SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(X) Annual report under section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1999
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 ___
State issuer's revenues for its most recent fiscal year: $5,141,913
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: $934,896 as of March 6, 2000
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 1,472,698 shares of
Common Stock as of March 6, 2000
Documents Incorporated by Reference: Yes
Transitional Small Business Disclosure Format (check one): Yes: ___ No: X
1
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND
WTC Industries, Inc., (the "Company" or "WTC") is a Delaware corporation and was
incorporated in April 1978 as an affiliate of a Michigan filter manufacturer.
Until November 1988, the Company was located in Michigan, where its founder,
L.L. Davis, managed it. During this period, the Company's principal efforts were
directed at developing prototype products incorporating the PentaPure(R)
technology and marketing those products to the U.S. government as well as
service and relief organizations.
In November 1988, the Company moved to Minnesota and expanded its product
development efforts to include commercial applications for the PentaPure(R)
technology. In September 1991, with a family of water purification products
developed and in the market, the Company raised nearly $4 million through an
initial public offering of its common stock.
In December 1994, the Company merged with Ecomaster Corporation to form a new
wholly owned subsidiary named WTC/Ecomaster Corporation. In February 1998, the
subsidiary's name was changed to PentaPure Incorporated.
BUSINESS
The Company designs, manufactures, and markets water filtration and purification
products for the potable water market. The potable water market includes
residential, commercial, and food service. The Company's filtration products
remove or reduce many undesirable contaminants found in water including lead,
chlorine, cryptosporidium and giardia, bad taste and odor. In addition, the
Company has a family of purification products that have the added benefit of
devitalizing or removing bacteria, viruses, and parasites.
Consumer demand is driven both by the consumers desire to improve the taste and
quality of their drinking water and by heightened concerns of regulatory
agencies. Recent outbreaks of cryptosporidium and giardia cyst and, in some
cases, bacteria and virus contamination, have raised the health concerns of
consumers in the U.S. and other major developed countries. Third world
countries' drinking water quality has been found to be severely inadequate. In
the food service industry, restaurants have become increasingly aware of the
need for water filtration to control the quality and taste of the water used in
their businesses.
The Company anticipates accelerated growth in coming years based on the
following growth strategies:
NEW PRODUCT DEVELOPMENT AND TECHNOLOGY INTEGRATION FOR THE OEM MARKET. Recently,
the Company has developed specialized high value-added products for three major
OEM customers. The Company anticipates that it will continue to grow this market
by providing products that it believes are superior in design, function and
quality. The Company is in the process of designing, testing and a long-term use
purification device that utilizes the PentaPure(R) technology for the U.S.
market. In addition, the Company intends to continue to develop its ability to
integrate other filtration and purification technologies into its products.
2
<PAGE>
CONTINUED IMPROVEMENT IN OPERATING EFFICIENCIES. The Company believes it can
improve efficiencies by increasing revenues and improving gross profit margins.
The Company has implemented new cost controls in the areas of purchasing and
inventory control. New production methods and automation have increased both
output and quality while reducing labor costs.
PRODUCTS
The Company's products fall into the following categories: systems and
cartridges for use by original equipment manufacturers (OEMs), portable and
mobile systems, point-of-use systems and point-of-entry systems. The Company's
products are suitable for a broad range of applications including; home, travel,
outdoor recreation, military and emergency relief, and commercial.
ORIGINAL EQUIPMENT MANUFACTURERS (OEM)
The Company has developed a family of point-of-use filtration systems that are
designed for the OEM appliance market in the U.S. In 1996, the Company developed
a point-of-use filtration system that utilizes a patented quick dry-change
system. This new design incorporates a valve-in-head design that turns the water
"on and off" when replacing the cartridge. This allows end-users to change
replacement cartridges with ease, convenience and without water spills.
PORTABLE AND MOBILE SYSTEMS
The Company's portable and mobile systems are designed for the travel, outdoor
recreation, military and emergency relief markets. The portable systems include
a sport bottle, the PentaPure(R) bucket, and a series of hand operated pump
systems for group and refugee camp use. The Company's mobile purification
systems are typically used in emergency, disaster and military applications.
They are generally mounted on a truck or trailer and designed to efficiently
produce large amounts of purified water from almost any freshwater or municipal
water source.
Although the above systems vary in size and capacity, the product configuration
is virtually the same. The system configuration includes the following four
stages: The first stage consists of a carbon filter to remove sediment and
organic material from the water. In the second stage, the PentaPure(R)
devitalizes water-borne bacteria and virus. The third stage uses solid carbon
blocks to remove undesirable taste, odor, lead, chlorine, chemicals, protozoan
cysts (such as cryptosporidium and giardia) and other organic contaminants. The
last stage incorporates a scavenger media to remove any remaining iodine and
iodide residuals and to further improve taste. The result is fresh, purified
water for drinking and cooking.
POINT-OF-USE SYSTEMS
The Company continues to sell a family of "wet change" point-of-use filtration
and purification systems that are designed for residential use in international
markets. These systems typically attach to the water line under a sink and
dispense purified water through a dedicated faucet. Some units attach to the
sink faucet and sit on the counter top. Individual systems can be configured to
accommodate specific water quality problems.
3
<PAGE>
POINT-OF-ENTRY SYSTEMS
The Company has a small product line of point-of-entry purification systems that
are typically designed for commercial and light industrial use in international
markets. These systems attach to the main water line inside the building and
then are capable of both filtration and purification of the water before it
reaches its point-of-use. These systems can be configured to accommodate
specific water quality problems and volume requirements for office, restaurant,
hospital, embassy, hotel and other applications.
DISTRIBUTION AND SALES
U.S. MARKET
The past three years, the Company has implemented a marketing strategy that
focuses on OEM customers. This strategy is intended to allow the Company to
utilize the brand recognition and the sales and distribution networks of the
OEM, while reducing the Company's marketing expense.
The Company's domestic sales accounted for 84% of total net sales in 1999
compared to 64% in 1998. The largest domestic OEM customer accounted for 70% of
total net sales in 1999 and 53% of total net sales in 1998.
INTERNATIONAL MARKETS
Internationally, the Company has established relationships with either
independent sales representatives or distributors to market the Company's
products. Local sales organizations may use direct sales representatives,
network marketing organizations and independent manufacturer sales
representatives as well as other means customary to the specific region to
distribute the Company's products.
The Company's agreements with its international distributors are usually for a
period of two years. Such agreements usually assign an exclusive territory,
prohibit distributors from carrying competing products, and require distributors
to carry an adequate stock of its products. The Company does not believe that
the loss of any one of its distributors would have a material adverse affect on
the Company.
The Company's international sales accounted for 16% of total net sales in 1999
compared to 36% in 1998.
COMPETITION
The markets in which the Company competes are highly competitive. Due to the
broad spectrum of product and market applications in the water filtration
industry, there are many companies that compete with one or more of the
Company's products. Several of these competitors are significantly larger than
the Company, but none competes directly against all of its product lines. The
largest and best-known companies with whom WTC competes include Brita, Cuno,
Proctor & Gamble (PUR), EcoWater, and US Filter.
Both in the U.S. and international markets, the water filtration industry is
highly fragmented. Many companies manufacture and market products that filter
water. However, fewer companies market products that actually provides the added
benefit of devitalization or removal of viruses and bacteria. The
4
<PAGE>
Company believes that the superiority of its PentaPure(R) technology serves as a
distinct competitive and cost advantage over other water purification products.
At least three other U.S. companies make they're own versions of iodinated resin
that compete with the Company's purification media. These companies include The
Purolite Company, Umpqua Research Company, Ametek, Inc. and Recovery Engineering
(Proctor & Gamble). The Company believes these resins leave much higher iodine
and iodide residual levels in the treated water than PentaPure(R) and, as a
result, water treated with these iodinated resins has an undesirable taste and
odor. The Company offers a far broader range of products based on iodinated
resin technology than any of these competitors.
MANUFACTURING AND SUPPLIERS
The Company performs all of its own product assembly at two facilities in
Minnesota. The Company believes that it generally has sufficient manufacturing
capacity for the foreseeable future.
Most of the vendors that manufacture plastic component parts for the Company's
products utilize tooling owned by the Company. Management believes that
components used in the Company's products can be purchased from more than one
vendor in the event a current supplier is unable or unwilling to do so.
The Company utilizes the services of an independent contractor to manufacture
iodinated resin that is incorporated into some of the Company's products.
Certain techniques used to manufacture the iodinated resins were developed by
and are the property of the supplier. 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 this supplier. The supplier has
agreed to sell the iodinated resin only to the Company and one other party. The
other party does not compete with the Company in any of its product
applications. The Tapemark Company ("Tapemark"), of West Saint Paul, Minnesota,
provides labels for the Company's products, and, provides office and
manufacturing facilities. Mr. Robert C. Klas, Sr., the Company's CEO, Chairman
and largest stockholder, is also the CEO, Chairman of the Board and largest
shareholder of Tapemark. During 1999 and 1998, the Company paid Tapemark a total
of $60,700 and $76,900, respectively, for these services.
The Company has an agreement with a supplier that expires in June 2002 under
which the Company is obligated to purchase a minimum of $172,500 annually of its
cyst filter requirements for certain of its products. Robert Klas, Sr.,
personally guarantees the Company's performance under the contract, subject to a
$100,000 limitation on the guaranty. The Company has accrued the remaining
estimated commitment not likely to be fulfilled under this contract. At December
31, 1999 and 1998, $517,500 is accrued, of which $225,100 and $172,500,
respectively, is included in current liabilities.
INTELLECTUAL PROPERTY
The Company has an exclusive license from KSURF to commercialize iodinated resin
processes developed by KSU scientists and patented in the U.S. and certain
foreign countries. The Company's license is exclusive except for KSU's right to
conduct scientific research. Although the Company recognizes that the KSURF
patents may offer only limited protection, the Company believes its own
technical expertise, many years of iodinated resin manufacturing experience,
responsiveness to marketplace demands and trade secrets developed over the years
are as important to its competitiveness as patent protection.
5
<PAGE>
The Company has obtained federal registration for its trademark PentaPure(R) and
related logos. The Company places such trademarks on all its resin-containing
products and related marketing materials, and normally requires or encourages
OEMs who incorporate PentaPure(R) in their own products to place the trademark
on their packaging and marketing material. The Company believes that brand
recognition of PentaPure(R) and the superior quality and unique product
applications of its resin will assist the Company in retaining customers.
RESEARCH AND DEVELOPMENT
The Company's current research and development efforts is focused on OEM new
product development and EPA registration for a long-term continual use
purification device that utilizes the PentaPure(R) technology. During 1999 and
1998, the Company expended $283,163 and $291,838, respectively, on research and
development activity.
GOVERNMENT REGULATION
The manufacture, marketing and advertising, and distribution in the United
States of water purification devices containing active ingredients, such as
iodine, are regulated by the EPA pursuant to the Federal Insecticide, Fungicide,
and Rodenticide Act. The EPA generally requires registration of the
manufacturer, the active ingredients, and the applicable device and its
packaging. Registration entails obtaining independent scientific data as to the
efficacy and toxicity of the device and its active ingredients.
In April 1986, the EPA issued a tentative protocol (the "1986 Protocol"),
applicable to all manufacturers for the testing and certification of all
microbiological water purification devices, including those offered by the
Company. The 1986 Protocol requires that to be registered as a "microbiological
water purifier," a device must remove, kill or deactivate all types of
disease-causing microorganisms from the water, including bacteria, viruses and
protozoan cysts, so as to render the processed water safe for drinking. In
addition to EPA regulation, some states require registration of water treatment
products.
The Company is also subject to regulations with respect to the handling and
disposal of elemental iodine used in manufacturing resin. While the Company
believes it is in compliance with all applicable rules and regulations, there
can be no assurance that more restrictive and costly requirements will not be
imposed in the future.
EMPLOYEES
As of March 6, 2000, the Company had 27 full time employees. In addition, the
Company utilizes the services of two consultants in the areas of research and
development. None of the Company's employees are covered by collective
bargaining agreements or are members of a union. The Company has never
experienced a work stoppage and believes that its relations with its employees
are good.
ITEM 2. PROPERTIES
The Company leases approximately 1,800 square feet of corporate office space and
approximately 3,200 square feet of manufacturing space from Tapemark in a
building that also houses Tapemark's principal executive office. The Company
satisfied the rent for the first year of the lease (ended February 28, 1999)
6
<PAGE>
through the issuance of an option to purchase 11,200 shares of Company common
stock at a price of $3.125 per share, which expires December 31, 2000. The lease
as been extended through February 28, 2001 in consideration of 23,333 shares of
Company common stock for each year. In October 1999, the Company expanded its
manufacturing space to approximately 10,000 square feet within Tapemark with no
further lease obligation. The Company is not making any cash payments to
Tapemark for rent, general utilities, real estate taxes and special assessments.
On February 23, 1998, the Company entered into a new lease agreement for
approximately 8,200 square feet of warehouse space at 2955 Lone Oak Circle,
Eagan, Minnesota 55121. Under the term of a lease, which expires on February 28,
2001, the Company pays base rent of $2,369 per month for the first two years and
$2,538 for the third year and a pro rata share of real estate taxes and
operating expenses. The Company has the option to cancel the lease on February
29, 2000 for a cancellation fee of $4,000. The Company exercised its right to
cancel the lease effective February 29, 2000.
On January 1, 1998, the Company entered into a twelve-month lease agreement for
approximately 5,000 square feet of production space in Kennedy, Minnesota from
Bowman Industries, Inc. The Company currently pays base rent of $1,000 per month
and all operating expenses associated with the building. The Company renewed the
lease on January 1, 2000 for six months with the option to renew every six
months.
On February 1, 1997, the Company entered into a six-month lease agreement for
approximately 10,000 square feet of warehouse space in Kennedy, Minnesota. The
Company continues to renew the lease every six months. The Company pays base
rent of $250 per month and also the operating expenses associated with the
building.
On October 5, 1999, effective September 1, 1999, the Company entered into a
six-month lease agreement for approximately 2,500 square feet of additional
warehouse space in Kennedy, Minnesota. The Company renewed the lease for an
additional six months on March 1, 2000. The Company pays base rent of $250 per
month and also the operating expenses associated with the building.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF
SECURITY HOLDERS
None
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been quoted on the Over The Counter Bulletin
Board under the symbol "WTCO" since 1994.
7
<PAGE>
The following table sets forth the quarterly high and low bid prices for the
periods indicated, as reported on the OTC Bulletin Board. The prices listed are
inter-dealer quotations without retail mark-up, mark-down or commission and may
not represent actual transactions. The Company obtained this information from
the Dow Jones News/Retrieval reporting service.
- --------------------------------------------------------------------------------
PERIOD LOW HIGH
- --------------------------------------------------------------------------------
1998 January 1 - March 31 $ 5/16 $ 1 1/16
- --------------------------------------------------------------------------------
April 1 - June 30 $ 9/32 $ 1 3/16
- --------------------------------------------------------------------------------
July 1 - September 30 $ 13/32 $ 15/16
- --------------------------------------------------------------------------------
October 1 - December 31 $ 3/16 $ 1
- --------------------------------------------------------------------------------
1999 January 1 - March 31 $ 1 1/16 $ 5
- --------------------------------------------------------------------------------
April 1 - June 30 $ 1 1/16 $ 9 15/16
- --------------------------------------------------------------------------------
July 1 - September 30 $ 1 1/16 $ 9 1/2
- --------------------------------------------------------------------------------
October 1 - December 31 $ 1 1/4 $ 9 1/2
- --------------------------------------------------------------------------------
2000 January 1 - March 6 $ 2 1/4 $ 5
- --------------------------------------------------------------------------------
Approximately 850 stockholders as of March 6, 1999 held the Company's Common
Stock.
CASH DIVIDENDS
The Company has never paid any cash dividends on its Common Stock and does not
anticipate paying any in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following portions of the 1999 Annual Report to Stockholders are
incorporated herein by reference:
(a) All of the material on pages 4 - 7 under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company and report of independent
auditors included on pages 8 - 22 of the Annual Report to Stockholders for the
fiscal year ended December 31, 1999 are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On November 11, 1998, the Company dismissed its former independent accountants,
Deloitte & Touche, LLP and engaged McGladrey & Pullen, LLP as the Company's
independent accountants for the fiscal year ended December 31, 1998. The
decision to change accountants was approved by the Company's Board of Directors.
There were no disagreements with the former accountants, whether or not
resolved, on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or
8
<PAGE>
procedure, which, if not resolved to the former accountant's satisfaction, would
have caused it to make reference to the subject matter of the disagreement in
connection with its report.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF
THE EXCHANGE ACT
Regarding the directors and executive officers of the Registrant, reference is
made to the information set forth under the caption "Election of Directors" in
the Company's Information Statement Pursuant to Section 14(c) of the Securities
Exchange Act of 1934.
ITEM 10. EXECUTIVE COMPENSATION
Regarding the directors and executive officers of the Registrant, reference is
made to the information set forth under the caption "Executive Compensation" in
the Company's Information Statement Pursuant to Section 14(c) of the Securities
Exchange Act of 1934.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Regarding the directors and executive officers of the Registrant, reference is
made to the information set forth under the caption "Information Regarding
Security Ownership of Certain Beneficial Owners and Management" in the Company's
Information Statement Pursuant to Section 14(c) of the Securities Exchange Act
of 1934.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Regarding the directors and executive officers of the Registrant, reference is
made to the information set forth under the caption "Certain Transactions" in
the Company's Information Statement Pursuant to Section 14(c) of the Securities
Exchange Act of 1934.
ITEM 13. EXHIBITS AND REPORTS
(a) Exhibits
Exhibit
No. Title Method of Filing
- --- ----- ----------------
3.1 Certificate of Incorporation
of Water Technologies Corporation, as amended (A)
3.2 Bylaws of Water Technologies Corporation,
as amended (A)
3.3 Certificate of Amendment of Certificate
of Incorporation of WTC Industries, Inc. (G)
10.1 License Agreement dated January 1, 1990,
9
<PAGE>
between Kansas State University Research
Foundation and Water Technologies Corporation (A)
10.1.1 Amendment to License Agreement dated May 7, 1998 (G)
10.1.2 Amendment to License Agreement dated July 1, 1998 (G)
10.4 Amendment to Agreement dated June 21, 1991
between Water Technologies Corporation and
Water and Air Development Corporation (B)
10.38 1994 Non qualified Stock Option Plan (C)
10.46 Stock Purchase Agreement between WTC
Industries, Inc. and Robert C. Klas, Sr.
dated March 22, 1996 (D)
10.48 Memorandum of Agreement between WTC
Industries, Inc. and DentalPure Corp.
dated March 22, 1996 (E)
10.49 Porous Media Requirements Contract dated (F)
January 6, 1997
10.50 1996 Stock Option Plan (F)
10.52 1998 Lease Agreement between WTC Industries,
Inc. and the Tapemark Company (G)
10.53 1999 Lease Agreement between WTC Industries,
Inc and the Tapemark Company (G)
10.56 Promissory Notes issued by the Company to
Robert C. Klas, Sr. and Tapemark Company
dated January 1, 1999 (G)
10.57 Amendment to Promissory Notes (G)
13.1 1999 Annual Report to Shareholders Filed Herewith
21.1 List of WTC Industries, Inc. Subsidiary Filed Herewith
23.10 McGladrey & Pullen, LLP Auditors Consent Filed Herewith
27 Financial Data Schedule Filed Herewith
(A) Incorporated by reference to the same numbered Exhibit to the Company's
Registration Statement on Form S-18, which was declared effective September
11, 1991.
10
<PAGE>
(B) Incorporated by reference to the same numbered Exhibit to the Company's
Form 10-K filed for the year ended December 31, 1991.
(C) Incorporated by reference to the same number Exhibit to the Company's Form
10-KSB filed for the year ended December 31, 1994.
(D) Incorporated by reference to Exhibit number 10.1 to the Company's Form 8-K
filed on March 22, 1996.
(E) Incorporated by reference to the same number Exhibit to the Company's Form
10-KSB filed for the year ended December 31, 1995.
(F) Incorporated by reference to the same number Exhibit to the Company's Form
10-KSB filed for the year ended December 31, 1996.
(G) Incorporated by reference to the same number Exhibit to the Company's Form
10-KSB filed for the year ended December 31, 1998.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1999.
11
<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: March 20, 2000 By: /s/ Robert C. Klas, Sr.
----------------------------
Robert C. Klas, Sr.
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Robert C. Klas, Sr. Chairman of the Board, Director and March 20, 2000
- --------------------------- Chief Executive Officer --------------
Robert C. Klas, Sr.
/s/ Gregory P. Jensen Chief Financial Officer, Secretary March 20, 2000
- --------------------------- and Treasurer --------------
Gregory P. Jensen
/s/ John A. Clymer Director March 20, 2000
- --------------------------- --------------
John A. Clymer
/s/ Biloine W. Young Director March 20, 2000
- --------------------------- --------------
Biloine W. Young
/s/ Ronald A. Mitsch Director March 20, 2000
- --------------------------- --------------
Ronald A. Mitsch
/s/ Robert C. Klas, Jr. Director March 20, 2000
- --------------------------- --------------
Robert C. Klas, Jr.
</TABLE>
12
EXHIBIT 13.1
LETTER TO SHAREHOLDERS
WTC INDUSTRIES INC.
- --------------------------------------------------------------------------------
Dear Fellow Shareholders:
WTC Industries, Inc. has entered into a new phase of its history. New
strategic initiatives are beginning to reveal evidence of the Company's
turnaround. In 1999 the Company's financial performance improved dramatically
compared to prior years. Revenues grew 36% to $5,141,913. Gross profit margins
reached 32% of total net sales as a result of improved efficiencies in
manufacturing and cost reduction programs. The Company generated income from
operations of $174,124. In addition, new product development efforts have
enabled the Company to increase its future revenue growth in the original
equipment manufacturer (OEM) market.
OEM PARTNERSHIPS
In March 2000, the Company was awarded its second major OEM contract in
three years. General Electric selected the Company to be the exclusive supplier
of water filtration systems for its 2001 model-year refrigerators. General
Electric's decision was based on our product design capability and our ability
to integrate different filtration technologies into a superior performing water
filtration system. Shipments to General Electric are expected to begin in
October 2000.
The Company also continues to be the exclusive supplier to Amana for their
premium-grade refrigerator water filtration program. Due to increased consumer
awareness regarding water quality, Amana has increased the number of
refrigerators that will include our water filtration system. We have begun
shipping a newly designed water filtration system for their 2000 model-year
refrigerators.
The Company also developed two other new OEM partnerships in 1999 that
utilize the PentaPure(R) iodinated resin technology. These new relationships are
increasing sales to the outdoor recreation market in the U.S. and to water
dealer networks in European countries. In addition, we are encouraged by
prospects in Latin America and Europe that are currently testing our water
purification systems for use in emergency relief and military applications.
TECHNOLOGY
During the past year the Company has made significant advancements in
becoming a leader in water filtration technology integration. Our new product
development team consists of professionals in the areas of water treatment,
design engineering, manufacturing, and regulatory approval who are capable of
designing and manufacturing innovative water treatment systems. From product
design to regulatory approval, our number one priority is to provide our
customers with cost effective and value-added solutions for their specialized
needs.
<PAGE>
LETTER TO SHAREHOLDERS
WTC INDUSTRIES INC.
- --------------------------------------------------------------------------------
In 1999, we initiated a number of new research and development activities
related to the PentaPure(R) technology. First, we completed the installation of
a state of the art water filtration laboratory. This will enable us to better
develop and test new products in a variety of water conditions.
Second, we contracted with NSF International, the primary independent water
testing laboratory in the U.S., to develop a protocol for the EPA to test and
certify our residential water purification system and to determine the maximum
allowable level for iodine in drinking water.
Third, the Company will be using the Environmental Technology Verification
Program, an EPA program designed to facilitate the deployment of innovative
technologies through performance verification, to test and evaluate the
performance of our larger water purification systems used in emergency and
disaster relief applications.
As a result of these efforts, we expect to shorten the time from product
development to market introduction, increase OEM market opportunities in both
the U.S. and international markets, and better leverage our future revenue and
earnings potential.
THE FUTURE
In 2000 and beyond, we anticipate continued sales growth due to the
expanding OEM market and the large aftermarket potential for the Company's
proprietary refrigerator replacement cartridges. With our persistent commitment
to develop and certify new water purification products combined with our proven
ability to provide cost effective solutions, we are confident that we will be
able to cultivate new customers and expand existing relationships. We believe we
have positioned the Company for accelerated growth in the coming years and are
looking toward the future with renewed enthusiasm, confidence and commitment to
leverage our strategic strengths.
We are also pleased that Dr. Ronald Mitsch has joined our Board of
Directors. His experience as vice chairman of 3M will be invaluable in helping
the Company develop its technology strategy and pursue new market opportunities.
Finally, we appreciate the continuing support of our investors and
employees as we implement our strategy for growth, profitability and increased
shareholder value.
/s/ Robert C. Klas, Sr.
Robert C. Klas, Sr.
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
WTC INDUSTRIES, INC.
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
GOING CONCERN. The Company's financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities and commitments in the normal course of business.
The Company has incurred net losses of $141,629 and $3,042,230, and has used
cash to finance operating activities of $109,173 and $1,066,116 for the years
ended December 31, 1999 and 1998, respectively. In addition, as of December 31,
1999, the Company had a deficiency in working capital of $215,917, an
accumulated deficit of $17,470,239, and a stockholders' deficit of $5,583,073.
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 1999 were met through additional loans of $400,000 by its
Chairman and the restructuring of outstanding notes payable to various
noteholders. Management's plans for the Company to continue as a going concern
include (a) increasing sales to the domestic OEM refrigerator water filtration
market, (b) continuing research and development efforts for new disinfection
technology markets, and (c) continued improvement in the Company's production
processes and quality controls to increase gross profit margins. There is no
assurance whatsoever that these plans will be successful.
In February and March 2000, the Company restructured an existing bank loan
of $750,000, obtained new bank financing consisting of a term loan for $750,000
and a revolving line of credit for $700,000 and obtained new equity financing
from Mr. Klas for $250,000. Management believes that the Company's existing cash
position, collection of accounts receivable and other available sources of
liquidity are sufficient to meet current and anticipated requirements for the
foreseeable future.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET SALES
The Company had net sales of $5,141,913 in 1999, representing an increase
of 35.8% from net sales of $3,785,909 in 1998.
The increase in net sales was primarily due to increased sales to the
domestic OEM appliance market. Domestic sales increased 78.2% in 1999. Domestic
sales were $4,321,000, or 84% of total net sales in 1999, compared to $2,425,000
or 64% in 1998. The Company anticipates significant revenue growth in this
market for the foreseeable future.
International sales were $821,000 or 16% of total net sales in 1999,
compared to $1,361,000 or 36% in 1998. The most significant factor contributing
to the decrease in international sales was the continuing poor economic
conditions overseas and the strong U.S dollar. Foreign currency exchange rate
fluctuations and deteriorating economic conditions have had a material impact on
the demand for the Company's products in Asian and Eastern Europe markets. The
Company anticipates this trend to continue into the year 2000. However, the
Company has a number of initiatives that could increase sales of its outdoor
product line to South American countries in the first six months of 2000.
GROSS PROFIT (LOSS)
The Company's gross profit increased $1,983,866 to $1,666,942 in 1999 from
a gross loss of $316,924 in 1998. Gross profit as a percentage of net sales
increased to 32.4% in 1999 from (8.4%) in 1998. After adjusting for an inventory
write-down of $436,230 recorded in the fourth quarter of 1998 due to the market
conditions in Asia and Eastern Europe, the Company's gross profit increased
$1,547,636 over the prior year. In 1998, the Company incurred significantly
higher than budgeted production costs related to a new refrigerator filtration
system. In 1999, the Company was able to
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
WTC INDUSTRIES, INC.
- --------------------------------------------------------------------------------
implement cost reduction programs that significantly reduced both material and
labor costs related to this product line. In addition, the Company had higher
replacement cartridge sales in 1999 compared to 1998.
OPERATING EXPENSES
Selling, general and administrative expenses increased $73,527 in 1999, an
increase of 6.5% from 1998. Selling expenses were $542,950 or 10.6% of net sales
in 1999 compared to $588,290 or 15.5% of net sales in 1998. The reduction in
selling expenses was primarily due to lower expenses associated with trade shows
and travel expenses. Administrative expenses were $666,705 or 13% of net sales
in 1999 compared to $547,838 or 14.4% of net sales in 1998. The increase in
administrative expenses was primarily due to higher personnel costs and fees for
professional services.
Research, development and engineering expenses were comparable at $283,163
in 1999 versus $291,838 in 1998.
In 1998, 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.
In 1998, the Company incurred a one-time charge of $463,500 related to
minimum purchase requirements under a cyst filter purchase agreement whereby the
Company is obligated to purchase $172,500 filters per year for five years. The
Company believes that it has adequately reserved for the estimated commitment
not likely to be fulfilled under this contract based on its estimated use for
the next three years.
INCOME (LOSS) FROM OPERATIONS
As a result of the above, income from operations was $174,124 in 1999 as
compared to a loss from operations of $2,558,390 in 1998. Excluding the 1998
unusual charges totaling $1,249,730 for inventory write-down, loss on royalty
agreement, and loss on purchase commitment, the Company increased its operating
income by $1,482,784.
INTEREST EXPENSE
Interest expense was $305,736 or 5.9% of net sales in 1999 compared to
$436,650 or 11.5% of net sales in 1998. Interest expense decreased $130,914
because of the debt restructuring in May 1999 that lowered the effective
interest rate on the majority of the outstanding debt.
INCOME TAXES
No provision for income taxes as been recorded for 1999 and 1998. At
December 31, 1999, the Company has a federal net operating loss (NOL)
carryforward of approximately $15,890,000. It is uncertain if the Company will
realize any benefit from the NOL.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company had a working capital deficit (total
current liabilities in excess of total current assets) of $215,917, compared
with a working capital deficit of $980,253 as of December 31, 1998. The
improvement in the working capital deficit is principally due to the
reclassification effect, as of December 31, 1999, resulting from the Company's
new loan agreements with the Chairman and the bank of $750,000 and the
conversion of debt to equity of $450,000, which occurred in February and March
2000.
During 1999, cash decreased $14,218 due to cash used in operations of
$109,173 and cash used in investing activities of $243,095, offset by cash
provided by financing activities of $338,050.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
WTC INDUSTRIES, INC.
- --------------------------------------------------------------------------------
Significant cash uses by operations included the net loss and increases in
accounts receivable of $315,459 and other current assets of $40,794, partially
offset by an increase in current liabilities of $173,153 and a decrease in
inventory of $74,010. Net cash used in investing activities consisted of
purchases of property and equipment of $229,186, an officer receivable of
$15,000, offset by proceeds from sale of equipment of $1,091. Net cash provided
by financing activities resulted from notes payable of $400,000 from the
chairman of the Board, partially offset by payments on long-term debt of
$61,950.
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 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.
The Company has borrowed certain sums from Mr. Klas and Tapemark for
working capital purposes. At December 31, 1998, the Company had outstanding
borrowings from Mr. Klas totaling $2,300,000 with accrued interest of $198,807,
and from Tapemark totaling of $500,000 with accrued interest of $53,114. All
borrowings from Mr. Klas and Tapemark were evidenced by demand promissory notes.
On April 13, 1999, effective January 1, 1999, the Company entered into an
agreement with Mr. Klas and Tapemark to extend demand notes held by them
totaling $2,300,000 and $500,000, respectively, including all accrued interest
of $198,907 and $53,114, respectively, through May 31, 2002. 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 notes. 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 and Tapemark four year warrants to
purchase 176,998 and 39,178, respectively, shares of the Company's Common Stock
at an exercise price of $1.00 per share.
During 1999, Mr. Klas advanced the Company an additional $400,000 in demand
promissory notes and Mr. Klas also purchased a $50,000 promissory note owed by
the Company to another private noteholder. On February 29, 2000, the Company and
Mr. Klas agreed to convert a total of $450,000 of the Company's existing
indebtedness to him for 180,000 shares of the Company's common stock. In
conjunction with the debt conversion, Mr. Klas purchased 100,000 shares of the
Company's common stock for $250,000.
On March 20, 2000, Mr. Klas assumed the Company's indebtedness of $750,000
to its bank and the Company issued Mr. Klas a convertible promissory note in the
amount of the indebtedness. The new promissory note matures in one year and
provides a right to convert the indebtedness to shares of Company common stock,
at the discretion of the holder of the Note, at a conversion price of $3.00 per
share. In addition, Mr. Klas agreed to co-sign a new credit agreement with the
bank under which the bank extends the Company a new term loan of $750,000 and a
new revolving credit facility of $700,000. In consideration thereof, the Company
issued to Mr. Klas a new stock warrant to purchase 80,000 shares of the
Company's common stock for an exercise price of $3.125 per share on or before
March 1, 2004.
The Company extended the expiration date to May 22, 2006 of an existing
warrant held by Mr. Klas (issued in 1996) to purchase 240,000 shares of Company
common stock at an exercise price of $20.00 per share.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
WTC INDUSTRIES, INC.
- --------------------------------------------------------------------------------
The Company has an agreement with a supplier that expires in June 2002
under which the Company is obligated to purchase a minimum of $172,500 annually
of its cyst filter requirements for certain of its products. Through December
31, 1999, the Company has paid a total of $199,000 of its total estimated
contract obligation of $862,500. During 2000, the Company anticipates it will
pay approximately $225,100, which represents the remaining obligation for 1999
and the obligation for 2000. Failure of the Company to perform under this
agreement could have a significant negative impact on the Company's financial
resources.
The Company estimates that during 2000 it will have working capital needs
of approximately $750,000 to fund its operations and continue revenue growth in
the domestic OEM market and an additional $750,000 to fund capital expenditures
needs for equipment and tooling.
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 through 2000.
EFFECTS OF INFLATION
The Company believes that during 1999 and 1998 inflation did not have a
material impact on the Company's business.
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, 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>
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
WTC INDUSTRIES, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Net sales (Note 10) .................................... $5,141,913 $ 3,785,909
Cost of goods sold ..................................... 3,474,971 4,102,833
---------- -----------
GROSS PROFIT (LOSS) ................................. 1,666,942 (316,924)
---------- -----------
Operating expenses:
Selling, general, and administrative ................. 1,209,655 1,136,128
Research and development ............................. 283,163 291,838
Loss on royalty agreement (Note 11) .................. -- 350,000
Loss on minimum purchase contract (Note 11) .......... -- 463,500
---------- -----------
1,492,818 2,241,466
---------- -----------
INCOME (LOSS) FROM OPERATIONS ....................... 174,124 (2,558,390)
---------- -----------
Other expense:
Interest expense (Note 5) ............................ 305,736 436,650
Other ................................................ 10,017 47,190
---------- -----------
315,753 483,840
---------- -----------
NET LOSS ............................................ $ (141,629) $(3,042,230)
========== ===========
Net loss per basic and diluted common share ............ $ (0.12) $ (2.69)
========== ===========
Weighted-average number of common shares outstanding --
basic and diluted ..................................... 1,165,593 1,130,129
========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
8
<PAGE>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
WTC INDUSTRIES, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (NOTE 5)
Current Assets
Cash ............................................................ $ 11,043 $ 25,261
Accounts receivable, net of allowance for doubtful accounts of
approximately $9,000 and $10,000, respectively (Note 10) ....... 533,174 217,715
Inventories, net of obsolescence reserve of approximately
$739,000 and $929,000, respectively (Note 3) ................... 356,096 430,106
Prepaid expenses and other ...................................... 43,950 3,691
------------ ------------
TOTAL CURRENT ASSETS ......................................... 944,263 676,773
Property and Equipment, at cost, net (Note 4) ..................... 325,340 193,839
Other Assets ...................................................... 5,191 11,792
------------ ------------
$ 1,274,794 $ 882,404
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Current maturities of long-term debt (Note 5) ................... $ 139,132 $ 861,731
Accounts payable ................................................ 486,737 459,462
Customer deposits ............................................... 5,438 8,427
Accrued interest payable ........................................ 157,552 41,248
Accrued expenses (Note 11) ...................................... 371,321 286,158
------------ ------------
TOTAL CURRENT LIABILITIES .................................... 1,160,180 1,657,026
------------ ------------
Long-Term Liabilities
Accrued minimum purchase commitments (Note 11) .................. 292,400 345,000
Long-term debt, net of current maturities (Note 5) .............. 5,405,287 4,398,321
------------ ------------
5,697,687 4,743,321
------------ ------------
Commitments and Contingencies (Notes 11 and 12)
Stockholders' Deficit (Notes 5, 6, 7, 9, and 11)
Preferred stock ................................................. -- --
Common stock, $0.10 par value; 15,000,000 shares authorized;
1,169,364 and 1,146,031 shares issued and outstanding in 1999
and 1998, respectively ......................................... 116,936 114,603
Additional paid-in capital ...................................... 11,800,230 11,711,064
Officer receivable .............................................. (30,000) (15,000)
Accumulated deficit ............................................. (17,470,239) (17,328,610)
------------ ------------
(5,583,073) (5,517,943)
------------ ------------
$ 1,274,794 $ 882,404
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
9
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1999 AND 1998
WTC INDUSTRIES, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------------------- PAID-IN OFFICER ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT DEFICIT
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 ......... 1,103,518 $ 110,352 $ 11,347,639 $ (15,000) $(14,286,380) $ (2,843,389)
Adjustment for fractional shares
due to 1-for-10 reverse stock
split (Note 6) .................... 13 1 (1) -- -- --
Issuance of common stock for
payment of royalty fees
(Note 11) ......................... 42,500 4,250 345,750 -- -- 350,000
Compensation expense recorded
on stock options .................. -- -- 17,676 -- -- 17,676
Net loss ........................... -- -- -- -- (3,042,230) (3,042,230)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 ......... 1,146,031 114,603 11,711,064 (15,000) (17,328,610) (5,517,943)
Issuance of common stock for
payment of rent (Note 9) .......... 23,333 2,333 15,166 -- -- 17,499
Issuance of warrants in debt
restructuring (Note 5) ............ -- -- 74,000 -- -- 74,000
Note receivable from officer ....... -- -- -- (15,000) -- (15,000)
Net loss ........................... -- -- -- -- (141,629) (141,629)
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1999 ......... 1,169,364 $ 116,936 $ 11,800,230 $ (30,000) $(17,470,239) $ (5,583,073)
============ ============ ============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
10
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
WTC INDUSTRIES, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net loss ........................................................... $ (141,629) $(3,042,230)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation ..................................................... 97,685 129,345
Amortization ..................................................... 7,136 17,125
Provision for obsolete inventory ................................. -- 436,230
Rent and royalty fees paid in common stock ....................... 17,499 350,000
Provision for loss on minimum purchase commitment ................ -- 463,500
(Gain) loss on sale of property and equipment .................... (1,091) 30,088
Noncash compensation ............................................. -- 17,676
Accretion of long-term debt discount ............................. 20,317 --
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable .......................................... (315,459) (64,412)
Inventories .................................................. 74,010 218,112
Current and other assets ..................................... (40,794) 13,919
Increase in:
Accounts payable ............................................. 27,275 260,107
Other accrued liabilities .................................... 145,878 104,424
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES ........................ (109,173) (1,066,116)
----------- -----------
Cash Flows From Investing Activities
Purchases of property and equipment ................................ (229,186) (107,613)
Note receivable from officer ....................................... (15,000) --
Proceeds from sale of property and equipment ....................... 1,091 --
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES ........................ (243,095) (107,613)
----------- -----------
Cash Flows From Financing Activities
Proceeds of loans from chairman .................................... 400,000 1,200,000
Payments on long-term debt ......................................... (61,950) (6,251)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES .................... 338,050 1,193,749
----------- -----------
NET INCREASE (DECREASE) IN CASH .............................. (14,218) 20,020
Cash
Beginning of year .................................................. 25,261 5,241
----------- -----------
End of year ........................................................ $ 11,043 $ 25,261
=========== ===========
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for interest ............................. $ 169,115 $ 231,378
=========== ===========
Supplemental Disclosures of Noncash Investing and
Financing Activities
Common stock issued for payment of rent (Note 9) ................... $ 17,499 $ --
Warrants issued in debt restructuring (Note 5) ..................... 74,000 --
Common stock issued for payment of royalty fees (Note 11) .......... -- 350,000
Common stock options issued for compensation ....................... -- 17,676
Accrued interest converted to long-term debt ....................... -- 126,006
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WTC INDUSTRIES, INC.
- --------------------------------------------------------------------------------
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 subsidiary (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 (KSU) 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).
All of the Company's revenue is attributed to one operating segment.
A summary of the Company's significant accounting policies follows:
PRINCIPLES OF CONSOLIDATION: The 1999 consolidated financial statements
include the accounts of WTC and its wholly owned subsidiary, PentaPure
Incorporated. Another wholly owned subsidiary, Water Pollution Control Systems,
Inc., was merged into PentaPure Incorporated on September 7, 1999. 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.
IMPAIRMENT OF LONG-LIVED ASSETS: The Company evaluates the carrying value
of 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 11).
FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair values 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
estimated fair value of notes payable and long-term debt is $5,051,000 as of
December 31, 1999. The recorded value of these items at December 31, 1998
approximated 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.
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
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WTC INDUSTRIES, INC.
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 incurred a year-to-date loss. 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.
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 $141,629 and $3,042,230, and has used cash to finance
operating activities of $109,173 and $1,066,116 for the years ended December 31,
1999 and 1998, respectively. In addition, as of December 31, 1999, the Company
had a deficiency in working capital of $215,917, an accumulated deficit of
$17,470,239, and a stockholders' deficit of $5,583,073.
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 1999 included the restructuring of outstanding
notes payable with the respective parties and additional loans of $400,000 from
the chairman of the Board (see Note 5).
Management's plans to continue as a going concern include (a) seeking
further financing from the chairman of the Board or other investors, (b)
increasing sales to the domestic OEM refrigerator water filtration market, and
(c) continuing research and development efforts for new disinfection technology
markets. The Company remains dependent on financing from its chairman. There is
no assurance that management's plans can be successfully accomplished.
The consolidated financial statements do not include any adjustments
related to the recoverability and classification of recorded asset amounts or
the amounts and classifications of liabilities that might be necessary should
the Company be unable to continue as a going concern.
NOTE 3. INVENTORIES
Inventories, net of reserves, consisted of the following at December 31:
1999 1998
- --------------------------------------------------------------------------------
Raw materials ...................................... $ 233,291 $ 283,326
Work in process .................................... 5,849 3,484
Finished goods ..................................... 116,956 143,296
--------- ---------
$ 356,096 $ 430,106
========= =========
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WTC INDUSTRIES, INC.
- --------------------------------------------------------------------------------
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
1999 1998
- --------------------------------------------------------------------------------
Office equipment .................................... $ 210,299 $190,505
Machinery and equipment ............................. 677,870 607,896
Deposits on equipment and tooling ................... 137,183 --
---------- --------
1,025,352 798,401
Less accumulated depreciation ....................... 700,012 604,562
---------- --------
$ 325,340 $193,839
========== ========
NOTE 5. NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Note payable to a bank at prime, payable in monthly interest-only
payments, with principal due May 31, 2000, secured by substantially
all assets of the Company and guaranteed by chairman (d) ................ $ 750,000 $ 750,000
Note payable to chairman at prime, payable in semiannual
interest-only payments, with principal due December 31, 1999 (c) ........ 400,000 --
Notes restructured during 1999:
Note payable to chairman, payable in semiannual interest-only
payments, with principal due May 31, 2002 (a) ......................... 2,464,700 2,498,807
Notes payable, of which $216,002 is with directors or a company
affiliated with the chairman, payable in quarterly installments of
approximately $28,000 beginning July 1999, with balance due
May 31, 2002 (a) ...................................................... 1,056,007 1,100,000
Note payable to a company affiliated with the chairman, payable
in semiannual installments of approximately $22,000, with balance
due May 31, 2002 (a) .................................................. 527,020 553,114
Notes payable, 5.18%, payable in quarterly installments of
approximately $8,000 beginning July 1999, with balance due
May 31, 2002 (b) ...................................................... 295,430 300,000
Note payable to chairman at prime plus 2%, payable in interest-only
payments quarterly, with balance due May 31, 1999 (c) ................... 50,000 50,000
Other .................................................................... 1,262 8,131
---------- ----------
5,544,419 5,260,052
Less current maturities ................................................ 139,132 861,731
---------- ----------
$5,405,287 $4,398,321
========== ==========
</TABLE>
- -------------------
(a) The terms of these notes were modified in 1999 and are being accounted for
as a troubled debt restructuring. The notes were originally due in May 1999
and carried an interest rate of 7.75 percent or prime plus 2 percent. Under
the restructuring, the holders agreed to extend the notes to May 2000, with
a stated interest rate of 1 percent, at which time the rate increases to
5.18 percent. The Company recognizes interest expense on these notes using
the interest method, which results in constant effective interest rates of
3.975 to 4.182 percent over the terms of the notes. In addition, the
various note holders
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WTC INDUSTRIES, INC.
- --------------------------------------------------------------------------------
NOTE 5. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
were granted four-year warrants to purchase 271,176 shares of common stock
at a price of $1 per share. The portion of the loan amount ascribed to the
warrants was $74,000, as determined using the Black-Scholes option pricing
model. The carrying balance of the notes has been discounted for the value
ascribed to the warrants. No gain or loss was recognized from the
restructuring.
(b) The terms of these notes were modified in 1999 and are being accounted for
as a troubled debt restructuring. The notes were originally due in May 1999
and carried an interest rate of prime plus 2 percent.
(c) On February 29, 2000, the Board of Directors approved the conversion of
these notes to 180,000 shares of common stock. The conversion rate is in
excess of the fair market value of stock at the time of conversion. As a
result of this conversion, these notes have been classified as noncurrent
and subsequent to December 31, 1999 will be converted to equity.
(d) On March 20, 2000, the chairman assumed this note and its related accrued
interest. The Company will issue the chairman a one year convertible note
payable which provides a right to conversion at the discretion of the
holder into shares of the Company's common stock at $3.00 per share. The
conversion rate is in excess of the fair market value at the time the rate
was determined. This note has been classified as if the refinancing had
occurred by December 31, 1999.
(e) In conjunction with (c) and (d) above, the Company extended the chairman's
existing warrant five years to May 22, 2006, to purchase 240,000 shares of
common stock at $20.00 per share. The value assigned to this extension was
nominal using the Black-Scholes pricing model.
On March 20, 2000, the Company entered into a new loan agreement with a
bank for a term loan of $750,000 and a $700,000 revolving credit facility, both
of which are co-signed by the chairman. The bank will receive a four year
warrant to purchase 15,000 shares of common stock at $5.00 per share. In
exchange for his personal obligation, the chairman will receive a warrant to
purchase 80,000 shares of common stock at $3.125 per share. The warrant will
expire March 1, 2004. The value ascribed to these warrants will be determined
using the Black-Scholes option pricing model and amortized over the term of the
debt as a financing cost.
Approximate maturities of long-term debt, excluding debt subsequently
converted to equity, at December 31, 1999, are as follows:
- --------------------------------------------------------------------------------
Years ending December 31:
2000 ........................................................... $ 139,000
2001 ........................................................... 819,000
2002 ........................................................... 4,136,000
----------
$5,094,000
==========
Interest expense related to the borrowings with the chairman, the company
affiliated with the chairman, and other directors charged to operations during
1999 and 1998 was $179,016 and $220,963, 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. All share and
per-share amounts presented have been retroactively adjusted to reflect the
reverse split.
PREFERRED STOCK: At December 31, 1999 and 1998, 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.
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WTC INDUSTRIES, INC.
- --------------------------------------------------------------------------------
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, 1999 and 1998.
NONEMPLOYEE GRANTS: The Company also grants options and warrants to
nonemployees 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 1999 and 1998 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
----------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Net loss, as reported ............................................ $ (141,629) $(3,042,230)
Net loss, pro forma .............................................. (292,049) (3,228,115)
Basic and diluted net loss per common share, as reported ......... (0.12) (2.69)
Basic and diluted net loss per common share, pro forma ........... (0.25) (2.86)
</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 1999 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Volatility ....................................................... 24.5% 133.0%
Risk-free interest rate .......................................... 6.2% 6.0%
Expected life (years) ............................................ 4 2
Expected dividend yield .......................................... NONE None
</TABLE>
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 10 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, 1999, 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
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WTC INDUSTRIES, INC.
- --------------------------------------------------------------------------------
NOTE 7. STOCK OPTIONS AND WARRANTS (CONTINUED)
to 150,000 shares of common stock that have a maximum term of 10 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, 1999, 43,896 options have been granted and
outstanding, with 106,104 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 options have a maximum term of 10
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, 1999, 346,600 options
are outstanding. In 1999 the Board of Directors increased the shares of common
stock available for distribution to 500,000.
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, 1999 and 1998, the Company had options
outstanding to an unrelated party to purchase 3,000 shares of common stock at
exercise prices of $15.00 to $25.00. The options are currently exercisable and
will expire in 2001.
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WTC INDUSTRIES, INC.
- --------------------------------------------------------------------------------
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, 1999, is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
1994 1996 AVERAGE
ISOP PLAN PLAN OTHER TOTAL EXERCISE PRICE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Granted (weighted-average
fair value $0.35) .......... -- -- 266,000 -- 266,000 1.19
Canceled .................... -- (5,000) (7,740) -- (12,740) 6.58
---------------------------------------------------------------------------
Options outstanding at
December 31, 1999 ............ -- 43,896 338,860 3,000 385,756 $ 3.85
===========================================================================
Options exercisable at
December 31, 1998 ............ -- 48,896 33,977 3,000 85,873 $ 8.96
Options exercisable at
December 31, 1999 ............ -- 43,896 147,741 3,000 194,637 $ 5.43
</TABLE>
Options outstanding and exercisable by price range as of December 31, 1999,
are 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>
$ 1.06 - $ 1.90 240,000 7.5 $ 1.07 94,334 $ 1.07
$ 2.25 25,000 7.6 2.25 1.000 2.25
$ 3.13 12,200 1.3 3.13 12,200 3.13
$ 5.00 3,000 1.2 5.00 3,000 5.00
$ 7.50 30,000 5.6 7.50 20,000 7.50
$10.00 34,000 4.3 10.00 34,000 10.00
$12.50 36,860 4.3 12.50 25,407 12.50
$15.00 - $17.50 3,000 2.4 15.83 3,000 15.83
$25.00 - $28.75 1,696 2.5 26.54 1,696 26.54
------- -------
385,756 194,637
======= =======
</TABLE>
STOCK WARRANTS: The Company has an outstanding warrant to purchase 240,000
shares of common stock at an exercise price of $20.00 per share on or before May
22, 2001. On February 29, 2000, the expiration date of this warrant was extended
to March 22, 2006 (see Note 5).
Also the warrants issued with debt (see Note 5) to purchase 271,176 shares
of common stock at an exercise price of $1.00 on or before June 30, 2002, were
outstanding at December 31, 1999.
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WTC INDUSTRIES, INC.
- --------------------------------------------------------------------------------
NOTE 7. STOCK OPTIONS AND WARRANTS (CONTINUED)
A summary of stock warrant transactions during the two-year period ended
December 31, 1999, is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER OF AVERAGE EXERCISE
SHARES PRICE PER SHARE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Warrants outstanding and exercisable at December 31, 1997 and 1998 240,000 $ 20.00
Issued in 1999 .................................................. 271,176 1.00
-------
Warrants outstanding and exercisable at December 31, 1999 ......... 511,176 9.92
=======
</TABLE>
NOTE 8. INCOME TAXES
No provision for income taxes has been recorded for the years ended
December 31, 1999 and 1998, 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 $15,890,000 at December 31, 1999. Utilization of approximately
$5,676,000 of the NOL carryforward is limited to approximately $29,000 per year
through 2009 ($290,000 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 use of the NOL carryforward may
be further limited by ownership changes occurring subsequent to December 31,
1994.
The NOL carryforward has the following expiration dates:
- --------------------------------------------------------------------------------
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 ........................................................ 1,510,000
2018 ........................................................ 2,559,000
2019 ........................................................ 314,000
-----------
$15,890,000
===========
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WTC INDUSTRIES, INC.
- --------------------------------------------------------------------------------
NOTE 8. INCOME TAXES (CONTINUED)
A summary of the Company's deferred taxes at December 31 is as follows:
1999 1998
- -------------------------------------------------------------------------------
Assets:
Inventory obsolescence reserve .............. $ 296,000 $ 371,000
Loss on minimum purchase commitment ......... 207,000 207,000
Allowance for doubtful accounts ............. 4,000 4,000
Warranty reserve ............................ 20,000 24,000
Compensation and employee benefits .......... 7,000 7,000
NOL carryforwards ........................... 4,201,000 3,900,000
----------- -----------
4,735,000 4,513,000
Less valuation reserve ...................... (4,735,000) (4,513,000)
----------- -----------
$ -- $ --
=========== ===========
NOTE 9. 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, 1999 and 1998, the Company paid Tapemark a total of $60,700 and $76,900,
respectively, for these services.
The Company also leases manufacturing and office space from Tapemark under
a two-year noncancelable lease. The Company will make no payments to Tapemark
for general utilities, pro rata taxes, and special assessments. In lieu of cash
payments for rent, the Company issued 23,333 shares of common stock at its fair
market value of $17,499 to Tapemark. In 2000, the Company will issue an
additional 23,334 shares of common stock for that year's rent.
Under the lease in effect in 1998, the Company issued options to purchase
11,200 shares of common stock at an exercise price of $3.125 to Tapemark in lieu
of cash payments for rent. The options are immediately exercisable with an
expiration date of December 31, 2000.
NOTE 10. ENTERPRISE-WIDE AND MAJOR CUSTOMER DISCLOSURES
The Company sells its products worldwide through direct sales and various
distributor agreements. Net sales by geographic area for the years ended
December 31, 1999 and 1998, were approximately as follows:
1999 1998
- --------------------------------------------------------------------------------
Domestic sales ................................... $4,321,000 $2,425,000
Foreign sales:
Europe/Africa/Middle East ...................... 414,000 846,000
Asia ........................................... 115,000 302,000
Other .......................................... 292,000 213,000
---------- ----------
Net sales ........................................ $5,142,000 $3,786,000
========== ==========
The Company has one customer that accounted for 70 and 53 percent of net
sales in 1999 and 1998, respectively. Accounts receivable from this customer
were approximately $440,000 at December 31, 1999.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WTC INDUSTRIES, INC.
- --------------------------------------------------------------------------------
NOTE 11. 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 2004. Future minimum lease
payments for the next five years range from $3,000 up to $18,000 per year,
excluding allocable operating costs, due under these operating leases.
Rent expense under all operating leases was approximately $72,000 and
$112,000 for the years ended December 31, 1999 and 1998, respectively.
MINIMUM PURCHASE COMMITMENT: Effective June 15, 1997, the Company entered
into a five-year requirement contract under which the Company agreed to purchase
all of its cyst filters required for certain of its products. The Company agreed
to purchase a minimum of $172,000 of filters per year throughout the term of the
agreement. The Company's performance under the contract is personally guaranteed
by the Company's chairman up to $100,000. The Company has accrued the estimated
commitment, not likely to be fulfilled. At December 31, 1999 and 1998, minimum
purchase commitments of $517,500 were accrued, of which $225,100 and $172,500
were included in current liabilities, respectively.
ARRANGEMENT WITH SUPPLIER: The Company utilizes the services of 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 the supplier. 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
this supplier. The supplier has agreed to sell iodinated resin only to the
Company and one other party. The other party 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.
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. Royalty expenses were $25,000 for the years ended
December 31, 1999 and 1998.
NOTE 12. RETIREMENT PLAN
Effective January 1, 1999, the Company adopted a salary savings plan that
covers all eligible employees. Under the terms of the plan, eligible employees
of the Company are permitted to make voluntary contributions up to the maximum
allowed under Internal Revenue Service regulations. Employer contributions may
be made to the plan at the discretion of the Company's Board of Directors. No
discretionary contributions were made to the plan for 1999.
21
<PAGE>
INDEPENDENT AUDITOR'S REPORT
WTC INDUSTRIES, INC.
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
WTC Industries, Inc. and Subsidiary
West St. Paul, Minnesota
We have audited the accompanying consolidated balance sheets of WTC
Industries, Inc. and Subsidiary (the Company) as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' deficit,
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 1999 and 1998, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company's recurring losses from
operations, deficiency in working capital, and 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 any adjustments that might result from the
outcome of this uncertainty.
/s/ McGladrey & Pullen, LLP
Minneapolis, Minnesota
January 20, 2000, except for Note 5, as to which
the date is March 20, 2000
22
<PAGE>
CORPORATE AND SHAREHOLDER INFORMATION
WTC INDUSTRIES, INC.
- --------------------------------------------------------------------------------
CORPORATE HEADQUARTERS DIRECTORS
WTC Industries, Inc. Robert C. Klas, Sr.
150 Marie Avenue East Chairman of the Board
West Saint Paul, Minnesota Tapemark Company
651-554-3140
Biloine W. Young
CORPORATE COUNSEL Writer
Lindquist & Vennum PLLP
Minneapolis, Minnesota
John A. Clymer
Managing Director
INDEPENDENT AUDITORS Resource Companies, Inc.
McGladrey & Pullen, LLP
Minneapolis, Minnesota
Ronald A. Mitsch
Vice Chairman (Retired)
TRANSFER AGENT 3M Company
Norwest Bank Minnesota, N.A.
161 North Concord Exchange
P.O. Box 738 Robert C. Klas, Jr.
South Saint Paul, Minnesota 55075 President
(800) 468-9716 Tapemark Company
FORM 10-KSB EXECUTIVE OFFICERS
A copy of the WTC Industries, Inc. Form Robert C. Klas, Sr.
10-KSB as filed with the Securities and Chief Executive Officer
Exchange Commission will be sent to any
shareholder, without charge, upon written
request to Mr. Gregory P. Jensen, WTC Gregory P. Jensen
Industries, Inc., 150 Marie Avenue East, Chief Financial Officer
West Saint Paul, Minnesota 55118-4002. Secretary and Treasurer
ANNUAL MEETING OF SHAREHOLDERS James J. Carbonari
The Annual Meeting of Shareholders of WTC President
Industries, Inc. will be held at 2:00 pm PentaPure Incorporated
on May 2, 2000 at Southview Country Club,
239 East Mendota Road, West Saint Paul,
Minnesota. David M. Botts
Vice President
PentaPure Incorporated
EXHIBIT 21.1
List of WTC Industries, Inc. Subsidiary
PentaPure Incorporated
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in Registration Statement on
Form S-8 (No. 33-98684) of our report, dated January 20, 2000, except for Note
5, as to which the date is March 20, 2000, 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
Subsidiary, incorporated by reference from the Company's Annual Report to
Shareholders on Form 10-KSB for the year ended December 31, 1999.
/s/ McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27
WTC INDUSTRIES, INC.
150 Marie Avenue East
West Saint Paul, Minnesota 55118-4002
Financial Data Schedule
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 11,043
<SECURITIES> 0
<RECEIVABLES> 533,174
<ALLOWANCES> 9,000
<INVENTORY> 356,096
<CURRENT-ASSETS> 944,263
<PP&E> 1,025,352
<DEPRECIATION> 700,012
<TOTAL-ASSETS> 1,274,794
<CURRENT-LIABILITIES> 1,160,180
<BONDS> 5,697,687
0
0
<COMMON> 116,936
<OTHER-SE> (5,700,009)
<TOTAL-LIABILITY-AND-EQUITY> 1,274,794
<SALES> 5,141,913
<TOTAL-REVENUES> 5,141,913
<CGS> 3,474,971
<TOTAL-COSTS> 1,492,818
<OTHER-EXPENSES> 10,017
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 305,736
<INCOME-PRETAX> (141,629)
<INCOME-TAX> 0
<INCOME-CONTINUING> (141,629)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (141,629)
<EPS-BASIC> (.12)
<EPS-DILUTED> (.12)
</TABLE>
