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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 for the fiscal year ended December 31, 1995
Commission file number
0-19622
WTC Industries, Inc.
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(Name of Small Business Issuer in Its Charter)
Delaware 38-2308668
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(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
14405 - 21st Avenue North, Minneapolis, Minnesota 55447
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: 612/473-1625
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Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
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(Title of Class)
[Cover Page 1 of 2 pages]
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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 requirements for the past 90 days.
Yes No x
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Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB
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State issuer's revenues for its most recent fiscal year. $2,882,504
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State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and ask prices of such stock, as of a specified date within the past 60
days.
$4,498,300 as of May 15, 1996
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date.
10,689,773 shares of Common Stock as of May 15, 1996
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (check one):
Yes ; No x
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[Cover Page 2 of 2 Pages]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
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 most undesirable contaminants found in water including lead,
chlorine, bad taste and odors. PURIFICATION products have the added benefit of
devitalization or removal of viruses, bacteria and parasites.
Many of the Company's purification products contain PentaPure-Registered
Trademark- iodinated resin and other patented and proprietary technology and
configurations. The PentaPure-Registered Trademark- resin 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-Registered Trademark- resin and other state of the
art technologies, when applied in the Company's unique purification products,
devitalize bacteria and viruses in drinking water, remove protozoa and reduce
other targeted contaminants. Such systems are capable of making virtually any
source water microbiologically potable and better tasting. The Company's
products fall into the following categories: portable systems, point-of-use
systems, point-of-entry systems, mobile purification systems,
commercial/industrial systems and components, and systems for original equipment
manufacturers (OEMs). The Company's products are suitable for a broad range of
applications including: personal travel, outdoor recreation, emergency use, and
complete integrated home, commercial, industrial and military water purification
and filtration.
This Form 10-KSB 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.
COMPANY HISTORY
The Company is a Delaware Corporation and was incorporated in April 1978 as an
affiliate of a Michigan filter manufacturer. Several years later the Company
entered into an exclusive license agreement with the KSURF allowing the Company
to develop, manufacture and market water purification products using the
iodinated resin technology developed by KSU. Until November 1988, the Company
was located in Michigan, where it was managed by its founder, L.L. Davis.
During this period, the Company's principal efforts were directed at developing
initial products incorporating the KSURF technology and marketing those products
to the U.S. government.
In November 1988, the Company moved to Minnesota and expanded its product
development efforts to include commercial applications for the KSURF technology.
In September 1991, with a
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family of water purification products developed and in the market, the Company
raised nearly $4 million through an initial public offering of its common stock
at $5 per share.
Subsequent to the Company's IPO, the Company has continued to develop additional
products to broaden and strengthen its product line. In December 1994, the
Company merged with Ecomaster Corporation, a customer whose water purification
products also utilized the iodinated resin licensed by the Company from KSURF.
The merger enabled the Company to expand its product line and accelerate its
international sales efforts by using Ecomaster's distributors and marketing
programs in several foreign countries. Ecomaster also contributed significant
tooling, product design and manufacturing capabilities as well as a family of
patented devices using the PentaPure-Registered Trademark- resin technology
licensed by the Company from KSURF. Through the merger, the Company also
acquired an important technology which added to its PentaPure-Registered
Trademark- iodinated resin a process which significantly reduces the iodine
residual in the purified water. This technology dramatically improved the
water's taste and resolved a long-standing marketing issue associated with
products containing iodinated resin.
MARKET CHARACTERISTICS
Despite the abundance of water on our planet, safe drinking water is becoming
increasingly scarce. Many of the world's lakes, rivers, wells, and aquifers
contain disease causing toxins and microorganisms. Much of the world's
population lives in areas with inadequate sewage and water treatment facilities
where drinking water is unfit for human consumption. The United Nations
estimates that more than 25 million people, most of whom are children, die from
drinking contaminated water each year. According to the World Health
Organization, up to 75% of all illnesses worldwide result from drinking
contaminated water and up to 50% of hospital beds worldwide are occupied by
persons who drank contaminated water.
Even in the U.S. and other countries where municipally treated water is
generally safe from viruses and bacteria, local water systems often produce tap
water with an unpleasant taste, color or odor. In many cases, the only source
of pure, fresh-tasting drinking water currently available is bottled water,
which is inconvenient and expensive. These factors and others have created a
significant need for products that provide effective filtration and purification
of water for human consumption. Additional markets exist for systems to filter
or purify water for commercial and manufacturing applications. Each of these
market opportunities is comprised of multiple niche markets, thereby further
splintering the water filtration and purification industry into smaller
fragments. The characteristics of the international and U.S. markets for water
filtration and purification systems are considerably different.
U.S. MARKET
PURIFICATION SYSTEMS - Municipally treated water in the United States has
historically presented a relatively low risk of contamination due to viruses,
bacteria, and parasites. As such, consumer demand for purification systems to
purify municipally treated water has been low. However, there
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are several market niches in the U.S. for which there is a current perceived
need for water purification products or systems.
These market opportunities include:
- - Outdoor Recreation
- - Foreign Travel
- - Military/Government/Disaster Relief
An additional factor affecting the market for water purification devices in the
U.S. is governmental regulation. In the U.S., all devices which purify water
are required to be registered with the United States Environmental Protection
Agency ("EPA"). To receive such registration, a product must demonstrate that
it meets strict EPA standards under rigorous testing protocols.
Given the regulatory requirements and the perception that municipally treated
water presents a low risk from viruses, bacteria and parasites, the U.S. market
for water purification systems is generally characterized by specialized
products targeting select market niches.
FILTRATION SYSTEMS - While municipally treated water, as well as drinking water
from other sources in the U.S., may be perceived to present a low risk from
viruses and bacteria, it sometimes has an undesirable taste, color or odor.
Such water may contain excessive levels of lead, chlorine, pathogenic cysts, or
other contaminants. Beyond the inconvenience of bad taste, color or odor, such
polluted water may lead to illness, or, in extreme cases, even death. This
occurred in 1993 when approximately 100 people died in Milwaukee from drinking
municipal water which was contaminated with Cryptosporidium cysts.
In contrast to the U.S. market for water purification systems, the U.S. market
for water filtration products and systems is characterized by a combination of
specialized and general purpose products targeting a very broad spectrum of
needs and applications. Due to the generally accepted view that the taste of
municipally treated water could be improved, consumers have embraced water
filtration products designed for the mass market. Unlike purification systems,
filtration devices do not require registration by the EPA to be sold in the U.S.
Given these factors, filtration systems in the U.S. tend to compete on the basis
of product design, features and cost.
INTERNATIONAL MARKETS
Water purification devices sold outside the U.S. generally do not require
registration or approval by the EPA. In countries where a regulatory approval
exists, it is generally less stringent and more applicable to real world water
conditions than in the U.S. The Company has successfully passed these regulatory
hurdles in a number of countries worldwide. Further, the available drinking
water in many other countries, particularly less developed countries, is
generally of poor quality. In addition to chemicals, pathogenic cysts, and
other contaminants, such water often contains dangerous levels of viruses and
bacteria. In these environments, the only way to achieve safe drinking water is
through purification, not just filtration.
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These characteristics combine to produce several market segments which are
defined by the basic needs of the consumers and their relative household income.
In the more developed countries with greater personal income, consumers are
willing to pay the extra cost for point-of-use or point-of-entry systems that
can purify more water than just the minimum needed for drinking. In the less
developed countries, while safe drinking water is considered a fundamental
necessity, consumers have little disposable income. In these countries, the
price of a water purification system does not necessarily affect the perceived
need or demand for the product, but rather, the consumer's ability to purchase
the products.
The Company offers products in a broad range of market and application segments
worldwide. These include, but are not limited to, the following:
<TABLE>
<CAPTION>
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- - households - outdoor recreation - disaster and humanitarian relief
- - hospitals - bottling plants - industrial applications
- - restaurants - breweries - fish farming
- - schools - embassies - food processing
- - offices - laboratories - military applications
</TABLE>
TECHNOLOGY
PENTAPURE-Registered Trademark- IODINATED RESIN
In the late 1970's, scientists at Kansas State University ("KSU") developed and
patented a unique iodine-based technology for the purification of drinking
water. Iodine, in its natural state, exists as an I(2) molecule. Such I(2)
iodine would be consistent with that found in an iodine tablet commonly used by
campers, travelers and the military. The original technology developed by KSU
was based on the process of artificially creating an I(3) (tri-iodide) molecule
and then bonding it to an anion exchange resin bead. When tested by running
bacteria contaminated water through a bed of this resin, it was shown to be
approximately 1,000 times more effective at killing water-borne bacteria
instantly than iodine found in an iodine tablet. This tri-iodide resin was not
particularly effective, however, at killing viruses and parasites found in
certain water.
In 1981, KSU successfully developed and patented a new improved process
resulting in an I(5) (penta-iodide) resin.. Researchers determined that the
I(5) resin was 1,000 times more effective than the I(3) resin, or 1,000,000
times more effective than an I(2) molecule alone, such as would be found in an
iodine tablet. This new technology was also very effective at killing viruses
and had significant disinfection ability against the more resilient protozoan
group of organisms when properly engineered into a treatment system.
Through a complex proprietary process, I(5) ions are attached to resin beads
which become positively charged. This positive charge attracts the negatively
charged contaminants found in water such as bacteria, viruses, and protozoa. As
contaminated water passes through a bed of the I(5) resin, iodine is instantly
transferred to the microorganisms, effectively devitalizing them.
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Recognizing the commercial potential of iodinated resin as an effective method
of water purification, the Company obtained an exclusive license for all
commercial applications of the technology from KSURF in the early 1980's, and
subsequently obtained from KSURF an exclusive license for an improved method of
commercially manufacturing the iodinated resin. The Company has sought to
protect multiple proprietary formulations of the penta-iodide resin by marketing
all products containing this revolutionary technology under a registered
trademark, PentaPure-Registered Trademark-. This registered mark has been filed
in most countries in the world where registration is desirable, including the
U.S.
Although various methods have been used historically to disinfect water,
including chlorine gas, aqueous iodine, aqueous silver nitrate, hydrogen
peroxide, and boiling - each of these methods requires a sacrifice of cost,
time, taste or ease-of-use to be effective. Commonly used disinfectants, such as
chlorine, constantly release a prescribed amount of chemical agent into the
water no matter how many contaminants are present. If few contaminants are
present, the disinfectant leaves a large amount of chemical residue in the water
creating significant odor, taste and potential health problems through the by-
products it can create. If many contaminants are present, the prescribed amount
of chemical agent released into the water may not be enough to kill all of the
contaminants. An additional problem is that many of these disinfectants
function by osmotic diffusion into the microorganisms and require lengthy
contact time at fairly high concentrations to kill effectively even common
bacteria.
The Company believes its iodinated resin is technically superior to the versions
of iodinated resin manufactured by other companies. While all iodinated resins
leave residual iodine in the effluent water, the Company has dramatically
minimized the iodine residual problem. This iodine residual is further reduced
by a special scavenging process developed by the Company, which is incorporated
into most of the Company's purification systems.
PRODUCT CONFIGURATION
Depending upon a particular product's design and intended application, the
Company utilizes certain filtration technologies along with PentaPure-Registered
Trademark- to create an effective purification system. A typical product
configuration includes four stages. The first stage consists of a carbon filter
to remove sediment and organic material from the water. In the second stage,
PentaPure-Registered Trademark- resin kills water-borne bacteria and virus. The
third stage uses solid carbon blocks to remove undesirable taste, odor, lead,
chlorine, chemicals, protozoan cysts (such as Cryptosporidium and Giardia) and
other organic contaminants. The last stage incorporates the Company's scavenger
media, Ecosorb-TM-, to remove any remaining iodine and iodide residuals and to
further improve taste.
The Company's systems consist of separate modules for each filtration and
purification stage or may incorporate all stages into a single cartridge.
Although the amount of treatment capacity varies by product, the Company's
systems are designed to achieve the same general level of purification, whether
the filtration and purification stages are housed in separate modules, or
incorporated into a single cartridge. The efficacy and efficiency of the
PentaPure-Registered Trademark- resin allows
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the flexibility to scale products up or down in size to meet the needs of a wide
range of product applications.
The Company believes that PentaPure-Registered Trademark-, when combined with
filtration methods using solid carbon blocks, provides a very high level of
drinking water purification. The following list represents just a few of the
contaminants which the Company's purification systems devitalize, remove or
reduce from water:
<TABLE>
<CAPTION>
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- - lead - poliovirus - guinea worms
- - chlorine - rotavirus - volatile organic compounds
- - e. coli bacteria - hepatitis- B virus - pesticides and herbicides
- - klebsiella terrigena - AIDS virus - iron and rust
- - salmonella - Cryptosporidium cysts - sediment
- - cholera - Giardia cysts - asbestos fibers
</TABLE>
PRODUCTS
The flexibility of the PentaPure-Registered Trademark- iodinated resin and the
Company's water filtration technologies have enabled the Company to design,
develop and market a broad line of PURIFICATION and FILTRATION products that
address consumer, institutional, commercial and military/government
applications. While FILTRATION products reduce or remove most undesirable
contaminants found in water including lead, chlorine, bad taste and odors,
PURIFICATION products have the added benefit of devitalization or removal of
viruses, bacteria and parasites. Given the characteristics of the U.S. and
international markets, the Company's core product line, until late 1994,
consisted almost exclusively of purification systems designed for sale to
international markets. In 1995, the Company entered the U.S. market with the
introduction of the SPRING-Registered Trademark- and the OASIS-TM-. During
1996, the Company intends to begin shipping U.S. versions of the PUREIT-
Registered Trademark- Tap and the PUREIT-Registered Trademark- Pitcher.
The Company currently designs, manufactures and markets a broad range of water
filtration and purification systems. These products can be grouped into six
categories: portable systems, point-of-use systems, point-of-entry systems,
mobile purification systems, industrial and commercial systems, and applications
for original equipment manufacturers (OEMs).
PORTABLE SYSTEMS
The Company's portable systems are designed for the largest and fastest growing
markets - residential, travel and outdoor recreation. The Company expects that
three portable systems, the PUREIT-Registered Trademark-, the OASIS-TM-, and the
SPRING-Registered Trademark-, will generate most of its near term revenue
growth.
PUREIT-Registered Trademark- TAP AND PUREIT-Registered Trademark- PITCHER
(PURIFICATION VERSION) - The PURIFICATION version of the PUREIT-Registered
Trademark- Tap was introduced in 1995 for sale to international markets and is a
2.5 liter, two chambered carafe designed for everyday use that can be placed in
a refrigerator, on a countertop or used outdoors. The product's entire
purification system is located in a single cartridge (patent
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pending). In the purification version of the PUREIT-Registered Trademark- Tap,
the system includes: 1) a washable and reusable filter for removing sediment;
2) a purification cartridge containing PentaPure-Registered Trademark- iodinated
resin for devitalizing water-borne bacteria and viruses; 3) an activated carbon
bed that absorbs elements that cause bad taste and odor, and 4) Ecosorb-TM-
scavenging media which removes residual iodine. The purification cartridge also
reduces agricultural and industrial chemicals, pesticides and herbicides. The
result is fresh, purified water for drinking, cooking, or brewing coffee and
tea. The Company has developed a pitcher version of the PUREit-Registered
Trademark- called the PUREIT-Registered Trademark- Pitcher which was introduced
at the International Housewares Show in January 1996.
PUREIT-Registered Trademark- TAP AND PUREIT-Registered Trademark- PITCHER
(FILTRATION VERSION) - The Company has developed FILTRATION versions of the
PUREIT-Registered Trademark- Tap and the PUREIT-Registered Trademark- Pitcher
for sale in the United States. The cartridge in the U.S. versions has a state-
of-the-art filtration system which reduces lead, chlorine, taste and odors but
does not contain iodinated resin, and therefore, does not require EPA
registration. The U.S. versions also have an optional cyst removal pre-filter
cartridge for the removal of Cryptosporidium and Giardia cysts. The U.S.
filtration versions were also introduced at the International Housewares Show in
January 1996.
Both the international and the U.S. versions of the PUREIT-Registered Trademark-
Tap and PUREIT-Registered Trademark- Pitcher are simple to operate. Users pour
water into an inner chamber and dispense purified or filtered water through a
built in faucet or spout. Both versions retail for approximately $25.
OASIS-TM- - The OASIS-TM- is a sport bottle water PURIFICATION device with a
patented cartridge. The OASIS-TM- is designed for outdoor use worldwide, or in
situations where the quality of the source water is unknown. Because it is a
purification device, the OASIS-TM- had to pass a demanding test protocol and
then be registered by the EPA before it could be sold in the United States. The
Company received this registration in August 1995 and initiated U.S. shipments
in October 1995. The Company has sold the OASIS-TM- internationally since early
1995.
The OASIS-TM- is simple to use. The consumer fills the bottle from any
relatively clear water source such as rivers, lakes, streams or ditches. The
user then activates the purification mechanism by squeezing the bottle and
sipping to provide microbiologically safe water. The EPA protocol, which this
device has passed, is made to simulate water which is far more contaminated
than water likely to be encountered in most situations. The OASIS-TM- retails
for approximately $35.
SPRING-Registered Trademark- - The SPRING-Registered Trademark- is a sport
bottle water FILTRATION device that was designed primarily for the United States
market for use on municipally treated water to be the functional replacement for
bottled drinking water. Its cartridge treats water using filtration rather than
iodinated resin. Since it does not kill bacteria and viruses, it does not
require EPA registration to be sold in the United States. The SPRING-Registered
Trademark- was introduced in early 1995. The proprietary filtration cartridge
in the SPRING-Registered Trademark- water filtration system reduces lead and
chlorine, filters out Cryptosporidium and Giardia cysts, significantly improves
taste and removes odor. Users can fill the bottle with conventional tap water
and enjoy the taste they expect from premium bottled drinking water without the
expense. The SPRING-Registered Trademark- retails for approximately $25.
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OTHER PORTABLE PRODUCTS AND SYSTEMS - The Company also sells other portable
products using its iodinated resin technology to the international marketplace
including a travel cup, a travel tap, a PentaPure-Registered Trademark- bucket
system, drinking straws and a series of hand, gasoline, diesel and electrical
operated pump systems for group and refugee camp use.
POINT-OF-USE SYSTEMS
The Company has developed a family of point-of-use PURIFICATION systems which
are designed for residential and light commercial use in international markets.
These systems typically attach to the water line under a sink and dispense
purified water through a dedicated faucet. Some units attach to the sink faucet
and sit on the counter top. Each stage of the purification process is housed in
a separate module and individual systems can be configured to accommodate
specific water quality problems. Depending on the configuration, point-of-use
systems generally retail for $90 to $375.
POINT-OF-ENTRY SYSTEMS
The Company has also developed a broad product line of point-of-entry
PURIFICATION systems which are typically designed for residential and commercial
use in international markets. These systems attach to a municipal water line
inside a building and purify the water before it reaches its point of use.
These systems can be used for whole house, office, restaurant, hospital,
embassy, hotel and many other applications. Point-of-entry systems are
configured to be flexible which allows them to be custom configured to
accommodate specific water quality problems and volume requirements. The retail
price of a typical installation ranges from $750 to $2,500.
MOBILE SYSTEMS
The Company's mobile PURIFICATION systems are typically used in standby
emergency, disaster response, military or other field situations. They are
generally mounted on a truck or trailer and designed to efficiently produce
large amounts of purified water from almost any freshwater or municipal water
source. The Company's largest system generates enough purified water to serve
the daily needs of 60,000 people or supply water to a 800 bed field hospital.
Wholesale prices range from $25,000 to $55,000 depending on system capacity.
INDUSTRIAL AND COMMERCIAL SYSTEMS
The Company designs and manufactures modular PURIFICATION systems for large
applications such as bottling plants, dairies, hotels, manufacturing process
water applications, fisheries, and other custom water purification applications
in international markets. These systems generally range from $10,000 to several
hundred thousand dollars depending on the required capacity and treatment
required.
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ORIGINAL EQUIPMENT MANUFACTURERS (OEM) APPLICATIONS
The Company designs, manufactures and supplies resin, cartridges and systems to
original equipment manufactures for incorporation either into their water
treatment systems, or to add value to the products which they manufacture. The
Company believes that significant future revenue will be derived from these
strategic alliances without the associated marketing costs. In most cases, the
OEM customers are required to display the PentaPure-Registered Trademark- resin
logo on the finished products which they manufacture. The Company sees this as
an excellent opportunity to build brand recognition and credibility by careful
selection and screening of strategic partners. (See also "Additional Market
Opportunities".)
CARTRIDGE REPLACEMENTS
Most of the Company's products include a replaceable filter or purification
cartridge. Depending on the application, these disposable cartridges must be
replaced every 4-12 months. The Company expects to generate a significant
portion of its future revenues from the sale of replacement purification and
filtration cartridges for its portable, point-of-use, and point-of-entry
systems.
MARKETING STRATEGY
The market for water filtration and purification devices is comprised of a
diverse spectrum of product applications and perceived market needs. To
determine which market niches present the most attractive and appropriate
opportunities for WTC, the Company evaluated each market need in light of the
Company's competitive strengths. Management believes that the Company's
advantage resides in the technical advantages of the PentaPure-Registered
Trademark- iodinated resin. Management believes the efficacy and efficiency of
the PentaPure-Registered Trademark- resin enables it to design smaller, lower
cost, more effective water purification devices than most competing technologies
or products. This technology has permitted the design of water purification
devices that do not require energy, pressure, or multiple passes to achieve
effective water purification. The patented PentaPure-Registered Trademark-
technology, combined with the Company's scavenger media and patented filtration
designs, produce effective, efficient, high-quality, low cost water purification
systems with low to non-detectable iodine residual levels.
The Company has developed its marketing strategy to capitalize on the strengths
of the PentaPure-Registered Trademark- resin. In international markets, the
Company promotes its inexpensive portable purification products, such as the
PUREIT-Registered Trademark- Tap, to the mass markets, particularly in the less
developed countries where the demand for purified water is high. Point-of-use
systems, which typically sell for $90-$375, are targeted for the general
population in more developed countries and the upper income population in the
less developed countries. Other products such as point-of-entry systems,
disaster relief systems, military products, and commercial systems, are sold
through direct or independent sales representatives, typically on a custom order
basis.
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In the U.S. market, the Company currently markets two products, the OASIS-TM-
sport bottle water purifier, and the SPRING-Registered Trademark- sport bottle
water filter. Both of these products are being marketed through retail and
catalogue distribution channels to consumers. The OASIS-TM- is being marketed
to consumers in the market niches with the greatest perceived need for personal
water purification devices; outdoor recreation and travel. The SPRING-
Registered Trademark- is being marketed to consumers in the market niches with
the greatest perceived need for personal water filtration devices; fitness,
health and sports. Management is not aware of any products with comparable
features that compete directly with the OASIS-TM- or the SPRING-Registered
Trademark-.
The U.S. filtration versions of the PUREIT-Registered Trademark- Tap and PUREIT-
Registered Trademark- Pitcher will also be marketed through retail and catalogue
distribution channels to consumers. In contrast to the OASIS-TM- and SPRING-
Registered Trademark-, these products will be targeted to the housewares,
gourmet products, department stores, mass merchandisers and specialty item
markets. While there are many existing water filtration products that will
compete directly with the PUREIT-Registered Trademark- Tap and PUREIT-Registered
Trademark- Pitcher in the U.S., the Company believes that the added features of
its products, especially the Cryptosporidium and Giardia cyst removal
capabilities, will enable it to compete effectively in the U.S. market.
SALES AND DISTRIBUTION
U.S. MARKET
In 1995, the Company began marketing the OASIS-TM- and SPRING-Registered
Trademark- as its initial product offering for the U.S. market. In 1996, the
Company will supplement its domestic product line with the U.S. versions of the
PUREIT-Registered Trademark- Tap and PUREIT-Registered Trademark- Pitcher. To
effectively distribute these products, the Company has established a network of
19 independent manufacturers sales representative agencies which have a total of
37 office locations throughout the U.S. This network of sales representatives
has enabled the Company to penetrate significant retail customers in the target
markets for the Company's products. These target markets have included: outdoor
recreation, health & nutrition, catalogue & mail order, housewares, grocery,
pharmacy, hardware home center, and specialty retailer markets.
INTERNATIONAL MARKETS
Internationally, the Company employs various strategies to market and distribute
its products. In many countries, the Company has established relationships with
independent representatives or distributors to market the Company's products.
The Company currently has such relationships in Hong Kong, Poland, Malaysia,
Viet Nam, Canada, Egypt, India, France, Japan, the United Kingdom, Norway,
Mexico, Sweden, China, Russia, the Ukraine, the Philippines, and certain
countries in the Middle East and Central and South America. Local sales
organizations may use direct sales representatives, network marketing
organizations and independent manufacturer's representatives as well as other
means customary to the specific region to distribute the Company's products.
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In India, where there is a significant middle income population, the Company has
entered into a strategic arrangement with a local company for the marketing and
distribution of the Company's products. During the initial phase of the
arrangement, the local partner evaluated market demand by serving as the
distributor for the Company's products. After determining that the market
demand was sufficient, certain manufacturing and product assembly functions are
now being transferred from the Company to the local partner. Such a transfer
will reduce the final cost of the finished products through the use of lower
cost labor and the reduction of import duties and transportation costs.
Eventually, in this arrangement, management anticipates that it will manufacture
only the proprietary purification or filtration cartridges and the local partner
will manufacture and assemble the remaining components. The Company anticipates
that its arrangement with its partner in India will serve as a model for other
international markets.
During 1995, the Company was dependent upon two major customers for a
substantial portion of its net sales. The Company's largest customer during
1995 (19% of net sales) was Ekonet Sp. z.o.o., a Polish company which sells and
distributes the Company's products through network marketing organizations
throughout Poland and Russia. The Company's other major customer in 1995 (15%
of net sales) was Ecomaster India Private, Ltd., the independent company
described above that was established to sell, distribute, and eventually
manufacture the Company's products in India. No other individual customer
accounted for more than 8% of the Company's 1995 net sales.
COMPETITION
In the United States, and internationally, the water treatment equipment
industry is highly fragmented. Many small, regional companies manufacture and
market products which filter water, however, fewer companies market products
that actually purify water. Purification provides the added benefit of
devitalization or removal of viruses and bacteria. The Company believes that
the superiority of its iodinated resin technology serves as a distinct
competitive advantage over other water purification products.
At least five other companies make their own versions of iodinated resin that
compete with the Company's PentaPure-Registered Trademark- resin. These
companies include Recovery Engineering, Inc., The Purolite Company, PuroTech,
Ltd., Umpqua Research Company (through MCV Technologies International, Inc.),
and Ametek, Inc. The Company believes these resins leave much higher iodine and
iodide residual levels in the treated water than PentaPure-Registered Trademark-
and, as a result, water treated with these resins has an undesirable taste and
odor.
Due to the broad spectrum of product and market applications in the water
filtration and purification industry, both domestically and internationally, and
the breadth of the Company's product lines, there are many companies that
compete with one or more of the Company's products. The largest and best known
companies with whom WTC competes include NSA, Brita (USA), Inc., SweetWater,
Inc., Katadyn, Recovery Engineering, Inc., Everpure, Inc., US Filtration,
General Ecology, Inc., Ametek, Inc., Pollenex, Amway, Cuno, and Dalton
Ceramics.
13
<PAGE>
Several of these competitors are significantly larger than the Company, but none
competes directly against all of its product lines.
Management expects to compete effectively in the sale of water purification and
filtration products on the basis of the Company's product performance and
quality, cost, responsiveness to the needs of the customers and proprietary
expertise including several application patents.
ADDITIONAL MARKET OPPORTUNITIES
The efficacy and adaptability of PentaPure-Registered Trademark- iodinated resin
makes it an ideal technology for a wide range of water purification
applications. PentaPure-Registered Trademark- is so effective at neutralizing
viruses and bacteria that miniaturized devices containing only 1 milliliter of
resin have been designed to effectively purify water in certain applications.
Likewise, the technology can be scaled up to provide effective water
purification in systems that provide in excess of 60,000 liters of purified
water per hour.
Given the flexibility of this technology, the Company has had discussions with
several other parties regarding possible business arrangements, including, but
not limited to, the following:
- - The Company has designed, and received a purchase order to supply, customized
water filtration and purification systems for Amana Refrigeration, Inc., a
major international manufacturer of refrigerators and other appliances for
commercial and residential applications. These filtration and purification
systems will be sold on an OEM basis for inclusion in certain models of
refrigerators with integrated ice and water capabilities and as a retrofit
product for the after-market. While the Company's future sales to this
customer could become significant in time, there have been no sales to date
and it is not currently possible to predict the level of future sales or
profits resulting from this arrangement.
- - The Company has entered into preliminary discussions with several
international manufacturers regarding OEM arrangements whereby the Company
would design and manufacture customized water filtration and purification
cartridges for inclusion in certain product categories where the respective
prospects have considerable distribution and marketing experience.
- - The Company has had preliminary discussions regarding its participation in
the design and construction of several large scale water purification
projects. These unrelated projects include municipal water treatment
facilities, water bottling plants, and other commercial applications.
MANUFACTURING AND SUPPLIERS
The Company out-sources most of its manufacturing and product assembly. Most of
the vendors that manufacture component parts for the Company's products utilize
tooling owned by the
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<PAGE>
Company, although certain vendors utilize their own tooling and technology.
Management believes that for most of the component parts used in the Company's
products there are multiple vendors that could manufacture such parts for the
Company should any of the current suppliers be unable or unwilling to do so.
BOWMAN INDUSTRIES, INC.
Prior to December 30, 1994, much of the Company's cartridge and systems
manufacturing and assembly was performed by Water and Air Purification
Corporation ("WAPCO") of St. Paul, Minnesota. On that date, certain assets and
liabilities previously held by WAPCO were acquired by the Company through its
wholly-owned subsidiary, WTC/Ecomaster Corp. Subsequent to the acquisition of
these assets, the Company engaged Bowman Industries, Inc. ("Bowman") to
manufacture and assemble certain components of the Company's products using the
production equipment previously held by WAPCO. Pursuant to an arrangement with
Bowman, the Company pays Bowman an amount equal to all costs and operating
expenses incurred by Bowman. In return, Bowman provides its production and
assembly services exclusively to the Company. The Company treats its
arrangement with Bowman as an independent contractor relationship. During the
year ended December 31, 1995, the Company paid Bowman a total of $142,400 under
this arrangement.
HYBRID TECHNOLOGIES CORP.
The Company utilizes the services of Hybrid Technologies Corp. ("Hybrid"), an
independent contractor, to manufacture iodinated resins which are incorporated
into some of the Company's products. Certain techniques used to manufacture the
iodinated resins were developed by and are the property of Hybrid. Under the
terms of an agreement, the Company has agreed that if it elects to buy iodinated
resin from an outside vendor, it will buy iodinated resin only from Hybrid.
Hybrid has agreed to sell iodinated resin only to the Company and DentalPure
Corp. The Company and DentalPure Corp. have a separate royalty arrangement.
DentalPure Corp. is owned by the Former CEO, and does not compete with the
Company in any of its product applications.
INTELLECTUAL PROPERTY
The Company has an exclusive license from KSURF to commercialize iodinated resin
processes developed by KSU scientists and patented in the U.S. and certain
foreign countries. The Company's license is exclusive except for KSU's right to
conduct scientific research. Under the terms of the license agreement, 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.
In November 1993, KSURF agreed to the inclusion under the license agreement of
certain technology for the manufacture of two new resins developed by KSU
scientists which are designed to remove residual iodine and iodide from
iodinated resin-treated water, and a membrane technology designed for air
disinfection and other potential applications.
15
<PAGE>
Although the Company recognizes that the KSURF patents may offer only limited
protection, the Company believes that its long-term relationship with KSU gives
the Company a competitive advantage because of its access to the expertise of
KSU's scientists. The Company believes its own technical expertise, many years
of resin manufacturing experience, responsiveness to marketplace demands,
quality control, and trade secrets developed over the years are as important to
its competitiveness as patent protection.
The Company has obtained federal registration for its trademark PentaPure-
Registered Trademark- and related logos. The Company places such trademarks on
all its resin-containing products and related marketing materials, and normally
requires or encourages OEMs who incorporate the PentaPure-Registered Trademark-
resin in their own products to place the trademark on their packaging and
marketing material. The Company believes that brand recognition of its
PentaPure-Registered Trademark- resin and the superior quality and unique
product applications of its resin will assist the Company in retaining
customers.
RESEARCH AND DEVELOPMENT
The Company is committed to its long-term investment in research and development
activities. In addition to certain employees, the Company utilizes several
independent consultants to perform, coordinate or contribute to its research and
development program. These consultants include: Dr. George Marchin, an
associate professor of microbiology and immunology at Kansas State University;
Gerald Enoksen, a consulting chemical engineer and principal of Hybrid
Technologies, Corp.; and Alan Lonneman, a consulting design engineer. The
Company's current research and development efforts include redesigning certain
existing products to improve quality and lower manufacturing cost. In addition,
the Company is designing and developing new products in connection with OEM and
private label arrangements. For the years ended December 31, 1995 and 1994,
research and development expenses were $268,843 and $365,676, respectively.
GOVERNMENT REGULATION
The manufacture, marketing and advertising, and distribution in the United
States of water purification devices containing active ingredients, such as
iodine, is regulated by the EPA pursuant to the Federal Insecticide, Fungicide,
and Rodenticide Act, as amended. The EPA generally requires registration of the
manufacturer, the active ingredients, and the applicable device and its
packaging. Registration entails obtaining independent scientific data as to the
efficacy and toxicity of the device and its active ingredients.
In April 1986, the EPA issued a tentative protocol (the "1986 Protocol"),
applicable to all manufacturers for the testing and certification of all
microbiological water purification devices, including those offered by the
Company. The 1986 Protocol requires that to be registered as a "microbiological
water purifier," a device must remove, kill, or deactivate all types of disease-
causing microorganisms from the water, including bacteria, viruses, and
protozoan cysts, so as to
16
<PAGE>
render the processed water safe for drinking. In addition to EPA regulation,
some states require registration of water treatment products.
In August 1995, after nearly two years of design, development and testing, the
Company successfully met the rigorous EPA test protocols and received its
registration of the PentaCell-TM- Purification Cartridge. The PentaCell-TM- is
the heart of the Company's OASIS-TM- personal water purification sport bottle
and such registration enabled the product to be marketed in the U.S.
The Company is also subject to regulations with respect to the handling and
disposal of elemental iodine used in manufacturing resin. While the Company
believes it is in compliance with all applicable rules and regulations, there
can be no assurance that more restrictive and costly requirements will not be
imposed in the future.
EMPLOYEES
As of May 15, 1996, the Company had 17 employees, consisting of four in
administration, seven in sales and marketing, two in finance, three in
production, and one in research and development. In addition, the Company
utilizes the services of several part-time consultants in the areas of research
and development, accounting, sales, and administration. None of the Company's
employees are covered by collective bargaining agreements or are members of a
union. The Company has never experienced a work stoppage and believes that its
relations with its employees are good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 11,000 square feet of improved office and light
manufacturing space at its corporate offices at 14405 21st Avenue North,
Minneapolis, Minnesota 55447. Under the terms of a lease which expires in June
1997, the Company pays base rent of $6,174 per month, and also a pro rata share
of real estate taxes and operating expenses. During 1995, the average total
monthly rent for this space was $8,846.
The Company also leases approximately 10,500 square feet of warehouse space at
14495 23rd Avenue North, Minneapolis, Minnesota 55447. Under the terms of a
lease which expires in August 1997, the Company pays base rent of $3,338 per
month, and also a pro rata share of real estate taxes and operating expenses.
During 1995, the average total monthly rent for this space was $5,367.
17
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
POROUS MEDIA CORPORATION
On September 21, 1995, the Company was named a defendant in a lawsuit brought in
Hennepin County District Court in Minneapolis, Minnesota by Porous Media
Corporation ("Porous Media"), a former supplier of one of the Company's
component parts. In the lawsuit, the plaintiff seeks a cash payment of
approximately $32,000 pertaining to invoices being disputed by the Company and
has asked the court to interpret certain terms and provisions of a contract
between the plaintiff and the Company. The plaintiff further claims to have the
right, under certain circumstances, to be granted a royalty-free license to
make, use and sell water purifiers incorporating certain technologies of the
Company.
The Company believes that this lawsuit is without merit and intends to defend
its position vigorously. Further, the Company has filed a countersuit against
Porous Media alleging, among other things, that the component parts supplied by
the vendor were not as specified in the contract, and that such non-conformance
caused the Company to suffer unnecessary testing costs and substantial delays in
product testing and delivery. The litigation with Porous Media is at an early
stage and the outcome cannot presently be determined.
EBCO MANUFACTURING COMPANY
On February 22, 1996, the Company was named a defendant in a lawsuit brought in
United States District Court, District of Minnesota, by EBCO Manufacturing
Company, a manufacturer of drinking water fountains and coolers ("EBCO"). In
the suit, EBCO alleges that the Company infringes several of EBCO's trademark
registrations for use of the name "Oasis" for various products marketed by EBCO.
EBCO is seeking damages and an injunction to prevent the Company from using the
"Oasis" name.
The Company believes that its use of the "Oasis" name for its product does not
infringe EBCO's trademark rights. Prior to marketing products under the name
"Oasis", the Company's trademark legal counsel conducted a trademark search, and
based on the results of that search, applied for registration with the United
States Patent and Trademark Office ("PTO") of the mark "Oasis" for use with the
Company's product. In June 1995, PTO published the mark for public comment.
The litigation with EBCO is at an early stage and the outcome cannot presently
be predicted.
AMERICAN PRODUCT SALES
On March 26, 1996, the Company settled a lawsuit which had been brought on
September 20, 1995 in Federal District Court, Northern District of California,
by American Product Sales, a division of S.J. Battery X-Change, Inc. In the
lawsuit, the plaintiff alleged that the Company had breached a contract and it
had suffered certain damages as a result. Under the terms of the settlement,
the Company agreed to pay the plaintiff $30,000 in return for a full release of
all claims associated with the legal action.
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<PAGE>
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF
SECURITY HOLDERS
Not applicable.
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock traded on the National Association of Securities
Dealers ("NASD") Small Cap Market from October 4, 1991 until July 14, 1994, when
the Common Stock was de-listed as a result of the Company not having sufficient
assets and stockholders' equity to remain eligible for continued listing. Since
July 14, 1994, the Company's Common Stock has been quoted on the OTC Bulletin
Board under the listing of WTCO.
The following table sets forth the quarterly high and low bid prices for the
periods indicated, as reported on the NASD Small Cap Market (until July 14,
1994) and the OTC Bulletin Board for subsequent periods. The prices listed are
interdealer quotations without retail mark-up, mark-down or commission and may
not represent actual transactions. The Company has not independently verified
the prices listed.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
PERIOD LOW BID HIGH BID
- ----------------------------------------------------------------------
<S> <C> <C> <C>
1994 January 1 - March 31 $ 1/2 $ 3 3/4
April 1 - June 30 $ 1 3/4 $ 3 3/8
July 1 - September 30 $ 1 $ 3 1/2
October 1 - December 31 $ 1 1/2 $ 3 5/8
- ----------------------------------------------------------------------
1995 January 1 - March 31 $ 1 3/4 $ 3 5/8
April 1 - June 30 $ 2 5/8 $ 4 1/2
July 1 - September 30 $ 3 1/2 $ 5
October 1 - December 31 $ 2 1/2 $ 3 1/2
- ----------------------------------------------------------------------
1996 January 1 - March 31 $ 1 5/8 $ 3 1/2
April 1 - May 15 $ 1 3/4 $ 2 5/8
- ----------------------------------------------------------------------
</TABLE>
The Company's Common Stock was held by approximately 1,100 stockholders as of
May 15, 1996.
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<PAGE>
CASH DIVIDENDS
The Company has never paid any cash dividends on its Common Stock and does not
anticipate paying any in the foreseeable future. Beginning with the quarter
ended March 31, 1993, the Company's Board of Directors suspended the payment of
dividends on the Company's 9% non-voting, participating, convertible preferred
stock (the "Preferred Stock"). During 1993 and 1994, a total of 271,000 and
475,000 shares, respectively, of Preferred Stock were converted into Common
Stock, leaving 6,800 shares of Preferred Stock outstanding. As of December 31,
1994, each of the shareholders holding preferred shares had agreed to waive all
accrued but unpaid dividends and convert their preferred shares into a total of
1,925 shares of common stock. As a result, the Company has not accrued
dividends on its preferred stock subsequent to December 31, 1994. The Company
is in the process of completing the conversion of the remaining preferred shares
into common stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
OVERVIEW
This Form 10-KSB 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 Company's consolidated financial statements are 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.
The Company incurred net losses of $3,221,083 and $2,062,183, and cash used by
operating activities was $2,505,922 and $2,093,716 for the years ended December
31, 1995 and 1994, respectively. In addition, at December 31, 1995, the Company
has a deficiency in working capital of $213,023 and an accumulated deficit of
$9,735,084.
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 1995 were met principally through the issuance
of interest bearing notes aggregating $1,950,000 to the Chairman of the Board
and an affiliated entity. Of the amounts advanced in 1995, $1,150,000, plus
accrued interest of $58,399, was converted into common stock of the Company in
1995, and $800,000 was converted into common stock of the Company in March 1996.
In addition, the Chairman of the Board assumed $1,100,000 of Company debt in
exchange for common stock, and committed to advance an additional $2,200,000 to
the Company in 1996 for additional shares of the Company's common stock.
Management's plans to continue as a going concern, in addition to the advances
committed to by the Chairman of the Board of Directors, include the following
efforts to generate the necessary
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<PAGE>
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)
aggressively managing cash collections and disbursements, b) promoting sales of
the Company's existing products, including those recently registered with the
U.S. Environmental Protection Agency, c) completing the introduction of new
products currently under development, and d) raising additional capital through
private or public placements of debt or equity securities, or through other
sources.
The consolidated 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.
MERGER. On December 30, 1994, WTC Acquisition Corp. (WTCAC), a newly-formed,
wholly-owned subsidiary of the Company, merged with Ecomaster Corporation
(Ecomaster). WTCAC exchanged 2,134,149 shares of WTC common stock for all of the
issued and outstanding common stock of Ecomaster. Immediately thereafter,
certain assets and liabilities of Water & Air Purification Corporation (WAPCO),
which had been distributed to its principal owner, were transferred to WTCAC in
exchange for 1,035,851 shares of WTC common stock. Upon the completion of these
transactions the principal owner of WAPCO and Ecomaster became the Chief
Executive Officer of the Company, and effective April 12, 1996, this officer
(the "Former CEO") resigned from the Company. These transactions have been
accounted for under the purchase method of accounting and thus, the consolidated
statements of operations do not include the results of operations for Ecomaster
or WAPCO for any period prior to December 30, 1994. There was no goodwill
recorded as a result of the transactions. WTCAC's name has since been changed
to WTC/Ecomaster Corp.
The following unaudited pro forma information presents the combined results of
operations of WTC, Ecomaster, and WAPCO for the year ended December 31, 1994,
with pro forma adjustments as if the transactions had been consummated as of
January 1, 1994. This pro forma information does not purport to be indicative
of what would have occurred had the transactions been made as of those dates or
of results which may occur in the future.
<TABLE>
<CAPTION>
1994
Pro Forma
<S> <C>
Net sales $ 2,073,142
------------
------------
Net loss $ (2,475,351)
Preferred stock dividend requirement (1,224)
------------
Net loss applicable to common stockholders $ (2,476,575)
------------
------------
Net loss per common share $ (.43)
------------
------------
</TABLE>
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
NET SALES. The Company had net sales of $2,882,504 for the year ended December
31, 1995. These results represent increases of 207.6% and 39.0% from reported
net sales of $937,127 and
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<PAGE>
pro forma net sales of $2,073,142, for the same period in 1994, respectively.
During 1995, the average selling prices of the Company's products have generally
remained unchanged or decreased, therefore, the increase in sales reflects
increases in the number of units sold.
Management believes the increase in net sales is attributable to the Company's
significant investment in sales and marketing as well as recent introductions of
new products. In addition, several of the Company's international marketing and
distribution relationships are maturing to higher levels of shipment activity.
These international sales, by their nature, tend to consist of a limited number
of high-value shipments. While the Company believes that on a general basis the
positive trend in sales will continue, the Company's dependence on a limited
number of high-value transactions, and the inability to control the timing of
some of those transactions, will, at the current sales levels, create the
possibility that sales could fluctuate significantly from quarter to quarter.
The increase in reported net sales is also attributable, in part, to the merger
transactions discussed above. Because those transactions were accounted for
under the purchase method of accounting, the Company's consolidated financial
statements do not include any results of operations of Ecomaster or WAPCO for
any period prior to December 30, 1994.
The Company was dependent upon two major customers for a substantial portion of
its net sales in 1995. The Company's largest customer during 1995 (19% of net
sales) was Ekonet Sp. z.o.o., a Polish company which sells and distributes the
Company's products through network marketing organizations throughout Poland and
Russia. The Company's other major customer in 1995 was Ecomaster India Private,
Ltd., an independent company in India established to sell, distribute, and
eventually manufacture the Company's products in India.
Foreign sales (including domestic sales destined for foreign markets)
represented 85% and 100%, respectively, of net sales for 1995 and 1994. To
date, the Company has required all payments from customers to be in U.S.
dollars, therefore, 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. To date, management believes
that foreign currency exchange rate fluctuations have not had a material
negative effect on the demand for the Company's products in foreign markets.
COST OF GOODS SOLD. For the years ended December 31, 1995 and 1994, the cost of
goods sold was $2,875,884 and $1,091,482, representing 99.8% and 116.5% of net
sales, respectively. One of the factors contributing to the Company's current
high cost of goods sold relative to sales is that the Company's three newest
products, the SPRING-Registered Trademark-, OASIS-TM-, and PUREIT-Registered
Trademark-, which represent a significant portion of the current sales volume,
have been priced to facilitate market penetration. To reduce the future cost of
sales of these products, the Company has redesigned them to achieve a lower
manufacturing cost and has also made substantial investments in production
tooling and equipment necessary to produce lower cost components.
22
<PAGE>
Since early 1994, through direct investment and through the transactions with
Ecomaster and WAPCO, the Company has made a significant investment in its
production tooling, equipment and facilities. As a result of this investment,
management believes that its current production capacity is substantially
greater than its current sales volume, which has resulted in the costs
associated with this excess production capacity contributing to the Company's
current high cost of goods sold.
In addition, as a result of the December 30, 1994 acquisition transactions
discussed above, the Company had to consolidate two similar product lines and
their related inventories during 1995. This process resulted in certain
production inefficiencies and inventory obsolescence. During 1995, the Company
recorded a charge of $225,000 against cost of goods sold, representing the
adjustment necessary to reduce the carrying value of certain inventory items to
the lower market value.
GROSS PROFIT/LOSS. For the year ended December 31, 1995, the Company recognized
gross profit of $6,620, representing 0.2% of net sales. For the year ended
December 31, 1994, the Company recognized a gross loss of $154,355, representing
16.5% of net sales. Management believes that in addition to the items included
in the above discussion of cost of goods sold, an additional factor affecting
gross margin is that the higher sales level in 1995 allowed for greater
absorption of production overhead.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the years ended December 31,
1995 and 1994, selling, general and administrative expenses were $2,612,115 and
$1,541,905, representing 90.6% and 164.5% of net sales, respectively.
SALES AND MARKETING EXPENSES - For the years ended December 31, 1995 and 1994,
sales and marketing expenses were $1,281,143 and $509,694, respectively.
As part of the Company's business development strategy, the Company has elected
to invest heavily in sales and marketing activities associated with new product
introductions. During 1994 and 1995, in connection with the introduction of the
SPRING-Registered Trademark-, OASIS-TM-, and PUREIT-Registered Trademark-
products, the Company significantly increased its expenditures for sales
brochures, marketing materials, packaging, trade shows, promotion and selling
expenses. The Company recognizes that these expenses represent an up front cost
associated with the introduction of new products to new markets, however, the
Company believes that such an investment is necessary if the Company's new
product introductions are to be successful. The Company expects sales and
marketing expenses to continue at significant levels, or increase as new
products are introduced.
GENERAL AND ADMINISTRATIVE EXPENSES - For the years ended December 31, 1995 and
1994, general and administrative expenses were $1,330,972 and $1,032,211,
respectively.
The increase in general and administrative expenses from 1994 to 1995, was due
in part to expenses associated with employee separation agreements, bad debts,
professional fees and litigation settlements. In addition, the acquisitions at
December 30, 1994 discussed above resulted in certain direct and indirect
transitional expenses being recognized in 1995.
23
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. For the years ended December 31, 1995 and
1994, research and development expenses were $268,843 and $365,676,
respectively. The high level of research and development expense in 1994 was
due, in part, to the substantial costs associated with the development and
testing of the SPRING-Registered Trademark-, OASIS-TM- and PUREIT-Registered
Trademark-. While the Company is committed to its long-term investment in
research and development, such expenses, by their nature, tend to fluctuate in
amount and as a percentage of sales. The Company's current research and
development focus is on redesigning existing products to improve quality and
lower manufacturing costs. The Company is also designing and developing new
products in connection with OEM (original equipment manufacturer) and private
label arrangements.
NET OPERATING LOSS CARRYFORWARDS. The Company has a federal net operating loss
("NOL") carryforward of approximately $8,900,000 at December 31, 1995.
Utilization of approximately $6,000,000 of the NOL carryforward is limited to
approximately $29,000 per year through 2009 based on an Internal Revenue Code
limitation, as prescribed by Section 382, imposed as a result of a change in
controlling interest in the Company in 1994. This change in controlling interest
resulted in part from the Ecomaster/WAPCO transactions. The NOL carryforward
may be further limited by ownership changes occurring subsequent to December 31,
1994.
1994 COMPARED TO 1993
NET SALES. The Company had net sales of $937,127 for the year ended December
31, 1994. This represents a 21% decrease from the $1,180,466 of net sales for
the same period in 1993. Management believes that the net sales decline between
1994 and 1993 relates principally to the Company's greater focus in 1994 on
research and development activities designed to improve product quality, new
product development on the Company's OASIS-TM- and SPRING-Registered Trademark-
product lines, and efforts to build a distributor organization suited to the
Company's strategy of retail as well as wholesale sales distribution.
The Company was dependent upon two major customers for a substantial portion of
its net sales in 1994. The Company's largest customer (17% of net sales) was
WAPCO, an affiliate of Jan H. Magnusson, the Former CEO. On December 30, 1994,
the Company's wholly-owned subsidiary acquired certain assets and liabilities of
WAPCO which had been distributed from WAPCO to Mr. Magnusson. The Company's
other major customer in 1994, WaterCare Marketing, accounted for 13% of the
Company's 1994 net sales. WaterCare Marketing is a Philippines distributor
specializing in light commercial water purification and filtration applications.
Foreign sales (including domestic sales destined for foreign markets)
represented 100% and 91%, respectively, of net sales for 1994 and 1993. To
date, the Company has required payment in US dollars, therefore, the Company has
not been subject to currency fluctuations directly.
COST OF GOODS SOLD. As a percentage of net sales, cost of goods sold increased
to 116% for 1994, compared with 93% for 1993. The increase in relative cost of
goods sold in 1994 over 1993 was caused principally by the Company's inability
to absorb fixed costs with the decline in net sales and a reduction in the bulk
iodinated resin sales to a major customer.
24
<PAGE>
GROSS PROFIT/LOSS. The gross loss for 1994 was $154,355, compared to a gross
profit of $78,586 in 1993. Gross loss as a percentage of net sales was 16% for
1994, and the gross profit as a percentage of net sales was 7% for 1993. The
gross loss for 1994 was due principally to the decline in net sales.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $1,541,905 and $1,068,955, representing 165% and
91% of net sales in 1994 and 1993, respectively. During the third quarter of
1993, management focused its efforts principally on cash conservation, which
included employee layoffs and reductions in marketing, travel, and legal
expenses. Commencing in the first quarter of 1994, and continuing throughout
1994, management began rehiring personnel and increasing selling and marketing
expenses as part of its strategy to reestablish distributor relationships and
begin pre-marketing promotion of the OASIS-TM- product line.
RESEARCH AND DEVELOPMENT EXPENSES. For the years ended December 31, 1994 and
1993, research and development expenses were $365,676 and $107,432,
respectively. During 1994, the Company focused its research and development
activities on redesigning existing products to improve quality and comply with
EPA requirements for registration and sale in the United States, and on
development and continued testing of the OASIS-TM- and SPRING-Registered
Trademark- product lines.
RESTRUCTURING EXPENSES. During the second quarter of 1993, a provision of
$351,000 for special charges related to restructuring was charged to operations.
The provision included employee severance costs, including costs relating to the
termination of the Company's Chief Executive Officer and settlement of his
employment agreement claims, selective write-downs of assets, and related
outside professional services. During 1994, the Company recognized a credit of
$49,600 as actual costs incurred were less than the amount accrued.
NET OPERATING LOSS CARRYFORWARDS. At December 31, 1994, the unrestricted
portion of the Company's net operating loss ("NOL") carryforward was
approximately $430,000. Utilization of the NOL carryforward is limited to
approximately $29,000 per year through 2009 based on an Internal Revenue Code
limitation, as prescribed by Section 382, imposed as a result of a change in
controlling interest in the Company in 1994. This change in control resulted in
part from the Ecomaster/WAPCO transactions. The NOL carryforward may be further
limited by ownership changes occurring subsequent to December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1995 the Company had a working capital deficit (total current
liabilities in excess of total current assets) of $213,023 compared with a
working capital surplus of $538,959 as of December 31, 1994. During 1995, the
Company used its cash balances, accounts receivable collections, bank lines of
credit, and trade accounts payable as sources of capital to fund its operations.
In addition, Robert C. Klas, Sr., the Chairman of the Board and principal
shareholder, has continued to loan additional funds to the Company for general
working capital purposes under
25
<PAGE>
the terms of various loan agreements. During 1995, Mr. Klas and an affiliated
entity advanced a net total of $1,950,000 to the Company.
For the year ended December 31, 1995; a) net cash used in operating activities
consisted primarily of the Company's $3,221,083 loss from operations and an
increase in accounts receivable of $467,878 offset by a $227,288 decrease in
inventories and increases in accounts payable and accrued expenses of $272,151
and $392,720, respectively, b) net cash used in investing activities consisted
primarily of purchases of property and equipment of $281,277 offset by
applications of restricted cash of $123,571, and c) net cash provided by
financing activities consisted primarily of $1,950,000 net proceeds from loans
by a director/stockholder and an affiliated entity, and $82,000 proceeds from
bank lines of credit.
For the year ended December 31, 1994; a) net cash used in operating activities
consisted primarily of the Company's $2,062,183 loss from operations, a $249,388
increase in inventories, and a $228,676 decrease in accrued expenses, offset by
a $281,226 increase in accounts payable, b) net cash used in investing
activities consisted primarily of increases in restricted cash of $357,300 and
purchases of property and equipment of $209,933, and c) net cash provided by
financing activities consisted primarily of $1,812,500 proceeds from a private
placement, $535,000 net proceeds from loans by a director/stockholder, and
$1,050,000 proceeds from bank lines of credit.
The Company estimates that it will have working capital needs of approximately
$2-4 million during 1996 to fund its operations and continue market introduction
of its OASIS-TM-, SPRING-Registered Trademark-, and PUREIT-Registered Trademark-
product lines. The Company also anticipates that it will have to fund growth in
inventories and accounts receivable. On March 22, 1996, the Company raised a
portion of this estimated capital requirement through the sale of 2,400,000
common shares and a warrant to purchase an additional 2,400,000 common shares at
$2.00 per share to the Chairman of the Board. As consideration for the
securities purchased, the Chairman converted $1,200,000 of existing debt and
invested, or committed to invest, $1,800,000 cash. Of the debt converted,
$800,000 had been advanced to the Company prior to December 31, 1995.
The Company maintains a $500,000 bank line of credit which is unsecured by the
Company, but has been guaranteed by the Former CEO. Unless it is extended or
renewed, the line of credit will expire on May 31, 1996. If the line of credit
expires, and the Company is required to pay off the $500,000 balance, the
Company's liquidity will be adversely affected.
The Company's plan of operations over the next 12 months is to increase sales
and further develop its domestic and international markets. In the U.S. market,
the Company's efforts will be to establish an initial market presence in retail
stores and consumer catalogs with the OASIS-TM-, SPRING-Registered Trademark-
and PUREIT-Registered Trademark- products. Although the Company's OASIS-TM-
product received EPA registration for sale in the U.S. in August 1995, due to
the seasonal nature of the product, meaningful sales are not expected until
1996. In international markets, the Company will continue to develop new
marketing and distribution channels and will attempt to increase sales of all
products through existing channels.
26
<PAGE>
The Company is also evaluating its available options to raise capital. Such
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. While
additional capital would provide the Company with greater flexibility in
executing its business plan, the Company recognizes that due to competition, the
uncertainties of the capital markets, and other factors beyond the Company's
control, 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.
27
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company are set forth on
pages 29 through 48 of the Form 10-KSB:
PAGE
Independent Auditors' Report 29
Independent Auditors' Report 30
Consolidated Balance Sheets as of December 31, 1995 and 1994 31
Consolidated Statements of Operations for the Years Ended
December 31, 1995 and 1994 32
Consolidated Statements of Stockholders' Equity (Deficit) for the
Years Ended December 31, 1995 and 1994 33
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995 and 1994 34
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1995 and 1994 36
28
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
WTC Industries, Inc.
Plymouth, Minnesota
We have audited the accompanying consolidated balance sheet of WTC Industries,
Inc. (WTC) as of December 31, 1995 and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the year then
ended. These financial statements are the responsibility of WTC's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such 1995 consolidated financial statements present fairly, in
all material respects, the financial position of WTC as of December 31, 1995 and
the results of its operations and its cash flows for the year then ended, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements as of and for the year ended
December 31, 1995 have been prepared assuming that WTC will continue as a going
concern. As discussed in Note 1 to the financial statements, WTC's recurring
losses from operations, deficiency in working capital, and net stockholders'
deficit raise substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are also described in Note
1. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
Deloitte & Touche LLP
Minneapolis, Minnesota
May 13, 1996
29
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders
WTC Industries, Inc.
Plymouth, Minnesota
We have audited the accompanying consolidated balance sheet of WTC INDUSTRIES,
INC. AND SUBSIDIARIES as of December 31, 1994, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of WTC INDUSTRIES,
INC. AND SUBSIDIARIES as of December 31, 1994, and the consolidated results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that WTC
INDUSTRIES, INC. AND SUBSIDIARIES will continue as a going concern. As
discussed in note 1 to the financial statements, the Company's recurring losses
from operations and working capital deficiencies raise substantial doubt about
the entity's ability to continue as a going concern. Management's plans in
regard to this matter are also described in note 1. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of reported asset amounts or the amounts and classification of
liabilities that might result from the outcome of this uncertainty.
LURIE, BESIKOF, LAPIDUS & CO., P.L.L.P.
Minneapolis, Minnesota
April 24, 1995
30
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
ASSETS (NOTE 6)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 33,489 $ 671,638
Accounts receivable, net of allowance for doubtful accounts
of $149,000 and $68,000 787,775 319,897
Inventories (Notes 4 and 18) 845,543 1,072,831
Prepaid expenses and other 63,062 75,688
----------- -----------
Total current assets 1,729,869 2,140,054
PROPERTY AND EQUIPMENT, net (Note 5) 513,040 444,327
OTHER ASSETS:
Restricted cash (Note 7) 233,729 357,300
Loan acquisition costs less amortization of $19,614 and $2,488 58,511 75,637
Noninfringement agreement, net of accumulated
amortization of $55,500 and $53,650 1,850
Patents and trademarks, net of accumulated amortization of
$36,678 and $17,076 61,335 80,937
Other 14,647 15,207
----------- -----------
368,222 530,931
----------- -----------
$ 2,611,131 $ 3,115,312
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable and current maturities of long-term obligations
(Note 6) $ 608,904 $ 873,579
Accounts payable 903,974 631,823
Salaries and commissions 209,623 500
Accrued expenses 220,391 95,193
----------- -----------
Total current liabilities 1,942,892 1,601,095
LONG-TERM OBLIGATIONS, net of current maturities (Notes 6 and 7) 1,474,466 2,207,760
COMMITMENTS AND CONTINGENCIES (Notes 8, 12, 15, 17, and 20)
INDEBTEDNESS REFINANCED IN MARCH 1996 (Notes 6 and 20) 800,000
STOCKHOLDERS' DEFICIT (Notes 3, 7, 9, 10, 17, and 20):
Preferred stock 6,800 6,800
Common stock 82,898 64,431
Additional paid-in capital 8,039,159 5,749,227
Accumulated deficit (9,735,084) (6,514,001)
----------- -----------
(1,606,227) (693,543)
----------- -----------
$ 2,611,131 $ 3,115,312
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
31
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
NET SALES (Notes 14 and 16) $ 2,882,504 $ 937,127
COST OF GOODS SOLD (Note 18) 2,875,884 1,091,482
----------- -----------
GROSS PROFIT (LOSS) 6,620 (154,355)
EXPENSES:
Selling, general, and administrative (Note 15) 2,612,115 1,541,905
Research and development 268,843 365,676
Provision for restructuring (Note 11) (49,600)
----------- -----------
2,880,958 1,857,981
----------- -----------
LOSS FROM OPERATIONS (2,874,338) (2,012,336)
OTHER INCOME (EXPENSE):
Interest income 5,153 572
Interest expense (336,312) (51,125)
Other (15,586) 706
----------- -----------
(346,745) (49,847)
----------- -----------
NET LOSS (3,221,083) (2,062,183)
PREFERRED STOCK DIVIDEND REQUIREMENT (Note 9) (1,224)
----------- -----------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $(3,221,083) $(2,063,407)
----------- -----------
----------- -----------
NET LOSS PER COMMON SHARE $ (0.46) $ (0.78)
----------- -----------
----------- -----------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 7,025,000 2,629,000
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
32
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK TOTAL
----------------------- --------------------- ADDITIONAL STOCKHOLDERS'
SHARES SHARES PAID-IN ACCUMULATED EQUITY
OUTSTANDING AMOUNT OUTSTANDING AMOUNT CAPITAL DEFICIT (DEFICIT)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 481,800 $ 481,800 1,710,810 $ 17,108 $ 4,202,871 $(4,451,818) $ 249,961
Conversion of preferred stock
into common stock (475,000) (475,000) 95,000 950 474,050
Preferred stock dividend declared (69,487) (69,487)
Issuance of common stock in lieu
of preferred stock accrued
dividends 34,745 348 69,139 69,487
Issuance of common stock on
conversion of director loans 1,070,000 10,700 524,300 535,000
Options issued to former director
at exercise price under fair
market value 5,000 5,000
Issuance of common stock in private
placement 362,500 3,625 358,875 362,500
Issuance of common stock in
connection with acquisitions
of Ecomaster Corporation and
certain net assets of Water and
Air Purification Corporation 3,170,000 31,700 184,479 216,179
Net loss (2,062,183) (2,062,183)
---------- ---------- ---------- ---------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1994 6,800 6,800 6,443,055 64,431 5,749,227 (6,514,001) (693,543)
Issuance of common stock on
assumption of debt and
conversion of director loan
(Note 6) 1,646,718 16,467 2,041,932 2,058,399
Issuance of common stock on
conversion of notes payable
to affiliated entity 200,000 2,000 248,000 250,000
Net loss (3,221,083) (3,221,083)
---------- ---------- ---------- ---------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1995 6,800 $ 6,800 8,289,773 $ 82,898 $ 8,039,159 $(9,735,084) $(1,606,227)
---------- ---------- ---------- ---------- ----------- ----------- -----------
---------- ---------- ---------- ---------- ----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
33
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (3,221,083) $ (2,062,183)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 210,616 107,090
Amortization 38,578 17,599
Loss on sale of fixed assets 28,500
Director's options earned 5,000
Changes in operating assets and liabilities:
Accounts receivable (467,878) (6,825)
Inventories 227,288 (249,388)
Prepaid expenses and other 13,186 42,441
Accounts payable 272,151 281,226
Accrued expenses 392,720 (228,676)
------------ ------------
Net cash used in operating activities (2,505,922) (2,093,716)
INVESTING ACTIVITIES:
Restricted cash 123,571 (357,300)
Purchases of property and equipment (281,277) (209,933)
Payment of security deposit (7,824)
Proceeds from sale of fixed assets 1,500
------------ ------------
Net cash used in investing activities (156,206) (575,057)
FINANCING ACTIVITIES:
Proceeds from private placement 1,812,500
Loan acquisition costs (75,637)
Proceeds of loans from director/stockholder 1,800,000 970,000
Proceeds of loan from affiliated entity 250,000
Payments on loan from director/stockholder (100,000) (435,000)
Payments on long-term obligations (8,021) (5,617)
Borrowings under bank lines of credit 82,000 1,050,000
------------ ------------
Net cash provided by financing activities 2,023,979 3,316,246
------------ ------------
NET (DECREASE) INCREASE IN CASH (638,149) 647,473
CASH AT BEGINNING OF YEAR 671,638 24,165
------------ ------------
CASH AT END OF YEAR $ 33,489 $ 671,638
------------ ------------
------------ ------------
</TABLE>
34
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
YEARS ENDED DECEMBER 31, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -
Cash paid during the year for interest $ 233,005 $ 27,221
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Common stock issued on conversion or assumption of long-term
debt and accrued interest $ 2,308,399 $ 535,000
Preferred stock converted to common stock 475,000
Common stock issued in lieu of unpaid preferred stock
accrued dividends 69,487
Common stock issued for acquisition of Ecomaster common stock
and certain net assets of Water and Air Purification Corporation 216,179
Capital lease incurred to acquire equipment 28,052
</TABLE>
See notes to consolidated financial statements.
35
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND MANAGEMENT'S PLANS REGARDING
OPERATING LOSSES AND LIQUIDITY
BUSINESS - WTC Industries, Inc. (WTC), formerly Water Technologies
Corporation, was incorporated in Delaware in April 1978. WTC and its
subsidiaries (the Company) manufacture and market water filtration and
purification products for commercial and personal use. Many of the
Company's purification products are based on an iodinated resin technology
that was originally developed by Kansas State University and has been
licensed to the Company by Kansas State University Research Foundation
(KSURF). The majority of the Company's sales have been to foreign
customers or to customers in the United States who ultimately resold the
products to foreign customers (see Note 16).
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. The Company has incurred net losses of $3,221,083 and
$2,062,183, and cash used by operating activities was $2,505,922 and
$2,093,716 for the years ended December 31, 1995 and 1994, respectively.
In addition, as of December 31, 1995, the Company had a deficiency in
working capital of $213,023 and an accumulated deficit of $9,735,084.
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 1995 were met principally
through the issuance of interest-bearing notes, aggregating $1,950,000, to
the Chairman of the Board and an affiliated entity. Of the amounts
advanced in 1995, $1,150,000, plus accrued interest of $58,399, was
converted into common stock of the Company in 1995 and $800,000 was
converted into common stock of the Company in March 1996. In addition, the
Chairman of the Board assumed $1,100,000 of Company debt in exchange for
common stock in 1995 and committed to advance an additional $2,200,000 to
the Company in 1996 for additional shares of the Company's common stock
(see Note 20).
Management's plans to continue as a going concern, in addition to the
advances committed to by the Chairman of the Board of Directors, 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) aggressively
managing cash collections and disbursements; (b) promoting sales of the
Company's existing products, including those recently registered with the
U.S. Environmental Protection Agency; (c) completing the introduction of
new products currently under development; and (d) raising additional
capital through private or public placements of debt or equity securities
or through other sources.
The consolidated 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.
36
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of WTC and, since the dates of their acquisition, its
wholly owned subsidiaries, Water Pollution Control Systems, Inc. and
WTC/Ecomaster Corp. (see Note 3). All significant intercompany balances
and transactions have been eliminated in consolidation.
INVENTORIES - Inventories are stated at the lower of cost (first-in,
first-out method) or market.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost
less accumulated depreciation. Depreciation is provided on a straight-line
basis over estimated useful lives of three to eight years for equipment and
over the lease term for leasehold improvements.
LOAN ACQUISITION COSTS - Loan acquisition costs represent fees paid in
connection with the sale of private placement units during 1994. Such
costs are being amortized by the straight-line method over five years, the
term of the private placement promissory notes.
NONINFRINGEMENT AGREEMENT - The noninfringement agreement was
amortized by the straight-line method over five years. The agreement was
part of an asset purchase and noninfringement agreement between the Company
and DAVCO Manufacturing Corporation on February 17, 1990, whereby DAVCO
agreed not to infringe on any patent currently owned by KSURF or the
Company respecting iodinated resins.
TRADEMARKS - The cost of trademark registration is being amortized by
the straight-line method over five years.
PATENT COSTS - The Company's patent costs are charged to operations as
incurred unless the cost exceeds $5,000, in which instance the costs are
capitalized and amortized over a period not to exceed the life of the
applicable patent. Expenditures for patents not owned by the Company, but
utilized through a license agreement, are charged to operations as
incurred.
REVENUE RECOGNITION - The Company recognizes revenue upon shipment of
the product.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs,
whether performed by the Company or by outside parties under contract, are
charged to operations as incurred.
NET LOSS PER COMMON SHARE - Net loss per common share is computed by
dividing the net loss applicable to common stockholders by the weighted
average number of common shares outstanding. Warrants, options, and
convertible preferred stock have been excluded from the computations
because the effect is anti-dilutive.
ESTIMATES - The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
these estimates.
37
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS - In accordance with the
requirements of Statement of Financial Accounting Standards (SFAS) No. 107,
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, management estimates
that the carrying value of long-term debt approximates fair value due to
the variable interest feature of the debt or its extinguishment shortly
after year end. The carrying value of all other financial instruments
approximate fair value due to the short-term nature of the instruments.
RECLASSIFICATIONS - Certain reclassifications were made to the 1994
consolidated financial statements to present them on a basis comparable
with the current year. The reclassifications had no effect on previously
reported net loss or stockholders' equity (deficit).
3. MERGER
On December 30, 1994, WTC Acquisition Corp. (WTCAC), a newly formed,
wholly owned subsidiary of WTC, merged with Ecomaster Corporation
(Ecomaster). WTCAC exchanged 2,134,149 shares of WTC common stock for all
of the issued and outstanding common stock of Ecomaster. Immediately
thereafter, certain assets and liabilities of Water and Air Purification
Corporation (WAPCO), which had been distributed to its principal owner,
were transferred to WTCAC in exchange for 1,035,851 shares of WTC common
stock. Upon the completion of these transactions, the principal owner of
WAPCO and Ecomaster became the Chief Executive Officer of the Company, and
effective April 12, 1996, this officer (the Former CEO) resigned from the
Company. These transactions have been accounted for under the purchase
method of accounting, and thus, the consolidated statements of operations
do not include the results of operations for Ecomaster or WAPCO for any
period prior to December 30, 1994. There was no goodwill recorded as a
result of the transactions. WTCAC's name has since been changed to
WTC/Ecomaster Corp.
The following unaudited pro forma information presents the combined
results of operations of WTC, Ecomaster, and WAPCO for the year ended
December 31, 1994, with pro forma adjustments made as if the transactions
had been consummated as of January 1, 1994. This pro forma information
does not purport to be indicative of what would have occurred had the
transactions been made as of those dates or of results which may occur in
the future.
1994
Pro Forma
(Unaudited)
Net sales $ 2,073,142
-----------
-----------
Net loss $(2,475,351)
Preferred stock dividend requirement (1,224)
-----------
Net loss applicable to common stockholders $(2,476,575)
-----------
-----------
Net loss per common share $ (.43)
-----------
-----------
4. INVENTORIES
Inventories consisted of the following at December 31:
1995 1994
Raw materials $473,960 $900,346
Work-in-process 16,424
Finished goods 355,159 172,485
-------- ----------
$845,543 $1,072,831
-------- ----------
-------- ----------
38
<PAGE>
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
1995 1994
Office equipment $255,502 $183,996
Machinery and equipment 561,198 421,114
Leasehold improvements 98,895 89,827
Art 19,825 19,825
-------- --------
935,420 714,762
Less accumulated depreciation 422,380 270,435
-------- --------
$513,040 $444,327
-------- --------
-------- --------
6. NOTES PAYABLE AND LONG-TERM OBLIGATIONS
Notes payable and long-term obligations consisted of the following at
December 31:
<TABLE>
<CAPTION>
Interest
Description Rate 1995 1994
<S> <C> <C> <C>
Bank line of credit, borrowings increased to $1,100,000
during 1995. Entire outstanding balance was assumed by
a director/stockholder as consideration for purchase of
common stock. Prime $1,050,000
Bank line of credit, maximum available borrowings of
$500,000. Line of credit expires May 31, 1996, is Prime
unsecured, and is guaranteed by the Former CEO. +1.5% $ 500,000 468,000
Demand note payable to company affiliated with the
Former CEO. Paid in March 1996. 10.5% 100,000 100,000
Notes payable from private placement. Interest due Prime
quarterly, principal due May 31, 1999 (see Note 7). +2% 1,450,000 1,450,000
Other 33,370 13,339
---------- ----------
2,083,370 3,081,339
Less current maturities 608,904 873,579
---------- ----------
$1,474,466 $2,207,760
---------- ----------
---------- ----------
The prime interest rate was 8.5% at December 31, 1995.
</TABLE>
39
<PAGE>
Maturities of long-term obligations are as follows for the years ending
ecember 31:
1996 $ 608,904
1997 9,528
1998 6,091
1999 1,456,959
2000 1,888
----------
$2,083,370
----------
----------
In addition to the notes payable and long-term obligations set forth above,
during 1995, the Chairman of the Board advanced $1,800,000 to the Company,
$900,000 of which was converted to common stock in August 1995 and $100,000
of which was repaid. The remaining $800,000, which was collateralized by
substantially all of the Company's assets except receivables and accrued
interest at 15%, was converted to common stock in March 1996 and, as a
result, is included in long-term liabilities at December 31, 1995
(see Note 20).
7. PRIVATE PLACEMENT
During 1994, the Company conducted a private placement offering with each
$125,000 unit consisting of: (1) $100,000 note payable due May 31, 1999,
interest payments due quarterly at prime plus 2%; (2) 25,000 shares of the
Company's common stock; and (3) warrants to purchase up to 10,000 shares of
the Company's common stock at a purchase price of $2.00 per share any time
prior to June 1, 1997. A provision of the private placement required
$25,000 of the proceeds from each unit (which aggregated $362,500) to be
placed in an escrow account (restricted cash) for the payment of interest
on the notes.
The Company raised an aggregate of $1,812,500 from the offering, including
restricted cash of $362,500. Of the 14.5 units sold, 3.75 units were sold
to related parties.
8. LEASES
OPERATING LEASES - The Company leases an office and manufacturing facility,
warehouse, and certain office equipment under noncancelable operating
leases. Future minimum lease payments due under these operating leases are
as follows for the years ending December 31:
1996 $114,000
1997 60,000
--------
$174,000
--------
--------
Rent expense under all operating leases was approximately $153,000 and
109,000 for the years ended December 31, 1995 and 1994, respectively.
CAPITAL LEASES - The Company leases certain equipment under capital leases.
Amortization of the capital lease property has been included in
depreciation expense.
40
<PAGE>
At December 31, 1995, total lease payments under these capital lease
agreements, included as "Other" in Note 6, are as follows for the years
ending December 31:
1996 $12,561
1997 12,150
1998 7,728
1999 7,728
2000 1,932
-------
42,099
Less amount representing interest 8,729
-------
$33,370
-------
-------
9. COMMON AND PREFERRED STOCK
COMMON STOCK - At December 31, 1995 and 1994, the Company had 10,000,000
shares of $.01 par value common stock authorized and 8,289,773 and
6,443,055 shares, respectively, issued and outstanding. In March 1996,
the Company amended its Certificate of Incorporation to increase the number
of authorized shares of common stock to 20,000,000.
During 1995, upon conversion of a $250,000 note payable, the Company issued
200,000 shares of common stock to an affiliate of a company whose Chairman
of the Board is also the Company's Chairman of the Board.
During 1995 and 1994, the Chairman of the Board of the Company converted
debt aggregating $958,339 and $535,000 into 766,718 and 1,070,000 shares of
the Company's common stock, respectively. Also in 1995, the Chairman of
the Board assumed $1,100,000 of Company debt in exchange for 880,000 shares
of common stock.
The value used for the 1995 conversions of debt to common stock was
determined, in part, based upon a fairness opinion obtained from an
independent securities firm.
During 1994, preferred stockholders converted 475,000 shares of preferred
stock into 95,000 shares of common stock.
During 1994, preferred stockholders and former preferred stockholders
received 34,375 shares of common stock in satisfaction of accrued dividends
on the preferred stock.
On December 30, 1994, the Company merged with Ecomaster and acquired
certain assets and liabilities of WAPCO which had been distributed to its
principal owner. To effect these transactions, the Company issued
3,170,000 shares of the Company's common stock (see Note 2).
PREFERRED STOCK - At December 31, 1995 and 1994, there were 2,000,000
shares of the Company's 9% convertible, cumulative, nonvoting, $1 par value
preferred stock authorized and 6,800 shares issued and outstanding. At
December 31, 1995, each of the shareholders holding preferred shares had
agreed to waive all accrued but unpaid dividends and convert their
preferred shares into a total of 1,925 shares of common stock. As a result,
the Company has not accrued dividends on its preferred stock subsequent to
December 31, 1994. The Company is in the process of issuing stock
certificates in connection with the conversion of the remaining preferred
shares into common stock.
41
<PAGE>
10. STOCK OPTIONS AND WARRANTS
INCENTIVE STOCK OPTION PLAN - An Incentive Stock Option Plan (ISOP) was
approved on March 31, 1990 which reserved 500,000 shares of common stock
for issuance under this plan. As of December 31, 1995, options to purchase
250 shares were outstanding and options to purchase 499,750 shares were
available to be granted. The outstanding options are currently exercisable
at $7.00 per share and expire in March 1997.
NONINCENTIVE STOCK OPTIONS - During the year ended December 31, 1994,
nonincentive stock options to purchase 59,000 shares of common stock were
canceled.
NONQUALIFIED STOCK OPTION PLAN - During 1994, the Company adopted the 1994
Nonqualified Stock Option Plan (the Plan). The purpose of the Plan is to
advance the interests of the Company and its stockholders by enhancing the
Company's ability to attract and retain qualified persons to perform
services for the Company. The maximum number of shares of common stock
authorized and reserved for issuance under the Plan is 1,500,000 shares.
Eligible recipients under the Plan include all employees of the Company,
including officers and directors who work for the Company, directors who
are not employed by the Company (Outside Directors), and consultants and
independent contractors of the Company. Options canceled or lapsed will be
available for subsequent grants under the Plan.
In accordance with the provisions of the Plan, Outside Directors are
entitled to receive an annual grant of options to purchase $10,000 worth of
common stock at the fair market value of such stock on the date of grant.
These options will vest and become exercisable immediately and shall
terminate five years after the date of grant or, if earlier, one year after
the director ceases to be a member of the Board of Directors. As of
December 31, 1995, no options have been issued to Outside Directors under
the Plan.
In 1994, options to purchase 700,000 shares of common stock were issued to
five employees of the Company, including 250,000 issued to the previous
Chairman of the Company's Board of Directors. During 1995, options to
purchase 100,000 of the previous Chairman's 250,000 shares were canceled
upon his resignation as Chairman. Of the 700,000 options granted in 1994,
300,000 were issued at an option price of $1.00 per share and were
immediately exercisable and 400,000 were issued at an option price of $.50
per share and are exercisable based on certain accrual and vesting
requirements, some of which are subject to the Company obtaining cumulative
income before income taxes for 1995 and 1996 equal to or in excess of
$1,000,000. Should the conditions for exercisability be achieved, the
Company may be required to record compensation expense for the difference
between the fair value of the common stock and the option exercise price.
42
<PAGE>
A summary of the stock option transactions during the two-year period ended
December 31, 1995 is as follows:
<TABLE>
<CAPTION>
Incentive Nonqualified
Stock Nonincentive Stock Exercise
Option Plan Stock Options Option Plan Total Price per Share
<S> <C> <C> <C> <C> <C>
Options outstanding at
December 31, 1993 74,950 59,000 133,950 $.50 - $7.00
Granted 700,000 700,000 $.50 - $1.00
Canceled (74,700) (59,000) (133,700) $.50 - $7.00
------- ------- -------- --------
Options outstanding at
December 31, 1994 250 700,000 700,250 $.50 - $7.00
Granted 90,000 90,000 $3.50
Canceled (200,000) (200,000) $ .50
------- ------- -------- --------
Options outstanding at
December 31, 1995 250 590,000 590,250 $.50 - $7.00
------- ------- -------- --------
------- ------- -------- --------
Options exercisable
December 31, 1995 250 200,000 200,250 $.50 - $7.00
------- ------- -------- --------
------- ------- -------- --------
</TABLE>
OPTIONS FOR SERVICES - During the year ended December 31, 1994, 20,000
options at an exercise price of $1.50 per share and 10,000 options at an
exercise price of $2.50 per share were issued to an unrelated company for
services provided. The options are immediately exercisable and expire in
2001. The Company has reserved 30,000 shares of common stock for issuance
under this agreement.
STOCK WARRANTS - In connection with private placement debt offerings
in November 1988, August 1989, and May 1991, the Company issued five-year
common stock warrants to each noteholder. All of the private placement
notes were payable to individual investors and were paid off in 1991 from
proceeds of the Company's initial public offering of common stock. Each
noteholder received a warrant to purchase one share of common stock for
each $3.00 of notes payable. At December 31, 1995, warrants to purchase
100,000 shares remain outstanding from the 1991 offering and are currently
exercisable until May 1996 at $3.40 per share. Under the terms of the
warrants, the warrants were initially exercisable at $4.50 per share or, in
the event of a public offering, the exercise price would be adjusted to
equal two-thirds of the final public offering price, rounded up to the
nearest $.10. The public offering price was $5.00 per share.
In connection with the Company's initial public offering, the Company
sold warrants for the purchase of 83,861 shares of common stock to the
underwriter for $100. These warrants are currently exercisable at an
exercise price of $7.50 per share and expire September 1996.
At December 31, 1995, warrants to purchase an aggregate of 145,000
shares of the Company's common stock, which were issued in connection with
the private placement offering in 1994, are outstanding and are exercisable
at $2.00 per share on or before May 31, 1997.
43
<PAGE>
A summary of stock warrant transactions during the two-year period
ended December 31, 1995 is as follows:
<TABLE>
<CAPTION>
Number Exercise
of Shares Price Per Share
<S> <C> <C>
Warrants outstanding at December 31, 1993 249,761 $3.40 - $7.50
Issued 145,000 $2.00
Canceled (65,900)
-------
Warrants outstanding at December 31, 1994 and 1995 328,861 $2.00 - $7.50
-------
-------
</TABLE>
11. PROVISION FOR RESTRUCTURING
In the second quarter of 1993, a provision for restructuring totaling
$351,000 was charged to operations. The provision included employee
severance costs of approximately $205,500, including costs relating to the
settlement and termination of the former Chairman/CEO's employment
agreement, selective write-downs of assets of approximately $29,500, and
related outside professional services of approximately $116,000. During
1994, the Company recognized income of $49,600 due to actual costs incurred
being less than the amount recorded in 1993.
12. LITIGATION SETTLEMENTS
LAWSUIT BY FORMER OFFICER - In July 1995, the Company settled a legal
action brought in Hennepin County District Court in Minneapolis, Minnesota
against the Company by a former officer. Under the terms of the
settlement, the plaintiff agreed to waive all rights to his vested stock
option for 30,000 shares of the Company's common stock and the Company
agreed to pay the former officer $105,000. These transactions were
completed in October 1995, and the $105,000 is included in selling,
general, and administrative expenses for the year ended December 31, 1995.
AMERICAN PRODUCT SALES - On March 26, 1996, the Company settled a legal
action which had been filed on September 20, 1995 in Federal District
Court, Northern District of California, by American Product Sales, a
division of S.J. Battery X-Change, Inc. In the action, the plaintiff
claimed that the Company had breached a contract with the plaintiff.
Under the terms of the settlement, the Company paid the plaintiff $30,000,
which was accrued in the consolidated financial statements at December 31,
1995.
13. INCOME TAXES
No provision (benefit) for income taxes has been recorded for the years
ended December 31, 1995 and 1994 as the Company incurred losses and it is
uncertain whether the Company will realize any benefit from these losses.
The Company has a federal net operating loss (NOL) carryforward of
approximately $8,900,000 at December 31, 1995. Utilization of
approximately $6,000,000 of the NOL carryforward is limited to
approximately $29,000 per year through 2009 based on an Internal Revenue
Code limitation, as prescribed by Section 382, imposed as a result of a
change in controlling interest in the Company in 1994. This change in
controlling interest resulted in part from the Ecomaster/WAPCO
transactions.
44
<PAGE>
The NOL carryforward may be further limited by ownership changes occurring
subsequent to December 31, 1994.
A summary of the Company's deferred taxes is as follows:
1995 1994
Current assets:
Inventory obsolescence reserve $ 149,000
Allowance for doubtful accounts 52,000
Warranty reserve 26,000
Litigation reserve 11,000
Vacation accrual 8,000
-----------
246,000
Less valuation reserve (246,000)
-----------
$ -
-----------
-----------
Noncurrent assets -
NOL carryforwards $ 1,179,000 $ 146,000
Less valuation reserve (1,179,000) (146,000)
----------- ---------
$ - $ -
----------- ---------
----------- ---------
14. RELATED-PARTY TRANSACTIONS
In addition to the transactions between the Company and the Chairman of the
Board and an affiliated entity discussed in Notes 1 and 6, the Company had
the following transactions with related parties.
Sales to Ecomaster and WAPCO, the companies subject to the acquisition
transactions on December 30, 1994, were approximately $100,000 during the
year ended December 31, 1994. Purchases from such companies were
approximately $200,000 during the year ended December 31, 1994.
During 1995, the brother-in-law of the Former CEO served as an independent
sales representative for the Company's products in certain countries in
Europe and the Middle East. Approximately $102,000 was charged to
operations and is payable at December 31, 1995 under this arrangement.
15. 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's
products contain iodinated resins which were developed by Kansas State
University and patented by 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 $75,000 for the years
ended December 31, 1995 and 1994.
45
<PAGE>
16. FOREIGN SALES AND SIGNIFICANT CUSTOMERS
The Company sells its products worldwide through direct sales and various
distributor agreements. Net sales by geographic area for the years ended
December 31, 1995 and 1994 were approximately as follows:
1995 1994
Domestic sales $ 436,000
Foreign sales:
Domestic sales destined for foreign markets 370,000 $440,000
Americas 234,000 153,000
Europe/Africa/Middle East 785,000 159,000
Asia 1,058,000 185,000
---------- --------
Net sales $2,883,000 $937,000
---------- --------
During the year ended December 31, 1995, two customers accounted for
approximately 19% and 15% of net sales. During the year ended December 31,
1994, two different customers accounted for approximately 17% and 13% of
net sales.
17. CONTINGENCIES
DELINQUENT FILINGS - The Company is delinquent in certain of its filings
with the Securities and Exchange Commission.
POROUS MEDIA CORPORATION - On September 21, 1995, the Company was named a
defendant in a lawsuit brought in Hennepin County District Court in
Minneapolis, Minnesota by Porous Media Corporation (Porous Media), a former
supplier of one of the Company's component parts. In the lawsuit, the
plaintiff seeks a cash payment of approximately $32,000 pertaining to
invoices being disputed by the Company and has asked the court to interpret
certain terms and provisions of a contract between the plaintiff and the
Company. The plaintiff further claims to have the right, under certain
circumstances, to be granted a royalty-free license to make, use, and sell
water purifiers incorporating certain technologies of the Company.
The Company believes that this lawsuit is without merit and intends to
defend its position vigorously. Further, the Company has filed a
countersuit against Porous Media alleging, among other things, that the
component parts supplied by the vendor were not as specified in the
contract and that such nonconformance caused the Company to suffer
unnecessary testing costs and substantial delays in product testing and
delivery.
The litigation with Porous Media is at an early stage, and the outcome
cannot presently be determined. While the consolidated financial
statements at December 31, 1995 include the accrual of $32,000 pertaining
to the disputed Porous Media invoices, no other costs or expenses
associated with this litigation have been recorded in the consolidated
financial statements.
46
<PAGE>
18. ARRANGEMENTS WITH SUPPLIERS
BOWMAN INDUSTRIES, INC. - The Company utilizes the services of Bowman
Industries, Inc. (Bowman) to manufacture and assemble certain components of
the Company's products using the Company's production equipment. Pursuant
to an arrangement with Bowman, the Company pays Bowman an amount equal to
all costs and operating expenses incurred by Bowman. In return, Bowman
provides its services exclusively to the Company. The Company treats its
arrangement with Bowman as an independent contractor relationship. During
the year ended December 31, 1995, the Company paid Bowman a total of
$142,400 under this arrangement.
HYBRID TECHNOLOGIES CORP. - The Company utilizes the services of Hybrid
Technologies Corp. (Hybrid), an independent contractor, to oversee and
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 only 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. The Company and DentalPure Corp. have a separate
royalty arrangement. DentalPure Corp. is owned by the Former CEO and does
not compete with the Company in any of its product applications.
19. RECENTLY ISSUED ACCOUNTING STANDARD
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF. SFAS No. 121 requires that assets to be held and
used be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. An
impairment loss should be recognized when the estimated future cash flows
from the assets are less than the carrying value of the assets. Assets to
be disposed of should be reported at the lower of their carrying amount or
fair value less costs of disposal. SFAS No. 121 will be effective for the
Company's consolidated financial statements for the year ending
December 31, 1996. The Company believes that adoption of this statement
will not have a material impact on the results of operations or financial
position.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which requires adoption of
the disclosure provisions for the Company's consolidated financial
statements for the year ending December 31, 1996 and adoption of the
recognition and measurement provisions for nonemployee transactions no
later than December 15, 1995. The new standard defines a fair value method
of accounting for stock options and other equity instruments. Under the
fair value method, compensation cost is measured at the grant date based on
the fair value of the award and is recognized over the service period,
which is usually the vesting period.
Pursuant to the new standard, companies are encouraged, but are not
required, to adopt the fair value method of accounting for employee stock-
based transactions. Companies are also permitted to continue to account
for such transactions under Accounting Principles Board (APB) Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, but would be required to
disclose in a note to the financial statements pro forma net income and
earnings (loss) per share as if the company had applied the new method of
accounting.
The Company has elected to continue following the guidance of APB Opinion
No. 25 for measurement and recognition of stock-based transactions with
employees. The Company will adopt the disclosure requirements of
SFAS No. 123 for the year ending December 31, 1996.
47
<PAGE>
20. SUBSEQUENT EVENTS
On February 22, 1996, the Company was named a defendant in a lawsuit
brought by a manufacturer of drinking water fountains and coolers. In the
suit, the plaintiff alleges that the Company infringed upon several of its
trademark registrations for use of the name "Oasis" for various products
marketed by the plaintiff. The plaintiff is seeking damages and an
injunction to prevent the Company from using the "Oasis" name. The Company
believes that its use of the "Oasis" name for its product does not infringe
upon the plaintiff's trademark rights. The litigation is at an early stage
and management believes that the outcome cannot presently be predicted.
Effective March 22, 1996, the Company issued to the Chairman of the Board
2,400,000 shares of common stock and a five-year warrant to purchase an
additional 2,400,000 shares of common stock at an exercise price of $2.00
per share for a purchase price of $3,000,000 which consisted of: (a)
conversion of $1,200,000 of debt, ($800,000 of which was outstanding at
December 31, 1995); (b) $900,000 of cash; and (c) a $900,000 noninterest-
bearing promissory note payable in equal monthly installments in April,
May, and June of 1996. Also on March 22, 1996, the Chairman of the Board
acquired 1,600,000 shares of restricted common stock from the Former CEO in
a private transaction. After these transactions, the Chairman owns more
than 50% of the outstanding stock of the Company.
The loss per common and common equivalent share, assuming conversion of the
$800,000 debt as of the date it was issued, would have been approximately
$0.44 per share for the year ended December 31, 1995.
Certain pro forma balance sheet information, prepared as if these
transactions had occurred as of December 31, 1995, (including conversion of
the $400,000 of debt which was incurred subsequent to December 31, 1995) is
as follows:
Pro Forma
December 31, 1995
CURRENT ASSETS $ 3,029,869
-----------
-----------
LONG-TERM DEBT $ 1,474,466
-----------
-----------
SHAREHOLDERS' EQUITY:
Preferred stock $ 6,800
Common stock 106,898
Additional paid-in capital 11,015,159
Accumulated deficit (9,735,084)
Receivable from shareholder (900,000)
-----------
Total shareholders' equity $493,773
-----------
-----------
48
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On December 19, 1995, the Company dismissed Lurie, Besikof, Lapidus & Co.,
P.L.L.P., as its independent auditors and appointed Deloitte & Touche LLP as its
independent auditors. The reports of Lurie, Besikof, Lapidus & Co., P.L.L.P. on
the consolidated financial statements of the Registrant for the fiscal years
ended December 31, 1994 and 1993 were unqualified and did not contain an adverse
opinion, any disclaimers, qualification or modification as to uncertainty, audit
scope, or accounting principles, except that the reports of Lurie, Besikof,
Lapidus & Co., P.L.L.P. on the consolidated financial statements of the
Registrant as of and for the fiscal years ended December 31, 1994 and 1993
contained an explanatory paragraph concerning the Company's ability to continue
as a going concern. The decision to change firms was recommended by the Audit
Committee of the Board of Directors. In connection with the audits of the
consolidated financial statements of the Registrant for the fiscal years ended
December 31, 1994 and 1993, and during the period commencing January 1, 1995
through December 19, 1995, there were no disagreements or reportable events.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF
THE EXCHANGE ACT
The names, ages and positions of the Company's directors and executive officers
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Robert C. Klas, Sr. 68 Chairman of the Board, Director and Chief
Executive Officer
David M. Botts 33 Chief Operating Officer
Todd Johnson 39 Chief Financial Officer, Secretary and Treasurer
Jan (Jon) H. Magnusson 53 Former Chief Executive Officer, resigned
April 12, 1996
Biloine W. Young 69 Director
John A. Clymer 47 Director
Robert R. Martin 69 Former Director, resigned May 6, 1996
</TABLE>
All directors have been elected to serve until the next annual election of
directors (to occur in 1996 at the annual meeting of the shareholders), or until
their earlier resignation or removal. Officers serve at the pleasure of the
Board of Directors.
Outside directors are entitled to receive an annual formula grant of options to
purchase $10,000 worth of common stock at the fair market value of such stock on
the date of the grant. These options vest and become exercisable immediately
and shall terminate five years after the date of grant or, if earlier, one year
after the director ceases being a member of the Board of Directors. As of
May 15, 1996, no options have been issued to Outside Directors under this
provision.
49
<PAGE>
MANAGEMENT
ROBERT C. KLAS, SR., CHAIRMAN OF THE BOARD, DIRECTOR AND CHIEF EXECUTIVE
OFFICER. Mr. Klas became a director of the Company in 1994 and has served as
the Chairman since January 1995. Effective April 12, 1996, Mr. Klas assumed the
additional position of Chief Executive Officer.
For the past forty years, Mr. Klas has been the owner, Chairman of the Board and
Chief Executive Officer of Tapemark Company, a $50 million label converter.
Tapemark has twice received the award as the best managed company in its
industry. In 1994, Mr. Klas was given his industry's highest executive award.
Mr. Klas also serves as a director of Signal Bank in West St. Paul.
DAVID M. BOTTS, CHIEF OPERATING OFFICER. Mr. Botts has been with the Company
since 1988 and has served as Executive Vice President, Vice President of Sales,
Vice President of Operations, General manager, and in his current position as
Chief Operating Officer. Mr. Botts has been certified as a Water Specialist
Level 3 by the Water Quality Association and is considered an expert at
engineering practical applications for iodinated resin.
TODD JOHNSON, CHIEF FINANCIAL OFFICER, SECRETARY AND TREASURER. Mr. Johnson has
been involved in finance, accounting and emerging growth companies since 1980.
Prior to joining WTC in July 1995, Mr. Johnson spent eleven years at
Minneapolis-based Pathfinder Venture Capital Funds where he was the Chief
Financial Officer and a general partner. Prior to Pathfinder, Mr. Johnson
served as the controller of Centennial Group, Inc., a publicly held real estate
development and investment firm, and as an auditor with the international public
accounting firm of Touche Ross & Co.
JAN (JON) H. MAGNUSSON, FORMER CHIEF EXECUTIVE OFFICER. Mr. Magnusson served as
the Company's Chief Executive Officer from January 9, 1995 to April 12, 1996.
Mr. Magnusson is the former Chairman of the Board and Chief Executive Officer of
Ecomaster Corporation, a manufacturer of water purification equipment he founded
in 1990, which merged with the Company in December 1994. In 1968, Mr. Magnusson
founded Jede Automater A. B., a Swedish based manufacturer of hot and cold
beverage vending units with subsidiaries and distributors throughout Europe.
Mr. Magnusson served as President of Jede Automater from its founding until
1981. Jede Automater is now a division of the Nestle' Companies in Switzerland.
Mr. Magnusson is an engineer and prolific inventor.
Mr. Magnusson is a director of Digital Biometrics, Inc., a publicly held
manufacturer of electronic fingerprinting equipment. He is also the controlling
shareholder of DentalPure Corp., a medical device company founded in conjunction
with the University of Minnesota to serve the purification needs of the dental
industry, and Global HealthShare Corp., a network marketing organization which
markets natural vitamins and other health-oriented products including certain
products of the Company.
50
<PAGE>
BILOINE W. YOUNG, DIRECTOR. Ms. Young retired as the President of Old Mexico
Shop, Inc. in St. Paul, Minnesota where she was employed for 22 years. Ms.
Young has served as a director of the Company since July 1994.
JOHN A. CLYMER, DIRECTOR. Mr. Clymer is currently the President and Chief
Investment Officer of Resource Capital Advisors, the asset management subsidiary
of Resource Trust Company, a privately owned Minneapolis-based financial
services provider. Prior to Resource, Mr. Clymer was employed by Minnesota
Mutual Life Insurance Company for 22 years, and served as President from 1991
through 1994. Mr. Clymer has served as a director of the Company since July
1994.
ROBERT R. MARTIN, FORMER DIRECTOR. Mr. Martin was elected a director of the
Company in March 1994 and served as Chairman from March 1994 to January 1995.
Effective May 6, 1996, Mr. Martin resigned as a director of the Company. From
February 1990 to October 1993, Mr. Martin served as Chairman of the Board of
Kinnard Investments, Inc., the parent company for a Minneapolis investment
banking firm. Between 1969 and 1989, Mr. Martin held various management
positions with Dain Bosworth Incorporated. Mr. Martin also serves as a director
of 24 Merrill Lynch mutual funds.
To the Company's knowledge, none of its officers or directors, other than its
Chief Financial Officer, have made any filings pursuant to Section 16(a) of the
Securities Exchange Act of 1934.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid by the Company during
the year ended December 31, 1995 to the Chief Executive Officer and each of the
other executive officers whose cash compensation exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG TERM
COMPENSATION
---------------------------------------------------------------------------------------
NAME AND YEAR SALARY BONUS OTHER (SECURITIES ALL OTHER
PRINCIPAL POSITION UNDERLYING OPTIONS) COMPENSATION
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Jan H. Magnusson (1) 1995 $ 84,000 $ -- $ 6,600 -- --
Chief Executive Officer
- ---------------------------------------------------------------------------------------------------------------------------
Stanley I. Barenbaum 1995 $ 71,194 $ -- $ -- -- 98,624
President and COO (2) 1994 $ 93,750 $ -- $45,000 150,000 --
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Mr. Magnusson served as the Company's Chief Executive Officer from
January 9, 1995 until April 12, 1996. Of the total 1995 salary shown above,
$73,350 was accrued at December 31, 1995. Of this amount, $37,039 will be
paid in 1996 and $36,311 will be paid in 1997. During 1994 there was no
Chief Executive Officer.
51
<PAGE>
(2) Mr. Barenbaum served as the Company's President and Chief Operating Officer
from April 1, 1994 to July 1, 1995. In addition to the stock option shown in
the table above, in April 1994 Mr. Barenbaum was granted an option to purchase
100,000 common shares. Such option is only exercisable if vested according to
certain conditions. Upon his separation from the Company in July 1995, 50,000
of these 100,000 options were canceled. In accordance with the terms of his
separation agreement, the Company also agreed to pay Mr. Barenbaum other
compensation shown above of $98,624. Of this amount, $54,812 was paid in 1995,
and $43,812 will be paid in 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
% OF TOTAL OPTIONS
NUMBER OF SHARES GRANTED TO EXERCISE OPTION
UNDERLYING EMPLOYEES IN PRICE EXPIRATION
NAME OPTIONS GRANTED FISCAL YEAR PER SHARE DATE
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Todd Johnson 60,000 66.7% $3.50 7/24/02
- ----------------------------------------------------------------------------------------
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
NAME SHARES ACQUIRED VALUE OPTIONS AT FY-END (#) AT FY-END ($)
ON EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
(#) ($) UNEXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David M. Botts -- -- 40,000/60,000 $120,000/$180,000
Todd Johnson -- -- 0/60,000 $ -- / $ --
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
EMPLOYMENT AGREEMENTS
Effective January 9, 1995, the Company entered into an Employment Agreement with
Jan H. Magnusson to serve as the Company's Chief Executive Officer. On April
12, 1996, Mr. Magnusson resigned from the Company. In accordance with his
Employment Agreement, Mr. Magnusson has agreed not to compete against the
Company for a period of 60 months after his termination of employment.
The Company has entered into an Employment Agreement with David M. Botts, the
Company's Chief Operating Officer. Mr. Botts' Employment Agreement with the
Company is for a period of three years, commencing April 1, 1994, and subject to
termination with or without cause, including failure of the Company to achieve
certain sales targets in each of the three years of the term of said agreement.
Mr. Botts' annual compensation under the terms of the Agreement is $75,000 per
year. He may also receive discretionary bonuses from time to time as determined
by
52
<PAGE>
the Board of Directors. Mr. Botts has agreed not to compete against the Company
for a period of one year after termination of employment.
The Company has also entered into an Employment Agreement with Todd Johnson, the
Company's Chief Financial Officer, Secretary and Treasurer. Under the terms of
the agreement, Mr. Johnson is employed "at will", subject to termination with or
without cause, at a base salary of $6,250 per month. Mr. Johnson has agreed not
to compete against the Company for a period of 18 months after termination of
employment.
NON-QUALIFIED STOCK OPTION PLAN
During 1994, the Board of Directors of the Company and the shareholders approved
the 1994 Non-Qualified Stock Option Plan (the "Plan"). The purpose of the Plan
is to advance the interests of the Company and its shareholders by enhancing the
Company's ability to attract and retain qualified persons to perform services
for the Company through providing an opportunity for investment in the Company
to such persons and the incentive advantages inherent in stock ownership in the
Company.
The Plan is administered by the non-employee members of the Board or by a
committee thereof and permits the exercise of options with either cash or shares
held by the optionee. The Plan administrators have the discretion to select the
optionee and establish the terms and conditions of each option, subject to the
provisions of the Plan, the Internal Revenue Code of 1986, as amended, and
applicable securities laws.
A total of 1,500,000 shares of common stock are authorized and reserved for
issuance under the Plan. Eligible recipients under the Plan include all
employees of the Company, including officers and directors who work for the
Company, directors who are not employed by the Company ("Outside Directors"),
consultants and independent contractors of the Company.
In accordance with the provisions of the Plan, Outside Directors are entitled
to receive an annual formula grant of options to purchase $10,000 worth of
common stock at the fair market value of such stock on the date grant. These
options vest and become exercisable immediately and shall terminate five years
after the date of grant or, if earlier, one year after the director ceases being
a member of the Board of Directors. As of May 15, 1996, no options have been
issued to Outside Directors under this provision.
Shares subject to canceled or lapsed options will be available for subsequent
grants under the Plan. The options are not assignable or transferable, nor can
they be subjected to any lien during the lifetime of the optionee. In the event
of the optionee's death, the rights are transferable by testamentary will or the
laws of descent and distribution. Options will be exercisable, during the
lifetime of the optionee, only by the optionee, and will be subject to various
other conditions and restrictions.
In April 1994, the Board of Directors granted options under the Plan to purchase
an aggregate of 700,000 shares of common stock at an exercise price of $.50 to
$1 per share to five employees,
53
<PAGE>
including grants of 250,000 options to each of Messrs. Martin and Barenbaum, who
at the time were Chairman of the Board and President of the Company,
respectively. Of the options granted to Messrs. Martin and Barenbaum, options
for 150,000 shares each are exercisable at any time through April 1, 2004 at an
exercise price of $1 per share. The remaining options for 100,000 shares each
were originally exercisable at a price of $.50 per share through such date, but
only if vested according to certain conditions contained in the options. Should
the conditions for exercisability of these options be achieved, the Company may
be required to record compensation expense for the difference between the fair
value of the common stock and the option exercise price. Mr. Martin's options
on his 100,000 shares lapsed upon his retirement as Chairman of the Board on
January 9, 1995. Mr. Barenbaum's options on 50,000 of his 100,000 such shares
lapsed upon his separation from the Company on July 1, 1995.
During 1995, the Board of Directors granted options under the Plan to purchase
an aggregate of 90,000 shares of common stock at an exercise price of $3.50 per
share to two employees, including the grant of a 60,000 share option to Todd
Johnson, the Company's Chief Financial Officer. The options granted are
exercisable, subject to certain vesting provisions, for a period of seven years
from the date of grant.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth as of May 15, 1996 the number of shares of common
stock beneficially owned by each person known to the Company to be the
beneficial owner of more than five percent (5%) of the outstanding shares of
common stock, by each director, and by all executive officers and directors as
a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNERS BENEFICIAL OWNERSHIP OF CLASS
- ------------------- -------------------- --------
<S> <C> <C>
Robert C. Klas, Sr. (1)
150 East Marie Avenue
West St. Paul, MN 55118 9,403,918 71.8%
David M. Botts (2)
5936 Ridgewood Road
Mound, MN 55364 41,500 0.4%
Jan H. Magnusson (3)
300 S. Owasso Blvd.
St. Paul, MN 55117 1,594,486 14.9%
Robert R. Martin (4)
513 Grand Hill
St. Paul, MN 55102 171,500 1.6%
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
John A. Clymer (5)
829 3rd Street
Hudson, WI 54016 19,500 0.2%
Biloine W. Young (6)
15 Crocus Hill
St. Paul, MN 55102 17,500 0.2%
All officers and directors as
a group, 5 persons (7)(8) 9,482,418 72.1%
</TABLE>
(1) Includes: a) a warrant to purchase 2,400,000 common shares on or before
March 22, 2001; b) 25,000 common shares and a warrant to purchase an additional
10,000 common shares on or before May 31, 1997, held by Tapemark Company; and
c) 200,000 common shares held by the Tapemark Company Cash or Deferred Profit
Sharing Plan.
(2) Includes 40,000 common shares which may be acquired upon the exercise of
stock options which are exercisable until April 1, 1999. Does not include 475
common shares to be issued upon conversion of preferred stock.
(3) Mr. Magnusson resigned as Chief Executive Officer of the Company on April
12, 1996.
(4) Includes: a) 150,000 common shares which may be acquired upon the exercise
of stock options which are exercisable until April 1, 2004, and b) warrants to
purchase 5,000 common shares on or before May 31, 1997. Mr. Martin resigned as
a director of the Company on May 6, 1996.
(5) Includes warrants to purchase 5,000 common shares on or before May 31, 1997.
(6) Includes warrants to purchase 5,000 common shares on or before May 31, 1997.
(7) Does not include beneficial ownership of Mr. Magnusson or Mr. Martin, who
resigned as Chief Executive Officer and director, respectively, prior to May 15,
1996.
(8) Includes warrants to purchase a total of 2,420,000 common shares and stock
options to purchase 40,000 common shares.
55
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
The Company's largest customer in 1994 and second largest in 1993 was Water and
Air Purification Corporation (WAPCO), which was wholly owned and controlled by
Jan Magnusson until certain of its assets and liabilities were acquired by the
Company on December 30, 1994. Net sales by the Company to WAPCO were $99,364 in
1994. Also on December 30, 1994, the Company acquired Ecomaster Corporation
(Ecomaster), an affiliate of WAPCO, through the merger of Ecomaster into a
wholly owned subsidiary of the Company. As a result of these transactions, Mr.
Magnusson became the Company's largest stockholder at that time and its Chief
Executive Officer. Mr. Magnusson resigned as Chief Executive Officer on April
12, 1996.
During 1994, 1995, and 1996, Mr. Robert C. Klas, Sr., the Company's Chairman of
the Board, advanced funds to the Company under various loan agreements, and also
assumed certain debt of the Company which had been advanced by others. The
total amount of cash advanced, or committed to be advanced, and debt assumed
during 1994, 1995 and 1996 (to May 15, 1996) was $970,000, $2,900,000, and
$2,200,000, respectively. As of May 15, 1996, $535,000 of such amounts had been
repaid to Mr. Klas and the remaining balance, plus accrued interest of $58,399,
had been converted into equity of the Company. In addition, on March 22, 1996,
Mr. Klas purchased, in a private transaction, 1,600,000 common shares of Company
common stock from Jan H. Magnusson, the Former CEO. As a result of these
transactions, Mr. Klas became the majority owner of the Company's outstanding
common stock.
On August 30, 1995, the Tapemark Company Cash or Deferred Profit Sharing Plan,
an affiliate of Mr. Klas, purchased a promissory note from the Company for
$250,000. The entire principal amount of the note was converted to common stock
of the Company on December 27, 1995.
The Company has available to it a bank line of credit with maximum available
borrowings of up to $500,000. This credit line expires on May 31, 1996 and is
personally guaranteed by Mr. Magnusson. At December 31, 1995 and 1994, the
outstanding balance of this line of credit was $500,000 and $468,000,
respectively.
In the December 1994 merger with Ecomaster, the Company succeeded to Ecomaster's
liability on a demand promissory note in the amount of $100,000 payable to The
Sailboard Warehouse, a company affiliated with Mr. Magnusson. On March 22,
1996, the promissory note plus accrued interest of $13,607 was paid in full.
Also on March 22, 1996, the Company paid Sailboard Warehouse an additional
$30,961 representing net accounts payable.
The Company sells certain of its products to Global HealthShare Corp., a company
affiliated with Mr. Magnusson. Global HealthShare is a network marketing
organization which sells health related products to consumers. Total sales to
Global HealthShare in 1995 were approximately $20,000.
The Company utilizes the services of Tord Nihlen to serve as an independent
sales representative for the Company's products in certain countries in Europe
and the Middle East. During 1995,
56
<PAGE>
Mr. Magnusson, on behalf of the Company, advanced $101,800 to Mr. Nihlen,
representing compensation and reimbursement of expenses. On March 22, 1996, Mr.
Magnusson and the Company entered into an agreement providing for the payment to
Mr. Magnusson in March 1997 of $127,647, representing reimbursement of the
amounts advanced to Mr. Nihlen from January 1995 through March 1996. Mr. Nihlen
is Mr. Magnusson's brother-in-law, and has provided services since 1990 under a
similar arrangement to Ecomaster Corporation prior to Ecomaster's merger with
the Company on December 30, 1994.
ITEM 13. EXHIBITS AND REPORTS
The following documents are filed as part of the report:
1. FINANCIAL STATEMENTS. Audited financial statements as of December 31,
1995 and 1994 and for the years then ended are filed as part of this Form 10-
KSB.
2. EXHIBITS. The following exhibits are being filed as part of this Form
10-KSB.
Exhibit
No. Title Method of Filing
- --- ----- ----------------
3.1 Certificate of Incorporation
of Water Technologies Corporation, as amended (A)
3.2 Bylaws of Water Technologies Corporation,
as amended (A)
3.3 Certificate of Amendment of Certificate Filed Herewith
of Incorporation of WTC Industries, Inc.
4.0 Specimen Common Stock Certificate (A)
10.1 License Agreement dated January 1, 1990,
between Kansas State University Research
Foundation and Water Technologies Corporation (A)
10.4 Amendment to Agreement dated June 21, 1991.
between Water Technologies Corporation and
Water and Air Development Corporation (B)
10.14 Amendment to Lease Agreement between Water
Technologies Corporation and Cimarron Business
Center II LP (C)
57
<PAGE>
10.19 License Agreement between WTC Industries, Inc.
and Calco, Ltd. (C)
10.33 Loan Agreement dated January 18, 1994, between
Robert C. Klas, Sr. and WTC Industries, Inc. (D)
10.34 Agreement and Plan of Merger
dated November 19, 1994, as
amended (E)
10.35 Agreement dated November 19,1994 between (E)
Robert C. Klas, Sr. and WTC Industries, Inc.
10.36 Loan Agreement Dated April 12, 1995 between (F)
Robert C. Klas, Sr. and WTC/Ecomaster Corp.
10.37 Credit Agreement with Signal Bank, Inc. dated
December 30, 1994 (F)
10.38 1994 Non qualified Stock Option Plan (F)
10.39 Employment Agreement dated April 1,
1994 with Robert R. Martin (F)
10.40 Employment Agreement dated April 1,
1994 with Stanley I. Barenbaum (F)
10.41 Employment Agreement dated April 1,
1994 with Ronald R. Hinrichs (F)
10.42 Employment Agreement dated April 1,
1994 with David M. Botts (F)
10.43 Employment Agreement dated April 1,
1994 with John M. Buettner (F)
10.44 Employment Agreement dated July 24,
1995 with Todd Johnson Filed Herewith
10.45 Debt Conversion and Loan Agreement (G)
dated August 23, 1995, between Robert C.
Klas, Sr. and WTC Industries, Inc.
58
<PAGE>
10.46 Stock Purchase Agreement between WTC
Industries, Inc. and Robert C. Klas, Sr.
dated March 22, 1996 (H)
10.47 Employment Agreement dated March 22,
1996 with Jan H. Magnusson Filed Herewith
10.48 Memorandum of Agreement between WTC
Industries, Inc. and DentalPure Corp.
dated March 22, 1996 Filed Herewith
16.1 Letter from Lurie, Besikof, Lapidus & Co., (I)
P.L.L.P, dated December 26, 1995
21.1 List of subsidiaries of WTC Industries, Inc. Filed Herewith
23.1 Independent Auditors' Consent Filed Herewith
23.2 Independent Auditors' Consent Filed Herewith
27.1 Financial Data Schedule Filed Herewith
(A) Incorporated by reference to the same numbered Exhibit to the Company's
Registration Statement on Form S-18, which was declared effective September
11, 1991.
(B) Incorporated by reference to the same numbered Exhibit to the Company's
Form 10-K filed for the year ended December 31, 1991.
(C) Incorporated by reference to the same number Exhibit to the Company's Form
10-KSB filed for the year ended December 31, 1992.
(D) Incorporated by reference to the same number Exhibit to the Company's Form
10-KSB filed for the year ended December 31, 1993.
(E) Incorporated by reference to the same number Exhibit to the Company's Form
8-K filed on January 14, 1995.
(F) Incorporated by reference to the same number Exhibit to the Company's Form
10-KSB filed for the year ended December 31, 1994.
(G) Incorporated by reference to Exhibit A to the Company's Form 8-K filed on
August 23, 1995.
(H) Incorporated by reference to Exhibit number 10.1 to the Company's Form 8-K
filed on March 22, 1996.
59
<PAGE>
(I) Incorporated by reference to the same number Exhibit to the Company's Form
8-K filed on December 26, 1995.
(b) REPORTS OF FORM 8-K.
A Form 8-K was filed by the Company on December 26, 1995.
60
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed by the undersigned, thereunto duly authorized.
WTC Industries, Inc.
By: /s/ Robert C. Klas, Sr.
---------------------------------
Robert C. Klas, Sr.
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Robert C. Klas, Sr. Chairman of the Board, Director and May 20, 1996
- ------------------------------ Chief Executive Officer ------------
Robert C. Klas, Sr.
/s/ J. Todd Johnson Chief Financial Officer, Secretary May 18, 1996
- ------------------------------ and Treasurer ------------
J. Todd Johnson
/s/ John A. Clymer Director May 20, 1996
- ------------------------------ -------------
John A. Clymer
/s/ Biloine W. Young Director May 18, 1996
- ------------------------------ -------------
Biloine W. Young
</TABLE>
61
<PAGE>
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
WTC Industries, Inc., a corporation organized and existing under and by virtue
of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That pursuant to a written action of the Board of Directors of WTC
Industries, Inc. (the "Company") dated January 30, 1996, resolutions were duly
adopted setting forth an amendment of the Certificate of Incorporation of the
Company, declaring said amendment to be advisable and in the best interests of
the Company. The resolutions setting forth the proposed amendment are as
follows:
RESOLVED, that an amendment to Article IV, Section A, of the Company's
Certificate of Incorporation is hereby approved by the Board of Directors
to increase the number of authorized shares of Common Stock referred to
therein from 10,000,000 shares to 20,000,000 shares, such that said Article
IV, Section A shall read as follows:
"Common Stock. 20,000,000 shares of Common Stock, which shall have a par
value of $.01 per share."
RESOLVED FURTHER, that the Chief Executive Officer and any other officer of
the Company are each hereby authorized, subject to the foregoing amendment
being approved by the consent of the majority in interest of shareholders
pursuant to Delaware General Corporation Law Section 228, to execute and
file a Certificate of Amendment of the Certificate of Incorporation with
the Delaware Secretary of State to effect such increase;
RESOLVED FURTHER, that the Chief Executive Officer, Executive Vice
President and Chief Financial Officer of the Company are each hereby
authorized to seek shareholder consents under the Delaware General
Corporation Law Section 228 for such amendment to the Certificate of
Incorporation.
SECOND: That on January 30, 1996, by a written consent, a majority of the
shareholders of the Company consented to and approved the resolutions adopted by
the Board of Directors.
THIRD: That said amendment was duly adopted in accordance with the provisions
of Section 242 of the General Corporation Law of the State of Delaware.
62
<PAGE>
FOURTH: That the capital of said corporation shall not be reduced under or by
reason of said amendment.
IN WITNESS WHEREOF, the Company has caused this certificate to be signed by Jan
H. Magnusson, its President, this 14th day of March, 1996.
WTC INDUSTRIES, INC.
By: /s/ Jan H. Magnusson
--------------------
Jan H. Magnusson, President
63
<PAGE>
EXHIBIT 10.44
AGREEMENT
THIS AGREEMENT, made as of this 24th day of July, 1995, by and between
WTC/Ecomaster Corp., a Minnesota corporation and WTC Industries, Inc., a
Delaware corporation (hereinafter "WTC/Ecomaster"), and J. Todd Johnson, a
resident of Hennepin County, Minnesota (hereinafter "Johnson").
WITNESSETH:
WHEREAS, Johnson desires to obtain employment at WTC/Ecomaster; and
WHEREAS, in the course of his employment with WTC/Ecomaster, Johnson will obtain
certain Confidential Information (as that term is hereafter defined) (the
"Confidential Information") from WTC/Ecomaster; and
WHEREAS, WTC/Ecomaster is willing to employ Johnson and to provide such
Confidential Information to Johnson for the limited purposes, and under the
terms and conditions, set forth herein.
NOW, THEREFORE, in such consideration of the mutual covenants and promises set
forth herein, the Parties hereto agree as follows:
1- EMPLOYMENT. WTC/Ecomaster hereby employs Johnson as its Chief Financial
Officer to perform such duties as the Chief Executive Officer of
WTC/Ecomaster shall from time to time direct. Johnson's employment
hereunder shall at all times be "at will," and Johnson is subject to
discharge and termination at any time and without cause. Johnson's
compensation shall be $6250.00 per month, payable according to
WTC/Ecomaster's payroll practices in effect from time to time. Johnson
shall be entitled to WTC/Ecomaster's standard medical/dental benefits, as
well as three weeks' paid vacation per year including sick days) pursuant
to WTC/Ecomaster's policies currently in effect. Johnson shall devote his
full time efforts to the performance of his duties hereunder. Provided,
however, that Johnson shall be entitled to devote up to eight (8) working
days in 1/2 day increments between the date hereof and December 31, 1995,
to the transition from his former employer, Pathfinder Venture Capital
Funds. It is anticipated that 3 days of this time will be taken in
October, and that none of this time will materially affect the performance
of Johnson's duties hereunder.
2- DEFINITION. As used herein, the term "Confidential Information" means
any and all documents, practices, policies, trade secrets, procedures,
customer lists, film and uses thereof, descriptive texts, financial data,
accounting data, software, technical information and all other information
whatsoever relating to WTC/Ecomaster which is provided or disclosed to
Johnson, or which Johnson develops in the course of performing his duties
for WTC/Ecomaster, unless there is an express written notation thereon that
such information is not confidential.
64
<PAGE>
3- USE. Any and all Confidential Information provided or disclosed to
Johnson shall be used by Johnson for the sole and exclusive purpose of
performing his duties for WTC/Ecomaster, and Johnson shall not use any of
the Confidential Information for any other purpose whatsoever. Except as
otherwise specifically provided in this Agreement, Johnson shall not
disclose, make available or divulge any of the Confidential Information, or
any other trade secret, or other secret information , to any individual or
entity, whether presently existing or hereafter formed. Johnson agrees and
acknowledges that the Confidential Information, and all part or portions
thereof, are the sole and exclusive property of WTC/Ecomaster, absolutely
and forever.
4- DUTY OF CARE. At all times during which Johnson shall be in possession
of Confidential Information, Johnson shall utilize the highest degree of
care to assure that Johnson adheres to and complies with the terms and
provisions of this Agreement.
5- RETURN OF CONFIDENTIAL INFORMATION. Any and all Confidential
Information in tangible form provided to Johnson hereunder, together with
any and all copies thereof and notes made therefrom, shall be returned to
WTC/Ecomaster upon demand by WTC/Ecomaster.
6- ACKNOWLEDGMENT. Johnson acknowledges and agrees that any breach or
violation of this Agreement or any disclosure or unauthorized use of any
Confidential Information will cause irreparable harm and loss to
WTC/Ecomaster for which there is no adequate remedy at law. Johnson
therefore consents to the issuance of an injunction or other equitable
relief in favor of WTC/Ecomaster enjoining any such breach, violation,
disclosure or use; provided that no such injunction or other relief shall
be, or be considered to be, an election of remedies by WTC/Ecomaster or a
replacement for or limitation of rights or remedies otherwise available to
WTC/Ecomaster.
7- NON-COMPETE CLAUSE. Johnson shall not directly or indirectly start or
participate in another organization or company which would compete directly
or indirectly with WTC/Ecomaster and its operations unless he is no longer
involved with WTC/Ecomaster in any capacity for a minimum period of
eighteen months.
8- SCOPE. If any covenant of Johnson under this Agreement shall be held to
be unenforceable because of its scope or duration, or the subject matter
thereof; Johnson agrees that the court making such determination shall have
the power to reduce or modify the scope, duration and/or subject matter of
such covenant to the extent that allows the maximum scope, duration and/or
subject matter permitted by applicable law.
9- SURVIVAL. The restrictions and obligations of Johnson under this
Agreement shall bind Johnson, its successors, heirs and assigns forever.
65
<PAGE>
10- NEGATION OF LICENSES. No rights or licenses, expressed or implied,
are hereby granted to Johnson under any patents, copyrights or trade
secrets of WTC/Ecomaster.
11- WAIVER. No waiver or modification of the provisions of this Agreement
shall be effective unless the same is made in writing and signed by an
authorized officer of WTC/Ecomaster, and no act or omission by
WTC/Ecomaster shall be deemed a waiver.
12- SEVERABILITY. Should any part of this Agreement, for any reason, be
declared invalid, such declaration shall not affect the validity of any
remaining portion, and such remaining portion shall remain in full force
and effect as if this Agreement has been executed with the valid portion
eliminated.
13- GOVERNING LAW. This Agreement and legal relations between the parties
hereto shall be governed by and construed in accordance with the laws of
the State of Minnesota applicable to agreements executed in Minnesota. In
the event of any dispute between the parties regarding this Agreement and
any of the associated documents, or the making or enforcement thereof, such
dispute shall be first submitted to voluntary mediation using one mediator
approved by the parties. If the parties are unable to choose a mediator
within five days of the service of the request for mediation by one party
upon the other, they shall each within ten days choose their own mediator
and the two mediators shall then within five days choose a third mediator.
If the parties are unable to resolve their dispute by mediation, upon the
request by one party, the dispute shall be submitted to binding arbitration
using one arbitrator chosen by a majority vote of the mediators. All
issues involved in the arbitration such as discovery, case management,
awards of attorney's fees and costs, shall be decided by the arbitrator and
the decision by the arbitrator shall be binding and enforceable in a court
of law. Such mediation and arbitration shall be held in Ramsey County,
Minnesota, unless otherwise agreed to by the parties.
14- BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors,
representatives, and assigns.
IN WITNESS WHEREOF, the parties hereunto have caused this Agreement to be
executed by duly authorized representatives of each of the parties.
1. WTC/Ecomaster Corp.-- WTC Industries, Inc.
BY: /s/ Jan H. Magnusson TITLE: Chief Executive Officer
---------------------------- --------------------------
2. /s/ J. Todd Johnson
----------------------------
66
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EXHIBIT 10.47
AGREEMENT
THIS AGREEMENT, made as of this 22nd day of March, 1996, to be effective from
and after January 9, 1995, by and between WTC/Ecomaster Corp. , a Minnesota
corporation and WTC Industries, Inc., a Delaware corporation (hereinafter
collectively " WTC/Ecomaster "), and Jan H. Magnusson, a resident of Washington
County, Minnesota (hereinafter "Magnusson").
WITNESSETH:
WHEREAS, Magnusson is employed by WTC/Ecomaster; and
WHEREAS, in the course of his employment with WTC/Ecomaster, Magnusson obtains
certain Confidential Information (as that term is hereafter defined) (the
"Confidential Information") from WTC/Ecomaster.
NOW, THEREFORE, in such consideration of the mutual covenants and promises set
forth herein, and the Payment and Release Agreement of even date hereof, the
Parties hereto agree as follows:
1- EMPLOYMENT. WTC/Ecomaster hereby employs Magnusson as its full-time
Chief Executive Officer, or such other capacity as the Board of Directors
may designate, to perform such duties as the Board of Directors of WTC
Industries, Inc. shall from time to time direct. Magnusson's employment
hereunder shall at all times be "at will," and Magnusson is subject to
discharge and termination at any time and without cause, subject to 90 days
prior written notice by either party. Magnusson's compensation shall be
$84,000.00 for the first year, payable according to WTC/Ecomaster's payroll
practices in effect from time to time. Magnusson shall be entitled to
WTC/Ecomaster's standard medical/dental benefits, monthly automobile
allowance of $550, as well as four weeks' paid vacation per year (including
sick days). Magnusson shall be entitled to participate in any stock option
plans in place or in the future adopted by WTC/Ecomaster.
2- DEFINITION. As used herein, the term "Confidential Information" means
any and all documents, practices, policies, trade secrets, procedures,
customer lists, film and uses thereof, descriptive texts, financial data,
accounting data, software, technical information and all other information
whatsoever not generally known relating to WTC/Ecomaster which is provided
or disclosed to Magnusson, or which Magnusson develops in the course of
performing his duties for WTC/Ecomaster, unless there is an express written
notation thereon that such information is not confidential. The provisions
of paragraphs 3,4,5 and 6 shall not prohibit the use of Confidential
Information by DentalPure Corp. for the development, manufacturing, and
marketing of products to be sold for use in the practice of dentistry
("Dental Applications") or for
67
<PAGE>
the distribution, marketing, and sale of products manufactured by
WTC/Ecomaster for Global HealthShare Corp. ("Global Applications").
3- USE. Any and all Confidential Information provided or disclosed to
Magnusson shall be used by Magnusson for the sole and exclusive purpose of
performing his duties for WTC/Ecomaster, and Magnusson shall not use any of
the Confidential Information for any other purpose whatsoever except for
use by DentalPure Corp. for Dental Applications and by Global HealthShare
Corp. for Global Applications. Except as otherwise specifically provided in
this Agreement, Magnusson shall not disclose, make available or divulge any
of the Confidential Information, or any other trade secret, or other secret
information, to any individual or entity, whether presently existing or
hereafter formed. Magnusson agrees and acknowledges that the Confidential
Information, and all part or portions thereof, are the sole and exclusive
property of WTC/Ecomaster, absolutely and forever.
4- DUTY OF CARE. At all times during which Magnusson shall be in
possession of Confidential Information, Magnusson shall utilize, and cause
DentalPure and Global to utilize, the highest degree of care to assure
that Magnusson adheres to and complies with the terms and provisions of
this Agreement.
5- RETURN OF CONFIDENTIAL INFORMATION. Any and all Confidential
Information in tangible form provided to Magnusson hereunder, together with
any and all copies thereof and notes made therefrom, shall be returned to
WTC/Ecomaster upon demand by WTC/Ecomaster.
6- ACKNOWLEDGMENT. Magnusson acknowledges and agrees that any breach or
violation of this Agreement or any disclosure or unauthorized use of any
Confidential Information will cause irreparable harm and loss to
WTC/Ecomaster for which there is no adequate remedy at law. Magnusson
therefore consents to the issuance of an injunction or other equitable
relief in favor of WTC/Ecomaster enjoining any such breach, violation,
disclosure or use; provided that no such injunction or other relief shall
be, or be considered to be, an election of remedies by WTC/Ecomaster or a
replacement for or limitation of rights or remedies otherwise available to
TC/Ecomaster.
7- NON-COMPETE CLAUSE. Magnusson agrees that for so long as he is employed
by the Company and for a period of 60 months after such employment ceases,
he shall not directly or indirectly anywhere in the world start or
participate in another organization or company which manufacures or markets
iodinated resin, water purification devices, or water filtration devices.
This paragraph shall not apply to DentalPure Corp. relating to Dental
Applications and/or Global HealthShare Corp. marketing products made by the
Company.
8- SCOPE. If any covenant of Magnusson under this Agreement shall be held
to be unenforceable because of its scope or duration, or the subject matter
thereof;
68
<PAGE>
Magnusson agrees that the court making such determination shall have the
power to reduce or modify the scope, duration and/or subject matter of such
covenant to the extent that allows the maximum scope, duration and/or
subject matter permitted by applicable law.
9- SURVIVAL. The restrictions and obligations of Magnusson under this
Agreement shall bind Magnusson, its successors, heirs and assigns forever.
10- NEGATION OF LICENSES. No rights or licenses, expressed or implied, are
hereby granted to Magnusson under any patents, copyrights or trade secrets
of WTC/Ecomaster.
11- WAIVER. No waiver or modification of the provisions of this Agreement
shall be effective unless the same is made in writing and signed by an
authorized officer of WTC/Ecomaster, and no act or omission by
WTC/Ecomaster shall be deemed a waiver.
12- SEVERABILITY. Should any part of this Agreement, for any reason, be
declared invalid, such declaration shall not affect the validity of any
remaining portion, and such remaining portion shall remain in full force
and effect as if this Agreement has been executed with the valid portion
eliminated.
13- GOVERNING LAW. This Agreement and legal relations between the parties
hereto shall be governed by and construed in accordance with the laws of
the State of Minnesota applicable to agreements executed in Minnesota. In
the event of any dispute between the parties regarding this Agreement and
any of the associated documents, or the making or enforcement thereof, such
dispute shall be first submitted to voluntary mediation using one mediator
approved by the parties. If the parties are unable to choose a mediator
within five days of the service of the request for mediation by one party
upon the other, they shall each within ten days choose their own mediator
and the two mediators shall then within five days choose a third mediator.
If the parties are unable to resolve their dispute by mediation, upon the
request by one party, the dispute shall be submitted to binding arbitration
using one arbitrator chosen by a majority vote of the mediators. All
issues involved in the arbitration such as discovery, case management,
awards of attorney's fees and costs, shall be decided by the arbitrator and
the decision by the arbitrator shall be binding and enforceable in a court
of law. Such mediation and arbitration shall be held in Ramsey County,
Minnesota, unless otherwise agreed to by the parties.
14- BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors,
representatives, and assigns.
IN WITNESS WHEREOF, the parties hereunto have caused this Agreement to be
executed by duly authorized representatives of each of the parties.
69
<PAGE>
1. WTC/Ecomaster Corp.-- WTC Industries, Inc.
BY: /s/ Robert C. Klas, Sr. TITLE: Chairman of the Board
---------------------------- --------------------------
2. /s/ Jan H. Magnusson
----------------------------
70
<PAGE>
EXHIBIT 10.48
MEMORANDUM OF AGREEMENT
THIS MEMORANDUM OF AGREEMENT, made and entered into the 22nd day of March, 1996,
to be effective from and after February 1, 1995, by and between WTC Industries,
Inc. and its wholly-owned subsidiary WTC/Ecomaster Corporation (hereinafter
collectively "WTC"), and DentalPure Corp. (hereinafter "DentalPure").
WITNESSETH:
WHEREAS, Water & Air Purification Corporation ("WAPCO") had entered into
that certain Agreement dated as of July 1, 1994, by and among WAPCO, Enoksen's,
Inc., Hybrid Technologies Corp., and DentalPure Corp. (hereinafter "Agreement"),
and
WHEREAS, WAPCO assigned its rights and obligations under said Agreement to
Ecomaster Corp. as of July 12, 1994 and
WHEREAS, WTC has succeeded to the rights and obligations of WAPCO and its
assignees under said Agreement; and
WHEREAS, the parties desire to clarify the markets into which DentalPure
may sell products containing the iodinated resin identified in the Agreement, as
well as other matters.
NOW, THEREFORE, for and in consideration of the continuing covenants
contained in said Agreement, and other good and valuable consideration, the
receipt and adequacy of which is hereby acknowledged, the parties hereto hereby
agree as follows:
1. DentalPure hereby agrees and confirms that all resin purchased or
transferred to it under said Agreement shall be used exclusively for
products to be sold for use in the practice of dentistry (Dental
Applications), and that it shall not succeed to any greater use or
distribution rights under any circumstances, including but not limited to
the provisions of paragraphs 3 and 4 of said Agreement relating to India
and bankruptcy, respectively.
2. WTC hereby irrevocably gives its consent for DentalPure to
purchase WTC's iodinated resins, including but not limited to any resins to
be manufactured in accordance with rules or regulations promulgated by any
governmental agency or board or registered with any governmental agency or
board, (hereinafter "Resins") from Hybrid Technologies Corp.(or any other
manufacturer of Resins used by WTC) solely for use in devices manufactured
and/or marketed by DentalPure for Dental Applications. DentalPure agrees to
pay WTC a marketing fee of 5% of the purchase price of all Resins purchased
by it from Hybrid (or other manufacturer used by WTC, including WTC).
DentalPure shall reimburse WTC promptly for any applicable royalty actually
paid by WTC on sale to DentalPure of Resins. In the event that WTC
manufactures Resins, or acquires Hybrid or substantially all the assets of
Hybrid, WTC shall sell Resins to DentalPure for Dental Applications at a
price which shall reflect no more than a
71
<PAGE>
35% gross profit margin relative to WTC's bona fide cost of labor and
materials in manufacturing the Resins.(1) Provided, however, if the
proceeding sentence shall require WTC to sell Resins to DentalPure at a
gross margin of less than 6% (such margin to include normal allocations of
overhead)(determined in accordance with Generally Accepted Accounting
Principles) then the parties shall renegotiate pricing. DentalPure shall
have the right to inspect the books and records of WTC to verify such cost
at any reasonable time and upon 5 days prior written notice. WTC shall
make available its outside independent auditors for verification of the
cost components to determine the selling price of Resins to DentalPure.
The expense of the outside auditors for such verification shall be borne
equally by the parties.
In the event that the parties are unable to agree upon the cost of
Resins, WTC shall nevertheless continue to supply DentalPure with Resins at
a price previously paid by DentalPure to Hybrid, until such time as the
cost shall be determined in accordance with paragraph 5 of this Agreement.
Any difference then finally determined (including arrearages or refunds)
shall be paid promptly upon such determination.
3. The parties agree that they each shall make available to the other
all technological developments, on a royalty-free basis, relating to the
Resins as the same are developed, provided that each party shall remain the
owner of developments created by it, and that such disclosures shall be
made only pursuant to appropriate confidentially and non-disclosure
agreements.
4. DentalPure agrees that it shall display WTC's PentaPure-Registered
Trademark-trademark logo in connection with the products it sells
containing Resins to which the trademark applies.
5. This Memorandum of Agreement shall be enforced in accordance with
the laws of the State of Minnesota. In the event of any dispute between
the parties regarding this Memorandum of Agreement and any of the
associated documents, or the making or enforcement thereof, such dispute
shall be first submitted to voluntary mediation using one mediator approved
by the parties. If the parties are unable to choose a mediator within five
days of the service of the request for mediation by one party upon the
other, they shall each within ten days choose their own mediator and the
two mediators shall then within five days choose a third mediator. If the
parties are unable to resolve their dispute by mediation, upon the request
by one party, the dispute shall be submitted to binding arbitration using
one arbitrator chosen by a majority vote of the mediators. All issues
involved in the arbitration such as discovery, case management, awards of
attorney's fees and costs, shall be decided by the arbitrator and the
decision by the arbitrator shall be binding and enforceable in a court of
law. Such mediation and arbitration shall be
- ----------------------------
(1) For example, if the selling price to DentalPure is $1.00, WTC's cost of
manufacturing can be no less than $.65.
72
<PAGE>
held in Ramsey County, Minnesota, unless otherwise agreed to by the parties
in writing.
6. This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors, representatives, and
assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Memorandum of
Agreement as of the day and year first above-written.
WTC Industries, Inc. WTC/Ecomaster Corp.
/s/ Robert C. Klas, Sr. /s/Robert C. Klas, Sr.
- ----------------------- ----------------------
Chairman & CEO Chairman & CEO
DentalPure Corporation
/s/Jan H. Magnusson
- -----------------------
President
73
<PAGE>
EXHIBIT 21.1
WTC INDUSTRIES, INC.
14405 21st Avenue North
Minneapolis, Minnesota 55447
List of Subsidiaries
State of Names Under Which
Name of Subsidiary Incorporation Such Subsidiaries Do Business
-------------------- ---------------- -------------------------------
1. WTC/Ecomaster Corp. Minnesota WTC/Ecomaster Corp.
2. Water Pollution Control
Systems, Inc. Texas None - company is inactive
Note: WTC/Ecomaster Corp. was previously named Ecomaster Corporation and
WTC Acquisition Corp.
74
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No. 33-
98684 of WTC Industries, Inc. on Form S-8 of our report dated May 13, 1996
(which expresses an unqualified opinion and includes an explanatory paragraph
relating to the uncertainty concerning the Company's ability to continue as a
going concern), appearing in this Annual Report on Form 10-KSB of WTC
Industries, Inc. for the year ended December 31, 1995.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
May 21, 1996
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement No. 33-
98684 of WTC Industries, Inc. on Form S-8 of our report dated April 24, 1995,
appearing in this Annual Report on Form 10-KSB of WTC Industries, Inc. for the
year ended December 31, 1995.
LURIE, BESIKOF, LAPIDUS, & CO., LLP
Minneapolis, Minnesota
May 21, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 31 AND 32 OF THE COMPANY'S FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31,
1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 33,489
<SECURITIES> 0
<RECEIVABLES> 936,775
<ALLOWANCES> 149,000
<INVENTORY> 845,543
<CURRENT-ASSETS> 1,729,869
<PP&E> 935,420
<DEPRECIATION> 422,380
<TOTAL-ASSETS> 2,611,131
<CURRENT-LIABILITIES> 1,942,892
<BONDS> 2,274,466
0
6,800
<COMMON> 82,898
<OTHER-SE> (1,695,925)
<TOTAL-LIABILITY-AND-EQUITY> 2,611,131
<SALES> 2,882,504
<TOTAL-REVENUES> 2,882,504
<CGS> 2,875,884
<TOTAL-COSTS> 2,880,958
<OTHER-EXPENSES> 346,745
<LOSS-PROVISION> 105,000
<INTEREST-EXPENSE> 336,312
<INCOME-PRETAX> (3,221,083)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,221,083)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,221,083)
<EPS-PRIMARY> (.46)
<EPS-DILUTED> (.46)
</TABLE>
