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, 1996
Commission file number
0-19622
WTC Industries, Inc.
(Name of Small Business Issuer in Its Charter)
Delaware 38-2308668
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
14405 - 21st Avenue North, Minneapolis, Minnesota 55447
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (612)-473-1625
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
(Title of Class)
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__x__ No
_____
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 ____
State issuer's revenues for its most recent fiscal year. $2,937,196
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.
$2,760,278 as of March 6, 1997
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.
10,716,698 shares of Common Stock as of March 6, 1997
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (check one):
Yes _____ No ___x___
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 many undesirable contaminants found in water including lead,
chlorine, bad taste and odor. Purification products have the added benefit of
devitalizing or removing viruses, bacteria and parasites.
Many of the Company's purification products contain PentaPure(R) iodinated resin
("PentaPure(R)") and other patented and proprietary technology and
configurations. The PentaPure(R) technology was originally developed by Kansas
State University ("KSU") and has been licensed to the Company by the Kansas
State University Research Foundation ("KSURF") on an exclusive basis.
PentaPure(R) and other state of the art technologies, when applied in the
Company's unique purification products, devitalize bacteria and viruses, remove
protozoa and reduce other targeted contaminants in drinking water. Such systems
are capable of making virtually any source water microbiologically fit to drink
and better tasting. The Company's products fall into the following categories:
portable systems, systems and cartridges for use by original equipment
manufacturers (OEMs), point-of-use systems, point-of-entry systems, mobile
purification systems and commercial/industrial systems and components. The
Company's products are suitable for a broad range of applications including:
home, personal travel, recreation, military, emergency use, commercial and
industrial.
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. 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
prototype products incorporating the KSURF technology and marketing those
products to the U.S. government as well as service and relief organizations.
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 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.
In December 1994, the Company merged with Ecomaster Corporation, a customer
whose water purification products also utilized the iodinated resin supplied by
the Company. 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(R) technology. Through the
merger, the Company acquired an important technology called EcoSorb filtration,
which significantly reduces the residual iodine 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, expensive and often of questionable purity. These factors and
others have created a significant need for products that provide effective
filtration and purification of water for human consumption. 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 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
* Household Filtration
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 also 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.
Filtration products making health claims are required to be registered in
California, Iowa, Massachusetts and Wisconsin. Given these factors, filtration
systems in the U.S. tend to compete on the basis of product design, features and
price.
INTERNATIONAL MARKETS
Water purification devices sold outside the U.S. generally do not require
registration or approval by the EPA. In countries where regulatory approval
requirements exist, they are 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
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.
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, while
there is a perceived need and demand for the product, sales are dependent on the
consumer's ability to purchase the product.
The Company offers products in a broad range of market and application segments
worldwide. These include, but are not limited to, the following:
* households * outdoor recreation * disaster and humanitarian relief
* hospitals * bottling plants * industrial applications
* restaurants * breweries * fish farming
* schools * embassies * food processing
* offices * laboratories * military applications
TECHNOLOGY
PENTAPURE(R)
In the late 1970's, scientists at Kansas State University developed and patented
a unique iodine-based technology for the purification of drinking water. Iodine,
in its natural state, exists as an I2 molecule. Such I2 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 I3 (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 I5 (penta-iodide) resin. Researchers determined that the I5
resin was 1,000 times more effective than the I3 resin, or 1,000,000 times more
effective than an I2 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 family of
organisms when properly engineered into a treatment system.
Through a complex proprietary process, I5 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 I5 resin, iodine is instantly
transferred to the microorganisms due to this difference in charge, effectively
devitalizing them. 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(R). This registered trademark 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 regardless of 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 effectively kill even commonly
occurring bacteria.
The Company believes its purification media 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 from its resin formulations even under water
conditions historically troublesome for iodinated resins. This iodine residual
is further reduced by a special scavenging process developed by the Company,
called EcoSorb filtration, 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 with PentaPure(R) 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, the PentaPure(R) 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 EcoSorb filtration media to remove any remaining
iodine and iodide residuals and to further improve taste. In some product
configurations, such as the PentaPure(R) Sport Purification System, the
protozoan cyst removal occurs in a preliminary filtration stage.
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(R) allows the flexibility to scale products up or down in size to meet
the needs of a wide range of product applications, water conditions and flow
rate requirements
The Company believes that PentaPure(R), 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:
* 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
PRODUCTS
The flexibility of the PentaPure(R) 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, military, government, humanitarian and disaster relief applications.
While filtration products reduce or remove most undesirable contaminants found
in water including lead, chlorine, bad taste and odor, purification products
have the added benefit of devitalizing or removing viruses, bacteria and
parasites. Given the characteristics of the U.S. and international markets, the
Company's core product line, until late 1995, consisted almost exclusively of
purification systems designed for sale to international markets. In late 1995,
the Company entered the U.S. market with the introduction of the Spring(R) and
the PentaPure(R) Sport Purification System, formerly known as the Oasis, to the
health and fitness and outdoor recreation markets, respectively. In addition,
beginning in the third quarter of 1996, the Company began shipping filtration
systems to a major appliance manufacturer for both the domestic and
international markets.
In 1996, domestic sales accounted for 31% of net sales. The Company's largest
domestic customer accounted for 8% of total net sales. The Company anticipates
generating larger revenues in the domestic market compared to prior years.
The Company currently designs, manufactures and markets a broad range of water
filtration and purification systems. These products can be grouped into six
categories: resin, systems and cartridges for original equipment manufactures
(OEMs), portable systems, point-of-use systems, point-of-entry systems, mobile
purification systems, and industrial and commercial systems.
ORIGINAL EQUIPMENT MANUFACTURERS (OEM) APPLICATIONS
The Company designs, manufactures and supplies systems and cartridges to OEMs
for incorporation either into their water treatment systems or to add value to
the products which they manufacture. The Company has designed, and begun to
supply, customized water filtration and purification systems for Amana(R)
Refrigeration, Inc., a major international manufacturer of refrigerators and
other appliances for commercial and residential applications. These filtration
and purification systems will be included as original equipment on some models
of refrigerators with ice or ice and water dispensing capabilities. Some models
will be sold under the Amana(R) brand name through authorized dealers and major
retailers as an after market accessory to retrofit already installed
refrigerators. In addition, they will be offered by the Amana(R) Consumer
Services Division through authorized parts distributors and service providers
worldwide.
The Company believes that significant future revenues will be derived from these
strategic alliances without the associated marketing costs. In most cases, the
OEM customers are required to display the PentaPure(R) 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 OEM partners.
PORTABLE SYSTEMS
The Company's portable systems are designed for the travel, outdoor recreation,
military and emergency relief markets.
PUREIT(R) FAMILY - The PureIt(R) Pitcher was introduced in 1996 and joins
the PureIt(R) Refrigerator Dispenser for sale to international markets. The
Pitcher is a 2.5 liter carafe designed for everyday use in a refrigerator, on a
countertop, in relief operations or outdoors. The product line purification
system is located in a single cartridge (patent pending). The system includes:
1) a washable and reusable filter for removing sediment; 2) a purification
cartridge containing PentaPure(R) for devitalizing water-borne bacteria and
viruses; 3) an activated carbon bed that absorbs elements which cause bad taste
and odor, and 4) EcoSorb filtration 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.
PENTAPURE(R) SPORT PURIFICATION SYSTEM - The PentaPure(R) Sport
Purification System is a sport bottle water purification device with a patented
cartridge. The PentaPure(R) Sport Purification System 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 PentaPure(R) Sport Purification System
had to pass a demanding test protocol and register with 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
PentaPure(R) Sport Purification System internationally since early 1995. The
PentaPure(R) Sport Purification System has recently been assigned a national
stocking number ("NSN") from the U.S. Government for the military, which will
allow it to be purchased as an off-the-shelf item as desired by all North
Atlantic Treaty Organization ("NATO") forces. In addition, several other
countries' armed services have begun using the PentaPure(R) Sport Purification
System or have expressed interest in this product's capabilities.
The PentaPure(R) Sport Purification System is simple to use. The consumer fills
the bottle from any relatively clear water source such as rivers, lakes and
streams. The purification mechanism is activated when the consumer squeezes the
bottle which forces water through the purification cartridge. 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
PentaPure(R) Sport Purification System has a suggested retail price of $34.95.
OTHER PORTABLE PRODUCTS AND SYSTEMS - The Company also sells other
portable products using its purification technology to the international
marketplace including the Travel Cup, a PentaPure(R) 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. 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.
In 1996, the Company completed development and testing and began shipping
PentaPure(R) InLine point-of-use filtration and purification systems utilizing a
unique quick dry change system (patent pending). This significant new design in
point-of-use water treatment incorporates a valve-in-head design with a totally
dry change cartridge configuration. First supplied under a private label for
Amana(R), these systems will be introduced in early 1997 to existing
international distributors and other niche market OEM customers.
These systems will be available in single, double, and triple stage
configurations to handle a wide variety of water treatment problems worldwide. A
single stage system has been independently tested and shown to remove 90% of
lead, 99% of Chlorine, 99.95% of giardia and cryptosporidium cysts, as well as
improve taste and odor. It has been registered for sale in California, Iowa,
Massachusetts and Wisconsin.
The Company believes that this new product line could have a significant impact
on future revenues and will allow distributors to sell a system which has
cartridges available only from the Company through its dealers and distributors
worldwide.
POINT-OF-ENTRY SYSTEMS
The Company has 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 point-of-entry system 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 an 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 in cost from $10,000 to
several hundred thousand dollars depending on the required capacity and
treatment required.
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 PentaPure(R) and in the unique
product design characteristics of its new InLine systems. Management believes
that the efficacy and efficiency of the PentaPure(R) enables it to design
smaller, less expensive and 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(R)
technology, combined with the Company's Ecosorb filtration media and patented
filtration designs, produce effective, efficient, high-quality and low cost
water purification systems with low to non-detectable iodine residual levels.
In international markets, the Company promotes its inexpensive portable
purification products, such as the PureIt(R) family of products, 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 less developed countries. These systems, along with
cartridge based point-of-entry systems, are sold through distributors that offer
all or a significant portion of the Company's complete product line. The
majority of these distributors sell via direct sales or multi-level marketing
organizations. Disaster relief systems, military products, and commercial
systems are sold through direct or independent sales representatives, typically
on a custom order basis.
In the U.S. market, the Company currently markets three products, the
PentaPure(R) Sport Purification System, the Spring(R) Filtration System and the
PureIt(R) InLine System. These products are marketed through retail and catalog
distribution channels to consumers utilizing a network of independent sales
representatives. The PentaPure(R) Sport Purification system is offered through a
value added distributor to the military organizations of the U.S. and NATO. The
PentaPure(R) Sport and the Spring(R) Filtration Systems are marketed in niche
markets with the greatest perceived need for these types of devices.
Specifically, WTC has targeted the outdoor recreation and travel industry for
the Sport and the health and fitness market for the Spring(R). The InLine
Systems are sold under the WTC brand name and the Amana(R) Clean n'Clear(TM)
brand. The Company is seeking to supply this product line to other market niches
through strategic marketing partners with the Company maintaining its role as
the manufacturer.
SALES AND DISTRIBUTION
U.S. MARKET
In 1996, the Company began marketing the PentaPure(R) Sport Purification System
and in late 1996 introduced the PureIt(R) InLine system. To distribute these
products the Company has established a network of 19 independent sales
representatives 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, catalogue and mail
order, housewares, hardware home centers 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 sales representatives or distributors to market the Company's
products. The Company currently has such relationships in Poland, Malaysia,
Korea, Indonesia, Taiwan, Viet Nam, Canada, Egypt, India, Pakistan, France,
Germany, Spain, Portugal, 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 sales representatives as well as other means customary to the
specific region to distribute the Company's products.
During 1996, the Company's international sales accounted for 69% of total net
sales. The Company's largest customer during 1996 (30% of total 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.
Five other major international customers together accounted for 13% of total net
sales in 1996.
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 PentaPure(R) technology serves as a distinct competitive advantage over
other water purification products.
At least five other U.S. companies make their own versions of iodinated resin
that compete with the Company's purification media. 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(R) and, as a result, water
treated with these iodinated 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./PUR, Everpure, Inc., Culligan,
EcoWater, US Filtration, General Ecology, Inc., Ametek, Inc., Pollenex, Amway,
Cuno and Dalton Ceramics. Several of these competitors are significantly larger
than the Company, but none competes directly against all of its product lines.
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 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.
Bowman Industries, Inc. ("Bowman") provides production and assembly services
exclusively to the Company. The Company pays Bowman an amount equal to all costs
and operating expenses incurred by Bowman. The Company treats its arrangement
with Bowman as an independent contractor relationship. During the years ended
December 31, 1996 and 1995, the Company paid Bowman a total of $254,500 and
$142,400, respectively, under this arrangement.
HYBRID TECHNOLOGIES CORP.
The Company utilizes the services of Hybrid Technologies Corp. ("Hybrid"), an
independent contractor, to manufacture the PentaPure(R) resins. Certain
techniques used to manufacture the PentaPure(R) 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 the PentaPure(R)
resin only to the Company and DentalPure Corp. DentalPure Corp. is developing
water purification products for dental uses and does not compete with the
Company in any of its product applications.
TAPEMARK COMPANY
Tapemark Company ("Tapemark"), of West St. Paul, Minnesota, provides assembly
and related support services to the Company for the Amana(R) and PureIt(R)
InLine point-of-use systems. Mr. Robert C. Klas, Sr., the Company's CEO,
Chairman and largest stockholder, is also the CEO and Chairman of the Board for
Tapemark. Tapemark also provides auxiliary support services for these product
lines in the areas of packaging, function-testing of the systems, inventory
control, quality support, receiving, warehouse and shipping. During the year
ended December 31, 1996, the Company paid Tapemark a total of $74,633.
POROUS MEDIA CORPORATION
On February 4, 1997, the Company entered into a five year requirements contract
with Porous Media under which the Company will purchase all of its cyst filter
requirements for the PentaPure(R) Sport Purification System and Spring(R)
Filtration System. The Company agreed to purchase a minimum of 100,000 filters
per year throughout the term (each such 12-month period is a year). The
Company's performance under the contract is personally guaranteed by Robert
Klas, Sr., subject to a $100,000 limitation on the guaranty.
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. Royalty expenses were $75,000 for
1996 and 1995.
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.
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 iodinated resin manufacturing experience, responsiveness to marketplace
demands 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(R) 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(R) in their own products to place the
trademark on their packaging and marketing material. The Company believes that
brand recognition of its PentaPure(R) 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. 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.; Alan Lonneman, a
consulting design engineer; and Michael Kuehn, a consulting design engineer. The
Company's current research and development efforts are to improve quality and
lower manufacturing costs for existing products. In addition, the Company is
reviewing plans to automate production lines at Bowman Industries, Inc. For 1996
and 1995, research and development expenses were $169,185 and $268,843,
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 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 PentaPure(R) Sport Purification System 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 March 6, 1997, the Company had 12 full time employees, consisting of two
in administration, five in sales and marketing, two in finance, and three in
production. In addition, the Company utilizes the services of three consultants
in the areas of research and development. 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 1996, the average total
monthly rent for this space was $9,181. On March 14, 1997, the Company signed a
two year extension with the option to terminate the lease after one year. The
base rent will increase $240 per month effective July 1, 1997.
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 a pro rata share of real estate taxes and operating expenses. During
1996, the average total monthly rent for this space was $5,384. The Company does
not intend to renew or extend this lease agreement.
On February 1, 1997, the Company entered into a six month lease agreement for
approximately 5,000 square feet of warehouse space in Kennedy, Minnesota. The
Company pays base rent of $250 per month and also the operating expenses
associated with the building.
ITEM 3. LEGAL PROCEEDINGS
POROUS MEDIA CORPORATION
In February 1997, the Company settled a lawsuit brought against it 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.
Under the terms of the settlement, the Company paid Porous Media $32,000 in cash
and issued 25,000 shares common stock in February 1997, the cost of which was
accrued in the consolidated financial statements at December 31, 1996. The
Company also entered into a new 5 year requirements agreement with Porous Media.
GEORGE KALOGERSON
On or about May 26, 1994, George Kalogerson sued Water & Air Purification Corp.
("WAPCO"), alleging that WAPCO breached an employment agreement and improperly
terminated him. Plaintiff's complaint seeks damages in an amount in excess of
$30,000. The Company is not a party to the suit, but WAPCO has asserted that the
Company has assumed any liability arising from the suit.
This matter was tried in Ramsey County District Court, sitting without a jury,
on February 25, 1997. No decision has yet been rendered in this case. The
Company has reserved $10,000 at December 31, 1996 in litigation expense.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF
SECURITY HOLDERS
On October 29, 1996, the Company held its Annual Meeting of Shareholders. At
that meeting the management slate of nominees was elected without oppositions,
and the voting was as follows:
1.) Election of Directors:
WITHHOLD
FOR AUTHORITY
Robert C. Klas, Sr. 8,785,066 9,065
Robert C. Klas, Jr. 8,781,566 12,565
John Clymer 8,785,066 9,065
Biloine W. Young 8,785,066 9,065
2.) Proposal to ratify and approve the 1996 Stock Plan.
BROKER
FOR 8,738,719 AGAINST 38,499 ABSTAIN 13,113 NON-VOTE 3,800
3.) Proposal to ratify appointment of Deloitte & Touche LLP as independent
public accountants.
BROKER
FOR 8,770,966 AGAINST 9,600 ABSTAIN 13,565 NON-VOTE 0
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 Over The
Counter Bulletin Board ("OTC") 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 OTC Bulletin Board. The prices listed are
interdealer quotations without retail mark-up, mark-down or commission and may
not represent actual transactions.
The Company obtained this information from the Dow Jones News/Retrieval
reporting service.
PERIOD LOW BID HIGH BID
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 1/4
April 1 - June 30 $ 1 3/4 $ 2 5/8
July 1 - September 30 $ 1 1/4 $ 2 3/8
October 1 - December 31 $ 1 1/4 $ 2 3/8
1997 January 1 - March 6 $ 1 1/16 $ 2 1/8
The Company's Common Stock was held by approximately 1,100 stockholders as of
March 6, 1997.
CASH DIVIDENDS
The Company has never paid any cash dividends on its Common Stock and does not
anticipate paying any in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
OVERVIEW
GOING CONCERN. The Company's 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 $3,038,536 and $3,221,083, and cash used by operating
activities was $2,314,394 and $2,505,922, for the years ended December 31, 1996
and 1995, respectively. In addition, as of December 31, 1996, the Company has a
deficiency in working capital of $713,153 and an accumulated deficit of
$12,773,620.
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 1996 were met principally through the issuance
of common stock to its Chairman of the Board for cash and conversion of debt in
March 1996 with aggregate proceeds of $3,000,000 and, in September 1996, the
expansion of its credit line by $250,000.
Management's plans to continue as a going concern include the following efforts
to generate the necessary cash flow to meet the Company's working capital needs
until sufficient operating cash flows can be generated to support the Company's
cost structure: a) raising additional capital through private or public
placements of debt or equity securities or through other sources, b) increasing
sales of the new PentaPure(R) InLine point-of-use filtration and purification
systems to niche market OEM customers and international distributors, c)
developing new and expanding existing strategic relationships for marketing
representation and distribution through direct sales organizations for both the
domestic and international markets, and d) continuing to evaluate and manage
costs and expenses and utilize resources effectively to increase gross profit
margins and reduce selling and general and administrative expenses. There is no
assurance that these plans can be successfully accomplished.
The consolidated financial statements do not include any adjustments related to
the recoverability and classification of recorded asset amounts or the amounts
and classifications of liabilities that might be necessary should the Company be
unable to continue as a going concern.
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
NET SALES. The Company had net sales of $2,937,196 for the year ended December
31, 1996 representing an increase of 1.9% from prior year net sales of
$2,882,504. During 1996 the average selling prices of the Company's products
have generally remained unchanged, therefore, the increase in sales reflects
increases in the number of units sold as well as a change in product mix.
Management believes the increase in net sales is attributable to the Company's
significant increase in domestic net sales as compared to international net
sales. In 1996, domestic sales accounted for 31% of net sales as compared to 15%
in 1995. In late 1995, the Company entered the U.S. market with the introduction
of the PentaPure(R) Sport Purification System to the outdoor recreation market
and, in addition, beginning in the third quarter of 1996, the Company began
shipping filtration and purification systems to a major appliance manufacturer
for both the domestic and international markets. The Company's largest domestic
customer accounted for 8% of total net sales for 1996. The Company anticipates
increasing revenues in the domestic marketplace compared to prior years.
The Company's international marketing and distribution relationships had mixed
results in 1996. Ekonet Sp. z.o.o, located in Poland, continues to be the
Company's largest customer with 30% of total net sales. The Company has entered
into several new strategic relationships for marketing representation and
distribution which the Company believes will significantly increase it's
revenues from distribution through direct sales organizations in Asia.
The Company's international sales 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.
To date, the Company has required all payments from customers to be in U.S.
dollars. Thus, the Company has not been subject to currency exchange rate
fluctuations directly. To the extent that a foreign customer's currency weakens
against the U.S. dollar, the Company's products will become more expensive in
the foreign market, and the resulting relative price increase would be expected
to affect the demand for the Company's products. To date, management believes
that foreign currency exchange rate fluctuations have not had a material
negative affect on the demand for the Company's products in foreign markets.
COST OF GOODS SOLD. For the years ended December 31, 1996 and 1995, the cost of
goods sold was $3,141,342 and $2,875,884, representing 107.0% and 99.8% of net
sales, respectively. A significant factor contributing to the Company's current
high cost of goods sold relative to net sales is that the Company wrote off
$463,000 and $225,000 in 1996 and 1995, respectively, for either obsolete or
slow moving inventory. These write-offs represent 15.8% and 7.8% of net sales in
1996 and 1995, respectively. To reduce the effects of large inventory write-offs
going forward, the Company has implemented more stringent controls in the areas
of purchasing, inventory management, product development and design changes,
manufacturing and quality assurance.
The Company is committed to increasing its resources in the areas of production
management and quality assurance. In January 1997, the Company hired a new
Director of Manufacturing who is responsible for implementing new production
methods and quality assurance programs for both component suppliers and
independent contract manufacturers. The Company will continue to evaluate its
component costs and seek to improve the overall manufacturing processes for all
product lines.
GROSS (LOSS) PROFIT. For the years ended December 31, 1996 and 1995, the Company
recognized gross (loss) of ($204,146) and a gross profit of $6,620,
respectively, representing (7.0%) and 0.2% of net sales. Management believes
that, in addition to the items included in the above discussion of cost of goods
sold and net sales, an additional factor affecting gross margin in the future
will be a reduction in manufacturing overhead costs and expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the years ended December 31,
1996 and 1995, selling, general and administrative expenses were $2,339,517 and
$2,612,115, representing 79.7% and 90.6% of net sales, respectively.
SALES AND MARKETING EXPENSES - For the years ended December 31, 1996 and 1995,
sales and marketing expenses were $1,202,252 and $1,281,143, 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 1996, the Company continued its expenditures for sales
brochures, marketing materials, packaging, trade shows, promotion and selling
expenses for the PentaPure(R) Sport Purification System and the PentaPure(R)
InLine product lines. 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 this investment is necessary to make new
product introductions successful. The Company expects sales and marketing
expenses to decrease in 1997 due to increased sales with OEM customers, which
absorb their own sales and marketing expenses.
The Company makes extensive use of independent sales representatives in
marketing its products. Management is continuing to evaluate their market
penetration effectiveness and their commission rate structure. The Company
anticipates implementing new agreements or discontinuing existing relationships
altogether.
GENERAL AND ADMINISTRATIVE EXPENSES - For the years ended December 31, 1996 and
1995, general and administrative expenses were $1,137,265 and $1,330,972,
respectively.
The decrease in general and administrative expenses from 1996 to 1995 was due to
reductions in bad debt expense of $64,000 and litigation settlements and
employee separation agreements of $178,000. These cost reductions were partially
offset by a charge of $39,000 in 1996 related to the writedown of certain
long-term assets.
RESEARCH AND DEVELOPMENT EXPENSES. For the years ended December 31, 1996 and
1995, research and development expenses were $169,185 and $268,843,
respectively. 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 to improve quality and lower manufacturing costs for
existing products.
NET OPERATING LOSS CARRYFORWARDS. The Company has a federal net operating loss
("NOL") carryforward of approximately $11,600,000 at December 31, 1996.
Utilization of approximately $5,500,000 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.
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 pro forma net sales (acquisition of WAPCO) of
$2,073,142, for 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.
The increase in reported net sales is also attributable, in part, to the merger
transactions with Ecomaster on December 30, 1994. 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.
Foreign sales (including domestic sales destined for foreign markets)
represented 85% and 100%, respectively, of net sales for 1995 and 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.
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(R), PentaPure(R) Sport Purification System, and PureIt(R)
which represent a significant portion of the current sales volume, have been
priced to facilitate market penetration. The Company has made substantial
investments in production tooling and equipment.
In addition, as a result of the December 30, 1994 merger with Ecomaster, the
Company had to consolidate two similar product lines and their related
inventories during 1995. 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 estimated net realizable value.
GROSS (LOSS) PROFIT. 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 invested
heavily in sales and marketing activities associated with new product
introductions. During 1994 and 1995, in connection with the introduction of the
Spring(R), PentaPure(R) Sport Purification System, and PureIt(R) 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.
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.
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(R), PentaPure(R) Sport Purification System and PureIt(R).
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
to improve quality and lower manufacturing costs for existing products. The
Company is also designing and developing new products in connection with OEM and
private label arrangements.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had a working capital deficit (total
current liabilities in excess of total current assets) of $713,153 compared with
a working capital deficit of $213,023 as of December 31, 1995. During 1996, the
Company used its cash balances, accounts receivable collections, bank line of
credit and trade accounts payable as sources of capital to fund its operations.
On March 22, 1996, the Company issued to its Chairman 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 which was paid in equal monthly
installments in April, May and June of 1996. This investment by the Chairman had
the result of increasing working capital by $1,300,000 and $900,000 in the first
and second quarters, respectively.
For the year ended December 31, 1996 cash increased $19,835 primarily due to
$2,339,680 from financing activities essentially offset by cash used in
operations of $2,314,394. Significant cash uses by operations included a
decrease in accounts payable of $279,929 and an increase in inventory, exclusive
of the provision for obsolete inventory, of $269,352, offset by a decrease in
accounts receivable of $155,764 and an increase in accrued expenses of $268,866.
Net cash used in investing activities consisted of purchases of property and
equipment of $152,357 less applications of restricted cash of $146,906. Net cash
provided by financing activities resulted primarily in issuance of common stock
of $900,000, cash advances and collection of promissory notes of $1,300,000 from
the Chairman, and a $250,000 expansion of the bank line of credit, offset by
payments to an affiliated company of $100,000 and payments on long-term debt of
$10,320.
For the year ended December 31, 1995 cash decreased $638,149 primarily due to
cash used in operations of $2,505,922. Significant cash uses by operations
included an increase in accounts receivable of $467,878, offset by increases in
accounts payable and accrued expenses of $272,151 and $392,720, respectively.
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 net cash provided by financing activities consisted of $1,950,000
net proceeds from loans by the Chairman and affiliated entities and $82,000
proceeds from bank lines of credit.
The Company estimates that it will have working capital needs of approximately
$1-2 million during 1997 to fund its operations and continue market introduction
of the Pentapure(R) Sport Purification System and the PureIt(R) InLine product
line. The Company also anticipates that it will have to fund growth in
inventories and accounts receivable. The Company does not anticipate that it
will have significant capital expenditures in 1997.
The Company maintains a $750,000 bank line of credit which is unsecured by the
Company, but has been guaranteed by the Chairman of the Board. Unless it is
extended or renewed, the line of credit will expire on May 31, 1997. If the line
of credit expires, and the Company is required to pay off the $750,000 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 expand its OEM customer base and its sales of
the PureIt(R) InLine point-of-use systems and increase sales of the Pentapure(R)
Sport Purification Bottle to niche markets such as outdoor recreation, military,
and emergency relief. 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.
The Company is also evaluating its available options to raise capital. These
options include, but are not limited to, private placements of debt or equity
securities to accredited investors, registered offerings of the Company's common
stock and strategic partnership or joint venture arrangements. There is no
assurance that the Company will be able to obtain additional financing, or that
the terms of any such financing will be acceptable to the Company. If the
Company's efforts to raise additional capital are not successful, the Company's
operations may be negatively impacted.
EFFECTS OF INFLATION
The Company believes that, during the periods discussed above, inflation has
not had a material impact on the Company's business.
ITEM 7. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company are set forth on
pages 28 through 45 of the Form 10-KSB:
PAGE
Independent Auditors' Report 28
Consolidated Balance Sheets as of December 31, 1996 and 1995 29
Consolidated Statements of Operations for the Years Ended
December 31, 1996 and 1995 30
Consolidated Statements of Stockholders' Deficit for the
Years Ended December 31, 1996 and 1995 31
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996 and 1995 32
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1996 and 1995 33
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
WTC Industries, Inc.
Plymouth, Minnesota
We have audited the accompanying consolidated balance sheets of WTC Industries,
Inc. (WTC) as of December 31, 1996 and 1995 and the related consolidated
statements of operations, stockholders' deficit, and cash flows for the years
then ended. These consolidated financial statements are the responsibility of
WTC's management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of WTC as of December
31, 1996 and 1995 and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that WTC will continue as a going concern. As discussed in Note 1 to the
consolidated 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
March 17, 1997
(March 26, 1997 as to the third paragraph of Note 16)
<TABLE>
<CAPTION>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
------------ ------------
<S> <C> <C>
ASSETS (NOTE 5)
CURRENT ASSETS:
Cash $ 53,324 $ 33,489
Accounts receivable, net of allowance for doubtful accounts
of $19,000 and $149,000 632,011 787,775
Inventories (Notes 3 and 15) 651,895 845,543
Prepaid expenses and other 31,651 63,062
------------ ------------
Total current assets 1,368,881 1,729,869
PROPERTY AND EQUIPMENT, net (Note 4) 387,987 513,040
OTHER ASSETS:
Restricted cash (Note 6) 86,823 233,729
Loan acquisition costs, less amortization of $36,739 and $19,614 41,386 58,511
Patents and trademarks, net of accumulated amortization of
$95,492 and $36,678 (Note 2) 2,522 61,335
Other 13,613 14,647
------------ ------------
144,344 368,222
------------ ------------
$ 1,901,212 $ 2,611,131
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable and current maturities of long-term obligations (Note 5) $ 945,716 $ 608,904
Accounts payable 624,045 903,974
Salaries and commissions 81,379 209,623
Accrued expenses 430,894 220,391
------------ ------------
Total current liabilities 2,082,034 1,942,892
LONG-TERM OBLIGATIONS, net of current maturities (Notes 5 and 6) 1,463,941 1,474,466
COMMITMENTS AND CONTINGENCIES (Notes 7, 9 and 14)
INDEBTEDNESS REFINANCED IN MARCH 1996 (Note 5) 800,000
STOCKHOLDERS' DEFICIT (Notes 6, 7 and 8):
Preferred stock 6,800
Common stock 106,917 82,898
Additional paid-in capital 11,021,940 8,039,159
Accumulated deficit (12,773,620) (9,735,084)
------------ ------------
(1,644,763) (1,606,227)
------------ ------------
$ 1,901,212 $ 2,611,131
============ ============
</TABLE>
See notes to consolidated financial statements
<TABLE>
<CAPTION>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
------------ ------------
<S> <C> <C>
NET SALES (Note 13) $ 2,937,196 $ 2,882,504
COST OF GOODS SOLD (Note 15) 3,141,342 2,875,884
------------ ------------
GROSS (LOSS) PROFIT (204,146) 6,620
EXPENSES:
Selling, general, and administrative (Note 12) 2,339,517 2,612,115
Research and development 169,185 268,843
------------ ------------
2,508,702 2,880,958
------------ ------------
LOSS FROM OPERATIONS (2,712,848) (2,874,338)
OTHER INCOME (EXPENSE):
Interest income 2,547 5,153
Interest expense (244,771) (336,312)
Other (83,464) (15,586)
------------ ------------
(325,688) (346,745)
------------ ------------
NET LOSS $ (3,038,536) $ (3,221,083)
============ ============
NET LOSS PER COMMON SHARE $ (0.30) $ (0.46)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 10,153,000 7,025,000
============ ============
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
PREFERRED STOCK COMMON STOCK
--------------- ------------
SHARES AMOUNT SHARES AMOUNT
---------- --------- ----------- ------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 6,800 $ 6,800 6,443,055 $ 64,431
Issuance of common stock on
assumption of debt and
conversion of director loan
(Note 5) 1,646,718 16,467
Issuance of common stock on
conversion of notes payable to
affiliated entity 200,000 2,000
Net loss
---------- --------- ----------- ------------
BALANCE AT DECEMBER 31, 1995 6,800 6,800 8,289,773 82,898
Issuance of common stock on
conversion of debt and receipt of
cash and promissory note to
Chairman of the Board (Note 5) 2,400,000 24,000
Conversion of preferred stock into
common stock (Note 7) (6,800) (6,800) 1,925 19
Net loss
---------- --------- ----------- ------------
BALANCE AT DECEMBER 31, 1996 - $ - 10,691,698 $ 106,917
========== ========= =========== ============
</TABLE>
(WIDE TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PAID-IN ACCUMULATED STOCKHOLDERS'
CAPITAL DEFICIT DEFICIT
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 $ 5,749,227 $ (6,514,001) $ (693,543)
Issuance of common stock on
assumption of debt and
conversion of director loan
(Note 5) 2,041,932 2,058,399
Issuance of common stock on
conversion of notes payable to
affiliated entity 248,000 250,000
Net loss (3,221,083) (3,221,083)
------------ ------------ ------------
BALANCE AT DECEMBER 31, 1995 8,039,159 (9,735,084) (1,606,227)
Issuance of common stock on
conversion of debt and receipt of
cash and promissory note to
Chairman of the Board (Note 5) 2,976,000 3,000,000
Conversion of preferred stock into
common stock (Note 7) 6,781
Net loss (3,038,536) (3,038,536)
------------ ------------ ------------
BALANCE AT DECEMBER 31, 1996 $ 11,021,940 $(12,773,620) $ (1,644,763)
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(3,038,536) $(3,221,083)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 211,042 210,616
Amortization 75,938 38,578
Provision for obsolete inventory 463,000 225,000
Loss on sale of fixed assets 66,368 28,500
Changes in operating assets and liabilities:
Accounts receivable 155,764 (467,878)
Inventories (269,352) 2,288
Prepaid expenses and other 32,445 13,186
Accounts payable (279,929) 272,151
Accrued expenses 268,866 392,720
---------- ----------
Net cash used in operating activities (2,314,394) (2,505,922)
INVESTING ACTIVITIES:
Restricted cash 146,906 123,571
Purchases of property and equipment (152,357) (281,277)
Proceeds from sale of fixed assets 1,500
---------- ----------
Net cash used in investing activities (5,451) (156,206)
FINANCING ACTIVITIES:
Proceeds of loans from director/stockholder 400,000 1,800,000
Proceeds from collection of promissory note 900,000
Proceeds of loan from affiliated entity 250,000
Payments on loan from director/stockholder (100,000)
Payments on loan from affiliated entity` (100,000)
Payments on long-term obligations (10,320) (8,021)
Borrowings under bank line of credit 250,000 82,000
Proceeds from sale of common stock 900,000
---------- ----------
Net cash provided by financing activities 2,339,680 2,023,979
---------- ----------
NET INCREASE (DECREASE) IN CASH 19,835 (638,149)
CASH AT BEGINNING OF YEAR 33,489 671,638
---------- ----------
CASH AT END OF YEAR $ 53,324 $ 33,489
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -
Cash paid during the year for interest $ 270,021 $ 233,005
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Common stock issued on conversion of long-term
debt and accrued interest 1,200,000 2,308,399
Common stock issued in exchange for promissory note 900,000
Amounts due to Former CEO refinanced to long-term debt from
accrued expenses 186,607
Conversion of preferred stock to common stock 6,800
Capital lease incurred to acquire equipment 28,052
See notes to consolidated financial statements.
</TABLE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
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 13).
GOING CONCERN - The consolidated 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 $3,038,536 and
$3,221,083, and cash used by operating activities was $2,314,394 and
$2,505,922 for the years ended December 31, 1996 and 1995, respectively.
In addition, as of December 31, 1996, the Company had a deficiency in
working capital of $713,153 and an accumulated deficit of $12,773,620.
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 1996 were met principally
through the issuance of common stock to the Chairman of the Board for
cash and conversion of debt, aggregating $3,000,000, and an additional
$250,000 of net borrowings under the Company's line of credit.
Management's plans to continue as a going concern include the following
efforts to generate the necessary cash flow to meet the Company's
working capital needs until sufficient operating cash flows can be
generated to support the Company's cost structure: (a) raising
additional capital through private or public placements of debt or
equity securities or through other sources; (b) increasing sales of the
new PentaPure(R) InLine point-of-use filtration and purification systems
to niche market OEM customers and international distributors; (c)
developing new and expanding existing strategic relationships for
marketing representation and distribution through direct sales
organizations for both the domestic and international markets; and (d)
continuing to evaluate and manage costs and expenses and utilize
resources effectively to increase gross profit margins and reduce
selling and general and administrative expenses as a percentage of net
sales. There is no assurance that these plans can be successfully
accomplished.
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of WTC and its wholly owned subsidiaries, Water
Pollution Control Systems, Inc. and WTC/Ecomaster Corp. 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 and double-declining balance bases over estimated useful
lives of three to seven 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.
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.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company continually evaluates the
carrying value of trademarks, patents and other long-lived assets on an
ongoing basis, based on a number of factors, including operating
results, business plans, budgets, and economic projections. In addition,
the Company's evaluation considers nonfinancial data such as continuity
of personnel, changes in the operating environment, competitive
information, market trends, and business relationships. Based on this
evaluation, patents with a net book value of $39,311 were written off
and are included in amortization expense during 1996.
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 consolidated 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.
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. The carrying
value of all other financial instruments approximate fair value due to
the short-term nature of the instruments.
3. INVENTORIES
Inventories consisted of the following at December 31:
1996 1995
Raw materials $ 459,724 $ 473,960
Work-in-process 33,408 16,424
Finished goods 158,763 355,159
----------- -----------
$ 651,895 $ 845,543
=========== ===========
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
1996 1995
Office equipment $ 272,598 $ 255,502
Machinery and equipment 540,583 561,198
Leasehold improvements 54,363 98,895
Art 19,825 19,825
----------- -----------
887,369 935,420
Less accumulated depreciation 499,382 422,380
----------- -----------
$ 387,987 $ 513,040
=========== ===========
Property and equipment at December 31, 1996 and 1995 includes $47,046 of
equipment under capitalized leases and $25,510 and $16,101,
respectively, of related accumulated amortization. Amortization of the
capital lease property has been included in depreciation expense.
5. NOTES PAYABLE AND LONG-TERM OBLIGATIONS
Notes payable and long-term obligations consisted of the following at
December 31:
<TABLE>
<CAPTION>
INTEREST
DESCRIPTION RATE 1996 1995
<S> <C> <C> <C>
Bank line of credit, maximum available borrowings of
$750,000. Line of credit expires May 31, 1997, is
unsecured, and is guaranteed by the Chairman. Prime $750,000
Bank line of credit, maximum available borrowings of Prime
$500,000. Line of credit expired May 31, 1996. +1.5% $500,000
Note payable to Former CEO. None 186,607
Demand note payable to company affiliated with the
Former CEO. 10.5% 100,000
Notes payable from private placement. Interest due Prime
quarterly, principal due May 31, 1999 (see Note 6). +2% 1,450,000 1,450,000
Capital leases 23,050 33,370
------------- --------------
2,409,657 2,083,370
Less current maturities 945,716 608,904
------------- --------------
$ 1,463,941 $ 1,474,466
============= ==============
</TABLE>
The prime interest rate was 8.25% at December 31, 1996.
Maturities of long-term obligations at December 31, 1996 are as follows
for the years ending December 31:
1997 $ 945,716
1998 5,809
1999 1,456,872
2000 1,260
-------------
$ 2,409,657
=============
During 1996, the Company entered into an agreement with its former chief
executive officer (the Former CEO) whereby payment of $159,961 included
in current liabilities at December 31, 1995 as well as $26,646 incurred
in 1996 was refinanced to a note payable due March 31, 1997. No interest
has been accrued or will be paid on these amounts.
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, and an
additional $400,000 borrowed by the Company in 1996, were converted to
common stock in 1996. As a result, the $800,000 outstanding at December
31, 1995 is included in long-term liabilities at December 31, 1995 (see
Note 7).
6. 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.
7. COMMON AND PREFERRED STOCK
COMMON STOCK - At December 31, 1996 and 1995, the Company had 20,000,000
and 10,000,000 shares of $.01 par value common stock authorized,
respectively, and 10,691,698 and 8,289,773 shares, respectively, issued
and outstanding.
During 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 in 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.
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, the Chairman of the Board of the Company converted debt
aggregating $958,339 into 766,718 shares of the Company's common stock.
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 these 1996 and 1995 transactions was determined, in
part, based upon fairness opinions obtained from an independent
securities firm.
PREFERRED STOCK - At December 31, 1996 and 1995, there were 2,000,000
shares of the Company's 9% convertible, cumulative, nonvoting, $1 par
value preferred stock authorized and 0 and 6,800 shares issued and
outstanding, respectively. 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 had not accrued
dividends on its preferred stock subsequent to December 31, 1994. The
conversion occurred in 1996.
8. 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, 1996, 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.
NON-QUALIFIED STOCK OPTION PLAN - During 1994, the Company adopted the
1994 Non-qualified Stock Option Plan (the 1994 Plan). The purpose of the
1994 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 1994 Plan is 1,500,000 shares. Eligible recipients under the
1994 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 1994 Plan.
During 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,
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. Because certain of the options granted under the
1994 Plan contain performance criteria, compensation cost will be
determined at the time the performance criteria are met based on the
fair value of the common stock on that date and the option exercise
price. On December 31, 1996, 110,000 options were canceled as the
Company did not reach the required level of net income.
1996 QUALIFIED STOCK OPTION PLAN - During 1996, the Company adopted the
1996 Stock Option Plan (the 1996 Plan). The purpose of the 1996 Plan is
to enable the Company and its subsidiaries to retain and attract
directors, executives, other employees, and consultants who contribute
to the Company's success by their ability, ingenuity and industry, and
to enable such individuals to participate in the long-term success and
growth of the Company by giving them a proprietary interest in the
Company. The 1996 Plan authorizes the granting of incentive stock
options, non-qualified stock options and restricted stock awards. The
maximum number of shares of common stock reserved and available for
stock options and restricted stock awards under the 1996 Plan is 500,000
shares (subject to possible adjustment in the event of stock splits or
other similar changes in the common stock). Shares of common stock
covered by expired or terminated stock options, or forfeited shares of
restricted stock, may be used for subsequent grants under the 1996 Plan.
In accordance with the provisions of the 1996 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 but in no event more than 5,000 shares per Outside Director per
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, 1996, 10,000 options have been issued to Outside
Directors under the 1996 Plan.
A summary of the stock option transactions under these plans during the
two-year period ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
INCENTIVE AVERAGE
STOCK OPTION 1994 1996 EXERCISE
PLAN PLAN PLAN TOTAL PRICE
<S> <C> <C> <C> <C> <C>
Options outstanding at
December 31, 1994 250 700,000 700,250 $0.72
Granted 90,000 90,000 3.42
Canceled (200,000) (200,000) 0.50
-------- ----------- ----------- ----------- -------
Options outstanding at
December 31, 1995 250 590,000 590,250 $1.20
Granted 10,000 10,000 1.75
Canceled (200,000) (200,000) 1.81
-------- ----------- ----------- ----------- -------
Options outstanding at
December 31, 1996 250 390,000 10,000 400,250 $0.93
======== =========== =========== =========== =======
Options exercisable at
December 31, 1995 250 200,000 200,250 $0.88
======== =========== =========== =========== =======
Options exercisable at
December 31, 1996 250 370,000 10,000 380,250 $0.93
======== =========== =========== =========== =======
</TABLE>
Options outstanding and exercisable by price range as of December 31,
1996:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
<S> <C> <C> <C> <C> <C>
$0.50 - $1.75 400,000 6.1 $ 0.88 380,000 $ 0.91
$7.00 250 0.2 7.00 250 7.00
--------- -------- ------- --------- --------
400,250 6.1 $ 0.92 380,250 $ 0.93
========= ======== ======= ========= =======
</TABLE>
The Company applies Accounting Principles Board (APB) Opinion 25 and
related interpretations in accounting for the Plans. No compensation
cost has been recognized for options issued under the Plans because the
exercise price of all options was at least equal to the fair value of
the common stock on the measurement date. Had compensation cost for the
Company's stock option plan issued to certain directors been determined
based on the fair value at the grant date for awards in 1996 and 1995,
consistent with the provisions of SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, the effect on the Company's net loss and loss
per share would have been immaterial.
OPTIONS FOR SERVICES - At December 31, 1996 and 1995, 20,000 options at
an exercise price of $2.50 per share were issued and outstanding to an
unrelated company for services provided. The options are currently
exercisable and will expire in 2001. The Company has reserved 30,000
shares of common stock for issuance under this agreement.
STOCK WARRANTS - In connection with the conversion of debt and issuance
of common stock to the Chairman of the Board (Note 7), the Company
issued a warrant to purchase 2,400,00 shares of common stock at an
exercise price of $2.00 per share on or before May 22, 2001.
At December 31, 1996, warrants to purchase an aggregate of 145,000
shares of the Company's common stock, 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.
A summary of stock warrant transactions during the two-year period ended
December 31, 1996 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE PER SHARE
<S> <C> <C>
Warrants outstanding at December 31, 1994 and 1995 328,861 $ 3.83
Granted 2,400,000 2.00
Canceled (183,861) 5.27
-------------
Warrants outstanding at December 31, 1996 2,545,000 $ 2.00
=============
</TABLE>
9. 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 - In March 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. 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.
EBCO MANUFACTURING COMPANY - In August 1996, the Company settled a legal
action brought against it in the United States District Court by EBCO
Manufacturing. Under the terms of the settlement, the Company will cease
manufacturing products bearing the name and mark Oasis as of December
31, 1996. The Company will have until July 31, 1997 to liquidate any
inventory of Oasis products manufactured on or before December 31, 1996.
There were no other compensatory damages due either party.
10. INCOME TAXES
No provision for income taxes has been recorded for the years ended
December 31, 1996 and 1995 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 $11,600,000 at December 31, 1996. Utilization of
approximately $5,500,000 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. The NOL
carryforward may be further limited by ownership changes occurring
subsequent to December 31, 1994.
A summary of the Company's deferred taxes at December 31 is as follows:
1996 1995
-------------- -------------
Current assets:
Inventory obsolescence reserve $ 142,000 $ 149,000
Allowance for doubtful accounts 8,000 52,000
Warranty reserve 39,000 26,000
Litigation reserve 4,000 11,000
Compensation and employee benefits 100,000 8,000
-------------- -------------
293,000 246,000
Less valuation reserve (293,000) (246,000)
-------------- -------------
$ - $ -
============== =============
Noncurrent assets:
NOL carryforwards $ 2,451,000 $ 1,179,000
Less valuation reserve (2,451,000) (1,179,000)
-------------- -------------
$ - $ -
============== =============
11. 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 7, during
1995 and 1996, 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 $97,000 and
$102,000 was charged to operations in 1996 and 1995, respectively.
During 1996, the Company modified the terms of the agreement to a basis
similar to the Company's other independent sales representatives.
12. 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, 1996 and
1995.
13. 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, 1996 and 1995 were approximately as follows:
1996 1995
Domestic sales $ 915,000 $ 436,000
Foreign sales:
Europe/Africa/Middle East 966,000 785,000
Asia 809,000 1,058,000
Other 247,000 604,000
------------- ------------
Net sales $ 2,937,000 $ 2,883,000
============= ============
During the year ended December 31, 1996, one customer accounted for
approximately 30% of net sales. During the year ended December 31, 1995,
the same customer accounted for approximately 19% of net sales and one
other customer accounted for 15%.
14. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES - The Company leases an office and manufacturing
facility, a warehouse, and certain office equipment under noncancelable
operating leases. Future minimum lease payments, excluding allocable
operating costs, due under these operating leases are as follows for the
years ending December 31:
1997 $ 117,000
1998 67,000
1999 1,000
----------
$ 185,000
==========
Rent expense under all operating leases was approximately $199,000 and
$153,000 for the years ended December 31, 1996 and 1995, respectively.
In February 1997, the Company settled a lawsuit brought against it in
Hennepin County District Court in Minneapolis, Minnesota by Porous Media
Corporation (Porous Media), a supplier of one of the Company's component
parts. Under the terms of the settlement, the Company paid Porous Media
$32,000 in cash and issued 25,000 shares common stock in February 1997,
both of which were accrued in the consolidated financial statements at
December 31, 1996.
15. ARRANGEMENTS WITH SUPPLIERS
BOWMAN INDUSTRIES, INC. - Bowman Industries, Inc. (Bowman) provides
production and assembly services exclusively to the Company. The Company
pays Bowman an amount equal to all costs and operating expenses incurred
by Bowman. The Company treats its arrangement with Bowman as an
independent contractor relationship. During the year ended December 31,
1996 and 1995, the Company paid Bowman a total of $254,500 and $142,400,
respectively, 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. DentalPure Corp. is developing water purification
products for dental applications and does not compete with the Company
in any of its product applications.
TAPEMARK COMPANY - Tapemark Company (Tapemark), of West St. Paul,
Minnesota, provides assembly and related support services to the Company
for certain customers and point-of-use systems. The Company's chairman
and largest stockholder, is the CEO and Chairman of the Board for
Tapemark. Tapemark, also provides auxiliary support services for these
product lines in the areas of packaging, function-testing of the
systems, inventory control, quality support, receiving, warehousing and
shipping. During the year ended December 31, 1996, the Company paid
Tapemark a total of $74,633 for these services. No services were
provided in 1995.
16. SUBSEQUENT EVENTS
On January 14, 1997, the Company borrowed $250,000 from a Company
affiliated with the Chairman. The loan matures on April 30, 1997 and
accrues interest at a rate of prime plus 2%.
On February 4, 1997, the Company entered into a five-year requirement
contract with Porous Media under which the Company will purchase all of
its cyst filters requirements for the PentaPure(R) Sport Purification
System and Spring(R) Filtration System (Systems). The Company agreed to
purchase a minimum of 100,000 filters per year throughout the term of
the agreement at an average price of $1.72 per filter. The Company's
performance under the contract is personally guaranteed by the Company's
Chairman, subject to a $100,000 limitation on the guaranty.
On March 26, 1997, the Company entered into an agreement to borrow
$250,000 from a Company affiliated with the Chairman. The loan matures
on June 30, 1997 and accrues interest at a rate of prime plus 2%.
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:
NAME AGE POSITION
Robert C. Klas, Sr. 69 Chairman of the Board, Director and
Chief Executive Officer
David M. Botts 34 Chief Operating Officer
Gregory P. Jensen 36 Chief Financial Officer, Secretary and Treasurer
Biloine W. Young 70 Director
John A. Clymer 48 Director
Robert C. Klas, Jr. 43 Director
All directors have been elected to serve until the next annual election of
directors (to occur in 1997 at the annual meeting of the shareholders), or until
their earlier resignation or removal. Officers serve at the pleasure of the
Board of Directors.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the securities Act of 1934 requires the Company's directors and
executive officers, and holders of more than 10% of a registered class of the
Company's equity securities, to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. These persons are required by
Securities and Exchange Commission regulations to furnish the Company with
copies of all Section 16(a) forms they file, including Forms 3, 4, and 5.
To the Company's knowledge, based solely on review of the copies of such reports
furnished to the Company, the following filings were not made, or not made on a
timely basis, by the persons referred to above: (1) Mr. Klas, Sr. did not file a
Form 3 in 1992 concerning his election as a director, one Form 5 in 1993 to
report two transactions, one Form 5 in 1994 to report seven transactions, and
one Form 5 in 1995 to report three transactions (these reports were filed in
1996); (2) Mr. Magnusson has not filed any Forms 3, 4 and 5 to report his
election as an executive officer or for any transactions; (3) Mr. Botts did not
file a Form 3 in 1991 concerning his election as an officer, one Form 5 in 1991
to report one transaction, one Form 5 in 1993 to report one transaction (these
reports were filed in 1996); (4) Mr. Clymer did not file one Form 3 and two
Forms 4 to report four transactions occurring in 1994 (these reports were filed
in 1996); and (5) Ms. Young did not file one Form 3 to report her election as a
director in 1994 (this report was filed in 1996).
MANAGEMENT
ROBERT C. KLAS, SR., CHAIRMAN OF THE BOARD, DIRECTOR AND CHIEF EXECUTIVE
OFFICER. Mr. Klas is a director and the current Chairman of the Board and Chief
Executive Officer of the Company. Mr. Klas became a director of the Company in
1994 and has served as the Chairman since January 1995. Effective April 13,
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 converting and
manufacturing company, specializing in narrow web flexographic printing,
lamenating and precision die-cutting. 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 located in West St. Paul, Minnesota. Mr. Klas is the
father of Robert C. Klas, Jr. who is also a director and President of the
Company.
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.
GREGORY P. JENSEN, CHIEF FINANCIAL OFFICER, SECRETARY AND TREASURER. Mr. Jensen
has been with the Company since July 8, 1996 and serves as the Company's Chief
Financial Officer, Secretary and Treasurer. Prior to joining the Company, Mr.
Jensen was the Chief Financial Officer of Envirostaff, Inc. of Burnsville,
Minnesota from 1994 to 1996. From 1988 to 1994 he was employed by ABC Bus
Companies, Inc., lastly as Vice President of Finance and Administration.
BILOINE W. YOUNG, DIRECTOR. Ms. Young retired as the President of Old Mexico
Shop, Inc. located in St. Paul, Minnesota where she had been employed for 22
years. Ms. Young has served as a director of the Company since July 1994.
JOHN A. CLYMER, DIRECTOR. Mr. Clymer is 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 joining Resource Capital Advisors in 1994, 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 C. KLAS, JR., DIRECTOR. Mr. Klas became a director of the Company on July
30, 1996. For more than the last five years Mr. Klas, Jr. has been the President
of the Tapemark Company. Mr. Klas, Jr. is the son of Robert Klas, Sr. who also
is a director.
ITEM 10. EXECUTIVE COMPENSATION
The following table shows for the Company's last two fiscal years the cash
compensation paid by the Company, as well as certain other compensation paid or
accrued for those years, to the Chief Executive Officer and each of the other
executive officers whose cash compensation exceeded $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
NAME AND YEAR SALARY BONUS OTHER (SECURITIES UNDERLYING ALL OTHER
PRINCIPAL POSITION OPTIONS) COMPENSATION
<S> <C> <C> <C> <C> <C> <C>
Robert C. Klas Sr. (1) 1996 -- -- -- -- --
Chief Executive Officer 1995 -- -- -- -- --
Jan H. Magnusson (1) 1996 $ 21,000 $ -- $ 1,650 -- --
Chief Executive Officer 1995 $ 84,000 $ -- $ 6,600 -- --
David M. Botts 1996 $ 121,036 $ -- $ -- -- --
Chief Operating Officer 1995 $ 75,000 $ -- $ -- -- --
</TABLE>
(1) Mr. Klas, Sr. was elected as the Company's Chief Executive Officer on April
13, 1996. The Company has not paid a salary, bonus or other annual compensation
to Mr. Klas, Sr.
(2) Mr. Magnusson served as the Company's Chief Executive Officer from January
9, 1995 until April 12, 1996. Of the total 1996 salary shown above, $22,650 was
accrued at December 31, 1996 and will be paid in 1997. Of the total 1995 salary
shown, $73,350 was accrued as of December 31, 1995. Of this amount, $37,039 was
paid in 1996 and $36,311 will be paid in 1997.
No stock options were granted to the Named Executive Officers in fiscal year
1996 and none of the Executive Officers exercised any options during 1996. The
following table sets forth information with respect to the Named Executives
concerning the options held as of December 31, 1996:
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
NAME SHARES ACQUIRED VALUE AT FY-END (#) FY-END ($)
ON EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
(#) ($) UNEXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
David M. Botts -- -- 40,000/20,000 $62,500/$31,250
Robert C. Klas, Sr. -- -- 0/0 0/0
Jan H. Magnusson -- -- 0/0 0/0
</TABLE>
EMPLOYMENT AGREEMENTS
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 which was adjusted to $125,000 in May 1996. He may also receive
discretionary bonuses from time to time as determined by the Board of Directors.
Mr. Botts has agreed not to compete against the Company for a period of one year
after termination of employment.
DIRECTOR COMPENSATION
The Company does not pay any cash fee or other cash compensation to directors
who are not employed by the Company. Under the 1996 Stock Plan, outside
directors are entitled to receive an annual formula grant of non-qualified
options to purchase a number of shares determined by dividing $10,000 by the
fair market value per share of the Common Stock on the date of grant, but in no
event more than 5,000 shares per Outside Director per grant. These options will
have an exercise price equal to 100% of the fair market value per share of the
Common Stock on the date of grant, will be fully vested on the date of grant and
will expire five years after date of grant. On October 29, 1996, options for
10,000 shares of Common Stock were granted to the Outside Directors under this
provision.
1996 STOCK OPTION PLAN
During 1996, the Board of Directors of the Company and the shareholders approved
the 1996 Stock Option Plan (the "1996 Plan"). The purpose of the 1996 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 1996 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 1996 Plan administrators have the discretion to select
the optionee and establish the terms and conditions of each option, subject to
the provisions of the 1996 Plan, the Internal Revenue Code of 1986, as amended,
and applicable securities laws.
A total of 500,000 shares of common stock are authorized and reserved for
issuance under the Plan. Eligible recipients under the 1996 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.
Under the 1996 Plan, Outside Directors are entitled to receive an annual formula
grant of non-qualified options to purchase a number of shares determined by
dividing $10,000 by the fair market value per share of the Common Stock on the
date of grant, but in no event more than 5,000 shares per Outside Director per
grant. This provision supersedes the 1994 Non-Qualified Stock Option Plan.
These options will have an exercise price equal to 100% of the fair market value
per share of the Common Stock on the date of grant, will be fully vested on that
date of grant and will expire five years after date of grant.
Shares of common stock covered by expired or terminated stock options, or
forfeited shares of restricted stock, may be used for subsequent grants under
the 1996 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.
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 "1994 Plan"). The purpose of the
1994 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 1994 Plan administrators have the discretion to select
the optionee and establish the terms and conditions of each option, subject to
the provisions of the 1994 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 1994 Plan. Eligible recipients under the 1994 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.
Shares subject to canceled or lapsed options will be available for subsequent
grants under the 1994 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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth, as of March 6, 1997, 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.
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNERS BENEFICIAL OWNERSHIP OF CLASS
Robert C. Klas, Sr. (1)
150 East Marie Avenue
West St. Paul, MN 55118 9,403,918 71.6%
Robert C. Klas, Jr. (2)
150 East Marie Avenue
West St. Paul, MN 55118 8,750 * %
David M. Botts (3)
980 Bayside Lane
Minnetrista, MN 55364 61,975 * %
Gregory P. Jensen (6)
3809 Azalea Place
Burnsville, MN 55337 -- * %
John A. Clymer (4)(5)
829 3rd Street
Hudson, WI 54016 24,500 * %
Biloine W. Young (4)(5)
15 Crocus Hill
St. Paul, MN 55102 22,500 * %
Jan H. Magnusson (7)
300 S. Owasso Blvd.
St. Paul, MN 55117 1,594,486 14.9%
All officers and directors as
a group, 5 persons (7)(8) 9,521,643 72.1%
(1) Includes: a) a warrant to purchase 2,400,000 shares of Common Stock on or
before March 22, 2001; b) 25,000 shares of Common Stock and a warrant to
purchase an additional 10,000 shares of Common Stock on or before May 31, 1997,
held by Tapemark Company; and c) 200,000 shares of Common Stock held by the
Tapemark Company Cash or Deferred Profit Sharing Plan.
(2) Includes warrants to purchase 2,500 shares of Common Stock on or before
May 31, 1997.
(3) Includes 60,000 shares of Common Stock which may be acquired upon the
exercise of stock options which are vested now or within sixty days.
(4) Includes warrants to purchase 5,000 shares of Common Stock on or before
May 31, 1997.
(5) Includes stock options to purchase 5,000 shares of Common Stock.
(6) Serves as an executive officer of the Company.
(7) Mr. Magnusson resigned as Chief Executive Officer of the Company on
April 12, 1996.
(8) Includes warrants to purchase a total of 2,422,500 common shares and stock
options to purchase 70,000 common shares.
ITEM 12. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
During 1995 and 1996, Mr. Robert C. Klas, Sr., the Company's Chairman of the
Board and Chief Executive Officer, 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 and debt assumed during
1995 and 1996 was $2,900,000, and $2,200,000, respectively.
On August 30, 1995, the Tapemark Company Cash or Deferred Profit Sharing Plan,
an affiliate of Mr. Klas, Sr., 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.
Tapemark Company ("Tapemark"), of West St. Paul, Minnesota, provides assembly
and related support services to the Company for the Amana(R) and Pureit(R)
InLine point-of-use systems. Mr. Robert Klas, Sr. is Tapemark's Chairman and CEO
and Robert Klas, Jr. is Tapemark's President. During the year ended December 31,
1996, the Company paid Tapemark a total of $74,633.
At December 31, 1996, the Company has available a bank line of credit with
maximum available borrowings of up to $750,000. This credit line expires on May
31, 1997 and is personally guaranteed by Mr. Robert Klas, Sr. At December 31,
1996, the outstanding balance of this line of credit was $750,000.
At December 31, 1995, the Company had available a bank line of credit with
maximum available borrowings of up to $500,000. This credit line expired on May
31, 1996 and was personally guaranteed by the Former CEO. At December 31, 1995,
the outstanding balance of this line of credit was $500,000.
On March 22, 1996, Mr. Klas, Sr. 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, Sr. became the majority owner of the
Company's outstanding common stock.
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 1996 and 1995 were approximately $3,300 and $20,000,
respectively.
The Company utilizes the services of Tord Nihlen, the brother-in-law of the
Former CEO, to serve as an independent sales representative for the Company's
products in certain countries in Europe and the Middle East. During 1996, the
Company modified the terms of the agreement to a basis similar to the Company's
other independent sales representatives. Total advances to Mr. Nihlen for 1996
and 1995 were $97,000 and $102,000, respectively.
EXHIBITS AND REPORTS
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Title Method of Filing
<S> <C> <C>
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
of Incorporation of WTC Industries, Inc. (H)
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 Filed Herewith
10.19 License Agreement between WTC Industries, Inc.
and Calco, Ltd. (C)
10.34 Agreement and Plan of Merger dated
November 19, 1994, as amended (D)
10.38 1994 Non qualified Stock Option Plan (E)
10.42 Employment Agreement dated April 1, 1994
with David M. Botts (E)
10.44 Employment Agreement dated July 24,
1995 with Todd Johnson (H)
10.45 Debt Conversion and Loan Agreement dated August 23, 1995,
between Robert C. Klas, Sr. and WTC Industries, Inc. (F)
10.46 Stock Purchase Agreement between WTC
Industries, Inc. and Robert C. Klas, Sr.
dated March 22, 1996 (G)
10.47 Employment Agreement dated March 22,
1996 with Jan H. Magnusson (H)
10.48 Memorandum of Agreement between WTC
Industries, Inc. and DentalPure Corp.
dated March 22, 1996 (H)
10.49 Porous Media Requirements Contract Filed Herewith
10.50 1996 Stock Option Plan Filed Herewith
21.1 List of subsidiaries of WTC Industries, Inc. (H)
23 Independent Auditors' Consent Filed Herewith
27 Financial Data Schedule Filed Herewith
</TABLE>
(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
8-K filed on January 14, 1995.
(E) Incorporated by reference to the same number Exhibit to the Company's Form
10-KSB filed for the year ended December 31, 1994.
(F) Incorporated by reference to Exhibit A to the Company's Form 8-K filed on
August 23, 1995.
(G) Incorporated by reference to Exhibit number 10.1 to the Company's Form 8-K
filed on March 22, 1996.
(H) Incorporated by reference to the same number Exhibit to the Company's Form
10-KSB filed for the year ended December 31, 1995.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1996.
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 March 28, 1997
Robert C. Klas, Sr. Chief Executive Officer
/s/ Gregory P. Jensen Chief Financial Officer, Secretary March 28, 1997
Gregory P. Jensen and Treasurer
/s/ John A. Clymer Director March 28, 1997
John A. Clymer
/s/ Biloine W. Young Director March 28, 1997
Biloine W. Young
/s/ Robert C. Klas, Jr. Director March 28, 1997
Robert C. Klas, Jr.
</TABLE>
- -
EXHIBIT G
ADDENDUM TO LEASE AGREEMENT
WITH LESSEE: Water Technologies Corporation DATED: March 14, 1997
THE ORIGINAL LEASE DATED NOVEMBER 9, 1988, AND AMENDED IN EXHIBIT F DATED
FEBRUARY 13, 1992, REMAIN IN FULL FORCE AND EFFECT WITH THE FOLLOWING
MODIFICATIONS:
G-1. The Lease Expiration Date will be extended to June 30, 1999 from June
30, 1997. However, if Lessee is not otherwise in default of this Lease,
Lessee can terminate the remaining Lease term on June 30, 1998, by
giving prior written notice to Lessor on or before December 31, 1997.
Also on June 30, 1998, Lessor may terminate the remaining Lease term by
giving Lessee prior written notice on or before December 31, 1997.
G-2. If Lessee is not otherwise in default of this Lease, Lessee may cancel
the remaining Lease term on the last day of any month after May 31,
1998, by giving Lessor one hundred eighty days prior written notice.
Lessee is responsible for all of the Lease terms and conditions during
the 180 day notice period.
G-3. Effective July 1, 1997, the Base Rent will increase by $240.00 per
month to $6,414.00 monthly and $76,968.00 annually and on July 1, 1998,
the Base Rent will be increased by $200.00 per month.
G-4. Lessee waives it's expansion rights into suite #118.
EXCEPT AS PROVIDED FOR IN THE ABOVE DESCRIBED AMENDMENTS, THE TERMS AND
CONDITIONS ON THE ATTACHED LEASE AGREEMENT ARE UNCHANGED AND REMAIN IN FULL
FORCE AND EFFECT.
Date: March 3, 1997
LESSEE: LESSOR:
Water Technologies Corporation Parkers Lake Pointe I Limited Partnership
Caliber Development Corporation, G.P.
/s/Greg Jensen /s/John Lavander
Its: Chief Financial Officer Its: President
1/6/97
REQUIREMENTS AGREEMENT
THIS REQUIREMENTS AGREEMENT (the "Agreement"), made effective as of
January 6, 1996, is by and between POROUS MEDIA CORPORATION, a Minnesota
corporation which has its principal place of business at 1350 Hammond Road, St.
Paul, Minnesota 55110 ("Porous"), and WTC INDUSTRIES, INC., a Minnesota
corporation which has its principal place of business at 14405 21st Avenue
North, Minneapolis, Minnesota 55447 ("WTC").
BACKGROUND
A. Porous manufactures and assembles cyst filters, as identified by
internal Porous product number DFE12025M03B-Y (which product, together with all
improvements, enhancements and modifications thereto, whether now existing or
hereafter arising, plus all other cyst filters produced by Porous and sold to
WTC, shall be referred to herein as the "Filters").
B. WTC assembles, markets and sells throughout the world the
PENTAPURE(R) water purification system (formerly referred to as the OASIS water
purification system) and the SPRING(TM) water filtration system, both of which
are personal water treatment systems that can be used to remove cryptosporidium
and giardia cysts, as well as other particulates and organisms, from water.
Those two products, together with all improvements, enhancements and
modifications to those two products, whether now existing or hereafter arising,
shall be referred to herein as the "Systems".
C. The Systems require cyst filters similar to the Filters manufactured
by Porous.
D. Porous has agreed to manufacture and sell to WTC all of WTC's
requirements for Filters, and WTC has agreed to purchase all of its requirements
of cyst filters for its Systems exclusively from Porous, in accordance with the
terms and conditions of this Agreement.
Wherefore, the parties agree as follows:
TERMS
ARTICLE I
EXCLUSIVITY; MINIMUM QUANTITIES
1.1 Exclusive. During the 5-year period commencing April 1, 1997 and ending
March 31, 2002 (the "Term"), WTC shall purchase from Porous all of
WTC's requirements for cyst filters used in the Systems (including
WTC's requirements for cyst filters used in replacement parts and
cartridges for the Systems), and Porous shall sell to WTC all of WTC's
cyst filter requirements for the Systems. Porous agrees not to sell
Filters during the Term to third parties for use in products which
compete with the Systems or for resale as an aftermarket replacement
part for the Systems.
1.2 Minimum Purchases and Sales. During each 12-month period beginning on
April 1 throughout the Term (each such 12-month period is a "Year"),
WTC shall purchase a minimum of 100,000 Filters from Porous and Porous
shall sell to WTC all of WTC's cyst filter requirements for the Systems
during each Year.
1.3 Definitions.
(A) For all purposes of this Agreement, Filters will be deemed to
be "purchased" by WTC and "sold" by Porous in the Year in
which WTC delivers the purchase order for those Filters to
Porous, but only if WTC pays Porous the amount due under the
invoice for those Filters by the date payment is due pursuant
to Sections 6.4.
(B) Each 3-month period beginning on April 1, July 1, October 1
and January 1 throughout the Term is a "Quarter".
ARTICLE II
TOOLING; MANUFACTURING INFORMATION
2.1 Tooling. WTC shall deliver all of the tooling (the "Tooling") for cyst
filters used by WTC's current cyst filter supplier to Porous as soon as
possible after the date hereof, but in no event later than 45 days
after the effective date of this Agreement. Upon the termination, for
any reason, of this Agreement, Porous must promptly return the Tooling
to WTC, at Porous's sole expense, in the same condition the Tooling was
in on the date WTC delivered the Tooling to Porous, normal wear and
tear excepted. At all times, WTC retains title to the Tooling and
Porous must not transfer or subject the Tooling to any lien or other
encumbrance. Porous must only use the Tooling for the sole purpose of
producing Filters for WTC.
2.2 WTC Information.
(A) WTC shall deliver to Porous, contemporaneously with the
execution of this Agreement, copies of the bill of materials
and specifications for the Systems, a copy of the list of
vendors currently supplying materials and parts to WTC for the
Systems and copies of such other information, documentation
and drawings directly related to the Systems as Porous may
reasonably request to enable Porous to manufacture the Systems
(collectively, the "WTC Information"). Until this Agreement is
terminated, Porous may request updates of the WTC Information
at the end of each Quarter to reflect ongoing developments in
the WTC Information.
(B) Porous acknowledges that the WTC Information is confidential
and constitutes proprietary information of WTC. Except as
provided in Article XV, Porous shall not make any use of the
WTC Information, either for itself (except solely to meet its
obligations under this Agreement) or for the benefit of any
third party. Porous shall use all reasonable efforts to
prevent any disclosure of the WTC Information to any third
party, including, without limitation, Porous's employees and
agents for whom knowledge of the WTC Information is not
essential to the performance of Porous's obligations under
this Agreement, except as provided in Article XV.
(C) Except as provided in Article XV, upon the termination of this
Agreement, for any reason, Porous shall promptly redeliver all
written WTC Information, contained in or on any media, to WTC,
including, without limitation, all copies of the WTC
Information, on whatever media, and all other materials
containing or reflecting any information about the WTC
Information (whether prepared by WTC or otherwise) and Porous
shall not retain any copies, extras or other reproductions, in
whole or in part, of the WTC Information, and such redelivery
shall be certified in writing by an authorized officer of
Porous supervising such redelivery.
(D) Notwithstanding the provisions of Sections 2.2(A) through (C),
Porous is not under any obligation to preserve the
confidentiality of, or be restricted in the use of, any
information which
(1) becomes generally available to the public other than
as a result of a disclosure by Porous or Porous's
directors, officers, employees, agents or advisors,
or
(2) becomes available to Porous on a non-confidential
basis from a source other than WTC, its officers,
employees, agents, or its advisors, provided that
such source is not bound by a confidentiality
agreement with or other obligation of secrecy to WTC
or another party.
ARTICLE III
FORECAST FOR FILTERS
On the first business day of each Quarter, WTC shall provide Porous
with a written 6-month forecast of its estimated monthly Filter orders for the
six-month period beginning on such day (a "6-Month Forecast") as well as a
forecast of its estimated Filter orders each remaining Year in the Term. Porous
acknowledges that such forecasts are for Porous's convenience only and agrees
that none of the forecasts create any liability or obligation of WTC to submit
orders or make purchases matching or approximating those forecasts.
ARTICLE IV
ORDERING
WTC shall order all Filters under this Agreement by delivering to
Porous a written, non-cancelable purchase order. Each purchase order shall
include a description of the Filter ordered (including the internal Porous
product number), the quantity, the delivery date(s) and destination(s) for
Filters ordered (the "Order Terms"). Porous shall not be required to deliver any
Filters sooner than 30 days after WTC has delivered the purchase order for those
particular Filters. Upon receipt of each purchase order, Porous must deliver the
Filters orders pursuant to the order and this Agreement.
ARTICLE V
SHIPPING
5.1 Timing of Delivery. During each calendar month, Porous must deliver for
shipment to WTC the number of Filters ordered by WTC in each purchase
order delivered to Porous during each such month no later than 5
business days after the delivery date specified in each such purchase
order, up to a maximum of 125% of the estimated number of Filters
listed in the most recent 6-Month Forecast for that month. Porous must
use its best efforts to deliver for shipment to WTC that number of
Filters ordered in excess of that percentage as promptly as reasonably
possible. Porous acknowledges and agrees that time is of the essence
with respect to the delivery of Filters in accordance with this Section
5.1.
5.2 Shipping. Filters must be shipped F.O.B. Porous's plant. Porous shall
make packaged products available to UPS, or such other carrier as WTC
may request, at Porous's place of business for shipping to the
destination(s) specified in each of WTC's purchase orders. At the time
Porous makes a delivery of ordered Filters, it shall simultaneously
provide WTC with a certification to the effect that the Filters
delivered meet or exceed the minimum performance specifications
described in Article VII below.
5.3 Carrier Expenses. WTC shall pay and be responsible for all expenses of
carrier expenses and shall bear the risk of loss once Porous has
delivered the packaged products to a carrier as provided in paragraph
5.2 above.
ARTICLE VI
PRICE TERMS; PAYMENT
6.1 Price. The price charged WTC by Porous for each Filter purchased by WTC
which has the internal Porous product number DFE12025M03B-Y is
determined by the cumulative number of such Filters purchased each
Year. The first 50,000 such Filters purchase in each Year by WTC must
be sold by Porous for $1.80 per Filter. After the cumulative number of
such Filters purchased by WTC reaches 50,000 units, the price of each
such Filter will decrease in accordance with the prices set forth in
the following table:
CUMULATIVE QUANTITY PURCHASED PRICE/FILTER
----------------------------- ------------
50,001 through 100,000 $1.65
100,001 through 175,000 1.50
175,001 through 400,000 1.30
400,001 through 1,000,000 1.10
1,000,001 through 2,500,000 0.90
2,500,001 through 5,000,000 0.85
5,000,001 and over 0.80
6.2 Price Adjustments. The prices set forth in Section 6.1 shall be each be
increased by 2.5% per year effective April 1, 1998 and each subsequent
April 1st.
6.3 Invoicing and Payment. Porous must date each invoice for each purchase
order WTC delivers to Porous no earlier than the date on which all of
the Filters requested under each purchase order have been shipped. WTC
must pay the amount of the invoice net 30 from date of invoice.
6.4 Guarantee. Notwithstanding the foregoing, WTC has contemporaneously
delivered to Porous a Guarantee in the form attached hereto as Exhibit
A pursuant to which Robert C. Klas, Sr. has personally guaranteed WTC's
obligations under this Agreement, subject to a maximum cumulative
liability under the guarantee of $100,000 (the "Guarantee").
ARTICLE VII
PERFORMANCE STANDARDS
All Filters delivered to WTC by Porous must, at a minimum, meet the
performance specifications set forth on Schedule 7 attached to this Agreement.
ARTICLE VIII
LIMITED WARRANTY; PRODUCT LIABILITY
8.1 Warranty.
(A) Porous warrants to WTC and all purchasers of WTC products
containing the Filters sold to WTC during the Term, that for a
period of six (6) months from the date of shipment from the
originating factory that at the time of shipment the Filters
will be free from defects in material and workmanship for
normal use and service, such defects including, without
limitation, a failure of the Filters to meet the performance
standard set forth in Article VII. This warranty does not
extend to Filters subjected to misuse, neglect, accident or
improper installation, or to Filters which have been altered
or repaired by anyone other than Porous. WTC, or any person
receiving the Filters sold to WTC during the Term, shall
contact Porous as soon as any defect becomes known and, upon
delivery of the defective Filter(s) to Porous, Porous must
promptly repair or replace the defective Filter(s). Porous's
sole obligation under this warranty is limited to repair or
replacement of the defective Filter(s), as Porous deems
appropriate, or refund of the purchase price. If Porous elects
to repair the defective Filter(s) and if Porous is unable to
repair those Filter(s) after two attempts, Porous must
promptly replace the defective Filter(s). All repaired or
replaced Filters will be shipped to WTC with transportation
charges paid by Porous to any destination in the United
States, excluding Alaska and Hawaii. For the latter two states
and all other countries, transportation charges will be paid
by Porous to the nearest port of export. If, after notifying
Porous of a defect, WTC returns the Filter(s) to Porous for
repair and Porous reasonably determines that it has not
breached the foregoing warranty, WTC will be assessed Porous's
regular reconditioning charges.
(B) THIS WARRANTY IS OFFERED IN LIEU OF ANY OTHER WARRANTY,
EXPRESS OR IMPLIED, INCLUDING (WITHOUT LIMITATION) THE
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE. POROUS SHALL NOT BE LIABLE FOR ANY SPECIAL, INDIRECT
OR CONSEQUENTIAL DAMAGES ARISING FROM DEFECTIVE FILTERS.
ARTICLE IX
REMEDIES AND LIMITATION OF LIABILITY
9.1 Product Warranty. With respect to Porous's warranty obligations under
Section 8.1, WTC's exclusive remedy is replacement or refund. Porous
will not be liable to WTC, or its agents or purchasers, or to any third
party, for any indirect, collateral, special, incidental or
consequential loss, personal injury, damage or expense (including
without limitation, loss of profits, or goodwill and any losses arising
from claims by third parties) arising, directly or indirectly, from the
sale or use of the Filters whether such claim is based on warranty,
tort, contract, negligence, strict liability or on any other basis.
Under no circumstances will the liability of Porous to WTC under
Article VIII exceed the amount paid by WTC to Porous for the Filters.
ARTICLE X
PATENTS
10.1 Indemnification. Porous shall indemnify and hold harmless WTC and any
other person or entity receiving the Filters sold to WTC during the
Term against any claim of a third party that the Filters manufactured
by Porous infringe any United States Letters Patent; provided, however,
that if WTC furnishes specifications to Porous, WTC shall hold Porous
harmless against any such claims which arise out of compliance with the
specifications. In the event that any Filters manufactured by Porous
are held to constitute infringement and their use is enjoined, Porous
must, if Porous is unable, after using its best efforts and within a
reasonable period of time, to secure for WTC the right to continue
using such Filters, either by suspension of the injunction or by
securing a license or otherwise, at Porous's sole own expense, either
replace the infringing Filters at WTC's place of business with
non-infringing Filters, or modify the infringing Filters so that they
become non- infringing, or accept from WTC the return of the enjoined
Filters and refund to WTC the purchase price thereof.
10.2 Discontinuance of all Sales and Purchases. Whenever Porous deems it
necessary or expedient for the protection of Porous's patent rights or
for the prevention of patent infringement litigation to discontinue the
sale of Filters, WTC, upon receipt of written notice from Porous that
Porous intends to discontinue the sale of Filters, shall make no
further sales or use of the Filters manufactured by Porous and, except
for payments due WTC pursuant to the following sentence, neither Porous
nor WTC will have any further obligations under this Agreement and this
Agreement will immediately terminate. WTC must return all Filters then
held by WTC to Porous, at Porous' sole expense, and Porous must
promptly tender payment to WTC in an amount equal to the amount paid by
WTC for those returned Filters.
ARTICLE XI
TERM AND TERMINATION
11.1 Term and Termination. The term of this Agreement commences as of the
effective date hereof and continues until the last date of the Term,
unless earlier terminated as provided below:
(A) Porous may terminate this Agreement if (i) WTC is dissolved or
becomes insolvent (as that term is defined in the United
States Bankruptcy Code), (ii) WTC voluntarily commences or
there is commenced involuntarily against WTC (and such
involuntary action remains undismissed for a period of 60
days) a case under the United States Bankruptcy Code, (iii)
WTC materially breaches any of its obligations under this
Agreement and fails to cure such breach within 30 days of
written notice of such breach. WTC will be deemed to have
materially breached this Agreement if WTC fails to pay Porous
for Filters in accordance with Section 6.4 or if WTC fails to
meet the minimum purchase requirements under Section 1.1.
(B) WTC may terminate this Agreement if (i) Porous is dissolved or
becomes insolvent (as that term is defined in the United
States Bankruptcy Code), (ii) Porous voluntarily commences or
there is commenced involuntarily against Porous (and such
involuntary action remains undismissed for a period of 60
days) a case under the United States Bankruptcy Code, (iii)
Porous materially breaches any of its obligations under this
Agreement and fails to cure such breach within 30 days of
written notice of such breach, or (iv) WTC ceases to
manufacture the Systems and pays Porous the termination fee
provided in Section 14.2. Porous will be deemed to have
materially breached this Agreement if Porous fails to deliver
the number of Filters required by WTC pursuant to Sections 1.1
and 1.2, breaches its obligations under Article II or VII or
breaches its delivery obligations under Section 5.1.
(C) Termination pursuant to Sections 10.2, 14.3 or 14.4.
11.2 Remedies on Breach. If this Agreement is terminated, the non-breaching
party shall have all legal and equitable remedies available to it,
including, but not limited to, the right to recover damages for breach
of this Agreement (including reasonable attorneys' and accountants'
fees and interest at a commercially reasonable rate).
11.3 Guarantee. In the event of a termination of this Agreement pursuant to
Section 11.1(A), the Guarantee shall remain in full force and effect
through the Term and Porous shall have the right, in addition to all
other legal and equitable rights available to it, to collect the full
amount guaranteed thereby to the extent not already received by Porous.
11.4 Survival. Notwithstanding the expiration or termination of this
Agreement, the indemnification obligations under Sections 8.2, 10.1 and
13.1 will continue until all applicable statutes of limitations have
run. Porous's obligations under Section 2.2 and WTC's obligations under
Section 12.1 will survive the expiration or termination of this
Agreement.
ARTICLE XII
CONFIDENTIALITY AND DEVELOPMENT
12.1 Porous Information. Other than the WTC Information, all information,
drawings, research materials, equipment and apparatus designs and other
confidential documents disclosed or delivered to WTC by Porous pursuant
to this Agreement, as well as the terms of this Agreement and all
knowledge of the business relationship between WTC and Porous
(collectively, the "Porous Information"), shall be treated by WTC as
confidential information of Porous and WTC must use all reasonable
efforts to prevent the disclosure of the Porous Information to third
parties by WTC, its officers and employees, without the prior written
consent of Porous.
12.2 No WTC Obligation. Notwithstanding the provisions of Section 12.1, WTC
is not under any obligation to preserve the confidentiality of, or be
restricted in the use of, any information which
(A) becomes generally available to the public other than as a
result of a disclosure by WTC or WTC's directors, officers,
employees, agents or advisors, or
(B) becomes available to WTC on a non-confidential basis from a
source other than Porous, its officers, employees, agents, or
its advisors, provided that such source is not bound by a
confidentiality agreement with or other obligation of secrecy
to Porous or another party.
ARTICLE XIII
[INTENTIONALLY DELETED]
ARTICLE XIV
ASSIGNMENT; SALE
14.1 Limitation on Assignments. This Agreement and the rights and
obligations hereunder are personal to the parties hereto and may not be
assigned in whole or in part by either party without the prior written
consent of the other, provided that either party may assign this
Agreement in connection with a sale of all or substantially all of its
assets (a "Business Sale") if the assignee assumes this Agreement by
means of a written instrument delivered to the other party to this
Agreement. No such assignment shall relieve the assigning party of its
obligations under this Agreement to the other party to the Agreement.
14.2 Termination Fee. In the event of a Business Sales by WTC, WTC shall
have the right to terminate this Agreement by payment to Porous of a
termination fee (the "Termination Fee") in an amount calculated jointly
and in good faith by WTC and Porous as follows:
(A) Monthly Earnings. "Monthly Gross Earnings" means (i) Net Gross
of Porous for the 12- month period ending on the last day of
the month immediately preceding the Business Sale, divided by
(ii) twelve.
(B) Gross Earnings. "Gross Earnings" means, for any period of
calculation, Porous's gross sales, less returns and discounts,
of Filters sold to WTC, less Porous's cost of goods sold, less
the direct labor and production expenses associated with those
gross sales (including, without limitation, the depreciation
and amortization expense associated with the production of the
Filters), all as determined in accordance with generally
accepted accounting principals (consistently applied with
prior periods) for such period.
(C) Termination Fee. The Termination Fee must equal the present
value (based on an annual discount rate equal to one-half of
one percent above the prime or reference rate of First Bank
National Association then in effect) of the Monthly Gross
Earnings, under the assumption that Porous would have earned
the Monthly Gross Earnings in each month remaining in the
Term, including the month in which the Business Sale is
closed.
14.3 Termination. Upon payment of the Termination Fee, this Agreement will
immediately terminate, neither WTC nor Porous will have any further
obligations or rights under this Agreement, and Porous shall return to
WTC and make no further use of the WTC Information.
14.4 Porous. Porous must not assign its rights or delegate its duties under
this Agreement without WTC's prior written consent, which consent may
not be unreasonably withheld. Porous must not permit the assignment of
any of its rights or the delegation of any of its obligations under
this Agreement by operation of law or otherwise. If Porous breaches
this Section 14.4, this Agreement will immediately terminate and
neither WTC nor Porous will have any further rights or obligations
under this Agreement.
14.5 Generally. For purposes of this Article XIV, an assignment of rights
and a delegation of duties includes the sale or transfer of all or a
controlling quantity of the stock of one of the parties or the sale of
that party's entire business or substantially all of that party's
assets.
ARTICLE XV
DISSOLUTION, BANKRUPTCY, INSOLVENCY
If WTC (i) is dissolved or becomes insolvent (as that term is defined
in the United States Bankruptcy Code), (ii) voluntarily commences, or there is
commenced involuntarily against WTC (and such action remains undismissed for a
period of 60 days), a case under the United States Bankruptcy Code, or (iii)
ceases to manufacture the Systems, then (A) Porous will have the right to
manufacture and market the Systems throughout the world, and WTC must grant
Porous a perpetual, non-exclusive, royalty-free license to manufacture and
market the Systems upon any such event and (B) Porous may use the WTC
Information solely for its own use and may disclose WTC Information to those
Porous employees and agents for whom the WTC Information is essential for the
production and marketing of the Systems by Porous and (C) Porous will have no
further obligations under Section 2.2(C).
ARTICLE XVI
MISCELLANEOUS
16.1 Notices. All notices required or permitted to be given under this
Agreement must be in writing and are deemed given when delivered in
person, or three business days after being deposited in the United
States mail, postage prepaid, registered or certified, addressed as set
forth below, or on the next business day after being deposited with a
nationally- recognized overnight courier service addressed as set forth
below, or upon dispatch if sent by facsimile with telephonic
confirmation of receipt from the intended recipient to the telecopy
number set forth below:
(A) If to WTC, addressed to:
WTC Industries, Inc.
14405 - 21st Avenue North
Minneapolis, Minnesota 55447
Attention: Robert C. Klas, Sr.
Facsimile No. (612) 473-1712
with a copy to:
Lindquist & Vennum P.L.L.P.
80 South 8th Street
4200 IDS Center
Minneapolis, Minnesota 55402
Attention: Richard D. McNeil
Facsimile No. (612) 371-3207
(B) To Porous, addressed to:
Porous Media Corporation
1350 Hammond Road
St. Paul, Minnesota 55110
Attention: Michael/Patrick Spearman
Facsimile No. (612) 653-2230
with a copy to:
Robins, Kaplan Miller & Ciresi
2800 LaSalle Plaza
800 LaSalle Avenue
Minneapolis, Minnesota 55402
Attention: Robert J. Tansey, Jr.
Facsimile No. (612) 339-4181
or to such other address or to such other person as WTC or Porous shall
have last designated by notice given in accordance with the provisions
of this Section 16.1, except that any notice of a change of address
will not be deemed effective until actually received by the party to
whom notice is directed.
16.2 Waiver. The failure in any one or more instances of a party to insist
upon performance of any of the terms, covenants or conditions of this
Agreement, to exercise any right or privilege conferred in this
Agreement, or the waiver by said party of any breach of any of the
terms, covenants or conditions of this Agreement, must not be construed
as a subsequent waiver of any such terms, covenants, conditions, rights
or privileges, but the same will continue and remain in full force and
effect as if no such forbearance or waiver had occurred. No waiver is
effective unless it is in writing and signed by an authorized
representative of the waiving party.
16.3 Successors and Assigns. This Agreement shall apply to, benefit and bind
not only the parties to this Agreement but also their respective
permitted assigns and successors in interest.
16.4 Entire Agreement; Written Modification Only; Severability.
(A) This Agreement constitutes the entire agreement between Porous
and WTC concerning the subject matter hereof. This Agreement
supersedes all prior communications, statements,
representations and understandings, whether oral or written,
on the subject matter hereof, including, but not limited to,
that certain Agreement between Porous and WTC Industries, Inc.
dated April 21, 1994. Porous shall not be bound by any
additional or different terms in WTC's purchase order unless
specifically agreed to by Porous and WTC.
(B) This Agreement may only be amended or modified by a writing
signed by a duly authorized officer of WTC and Porous and that
writing states expressly the parties' intent to modify this
Agreement. Neither prior course of dealing, trade usage nor
performance is a modification except as expressed in an
appropriate signed writing.
(C) The provisions of this Agreement are intended to be
interpreted and construed in a manner so as to make such
provisions valid, binding and enforceable. In the event any
provision of this Agreement is determined to be partially or
wholly invalid, illegal or unenforceable, then (i) such
provision shall be deemed to be modified or restricted to the
extent necessary to make such provision valid, binding and
enforceable; or (ii) if such provision cannot be modified or
restricted in a manner so as to make such provision valid,
binding and enforceable, then such provision shall be deemed
to be excised from this Agreement and the validity, binding
effect and enforceability of the remaining provisions of this
Agreement shall not be affected or impaired in any manner.
16.5 Headings and Captions. The headings and captions of this Agreement are
inserted for convenience only and do not constitute a part of this
Agreement.
16.6 Governing Law; Statute of Limitations. This Agreement shall be
construed in accordance with, and governed by, the internal laws of the
State of Minnesota, including, without limitation, the provisions of
the Uniform Commercial Code as adopted by the state of Minnesota,
without regard to that state's provisions for conflict of laws.
Whenever a term defined in the applicable provisions of the Uniform
Commercial Code is used herein, the definition contained in such
provisions shall control. Any action for breach of this Agreement must
be commenced within one (1) year after the cause of action has accrued
unless such provision is not permitted by applicable law.
16.7 Counterparts. This Agreement may be executed in two or more
counterparts, each of which is an original and all of which together
constitute but one agreement.
16.8 Non-exclusivity. Except as provided in Article IX, the rights,
remedies, powers and privileges provided in this Agreement are
cumulative and not exclusive and are in addition to any and all rights,
remedies, powers and privileges granted by law, rule, regulation or
instrument.
16.9 Third Parties. Except as provided in Sections 8.1 and 10.1, nothing in
this Agreement, whether expressed or implied, is intended to confer any
rights or remedies under or by reason of this Agreement on any other
person other than the parties to this Agreement and their respective
successors and assigns, nor is anything in this Agreement intended to
relieve or discharge the obligation or liability of any third person to
any party to this Agreement and this Agreement is not intended to and
does not create any third party beneficiary rights whatsoever.
16.10 Force Majeure. In the event that either party to this Agreement is
unable to perform any obligation under this Agreement due to Acts of
God, acts of the public enemy, or other unforseen circumstances beyond
its control, in each case that could not reasonably have been
anticipated and do not involve any negligence on the part of the party
who is thus unable to perform, the performance of such obligation under
this Agreement shall be temporarily excused during the period of such
inability to perform.
ACCEPTED AND AGREED TO:
POROUS MEDIA CORPORATION
By ______________________________________
Its _____________________________________
WTC INDUSTRIES, INC.
By ______________________________________
Its _____________________________________
Schedule 7
PERFORMANCE STANDARDS
When tested according to NSF International Standard 53, the filters
must reduce the number of 3- to 4- micrometer particles from an influent
challenge level of at least 50,000 per milliliter by at least 99.95%.
As Adopted on
September 24, 1996
WTC INDUSTRIES, INC.
1996 STOCK PLAN
SECTION 1. General Purpose of Plan; Definitions.
The name of this Plan is WTC Industries, Inc. 1996 Stock Plan (the
"Plan"). The purpose of the Plan is to enable WTC Industries, Inc. (the
"Company") and its Subsidiaries to retain and attract executives and other key
employees and consultants who contribute to the Company's success by their
ability, ingenuity and industry, and to enable such individuals to participate
in the long-term success and growth of the Company by giving them a proprietary
interest in the Company.
For purposes of the Plan, the following terms shall be defined as set
forth below:
a. "Board" means the Board of Directors of the Company.
b. "Cause" means a felony conviction of a participant or the
failure of a participant to contest prosecution for a felony,
or a participant's willful misconduct or dishonesty, any of
which is directly and materially harmful to the business or
reputation of the Company.
c. "Code" means the Internal Revenue Code of 1986, as amended.
d. "Committee" means the Committee referred to in Section 2 of
the Plan. If at any time no Committee shall be in office, then
the functions of the Committee specified in the Plan shall be
exercised by the Board.
e. "Company" means WTC Industries, Inc., a corporation organized
under the laws of the State of Minnesota (or any successor
corporation).
f. "Disability" means permanent and total disability as
determined by the Committee.
g. "Disinterested Person" shall have the meaning set forth in
Rule 16b-3(d)(3) as promulgated by the Securities and Exchange
Commission under the Securities Exchange Act of 1934, or any
successor definition adopted by the Commission.
h. "Early Retirement" means retirement, with consent of the
Committee at the time of retirement, from active employment
with the Company and any Subsidiary or Parent Corporation of
the Company.
i. "Fair Market Value" means the value of the Stock on a given
date as determined by the Committee in accordance with the
applicable Treasury Department regulations under Section 422
of the Code with respect to "incentive stock options."
j. "Incentive Stock Option" means any Stock Option intended to be
and designated as an "Incentive Stock Option" within the
meaning of Section 422 of the Code.
k. "Non-Qualified Stock Option" means any Stock Option that is
not an Incentive Stock Option, and is intended to be and is
designated as a "Non-Qualified Stock Option."
l. "Normal Retirement" means retirement from active employment
with the Company and any Subsidiary or Parent Corporation of
the Company on or after age 60.
m. "Parent Corporation" means any corporation (other than the
Company) in an unbroken chain of corporations ending with the
Company if each of the corporations (other than the Company)
owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations
in the chain.
n. "Restricted Stock" means an award of shares of Stock that are
subject to restrictions under Section 6 below.
o. "Retirement" means Normal Retirement or Early Retirement.
p. "Stock" means the Common Stock, par value $.01 per share, of
the Company.
q. "Stock Option" means any option to purchase shares of Stock
granted pursuant to Section 5 below.
r. "Subsidiary" means any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company
if each of the corporations (other than the last corporation
in the unbroken chain) owns stock possessing 50% or more of
the total combined voting power of all classes of stock in one
of the other corporations in the chain.
SECTION 2. Administration.
The Plan shall be administered by the Board of Directors or by a
Committee of not less than three Disinterested Persons, who shall be appointed
by the Board of Directors of the Company and who shall serve at the pleasure of
the Board.
The Committee shall have the power and authority to grant to eligible
employees and consultants of the Company (which consultants shall serve pursuant
to a written agreement with the Company), pursuant to the terms of the Plan: (i)
Stock Options, or (ii) Restricted Stock.
In particular, the Committee shall have the authority:
(i) to select the officers and other key employees of the
Company and its Subsidiaries and consultants to whom
Stock Options and/or Restricted Stock awards may from
time to time be granted hereunder;
(ii) to determine whether and to what extent Incentive
Stock Options, Non-Qualified Stock Options or
Restricted Stock awards, or a combination of the
foregoing, are to be granted hereunder;
(iii) to determine the number of shares to be covered by
each such award granted hereunder;
(iv) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award
granted hereunder (including, but not limited to, any
restriction on any Stock Option or other award and/or
the shares of Stock relating thereto); and
(v) to determine whether, to what extent and under what
circumstances Stock and other amounts payable with
respect to an award under this Plan shall be deferred
either automatically or at the election of the
participant.
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall,
from time to time, deem advisable; to interpret the terms and provisions of the
Plan and any award issued under the Plan (and any agreements relating thereto);
and to otherwise supervise the administration of the Plan. The Committee may
delegate its authority to officers of the Company for the purpose of selecting
employees who are not officers of the Company for purposes of (i) above.
All decisions made by the Committee pursuant to the provisions of the
Plan shall be final and binding on all persons, including the Company and Plan
participants.
SECTION 3. Stock Subject to Plan.
The total number of shares of Stock reserved and available for
distribution under the Plan shall be 500,000 shares. Such shares may consist, in
whole or in part, of authorized and unissued shares.
If any shares that have been optioned ceased to be subject to Options,
or if any shares subject to any Restricted Stock award granted hereunder are
forfeited or such award otherwise terminates without a payment being made to the
participant, such shares shall again be available for distribution in connection
with future awards under the Plan.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, other change in corporate structure affecting
the Stock, or spin-off or other distribution of assets to shareholders, such
substitution or adjustment shall be made in the aggregate number of shares
reserved for issuance under the Plan, in the number and option price of shares
subject to outstanding options granted under the Plan, and in the number of
shares subject to Restricted Stock awards granted under the Plan as may be
determined to be appropriate by the Committee, in its sole discretion, provided
that the number of shares subject to any award shall always be a whole number.
SECTION 4. Eligibility.
Officers, other employees, consultants (which consultants shall serve
pursuant to a written agreement with the Company) and members of the Board of
Directors of the Company and Subsidiaries who are responsible for or contribute
to the management, growth and/or profitability of the business of the Company
and its Subsidiaries are eligible to be granted Stock Options or Restricted
Stock awards under the Plan. The optionees and participants under the Plan shall
be selected from time to time by the Committee, in its sole discretion, from
among those eligible, and the Committee shall determine, in its sole discretion,
the number of shares covered by each award.
SECTION 5. Stock Options.
Any Stock Option granted under the Plan shall be in such form as the
Committee may from time to time approve.
The Stock Options granted under the Plan may be of two types: (i)
Incentive Stock Options and (ii) Non-Qualified Stock Options. No Incentive Stock
Options shall be granted under the Plan more than ten years after the Plan is
adopted.
The Committee shall have the authority to grant any optionee Incentive
Stock Options, Non-Qualified Stock Options, or both types of options. To the
extent that any option does not qualify as an Incentive Stock Option, it shall
constitute a separate Non-Qualified Stock Option.
Anything in the Plan to the contrary notwithstanding, no term of this
Plan relating to Incentive Stock Options shall be interpreted, amended or
altered, nor shall any discretion or authority granted under the Plan be so
exercised, so as to disqualify either the Plan or any Incentive Stock Option
under Section 422 of the Code. The preceding sentence shall not preclude any
modification or amendment to an outstanding Incentive Stock Option, whether or
not such modification or amendment results in disqualification of such Option as
an Incentive Stock Option, provided the optionee consents in writing to the
modification or amendment.
Options granted under the Plan shall be subject to the following terms
and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem desirable.
(a) Option Price. The option price per share of Stock purchasable under
a Stock Option shall be determined by the Committee at the time of grant and
may, except as provided in this paragraph, be less than the Fair Market Value of
the Stock on the date of the grant of the Option. In no event shall the option
price per share of Stock purchasable under an Incentive Stock Option be less
than 100% of the Fair Market Value of the Stock on the date of the grant of the
option. If an employee owns or is deemed to own (by reason of the attribution
rules applicable under Section 425(d) of the Code) more than 10% of the combined
voting power of all classes of stock of the Company or any Parent Corporation or
Subsidiary and an Incentive Stock Option is granted to such employee, the option
price shall be no less than 110% of the Fair Market Value of the Stock on the
date the option is granted. No Non-Qualified Stock Option shall have an option
price less than 85% of the Fair Market Value of the Stock on the date of grant.
(b) Option Term. The term of each Stock Option shall be fixed by the
Committee, but no Incentive Stock Option shall be exercisable more than ten
years after the date the option is granted. If an employee owns or is deemed to
own (by reason of the attribution rules of Section 425(d) of the Code) more than
10% of the combined voting power of all classes of stock of the Company or any
Parent Corporation or Subsidiary and an Incentive Stock Option is granted to
such employee, the term of such option shall be no more than five years from the
date of grant.
(c) Exercisability. Stock Options shall be exercisable at such time or
times as determined by the Committee at or after grant. If the Committee
provides, in its discretion, that any option is exercisable only in
installments, the Committee may waive such installment exercise provisions at
any time.
(d) Method of Exercise. Stock Options may be exercised in whole or in
part at any time during the option period by giving written notice of exercise
to the Company specifying the number of shares to be purchased. Such notice
shall be accompanied by payment in full of the purchase price, either by
certified or bank check, or by any other form of legal consideration deemed
sufficient by the Committee and consistent with the Plan's purpose and
applicable law, including promissory notes or a properly executed exercise
notice together with irrevocable instructions to a broker acceptable to the
Company to promptly deliver to the Company the amount of sale or loan proceeds
to pay the exercise price. As determined by the Committee, in its sole
discretion, payment in full or in part may also be made in the form of
unrestricted Stock already owned by the optionee or, in the case of the exercise
of a Non-Qualified Stock Option or Restricted Stock subject to an award
hereunder (based, in each case, on the Fair Market Value of the Stock on the
date the option is exercised, as determined by the Committee); provided,
however, that, in the case of an Incentive Stock Option, the right to make a
payment in the form of already owned shares may be authorized only at the time
the option is granted, and provided further that in the event payment is made in
the form of shares of Restricted Stock, the optionee will receive a portion of
the option shares in the form of, and in an amount equal to, the Restricted
Stock award tendered as payment by the optionee. If the terms of an option so
permit, an optionee may elect to pay all or part of the option exercise price by
having the Company withhold from the shares of Stock that would otherwise be
issued upon exercise that number of shares of Stock having a Fair Market Value
equal to the aggregate option exercise price for the shares with respect to
which such election is made. No shares of Stock shall be issued until full
payment therefor has been made. An optionee shall generally have the rights to
dividends and other rights of a shareholder with respect to shares subject to
the option when the optionee has given written notice of exercise, has paid in
full for such shares, and, if requested, has given the representation described
in paragraph (a) of Section 10.
(e) Non-transferability of Options. No Stock Option shall be
transferable by the optionee otherwise than by will or by the laws of descent
and distribution, and all Stock Options shall be exercisable, during the
optionee's lifetime, only by the optionee.
(f) Termination by Death. If an optionee's employment by the Company
and any Subsidiary or Parent Corporation terminates by reason of death, the
Stock Option may thereafter be immediately exercised, to the extent then
exercisable (or on such accelerated basis as the Committee shall determine at or
after grant), by the legal representative of the estate or by the legatee of the
optionee under the will of the optionee, for a period of three years (or such
shorter period as the Committee shall specify at grant) from the date of such
death or until the expiration of the stated term of the option, whichever period
is shorter.
(g) Termination by Reason of Disability. If an optionee's employment by
the Company and any Subsidiary or Parent Corporation terminates by reason of
Disability, any Stock Option held by such optionee may thereafter be exercised,
to the extent it was exercisable at the time of termination due to Disability
(or on such accelerated basis as the Committee shall determine at or after
grant), but may not be exercised after three years (or such shorter period as
the Committee shall specify at grant) from the date of such termination of
employment or the expiration of the stated term of the option, whichever period
is the shorter. In the event of termination of employment by reason of
Disability, if an Incentive Stock Option is exercised after the expiration of
the exercise periods that apply for purposes of Section 422 of the Code, the
option will thereafter be treated as a Non-Qualified Stock Option.
(h) Termination by Reason of Retirement. If an optionee's employment by
the Company and any Subsidiary or Parent Corporation terminates by reason of
Retirement, any Stock Option held by such optionee may thereafter be exercised
to the extent it was exercisable at the time of such Retirement, but may not be
exercised after three years (or such shorter period as Committee shall specify
at grant) from the date of such termination of employment or the expiration of
the stated term of the option, whichever period is the shorter. In the event of
termination of employment by reason of Retirement, if an Incentive Stock Option
is exercised after the expiration of the exercise periods that apply for
purposes of Section 422 of the Code, the option will thereafter be treated as a
Non-Qualified Stock Option.
(i) Other Termination. Unless otherwise determined by the Committee, if
an optionee's employment by the Company and any Subsidiary or Parent Corporation
terminates for any reason other than death, Disability or Retirement, the Stock
Option shall thereupon terminate, except that the option may be exercised to the
extent it was exercisable at such termination for the lesser of three months or
the balance of the option's term if the optionee is involuntarily terminated
without Cause by the Company and any Subsidiary or Parent Corporation.
(j) Annual Limit on Incentive Stock Options. The aggregate Fair Market
Value (determined as of the time the Option is granted) of the Common Stock with
respect to which an Incentive Stock Option under this Plan or any other plan of
the Company and any Subsidiary or Parent Corporation is exercisable for the
first time by an optionee during any calendar year shall not exceed $100,000.
(k) Automatic Grant to Outside Directors. Each person serving as a
member of the Company's Board of Directors who is not, as of the date of
determination under this paragraph (k), an employee of the Company, any Parent
Corporation or any Subsidiary, or the beneficial owner of 20% or more of the
Company's outstanding shares of Stock, or an affiliate or associate of such
beneficial holder, is referred to herein for purposes of this paragraph (k) as
an "Outside Director". Each person who is an Outside Director at the conclusion
of each Annual Meeting of Shareholders of the Company (including without
limitation the Annual Meeting at which this Plan is approved by the
shareholders) shall be automatically granted as of the date of such Annual
Meeting a Non-Qualified Option to purchase a number of shares of Stock equal to
$10,000 divided by the Fair Market Value of a share of Stock on the date of
grant, rounded up to the next whole share; provided, that no such Non-Qualified
Option granted to any particular Outside Director on a particular date shall
cover more than 5,000 shares.
Each person who is elected to be an Outside Director between Annual
Meetings shall be automatically granted as of the date of such election a
Non-Qualified Option to purchase a number of shares calculated by (1) dividing
$10,000 by the Fair Market Value of a share of Stock on the date of grant, (2)
multiplying the lesser of that result or 5,000 shares by a fraction in which the
numerator is 365 minus the number of days that have elapsed from the date of the
most recent Annual Meeting to the date of election of the Outside Director and
the denominator is 365, and (3) rounding that result up to the next whole share.
Each Non-Qualified Option granted pursuant to this paragraph (k) shall
have an exercise price per share equal to the Fair Market Value per share of the
Stock on the date of grant, shall be fully vested upon the date of grant and
shall expire five years after the date of grant.
No further grants of stock options shall be made to any member of the
Board of Directors under Article 8 of the Company's 1994 Non-Qualified Stock
Option Plan (the "1994 Plan") on or after the date this Plan is approved by the
Company's shareholders, it being intended that this paragraph (k) provides a
substitute for options under Article 8 of the 1994 Plan.
SECTION 6. Restricted Stock.
(a) Administration. Shares of Restricted Stock may be issued either
alone or in addition to other awards granted under the Plan. The Committee shall
determine the officers and key employees of the Company and Subsidiaries to
whom, and the time or times at which, grants of Restricted Stock will be made,
the number of shares to be awarded, the time or times within which such awards
may be subject to forfeiture, and all other conditions of the awards. The
Committee may also condition the grant of Restricted Stock upon the attainment
of specified performance goals. The provisions of Restricted Stock awards need
not be the same with respect to each recipient.
(b) Awards and Certificates. The prospective recipient of an award of
shares of Restricted Stock shall not have any rights with respect to such award,
unless and until such recipient has executed an agreement evidencing the award
and has delivered a fully executed copy thereof to the Company, and has
otherwise complied with the then applicable terms and conditions.
(i) Each participant shall be issued a stock certificate in
respect of shares of Restricted Stock awarded under the Plan. Such
certificate shall be registered in the name of the participant, and
shall bear an appropriate legend referring to the terms, conditions,
and restrictions applicable to such award, substantially in the
following form:
"The transferability of this certificate and the shares of
stock represented hereby are subject to the terms and
conditions (including forfeiture) of WTC Industries, Inc. 1996
Stock Plan and an Agreement entered into between the
registered owner and the Company. Copies of such Plan and
Agreement are on file in the offices of the Company."
(ii) The Committee shall require that the stock certificates
evidencing such shares be held in custody by the Company until the
restrictions thereon shall have lapsed, and that, as a condition of any
Restricted Stock award, the participant shall have delivered a stock
power, endorsed in blank, relating to the Stock covered by such award.
(c) Restrictions and Conditions. The shares of Restricted Stock awarded
pursuant to the Plan shall be subject to the following restrictions and
conditions:
(i) Subject to the provisions of this Plan and the award
agreement, during a period set by the Committee commencing with the
date of such award (the "Restriction Period"), the participant shall
not be permitted to sell, transfer, pledge or assign shares of
Restricted Stock awarded under the Plan. Within these limits, the
Committee may provide for the lapse of such restrictions in
installments where deemed appropriate.
(ii) Except as provided in paragraph (c)(i) of this Section 6,
the participant shall have, with respect to the shares of Restricted
Stock, all of the rights of a shareholder of the Company, including the
right to vote the shares and the right to receive any cash dividends.
The Committee, in its sole discretion, may permit or require the
payment of cash dividends to be deferred and, if the Committee so
determines, reinvested in additional shares of Restricted Stock (to the
extent shares are available under Section 3 and subject to paragraph
(f) of Section 10). Certificates for shares of unrestricted Stock shall
be delivered to the grantee promptly after, and only after, the period
of forfeiture shall have expired without forfeiture in respect of such
shares of Restricted Stock.
(iii) Subject to the provisions of the award agreement and
paragraph (c)(iv) of this Section 6, upon termination of employment for
any reason during the Restriction Period, all shares still subject to
restriction shall be forfeited by the participant.
(iv) In the event of special hardship circumstances of a
participant whose employment is terminated (other than for Cause),
including death, Disability or Retirement, or in the event of an
unforeseeable emergency of a participant still in service, the
Committee may, in its sole discretion, when it finds that a waiver
would be in the best interest of the Company, waive in whole or in part
any or all remaining restrictions with respect to such participant's
shares of Restricted Stock.
SECTION 7. Transfer, Leave of Absence, etc.
For purposes of the Plan, the following events shall not be deemed a
termination of employment:
(a) a transfer of an employee from the Company to a Parent Corporation
or Subsidiary, or from a Parent Corporation or Subsidiary to the Company, or
from one Subsidiary to another;
(b) a leave of absence, approved in writing by the Committee, for
military service or sickness, or for any other purpose approved by the Company
if the period of such leave does not exceed ninety (90) days (or such longer
period as the Committee may approve, in its sole discretion); and
(c) a leave of absence in excess of ninety (90) days, approved in
writing by the Committee, but only if the employee's right to reemployment is
guaranteed either by a statute or by contract, and provided that, in the case of
any leave of absence, the employee returns to work within 30 days after the end
of such leave.
SECTION 8. Amendments and Termination.
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration, or discontinuation shall be made (i) which would impair the rights
of an optionee or participant under a Stock Option, Restricted Stock or other
Stock-based award theretofore granted, without the optionee's or participant's
consent, or (ii) which without the approval of the stockholders of the Company
would cause the Plan to no longer comply with Rule 16b-3 under the Securities
Exchange Act of 1934, Section 422 of the Code or any other regulatory
requirements.
The Committee may amend the terms of any award or option theretofore
granted, prospectively or retroactively, but, subject to Section 3 above, no
such amendment shall impair the rights of any holder without his consent.
Without limiting the generality of the foregoing, the Committee (or if there is
no Committee, then the Board) shall have the authority to accelerate the vesting
of any or all outstanding options or awards in the event of any actual or
threatened change in control of the Company. The Committee may also substitute
new Stock Options for previously granted options, including previously granted
options having higher option prices.
SECTION 9. Unfunded Status of Plan.
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
participant or optionee by the Company, nothing contained herein shall give any
such participant or optionee any rights that are greater than those of a general
creditor of the Company. In its sole discretion, the Committee may authorize the
creation of trusts or other arrangements to meet the obligations created under
the Plan to deliver Stock or payments in lieu of or with respect to awards
hereunder, provided, however, that the existence of such trusts or other
arrangements is consistent with the unfunded status of the Plan.
SECTION 10. General Provisions.
(a) The Committee may require each person purchasing shares pursuant to
a Stock Option under the Plan to represent to and agree with the Company in
writing that the optionee is acquiring the shares without a view to distribution
thereof. The certificates for such shares may include any legend which the
Committee deems appropriate to reflect any restrictions on transfer.
All certificates for shares of Stock delivered under the Plan pursuant
to any Restricted Stock or other Stock-based awards shall be subject to such
stock-transfer orders and other restrictions as the Committee may deem advisable
under the rules, regulations, and other requirements of the Securities and
Exchange Commission, any stock exchange upon which the Stock is then listed, and
any applicable Federal or state securities laws, and the Committee may cause a
legend or legends to be put on any such certificates to make appropriate
reference to such restrictions.
(b) Subject to paragraph (d) below, recipients of Restricted Stock and
other Stock-based awards under the Plan (other than Stock Options) are not
required to make any payment or provide consideration other than the rendering
of services.
(c) Nothing contained in this Plan shall prevent the Board of Directors
from adopting other or additional compensation arrangements, subject to
stockholder approval if such approval is required; and such arrangements may be
either generally applicable or applicable only in specific cases. The adoption
of the Plan shall not confer upon any employee of the Company or any Subsidiary
any right to continued employment with the Company or a Subsidiary, as the case
may be, nor shall it interfere in any way with the right of the Company or a
Subsidiary to terminate the employment of any of its employees at any time.
(d) Each participant shall, no later than the date as of which any part
of the value of an award first becomes includible as compensation in the gross
income of the participant for Federal income tax purposes, pay to the Company,
or make arrangements satisfactory to the Committee regarding payment of, any
Federal, state, or local taxes of any kind required by law to be withheld with
respect to the award. The obligations of the Company under the Plan shall be
conditional on such payment or arrangements and the Company and Subsidiaries
shall, to the extent permitted by law, have the right to deduct any such taxes
from any payment of any kind otherwise due to the participant. With respect to
any award under the Plan, if the terms of such award so permit, a participant
may elect by written notice to the Company to satisfy part or all of the
withholding tax requirements associated with the award by (i) authorizing the
Company to retain from the number of shares of Stock that would otherwise be
deliverable to the participant, or (ii) delivering to the Company from shares of
Stock already owned by the participant, that number of shares having an
aggregate Fair Market Value equal to part or all of the tax payable by the
participant under this Section 10(d). Any such election shall be in accordance
with, and subject to, applicable tax and securities laws, regulations and
rulings.
(e) At the time of grant, the Committee may provide in connection with
any grant made under this Plan that the shares of Stock received as a result of
such grant shall be subject to a repurchase right in favor of the Company,
pursuant to which the participant shall be required to offer to the Company upon
termination of employment for any reason any shares that the participant
acquired under the Plan, with the price being the then Fair Market Value of the
Stock or, in the case of a termination for Cause, an amount equal to the cash
consideration paid for the Stock, subject to such other terms and conditions as
the Committee may specify at the time of grant. The Committee may, at the time
of the grant of an award under the Plan, provide the Company with the right to
repurchase, or require the forfeiture of, shares of Stock acquired pursuant to
the Plan by any participant who, at any time within one year after termination
of employment with the Company, directly or indirectly competes with, or is
employed by a competitor of, the Company.
(f) The reinvestment of dividends in additional Restricted Stock at the
time of any dividend payment shall only be permissible if the Committee (or the
Company's chief financial officer) certifies in writing that under Section 3
sufficient shares are available for such reinvestment (taking into account then
outstanding Stock Options and other Plan awards).
SECTION 11. Effective Date of Plan.
The Plan shall be effective on the date it is approved by a vote of the
holders of a majority of the Stock present and entitled to vote at a meeting of
the Company's shareholders.
Adopted by the Board of Directors: September 24, 1996
Approved by Stockholders: October 29, 1996
EXHIBIT 23
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 March 17, 1997
(March 26, 1997 as to the third paragraph of Note 16), appearing in this Annual
Report on Form 10-KSB of WTC Industries, Inc. for the year ended December 31,
1996.
Deloitte & Touche LLP
Minneapolis, Minnesota
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statements of operations found on
pages 29 and 30 of the Company's Form 10-KSB for the year ended December 31,
1996 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 53,324
<SECURITIES> 0
<RECEIVABLES> 651,011
<ALLOWANCES> 19,000
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