SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
AMENDMENT NO. 1 TO FORM 10KSB
(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.
- --------------------------------------------------------------------------------
(Name of Small Business Issuer in Its Charter)
Delaware 38-2308668
- --------------------------------------------------------------------------------
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
150 Marie Avenue East, West St. Paul, Minnesota 55118-4002
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (651) 450-4913
- --------------------------------------------------------------------------------
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 Yes x
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 April 14, 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 April 14, 1999
Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format (check one):
Yes: No: x
1
<PAGE>
Part II. Item 6 is hereby amended to read as follows:
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
OVERVIEW
GOING CONCERN. The Company's financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities and commitments in the normal course of business. 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 $980,253 and an accumulated deficit of $17,328,610. These
factors, among others, indicate that the Company may be unable to continue as a
going concern in the near future.
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. In addition, on January 1, 1999, Mr. Klas agreed to loan an additional
$500,000 to the Company during 1999. As of April 13, 1999, $400,000 of this
amount had been advanced. Other than the remaining $100,000 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 further financing to
the Company.
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, (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
2
<PAGE>
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 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.
3
<PAGE>
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 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 $15,736,000 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 $980,253, compared
with a working capital deficit of $1,668,801 as of December 31, 1997. The
improvement in the working capital deficit is principally due to the extension
of the maturity date (and resulting reclassification as long term liabilities)
of promissory notes, offset by an increase in current liabilities and a decrease
in inventory.
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 $218,112, 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
4
<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. The Company
anticipates that it will have capital expenditure needs 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's liquidity would be adversely affected.
The Company has $1,450,000 in principal of promissory notes that were issued in
a private placement in 1994 that by their original terms matured on May 31,
1999. As of April 13, 1999, the Company had received approval from the holders
of $1,400,000 in principal of these notes to extend their maturity to May 31,
2002. In addition, the holders of these notes agreed to reduce the interest rate
applicable to these notes to either 5.18% until May 31, 2002, or to 1% for the
twelve months ending May 31, 2000 and thereafter to 5.18%. In addition, each
interest payment will be accompanied by a prepayment of a portion of the
outstanding principal sufficient to increase the quarterly payment to the amount
that would have been on that date had the interest rate remained at the current
rate of 9.75%. Note holders who agreed to the 1% interest rate would receive a
four year warrant to purchase 5,000 shares (for every $100,000 in principal) of
the Company's common stock at an exercise price of $1.00 per share. A total of
55,000 warrants were issued.
On April 13, 1999, effective January 1, 1999, the Company entered into an
agreement to extend demand notes payable totaling $2,498,807 to the Chairman and
CEO through May 31, 2002. Accrued interest of $98,926 at December 31, 1998 was
included in the new note payable. Interest will accrue at 1.0% for the
seventeen-month period ending May 31, 2000 and then will increase to 5.18% for
the duration of the note. Interest is due and payable semi-annually. In exchange
for the reduced interest rate from January 1, 1999 to May 31, 2000, the Company
issued Mr. Klas a
5
<PAGE>
four year warrant to purchase 176,998 shares of the Company's Common Stock at an
exercise price of $1.00 per share.
On April 13, 1999, effective January 1, 1999, the Company entered into an
agreement to extend demand notes payable totaling $553,114 to Tapemark Company
(which is affiliated with the Company's Chairman) through May 31, 2002. Accrued
interest of $27,080 at December 31, 1998 was included in the new note payable.
Interest will accrue at 1.0% for the seventeen-month period ending May 31, 2000
and then will increase to 5.18% for the duration of the note. Each interest
payment will be accompanied by a prepayment of a portion of the outstanding
principal sufficient to increase the semi-annual payment to the amount that
would have been on that date had the interest rate remained at the current rate
of 7.75%. In exchange for the reduced interest rate from January 1, 1999 to May
31, 2000, the Company issued Tapemark a four year warrant to purchase 39,178
shares of the Company's Common Stock at an exercise price of $1.00 per share.
On January 1, 1999, the Company entered into an agreement to borrow up to an
additional $500,000 from the Chairman and CEO. The loan matures on December 31,
1999 and accrues interest at prime and is payable on June 30, 1999 and December
31, 1999. As of April 13, 1999, $400,000 had been advanced under this agreement.
Other than the remaining $100,000 covered by an existing agreement with Mr.
Klas, he has no obligation to provide any further financing to the Company, and
there is no assurance that he will provide any further financing to the Company.
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.
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.
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.
6
<PAGE>
EFFECTS OF INFLATION
The Company believes that during 1997 and 1998 inflation has not had a material
impact on the Company's business.
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.
7
<PAGE>
Part II. Item 7 is hereby amended to read as follows:
ITEM 7. FINANCIAL STATEMENTS
The audited financial statements that are included with this amended
Form 10-KSB are presented beginning on page F-1 following the signature pages.
Part III. Item 12 is hereby amended to read as follows:
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 accrued 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 April 13, 1999, effective 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 May 31, 2002. Accrued interest of $27,080
at December 31, 1998 was included in the new note payable. Interest will accrue
at 1.0% for the seventeen-month period ending May 31, 2000 and then will
increase to 5.18% for the duration of the note. Each interest payment will be
accompanied by a prepayment of a portion of the outstanding principal sufficient
to increase the semi-annual payment to the amount that would have been on that
date had the interest rate remained at the current rate of prime. In exchange
for the reduced interest rate from January 1, 1999 to May 31, 2000, the Company
issued Tapemark a four year warrant to purchase 39,178 shares of the Company's
Common Stock at an exercise price of $1.00 per share.
During 1998 Mr. Klas loaned the Company $1,200,000. These loans accrued 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 was converted into a note
payable on January 1, 1999.
On April 13, 1999, effective January 1, 1999, the Company entered into an
agreement to extend demand notes payable totaling $2,498,807 to the Chairman and
CEO through May 31, 2002. Accrued interest of $98,926 at December 31, 1998 was
included in the new note payable. Interest will accrue at 1.0% for the
seventeen-month period ending May 31, 2000 and then will increase to 5.18% for
the duration of the note. Interest is due and payable semi-annually. In exchange
for the reduced interest rate from January 1, 1999 to May 31, 2000, the Company
issued Mr. Klas a
8
<PAGE>
four year warrant to purchase 176,998 shares of the Company's Common Stock at an
exercise price of $1.00 per share.
On January 1, 1999, the Company entered into an agreement to borrow up to an
additional $500,000 from the Chairman and CEO. The loan matures on December 31,
1999 and accrues interest at prime and is payable on June 30, 1999 and December
31, 1999. As of April 13, 1999, $400,000 had been advanced under this agreement.
Other than the remaining $100,000 covered by an existing agreement with Mr.
Klas, he has no obligation to provide any further financing to the Company, and
there is no assurance that he will provide any further financing to the Company.
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.
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.
Part III. Item 13 is hereby amended to read as follows:
ITEM 13. EXHIBITS AND REPORTS
(a) Exhibits
Exhibit
No. Title Method of Filing
- --- ----- ----------------
10.55 Cancelled Promissory Notes to Robert C. Klas, Sr. and
Tapemark Company Filed Herewith
10.56 Promissory Notes issued by the Company to Robert C.
Klas, Sr. and Tapemark Company Filed Herewith
10.57 Amendment to Promissory Notes Filed Herewith
23.10 McGladrey & Pullen, LLP Auditors Consent Filed Herewith
23.11 Deloitte & Touche, LLP Auditors Consent Filed Herewith
27 Financial Data Schedule Filed Herewith
9
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed by the undersigned, thereunto duly authorized.
WTC Industries, Inc.
Dated: April 14, 1999 By: /s/ Robert C. Klas, Sr.
--------------------------------
Robert C. Klas, Sr.
Chief Executive Officer
10
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORTS F-1 - F-2
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Consolidated balance sheets F-3
Consolidated statements of operations F-4
Consolidated statements of stockholders' deficit F-5 - F-6
Consolidated statements of cash flows F-7 - F-8
Notes to consolidated financial statements F-9 - F-21
- --------------------------------------------------------------------------------
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
WTC Industries, Inc. and Subsidiaries
West Saint Paul, Minnesota
We have audited the accompanying consolidated balance sheet of WTC Industries,
Inc. and Subsidiaries (the Company) as of December 31, 1998, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The consolidated
financial statements of the Company for the year ended December 31, 1997, were
audited by other auditors whose report, dated March 6, 1998, on those
consolidated financial statements included an explanatory paragraph that
expressed substantial doubt about the Company's ability to continue as a going
concern.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1998, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company's recurring losses from
operations, deficiency in working capital, and net stockholders' deficit raise
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are also described in Note 2. The consolidated
financial statements do not include an adjustments that might result from the
outcome of this uncertainty.
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
January 22, 1999, except for Notes 5 and 13,
as to which the date is April 13, 1999
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
WTC Industries, Inc. and subsidiaries
West Saint Paul, Minnesota
We have audited the accompanying consolidated balance sheet of WTC Industries,
Inc. (the Company) as of December 31, 1997 and the related consolidated
statements of operations, stockholders' deficit, and cash flows for the year
then ended. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1997 and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's recurring losses from
operations, deficiency in working capital, and net stockholders' deficit raise
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Minneapolis, Minnesota
March 6, 1998
F-2
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS (NOTE 5) 1998 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
Current maturities of long-term debt (Note 5) $ 861,731 $ 2,355,729
Accounts payable 459,462 199,355
Customer deposits 8,427 100,854
Accrued interest payable (Note 5) 41,248 87,895
Accrued expenses (Note 12) 286,158 176,080
-------------------------------
TOTAL CURRENT LIABILITIES 1,657,026 2,919,913
-------------------------------
Long-Term Liabilities
Accrued minimum purchase commitments (Note 12) 345,000 --
Long-term debt, net of current maturities (Note 5) 4,398,321 1,458,654
-------------------------------
4,743,321 1,458,654
-------------------------------
Commitments and Contingencies (Notes 10, 12 and 13)
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-3
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 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-4
<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 (Note 6) 13 1
Issuance of common stock for payment of royalty fees (Note 12) 42,500 4,250
Compensation expense recorded on stock options -- --
Net loss -- --
-------------------------
Balance at December 31, 1998 1,146,031 $ 114,603
=========================
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<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-6
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 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-7
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 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
Common stock issued for payment of royalty fees 350,000 75,000
Debt currently due subsequently refinanced (Note 5) 4,375,915 --
Accrued interest converted to long-term debt 126,006 --
==========================
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
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.
F-9
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 $980,253, an accumulated deficit
of $17,328,610, and a stockholders' deficit of $5,517,943.
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
(see Note 5); (b) seeking further financing from the chairman of the Board 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 gros profit margins. There is no
assurance that these plans can be successfully accomplished.
F-10
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2. BASIS OF PRESENTATION (CONTINUED)
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 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.
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
1998 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
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
- --------------------------------------------------------------------------------
NOTE 5. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Note payable to chairman, 1% until May 31, 2000, at which time the rate
increases to 5.18%, payable in semi-annual interest-only payments, with
principal due May 31, 2002 (a) (f) $ 2,498,807 $ 1,100,000
Note payable to a company affiliated with the chairman, 1% until May 31, 2000,
at which time the rate increases to 5.18%, payable in semi-annual
installments of approximately $22,000, with balance due May 31, 2002 (b) (f) 553,114 500,000
Note payable to a bank at prime, payable in monthly interest-only payments with
principal due May 31, 1999 750,000 750,000
Notes payable to unrelated parties, 1% until May 31, 2000, at which time the
rate increases to 5.18%, payable in quarterly installments of $28,000
beginning July 1999, with balance due May 31, 2002 (c) (d) (f) 1,100,000 1,100,000
Notes payable to unrelated parties, 5.18%, payable in quarterly installments of
$8,000 beginning July 1999, with balance due May 31, 2002 (c) (d) 300,000 300,000
Notes payable at prime plus 2%, payable in interest-only
payments quarterly, with balance due May 31, 1999 (c) 50,000 50,000
Other 8,131 14,383
------------------------------------
5,260,052 3,814,383
Less current maturities 861,731 2,355,729
------------------------------------
$ 4,398,321 $ 1,458,654
====================================
</TABLE>
(a) At December 31, 1998, the Company had $2,399,881 notes payable to the
chairman. These notes payable accrued interest at a rate of prime (7.75
percent at December 31, 1998) plus 1 percent. Principal and accrued
interest were due on December 31, 1998. Subsequent to December 31, 1998,
these notes were extended to May 31, 2002. The notes are presented in
these financial statements as if the extension occurred by December 31,
1998. With the extension of the notes, interest accrued through December
31, 1998 of $98,926 was converted to note principal. Also in conjunction
with this extension, the chairman was granted four-year warrants to
purchase 176,998 shares of the Company's common stock at an exercise
price of $1.00 per share.
(b) At December 31, 1998, the Company had $526,034 notes payable to a
company affiliated with the chairman. These notes payable accrued
interest at a rate of prime (7.75 percent at December 31, 1998) plus 2
percent. Principal and accrued interest were due on December 31, 1998.
Subsequent to December 31, 1998, these notes were extended to May 31,
2002. The notes are presented in these financial statements as if the
extension occurred by December 31, 1998. With the extension of the
notes, interest accrued through December 31, 1998 of $27,080 was
converted to note principal. Also in conjunction with this extension,
the holders were granted four-year warrants to purchase 39,178 shares of
the Company's common stock at an exercise price of $1.00 per share.
F-12
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
(c) During 1994, the Company conducted a private 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 share 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.
(d) Subsequent to December 31, 1998, these notes were extended to May 31,
2002. The notes are presented in these financial statements as if the
extension occurred by December 31, 1998. In conjunction with this
extension, each holder was granted a four-year warrant to purchase 5,000
shares of the Company's common stock at an exercise price of $1.00 per
share for each $100,000 in principal of note. A total of 55,000 warrants
were issued.
(e) Subsequent to December 31, 1998, these notes were extended to May 31,
2002. These notes are presented in the financial statements as if the
extension occurred by December 31, 1998.
(f) In 1999, the carrying balance of the notes will be discounted for the
value ascribed to the warrants. The Company will compute interest
expense on these notes using the interest method which will result in a
constant effective interest rate over the term of the notes.
Approximate maturities of long-term debt at December 31, 1998, are as follows:
Years ending December 31:
1999 $ 862,000
2000 114,000
2001 117,000
2002 4,167,000
--------------
$ 5,260,000
==============
Interest expense related to the borrowings with the chairman and the company
affiliated with the chairman charged to operations during 1998 and 1997 was
$220,963 and $64,000, respectively.
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-13
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 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-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1998 and 1997:
<TABLE>
<CAPTION>
December 31
---------------------------------
1998 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-14
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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-15
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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) -- 14,200 34,040 -- 48,240 5.96
Canceled -- (348) (2,496) -- (2,844) 14.49
---------------------------------------------------------------------------------
Options outstanding at
December 31, 1998 -- 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:
<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-16
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
Weighted-
Number of Average Exercise
Shares Price per Share
- ----------------------------------------------------------------------------------------
<S> <C> <C>
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 240,000 20.00
============
</TABLE>
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
$15,736,000 at December 31, 1998. Utilization of approximately $6,000,000 of the
NOL carryforward is limited to approximately $29,000 per year through 2009
($406,000 in aggregate) 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-17
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9. INCOME TAXES (CONTINUED)
The NOL carryforward has the following expiration dates:
1999 $ 26,000
2000 19,000
2001 24,000
2002 138,000
2003 138,000
2004 481,000
2005 209,000
2007 1,046,000
2008 1,450,000
2009 2,170,000
2010 2,545,000
2011 3,287,000
2012 1,511,000
2018 2,692,000
---------------
$ 15,736,000
===============
A summary of the Company's deferred taxes at December 31 is as follows:
1998 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.
F-18
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10. RELATED-PARTY TRANSACTIONS (CONTINUED)
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.
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 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:
Customer 1998 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:
1999 $ 68,000
2000 65,000
2001 11,000
---------------
$ 144,000
===============
F-19
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expense under all operating leases was approximately $112,000 and $210,000
for the years ended December 31, 1998 and 1997, respectively.
MINIMUM PURCHASE COMMITMENT: Effective June 15, 1997, the Company entered into a
five-year requirement contract with Porous Media under which the Company will
purchase all of its cyst filters required for the PentaPure(R) Sport
Purification System and Spring(R) Filtration System (Systems). The Company
agreed to purchase a minimum of 100,000 filters per year throughout the term of
the agreement at an average price of $1.72 per filter. The Company's performance
under the contract is personally guaranteed by the Company's Chairman up to
$100,000. During 1997, the Company purchased 15,000 units ($36,000) of inventory
pursuant to this contract 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 based upon the quoted market price of
unrestricted common stock discounted for lack of marketability. Due to the
uncertainty of the future realization of its value, the Company wrote off this
prepaid royalty in 1998.
F-20
<PAGE>
WTC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13. SUBSEQUENT EVENT
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 April 13, 1999, $400,000 had been advanced under this agreement.
NOTE 14. FOURTH-QUARTER 1998 ADJUSTMENTS
In the fourth-quarter 1998, the Company increased its inventory reserve by
approximately $366,000 and accrued the estimated commitment, not likely to be
fulfilled, under the Porous Media contract (see Note 12) of $463,500.
F-21
EXHIBIT 10.55
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
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
This Promissory Note, dated January 1, 1999, for the principal sum of
$2,498,806.59 has been canceled as of April 13, 1999, effective as of January
1, 1999, and a replacement Note issued this same day, dated January 1, 1999, in
the principal sum of $2,498,806.59 with a maturity date of May 31, 2002.
By: /s/ Robert C. Klas, Sr.
----------------------------------
Robert C. Klas, Sr. (the "Holder")
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
This Promissory Note, dated January 1, 1999, for the principal sum of
$553,114.20 has been canceled as of April 13, 1999, effective as of January
1, 1999, and a replacement Note issued this same day, dated January 1, 1999, in
the principal sum of $553,114.20 with a maturity date of May 31, 2002.
By: The TAPEMARK Company (the "Holder")
/s/ James T. Burmeister
James T. Burmeister
Sr. V.P./Chief Financial Officer
2
EXHIBIT 10.56
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 will accrue at 1.0% for the seventeen-month period ending May
31, 2000 and then will adjust to 5.18% for the duration of the note. Accrued
interest shall be due and payable on June 30 and December 31. In exchange for
the reduced interest rate from January 1, 1999 to May 31, 2000, the Company will
issue Mr. Klas a four year warrant to purchase 176,998 shares of the Company's
Common Stock at an exercise price of $1.00 per share.
Principal shall be payable upon demand, but not sooner than May 31,
2002.
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
1
<PAGE>
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 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.
Effective January 1, 1999, the interest rate on the unpaid principal
shall be 1.0% for the seventeen month period ending May 31, 2000 and then will
adjust to 5.18% for the duration of the note. Accrued interest shall be due and
payable on June 30 and December 31. Each interest payment will be accompanied by
a prepayment of a portion of the outstanding principal sufficient to increase
the total semi-annual payment to be the amount which would have been paid on
that date had the interest rate on the Note been equal to seven and seventy five
one-hundredths percent (7.75%). In exchange for the reduced interest rate from
January 1, 1999 to May 31, 2000, the Company issued Tapemark a four year warrant
to purchase 39,178 shares of the Company's Common Stock at an exercise price of
$1.00 per share.
Principal shall be payable upon demand, but not sooner than May 31,
2002.
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.
1
<PAGE>
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 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
EXHIBIT 10.57
To: Holders of Promissory Notes issued by WTC Industries, Inc.
scheduled to mature May 31, 1999
Re: Amendment of Promissory Note
This Memorandum concerns the Promissory Note issued by WTC Industries,
Inc. ("WTC") to you which is now scheduled to mature on May 31, 1999 (the
"Note"). We request that you agree to amend the Note which you hold by
initialing one of the two following Alternatives:
ALTERNATIVE ONE __________:
a. The maturity date for payment of all principal and any unpaid
interest on the Note is extended from May 31, 1999 to May 31, 2002.
b. Effective June 1, 1999, the interest rate on the unpaid principal
shall be five and eighteen one-hundredths percent (5.18%) until all principal
has been repaid. Interest shall continue to be due and payable quarterly on the
20th day of each January, April, July and October.
c. Each interest payment will be accompanied by a prepayment of a
portion of the outstanding principal sufficient to increase the quarterly
payment to the amount which would have been paid on that date had the interest
rate remained nine and three-quarters percent (9-3/4%).
ALTERNATIVE TWO __________:
a. The maturity date for payment of all principal and any unpaid
interest on the Note is extended from May 31, 1999 to May 31, 2002.
b. Effective June 1, 1999, the interest rate on the unpaid principal
shall be one percent (1%) for the twelve month period ending May 31, 2000, and
thereafter five and eighteen one-hundredths percent (5.18%) until all principal
has been repaid. Interest shall continue to be due and payable quarterly on the
20th day of each January, April, July and October.
c. Each interest payment will be accompanied by a prepayment of a
portion of the outstanding principal sufficient to increase the total quarterly
payment to the amount which would have been paid on that date had the interest
rate on the Note remained nine and three-quarters percent (9-3/4%).
d. WTC will issue to each Note holder selecting Alternative Two a four
year warrant to purchase 5,000 shares of WTC common stock at an exercise price
of $1.00 per share. The warrant would allow purchase of 5,000 shares for each
$100,000 in principal of note. Issuance of the warrant and shares purchased
under it will not have been registered under federal or state securities laws,
and each Note holder selecting Alternative Two must sign a Subscription
Agreement, which among other things would confirm that the Note holder is an
accredited investor who is obtaining the warrant for investment and not for
resale.
Please select and initial one of the alternatives above, sign below to indicate
your agreement that the Note which you hold is amended accordingly, and return
the signed original to us at WTC Industries, Inc., Attention: Greg Jensen, 150
Marie Avenue East, West St. Paul, Minnesota 55118-4002. Please send it to arrive
on or before prior to April 9, 1999. A copy will be promptly signed on behalf of
WTC and returned to you. We appreciate very much your assistance.
WTC INDUSTRIES, INC. NOTE HOLDER:
By
---------------------------------- ------------------------------------
Robert C. Klas, Sr., CEO (Note holder signature)
Date: April 13, 1999
------------------------------- ------------------------------------
(print name of Note holder)
EXHIBIT 23.10
CONSENT OF INDEPENDENT ACCOUNTANT
We hereby consent to the incorporation by reference in Registration Statement on
Form S-8 (No. 33-98684) of our report, dated January 22, 1999, which includes an
emphasis paragraph relating to an uncertainty as to the Company's ability to
continue as a going concern, on the consolidated financial statements of WTC
Industries, Inc. and Subsidiaries for the year ended December 31, 1998.
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
April 15, 1999
EXHIBIT 23.11
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-98684 of WTC Industries, Inc. on Form S-8 of our report dated March 6, 1998,
appearing in this Annual Report on Form 10-KSB/A of WTC Industries, Inc. for the
year ended December 31, 1997.
Deloitte & Touche LLP
Minneapolis, Minnesota
April 13, 1999
<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> 1,657,026
<BONDS> 4,743,321
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>
