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, 1997
Commission file number
0-19622
WTC Industries, Inc.
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(Name of Small Business Issuer in Its Charter)
Delaware 38-2308668
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(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
150 Marie Avenue East, West St. Paul, Minnesota 55118
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (612)-450-4913
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Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
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(Title of Class)
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes _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. $3,284,685
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.
$1,887,642 as of March 6, 1998
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.
11,035,180 shares of Common Stock as of March 6, 1998
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (check one):
Yes ___ No _x_
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
WTC Industries, Inc. and its wholly-owned subsidiaries (collectively the
"Company" or "WTC") develop, manufacture, and market water filtration and
purification products for commercial and personal use. Filtration products
remove or reduce many undesirable contaminants found in water including lead,
chlorine, protozoan cysts (such as cryptosporidium and giardia), bad taste and
odor. Purification products have the added benefit of devitalizing or removing
viruses, bacteria and parasites.
Many of the Company's purification products contain PentaPure(R) iodinated resin
("PentaPure(R)") and other patented and proprietary technology and
configurations. The PentaPure(R) technology was originally developed by Kansas
State University ("KSU") and has been licensed to the Company by the Kansas
State University Research Foundation ("KSURF") on an exclusive basis.
PentaPure(R) and other state of the art technologies, when applied in the
Company's unique purification products, devitalize bacteria and viruses, remove
protozoa and reduce other targeted contaminants in drinking water. Such systems
are capable of making virtually any source water microbiologically fit to drink
and better tasting. The Company's products fall into the following categories:
systems and cartridges for use by original equipment manufacturers (OEMs),
portable systems, point-of-use systems, point-of-entry systems, mobile
purification systems and commercial systems. The Company's products are suitable
for a broad range of applications including: home, personal travel, recreation,
military, emergency use, commercial and industrial.
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
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also contributed significant tooling, product design and manufacturing
capabilities as well as a family of patented devices using the PentaPure(R)
technology.
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. These factors and others have
created a significant need for products that provide effective filtration and
purification of water for human consumption as well as 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, in recent years, there
have been a number of instances where municipally treated water has been the
cause of 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. 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
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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.
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.
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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 KSU developed and patented a unique
iodine-based technology for the purification of drinking water. Iodine, in its
natural state, exists as an I[2] molecule. Such I[2] iodine would be consistent
with that found in an iodine tablet commonly used by campers, travelers and the
military. The original technology developed by KSU was based on the process of
artificially creating an I[3] (tri-iodide) molecule and then bonding it to an
anion exchange resin bead. When tested by running bacteria contaminated water
through a bed of this resin, it was shown to be approximately 1,000 times more
effective at killing water-borne bacteria instantly than iodine found in an
iodine tablet. This tri-iodide resin was not particularly effective, however, at
killing viruses and parasites found in certain water.
In 1981, KSU successfully developed and patented a new improved process
resulting in an I[5] (penta-iodide) resin. Researchers determined that the I[5]
resin was 1,000 times more effective than the I[3] resin, or 1,000,000 times
more effective than an I[2] molecule alone, such as would be found in an iodine
tablet. This new technology was also very effective at killing viruses and had
significant disinfection ability against the more resilient protozoan family of
organisms when properly engineered into a treatment system.
Through a complex proprietary process, I[5] ions are attached to resin beads
which become positively charged. This positive charge attracts the negatively
charged contaminants found in water such as bacteria, viruses and protozoa. As
contaminated water passes through a bed of the I[5] resin, iodine is instantly
transferred to the microorganisms 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.
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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 filtration process, 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 the PentaPure(R)
technology 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 silver impregnated carbon
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 believes that PentaPure(R), when combined with filtration methods
using solid carbon blocks, provides a very high level of drinking water
purification. 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.
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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.
The Company's products can be grouped into six categories: systems and
cartridges for 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 either 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.
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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) silver impregnated carbon 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 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
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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 marketed to niche market OEM customers both in
the U.S. and internationally. 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.
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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
strengths reside in the technical advantages of the 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 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 is focusing its efforts on OEM customers with
the PentaPure(R) InLine Systems product line. 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 niche markets through strategic
marketing partners with the Company maintaining its role as the manufacturer.
DISTRIBUTION AND SALES
U.S. MARKET
Beginning in late 1996 and into 1997, the Company began a new marketing strategy
that focuses the Company's sales and distribution efforts to OEM customers.
Because the Company has limited capital strength, the Company is implementing
sales strategies that utilize the brand
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recognition and the sales and distributions networks of the OEM. In prior years,
the Company had established a network of independent sales representatives which
had office locations throughout the U.S. This arrangement had limited success.
The Company, in a limited capacity, does continue to support this network of
sales representatives in target markets such as the outdoor recreation,
catalogue and mail order, housewares, hardware home centers and specialty
retailer markets.
During 1997, the Company's domestic sales accounted for 36% of total net sales.
Amana Inc., the largest domestic customer, accounted for 25% of total net sales.
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 1997, the Company's international sales accounted for 64% of total net
sales. Two of the Company's largest customers during 1997, representing 28% of
total net sales, were Ekonet and U.S. Pacific Expo.
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
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(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. 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.
In 1997 and prior years, Bowman Industries, Inc. ("Bowman") provided production
and assembly services exclusively to the Company. The Company paid Bowman an
amount equal to all costs and operating expenses incurred by Bowman. The Company
treated its arrangement with Bowman as an independent contractor relationship.
During the years ended December 31, 1997 and 1996, the Company paid Bowman a
total of $289,000 and $254,500, respectively, under this arrangement. Beginning
on January 1, 1998, the employees of Bowman became employees of the Company and
all operating expenses related to Bowman will be directly paid to the vendors by
the Company.
HYBRID TECHNOLOGIES CORP.
The Company utilizes the services of Hybrid Technologies Corp. ("Hybrid"), an
independent contractor, to manufacture the 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 the iodinated 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, and is also the CEO, Chairman of the Board and
largest shareholder 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
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ended December 31, 1997 and 1996, the Company paid Tapemark a total of $110,900
and $74,600, respectively, for these services.
POROUS MEDIA CORPORATION
Effective June 15, 1997, the Company entered into a five year requirements
contract with Porous Media under which the Company will purchase all of its cyst
filter requirements for the PentaPure(R) Sport Purification System and Spring(R)
Filtration System. The Company agreed to purchase a minimum of 100,000 filters
per year throughout the term of the agreement at an average price of $1.72 per
filter. 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
the years ended December 31, 1997 and 1996. Royalties for 1997 were settled with
the issuance of 75,000 shares of the Company's common stock.
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 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 PentaPure(R) in their own products to place the trademark
on their packaging and marketing material. The Company believes that brand
recognition of 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
<PAGE>
professor of microbiology and immunology at Kansas State University; Gerald
Enoksen, a consulting chemical engineer and principal of Hybrid Technologies,
Corp.; and Michael Kuehn, a consulting design engineer. The Company's current
research and development efforts is to acquire National Sanitation Foundation
(NSF) approval for the PentaPure(R) InLine Filtration Systems product line in
1998. NSF provides independent certification regarding the Company's performance
claims of its filtration devices.
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, 1998, the Company had 17 full time employees, consisting of one
in administration, five in sales and marketing, two in finance, and nine 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.
<PAGE>
ITEM 2. PROPERTIES
The Company leased 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 lease, which was terminated on March 1,
1998, the Company paid base rent of $6,424 per month and a pro rata share of
real estate taxes and operating expenses. During 1997, the average total monthly
rent for this space was $10,500. The Company was released from its lease
commitment without penalty.
On March 1, 1998, the Company entered into a twelve month lease with Tapemark
for manufacturing and office space. The new address for the corporate offices is
150 Marie Avenue East, West St. Paul, Minnesota 55118-4000. The lease term is
one year with rent consisting of an option for 112,000 shares of the Company's
common stock at a price of $0.3125 per share. The option is immediately
exercisable with an expiration date of December 31, 2000. The Company will make
no cash payments to Tapemark for rent, general utilities, pro rata taxes and
special assessments, or build-out costs. The Company will be responsible for
incremental utilities.
The Company also leases approximately 10,500 square feet of warehouse space at
14495 23rd Avenue North, Minneapolis, Minnesota 55447. Under the lease, which
expires in April 1998, the Company pays base rent of $3,338 per month and a pro
rata share of real estate taxes and operating expenses. During 1997, the average
total monthly rent for this space was $5,384.
On February 23, 1998, the Company entered into a new lease agreement for
approximately 8,200 square feet of warehouse space at 2955 Lone Oak Circle,
Eagan, Minnesota 55121. Under the term of a lease, which expires on February 28,
2001, the Company pays base rent of $2,369 per month for the first two years and
$2,538 for the third year and a pro rata share of real estate taxes and
operating expenses. The Company has the option to cancel the lease on February
29, 2000 for a cancellation fee of $4,000.
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 continues to renew the lease every six months. The Company pays base
rent of $250 per month and also the operating expenses associated with the
building.
ITEM 3. LEGAL PROCEEDINGS
This item is not applicable.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF
SECURITY HOLDERS
This item is not applicable.
<PAGE>
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.
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
inter-dealer 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.
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PERIOD LOW BID HIGH BID
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1996 January 1 - March 31 $ 1 5/8 $ 3 1/4
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April 1 - June 30 $ 1 3/4 $ 2 5/8
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July 1 - September 30 $ 1 1/4 $ 2 3/8
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October 1 - December 31 $ 1 1/4 $ 2 3/8
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1997 January 1 - March 31 $ 1 $ 1 15/16
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April 1 - June 30 $ 13/16 $ 1
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July 1 - September 30 $ 11/16 $ 95/100
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October 1 - December 31 $ 1/4 $ 13/16
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1998 January 1 - March 6 $ 5/16 $ 27/32
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The Company's Common Stock was held by approximately 700 stockholders as of
March 6, 1998.
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
<PAGE>
commitments in the normal course of business. The Company has incurred net
losses of $1,512,760 and $3,038,536, and cash used by operating activities was
$1,691,400 and $2,314,394, for the years ended December 31, 1997 and 1996,
respectively. In addition, as of December 31, 1997, the Company has a deficiency
in working capital of $1,668,801 and an accumulated deficit of $14,286,380.
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 1997 were met principally through the issuance
of common stock in lieu of cash payment for the settlement of certain expenses
and debt aggregating $299,134, borrowings of $1,100,000 from the Chairman of the
Board, and borrowings of $500,000 from a company affiliated with the Chairman of
the Board.
Management's plans to continue as a going concern include the following efforts
to generate the necessary cash flow to meet the Company's working capital needs
until sufficient operating cash flows can be generated to support the Company's
cost structure: a) raising additional capital through private or public
placements of debt or equity securities or through other sources; b) converting
existing short term and long term debt into equity securities; c) pursuing and
obtaining NSF and EPA approval for the new PentaPure(R) InLine filtration and
purification systems to increase sales to OEM customers in both the domestic and
international markets; d) identifying alternative uses for the PentaPure(R)
technology in other industry segments, such as the medical filtration and
medical devices segments, to maximize the Company's technology to its
competitive advantage; e) continuing to reduce non-valued added selling, general
and administrative expenses; and f) improving the Company's production processes
and quality controls to increase gross profit margins. There is no assurance
that these plans can be successfully accomplished.
The 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
1997 COMPARED TO 1996
NET SALES. The Company had net sales of $3,284,685 for the year ended December
31, 1997 representing an increase of 11.8% from prior year net sales of
$2,937,196. During 1997 the average selling prices of the Company's products
generally remained unchanged. Therefore, the increase in sales reflects
increases in the number of units sold as well as a change in product mix.
The increase in total net sales is attributable to the Company's increase in
domestic sales of 30% over 1996. In 1997, domestic sales were $1,186,000 or 36%
of total net sales, compared to $915,000 or 31% in 1996. 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. This
customer accounted for 25% of total net sales for 1997 compared to 8% in 1996.
The Company anticipates increased revenues in the domestic marketplace because
of
<PAGE>
regulatory approval for the PentaPure(R) InLine systems and focusing its
marketing efforts towards new and existing OEM customers.
International sales were 64% of total net sales in 1997 compared to 69% in 1996.
In the first half of 1997, the Company generated revenue growth in Asia from a
new distributor relationship in the countries of Korea and Malaysia, which
accounted for 12% of total net sales in 1997. However, in the second half of the
year, the demand for the Company's products dropped significantly in these
markets due to the Asian financial crisis and the strong U.S. dollar.
Ekonet Sp. z.o.o., located in Poland, continues to be the Company's largest
international customer with 16% of total net sales, compared to 30% in 1996. In
late 1997, the Company made arrangements with Ekonet to sell direct to Ekodar,
their largest distributor in Russia. As a result, sales to Ekonet will be
significantly less than in prior years. The Company anticipates sales to Ekodar
in 1998 will more than offset the sales decline to Ekonet.
The Company's international sales tend to consist of a limited number of
high-value shipments. The Company's dependence on a limited number of high-value
transactions, and the inability to control the timing of some of those
transactions, will, at the current sales levels, 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. Beginning in the third quarter
of 1997, foreign currency exchange rate fluctuations had a material negative
impact on the demand for the Company's products in foreign markets, especially
in the Asian market.
COST OF GOODS SOLD. For the years ended December 31, 1997 and 1996, the cost of
goods sold was $2,937,670 and $3,092,794, representing 89.4% and 105.3% of total
net sales, respectively. A significant factor contributing to the Company's
improvement in cost of goods sold was the reduction of slow moving or obsolete
inventory reserve relative to total net sales. The Company wrote off $108,000
and $463,000 in 1997 and 1996, respectively, for either slow moving or obsolete
inventory. These write-offs represent 3.3% and 15.8% of net sales in 1997 and
1996, respectively.
To reduce large inventory write-offs and implement new production methods and
quality assurance programs, the Company hired a new Director of Manufacturing.
Improvements in these areas during the year helped reduce manufacturing costs
and costs associated with returned goods or defective products. The Company is
attempting to evaluate and improve its raw material component costs and
manufacturing processes and further reduce its production overhead expenses.
GROSS PROFIT (LOSS). For the years ended December 31, 1997 and 1996, the Company
recognized a gross profit of $347,015 and a gross (loss) of $(155,598),
respectively, representing
<PAGE>
10.6% and (5.3)% of total net sales. The Company believes it can continue to
improve its gross profit margins. However, margins may be negatively impacted if
the Company is successful in increasing sales to OEMs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the years ended December 31,
1997 and 1996, selling, general and administrative expenses were $1,371,663 and
$2,388,065, representing 41.8% and 81.3% of total net sales, respectively.
SALES AND MARKETING EXPENSES - For the years ended December 31, 1997 and 1996,
sales and marketing expenses were $724,355 and $1,249,500, respectively,
representing 22.1% and 42.5% of total net sales, respectively.
Significant reductions in selling and marketing expenses in 1997 were due
primarily to reductions in salaries and related expenses of $213,000 due to
lower head count, commissions to independent sales representative expenses of
$130,000, and marketing brochures and advertising expenses of $82,000.
Beginning in late 1996 and into 1997, the Company began a new marketing strategy
that focuses the Company's sales and distribution efforts to OEM customers.
Because the Company has limited capital, the Company is implementing sales
strategies that utilize the brand recognition of the OEM and the sales and
distributions networks of the OEM. The Company expects sales and marketing
expenses to continue to decrease in 1998 due to increased sales to OEM
customers, which absorb their own sales and marketing expenses.
The Company continues to use independent sales representatives in marketing its
products internationally. 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, 1997 and
1996, general and administrative expenses were $647,308 and $1,138,565,
respectively, representing 19.7% and 38.8% of total net sales, respectively.
The decrease in general and administrative expenses in 1997 was primarily due to
reductions in salaries and related expenses of $149,000 due to lower head count,
bad debt expense of $48,000, professional and outside service fees of $128,000,
and litigation settlements of $70,000. The Company incurred significant
professional fees and outside service fees in 1996 related to resolving
litigation matters and expenses associated with an independent evaluation of the
Company to raise capital.
On March 1, 1998, the Company relocated it's corporate offices to the Tapemark
Company. The lease term is for one year with rent consisting of an option for
112,000 shares of the Company's common stock at a price of $0.3125 per share.
The Company will make no cash payments to Tapemark for rent, general utilities,
pro rata taxes and special assessments, or build-out costs. The Company
anticipates that it will significantly reduce it's operating expenses as a
result of this
<PAGE>
lease. In addition, Management continues to evaluate other general and
administrative expenses that can be either reduced or eliminated to help the
Company reach profitability.
RESEARCH AND DEVELOPMENT EXPENSES. For the years ended December 31, 1997 and
1996, research and development expenses were $140,834 and $169,185,
respectively. While the Company is committed to its long-term investment in
research and development, such expenses tend to fluctuate related to, in part,
the Company's available resources. The Company's current research and
development efforts is to acquire NSF approval for the PentaPure(R) InLine
Filtration Systems product line in 1998.
NET OPERATING LOSS CARRYFORWARDS. The Company has a federal net operating loss
("NOL") carryforward of approximately $13,300,000 at December 31, 1997.
Utilization of approximately $6,000,000 of the NOL carryforward is limited to
approximately $29,000 per year through 2009 based on an Internal Revenue Code
limitation, as prescribed by Section 382, imposed as a result of a change in
controlling interest in the Company in 1994. This change in controlling interest
resulted in part from the Ecomaster/WAPCO transactions. The NOL carryforward may
be further limited by ownership changes occurring subsequent to December 31,
1994.
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's international marketing and distribution relationships had mixed
results in 1996. Ekonet Sp. z.o.o., located in Poland, was 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.
The Company's international sales tend to consist of a limited number of
high-value shipments. 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
<PAGE>
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 $3,092,794 and $2,875,884, representing 105.3% 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.
GROSS (LOSS) PROFIT. For the years ended December 31, 1996 and 1995, the Company
recognized a gross (loss) of ($155,598) and a gross profit of $6,620,
respectively, representing (5.3%) and 0.2% of net sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the years ended December 31,
1996 and 1995, selling, general and administrative expenses were $2,388,065 and
$2,612,115, representing 81.3% 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 $1,249,500 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 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 $1,138,565 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.
<PAGE>
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 on
existing products.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had a working capital deficit (total
current liabilities in excess of total current assets) of $1,668,801 compared
with a working capital deficit of $713,153 as of December 31, 1996. During 1997,
the Company funded its operations primarily through cash advances of $1,100,000
and $500,000 from the Chairman of the Board and a company affiliated with the
Chairman, respectively.
For the year ended December 31, 1997 cash decreased $48,083 due to cash used in
operations of $1,691,400 offset by $1,593,860 from financing activities and
$49,457 from investing activities. Significant cash uses by operations included
the net loss and decreases in current liabilities of $576,133 and an increase in
inventory, exclusive of the provision for obsolete inventory, of $540,553,
partially offset by a decrease in accounts receivable of $478,708. Net cash used
in investing activities consisted of purchases of property and equipment of
$42,127 less applications of restricted cash of $86,810. Net cash provided by
financing activities resulted from cash advances from notes payable of
$1,100,000 from the Chairman of the Board and $500,000 from a company affiliated
with the Chairman of the Board, and proceeds of $15,000 from the sale of common
stock, which was partially offset by payments on long-term debt of $21,140.
For the year ended December 31, 1996 cash increased $19,835 primarily due to
$2,339,680 from financing activities which was essentially offset by cash used
in operations of $2,314,394. Significant cash uses by operations included the
net loss, 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.
The Company estimates that it will have working capital needs of approximately
$1,000,000 during 1998 to fund its operations and continue market introduction
of the PentaPure(R) InLine systems product line. The Company also anticipates
that it will have to fund growth in inventories and accounts receivable. The
Company anticipates that it will have capital expenditures for equipment and
computer hardware and software enhancements of approximately $150,000 in 1998.
<PAGE>
At December 31, 1997, the Company has a $750,000 note payable to a financial
institution which is secured by a security interest in the Company's assets, is
guaranteed by the Chairman of the Board, and is due on May 31, 1998. If the note
is not renewed, and the Company is required to pay off the $750,000 balance, the
Company's liquidity will be adversely affected.
On January 1, 1998, the Company entered into an agreement to extend the
$1,100,000 demand note payable to the Chairman through June 30, 1998. In
addition, $30,673 of interest accrued at December 31, 1997 was included in the
new note payable. Interest will accrue at a rate of prime plus 1% payable at
maturity.
On January 1, 1998, the Company entered into an agreement to extend the $500,000
demand note payable to a company affiliated with the Chairman through June 30,
1998. Interest will accrue at a rate of prime plus 2% payable at maturity.
On January 7, 1998, the Company entered into an agreement to borrow an
additional $500,000 from the Chairman. The loan matures on June 30, 1998 and
accrues interest at a rate of prime plus 1%. Through March 6, 1998, $200,000 had
been advanced under this agreement.
Effective June 15, 1997, the Company entered into a requirements contract. The
minimum commitment is approximately $172,000 per contract year beginning June
15. Through December 31, 1997, the Company had fulfilled $36,000 of this
commitment. Although the Company's performance, up to $100,000, is guaranteed by
the Chairman of the Board, failure of the Company to perform under this
agreement could have a significant negative impact on the Company's financial
resources.
The Company's plan of operations over the next 12 months is to further develop
its OEM customer base and its sales of the PureIt(R) InLine point-of-use systems
in both the domestic and international markets. In addition, the Company will
continue to develop new marketing and distribution channels in international
markets and will attempt to increase sales through existing channels.
The Company is also evaluating its available options to raise capital. These
options include, but are not limited to, private placements of debt or equity
securities to accredited investors, registered offerings of the Company's common
stock and strategic partnership or joint venture arrangements. In addition, the
Company will evaluate the possibility of converting to equity some or all of its
outstanding short term and long term debt. There is no assurance that the
Company will be able to obtain additional financing, or that the terms of any
such financing will be acceptable to the Company. If the Company's efforts to
raise additional capital are not successful, the Company's operations may be
negatively impacted.
<PAGE>
FOREIGN CURRENCY EFFECTS
The Company's transactions are denominated in U.S. dollars; as such,
fluctuations in foreign currency exchange rates have historically had little
impact on the Company. However, beginning in third quarter 1997, foreign
currency exchange rate fluctuations had a material negative impact on the demand
for the Company's products in certain foreign markets, especially in the Asian
market.
EFFECTS OF INFLATION
The Company believes that, during the periods discussed above, inflation has not
had a material impact on the Company's business.
IMPACT OF RECENT ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 128,
EARNINGS PER SHARE, effective December 31, 1997. SFAS No. 128 requires the
Company to report both basic and diluted earnings pre share (EPS). The change in
methodology of the basic and diluted EPS calculations had no effect on the
Company's EPS as previously reported. Net loss per common share for 1997 and
1996 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 antidilutive.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No.
131 is effective for the Company for the year ended December 31, 1998, and
requires expanded disclosure regarding the Company's business segments,
geographic sales and major customers. Although the Company has not completed its
evaluation of SFAS No. 131, it is not expected to require a significant change
to the Company's current disclosure.
YEAR 2000 COMPLIANCE
The Company has begun evaluating its computer hardware and software for
compliance with Year 2000 requirements, and believes that expected costs for
compliance will not be material to its results of operations or liquidity. The
Company is in the process of becoming Year 2000 compliant at an initial
estimated cost of $10,000. In addition, the Company is proactively requiring key
suppliers to certify their compliance.
NOTIFICATION REGARDING FORWARD LOOKING INFORMATION
Except for historical information contained herein, certain statements are
forward looking statements that involve risks and uncertainties, including, but
not limited to, the results of financing efforts and sufficiency of working
capital requirements, product demand and market acceptance risks, customer mix,
the effect of economic conditions including the Asian economic
<PAGE>
downturn, the impact of competitive products and pricing, product development,
commercialization and technological difficulties, supply constraints or
difficulties, and actual purchases under agreements. The actual results that the
Company achieves may differ materially from these forward looking statements due
to such risks and uncertainties. The Company undertakes no obligation to revise
any forward looking statements in order to reflect events or circumstances that
may arise after the date of this 10-KSB report. Readers are urged to carefully
review and consider the various disclosures made by the Company's other filings
with the Securities and Exchange Commission that advise interested parties of
the risks and uncertainties that may effect the Company's financial condition
and results of operations.
<PAGE>
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:
Independent Auditors' Report 28
Consolidated Balance Sheets as of December 31, 1997 and 1996 29
Consolidated Statements of Operations for the Years Ended
December 31, 1997 and 1996 30
Consolidated Statements of Stockholders' Deficit for the
Years Ended December 31, 1997 and 1996 31
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997 and 1996 32
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1997 and 1996 34
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
WTC Industries, Inc. and subsidiaries
West Saint Paul, Minnesota
We have audited the accompanying consolidated balance sheets of WTC Industries,
Inc. (the Company) as of December 31, 1997 and 1996 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
the Company'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 the Company as of
December 31, 1997 and 1996 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 the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company'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.
Minneapolis, Minnesota
March 6, 1998
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
1997 1996
<S> <C> <C>
ASSETS (NOTE 4)
CURRENT ASSETS:
Cash $ 5,241 $ 53,324
Accounts receivable, net of allowance for doubtful accounts
of $16,000 and $19,000 153,303 632,011
Inventories (Note 3) 1,084,448 651,895
Prepaid expenses and other 8,120 31,651
------------ ------------
Total current assets 1,251,112 1,368,881
PROPERTY AND EQUIPMENT, net (Notes 3 and 4) 245,659 387,987
OTHER ASSETS (Notes 2 and 4) 38,407 144,344
------------ ------------
$ 1,535,178 $ 1,901,212
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Demand notes payable to related parties (Notes 4 and 12) $ 1,600,000 $ 186,407
Note payable to bank (Note 4) 750,000 750,000
Current maturities of long-term obligations (Note 4) 5,729 9,309
Accounts payable 199,355 624,045
Customer deposits 100,854 66,639
Accrued interest payable 87,895 42,790
Accrued expenses 176,080 402,844
------------ ------------
Total current liabilities 2,919,913 2,082,034
LONG-TERM OBLIGATIONS, net of current maturities (Note 4) 1,458,654 1,463,941
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' DEFICIT (Notes 4, 5, and 6):
Common stock 110,352 106,917
Additional paid-in capital 11,347,639 11,021,940
Officer receivable (15,000)
Accumulated deficit (14,286,380) (12,773,620)
------------ ------------
(2,843,389) (1,644,763)
------------ ------------
$ 1,535,178 $ 1,901,212
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
1997 1996
<S> <C> <C>
NET SALES (Note 10) $ 3,284,685 $ 2,937,196
COST OF GOODS SOLD (Notes 9, 11 and 12) 2,937,670 3,092,794
------------ ------------
GROSS PROFIT (LOSS) 347,015 (155,598)
EXPENSES:
Selling, general, and administrative (Note 11) 1,371,663 2,388,065
Research and development 140,834 169,185
------------ ------------
1,512,497 2,557,250
------------ ------------
LOSS FROM OPERATIONS (1,165,482) (2,712,848)
OTHER EXPENSE (INCOME):
Interest income (306) (2,547)
Interest expense 294,433 244,771
Other 53,151 83,464
------------ ------------
347,278 325,688
------------ ------------
NET LOSS $ (1,512,760) $ (3,038,536)
============ ============
NET LOSS PER COMMON SHARE - Basic and Diluted $ (0.14) $ (0.30)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 10,895,000 10,153,000
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
------------------ ------------------- PAID-IN OFFICER ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT DEFICIT
-------- --------- ---------- --------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 6,800 $ 6,800 8,289,773 $ 82,898 $ 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) 2,400,000 24,000 2,976,000 3,000,000
Conversion of preferred stock into
common stock (Note 5) (6,800) (6,800) 1,925 19 6,781
Net loss (3,038,536) (3,038,536)
------- ------- ---------- --------- ----------- --------- ------------ ------------
BALANCE AT DECEMBER 31, 1996 -- -- 10,691,698 106,917 11,021,940 (12,773,620) (1,644,763)
Issuance of common stock in
settlement of lawsuit (Note 7) 25,000 250 49,750 50,000
Issuance of common stock for
payment of royalty fees (Note 11) 75,000 750 74,250 75,000
Exercise of stock options (Note 6) 50,000 500 29,500 $ (15,000) 15,000
Conversion of debt into common
stock (Note 4) 193,482 1,935 172,199 174,134
Net loss (1,512,760) (1,512,760)
------- ------- ---------- --------- ----------- --------- ------------ ------------
BALANCE AT DECEMBER 31, 1997 -- $ -- 11,035,180 $ 110,352 $11,347,639 $ (15,000) $(14,286,380) $ (2,843,389)
======= ======= ========== ========= =========== ========= ============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
1997 1996
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(1,512,760) $(3,038,536)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 182,453 211,042
Amortization 19,126 75,938
Provision for obsolete inventory 108,000 463,000
Royalty fees paid in common stock 75,000
Provision for loss on minimum purchase commitment 54,000
(Gain) loss on sale of fixed assets (2,772) 66,368
Changes in operating assets and liabilities:
Accounts receivable 478,708 155,764
Inventories (540,553) (269,352)
Current and other assets 23,531 32,445
Accounts payable (424,690) (279,929)
Other accrued liabilities (151,443) 268,866
----------- -----------
Net cash used in operating activities (1,691,400) (2,314,394)
INVESTING ACTIVITIES:
Purchases of property and equipment (42,127) (152,357)
Proceeds from sale of fixed assets 4,774
Restricted cash 86,810 146,906
----------- -----------
Net cash provided by (used in) investing activities 49,457 (5,451)
FINANCING ACTIVITIES:
Proceeds of loans from director/stockholder 1,100,000 400,000
Proceeds from collection of promissory note 900,000
Proceeds of loan from affiliated entity 500,000
Payments on loan from director/stockholder (12,473)
Payments on loan from affiliated entity (100,000)
Payments on long-term obligations (8,667) (10,320)
Borrowings under bank line of credit 250,000
Proceeds from sale of common stock 15,000 900,000
----------- -----------
Net cash provided by financing activities 1,593,860 2,339,680
----------- -----------
NET (DECREASE) INCREASE IN CASH (48,083) 19,835
CASH AT BEGINNING OF YEAR 53,324 33,489
----------- -----------
CASH AT END OF YEAR $ 5,241 $ 53,324
=========== ===========
</TABLE>
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
1997 1996
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -
Cash paid during the year for interest $ 249,328 $ 270,021
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Common stock issued on conversion of long-term
debt and accrued interest 174,134 1,200,000
Common stock issued in exchange for promissory note 15,000 900,000
Common stock issued in settlement of lawsuit, accrued at
December 31, 1996 50,000
Common stock issued for payment of royalty fees 75,000
Amounts due to Former CEO refinanced to long-term debt from
accrued expenses 186,607
Conversion of preferred stock to common stock 6,800
</TABLE>
See notes to consolidated financial statements.
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND MANAGEMENT'S PLANS REGARDING OPERATING LOSSES
AND LIQUIDITY
BUSINESS - WTC Industries, Inc. (WTC) 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 10).
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 $1,512,760 and
$3,038,536, and cash used by operating activities was $1,691,400 and
$2,314,394 for the years ended December 31, 1997 and 1996, respectively.
In addition, as of December 31, 1997, the Company had a deficiency in
working capital of $1,668,801 and an accumulated deficit of $14,286,380.
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 1997 were met principally through the
issuance of common stock in lieu of cash payment for the settlement of
certain expenses and debt aggregating $299,134, borrowings of $1,100,000
from the Chairman of the Board, and borrowings of $500,000 from a company
affiliated with the Chairman of the Board.
Management's plans to continue as a going concern include the following
efforts to generate the necessary cash flow to meet the Company's working
capital needs until sufficient operating cash flows can be generated to
support the Company's cost structure (a) raising additional capital
through private or public placements of debt or equity securities or
through other sources; (b) converting existing short-term and long-term
debt into equity securities; (c) pursuing and obtaining National
Sanitation Foundation and Environmental Protection Agency approval for the
new PentaPure(R) InLine point-of-use filtration and purification systems
to increase sales to OEM customers in both the domestic and international
markets; (d) identifying alternative uses for the PentaPure(R) technology
in other industry segments, such as the medical filtration and medical
devices segments, to maximize the Company's technology to its competitive
advantage; (e) continuing to reduce non-value-added selling, general, and
administrative expenses; and (f) improving the Company's productions
processes and quality controls to increase gross profit margins. 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.
<PAGE>
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.
REVENUE RECOGNITION - The Company recognizes revenue upon shipment of the
product.
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 basis 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. Other assets includes
$78,125 of loan acquisition costs net of accumulated amortization of
$53,864 and $36,739 at December 31, 1997 and 1996, respectively.
TRADEMARKS AND PATENTS- The cost of trademark registration is being
amortized by the straight-line method over five years. 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. At December 31, 1997 and
1996 the Company had trademarks and patents of $98,014 with accumulated
amortization of $97,493 and $95,492, respectively.
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. No impairment occurred during 1997.
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.
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
<PAGE>
variable interest feature of the debt. The carrying value of all other
financial instruments approximates fair value due to the short-term nature
of the instruments.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) NO. 128 - The Company
has adopted SFAS No. 128, EARNINGS PER SHARE, effective December 31, 1997.
SFAS No. 128 requires the Company to report both basic and diluted
earnings per share (EPS). The change in methodology of the basic and
diluted EPS calculations had no effect on the Company's EPS as previously
reported. Net loss per common share for 1997 and 1996 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 representing 3,270,997 and 2,975,269 shares of
common stock at December 31, 1997 and 1996, respectively, have been
excluded from the computations because the effect is antidilutive.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1996
financial statements to conform to the 1997 presentation. These
reclassifications had no impact on net loss or stockholders' deficit as
previously reported.
3. BALANCE SHEET ACCOUNTS
Inventories consisted of the following at December 31:
1997 1996
Raw materials $ 670,943 $ 459,724
Work-in-process 118,557 33,408
Finished goods 294,948 158,763
---------- ----------
$1,084,448 $ 651,895
========== ==========
Property and equipment consisted of the following at December 31:
1997 1996
Office equipment $ 278,340 $ 272,598
Machinery and equipment 573,631 540,583
Leasehold improvements 54,363 54,363
Art 19,825 19,825
---------- ----------
926,159 887,369
Less accumulated depreciation 680,500 499,382
---------- ----------
$ 245,659 $ 387,987
========== ==========
Property and equipment at December 31, 1997 and 1996 includes $28,052 and
$47,046 of equipment under capitalized leases and $14,026 and $25,510 of
related accumulated amortization, respectively. Amortization of the
capital lease property has been included in depreciation expense.
<PAGE>
4. NOTES PAYABLE AND LONG-TERM OBLIGATIONS
Notes payable and long-term obligations consisted of the following at
December 31:
DESCRIPTION 1997 1996
Demand note payable to the Chairman (Note 12) $1,100,000
Demand note payable to a company affiliated with
the Chairman (Note 12) 500,000
Note payable to bank 750,000 $ 750,000
Note payable to Former CEO 186,607
Notes payable from private placement 1,450,000 1,450,000
Capital leases 14,383 23,050
---------- ----------
3,814,383 2,409,657
Less current maturities 2,355,729 945,716
---------- ----------
$1,458,654 $1,463,941
========== ==========
The weighted average interest rate on short-term borrowings outstanding at
December 31, 1997 and 1996 was 9.4% and 8.3%, respectively.
Maturities of long-term obligations at December 31, 1997 are as follows
for the years ending December 31:
1998 $2,355,729
1999 1,456,872
2000 1,782
----------
$3,814,383
==========
DEMAND NOTES PAYABLE TO THE CHAIRMAN AND A COMPANY AFFILIATED WITH THE
CHAIRMAN - At December 31, 1997, the Company had $1,100,000 and $500,000
demand notes payable to the Chairman and a company affiliated with the
Chairman, respectively. These notes payable accrue interest at a rate of
prime (8.5% at December 31, 1997) plus one percent and prime plus two
percent, respectively. Principal and accrued interest were due on December
31, 1997 (see Note 12). Interest expense related to these borrowings
charged to operations during 1997 was $64,000 of which $44,000 is included
in accrued interest payable at December 31, 1997.
NOTE PAYABLE TO BANK - At December 31, 1997 and 1996, the Company had a
$750,000 note payable to a financial institution. The note payable to the
bank accrues interest at prime, is due on May 31, 1998, and is secured by
substantially all of the Company's assets in addition to a guarantee by
the Chairman.
NOTE PAYABLE TO FORMER CEO - 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 noninterest
bearing note payable due March 31, 1997. In 1997, the Company settled the
note payable for $51,372 in cash and issuance of 193,482 shares of the
Company's common stock valued, based on market price of the common stock ,
at $174,134.
<PAGE>
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. The warrants lapsed
without exercise.
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. Other assets include restricted cash of $13 and $86,823 at
December 31, 1997 and 1996, respectively.
5. COMMON AND PREFERRED STOCK
COMMON STOCK - At December 31, 1997 and 1996, the Company had 20,000,000
shares of $.01 par value common stock authorized and 11,035,180 and
10,691,698 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 owned more than 50% of the
outstanding stock of the Company.
The value used for these 1996 transactions was determined, in part, based
upon fairness opinions obtained from an independent securities firm.
PREFERRED STOCK - At December 31, 1997 and 1996, there were 2,000,000
shares of the Company's 9% convertible, cumulative, nonvoting, $1 par
value preferred stock authorized with no shares outstanding. At December
31, 1995, each of the shareholders holding preferred shares had agreed to
waive all accrued but unpaid dividends and convert their preferred shares
into a total of 1,925 shares of common stock. As a result, the Company had
not accrued dividends on its preferred stock subsequent to December 31,
1994. The conversion occurred in 1996.
6. 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 options, exercisable at $7.00 per share,
expired in March 1997. No options are outstanding at December 31, 1997
NONQUALIFIED STOCK OPTION PLAN - During 1994, the Company adopted the 1994
Nonqualified 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
<PAGE>
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. As
of December 31, 1997, 10,437 options have been issued to Outside Directors
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
former Chairman of the Company's Board of Directors. During 1995, options
to purchase 100,000 of the former 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 $0.50 per share
of which 120,000 were exercisable based on certain service vesting
requirements and 280,000 were subject to the Company obtaining cumulative
income before income taxes for 1995 and 1996 equal to or in excess of
$1,000,000. During 1995, 300,000 shares were canceled due to the
resignation of the employees. At December 31, 1996, the 110,000 options
subject to performance criteria were canceled as the Company did not reach
the required level of net income. At December 31, 1997, options to
purchase 190,000 shares remain outstanding and exercisable under the 1994
grant.
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 expertise, 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,
nonqualified 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, 1997, 10,000 options have been issued to Outside
Directors under the 1996 Plan.
<PAGE>
A summary of the stock option transactions under these plans during the
two-year period ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Incentive Weighted
Stock Average
Option 1994 1996 Exercise
Plan Plan Plan Total Price
<S> <C> <C> <C> <C> <C>
Options outstanding at December 31, 1995 250 590,000 -- 590,250 $1.20
Granted (weighted average fair value $1.53) 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
Granted (weighted average fair value $.84) 10,437 803,860 814,297 1.21
Exercised (50,000) (50,000) 0.60
Expired (250) (250) 7.00
Canceled (323,300) (323,300) 1.15
-------- -------- ---------- --------
Options outstanding at December 31, 1997 -- 350,437 490,560 840,997 1.13
======== ======== ========== ========
Options exercisable at December 31, 1996 250 370,000 10,000 380,250 0.93
======== ======== ========== ========
Options exercisable at December 31, 1997 -- 350,437 127,593 478,030 1.04
======== ======== ========== ========
</TABLE>
Options outstanding and exercisable by price range as of December 31, 1997
is as follows:
<TABLE>
<CAPTION>
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 - $1.75 830,560 5.9 $1.11 467,593 $ 1.00
$2.88 10,437 2.9 2.88 10,437 2.88
------- -------
840,997 478,030
======= =======
</TABLE>
The Company applies Accounting Principles Board (APB) Opinion No. 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 options issued to certain directors and employees been
determined based on the fair value at the grant date for awards in 1997
and 1996, 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 as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Net loss, as reported $ (1,512,760) $ (3,038,536)
Net loss, pro forma (1,673,561) (3,053,865)
Basic and diluted loss per share, as reported (0.14) (0.30)
Basic and diluted loss per share, pro forma (0.15) (0.30)
</TABLE>
<PAGE>
The weighted average fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model and represents
the difference between the fair market value on the date of grant and the
option exercise price. The model uses the following weighted-average
assumptions:
1997 1996
Volatility 104% 97%
Risk-free interest rate 6.5% 6.5%
Expected life (years) 7 5
Dividend yield None None
OPTIONS FOR SERVICES - At December 31, 1997 and 1996, 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 (see Note 5), the Company issued
a warrant to purchase 2,400,000 shares of common stock at an exercise
price of $2.00 per share on or before May 22, 2001. At December 31, 1997,
the warrant remained exercisable and outstanding.
During 1997, warrants to purchase an aggregate of 145,000 shares of the
Company's common stock at $2.00 per share on or before May 31, 1997,
issued in connection with the private placement offering in 1994 (see Note
4), expired.
A summary of stock warrant transactions during the two-year period ended
December 31, 1997 is as follows:
Weighted Average
Number Exercise
of Shares Price Per Share
Warrants outstanding at December 31, 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
Expired (145,000) 2.00
---------
Warrants outstanding at December 31, 1997 2,400,000 2.00
=========
7. LITIGATION SETTLEMENTS
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
<PAGE>
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.
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 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.
8. INCOME TAXES
No provision for income taxes has been recorded for the years ended
December 31, 1997 and 1996 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 $13,300,000 at December 31, 1997. Utilization of
approximately $6,000,000 of the NOL carryforward is limited to
approximately $29,000 per year through 2009 based on an Internal Revenue
Code limitation, as prescribed by Section 382, imposed as a result of a
change in controlling interest in the Company in 1994. 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:
1997 1996
Current assets:
Inventory obsolescence reserve $ 197,000 $ 142,000
Loss on minimum purchase commitment 22,000
Allowance for doubtful accounts 6,000 8,000
Warranty reserve 16,000 39,000
Compensation and employee benefits 10,000 100,000
Other 12,000 4,000
----------- -----------
263,000 293,000
Less valuation reserve (263,000) (293,000)
----------- -----------
$ -- $ --
=========== ===========
Noncurrent assets:
NOL carryforwards $ 3,051,000 $ 2,451,000
Less valuation reserve (3,051,000) (2,451,000)
----------- -----------
$ -- $ --
=========== ===========
<PAGE>
9. RELATED-PARTY TRANSACTIONS
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 years ended
December 31, 1997 and 1996, the Company paid Tapemark a total of $110,900
and $74,600, respectively, for these services.
In addition to the transactions between the Company and the Chairman of
the Board and Tapemark discussed above and in Notes 1, 4, 5, and 12,
during 1997 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 $43,000 and $97,000
were charged to operations in 1997 and 1996, respectively, related to this
arrangement. The terms of the sales representative agreement are on a
basis similar to the Company's other independent sales representatives.
10. 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, 1997 and 1996 were approximately as follows:
1997 1996
Domestic sales $1,186,000 $ 915,000
Foreign sales:
Europe/Africa/Middle East 835,000 966,000
Asia 910,000 809,000
Other 354,000 247,000
---------- ----------
Net sales $3,285,000 $2,937,000
========== ==========
The Company has the following customers that account for more than 10% of
net sales:
1997 1996
Customer A 25% 8%
Customer B 16% 30%
Customer C 12% --
Customers A and B comprised 56% and 29%, respectively, of net accounts
receivable at December 31, 1997.
11. 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
year ending December 31, 1998 are $28,400. All noncancelable operating
leases expire in 1998.
<PAGE>
Rent expense under all operating leases was approximately $210,000 and
$199,000 for the years ended December 31, 1997 and 1996, respectively.
MINIMUM PURCHASE COMMITMENT - Effective June 15, 1997, the Company entered
into a five-year requirement contract with Porous Media under which the
Company will purchase all of its cyst filters required for the
PentaPure(R) Sport Purification System and Spring(R) Filtration System
(Systems). The Company agreed to purchase a minimum of 100,000 filters per
year throughout the term of the agreement at an average price of $1.72 per
filter. The Company's performance under the contract is personally
guaranteed by the Company's Chairman, up to $100,000. During 1997, the
Company purchased 15,000 units ($36,000) of inventory pursuant to this
contract. Management has accrued the unfulfilled pro rata commitment of
approximately $54,000 in connection with this agreement as of December 31,
1997.
ARRANGEMENTS WITH SUPPLIERS. - 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.
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, 1997 and 1996.
Royalties for 1997 were settled with the issuance of 75,000 shares of the
Company's common stock.
12. SUBSEQUENT EVENTS
BOWMAN INDUSTRIES, INC. - On January 1, 1998, the Company changed its
relationship with Bowman Industries, Inc. (Bowman) to that of an
employer-employee. During 1996 and 1997, Bowman provided production and
assembly services exclusively to the Company as an independent contractor.
The Company paid Bowman an amount equal to all costs and operating
expenses incurred by Bowman. During the year ended December 31, 1997 and
1996, the Company paid Bowman a total of $ 289,000 and $254,500,
respectively, under this arrangement. The Company will directly pay
operating expenses as incurred, and individuals formerly employed by
Bowman became employees of the Company.
DEMAND NOTES PAYABLE TO THE CHAIRMAN AND A COMPANY AFFILIATED WITH THE
CHAIRMAN - On January 1, 1998, the Company entered into an agreement to
extend the $1,100,000 demand note payable to the Chairman through June 30,
1998. In addition, $30,673 of interest accrued at December 31, 1997 was
included in the new note payable. Interest will accrue at a rate of prime
plus 1% payable at maturity.
<PAGE>
On January 1, 1998, the Company entered into an agreement to extend the
$500,000 demand note payable to a company affiliated with the Chairman
through June 30, 1998. Interest will accrue at a rate of prime plus 2%
payable at maturity.
On January 7, 1998, the Company entered into an agreement to borrow an
additional $500,000 from the Chairman. The loan matures on June 30, 1998
and accrues interest at a rate of prime plus 1%. Through March 6, 1998,
$200,000 had been advanced under this agreement.
TERMINATION OF LEASE - On March 1, 1998, the Company entered into a lease
with Tapemark for manufacturing and office space. The lease term is one
year with rent consisting of an option to purchase 112,000 shares of the
Company's common stock at a price of $0.3125 per share. The option is
immediately exercisable with an expiration date of December 31, 2000. The
Company will make no cash payments to Tapemark for rent, general
utilities, pro rata taxes and special assessments, or build-out costs. The
Company will be responsible for incremental utilities. The Company was
released from its prior lease commitment without penalty.
<PAGE>
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. 70 Chairman of the Board, Director and
Chief Executive Officer
David M. Botts 35 Chief Operating Officer
Gregory P. Jensen 37 Chief Financial Officer, Secretary and Treasurer
Biloine W. Young 71 Director
John A. Clymer 49 Director
Robert C. Klas, Jr. 44 Director
All directors have been elected to serve until the next annual election of
directors (to occur in 1998 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 persons referred to above have filed the required
Section 16(a) forms. Jon Magnusson has not filed the required Section 16(a)
forms.
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 flexograpic printing,
laminating and precision die-cutting. Tapemark
<PAGE>
has twice received awards 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., most recently 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.
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
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) 1997 -- -- -- -- --
Chief Executive Officer 1996 -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------
Jan H. Magnusson (2) 1997 -- -- -- -- --
Chief Executive Officer 1996 $ 21,000 -- $ 1,650 -- --
- ----------------------------------------------------------------------------------------------------------
David M. Botts 1997 $ 125,000 -- -- -- --
Chief Operating Officer 1996 $ 121,036 -- -- -- --
- ----------------------------------------------------------------------------------------------------------
</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, $22,650 was
accrued at December 31, 1996 and was paid in 1997.
The following table sets forth options granted during 1997 with respect to the
Named Executives:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
NUMBER OF % OF TOTAL OPTIONS
SECURITIES GRANTED TO
UNDERLYING OPTIONS EMPLOYEES IN
NAME GRANTED FISCAL YEAR EXERCISE PRICE EXPIRATION DATE
($/SHARE)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David M. Botts 75,000 9.3% $1.25 4/1/04
- ---------------------------------------------------------------------------------------------------------------
Gregory P. Jensen 75,000 9.3% $1.25 4/1/04
- ---------------------------------------------------------------------------------------------------------------
Gregory P. Jensen 50,000 6.2% $1.00 4/30/04
- ---------------------------------------------------------------------------------------------------------------
Gregory P. Jensen 25,000 3.1% $1.25 4/30/04
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The following table sets forth information with respect to the Named Executives
concerning the options held as of December 31, 1997:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
NAME SHARES ACQUIRED VALUE AT FY-END (#) FY-END ($)
ON EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
(#) ($) UNEXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David M. Botts 30,000 -- 42,500/62,500 0/0
- ---------------------------------------------------------------------------------------------------------------------
Gregory Jensen -- -- 62,500/87,500 0/0
- ---------------------------------------------------------------------------------------------------------------------
Robert C. Klas, Sr. -- -- 0/0 0/0
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
EMPLOYMENT AGREEMENTS
The Company entered into an Employment Agreement with David M. Botts, the
Company's Chief Operating Officer, for a period of three years, commencing April
1, 1994, and subject to termination with or without cause. Mr. Botts' annual
compensation under the terms of the Agreement was $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. This employment agreement expired on April 1, 1997 and has not been
renewed; however, Mr. Botts remains in the employment of the Company.
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 Option 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, are 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. No options were granted to the Outside Directors for services related
to 1997.
During 1997, options for 10,437 shares of common stock were granted to the
Outside Directors for services related to 1995 under the Non-Qualified Stock
Option Plan. The terms under this plan are the same as those under the 1996
Stock Option Plan.
<PAGE>
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 the 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.
1994 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.
<PAGE>
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, 1998, 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)(6)
150 East Marie Avenue
West St. Paul, MN 55118 9,393,918 67.1%
Robert C. Klas, Jr.
150 East Marie Avenue
West St. Paul, MN 55118 6,250 -- %
David M. Botts (3)(6)
980 Bayside Lane
Minnetrista, MN 55364 86,975 1.0 %
<PAGE>
Gregory P. Jensen (2)(6)
3809 Azalea Place
Burnsville, MN 55337 75,000 1.0 %
John A. Clymer (4)
829 3rd Street
Hudson, WI 54016 22,979 -- %
Biloine W. Young (4)
15 Crocus Hill
St. Paul, MN 55102 20,979 -- %
Jan H. Magnusson (5)
300 S. Owasso Blvd.
St. Paul, MN 55117 1,738,832 12.4%
All officers and directors as
a group, 5 persons (5)(7) 11,344,933 81.0%
(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 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 75,000 shares of Common Stock which may be acquired upon the
exercise of stock options which are vested.
(3) Includes 55,000 shares of Common Stock which may be acquired upon the
exercise of stock options which are vested now.
(4) Includes stock options to purchase 8,479 shares of Common Stock.
(5) Mr. Magnusson resigned as Chief Executive Officer of the Company on April
12, 1996.
(6) Serves as an executive officer of the Company.
(7) Includes warrants to purchase a total of 2,400,000 common shares and stock
options to purchase 146,958 common shares.
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
During 1996 the Company issued to Mr. Robert C. Klas, Sr., the Company's
Chairman of the Board and Chief Executive Officer, 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 owned more than 50% of the outstanding stock of the
Company.
During 1997, the Chairman of the Board advanced the Company $1,100,000 and a
company affiliated with the Chairman of the Board advanced the Company $500,000
for notes payable. These notes payable accrue interest at a rate of prime (8.5%
at December 31, 1997) plus one percent and prime plus two percent, respectively.
Interest expense related to these borrowings charged to operations during 1997
was $64,000 of which $44,000 is included in accrued interest at December 31,
1997.
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 years ended December
31, 1997 and 1996, the Company paid Tapemark a total of $110,900 and $74,600,
respectively, for these services.
At December 31, 1997 and 1996, the Company had a $750,000 note payable to a
financial institution, which is due on May 31, 1998, and is secured by
substantially all of the Company's assets in addition to a personal guarantee by
Mr. Robert Klas, Sr.
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 utilizes the services of Tord Nihlen, the brother-in-law of a 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. Approximately $43,000 and $97,000 were
charged to operations in 1997 and 1996, respectively, related to this
arrangement.
<PAGE>
ITEM 13. EXHIBITS AND REPORTS
(a) Exhibits
Exhibit
No. Title Method of Filing
- --- ----- ----------------
3.1 Certificate of Incorporation
of Water Technologies Corporation, as amended (A)
3.2 Bylaws of Water Technologies Corporation,
as amended (A)
3.3 Certificate of Amendment of Certificate
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 (I)
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)
10.45 Debt Conversion and Loan Agreement
dated August 23, 1995, between Robert C.
Klas, Sr. and WTC Industries, Inc. (F)
<PAGE>
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 (I)
10.50 1996 Stock Option Plan (I)
21.1 List of subsidiaries of WTC Industries, Inc. (H)
23 Independent Auditors' Consent Filed Herewith
27 Financial Data Schedule Filed Herewith
(A) Incorporated by reference to the same numbered Exhibit to the Company's
Registration Statement on Form S-18, which was declared effective
September 11, 1991.
(B) Incorporated by reference to the same numbered Exhibit to the Company's
Form 10-K filed for the year ended December 31, 1991.
(C) Incorporated by reference to the same number Exhibit to the Company's
Form 10-KSB filed for the year ended December 31, 1992.
(D) Incorporated by reference to the same number Exhibit to the Company's
Form 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.
<PAGE>
(I) Incorporated by reference to the same number Exhibit to the Company's
Form 10-KSB filed for the year ended December 31, 1996.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1997.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed by the undersigned, thereunto duly authorized.
WTC Industries, Inc.
By: /s/ Robert C. Klas, Sr.
--------------------------------
Robert C. Klas, Sr.
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
date indicated.
SIGNATURE TITLE DATE
/s/ Robert C. Klas, Sr. March 28, 1998
- ----------------------- Chairman of the Board, Director and --------------
Robert C. Klas, Sr. Chief Executive Officer
/s/ Gregory P. Jensen March 28, 1998
- ----------------------- Chief Financial Officer, Secretary --------------
Gregory P. Jensen and Treasurer
/s/ John A. Clymer Director March 28, 1998
John A. Clymer --------------
/s/ Biloine W. Young Director March 28, 1998
- ----------------------- --------------
Biloine W. Young
/s/ Robert C. Klas, Jr. Director March 28, 1998
- ----------------------- --------------
Robert C. Klas, Jr.
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 6, 1998
appearing in this Annual Report on Form 10-KSB of WTC Industries, Inc. for the
year ended December 31, 1997.
Deloitte & Touche LLP
Minneapolis, Minnesota
March 25, 1998
<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,
1997 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,241
<SECURITIES> 0
<RECEIVABLES> 169,303
<ALLOWANCES> 16,000
<INVENTORY> 1,084,448
<CURRENT-ASSETS> 1,251,112
<PP&E> 926,159
<DEPRECIATION> 680,500
<TOTAL-ASSETS> 1,535,178
<CURRENT-LIABILITIES> 2,919,913
<BONDS> 1,458,654
0
0
<COMMON> 110,352
<OTHER-SE> (2,953,741)
<TOTAL-LIABILITY-AND-EQUITY> 1,535,178
<SALES> 3,284,685
<TOTAL-REVENUES> 3,284,685
<CGS> 2,937,670
<TOTAL-COSTS> 1,512,497
<OTHER-EXPENSES> 347,278
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 294,433
<INCOME-PRETAX> (1,512,760)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,512,760)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,512,760)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
