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, 1998
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 55118-4002
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (651) 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
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: $3,785,909
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: $283,808 as of March 22, 1999
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 1,146,031 shares of
Common Stock as of March 22, 1999
Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format (check one):
Yes:___ No:_X_
Pursuant to Rule 12b-25(e)(1), the registrant is filing this Form
10-KSB without including an auditors report or audited financial statements in
Item 7. Item 7 includes unaudited financial statements for the required period.
The registrant is filing Form 12b-25 with this Form 10-KSB.
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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 technologies, when applied in the Company's 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 also contributed
significant tooling, product design and manufacturing capabilities as well as a
family of patented devices using the PentaPure(R) technology.
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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 that
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 that purify water are
required to be registered with the United States Environmental Protection Agency
("EPA"). To receive such registration, a product must demonstrate that it meets
strict EPA standards under rigorous testing protocols.
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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 that 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 1970s, 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
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
that 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 a scavenger 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 that 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)
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 believes that significant
future revenues may be derived from these strategic alliances. In most cases,
the OEM customers are required to display the PentaPure(R) logo on the finished
products that they manufacture. The Company sees this as an excellent
opportunity to build brand recognition and credibility by careful selection and
screening of OEM partners.
PORTABLE SYSTEMS
The Company's portable systems are designed for the travel, outdoor recreation,
military and emergency relief markets.
PUREIT(R) FAMILY - The PureIt(R) Refrigerator Dispenser is for sale to
international markets. The Dispenser is designed for everyday use in a
refrigerator, in relief operations or the outdoors. The purification system is
located in a single cartridge. The system includes: 1) a washable and
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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)
scavenger 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 and cooking.
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 that is far more
contaminated than water likely to be encountered in most situations.
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 that are
designed for residential and light commercial use in international markets.
These systems typically attach to the water line under a sink and dispense
purified water through a dedicated faucet. Some units attach to the sink faucet
and sit on the counter top. Individual systems can be configured to accommodate
specific water quality problems
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. 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 to a major OEM
customer, the Company intends to market this system 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
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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 that 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 that
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.
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.
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.
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
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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 a scavenger media and a variety of
filtration products, 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) product, 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 InLine Systems product line. The Company is also 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
The past two years, the Company has implemented a marketing strategy that
focuses on OEM customers. This strategy is intended to allow the Company to
utilize the brand recognition and the sales and distributions networks of the
OEM, while reducing the Company's marketing expense.
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 continues, to a limited extent, 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.
The Company's domestic sales accounted for 64% of total net sales in 1998,
compared to 36% in 1997 and 31% in 1996. Amana Inc., the largest domestic
customer, accounted for 53% of total net sales in 1998.
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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, 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.
The Company's international sales accounted for 36% of total net sales in 1998,
compared to 64% in 1997 and 69% in 1996.
COMPETITION
In the United States and internationally the water treatment equipment industry
is highly fragmented. Many small, regional companies manufacture and market
products that 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 three other U.S. companies make their own versions of iodinated resin
that compete with the Company's purification media. These companies include, The
Purolite Company, Umpqua Research Company, 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. The Company offers a far broader range
of products based on iodinated resin technology than any of these competitors.
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 Brita (USA), Inc., Katadyn, Recovery
Engineering, Inc. (PUR), EcoWater, US Filter, General Ecology, Inc., Amway,
Cuno, Teledyne Water Pik and Dalton Ceramics. Several of these competitors are
significantly larger than the Company, but none competes directly against all of
its product lines.
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MANUFACTURING AND SUPPLIERS
The Company performs all of its own product assembly at two facilities in
Minnesota. The Company believes that it generally has sufficient manufacturing
capacity for the foreseeable future. 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.
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 labels for
the Company's products and office and manufacturing facilities. Mr. Robert C.
Klas, Sr., the Company's CEO, Chairman and largest stockholder, is also the CEO,
Chairman of the Board and largest shareholder for Tapemark. During 1998 and
1997, the Company paid Tapemark a total of $76,900 and $110,900, 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.
During the year, the Company fulfilled its first year obligation of $172,500 of
which $127,000 is included in the slow moving inventory reserve as of December
31, 1998. In the fourth quarter of 1998, management accrued the remaining
estimated commitment, not likely to be fulfilled by the Company, of
approximately $463,500. As a result, the Company has established a reserve at
December 31, 1998 totaling $517,500, of which $172,500 is included in current
liabilities.
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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.
In May and July 1998 the Company amended its license agreement with KSURF to
reduce the annual minimum cash royalty payable by the Company from $75,000 to
$25,000 for the remainder of the license agreement. In consideration for these
amendments the Company issued a total of 42,500 shares of its common stock to
KSURF. The Company incurred a one-time charge of $350,000 related to the
amendments, due to the uncertainty of the future realization of its value. The
cash royalty paid to KSURF in 1998 was $25,000. Royalties for 1997 were settled
with the issuance of 7,500 shares of the Company's common stock.
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 utilizes several independent consultants to perform, coordinate or
contribute to its research and development program. Primary among them is Dr.
George Marchin, an associate professor of microbiology and immunology at Kansas
State University. The Company's current research and development efforts is
focused on OEM projects and improving the performance of its existing product
lines.
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.
13
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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 22, 1999, the Company had 19 full time employees, consisting of two
in administration, four in sales and marketing, two in finance, one in
engineering, and ten in production. In addition, the Company utilizes the
services of two consultants in the areas of research and development. None of
the Company's employees are covered by collective bargaining agreements or are
members of a union. The Company has never experienced a work stoppage and
believes that its relations with its employees are good.
Item 2. PROPERTIES
The Company leases approximately 1,800 square feet of corporate office space and
approximately 3,200 square feet of manufacturing space from Tapemark in a
building that also houses Tapemark's principal executive office. The rent for
the first year of the lease (ended February 28, 1999) was issuance of an option
to purchase 11,200 shares of Company common stock at a price of $3.125 per share
which expires December 31, 2000. The lease as been extended through February 28,
2001 in consideration of 23,333 shares of Company common stock for each year.
The Company is not making any cash payments to Tapemark for rent, general
utilities, real estate taxes and special assessments.
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
14
<PAGE>
and operating expenses. The Company has the option to cancel the lease on
February 29, 2000 for a cancellation fee of $4,000.
On January 1, 1998, the Company entered into a twelve month lease agreement for
approximately 5,000 square feet of production space in Kennedy, Minnesota from
Bowman Industries, Inc. The Company pays base rent of $350 per month and all
operating expenses associated with the building. The Company renewed the lease
on January 1, 1999 for six months with the option to renew every six months. The
base rent increased to $1,000 per month.
On February 1, 1997, the Company entered into a six month lease agreement for
approximately 10,000 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
None.
Item 4. SUBMISSIONS OF MATTERS TO A VOTE OF
SECURITY HOLDERS
On December 15, 1998, Robert C. Klas, Sr., the Company's majority
shareholder, approved by written consent in accordance with Delaware law a
one-for-ten reverse stock split of the Company's Common Stock and an increase in
the number of authorized shares of Common Stock to 15,000,000 shares (on a
post-reverse split basis). On that date, prior to the effectiveness of the
reverse split, the majority stockholder owned 6,760,118 of the total of
11,460,118 shares which were then outstanding (prior to the reverse split). The
Company filed and distributed an Information Statement with respect to the
written consent, but no other written consents were solicited or obtained. After
expiration of the applicable notice period, the reverse stock split and increase
in the number of authorized shares became effective on January 6, 1999. The
reverse stock split reduced the number of outstanding shares from 11,460,180 to
1,146,031 shares.
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
15
<PAGE>
retail mark-up, mark-down or commission and may not represent actual
transactions. The Company obtained this information from the Dow Jones
News/Retrieval reporting service.
- ------------------------------------------------------------
PERIOD LOW HIGH
- ------------------------------------------------------------
- ------------------------------------------------------------
1996 January 1 - March 31 $ 1 5/8 $ 3 1/4
- ------------------------------------------------------------
April 1 - June 30 $ 1 3/4 $ 2 5/8
- ------------------------------------------------------------
July 1 - September 30 $ 1 1/4 $ 2 3/8
- ------------------------------------------------------------
October 1 - December 31 $ 1 1/4 $ 2 3/8
- ------------------------------------------------------------
1997 January 1 - March 31 $ 1 $ 1 15/16
- ------------------------------------------------------------
April 1 - June 30 $ 13/16 $ 1
- ------------------------------------------------------------
July 1 - September 30 $ 11/16 $ 95/100
- ------------------------------------------------------------
October 1 - December 31 $ 1/4 $ 13/16
- ------------------------------------------------------------
1998 January 1 - March 31 $ 5/16 $ 1 1/16
- ------------------------------------------------------------
April 1 - June 30 $ 9/32 $ 1 3/16
- ------------------------------------------------------------
July 1 - September 30 $ 13/32 $ 15/16
- ------------------------------------------------------------
October 1 - December 31 $ 3/16 $ 1
- ------------------------------------------------------------
1999 January 1 - March 22 $ 1 1/16 $ 5
- ------------------------------------------------------------
The Company's Common Stock was held by approximately 812 stockholders as of
March 1, 1999.
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; INSOLVENCY; PROSPECT OF BANKRUPTCY. The Company's financial
statements have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities and commitments in the
normal course of business. During 1998 and 1997, the Company has incurred net
losses of $3,042,230 and $1,512,760, respectively, and cash used by operating
activities was $1,066,116 and $1,691,400, respectively. As of December 31, 1998,
the Company has a working capital deficiency of $5,377,313 and an accumulated
deficit of $17,328,610. In addition, the Company has $1,450,000 of notes payable
that mature on May 31, 1999. These factors, among others, indicate that the
Company may be insolvent, may be unable to continue as a going concern in the
near future, and may be forced into voluntary or involuntary bankruptcy.
16
<PAGE>
The Company's working capital requirements for 1997 and 1998 were met through
loans by Robert C. Klas, Sr., the Company's Chairman and CEO, and by a company
affiliated with him (Tapemark), which totaled $1,600,000 in 1997 and $1,200,000
in 1998. As of January 1, 1999, Mr. Klas agreed to loan an additional $500,000
to the Company during 1999, and as of March 22, 1999, $350,000 of this amount
had been advanced. Other than the remaining $150,000 covered by that agreement,
Mr. Klas has no obligation to provide any further financing to the Company, and
there is no assurance that he will provide any futher financing to the Company.
There is also no assurance that the holders of the promissory notes due on May
31, 1999 will agree to extend the maturity of those notes or to forebear in the
enforcement of their rights as creditors. If all or a portion of the note
holders do not accept such an extension or exchange, or if Mr. Klas is unwilling
to provide any further financing to the Company beyond the amounts he has
already committed, the Company will likely be forced to file for bankruptcy or
have involuntary bankruptcy proceedings filed against it. If any of those events
occur, it is highly unlikely that holders of the Company's Common Stock would
receive anything upon the Company's liquidation or the bulk sale of its assets.
Management's plans for the Company to continue as a going concern include (a)
efforts to persuade holders of existing short term debt to extend the maturity
of the debt or exchange the debt for equity securities, (b) seeking further
financing from Mr. Klas or other investors, (c) pursuing and obtaining
Environmental Protection Agency approval for the new PentPure(R) InLine
purification systems to increase sales to the OEM domestic market, and (d)
improving the Company's production processes and quality controls to increase
gross profit margins. There is no assurance whatsoever that these plans will be
successful.
The Company's 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 would be necessary should
the Company be unable to continue as a going concern.
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
NET SALES. The Company had net sales of $3,785,909 in 1998, representing an
increase of 15.3% from net sales of $3,284,685 in 1997.
The increase in net sales is primarily due to a 104.5% increase in domestic
sales in 1998 compared to 1997. In 1998, domestic sales were $2,425,000, or 64%
of total net sales, compared to $1,186,000 or 36% in 1997. The increase in
domestic sales is primarily due to increased sales to Amana Appliances
("Amana"), which uses a built-in refrigerator filtration system designed by the
Company exclusively for Amana refrigerators.
International sales were $1,360,900 or 36% of total net sales in 1998, compared
to $2,098,700 or 64% in 1997. The most significant factor contributing to the
decrease in international sales was
17
<PAGE>
poor economic conditions overseas and the strong U.S dollar. Beginning in third
quarter 1997 and into 1998, foreign currency exchange rate fluctuations and
deteriorating economic conditions had a material impact on the demand for the
Company's products in Asian markets. In addition, beginning in July of 1998,
foreign currency exchange rate fluctuations and deteriorating economic
conditions in Eastern Europe had a material impact on the sales to the Company's
largest distributor. The Company anticipates these trends to continue into 1999.
COST OF GOODS SOLD. For 1998 and 1997, the cost of goods sold was $4,102,833 and
$2,883,670, representing 108.4% and 87.8% of total net sales, respectively.
Factors contributing to the Company's increase in cost of goods sold include a
significant increase in slow moving inventory, higher than budgeted production
costs related to the new Amana built-in refrigerator filtration system and a
decrease in international sales of approximately $738,000.
In 1998 and 1997, the Company wrote off $436,230 and $108,000, respectively, for
either slow moving or obsolete inventory. The increased reserves are due to the
market conditions in both Asia and Eastern Europe. The expenses resulting from
slow moving or obsolete inventory provision represent 11.5% and 3.3% of net
sales in 1998 and 1997, respectively.
In the second quarter of 1998, the Company began to produce the Amana built-in
refrigerator filtration system. The initial start-up costs combined with the
production learning curve generated significant unfavorable variances for both
direct materials and direct labor. During the remainder of 1998 these problems
were rectified. In addition, during the fourth quarter, the Company began to
implement new cost saving measures. Management believes it has and will continue
to reduce the production costs associated with this project.
GROSS PROFIT (LOSS). For 1998 and 1997 the Company recognized a gross loss of
$(316,924) and a gross profit of $401,015, respectively, representing (8.4)% and
12.2% of total net sales. The significant decrease in gross profit is attributed
to the items mentioned above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For 1998 and 1997, selling,
general and administrative expenses were $1,136,128 and $1,371,663, representing
30.0% and 41.8% of total net sales, respectively. The reduction in selling,
general and administrative expenses is primarily due to lower expenses
associated with trade shows, sales commissions, professional fees and building
related expenses.
The Company continues to implement a marketing and sales strategy that focuses
the Company's sales and distribution efforts towards OEM customers. This
strategy is intended to allow the Company to utilize the brand recognition and
the sales and distributions networks of the OEM, while reducing the Company's
marketing expense.
RESEARCH AND DEVELOPMENT EXPENSES. For 1998 and 1997, research and development
expenses were $291,838 and $140,834, respectively. The increase is due to NSF 42
and 53 certification for the InLine filtration systems. While the Company is
committed to its long-term investment in
18
<PAGE>
research and development, such expenses tend to fluctuate and are related in
part to the Company's available resources.
LOSS ON ROYALTY AGREEMENT. The Company incurred a one-time charge of $350,000,
or 9.2% of total sales, related to the issuance of 42,500 shares of stock to
KSURF. These shares were issued pursuant to an amendment to the Company's
license agreement with KSURF to reduce the annual minimum cash payment from
$75,000 to $25,000 for the remainder of the license agreement. This resulted in
recognizing $350,000 of prepaid royalties, which were written off due to the
uncertainty of the future realization of their value.
LOSS ON MINIMUM PURCHASE CONTRACT. The Company is under contract to purchase
100,000 cyst filters from Porous Media for five years. During 1998, the Company
fulfilled its first year obligation of $172,500 of which $127,000 is included in
the slow moving inventory reserve as of December 31, 1998. In addition, the
Company anticipates that the total number of cyst filters that would be
purchased over the remaining life of the contract to be 100,000 units. As a
result, the Company has established a reserve at December 31, 1998 totaling
$517,500. The total expense was $463,500 and $54,000 in 1998 and 1997,
respectively, which represents 12.2% and 1.6% of total net sales, respectively.
NET OPERATING LOSS CARRYFORWARDS. The Company has a federal net operating loss
("NOL") carryforward of approximately $16,800,000 at December 31, 1998.
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.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had a working capital deficit (total
current liabilities in excess of total current assets) of $5,377,313, compared
with a working capital deficit of $1,668,801 as of December 31, 1997. This
substantial increase in the working capital deficit is principally due to (i)
the reclassification of the Company's outstanding promissory notes in the
principal amount of $1,450,000 which mature May 31, 1999 from a long-term
liability to a current liability, and (ii) new loans totaling $1,200,000 from
the Company's Chairman and CEO to fund operations.
During 1998 cash increased $20,020 due to cash provided by financing activities
of $1,193,749, offset by cash used in operations of $1,066,116 and cash used in
investing activities of $107,613. Significant cash uses in operations included
the net loss and an increase in accounts receivable of $64,412, partially offset
by a decrease in inventory, exclusive of the provision for obsolete inventory,
of $436,230, and an increase in current liabilities of $364,531. Net cash used
in investing activities consisted of purchases of property and equipment of
$107,613. Net cash
19
<PAGE>
provided by financing activities resulted from notes payable of $1,200,000 from
the Chairman of the Board, which was partially offset by payments on long-term
debt of $6,251.
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 loans of $1,100,000 by the Chairman and
CEO, $500,000 from a company affiliated with the Chairman and CEO and proceeds
of $15,000 from the sale of common stock. The cash advances were partially
offset by payments on long-term debt of $21,140.
The Company estimates that during 1999 it will have working capital needs of
approximately $1,250,000 to fund its operations and continue market introduction
of the PentaPure(R) InLine quick-dry change product line. This is in addition to
working capital which is needed to repay the $1,450,000 of short term that
matures on May 31, 1999. 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 $135,000 in 1999.
At December 31, 1998, the Company has a $750,000 note payable to a financial
institution that is due on May 31, 1999. The note payable is secured by the
Company's assets and is guaranteed by the Chairman and CEO. If the note is not
renewed, and the Company is required to pay off the $750,000 balance, the
Company may be required to suspend or terminate operations.
The Company has $1,450,000 in principal of promissory notes that were issued in
a private placement in 1994 which mature on May 31, 1999. The notes bear
interest at the prime rate plus 2% and interest is payable quarterly. The
Company intends to attempt to persuade the holders of these notes to extend the
maturity. There is no assurance whatsoever that any of the note holders will
agree to such an extension.
On January 1, 1999, the Company entered into an agreement to extend demand notes
payable totaling $2,498,807 to the Chairman and CEO through December 31, 1999.
Accrued interest of $98,926 at December 31, 1998 was included in the new note
payable. Interest will accrue at prime and is payable on June 30, 1999 and
December 31, 1999.
On January 1, 1999, the Company entered into an agreement to extend demand notes
payable totaling $553,114 to a company affiliated with the Chairman through
December 31, 1999. Accrued interest of $27,080 at December 31, 1998 was included
in the new note payable. Interest will accrue at prime and is payable on June
30, 1999 and December 31, 1999.
20
<PAGE>
On January 1, 1999, the Company entered into an agreement to borrow up to an
additional $500,000 from the Chairman. The loan matures on December 31, 1999 and
accrues interest at prime and payable on June 30, 1999 and December 31, 19999.
Through March 22, 1999 $350,000 had been advanced under this agreement.
Effective June 15, 1997, the Company entered into a cyst filter requirements
contract with Porous Media. The minimum commitment is $172,500 per contract year
beginning June 15. Through December 31, 1998, the Company had fulfilled its
first contract year obligation. The Company is required to purchase an
additional 400,000 cyst filters over the next three and one-half (3.5) years.
Although the Company's performance is guaranteed by the Chairman and CEO up to
$100,000, failure of the Company to perform under this agreement could have a
significant negative impact on the Company's financial resources.
Other than the remaining $150,000 covered by an existing agreement with Mr.
Klas, he has no obligation to provide any further financing to the Company, and
there is no assurance that he will provide any futher financing to the Company.
There is also no assurance that the holders of the promissory notes due on May
31, 1999 will agree to extend the maturity of those notes or to forebear in the
enforcement of their rights as creditors. If all or a portion of the note
holders do not accept such an extension or exchange, or if Mr. Klas is unwilling
to provide any further financing to the Company beyond the amounts he has
already committed, the Company will likely be forced to file for bankruptcy or
have involuntary bankruptcy proceedings filed against it. If any of those events
occur, it is highly unlikely that holders of the Company's Common Stock would
receive anything upon the Company's liquidation or the bulk sale of its assets.
If the Company is able to obtain additional financing to continue operations,
its plan of operations over the next 12 months is to further develop its OEM
customer base and its sales of the PureIt(R) InLine point-of-use systems in both
the domestic and international markets.
FOREIGN CURRENCY EFFECTS
Beginning in the third quarter 1997, foreign currency exchange rate fluctuations
and deteriorating economic conditions had a material impact on the demand for
the Company's products in Asian markets. In addition, beginning in the third
quarter of 1998, foreign currency exchange rate fluctuations and deteriorating
economic conditions in Eastern Europe had a material impact on sales to the
Company's largest distributor. The Company anticipates these trends to continue
into 1999.
EFFECTS OF INFLATION
The Company believes that during 1997 and 1998 inflation has not had a material
impact on the Company's business.
21
<PAGE>
YEAR 2000 COMPLIANCE
Management has initiated a company-wide program to prepare the Company's
computer systems, information technology and non-information technology to be
Year 2000 compliant.
The Company is communicating with its suppliers, customers and other service
providers to determine the extent of the Company's vulnerability to the failure
of third parties to be Year 2000 complaint. The Company has made significant
progress and has substantially completed its internal program to remediate the
Year 2000 issue. During 1998, the Company upgraded its manufacturing and
financial software, along with personal computers and related software. The
Company's expenditures in 1998 related to Year 2000 issues were approximately
$40,000. The costs of the new equipment and software are being depreciated over
their useful lives. Based on information currently available, the total
remaining maintenance or capital costs to be incurred in 1999 is estimated to be
$10,000.
The risks to the Company resulting from failure of the Company's own information
systems or third parties to attain Year 2000 readiness is similar to other
businesses. These risks include but are not limited to (1) disruptions in
information systems used for transaction processing, (2) disruptions in the
supply of raw materials and other components from major vendors, and (3)
disruptions in facilities used in the manufacturing process.
The Company is in the process of developing a contingency plan to address the
above risks. The contingency plan is expected to be in place by September 30,
1999. If the Company or its major customers, suppliers or other third parties
with whom the Company does business fail to address adequately the Year 2000
issues, or the Company fails to successfully integrate its information systems,
the Company's business or results of operations could be materially adversely
affected.
NOTIFICATION REGARDING FORWARD LOOKING INFORMATION
Except for historical information contained herein, certain statements are
forward looking statements that involve risks and uncertainties, including, but
not limited to, the results of financing efforts and sufficiency of working
capital requirements, product demand and market acceptance risks, customer mix,
the effect of economic conditions including the Asian economic downturn, the
impact of competitive products and pricing, product development,
commercialization and technological difficulties, supply constraints or
difficulties, and actual purchases under agreements. The actual results that the
Company achieves may differ materially from these forward looking statements due
to such risks and uncertainties. Readers are urged to carefully review and
consider the various disclosures made by the Company's other filings with the
Securities and Exchange Commission that advise interested parties of the risks
and uncertainties that may effect the Company's financial condition and results
of operations.
22
<PAGE>
Item 7. FINANCIAL STATEMENTS
The unaudited financial statements that are included with this Form
10-KSB are presented beginning on page F-1 following the signature pages.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On November 11, 1998, the Company dismissed its former independent
accountants, Deloitte & Touche, and engaged McGladrey & Pullen as the Company's
independent accountants for the fiscal year ended December 31, 1998. The
decision to change accountants was approved by the Company's Board of Directors.
There were no disagreements with the former accountants, whether or not
resolved, on any matter of accounting principles or practices, fiancial
statement disclosure, or auditing scope or procedure, which, if not resolved to
the former accountant's satisfaction, would have caused it to make reference to
the subject matter of the disagreement in connection with its report.
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. 71 Chairman of the Board, CEO and Director
David M. Botts 36 Chief Operating Officer
Gregory P. Jensen 38 Chief Financial Officer, Secretary and Treasurer
Biloine W. Young 72 Director
John A. Clymer 50 Director
Robert C. Klas, Jr. 45 Director
James J. Carbonari 57 President of PentaPure Incorporated
All directors have been elected to serve until the next annual election of
directors (to occur in 1999 at the annual meeting of the shareholders), or until
their earlier resignation or removal. Officers serve at the pleasure of the
Board of Directors.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
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.
23
<PAGE>
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, a 10% shareholder, 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-seven years, Mr. Klas has been the owner, Chairman of the
Board and Chief Executive Officer of The Tapemark Company, a $67 million
converting and manufacturing company, specializing in narrow web flexograpic
printing, laminating and precision die-cutting. Tapemark 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 is the father of Robert C.
Klas, Jr. who is also a director 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
24
<PAGE>
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.
JAMES J. CARBONARI, PRESIDENT. Mr. Carbonari joined the Company in August 1998
and serves as the President for PentaPure Incorporated, a wholly owned operating
subsidiary of WTC Industries, Inc. Prior to joining the Company, Mr. Carbonari
served nine years as Vice President of Sales and Marketing for Osmonics Inc. He
served as regional manager for the Donaldson Company from 1988 to 1989 and as
Vice President for the Carter Day Co. from 1984 to 1988.
Item 10. EXECUTIVE COMPENSATION
The following table shows for the Company's last three 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 ("named
executives").
Summary Compensation Table
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG TERM
COMPENSATION
---------------------------------------------------------------------------
NAME AND (SECURITIES ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS OTHER UNDERLYING OPTIONS) COMPENSATION
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert C. Klas, Sr. (1) 1998 -0- -- -- -- --
Chief Executive Officer 1997 -0- -- -- -- --
1996 -0- -- -- -- --
- ------------------------------------------------------------------------------------------------------
David M. Botts 1998 $ 125,000 -- -- -- --
Chief Operating Officer 1997 $ 125,000 -- -- -- --
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.
During 1998, there were no stock options granted to the named executives.
The following table sets forth information with respect to the Named Executives
concerning the options held as of December 31, 1998:
25
<PAGE>
Aggregate Option Exercises in Last Fiscal Year and FY-End Option Values
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES ACQUIRED OPTIONS AT FY-END (#) AT FY-END ($)
ON EXERCISE VALUE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert C. Klas, Sr. -- -- 0/0 0/0
- --------------------------------------------------------------------------------------------------------
David M. Botts -- -- 5,500/5,000 0/0
- --------------------------------------------------------------------------------------------------------
</TABLE>
The above tables incorporate the effect of the one-for-ten reverse stock split
on January 6, 1999.
EMPLOYMENT AGREEMENTS
None of the Company's executive officers is party to an employment agreement
with 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 $1,000 by the fair
market value per share of the Common Stock on the date of grant, but in no event
more than 500 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 1,000
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 or 1998.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth, as of March 22, 1999, 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 (1) OF CLASS
- ------------------- ------------------------ --------
Robert C. Klas, Sr. (2)(3)(5)
150 East Marie Avenue
West St. Paul, MN 55118 949,712 62.5%
26
<PAGE>
Robert C. Klas, Jr. (2)
150 East Marie Avenue
West St. Paul, MN 55118 1,875 *
James J. Carbonari (4)
18515 5th Avenue North
Plymouth, MN 55447 30,000 2.0%
David M. Botts (3)
980 Bayside Lane
Minnetrista, MN 55364 13,698 1.0%
Gregory P. Jensen (3)
3809 Azalea Place
Burnsville, MN 55337 15,000 1.0%
John A. Clymer (2)
829 3rd Street
Hudson, WI 54016 2,298 *
Biloine W. Young (2)
15 Crocus Hill
St. Paul, MN 55102 2,098 *
Jan H. Magnusson
300 S. Owasso Blvd.
St. Paul, MN 55117 173,883 11.5%
All officers and directors as
a group, 7 persons (1) 1,188,564 78.3%
* Less than one percent.
(1) Includes options to purchase the following number of shares, which are
or will become exercisable within 60 days of December 31, 1998: 11,200
shares--available under options held by The Tapemark Company, an
affliate of Mr. Klas, Sr.; Mr. Klas, Jr.--1,250 shares; Mr. Clymer--848
shares; Ms. Young--848 shares; Mr. Carbonari--10,000 shares; Mr.
Botts-- 5,500 shares, Mr. Jensen--8,750 shares; and all officers and
directors as a group--38,396 shares.
(2) Serves as a director of the Company.
(3) Serves as an executive officer of the Company.
27
<PAGE>
(4) Serves as President for PentaPure Incorporated.
(5) Includes: (a) a warrant to purchase 240,000 shares of Common Stock on
or before March 22, 2001; (b) 22,500 shares of Common Stock held by The
Tapemark Cash or Deferred Profit Sharing Plan; and (c) 11,200 shares of
Common Stock available under vested options held by The Tapemark
Company.
Item 12. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
During 1997, Mr. Klas loaned the Company $1,100,000 and his affiliate Tapemark
loaned the Company $500,000. These loans accrue interest at a rate of prime 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. On January 1,
1998, Mr. Klas converted the interest payable due him of $ 30,673 into a new
note.
On June 30, 1998, the Company replaced a $500,000 demand note payable to
Tapemark with a new demand note payable for $526,034, which includes the
original principal of $500,000 and accrued interest payable through June 30,
1998 of $26,034.
On January 1, 1999, the Company entered into an agreement to extend through
December 31, 1999 all demand notes payable to Tapemark. Accrued interest of
$27,080 at December 31, 1998 was included in the new note payable. Interest will
accrue at prime and is payable on June 30, 1999 and December 31, 1999.
During 1998 Mr. Klas loaned the Company $1,200,000. These loans accrue interest
at a rate of prime plus one percent. Interest expense related to these
borrowings charged to operations was $168,134, of which $69,208 was converted
into a note payable on June 30, 1998 and $98,926 is included in accrued interest
payable at December 31, 1998.
On January 1, 1999, the Company entered into an agreement with Mr. Klas to
extend and consolidate all of the demand notes payable totaling $2,498,807
through December 31, 1999. Accrued interest of $98,926 at December 31, 1998 was
included in the new note payable. Interest will accrue at prime and is payable
on June 30, 1999 and December 31, 1999.
Tapemark provides labels for the Company's products and office and manufacturing
facilities. Mr. Robert C. Klas, Sr., the Company's Chairman, CEO and largest
stockholder, and is also the CEO, Chairman of the Board and largest shareholder
of Tapemark. During the year ended December 31, 1998 and 1997, the Company paid
Tapemark a total of $76,900 and $110,900, respectively, for these services.
28
<PAGE>
At December 31, 1998 and 1997, the Company had a $750,000 note payable to a
financial institution, which is due on May 31, 1999, and is secured by
substantially all of the Company's assets in addition to a personal guarantee by
Mr. Robert Klas, Sr.
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. Filed Herewith
4.0 Specimen Common Stock Certificate Filed Herewith
10.1 License Agreement dated January 1, 1990,
between Kansas State University Research
Foundation and Water Technologies Corporation (A)
10.1.1 Amendment to License Agreement dated May 7, 1998 Filed Herewith
10.1.2 Amendment to License Agreement dated July 1, 1998 Filed Herewith
10.4 Amendment to Agreement dated June 21, 1991
between Water Technologies Corporation and
Water and Air Development Corporation (B)
10.34 Agreement and Plan of Merger dated
November 19, 1994, as amended (C)
10.38 1994 Non qualified Stock Option Plan (D)
10.46 Stock Purchase Agreement between WTC
Industries, Inc. and Robert C. Klas, Sr.
dated March 22, 1996 (E)
29
<PAGE>
10.48 Memorandum of Agreement between WTC
Industries, Inc. and DentalPure Corp.
dated March 22, 1996 (F)
10.49 Porous Media Requirements Contract (G)
10.50 1996 Stock Option Plan (G)
10.51 Promissory Notes issued by the Company to
Robert C. Klas, Sr. and Tapemark Company Filed Herewith
10.52 1998 Lease Agreement between WTC Industries, Inc.
and the Tapemark Company Filed Herewith
10.53 1999 Lease Agreement between WTC Industries, Inc.
and the Tapemark Company Filed Herewith
21.1 List of subsidiaries of WTC Industries, Inc. (F)
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 8-K filed on January 14, 1995.
(D) Incorporated by reference to the same number Exhibit to the Company's
Form 10-KSB filed for the year ended December 31, 1994.
(E) Incorporated by reference to Exhibit number 10.1 to the Company's
Form 8-K filed on March 22, 1996.
(F) Incorporated by reference to the same number Exhibit to the Company's
Form 10-KSB filed for the year ended December 31, 1995.
(G) Incorporated by reference to the same number Exhibit to the Company's
Form 10-KSB filed for the year ended December 31, 1996.
30
<PAGE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1998.
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. Chairman of the Board, Director and March 29, 1999
- ------------------------ Chief Executive Officer
Robert C. Klas, Sr.
/s/ Gregory P. Jensen Chief Financial Officer, Secretary March 29, 1999
- ------------------------ and Treasurer
Gregory P. Jensen
/s/ John A. Clymer Director March 29, 1999
- ------------------------
John A. Clymer
/s/ Biloine W. Young Director March 29, 1999
- ------------------------
Biloine W. Young
/s/ Robert C. Klas, Jr. Director March 29, 1999
- ------------------------
Robert C. Klas, Jr.
31
<PAGE>
Contents
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Consolidated balance sheets F-2
Consolidated statements of operations F-3
Consolidated statements of stockholders' deficit F-4 - F-5
Consolidated statements of cash flows F-6 - F-7
Notes to consolidated financial statements F-8 - F-20
- --------------------------------------------------------------------------------
F-1
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998
ASSETS (Note 5) (Unaudited) 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash $ 25,261 $ 5,241
Accounts receivable, net of allowance for doubtful accounts of
$10,000 and $16,000 217,715 153,303
Inventories, net of obsolescence reserve of approximately
$929,000 and $493,000 (Note 3) 430,106 1,084,448
Prepaid expenses and other 3,691 8,120
--------------------------------
TOTAL CURRENT ASSETS 676,773 1,251,112
Property and Equipment, net (Note 4) 193,839 245,659
Other Assets 11,792 38,407
--------------------------------
$ 882,404 $ 1,535,178
================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Demand notes payable to related parties (Notes 5 and 13) $ 2,925,915 $ 1,600,000
Note payable to bank (Note 5) 750,000 750,000
Current maturities of long-term debt (Note 5) 1,456,870 5,729
Accounts payable 459,462 199,355
Customer deposits 8,427 100,854
Accrued interest payable (Note 5) 167,254 87,895
Accrued expenses (Note 12) 286,158 176,080
--------------------------------
TOTAL CURRENT LIABILITIES 6,054,086 2,919,913
--------------------------------
Long-Term Liabilities
Accrued minimum purchase commitments (Note 12) 345,000 --
Long-term debt, net of current maturities (Note 5) 1,261 1,458,654
--------------------------------
346,261 1,458,654
--------------------------------
Commitments and Contingencies (Notes 10 and 12)
Stockholders' Deficit (Notes 5, 6, 7, 8, 10, and 12)
Preferred stock -- --
Common stock, $0.10 par value; 15,000,000 shares authorized; 1,146,031 and
1,103,518 shares issued and outstanding in 1998 and 1997, respectively 114,603 110,352
Additional paid-in capital 11,711,064 11,347,639
Officer receivable (15,000) (15,000)
Accumulated deficit (17,328,610) (14,286,380)
--------------------------------
(5,517,943) (2,843,389)
--------------------------------
$ 882,404 $ 1,535,178
================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998
(UNAUDITED) 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales (Note 11) $ 3,785,909 $ 3,284,685
Cost of goods sold (Notes 10 and 12) 4,102,833 2,883,670
-----------------------------
GROSS PROFIT (LOSS) (316,924) 401,015
-----------------------------
Expenses:
Selling, general, and administrative (Note 10) 1,136,128 1,371,663
Research and development 291,838 140,834
Loss on royalty agreement (Note 12) 350,000 --
Loss on minimum purchase contract (Note 12) 463,500 54,000
-----------------------------
2,241,466 1,566,497
-----------------------------
LOSS FROM OPERATIONS (2,558,390) (1,165,482)
-----------------------------
Other expense:
Interest expense (Note 5) 436,650 294,433
Other 47,190 52,845
-----------------------------
483,840 347,278
-----------------------------
NET LOSS $(3,042,230) $(1,512,760)
=============================
Net loss per basic and diluted common share (Note 6) $ (2.69) $ (1.39)
=============================
Weighted-average number of common shares outstanding (Note 6) 1,130,129 1,089,500
=============================
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Common Stock
---------------------------
Shares Amount
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1996 1,069,170 $ 106,917
Issuance of common stock in settlement of lawsuit (Note 8) 2,500 250
Issuance of common stock for payment of royalty fees (Note 12) 7,500 750
Exercise of stock options (Note 7) 5,000 500
Conversion of debt into common stock (Note 5) 19,348 1,935
Net loss -- --
---------------------------
Balance at December 31, 1997 1,103,518 110,352
Adjustment for fractional shares due to 1-for-10 reverse stock
split (unaudited) (Note 6) 13 1
Issuance of common stock for payment of royalty fees (unaudited)
(Note 12) 42,500 4,250
Compensation expense recorded on stock options (unaudited) -- --
Net loss (unaudited) -- --
---------------------------
Balance at December 31, 1998 (unaudited) 1,146,031 $ 114,603
===========================
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
Additional Total
Paid-In Officer Accumulated Stockholders'
Capital Receivable Deficit Deficit
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 11,021,940 $ -- $(12,773,620) $ (1,644,763)
49,750 -- -- 50,000
74,250 -- -- 75,000
29,500 (15,000) -- 15,000
172,199 -- -- 174,134
-- -- (1,512,760) (1,512,760)
- ------------------------------------------------------------------------------------
11,347,639 (15,000) (14,286,380) (2,843,389)
(1) -- -- --
345,750 -- -- 350,000
17,676 -- -- 17,676
-- -- (3,042,230) (3,042,230)
- ------------------------------------------------------------------------------------
$ 11,711,064 $ (15,000) $(17,328,610) $ (5,517,943)
====================================================================================
</TABLE>
F-5
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998
(UNAUDITED) 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $(3,042,230) $(1,512,760)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 129,345 182,453
Amortization 17,125 19,126
Provision for obsolete inventory 436,230 108,000
Royalty fees paid in common stock 350,000 75,000
Provision for loss on minimum purchase commitment 463,500 54,000
(Gain) loss on sale of fixed assets 30,088 (2,772)
Noncash compensation 17,676 --
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (64,412) 478,708
Inventories 218,112 (540,553)
Current and other assets 13,919 23,531
Increase (decrease) in:
Accounts payable 260,107 (424,690)
Other accrued liabilities 104,424 (151,443)
-----------------------------
NET CASH USED IN OPERATING ACTIVITIES (1,066,116) (1,691,400)
-----------------------------
Cash Flows From Investing Activities
Purchases of property and equipment (107,613) (42,127)
Proceeds from sale of fixed assets -- 4,774
Restricted cash -- 86,810
-----------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (107,613) 49,457
-----------------------------
Cash Flows From Financing Activities
Proceeds of loans from director/stockholder 1,200,000 1,100,000
Proceeds of loan from affiliated entity -- 500,000
Payments on loan from director/stockholder -- (12,473)
Payments on long-term debt (6,251) (8,667)
Proceeds from sale of common stock -- 15,000
-----------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,193,749 1,593,860
-----------------------------
NET INCREASE (DECREASE) IN CASH 20,020 (48,083)
Cash
Beginning of year 5,241 53,324
-----------------------------
End of year $ 25,261 $ 5,241
=============================
</TABLE>
(Continued)
F-6
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998
(UNAUDITED) 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for interest $ 231,378 $ 249,328
=============================
Supplemental Disclosures of Noncash Investing and Financing Activities
Common stock issued on conversion of long-term debt and accrued interest $ -- $ 174,134
Common stock issued in exchange for promissory note -- 15,000
Common stock issued in settlement of lawsuit -- 50,000
Conversion of accrued interest to demand notes payable to related parties 126,006 --
Common stock issued for payment of royalty fees 350,000 75,000
=============================
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION APPLICABLE TO THE YEAR ENDED DECEMBER 31, 1998, IS UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF 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
Company's customers include original equipment manufacturers based in the United
States and also foreign customers or customers in the United States who
ultimately resell the products to foreign customers (see Note 11).
A summary of the Company's significant accounting policies follows:
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of WTC and its wholly-owned subsidiaries, PentaPure Incorporated and
Water Pollution Control Systems, Inc. All significant intercompany balances and
transactions have been eliminated in consolidation.
REVENUE RECOGNITION: The Company recognizes revenue upon shipment of the
product.
CASH: The Company maintains its cash in bank deposit accounts which, at times,
may exceed federally insured limits. The Company has not experienced any losses
in such accounts.
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 $70,989 and $53,864 at December 31,
1998 and 1997, 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 (see Note 12).
FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of the Company's demand
notes payable, note payable to bank, and long-term debt are estimated based on
interest rates for the same or similar debt having the same or similar remaining
maturities with similar risk and collateral requirements. The recorded value of
these items approximates their fair value.
F-8
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION APPLICABLE TO THE YEAR ENDED DECEMBER 31, 1998, IS UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
BASIC AND DILUTED NET LOSS PER SHARE: Basic per-share amounts are computed,
generally, by dividing net income or loss by the weighted-average number of
common shares outstanding. Diluted per-share amounts assume the conversion,
exercise, or issuance of all potential common stock instruments unless their
effect is antidilutive, thereby reducing the loss or increasing the income per
common share.
The Company has granted options and warrants to purchase shares of common stock
at various amounts per share (see Note 7). Those options and warrants were not
included in the computation of diluted earnings per share because the Company
has incurred losses in all periods. The inclusion of potential common shares in
the calculation of diluted loss per share would have an antidilutive effect.
Therefore, basic and diluted loss per share amounts are the same in each period
presented.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: In 1998, the Company adopted
Statements of Financial Accounting Standards (SFAS) No. 130, REPORTING
COMPREHENSIVE INCOME, and SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. The adoption of these standards did not
affect the Company's results of operations, financial position, or financial
statement presentation.
RECLASSIFICATIONS: Certain reclassifications have been made to the 1997
financial statements to conform to the 1998 presentation. These
reclassifications had no impact on net loss or stockholders' deficit as
previously reported.
UNAUDITED FINANCIAL INFORMATION: The financial statements and notes related
thereto as of December 31, 1998, for the year ended December 31, 1998, are
unaudited but, in the opinion of management, include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
financial position and results of operations. The operating results for the
interim periods are not indicative of the operating results to be expected for a
full year or for other interim periods. Not all disclosures required by
generally accepted accounting principles necessary for a complete presentation
have been included.
F-9
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION APPLICABLE TO THE YEAR ENDED DECEMBER 31, 1998, IS UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 2. BASIS OF PRESENTATION
The consolidated financial statements have been prepared on a going-concern
basis which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business. The Company has
incurred net losses of $3,042,230 and $1,512,760, and used cash to finance
operating activities of $1,066,116 and $1,691,400 for the years ended December
31, 1998 and 1997, respectively. In addition, as of December 31, 1998, the
Company had a deficiency in working capital of $5,377,313, an accumulated
deficit of $17,328,610, and a stockholders' deficit of $5,517,943. In addition,
the Company has $1,450,000 of notes payable that mature on May 31, 1999 (see
Note 5).
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 1998 were met principally through loans of
$1,200,000 from the Chairman of the Board.
Management's plans to continue as a going concern include (a) efforts to
persuade holders of existing short-term debt to extend the maturity of the debt
or exchange the debt for equity securities; (b) seeking further financing from
Mr. Klas or other investors; (c) pursuing and obtaining Environmental Protection
Agency approval for the new PentaPure(R) InLine purification systems to increase
sales to the OEM domestic market; and (d) 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.
NOTE 3. INVENTORIES
Inventories, net of reserves, consisted of the following at December 31:
1998
(Unaudited) 1997
- ---------------------------------------------------------------------------
Raw materials $ 283,326 $ 670,943
Work-in-process 3,484 118,557
Finished goods 143,296 294,948
----------------------------------------
$ 430,106 $1,084,448
========================================
In the fourth quarter of 1998, the Company increased its inventory reserve by
approximately $366,000 for slow-moving items.
F-10
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION APPLICABLE TO THE YEAR ENDED DECEMBER 31, 1998, IS UNAUDITED)
- --------------------------------------------------------------------------------
Note 4. Property and Equipment
Property and equipment consisted of the following at December 31:
1998
(Unaudited) 1997
- --------------------------------------------------------------------------------
Office equipment $190,505 $278,340
Machinery and equipment 607,896 573,631
Leasehold improvements 54,363
Art 19,825
---------------------------------
798,401 926,159
Less accumulated depreciation 604,562 680,500
---------------------------------
$193,839 $245,659
=================================
Property and equipment at December 31, 1998 and 1997, includes $28,052 of
equipment under capitalized leases and $19,636 and $14,026 of related
accumulated amortization, respectively. Amortization of the capital lease
property has been included in depreciation expense.
NOTE 5. NOTES PAYABLE AND LONG-TERM DEBT
DEMAND NOTES PAYABLE TO THE CHAIRMAN AND A COMPANY AFFILIATED WITH THE CHAIRMAN:
At December 31, 1998, the Company had $2,399,881 and $526,034 demand notes
payable to the chairman and a company affiliated with the chairman,
respectively. These notes payable accrue interest at a rate of prime (7.75
percent at December 31, 1998) plus 1 percent and prime plus 2 percent,
respectively. Principal and accrued interest were due on December 31, 1998 (see
Note 13). Interest expense related to these borrowings charged to operations
during 1998 was $220,963, of which $126,006 is included in accrued interest
payable at December 31, 1998.
NOTE PAYABLE TO BANK: At December 31, 1998 and 1997, the Company had a $750,000
note payable to a bank. This note accrues interest at prime, is due on May 31,
1999, and is secured by substantially all of the Company's assets in addition to
a guarantee by the chairman.
NOTE PAYABLE TO FORMER CEO: In 1997, the Company settled a note payable with its
former chief executive officer 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.
F-11
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION APPLICABLE TO THE YEAR ENDED DECEMBER 31, 1998, IS UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 5. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
Long-term debt consisted of the following at December 31:
1998
(Unaudited) 1997
- ------------------------------------------------------------------------------
Notes payable from private placement $1,450,000 $1,450,000
Other 8,131 14,383
-------------------------------
1,458,131 1,464,383
Less current maturities 1,456,870 5,729
-------------------------------
$ 1,261 $1,458,654
===============================
Maturities of long-term debt at December 31, 1998, are as follows:
Years ending December 31 (unaudited):
1999 $1,456,870
2000 1,261
----------
$1,458,131
==========
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 percent; (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.
NOTE 6. COMMON AND PREFERRED STOCK
COMMON STOCK: On January 6, 1999, the Company reduced the number of common
shares outstanding in a 1-for-10 reverse stock split. In addition, the Company
amended its Articles of Incorporation to increase the number of shares
authorized to 15,000,000 and the par value to $0.10 per share. At December 31,
1998, the Company had 1,146,031 shares issued and outstanding. All share and
per-share amounts presented have been retroactively adjusted to reflect the
reverse split.
PREFERRED STOCK: At December 31, 1998 and 1997, there were 2,000,000 shares of
the Company's 9 percent convertible, cumulative, nonvoting, $1 par value
preferred stock authorized with no shares outstanding.
F-12
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION APPLICABLE TO THE YEAR ENDED DECEMBER 31, 1998, IS UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 7. STOCK OPTIONS AND WARRANTS
EMPLOYEE GRANTS: The Company regularly grants options to its employees under
various plans as described below. As permitted under generally accepted
accounting principles, these grants are accounted for following APB Opinion No.
25 and related interpretations. Accordingly, compensation cost has been
recognized for those grants whose exercise price is less than the fair market
value of the stock on the date of grant. There was no compensation expense
recorded for employee grants for the years ended December 31, 1998 and 1997.
NON-EMPLOYEE GRANTS: The Company also grants options and warrants to
non-employees for goods and services and in conjunction with certain agreements.
These grants are accounted for under FASB Statement No. 123 based on the grant
date fair values.
Had compensation cost for all of the stock-based compensation grants and
warrants issued been determined based on the fair values at the grant date for
awards in 1998 and 1997 consistent with the provisions of Statement No. 123, the
Company's net loss and net loss per basic and diluted common share would have
been as indicated below.
<TABLE>
<CAPTION>
December 31
---------------------------------
1998
(Unaudited) 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Net loss, as reported $ (3,042,230) $ (1,512,760)
Net loss, pro forma (3,228,115) (1,673,561)
Basic and diluted net loss per common share, as reported (2.69) (1.39)
Basic and diluted net loss per common share, pro forma (2.86) (1.54)
</TABLE>
The above pro forma effects on net loss and net loss per basic and diluted
common share are not likely to be representative of the effects on reported net
loss or net loss per common share for future years because options vest over
several years and additional awards generally are made each year.
The fair value of each option grant is estimated on the date of grant using the
Black-Sholes option pricing model with the following weighted-average
assumptions used for grants in 1998 and 1997:
<TABLE>
<CAPTION>
December 31
---------------------------------
1998
(Unaudited) 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Volatility 133.0% 104.0%
Risk-free interest rate 6.0% 6.5%
Expected life (years) 2 7
Expected dividend yield None None
</TABLE>
F-13
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION APPLICABLE TO THE YEAR ENDED DECEMBER 31, 1998, IS UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 7. STOCK OPTIONS AND WARRANTS (CONTINUED)
INCENTIVE STOCK OPTION PLAN: An Incentive Stock Option Plan (ISOP) was approved
on March 31, 1990, and 50,000 shares of common stock were reserved for issuance.
The ISOP allows the Company to grant options to purchase shares of common stock
with a maximum term of ten years and an exercise price not less than the market
price on the date of grant. Unless otherwise provided by the Board or Committee
granting the option, the options vest in one-quarter increments over four years
on each of the anniversary dates of the grant. If any of the options granted
under the plan expire or are terminated prior to being exercised in full, then
the unexercised portion of such options will once again be available for
additional option grants. No options may be granted under the ISOP after April
1, 2000. At December 31, 1998, no options are outstanding and 50,000 options are
available for grant.
NONQUALIFIED STOCK OPTION PLAN: On April 1, 1994, the Company adopted the 1994
Nonqualified Stock Option Plan (1994 Plan). The 1994 Plan allows the Company to
grant options to purchase up to 150,000 shares of common stock that have a
maximum term of ten years. The exercise price and vesting requirements are
determined on the date of grant by the granting committee. No options may be
granted under the 1994 Plan after March 31, 2004. As of December 31, 1998,
53,896 options have been granted, and 48,896 options are outstanding, with
96,104 options available for grant.
1996 STOCK OPTION PLAN: On October 29, 1996, the Company's stockholders approved
the WTC Industries, Inc. 1996 Stock Option Plan (1996 Plan) and 50,000 shares of
common stock were reserved for issuance. The 1996 Plan allows the Company to
grant both incentive stock options and nonqualified stock options and restricted
stock awards. Incentive stock option have a maximum term of ten years and the
exercise price may not be less than the market price on the date of grant. The
exercise price of any nonqualified stock options granted may be no less than 85
percent of the market price on the date of grant. Any vesting requirement will
be determined on the date of grant by the granting committee. No incentive stock
options may be granted after September 24, 2006. If any of the options granted
under the plan expire or are terminated prior to being exercised in full, then
the unexercised portion of such options will once again be available for
additional option grants. At December 31, 1998, 80,600 options are outstanding.
The Company granted more options than available under the 1996 Plan and is in
the process of amending the plan.
In addition, outside directors of the Company are entitled to receive annual
grants of nonqualified stock options to purchase $1,000 worth of common stock at
the market value on the date of grant, but in no event more than 500 shares per
outside director per grant. These options vest and become exercisable
immediately and shall terminate five years after the date of grant or, if
earlier, one year after the outside director ceases to be a member of the Board
of Directors.
OTHER OPTIONS: At December 31, 1998 and 1997, the Company had options to
purchase 3,000 shares of common stock at exercise prices of $15.00 to $25.00
issued and outstanding to an unrelated company for services provided. The
options are currently exercisable and will expire in 2001.
F-14
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION APPLICABLE TO THE YEAR ENDED DECEMBER 31, 1998, IS UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 7. STOCK OPTIONS AND WARRANTS (CONTINUED)
A summary of the stock option transactions under these plans during the two-year
period ended December 31, 1998, is as follows:
<TABLE>
<CAPTION>
Weighted-
1994 1996 Average
ISOP Plan Plan Other Total Exercise Price
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
December 31, 1996 25 39,000 1,000 3,000 43,025 $ 9.62
Granted (weighted-average fair
value $0.84) -- 1,044 80,386 -- 81,430 10.21
Exercised -- (5,000) -- -- (5,000) 6.00
Expired (25) -- -- -- (25) 70.00
Canceled -- -- (32,330) -- (32,330) 11.5
-----------------------------------------------------------------------------
Options outstanding at
December 31, 1997 -- 35,044 49,056 3,000 87,100 11.49
Granted (weighted-average fair
value $0.41) (unaudited) -- 14,200 34,040 -- 48,240 5.96
Canceled (unaudited) -- (348) (2,496) -- (2,844) 14.49
-----------------------------------------------------------------------------
Options outstanding at
December 31, 1998 (unaudited) -- 48,896 80,600 3,000 132,496 $ 9.41
=============================================================================
Options exercisable at
December 31, 1997 -- 35,044 12,760 3,000 50,804 $ 10.77
Options exercisable at
December 31, 1998 -- 48,896 33,977 3,000 85,873 8.96
</TABLE>
Options outstanding and exercisable by price range as of December 31, 1998, is
as follows (unaudited):
<TABLE>
<CAPTION>
Average Weighted- Weighted-
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life - Years Price Exercisable Price
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3.13 15,240 1.7 $ 3.13 15,240 $ 3.13
$ 5.00 8,000 1.0 5.00 8,000 5.00
$ 7.50 30,000 6.7 7.50 10,000 7.50
$10.00 34,000 5.3 10.00 34,000 10.00
$12.50 40,560 5.3 12.50 13,937 12.50
$15.00 - $17.50 3,000 3.4 15.83 3,000 15.83
$25.00 - $28.75 1,696 3.5 26.54 1,696 26.54
------- ------
132,496 85,873
======= ======
</TABLE>
STOCK WARRANTS: In connection with the conversion of debt and issuance of common
stock to the chairman of the Board, the Company issued a warrant to purchase
240,000 shares of common stock at an exercise price of $20.00 per share on or
before May 22, 2001. At December 31, 1998, the warrant remained exercisable and
outstanding.
During 1997, warrants to purchase an aggregate of 14,500 shares of the Company's
common stock at $20.00 per share expired. These warrants had been issued in
connection with the private placement offering in 1994 (see Note 4).
F-15
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION APPLICABLE TO THE YEAR ENDED DECEMBER 31, 1998, IS UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 7. STOCK OPTIONS AND WARRANTS (CONTINUED)
A summary of stock warrant transactions during the two-year period ended
December 31, 1998, is as follows:
Weighted-
Number of Average Exercise
Shares Price per Share
- --------------------------------------------------------------------------------
Warrants outstanding at December 31, 1996 254,500 $20.00
Expired in 1997 (14,500) 20.00
-------
Warrants outstanding at December 31, 1997 and 1998
(unaudited) 240,000 20.00
=======
NOTE 8. LITIGATION SETTLEMENTS
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 2,500 shares of common stock in February 1997,
both of which were accrued in the consolidated financial statements at December
31, 1996.
NOTE 9. INCOME TAXES
No provision for income taxes has been recorded for the years ended December 31,
1998 and 1997, 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
$16,800,000 at December 31, 1998. 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.
F-16
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION APPLICABLE TO THE YEAR ENDED DECEMBER 31, 1998, IS UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 9. INCOME TAXES (CONTINUED)
A summary of the Company's deferred taxes at December 31 is as follows:
1998
(Unaudited) 1997
- -------------------------------------------------------------------------------
Current assets:
Inventory obsolescence reserve $ 371,000 $ 197,000
Loss on minimum purchase commitment 207,000 22,000
Allowance for doubtful accounts 4,000 6,000
Warranty reserve 24,000 16,000
Compensation and employee benefits 7,000 10,000
Other 12,000
----------------------------
613,000 263,000
Less valuation reserve (613,000) (263,000)
----------------------------
$ -- $ --
============================
Noncurrent assets:
NOL carryforwards $ 3,900,000 $ 3,051,000
Less valuation reserve (3,900,000) (3,051,000)
----------------------------
$ -- $ --
============================
NOTE 10. RELATED-PARTY TRANSACTIONS
Tapemark Company (Tapemark), of West St. Paul, Minnesota, provides labels for
the Company's products. The Company's chairman and largest stockholder is the
CEO and chairman of the Board for Tapemark. During the years ended December 31,
1998 and 1997, the Company paid Tapemark a total of $76,900 and $110,900,
respectively, for these services.
The Company also leases manufacturing and office space from Tapemark under a
one-year noncancelable lease. In lieu of cash payments for rent, the Company
issued options to purchase 11,200 shares of common stock at a price of $3.125 to
Tapemark. The options are immediately exercisable with an expiration date of
December 31, 2000. The Company will make no payments to Tapemark for general
utilities, pro rata taxes, and special assessments.
F-17
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION APPLICABLE TO THE YEAR ENDED DECEMBER 31, 1998, IS UNAUDITED)
NOTE 11. 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, 1998 and 1997, were approximately as follows:
1998
(Unaudited) 1997
- -------------------------------------------------------------------------------
Domestic sales $ 2,425,000 $ 1,186,000
Foreign sales:
Europe/Africa/Middle East 846,000 835,000
Asia 302,000 910,000
Other 213,000 354,000
------------------------------
Net sales $ 3,786,000 $ 3,285,000
==============================
The Company has the following customers that account for more than 10 percent of
net sales:
1998
Customer (Unaudited) 1997
- -------------------------------------------------------------------------------
A 53% 25%
B * 16%
C * 12%
* These customers did not meet the 10 percent threshold in the year indicated.
Customer A's accounts receivable balance at December 31, 1998, was $200,000.
NOTE 12. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES: The Company leases office, manufacturing, and warehouse space,
and certain office equipment under both cancelable and noncancelable operating
leases expiring at various times through 2001. Future minimum lease payments,
excluding allocable operating costs, due under these operating leases, are as
follows:
Years ending December 31 (unaudited):
1999 $ 68,000
2000 65,000
2001 11,000
---------
$ 144,000
=========
Rent expense under all operating leases was approximately $112,000 and $210,000
for the years ended December 31, 1998 and 1997, respectively.
F-18
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION APPLICABLE TO THE YEAR ENDED DECEMBER 31, 1998, IS UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 and had accrued the unfulfilled pro rata commitment of
$54,000. In the fourth quarter of 1998, management accrued the remaining
estimated commitment, not likely to be fulfilled by the Company, of
approximately $463,500. Therefore, at December 31, 1998, $517,500 is accrued, of
which $172,500 is included in current liabilities.
ARRANGEMENT 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 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. The Company pays a
royalty on annual sales of certain products equal to 3 percent of the first
$1,000,000 of net sales and 2 percent of the excess, due quarterly, subject to a
minimum annual royalty. 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 percent of any royalties
or payments received for sublicensing the patent rights contained in the license
agreement. Royalty expenses were $25,000 and $75,000 for the years ended
December 31, 1998 and 1997, respectively. Royalties for 1997 were settled with
the issuance of 7,500 shares of the Company's common stock.
In May and July 1998, the Company amended this license agreement to reduce the
minimum annual royalty from $75,000 to $25,000 for the remainder of the license
agreement. In consideration, the Company issued 42,500 shares of its common
stock to KSURF, valued at $350,000. Due to the uncertainty of the future
realization of its value, the Company wrote off this prepaid royalty in 1998.
F-19
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION APPLICABLE TO THE YEAR ENDED DECEMBER 31, 1998, IS UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 13. SUBSEQUENT EVENTS
DEMAND NOTES PAYABLE TO THE CHAIRMAN AND A COMPANY AFFILIATED WITH THE CHAIRMAN:
On January 1, 1999, the Company entered into an agreement to extend the
$2,399,881 demand note payable to the chairman to December 31, 1999. In
addition, $98,926 of interest accrued at December 31, 1998, was included in the
new note payable. Interest will accrue at prime and is payable on June 30, 1999,
and December 31, 1999.
On January 1, 1999, the Company entered into an agreement to borrow an
additional $500,000 from the chairman. The loan matures on December 31, 1999,
and accrues interest at prime payable on June 30, 1999, and December 31, 1999.
Through March 22, 1999, $350,000 had been advanced under this agreement.
On January 1, 1999, the Company entered into an agreement to extend the $526,034
of demand notes payable to a company affiliated with the chairman to December
31, 1999. In addition, $27,080 of interest accrued at December 31, 1998, was
included in the new note payable. Interest will accrue at prime and is payable
on June 30, 1999, and December 31, 1999.
NOTE 14. FOURTH-QUARTER 1998 OPERATING RESULTS
The Company recorded a pretax loss of $1,356,000 in the 1998 fourth quarter,
compared with pretax losses totaling $1,531,000 in the first three quarters of
1998. The fourth-quarter 1998 loss is due, in part, to an increase in the
inventory reserve of approximately $366,000 and an accrual of the estimated
commitment, not likely to be fulfilled, under the Porous Media contract (see
Note 12) of $463,500.
F-20
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT
OF
THIRD RESTATED CERTIFICATE OF INCORPORATION
OF
WTC INDUSTRIES, INC.
WTC Industries, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware, does hereby
certify:
FIRST: That pursuant to the recommendation of the Board of Directors of
WTC Industries, Inc. (the "Company"), the following resolutions amending the
Certificate of Incorporation of the Company were duly adopted by the written
consent of stockholders of the Company holding a majority of the outstanding
stock entitled to vote thereon. The resolutions setting forth the proposed
amendment are as follows:
"NOW, THEREFORE, BE IT RESOLVED, that on the effective date
referred to below (the "Effective Date") each one share of the
Company's common stock, par value $.01 per share, which is
outstanding as of the close of business on the Effective Date
shall at that time, without further action by the holders of
such common stock, be made the subject of a reverse stock
split and converted into one-tenth of one share of Company
common stock;
RESOLVED FURTHER, that as of the Effective Date, Article
Fourth, Section A of the Company's Certificate of Incorporation
shall be amended to read as follows:
'Common Stock. 15,000,000 shares of Common
Stock, which shall have a par value of $.10
per share.'
RESOLVED FURTHER, that the foregoing resolutions and the
reverse split and amendment to the Certificate of
Incorporation provided for therein shall be submitted for
approval of the shareholders of record on December 15, 1998 in
accordance with Delaware law, either at a meeting of
shareholders or by means of written consents, and shall become
effective following such shareholder approval at an effective
date (the "Effective Date") which shall be specified by the
President in a press release issued with respect to the
reverse stock split;"
SECOND: That the foregoing resolutions have been adopted by written
consent of stockholders holding a majority of the outstanding stock entitled to
vote thereon in accordance with Section 216 of the General Corporation Law of
the State of Delaware.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
<PAGE>
FOURTH: That the capital of said corporation shall not be reduced under
or by reason of said amendment.
IN WITNESS WHEREOF, the Company has caused this certificate to be
signed by Robert C. Klas, Sr., its Chief Executive Officer, on this 4th day of
January, 1999.
WTC INDUSTRIES, INC.
By /s/ Robert C. Klas, Sr.
-------------------------
Robert C. Klas, Sr.
Chief Executive Officer
EXHIBIT 4.0
- ---------------- ----------------
NUMBER [LOGO] SHARES
PENTAPURE
- ---------------- INCORPORATED ----------------
A WHOLLY OWNED SUBSIDIARY OF WTC INDUSTRIES, INC.
WTC INDUSTRIES, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE SIDE
FOR CERTAIN DEFINITIONS
-----------------------
CUSIP 929341 20 4
-----------------------
THIS CERTIFIES THAT
SPECIMEN
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, OF THE PAR VALUE OF
$.10 PER SHARE, OF
============================= WTC INDUSTRIES, INC. =============================
TRANSFERABLE ON THE BOOKS OF THE CORPORATION BY THE HOLDER HEREOF IN PERSON OR
BY ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED. THIS
CERTIFICATE IS NOT VALID UNLESS COUNTERSIGNED BY THE TRANSFER AGENT AND
REGISTRAR.
IN WITNESS WHEREOF, THE SAID CORPORATION HAS CAUSED THIS CERTIFICATE TO BE
SIGNED BY FACSIMILE SIGNATURE OF ITS DULY AUTHORIZED OFFICER.
DATED:
/s/ Robert C. Klas, Sr.
CHIEF EXECUTIVE OFFICER AND SECRETARY
Countersigned and Registered:
NORWEST BANK MINNESOTA, N.A.
Transfer Agent and Registrar
By
Authorized Signature
<PAGE>
- --------------------------------------------------------------------------------
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common UTMA - ______Custodian__________
TEN ENT -- as tenants by entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Transfer to Minors
survivorship and not as tenants
in common Act_______________________
(State)
Additional abbreviations may also be used though not in the above list.
- --------------------------------------------------------------------------------
FOR VALUE RECEIVED ______________ HEREBY SELL, ASSIGN AND TRANSFER UNTO
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
____________________________________
____________________________________
________________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ SHARES
OF THE CAPITAL STOCK REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY
IRREVOCABLY CONSTITUTE AND APPOINT _____________________________________________
_______________________________________________________________________ ATTORNEY
TO TRANSFER THE SAID STOCK ON THE BOOKS OF THE WITHIN-NAMED CORPORATION WITH
FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED ________________________________________
________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER
SIGNATURE GUARANTEED
- ---------------------------------------
ALL GUARANTEES MUST BE MADE BY A
FINANCIAL INSTITUTION (SUCH AS A BANK
OR BROKER) WHICH IS A PARTICIPANT IN
THE SECURITIES TRANSFER AGENTS MEDALLION
PROGRAM ("STAMP"). THE NEW YORK STOCK
EXCHANGE, INC. MEDALLION SIGNATURE
PROGRAM ("MSP"), OR THE STOCK EXCHANGES
MEDALLION PROGRAM ("SEMP") AND MUST NOT
BE DATED. GUARANTEES BY A NOTARY PUBLIC
ARE NOT ACCEPTABLE.
- ---------------------------------------
EXHIBIT 10.1.1
AGREEMENT AMENDMENT
THIS AGREEMENT AMENDMENT, effective as of January 1, 1998, modifies the
LICENSE AGREEMENT, as previously revised on December 1, 1989, and modified by
letter agreement on November 10, 1993, and by amendment on July 31, 1997,
between Kansas State University Research Foundation (hereinafter the
"FOUNDATION") and WTC Industries, Inc. (formerly referred to as "WATER
TECHNOLOGIES," hereinafter "LICENSEE") relating to the commercialization of
certain polyiodide water disinfectant technologies and improvements thereof.
FOUNDATION agrees to reduce the annual minimum royalty payment
specified in Section (2) of ARTICLE VI of LICENSE AGREEMENT from $75,000 to
$25,000 in return for the additional consideration of three hundred and
sixty-five thousand (365,000) unrestricted shares of WTC Industries, Inc.,
common stock. Payment of the minimum royalty for 1998 and transmittal of said
shares of common stock will be due and payable upon execution of this AGREEMENT
AMENDMENT.
Upon execution of this agreement, LICENSEE may elect to no longer
reimburse all subsequent expenses for prosecution and maintenance of any foreign
patent applications and patents, as specified in ARTICLE VII of LICENSE
AGREEMENT, by providing written notice of such intent to FOUNDATION. In such an
event, FOUNDATION may elect to either abandon or sustain at its own expense such
foreign patent applications and patents. However, in the event of abandonment of
such foreign patent applications and patents, the definition of "Licensed
Territory" will remain unchanged as if such foreign patent applications and
patents remained in effect under the LICENSE AGREEMENT.
All other terms, conditions, and obligations of the underlying LICENSE
AGREEMENT shall remain unchanged.
IN WITNESS WHEREOF, the parties hereto caused this AGREEMENT
AMENDMENT to be duly executed by their duly authorized representatives.
KANSAS STATE UNIVERSITY RESEARCH FOUNDATION WTC INDUSTRIES, INC.
Recommended: Agreed:
By: /s/ Ronald L. Sampson By: /s/ Robert C. Klas, Jr.
-------------------------------- -----------------------------
Ronald L. Sampson Robert C. Klas, Jr.
President, Mid-America President
Commercialization Corporation
Date: April 29, 1998 Date: May 7, 1998
------------------------------ ---------------------------
Agreed:
By: /s/ Ronald W. Trewyn
--------------------------------
Ronald. W. Trewyn
President
Date: April 30, 1998
------------------------------
EXHIBIT 10.1.2
AGREEMENT AMENDMENT
THIS AGREEMENT AMENDMENT, effective as of July 1, 1998, modifies the
LICENSE AGREEMENT, as previously revised on December 1, 1989, and modified by
letter agreement on November 10, 1993, and by amendments on July 31, 1997 and
May 7, 1998, between Kansas State University Research Foundation (hereinafter
the "FOUNDATION") and WTC Industries, Inc. (formerly referred to as "WATER
TECHNOLOGIES," hereinafter "LICENSEE") relating to the commercialization of
certain polyiodide water disinfectant technologies and improvements thereof, as
follows.
1. FOUNDATION agrees to accept four hundred and twenty-five thousand (425,000)
restricted shares of WTC Industries, Inc. common stock in lieu of both (a)
removal of the restriction on seventy-five thousand (75,000) shares issued
in relation to the amendment of July 31, 1997; and (b) issuance of three
hundred and sixty-five thousand (365,000) shares of unrestricted stock to
be issued in relation to the amendment of May 7, 1998.
2. The 425,000 new shares of common stock to be issued in accordance with this
AGREEMENT AMENDMENT will be transmitted promptly to FOUNDATION upon
execution of this AMENDMENT.
3. The FOUNDATION and LICENSEE agree that the restriction on the five hundred
thousand shares to be held by the FOUNDATION will be removed on or before
May 7, 1999.
4. Subject to their trading restriction prior to registration with the
Securities and Exchange Commission, the restricted shares held by the
FOUNDATION shall receive all other rights and privileges of the common
stock of WTC Industries, Inc. that do not contravene any existing laws and
regulations.
5. All other terms, conditions, and obligations of the underlying and amended
LICENSE AGREEMENT shall remain unchanged.
IN WITNESS WHEREOF, the parties hereto caused this AGREEMENT AMENDMENT
to be duly executed by their duly authorized representatives.
KANSAS STATE UNIVERSITY RESEARCH FOUNDATION WTC INDUSTRIES, INC.
Recommended: Agreed:
By: /s/ Ronald L. Sampson By: /s/ Robert C. Klas, Jr.
-------------------------------- -----------------------------
Ronald L. Sampson Robert C. Klas, Jr.
President, Mid-America President
Commercialization Corporation
Date: July 13, 1998 Date: July 24, 1998
------------------------------ ---------------------------
Agreed:
By: /s/ R. W. Trewyn
--------------------------------
R. W. Trewyn
President
Date: July 14, 1998
------------------------------
EXHIBIT 10.51
PROMISSORY NOTE
Date: January 1, 1999 Principal Sum: $2,498,806.59
ON DEMAND, but not sooner than the date specified below, for value
received, the undersigned, WTC Industries, Inc. (the "Maker"), promises to pay
to the order of Robert C. Klas, Sr., (the "Holder"), at 150 East Marie Avenue,
West St. Paul, Minnesota 55118, or at any other place designated at any time by
the holder hereof, in lawful money of the United States of America, the
principal sum of Two Million Four Hundred Ninety Eight Thousand Eight Hundred
Six and 59/100 Dollars ($2,498,806.59) or, if less than such amount, the
aggregate unpaid principal amount of all advances made to Maker from time to
time, with interest (calculated on the basis of actual days elapsed in a 365 day
year) thereon from the date hereof on the unpaid balances from time to time
remaining.
Interest shall accrue on the unpaid balance at an annual rate equal to
the Wall Street Journal prime rate of interest. Accrued interest shall be
payable June 30, 1999 and December 31, 1999.
Principal shall be payable upon demand, but not sooner than December
31, 1999.
All payments under this Note shall first be applied to interest on
unpaid principal and the balance to the amortization and reduction of principal.
The Maker hereof shall have the option to prepay the balance of this
Note in whole or in part, at any time, without penalty provided that any such
prepayment shall be applied against future payments and installments due under
this Note in the inverse order of maturity.
This Note shall become automatically due and payable, including unpaid
interest accrued thereon, without notice or demand, should a petition be filed
by or against the undersigned under the United States Bankruptcy Code.
If any payment under this Note is not paid when due, or if any other
indebtedness of the undersigned to the Holder is not paid when due, the Holder
hereof may, at its option, declare this Note to be immediately due and payable
and thereupon this Note shall be immediately due and payable, together with all
unpaid interest accrued hereon, without notice or demand; provided, however,
nothing herein
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contained shall preclude or limit the holder hereof from demanding payment of
this Note at any time and for any reason, without notice.
The undersigned agrees to pay all costs of collection, including
reasonable attorney's fees and legal expenses incurred by the holder hereof in
the event this Note is not duly paid.
Presentment or other demand for payment, notice of dishonor and protest
are hereby waived by the undersigned.
This Note shall be governed by the substantive laws of the State of
Minnesota.
Address of Maker: WTC INDUSTRIES, INC.
WTC Industries, Inc. By: /s/ Greg Jensen
-----------------------------------
14405 21st Avenue North Greg Jensen
Minneapolis MN 55447 Chief Financial Officer
2
<PAGE>
PROMISSORY NOTE
Date: January 1, 1999 Principal Sum: $500,000.00
ON DEMAND, but not sooner than the date specified below, for value
received, the undersigned, WTC Industries, Inc. (the "Maker"), promises to pay
to the order of Robert C. Klas, Sr., (the "Holder"), at 150 East Marie Avenue,
West St. Paul, Minnesota 55118, or at any other place designated at any time by
the holder hereof, in lawful money of the United States of America, the
principal sum of Five Hundred Thousand Dollars ($500,000.00) or, if less than
such amount, the aggregate unpaid principal amount of all advances made to Maker
from time to time, with interest (calculated on the basis of actual days elapsed
in a 365 day year) thereon from the date hereof on the unpaid balances from time
to time remaining.
Interest shall accrue on the unpaid balance at an annual rate equal to
the Wall Street Journal prime rate of interest. Accrued interest shall be
payable June 30, 1999 and December 31, 1999.
Principal shall be payable upon demand, but not sooner than December
31, 1999.
All payments under this Note shall first be applied to interest on
unpaid principal and the balance to the amortization and reduction of principal.
The Maker hereof shall have the option to prepay the balance of this
Note in whole or in part, at any time, without penalty provided that any such
prepayment shall be applied against future payments and installments due under
this Note in the inverse order of maturity.
This Note shall become automatically due and payable, including unpaid
interest accrued thereon, without notice or demand, should a petition be filed
by or against the undersigned under the United States Bankruptcy Code.
If any payment under this Note is not paid when due, or if any other
indebtedness of the undersigned to the Holder is not paid when due, the Holder
hereof may, at its option, declare this Note to be immediately due and payable
and thereupon this Note shall be immediately due and payable, together with all
unpaid interest accrued hereon, without notice or demand; provided, however,
nothing herein
1
<PAGE>
contained shall preclude or limit the holder hereof from demanding payment of
this Note at any time and for any reason, without notice.
The undersigned agrees to pay all costs of collection, including
reasonable attorney's fees and legal expenses incurred by the holder hereof in
the event this Note is not duly paid.
Presentment or other demand for payment, notice of dishonor and protest
are hereby waived by the undersigned.
This Note shall be governed by the substantive laws of the State of
Minnesota.
Address of Maker: WTC INDUSTRIES, INC.
WTC Industries, Inc. By: /s/ Greg Jensen
-----------------------------------
14405 21st Avenue North Greg Jensen
Minneapolis MN 55447 Chief Financial Officer
2
<PAGE>
PROMISSORY NOTE
Date: January 1, 1999 Principal Sum: $553,114.20
ON DEMAND, but not sooner than the date specified below, for value
received, the undersigned, WTC Industries, Inc. (the "Maker"), promises to pay
to the order of THE TAPEMARK COMPANY, (the "Holder"), at 150 East Marie Avenue,
West St. Paul, Minnesota 55118, or at any other place designated at any time by
the holder hereof, in lawful money of the United States of America, the
principal sum of Five Hundred Fifty Three Thousand One Hundred Fourteen and
20/100 Dollars ($553,114.20) or, if less than such amount, the aggregate unpaid
principal amount of all advances made to Maker from time to time, with interest
(calculated on the basis of actual days elapsed in a 365 day year) thereon from
the date hereof on the unpaid balances from time to time remaining.
Interest shall accrue on the unpaid balance at an annual rate equal
to the Wall Street Journal prime rate of interest. Accrued interest shall be
payable on June 30, 1999 and December 31, 1999.
Principal shall be payable upon demand, but not sooner than December
31, 1999.
All payments under this Note shall first be applied to interest on
unpaid principal and the balance to the amortization and reduction of principal.
The Maker hereof shall have the option to prepay the balance of this
Note in whole or in part, at any time, without penalty provided that any such
prepayment shall be applied against future payments and installments due under
this Note in the inverse order of maturity.
This Note shall become automatically due and payable, including unpaid
interest accrued thereon, without notice or demand, should a petition be filed
by or against the undersigned under the United States Bankruptcy Code.
If any payment under this Note is not paid when due, or if any other
indebtedness of the undersigned to the Holder is not paid when due, the Holder
hereof may, at its option, declare this Note to be immediately due and payable
and thereupon this Note shall be immediately due and payable, together with all
unpaid interest accrued hereon, without notice or demand; provided, however,
nothing herein
1
<PAGE>
contained shall preclude or limit the holder hereof from demanding payment of
this Note at any time and for any reason, without notice.
The undersigned agrees to pay all costs of collection, including
reasonable attorney's fees and legal expenses incurred by the holder hereof in
the event this Note is not duly paid.
Presentment or other demand for payment, notice of dishonor and protest
are hereby waived by the undersigned.
This Note shall be governed by the substantive laws of the State of
Minnesota.
Address of Maker: WTC INDUSTRIES, INC.
WTC Industries, Inc. By: /s/ Greg Jensen
-----------------------------------
14405 21st Avenue North Greg Jensen
Minneapolis MN 55447 Chief Financial Officer
2
EXHIBIT 10.52
LEASE AGREEMENT
The TAPEMARK Company ("Owner") and the WTC Industries, Inc. ("Tenant") referred
to below hereby agree to the terms and conditions of this Lease as hereinafter
set forth.
I. Basic Provisions
1.1 Date of Lease: 03/01/98
1.2 Tenant Name and Address: WTC Industries, Inc., 150 Marie
Avenue East, West St. Paul, MN 55118-4002
1.3 Premises: 1685 Marthaler Lane, West St. Paul, MN
55118-Mezzanine
(the "Premises") situated on the real property legally
described in attached exhibit A (the Land).
1.4 Lease Term: 12 months, expiration date February 28, 1999.
1.5 Rent: WTC Industries, Inc., will lease approximately 5,000
square feet of manufacturing and office space at two TAPEMARK
facilities located in West St. Paul, Minnesota as follows:
DESCRIPTION LEASE SPACE LOCATION
----------- ----------- --------
Manufacturing Space Approx. 3,200 sq. ft. 1685 Marthaler Lane
Office Space Approx. 1,800 sq. ft. 150 East Marie Avenue
Lease Cost: Owner hereby leases to Tenant the 5,000 square
feet of manufacturing and office space @ $7.00/square foot per
year for a total lease value of $35,000.00. The Tenant will
pay Owner the lease cost of $35,000.00 in the manner
identified in Section 3. - Rent in this Lease Agreement.
1.6 Light manufacturing/assembly - 1685 Marthaler Lane facility.
Office space - 150 East Marie Avenue facility.
1.7 Name and Use. Tenant shall do business on the Premises under
the name of: WTC Industries, Inc.
2. Grant. Owner hereby leases to Tenant, and Tenant hereby leases from
Owner, the Premises upon the terms and conditions set forth hereinafter. Taking
possession of the Premise by Tenant shall be conclusive evidence as against
Tenant that the Premises are in satisfactory conditions on such date of
possession.
<PAGE>
3. Rent. Upon execution of this Lease, Tenant shall provide Owner with
an executable Stock Option Certificate for 112,00 shares at an exercise price
of$.3125 per share, "the bid price", with an expiration date of December 31,
2000. This Stock Option Certificate is considered payment in full during the
term of this lease for the manufacturing and office space identified in Section
1.5 above.
4. Use of Premises. Tenant shall use the Premises for the purpose
stated at all times in Section 1.6 of this Lease, and shall conduct its business
at all times in accordance with all applicable federal, state, and local laws,
regulations and ordinances. Tenant shall, at its expense, obtain and maintain
all necessary permits required for the conduct of Tenant's business on the
Premises. Tenant's use of the Premises shall be further subject to any rules and
regulations promulgated from time to time by Owner.
5. Hazardous Waste. Tenants shall not cause or introduce to the
property or allowed to be introduced to the property after the effective date of
this lease, as a result of any intentional or unintentional act of omission on
its part, a releasing, spilling, leaking, pumping, emitting, pouring, seeping,
leaching, emptying or dumping of "Toxic Materials." "Hazardous Substance" or
"Hazardous Waste" in, on or about the Premises or the Land (the above terms
shall have the meaning subscribed to such terms and state or federal statutes
and/or regulations promulgated in relation thereto and shall include petroleum,
asbestos and agricultural chemicals and pesticides.)
Tenant, and Tenant's respective successors and assigns, agree to
defend, indemnify and hold harmless Owner, its successors and assigns; and in
turn the Owner and its successors agree to defend, indemnify and hold harmless
the Tenant and the Tenant's respective successors and assigns, from and against
any and all claims, demands, judgments, damages, actions, causes of action,
injuries, administrative orders, consent agreements and orders, liabilities,
penalties, cost and expenses of any kind whatsoever, including claims arising
out of loss of life, injury to persons, property or business or damage to
natural resources arising out of the use or discharge of Toxic Material,
Hazardous Substance or Hazardous Waste by Tenant or parties in contractual
relationship with Tenant. Tenant acknowledges that its indemnification of Owner
and obligations hereunder shall not terminate upon the termination of this
Lease.
Tenant and Tenant's respective successors and assigns, shall bear, pay
and discharge when and as the same become due and payable, any and all such
judgments or claims for damages, penalties or otherwise against Owner described
above, shall hold Owner harmless for those judgments or claims, and proceedings
and negotiation of any description with any and all person, political
subdivisions or government agencies arising out of any of the occurrences set
fourth above, and in turn, the Owner shall do the same.
6. Maintenance; Repairs; Expenses. Tenant shall be responsible for all
routine maintenance and repair within their own leased space during the term of
this Lease. Owner shall be responsible for the maintenance and repair of all
structural
2
<PAGE>
components, foundation, and roof of the Premises. Owner shall also be
responsible for all plumbing and heating to be in working order at time of
possession. The exceptions being: Janitorial will be provided by tenant with
TAPEMARK responsible for trash removal. All mechanical, plumbing, and electrical
will be done at WTC expense, but first must meet TAPEMARK's approval relative to
the contractors, design and conformance to code. All mechanical plumbing and
electrical or other work performed in this section of the lease agreement must
be of a temporary nature and, if requested by the Owner, removed by the Tenant
at Tenant's expense prior to the termination of this lease.
7. Insurance. Tenant, at its sole cost and expense but for the mutual
benefit of Owner and Tenant, shall purchase and keep and maintain in force and
effect during the term of the lease, as follows:
a. comprehensive general public liability, products liability, contractual
liability, and property damage liability insurance, under policies and with
limits of not less than $2,000,000 for personal injury, bodily injury, sickness,
disease or death and $2,000,000 for damage or injury to or destruction of
property (including the loss of use thereof) for any one occurrence. Tenant's
policy or policies shall name Owner and its officers, agents and employees as
additional insured.
b. all risks" property insurance, such as a policy to cover Tenant's stock in
trade, fixtures, furniture, equipment, and tenant's improvements. Such policy
shall contain a replacement cot endorsement and a clause pursuant to which the
insurance carrier waives all rights of subrogation against the Landlord with
respect to losses payable under such policies.
c. flood insurance; if required.
d. worker's compensation insurance, with coverage according to the requirements
of the appropriate worker's compensation statutes.
All of the foregoing insurance policies shall be written on forms and with
insurance companies satisfactory to the Owner, shall provide for at least thirty
(30) days' prior written notice to Owner of any cancellation or material
modification of such policies, shall be in amounts sufficient to prevent Owner
from becoming a co-insurer of any loss thereunder, and shall provide that loss
proceeds under any such policies be made payable to Owner.
8. Indemnification by Tenant. Tenant shall indemnify and hold Owner and
its agent and employees harmless from and against any and all claims, actions,
liability and expense in connection with loss of life, bodily injury and/or
damage occurring on the Premises occasioned by Tenant, its agents, employees,
servants, licenses or invites, unless the same be caused wholly or in part by
the willful or grossly negligent act or proceeding is brought against the
parties indemnified under this Section, Tenant, at its expense, upon receiving
notice thereof from Owner, agrees to defend such action or proceeding by
3
<PAGE>
counsel reasonably acceptable to Owner. Owner agrees to indemnify Tenant from
any act by any person injured outside the Premises not occupied by the Tenant.
9. Taxes and Assessments. Real estate taxes and special assessments for
the Premises due and payable during the Lease Term shall be paid by the Owner.
10. Utilities. Owner will be responsible for providing general
utilities (heating, lighting, air-conditioning, general electrical, water and
sewer) and will be provided at Owner's expense. Tenant is responsible for all
other utilities included, but not limited to, special electrical, water, gas,
phone lines and service, data communications, etc. Tenant must receive Owner's
permission to install any utilities or service as defined in this section of the
lease agreement. Tenant is solely responsible for the installation charges and
disconnect/removal charges upon termination of this lease agreement.
11. Alterations and Liens. Tenant may not make any alterations or
improvements to the Premises (except routine maintenance and repairs as provided
in Section 6) without the prior written consent of the Owner. Tenant shall not
allow any liens of any kind to attach to the Premises on the Land, including
mechanics' liens.
12. Subordination of Lease. This Lease shall be subordinate to the lien
of any present or future mortgage against the Premises and the Land. Upon
written request of Owner or the holder of any such mortgage, Tenant shall by
appropriate instructment subordinate its rights under this lease to the lien of
such mortgage. A refusal by Tenant to execute and deliver any such instrument
shall constitute an event of default under this lease.
13. Attornment. Tenant shall, in the event any proceedings are brought
for the foreclosure of any mortgage made by Owner covering the Land and the
Premises, attorn to the purchaser upon any such foreclosure and recognize such
purchaser as owner under this Lease. Upon the request of any interested party,
Tenant shall execute, acknowledge and deliver an appropriate instrument
evidencing the attornment provided for in this Section. A refusal by Tenant to
execute and deliver any such statement shall constitute an event of default
under this lease.
14. Damage to Premises. If the Premises are damaged or destroyed by
fire or other casualty insurable under standard "all risks" insurance so as to
become partially or totally untenantable, Owner may elect to terminate this
lease by giving notice therefore to Tenant within 30 days after such occurrence.
If Owner exercises such right, then this Lease shall cease as of the date of
such notice and all rent and other charges payable by Tenant shall be adjusted
as of the date of the damage. In the event of major damage to the Premises, and
the Premises are rendered untenable, the Tenant at their sole option may
terminate the Lease after a reasonable time after the event.
If Owner does not elect to terminate this Lease, then Owner shall
repair and restore the Premises with due diligence, and all rent and other
charges payable hereunder
4
<PAGE>
shall be abated during any period in which such damage materially interferes
with the operation of Tenant's business on the Premises.
Rent abatement shall be Tenant's sole right against Owner by reason of
such damage and such abatement shall apply only during the period commencing
with such damage and ending when Owner substantially completes its repairs.
15. Condemnation of Property. If any part of the Premises shall be
taken by eminent domain, then the Term of this Lease shall terminate as to the
portion of the Premises taken as of the date possession shall be adjusted as of
the date of such termination. In the event a partial taking is not so extensive
as to render the Premises unsuitable for the business of Tenant, this lease
shall continue in effect as to such portion. In the event of any taking of the
Premise, Tenant shall not be entitled to any part of the condemnation award,
whether paid as compensation for diminution in value to the leasehold or to
award. To the extent the amount recoverable by Owner is not diminished thereby,
Tenant shall have the right to claim and recover from the condemning authority
(but not from Owner) such compensation as may be separately awarded to Tenant in
Tenant's own name and right on account on any damage to Tenant's business by
reason of such taking.
16. Default and Remedies. If rent, or any other charge payable by
Tenant under this Lease shall be unpaid on the date payment is required, or if
Tenant fails to perform any of the other terms, conditions, covenants and
obligation of this Lease to be observed and performed by Tenant for more than
fifteen (15) days after Owner gives Tenant notice of such default (it being
agreed that a default other than the failure to pay money which is of such a
character that the cure thereof reasonably requires longer than 15 days shall be
deemed cured within said period if Tenant commences a cure within such 15 days
and completes the same with due diligence), or if Tenant shall vacate or abandon
the Premises (a failure, without Owner's written consent, to operate its
business in the Premises for 20 consecutive days or more being conclusively
deemed an abandonment), or suffer his Lease to be taken under any writ of
exclusion, attachment or other process of law, then Owner shall have the
following rights in addition to all its other rights or remedies:
(a) Owner may, upon notice to Tenant, terminate this Lease and reenter
the Premises and take possession of the Premises. No re-entry or taking
possession of the Premises by Owner shall be construed as an election on its
part to terminate this Lease unless a notice of such intention is given to
Tenant (all other demands and notices of forfeiture or other similar notices
being hereby expressly waived by Tenant). Upon the service of any such notice of
termination, the term of this Lease shall automatically terminate. Should Owner
at any time terminate this Lease for any breach, in addition to any other
remedies it may have, it may recover from Tenant all damages it may incur by
reason of such breach, including the cost of recovering the Premises, reasonable
attorneys fees, and the value at the time of such termination of any rent
reserved in this Lease for the remainder of the term over the ten reasonable
rental value of the Premises for the
5
<PAGE>
remainder of such term, all of which amount shall be immediately due and payable
from Tenant to Owner.
(b) Owner may make such alterations and repairs as it shall determine
may be reasonably necessary to relet the Premises and Owner may (but shall not
be required to) relet the same or any part thereof upon such terms and
conditions as Owner in its sole discretion may deem advisable. Upon any
reletting, all rentals received by Owner from such reletting shall be applied as
follows: first, to the payment of any indebtedness other than rent or other
charges due under this Lease from Tenant to Owner; second, to the payment of any
costs and expenses of such reletting, including brokerage fees, attorneys' fees,
and costs of such alterations and repairs; and third, to the payment of rent and
other charges due and unpaid hereunder. In no event shall Tenant be entitled to
receive any surplus of any sums received by Owner on a reletting in excess of
the rental and other charges payable hereunder. If such rentals and other
charges received from such reletting during any month are less than those to be
paid during that month by Tenant shall pay any such deficiency to Owner upon
demand.
17. Surrender of Property. On the last day of the Lease Term or on the
earlier termination thereof, Tenant shall peaceably surrender the Premises to
Owner in good condition, reasonable wear and tear excepted.
18. Holding Over. In the event Tenant remains in possession of the
Premises after the expiration of the Lease term, Tenant, at Owner's option,
without the execution of a new lease, shall be deemed to be occupying the
Premises as a tenant from month-to-month at the annual rent for the last year of
the Lease Term, subject to all other conditions of this Lease.
19. General Provisions.
(a) Entire Agreement. This Lease, and exhibits, constitute the complete
agreement between Owner and Tenant concerning the Premises. There are no oral
agreements, understandings, promises or representations between Owner and Tenant
affecting this Lease. Any prior negotiations and understandings between the
parties shall be of no force or effect and shall not be used to interpret this
Lease.
(b) Successors. All rights and liabilities herein given to or imposed
upon the respective parties hereto shall extend to and bind the respective
successors and assigns of the parties. No rights, however, shall injure to the
benefit of any assignee of Tenant unless the assignment to such assignee has
been made in accordance with the provisions of this Lease.
(c) Governing Law. The laws of Minnesota shall govern this Lease.
(d) Amendment. Except as otherwise expressly provided herein, no
alteration or addition to this Lease shall be biding upon the Owner or Tenant
unless reduced to writing and signed by them.
20. Notices and Payments. Whenever any payment, notice, consent,
approval, or authorization is required or permitted under this Lease, the same
shall be in writing and
6
<PAGE>
shall be sent by hand delivery or by registered or certified mail (return
receipt requested), postage prepaid, as follows:
To Owner:
--------------------------------------
--------------------------------------
--------------------------------------
To Tenant:
--------------------------------------
--------------------------------------
--------------------------------------
21. Assignment; Subletting. Tenant may not assign this Lease or sublet
the Premises only with the prior written consent of Owner.
22. Attorneys' Fees. In the event of a default in any of the terms of
this Lease, the defaulting party shall pay to the non-defaulting party on demand
all attorneys' fees and costs incurred in the enforcement of this Lease.
23. Additional Items.
23.1 Throughout the term of this lease agreement, Tenant will operate as an
independent business occupying a portion of the TAPEMARK Company facilities
located at 1685 Marthaler Lane and 150 East Marie Avenue, West St. Paul, MN
55118. All costs associated with operating the WTC Industries, Inc. business at
these location will be billed directly to WTC Industries, Inc. In no event, will
any costs or charges associated with their business be billed directly to
TAPEMARK Company without the written consent of two senior officers of the
TAPEMARK Company.
23.2 Manufacturing Space - 1685 Marthaler Lane Facility Mezzanine Area
a. Access to the building will be via Lothenbach lower entrance. Appropriate
security access cards will be issued. ($15 initiation fee per card and $15
replacement charge). A twenty-four hour notice is required. TAPEMARK will not be
responsible for access of temporary WTC employees (no card access and require
escorting by WTC personnel).
b. Working hours will coincide with the TAPEMARK hours unless appropriate
arrangements are made and approved.
c. Rest room and cafeteria privileges are granted for the lower level only.
d. No access is allowed to the TAPEMARK mezzanine office or any manufacturing
areas except for movement of goods to and from dock and personnel traffic to
work areas.
7
<PAGE>
e. Assistance in the movement of materials to and from production area will be
provided by TAPEMARK personnel. No TAPEMARK power equipment will be operated by
WTC personnel.
f. The shipping dock may be used. However, WTC will use their own documents and
postage.
g. Confidentially statements will be required relative to TAPEMARK business.
h. Tenant will abide by all TAPEMARK safety and health requirements.
23.3 Office Space - 150 East Marie Avenue Lower Level Office Space
a. Access to the building will be via the front entrance or the back entrance.
TAPEMARK receptionist will greet visitors and call WTC receptionist for
notification. The WTC personnel are responsible for coming up to greet their
visitors and escorting them to their offices. WTC visitors are required to
follow the same security procedures as TAPEMARK visitors, but must sign in as
WTC visitors.
b. Working hours will coincide with the TAPEMARK hours for this location unless
appropriate arrangements are made and approved with authorized TAPEMARK
personnel.
c. WTC employees should use the rest rooms on the lower level - one rest room is
under the steps and additional rest rooms are next to the lunch room. The lunch
room facilities and equipment is reserved for the use of TAPEMARK personnel
between 12:00 Noon and 12:30 p.m.. We would recommend WTC personnel who would
like to use the lunch room facilities do so either before 12:00 Noon or after
12:30 p.m. Please leave facilities clean and orderly after each use.
d. WTC employees shall not have access to TAPEMARK facilities other than to the
premises which are specifically part of this Lease, unless escorted by
authorized TAPEMARK personnel. The primary reason for this restriction is to
protect the confidentiality of the information processed by the Corporate office
employees located in this facility. One exception to this restriction would be
for those WTC employees who have a need to visit the offices of Bob Klas, Sr.
and Bob Klas, Jr. as dictated by those individuals.
e. No TAPEMARK power equipment will be operated by WTC personnel.
f. The shipping dock may be used as follows: Incoming materials will be received
and distributed by the Warehouse personnel in Building 150. If inspection of
incoming goods are required by WTC, WTC should make personnel available to do so
when the goods are received. TAPEMARK personnel are only responsible for
receiving and moving the goods to the WTC offices. Items maybe shipped out via
the Warehouse docks, but the
8
<PAGE>
items must be packaged and prepared for shipping by WTC. TAPEMARK will not
provide shipping materials and goods may not be shipped out using TAPEMARK's
shippers and then be rebilled to WTC. WTC will use their own documents and
postage.
g. Confidentiality statements will be required relative to TAPEMARK business.
h. Tenant will abide by all TAPEMARK safety and health requirements.
i. Use of Small and Large Conference Rooms in this facility. WTC is requested to
conduct their internal meetings as well as meetings with visitors within their
leased office space if at all possible. Use of the TAPEMARK Conference Room
facilities is permissible if approved by authorized TAPEMARK personnel. In such
instances, approved WTC meetings are to be scheduled through Sue Bjorgum with
TAPEMARK located in the front offices of Building 150. TAPEMARK will respect
WTC's meeting schedule for either conference room, but must retain the right to
preempt any WTC meeting if necessary.
The "Owner" and the "Tenant" hereby execute this Lease on February 9, 1998.
OWNER
By /s/ James Burmeister
-----------------------------------------------
Title Sr. Vice President & Chief Financial Officer
--------------------------------------------
TENANT
By /s/ Greg Jensen
-----------------------------------------------
Title Chief Financial Officer
--------------------------------------------
9
EXHIBIT 10.53
LEASE AGREEMENT
The TAPEMARK Company ("Owner") and the WTC Industries, Inc. ("Tenant") referred
to below hereby agree to the terms and conditions of this Lease as hereinafter
set forth.
I. Basic Provisions
1.1 Date of Lease: 03/01/99
1.2 Tenant Name and Address: WTC Industries, Inc., 150 Marie
Avenue East, West St. Paul, MN 55118-4002
1.3 Premises: 1685 Marthaler Lane, West St. Paul, MN
55118-Mezzanine
(the "Premises") situated on the real property legally
described in attached exhibit A (the Land).
1.4 Lease Term: 24 months, expiration date February 28, 2001.
1.5 Rent: WTC Industries, Inc., will lease approximately 5,000
square feet of manufacturing and office space at two TAPEMARK
facilities located in West St. Paul, Minnesota as follows:
DESCRIPTION LEASE SPACE LOCATION
----------- ----------- --------
Manufacturing Space Approx. 3,200 sq. ft. 1685 Marthaler Lane
Office Space Approx. 1,800 sq. ft. 150 East Marie Avenue
Lease Cost: Owner hereby leases to Tenant the 5,000 square
feet of manufacturing and office space @ $7.00/square foot per
year for a total lease value of $70,000.00. The Tenant will
pay Owner the lease cost of $70,000.00 in the manner
identified in Section 3. - Rent in this Lease Agreement.
1.6 Light manufacturing/assembly - 1685 Marthaler Lane facility.
Office space - 150 East Marie Avenue facility.
1.7 Name and Use. Tenant shall do business on the Premises under
the name of: WTC Industries, Inc.
2. Grant. Owner hereby leases to Tenant, and Tenant hereby leases from
Owner, the Premises upon the terms and conditions set forth hereinafter. Taking
possession of the Premise by Tenant shall be conclusive evidence as against
Tenant that the Premises are in satisfactory conditions on such date of
possession.
<PAGE>
3. Rent. Upon execution of this Lease, Tenant shall provide Owner with
a Stock Certificate for 23,333 shares of WTC Industries, Inc. Common Stock which
will represent the first year lease obligation of $35,000.00. On March 1, 2000,
the Tenant shall issue a Stock Certificate for 23,334 shares of WTC Industries,
Inc. Common Stock which will represent the second year lease obligation of
$35,000.00.
4. Use of Premises. Tenant shall use the Premises for the purpose
stated at all times in Section 1.6 of this Lease, and shall conduct its business
at all times in accordance with all applicable federal, state, and local laws,
regulations and ordinances. Tenant shall, at its expense, obtain and maintain
all necessary permits required for the conduct of Tenant's business on the
Premises. Tenant's use of the Premises shall be further subject to any rules and
regulations promulgated from time to time by Owner.
5. Hazardous Waste. Tenants shall not cause or introduce to the
property or allowed to be introduced to the property after the effective date of
this lease, as a result of any intentional or unintentional act of omission on
its part, a releasing, spilling, leaking, pumping, emitting, pouring, seeping,
leaching, emptying or dumping of "Toxic Materials." "Hazardous Substance" or
"Hazardous Waste" in, on or about the Premises or the Land (the above terms
shall have the meaning subscribed to such terms and state or federal statutes
and/or regulations promulgated in relation thereto and shall include petroleum,
asbestos and agricultural chemicals and pesticides.)
Tenant, and Tenant's respective successors and assigns, agree to
defend, indemnify and hold harmless Owner, its successors and assigns; and in
turn the Owner and its successors agree to defend, indemnify and hold harmless
the Tenant and the Tenant's respective successors and assigns, from and against
any and all claims, demands, judgments, damages, actions, causes of action,
injuries, administrative orders, consent agreements and orders, liabilities,
penalties, cost and expenses of any kind whatsoever, including claims arising
out of loss of life, injury to persons, property or business or damage to
natural resources arising out of the use or discharge of Toxic Material,
Hazardous Substance or Hazardous Waste by Tenant or parties in contractual
relationship with Tenant. Tenant acknowledges that its indemnification of Owner
and obligations hereunder shall not terminate upon the termination of this
Lease.
Tenant and Tenant's respective successors and assigns, shall bear, pay
and discharge when and as the same become due and payable, any and all such
judgments or claims for damages, penalties or otherwise against Owner described
above, shall hold Owner harmless for those judgments or claims, and proceedings
and negotiation of any description with any and all person, political
subdivisions or government agencies arising out of any of the occurrences set
fourth above, and in turn, the Owner shall do the same.
6. Maintenance; Repairs; Expenses. Tenant shall be responsible for all
routine maintenance and repair within their own leased space during the term of
this Lease. Owner shall be responsible for the maintenance and repair of all
structural components, foundation, and roof of the Premises. Owner shall also be
responsible for
2
<PAGE>
all plumbing and heating to be in working order at time of possession. The
exceptions being: Janitorial will be provided by tenant with TAPEMARK
responsible for trash removal. All mechanical, plumbing, and electrical will be
done at WTC expense, but first must meet TAPEMARK's approval relative to the
contractors, design and conformance to code. All mechanical plumbing and
electrical or other work performed in this section of the lease agreement must
be of a temporary nature and, if requested by the Owner, removed by the Tenant
at Tenant's expense prior to the termination of this lease.
7. Insurance. Tenant, at its sole cost and expense but for the mutual
benefit of Owner and Tenant, shall purchase and keep and maintain in force and
effect during the term of the lease, as follows:
a. comprehensive general public liability, products liability, contractual
liability, and property damage liability insurance, under policies and with
limits of not less than $2,000,000 for personal injury, bodily injury, sickness,
disease or death and $2,000,000 for damage or injury to or destruction of
property (including the loss of use thereof) for any one occurrence. Tenant's
policy or policies shall name Owner and its officers, agents and employees as
additional insured.
b. all risks" property insurance, such as a policy to cover Tenant's stock in
trade, fixtures, furniture, equipment, and tenant's improvements. Such policy
shall contain a replacement cot endorsement and a clause pursuant to which the
insurance carrier waives all rights of subrogation against the Landlord with
respect to losses payable under such policies.
c. flood insurance; if required.
d. worker's compensation insurance, with coverage according to the requirements
of the appropriate worker's compensation statutes.
All of the foregoing insurance policies shall be written on forms and with
insurance companies satisfactory to the Owner, shall provide for at least thirty
(30) days' prior written notice to Owner of any cancellation or material
modification of such policies, shall be in amounts sufficient to prevent Owner
from becoming a co-insurer of any loss thereunder, and shall provide that loss
proceeds under any such policies be made payable to Owner.
8. Indemnification by Tenant. Tenant shall indemnify and hold Owner and
its agent and employees harmless from and against any and all claims, actions,
liability and expense in connection with loss of life, bodily injury and/or
damage occurring on the Premises occasioned by Tenant, its agents, employees,
servants, licenses or invites, unless the same be caused wholly or in part by
the willful or grossly negligent act or proceeding is brought against the
parties indemnified under this Section, Tenant, at its expense, upon receiving
notice thereof from Owner, agrees to defend such action or proceeding by counsel
reasonably acceptable to Owner. Owner agrees to indemnify Tenant from any act by
any person injured outside the Premises not occupied by the Tenant.
3
<PAGE>
9. Taxes and Assessments. Real estate taxes and special assessments for
the Premises due and payable during the Lease Term shall be paid by the Owner.
10. Utilities. Owner will be responsible for providing general
utilities (heating, lighting, air-conditioning, general electrical, water and
sewer) and will be provided at Owner's expense. Tenant is responsible for all
other utilities included, but not limited to, special electrical, water, gas,
phone lines and service, data communications, etc. Tenant must receive Owner's
permission to install any utilities or service as defined in this section of the
lease agreement. Tenant is solely responsible for the installation charges and
disconnect/removal charges upon termination of this lease agreement.
11. Alterations and Liens. Tenant may not make any alterations or
improvements to the Premises (except routine maintenance and repairs as provided
in Section 6) without the prior written consent of the Owner. Tenant shall not
allow any liens of any kind to attach to the Premises on the Land, including
mechanics' liens.
12. Subordination of Lease. This Lease shall be subordinate to the lien
of any present or future mortgage against the Premises and the Land. Upon
written request of Owner or the holder of any such mortgage, Tenant shall by
appropriate instructment subordinate its rights under this lease to the lien of
such mortgage. A refusal by Tenant to execute and deliver any such instrument
shall constitute an event of default under this lease.
13. Attornment. Tenant shall, in the event any proceedings are brought
for the foreclosure of any mortgage made by Owner covering the Land and the
Premises, attorn to the purchaser upon any such foreclosure and recognize such
purchaser as owner under this Lease. Upon the request of any interested party,
Tenant shall execute, acknowledge and deliver an appropriate instrument
evidencing the attornment provided for in this Section. A refusal by Tenant to
execute and deliver any such statement shall constitute an event of default
under this lease.
14. Damage to Premises. If the Premises are damaged or destroyed by
fire or other casualty insurable under standard "all risks" insurance so as to
become partially or totally untenantable, Owner may elect to terminate this
lease by giving notice therefore to Tenant within 30 days after such occurrence.
If Owner exercises such right, then this Lease shall cease as of the date of
such notice and all rent and other charges payable by Tenant shall be adjusted
as of the date of the damage. In the event of major damage to the Premises, and
the Premises are rendered untenable, the Tenant at their sole option may
terminate the Lease after a reasonable time after the event.
If Owner does not elect to terminate this Lease, then Owner shall
repair and restore the Premises with due diligence, and all rent and other
charges payable hereunder shall be abated during any period in which such damage
materially interferes with the operation of Tenant's business on the Premises.
4
<PAGE>
Rent abatement shall be Tenant's sole right against Owner by reason of
such damage and such abatement shall apply only during the period commencing
with such damage and ending when Owner substantially completes its repairs.
15. Condemnation of Property. If any part of the Premises shall be
taken by eminent domain, then the Term of this Lease shall terminate as to the
portion of the Premises taken as of the date possession shall be adjusted as of
the date of such termination. In the event a partial taking is not so extensive
as to render the Premises unsuitable for the business of Tenant, this lease
shall continue in effect as to such portion. In the event of any taking of the
Premise, Tenant shall not be entitled to any part of the condemnation award,
whether paid as compensation for diminution in value to the leasehold or to
award. To the extent the amount recoverable by Owner is not diminished thereby,
Tenant shall have the right to claim and recover from the condemning authority
(but not from Owner) such compensation as may be separately awarded to Tenant in
Tenant's own name and right on account on any damage to Tenant's business by
reason of such taking.
16. Default and Remedies. If rent, or any other charge payable by
Tenant under this Lease shall be unpaid on the date payment is required, or if
Tenant fails to perform any of the other terms, conditions, covenants and
obligation of this Lease to be observed and performed by Tenant for more than
fifteen (15) days after Owner gives Tenant notice of such default (it being
agreed that a default other than the failure to pay money which is of such a
character that the cure thereof reasonably requires longer than 15 days shall be
deemed cured within said period if Tenant commences a cure within such 15 days
and completes the same with due diligence), or if Tenant shall vacate or abandon
the Premises (a failure, without Owner's written consent, to operate its
business in the Premises for 20 consecutive days or more being conclusively
deemed an abandonment), or suffer his Lease to be taken under any writ of
exclusion, attachment or other process of law, then Owner shall have the
following rights in addition to all its other rights or remedies:
(a) Owner may, upon notice to Tenant, terminate this Lease and reenter
the Premises and take possession of the Premises. No re-entry or taking
possession of the Premises by Owner shall be construed as an election on its
part to terminate this Lease unless a notice of such intention is given to
Tenant (all other demands and notices of forfeiture or other similar notices
being hereby expressly waived by Tenant). Upon the service of any such notice of
termination, the term of this Lease shall automatically terminate. Should Owner
at any time terminate this Lease for any breach, in addition to any other
remedies it may have, it may recover from Tenant all damages it may incur by
reason of such breach, including the cost of recovering the Premises, reasonable
attorneys fees, and the value at the time of such termination of any rent
reserved in this Lease for the remainder of the term over the ten reasonable
rental value of the Premises for the remainder of such term, all of which amount
shall be immediately due and payable from Tenant to Owner.
5
<PAGE>
(b) Owner may make such alterations and repairs as it shall determine
may be reasonably necessary to relet the Premises and Owner may (but shall not
be required to) relet the same or any part thereof upon such terms and
conditions as Owner in its sole discretion may deem advisable. Upon any
reletting, all rentals received by Owner from such reletting shall be applied as
follows: first, to the payment of any indebtedness other than rent or other
charges due under this Lease from Tenant to Owner; second, to the payment of any
costs and expenses of such reletting, including brokerage fees, attorneys' fees,
and costs of such alterations and repairs; and third, to the payment of rent and
other charges due and unpaid hereunder. In no event shall Tenant be entitled to
receive any surplus of any sums received by Owner on a reletting in excess of
the rental and other charges payable hereunder. If such rentals and other
charges received from such reletting during any month are less than those to be
paid during that month by Tenant shall pay any such deficiency to Owner upon
demand.
17. Surrender of Property. On the last day of the Lease Term or on the
earlier termination thereof, Tenant shall peaceably surrender the Premises to
Owner in good condition, reasonable wear and tear excepted.
18. Holding Over. In the event Tenant remains in possession of the
Premises after the expiration of the Lease term, Tenant, at Owner's option,
without the execution of a new lease, shall be deemed to be occupying the
Premises as a tenant from month-to-month at the annual rent for the last year of
the Lease Term, subject to all other conditions of this Lease.
19. General Provisions.
(a) Entire Agreement. This Lease, and exhibits, constitute the complete
agreement between Owner and Tenant concerning the Premises. There are no oral
agreements, understandings, promises or representations between Owner and Tenant
affecting this Lease. Any prior negotiations and understandings between the
parties shall be of no force or effect and shall not be used to interpret this
Lease.
(b) Successors. All rights and liabilities herein given to or imposed
upon the respective parties hereto shall extend to and bind the respective
successors and assigns of the parties. No rights, however, shall injure to the
benefit of any assignee of Tenant unless the assignment to such assignee has
been made in accordance with the provisions of this Lease.
(c) Governing Law. The laws of Minnesota shall govern this Lease.
(d) Amendment. Except as otherwise expressly provided herein, no
alteration or addition to this Lease shall be biding upon the Owner or Tenant
unless reduced to writing and signed by them.
20. Notices and Payments. Whenever any payment, notice, consent,
approval, or authorization is required or permitted under this Lease, the same
shall be in writing and shall be sent by hand delivery or by registered or
certified mail (return receipt requested), postage prepaid, as follows:
6
<PAGE>
To Owner:
--------------------------------------
--------------------------------------
--------------------------------------
To Tenant:
--------------------------------------
--------------------------------------
--------------------------------------
21. Assignment; Subletting. Tenant may not assign this Lease or sublet
the Premises only with the prior written consent of Owner.
22. Attorneys' Fees. In the event of a default in any of the terms of
this Lease, the defaulting party shall pay to the non-defaulting party on demand
all attorneys' fees and costs incurred in the enforcement of this Lease.
23. Additional Items.
23.1 Throughout the term of this lease agreement, Tenant will operate as an
independent business occupying a portion of the TAPEMARK Company facilities
located at 1685 Marthaler Lane and 150 East Marie Avenue, West St. Paul, MN
55118. All costs associated with operating the WTC Industries, Inc. business at
these location will be billed directly to WTC Industries, Inc. In no event, will
any costs or charges associated with their business be billed directly to
TAPEMARK Company without the written consent of two senior officers of the
TAPEMARK Company.
23.2 Manufacturing Space - 1685 Marthaler Lane Facility Mezzanine Area
a. Access to the building will be via Lothenbach lower entrance. Appropriate
security access cards will be issued. ($15 initiation fee per card and $15
replacement charge). A twenty-four hour notice is required. TAPEMARK will not be
responsible for access of temporary WTC employees (no card access and require
escorting by WTC personnel).
b. Working hours will coincide with the TAPEMARK hours unless appropriate
arrangements are made and approved.
c. Rest room and cafeteria privileges are granted for the lower level only.
d. No access is allowed to the TAPEMARK mezzanine office or any manufacturing
areas except for movement of goods to and from dock and personnel traffic to
work areas.
e. Assistance in the movement of materials to and from production area will be
provided by TAPEMARK personnel. No TAPEMARK power equipment will be operated by
WTC personnel.
7
<PAGE>
f. The shipping dock may be used. However, WTC will use their own documents and
postage.
g. Confidentially statements will be required relative to TAPEMARK business.
h. Tenant will abide by all TAPEMARK safety and health requirements.
23.3 Office Space - 150 East Marie Avenue Lower Level Office Space
a. Access to the building will be via the front entrance or the back entrance.
TAPEMARK receptionist will greet visitors and call WTC receptionist for
notification. The WTC personnel are responsible for coming up to greet their
visitors and escorting them to their offices. WTC visitors are required to
follow the same security procedures as TAPEMARK visitors, but must sign in as
WTC visitors.
b. Working hours will coincide with the TAPEMARK hours for this location unless
appropriate arrangements are made and approved with authorized TAPEMARK
personnel.
c. WTC employees should use the rest rooms on the lower level - one rest room is
under the steps and additional rest rooms are next to the lunch room. The lunch
room facilities and equipment is reserved for the use of TAPEMARK personnel
between 12:00 Noon and 12:30 p.m.. We would recommend WTC personnel who would
like to use the lunch room facilities do so either before 12:00 Noon or after
12:30 p.m. Please leave facilities clean and orderly after each use.
d. WTC employees shall not have access to TAPEMARK facilities other than to the
premises which are specifically part of this Lease, unless escorted by
authorized TAPEMARK personnel. The primary reason for this restriction is to
protect the confidentiality of the information processed by the Corporate office
employees located in this facility. One exception to this restriction would be
for those WTC employees who have a need to visit the offices of Bob Klas, Sr.
and Bob Klas, Jr. as dictated by those individuals.
e. No TAPEMARK power equipment will be operated by WTC personnel.
f. The shipping dock may be used as follows: Incoming materials will be received
and distributed by the Warehouse personnel in Building 150. If inspection of
incoming goods are required by WTC, WTC should make personnel available to do so
when the goods are received. TAPEMARK personnel are only responsible for
receiving and moving the goods to the WTC offices. Items maybe shipped out via
the Warehouse docks, but the items must be packaged and prepared for shipping by
WTC. TAPEMARK will not provide shipping materials and goods may not be shipped
out using TAPEMARK's shippers and then be rebilled to WTC. WTC will use their
own documents and postage.
8
<PAGE>
g. Confidentiality statements will be required relative to TAPEMARK business.
h. Tenant will abide by all TAPEMARK safety and health requirements.
i. Use of Small and Large Conference Rooms in this facility. WTC is requested to
conduct their internal meetings as well as meetings with visitors within their
leased office space if at all possible. Use of the TAPEMARK Conference Room
facilities is permissible if approved by authorized TAPEMARK personnel. In such
instances, approved WTC meetings are to be scheduled through Sue Bjorgum with
TAPEMARK located in the front offices of Building 150. TAPEMARK will respect
WTC's meeting schedule for either conference room, but must retain the right to
preempt any WTC meeting if necessary.
The "Owner" and the "Tenant" hereby execute this Lease on February 28, 1999.
OWNER
By /s/ Robert Klas, Jr.
-------------------------------------
Title President
----------------------------------
TENANT
By /s/ Greg Jensen
-------------------------------------
Title Chief Financial Officer
----------------------------------
9
<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 F-2 AND F-3 OF THE COMPANY'S FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 25,261
<SECURITIES> 0
<RECEIVABLES> 227,715
<ALLOWANCES> 10,000
<INVENTORY> 430,106
<CURRENT-ASSETS> 676,773
<PP&E> 798,401
<DEPRECIATION> 604,562
<TOTAL-ASSETS> 882,404
<CURRENT-LIABILITIES> 6,054,086
<BONDS> 346,261
0
0
<COMMON> 114,603
<OTHER-SE> (5,632,546)
<TOTAL-LIABILITY-AND-EQUITY> 882,404
<SALES> 3,785,909
<TOTAL-REVENUES> 3,785,909
<CGS> 4,102,833
<TOTAL-COSTS> 2,241,466
<OTHER-EXPENSES> 483,840
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 436,650
<INCOME-PRETAX> (3,042,230)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,042,230)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,042,230)
<EPS-PRIMARY> (2.69)
<EPS-DILUTED> (2.69)
</TABLE>
