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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended Commission file number 0-16416
OCTOBER 31, 1996
ELECTROPURE, INC.
(FORMERLY, HOH WATER TECHNOLOGY CORPORATION)
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0056212
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
23251 Vista Grande, Suite A, Laguna Hills, California 92653
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 770-9187
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 [ ] No [X].
Indicate by check mark whether any director, officer, beneficial owner of more
than 10 percent of any class of equity securities of the Registrant failed to
file any reports required by Section 16(a) of the Securities Exchange Act of
1934 on a timely basis during the most recent fiscal year. Yes [ ] No [X].
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at June 6, 1997 was $589,583.
At June 6, 1997, 3,942,290 shares of the Registrant's stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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PART I
ITEM 1. BUSINESS
BUSINESS
Electropure, Inc. ("Electropure" or the "Company" - formerly, HOH Water
Technology Corporation ("HOH")) was organized in 1979 to design, develop,
manufacture and market the "EDI" series of patented electrodeionization
(formerly referred to as "Electropure" or "Electropure technology") devices for
commercial, residential, municipal, industrial and agricultural applications.
The original EDI was designed as a point-of-entry system to treat the entire
house or facility. However, lack of funds and high production costs has delayed
development of this model. The Company subsequently developed a smaller
point-of-use model of the EDI technology aimed at the high purity water
treatment segment of the commercial (especially semiconductor, pharmaceutical,
and cosmetic companies), and industrial (pulp and paper, laboratories, and
petrochemical companies) water treatment markets. This next generation
technology will give the same output capacity at one-third to one-fifth the cost
of current technology and the ability to "modularize" this technology's capacity
to service installations up to 20 times the size of current output levels.
Extensive field testing conducted by the Company proved the EDI's ability to
desalt pre-treated (water filtered and softened generally by reverse osmosis)
tap water to a purity level exceeding one megohm-cm (roughly less than 0.5 parts
per million ("ppm") of total dissolved solids ("TDS")). A major environmental
and competitive benefit of the EDI technology is that it does not require the
addition of salts or other chemicals for regeneration. Most other processes
require the addition of these elements. Between February, 1991 and February,
1992, the Company sold and delivered three of such units. Although additional
orders were being sought and likely to be obtained, the Company had insufficient
working capital to manufacture adequate numbers of products or to properly
initiate an effective marketing campaign for this new product. Consequently, in
January, 1992 the Company was forced to suspend all meaningful operations while
it sought a source of financing because the Company's attempts to generate cash
flow from the manufacture and sale of reverse osmosis products (unrelated to the
EDI technology) had failed to fund its working capital requirements. At that
time, the Company was in immediate jeopardy of losing, irretrievably, its patent
rights on the EDI technology for failing to pay patent maintenance fees thereon.
In summary, the Company was in ultimate danger of having to file for protection
from its creditors. After several months of negotiations, in May, 1992, the
Company entered into a Letter of Intent with EDI Components to grant an
exclusive license to manufacture and market the Company's patented EDI
technology. See Item 1 - "License Agreements - Agreements with EDI Components."
On July 25, 1996, the Company effected a one-for-ten reverse stock split and a
corporate name change to "Electropure, Inc." See Item 4 - "Submission of Matters
to a Vote of Security Holders."
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LICENSE AGREEMENTS
AGREEMENTS WITH EDI COMPONENTS
On July 29, 1992, the Company entered into formal agreements with EDI Components
(formerly Electropure, Inc.), a privately-held California corporation. In
general, the agreements contain the following provisions:
A. A grant to EDI Components of an exclusive worldwide license (the
"License") to manufacture and market the Company's patented EDI
technology, with the right to sub-license, all subject to meeting the
annual sales criteria set forth below:
<TABLE>
<CAPTION>
-----------------------------------------------------
(IN UNITS(1))
MINIMUM SALES
CALENDAR YEAR REQUIREMENT
-----------------------------------------------------
<S> <C>
1992 NONE
1993 145
1994 175
1995 200
1996 240
1997 275
1998 and thereafter Minimum sales requirements to
be mutually established or,
if not so agreed, at least
275 Units.
-----------------------------------------------------
</TABLE>
Pursuant to a January, 1994 agreement, the above criteria was stayed
until the patent infringement action which the Company brought
against Millipore Corporation could be concluded. See Item 3 - "Legal
Proceedings". In the interim period, EDI Components was to pay all
reasonable operating expenses required by the Company. Although the
litigation with Millipore was settled in July, 1996, the above
criteria has not been renegotiated pending the intended termination
of the license relationship with EDI Components. See "Proposed
License Termination" below.
B. For the above rights, EDI Components paid the Company an initial fee
of $129,366 all of which was utilized to fund working capital and to
settle various debts with creditors. In addition, the agreement
called for EDI Components to pay the Company a percentage of all net
sales revenues received, based upon the monthly volume of Units sold
using the formula set forth in the following table.
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(1) A "Unit" is defined as any product which incorporates the technology
covered in U.S. Patent No. 4,465,573 issued on August 14, 1984 to Harry M.
O'Hare, Sr., European Patent No. 0078842 issued on May 8, 1991 to Harry M.
O'Hare, Sr. and U.S. Patent No. 4,964,970 issued on October 8, 1991 to
Harry M. O'Hare, Sr. (the "Patents"), relating to certain
electrodeionization water purification devices known as the "Electropure"
(herein referred to as "EDI") as well as certain non-patented trade secrets
related to the EDI.
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<TABLE>
<CAPTION>
------------------------------------------------------------
MONTHLY SALES SALES ALLOCATION
------------------------------------------------------------
PERCENTAGE OF
NET SALES REVENUES
------------------------------------------------------------
No. of Units EDI COMPONENTS ELECTROPURE
------------------------------------------------------------
<S> <C> <C>
20 or less 64% 36%
21 - 30 56% 44%
31 - 40 49% 51%
41 - 50 45% 55%
51- 60 34% 66%
61 or more 27% 73%
------------------------------------------------------------
</TABLE>
EDI Components paid the Company $72,550 and $81,559 in license fees
under the Agreement for the fiscal years ended October 31, 1995 and
1996, respectively. Pursuant to a January, 1994 amendment to the
Agreements, EDI Components is obligated to pay the Company a minimum
amount to cover all necessary operating expenses, including
accounting and auditing fees and certain monthly payments on accrued
liabilities. Between July, 1992 and October 31, 1996, EDI Components
has paid the Company an aggregate of $451,554 in license fees.
C. The Company executed a Security Agreement granting EDI Components a
security interest in the EDI patents (the "Collateral") to the extent
of the capital investment of EDI Components, which is limited to a
maximum of $600,000, unless increased by agreement. As of March 17,
1995, the Company agreed to increase such limit to $825,000 in
investments (cash or services) and $312,500 in loans to EDI
Components.
In the event the Company should default in the performance of such
Security Agreement, EDI Components shall have the option, upon 30
day's notice, to enforce its security interest by either (i) taking
title to the collateral and/or (ii) selling the collateral at public
or private sale.
In general, the Company shall default in the Security Agreement if
(i) the Company shall file any petition or action for relief under
any bankruptcy, reorganization, insolvency or moratorium law for the
relief of debtors; (ii) an involuntary petition shall be issued under
any bankruptcy statute against the Company or a custodian, receiver,
trustee, assignee for the benefit of creditors; (iii) the License
Agreement shall become ineffective or unenforceable; or (iv) there
shall be a "change of control" in the Company.
A "Change of Control" shall occur if (i) there shall be any
consolidation or merger of the Company in which Electropure, Inc. is
not the surviving corporation or pursuant to which the Company's
common stock shall be converted into cash, securities or other
property unless the holders of such common stock have the same
proportionate value of ownership of the surviving corporation; (ii)
all or substantially all of the assets of the Company are sold,
leased, exchanged or otherwise transferred; (iii) the stockholders of
Electropure,
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Inc. approve any plan for liquidation or dissolution of the Company;
or (iv) any person, except any investors in EDI Components, shall
become the beneficial owner of 20% or more of the Company's
outstanding common stock.
D. The Company leased to EDI Components all property and equipment which
it does not reasonable require to conduct business operations,
including all capital equipment, molds, inventory, machinery, tools,
office equipment and furniture. Such lease (the "Lease")
automatically terminates on January 31, 1998.
E. The Company has the right, until January 31, 1998 to reacquire the
license rights, the leased property and the security interest in the
EDI patents, thereby terminating the License, Lease and Security
Agreements, by paying EDI Components up to a maximum of $2,950,000.
As of June 6, 1997, the aggregate payment required under the
Agreements, and amendments thereto, totals $2,750,000(2). All excess
cash assets of EDI Components (not needed to fund operations) are
required to be set aside in a Special Fund (the "Fund"). All assets
of EDI Components, including the amounts set aside in such Fund, will
be available to the Company and credited toward the required payment
at such time as reacquisition occurs. In the event reacquisition does
not occur by January 31, 1998 and the Company has not been declared
in default of the Security Agreement, the License shall continue in
effect until the expiration of the last to expire of the licensed
patents and patent rights.
F. Subject to the above investment limit, the Company was required to
issue the following to each investor in EDI Components:
(1) Warrants to purchase four (4) shares of the Company's Common
Stock for each dollar invested in EDI Components. Pursuant to
subsequent amendments to the agreements, the Company increased
the number of Warrants to a maximum of 3,700,000 (370,000
post-reverse split), issuable at the discretion of EDI
Components, either in consideration for investments in or loans
to EDI Components. All of such warrants are exercisable at a
price of $0.05 ($0.50 post-reverse split) per share.
(2) A Stock Right Agreement providing each investor the right to
purchase, in an amount equal to their investment in EDI
Components, additional shares of the Company's common stock at a
25% discount from the cash purchase price at which the Company
may, in the future, offer such stock to bona fide third party
purchasers.
All of the foregoing warrants and stock rights are exercisable at any
time prior to January 31, 1998 or until the Company shall reacquire
the licensed rights, whichever shall first occur.
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(2) An additional $200,000 may be payable, for a total payment by the Company
of $2,950,000, upon conversion by Anthony Frank of $150,000 in loans to EDI
Components. See Item 12. Certain Relationships and Related Transactions -
Mr. Frank.
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As of June 6, 1997, the Company had issued 290,000 (post-reverse
split) of such warrants and stock right agreements granting rights to
purchase up to $725,000 in the Company's common stock to twelve (12)
individuals who had invested $725,000 in cash and services in EDI
Components. An additional 44,150 (post-reverse split) of such
warrants has been issued as partial consideration for $339,500 in
loans to that entity.
The Company also agreed to convert such loans to common stock at
discounts ranging from 25% to 50% of the fair market value of similar
common stock as of the date of conversion. During fiscal 1996, the
Company issued 404,764 (40,477 post-reverse split) shares on the
conversion of $259,500 and $28,787 in principal and interest accrued
thereon, respectively. In February, 1996, the Company further agreed
to allow the lender of a $500,000 loan to EDI Components the right to
convert such loan and accrued interest into the Company's Common
Stock at a 25% discount to fair market value. On June 2, 1997, the
lender elected to convert such loan, plus accrued but unpaid interest
thereon, and the Company shall issue an additional 1,717,484 shares
of Common Stock. See Item 12. - "Certain Relationships and Related
Transactions - Mr. Frank."
All of the investors of EDI Components, except one, are shareholders of the
Company. One such shareholder is also a former director of the Company. Of such
total investment amount, a $100,000 investment position has been granted to
Floyd H. Panning, President and Founder of EDI Components, in exchange for his
initial two years' of service to that company.
The investors of EDI Components exercise a significant amount of voting control
over the Company's operations. As of June 6, 1997, the combined stockholdings of
the EDI Components investors amounted to approximately 67.9%, with 38.1% of the
total voting control in the Company (3).
PROPOSED LICENSE TERMINATION
The Company is currently negotiating with its licensee, EDI Components (formerly
Electropure, Inc.) to terminate the July, 1992 license agreements and the
security interests provided in the Company's patents. The Company expects to
conclude such negotiations by mid-July, 1997, in keeping with the provisions of
a settlement agreement reached in May, 1997 between the parties and the Economic
Development Bank for Puerto Rico (see Item 3 - Legal Proceedings). It is
anticipated that the Company will pay EDI Components up to $2,950,000 to
terminate the license relationship in some combination of cash and equity over a
period of time. It is also anticipated that the Company will hire the management
and staff of EDI Components and that manufacturing and marketing of the EDI
technology will then be conducted by the Company. Because the Company believes
that its licensee has established a good reputation in the business community
and that its name ("Electropure, Inc.") has become positively associated with
the EDI product, during fiscal 1996, the Company sought and received approval
from shareholders to change its corporate name to Electropure, Inc. in order to
capitalize on the good will established by its licensee. As a result, the
Company's licensee has formally changed its corporate name to "EDI Components".
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(3) Excludes the common stock underlying 725,913 currently exercisable options
and warrants to purchase common stock. If such common stock were included, the
investors of EDI Components would own approximately 71.9% of the common stock
with 42.2% of the voting control.
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During the license relationship with EDI Components and until the licensed
rights are reacquired, the Company's primary operations have been and will
continue to be administrative. Once the license arrangement with EDI Components
has been terminated, as anticipated above, the Company intends to initiate
operations with a view toward implementing a production and marketing program.
However, no assurances can be given that production and sales will begin in
significant quantities since such sales may be dependent on obtaining additional
working capital through the sale of common stock or other securities.
AGREEMENTS WITH GLEGG WATER CONDITIONING, INC.
On July 1, 1994, the Company and its licensee granted Canadian-based Glegg Water
Conditioning, Inc. a non-exclusive license to use and commercially exploit the
EDI technology for an initial term of ten (10) years for which Glegg paid the
non-refundable sum of $50,000. The license, which may be extended by mutual
agreement, provides that Glegg pay EDI Components a continuing royalty of 5% on
the net sale price of all licensed products having a total system design flow
rate of 100 gallons per minute and above and a 10% royalty on flow rates less
than 100 gallons per minute.
In May, 1997, the Company and its licensee entered into an Amended and Restated
Technology Licence Agreement providing Glegg with a paid-up license for a lump
sum payment of $125,000 to EDI Components. The amended agreement pprovides Glegg
the right to sublicense its subsidiaries and affiliates as well as Asahi Glass
Co., Ltd, with which Glegg has an on-going working relationship.
AGREEMENT WITH POLYMETRICS
On May 3, 1995, the Company and EDI Components granted a non-exclusive EDI
license to Polymetrics of San Jose, California. The terms of such license, for
which Polymetrics paid the sum of $200,000, are similar to those contained in
the July, 1994 Glegg agreement as described above.
CORPORATE RESTRUCTURING
An integral component of the license relationship with EDI Components required
the Company to revise its organizational and operational structure by reducing
current debt and ongoing operational expenses. Of the $129,366 in initial fees
paid by Electropure, Inc., approximately $81,000 was utilized to settle past
debts due to creditors and employees of the Company, resulting in a gain on the
settlements in excess of $92,000. During fiscal 1996, an additional $25,000 was
paid by EDI Components to settle a $126,289 debt owed by the Company. The
remaining fees, and fees paid subsequently, have been used to fund the Company's
operational expenses since June, 1992, including the fees utilized to place the
Company's Puerto Rico subsidiary in bankruptcy as discussed below.
In a further effort to reduce operational expenses and losses, the Company had
been negotiating since the latter part of 1991 to reduce its equity interest in
its Puerto Rico manufacturing subsidiary, HOH International, Inc. The
subsidiary's president/general manager, Radames Torres, had formed an
independent water equipment retail dealership ("CNM2 Enterprises") and was
purchasing under-the-sink reverse osmosis products manufactured by HOH
International, Inc. Negotiations continued until
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April, 1992 when the subsidiary's preferred shareholder, the Economic
Development Bank for Puerto Rico, withdrew from discussions. Consequently, due
to a lack of operating capital, all operations at the Company's Puerto Rico
subsidiary terminated in May, 1992; its inventory of reverse osmosis component
parts was seized and sold for approximately $13,000 in June, 1993 by the
Internal Revenue Service to settle unpaid payroll taxes and on July 16, 1993,
the subsidiary filed for bankruptcy protection from its creditors in the United
States Bankruptcy Court in California. The subsidiary was declared bankrupt as
of November 18, 1993 and, as a result, all of the liabilities of the subsidiary
were discharged as of the fiscal year ended October, 31, 1994. See Item 3 -
Legal Proceedings - Puerto Rico."
THE MARKET FOR WATER PURIFICATION
Water is essential to life and potable water, that which is fit for human
consumption, is a necessity for which a market will always exist. Growing
population has increased demand for potable water just as the waste and
pollution created by the enlarging population has reduced nature's ability to
supply potable water. The United Nations focused attention on the world's water
problem by launching the "International Drinking Water Supply and Sanitation
Decade" on November 10, 1980 and allocated $300 billion to the development of
solutions to the problem. Beyond the need for water which is merely fit for
human consumption is the demand for "high purity" water which is usable for
purposes other than drinking, such as cleaning or industrial processing. Such
water requires the removal of contaminants which interfere with the intended
use. In fact, examination of municipal water use reveals that less than one
percent is actually used for human consumption. The remainder is used by
industry, irrigation, bathing, laundry, etc... Enhanced treatment of such water
at the point of use, therefore, is an economically viable solution for
compliance with stringent standards imposed by users of high purity water. The
EPA has studied and is in favor of the point-of-use approach, provided that
treatment equipment meets its Generally Available Technology (GAT) criteria.
Having grown 70% over the preceding five years, sales in this market segment
alone aggregated $10 billion in 1994 (including chemical treatments) and are
expected to increase another 50% during the next five years.
The high purity water market is a market segment which alone aggregated $954
million during 1992 and is expected to grow to $1.6 billion by 1997. Anna Crull,
President of Chemical Technology Consultants in Houston, estimates the annual
U.S. market for membranes and modules is $630 million (high purity water and
other applications) (4). The market for high purity water treatment equipment
and consumables was projected at $350 million for 1992, according to a Business
Communications Co. Inc. study. The 1992 study anticipated that sales would
exceed $528.0 million in 1994 and growth would continue to expand at this pace
for the foreseeable future with the current market estimated at $700 - $800
million. The market is currently growing at a rate of 30% annually and given the
general deterioration of the world's water supplies this growth is likely to
continue and expand as the cost of treatment falls. The industry is in a major
growth cycle and there are about 40 major companies in the world active in
supplying goods and services with an estimated 13,500 customers in the United
States.
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(4) Ultrapure Water, "Market overview - Membrane Markets Show Continued
Strength," April 1993, by Mike Henley.
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CURRENT TECHNOLOGIES IN WATER PURIFICATION
Water purification is a relative term referring to removing selected, but not
all, of a limited number of contaminants depending on the expected use to be
made of the water. There are three general types of water purification
processes:
1. Physical processes which depend simply on physical properties of the
impurities, such as particle size, specific gravity and viscosity.
Examples of this type of process are reverse osmosis, distillation,
screening, sedimentation, filtration and gas transfer.
2. Chemical processes which depend on the chemical properties of an
impurity or utilize the chemical properties of added reagents. Examples
are ion exchange, electrodialysis, chlorination, coagulation and
precipitation.
3. Biological processes which utilize biochemical reactions to remove
soluble or colloidal organic impurities. Examples are biological
filtration and the activated sludge process.
THE EDI TECHNOLOGY
The need to satisfy the increasing demand for high purity water in a variety of
industries can now be achieved through the Company's patented
electrodeionization process (EDI). The EDI design combines two well-established
water desalination technologies -- electrodialysis and ion exchange
deionization. Through this revolutionary technique dissolved salts can be
removed at low energy costs, and without the need for chemical regeneration; the
result is high quality water of multi-megohm/cm resistivity which can be
produced continuously at substantial flow rates.
The EDI module has been proved to be an effective new electrodeionization
process and can be used for a broad range of process applications, including the
supply of high water quality for the food and beverage industry, for
micro-electronics production, biomedical and laboratory use, pharmaceutical
compounders and for general industry. The advantages of having a dependable and
high quality water source which requires no chemical regeneration, coupled with
low operation and maintenance costs, makes the EDI process an attractive and
environmentally-safe alternative compared with other deionization processes.
The Company believes that the major advantage of the EDI technology over systems
utilizing ion exchange only is the efficient recharging of the ion exchange
resins without the extensive use of costly caustic or acid chemicals which add
excessive contamination to the system's waste water. The Company believes that
the primary advantage of the EDI technology over products using distillation and
reverse osmosis is its ability to utilize electrical and chemical properties of
the water molecule and of naturally occurring salts, instead of merely physical
properties, in separating water from the dissolved mineral ions. The EDI can
operate without booster pumps or holding tanks and the EDI module achieves a
high flow rate with relatively smaller sized and less expensive equipment.
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The advantage of the EDI technology over conventional electrodialysis is the
combination of various technologies, all of which are individually workable, but
which reinforce each other in the EDI technology. EDI technology requires less
maintenance than existing systems but requires more stringent pretreatment of
entry water. Maintenance is a major problem with conventional electrodialysis
and reverse osmosis units, particularly the clogging of membranes. Thus, the
advantages of the EDI technology system, as compared to some conventional water
treatment systems, include the following:
o the EDI technology system operates with variable local water pressure
and no booster pumps are required.
o lower maintenance since nothing is consumed except small amounts of
electricity. If at all necessary, chemicals are added less frequently
than existing equipment.
o large flow rate relative to its size, as compared to conventional
systems that purport to treat the same flow rates.
The Company's belief as to the expected advantages of the EDI technology are
based upon its experience with its prototypes and pilot production units. The
point-of-use EDI technology incorporates a number of design improvements to the
original EDI patent. In October 1990, U.S. Patent No. 4,964,970, was granted on
certain of these developments. Both the Company and its licensee, EDI
Components, intend to conduct continued product development on the EDI
technology, with an eye toward improving the technology while reducing
manufacturing costs, even after it has been marketed.
Development of new technologies for manufacture, such as the EDI technology, is
frequently subject to unforeseen expenses, difficulties and complications and in
some cases such development cannot be accomplished. In the opinion of
management, the EDI technology which has been licensed to EDI Components, has
demonstrated positive attributes, but any such attributes must be balanced
against the lack of any substantial operating experience, the existence of
established companies in the water purification field with greater financial
resources, experience and developed products, and unknown technological
difficulties. Consequently, no assurances can be given as to if and when the
product discussed above will be successfully marketed and sold.
MARKETING
The EDI point-of-use module was developed for the ultrapure light industrial
segment of the water treatment market, i.e., pharmaceuticals, electronics,
cosmetics, medical and research laboratories. The Company and its licensee, EDI
Components, intend to initially sell these products through manufacturers of
commercial water treatment equipment in the United States and in foreign
countries where the Company's patent is in force or which have reciprocal patent
treaties. The Company and its licensee have entered into certain licensing
arrangements with two water treatment equipment companies (see Item 1 - "License
Agreements") and similar relationships are currently being discussed with other
such companies.
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ULTRAPURE MARKET. The Company believes that a substantial market
currently exists for EDI technology in the commercial and light industrial
market sector where ultrapure water is a necessity in manufacturing and where
chemically pure water is demanded for laboratory uses. The electro-regeneration
feature of the EDI technology is considered a significant advantage over
existing demineralization technology. The EDI point-of-use model will provide
ultrapure water at a rate of 5 to 25 gallons per minute (and higher volumes in
parallel formations), which is generally ample for the needs of the OEM
marketers to these various end users. This model and the proposed larger scale
version of the EDI will access a market segment of approximately $340 million of
which $170 million is immediately accessible.
The Company's licensee does not currently intend to establish its own network of
dealerships, but rather to identify and target independent operating water
equipment manufacturers where the EDI technology could either be incorporated in
or replace certain components in the products currently offered by such
manufacturers. Discussions are presently underway with several such
manufacturers.
GOVERNMENT REGULATION
Pursuant to a statute in the State of California, effective in July, 1991,
certain commercial/residential water treatment products must be certified
(tested) by the California Department of Health Services or certain approved
private facilities that each performs according to the claims made by the seller
in order to be able to sell such proposed product in California. In addition,
another California statute makes it illegal to make any false claims in
connection with the sale of any water treatment product.
The Company believes that the EDI ultrapure industrial technology, which has
been licensed to Electropure, Inc., is not subject to the above statute;
however, some industrial applications of the EDI point-of-use technology, i.e.,
hospitals, will require approval by Underwriter's Laboratory or equivalent
organization. The Company or its licensee will seek all necessary approvals or
certifications.
PRODUCTION METHODS
The EDI is composed of various components. All internal parts are made of
engineered thermoplastics, except the membranes, electrodes and electronics. The
Company has purchased and leased to EDI Components certain tooling and molds
required for component plastic parts. EDI Components intends to contract for the
production of the plastic parts and electrodes for the point-of-use model and to
purchase the membranes from outside sources. All final assembly will be
completed by EDI Components at its 5,500 sq. ft. manufacturing facility in
Laguna Hills, California. Production and assembly functions are intended to be
designed with the flexibility of producing customized variations of the EDI for
specialized usage.
WARRANTY
The Company's licensee intends to offer a one year limited parts and labor
warranty for the EDI module. EDI Components may contract with others to provide
warranty service, but it has not made any arrangements with any persons to
provide such service and it may not be able to locate competent
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persons to perform the services at an acceptable price. No assurances can be
given as to whether expenses will not be significant.
SOURCES OF SUPPLY
The Company believes that material to build the EDI modules are readily
available from at least two sources and EDI Components currently has two sources
for all such material.
PATENTS AND LICENSE AGREEMENT
Certain technology used by the EDI technology is covered by U.S. Patent No.
4,465,573, issued on August 14, 1984, to Harry M. O'Hare, Sr. Corresponding
patent applications have been filed in certain limited foreign countries. A new
patent application was filed in September, 1988 and in connection therewith U.S.
Patent No. 4,964,970 was granted on October 23, 1990 on design improvement
features of the basic technology patented in 1984. These improvements involve
upgrades of various components, including ion permeable membranes, manifolds
(front and rear), and product water and waste water compartments. Such
improvements will increase performance quality and decrease production costs.
The existence of patents for the EDI technology may not provide any meaningful
protection for the Company because of technological changes, the decision of
courts not to uphold all or part of a patent, or because of the limited
financial resources which may be available to the Company to enforce its patent
rights. The patent does not cover the technology used to make the ion permeable
membranes or the anodes. The Company regards such technologies as trade secrets.
However, since such technologies are not patented, others could attempt to copy
such technologies to the potential detriment of the Company.
Neither the Company nor EDI Components hold patents pertaining to any products
other than the EDI technology and a registered trademark or trade name for the
"EDI" has not been secured.
Harry M. O'Hare, Sr., the inventor of the EDI technology, entered into a License
Agreement with the Company and HOH, Inc., dated October 30, 1986. The License
Agreement grants to the Company an exclusive worldwide license to manufacture,
use and sell the EDI technology and other water purification products covered by
the current patent and any improvements thereon or under corresponding foreign
patents for the life of such patents. Under the terms of the License Agreement,
the Company is obligated to pay to the individuals who have royalty rights in
the EDI technology, a royalty of approximately $42.50 for each EDI technology
system, which has a capacity of from six to twenty gallons per minute, sold or
placed in service by the Company and its licensees during the life of the
patent. Royalties of approximately $9.00 per such EDI technology are also
payable until a maximum of approximately $525,600 is paid at which time such
additional royalties will terminate. Royalties of approximately 2.05% of the net
sales price are also payable on EDI products of other flow rates. In May, 1987,
Mr. O'Hare assigned all of his interest, including rights to future royalties,
in the patent covering certain parts of the EDI technology to the Company.
On January 21, 1988, the Company and Harry M. O'Hare, Sr. entered into an
Invention Assignment Agreement for certain payments wherein Mr. O'Hare assigned
to the Company his entire right, title and interest in and to an Improved
Compact Water Purification System and an Improved Compact Low
12
<PAGE> 13
Volume Water Purification System, both of which are point-of-use products
designed to remove certain contaminants from solution on demand at flow rates
under 1 gallon per minute. In September, 1988, an application for a U.S. patent
was filed on the Compact Low Volume Water Purification System and in October,
1990, U.S. Patent No. 4,964,970 was granted thereon. The Company's point-of-use
EDI technology incorporates claims covered in both the original U.S. Patent No.
4,465,573 and the patent for the Improved Compact Low Volume Water Purification
System (Patent No. 4,964,970).
In July, 1992, the Company granted an exclusive worldwide license to EDI
Components for the manufacture and sale of EDI products. See Item 1 - "License
Agreements - Agreements with EDI Components."
COMPETITION
The Company's EDI technology will compete with only three principal competitors:
on-site regeneration, service deionization and electrodeionization. U.S. Filter
licensed electro-deionization technology from Millipore Corporation of New
Bedford, Mass. in 1989 and continues to work closely with its technical staff.
U.S. Filter manufactures and markets electrodeionization systems for the high
purity industrial segment with capacities ranging from 20 liters/hours to 25
gallons/minutes. Compared to the Company's point-of-use EDI technology, the U.S.
Filter (Ionpure) equipment is more expensive, but still offers substantial
operating cost savings over service deionization. Comparison tests have shown
that the EDI technology is also more efficient than the Ionpure product,
resulting in a lower operating cost.
The technology directly competitive with electro-deionization is service
deionization. The service deionization industry is composed of a few larger
companies such as Arrowhead Industrial Water, Polymetrics, and Continental
Water, as well as hundreds of smaller entities, some of which are dealerships of
Culligan and other water conditioning companies. The EDI unit can reduce
operating costs of producing high purity water by up to 40% in comparison to
service deionization. The marketing challenge for the Company will be to
convince water equipment manufacturers to utilize the EDI technology rather than
conventional ion exchange resin deionization. With service deionization, the
customer does not have to purchase capital equipment as he does with EDI, so the
service deionization system can be upgraded or down-sized with no substantial
cost to the customer. The customer pays for the water on either a
cost-per-gallon basis, or a cost-per-regeneration basis. Regeneration is done at
the service company's facility so that the customer does not have to handle or
dispose of chemical waste.
Many companies in the water treatment market are established in the field,
including the well-known firms mentioned above and others. All of such companies
are larger and better financed than the Company's licensee, have established
products and an established customer base and can accordingly devote more
resources to research and development, production and marketing activities. In
addition, it is possible that the water purification industry may be the subject
of technological innovation or other factors which may attract additional
competition in the future. The Company believes, however, that the patents for
the EDI technology and its technical know-how may be significant in its ability
to compete.
13
<PAGE> 14
EMPLOYEES
As of October 31, 1996, the Company employed one full time employee for
administrative and clerical functions. The Company believes that its
relationship with its employee is good and it is not a party to any collective
bargaining agreement. The future success of the Company will be dependent upon
its ability to attract and retain qualified personnel.
ITEM 2. PROPERTIES
The Company sub-leases 200 sq. ft. of office space within the Laguna Hills,
California facility leased by EDI Components. The Company paid Electropure a
rental of $500 per month between June, 1992 and July, 1995. Such rental includes
all utilities, including telephone, storage and the use of all equipment and
facilities on the premises. The Company continues to occupy such facility, rent
free as of August 1, 1995, and believes that this facility is adequate to
accommodate its foreseeable requirements for administrative functions.
ITEM 3. LEGAL PROCEEDINGS
PATENT PROCEEDINGS
On June 7, 1993, the Company and its licensee, EDI Components, filed a lawsuit
for patent infringement against Millipore Corporation and its licensees, Ionpure
Technologies Corporation and Eastern Enterprises (Eastern Enterprises was later
released from the lawsuit by mutual consent). The lawsuit, which was brought in
the United States Central District (Los Angeles) Court, alleged that the
defendants infringed upon the Company's 1984 patent for electrodeionization
technology. In April, 1996, a settlement of such lawsuit was reached by the
parties. While the terms of the settlement (which involved the grant of a
license to Millipore) are confidential, Millipore and US Filter/Ionpure agreed
to the entry in the U. S. District Court of a consent judgment of patent
validity. In accordance with the July, 1992 license arrangement, the Company and
its licensee were to share equally in any recovery. Pursuant to a 1994
amendment, the Company paid EDI Components proceeds from certain warrant
exercises and stock purchases during fiscal 1994 and 1995 in exchange for 75% of
such recovery.
In March, 1996, the Company and its licensee, EDI Components, filed a lawsuit
for declaratory judgment to invalidate and hold unenforceable two patents held
by Millipore Corporation relating to electrodeionization technology. The lawsuit
was filed in the U. S. Central District Court in Los Angeles and alleged that
the two patents covering Millipore's CDI products were each obtained by fraud on
the U.S. Patent Office in that Millipore "misrepresented material facts to the
U.S. Patent and Trademark Office which, if known, would not have resulted in
their issuance [U.S. Patent No. 4,632,745, issued on December 30, 1986, and U.S.
Patent No. 4,925,541, issued on May 15, 1990]. The Court had been requested to
determine whether Millipore's conduct posed a reasonable apprehension on the
part of the Company and its customers of threatened patent infringement. In
July, 1996, Judge John Davies ruled that there is no threat of patent
infringement and, accordingly, dismissed the lawsuit between the parties.
14
<PAGE> 15
PUERTO RICO
In July, 1993, the Company's subsidiary, HOH International, Inc., filed for
protection from its creditors in the United States Bankruptcy Court, Central
District of California. The petition filed by the subsidiary sought to have all
of that entity's debts discharged. On November 18, 1993, such proceedings were
concluded and the subsidiary was declared bankrupt and $2,979,215 in liabilities
were discharged, including all dividends accrued on preferred stock held by the
Economic Development Bank for Puerto Rico (the "Bank").
In October, 1996, the Company was advised that a $3 million default judgment had
been rendered in June, 1996 against the Company, its bankrupt subsidiary (HOH
International, Inc.) and various current and former officers and directors of
such companies. The judgment also was rendered against HOH/CNM2 Enterprises and
its incorporators, Carmen Morales and Radames Torres. Mr. Torres was the former
president and general manager of HOH International, Inc. No personal service or
notice of this action had been served upon the Company, any defendant, or their
respective counsel, prior to the entry of the judgment. The lawsuit, which was
brought by the Economic Development Bank for Puerto Rico (the preferred
stockholder in HOH International, Inc. - see Notes to Financial Statements at
Note (5) - "Stockholders' Deficit - Issuance of Cumulative Convertible Preferred
Stock of Subsidiary") in February, 1993 in the San Juan Superior Court, alleged
that the Company, its subsidiary, and the officers and directors of both,
breached their fiduciary duty in entering into a distribution agreement with
HOH/CNM2 Enterprises which ultimately led to the dissolution of the subsidiary,
all to the detriment of the Plaintiff. In April, 1997, the Court denied a motion
to set aside the above judgment based upon the defendants' claim of lack of
notice and inadequate service of process.
In May, 1997, the Company and its licensee, EDI Components, entered into a
settlement agreement with the Economic Development Bank to satisfy the above $3
million judgment on behalf of all of the defendants, in exchange for the
issuance to the Bank of 100,000 shares of common stock and 100,000 five-year
warrants to purchase common stock at $1.00 per share. The Company also issued,
in conjunction with EDI Components, a 10% Convertible Term Note in the sum of
$12,000, payable within one year or upon receipt of a minimum of $300,000 in
equity funding, whichever occurs first. The settlement in conditioned upon
termination of the license relationship with EDI Components and realignment of
the Company's Board of Directors by July 21, 1997. It is anticipated that the
Board of Directors of the Bank will ratify the settlement agreement on or about
June 11, 1997.
OTHER PROCEEDINGS
In December, 1993, a default judgment was rendered against the Company in the
sum of $20,270 for unpaid corporate credit card charges the majority of which
accrued from 1989. The lawsuit was brought in the Los Angeles County Municipal
Court. During the fiscal year ended October 31, 1994, the Company paid $250 on
this judgment; however, the Company has made no arrangements to satisfy this
obligation as of this writing.
15
<PAGE> 16
The Company is party to three other lawsuits claiming a total of $38,889 of past
due payments. The Company and its counsel expect the Company to prevail in these
lawsuits.
No assurances can be given as to the ultimate outcome of any such litigation or
legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In May, 1996, the Company's shareholders, by written consent, approved a
corporate name change to "Electropure, Inc." by a vote of 9,982,310 for and
283,707 against. The shareholders also approved a one-for-ten reverse stock
split by a vote of 9,983,080 for and 283,707 against.
16
<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS.
The Company's Units (consisting of three shares of Common Stock and three Class
A Warrants), Common Stock and Class A Warrants were quoted, since June 25, 1987,
under the symbols "HOHIU", "HOHI", and "HOHIW", respectively, on NASDAQ until
April 1, 1991, when such listing was lost for failing to meet NASDAQ's minimum
capital and surplus requirements for continued listing. Between May 17, 1988 and
September 8, 1988; April 20, 1989 and August 8, 1989; September 13, 1990 and
October 18, 1990; and between March 19, 1991 and March 30, 1992, the Company's
securities were quoted on NASDAQ under the temporary waivers of NASDAQ's capital
and surplus requirements. Although the Company is desirous of reapplying for
listing of its securities on NASDAQ or another securities exchange in the
future, no assurances can be given that it will, in fact, be successful in
qualifying for such listing or will thereafter continue to meet such
requirements and, thus, no assurances can be given that its securities will ever
be quoted on NASDAQ or any other securities exchange in the future. However, the
Company's common stock is currently quoted in the Over-the-Counter Bulletin
Board market as a "penny stock" under the symbol "ELTP". The following table
sets forth the high and low bid prices for the Company's Common Stock, as
reported on the Bulletin Board or "pink sheets", for the quarters that the
securities were traded. As of June 24, 1994, the Company's Class A and Class B
Warrants expired, and, therefore, the bid prices for such Class A and Class B
Warrants as well as the Company's Units after the expiration date are not
listed. The bid prices represent interdealer quotations without adjustments for
markups, markdowns and commissions.
<TABLE>
<CAPTION>
-----------------
COMMON STOCK
BID PRICES
-----------------
HIGH LOW
--------------------------------------------------------------
<S> <C> <C>
FISCAL 1995 First Quarter 11/32 1/16
--------------------------------------------------------------
Second Quarter 11/32 1/16
-------------------------------------------------
Third Quarter 1/4 1/8
-------------------------------------------------
Fourth Quarter 7/32 1/16
--------------------------------------------------------------
FISCAL 1996 First Quarter 1/4 1/16
--------------------------------------------------------------
Second Quarter 5/16 1/16
-------------------------------------------------
Third Quarter 9/32 5/32
-------------------------------------------------
Fourth Quarter(5) 2 1/8
--------------------------------------------------------------
FISCAL 1997 First Quarter 3/8 1/4
--------------------------------------------------------------
Second Quarter 1/4 1/8
-------------------------------------------------
Third Quarter (through June 6, 7/16 1/8
1997)
--------------------------------------------------------------
</TABLE>
The market for the Company's securities is sporadic and quoted prices may not
represent the true value of such securities.
As of June 6, 1997, the Company had approximately 760 holders of record of its
Common Stock.
- -----------------
(5) The Company's one-for-ten reverse stock split took effect on June 25, 1996.
Consequently, the trading prices of the company's securities reflect the
effect of such reverse stock split.
17
<PAGE> 18
On August 8, 1996, the Company issued 75,000 warrants to purchase common stock
at an exercise price of $1.19 per share. The warrants, exercisable until August
8, 1998, were issued as bonuses in consideration for advisory services rendered
to the Company by three (3) individuals and were issued under the exemption
provided by Section 4(2) of the Securities Act of 1933.
The Company has not paid any dividends on its Common Stock since its
incorporation. Electropure, Inc. anticipates that, in the foreseeable future,
earnings, if any, will be retained for use in reacquiring the rights licensed to
EDI Components or for other corporate purposes and it is not anticipated that
cash dividends will be paid. Payment of dividends is at the discretion of the
Board of Directors and may be limited by future loan agreements or California
law. Under California law, if a corporation does not have retained earnings, it
may pay dividends provided that after giving effect thereto, (a) the sum of the
assets of the corporation (exclusive of good will, capitalized research and
development expenses or deferred charge) would be at least equal to one and
one-quarter times its liabilities (not including deferred taxes, deferred income
and other deferred credits) and (b) the current assets of the corporation would
be at least equal to the current liabilities or, if the average of the earnings
of the corporation before taxes on income and for interest expense for the two
preceding fiscal years was less than the average of interest expense of the
corporation for such fiscal years, the current assets would be at least equal to
one and one-quarter times its current liabilities. Dividends were accrued but
not paid on the preferred stock issued to the Economic Development Bank for
Puerto Rico ("EDB") by the Company's subsidiary, HOH International, Inc. All
dividends accrued by such subsidiary were discharged in bankruptcy as of
November 18, 1993.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
FISCAL YEARS ENDED OCTOBER 31, 1995 AND 1996
During the fourth quarter of fiscal 1990, the Company began sales of an
under-the-sink reverse osmosis and filter-adsorber drinking water system which
it had developed in order to generate revenues until the EDI technology, its
primary product, could be marketed. Such activities ceased in January, 1992 and
in July, 1992, the Company granted an exclusive license to EDI Components to
manufacture and market the EDI technology.
License fees received for the fiscal year ended October 31, 1996 increased by
$9,009 compared to 1995. While the Company's licensee is obligated to pay all
necessary administrative operational expenses, which increased during fiscal
year 1996, revenues from the sale of common stock and from the exercise of
options, in the sum of $55,000 and $21,886, respectively, defrayed such
increased expenses.
General and administrative expenses for fiscal 1996 increased by $48,592 as
compared to fiscal 1995, primarily due to the legal and shareholder relations
fees associated with the Company corporate name change and one for ten reverse
stock split during fiscal 1996. In addition, the Company issued shares valued at
$24,000 for services rendered in writing a business plan during the fiscal year.
Interest expense for fiscal 1996 increased by $1,308 as compared to fiscal 1995
as a result of compounding interest accrued on notes payable.
18
<PAGE> 19
Financing costs for fiscal 1996 increased by $291,842 as compared to fiscal
1995, reflecting the cost of issuing shares in exchange for debt owed by the
Company's licensee.
Patent litigation rights for fiscal 1995 was $74,375 as compared to no activity
in fiscal 1996. Such expense resulted from a 1994 agreement to pay the Company's
licensee the proceeds from certain 1994/1995 warrant exercises and stock
purchases in exchange for a portion of such licensee's rights to any recovery in
the patent infringement action resolved during fiscal 1996.
No additional provision for loss on lawsuit settlement has been made in fiscal
1996 as the Company believes that adequate provision has been made to settle
pending lawsuits.
The Company realized a net loss before extraordinary item of $404,271 for fiscal
1996, representing an increase of $267,666 from the prior year level due to
financing costs relating to the issuance of common stock for debt incurred by
the Company's licensee.
During fiscal 1996, the Company realized an extraordinary gain of $113,188 on
settlement of debt. This represents a decrease of $111,098 over the prior year
level when the Company wrote off accounts payable and accrued liabilities which
had been carried on its books from past years.
LIQUIDITY AND CAPITAL RESOURCES
Since June, 1992, the Company principally funded its working capital through
license fees from EDI Components. During the fiscal years ended October 31, 1995
and 1996, the Company received a total of $72,550 and $81,559, respectively, in
license fees from EDI Components. At October 31, 1996, the Company had realized
a total of $451,554 in such license fees.
Of the above license fees, $25,000 was utilized in June, 1996 to settle a
$126,269 debt for past services rendered by the Company's former lawfirm,
resulting in a gain on settlement in the sum of $101,269.
During fiscal 1995, the Company realized $95,697 in cash from the exercise of
1,887,500 and 132,220 warrants to purchase common stock at $0.05 and $0.01 per
share, respectively. The Company paid Electropure, Inc. $74,375 of such amount
for patent litigation rights - see Item 3 - "Legal Proceedings."
At October 31, 1996, the Company had a working capital deficit (total current
assets less total current liabilities) of $48,705. All of the Company's funds
have been exhausted and the Company is currently reliant upon license fees from
EDI Components for its working capital requirements. It is expected, however,
that sales operations will be initiated in the near future, either by EDI
Components or the Company under a modified license arrangement, and that the
percentage of net sales revenues to which the Company is entitled therefrom will
be sufficient to fund its working capital requirements in the short term.
However, no assurances can be given that sales will begin in significant
quantities or in a timely fashion since such sales will be dependent obtaining
sufficient capital to initiate manufacturing operations.
19
<PAGE> 20
During the fiscal year ended October 31, 1996, the Company received net proceeds
of $21,886 from the exercise of 133,962 (13,397 post-split) warrants to purchase
common stock at prices ranging from $0.05 to $0.20 ($0.50 to $2.00 post-split)
per share. During the period, the Company also received $55,000 in net proceeds
from the sale of 286,957 shares at prices ranging from $0.17 to $0.20 per share
(28,696 shares at $1.73 to $2.00 per share, post-split).
No assurance can be given that the Company will obtain any significant revenues
from sales or that the Company can obtain additional working capital through the
sale of Common Stock, the sale of other securities, the issuance of indebtedness
or otherwise or on terms acceptable to the Company. Further, no assurances can
be given that any such equity financing will not result in a further dilution to
the existing shareholders.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which adopts
significant changes that apply to all taxable companies. Although the ultimate
impact is unknown, it is the opinion of the Company's management that adoption
of this Statement will not have a material effect on financial results in the
year of adoption. The Company adopted the new Standard for the fiscal year
beginning November 1, 1994.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 (a)
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
CHANGE IN CERTIFYING ACCOUNTANTS
Effective March 29, 1995, the Company's independent public accountants, Macias &
Company, resigned. On May 18, 1995, the Company retained the independent
accounting firm of Southland Business Service to conduct an audit of its books
and records for the fiscal year ended October 31, 1994. For the Company's fiscal
years ended October 31, 1992 and 1993, the financial statements were subject to
going concern qualifications but were not otherwise qualified or modified as to
uncertainty, audit scope, or accounting principles by Macias & Company, except
as to inventory quantities and selected notes payable of the Company's
subsidiary (now bankrupt). As a result of such qualification, Macias & Company
did not express an opinion on such financial statements. During the two fiscal
years ended October 31, 1992 and 1993, and since October 31, 1993, there were
not any disagreements with Macias & Company on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Macias &
Company, would have caused it to make a reference to the subject matter of the
disagreements in connection with its report, nor were there any "reportable
events" as defined in Item 304(a)(1)(v) of Regulation S-K. During the two fiscal
years ended October 31, 1992 and 1993, and between October 31, 1993 and May 18,
1995, Registrant has not consulted with Southland Business Service on the
application of accounting principles to a specified transaction, or the type of
audit opinion that might be rendered on the Registrant's financial statements or
any disagreements (as defined in Item 304(a)(1)(iv) of Regulation S-K) or a
reportable event (as defined above).
20
<PAGE> 21
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS,
EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors and executive officers of Electropure, Inc. are as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------
NAME AGE POSITION
--------------------------------------------------------
<S> <C> <C>
Randolph S. Heidmann 46 Director
William H. Lee 57 Director
Ronald J. O'Hare 48 Director
Catherine Patterson 44 Chief Financial
Officer and Secretary
</TABLE>
RANDOLPH S. HEIDMANN, 46, was employed by the Company between September, 1990
and November, 1991 as an electronics instrumentation design engineer to continue
development work on innovative electronic components which the Company planned
to engineer into its product line. He was named to the Company's Board of
Directors in September, 1991. Prior to joining the Company, he spent nine years
with Teledyne Electronics where he was responsible for data acquisition
subsystems design for telemetry products. He has participated in the development
of a variety of consumer electronics products and custom production test
equipment. Mr. Heidmann currently serves as an electrical engineer for Photonic
Detectors, Inc. in Simi Valley, California. He holds a BS degree in Physics from
the University of California at Davis.
WILLIAM H. LEE, 57, was named to the Board in June, 1996. Mr. Lee is the
President of Scientific Sales & Marketing Services of Pasadena, California which
provides marketing and sales consulting services to the bio-pharmaceutical,
scientific research and other technologically driven markets. Mr. Lee enjoys
equally impressive credentials with an emphasis on marketing and sales and a
background in microbiology and water treatment. He spent 10 years at Millipore's
Water Systems and Products Divisions where he managed its $30 million Western
Regional operations. Mr. Lee holds a BA in Biology from the California State
University at Los Angeles.
RONALD J. O'HARE, 48, became Operations Manager of the Company in December, 1986
and a Director of the Company in May, 1987. Mr. O'Hare was named Vice President
of Product Development in June, 1990 and served in that capacity until
operations at the Company terminated in January, 1992. Mr. O'Hare subsequently
joined EDI Components in June, 1992 as its Vice President of Operations. Prior
to joining the Company, Mr. O'Hare was with the service division of Culligan
Water Conditioning for 14 years where he supervised the design, installation and
repair of domestic and industrial water purification systems. Mr. O'Hare has
extensive experience in water treatment applications, including cooling towers,
boiler feedwater, ultraviolet, deionization and reverse osmosis
21
<PAGE> 22
systems. Ronald O'Hare is the son of HOH Founder, Harry M. O'Hare, and was
instrumental in the development of the Company's EDI point-of-use technology as
well as for the evolution of a line of reverse osmosis/filter adsorber products
and related components previously sold by the Company.
CATHERINE PATTERSON, 44, became Secretary of the Company in May, 1989, was
Assistant Secretary from May, 1986 to May, 1988, held the position of Treasurer
from August, 1984 to February, 1986, and was a director for a short time in
1984. In June, 1990, she became Chief Financial Officer and is the only employee
of the Company at this time. From 1971 until joining the Company in 1981, she
was a legal secretary for various Michigan law offices, including General Motors
Corporation, where she dealt closely with various corporate sectors and counsels
throughout the United States and Puerto Rico and portions of Canada and South
America.
ITEM 10. EXECUTIVE COMPENSATION
REMUNERATION
No executive officer of the Company received remuneration in excess of $100,000
during the fiscal year ended October 31, 1996 for services in all capacities
rendered to the Company.
Directors of the Company currently receive no compensation for their services as
directors or reimbursement for expenses.
22
<PAGE> 23
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
PRINCIPAL SHAREHOLDERS
The following table sets forth information as of June 6, 1997, with respect to
the Common Stock, Class B Common Stock, and Convertible Preferred Stock owned by
the only persons known by the Company to own beneficially 5% or more of any such
classes of stock, by each director and by all directors and officers as a group.
<TABLE>
<CAPTION>
Class B
Common Common Convertible % of
Stock % of Stock % of Preferred % of Voting
Name** (1)(2) Class (3) Class Stock (4) Class Power (5)
------ ------ ----- ------- ----- ----------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Anthony M. Frank (6)
320 Meadowood Court
Pleasant Hill, CA 94523 1,797,124 38.5% -- -- -- -- 22.6%
Randall P. Frank (6)
1310 2nd Street
Manhattan Beach, CA 90266 358,898 7.7% -- -- -- -- 4.5%
E. Dale Hartley
4100 Decker Road
Malibu, CA 90265 254,358 5.4% -- -- -- -- 3.2%
Harry M. O'Hare, Sr
2035 Huntington Dr. #1
S. Pasadena, CA 91030 4,575 * 83,983 100% 931,629 35.8% 20.3%
Ronald J. O'Hare 25,000 * -- -- 93,750 3.6% 1.5%
Floyd H. Panning(6)
23251 Vista Grande, Suite A
Laguna Hills, CA 92653 384,839 8.2% -- -- 7,500 -- 4.9%
Catherine Patterson 12,111 * -- -- 2,906 * *
All officers and directors
as a group (4 persons) 37,111 -- -- -- 96,656 3.7% 1.7%
</TABLE>
- -------------------
* Less than 1%
** Includes address of five percent or more shareholders of any class.
(1) Excludes shares of Common Stock issuable upon conversion of Class B Common
Stock, which carry eight (8) votes per share. If such Shares of Common
Stock were included, Mr. O'Hare and all officers and directors, as a group
would own 88,558 shares (1.9%) and 37,111 shares (1.0%) of Common Stock,
respectively.
23
<PAGE> 24
(2) Includes currently exercisable warrants or options to purchase an
aggregate of 725,913 shares of Common Stock.
(3) See Item 12. Certain Relationships and Related Transactions - Mr. Harry
M. O'Hare.
(4) The Convertible Preferred Stock was convertible into Common Stock only if
certain earnings or market prices of the Common Stock were achieved prior
to October 31, 1990. Such earnings and market prices were not achieved and
commencing January 31, 1991, the Company was required to redeem such
shares at $0.01 per share. The Company intends to redeem the Convertible
Preferred Stock when it has the funds and can legally do so under
California law.
(5) Reflects the voting rights of the Common Stock and Convertible Preferred
Stock, each of which carries one (1) vote per share, and Class B Common
Stock, which carries eight (8) votes per share.
(6) Includes 1,717,484 shares of Common Stock issued upon conversion of
$500,000 principal loan by Anthony Frank to EDI Components, plus interest
accrued from September 1, 1996 through June 2, 1997, totaling $538,055.
The conversion price was 75% of the Fair Market Value of the Common Stock
for thirty (30) consecutive trading days prior to the conversion date. Of
the 1,717,484 shares issued, 319,202 were sold by Mr. Frank to Floyd
Panning and 319,202 of such shares were sold to Randall Frank, all at the
conversion price of approximately $0.31 per share. See Item 12. Certain
Relationships and Related Transactions - Mr. Frank.
In 1989, the Company issued 40,000 shares in the name of its subsidiary, HOH
International, Inc. as collateral for $200,000 in bank loans. Such shares are
not treated as outstanding for purposes of the above table or the total
outstanding shares of Common Stock of the Company.
In order to comply with conditions imposed by the Commissioner of Corporations
of the State of California (the "Commissioner"), in connection with the public
offering of Units in June, 1987, Harry M. O'Hare, Sr. and Sandra O'Hare (Mr.
O'Hare's former late wife) have agreed that until such conditions are lifted by
order of the Commissioner, all the shares of Class B Common Stock and
Convertible Preferred Stock held by them (except for 107,848 shares of
Convertible Preferred Stock issued in July, 1988 to Harry M. O'Hare, Sr.) and
any Common Stock received upon conversion of the Class B Common Stock and
Convertible Preferred Stock, will be subject to the following conditions (which
shall be referenced in a legend on the certificates for such shares):
(1) such shares will not participate in dividends, other than stock dividends;
(2) such shares will not participate in any distribution of assets in the
event of liquidation; and
(3) such shares may not be transferred without prior written consent of the
Commissioner except for transfer pursuant to order or process of any
court.
The issuance of an order lifting such conditions is in the sole discretion of
the Commissioner. However, under the Commissioner's Rules, such an order will
generally be issued when the Company
24
<PAGE> 25
has demonstrated a satisfactory earnings record, as defined in such Rules, and
the Company understands that in practice such an order will also be issued in
the event of a merger, consolidation, or liquidation in which the holders of the
Common Stock have received a satisfactory return on such shares.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MR. ANTHONY FRANK
Between May, 1992 and March, 1995, Mr. Frank invested and loaned the Company's
licensee, EDI Components, the sums of $50,000 and $95,000, respectively.
Pursuant to the license agreement (and amendments thereto) between EDI
Components and the Company, Mr. Frank received 200,000 warrants and 165,000
warrants to purchase the Company's common stock at $0.05 per share in
consideration for his investment and loans, respectively. In addition, Mr. Frank
received the right to purchase up to $50,000 of the Company's common stock at a
25% discount to the price offered by the Company to bona fide third parties in
the future.
During fiscal 1995, Mr. Frank exercised 125,000 of the above warrants at $0.05
per share, for a total exercise price of $6,250. In February, 1996, Mr. Frank
converted the $95,000 in loans made to EDI Components, plus $5,000 in interest
accrued thereon, into 1,166,667 and 333,333 shares of common stock of the
Company (116,667 and 33,334 shares post-split) at $0.06 and $0.09 per share
($0.60 and $0.90 post split), respectively.
Also in February, 1996, Mr. Frank loaned EDI Components an additional $500,000
and received, as partial consideration therefor, a security interest in the
Company's patents and 300,000 warrants to purchase the Company's common stock at
$2.25. Such warrants were not subject to the Company's recent reverse stock
split and are exercisable until February, 2001. Mr. Frank had the right and
elected on June 2, 1997 to convert such loan, plus $38,056 in accrued but unpaid
interest, into the common stock of the Company at a 25% discount to Fair Market
Value for the thirty consecutive trading days prior to conversion. Such
conversion resulted in the issuance of 1,717,484 shares of the Company's common
stock, 319,202 of which shares were sold by Mr. Frank to Floyd Panning,
President of EDI Components, at his cost of $100,000. An additional 319,202 of
such shares were sold by Mr. Frank to his son, Randall Frank, at cost. See Item
11. Security Ownership of Certain Beneficial Owners and Management at footnote
(6).
Between December, 1996 and April, 1997, Mr. Frank loaned EDI Components an
additional $150,000 at 10% interest. Mr. Frank has the right to convert said
loans into common stock of EDI Components and, upon such conversion, receive
53,775 warrants to purchase the Company's common stock at $0.50 per share. If
such loans were converted, Mr. Frank would also be entitled to a payment from
the Company in the sum of $200,000 upon termination of the license relationship
with EDI Components.
As of the date hereof, Mr. Frank is one of twelve (12) investors of EDI
Components and owns 6.1% of that company's common stock, with 2.7% of the voting
control.
25
<PAGE> 26
MR. RANDALL FRANK
On June 2, 1997, Mr. Frank purchased 319,202 shares of the Company's common
stock from his father, Anthony M. Frank, at a purchase price of $100,000, or
approximately $0.31 per share.
Between 1990 and 1991, Mr. Randall Frank purchased 7,334 shares of the Company's
common stock in private placement offerings at prices of $2.50 and $7.50 per
share. In October, 1994, Mr. Frank exercised an option to purchase an additional
20,000 shares of common stock at $0.50 per share.
MR. HARTLEY
Between April, 1992 and June, 1995, Mr. Hartley, a former director of the
Company, invested and loaned the Company's licensee, EDI Components, the sums of
$125,000 and $107,000, respectively. Pursuant to the license agreement (and
amendments thereto) between EDI Components and the Company, Mr. Hartley received
500,000 warrants and 189,000 warrants to purchase the Company's common stock at
$0.05 per share in consideration for his investment and loans, respectively. In
addition, Mr. Hartley received the right to purchase up to $125,000 of the
Company's common stock at a 25% discount to the price offered by the Company to
bona fide third parties in the future.
In December, 1994, Mr. Hartley exercised 600,000 of the above warrants at $0.05
per share, for a total exercise price of $30,000. In February, 1996, Mr. Hartley
converted the $107,000 in loans made to EDI Components, plus $5,000 in interest
accrued thereon, into 1,366,667 and 333,333 shares of common stock of the
Company (136,667 and 33,334 shares post-split) at $0.06 and $0.09 per share
($0.60 and $0.90 post split), respectively.
As of the date hereof, Mr. Hartley is one of twelve (12) investors of EDI
Components and owns 15.2% of that company's common stock, with 6.9% of the
voting control.
MR. HARRY M. O'HARE
From time to time during his employment, the Company advanced funds to or on
behalf of Mr. O'Hare. Such unpaid advance, totaling $4,513 (including
receivables on common stock) as of October 31, 1995, are secured by 2,500 shares
of the Company's common stock owned by Mr. O'Hare but held by the Company.
MR. RONALD O'HARE
In February, 1993, the Board of Directors of the Company granted Mr. O'Hare
100,000 options to purchase common stock at $0.05 per share as a bonus. Mr.
O'Hare exercised 50,000 of such options on October 6, 1993 for $2,500 which is
reflected as a receivable on common stock as of the fiscal year ended October
31, 1996.
26
<PAGE> 27
MR. PANNING
Mr. Panning is the President of EDI Components, the Company's licensee. On June
3, 1996, Mr. Panning acquired 318,202 shares of the Company's Common Stock from
Anthony M. Frank in a private transaction for approximately $0.31 per share.
MS. PATTERSON
On February 28, 1993, the Company's Board of Directors granted Ms. Patterson
options to purchase 100,000 shares of common stock at $0.05 per share as a
bonus.
Between December, 1994 and February, 1995, the Company loaned Ms. Patterson a
total of $5,000 at 6% simple interest. As of the fiscal year ended October 31,
1996, such loan was repaid in full, together with a total of $239 in accrued
interest.
MISCELLANEOUS
The Company's Board of Directors has adopted a policy that no transaction
between the Company and any officer, director, employee or members of their
family shall be entered into without the full disclosure of such transaction to
and the approval of such transaction by the non-interested members of the Board
of Directors. Furthermore, no agreements will be entered into regarding
royalties, distributorships, supply agreements, sales agreements, the borrowing
of money or the sale or granting of securities or options or the leasing or
buying of property by the Company (exclusive of routine supply or sales
agreements not exceeding $25,000), or any other type of contract over three
months or $25,000 without the approval of the Board of Directors.
ITEM 13. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
As of the date of this report, all directors, officers and beneficial owners of
more than 10 percent of any class of equity securities of the Company have filed
all reports required by Section 16(a) of the Securities Exchange Act of 1934,
with the following exceptions: None.
PART IV
ITEM 14. EXHIBITS
3.1 Articles of Incorporation of the Registrant, as amended.***
3.2 By-Laws of the Registrant, as amended.*
10.19 Form of Indemnity Agreement with each current Officer and
Directors.**
10.46 Letter of Intent dated May 14, 1992 with Electropure, Inc.****
10.47 Master Agreement with Electropure, Inc. dated July 29, 1992.****
27
<PAGE> 28
10.47.1 Amendment to Master Agreement, dated July 14, 1993.****
10.47.2 License Agreement with Electropure, Inc. dated July 29, 1992.****
10.47.3 Security Agreement with Electropure, Inc. dated July 29, 1992****
10.47.4 Lease with Electropure, Inc. dated July 29, 1992.****
10.47.5 Minutes of Special Meeting of Board of Directors dated November 9,
1993, as reconvened on January 6, 1995, amending License Agreement
with Electropure, Inc.******
10.47.6 Minutes of Special Meeting of Board of Directors dated July 1,
1994 amending License Agreement with Electropure, Inc.******
10.47.7 Minutes of Special Meeting of Board of Directors dated March 17,
1995 amending License Agreement with Electropure, Inc.******
10.48 Technology License Agreement with Glegg Water Conditioning, Inc.
dated July 2, 1994.******
10.48.1 Amended and Restated Technology Licence Agreement with Glegg Water
Conditioning, Inc. dated May 22, 1997.
10.51 Settlement Agreement with Economic Development Bank for Puerto
Rico dated May 16, 1997.
17. Correspondence dated March 29, 1995 from Macias & Company
resigning as the Registrant's independent accountant.*****
- ----------------------------
* Previously filed in connection with Registration Statement of
Registrant on Form S-1, File No. 33-10669.
** Incorporated by reference to Exhibit "B" to Registrant's Definitive
Proxy Statement, dated April 20, 1988, for the Annual Meeting held
May 18, 1988.
*** Previously filed in connection with Registrant's Form 10-K for the
fiscal year ended October 31, 1988.
**** Previously filed in connection with Registrant's Form 10-KSB for the
fiscal year ended October 31, 1992.
***** Previously filed in connection with Registrant's Form 8-K dated
March 29, 1995.
****** Previously filed in connection with Registrant's Form 10-KSB for the
fiscal year ended October 31, 1994.
28
<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, as amended, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto.
Dated: June 6, 1997
ELECTROPURE, INC.
BY /s/ CATHERINE PATTERSON
---------------------------------
CATHERINE PATTERSON
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934, as amended, this
Report has been signed below by the following persons in the capacities and on
the dates indicated:
SIGNATURES
<TABLE>
<S> <C> <C>
Director June , 1997
- -------------------------------------
RANDOLPH S. HEIDMANN
/s/ WILLIAM H. LEE Director June 10, 1997
- -------------------------------------
WILLIAM H. LEE
/s/ RONALD J. O'HARE Director June 6, 1997
- -------------------------------------
RONALD J. O'HARE
Chief Financial
/s/ CATHERINE PATTERSON Officer (Principal June 6, 1997
- ------------------------------------- Financial and
CATHERINE PATTERSON Accounting Officer)
</TABLE>
29
<PAGE> 30
Southland Business Service
- --------------------------------------------------------------------------------
Accounting and Financial Planning 20929 Ventura Boulevard #206
Income Tax Preparation Woodland Hills, California 91364
(818) 347-3233
FAX (818) 347-3271
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Electropure, Inc.
We were engaged to audit the accompanying balance sheets of Electropure, Inc.
(formerly HOH Water Technology Corporation) ("the Company") as of October 31,
1996, and the related statements of operations, stockholders' equity
(deficiency) and cash flows for the years in the two-year period ended October
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of their operations and their cash flows for
the years ended October 31, 1995 and 1996 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that
Electropure, Inc. will continue as a going concern. As discussed in the notes to
the financial statements, the Company's recurring losses from operations,
deficiency in working capital and net capital deficiency raise substantial doubt
about the entity's ability to continue as a going concern. Management's plans in
regard to these matters are also described in the notes. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
F-1
<PAGE> 31
INDEPENDENT AUDITORS' REPORT (CONTINUED)
As more fully described in Note 8 to the financial statements, the Company is
party to certain claims and litigation. The final outcome resulting from certain
of these claims and litigation is not presently determinable, and no provision
has been made in the financial statements and financial statement schedules for
the effects, if any, of such claims and litigation.
/s/ J. E. HENDERSON
Woodland Hills, California
June 6, 1997
F-2
<PAGE> 32
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
BALANCE SHEETS
<TABLE>
<CAPTION>
Year ended
-----------------
Assets October 31, 1996
- ------------------------------------------------------------- ----------------
<S> <C>
Current assets:
Cash $ 674
Receivables:
Trade accounts 7,278
Due from related parties 78,898
Allowance for doubtful receivables (85,528)
--------
648
Other current assets 20,000
Total Current Assets 21,322
--------
Propery and equipment, at cost:
Office equipment 539
--------
539
Less accumulated depreciation and amortization 49
--------
490
Total Assets $ 21,812
========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 33
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
BALANCE SHEETS
<TABLE>
<CAPTION>
Year ended
-----------------
Liabilities and Stockholders' Equity (Deficiency) October 31, 1996
- ------------------------------------------------------------- ----------------
<S> <C>
Current liabilities:
Notes payable to stockholders $ 15,734
Accounts payable 30,744
Accrued liabilities 218
Allowance for loss on lawsuit settlements 23,331
------------
Total current liabilities 70,027
Litigation, claims, commitments and contingencies
Redeemable convertible preferred stock, $.01 assigned par
value. Authorized 2,600,000 shares; issued and outstanding
2,600,000 shares in 1995 and 1996 26,000
Stockholders' deficit:
Common stock, $.01 assigned par value. Authorized 20,000,000
shares; 17,979,097 shares issued and 17,579,097 shares
outstanding in 1995; 2,264,806 shares issued and 2,224,806
shares outstanding in 1996 22,248
Class B common stock, $.01 assigned par value 839,825
shares authorized, issued and outstanding in 1995; 83,983
shares authorized, issued and outstanding in 1996 840
Additional paid-in capital 16,080,709
Deficit accumulated in the development stage (16,025,246)
Notes receivable on common stock (152,766)
------------
(74,215)
------------
Total Liabilities and Stockholders' Equity (Deficiency) $ 21,812
============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 34
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended October 31,
-------------------------------
1995 1996
------------ ------------
<S> <C> <C>
License fees received $ 72,550 $ 81,559
------------ ------------
Costs and expenses:
General and administrative 91,610 140,202
------------ ------------
91,610 140,202
------------ ------------
Loss from operations (19,060) (58,643)
------------ ------------
Other income and (expense):
Interest expense (1,300) (12,155)
Interest income -- 239
Financing costs (41,070) (332,912)
Patent litigation rights (74,375) --
Miscellaneous income (expense) (800) (800)
------------ ------------
(117,545) (345,628)
------------ ------------
Loss before extraordinary item (136,605) (404,271)
Extraordinary item:
Gain on liabilities written off 244,286 113,188
------------ ------------
Net income (loss) $ 107,681 $ (291,082)
============ ============
Net income (loss) per share of common stock
Before extraordinary item (0.01) (0.15)
Extraordinary item:
Gain on liabilities written off 0.02 0.06
------------ ------------
$ 0.01 $ (0.09)
============ ============
Weighted average common shares outstanding 16,070,213 1,926,868
============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 35
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended October 31,
-------------------------
1995 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ 107,681 $(291,082)
--------- ---------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,048 49
Financing costs related to issuance of warrants 41,070 44,625
Financing costs related to issuance of common stock -- 288,287
Change in assets and liabilities, net of noncash transactions:
Decrease (increase) in receivables (2,253) 3,348
Decrease (increase) in other assets 4,500 (20,539)
Increase (decrease) in accounts payable and accrued expenses (245,670) (130,073)
Increase in interest payable, net 1,300 1,430
--------- ---------
Total adjustments (200,005) 187,127
--------- ---------
Net cash used in operating activities (92,324) (103,955)
Cash flows from investing activities: None
Cash flows from financing activities:
Proceeds from issuance of common stock 95,697 100,886
--------- ---------
Net cash provided by financing activities 95,697 100,886
--------- ---------
Net increase (decrease) in cash 3,373 (3,069)
Cash (overdraft) at beginning of period 370 3,743
--------- ---------
Cash (overdraft) at end of period $ 3,743 $ 674
========= =========
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE> 36
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended October 31,
------------------------
1995 1996
---------- --------
<S> <C> <C>
Supplemental disclosures of cash flow information - cash paid
during the period for interest $ -- $ --
========== ========
Supplemental schedule of noncash investing and financing activities -
Purchase of certain property and equipment for
notes payable and capital lease obligations -- --
Sale of acquired technology for common stock -- --
========== ========
-- --
========== ========
Additional common stock was issued upon the following:
Conversion of short-term debt -- --
Exercise of options in exchange for receivable on common stock -- --
Exercise of warrants paid for by reduction of short-term debt -- --
Issuance of common stock pledges -- --
Issuance of common stock for investment acquisition -- --
Issuance of common stock for lawsuit settlements -- --
Issuance of common stock for debt settlement -- 288,287
---------- --------
-- 288,287
========== ========
Redeemable preferred stock issued as a common stock dividend -- --
========== ========
Redeemable preferred stock issued as a key officer bonus -- --
========== ========
Additional noncash equity transactions are as follows:
Warrants granted to obtain loans -- --
Warrants granted for lawsuit settlements -- --
Grants of stock options below market -- 44,625
Sale of common stock to officers below market -- --
Sales of common stock to stockholders below market -- --
Sale of preferred stock to stockholders below market -- --
As consideration for acquisition of a purchase option -- --
As consideration for services received -- --
Cancellation of stock issued -- --
---------- --------
$ -- $ 44,625
========== ========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE> 37
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Common Stock Class B Common Stock
--------------------------------- ----------------------------------
Amount Amount
Number -------------------- Number --------------------
of Per of Per
shares share Total shares share Total
----------- ----- ----------- ----------- ----- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1994 15,852,734 $ -- $ 158,527 839,825 $ -- $ 8,398
----------- ------- ----------- ----------- ----- -----------
Issuance of common stock on:
exercise of warrants 1,887,500 0.0 18,875 -- -- --
exercise of warrants 132,220 0.0 1,322 -- --
Cancellation of common stock for
issuance of warrants (293,357) 0.1 (2,934) -- --
Net Loss -- -- -- -- -- --
----------- ------- ----------- ----------- ----- -----------
Balance at October 31, 1995 17,579,097 -- 175,790 839,825 -- 8,398
Issuance of common stock on
exercise of options 5,000 0.0 50 -- -- --
exercise of options 83,130 0.1 831 -- -- --
exercise of options 45,833 0.2 458 -- -- --
Issuance of common stock for cash 200,000 0.2 2,000 -- -- --
Issuance of common stock for
services rendered 200,000 0.1 2,000 -- -- --
services rendered 86,957 0.1 870 -- -- --
Issuance of common stock for
conversion of debt 2,533,334 0.0 25,333 -- -- --
conversion of debt 1,514,302 0.0 15,143 -- -- --
Reverse Stock Split (one-for-ten) (20,022,847) -- (200,228) (755,842) -- (7,558)
Issuance of warrants below
fair market value -- -- -- -- -- --
Net Loss -- -- -- -- -- --
----------- ------- ----------- ----------- ----- -----------
Balance at October 31, 1996 2,224,806 $ -- $ 22,248 83,983 $ -- $ 840
=========== ======= =========== =========== ====== ===========
</TABLE>
<TABLE>
<CAPTION>
Deficit
Notes accumulated Net
Additional receivable in the stockholders'
paid-in on common development equity
capital stock stage (deficiency)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at October 31, 1994 $ 15,366,305 $ (152,766) $(15,841,844) $ (461,380)
Issuance of common stock on:
exercise of warrants 75,500 -- -- 94,375
exercise of warrants -- -- -- 1,322
Cancellation of common stock for
issuance of warrants 44,004 -- -- 41,070
Net Loss -- -- 107,681 107,681
------------ ------------ ------------ ------------
Balance at October 31, 1995 15,485,809 (152,766) (15,734,163) (216,931)
Issuance of common stock on
exercise of options 200 -- -- 250
exercise of options 11,638 -- -- 12,469
exercise of options 8,708 -- -- 9,166
Issuance of common stock for cash 38,000 -- -- 40,000
Issuance of common stock for
services rendered 22,000 -- -- 24,000
services rendered 14,130 -- -- 15,000
Issuance of common stock for
conversion of debt 126,667 -- -- 152,000
conversion of debt 121,144 -- -- 136,287
Reverse Stock Split (one-for-ten) 207,787 -- -- --
Issuance of warrants below
fair market value 44,625 -- -- 44,625
Net Loss -- -- (291,083) (291,083)
------------ ------------ ------------ ------------
Balance at October 31, 1996 16,080,709 $ (152,766) $(16,025,246) $ (74,216)
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE> 38
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
Notes to Financial Statements, Continued
October 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
HOH, Inc. was incorporated on December 13, 1979 to design and develop a
proprietary electrochemical water purification system.
HOH Water Technology Corporation was incorporated on December 8, 1982 to market
the water purification system being developed by HOH, Inc.
Common stock was sold in HOH, Inc. from March 29, 1983 through October 21,
1983. On September 14, 1984, all of the outstanding shares of common stock in
HOH, Inc. were exchanged for an equal number of shares of common stock in HOH
Water Technology Corporation. The exchange of stock was accounted for in a
manner similar to that of a pooling of interests. No additional shares of common
stock in HOH, Inc. were issued subsequent to the exchange on September 14,
1984.
Between the date of its incorporation, December 8, 1982, and September 14, 1984,
HOH Water Technology Corporation was virtually inactive. Similarly, HOH, Inc.
was virtually inactive subsequent to September 14, 1984. In addition, HOH Water
Technology Corporation continued to design and develop the proprietary
electrochemical water purification system which H OH, Inc. was originally
incorporated to design and develop.
For financial statement purposes, HOH Water Technology Corporation and H OH,
Inc. are considered to represent the activities of a single entity which has
essentially operated under the same ownership and management. Additionally, the
two companies were legally merged on October 30, 1986. Accordingly, the
accompanying consolidated financial statements include the accounts of HOH Water
Technology Corporation and HOH, Inc. from their respective dates of
incorporation.
In July, 1996, the Company changed its name to "Electropure, Inc." and underwent
a one-for-ten reverse stock split. FOR PURPOSES OF THIS REPORT, ALL ISSUANCES OF
COMMON STOCK AND WARRANTS TO PURCHASE COMMON STOCK DURING THE FISCAL YEAR ENDED
OCTOBER 31, 1996 ARE REFLECTED IN POST-REVERSE SPLIT AMOUNTS.
On July 29, 1992, the Company granted EDI Components (formerly Electropure,
Inc.), a California corporation, an exclusive license to manufacture and market
its patented EDI technology. The Company has the right, until January 31, 1998,
to reacquire such licensed rights. See Note 7 - "License Agreement Agreements
with EDI Components." Under the terms of such license, as amended to date, EDI
Components has paid the Company $451,554 in license fees as of October 31, 1996.
Consequently, since July 1992, and until such license arrangement is
F-9
<PAGE> 39
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
Notes to Financial Statements, Continued
terminated, the Company's primary source or revenues will be derived from the
license with EDI Components.
LIQUIDITY
As of October 31, 1996, the Company had current liabilities in excess of current
assets of $48,705, a deficit accumulated during the development stage of
$16,025,246 and a stockholders' deficit of $74,215. The Company did not generate
a positive cash flow from operations during the 1991 fiscal year as lack of
working capital inhibited its ability to initiate sufficient marketing
operations. As a result, the Company ran out of funds in January, 1992 and was
forced to suspend operations while it sought additional financing. In May, 1992,
the Company entered into a Letter of Intent with EDI Components (a California
corporation) to grant an exclusive license to manufacture and market the
Company's patented Electropure ("EDI") technology. During fiscal year 1995, the
Company funded its working capital needs from license fees in the sum of $72,550
and $95,697 from the exercise of 1,887,500 and 132,220 warrants at $0.05 and
$0.01 per share, respectively. Of such proceeds, the Company paid EDI Components
$74,375 for patent litigation rights. During fiscal year 1996, the Company
received an additional $81,559 in license fees and $24,000 on the issuance of
200,000 shares in consideration for services rendered. The Company also received
$55,000 and $21,886 in net proceeds from the sale of 28,696 shares of common
stock, as well as upon the exercise of 13,396 warrants, respectively. See Note 5
- - "Stockholders' Deficit - Common Stock Activity."
During fiscal year 1995, the Company and its licensee, EDI Components, entered
into Technology License Agreements with and Polymetrics, Inc. ("Polymetrics").
Such agreement provides Polymetrics with a non-exclusive worldwide licenses to
use and commercially exploit the Electropure ("EDI") electrodeionization
technology owned by the Company. See Note 7 - "License Agreements - Agreement
Polymetrics, Inc.".
During the license relationship with EDI Components, the Company's primary
operations have been solely administrative. Such operations to date have been
financed by monies received from EDI Components pursuant to the provisions of
the license arrangement.
Due to lack of working capital and the restructuring necessitated by the above
license relationship, as of May, 1992, all operations at the Company's Puerto
Rico manufacturing subsidiary, HOH International, Inc. were terminated. On July
16, 1993, the subsidiary filed for bankruptcy protection from its creditors. HOH
International, Inc. was subsequently discharged bankrupt in November, 1993,
which resulted in a $2,661,691 net gain on discharge of debt for the 1994 fiscal
year. In October, 1996, the Company learned that a $3 million default judgment
had been rendered against it in June, 1996 in Puerto Rico with regard to a 1989
investment made in the subsidiary by the Economic Development Bank for Puerto
Rico. In May, 1997, the Company negotiated a settlement of such judgment
requiring the issuance of shares and warrants to the Puerto Rico Bank. See Note
8 - "Litigation and Claims" and Note 11 - "Subsequent Events."
F-10
<PAGE> 40
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
Notes to Financial Statements, Continued
The Company and EDI Components are currently negotiating to terminate the
license relationship and to bring all manufacturing and marketing operations
under the Company's auspices. The arrangement, which has been made a condition
of the above Puerto Rico settlement, will likely require the Company to pay its
licensee, EDI Components, up to $2,950,000 in a combination of cash and stock to
terminate the license. It is anticipated that negotiations will be concluded
within sixty (60) days of this report and that the officers and staff of EDI
Components will be engaged to continue the Company's management operations.
EDI Components has initiated sales and marketing operations for the EDI
technology and has begun preliminary training of potential original equipment
manufacturers who will become the primary distributors of the Company's product.
Additional working capital will be required to both carry on and expand such
sales and marketing efforts. The Company anticipates that, once the license
relationship between the Company and EDI Components has been terminated,
management will seek to secure necessary operating capital, initially, through
private funding sources as a bridge to a secondary public offering of the
Company's securities. No assurances can be given that either the Company or EDI
Components can or will provide sufficient working capital through the sale of
the Company's securities or that the sale of products can or will generate
sufficient revenues in the future to sustain operations. The Company's ability
to continue as a going concern will be reliant upon its ability to do so. The
Company believes, however, that the current market interest in its product is
strong and will enhance its ability to generate sufficient revenues from the
sale of the Company's securities in the near future.
DEPRECIATION AND AMORTIZATION
Depreciation is provided for property and equipment over an estimated useful
life of five years using the straight-line method. Leasehold improvements and
equipment under capital lease obligations were amortized using the straight-line
method over the lesser of the terms of the respective leases or estimated useful
lives.
INVENTORY
Inventory, stated at the lower of cost (determined using the first in, first out
method) or replacement market, consists of components for water purification
systems. As of October 31, 1994, the Company had sold all of its inventory.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to expense as incurred.
However, the Company has not conducted any research and development activities
since entering into the license relationship with EDI Components.
F-11
<PAGE> 41
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
Notes to Financial Statements, Continued
FASB STATEMENTS NOT YET ADOPTED
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," which adopts
significant changes that apply to all taxable companies. Although the ultimate
impact is unknown, it is the opinion of the Company's management that adoption
of this Statement will not have a material effect on financial results in the
year of adoption. The Company adopted the new Standard for the fiscal year
beginning November 1, 1993.
(2) DUE FROM RELATED PARTIES
The Company has balances remaining due, including interest, on notes receivable
from related parties. The balance includes net amounts remaining on a $30,000
loan made to a former shareholder and an $80,000 loan made to a corporation
whose significant stockholder was James E. Cruver, a former officer and director
of the Company. The Company received partial payments representing principal
and/or interest on these loans, however, due to the fact that they are
significantly past due and the uncertainty of when or if they will be collected,
interest income was not being recognized until received and the balances at
October 31, 1996 are offset by an allowance for doubtful accounts.
A total of $23,763 remains due as of October 31, 1996 from former officers and
directors, Harry M. O'Hare, Sr. and David C. Kravitz. Such amount is secured by
3,757 shares of the Company's common stock resulting in an unsecured receivable
in the amount of $23,115, which has been offset by an allowance for doubtful
accounts.
During fiscal 1995, the Company loaned a current officer a total of $5,000
at 6% simple interest. As of the fiscal year ended October 31, 1996, such loan
had been repaid in full, together with a total of $239 in accrued interest.
(3) NOTES PAYABLE TO STOCKHOLDERS
Notes Payable to Stockholders are summarized as follows:
<TABLE>
<CAPTION>
October 31,
-------------------------
1995 1996
-------------------------
<S> <C> <C>
Notes Payable to Stockholders,
with interest annually at 10% $ 14,304 $ 15,734
======== ========
</TABLE>
As of October 31, 1996, the notes payable to stockholders (one individual) are
past due.
F-12
<PAGE> 42
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
Notes to Financial Statements, Continued
(4) COMMITMENTS AND CONTINGENCIES
The original cost and accumulated depreciation of assets recorded under capital
leases at October 31, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
October 31,
-------------------------
1995 1996
-------------------------
<S> <C> <C>
Furniture and fixtures $ -- $539
----- ----
Less accumulated depreciation
and amortization -- 49
----- ----
$ -- $490
===== ====
</TABLE>
COMMITMENTS
Lease payments for the fiscal years ended October 31, 1994 and 1995 were $6,000
and $4,500, respectively. The Company occupied its present office in Laguna
Hills, California through a sub-lease arrangement with its licensor, EDI
Components. The Company paid $500 per month, which includes the use of all
utilities, equipment and facilities on the premises from June, 1992 through
July, 1995. As of August, 1995, the Company has occupied such premises
rent-free. Consequently, the Company had no lease expense for the fiscal year
ended October 31, 1996.
(5) STOCKHOLDERS' DEFICIT
NET LOSS PER SHARE OF COMMON STOCK
Net loss per share of common stock is based on the weighted average number of
shares outstanding during each of the respective periods. No effect has been
given to common stock equivalents as the effect to loss per share would be
anti-dilutive.
VOTING RIGHTS
Each share of the Company's Class A Common Stock is entitled to one vote per
share and the Class B Common Stock of the Company is entitled to eight votes per
share. The holder(s) of the outstanding Convertible Preferred Stock of the
Company's subsidiary are entitled to one vote per share on the election of the
directors of the subsidiary only if the fixed dividends thereon shall be in
arrears in an amount equal to three years' dividends or if the accumulated
variable dividends exceed $100,000. Notwithstanding such voting privileges, the
holder(s) of the Convertible Preferred Stock are entitled to elect and appoint
one of the voting directors of such subsidiary so long as any of the aforesaid
Convertible Preferred shares remain outstanding.
F-13
<PAGE> 43
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
Notes to Financial Statements, Continued
COMMON STOCK ACTIVITY
FISCAL 1995
Between December, 1994 and September, 1995, the Company received net proceeds of
$94,375 upon the exercise of 1,887,500 warrants to purchase common stock at
$0.05 per share. Such warrants had been issued to six (6) individuals who had
made investment in or loans to EDI Components.
On November 8, 1994, the Company purchased 293,257 shares of its common stock
from one (1) individual for $0.15 per share, or a total of $44,044. In lieu of
cash, the Company issued such individual 314,308 warrants to purchase common
stock at $0.01 per share, exercisable for a period of five (5) years. The fair
market value of the common stock underlying such warrants, less the $0.01 per
share exercise price, was equal to the fair market value of similar common stock
on the date of the transaction. Consequently, the Company incurred an expense of
$41,070 relating to this purchase, equal to $0.14 per share purchased. The
Company realized $1,322 in net proceeds upon the exercise, in September, 1995,
of 132,220 of such warrants at $0.01 per share.
FISCAL 1996
In July, 1996, the Company changed its name to "Electropure, Inc." and underwent
a one-for-ten reverse stock split. FOR PURPOSES OF THIS REPORT, ALL ISSUANCES OF
COMMON STOCK AND WARRANTS TO PURCHASE COMMON STOCK DURING THE FISCAL YEAR ENDED
OCTOBER 31, 1996 ARE REFLECTED IN POST-REVERSE SPLIT AMOUNTS.
Between November, 1995 and January, 1996, the Company realized net proceeds of
$21,886 on the exercise of 13,396 of warrants at prices ranging from $0.05 to
$0.20 per share.
In February, 1996, the Company sold 200,000 shares of common stock to two
individuals in a private placement offering at $0.02 per share, resulting in net
proceeds to the Company in the sum of $40,000. The Company issued an additional
200,000 shares of common stock in February, 1996 in exchange for $24,000 in
services rendered. The transaction resulted in an increase in common stock and
additional paid in capital and a $24,000 general and administrative expense.
Pursuant to the provisions of the July, 1992 agreements with EDI Components, the
Company agreed to exchange shares, at discounts of 25% and 50% to the fair
market value, in cancellation of certain loans made to EDI Components.
Consequently, between February and March, 1996, the Company issued a total of
404,764 shares of its common stock at prices of $0.06 and $0.09 per share to six
(6) individuals, all of whom are investors in EDI Components, to cancel
principal
F-14
<PAGE> 44
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
Notes to Financial Statements, Continued
interest on loans made to that entity and interest accrued thereon. The
transaction resulted in a $288,287 finance expense to the Company.
On various dates through October 31, 1996, the Company has allowed certain
individuals, including former officers and directors, to exercise options or
warrants held by them in exchange for notes. The balance of notes receivable on
common stock is reflected as a reduction of equity in the accompanying Statement
of Stockholders' Equity (Deficiency) and is as follows:
<TABLE>
<CAPTION>
Number of October 31,
Shares Date --------------------
Holder Exercised Exercised 1995 1996
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Former Officer 66,500 09/07/89 $108,395 $108,395
Former Officer 13,500 02/02/90 6,075 6,075
Former Director 25,000 05/01/90 1,250 1,250
Director 50,000 10/06/93 2,500 2,500
Trust 20,000 10/11/89 1,250 1,250
Others 60,032 Various 1990 842 842
Others 106,032 Various 1991 32,454 32,454
-------- --------
$152,766 $152,766
======== ========
</TABLE>
WARRANTS
The Company has authorized the issuance of 3,375,000 Redeemable Class A Warrants
to purchase an aggregate of 3,375,000 shares of common stock. Each Class A
Warrant was originally exercisable until June 24, 1992 (extended to June 24,
1994) to purchase for $3.25 of common stock and one Class B Warrant. When such
Class A Warrants expired on June 14, 1994, due to antidilution provisions, each
Class A Warrant was exercisable to purchase for $2.47 one and one-third (1.3
shares) of common stock. .
The Company also authorized the issuance of 3,375,000 Redeemable Class B
Warrants to purchase an aggregate of 3,375,000 shares of common stock. Each
Class B Warrant was originally exercisable until June 24, 1992 (extended to June
24, 1994) to purchase for $5.00 one share of common stock. When such Class B
Warrants expired on June 14, 1994, due to antidilution provisions, each Class B
Warrant was exercisable to purchase for $3.95 one and one-third (1.3 shares) of
common stock.
Any outstanding Class A and B Warrants (Warrants) are subject to redemption by
the Company if the average closing bid prices of the common stock (if traded in
the over-the-counter market) or the average closing sale prices of the common
stock (if traded on any national securities exchange) equal or exceed $4.50 per
share and $7.00 per share, respectively, for 30 consecutive business days. The
redemption price is $.05 per Warrant. If any outstanding Warrants are redeemed,
then all outstanding Warrants must be redeemed. Once notice of redemption is
given, a Warrant holder will have 30 days in which to exercise the Warrant
before it is redeemed.
F-15
<PAGE> 45
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
Notes to Financial Statements, Continued
As of June 24, 1994, all of the Redeemable Class A and Class B Warrants expired.
Consequently, as of October 31, 1995 and October 31, 1996, there were no Class A
or Class B Warrants issued and outstanding.
On February 23, 1996, the Company and its licensee, EDI Components, entered into
a Convertible Loan agreement with a shareholder in both entities, whereby EDI
Components was loaned the sum of $500,000 for a period of two years at 10%
interest. As additional consideration for the loan, the Company granted the
lender a first security interest in all of the Company's patents and future
patents during the term that the loan remains outstanding. As further
consideration for the loan, the Company granted the lender 300,000 five-year
warrants to purchase common stock at $2.25 per share. No adjustment in the
number or exercise price of such warrants was made pursuant to the one-for-ten
reverse stock split which the Company effected in July, 1996. Under the terms of
the loan agreement, the lender has converted the principal and interest accrued
on such loan into the Company's common stock at a 25% discount to the fair
market value. See Note 11 - "Subsequent Events."
In August, 1996, the Company issued 75,000 warrants to purchase common stock at
$1.19 per share to three (3) individuals as bonuses in consideration for
advisory services rendered to the Company.
1987 STOCK OPTION PLAN
A total of 500,000 shares of common stock has been reserved for issuance under
the Company's 1987 Stock Option Plan (the Plan). The Plan provides for the grant
of incentive stock options and nonqualified stock options to officers, directors
and key employees of the Company and is administered by the Board of Directors
or a committee appointed by the Board (the Administrator).
The exercise price of each incentive stock option must be at least 100% of the
fair market value per share of the Company's common stock as determined by the
Administrator on the date of grant. An incentive stock option may be exercisable
for a period not in excess of ten years after the date of the grant. The
exercise price of incentive stock options granted to stockholders possessing
more than 10% of the total combined voting power of all classes of stock of the
Company must be no less than 110% of the fair market value on the date of the
grant. The option may be exercisable for a period not in excess of five years
after the date of grant. In the case of nonqualified stock options, the same
criteria exist, except that the exercise price must be no less than 85% of the
fair market value per share of the Company's common stock on the date of the
grant. During September 1989, the Board of Directors approved a change of
exercise price for certain key employees and consultants to the Company. As a
result, 110,000 qualified and 25,000 non-qualified options were reduced from the
original exercise prices to $.05 per share resulting in additional expense as
indicated below.
F-16
<PAGE> 46
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
Notes to Financial Statements, Continued
The following activity occurred under the Company's 1987 stock option
plan:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
EXERCISE PRICE
QUALIFIED STOCK OPTIONS SHARES PER SHARE EXTENSION
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Granted Fiscal year end 1987 40,000 $ 1.38 $ 55,200
-------- -----------
Balance at October 31, 1987 40,000 1.38 55,200
Granted 230,500 1.38 - 1.63 375,715
Exercised (500) 1.38 (690)
Cancelled (10,000) 1.38 (13,800)
-------- -----------
Balance at October 31, 1988 260,000 1.38 - 1.63 416,425
Exercised (73,500) 1.38 - 1.63 (118,680)
Cancelled (12,500) 1.38 - 1.63 (19,815)
Exercise price reduction - - (169,110)
Exercised (15,000) .05 (750)
-------- -----------
Balance at October 31, 1989 159,000 .05 - 1.63 108,070
Granted 7,000 1.03 7,210
Exercised (50,000) .05 (2,500)
-------- -----------
Balance at October 31, 1990 116,000 .05 - 1.63 112,780
Exercised (40,000) .05 (2,000)
-------- -----------
Balance at October 31, 1991 76,000 .05 - 1.63 110,780
Cancelled (71,000) 1.03 - 1.63 (110,530)
-------- -----------
Balance at October 31, 1992-1996 5,000 $ .05 $ 250
-------- -----------
- --------------------------------------------------------------------------------
NONQUALIFIED STOCK OPTIONS
- --------------------------------------------------------------------------------
Granted fiscal year end 1987 45,000 $ 1.17 $ 52,650
-------- -----------
Balance at October 31, 1987 45,000 1.17 52,650
Granted 15,000 .70 - 1.39 15,675
Exercised (10,000) 1.17 (11,700)
-------- -----------
Balance at October 31, 1988 50,000 .70 - 1.39 56,625
Exercise price reduction - - (39,200)
--------
Balance at October 31, 1989 50,000 .05 - 1.39 17,425
Granted 35,000 .88 -.90 31,300
Exercised (13,850) .05 (693)
-------- -----------
Balance at October 31, 1990 71,150 .05 - 1.39 48,033
Granted 147,000 .37 - .61 73,430
Exercised (10,000) .05 (500)
Exercised (147,000) .37 - .61 (73,430)
-------- -----------
Balance at October 31, 1991 61,150 .05 - 1.39 47,533
Cancelled (50,000) .70 - 1.39 (46,945)
-------- -----------
Balance at October 31, 1992 - 1996 11,150 $ .05 $ 558
-------- -----------
</TABLE>
F-17
<PAGE> 47
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
Notes to Financial Statements, Continued
Incentive stock options are not exercisable for one year from the date of grant,
but are exercisable in four equal annual installments thereafter. Generally,
nonqualified stock options are exercisable in four equal annual installments
commencing on the date of grant.
At October 31, 1996, options to purchase 34,750 and 63,150 shares of common
stock under qualified and nonqualified agreements, respectively, were
exercisable.
NOTES RECEIVABLE ON COMMON STOCK
As of October 31, 1996, the Company was due $152,766 from various individuals,
including former employees and a current director, on the exercise of options
and warrants at prices ranging from $0.05 to $1.63 per share.
ISSUANCE OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
On March 31, 1987, the Company issued 1-1/4 shares of redeemable convertible
preferred stock for every share of stock held by the common stockholders and
Class B common stockholders. As of July 28, 1988, as a result of progress made
on the completion of the Company's initial product, the Company issued a bonus
of 107,848 shares of the redeemable convertible preferred stock to the majority
stockholder. Accordingly, the estimated fair value of the stock, $1,078, was
expensed as compensation.
Each share of redeemable convertible preferred stock is to be converted to one
share of common stock upon the occurrence of any of the following:
o The daily market price per share of the Company's common stock has equaled
or exceeded $5.00, $6,50 or $8.00 per share for 30 consecutive trading
days during the fiscal years ending October 31, 1988, 1989 and 1990,
respectively, or
o The net earnings per share for the common stock of the Company shall equal
or exceed $.41, $.85 or $1.36 per share for the fiscal years ending
October 31, 1988, 1989 and 1990, respectively.
The agreement provides that should any automatic conversion of the redeemable
convertible preferred stock result in a charge being required to be taken by the
Company against income under then generally accepted accounting principles upon
the happening of an event which would otherwise cause automatic conversion into
common stock, the redeemable convertible preferred stock will not be
automatically convertible into common stock but will be redeemed for $.10 per
share as soon as the Company has the funds to legally redeem the shares.
F-18
<PAGE> 48
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
Notes to Financial Statements, Continued
The Company did not achieve the after-tax earning and market prices and
commencing January 31, 1991, the redeemable convertible preferred stock (the
Stock) is redeemable by the Company for $0.01 per share.
The holders of the redeemable convertible preferred stock shall not be entitled
to receive dividends. Dividends, if declared, shall be payable to the holders of
the Class A common stock and Class B common stock subject to the rights of the
holders of the preferred stock.
In the event of liquidation or dissolution of the Company, the holders of the
Class A common stock, Class B common stock and redeemable convertible preferred
stock, subject to the rights of the holders of preferred stock, shall be
entitled to receive an equal amount per share, provided, however, in no case
shall each share of redeemable convertible preferred stock receive more than an
amount equal to $.01 per share and in no case shall each share of Class B common
stock receive an amount greater than 80% of the amount each share of common
stock receives, subject to the restrictions imposed by the Commissioner of
Corporations of the State of California as described in Note 9.
ISSUANCE OF CUMULATIVE CONVERTIBLE PREFERRED STOCK OF SUBSIDIARY
In January, 1990, the Company's subsidiary, HOH International, Inc. (now
bankrupt), issued 1,000 shares of $1,000 assigned par value redeemable
cumulative convertible preferred stock to the Economic Development Bank for
Puerto Rico for $1,000,000. The preferred stock had cumulative fixed dividends
at the rate of 15% of par value per annum and a variable cumulative dividend
equal to 10% of the subsidiary's net income. The redeemable cumulative
convertible preferred stock, net of unamortized issuance costs of $44,501, was
reflected in a manner similar to a minority interest in the Company's
consolidated financial statements until the subsidiary was adjudicated bankrupt
in November, 1993. The cumulative fixed dividends, although not declared, had
also been included in the Company's consolidated financial statements as an
increase to the redeemable cumulative convertible preferred stock in a manner
similar to treatment under APB Opinion No. 18. Upon adjudication of the
subsidiary as bankrupt in November, 1993, the redeemable cumulative convertible
preferred stock and all dividends accrued thereon, totaling approximately
$1,554,000, was discharged.
(6) ROYALTIES
Royalty interests in the Company's product have been sold to approximately 80
individuals in consideration for loans made in earlier years to the Company. The
total royalties granted for certain Electropure ("EDI") water purification units
commence at $51.50. As a specified number of units are sold, they decrease to a
minimum of $42.50 for every unit sold, leased or placed in service by the
Company or its sublicensees until the expiration of all patents and improvement
patents covering the unit. The patents expire through August 14, 2001. The
royalties decrease as follows:
F-19
<PAGE> 49
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
Notes to Financial Statements, Continued
<TABLE>
<CAPTION>
--------------------------------------------
NUMBER OF UNITS SOLD ROYALTY PER UNIT
--------------------------------------------
<S> <C>
0 - 4,000 $51.50
4,001 - 8,000 49.50
8,001 - 60,000 47.50
60,001 - 81,600 46.50
81,601 - 120,000 44.50
120,001 - 240,000 43.50
Thereafter 42.50
</TABLE>
(7) LICENSE AGREEMENTS
AGREEMENTS WITH EDI COMPONENTS
In May, 1992, the Company entered into a Letter of Intent with EDI Components
(formerly Electropure, Inc. a privately-held California corporation) to grant an
exclusive license to manufacture and market the Company's patented EDI
technology. In addition to the licensed rights granted, the final agreements,
executed in July, 1992, as amended through March, 1995, generally provided for
the following:
A) The Company leased to EDI Components all property which it did not reasonably
require to conduct business operations, including all capital equipment, molds,
inventory, machinery, tools, office equipment and furniture. Such lease
terminates on January 31, 1998.
B) The Company granted EDI Components an exclusive license to manufacture and
sell the patented EDI technology subject to meeting minimum annual sales
requirements and subject to paying the Company a percentage of its net sales
revenues. Such sales requirements were temporarily stayed until the patent
infringement litigation with Millipore was concluded and such requirements have
not been reinstated, although all such litigation was resolved in July, 1996.
See Note 8 - "Litigation and Claims".
C) For the above rights, EDI Components is required to pay, as license fees, all
necessary operating expenses of the Company, subject to reinstatement or
renegotiation of the above sales requirements. As of October 31, 1996, EDI
Components has paid the Company an aggregate of $451,554 in such license fees.
D) The Company granted EDI Components a security interest in the EDI patent to
the extent of the latter's capital funding which is limited by agreement to a
maximum of $725,000 in cash and $100,000 of in "kind" investments and $312,500
in loans, unless the Company agrees to further increase such limit.
E) The Company has the right, until January 31, 1998, to reacquire the licensed
rights and terminate both the lease and the License Agreement by paying EDI
Components up to $2,950,000 (as of October 31, 1996, the total sum payable
aggregates $,2,750,000). All excess cash assets of EDI Components (not needed to
fund operations) are required to be set aside in a Special Fund.
F-20
<PAGE> 50
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
Notes to Financial Statements, Continued
The amounts in such Special Fund will be credited against the amount the Company
shall pay EDI Components to reacquire the licensed rights.
The Company sub-leases space in EDI Component's Orange County facility rent-free
on a month-to-month basis. Such lease covers the use by the Company of all
utilities, equipment and facilities in the building. The Company paid sub-lease
payments of $500 per month until July, 1995.
See also "Warrants" in Note 5.
AGREEMENTS WITH GLEGG WATER CONDITIONING, INC.
On July 2, 1994, the Company and its licensee, EDI Components, granted a
non-exclusive worldwide license to Glegg Water Conditioning, Inc., ("Glegg") of
Guelph, Ontario, Canada to use and commercially exploit the EDI technology
covered in the Company's U.S. and foreign patent numbers 4,465,573 and
0.078,842, respectively, together with any improvements thereon. The license is
for an initial term of ten (10) years, with mutually agreed upon five (5) year
extensions. Pursuant to the agreement, Glegg has paid EDI Components the
non-refundable sum of $50,000. The agreement also provided that Glegg will pay
EDI Components a continuing royalty on the net sales price of all licensed
products sold by Glegg as follows:
Five (5) percent of the Net Sales Price of all Licensed Products having a total
system design flow rate for such apparatus in an amount greater than or equal to
one hundred (100) gallons per minute; and
Ten (10) percent of the Net Sales Price of all Licensed Products having a total
system design flow rate for such apparatus in an amount less than one hundred
(100) gallons per minute.
In May, 1997, the parties entered into an Amended and Restated Technology
License Agreement whereby Glegg received a paid-up license to the EDI technology
in exchange for payment to EDI Components in the sum of $125,000.
AGREEMENT WITH POLYMETRICS
On May 3, 1995, the Company and EDI Components granted a non-exclusive EDI
license to Polymetrics, a San Jose, California based supplier of high purity and
ultrapure water treatment systems and services. The license, for which
Polymetrics paid EDI Components the sum of $200,000, provides for a royalty
structure similar to the 1994 Glegg agreement.
(8) LITIGATION AND CLAIMS
In December, 1993, a default judgment was rendered against the Company in an
action brought in the Los Angeles County Municipal Court. The lawsuit seeks to
recover $30,745 in accrued credit
F-21
<PAGE> 51
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
Notes to Financial Statements, Continued
card charges, including interest and attorneys fees, which is reflected in
accrued accounts payable. The Company paid $250 during fiscal year 1994 on this
judgment, however, no further arrangements have been made to satisfy this
obligation.
In addition to the above legal proceedings, the Company is a party to three
other claims seeking $38,889 and alleging, among other items, breach of contract
and failure to pay for services rendered. In the opinion of management, the
Company's financial statements include adequate provision for these claims,
including interest and reasonable attorneys fees and costs; however, no
assurances can be given as to the ultimate outcome of these claims and
accordingly, the effects, if any, cannot be reasonably estimated at this time.
In April, 1996, the Company and its licensee settled the 1993 lawsuit brought
against Millipore and its licensee, US Filter/Ionpure Technologies, for
infringement of the Company's EDI patent. While the terms of the settlement are
confidential, Millipore and US Filter/Ionpure agreed to the entry of a consent
judgment of patent validity which has been entered by the U. S. District Court
for the Central District (Los Angeles) of California. The settlement also
included the grant of a license to utilize the Company's EDI technology to
Millipore.
In March, 1996, the Company and its licensee filed a lawsuit for declaratory
judgment to invalidate and hold unenforceable two patents held by Millipore
Corporation relating to electrodeionization technology. The lawsuit was filed in
the United States Central District Court in Los Angeles and alleged that the two
patents covering Millipore's CDI products were each obtained by fraud on the
U.S. Patent Office in that Millipore "misrepresented material facts to the U.S.
Patent and Trademark Office which, if known, would not have resulted in their
issuance [U.S. Patent No. 4,632,745, issued on December 30, 1986, and U.S.
Patent No. 4,925,541, issued on May 15, 1990]. The Court had been requested to
determine whether Millipore's conduct posed a reasonable apprehension on the
part of the Company and its customers of threatened patent infringement. In
July, 1996, Judge John Davies ruled that there was no threat of patent
infringement and, accordingly, dismissed the lawsuit between the parties.
In June, 1996, the Company negotiated an arrangement with its former lawfirm to
pay $25,000 over a four month period, beginning July 1, 1996, to settle over
$125,000 in accounts payable for past services rendered. The Company's licensee
has made all payments required under the arrangement and, as a result, the
Company realized a gain of $101,289 on settlement of the debt.
F-22
<PAGE> 52
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
Notes to Financial Statements, Continued
(9) SECURITIES LAWS
The Company has, since incorporation, raised a substantial amount of private
capital, which is now represented by common stock, notes and royalty interests
in the water purification unit. Some of these transactions, or portions thereof,
occurred under circumstances in which they may have been subject to state and
Federal securities laws requiring prior authorization, approval or review.
On February 11, 1987, the California Department of Corporations issued a Desist
and Refrain Order ordering the Company and its majority stockholder to cease
violating the qualification provisions of the California Corporate Securities
Law of 1968, as amended. In the opinion of management and its legal counsel, the
Desist and Refrain Order will not have an adverse effect on the financial
position or results of operations of the Company.
Additionally, the Commissioner or Corporations of the State of California has
placed the following restrictions on most of the shares of stock held by the
majority shareholder:
o Such shares will not participate in dividends other than stock dividends
o Such shares will not participate in any distribution of assets in the
event of liquidation
o Such shares may not be transferred without prior written consent of the
Commissioner, except for transfer pursuant to order or process of any
court.
The issuance of an order lifting such conditions is at the sole discretion of
the Commissioner.
(10) INCOME TAXES
Since inception, each year, the Company incurred operating losses that are
carried forward to the fiscal year ended October 31, 1996. The Tax Reform Act of
1986 limits the Company's ability to utilize net operating losses carried
forward when ownership changes in excess of 50% occur. The Company's public
offering, effective June 25, 1987, resulted in a 50.2% ownership change. Thus,
the loss generated between 1979 and June 25, 1987 that can be used to offset the
Company's taxable income will be limited to $522,000 per year. The net operating
loss is carried forward for 15 years. If the net operating loss is not utilized
to offset future taxable income, the loss will expire as follows:
F-23
<PAGE> 53
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
Notes to Financial Statements, Continued
<TABLE>
<CAPTION>
Net operating loss carryforwards
---------------------------------------
Federal tax
purposes ----------------------- State
Year Year Full Annual tax
generated expiring loss limit* purposes
--------- -------- ------- ------- --------
<S> <C> <C> <C> <C>
10/81 1996 78,000 13,885 --
10/82 1997 78,000 13,885 --
10/83 1998 269,000 47,920 --
10/84 1999 616,000 109,620 --
10/85 2000 514,000 91,507 --
10/86 2001 550,000 97,927 --
6/25/87 2002 716,000 127,472 --
---------- ---------- ----------
Total Loss: 2,932,000 522,000 --
06/25/87 2002 352,000 352,000 --
10/88 2003 956,000 956,000 22,000
10/89 2004 1,015,000 1,015,000 46,000
10/90 2005 1,215,000 1,215,000 19,000
10/91 2006 1,859,000 1,859,000 1,252,000
10/92 2007 1,490,000 1,490,000 735,000
10/93 2008 6,000 6,000 6,000
10/94 2009 1,435,000 1,435,000 717,000
10/95 2010 1,304,000 1,304,000 652,000
10/96 2011 657,000 1,272,000 657,000
Less Gain from Debt Discharged: (357,000) (357,000) (254,000)
---------- ---------- ----------
Total Loss: 12,753,000 11,049,000 3,852,000
========== ========== ==========
</TABLE>
The differences between the loss carryforwards for financial reporting and
income tax purposes result primarily from the capitalization of start-up costs
for Federal income tax purposes, the capitalization of research and development
and start-up costs for state income tax purposes, and certain limitations on the
carryforward of net operating losses for California state tax purposes. The
Company began shipping products in August, 1990. Therefore, capitalization of
start-up costs were discontinued at that time and amortization of total
capitalized costs of $7,218,000 for federal and $5,967,000 for state were
amortized over 60 months beginning in August, 1990.
Additionally, in connection with the Company's conversion of debt to equity, the
Company elected Section 108(e)(10) of the Internal Revenue Code, which states
that for purposes of determining income from discharge of indebtedness where the
debtor is legally insolvent, the indebtedness is treated as being satisfied with
an amount equal to the indebtedness, and therefore, no gain is recognized for
income tax purposes. However, the net operating loss carryforward to the fiscal
year ending October 31, 1996 was reduced by the amount of gain not recognized
for income tax purposes. The treatment is similar for California state income
tax purposes.
- -----------------
* Annual limit due to ownership change on June 25, 1987.
F-24
<PAGE> 54
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
Notes to Financial Statements, Continued
However, an extraordinary gain is recognized for financial reporting purposes
which results in a permanent difference between income for tax purposes and for
financial reporting purposes.
(11) SUBSEQUENT EVENTS (UNAUDITED)
In May, 1997, the Company and its licensee negotiated a settlement of a $3
million default judgment rendered in June, 1996 against the Company and various
current and former officers and directors. The lawsuit was brought in February,
1993 by the Economic Development Bank for Puerto Rico, the preferred shareholder
in the Company's Puerto Rico subsidiary, alleging fraud and misconduct which
ultimately led to its dissolution and subsequent bankruptcy in November, 1993.
The settlement, which is subject to final ratification by the Bank's Board of
Directors on or about June 11, 1997, provides for the issuance to the Bank of
100,000 shares of the Company's Common Stock and 100,000 five-year warrants to
purchase Common Stock at $1.00 per share. In addition, the Company and its
licensee, EDI Components will issue a $12,000 promissory note to the Bank to
cover certain costs and attorneys fees. The settlement is conditioned upon
termination of the current license agreement between the Company and EDI
Components and conveyance of all assets back to the Company.
In May, 1997, the Company's Board of Directors authorized the issuance of 20,000
shares of Common Stock and 20,000 ten-year warrants to purchase Common Stock at
$1.00 per share as a bonus to an individual who assisted in negotiated the above
settlement with the Puerto Rico bank.
On June 2, 1997, Anthony Frank exercised his option to convert, at approximately
$0.31 per share, the principal and interest accrued on a $500,000 loan made to
EDI Component on February, 1996. The conversion resulted in the issuance of
1,717,484 shares of Common Stock, 319,202 of which were sold by Mr. Frank to
Floyd Panning, President of EDI Components, at his cost of $100,000, or
approximately $0.31 per share. An additional 319,202 of such shares were sold by
Mr. Frank to his son, Randall Frank, under identical terms.
F-25
<PAGE> 55
ELECTROPURE, INC.
(Formerly, HOH Water Technology Corporation)
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
PAGE
SEQUENTIALLY
NUMBERED
------------
<S> <C> <C>
10.48.1 Amended and Restated Technology Licence Agreement with Glegg Water
Conditioning, Inc. dated May 22, 1997.
10.51 Settlement Agreement, and Exhibits thereto, with Economic Development
Bank for Puerto Rico dated May 16, 1997.
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.48.1
AMENDED AND RESTATED TECHNOLOGY LICENCE AGREEMENT
THIS LICENCE AGREEMENT is made and is effective as of May 22, 1997,
by and between EDI Components (formerly Electropure, Inc.), a California
corporation, having a principal place of business at 23251 Vista Grande, Suite
A, Laguna Hills, California, 92653, and Electropure, Inc. (formerly HOH Water
Technology Corporation), a California corporation, having a principal place of
business at 23251 Vista Grande, Suite A, Laguna Hills, California, 92653
(hereinafter collectively referred to as "ELECTROPURE") on the one hand, and
Glegg Water Conditioning, Inc., an Ontario corporation, having a principal place
of business at 29 Royal Road, Guelph, Ontario, Canada, N1H 1G2 ("GLEGG") on the
other hand.
WITNESSETH
WHEREAS, EDI Components and Electropure, Inc. carry on the business
of the development, marketing, sale, manufacturing, installation and maintenance
of liquid electropurification equipment and own certain technology and
intellectual property rights relating thereto;
AND WHEREAS, certain inventions are disclosed and claimed in U.S.
Patent No. 4,465,573 entitled Method and Apparatus for the Purification of Water
relating to certain electrodeionization water purification devices and certain
foreign patents corresponding thereto, which are owned by Electropure, Inc. and
exclusively licensed to EDI Components;
AND WHEREAS, such patents are part of the Licensed Technology, and
Electropure has represented that Electropure, Inc. is the sole owner of the
entire right, title and interest in and to such patents and the Licensed
Technology, and that Electropure has the sole right to grant licences under such
patents and the Licensed Technology;
AND WHEREAS, the Parties entered into a technology license agreement
dated July 2, 1994 whereby Electropure granted to Glegg a non-exclusive
technology licence for a term to use the Licensed Patents and the Licensed
Technology throughout the world, and Electropure has agreed to grant, and Glegg
is desirous of receiving, a non-exclusive, fully paid-up licence to use such
patents for the life of such patents and to use such technology for a term of 50
years, in each case throughout the world for the commercial development,
marketing, use and sale of water purification equipment, upon and subject to the
terms and conditions of this Agreement;
NOW THEREFORE, in consideration of the covenants and undertakings
hereinafter set forth, it is agreed by and between the parties as follows:
<PAGE> 2
-2-
ARTICLE 1
DEFINITIONS AND PRINCIPLES OF INTERPRETATION
1.1 Definitions. For the purposes of this Agreement, and solely for the purpose,
the terms set forth hereinafter shall be defined as follows:
"AGREEMENT" means this agreement and all instruments supplementing or
amending or confirming this Agreement;
"ARTICLE" or "SECTION" means and refers to the specified article or
section of this Agreement;
"AFFILIATE" as used in this Agreement and as it applies to a Party to this
Agreement shall mean any corporation, other juridical entity, partnership or
other business enterprise which qualifies under any one of the following:
Fifty-one percent (51%) or more of the voting rights with respect to the
election of directors or other governing body or members is owned or controlled,
directly or indirectly, by the Party;
Fifty-one percent (51%) or more of the voting rights with respect to the
election of directors or other governing body or members is owned or controlled,
directly or indirectly, by any corporation, other juridical entity, partnership
or other business qualifying under item (a) above.
"BUSINESS DAY" means a day, other than a Saturday or Sunday, on which the
principal commercial banks located in the City of Los Angeles are open for
business during normal banking hours;
"ELECTROPURE" means collectively EDI Components and Electropure, Inc.;
"EDI COMPONENTS" means EDI Components of 23251 Vista Grande, Suite A,
Laguna Hills, California, United States of America, which company was formerly
known as Electropure, Inc.;
"ELECTROPURE BUSINESS" shall mean EDI Components's business and
Electropure, Inc.'s business consisting of the development, marketing, sale,
manufacture, installation and maintenance of liquid electropurification
equipment. For greater certainty, but without limiting the generality of the
foregoing, the term "ELECTROPURE BUSINESS" shall include the businesses
described in the EDI Components business plan executive summary dated November,
1993 and the United States Securities and Exchange Commission Form 10-KSB annual
report for the fiscal year ended October 31, 1992 for Electropure, Inc.;
"GLEGG" means Glegg Water Conditioning, Inc. of 29 Royal Road, Guelph,
Ontario, Canada, N1H 1G2;
<PAGE> 3
-3-
"ELECTROPURE, INC." means Electropure, Inc. of 23251 Vista Grande, Suite
A, Laguna Hills, California, United States of America, which company was
formerly known as HOH Water Technology Corporation;
"LICENSED PRODUCTS" means that EDI liquid purification equipment
especially made, used, or sold by Glegg to its customers, for use in a manner
covered by a Valid Patent Claim of United States Patent No. 4,465,573;
"PARTIES" means Electropure and Glegg collectively, and "PARTY" means any
one of them;
"LICENSED PATENTS" means all patents and inventions and applications
thereof relating to the Electropure Business and the Licensed Technology and
patents which may be issued from current applications (including divisions,
reissues, renewals, re-examinations, continuations, continuations in part and
extensions) including, without limitation, United States Patent No. 4,465,573
and any foreign patent corresponding thereto. Without limiting the foregoing,
Licensed Patents shall include the patents listed in Schedule "A" to this
Agreement;
"PERSON" shall mean an individual, corporation, partnership or other
entity;
"SENIOR OFFICERS" means, with respect to any corporation, the president,
chief executive officer, chief financial officer, managing director, a
vice-president, the secretary, treasurer, assistant treasurer and the general
manager of a corporation, and any other individual who performed functions for a
corporation similar to those normally performed by an individual occupying any
such office;
"LICENSED TECHNOLOGY" means all of the know how and trade secret
information relating to the Electropure Business, including, without limitation,
all trade secrets and other proprietary know-how, confidential information,
public information, non-proprietary know-how and invention disclosures, any
information of a scientific, technical or business nature regardless of its
form, all documented research, development, demonstration or engineering work,
all information that can be or is used to define a design or process or procure,
produce, support or operate material and equipment, methods of production, and
all other drawings, blueprints, patterns, plans, flow charts, equipment, parts
lists, software and procedures, specifications, formulas, designs, technical
data, descriptions, related instructions, manuals, records and procedures.
Without limiting the foregoing, Licensed Technology shall include technology
relating to: the "Electropure" series of electrodeionization ("EDI") units for
commercial, residential municipal, industrial and agricultural applications;
point-of-use "Electropure" water purifying product; reverse osmosis and
filter-adsorber water systems; ion permeable membranes; improvements on
manifolds (front and rear); production water and waste water compartments;
electronic power supply; electronic controllers; and reverse-osmosis monitoring
devices. Licensed Technology shall also include all Licensed Patents,
trademarks, copyrights, trade names and other intellectual property rights
whether registered or not relating to the Electropure Business;
<PAGE> 4
-4-
"SUBSIDIARIES" as used in this Agreement and as it applies to a Party to
this Agreement shall mean any corporation, other juridical entity, partnership
or other business enterprise which is wholly-owned, directly or indirectly, by
the Party;
"TERRITORY" means, generally, the world but, with respect to the Licensed
Patents, means the countries in which such patents are effective;
"VALID PATENT CLAIM" shall mean a bona fide, unexpired claim in a Licensed
Patent which has not been held invalid by a decision of a court or other
governmental agency of competent jurisdiction, unappealable or unappealed within
the time allowed for appeal, and which has not been admitted to be invalid by
the owner through reissue or disclaimer. If there should be two or more such
decisions conflicting with respect to the validity of the same claim the
decisions of the higher or highest tribunal shall thereafter control; however,
should the tribunals be of equal dignity, the decision or decisions holding the
claim invalid shall prevail; and
"TRANSFER" means any event pursuant to which the rights or obligations of
the affected party under this Agreement are or are attempted to be sold,
disposed of, assigned, pledged, hypothecated, charged, mortgaged, encumbered,
sublicensed or transferred and includes any transfer by operation of law.
1.2 Certain Rules of Interpretation. In this Agreement and the Schedule:
(a) unless otherwise specified, all references to money amounts are
to currency of the United States of America;
(b) the headings herein and any references to articles or sections
being intentionally deleted (which are references to deletions from
the technology license agreement dated July 2, 1994) are for
convenience only and shall not be deemed to limit or otherwise
affect the construction hereof;
(c) whenever a provision of this Agreement or the Schedule requires
an approval or consent by a Party to this Agreement and notification
of such approval or consent is not delivered within the applicable
time limited, then, unless otherwise specified, the Party whose
consent or approval is required shall be conclusively deemed to have
withheld its consent or approval;
(d) unless otherwise specified, time periods within or following
which any payment is to be made or act is to be done shall be
calculated by excluding the day on which the period commences and
including the day which ends the period and by extending the period
to the next Business Day following if the last of the period is not
a Business Day; and
<PAGE> 5
-5-
(e) whenever any payment is to be made or action to be taken under
this Agreement is required to be made or taken on a day other than a
Business Day, such payment shall be made or action taken on the next
Business Day following.
1.3 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between
the parties pertaining to the subject matter of this Agreement and supersedes
all prior agreements, understandings, negotiations and discussions, whether oral
or written, of the parties with respect to the subject matter hereof, including
the technology license agreement dated July 2, 1994 and the observer secrecy
deed dated November 29, 1993.
1.4 WAIVER. Any terms of this Agreement may be amended, modified or waived only
with the prior written consent of both Parties.
1.5 APPLICABLE LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, U.S.A.
ARTICLE 2
GRANT AND TERM
2.1 GRANT. Subject to the provisions of this Agreement, Electropure hereby
grants to Glegg the non-exclusive, fully paid-up right, licence and privilege
for a term of 50 years from the date hereof in the Territory to use and
commercially exploit the Licensed Technology including, subject to Section 2.4,
the Licensed Patents. Such right shall include the non-exclusive right to
develop, market, sell, manufacture, install and maintain liquid purification
equipment including the Licensed Products. The Parties acknowledge that the
right, license and privilege granted hereunder (i) is commercially reasonable;
and (ii) shall not terminate upon the occurrence of any event, including,
without limitation, the bankruptcy or insolvency of Electropure, Inc. or EDI
Components.
2.2 TERM AND EFFECTIVE DATE. This Agreement shall become effective on the date
of signing by all Parties. The term of this Agreement shall be 50 years.
2.3 PRIOR ARRANGEMENTS. EDI Components and Electropure, Inc. agree that any
agreements or arrangements among them that would preclude the grant of the
licence and other arrangements contemplated by this Agreement have been
terminated or amended including, without limitation, the exclusive nature of the
licence granted by Electropure, Inc. to EDI Components dated July 29, 1992.
2.4 LIMITATIONS ON RIGHTS TO LICENSED PATENTS. Glegg acknowledges that, to the
extent the rights granted hereunder relate to Licensed Patents, (i) such patents
have limited application in terms of both the jurisdictions to which they apply
and the time period for which they are effective; and (ii) Electropure does not,
subject to Article 8,
<PAGE> 6
-6-
purport to grant to Glegg any greater rights in and to such Licensed Patents
than it owns or possesses.
ARTICLE 3
BUSINESS REVIEW
[Intentionally Deleted]
ARTICLE 4
FEES AND REPORTING
3.1 PAYMENT AND ROYALTY. In consideration of the ongoing right, licence and
privilege granted to Glegg hereunder, Glegg has paid to Electropure a
non-refundable, one time royalty of U.S. $125,000, the receipt of which is
hereby acknowledged by Electropure.
ARTICLE 5
ADJUSTMENT TO LICENCE AGREEMENT
[Intentionally Deleted]
ARTICLE 6
IMPROVEMENTS
6.1 IMPROVEMENTS. Any inventions, works, discoveries, improvements and
innovations made by a Party to this Agreement shall be licensed by that Party to
the other only upon the mutual agreement of the Parties.
ARTICLE 7INFRINGEMENTS
7.1 INFRINGEMENT BY UNAUTHORIZED PERSONS. In the event that the Licensed
Patents are infringed or the Licensed Technology appropriated by third Persons,
the Parties agree that:
<PAGE> 7
-7-
(a) the Party to this Agreement having notice of such infringement
or appropriation shall promptly notify the other in writing which
notice shall set forth the facts of such infringement or
appropriation in reasonable detail;
(b) in the event that Electropure shall fail within a period of one
hundred and twenty (120) days after notice of such infringement or
appropriation, to initiate litigation to abate the infringement or
appropriation, Glegg shall have the right, at its sole option to
bring suit or other action against the infringer in its own name and
at its own expense. Glegg shall have the right to control any such
action brought in its own name and to appoint counsel of its own
choice. In the event that Glegg brings any such action or
proceeding, Electropure agrees to be joined as a party plaintiff and
to give Glegg all needed information, assistance and authority to
file and prosecute such suit;
(c) upon their mutual agreement, the Parties may otherwise join in a
suit or other action to abate such infringement or appropriation;
(d) the costs of any suit filed under subsection 7.1(b), including
attorney's fees, shall be borne by Glegg. The costs of any suit
filed under subsection 7.1(c) shall be borne by the Parties in
accordance with the Parties' mutual agreement. All damages or other
monetary awards recovered in suits brought under subsection 7.1(b)
shall be shared equally by the Parties. All damages or other
monetary awards recovered in suits filed under subsection 7.1(c)
shall be awarded in accordance with the mutual agreement of the
Parties;
(e) Electropure agrees to notify Glegg before entering into or
authorizing any settlement, adjustment, or compromise of any action
involving the Licensed Patents and/or the Licensed Technology; and
(f) Electropure shall promptly inform Glegg in the event that legal
action involving the Licensed Patents and/or the Licensed Technology
is instituted by or against any of Electropure's licensees
thereunder.
ARTICLE 8REPRESENTATIONS AND WARRANTIES OF ELECTROPURE
Electropure hereby represents and warrants to Glegg that:
8.1 INCORPORATION AND REGISTRATION. EDI Components and Electropure, Inc. are
corporations duly incorporated and validly existing under the laws of the State
of California and have all necessary corporate power, authority and capacity to
own the Licensed Technology and the Licensed Patents. EDI Components and
Electropure, Inc. have all necessary corporate power, authority and capacity to
enter into this
<PAGE> 8
-8-
Agreement and to carry out their obligations under this Agreement. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated by this Agreement have been duly authorized by all necessary
corporate action on the part of EDI Components and Electropure, Inc.;
8.2 OWNERSHIP AND RIGHT TO LICENSE. Electropure, Inc. is the absolute registered
legal and beneficial owner of all right, title and interest in and to the
Licensed Technology including the Licensed Patents, with no breaks in chain of
title, with good and marketable title, free and clear of any claims, security
interests, liens, pledges, options, charges, encumbrances of any kind whatsoever
or rights of others, other than the security interests set out in Schedule "A".
Electropure has the right to grant the rights, privileges and licenses granted
hereunder. Electropure has not otherwise Transferred the Licensed Technology or
the Licensed Patents to any other Person. The Licensed Patents are in full force
and effect and have not been used or enforced or failed to be used or enforced
in a manner that would result in the abandonment, cancellation or
unenforceability of any of the Licensed Patents;
8.3 ABSENCE OF CONFLICTING AGREEMENTS AND ORDERS. Neither EDI Components nor
Electropure, Inc. are a party to, bound or affected by or subject to any
indenture, mortgage, lease, agreement, licence, obligation, instrument, charter
or by-law provision, statute, regulation, order, judgement, decree, license,
permit or law (including applicable securities laws) which would be violated,
contravened, breached by, or under which default would occur or a lien, claim,
restriction or encumbrance would be created as a result of the execution and
delivery of this Agreement or the consummation of any of the transactions
provided for under this Agreement. Without limiting the foregoing, Electropure
represents and warrants that the Turnover Order dated March 10, 1987 issued by
the District Court of Harris, Texas in case no. 86-11762 between Ethel Bennett
Trust and HOH Water Tech Inc. has been voided and is of no effect;
8.4 ABSENCE OF FUTURE ENCUMBRANCES. Other than as may be described in Schedule
"A", neither EDI Components nor Electropure, Inc. are a party to, bound or
affected by or subject to any claims, security interests, liens, pledges,
options, charges, encumbrances of any kind whatsoever, rights of others,
indentures, mortgages, leases, agreements, licences, obligations, instruments,
charter or by-law provisions, statutes, regulations, orders, judgements,
decrees, permits or laws (including applicable securities laws). None of the
security interests, suits, claims or other encumbrances set out on Schedule "A"
could result in the termination or Transfer of this Agreement, the Transfer of
the Licensed Technology including the Licensed Patents or could otherwise
interfere with Glegg's exercise of its rights under this Agreement or adversely
affect the Licensed Technology or the Licensed Patents;
8.5 REGULATORY APPROVALS. No governmental or regulatory authorization,
approval, order, consent or filing is required on the part of either EDI
Components, Electropure, Inc. or its shareholders in connection with the
execution, delivery and performance of this Agreement or the performance of
Electropure's obligations under this Agreement; and
<PAGE> 9
-9-
8.6 INTELLECTUAL PROPERTY. Schedule A to this Agreement sets forth a complete
and correct list of all Licensed Patents. Schedule A sets forth a complete and
correct and brief description of all infringements, violations or appropriations
of the Licensed Patents and the Licensed Technology of which Electropure is
aware. Except as set out in Schedule A, there is no suit, action, litigation,
investigation, claim, complaint or proceeding, including appeals, in progress,
pending or, to the best of the knowledge, information and belief (after due
enquiry) of the Senior Officers of Electropure, threatened, relating to the
Electropure Business, the Licensed Technology or the Licensed Patents before any
court, domestic or foreign, or arbitration panel which, if determined adversely
to Electropure, might adversely affect the Electropure Business and, there is
not presently outstanding against Electropure any judgement, covenant not to
sue, decree, injunction, rule or order of any court, governmental department,
commission, agency, instrumentality or arbitrator pertaining to the Electropure
Business, the Licensed Technology or the Licensed Patents. Except as disclosed
in Schedule "A", the Senior Officers of Electropure are not aware (after due
enquiry) of any claim of adverse ownership, invalidity or other opposition of or
conflict with any of the Licensed Technology or the Licensed Patents nor of any
pending or threatened suit, proceeding, claim, demand, action or investigation
of any nature or kind against Electropure relating to the Electropure Business
or the Licensed Technology.
ARTICLE 9
REPRESENTATIONS AND WARRANTIES OF GLEGG
Glegg hereby represents and warrants to Electropure that:
9.1 INCORPORATION. Glegg is a corporation duly incorporated and validly existing
under the laws of Ontario, Canada;
9.2 DUE AUTHORIZATION. Glegg has all necessary corporate power, authority and
capacity to enter into this Agreement and to carry out its obligations under
this Agreement. The execution and delivery of this Agreement and the
consummation of the transaction contemplated under this Agreement have been duly
authorized by all necessary corporate action of Glegg; and
9.3 ABSENCE OF CONFLICTING AGREEMENTS. Glegg is not a party to, bound or
affected by or subject to any indenture, mortgage, lease, agreement, obligation,
instrument, charter or by-law provision, statute, regulation, order, judgement,
decree, license, permit or law which would be violated, contravened or breached
by, or under which any default would occur or a lien, claim, restriction or
encumbrance would be created as a result of the execution and delivery by it of
this Agreement or the consummation of any of the transactions contemplated in
this Agreement.
<PAGE> 10
-10-
ARTICLE 10
TERMINATION
[Intentionally Deleted]
ARTICLE 11
MISCELLANEOUS
11.1 INDEPENDENT PARTIES. Each Party is and will at all times remain an
independent contractor and is not and shall not represent itself to be the
agent, joint venturer or partner of the other or to be related to the other,
other than as licensee and licensor. No representations will be made or acts
taken by either Party which could establish any apparent relationship of agency,
joint venture or partnership with the other Party and neither Party shall be
bound in any manner whatsoever by any agreements, warranties or representations
made by the other Party to any other person or with respect to any other action
of the other Party. Neither Party shall establish any bank account, make any
purchase, apply for any loan or credit or incur or permit any obligation to be
incurred in the name of or on the credit of the other without the other Party's
prior written consent. No acts of assistance given by one Party to the other
shall be construed to alter this relationship.
11.2 GLEGG THIRD PARTY REPRESENTATIONS. All representations or warranties made
in connection with the sale of Licensed Products by Glegg and its Affiliates as
manufacturer and/or seller shall in no way directly or impliedly obligate
Electropure.
11.3 FORCE MAJEURE. Neither party shall be responsible to the other for
non-performance or delay in performance (other than any payment of money)
occasioned by any causes beyond its control including without limitation acts or
omissions of the other party, acts of civil or military authority, strikes,
lockouts, embargoes, insurrections or Acts of God. If any such delay occurs, any
applicable time period shall be automatically extended for a period equal to the
time lost, provided that the party affected makes reasonable efforts to correct
the reason for such delay and gives to the other party prompt notice of any such
delay.
11.4 SURVIVAL. Intentionally Deleted.
11.5 EXPENSES. All costs and expenses (including, without limitations, the fees
and disbursements of legal counsel) incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the Party incurring
such expenses.
11.6 NOTICES. Any notice or other writing required or permitted to be given
under this Agreement or for the purposes of this Agreement (in this Agreement
referred to as a "notice") to any Party shall be in writing and shall be
sufficiently given if delivered personally, or if sent by prepaid registered
mail or if transmitted by fax or other form of recorded communication tested
prior to transmission to such Party:
<PAGE> 11
-11-
(a) in the case of a notice to EDI Components and Electropure, Inc. at:
EDI Components/Electropure, Inc.
23251 Vista Grande
Suite A
Laguna Hills, California
United States of America
92653
Attention: Mr. Floyd Panning
Fax: (714) 770-9209
(b) in the case of a notice to Glegg at:
Glegg Water Conditioning, Inc.
29 Royal Road
Guelph, Ontario
Canada
N1H 1GF
Attention: Mr. Robert Glegg, President
Fax: (519) 763-8492
or at such other address as the Party to whom such writing is to be given shall
have last notified to the Party giving the same in the manner provided in this
section. Any notice delivered to the Party to whom it is addressed as provided
above shall be deemed to have been given and received on the day it is so
delivered at such address, provided that if such day is not a Business Day then
the notice shall be deemed to have been given and received on the next Business
Day. Any such notice mailed as aforesaid shall be deemed to have been given and
received on the fifth Business Day following the date of its mailing. Any notice
transmitted by fax or other form of recorded communication shall be deemed given
and received on the first Business Day after its transmission.
11.7 ASSIGNMENT. (1) The rights and obligations of each party under this
Agreement shall not be assignable or otherwise transferable without the prior
written consent of the other. Neither Party shall be entitled to Transfer this
agreement, the Licensed Technology, the Licensed Patents or the rights, licences
and privileges granted hereunder without the prior written consent of the other,
provided that nothing herein shall preclude Electropure from licensing the
Licensed Technology to third parties and Glegg shall be entitled to, subject to
section 11.7(2) of this Agreement, sublicense its rights to the Licensed
Technology to its Affiliates, Asahi Glass Co., Ltd. and any Subsidiaries of
Asahi Glass Co., Ltd. (but not to Affiliates of Asahi Glass Co., Ltd. that are
not also Subsidiaries of Asahi Glass Co., Ltd.) and to assign this Agreement to
any of Glegg's Affiliates (in which case such assignee of Glegg shall have and
may exercise all of the rights, and shall assume all of the
<PAGE> 12
-12-
obligations, of Glegg under this Agreement). Subject thereto, this Agreement
shall enure to the benefit of and be binding upon the Parties and their
respective successors (including any successor by reason of amalgamation of any
Party) and permitted assigns.
(2) Any sublicense granted by Glegg to Asahi Glass Co., Ltd. or any
Subsidiaries of Asahi Glass Co., Ltd. pursuant to section 11.7(1) of this
Agreement shall be subject to the restriction that neither Asahi Glass Co., Ltd.
nor any of its Subsidiaries may manufacture Licensed Products outside of the
country of Japan.
11.8 FURTHER ASSURANCES. The Parties shall, with reasonable diligence, do all
such things and provide all such reasonable assurances as may be required to
consummate the transactions contemplated by this Agreement, and each Party shall
provide such further documents or instruments required by any other Party as may
be reasonably necessary or desirable to effect the purpose of this Agreement and
carry out its provisions.
11.9 COUNTERPARTS. This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, and it shall not be necessary in
making proof of this Agreement to produce or account for more than one such
counterpart.
11.10 UNENFORCEABILITY. If any provision of this Agreement shall be held
invalid, illegal or unenforceable in any respect, the validity, legality and
enforceability of all other provisions of this Agreement shall not in any way be
affected or impaired.
11.11 EDI COMPONENTS'S SECURITY INTEREST. EDI Components acknowledges that
Electropure, Inc has granted it a security interest in the Licensed Patents and
EDI Components agrees that it will not (whether or not it enforces or realizes
upon such security interest) disturb or interfere with Glegg's rights to the
Licensed Technology and Licensed Patents under this Agreement.
IN WITNESS WHEREOF the Parties have hereunto duly executed this Agreement.
EDI Components
By: /s/ Floyd Panning
----------------------------------------
By: President
----------------------------------------
Electropure, Inc.
By: /s/ Catherine Patterson
----------------------------------------
By: Chief Financial Officer
----------------------------------------
<PAGE> 13
-13-
GLEGG WATER CONDITIONING, INC.
By: /s/ Robert Glegg
----------------------------------------
By: President
----------------------------------------
<PAGE> 14
SCHEDULE "A"
INTELLECTUAL PROPERTY
A. United States Patents
4,465,573
B. European Patents
See attached "Particulars of Letters Patent" 0,078,842
C. Intellectual Property, Disclosure of Outstanding Claims, Ref.
Article 8
Reference is hereby made to the disclosure contained in SEC Forms
filed by Electropure, Inc., particularly, Form 10-KSB for the fiscal
year ended October 31, 1995 and Form 10-QSB for the quarterly period
ended July 31, 1996, all subject to any further disclosures
indicated below.
Electropure, Inc. is currently negotiating with its licensee, EDI
Components to modify the terms of the July, 1992 license agreement
to provide for either a modified relationship or for an extension of
time for Electropure, Inc. to reacquire the license. Currently,
Electropure, Inc. has until January 31, 1998 to pay EDI Components
up to $2,950,000 to terminate the license or lose its right to do
so. It is anticipated that the modified arrangement will provide
that Electropure, Inc. will increase the above payment by $1 million
and grant an additional $1 million security interest in Electropure,
Inc.'s patents (currently $825,000) to the investors of EDI
Components under a modified arrangement.
In July, 1993, Electropure, Inc.'s subsidiary, HOH International,
Inc., filed for protection from its creditors in the United States
Bankruptcy Court, Central District of California. The petition filed
by the subsidiary sought to have all of that entity's debts
discharged. On November 18, 1993, such proceedings were concluded
and the subsidiary was declared bankrupt and $2,979,215 in
liabilities were discharged, including all dividends accrued on
preferred stock held by the Economic Development Bank for Puerto
Rico.
In October, 1996, Electropure, Inc. was advised that a $3 million
default judgment had been rendered in June, 1996 against
Electropure, Inc., its bankrupt subsidiary (HOH International, Inc.)
and various officers and directors of such companies, including one
current Director and one current officer of Electropure, Inc.. The
judgment also was rendered
<PAGE> 15
- 2 -
against HOH/CNM2 Enterprises and its incorporators, Carmen Morales
and Radames Torres. Mr. Torres was the former president and general
manager of HOH International, Inc. The lawsuit, which was brought by
the Economic Development Bank for Puerto Rico (the preferred
stockholder in HOH International, Inc.) in February, 1993 in the San
Juan Superior Court, alleges that Electropure, Inc., its subsidiary,
and the officers and directors of both, breached their fiduciary
duty in entering into a distribution agreement with HOH/CNM2
Enterprises which ultimately led to the dissolution of the
subsidiary, all to the detriment of the Plaintiff. A motion to set
aside such default judgment, based on inadequate service of process,
was denied by the San Juan Court in April, 1997. Notwithstanding the
foregoing, Electropure, Inc. has tentatively reached a settlement
with the Plaintiff and anticipates resolving the matter in its
entirety by the end of May, 1997.
Electropure, Inc. granted a first security interest in all of
Electropure, Inc.'s patents and future patents in consideration for
a $500,000 loan made on February 23, 1996 to Electropure, Inc.'s
licensee by Anthony M. Frank. Electropure, Inc. is in default under
the terms of such loan as a result of the $3 million judgement
rendered against it in Puerto Rico. In addition, Electropure, Inc.'s
licensee is in default of the loan terms for failure to pay an
interest payment thereon in February, 1997. Mr. Frank has not taken
formal steps to declare the loan in default and has indicated his
desire to convert the loan, and accrued interest, to Electropure,
Inc.'s common stock.
<PAGE> 1
EXHIBIT 10.51
SETTLEMENT AGREEMENT
1.0 PARTIES
The parties to this Agreement are:
ECONOMIC DEVELOPMENT BANK FOR PUERTO RICO, hereinafter referred to as the
"BANK" ;
ELECTROPURE, INC. (formerly HOH Water Technology Corporation), hereinafter
referred to as "ELECTROPURE" OR THE "COMPANY"; and
EDI COMPONENTS, hereinafter referred to as "EDI".
2.0 EFFECTIVE DATE OF AGREEMENT
This Agreement shall be effective as of May 23, 1997, subject to final
approval and ratification of the form and substance of this Agreement, and
Exhibits hereto, by the Boards of Directors of the respective parties.
Each party shall provide the other parties hereto with satisfactory
evidence of corporate authority to execute this Agreement and the Exhibits
hereto on or before June 13, 1997.
3.0 DEFINITIONS
3.1 The "Date of this Agreement" is its effective date, as specified in
Paragraph 2.0 above.
3.2 The "Superior Court Action" is the lawsuit filed by the Bank against
the Defendants in the Superior Court of Puerto Rico in San Juan, titled
Banco de Desarrollo Economico Para Puerto Rico v. HOH Water Technologies
Corp., HOH International, Inc., Harry O'Hare, David C. Kravitz, James I
Cruver, Ronald O'Hare, Paul Ovando, Catherine Patterson and Radames
Torres, Carmen M. Morales and the Sociedad Legal de Gananciales Formed by
these H/N/C HOH/CNM2 Enterprises, Inc., Civil No. KAC93/0151 (902).
3.3 "Stock" is Electropure, Inc. Class A Common Stock, as defined in
Exhibit "A" attached hereto and made a part hereof, which contains
restrictions on the Bank's ability to sell, trade, or otherwise transfer
the shares imposed by the federal securities laws or applicable "blue Sky"
laws. Notwithstanding the above, the Bank recognizes and agrees that the
Common Stock may not be sold for a period of one (1) year from the
Transfer Date.
3.4 The "Cash Obligation" is the obligation created by this Agreement
wherein EDI and/or Electropure will pay to the Bank the sum of $12,000.00
according to the terms set forth below and in the 8% One-Year Convertible
Term Note (the "Note") attached hereto as Exhibit "B".
3.5. A "Business Day" is any day of the week that is not a Saturday,
Sunday, or legal holiday.
3.6 "Transfer Date" is the date that Electropure transfers to the Bank all
100,000 shares of Stock called for in this Agreement, but not later than
June 13, 1997.
<PAGE> 2
3.7 An "Uncured Default" is a failure by EDI and/or Electropure, as the
case may be, to make any payment or transfer to the Bank of any Stock or
Warrants called for in this Agreement or any payments called for in the
Note attached hereto as Exhibit "B" at the time, or in the precise manner
called for herein, or the failure to timely comply with Paragraphs 9.0 and
10.0 hereof, together with the failure of EDI and/or Electropure to cure
such default within 48 hours of the Bank's written demand to cure the
default.
3.8 "Fair Market Value per share of Stock" of Electropure, Inc. shall be
(a) The average of the following prices for the 20 consecutive
trading days before revocation (pursuant to paragraph 11.4 hereof):
(i) If the Stock is listed on a National Securities Exchange
or admitted to unlisted trading privileges on such exchange or listed for
trading on the NASDAQ system, the last reported sale price of the Stock on
such exchange or system on each such trading day or if no such sale is
made (or reported) on such day, the average closing bid and asked prices
for such day on such exchange or system; or
(ii) If the Stock is not so listed or admitted to unlisted
trading privileges, the current market value shall be the mean of the last
reported bid and asked prices reported by the Electronic Bulletin Board or
National Quotation Bureau, Inc. on each such trading day; or
(b) If the Stock is not so listed or admitted to unlisted trading
privileges and bid and asked prices are not so reported, the Fair Market
Value of the Stock shall be an amount, not less than book value thereof as
at the end of the most recent fiscal year of Electropure ending prior to a
revocation pursuant to Paragraph 11, determined in such reasonable manner
as may be prescribed by mutual agreement of the parties or by an
independent appraiser mutually approved by the parties.
3.9 "Warrants" are Electropure, Inc. warrants to purchase 100,000 shares
of Stock of Electropure, Inc., at a price of $1.00 per share, as defined
in the Warrant Agreement attached hereto and made a part hereof as Exhibit
"C". Such warrants shall be subject to transfer restrictions under the
Securities Act of 1933, as amended, as provided on the form of the Warrant
Agreement.
3.10 "Defendants" shall mean the defendants in the Superior Court Action.
4.0 RECITALS
4.1 The Bank has obtained a judgment against the Defendants in the amount
of $3,000,000 in the Superior Court Action, plus costs, interest and
$20,000 in legal fees.
4.2 All parties desire to settle the disputes between them without further
litigation.
2
<PAGE> 3
5.0 BANK'S AGREEMENT TO EXECUTE SATISFACTION OF JUDGMENT
5.1 Within ten (10) days after Electropure and EDI satisfactorily perform
all of the terms of this Agreement, as set forth below, including, but not
limited to the terms contained in Paragraphs 6, 7, 8, 9 and 10 of this
Agreement, the Bank agrees to file in the proper court a properly executed
Notice of Conditional Satisfaction of Judgment in the Superior Court
Action (the "Notice") and will provide Electropure with a file stamped
copy of the document. The Notice shall specifically provide that it shall
be automatically revoked upon the occurrence of an Uncured Default and
will include all of the Defendants.
5.2 Concurrently with the filing of the Notice, the Company will file a
dismissal of its current challenge to the judgment in the Superior Court
Action.
6.0 EXECUTION OF PROMISSORY NOTE
6.1 In exchange for the Bank's performance, as described above, EDI and
Electropure agree to execute the 8% One-Year Convertible Term Note (the
"Note") attached hereto and made a part hereof as Exhibit "B". For
purposes of the preceding sentence, if an Uncured Default shall occur or
in the event the Bank revokes this Agreement in accordance with Paragraph
11.2 hereof, it shall be deemed to have complied and performed the
obligations hereunder. The amount of such Note represents Twelve Thousand
Dollars ($12,000.00) in payment of attorneys' fees and to reimburse the
Bank for the air travel, hotel and car rental expenses incurred by its
representatives in traveling to California to execute this Settlement
Agreement (The "Cash Obligation") Payment by EDI and Electropure of the
Cash Obligation shall be made in accordance with the terms of such Note.
6.2 All payment made pursuant to this Agreement that are made on or after
the Date of this Agreement shall be made by certified check or cashier's
check.
7.0 DELIVERY TO BANK OF SHARES OF RESTRICTED STOCK
7.1 In addition to the delivery of the executed Note (Exhibit "B") and
Warrants (Exhibit "C"), Electropure will deliver to the Bank, within
fifteen (15) days of the Date of this Agreement, One Hundred Thousand
(100,000) shares of restricted Stock.
(a) By acceptance of these Shares, the Bank agrees and understands
that neither Electropure nor EDI is under any obligation to register the
Shares on its behalf or to assist it in complying with any exemption from
registration.
(b) Electropure intends to file a registration statement within one
(1) year. If Electropure files a registration statement within five (5)
years of the Date of this Agreement, Electropure shall provide the Bank
with four weeks notice of its intention to file such registration
statement (the "Registration Statement") pursuant to the Securities Act of
1933, as amended (the "Act"), to the end that the Shares may be sold under
the Act as promptly as practicable thereafter and Electropure will use its
best efforts to cause such registration to become effective and continue
to be effective (current) (including the taking of such steps as are
necessary to obtain the removal
3
<PAGE> 4
of any stop order) for a period equal to the lesser of two (2) years or
until the holder has advised Electropure that all of the Shares have been
sold; provided, that if at the time of a proposed registration statement,
the Shares can be sold under Rule 144 of the Act without any restriction
and the Company removes any legends restricting transfers of the Shares,
the Company does not have to include the Shares in any registration
statement; provided further, that the Bank shall furnish Electropure with
appropriate information (relating to the intentions of such Holder) in
connection therewith as Electropure shall reasonably request in writing.
(c) The following provision of this Section 7 shall also be
applicable:
(i) Following the effective date of such registration
statement, Electropure shall upon the request of any owner of the Shares
forthwith supply such a number of prospectuses meeting the requirements of
the Act, as shall be requested by such owner to permit such holder to make
a public offering of all the Shares from time to time offered or sold to
such holder, provided that such holder shall from time to time furnish
Electropure with such appropriate information (relating to the intentions
of such holder) in connection therewith as Electropure shall request in
writing.
(ii) Electropure shall bear the entire cost and expense of any
registration of securities under this Section 6 notwithstanding that other
shares may be included in any such registration. Any holder whose Shares
are included in any such registration statement pursuant to this Section 6
shall, however, bear the fees of his own counsel and any registration
fees, transfer taxes or underwriting discounts or commissions applicable
to the Shares sold by it pursuant thereto; provided, however, if the
Shares are sold through an underwriter in a firm commitment offering along
with Common Stock of the Company, the Company shall pay the registration
fees and the underwriting discounts and commissions for the Shares.
(iii) Electropure shall indemnify and hold harmless the holder
and any underwriter who may purchase from or sell for any such holder any
Shares or from and against any and all losses, claims, damages and
liabilities caused by any untrue statement or alleged untrue statement of
a material fact contained in the registration statement or any
post-effective amendment thereto under the Act or any prospectus included
therein required to be filed or furnished by reason of this Section 7 or
caused by any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein no misleading, except insofar as such losses, claims, damages or
liabilities are caused by any such untrue statement or alleged untrue
statement or omission or alleged omission based upon information furnished
or required to be furnished in writing to Electropure by such holder or
underwriter expressly for use therein.
(iv) If in such registration statement, the Company proposes
to sell its Common Stock through an underwriter on a firm commitment
basis, it shall use its best efforts to have the underwriter underwrite
the Shares.
The agreements of Electropure with respect to the Shares in this
Section 7 shall continue in effect notwithstanding any other provision
contained in this Agreement to the contrary.
4
<PAGE> 5
7.2 The failure of Electropure, for any reason, to deliver to the Bank all
Stock called for in this Agreement by the Transfer Date shall constitute
an Uncured Default under paragraph 3.7 of this Agreement, entitling the
Bank to proceed under paragraph 11.2 below and to rescind the obligations
set forth in Paragraph 5.1 above.
8.0 DELIVERY TO BANK OF WARRANT AGREEMENT
8.1 In addition to the delivery of the executed Note pursuant to Paragraph
6 hereof and the delivery of Stock in accordance with Paragraph 7 hereof,
Electropure will execute and deliver, concurrent with the execution of
this Agreement, the Warrant Agreement attached hereto and made a part
hereof as Exhibit "C". Such Warrant Agreement represents the right of the
Bank to purchaseOne Hundred Thousand (100,000) Shares of the Stock for the
price of One Dollar ($1.00) per share (the "Exercise Price") for five (5)
years, all as set forth in the Warrant Agreement attached hereto. The Bank
may exercise the Warrants at any time during such five (5) year period,
without restriction. The Warrants shall be subject to transfer
restrictions under the Act, as provided on the form of the Warrant
Agreement attached hereto. All Warrants discussed in this Agreement shall
mean Warrants containing the terms described in this paragraph.
8.2 The Bank agrees and understands that the registration conditions
imposed on the Shares under Paragraph 7.1(a) through (c) of this Agreement
shall also apply to the Common Stock underlying the Warrants issued
hereby.
9.0 TERMINATION OF LICENSE AGREEMENTS BETWEEN ELECTROPURE AND EDI
9.1 Electropure and EDI will deliver to the Bank, within 60 days of the
Effective Date hereof, an executed copy of an agreement, to be negotiated,
which will provide for the following:
(a) Termination of the 1992 license relationship between Electropure
and EDI, resulting in the conveyance of all assets licensed and leased
thereunder to Electropure; provided, however, that EDI shall not be
required to convey to Electropure any assets licensed and/or leased under
the 1992 agreements which assets have heretofore been disposed of, i.e.,
inventory, obsolete office equipment, furniture and fixtures. All capital
equipment and molds, as defined in the 1992 License Agreement, together
with all manufacturing equipment leased to EDI must, however, be included
in such conveyance.
(b) Such negotiated agreement shall in no event nor for any reason
permit any further or future conveyance of such assets by Electropure to
EDI. Further, such negotiated agreement shall not contain terms of any
substance or nature which would or could have a materially adverse affect
the rights of the Bank hereunder.
(c) Realignment of the current Board of Directors of Electropure.
10.0 WAIVER OF RIGHT TO APPEAL JUDGMENT AND GENERAL RELEASE
10.1 Electropure agrees irrevocably to waive its right to appeal any
portion of the judgment in the Superior Court Action or any right to
collaterally attack the validity or the enforceability of the
5
<PAGE> 6
judgment entered in the Superior Court Action. Electropure further agrees
to cause the other defendants described in Paragraph 3.2 above to
irrevocably waive their rights to appeal or collaterally attack any
portion of such judgment, to obtain a mutual release from each Defendant
in the form of Section 10.2 hereof, and to provide the Bank with written
documentation thereof within thirty (30) days of the Effective Date.
10.2 The Bank, on one hand, of its own free will, knowingly and
voluntarily releases and forever discharges EDI, Electropure, each of the
defendants in the Superior Court Action and their predecessors,
successors, assigns, heirs, executors, administrators, shareholders,
officers, directors and agents, attorneys, subsidiaries, insurance
carriers, and divisions and affiliated corporations (jointly referred to
as "Electropure Released Parties"), and EDI and Electropure, on the other
hand, of each of their own free will, knowingly and voluntarily releases
and forever discharges the Bank and its predecessors, successors, assigns,
shareholders, officers, directors, agents, attorneys, subsidiaries,
insurance carriers, and divisions and affiliated corporations (jointly
referred to as "Bank Released Parties") of and from any and all actions or
causes of action, suits, claims, charges, complaints, contracts (whether
oral or written, express or implied from any source), and promises,
whatsoever, in law or equity, which may now have or hereafter can, shall,
or may have against the Electropure Released Parties on one hand, and the
Bank Released Parties on the other hand, including all unknown,
undisclosed and unanticipated losses, wrongs, injuries, debts, claims, or
damages for, upon, or by reasons of any matter, cause or thing whatsoever
including, but not limited to, any and all matters arising out of any
charge, claim or action of any kind, nature and character whatsoever,
known or unknown, which it, he or she may now have, has ever had, or may
in the future have against the Electropure Released Parties, on one hand,
and the Bank Released Parties, on the other hand, which is based in whole
or in part on the Superior Court Action on any matter, agreement or issue
related to or subject to the dispute involving the Superior Court Action.
10.3 It is understood and agreed that this is a full and general release
covering all unknown, undisclosed and unanticipated losses, wrongs,
injuries, debts, claims or damages to the Superior Court Action and the
subject matter thereof which may have arisen, or may arise from any act or
omission prior to the date of execution of this release of an act or
omission as THEREFORE, EACH OF BANK, EDI AND ELECTROPURE HEREBY WAIVES ANY
AND ALL RIGHTS OR BENEFITS WHICH IT MAY NOW HAVE, OR IN THE FUTURE MAY
HAVE, UNDER THE TERMS OF SECTION 1542 OF THE CALIFORNIA CIVIL CODE, WHICH
PROVIDES AS FOLLOWS:
A general release does not extend to claims which the creditor
does not know or suspect to exist in [his, her or its] favor
at the time of executing the release, which if known [by him,
her or it] must have materially affected [his, her or its]
settlement with the debtor.
10.4 The Bank, EDI and Electropure each represent and warrant that they
have consulted with counsel as to the effect of the general release and
have not sold or transferred the claims which are the subject matter of
the general release.
6
<PAGE> 7
11.0 REMEDIES FOR FAILURE TO PERFORM
11.1 In light of the relationship between the Bank and the Defendants and
between Electropure and EDI, and their prior interactions, Electropure and
EDI acknowledge that a material portion of the consideration for this
Agreement received by the Bank is their promise to perform the terms of
this Agreement to the letter. Any failure by Electropure or EDI to perform
any term of this Agreement as expressly agreed to herein shall constitute
a material breach of the entire Agreement, and shall entitle the Bank to
invoke and rely upon any of the provisions or remedies set forth below.
The parties further acknowledge that time is of the essence in this
Agreement.
11.2 In addition to any rights the Bank may have under any paragraph
contained herein, in the event of any Uncured Default by Electropure or
EDI, the Bank shall have the right to revoke this Agreement.
11.3 If the Bank revokes this Agreement under paragraph 11.2 above, it
shall provide all parties to this Agreement with a written Notice of
Revocation. After revocation of this Agreement, the Bank shall be entitled
to enforce the judgment in the Superior Court Action for the entire amount
of that judgment, plus interest at an annual rate of 9.75% from the date
of the judgment in the Superior Court Action, less any cash payments
already received by the Bank under this Agreement.
11.4 Upon revocation of this Agreement, the Bank shall, at its sole option
and discretion, either return all Stock and Warrants transferred to it by
Electropure under this Agreement, or shall keep such Stock and Warrants.
If the Bank elects to keep the Stock and Warrants upon revocation of this
Agreement, Electropure shall be entitled to receive credit for the Common
Stock against the amount of the judgment in the Superior Court Action
equal to the Fair Market Value of the Stock transferred to the Bank.
Credit for the Warrants shall be determined by subtracting the Exercise
Price of the Warrants from the Fair Market Value of the Common Stock on
the date of revocation, but in no event shall the value of the Warrants be
less than zero.
11.5 If any party to this Agreement brings an action to enforce his or its
rights under this Agreement, the substantially prevailing party shall be
entitled to recover his or its expenses and costs, including court costs
and reasonable attorneys' fees, if any, incurred in connection with such
suit.
12.0 INVESTMENT
By acceptance of the Shares in consideration for the representations and
warranties of Electropure and EDI herein contained, the Bank agrees that
the Shares are acquired for the purpose of investment and not with a
present view to the sale or distribution thereof and that, with respect to
the Shares, the Bank agrees to execute the Stock Representation Agreement
attached hereto and made a part hereof as Exhibit "D".
13. RIGHT OF FIRST REFUSAL
If the Bank proposes to engage in a bona fide Sale, directly or
indirectly, to an unaffiliated, bona fide third party, any of the Shares,
then prior to taking any such action, the Bank shall deliver to
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<PAGE> 8
Electropure a statement in writing (the "Statement") setting forth (i) the
date of the Statement (the "Statement Date"); (ii) the manner in which the
Sale is proposed to occur; and (iii) the consideration for the proposed
Sale (the "Offer"). Electropure shall thereupon have the irrevocable and
exclusive option, but not the obligation (the "Option"), to purchase all
of the Shares subject to the Option upon the same terms and conditions set
forth in the Statement. The Option shall be exercised by Electropure by
giving notice (the "Option Notice") to the Bank, within 15 days following
the date of the Statement, that the Company elects to exercise the Option.
Upon exercise of the Option, the Bank shall have the obligation to
consummate the Sale or and subject to the terms and conditions set forth
in the Statement. Failure by Electropure to give an Option Notice within
fifteen (15) days following the date of the Statement shall be deemed an
election by it not to exercise the Option and the Bank shall be entitled
to sell the Shares for ninety (90) days thereafter at a price not less
than that set forth in the Statement. A Sale shall mean any sale of the
Shares.
14.0 MODIFICATION MUST BE IN WRITING
The parties agree that if they make any modifications in this Agreement,
or modify the rights of any party under this Agreement, that such
modification will be made in writing, signed by all affected parties. No
modification to this Agreement or to any parties' rights under this
Agreement will be effective unless it is made in writing as provided
herein.
15.0 SOLE AGREEMENT
Except for the Satisfaction of Judgment which the Bank will provide to
Electropure pursuant to this Agreement after Electropure and EDI have
completely performed their obligations under this Agreement, this
Agreement, and the Exhibits hereto, represents the sole and entire
Agreement between the parties and supersedes all prior agreements,
negotiations and discussions between the parties to this Agreement, and
their respective counsel with respect to the subject matters covered by
this Agreement.
16.0 CONSTRUCTION OF THIS AGREEMENT AND VENUE
The language of this Agreement shall not be construed for or against any
particular party. The headings used in this Agreement are for reference
only, and shall not affect the construction of this Agreement.
Jurisdiction for any lawsuit under this Agreement shall be exclusively in
federal court in Puerto Rico.
17.0 NONADMISSION OF LIABILITY
Nothing in this Agreement, or the fact that any party has entered into
this Agreement, or performed any term of this Agreement, shall constitute,
or be construed as an admission of any liability whatsoever by any party
to any other party hereto.
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<PAGE> 9
18.0 NOTICES
All notices of default, demands to cure default, at least ten (10) days
advance notice of any intent to file a lawsuit, and notices of revocation
called for under this Agreement shall be made in writing. Where possible,
they shall be transmitted via facsimile to all other parties to this
Agreement, and their counsel, at the addresses, telephone numbers, and
facsimile numbers listed below. After being transmitted via facsimile, all
notices shall be sent, using overnight delivery service or mail, to all
parties listed below.
All other notices called for in this Agreement shall be sent to all
parties at the names and addresses set forth below, via certified or
first-class mail.
THE BANK: Economic Development Bank for Puerto Rico
Attn: Mr. Javier Mercado
Director of Venture Capital
268 Munoz Rivera Avenue, 7th Floor
Hato Rey, PR 00918
Telephone: (787) 766-4300
Facsimile: (787) 767-7925
Counsel designated to receive notices on behalf of the Bank:
Jaime Santos, Esq.
Pietrantoni Mendez & Alvarez
209 Munoz Rivera Avenue
Hato Rey, PR 00918
Telephone: (787) 274-1212
Facsimile: (787) 274-1470
ELECTROPURE: Electropure, Inc.
ATTN: Catherine Patterson
Chief Financial Officer
23251 Vista Grande, Suite A
Laguna Hills, CA 92653
Telephone: (714) 770-9187
Facsimile: (714) 770-9209
EDI: EDI Components
ATTN: Floyd Panning, President
23251 Vista Grande, Suite A
Laguna Hills, CA 92653
Telephone: (714) 770-9347
Facsimile: (714) 770-9209
Counsel designated to receive notices on behalf of Electropure and EDI:
Ronald P. Givner, Esq.
Jeffer, Mangels, Butler & Marmaro
2121 Avenue of the Stars., 10th Floor
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Los Angeles, CA 90067
Telephone: (310) 203-8080
Facsimile: (310) 203-0567
19.0 AUTHORIZATION; NO CONFLICT
The execution and delivery of this Settlement Agreement and the
performance by Electropure and/or EDI of their respective obligations
under this Agreement are within the corporate powers of Electropure and
EDI, have been authorized by all necessary corporate action, have received
all necessary governmental approval (if any shall be required) and do not
and will not contravene or conflict with any provision of the law or of
the charter or by-laws of Electropure or EDI or of any agreement binding
upon either of them.
20.0 COUNTERPARTS.
This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original but all of which together shall constitute one
and the same instrument.
IN WITNESS WHEREOF, the parties to this Agreement have executed this Agreement
on the dates indicated below, effective as of the date indicated above in
paragraph 2.0.
BANK: ECONOMIC DEVELOPMENT BANK
FOR PUERTO RICO
By /s/ Javier Mercado
------------------------------------------
Title: Director, Venture Capital
--------------------------------------
Date: May 16, 1997
---------------------------------------
ELECTROPURE: ELECTROPURE, INC.
By /s/ Cahterine Patterson
------------------------------------------
Title: Chief Financial Officer
--------------------------------------
Date: May 16, 1997
---------------------------------------
EDI: EDI COMPONENTS
By /s/ Floyd Panning
------------------------------------------
Title: President
--------------------------------------
Date: May 16, 1997
---------------------------------------
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EXHIBIT "A"
TO
SETTLEMENT AGREEMENT
DESCRIPTION OF CAPITAL STOCK
CLASS A COMMON STOCK
Electropure, Inc. (the "Company") is authorized to issue up to 20,000,000 shares
of $0.01 par value Common Stock. In May, 1996, the Company's shareholders
approved a one-for-ten reverse stock split of its then currently outstanding
Class A and Class B Common Stock. Consequently, on July 25, 1996 the currently
outstanding 18,960,695 shares of Class A Common Stock were reconstituted and
converted into 1,896,070 shares of $0.01 par value Class A Common Stock. The
issued and outstanding shares of Class A Common Stock and the shares being
offered hereby and the shares issuable upon exercise of Warrants when exercised
and issued, will be validly issued, fully paid and nonassessable.
Holders of Class A Common Stock are entitled to one vote per share on all
matters to be voted upon by the shareholders and except as may otherwise be
required by law or as set forth under "Description of Capital Stock Class B
Common Stock," will vote with the holders of the Class B Common Stock and
Convertible Preferred Stock as one class. Under California law, separate class
voting is required for mergers or sales of substantially all the Company's
assets. If, prior to the election of directors, any shareholder has given notice
that he intends to cumulate his votes, then for the election of directors each
shareholder may cumulate votes for any nominee, if the nominee's name was placed
in nomination prior to the voting. In cumulative voting, each shareholder is
entitled in the election of directors to one vote for each voting share held by
him multiplied by the number of directors to be elected and may cast all such
votes for a single nominee for directors or may distribute them among any two or
more nominees as he sees fit.
The shares of Class A Common Stock have no preemptive, subscription, conversion
or redemption rights. Upon liquidation, dissolution or winding up of the
Company, the holders of Class A Common Stock are entitled to receive pro rata
the assets of the Company which are legally available for distribution to
shareholders, subject to the liquidation rights held by the Class B Common Stock
and the Convertible Preferred Stock, and the prior rights, if any, which may be
established in the future for Preferred Stock, if any. See "Description of
Capital Stock - Preferred Stock". Holders of Class A Common Stock are entitled
to dividends when, as and if declared by the Board of Directors out of funds
legally available therefor along with the holders of the Class B Common Stock,
subject to any prior rights when may be granted in the future to holders of
Preferred Stock.
As of the fiscal year ended October 31, 1996, 2,224,766 shares and 83,983 shares
of the Company's Class A and Class B Common Stock were outstanding,
respectively.
CLASS B COMMON STOCK
Pursuant to the July 25, 1996 one-for-ten reverse stock split, 839,825
authorized and outstanding shares of Class B Common Stock (all of which are
issued and owned by Harry M. O'Hare, Sr.) were
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<PAGE> 12
reconstituted and converted into 83,983 authorized and outstanding shares of
$0.01 par value Class B Common Stock. The Class B Common Stock, the Common Stock
and the Convertible Preferred Stock vote as a single class on all matters except
as required by law and except if a reverse stock split or stock split is
effected on the Common Stock and a similar verse stock split or stock split is
not effected on the Class B Common Stock or if a stock dividend in Class B
Common Stock is not declared equal to a stock dividend declared on the Common
Stock. In the latter situations, a separate class vote of the Class B Common
Stock is required.
Each share of Class B Common Stock carries eight votes per share and is entitled
to non-stock dividends and liquidation payments equal to 80% of those paid on
the Common Stock. The Class B Common Stock may not be transferred or assigned by
the owner thereof. If a transfer is made of a share of Class B Common Stock in
contravention of such restrictions, such share will automatically be converted
into a share of Common Stock. Class B Common Stock will automatically convert,
on a share-for-share basis, into shares of Common Stock upon the death of Harry
M. O'Hare, Sr.
CONVERTIBLE PREFERRED STOCK
The Company is authorized to issue 2,600,000 shares of Convertible Preferred
Stock, $0.01 par value. In March, 1987, an aggregate of 2,492,152(6) shares of
Convertible Preferred Stock had been issued pro rata to all of the shareholders
of the then currently outstanding Common Stock and Class B Common Stock. On July
28, 1988, the balance of 107,848(7) Convertible Preferred Shares were issued to
Harry M. O'Hare, Sr. as a bonus. Each share of Convertible Preferred Stock has
one vote per share and except as otherwise may be required by law or set forth
in "Description of Capital Stock - Class B Common Stock," will vote as a class
on all matters with the Common Stock. The Convertible Preferred Stock is not
entitled to receive any dividends, and in the event of liquidation, dissolution
or winding up of the Company, each share is entitled to share ratably in all
assets available for distribution at the rate equal to one share of Common Stock
up to a maximum of $0.01 per share. The shares of Convertible Preferred Stock
have no preemptive rights or other rights to subscribe for additional securities
and there are no redemption or sinking fund provisions with respect to such
shares.
Each share of Convertible Preferred Stock was to have been convertible into one
share of Common Stock upon the first to occur of any of the following:
The daily market price per share of the Company's Common Stock
equaled or exceeded $5.00, $6.50 or $8.00 per share for 30
consecutive trading days during the fiscal years ending October 31,
1988, 1989 and 1990, respectively, or
- ------------
(6) Of the 2,492,152 shares of Convertible Preferred Stock issued in March,
1987, Harry M. O'Hare received 1,049,780 shares, all of which were subject to
the same transfer conditions imposed by the California Corporation Commission.
In February, 1989, pursuant to a divorce settlement, Mr. O'Hare waived his
rights to 118,151 of such shares in favor of Sandra K. O'Hare (now deceased).
(7) Such shares were not subject to transfer restrictions and on February 6,
1989 were transferred to five individuals in various amounts (including 81,149
shares transferred to Sandra K. O'Hare as part of the above divorce settlement).
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The net earnings per share for the Common Stock of the Company
equaled or exceeded $0.41, $0.85 or $1.36 per share for the fiscal
years ending October 31, 1988, 1989 and 1990, respectively.
The Company did not achieve the after-tax earnings and/or market prices and as
of January 31, 1991, the Convertible Preferred Stock became redeemable by the
Company for $0.01 per share as soon as the Company has the funds legally
available to do so.
The Convertible Preferred Stock is not assignable or transferable (except upon
death or upon approval of a majority of the members of the Board of Directors
not holding shares of Convertible Preferred Stock).
PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of Preferred Stock, $1.00
par value, none of which are currently outstanding. The terms of the Preferred
Stock, or any series thereof, may be determined from time to time by the Board
of Directors. Such shares may be convertible into Common Stock and may have rank
superior to the Common Stock in the payment of dividends, liquidation rights,
voting and other rights, preferences and privileges. Future shares of Preferred
Stock may be issued by the Company without submitting a proposal regarding the
issuance of such shares to a vote of holders of Common Stock. The Company in the
future could issue Preferred Stock in a situation designed to discourage a
tender offer. The Company has no present plans to issue any shares of Preferred
Stock.
WARRANTS
CLASS A AND CLASS B WARRANTS. On June 25, 1987, pursuant to the Company's
initial public offering of Common Stock, the Company authorized the issuance of
Redeemable Class A Warrants to purchase an aggregate of 3,375,000 shares of
Common Stock and 3,375,000 Class B Warrants at $3.25 per share. The Class B
Warrants were exercisable at $5.00 per share. The June 24, 1992 expiration date
of such Class A and Class B Warrants was extended by the Company to June 24,
1994 at which time they expired.
OTHER WARRANTS AND STOCK OPTIONS. On various dates through July 25, 1996,
the Company's Board of Directors has granted other options and warrants to
purchase Common Stock at prices ranging from $0.05 to $1.63 per share. As a
result of the one-for-ten reverse stock split, 3,681,353 currently outstanding
warrants and options were reconstituted and converted on July 25, 1996 into
368,135 of such warrants and options to purchase Common Stock at prices ranging
from $0.50 to $16.30 per share.
In February, 1996, the Company issued 300,000 warrants to purchase common stock
at $2.25 per share as partial consideration for a $500,000 loan to the Company's
licensee. Such warrants were not affected by the above-described reverse stock
split.
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EXHIBIT "B"
TO
SETTLEMENT AGREEMENT
8% ONE-YEAR CONVERTIBLE TERM NOTE
$12,000.00 May 23, 1997
ELECTROPURE, INC., a California corporation ("ELECTROPURE") and EDI
COMPONENTS, a California corporation ("EDI") (hereinafter collectively referred
to as the "Company"), for the value received, jointly and severally hereby
unconditionally and absolutely promise to pay to the order of THE ECONOMIC
DEVELOPMENT BANK FOR PUERTO RICO, or holder (collectively, the "HOLDER"), upon
presentation and surrender of this Note at their office at 23251 Vista Grande,
Suite A, Laguna Hills, California 92653, or such other place as the Company may,
from time to time, designate, the sum of ($12,000,00), in lawful money of the
United States, on May 23, 1998 or upon receipt by the Company of a minimum of
$300,000 in Equity Funding (as hereinafter defined), whichever shall first
occur, or if such day is not a regular business day, then on the next business
day thereafter (the "Maturity Date"). Accrued interest shall be paid in
accordance with the terms set forth in Section 2 hereof.
1. CONVERSION.
(a) The Holder of this Note shall have the right, at its option, at
any time the Fair Market Value of the Common Stock of Electropure shall equal or
exceed One Dollar ($1.00) and up until 5:00 P.M. Los Angeles time on the fifth
(5th) day immediately before the Maturity Date (except that, with respect to any
portion of this Note which shall be called for prepayment, such right shall as
to such portion terminate at 5:00 P.M. Los Angeles time on the fifth (5th) day
immediately prior to the Prepayment Date (as defined in Section 2 hereof)), to
convert all or any portion of this Note, including interest accrued thereon,
subject to the terms and provisions of this Section 1, into Electropure Class A
Common Stock (the "Conversion Shares") at and having a value equal to One Dollar
($1.00) per share (the "Conversion Price").
The Conversion Shares shall have the rights, preferences and privileges
set forth in Exhibit "A" to the Settlement Agreement under DESCRIPTION OF
CAPITAL STOCK - "Common Stock".
(b) As promptly as practicable after the surrender, as herein
provided, of this Note for conversion, Electropure shall deliver or cause to be
delivered, to or upon the written order of the Holder of this Note so
surrendered, certificates representing the number of full shares into which this
Note or any portion thereof may be converted in accordance with the provisions
of this Section 1, together with any check in payment for fractional shares.
Such conversion shall be deemed to have been made at the close of business on
the date that this Note shall have been received by the Company for conversion,
with a written Notice of Conversion duly executed, in satisfactory form for
conversion, so that the rights of the Holder of this Note as a Noteholder, to
the extent of that portion of the Note so converted, shall cease
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<PAGE> 15
at such time and, subject to the following provisions of this Section 1(b). If
this Note shall be converted in part only, Electropure, Inc. shall, upon
surrender of this Note for cancellation, execute and deliver a new Note
evidencing the rights of the Holder thereof with regard to that portion of the
Note not converted. The person or persons entitled to receive the Conversion
Shares of Class A Common Stock (the "Common Stock") upon conversion of this Note
shall be treated for all purposes as having become the record holder or holders
of such Shares of Common Stock at such time and such conversion shall be at the
Conversion Price in effect at such time; provided, however, that no such
surrender upon voluntary conversion on any date when the stock transfer books of
Electropure shall be closed shall be effective to constitute the person or
persons entitled to receive the Shares of Common Stock upon such conversion as
the record holder or holders of such Shares of Common Stock on such date, but
such surrender shall be effective to constitute the person or persons entitled
to receive such Shares of Common Stock as the record holder or holders thereof
for all purposes at the close of business on the next succeeding day on which
such stock transfer books are open; and such conversion shall be at the
Conversion Price in effect on the date that this Note shall have been
surrendered for conversion in satisfactory form for conversion, as if the stock
transfer books of Electropure had not be closed.
(c) No adjustment in respect of declared but unpaid cash dividends
on the Common Stock shall be made upon the conversion of this Note.
2. PAYMENTS AND PREPAYMENTS.
(a) All payment and prepayments of principal and interest shall be
made in immediately available funds to the Holder at its office at 268 Munoz
Rivera Avenue, 7th Floor, Hato Rey, Puerto Rico 00918.
(b) The unpaid principal amount of the Note from time to time
outstanding shall bear interest from the date of this Note at the rate of Eight
Percent (8%) per annum until paid. Accrued interest shall be payable on the
Maturity Date and shall be computed for the actual number of days elapsed on the
basis of a year consisting of 360 days.
(c) The Company may prepay at any time all or any part of this Note
by notifying the Holder in writing at least fifteen (15) days in advance of the
proposed date for prepayment (the "Prepayment Date"). The notice shall state:
(1) The Prepayment Date;
(2) that the portion of the Note to be repaid may be converted
at any time before 5:00 P.M. Los Angeles time on the fifth (5th) day immediately
prior to the Prepayment Date;
(3) that Holders who want to convert any portion of this Note
must satisfy the requirements in Section (1) hereof;
(4) the Note called for prepayment must be surrendered to the
Company to collect the amount being prepaid, and if less than the entire
principal amount is being repaid, to receive a new Note for the remaining
balance; and
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<PAGE> 16
(5) that interest on the portion of the Note called for
prepayment ceases to accrue on and after the Prepayment Date.
(d) Once notice of prepayment is mailed, the part of this Note
called for prepayment, unless converted, becomes due and payable on the
Prepayment Date. Upon surrender to the Company, such part of this Note shall be
paid at the Prepayment Date, plus accrued interest on the portion of the
principal being prepaid to the Prepayment Date.
(e) Upon surrender of this Note to be prepaid in part, the Company
shall issue to the Holder a new Note equal in principal amount to the nonprepaid
portion of this Note surrendered.
3. FAIR MARKET VALUE OF THE COMMON STOCK.
"Fair Market Value per share of Common Stock of Electropure, Inc."
shall be:
(a) The average of the following prices for the 20 consecutive
trading days before the Conversion Date:
(i) If the Common Stock is listed on a National Securities
Exchange or admitted to unlisted trading privileges on such exchange or
listed for trading on the NASDAQ system, the last reported sale price of
the Common Stock on such exchange or system on each such trading day or if
no such sale is made (or reported) on such day, the average closing bid
and asked prices for such day on such exchange or system; or
(ii) If the Common Stock is not so listed or admitted to
unlisted trading privileges, the current market value shall be the mean of
the last reported bid and asked prices reported by the Electronic Bulletin
Board or National Quotation Bureau, Inc. on each such trading day; or
(b) If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the Fair
Market Value of the Common Stock shall be an amount, not less than book
value thereof as at the end of the most recent fiscal year of Electropure
ending prior to a conversion, determined in such reasonable manner as may
be prescribed by mutual agreement of the parties or by an independent
appraiser mutually approved by the parties.
4. EQUITY FUNDING.
For purposes of this Note, the term "Equity Funding" shall mean any
monies received from the sale of the equity securities of Electropure and/or
EDI, or either of them. Equity Funding shall specifically exclude any revenues
from the sale of products or from licensing arrangements.
5. NOTICES TO NOTEHOLDER.
So long as this Note shall be outstanding, if Electropure (i) shall
pay any dividend or make any distribution upon the Common Stock or (ii) shall
offer to the holders of Common Stock for subscription or purchase by them any
share of any class or any other rights or (iii) shall effect a capital
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<PAGE> 17
reorganization, reclassification of capital stock, consolidation or merger with
or into another corporation, sale, lease or transfer of all or substantially all
of the property and assets of Electropure to another corporation, or voluntary
or involuntary dissolution, liquidation or winding up of Electropure, then in
any such case, Electropure shall cause to be mailed by certified mail to the
Holder, at least fifteen days prior to the date specified in (x) or (y) below,
as the case may be, a notice containing a brief description of the proposed
action and stating the date on which (x) a record is to be taken for the purpose
of such dividend, distribution or rights, or (y) such reclassification,
reorganization, consolidation, merger, conveyance, lease, dissolution,
liquidation or winding up is to take place and the date, if any is to be fixed,
as of which the holders of Common Stock or other securities shall receive cash
or other property deliverable upon such reclassification, reorganization,
consolidation, merger, conveyance, dissolution, liquidation or winding up.
6. RECLASSIFICATION, REORGANIZATION OR MERGER.
In case of any reclassification, capital reorganization or other
change of outstanding shares of Common Stock of Electropure, or in case of any
consolidation or merger of Electropure with or into another corporation(other
than a merger with a subsidiary or with EDI Components in which merger
Electropure is the continuing corporation and which does not result in any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the class issuable upon conversion of this Note) or in case
of any sale, lease or conveyance to another corporation of the property of
Electropure as an entirety, Electropure shall, as a condition precedent to such
transaction, cause effective provisions to be made so that the Holder shall have
the right thereafter by converting this Note at any time prior to the payment in
full of the Note, to acquire the kind and amount of shares of stock and other
securities and property receivable upon such reclassification, capital
reorganization and other change, consolidation, merger, sale or conveyance by a
holder of the number of shares of Common Stock which might have been acquired
upon conversion of this Note immediately prior to such reclassification, change,
consolidation, merger, sale or conveyance. Any such provisions shall include
provisions for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Note. The foregoing
provisions of this Section 6 shall similarly apply to successive
reclassifications, capital reorganizations and changes of shares of Common Stock
and to successive consolidations, mergers, sales or conveyances.
7. REGISTRATION UNDER THE SECURITIES ACT OF 1933.
(a) By acceptance of this Note, Holder agrees and understands that
neither Electropure nor EDI is under any obligation to register the Conversion
Shares on its behalf or to assist it in complying with any exemption from
registration.
(b) Electropure intends to file a registration statement within one
(1) year. If Electropure files a registration statement within five (5) years of
the date of this Agreement, Electropure shall provide the Bank with four weeks
notice of its intention to file such registration statement (the "Registration
Statement") pursuant to the Securities Act of 1933, as amended (the "Act"), to
the end that the Shares may be sold under the Act as promptly as practicable
thereafter and Electropure will use its best efforts to cause such registration
to become effective and continue to be effective (current) (including the taking
of such steps as are necessary to obtain the removal of any stop order) for a
period equal to the lesser of two (2) years or until the holder has advised
Electropure that all of the Shares have been sold; provided, that if at the time
of a proposed registration statement, the Shares can be sold under Rule 144 of
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<PAGE> 18
the Act without any restriction and the Company removes any legends restricting
transfers of the Shares, the Company does not have to include the Shares in any
registration statement; provided further, that the Bank shall furnish
Electropure with appropriate information (relating to the intentions of such
Holder) in connection therewith as Electropure shall reasonably request in
writing.
(c) The following provision of this Section 7 shall also be
applicable:
(i) Following the effective date of such registration
statement, Electropure shall upon the request of any owner of the Note and the
Shares forthwith supply such a number of prospectuses meeting the requirements
of the Act, as shall be requested by such owner to permit such holder to make a
public offering of all the Shares from time to time offered or sold to such
holder, provided that such holder shall from time to time furnish Electropure
with such appropriate information (relating to the intentions of such holder) in
connection therewith as Electropure shall request in writing.
(ii) Electropure shall bear the entire cost and expense of any
registration of securities under this Section 6 notwithstanding that other
shares may be included in any such registration. Any holder whose Shares are
included in any such registration statement pursuant to this Section 6 shall,
however, bear the fees of his own counsel and any registration fees, transfer
taxes or underwriting discounts or commissions applicable to the Shares sold by
it pursuant thereto; provided, however, if the Shares are sold through an
underwriter in a firm commitment offering along with Common Stock of the
Company, the Company shall pay the registration fees and the underwriting
discounts and commissions for the Conversion Shares.
(iii) Electropure shall indemnify and hold harmless the holder
and any underwriter who may purchase from or sell for any such holder any Shares
or from and against any and all losses, claims, damages and liabilities caused
by any untrue statement or alleged untrue statement of a material fact contained
in the registration statement or any post-effective amendment thereto under the
Act or any prospectus included therein required to be filed or furnished by
reason of this Section 7 or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein no misleading, except insofar as such losses, claims, damages
or liabilities are caused by any such untrue statement or alleged untrue
statement or omission or alleged omission based upon information furnished or
required to be furnished in writing to Electropure by such holder or underwriter
expressly for use therein.
(iv) If in such registration statement, the Company proposes
to sell its Stock through an underwriter on a firm commitment basis, it shall
use its best efforts to have the underwriter underwrite the Shares.
The agreements of Electropure with respect to the Shares in this
Section 7 shall continue in effect regardless of the conversion or payment of
this Note.
8. INVESTMENT.
(a) By acceptance of this Note, the Holder agrees that this Note and
the Conversion Shares (collectively, the "Securities") are acquired for the
purpose of investment and not with a present
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<PAGE> 19
view to the sale or distribution thereof and that, with respect to the
Securities the Holder agrees to the following representations and covenants:
(1) The Securities are being acquired for the purpose of
investment and not with a present view to the sale or distribution thereof.
(2) The recipient is familiar with the affairs and financial
condition of the Company and is financially capable of holding this Note for
investment.
(3) No sale, transfer, assignment, hypothecation or other
disposition of the Securities will be made except (i) in a transaction in
compliance with the registration requirements of the Act, or (ii) in a
transaction pursuant to an exemption from the registration requirements of the
Act, or (iii) in a transaction or under circumstances to which the registration
requirements of the Act are not applicable.
(b) The Securities and all agreements or certificates with respect
to any Securities shall be subject to the following legend:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 ("ACT"). THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO
THE SECURITIES UNDER THE ACT OR AN OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED."
9. RIGHT OF FIRST REFUSAL.
If the Bank proposes to engage in a bona fide Sale, directly or
indirectly, to an unaffiliated, bona fide third party, any of the Shares, then
prior to taking any such action, the Bank shall deliver to Electropure a
statement in writing (the "Statement") setting forth (i) the date of the
Statement (the "Statement Date"); (ii) the manner in which the Sale is proposed
to occur; and (iii) the consideration for the proposed Sale (the "Offer").
Electropure shall thereupon have the irrevocable and exclusive option, but not
the obligation (the "Option"), to purchase all of the Shares subject to the
Option upon the same terms and conditions set forth in the Statement. The Option
shall be exercised by Electropure by giving notice (the "Option Notice") to the
Bank, within 15 days following the date of the Statement, that the Company
elects to exercise the Option. Upon exercise of the Option, the Bank shall have
the obligation to consummate the Sale or and subject to the terms and conditions
set forth in the Statement. Failure by Electropure to give an Option Notice
within fifteen (15) days following the date of the Statement shall be deemed an
election by it not to exercise the Option and the Bank shall be entitled to sell
the Shares for 90 days thereafter at a price not less than that set forth in the
Statement. A Sale shall mean any sale of the Shares.
10. EVENTS OF DEFAULT. If one or more of the following described events
shall occur (each an "Event of Default"):
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(a) The Company shall fail to pay the principal of, or interest on,
this Note within five (5) days of its due date; or
(b) The Company shall fail to perform or observe any of the
provisions contained in any Section of this Note and such failure shall continue
for more than thirty (30) days after the Holder has given written notice to the
Company; or
(c) Any material representation or warranty made in writing by or on
behalf of the Company in this Note shall prove to have been false or incorrect
in any material respect, or omits to state a material fact required to be stated
therein in order to make the statements contained therein, in the light of the
circumstances under which made, not misleading, on the date as of which made,
and the Company shall have failed to cure such false or incorrect statement
within thirty (30) days after the Holder has given written notice to the
Company; or
(d) The Company shall be adjudicated a bankrupt or insolvent, or
admit in writing its inability to pay its debts as they mature, or make an
assignment for the benefit of creditors; or the Company shall apply for or
consent to the appointment of a receiver, trustee, or similar officer for it or
for all or any substantial part of its property; or such receiver, trustee or
similar officer shall be appointed without the application or consent of the
Company and such appointment shall continue undischarged for a period of thirty
(30) days; or the Company shall institute (by petition, application, answer,
consent or otherwise) any bankruptcy, insolvency, reorganization, arrangement,
readjustment of debt, dissolution, liquidation or similar proceeding relating to
it under the laws of any jurisdiction; or any such proceeding shall be
instituted (by petition, application or otherwise) against the Company and shall
remain undismissed for a period of ninety (90) days; or any judgment, writ,
warrant of attachment or execution or similar process shall be issued or levied
against a substantial part of the property of the Company and such judgment,
writ, or similar process shall not be released, vacated or fully bonded within
ninety (90) days after its issue or levy; or
(e) The Company shall be enjoined, restrained or in any way
prevented by a court order from continuing to conduct all or any material part
of its business affairs;
(f) Any suit, action or other proceeding (judicial or
administrative) commenced against the Company, or with respect to any assets of
the Company, shall threaten to have a material adverse effect on their future
operations, including, without limitation a final judgment or settlement in
excess of $25,000 in excess of insurance shall be entered in, or agreed to in
respect of any such suit, action or proceeding.
THEN, or at any time thereafter, and in each and every case:
(1) Where the Company is in default under the provisions of
Section 10(d) hereof, the entire unpaid principal amount of the Note, all
interest accrued and unpaid thereon, and all other amounts payable to the Holder
hereunder shall automatically become and be forthwith due and payable without
offset or counterclaim of any kind and without presentment, demand, protest or
notice of any kind, and without regard to the running of the statute of
limitations, all of which are hereby expressly waived by the Company; and
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(2) In any other case referred to in this Section 10, the
Holder may, by written notice to the Company, as the case may be, declare the
entire unpaid principal amount of this Note, all interest accrued and unpaid
hereon, and all other amounts payable hereunder to be forthwith due and payable,
whereupon the same shall become immediately due and payable, without offset or
counterclaim of any kind and without presentment, demand, or protest, and
without regard to the running of any statutes of limitation, all of which are
hereby expressly waived by the Company.
Any declaration made pursuant to Section 10(2) hereof is subject to
the condition that, if at any time after the principal of this Note shall have
become due and payable, and before any judgment or decree for the payment of the
moneys so due, or any thereof, shall have been entered, all arrears of interest
upon this Note (except that principal of this Note which by such declaration
shall have become payable) shall have been duly paid, and every Event of Default
shall have been made good, waived or cured, then and in every such case the
Holder shall be deemed to have rescinded and annulled such declaration and its
consequences; but no such rescission or annulment shall extend to or affect any
subsequent Event of Default or impair any right consequent thereon.
11. CORPORATE OBLIGATION. It is expressly understood that this Note is
solely a corporate obligation of the Company (Electropure and EDI), as the case
may be, and that any and all personal liability, either at common law or in
equity, or by constitution or statute, of, and any and all rights and claims
against, every stockholder, officer, or director, as such, past, present or
future, are expressly waived and released by the Holder as a part of the
consideration for the issuance hereof.
12. AUTHORIZATION; NO CONFLICT. The borrowings hereunder, the execution
and delivery of the Note and the performance by the Company of their respective
obligations under this Agreement and the Note are within the corporate powers of
the Company, have been authorized by all necessary corporate action, have
received all necessary governmental approval (if any shall be required) and do
not and will not contravene or conflict with any provision of law or of the
charter or by-laws of the Company or of any agreement binding upon the Company.
13. TRANSFER. Subject to the appropriate provisions of the Act and of
Section 9 hereof, this Note or any portion of the principal amount hereof (or
any remaining balance if any pre-payments have occurred pursuant to Section 2
hereof) is transferable on the records of the Company upon presentation of this
Note, properly endorsed, at its principal office; upon such presentation and
transfer a new Note or Notes will be issued. For the purposes of payment and all
other purposes, the Company shall deem and treat the person in whose name this
Note is registered as the absolute owner hereof and the Company shall not be
affected by any notice to the contrary.
14. MISCELLANEOUS.
Notwithstanding the foregoing, the Company promises to pay interest
after maturity (whether by acceleration or otherwise, and before as well as
after judgment) at 11% per annum on balances, if any, then outstanding.
15. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
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IN WITNESS WHEREOF, Electropure and EDI have caused this Note to be
executed in Laguna Hills, California as of the day and year first above written.
COMPANY: ELECTROPURE, INC.
By__________________________________________
Catherine Patterson
Chief Financial Officer
EDI COMPONENTS
By__________________________________________
Floyd Panning
President
HOLDER: ECONOMIC DEVELOPMENT BANK
FOR PUERTO RICO
By__________________________________________
Title:______________________________________
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EXHIBIT 10.51
EXHIBIT "C"
TO
SETTLEMENT AGREEMENT
WARRANT AGREEMENT
This is to certify that, for value received, THE ECONOMIC DEVELOPMENT BANK FOR
PUERTO RICO, or assigns, ("Holder"), is entitled to purchase, subject to the
provisions of this Warrant, from ELECTROPURE, INC. (formerly HOH Water
Technology Corporation), a California corporation ("Company"), One Hundred
Thousand (100,000) fully paid, validly issued and nonassessable shares of
Common Stock, $0.01 par value, of the Company ("Common Stock") at any time or
from time to time during the period from the date hereof until the 5:00 P.M. Los
Angeles City Time on June 13, 2002 (the "Exercise Period") at an initial
exercise price equal to One Dollar ($1.00) per share. The number of shares of
Common Stock to be received upon the exercise of this Warrant and the price to
be paid for each share of Common Stock may be adjusted from time to time as
hereinafter set forth. The shares of Common Stock deliverable upon such
exercise, and as adjusted from time to time are hereinafter sometimes referred
to as "Warrant Shares" and the exercise price of a share of Common Stock in
effect at any time and as adjusted from time to time is hereinafter sometimes
referred to as the "Exercise Price."
A. EXERCISE OF WARRANT. This Warrant may be exercised in whole or in part at any
time during the Exercise Period, and during the Exercise Period the Holder shall
have the right to exercise this Warrant into the kind and amount of shares of
stock and other securities and property (including cash) receivable by a holder
of the number of shares of Common Stock into which this Warrant might have been
exercisable immediately prior thereto. This Warrant may be exercised by
presentation and surrender hereof to the Company at its principal office, or at
the office of its stock transfer agent, if any, with the Purchase Form annexed
hereto duly executed and accompanied by payment of the Exercise Price for the
number of Warrant Shares specified in such form. As soon as practicable after
each such exercise of the Warrants, but not later than fourteen (14) days from
the date of such exercise, the Company shall issue and deliver to the Holder a
certificate or certificates for the Warrant Shares issuable upon such exercise,
registered in the name of the Holder or its designee. If this Warrant should be
exercised in part only, the Company shall, upon surrender of this Warrant for
cancellation, execute and deliver a new Warrant evidencing the rights of the
Holder thereof to purchase the balance of the Warrant Shares purchasable
thereunder. Upon receipt by the Company of this Warrant at its office, or by the
stock transfer agent of the Company at its office, in proper form for exercise,
the Holder shall be deemed to be the holder of record of the shares of Common
Stock issuable upon such exercise, notwithstanding that the stock transfer books
of the Company shall then be closed or that certificates representing such
shares of Common Stock shall not then be physically delivered to the Holder.
B. RESERVATION OF SHARES. The Company shall at all times reserve for issuance
and/or delivery upon exercise of this Warrant such number of shares of its
Common Stock as shall be required for issuance and delivery upon exercise of the
Warrants.
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C. FRACTIONAL SHARES. No fractional shares or script representing fractional
shares shall be issued upon the exercise of this Warrant. With respect to any
fraction of a share called for upon any exercise hereof, the Company shall pay
to the Holder an amount in cash equal to such fraction multiplied by the current
market value of a share, determined as follows:
(1) If the Common Stock is listed on a National Securities Exchange or
admitted to unlisted trading privileges on such exchange or listed for trading
on the NASDAQ system, the current market value shall be the last reported sale
price of the Common Stock on such exchange or system on the last business day
prior to the date of exercise of this Warrant or if no such sale is made on such
day, the average closing bid and asked prices for such day on such exchange or
system; or
(2) If the Common Stock is not so listed or admitted to unlisted trading
privileges, the current market value shall be the mean of the last reported bid
and asked prices reported by the National Quotation Bureau, Inc. on the last
business day prior to the date of the exercise of this Warrant; or
(3) If the Common Stock is not so listed or admitted to unlisted trading
privileges and bid and asked prices are not so reported, the Fair Market Value
of the Common Stock shall be an amount, not less than book value thereof as at
the end of the most recent fiscal year of Electropure ending prior to an
exercise pursuant to Paragraph 11, determined in such reasonable manner as may
be prescribed by mutual agreement of the parties or by an independent appraiser
mutually approved by the parties.
D. EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This Warrant is
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company or at the office of its stock transfer
agent, if any, for other warrants of different denominations entitling the
holder thereof to purchase in the aggregate the same number of shares of Common
Stock purchasable hereunder. Upon surrender of this Warrant to the Company at
its principal office or at the office of its stock transfer agent, if any, with
an assignment duly executed and funds sufficient to pay any transfer tax, the
Company shall, without charge, execute and deliver a new Warrant in the name of
the assignee named in such instrument of assignment and this Warrant shall
promptly be canceled. This Warrant may be divided or combined with other
warrants which carry the same rights upon presentation hereof at the principal
office of the Company or at the office of its stock transfer agent, if any,
together with a written notice specifying the names and denominations in which
new Warrants are to be issued and signed by the Holder hereof. The term
"Warrant" as used herein includes any Warrants into which this Warrant may be
divided or exchanged. Upon receipt of the Company of evidence satisfactory to it
of the loss, theft, destruction or mutilation of this Warrant, and (in the case
of loss, theft or destruction) of reasonably satisfactory indemnification, and
upon surrender and cancellation of this Warrant, if mutilated, the Company will
execute and deliver a new Warrant of like tenor and date. Any such new Warrant
executed and delivered shall constitute an additional contractual obligation on
the part of the Company, whether or not this Warrant so lost, stolen, destroyed,
or mutilated shall be at any time enforceable by anyone.
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E. RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be entitled to
any rights of a shareholder in the Company, either at law or equity, and the
rights of the Holder are limited to those expressed in the Warrant and are not
enforceable against the Company except to the extent set forth herein.
F. ANTI-DILUTION PROVISIONS. The Exercise Price in effect at any time and the
number and kind of securities purchasable upon the exercise of the Warrants
shall be subject to adjustment from time to time upon the happening of certain
events as follows:
(1) In case the Company shall (i) declare a dividend or make a
contribution on its outstanding shares of Common Stock in shares of Common
Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into
a greater number of shares, or (iii) combine or reclassify its outstanding
shares of Common Stock into a smaller number of shares, the Exercise Price in
effect at the time of the record date for such dividend or distribution or of
the effective date of such subdivisions, combination or reclassification shall
be adjusted so that it shall equal the price determined by multiplying the
Exercise Price by a fraction, the denominator of which shall be the number of
shares of Common Stock outstanding after giving effect to such action, and the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such action. Such adjustment shall be made successively
whenever any event listed above shall occur.
(2) Whenever the Exercise Price payable upon exercise of each Warrant is
adjusted pursuant to Subsection (1) above, the number of shares purchasable upon
exercise of this Warrant shall simultaneously be adjusted by multiplying the
number of shares initially issuable upon exercise of this Warrant by the
Exercise Price in effect on the date hereof and dividing the product so obtained
by the Exercise Price, as adjusted.
(3) Whenever the Exercise Price is adjusted, as herein provided, the
Company shall promptly cause a notice setting forth the adjusted Exercise Price
and adjusted number of shares issuable upon exercise of each Warrant to be
mailed to the Holders, at their last addresses appearing in the Warrant
Register, and shall cause a certified copy thereof to be mailed to its transfer
agent, if any. The Company may retain a firm of independent certificate public
accountants selected by the Board of Directors (who may be the regular
accountants employed by the Company) to make any computation required by this
Section F and a certificate signed by such firms shall be conclusive evidence of
the correctness of such adjustment.
(4) In the event that at any time, as a result of an adjustment made
pursuant to Subsection (1) above, the Holder of this Warrant thereafter shall
become entitled to receive any shares of the Company, other than Common Stock,
thereafter the number of such other shares so receivable upon exercise of this
Warrant shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Common Stock contained in Subsection (1) above.
(5) Irrespective of any adjustments in the Exercise Price or the number or
kind of shares purchasable upon exercise of this Warrant, Warrants theretofore
or thereafter issued may continue to
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express the same price and number and kind of shares as are stated in the
similar Warrants initially issuable pursuant to this Agreement.
G. OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be adjusted as
required by the provisions of the foregoing Section, the Company shall forthwith
file in the custody of its Secretary or an Assistant Secretary at its principal
office and with its stock transfer agent, if any, an officer's certificate
showing the adjusted Exercise Price determined as herein provided, setting forth
in reasonable detail the facts requiring such adjustment, including a statement
of the number of additional shares of Common Stock, if any, and such other facts
as shall be necessary to show the reason for and the manner of computing such
adjustment. Each such officer's certificate shall be made available at all
reasonable times for inspection by the holder or any holder of a Warrant
executed and delivered pursuant to Section A and the Company shall, forthwith
after each such adjustment, mail a copy by certified mail of such certificate to
the Holder or any such holder.
H. RIGHT OF FIRST REFUSAL. If Holder proposes to engage in a bona fide Sale,
directly or indirectly, to an unaffiliated, bona fide third party, any of the
Shares, then prior to taking any such action, Holder shall deliver to
Electropure a statement in writing (the "Statement") setting forth (i) the date
of the Statement (the "Statement Date"); (ii) the manner in which the Sale is
proposed to occur; and (iii) the consideration for the proposed Sale (the
"Offer"). Electropure shall thereupon have the irrevocable and exclusive option,
but not the obligation (the "Option"), to purchase all of the Shares subject to
the Option upon the same terms and conditions set forth in the Statement. The
Option shall be exercised by Electropure by giving notice (the "Option Notice")
to Holder, within 15 days following the date of the Statement, that the Company
elects to exercise the Option. Upon exercise of the Option, Holder shall have
the obligation to consummate the Sale or and subject to the terms and conditions
set forth in the Statement. Failure by Electropure to give an Option Notice
within fifteen (15) days following the date of the Statement shall be deemed an
election by it not to exercise the Option and the Bank shall be entitled to sell
the Shares for 90 days thereafter at a price not less than that set forth in the
Statement. A Sale shall mean any sale of the Shares.
I. NOTICES TO WARRANT HOLDERS. So long as this Warrant shall be outstanding, (i)
if the Company shall pay any dividend or make any distribution upon the Common
Stock or (ii) if the Company shall offer to the holders of Common Stock for
subscription or purchase by them any share of any class or any other rights or
(iii) if the capital reorganization of the Company, reclassification of the
capital stock of the Company, consolidation or merger of the Company with or
into another corporation, sale, lease or transfer of all or substantially all of
the property and assets of the Company to another corporation, or voluntary or
involuntary dissolution, liquidation or winding up of the Company shall be
effected, then in any such case, the Company shall cause to be mailed by
certified mail to the Holder, at least fifteen days prior to the date specified
in (x) or (y) below, as the case may be, a notice containing a brief description
of the proposed action and stating the date on which (x) a record is to be taken
for the purpose of such dividend, distribution or rights, or (y) such
reclassification, reorganization, consolidation, merger, conveyance, lease,
dissolution, liquidation or winding up is to take place and the date, if any is
to be fixed, as of which the holders of Common Stock or other securities shall
receive cash or other property deliverable upon such reclassification,
reorganization, consolidation, merger, conveyance, dissolution, liquidation or
winding up.
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J. RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any reclassification,
capital reorganization or other change of outstanding shares of Common Stock of
the Company, or in case of any consolidation or merger of the Company with or
into another corporation (other than a merger with a subsidiary or with EDI
Components in which merger the Company is the continuing corporation and which
does not result in any reclassification, capital reorganization or other change
of outstanding shares of Common Stock of the class issuable upon exercise of
this Warrant) or in case of any sale, lease or conveyance to another corporation
of the property of the Company as an entirety, the Company shall, as a condition
precedent to such transaction, cause effective provisions to be made so that the
Holder shall have the right thereafter by exercising this Warrant at any time
prior to the expiration of the Warrant, to purchase the kind and amount of
shares of stock and other securities and property receivable upon such
reclassification, capital reorganization and other change, consolidation,
merger, sale or conveyance by a holder of the number of shares of Common Stock
which might have been purchased upon exercise of this Warrant immediately prior
to such reclassification, change, consolidation, merger, sale or conveyance. Any
such provision shall include provision for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Warrant. The foregoing provisions of this Section J shall similarly apply to
successive reclassifications, capital reorganizations and changes of shares of
Common Stock and to successive consolidations, mergers, sales or conveyances. In
the event that in connection with any such capital reorganization or
reclassification, consolidation, merger, sale or conveyance, additional shares
of Common Stock shall be issued in exchange, conversion, substitution or
payment, in whole or in part, for a security of the Company other than Common
Stock, any such issue shall be treated as an issue of Common Stock covered by
the provisions of Subsection (1) of Section F hereof.
IN WITNESS THEREOF, the Company has caused this Warrant to be signed and
attested by the Undersigned, being duly authorized, as of June 13, 1997.
ELECTROPURE, INC.
BY__________________________________________
CATHERINE PATTERSON
CORPORATE SECRETARY
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EXHIBIT "D"
TO
SETTLEMENT AGREEMENT
STOCK REPRESENTATION AGREEMENT
THIS STOCK REPRESENTATION AGREEMENT (the "Agreement") is made and entered
into as of June 13, 1997, by and between ELECTROPURE, INC. (formerly HOH WATER
TECHNOLOGY CORPORATION), a California corporation (the "Company") and the
ECONOMIC DEVELOPMENT BANK FOR PUERTO RICO (the "Bank").
1. ACQUISITION OF SHARES. The Company hereby issues to the Bank One Hundred
Thousand (100,000) shares of its $0.01 par value, Common Stock (the
"Shares") in partial consideration of the settlement of the lawsuit
brought by the Bank against the Company and certain current and former
officers and directors of the Company (Civil Number KAC93/0151 (902) in
the Free Associated State of Puerto Rico, First Instance Tribunal,
Superior Court Room, San Juan, Banco de Desarrollo Economico of Puerto
Rico v. HOH Water Technologies Corp., et al.).
2. REPRESENTATIONS AND WARRANTIES OF BANK. The Bank represents and warrants
to the Company.
2.1 The Shares are being acquired by the Bank for investment for an
indefinite period, for the Bank's own account, not as a nominee or agent,
and not with a view to the sale or distribution of any part thereof, and
the Bank has no present intention of distributing the same.
2.2 Except as set forth in the Settlement Agreement, the Bank does not
have any contract, undertaking, agreement or arrangement with any person
to sell, transfer, or grant participation to such person or to any third
person, with respect to the Shares.
2.3 The Bank understands that the Shares have not been registered under
the Securities Act of 1933, as amended (the "Act") in reliance upon the
exemptions from the registration provisions of the Act contained in
Section 4(2) thereof, and any continued reliance on such exemption is
predicated on the representations of the Bank set forth herein.
2.4. The Bank (i) has adequate means of providing for its current needs
and possible personal contingencies, (ii) has no need for liquidity in
this investment, (iii) is able to bear the substantial economic risks of
an investment in the Shares for an indefinite period, (iv) at the present
time, can afford a complete loss of such investment, and (v) does not have
an overall commitment to investments which are not readily marketable that
is disproportionate to the Bank's net worth, and the Bank's investment in
the Shares will not cause such overall commitment to become excessive.
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<PAGE> 29
2.5 The Bank is an "accredited investor" (as defined in Regulation D
promulgated under the Act).
2.6 The Bank recognizes that the Company has had no revenues, is in the
development/premarketing stage and that the Shares as an investment
involve significant risks.
2.7 The Bank understands that the Shares must be held indefinitely unless
the sale or other transfer thereof is subsequently registered under the
Act, as amended, or an exemption from such registration is available.
2.8 The Bank will not transfer the Shares without registering them under
applicable federal or state securities laws unless the transfer is exempt
from registration under such laws. The Bank understands that legends will
be placed on the certificates representing the Shares, with respect to the
above restrictions on resale or other disposition of the Shares and that
stop transfer instructions have or will be placed with respect to the
Shares so as to restrict the assignment, resale or other disposition
thereof. The legend shall be eliminated upon the satisfaction of the time
period set forth in Rule 144 of the Act.
2.9 The Company will direct its transfer agent to place such an order in
its books respecting the transfer of the Shares, and the certificate or
certificates representing the Shares will bear the following legend or a
legend substantially similar thereto:
"THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. THEY MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF:
(1) AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
THE ACT, OR (2) AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED."
2.10 The Bank understands that Rule 144, promulgated by the Securities and
Exchange Commission under the Act, may not be currently available for sale
of the Shares, and there is no assurance that it will be available at any
particular time in the future. If and when Rule 144 is available for sale
of the Common Stock underlying the Shares, such sales in reliance upon
Rule 144 may only be made (i) in limited quantities after the Shares have
been held for one year after being issued by the Company, or (ii) in
unlimited quantities by non-affiliates after the Shares have been held for
two years after being issued by the Company, in each case in accordance
with the conditions of the Rule, all of which must be met (including the
requirement, if applicable, that adequate information concerning the
Company is then available to the public). The Company has no obligation to
supply the information required for sales under Rule 144 and the Company
is not currently in compliance with the informational requirements of Rule
144.
2.11 The Bank has determined that the acquisition of the Shares is fair
and appropriate for the Bank based solely upon the Bank's independent
investigation and due diligence of the
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Company, and neither the Company nor any of its agents, including, without
limitation, any of their officers, directors, employees, accountants and
attorneys, has made any representations or warranties whatsoever in
connection with the issuance of the Shares by the Company to the Bank. The
Bank has had sufficient opportunity in connection with the sale of the
Shares to review the Company's business and affairs (including, without
limitation, the Company's financial statements and other information
included in the Company's filings with the Securities and Exchange
Commission). The Company has had answered to the Bank's satisfaction any
questions with respect to the Company's business and affairs. The Bank
further has had the opportunity to obtain independent financial, legal,
accounting, business, tax and other appropriate advice with respect to the
transactions contemplated by this Agreement, and is not relying upon the
Company or any of its agents in any manner in connection with same.
3. AMENDMENT. This Agreement may not be amended except by written document
executed by the parties.
4. SUBJECT HEADINGS. Subject headings are included for convenience only and
shall not be deemed part of this Agreement.
5. SEVERABILITY. If any provision of this Agreement shall be held
unenforceable as applied to any circumstance, the remainder of this
Agreement and the application of such provision to other circumstances
shall be interpreted so as best to effect the intent of the parties. The
parties further agree to replace any such unenforceable provision with an
enforceable provision (and to take such other action) which will achiever,
to the extent possible, the purposes of the unenforceable provision.
6. ATTORNEYS' FEES. In any action to enforce this Agreement, the prevailing
party shall be entitled to recover from the non-prevailing party all
reasonable costs, including, without limitation, attorneys' fees.
7. PARTIES BOUND. This Agreement is binding on and shall inure to the benefit
of the parties and their respective successors, assigns, heirs, and legal
representatives.
8. SURVIVAL. The representations, warranties, covenants, and agreements
contained in this Agreement shall survive the consummation of the
transactions contemplated hereby.
9. COUNTERPARTS. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original but all of which together shall
constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
COMPANY: ELECTROPURE, INC.
By________________________________________________
Catherine Patterson, Chief Financial Officer
Address:
23251 Vista Grande, Suite A
Laguna Hills, California 92653
BANK: ECONOMIC DEVELOPMENT BANK
FOR PUERTO RICO
By________________________________________________
Title_____________________________________________
Address:
268 Munoz Rivera Avenue, 7th Floor
Hato Rey, Puerto Rico 00918
31
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0
26,000
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