<PAGE> 1
As Filed with the Securities and Exchange Commission on December 1, 1997
Registration Statement No. 33-________
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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-------------------------
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
--------------------------
ELECTROPURE, INC.
(FORMERLY, HOH WATER TECHNOLOGY CORPORATION)
(Name of Small Business Issuer as specified in its charter)
CALIFORNIA
(State of Other 3589 33-0065212
Jurisdiction of (Primary Standard (IRS Employer
Incorporation Industrial Classification ID No.)
or Organization) Code Number)
23251 Vista Grande, Suite A, Laguna Hills, California 92653
(714) 770-9347
(Address and telephone number of principal executive offices)
--------------------------
FLOYD H. PANNING, President
ELECTROPURE, INC.
23251 Vista Grande, Suite A
Laguna Hills, California 92653
(714) 770-9347
(Name, address and telephone number of Agent for service of process)
--------------------------
Copies of communications to:
Ronald P. Givner, Esq.
JEFFER, MANGELS, BUTLER & MARMARO, LLP
2121 Avenue of the Stars, Tenth Floor
Los Angeles, California 90067
(310) 203-8080
Approximate date of commencement of proposed sale to public:
As soon as practicable after the registration
statement becomes effective.
--------------------------
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE> 2
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Proposed Proposed
Maximum Maximum
Offering Aggregate Amount of
Title of Each Class of Securities Amount to be Price Per Offering Registration
to be Registered Registered Unit (1) Price Fee
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<S> <C> <C> <C> <C>
Common Stock, $0.01 par value 6,070,313 $ 1.4375 $8,726,075 $2,644.27
</TABLE>
- ----------
(1) Based on the closing sale price as reported on the Electronic Bulletin Board
on 11/24/97
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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i
<PAGE> 3
P R O S P E C T U S
6,070,313 SHARES OF COMMON STOCK
ELECTROPURE, INC.
This Prospectus relates to 4,562,376 shares of the Common Stock, par value $0.01
per share, of Electropure, Inc. (the "Company"), which may be offered from time
to time by any or all of the Selling Shareholders named herein (the "Selling
Shareholders"). 1,507,937 of the shares covered by this Prospectus may be issued
upon the exercise of options and warrants. The Company will not receive any part
of the proceeds of any sales by the Selling Shareholders, but will receive
proceeds upon the exercise of options and warrants.
The Common Stock is traded on the OTC Electronic Bulletin Board under the symbol
"ELTP." On November 11, 1997, the last sale price of the Common Stock was
$1.375.
THESE ARE SPECULATIVE SECURITIES. SEE "RISK FACTORS" ON PAGES 9 TO 15 FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH PROSPECTIVE
INVESTOR.
The sale of the shares offered hereby may be effected from time to time in
transactions (which may include block transactions by or for the account of the
Selling Shareholders) in the over-the-counter market or in negotiated
transactions, through the writing of options on the shares, through a
combination of such methods of sale or otherwise. Sales may be made at fixed
prices which may be changed, at market prices prevailing at the time of sale, or
at negotiated prices. If any Selling Shareholder sells his, her or its shares,
or options thereon, pursuant to this Prospectus at a fixed price or at a
negotiated price which is, in either case, other than the prevailing market
price or in a block transaction to a purchaser who resells, or if any Selling
Shareholder pays compensation to a broker-dealer that is other than the usual
and customary discounts, concessions or commissions, or if there are any
arrangements either individually or in the aggregate that would constitute a
distribution of the shares, a post-effective amendment to the Registration
Statement of which this Prospectus is a part would need to be filed and declared
effective by the Securities and Exchange Commission before such Selling
Shareholder could make such sale, pay such compensation or make such a
distribution. The Company is under no obligation to file a post-effective
amendment to the Registration Statement of which this Prospectus is a part under
such circumstances.
All expenses incurred in connection with the registration of the shares offered
hereby, which expenses are not expected to exceed $20,000, are being borne by
the Company.
---------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------------------------------
The date of this Prospectus is November __, 1997.
<PAGE> 4
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AVAILABLE INFORMATION
- --------------------------------------------------------------------------------
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the securities offered hereby. This Prospectus does not
contain all the information set forth in the Registration Statement. For further
information with respect to the Company and the securities offered hereby,
reference is made to the Registration Statement, including the exhibits and
financial statements and schedules filed therewith or incorporated therein by
reference. Statements contained in this Prospectus as to the contents of any
contract or other document are not necessarily complete, and in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or incorporated therein by reference, each
statement being qualified in its entirety by such reference. All of these
documents may be obtained upon payment of the prescribed fees or examined
without charge at the office of the Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, DC 20549, and at the Commission's web site
(http//: www.sec.gov.).
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and, in accordance therewith, files reports
and other information with the Commission. Such reports and other information
can be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, DC 20549, and its Regional
Offices at 219 S. Dearborn Street, Chicago, Illinois 60604 and 75 Park Place,
14th Floor, New York, New York 10007. Copies of such materials can also be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington DC 20549, at prescribed rates, and at the Commission's
web site (http//: www.sec.gov.).
The Company furnishes, and will continue to furnish upon request, to its
shareholders annual reports containing audited financial statements.
------------------------------------------------
2
<PAGE> 5
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PROSPECTUS SUMMARY
- --------------------------------------------------------------------------------
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
THE COMPANY
Electropure, Inc. (the "Company") has developed a point-of-use model of an
electrodeionization ("EDI") water purification system 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. The Company
believes that the EDI design will give the same output capacity at one-third to
one-fifth the cost of current technologies and the ability to "modularize" the
technology's capacity to service installations up to 20 times (or more) the size
of current output levels (3 to 6 gallons per minutes [gpm]). The Company began
limited sales of this product in 1997.
The mission of Electropure, Inc. is to become the leading manufacturer and
supplier of proprietary components to the ultrapure water industry based on
electrodeionization technology. The Company will focus on providing unique
technology to differentiate itself from its competitors. Electropure, Inc. will
service original water equipment manufacturers of water treatment systems. In
this regard, the Company has recently acquired the right to develop a laser
monitoring technology which is to be developed for the detection of dangerous
materials in water such as parasites, bacteria, viruses and spores.
The Company was incorporated in December, 1979 in California under the name HOH
Water Technology Corporation and changed its name to Electropure, Inc. in 1996.
The Company's address and telephone number is: 23251 Vista Grande, Suite A,
Laguna Hills, California 92653, (714) 770-9347.
3
<PAGE> 6
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Securities Offered......................6,070,313 shares of Common Stock, $0.01
par value, including shares which may be
issued upon the exercise of options and
warrants.
Number of Shares of Common
Stock Outstanding.......................7,794,293 shares as of the date hereof.*
Each share of Common Stock has one vote
per share.
Number of Shares of Class B Common
Stock Outstanding.......................83,983 shares. Each share of Class B
Common Stock has eight votes per share.
Number of Shares of Convertible
Preferred Stock Outstanding.............2,600,000 shares. Each share of
redeemable Convertible Preferred Stock
has one vote per share.
Use of Proceeds.........................Any proceeds received by the Company
upon exercise of options or warrants
held by Selling Shareholders will be
used for working capital.
Electronic Bulletin Board Symbol........ELTP: Common Stock.
</TABLE>
RISK FACTORS
The securities offered hereby involve a high degree of risk, including limited
working capital, and possible dilution. See "RISK FACTORS." There can be no
assurance that the Company can successfully manufacture and market its EDI water
purification product or any other proposed product or sell such products at
prices which will result in net income. Actual results of manufacturing,
marketing and competitive conditions and other factors may require significant
modification of the Company's future operations from those planned operations
described herein.
- ----------
* Excludes 83,983 shares of Common Stock issuable upon conversion of Class B
Common Stock and 1,507,937 shares issuable upon exercise of outstanding
options or warrants. Also excludes 2,600,000 shares of Convertible Preferred
Stock which became redeemable by the Company as of January 31, 1991 for
$0.01 per share.
4
<PAGE> 7
SUMMARY FINANCIAL DATA
The Company has sold several EDI products and has received orders for additional
products; however, the Company does not anticipate that it will generate
significant revenues from the sale of these products until it can raise
sufficient working capital to expand its manufacturing operations, including
relocating to a larger facility.
SUMMARY OPERATING STATEMENT DATA:
<TABLE>
<CAPTION>
Fiscal Year Nine Months
Ended October 31, Ended July 31,
--------------------------- ---------------------------
1995 1996 1996 1997
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
License Fees Received....... $ 72,550 $ 81,559 $ 29,969 $ 66,337
Net (loss) gain*............ 107,681 (291,082) (166,519) (673,447)
Net (loss) gain per share... 0.01 (0.15) (0.10) (0.30)
Weighted average shares
outstanding................ 1,607,022 1,926,868 1,667,110 2,219,283
</TABLE>
SUMMARY BALANCE SHEET:
<TABLE>
<CAPTION>
October 31, 1996 July 31, 1997
--------------------- -----------------------
(Unaudited)
<S> <C> <C>
Working capital (deficit)... $ (48,705) $ (64,016)
Total assets................ 21,812 23,046
Total current liabilities... 70,027 86,653
Deficit accumulated in the
development stage......... (16,025,246) (16,698,692)
Stockholders' deficit....... (74,215) (89,607)
Stockholders' deficit per
share..................... (0.04) (0.04)
</TABLE>
For certain recent significant developments, since July 31, 1997, see "RECENT
SIGNIFICANT DEVELOPMENTS."
- ----------
* The Company recognized a gain of $244,286 in fiscal year 1995 on writing off
accrued liabilities and accounts payable. In addition, the Company
recognized a gain of $113,188 on the settlement of debt during fiscal 1996.
5
<PAGE> 8
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RECENT SIGNIFICANT DEVELOPMENTS
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LICENSE TERMINATION AGREEMENT
Effective August 5, 1997, the Company entered into a License Termination
Agreement with EDI Components ("EDI Components") terminating the July, 1992
agreements which granted EDI Components a security interest in and exclusive
manufacturing and marketing rights to the Company's patented water purification
technology. Pursuant to the termination agreement, 362,500 shares of the
Company's Common Stock, valued at $2.00 per share, were issued to the investors
of EDI Components in amounts commensurate with their capital investment in such
entity. The Company has agreed to issue Additional Shares upon the Common Stock
of the Company first having a per share value for thirty consecutive trading
days equal to or in excess each of $3.00, $4.00 and $5.50 per share (each a
"Trigger Value"). The aggregate value of such Additional Shares shall equal
$675,006, $675,012 and $674,982, respectively, for a total additional value of
$2,025,000. If all of the Additional Shares are issued pursuant to the License
Termination Agreement, the investors of EDI Components will have received a
total of 787,979 shares of the Company's Common Stock, with an aggregate value
equal to $2,750,000. The fair market value of the Company's Common Stock was
$0.375 per share on August 14, 1997, the date on which the 362,500 shares were
issued to the investors of EDI Components. Consequently, as a result of such
issuance, the Company will reflect a finance charge in the sum of $135,938 on
its financial statements for the fiscal year ended October 31, 1997.
In connection with the License Termination Agreement, the Company issued (i)
94,599 shares of Common Stock at $0.50 per share, including 40,000 shares to the
current President and Chief Executive Officer of the Company, and (ii) 566,409
shares of Common Stock at $0.375 per share upon conversion of certain
indebtedness, plus related interest.
TECHNOLOGY TRANSFER AGREEMENT
On October 25, 1997, the Company issued 2,100,000 shares of its Common Stock to
Wyatt Technology Corporation ("Wyatt") as consideration for the transfer by
Wyatt of an exclusive worldwide license to certain intellectual property related
to drinking water monitoring technology. The agreement encompasses exclusive
patent rights, software, technical support, manufacturing services and other
know-how based on Wyatt's proprietary multi-angle laser light scattering
instrumentation and techniques to detect and monitor the presence of toxicants
(mutagens, carcinogens, and metabolic toxins) in fluid.
Pursuant to the transfer agreement, the Company will focus its initial research
efforts on applying the Wyatt technology in developing the instrumentation and
software to detect, in near "real-time," particulate materials (parasites and
other organisms such as bacteria, viruses, spores, etc.) in drinking water. The
primary target will be for the identification and measurement of Cryptosporidium
and Giardia cysts in municipal drinking water supplies. Under the agreement,
Wyatt will provide technical support as well as various laboratory equipment and
supplies
6
<PAGE> 9
required for this research phase which is anticipated to run approximately five
(5) months. A market feasibility study will be conducted concurrently.
As a result of the issuance of the 2,100,000 shares on October 25, 1997, Wyatt
Technology Corporation owns 26.7% of the common stock of the Company, with 19.0%
of the voting control.
STOCK ISSUANCES
Between August 14, 1997 and October 31, 1997, in addition to the shares
discussed above, the Company issued 643,094 additional shares of Common Stock.
Of such Common Stock, 107,400 shares were issued pursuant to the exercise of
options and warrants at $0.50 per share; 30,988 and 500,000 shares were issued
in private placements at $0.375 and $1.00 per share, respectively; and 4,706
shares were issued in consideration for services rendered. 250,000 three-year
warrants to purchase Common Stock at $2.00 per share were issued in conjunction
with the Company's August, 1997 private placement offering of 500,000 shares at
$1.00 per share as described above. Such warrants are redeemable by the Company
at $0.05 per Warrant at any time that the closing bid price of the Common Stock
exceeds $4.00 per share for thirty consecutive business days.
In November, 1997, the Company issued 60,000 shares of Common Stock in
consideration for an option to purchase a 30,000 square foot building to which
the Company intends to relocate its operations in or around February, 1998. See
"BUSINESS - Properties."
OTHER TRANSACTIONS
The Company's Board of Directors authorized, effective November 1, 1997, a
private placement offering of 16 Units of its securities, each Unit consisting
of 10,000 shares of Common Stock and 5,000 Warrants to purchase Common Stock at
$3.50 per share. Units will be offered to accredited investors at $25,000 each
until December 31, 1997, at which time the offering will expire unless extended
by the Board. The Warrants are redeemable by the Company at $0.05 per Warrant at
any time the bid price of the Company's Common Stock exceeds $5.00 per share for
thirty consecutive business days. No offering of such Units is being made by
this Prospectus.
LIMITED WORKING CAPITAL
As a result of the delays in bringing the EDI water purification product to
market, as well as delays in expanding production of the EDI product and the
various legal matters encountered by the Company over the past several years,
the Company has limited working capital. The Company has sold its Common Stock
and warrants to reduce this working capital shortfall and believes it has
adequate sources of working capital to support operations through approximately
August, 1998. However, the Company may need additional financing prior to that
time and is currently seeking investments through private placement offerings of
its securities. In addition, the Company proposes to seek additional financing
through corporate borrowing and/or a public offering of securities through an
underwriter. No assurances can be given that the Company can
7
<PAGE> 10
obtain additional working capital through the sale of Common Stock or 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.
8
<PAGE> 11
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RISK FACTORS
- --------------------------------------------------------------------------------
WHILE SEVERAL UNITS OF THE HIGH PURITY POINT-OF-USE ELECTROPURE HAVE BEEN PLACED
IN OPERATION, THERE IS NO ASSURANCE THAT THE COMPANY WILL BE COMMERCIALLY
VIABLE. IN ADDITION, ACTUAL RESULTS OF THE DEVELOPMENT ACTIVITIES, MANUFACTURING
PROCESSES, TECHNOLOGICAL DEVELOPMENTS, MARKET AND COMPETITIVE CONDITIONS,
FINANCIAL RESOURCES, RESULTS OF OPERATIONS AND OTHER FACTORS MAY REQUIRE
SIGNIFICANT MODIFICATIONS TO ALL OR PART OF THE PROPOSED BUSINESS REGARDING THE
COMPANY. AN INVESTMENT IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK AND
SHOULD BE MADE ONLY BY INVESTORS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. PROSPECTIVE PURCHASERS, PRIOR TO MAKING AN INVESTMENT IN THE COMMON
STOCK, SHOULD CAREFULLY CONSIDER, ALONG WITH OTHER MATTERS REFERRED TO HEREIN,
THE FOLLOWING RISK FACTORS AND SHOULD CONSULT WITH THEIR OWN LEGAL, TAX AND
FINANCIAL ADVISORS WITH RESPECT THERETO. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISK AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS." PROSPECTIVE
PURCHASERS SHOULD CAREFULLY CONSIDER, AMONG OTHER FACTORS, THE FOLLOWING:
1. STAGE OF DEVELOPMENT OF THE COMPANY. Until January, 1992, the Company had
been engaged in development of a water purification system known as the
Electropure ("EDI"). The Company had constructed a number of prototypes and
pre-production units of the point-of-use version of the EDI and during 1991 had
sold several of such units. However, lack of working capital had earlier led the
Company to seek immediate cash flow from sales of an ultrapure reverse
osmosis/ultraviolet water treatment system. Because the Company had only limited
operating capital and continued to incur substantial expenses, it was unable to
sustain operations. Consequently, in May, 1992, the Company entered into a
Letter of Intent to license the manufacturing and marketing of its patented
Electropure "EDI" technology to EDI Components, a privately-held California
corporation. Formal agreements concerning the license were executed on July 29,
1992. In August, 1997, the Company negotiated an early termination of such
license agreement and intends to commence manufacturing and marketing
activities. No assurances can be given that the Company can manufacture any EDI
products at an economical cost. Further, no assurances can be given that EDI
products or other products offered by the Company will receive market
acceptance. The Company is subject to all the risks inherent in the
establishment of a new enterprise and the marketing and manufacturing of new
products, any of which risks are beyond the control of the Company. Further,
with regard to the technology licensed from Wyatt, it is also subject to all the
risks inherent in trying to adapt a technology for a new use. No assurances can
be given that the Company can successfully develop or market any products.
9
<PAGE> 12
2. ACCUMULATED DEFICITS; OPERATING LOSSES; GOING CONCERN. From the inception of
the Company in 1979 through July 31, 1997, the Company accumulated a loss in the
development stage of $16,698,692 and a net stockholders' deficit of $89,607. The
losses are principally due to expenses incurred in the development of the
proposed products, initial manufacturing start-up costs, initial marketing
efforts, administrative expenses and interest. The report of the Company's
independent auditors for the fiscal year ended October 31, 1996 contains
explanatory paragraphs as to the ability of the Company to continue as a going
concern, the utilization of assets and the outcome of claims and litigation. The
first two qualifications are expected to be contained in the independent
auditors' report for the fiscal year ended October 31, 1997.
3. COMPETING PATENT CLAIMS DELAYING SALES; LIMITED PATENT PROTECTION. During the
pendency of the patent infringement lawsuit filed by the Company against
Millipore Corporation and its licensee, Ionpure Technologies in 1993, the
Company's ability to market the EDI technology was materially impacted. Such
lawsuit, and a second lawsuit filed by the Company against Millipore in March,
1996, were resolved as of July, 1996. However, the delay incurred by the Company
in marketing its product may have allowed other companies to develop and
commence production of similar products. Due to potential competitive pressures,
the Company's ability to capitalize on the features of the EDI product in the
marketplace may be dependent on its ability to deliver products in the near
future.
The Company owns two U.S. patents and limited foreign patents, with respect to
certain aspects of its technology for the EDI, one granted in 1984 and the other
in 1990. U.S. patents, subject to certain maintenance fees, are valid for 17
years. In the absence of significant patent protection, competitors could
legally imitate the Company's design approaches. The Company may not be able to
afford the expenses required to enforce any patent it may have now or in the
future and no assurances can be given that any patents would be upheld if
challenged, or if upheld, would provide the Company with meaningful protection.
Certain components of the EDI, such as the technology used to manufacture the
anode used in the electrodialysis, are not covered by the patent. The Company
believes that the patent for the EDI and its technical know-how may be
significant in its ability to compete and that it may have to vigorously defend
its patents.
4. NECESSITY FOR ADDITIONAL FINANCING. The Company, from time to time,
experienced working capital shortfalls which slowed the development of the EDI
product. The Company will be required to raise substantial amounts of new
financing, in the form of additional equity investments or loan financing, in
order to carry out its business objectives. There can be no assurance that the
Company will be able to obtain such additional financing on terms that are
acceptable to the Company and at the time required by the Company, or at all.
Further, any such financing may cause dilution of the interests of the current
shareholders in the Company. If the Company is unable to obtain such additional
equity or loan financing, the Company's financial condition and results of
operations will be materially adversely affected. Moreover, the Company's
estimates of its cash requirements to carry out its current business objectives
are based upon certain assumptions, including certain assumptions as to the
Company's revenues, net income (loss) and other factors, and there can be no
assurance that such assumptions will prove to be accurate or that unbudgeted
costs will not be incurred. Future events, including the problems, delays,
expenses and difficulties frequently encountered by similarly situated
companies, as well as
10
<PAGE> 13
changes in economic, regulatory or competitive conditions, may lead to cost
increases that could have a material adverse effect on the Company and its
plans. If the Company is not successful in obtaining loans or equity financing
for future developments, it is unlikely that the Company will have sufficient
cash to continue to conduct operations as currently planned. The Company
believes that in order to raise needed capital, it may be required to issue debt
or equity securities that are significantly lower than the current market price
of the Company's Common Stock.
In August, 1997, the Company authorized a private placement offering of up to 20
Units of its securities, each Unit consisting of 25,000 shares of common stock
and 12,500 three-year warrants to purchase common stock at $2.00 per share. As
of October 31, 1997, the Company had sold all of such Units for net revenues of
$500,000. In the opinion of management, the proceeds realized from such private
placement offering will satisfy the Company's working capital requirements for
up to nine (9) months. However, no assurances can be given that such proceeds
will satisfy the working capital needs of the Company for the period estimated,
or; that the Company can obtain additional working capital through the sale of
Common Stock or 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 substantial dilution to the
existing shareholders or will be on terms satisfactory to the Company.
5. PRIOR DELAYS IN DEVELOPING THE EDI TECHNOLOGY. The original concept for the
EDI technology was a point-of-entry system to treat the entire house or
facility. However, inherent difficulties in developing this model due to
pre-treatment requirements and high production costs, led to the development of
a smaller, point-of-use model of the EDI technology aimed at the high purity
water treatment segment of the commercial and industrial water treatment
markets. Further, at times the Company has been forced to significantly reduce
operations or suspend sales activities due to limited resources or patent
disputes. While the Company has resolved the patent disputes, limited resources
could again delay the development and marketing of products. Further, delays can
occur in the development or improvement of potential products. Therefore, no
assurances can be given as to when the Company will have the resources to fully
market the current EDI technology or when the newly acquired laser technology
will lead, if ever, to a commercially viable product.
6. RISK OF NEW PRODUCT AND TECHNOLOGY; PRODUCT LIABILITY. The proposed
manufacturing and marketing of the Company's EDI product, incorporating
relatively new and unproved technology, have inherent risks. No one can be sure
how the products will operate over time under various conditions of actual use.
Only a limited number of the EDI products have been placed in operation since
1991.
Even if the product is successfully manufactured and marketed, the occurrence of
warranty or product liability, or retraction of market acceptance due to product
failure or failure of the product to meet expectations could prevent the Company
from ever becoming profitable. Failure of the product to operate as expected
could lead to potential product liability suits. Development of new technologies
for manufacture is frequently subject to unforeseen expenses, difficulties and
complications and in some cases such development cannot be accomplished. Ionpure
and its licensor have significantly greater marketing and financial resources
than the Company.
11
<PAGE> 14
In the opinion of management, the EDI demonstrates positive attributes, but any
such attributes of the EDI product must be balanced against the lack of any
significant field operating experience of such product, the existence of
established companies in the water purification field with greater financial
resources, experience and developed products, the fact that the EDI product has
not been tested on a wide variety of water conditions, including hard water and
unknown technological difficulties.
The same risks, as well as many of the risks set forth in the other Risk Factors
discussed below, do or will also apply to the development of the Wyatt
technology for use in detecting dangerous items in water. Further, since the
Wyatt technology has not yet been adapted for its intended use, there is a risk
that such technology cannot be adapted for use in detecting dangerous items in
water as contemplated by the Company. Further, even if the Company successfully
adapts such technology as intended, there can be no assurances that the
developed product will be commercially viable.
7. STATUS OF THE ELECTROPURE "EDI". In late 1990, the Company developed the
point-of-use module of the EDI, aimed at the high purity water treatment market,
which is able to desalt 1/2 - 5 gallons of water per minute of pre-treated tap
water to a purity level exceeding one-megohm-cm (roughly less than 0.5 parts per
million ("ppm") of total dissolved solids ("TDS"). The Company believes that
this model, which is currently being sold by the Company in limited quantities,
is significant in its ability to compete in terms of capital cost and product
efficiency. Additional models of the EDI which will provide higher flow rates
are contemplated for development by the Company.
No assurances can be given that the EDI will not need additional development
work or require further modifications which may require re-engineering of parts
and additional delays in mass marketing of the product. Further, no assurances
can be given that the Company will successfully develop additional models of the
EDI product.
The Company just recently acquired its rights to use the Wyatt technology in
water monitoring and it has just begun the process of trying to adapt such
technology for such use.
8. UNCERTAINTY OF MARKET ACCEPTANCE. While the Company believes that its EDI
product should offer advantages over traditional water purification methods and
indications of interest from potential customers is evident, there is no
assurance that the Company's product will attain significant market acceptance
and generate adequate revenues. Generally, market acceptance of a new technology
requires substantial efforts to inform potential customers of the new
technology's distinctive characteristics. This effort will be crucial in
marketing the Company's EDI product. The Company will seek to have potential
purchasers invest in the EDI product instead of currently available equipment or
to treat water which is currently not being treated. While the Company believes
that the initial EDI product will be able to be sold at a lower capital cost per
gallon of water treated and will have lower operating and maintenance costs than
existing competitive products, the Company has not yet demonstrated that cost
savings from frequent use over an extended time prior in actual production
models or that such EDI product
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<PAGE> 15
can justify this capital cost or that the demand for high purity water equipment
is sufficient to justify the cost. Price of the Company's product will be a
critical factor in marketing the Company's EDI product.
Similar risks will apply to the use of any product which may be developed using
the Wyatt technology.
9. GOVERNMENT REGULATIONS. California passed certain legislation which (i) makes
illegal the making of any untrue statement in connection with the sale of a
water purification product, and (ii) will require a water purification device to
be tested (certified) to determine if it performs as represented and once
tested, claims for such a product's performance cannot go beyond such test
results. The Company believes that the EDI product is not subject to the above
statue, however, some applications of the EDI technology, i.e., hospitals, will
require approval by Underwriter's Laboratory or equivalent organization. The
Company will seek all necessary approvals or certifications. Sales in other
countries will be subject to the risks of import regulations, custom duties and
currency fluctuations.
10. COMPETITION. There are many firms in the water purification and related
industries, substantially all with financial resources, experience and technical
staffs larger than those of the Company, including Ionpure, Millipore and its
licensees. Several firms have successfully developed products which meet some or
most of the needs intended to be met by the EDI and have established strong
market positions in these areas. These competitors may respond vigorously to any
threat to their established market shares. In addition, other companies may be
developing or planning the development of devices competitive with the Company's
current product.
11. TECHNOLOGICAL CHANGE. The technology upon which the Company's EDI water
purification product relies may undergo rapid development and change. There can
be no assurance that the technology utilized by the Company will be competitive
in light of possible future technological developments and will not become
obsolete or that the Company will have adequate funds to meet technological
changes.
12. NEED FOR ADDITIONAL EMPLOYEES AND FACILITIES. The Company's employees are
sufficient to conduct the manufacturing and administrative functions required at
the current time. However, the Company's current facility severely limits its
EDI manufacturing capabilities and the Company has plans to relocate its
facilities in the near future to provide for an increase in such activities.
Additional employees will also be required once manufacturing operations
increase. No assurance can be given that the Company can obtain such employees
when required.
13. OUTSTANDING ROYALTIES. The total royalties granted per EDI sold is
approximately $42.50, plus approximately $9.00 (until such additional $9.00 of
royalties paid equals approximately $525,600 of royalties) for each
point-of-entry EDI sold. Royalties for the point-of-use EDI are expected to be
approximately 2.05% of net sales. Mr. Harry O'Hare, the founder of the Company,
does not hold any royalties in the EDI but does have certain royalty rights in
connection with two products he sold to the Company in 1987. Royalties of from
1% to 1-1/2%
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<PAGE> 16
are payable on certain other EDI products. There can be no assurances that the
profitability of the Company will not be adversely affected by such royalty
payments.
14. FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS. The Company's revenues in
the next several years may be uneven depending on the timing and sales of
products or the potential licensing of technology. The timing of such events, if
they occur, could have a significant effect on the Company's results of
operations, and the results of one quarter are not necessarily indicative of
results for subsequent quarters.
15. CONTROL OF THE COMPANY. As of November 12, 1997, Anthony M. Frank, Wyatt
Technology Corporation, Harry M. O'Hare, Sr. and the current officers and
directors of the Company owned approximately 16.2%, 16.7%, 12.8% and 8.8% of the
voting power of the Company, respectively. As a result, these individuals and
entities, if they agreed to act in concert, are in a position to materially
influence, if not control, the outcome of all matters requiring shareholder
approval, including the election of directors.
16. DEPENDENCE ON MANAGEMENT. The Company is significantly dependent upon the
continued availability of Floyd H. Panning, its President and Chief Executive
Officer. The loss or unavailability of Mr. Panning for an extended period of
time could have a material adverse effect on the Company's business operations
and prospects. To the extent that the services of this office is unavailable to
the Company for any reason, the Company will be required to procure other
personnel to manage and operate the Company. There can be no assurance that the
Company will be able to locate or employ such qualified personnel on acceptable
terms. The Company has entered into an employment agreement with Mr. Panning.
17. POSSIBLE VOLATILITY OF COMMON STOCK. The trading prices of the Common Stock
may respond to variations in operating results and other events or factors,
including, but not limited to, the sale or attempted sale of a large amount of
the Common Stock into the market, as could occur from sales by the Selling
Shareholders. In addition, the stock market has experienced extreme price and
volume fluctuations in recent years, particularly in the securities of smaller
companies. These fluctuations have had a substantial effect on the market prices
of many companies, often unrelated to the operating performance of the specific
companies, and similar events in the future may adversely affect the market
prices of the Common Stock.
18. RISK OF LOW PRICED STOCKS; NASDAQ LISTING REQUIREMENTS. The Company's Common
Stock is currently traded in the Over-the-Counter market and is listed on the
Electronic Bulletin Board under the symbol "ELTP".
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure related to the market for penny stock for trades in any
stock defined to be a "penny stock." The Commission has adopted regulations
under such Act which would define a penny stock to be any non-NASDAQ or listed
equity security that has a market price of less than $5 per share (as defined)
or with an exercise price of less than $5 per share. Unless exempt, for any
transaction involving a penny stock, the rules require the delivery, prior to
any transaction in a penny stock, of a disclosure schedule prepared by the
Commission explaining important concepts involving the
14
<PAGE> 17
penny stock market, the nature of such market, terms used in such market, the
broker/dealer's duties to the customer, a toll-free telephone number for
inquiries about the broker/dealer's disciplinary history and the customer's
rights and remedies in cause of fraud or abuse in the sale. Disclosure also has
to be made about commissions payable to both the broker/dealer and the
registered representative and current quotations for the securities. In
addition, monthly statements must be sent disclosing recent price information
for the penny stock held in the account and information on the limited market in
penny stocks. Non-NASDAQ stocks are not covered by the definition of penny stock
for (i) issuers who have $2,000,000 in tangible assets - the Company does not
meet this criteria - ($5,000,000 if the issuer has not been in continuous
operation for three years), (ii) transaction in which the customer is an
institutional accredited investor and (iii) transactions that are not
recommended by the broker/dealer.
In addition to penny stocks, the Securities and Exchange Commission
("Commission") rule that imposes additional sales practice requirements on
broker-dealers who recommend such securities to persons other than established
customers and accredited investors (generally institutions with assets in excess
of $5,000,000 or individuals with net worth in excess of $1,000,000 or annual
income exceeding $200,000 or $300,000 jointly with their spouse). For
transactions covered by such rule, the broker-dealer must make a special written
suitability determination for the purchaser and receive the purchaser's written
agreement to the transaction prior to sale. Securities are also exempt from the
new rule if the market price is over $5.00 per share or, for warrants, they must
be exercisable for more than $5.00.
As a result of such rules, trading in the Company's Common Stock, which
currently is a penny stock, may be severely limited and holders may experience
difficulties in selling such securities, the market price for the Company's
securities may be less than they may otherwise be, news coverage regarding the
Company may be more limited and the Company may find obtaining new financing to
be more difficult. Such reduced liquidity could result in a material adverse
impact on the value of such securities. Currently, only a sporadic market exists
for the Company's common stock.
NASDAQ has recently significantly increased the requirements for initial and
continued listing on the NASDAQ Small Cap Market and National Market. It is
unlikely that the Company, in the near future, will be able to meet even the
initial listing requirements for the Small Cap Market.
19. EXISTING WARRANTS AND OPTIONS. Currently, there 1,507,937 are warrants and
options outstanding, exercisable at prices ranging from $0.10 to $16.30 per
share and expiring through August, 2007. For the term of such options and
warrants, the holders thereof will have an opportunity to profit from the rise
in the market price of the Company's Common Stock without assuming the risks of
ownership. The existence of all of these options and warrants may have an
adverse effect on the terms upon which the Company would be able to obtain
additional capital. Furthermore, it might be expected that the holders of all of
such options and warrants would exercise their options at a time when the
Company could obtain equity capital on terms more favorable than those provided
for by the options and warrants.
20. LACK OF DIVIDENDS. The Company has not paid cash dividends on its Common
Stock and does not anticipate paying any cash dividends for the foreseeable
future.
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<PAGE> 18
- -------------------------------------------------------------------------------
DIVIDEND POLICY
- -------------------------------------------------------------------------------
The Company has not paid any dividends on its Common Stock since its
incorporation. Electropure anticipates that, in the foreseeable future,
earnings, if any, will be retained for use in the business 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 charges) 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.
- --------------------------------------------------------------------------------
USE OF PROCEEDS
- --------------------------------------------------------------------------------
The Company will not receive any proceeds upon the sale of any shares of Common
Stock by the Selling Shareholders, but will receive funds upon the exercise of
options or warrants held by the Selling Shareholders. Any such proceeds will be
used to pay the estimated expenses of this offering (approximately $20,000) and
for working capital, including, salaries, rent, overhead, marketing, production
and research and development costs associated with the technology
licensed/transferred from Wyatt Technology Corporation.
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<PAGE> 19
- --------------------------------------------------------------------------------
MARKET PRICES
- --------------------------------------------------------------------------------
The Company's common stock is currently quoted in the OTC Electronic 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.
<TABLE>
<CAPTION>
COMMON STOCK
BID PRICES
-------------
HIGH LOW
<S> <C> <C> <C>
FISCAL 1996 First Quarter 1/4 1/16
Second Quarter 5/16 1/16
Third Quarter 9/32 5/32
Fourth Quarter (1) 2 1/8
FISCAL 1997 First Quarter 3/8 1/4
Second Quarter 1/4 1/8
Third Quarter 1/2 1/8
Fourth Quarter 1-3/4 5/16
FISCAL 1998 First Quarter (through November 12, 1997) 1-3/4 1-1/2
</TABLE>
The market for the Company's securities is sporadic and quoted prices may not
represent the true value of such securities.
As of November 12, 1997, the Company had approximately 760 holders of record of
its Common Stock.
- ----------
(1) The Company's one-for-ten reverse stock split took effect on June 25, 1996.
Consequently, the trading and other prices of the Company's securities and
the number of shares reflect the effect of such reverse stock split
throughout this Prospectus.
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<PAGE> 20
- --------------------------------------------------------------------------------
MANAGEMENTS' DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
FISCAL YEARS ENDED OCTOBER 31, 1995 AND 1996
License fees received for the fiscal year ended October 31, 1996 increased by
$9,009 compared to 1995. While the Company's former licensee was 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.
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 former 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
former 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.
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<PAGE> 21
NINE MONTHS ENDED JULY 31, 1996 AND 1997
References to 1996 and 1997 are for the nine months ended July 31, 1996 and
1997, respectively.
License fees received for fiscal 1997 increased by $36,368 compared to 1996. The
increase is primarily due to the fact that the Company's source of revenue was
limited in fiscal 1997 to license fees from its former licensee, which was
obligated to pay the Company's necessary operating expenses. In fiscal 1996, the
Company realized income from the exercise of options which reduced such former
licensee's obligation to cover such costs in that year.
General and administrative expenses for fiscal 1997 decreased by $30,762 as
compared to fiscal 1996. This decrease is due, primarily, to a decrease in fees
for outside services and accounting expense for the current period.
Interest expense for fiscal 1997 increased by $290 as compared to fiscal 1996,
due to the annual compounding of interest accruing on notes payable as well as
the addition of the $12,000 note issued as part of the Puerto Rico litigation
settlement.
Litigation settlement costs for fiscal 1997 were $112,000 as compared to no
expense for 1996, comprised of the $12,000 principal note payable issued to the
Puerto Rico Bank and the cost of 100,000 common shares issued to such Bank in
settlement.
Financing costs for fiscal 1997 increased by $461,768, reflecting the expense
incurred by the Company on the exchange of a $500,000 principal loan, plus
accrued interest, into common shares.
No additional provision for loss on lawsuit settlement has been made in fiscal
1997 as the Company believes that adequate provision has been made to settle
pending lawsuits.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1997, the Company had a working capital deficit (total current
assets less total current liabilities) of $64,016, representing a decrease of
$131,779 from the prior year period, primarily as a result of writing off over
$127,000 in accrued liabilities in the fourth quarter of fiscal 1996.
All of the Company's funds were exhausted after July 31, 1997, but in August,
1997, the Company began a private placement offering of 20 Units of securities,
each Unit consisting of 25,000 shares of Common Stock and 12,500 three-year
redeemable warrants to purchase common stock at $2.00 per share. The purchase
price of each Unit was $25,000 and, as of October 31, 1997, the Company sold all
20 Units for net proceeds totaling $500,000. The Company believes that such
proceeds will be sufficient to cover its current working capital requirements
for the next six to eight months. See "Plan of Operation".
During fiscal 1996, the Company received $81,559 in license fees and realized
net proceeds of $40,000 and $21,886 from the sale of common stock and from the
exercise of warrants to
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<PAGE> 22
purchase common stock, respectively. During the nine months ended July 31, 1997,
the Company received an additional $66,337 in license fees.
The Company will be required to raise substantial amounts of new financing, in
the form of additional equity investments or loan financing, in order to carry
out its business objectives. There can be no assurance that the Company will be
able to obtain such additional financing on terms that are acceptable to the
Company and at the time required by the Company, or at all. Further, any such
financing may cause dilution of the interests of the current shareholders in the
Company. If the Company is unable to obtain such additional equity or loan
financing, the Company's financial condition and results of operations will be
materially adversely affected. Moreover, the Company's estimates of its cash
requirements to carry out its current business objectives are based upon certain
assumptions, including certain assumptions as to the Company's revenues, net
income (loss) and other factors, and there can be no assurance that such
assumptions will prove to be accurate or that unbudgeted costs will not be
incurred. Future events, including the problems, delays, expenses and
difficulties frequently encountered by similarly situated companies, as well as
changes in economic, regulatory or competitive conditions, may lead to cost
increases that could have a material adverse effect on the Company and its
plans. If the Company is not successful in obtaining loans or equity financing
for future developments, it is unlikely that the Company will have sufficient
cash to continue to conduct operations as currently planned. The Company
believes that in order to raise needed capital, it may be required to issue debt
or equity securities that are significantly lower than the current market price
of the Company's Common Stock.
PLAN OF OPERATION
The Company recently completed a private placement offering of securities and
realized net proceeds of $500,000 in working capital as a "bridge" to an
intended secondary public offering within the next 6 - 12 months. No assurances
can be given that the Company will successfully complete any additional
offering. Currently, the Company has orders for several of its patented
electrodeionization ("EDI") water treatment modules and anticipates receiving
additional orders from which it expects to realize approximately $25,000 in net
revenues per month. In addition, the Company has authorized an additional
private placement offering seeking revenues of up to $1 million. See "RECENT
SIGNIFICANT DEVELOPMENTS - Other Transactions."
With the above private placement proceeds received, and with additional working
capital expected from the sale of the Company's EDI products, the Company
believes that it will have adequate sources of working capital through
approximately August, 1998, although it may need additional working capital
prior to said date, particularly if the Company is not successful in selling
sufficient quantities of EDI products.
The Company intends in or around February, 1998 to relocate to larger facilities
and initiate operations with a view toward implementing an expanded production
and marketing program. However, no assurances can be given that the Company will
relocate in a timely manner or 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.
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<PAGE> 23
- --------------------------------------------------------------------------------
BUSINESS
- --------------------------------------------------------------------------------
Electropure, Inc. ("Electropure" or the "Company") manufactures and markets the
"EDI" series of patented electrodeionization water treatment devices for
commercial and industrial high purity water applications. The Company's EDI
product is marketed to original equipment manufacturers ("OEM's) as a
specialized component for water treatment systems designed to provide ultrapure
water to market segments whose major customers include, but are not limited to,
semiconductor, pharmaceutical and cosmetic companies, as well as laboratories
and petrochemical companies.
The Company's current EDI design is able 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")) at a rate of 3 to 6 gallons per minute on demand.
Modularized designs (connecting additional modules in parallel formations)
increase a system's capacity exponentially to service installations requiring up
to hundreds of gallons per minute. In addition to its cost-effective operation,
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 competitive processes require the addition of these elements.
The Company recently acquired an exclusive license to certain patent and
intellectual property rights involving laser light scattering techniques to be
utilized in the detection and monitoring of toxicants in drinking water. This
acquisition will provide the basis for Electropure's proposed development of
near "real-time" drinking water monitoring systems primarily for municipal
applications. See "RECENT SIGNIFICANT DEVELOPMENTS - Technology Transfer
Agreement" and "BUSINESS - Laser Monitoring Division."
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
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<PAGE> 24
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). 2 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.
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 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.
- ----------
(1) Ultrapure Water, "Market overview - Membrane Markets Show Continued
Strength," April 1993, by Mike Henley.
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<PAGE> 25
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 initial point-of-use module of the EDI technology is approximately 8 inches
wide, 11 inches deep and 20 inches in height. The product has no moving parts
and is capable of processing five (5) gallons of ultrapure water per minute. The
module is marketed to original equipment manufacturers (OEM's) of water
treatment equipment for incorporation into a point-of-use system complete with
pre-treatment components (such as reverse osmosis, filters, softeners, etc.),
power supply, and desired gauges and monitors. This system would then be
connected to the incoming water line at the point-of-use, to a drain line and to
an electrical source. This system is designed to service the small industry
users . For higher flow rate requirements, the existing EDI module has been
successfully combined in parallel formations to provide 5 - 25 gallons per
minute (GPM) of multi-megohm quality water. Larger systems, which produce 25 -
100 GPM, would be marketed to medium scale users. The Company plans to design a
higher capacity version of the EDI module which will be intended to provide
volumes to high purity water at 15 GPM or more from a single module. The Company
believes that this model, if it can be developed, will become the primary
product line for desired high purity flow rates in the 25-100 GPM market
segment.
- -------------------------------------------------------------------------------
EDI 5 GPM MODULE
- --------------------------------------------------------------------------------
Side View Front View
(arrow down) (arrow down)
[Diagrams of side and front view of
EDI 5 GPM Module]
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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<PAGE> 26
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:
- the EDI technology system operates with variable local water
pressure and no booster pumps are required.
- lower maintenance since nothing is consumed except small amounts of
electricity. If at all necessary, chemicals are added less
frequently than existing equipment.
- 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. The Company intends 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 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 intends to 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 EDI Components) entered
into certain licensing arrangements with two water treatment equipment companies
(see "BUSINESS - License Agreements") and similar relationships are currently
being discussed with other such companies.
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.
24
<PAGE> 27
The electro-regeneration feature of the EDI technology is considered a
significant advantage over existing demineralization technology. The existing
EDI module will provide ultrapure water at a rate of 1/2 to 5 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 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.
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 previously purchased certain tooling and molds required for
component plastic parts and intends to contract for the production of the
plastic parts and electrodes for the EDI product and to purchase the membranes
from outside sources. All final assembly will be completed by the Company at its
Laguna Hills, California manufacturing facility. Production and assembly
functions are intended to be designed with the flexibility of producing
customized variations of the EDI for specialized usage.
SOURCES OF SUPPLY
The Company believes that material to build the EDI modules are readily
available from at least two sources and the Company currently has two sources
for all such material.
WARRANTY
The Company intends to offer a one year limited parts and labor warranty for the
EDI module and may contract with others to provide warranty service. However, it
has not made any arrangements with any persons to provide such service and it
may not be able to locate competent persons to perform the services at an
acceptable price. No assurances can be given as to whether expenses will not be
significant.
LICENSE AGREEMENTS
AGREEMENTS WITH GLEGG WATER CONDITIONING, INC.
On July 1, 1994, the Company and its former licensee (EDI Components) 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
25
<PAGE> 28
$50,000. The license, which may be extended by mutual agreement, provides that
Glegg pay 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 former 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 provides
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 its former licensee 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.
LASER MONITORING DIVISION
The technology transferred under the October 25, 1997 agreement with Wyatt
Technology Corporation has (at inception) two main areas for exploitation:
(1) Detection and early warning of dangerous particulate materials such as
parasites and other organisms such as bacteria, viruses, spores, etc.
Also included (for future programs) would be asbestos fibers and similar
materials which pose a health hazard to the consumer.
(2) Detection and early warning of dangerous soluble substances such as
mutagens, carcinogens and metabolic poisons.
The latter technology area has already been confirmed, although never
commercialized, during a study by Wyatt for the U. S. Army through a Small
Business Innovative Research program conducted approximately a decade ago. To
make the latter area into a viable product line will require the development of
specialized instrumentation for the implementation of the methods developed (and
patented) under that program, market studies, and the establishment of a
marketing plan to target water consumer delivery agencies (municipalities).
Although this market may well represent a major opportunity (on a worldwide
basis) for future growth of the Company's consumer market products, the current
instrumentation and software available from the Wyatt transfer appears to
provide a more immediate path to developing the parasite detection concept for
the technology. It is for this reason that the Company's initial emphasis will
be to conduct a feasibility study for the detection and monitoring of parasites,
primarily Cryptosporidium and Giardia(1), in drinking water sources. Since these
parasites form cysts that
- ----------
(1) Cryptosporidium (Cryptosporidium parvum) and Giardia (Giardia lamblia) are
water borne protozoan parasites which contaminate water sources such as
wells, rivers, steams, and lakes, generally through animal and fowl fecal
deposits.
26
<PAGE> 29
have a protective shell, they are particularly dangerous and difficult to remove
as they are resistant to normal treatment levels of chlorine.
The Center for Disease Control ("CDC") and the Environmental Protection Agency
("EPA") have developed a national "surveillance system" to monitor and track the
incidences of water borne diseases. However, this system relies upon standard
water sample gathering and analysis and recognition of outbreaks after they
occur. According to the CDC and EPA, in 1993 and 1994 alone, there were over 30
outbreaks of water borne diseases. In a Milwaukee incident, over 400,000 people
(more than half of the total population of the City) became ill, with more than
4,000 hospitalized and 100 deaths. Particularly susceptible were
immunocompromised persons.
The current method for water quality sampling is labor intensive, expensive,
sporadic, time consuming, and results are untimely for corrective action. In the
monitoring for bacteria or parasite detection, for example, workers will collect
samples at distribution points, influent points or effluent points. These
samples will then be transported to laboratories that are equipped to provide
detection and identification of the contaminants in question. Samples are then
either incubated on various media or physically separated to allow for
microscopic visual identification by trained technicians. Standard turn-around
time for information is one to two days, although some tests can often be run in
as little as a few hours. Expenses increase dramatically if quick (few hour)
turn-around is requested or required.
This method of "surveillance" is recognized as woefully inadequate by the water
industry. While it serves to provide incidence statistics, it is operationally
ineffective since problems are detected after dangerous levels of contamination
have already been reached. By the time positive detection is made, it is not
possible to take corrective action to prevent exposure. Corrective actions are
limited to gross and often overblown solutions such as general boil orders or a
total water system shut-down. These actions serve to only limit the initial
outbreaks, rather than to prevent them.
A system that would provide for "real-time" contaminant detection and monitoring
could prevent or limit outbreaks, saving lives and money in the process. The
availability of this technology would clearly represent a leap forward in water
delivery and monitoring. Under the guidance of Dr. Gregory M. Quist, using the
instrumentation and (some) software acquired through the Wyatt transfer, the
Company will seek to develop software and analytical packages to confirm that
the multiangle light scattering ("MALS") measurements of individual
Cryptosporidium and Giardia cysts can be identified with a certainty greater
than 90% in the presence of various background algal species. The proposed
system would monitor the MALS properties of each particle passing through the
detector region and the software program would examine the measurements and
decide whether or not the particle was one of the two test parasites.
Potential customers for the proposed system would include local water utilities,
both private and municipal; state water utilities and water quality and health
agencies; Federal government agencies such as EPA, DoD, DoE, CDC; wastewater
treatment plants; ground water and well users; and potentially, as the cost of
the sensors and system decrease, homeowners.
27
<PAGE> 30
Based on a very preliminary evaluation of market needs and the size and number
of potential customers, the market size is estimated to be greater than $200
million per year. Detailed market validation has not been completed; however,
management believes that this estimate is conservative. Concurrent with
conducting the phase one feasibility program, the Company intends to conduct a
more comprehensive market study for this proposed drinking water monitoring
system. See "RECENT SIGNIFICANT DEVELOPMENTS - Technology Transfer Agreement."
COMPETITION
The Company's EDI technology competes 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, 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.
With regard to the Company's proposed drinking water monitoring product, there
are established methods of water quality testing currently employed by local and
state water utilities, both private and municipal. However, these methods are
labor intensive, expensive and time consuming and do not provide the near "real
time" monitoring capabilities which the Company's product, if it can be
developed, would purport to offer.
28
<PAGE> 31
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.
The Company has not secured a registered trademark or trade name for the "EDI".
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 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).
29
<PAGE> 32
In July, 1992, the Company granted an exclusive worldwide license to EDI
Components for the manufacture and sale of EDI products. Such license was
terminated in August, 1997. See "RECENT SIGNIFICANT DEVELOPMENTS - License
Termination Agreement."
For a description of the Wyatt license, see "RECENT SIGNIFICANT DEVELOPMENTS -
Technology Transfer Agreement."
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 will seek all necessary approvals or certifications.
EMPLOYEES
As of November 11, 1997, the Company employed six full-time employees, of which
three were engaged in development, production and design and three in
administrative, marketing and clerical functions. Dr. Gregory Quist, who will
commence employment with the Company on December 1, 1997, will be engaged in
research and development of the Company's proposed drinking water monitoring
product based on the Wyatt technology acquired in October, 1997 (see "BUSINESS
Laser Monitoring Division"). In order to implement its proposed business, the
Company will have to hire additional employees in 1998, particularly
manufacturing and marketing employees. However, the Company cannot predict with
any certainty when it will hire such personnel. 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.
PROPERTIES
The Company currently leases, from an unaffiliated third party, a 5,600 sq. ft.
facility in Laguna Hills, California on a month-to-month basis at a rental of
$3,892 per month. The Company believes that this facility is adequate to
accommodate its requirements temporarily until it can relocate to its new
facility in Laguna Hills. The Company has negotiated (and will execute by the
end of November, 1997) a lease with an option to purchase a 30,000 sq. ft.
facility in Laguna Hills and will pay a gross (including taxes, insurance and
major repairs) lease payment of $16,000 per month beginning February 1, 1998.
The Company intends to sub-lease approximately 10,000 sq. ft. of such facility
to offset approximately $6,500 of such monthly rental.
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<PAGE> 33
- -------------------------------------------------------------------------------
LITIGATION
- -------------------------------------------------------------------------------
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.) 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 was conditioned upon
termination of the license relationship with EDI Components and realignment of
the Company's Board of Directors by July 21, 1997. The Boards of Directors of
both parties ratified the settlement agreement in June, 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
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<PAGE> 34
31, 1994, the Company paid $250 on this judgment; however, the Company has made
no arrangements to satisfy this obligation as of this writing.
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.
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<PAGE> 35
- --------------------------------------------------------------------------------
MANAGEMENT
- --------------------------------------------------------------------------------
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Electropure, Inc. are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William F. Farnam 76 Director
Randall P. Frank 35 Director
Randolph S. Heidmann 46 Director
William H. Lee 57 Director
Floyd H. Panning 69 Director, President and
Chief Executive Officer
Catherine Patterson 45 Chief Financial Officer
and Secretary
</TABLE>
WILLIAM F. FARNAM, 76, was named to the Board of Directors on August 5, 1997.
Mr. Farnam served for 20 years as Public Works Director and City Engineer for
the City of Inglewood, California and went on to become the Assistant City
Manager there before he retired. Mr. Farnam is a Registered Professional Civil
Engineer in the State of California and received a Bachelor of Science Degree in
Electrical Engineering from the University of Southern California and is a
Management Studies Graduate from the University of California at Los Angeles.
RANDALL P. FRANK, 35, joined the Board of Directors on October 25, 1997. Mr.
Frank, is the son of Anthony M. Frank, who is the former Postmaster General of
the United States and is a substantial shareholder in the Company. Randall Frank
is engaged as an insurance underwriter with Five Star Managers, LLC in San
Francisco, California, an insurance firm whose primary business is underwriting
trustees for union and corporate employee benefit plans. Mr. Frank received a
B.A. degree from the University of California at Berkeley and a Masters degree
in International Management from the American Graduate School of International
Management ("Thunderbird").
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
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<PAGE> 36
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 has 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.
FLOYD H. PANNING, 69, joined the Board of Directors and was engaged by the
Company as President and Chief Executive Officer in August, 1997. Mr. Panning
came out of retirement in April, 1992 to establish EDI Components and form a
license relationship with the Company to manufacture and market the EDI
technology. Prior to forming EDI Components, Mr. Panning had founded two
million-dollar businesses which were sold in 1982. In 1972, he founded
Formatron, Inc., a manufacturer of rotational molded plastic products such as
plating and chemical storage tanks, and many other polyethylene and
polypropylene containers. In 1963, he acquired Mills Engineering Co., a
manufacturer of high quality aluminum products. As owner/operator he expanded
the firm from a limited local sales organization by establishing major national
and international accounts with Fortune 100 companies and major municipalities.
CATHERINE PATTERSON, 45, 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 of the Company. 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.
Directors serve until the next Annual Meeting of Shareholders when their
successors are elected and qualified. Mr. Panning has a right to nominate one
director of the Company. See "MANAGEMENT - Employment Agreement." Officers,
subject to any employment agreements, serve at the pleasure of the Board of
Directors.
KEY EMPLOYEES
RONALD J. O'HARE, 49, resigned from the Board of Directors in August, 1997 after
having served since May, 1987. Mr. O'Hare worked for the Company from December,
1986 through June, 1992, at which time he joined EDI Components as Vice
President of Operations. In August, 1997, when the license arrangement between
the Company and EDI Components terminated, Mr. O'Hare rejoined Electropure, Inc.
as its Manager of Engineering and Product Design. Prior to joining the Company
in 1986, Mr. O'Hare was with the service division of Culligan Water
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<PAGE> 37
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 systems. Ronald
O'Hare is the son of Harry M. O'Hare, the Company's founder, and was
instrumental in the development of the current design of the Company's EDI
technology.
GREGORY M. QUIST, PHD, 41, will join the Company on December 1, 1997 as General
Manager of the newly-created Laser Monitoring Division of Electropure, Inc. Dr.
Quist will head the Company's efforts to develop "real time" laser-based
drinking water quality monitoring systems derived from the Technology Transfer
Agreement signed with Wyatt Technology Corporation on October 25, 1997. Dr.
Quist has an extensive background in the fields of water and airborne particle
detection and was directly involved in the earlier developments at Wyatt
Technology of its proprietary multiangle laser light scattering techniques. He
leaves his position as Vice President and Director of Technology Applications at
Science Applications International Corporation ("SAIC") in San Diego, where he
was responsible for a variety of spin-off businesses based on SAIC technology.
Dr. Quist received a B.S. degree from Yale University in Astronomy and Physics
and a PhD from the University of California at Santa Barbara in Applied
Theoretical Physics.
MANAGEMENT COMPENSATION
Until August 14, 1997, the Company did not have a Chief Executive Officer and
had only one executive officer whose annual compensation was less than $100,000
per year. Floyd Panning, the Chief Executive Officer of the Company, is being
compensated since August 14, 1997 at the rate set forth in his Employment
Agreement with the Company that is described under "MANAGEMENT - Employment
Agreement." The Company has no stock option or other forms of compensation
plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company does not have a compensation committee or other committees of the
Board of Directors performing similar functions. Compensation of executive
officers is determined by the Board of Directors. The Board of Directors
negotiated Mr. Floyd Panning's Employment Agreement, whereby he became President
and Chief Executive Officer of the Company, in connection with the License
Termination Agreement with EDI Components and Mr. Panning assuming such
positions with the Company.
EMPLOYMENT AGREEMENT
On August 14, 1997, the Company entered into a five-year Employment Agreement
(effective August 5, 1997) with Floyd Panning engaging him as the Company's
President and Chief Executive Officer. Mr. Panning has the unilateral option to
extend such employment for a period of two (2) years. The Agreement provides Mr.
Panning with five weeks' vacation, the use of a Company car and cellular
telephone and participation in any benefit programs offered by the
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<PAGE> 38
Company (none at this time). Pursuant to the terms of the Employment Agreement,
Mr. Panning was granted 125,000 warrants to purchase Common Stock at $0.28125
per share. Such warrants are exercisable in increments of 25,000 annually
commencing with the date of the agreement. The Employment Agreement also
provides for the following:
(a) A base monthly salary of $6,500 increasing to $8,000 per month once
the Company has realized a minimum of $1 million in financing. Each
year thereafter, the base salary shall automatically increase by an
amount equal to five (5%) percent.
(b) Upon realizing the above minimum financing, the Company has agreed to
reimburse Mr. Panning for certain wages deferred while he was
employed at EDI Components (a total of $63,700 was deferred). A
$25,000 promissory note issued by Mr. Panning, in consideration for
his exercise of 50,000 warrants to purchase Common Stock at $0.50 per
share, will be satisfied (including accrued interest) with such
deferred wages, net of normal federal, state and local income and
payroll taxes. Mr. Panning agreed to waive any remaining balance of
deferred wages after payment of such promissory note.
(c) Mr. Panning has the right to nominate, subject to shareholder
approval, one person to the Company's Board of Directors during the
term of his employment. In the meantime, Mr. Panning has been named
to the Company's Board of Directors.
(d) Mr. Panning may, without cause, terminate his employment and retain
the right to the following percentage of his base monthly salary:
<TABLE>
<CAPTION>
YEAR OF PERCENT
TERMINATION OF SALARY
----------- ---------
<S> <C>
1 60%
2 70%
3 80%
4 90%
5 100%
6 0%
7 0%
</TABLE>
(e) Any termination of employment by the Company shall immediately vest
all 125,000 warrants granted to Mr. Panning under the employment
agreement. In addition, termination by the Company of Mr. Panning's
employment without cause, shall automatically accelerate the issuance
of Additional Shares due EDI's investors under the License
Termination Agreement at the then fair market value; provided,
however, Mr. Panning's successor has not been approved by simple
majority vote of such EDI Components' investors (excluding Mr.
Panning).
36
<PAGE> 39
COMPENSATION OF DIRECTORS
In August, 1997, the Company authorized an annual issuance of 10,000 ten-year
warrants to purchase Common Stock to each Director for service to the Company.
Such warrants are granted at a 25% discount to the fair market value of the
Common Stock as of the date of grant. In August, 1997, 10,000 warrants to
purchase Common Stock were issued to each of the five (5) Directors of the
Company (including Ronald J. O'Hare, who has subsequently resigned, and Mr.
Floyd Panning, who joined the Board in August) at the rate of $0.375 per share.
37
<PAGE> 40
- -------------------------------------------------------------------------------
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
- -------------------------------------------------------------------------------
PRINCIPAL SHAREHOLDERS
The following table sets forth information as of November 12, 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>
Common Class B Convertible % of
Stock % of Common % of Preferred % of Voting
Name** (1)(2) Class Stock Class Stock (3) Class Power (4)
- -------------------------- ----- ----- ------ ----- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
William F. Farnam 54,000 * - - - - *
Anthony M. Frank
320 Meadowood Court
Pleasant Hill, CA 94523 2,037,083 21.9% - - - - 16.2%
Randall P. Frank 394,121 4.2% - - - - 3.1%
Randolph S. Heidmann 10,000 * - - - - *
William H. Lee 10,000 * - - - - *
Harry M. O'Hare, Sr.
2035 Huntington Dr. #1
S. Pasadena, CA 91030 4,575 * 83,983 100% 931,629 35.8% 12.8%
Floyd H. Panning
23251 Vista Grande, Suite A
Laguna Hills, CA 92653 566,892 6.1% - - 7,500 * 4.6%
Wyatt Technology Corporation
802 E. Cota Street
Santa Barbara, CA 93103 2,100,000 22.6% - - - - 16.7%
All officers and directors
as a group (6 persons) 1,097,125 14.1% - - 10,406 * 8.8%
</TABLE>
- ----------
* Less than 1%
** Includes address of five percent or more shareholders of any class.
38
<PAGE> 41
(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 (1.0%) and 1,097,125 shares (11.7%)
of Common Stock, respectively.
(2) Includes currently exercisable warrants or options to purchase an
aggregate of 1,507,937 shares of Common Stock.
(3) 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.
(4) 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.
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 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.
39
<PAGE> 42
- --------------------------------------------------------------------------------
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------------------------
MR. WILLIAM FARNAM
On October 31, 1997, Mr. Farnam exercised 44,000 warrants to purchase Common
Stock at $0.50 per share. Such warrants, which were scheduled to expire at 5:00
P.M. on October 1, 1997, had been assigned to Mr. Farnam by various investors of
EDI Components.
MR. ANTHONY FRANK
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.
Between December, 1996 and April, 1997, Mr. Frank loaned EDI Components an
additional $150,000 at 10% interest. Mr. Frank had the right to convert said
loans into common stock of the Company and in August, 1997 converted such loans,
plus $7,110 in accrued interest, into 418,906 shares of the Company's Common
Stock at the rate of $0.375 per share. On October 7, 1997, Mr. Frank sold, at
his cost, 200,000 of such shares to his adult daughter, Tracy F. Frank (100,000
shares), and to Ronald J. O'Hare (50,000 shares) and Catherine Patterson (50,000
shares). Mr. O'Hare is currently employed by the Company and formerly served as
a Director until August 14, 1997. Ms. Patterson currently serves as Corporate
Secretary and Chief Financial Officer of the Company.
On August 14, 1997, Mr. Frank received 25,000 shares of Common Stock, valued at
$2.00 per share, as part of an initial issuance of shares to the investors of
EDI Components in accordance with the terms of the License Termination Agreement
entered into between Electropure and that company.
On October 1, 1997, Mr. Frank assigned, at no cost, warrants to purchase 4,000
shares of the Company's Common Stock at $0.50 per share to Mr. William Farnam, a
Director of the Company, who subsequently exercised same. Such warrants were
scheduled to expire at 5:00 P.M. on October 1, 1997.
40
<PAGE> 43
MR. RANDALL FRANK
On August 14, 1997, Mr. Frank received 25,000 shares of Common Stock, valued at
$2.00 per share, as part of an initial issuance of shares to the investors of
EDI Components in accordance with the terms of the License Termination Agreement
entered into between Electropure and that company.
MR. PANNING
On August 14, 1997, Mr. Panning received 50,000 shares of Common Stock, valued
at $2.00 per share, as part of an initial issuance of shares to the investors of
EDI Components, in accordance with the terms of the License Termination
Agreement entered into between the Company and EDI Components. Mr. Panning was
the founder, the President and a principal shareholder of EDI Components.
Also on August 14, 1997, pursuant to the terms of a five-year Employment
Agreement entered into with the Company, Mr. Panning was granted 125,000
ten-years warrants to purchase Common Stock at $0.28125 per share. Such warrants
are exercisable in increments of 25,000 each year on a cumulative basis.
Concurrent with the execution of the above employment agreement, Mr. Panning was
named to the Company's Board of Directors.
On August 22, 1997, Mr. Panning exercised his right to purchase 50,000 shares of
the Company's Common Stock at $0.50 per share. Mr. Panning issued a Full
Recourse Promissory Note for the $25,000 purchase price, secured by the shares,
payable once the Company has reimbursed Mr. Panning for wages he deferred while
employed by EDI Components. Of the warrants exercised, 40,000 had been issued
pursuant to the July, 1992 license arrangement between the Company and EDI
Components whereby the Company issued warrants to all investors in EDI
Components in conjunction with their capital investment in that entity. The
balance of 10,000 warrants exercised had been issued to Mr. Panning in February,
1993 as a bonus for services rendered to the Company.
WYATT TECHNOLOGY CORPORATION
The Company issued 2,100,000 shares of Common Stock to Wyatt Technology
Corporation pursuant to a Technology Transfer Agreement entered into on October
25, 1997. See "RECENT SIGNIFICANT DEVELOPMENTS - Technology Transfer Agreement."
41
<PAGE> 44
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 $50,000 without the approval of the Board of Directors.
42
<PAGE> 45
- --------------------------------------------------------------------------------
SELLING SHAREHOLDERS
- --------------------------------------------------------------------------------
The following table shows the names and positions, if any, with the Company of
the Selling Shareholders, the number of shares of Common Stock of the Company
beneficially owned by each of them as of November 12, 1997, the number of shares
covered by this Prospectus and the number of shares (and percentage, if over 1%)
such individuals would beneficially own if all of the shares covered by this
Prospectus were fully sold:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
NUMBER OF AFTER
NUMBER OF SHARES OFFERING
NUMBER OF SHARES OWNED AFTER PERCENT OF
NAME AND POSITION SHARES COVERED BY THIS CLASS, IF
WITH COMPANY, IF ANY OWNED(1) PROSPECTUS OFFERING(1) GREATER THAN 1%
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Adams, Ray 15,494 15,494
Addison, John 3,612 3,612(2)
Aguirre, Gilbert G 37,500 37,500(2)
AM-FM Enterprises 1,112 1,112(2)
Amato, Frank L 500 500(2)
Arndt, Douglas 2,000 2,000(2)
Austin, Jackson 1,250 1,250(2)
Azzalino Trust, William 12,354 12,354
Barber, George 2,223 2,223(2)
Barrett, Robert 1,250 1,250(2)
Belk, John 3,335 3,335(2)
Bias, Alan 556 556(2)
Bone, Alan 223 223(2)
Boston, E. A 1,112 1,112(2)
Brown, Michael 1,112 1,112(2)
Campbell, Eric 667 667(2)
Carrillo, Ciro 84,167 84,167(2)
Clanin, Thomas 625 625(2)
Crosson, Albert 1,250 1,250(2)
Cruver, James E. -
Former Director
and Former President 1,612 1,612(2)
Cummus, Ann 1,112 1,112(2)
Curtis, Tom 250 250(2)
Danna, Gay 445 445(2)
Dargenzio, Alfonso 150,667 150,667(2)
Dargenzio, Raymond 223 223
Dargenzio, Richard 890 223 667
Das, Philip 625 625(2)
Davidson, Frances D 2,000 2,000
Dennis Family Trust 26,000 26,000
Dennis, Lawrence 2,000 2,000
Dhawan, Gil K 45,834 45,834
Economic Development Bank
for Puerto Rico(3) 200,000 200,000(2)
</TABLE>
43
<PAGE> 46
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
NUMBER OF AFTER
NUMBER OF SHARES OFFERING
NUMBER OF SHARES OWNED AFTER PERCENT OF
NAME AND POSITION SHARES COVERED BY THIS CLASS, IF
WITH COMPANY, IF ANY OWNED(1) PROSPECTUS OFFERING(1) GREATER THAN 1%
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Egan, William 667 667(2)
Ensch, Thomas 125 125(2)
Farnam Living Trust - Director(4) 54,000 54,000(2)
Fiducia Trading Co. - Former Director 2,223 2,223(2)
Fishman, Richard L 21,112 21,112(2)
Fleming Profit Sharing Plan 77,500 75,000(2) 2,500
Fleming, Ana Leigh 8,750 7,500 1,250
Fleming, Michael W 5,000 5,000
Fleming, Terry L 172,500 147,500(2) 25,000
Fleming, Terry L., Jr 5,000 5,000
Fonmin, John L 2,446 1,112(2) 1,334
Foti, A. Bert 4,446 1,112(2) 3,334
Foti, Andrew 4,446 1,112(2) 3,334
Frank, Anthony M.(4) 1,968,874 1,823,040(2) 145,834 1.6%
Frank, Randall P. - Director(4) 390,564 366,564(2) 24,000
Frank, Tracy F 138,862 124,862(2) 14,000
Frisenda, Frank 25,000 25,000(2)
Frisenda, Quinton & Nicholson 8,696 8,696
Givner, Ronald P 25,000 25,000(2)
Hamera, Tracy Carlyle 5,000 5,000
Hartley, E. Dale - Former Director 316,759 238,900 77,859
Heidmann, Randolph S. - Director(4) 10,000 10,000(2)
Hughes, Martin 1,112 1,112(2)
Illes, Steve G 51,112 51,112(2)
Jepson, Joanne 556 556(2)
Kearns, Jeanne M 500 500(2)
Kwan Pension Plan 1,181 1,181(2)
Kwan Profit Sharing Plan 1,181 1,181(2)
Landrace Corporation 4,446 1,112(2) 3,334
Lee, William H. - Director(4) 10,000 10,000(2)
Link, F. Steven 2,788 556(2) 2,232
Littlewood, Ken 1,112 1,112(2)
Lupo. Vince 1,112 1,112(2)
Martinez, Susan 446 112(2) 334
Meier, Lon 223 223(2)
Metals Precision Co. 1,212 303(2) 909
Meylor, Tom 334 63(2) 271
Mihama Corporation 150,000 150,000(2)
Nance, Edward 4,446 1,112(2) 3,334
Neff, Merlin L 8,940 2,223(2) 6,717
Nemerovski, Harold 4,446 1,112(2) 3,334
O'Connell, George 75,000 75,000(2)
O'Hare, Harry M. - Former Director
and Former Chief Executive
Officer(5) 4,575 2,075(2) 2,500
O'Hare, Ronald J. - Former Director
and Design Engineer(4) 84,500 79,500(2) 5,000
Ovando, Paul J. - Former Director 66,647 48,807(2) 17,840
Panning, Floyd - Director, President
and Chief Executive Officer(4) 564,202 564,202(2)
</TABLE>
44
<PAGE> 47
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
NUMBER OF AFTER
NUMBER OF SHARES OFFERING
NUMBER OF SHARES OWNED AFTER PERCENT OF
NAME AND POSITION SHARES COVERED BY THIS CLASS, IF
WITH COMPANY, IF ANY OWNED(1) PROSPECTUS OFFERING(1) GREATER THAN 1%
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Patterson, Catherine - Secretary
and Chief Financial Officer(4) 62,112 62,000(2) 112
Pett, Robert A 104,929 104,929(2)
Powell, Charles 16,973 7,500(2) 9,473
Quist, Gregory - General Manager 300,000 300,000(2)
Laser Division(4)
Reason, Robert 37,500 37,500(2)
Roman Catholic Bishop of
Orange County 575 575
Romig, Richard 1,815 1,250(2) 565
Schaeffer, Richard 788 88(2) 700
Schmitt, Daryl 4,446 1,112(2) 3,334
Shani, Ruth - Admin. Asst 12,000 12,000(2)
Sikora, Thaddeus S 1,875 1,875(2)
Skalski, Ken 556 556(2)
Smith Trust, Dorothy 20,000 20,000
Smith, Douglas D 5,000 5,000
Smutko, John 1,100 1,100(2)
Spencer, Charles 2,223 2,223(2)
Sugarman Family Partnership 35,000 25,000 10,000
Tarlow Family Trust 88,279 54,167 34,112
Tarlow, Herbert D 31,432 18,210(2) 13,222
Textile Apparel Corp. 1,112 1,112(2)
Thorp, Carolyn 3,036 3,036
TNKRGK Family Trust 2,362 2,362(2)
Traub, Gordon 6,243 1,112(2) 5,131
Vardiabasis, Demos 3,036 3,036
Veraldi, William 1,112 1,112(2)
von Leesen, John 21,918 12,918(2) 9,000
Waldman Family Trust 115,157 115,157(2)
Waldman, Jill 1,250 1,250(2)
Wenc, Henry S 2,625 625(2) 2,000
White, Bryan L 1,000 1,000(2)
White, Kevin C 1,000 1,000(2)
White, Kristi, A 1,000 1,000(2)
White, Leroy - Production Manager 20,000 20,000(2)
White, Sally J 1,000 1,000(2)
Whiting, Mikel 1,112 1,112(2)
Winokur Water Trust 72,334 72,334
Worley, Samantha L 1,000 1,000(2)
Wyatt Technology Corporation(6) 2,100,000 630,000 1,470,000 15.8%
Yamada, Kenneth 938 938(2)
--------- ----------- ---------
7,972,879 6,070,313 1,902,566
--------- ------------ ---------
</TABLE>
45
<PAGE> 48
(1) Includes shares currently issuable upon exercise of options or warrants
or exercisable within 60 days of the date hereof. Excludes Class B
Common Stock and Convertible Preferred Stock owned by the Selling
Shareholders.
(2) Includes Common Stock underlying options or warrants.
(3) See "LITIGATION" - Puerto Rico."
(4) See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and "MANAGEMENT -
Directors, Officers and Key Employees."
(5) Through ownership of Common Stock, Class B Common Stock and Convertible
Preferred Stock, Mr. O'Hare controls 12.8% of the voting power of
Electropure, Inc. See "PRINCIPAL SHAREHOLDERS."
(6) See "RECENT SIGNIFICANT DEVELOPMENTS - Technology Transfer Agreement."
The sale of common stock may be effected from time to time in transactions
(which may include block transactions by or for the account of the Selling
Shareholder) in the over-the-counter market or in negotiated transactions,
through the writing of options on the common stock, through a combination of
such methods of sale, or otherwise. Sales may be made at fixed prices which may
be changed, at market prices prevailing at the time of sale, or at negotiated
prices. If any Selling Shareholder sells his, her or its shares, or options
thereon, pursuant to this Prospectus at a fixed price or at a negotiated price
which is, in either case, other than the prevailing market price or in a block
transaction to a purchaser who resells, or if any Selling Shareholder pays
compensation to a broker-dealer that is other than the usual and customary
discounts, concessions or commissions, or if there are any arrangements either
individually or in the aggregate that would constitute a distribution of the
shares, a post-effective amendment to the Registration Statement of which this
Prospectus is a part would need to be filed and declared effective by the
Securities and Exchange Commission before such Selling Shareholder could make
such sale, pay such compensation or make such a distribution. The Company is
under no obligation to file a post-effective amendment to the Registration
Statement of which this Prospectus is a part under such circumstances.
The Selling Shareholders may effect transactions in their common stock by
selling their securities directly to purchasers, through broker-dealers acting
as agents for the Selling Shareholders or to broker-dealers who may purchase the
Selling Shareholder's shares as principals and thereafter sell such securities
from time to time in the over-the-counter market, in negotiated transactions, or
otherwise. Such broker-dealers, if any, may receive compensation in the form of
discounts, concessions or commissions from the Selling Shareholders and/or the
purchasers for whom such broker-dealers may act as agents or to whom they may
sell as principals or both.
The Selling Shareholders and broker-dealers, if any, acting in connection with
such sales might be deemed to be "underwriters" within the meaning of Section
2(11) of the Act and any commission
46
<PAGE> 49
received by them and any profit on the resale of such securities might be deemed
to be underwriting discounts and commissions under the Act.
The Selling Shareholders have been advised that during the time each is engaged
in "distribution" (as defined under Regulation M under the Securities Exchange
Act of 1934, as amended) of the securities covered by this Prospectus, each must
comply with Regulation M under the Securities Exchange Act of 1934, as amended,
and pursuant thereto: (i) shall not engage in any stabilization activity in
connection with the Company's securities; and (ii) shall not bid for or purchase
any securities of the Company or attempt to induce any person to purchase any of
the Company's securities other than as permitted under the Securities Exchange
Act of 1934, as amended. Any Selling Shareholder who may be "affiliated
purchasers" of the Company as defined in Regulation M have been further advised
that they must coordinate their sales under this Prospectus with each other and
the Company for purposes of Regulation M. Each Selling Shareholder must also
furnish each broker through which common stock is sold copies of this
Prospectus.
- --------------------------------------------------------------------------------
DESCRIPTION OF CAPITAL STOCK
- --------------------------------------------------------------------------------
COMMON STOCK
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 Common Stock and the shares being offered hereby and the shares
issuable upon exercise of Warrants and options when exercised and issued, will
be validly issued, fully paid and nonassessable.
Holders of 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 Common Stock have no preemptive, subscription, conversion or
redemption rights. Upon liquidation, dissolution or winding up of the Company,
the holders of 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
47
<PAGE> 50
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 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 November 12, 1997, 7,794,293 shares of the Company's Common Stock were
outstanding, including 2,100,000 issued to Wyatt Technology Corporation on
October 25, 1997.
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 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 reverse 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 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 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.
48
<PAGE> 51
The Company did not achieve certain 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.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is American
Stock Transfer Company, 40 Wall Street, New York, New York 10005.
SHARES ELIGIBLE FOR FUTURE SALE
6,249,379 of the shares of Common Stock owned by shareholders of the Company are
"restricted securities" as such term is defined in the Securities Act of 1933
(the "Act"). An aggregate of approximately 957,098 shares of Common Stock are
eligible for sale under Rule 144. In general, Rule 144 permits a shareholder of
the Company who has held his shares for at least one year after payment therefor
to sell within any three-month period a number of shares that does not exceed
the greater of 1% of the outstanding shares of Common Stock (currently
approximately 77,943 shares) or the average weekly trading volume of such shares
for the four weeks preceding the sale. Any shareholder who is not an affiliate
of the Company and has not been an affiliate for the preceding three months and
who has held his shares of Common Stock for at least two years after payment may
sell his shares under Rule 144, without any volume limitations. If a substantial
number of shares of Common Stock are sold pursuant to Rule 144, registration
statements or otherwise, the price at which the shares of Common Stock are
traded may be adversely affected.
49
<PAGE> 52
- --------------------------------------------------------------------------------
LEGAL OPINION
- --------------------------------------------------------------------------------
Jeffer, Mangels, Butler & Marmaro, LLP, 2121 Avenue of the Stars, Tenth Floor,
Los Angeles, California 90067, securities counsel to Electropure, will render an
opinion with respect to the valid issuance and nonassessability of the Common
Stock being offered hereby. Ronald P. Givner, of counsel to Jeffer, Mangels,
Butler & Marmaro, LLP, has the right, until August, 1998, to purchase 25,000
shares of Common Stock at $1.19 per share.
- --------------------------------------------------------------------------------
EXPERTS
- -------------------------------------------------------------------------------
The Financial Statements of Electropure, Inc. (formerly HOH Water Technology
Corporation) as of October 31, 1995 and 1996, and for the years in the two-year
period ended October 31, 1996, included herein and elsewhere in the Registration
Statement, have been included herein and in the Registration Statement in
reliance upon the report of Southland Business Service, independent auditors,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing. The report of Southland Business Service contained
explanatory paragraphs as to the Company's ability to continue as a going
concern, and to the outcome of certain claims and litigation.
- --------------------------------------------------------------------------------
CHANGE IN CERTIFYING ACCOUNTS
- --------------------------------------------------------------------------------
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 did not consult 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).
50
<PAGE> 53
[SOUTHLAND BUSINESS SERVICE LETTERHEAD]
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> 54
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> 55
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> 56
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> 57
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) (0.21)
Extraordinary item:
Gain on liabilities written off 0.02 0.06
------------ -----------
$ 0.01 $ (0.15)
============ ===========
Weighted average common shares outstanding 16,070,213 1,926,868
============ ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 58
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> 59
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> 60
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 0.05 18,875 - - -
exercise of warrants 132,220 0.01 1,322 - - -
Cancellation of common stock for
issuance of warrants (293,357) 0.15 (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 0.05 50 - - -
exercise of options 83,130 0.15 831 - - -
exercise of options 45,833 0.20 458 - - -
Issuance of common stock for cash 200,000 0.20 2,000 - - -
Issuance of common stock for
services rendered 200,000 0.12 2,000 - - -
services rendered 86,957 0.17 870 - - -
Issuance of common stock for
conversion of debt 2,533,334 0.06 25,333 - - -
conversion of debt 1,514,302 0.09 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> 61
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(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 H OH, 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 H OH, 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, H OH, 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 H OH, 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> 62
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
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> 63
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
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> 64
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
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> 65
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(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> 66
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
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> 67
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
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>
October 31,
Number of Date -----------------------
Holder Shares 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> 68
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
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> 69
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
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> 70
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
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:
- 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
- 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> 71
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
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> 72
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<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> 73
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
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> 74
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
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> 75
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(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:
- Such shares will not participate in dividends other than stock
dividends
- Such shares will not participate in any distribution of assets in the
event of liquidation
- 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> 76
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Net operating loss carryforwards
--------------------------------
Federal tax purposes
-------------------- State
Year Year Full Annual tax
generated expiring loss limit* purposes
--------- -------- ---- ------- --------
<S> <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 -
(less than) 06/25/87 2002 716,000 127,472 -
--------- ---------
Total Loss: 2,932,000 522,000 -
(greater than) 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> 77
ELECTROPURE, INC.
(Formerly HOH Water Technology Corporation)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
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> 78
- --------------------------------------------------------------------------------
UNAUDITED INTERIM FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The accompanying interim condensed Financial Statements are unaudited and have
been prepared in accordance with the rules and regulations of the Securities and
Exchange Commission. These statements should be read in connection with the
Financial Statements for the two years ended October 31, 1996, and the notes
thereto included in this Prospectus. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations.
In the opinion of management, the accompanying unaudited interim condensed
Financial Statements contain all adjustments (consisting only of normal
recurring accruals) necessary to present fairly the Company's financial position
as of July 31, 1997, and the results of its operations and its cash flows for
the nine months ended July 31, 1996 and 1997. The results of operations for the
nine-month period ended July 31, 1997 are not necessarily indicative of the
results to be expected for the full year.
F-26
<PAGE> 79
ELECTROPURE, INC.
(Formerly, HOH Water Technology Corporation)
BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, July 31,
Assets 1996 1997
------ ---------- ----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 674 $ 2,166
Receivables:
Trade accounts 7,278 7,278
Due from related parties 78,898 78,898
Allowance for doubtful receivables (85,528) (85,705)
---------- --------
648 471
Other current assets 20,000 20,000
Total Current Assets $ 21,322 $ 22,637
---------- --------
Propery and equipment, at cost:
Office equipment 539 539
---------- --------
539 539
Less accumulated depreciation and amortization 49 130
---------- --------
490 409
Total Assets $ 21,812 $ 23,046
========== ========
</TABLE>
F-27
<PAGE> 80
ELECTROPURE, INC.
(Formerly, HOH Water Technology Corporation)
BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, July 31,
Liabilities and Stockholders' Equity (Deficiency) 1996 1997
-------------- -------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Notes payable to stockholders $ 15,734 $ 29,098
Accounts payable 30,744 30,744
Accrued liabilities 218 3,480
Allowance for loss on lawsuit settlements 23,331 23,331
------------ -----------
Total current liabilities 70,027 86,653
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 1996 and 1997 26,000 26,000
Stockholders' deficit:
Common stock, $.01 assigned par value. Authorized
20,000,000 shares; 1,757,910
shares issued and 1,797,910 shares
outstanding in 1996; 4,102,290 shares
issued and 4,062,290 shares outstanding in 1997 22,248 40,623
Class B common stock, $.01 assigned par value. Authorized
83,983 shares; issued and outstanding 83,983 shares in
1996 and 1997 840 840
Additional paid-in capital 16,080,709 16,720,389
Deficit accumulated in the development stage (16,025,246) (16,698,692)
Notes receivable on common stock (152,766) (152,766)
------------ ------------
(74,215) (89,607)
------------ ------------
Total Liabilities and Stockholders' Equity (Deficiency) $ 21,812 $ 23,046
============ ============
</TABLE>
F-28
<PAGE> 81
ELECTROPURE, INC.
(Formerly, HOH Water Technology Corporation)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
July 31,
-------------------------------
1996 1997
------------- ----------
<S> <C> <C>
License fees received $ 29,929 $ 66,337
----------- -----------
Costs and expenses:
General and administrative 119,127 88,365
----------- -----------
119,127 88,365
Loss from operations (89,158) (22,028)
----------- -----------
Other income and (expense):
Interest expense (1,074) (1,364)
Litigation settlement costs - (112,000)
Financing costs (76,287) (538,055)
----------- -----------
(77,361) (651,419)
----------- -----------
Net income (loss) $ (166,519) $ (673,447)
----------- -----------
Net income (loss) per share of common stock $ (0.10) $ (0.30)
----------- -----------
Weighted average common shares outstanding 1,667,110 2,219,283
----------- -----------
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE> 82
ELECTROPURE, INC.
(Formerly, HOH Water Technology Corporation)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Unaudited)
<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, 1996 2,224,806 $ - $ 22,248 83,983 $ - $ 840
Issuance of common stock for
conversion of debt 1,717,484 0.31 17,175 - - -
Issuance of common stock for
litigation settlement 100,000 1.00 1,000 - - -
Issuance of common stock for
services rendered 20,000 1.00 200 - - -
Net Loss - - - - - -
--------- --------- --------- ---------
Balance at July 31, 1997 4,062,290 40,623 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, 1996 $ 16,080,709 $ (152,766) $(16,025,246) $ (74,215)
Issuance of common stock for
conversion of debt 520,880 - - 538,055
Issuance of common stock for
litigation settlement 99,000 - - 100,000
Issuance of common stock for
services rendered 19,800 - - 20,000
Net Loss - - (673,447) (673,447)
------------ ------------ ------------ ---------
Balance at July 31, 1997 16,720,389 (152,766) (16,698,692) (89,607)
</TABLE>
See accompanying notes to financial statements
F-30
<PAGE> 83
ELECTROPURE, INC.
(Formerly, HOH Water Technology Corporation)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
July 31,
-------------------------
1996 1997
--------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(166,519) $(673,447)
--------- ---------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 22 81
Financing costs related to issuance of warrants - -
Financing costs related to issuance of common stock 76,287 658,055
Change in assets and liabilities, net of noncash transactions:
Decrease (increase) in receivables 2,100 177
Decrease (increase) in other assets (539) -
Increase in notes payable - 12,000
Increase (decrease) in accounts payable and accrued expenses (1,087) 3,262
Increase in interest payable, net 1,074 1,364
--------- ---------
Total adjustments 77,857 674,939
Net cash used in operating activities (88,662) 1,492
Cash flows from investing activities: None
Cash flows from financing activities:
Proceeds from issuance of common stock 85,886 -
--------- ---------
Net cash provided by financing activities 85,886 -
--------- ---------
Net increase (decrease) in cash (2,776) 1,492
--------- ---------
Cash (overdraft) at beginning of period 3,743 674
--------- ---------
Cash (overdraft) at end of period $ 967 $ 2,166
========= =========
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE> 84
(1) INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed financial statements include all
adjustments which management believes are necessary for a fair presentation of
the results of operations for the periods presented, except those which may be
required to adjust assets and liabilities to the net realizable value should the
Company not be able to continue operations. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. It
is suggested that the accompanying condensed financial statements be read in
conjunction with the Company's audited financial statements and footnotes as of
and for the year ended October 31, 1996.
In May, 1996, the Company's shareholders approved amendments to the Articles of
Incorporation which provided for a corporate name change to "Electropure, Inc."
and a one-for-ten reverse stock split of its Class A and Class B common stock.
Such name change and reverse stock split became effective on July 25, 1996 at
which time the Company's trading symbol on the over-the-counter market was
changed to "ELTP".
LIQUIDITY
As of July 31, 1997, the Company had current liabilities in excess of current
assets of $64,016, a deficit accumulated during the development stage of
$16,698,692 and a stockholders' deficit of $89,607. The Company has never
generated a positive cash flow from operations and, as a result of a severe lack
of working capital, in January, 1992 was forced to suspend operations while it
sought additional financing. In May, 1992, the Company entered into a Letter of
Intent with EDI Components (formerly Electropure, Inc.), a California
corporation, to grant an exclusive license to manufacture and market the
Company's patented Electropure ("EDI") technology. From May, 1992, since
entering into such license relationship, through October 31, 1996, the Company
has funded its working capital needs from license fees paid by EDI Components
totaling $451,554. During the nine months ended July 31, 1997, the Company
received an additional $66,337 in such license fees.
The one-for-ten reverse stock split effected by the Company on July 25, 1996,
resulted in a reduction in capital stock as of such date in the amount of
$170,646 for Class A common shares and $7,558 for Class B common shares and an
increase of $178,203 in additional paid-in capital.
(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
F-32
<PAGE> 85
not being recognized until received and the balances at July 31, 1997 are offset
by an allowance for doubtful accounts.
A total of $23,763 remains due as of July 31, 1997 from former officers and
directors, Harry M. O'Hare, Sr. and David C. Kravitz. Such amount is secured by
37,565 shares of the Company's common stock resulting in an unsecured receivable
in the amount of $23,292, which has been offset by an allowance for doubtful
accounts.
(3) 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.
(4) COMMITMENTS AND CONTINGENCIES
The original cost and accumulated depreciation of assets at July 31, 1997 are as
follows.
<TABLE>
<CAPTION>
<S> <C>
Furniture and fixtures $539
Less accumulated depreciation and amortization 130
----
$409
====
</TABLE>
COMMITMENTS
In June, 1992, the Company entered into a sub-lease with EDI Components for the
rental of space at its current location in Laguna Hills, California. The Company
paid $500 per month through July, 1995 pursuant to such sub-lease agreement,
which includes the use of all utilities, equipment and facilities on the
premises. Since August 1, 1995, the Company has occupied the premises on a
rent-free basis pursuant to an amendment to the license agreements with EDI
Components. Consequently, the Company had no sub-lease expense for the fiscal
period ended July 31, 1997.
(5) STOCKHOLDERS' DEFICIT
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 was ratified by the Bank's Board of Directors on or about
June 16, 1997, provided 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,
have issued a $12,000 promissory note to the Bank, bearing 8% annual interest,
to cover certain costs and attorneys fees. The settlement was conditioned upon
termination of the July, 1992 license agreement between the Company and EDI
F-33
<PAGE> 86
Components and conveyance of all assets back to the Company. See Note (7)
"Subsequent Events."
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 negotiating 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 are to be 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.
(6) 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.
(7) SUBSEQUENT EVENTS
LICENSE TERMINATION AGREEMENT
Effective August 5, 1997, the Company entered into a License Termination
Agreement with its licensee, EDI Components ("EDI"), to terminate the July, 1992
agreements granting EDI a security interest in and exclusive manufacturing and
marketing rights to the Company's patented water purification technology.
Pursuant to the agreement, 362,500 shares of the Company's Common Stock, valued
at $2.00 per share, were issued to the investors of EDI in amounts commensurate
with their capital investment in such entity. The Company has agreed to issue
Additional Shares upon the Common Stock of the Company first having a per share
market value for thirty consecutive trading days equal to or in excess each of
$3.00, $4.00 and $5.50 per share (each a "Trigger Value"). The aggregate value
of such Additional Shares shall equal $675,006, $675,012 and $674,982,
respectively, for a total additional value of $2,025,000. If all of the
Additional Shares are issued pursuant to the License Termination Agreement, the
investors of EDI will have received a total of 878,979 shares of the Company's
Common Stock, with an aggregate value equal to $2,750,000.
The License Termination Agreement also provided for an extension, until October
1, 1997, on the term within which 95,400 warrants to purchase common stock may
be exercised. Such warrants, exercisable at $0.50 per share, had been previously
granted to various EDI investors pursuant to the July, 1992 license agreements
and were to expire upon termination of such license. As of September 6, 1997,
40,000 of such warrants have been exercised by Floyd Panning, president of EDI.
Mr. Panning exercised such warrants, along with an additional 10,000 warrants
granted to
F-34
<PAGE> 87
him in February, 1993 as a bonus for services rendered. Mr. Panning issued a
full resource promissory note for the $25,000 purchase price, secured by the
shares, payable once the Company has reimbursed him for wages he deferred while
employed by EDI. See "Employment Agreement" below.
The Company agreed to assume all liability for payment of the principal and
interest on $210,000 in loans made to EDI between November, 1993 and April,
1997. As of September 8, 1997, the Company has negotiated with two of the
lenders to convert $175,000 in principal loans, plus $10,278 in accrued
interest, for 494,075 shares of common stock at $0.375 per share. The Company
sold an additional 30,983 shares of common stock, at $0.375 per share, to two
individuals for net proceeds of $11,620 which will be utilized to satisfy the
principal and interest accrued on an additional $10,000 of such loans.
EMPLOYMENT AGREEMENT
On August 14, 1997, the Company entered into a five-year Employment Agreement
(effective August 5, 1997) with Floyd Panning engaging him as the Company's
President and Chief Executive Officer. Mr. Panning has the unilateral option to
extend such employment for a period of two (2) years. The Agreement provides Mr.
Panning with five weeks' vacation, the use of a company car and cellular
telephone and participation in any benefit programs offered by the Company (none
at this time). Pursuant to the terms of the Employment Agreement, Mr. Panning
was granted 125,000 warrants to purchase Common Stock at $0.28125 per share.
Such warrants are exercisable in increments of 25,000 annually commencing with
the date of the agreement. The Employment Agreement also provides for the
following:
(a) A base monthly salary of $6,500 increasing to $8,000 per month once
the Company has realized a minimum of $1 million in financing. Each
year thereafter, the base salary shall automatically increase by an
amount equal to five (5%) percent.
(b) Upon realizing the above minimum financing, the Company has agreed to
reimburse Mr. Panning for certain wages deferred while he was
employed at EDI Components (a total of $63,700 was deferred). A
$25,000 promissory note issued by Mr. Panning, in consideration for
his exercise of 50,000 warrants to purchase Common Stock at $0.50 per
share, will be satisfied (including accrued interest) with such
deferred wages, net of normal federal, state and local income and
payroll taxes. Mr. Panning agreed to waive any remaining balance of
deferred wages after payment of such promissory note.
(c) Mr. Panning has the right to nominate, subject to shareholder
approval, one person to the Company's Board of Directors during the
term of his employment. In the meantime, Mr. Panning has been named
to the Company's Board of Directors.
(d) Mr. Panning may, without cause, terminate his employment and retain
the right to the following percentage of his base monthly salary:
F-35
<PAGE> 88
<TABLE>
<CAPTION>
YEAR OF PERCENT
TERMINATION OF SALARY
---------------- ------------------
<S> <C>
1 60%
2 70%
3 80%
4 90%
5 100%
6 0%
7 0%
</TABLE>
(e) Any termination of employment by the Company shall immediately vest
all 125,000 warrants granted to Mr. Panning under the employment
agreement. In addition, termination by the Company of Mr. Panning's
employment without cause, shall automatically accelerate the issuance
of Additional Shares due EDI's investors under the License
Termination Agreement at the then fair market value; provided,
however, Mr. Panning's successor has not been approved by simple
majority vote of such EDI investors (excluding Mr. Panning).
BOARD OF DIRECTORS
On August 5, 1997, Mr. William Farnam was named to the Company's Board of
Directors. Mr. Farnam served for 20 years as Public Works Director and City
Engineer for the City of Inglewood, California and went on to become the
Assistant City Manager there before he retired. Mr. Farnam is a Registered
Professional Civil Engineer in the State of California and received a Bachelor
of Science Degree in Electrical Engineering from the University of Southern
California and is a Management Studies Graduate from the University of
California at Los Angeles.
Mr. Ronald O'Hare, who had served on the Company's Board of Directors since May,
1987, resigned as a Director on August 14, 1997. Mr. O'Hare has been employed by
the Company has Manager of Engineering and Production Design.
Effective August 5, 1997, Mr. Floyd Panning joined the Company's Board of
Directors.
F-36
<PAGE> 89
No dealer, salesman or other person is authorized to give any information or to
make any representations not contained in this Prospectus in connection with the
offer made hereby, and if given or made, such information or presentations must
not be relied upon as having been authorized by the Company. This Prospectus
does not constitute an offer to sell or a solicitation of any offer to buy the
securities offered hereby to any person in any state or other jurisdiction in
which such offer or solicitation would be unlawful. The delivery of this
Prospectus at any time does not imply that information contained herein is
correct as of any time subsequent to its date.
TABLE OF CONTENTS
AVAILABLE INFORMATION..........................................................
PROSPECTUS SUMMARY.............................................................
THE COMPANY....................................................................
RECENT SIGNIFICANT DEVELOPMENTS................................................
RISK FACTORS...................................................................
DILUTION.......................................................................
DIVIDEND POLICY................................................................
USE OF PROCEEDS................................................................
MARKET PRICES..................................................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS...............................
BUSINESS.......................................................................
LITIGATION.....................................................................
MANAGEMENT.....................................................................
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................
SELLING SHAREHOLDERS...........................................................
DESCRIPTION OF CAPITAL STOCK...................................................
LEGAL OPINION..................................................................
EXPERTS........................................................................
ACCOUNTANTS' REPORT............................................................
FINANCIAL STATEMENTS...........................................................
UNAUDITED INTERIM FINANCIAL STATEMENTS.........................................
ELECTROPURE, INC.
COMMON STOCK
- --------------------------------------------------------------------------------
PROSPECTUS
- --------------------------------------------------------------------------------
_____________ __, 1997
<PAGE> 90
PART II
- --------------------------------------------------------------------------------
INFORMATION NOT REQUIRED IN PROSPECTUS
- --------------------------------------------------------------------------------
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 317 of the California Corporations Code allows a corporation to advance
expenses incurred by an officer or director in defending any proceeding prior to
the final disposition of such proceeding upon receipt of an undertaking to repay
such amount if such person is not ultimately entitled to indemnification. In
non-derivative actions, an officer or director is entitled to reimbursements for
expenses, fines, judgments and settlements if such individual has acted in good
faith and in a manner he believed to be in the best interests of the corporation
and in the case of criminal proceedings, he had no reasonable cause to believe
the conduct was unlawful. With regard to derivative actions (a suit brought on
behalf of the Registrant), such person is entitled to reimbursements for
expenses if the officer or director acted in good faith, in a manner the officer
or director believed to be in the best interests of the corporation and with
such care, including reasonable injury, as an ordinary and prudent person in
like position would use in similar circumstances; provided, however, that no
indemnification shall be made (1) if the officer or director is found liable to
the corporation, except as may be determined by the court in which the action is
pending; (2) for amounts paid in settling an action without court approval; or
(3) for amounts paid in defending such action which is terminated without court
approval.
If indemnification is authorized by Section 317, but not required, then it shall
be determined by (i) a majority vote of the disinterested members of the Board
of Directors, (ii) a majority vote of the disinterested shareholders, (iii) the
court in which the action is pending; or (iv) if a quorum of independent
directors is not available, by independent legal counsel in a written opinion.
If the officer or director is successful in the defense of an action, Section
317 provides that such individual shall be entitled to indemnification. Finally,
Section 317 authorizes a corporation to maintain officers' and directors'
liability insurance.
Article III, Section 16 of the By-Laws of Registrant provides for
indemnification of officers and directors in the situations authorized by
Section 317.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection with the
offering described in this Registration Statement.
<TABLE>
<CAPTION>
<S> <C>
Registration Fee Under Securities
Act of 1933............................... $ 4,000
Accounting Fees and Expenses................... 1,500
Legal Fees and Expenses........................ 10,000
Miscellaneous.................................. 4,500
--------
Total ............................. $ 20,000
</TABLE>
II-1
<PAGE> 91
ITEM 26. RECENT SALE OF UNREGISTERED SECURITIES
During the past three years, the Registrant has issued or sold the securities
set forth in "RECENT SIGNIFICANT DEVELOPMENTS License Termination Agreement,
Technology Transfer Agreement, Stock Issuances, and Other Transactions,"
"LITIGATION," "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS," and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Liquidity and Capital Recourses."
The issuance of securities in these transactions, except as described below,
were exempt from registration under the Securities Act of 1933, as amended (the
"Act"), by virtue of Sections 3(b) and 4(2) of the Act, including Regulation D
promulgated thereunder. The Company believes that the recipients in each case
acquired the securities for investment only and not with a view to the
distribution thereof and legends were affixed to the stock certificates.
ITEM 27. EXHIBITS
--------
3.1 Articles of Incorporation of the Registrant, as amended. ***
3.2 By-Laws of the Registrant, as amended. *
5.0 Opinion of Jeffer, Mangles, Butler & Marmaro, LLP.
10.19 Form of Indemnity Agreement with each current Officer and
Director. **
10.47.8 License Termination Agreement with EDI Components dated August 14,
1997 (effective 08/05/97). ******
10.47.9 Employment Agreement with Floyd H. Panning dated August 14, 1997
(effective 08/05/97). ******
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. *****
10.52 Technology Transfer Agreement with Wyatt Technology Corporation
dated October 25, 1997. *******
24.1 Consent of Southland Business Service.
II-2
<PAGE> 92
24.2 Consent of Jeffer, Mangles, Butler & Marmaro, LLP (included in
Exhibit 5.0).
25 Power of Attorney (see page II-5).
- ----------
* 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, 1994.
***** Previously filed in connection with Registrant's Form 10-KSB for the
fiscal year ended October 31, 1996.
****** Previously filed in connection with Registrant's Form 10-QSB for the
fiscal quarter ended July 31, 1997.
******* Previously filed in connection with Schedule 13-D filed on November 14,
1997 by Wyatt Technology Corporation.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events
arising after the effective date of the Registration Statement
(or the most recent post-effective amendment thereto) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the Registration Statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
Registration Statement or any material change to such information
in the Registration Statement;
II-3
<PAGE> 93
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do
not apply if the registration statement is on Form S-3, Form S-8
or Form F-3 and the information required to be included in a
post-effective amendment by those paragraphs is contained in
periodic reports filed with or furnished to the Securities and
Exchange Commission by the registrant pursuant to Section 13 or
Section 13(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions in Item 14 hereof, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless, in the opinion of its counsel, the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE> 94
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this Registration Statement
to be signed on its behalf by the undersigned thereunder duly authorized, in the
City of Laguna Hills, California, on November 12, 1997.
ELECTROPURE, INC.
BY /s/ CATHERINE PATTERSON
--------------------------------------------
CATHERINE PATTERSON
Chief Financial Officer
- --------------------------------------------------------------------------------
POWER OF ATTORNEY
- --------------------------------------------------------------------------------
Each person whose individual signature appears below hereby constitutes and
appoints Catherine Patterson and Floyd H. Panning as his true and lawful
attorneys-in-fact with full power of substitution to execute in the name and on
behalf of such person, individually and in each capacity stated below, and to
file, any and all amendments to this Registration Statement, including any and
all post-effective amendments.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURES
/s/ WILLIAM F. FARNAM Director November 12, 1997
- -----------------------------
WILLIAM F. FARNAM
/s/ RANDALL P. FRANK Director November 12, 1997
- -----------------------------
RANDALL P. FRANK
Director November , 1997
- -----------------------------
RANDOLPH S. HEIDMANN
/s/ WILLIAM H. LEE Director November 12, 1997
- -----------------------------
WILLIAM H. LEE
/s/ FLOYD H. PANNING Chief Executive Officer November 12, 1997
- ----------------------------- and Director
FLOYD H. PANNING
Chief Financial
/s/ CATHERINE PATTERSON Officer (Principal November 12, 1997
- ----------------------------- Financial and
CATHERINE PATTERSON Accounting Officer)
II-5
<PAGE> 95
Exhibit Page No.
- ------- --------
5.0 Opinion of Jeffer, Mangels, Butler & Marmaro, LLP
24.1 Consent of Southland Business Service
<PAGE> 1
EXHIBIT 5.0
[JEFFER, MANGELS, BUTLER & MARMARO LLP LETTERHEAD]
November 20, 1997 55755-0001
Electropure, Inc.
23251 Vista Grande, Suite A
Laguna Hills, California 92653
Re: Electropure, Inc.
Registration Statement on Form SB-2
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form SB
2 (the "Registration Statement") which Electropure, Inc., a California
corporation (the "Company"), proposes to file with the Securities and Exchange
Commission.
The Registration Statement covers 6,070,313 shares (the "Shares") of the
Company's common stock, including 1,507,937 which may be issued pursuant to
outstanding options and warrants.
In rendering the following opinion, we have examined and relied only
upon the documents and certificates of public officials as are specifically
described below. In our examination, we have assumed the genuiness of all
signatures, the authenticity, accuracy and completeness of the documents
submitted to us as originals, and the conformity with the original documents of
all documents submitted to us as copies. Our examination was limited to the
following documents and no others:
1. Certificate of Incorporation of the Company, as amended to date:
2. By-Laws of the Company, as amended to date;
3. Resolutions adopted by the Board of Directors of the Company
approving and and authorizing the issuance of the options, warrants and
Shares;
4. The form of options and warrants;
<PAGE> 2
JEFFER, MANGLES, BUTLER & MARMARO LLP
Electropure, Inc.
November 20, 1997
Page 2
5. The form of the Company's Common Stock certificate; and
6. The Registration Statement, together with all amendments thereto,
exhibits filed in connection therewith and form of Prospectus contained therein.
We have not undertaken, nor do we intend to undertake, any independent
investigation beyond such documents and records, or to verify the adequacy or
accuracy of same.
Based upon and subject to the foregoing, it is our opinion that subject
to (i) the effectiveness of the Registration Statement and (ii) the compliance
with applicable blue sky laws, the outstanding Shares are, and the Shares to be
issued upon exercise of outstanding options and warrants when issued upon
exercise against payment therefor pursuant to the respective options and
warrants will, constitute legally issued, fully paid and nonassessable shares of
the common stock of the Company.
We express no opinion as to compliance with the securities or "blue sky"
laws of any state in which the Shares are proposed to be offered and sold or as
to the effect, if any, which non-compliance with such laws might have on the
validity of issuance of the Shares.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement; to the filing of this opinion in connection with such
filings of applications by the Company as may be necessary to register, qualify
or establish eligibility for an exemption from registration or qualification of
the Securities under the blue sky laws of any state or other jurisdiction; and
to the reference, if any, to this firm in the Prospectus under the heading
"Legal Opinion". In giving this consent, we do not admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended or the rules and regulations of the Commission
promulgated thereunder.
Other than as provided in the preceding sentence, this opinion (i) is
addressed solely to you, (ii) may not be relied upon by any other party, (iii)
may not
<PAGE> 3
JEFFER, MANGELS, BUTLER & MARMARO LLP
Electropure, Inc.
November 20, 1997
Page 3
be quoted or reproduced or delivered by you to any other person, and (iv) may
not be relied upon for any other purpose whatsoever. Nothing herein shall be
deemed to relate to or constitute an opinion concerning any matters not
specifically set forth above.
The opinions set forth herein are based upon the federal laws of the
United States of America and the laws of the State of California. We express no
opinion as to whether the laws of any particular jurisdiction apply, and no
opinion to the extent that the laws of any jurisdiction other than those
identified above are applicable to the subject matter hereof.
The information set forth herein is as of the date of this letter. We
disclaim any undertaking to advise you of changes which may be brought to our
attention after the effective date of the Registration Statement.
Very truly yours,
/s/ JEFFER, MANGELS, BUTLER & MARMARO LLP
JEFFER, MANGELS, BUTLER & MARMARO LLP
RPG:wpc
<PAGE> 1
EXHIBIT 24.1
[SOUTHLAND BUSINESS SERVICE LETTERHEAD]
To the Board of Directors and
Stockholders of Electropure, Inc.
The audits referred to in our report dated June 2, 1997 included the related
financial statements as of October 31, 1996 and for each of the years in the
two-year period ended October 31, 1996 included in the Registration Statement.
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 audits. In our opinion, such financial statement schedules, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
Our report dated June 2, 1997 contains explanatory paragraphs that state that
the Company's recurring losses from operations and net capital deficiency raise
substantial doubt about the entity's ability to continue as a going concern and
the final outcome resulting from certain claims and litigation is not presently
determinable. The financial statements do not include any adjustments relating
to the recoverability and classification of reported asset amounts or the
amounts and classification of liabilities that might result from the outcome of
these uncertainties.
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the Prospectus.
/s/ J. E. HENDERSON
Woodland Hills, California
November 17, 1997
