately 5,000 square feet of manufacturing and office space.
On June 30, 1999, the Company issued warrants to purchase 271,176 shares of the
Company's Common Stock at an exercise price of $1.00 per share with an exercise
period of four years. These warrants were issued to certain holders of
promissory notes
16
<PAGE>
previously issued by the Company in consideration for an amendment to the terms
of the notes.
For the above stock transactions, the Company did not use any underwriters or
placement agents and no commissions were paid. The securities referred to above
were acquired by the recipients for investment purposes for their own account
and not with a view to a distribution. Based on these facts the Company relied
on the exemption provided 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.
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 1999.
SIGNATURES
- ----------
In accordance with the Exchange Act, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: July 23, 1999 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
JUNE 30, 1999 AND 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 167,118
<SECURITIES> 0
<RECEIVABLES> 468,527
<ALLOWANCES> 10,000
<INVENTORY> 278,352
<CURRENT-ASSETS> 935,609
<PP&E> 879,328
<DEPRECIATION> 650,253
<TOTAL-ASSETS> 1,169,125
<CURRENT-LIABILITIES> 2,034,342
<BONDS> 4,560,976
0
0
<COMMON> 116,937
<OTHER-SE> (5,543,130)
<TOTAL-LIABILITY-AND-EQUITY> 1,169,125
<SALES> 2,665,495
<TOTAL-REVENUES> 2,665,495
<CGS> 1,803,230
<TOTAL-COSTS> 691,491
<OTHER-EXPENSES> 6,017
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 164,506
<INCOME-PRETAX> 251
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