<PAGE> 1
Filed with the Securities and Exchange Commission on April 2, 1998
Registration Statement No. 33-41289
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-------------------------
AMENDMENT NO. 1 to
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)
23456 South Pointe, Laguna Hills, California 92653
(714) 770-9347
(Address and telephone number of principal executive offices)
--------------------------
FLOYD H. PANNING, President
ELECTROPURE, INC.
23456 South Pointe
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
Amount to be Offering Aggregate Amount of
Title of Each Class of Securities Registered Pricer Per Offering Registration
to be Registered Registered Unit (1) Price Fee
- ----------------------------------- -------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value 5,172,536 $1.75 $9,051,938 $2,743.02
Previously paid ........................................................... 2,644.27
-------------
Amount Due ..................................................................... $ 98.75
</TABLE>
- ----------
(1) Based on the closing sale price as reported on the Electronic Bulletin
Board on March 6, 1998.
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.
i
<PAGE> 3
P R O S P E C T U S
5,172,536 SHARES OF COMMON STOCK
ELECTROPURE, INC.
This Prospectus relates to 5,172,536 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"). Included in such 5,172,536 shares, are 1,537,437 shares that 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. This Prospectus
does not cover the exercise of such options and warrants.
The Common Stock is traded on the OTC Electronic Bulletin Board under the symbol
"ELTP." On March 6, 1998 the last sale price of the Common Stock was $1.75.
THESE ARE SPECULATIVE SECURITIES. SEE "RISK FACTORS" ON PAGES 10 TO 17 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
addrrangements 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 March ___, 1998.
<PAGE> 4
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
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 minute [gpm]). The Company began
limited sales of this product in 1997.
On February 17, 1998, the Company acquired the rights to certain proprietary
membrane technology from Hydro Components, Inc., a Pennsylvania company which
manufactures and markets light commercial water and waste water treatment
equipment. The Company intends to utilize the acquired technology to develop ion
permeable membranes for use with its EDI product. If development efforts are
successful, such membranes would allow the Company to offer more cost-sensitive
models of its EDI product to a broader range of users for a wider range of uses.
In October, 1997, the Company 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. The Company's EDI product and this new technology are not intended
to be integrated into one product.
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: 23456 South Pointe Drive, Laguna
Hills, California 92653, (714) 770-9347.
3
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Securities Offered ................. 5,172,536 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 .................. 8,000,479 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 1,537,437 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 began sales of its patented EDI product in September, 1997 and
currently has orders for additional products pending; however, the Company does
not anticipate that it will generate substantial revenues from the sale of these
products until it can raise sufficient working capital to expand its
manufacturing operations. In anticipation of such expansion, the Company
relocated to its current, larger facilities in late February, 1998.
SUMMARY OPERATING STATEMENT DATA:
<TABLE>
<CAPTION>
Fiscal Year Three Months
Ended October 31, Ended January 31,
--------------------------- ---------------------------
1996 1997 1997 1998
----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
License fees received** ................ $ 87,559 $ 78,437 $ 20,300 $ --
Sales .................................. -- 44,989 -- 125,257
Cost of goods sold ..................... -- 26,193 -- 69,055
Gross margin* .......................... 87,559 97,233 20,300 56,202
Net (loss) gain* ....................... (367,082) (1,096,0343) (4,267) (234,594)
Net (loss) gain per share* ............. (0.19) (0.37) -- (0.05)
Weighted average shares outstanding .... 1,926,868 2,955,690 1,926,868 4,358,663
</TABLE>
SUMMARY BALANCE SHEET:
<TABLE>
<CAPTION>
October 31, 1997 January 31, 1998
---------------- ----------------
Unaudited
<S> <C> <C>
Working capital .................................. $ 330,995 $ 426,668
Total assets ..................................... 894,953 953,907
Total current liabilities ........................ 114,870 86,200
Accumulated deficit * ............................ (17,197,281) (17,431,874)
Stockholders' equity ............................. 754,083 841,707
Stockholders' equity (deficit) per share ......... 0.26 0.19
</TABLE>
For certain recent significant developments, see "RECENT SIGNIFICANT
DEVELOPMENTS."
- --------
* Restated to reflect prior period adjustments for the fiscal year ended
October 31, 1996 to account for 1) a $6,000 imputed rent expense and a
credit in the same amount for license fees received, and 2) a $76,000
financing expense and an increase in accumulated deficit (carried forward to
subsequent period). The summary information shown for the three months ended
January 31, 1997 has also been restated to reflect a $1,500 imputed rent
expense and increase to license fees received during the period.
5
<PAGE> 8
RECENT SIGNIFICANT DEVELOPMENTS
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, with an agreed value by the parties of $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(1) of
the Company's restricted 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 has
reflected 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 an
additional 566,409 shares of Common Stock, at $0.375 per share, upon conversion
of $200,000 in indebtedness, plus $12,404 in related interest, on notes payable
assumed by the Company from EDI Components. An additional $10,000 principal
loan, plus $1,620 in accrued interest, was assumed by the Company and was paid
in September, 1997 with the proceeds realized from the sale of an additional
30,983 shares of Common Stock at $0.375 per share.
The License Termination Agreement provided for an extension, until October 1,
1997, on 95,400 warrants to purchase common stock granted to various investors
of EDI Components pursuant to the July, 1992 license agreement. As of October 1,
1997, all of such warrants were exercised at $0.50 per share, including 44,000
warrants which had been assigned to William Farnam, a Director of the Company,
and 40,000 warrants held by Floyd Panning, president of EDI. Mr. Panning also
exercised 10,000 warrants to purchase common stock previously issued to him in
February, 1993 at $0.50 per share as a bonus for services rendered. See
"MANAGEMENT Employment Agreement."
TECHNOLOGY TRANSFER AGREEMENT
- ----------
(1) The Company has consistently determined the Fair Market Value of its
publicly-traded common stock as the mean of the bid and ask prices of such
common stock on the date of issuance. In the case of restricted common stock
issued by the Company, unless otherwise noted, the Company applies a 25%
discount to such Fair Market Value. On August 14, 1997, the bid and ask
prices of the Company's common stock were $0.3125 and $0.6875, respectively.
6
<PAGE> 9
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. The Company agreed to
register 630,000 of the shares issued to Wyatt to the end that a sufficient
number of shares may be sold by Wyatt to pay federal and state income taxes on
the transaction. Any shares not required to be sold for this purpose will remain
restricted for a period of two years from the transaction date. Wyatt has
recently withdrawn its request to register any shares, indicating that it may in
the future sell shares in a private transaction to cover its tax liability.
The value of the 2,100,000 shares issued to Wyatt are reflected in the Company's
financial statements for the fiscal year ended October 31, 1997 as a $447,146
increase in acquired technology, less $1,470 in amortization, which will be
amortized over a five-year period -- the remaining life of the primary patent
covering the technology. The valuation, which was established through an
independent appraisal, utilized a weighted average calculation using the last
trade prior to and subsequent to the transaction date (October 25, 1997, a
Saturday), resulting in a $1.175 value per share. A 28% discount to such value
was then applied to 115,000 of the shares - the estimated number of shares which
must be sold by Wyatt to pay income taxes on the transaction. An 85% discount
was applied to the balance of the shares issued (1,985,000), which must be held
for two years from the date of the transaction. In summary, the appraisal
concluded that the 115,000 and 1,985,000 shares were worth $97,290 and $349,856,
respectively, for a total value of $447,146.
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 required for this research phase which is anticipated to run
approximately five (5) months. A market feasibility study will be conducted
concurrently.
For a period of three years from the date of the transfer agreement, Wyatt will
manufacture and sell to the Company (at a price to be agreed upon) the
components required for any product developed by Electropure utilizing the
transferred technology. Thereafter, the Company may, at its option, manufacture
all such components (except an optical component to which Wyatt will retain all
rights), purchase them from others, or continue to purchase said components from
Wyatt under terms to be agreed upon. Pricing of the component parts, as well as
the optical product proprietary to Wyatt, will be dependent upon their design
and features and can only be determined if the research and development phase
discussed above has been successfully concluded.
7
<PAGE> 10
As a result of the issuance of the 2,100,000 shares in the above transaction,
Wyatt Technology Corporation owns 22.0% of the common stock of the Company, with
16.4% of the voting control as of March 6, 1998.
ASSIGNMENT AGREEMENT
On February 17, 1998, the Company entered into an Assignment Agreement with
Hydro Components, Inc. to acquire the rights to certain proprietary ion exchange
membrane technology for use with its EDI water treatment product. Hydro
Components, Inc. ("HCI") is a Pennsylvania-based manufacturer of light
commercial water and wastewater treatment equipment. The Company paid HCI
$200,000 for the know-how and technical support to develop extruded membranes
from ion exchange materials into sheet form, as compared to the more expensive
cast membranes presently available. Such membranes, if they can be developed,
would theoretically be more consistent in physical characteristics, i.e.,
thickness, electrical resistance, and ion transport efficiency, than is now
possible with current membrane processes. If the Company is successful in its
efforts to develop the proposed HCI membrane, the anticipated cost savings for
this component would allow the Company to offer new models of its EDI product
for uses beyond the ultrapure water treatment area which it now services.
In conjunction with the above Assignment Agreement, the Company loaned HCI an
additional $200,000 for sixty days at 8% interest. Such loan, due to be repaid
to the Company on or before April 17, 1998, is collateralized by all of HCI's
assets and is personally guaranteed by the President and sole shareholder of
HCI, Joesph Bernatowicz.
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.
On November 12, 1997, the Company issued 60,000 shares of Common Stock as
consideration for an option to purchase the building to which it relocated in
February, 1998. The Common Stock was valued at $1.50 per share and resulted in
an expense to the Company during the fiscal quarter ended January 31, 1998 in
the sum of $90,000. See "BUSINESS - Properties."
On January 29, 1998, the Company issued 206,186 shares of Common Stock upon the
conversion of a $200,000 loan made by principal shareholder, Anthony Frank. The
shares were issued at the below fair market value of $0.97 per share, resulting
in an expense as of January 31, 1998 in the sum of $7,217. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS - Mr. Anthony Frank."
8
<PAGE> 11
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 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.
9
<PAGE> 12
RISK FACTORS
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 has commenced limited manufacturing and marketing
activities. No assurances can be given that the Company can manufacture
sufficient EDI products at an economical cost, or sell such products at a net
profit. 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
Wyattand the technology acquired from Hydro Components, they are 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.
While units of the high purity point-of-use Electropure product are being placed
in operation and several units have been operating efficiently for over two
years, 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.
10
<PAGE> 13
2. ACCUMULATED DEFICIT; OPERATING LOSSES; GOING CONCERN. From the inception of
the Company in 1979 through January 31, 1998, the Company accumulated a loss of
$17,431,874 and net stockholders' equity of $841,707. The accumulated loss is
principally due to expenses incurred in the development of the EDI product,
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, 1997 contains an explanatory paragraph as to the
ability of the Company to continue as a going concern and the Company's
financial statements have been prepared assuming that the Company will continue
as a going concern. As discussed in the notes to the financial statements, the
Company's recurring losses from operations, net capital deficiency and past
history of working capital deficiencies raise substantial doubt about the
Electropure's ability to continue as a going concern. Management's plans in
regard to these matters are also described in the notes and in "MANAGEMENTS'
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." The
independent auditors' report is also subject to the outcome of certain claims
and litigation.
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. Besides Ionpure Technologies, two other companies are believed to have
developed or are developing products using electrodeionization or similar
technology.
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
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<PAGE> 14
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.
In the opinion of management, available funds will satisfy the Company's working
capital requirements through August, 1998. 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 and membrane
technologies will lead, if ever, to commercially viable products.
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
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<PAGE> 15
complications and in some cases such development cannot be accomplished. Ionpure
and its licensor have significantly greater marketing and financial resources
than the Company.
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 HCI membrane
technology and the Wyatt technology for use in detecting dangerous items in
water. Further, since neither the HCI technology nor the Wyatt technology have
yet been adapted for their intended uses, there is a risk that such technologies
cannot be adapted as contemplated by the Company. Further, even if the Company
successfully adapts either or both such technologies as intended, there can be
no assurances that the developed product(s) 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. Additional models of the EDI,
for applications other than high purity water treatment, may also result from
development of the intended HCI membrane technology.
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. The Company anticipates initiating limited research and
development activities on the HCI membrane technology in April, 1998.
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
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<PAGE> 16
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 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 and/or HCI technologies.
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. Other states have similar laws. 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 relocated its
operations to a 30,201 sq. ft. facility in Laguna Hills, California. Management
estimates that the current facility will be adequate to conduct its
manufacturing activities, including manufacturing of any products resulting from
the Wyatt and/or HCI membrane technologies, for the foreseeable future. The
Company's employees are sufficient to conduct the manufacturing and
administrative functions required at the current time. However, additional
employees will be required once manufacturing operations increase and if the
Company is successful in developing a drinking water monitoring product
utilizing the Wyatt technology or the membrane technology acquired
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<PAGE> 17
from HCI. 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% 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 March 6, 1998, Anthony M. Frank, Wyatt
Technology Corporation, Harry M. O'Hare, Sr. and the current officers and
directors of the Company owned approximately 17.5%, 22.0%, 12.6% and 8.6% 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.
The Company does not, however, maintain key employee insurance on Mr. Panning or
on any other employee of the Company.
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.
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<PAGE> 18
18. RISK OF LOW PRICED STOCKS; INABILITY TO MEET 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 defines 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 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. The recently announced
proposed changes to listing on the Electronic Bulletin Board will not
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<PAGE> 19
effect the Company, but would require brokers to deliver an explanation of the
differences between the Electronic Bulletin Board and NASDAQ.
19. EXISTING WARRANTS AND OPTIONS. Currently, there are 1,537,437 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.
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 technologies acquired
from Wyatt Technology Corporation and Hydro Components, Inc.
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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. The quotations reflect inter-dealer prices, without
retail mark-up or mark-down or commissions and may not represent actual
transactions.
<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 2-1/16 3/4
Second Quarter (through March 6, 1998) 2-1/4 7/8
</TABLE>
The market for the Company's securities is sporadic and quoted prices may not
represent the true value of such securities.
As of March 6, 1998, 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 July 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> 21
MANAGEMENTS' DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
In February, 1996, the Company issued 253,334 shares of Common Stock upon the
conversion of $152,000 in loans payable by its former licensee, EDI Components.
Although the shares were issued at a below fair market value of $0.60 per share,
resulting in an expense of $228,000, the Company mistakenly reflected the
expense at $152,000 for the fiscal year ended October 31, 1996. In addition, the
Company failed to impute a $500 per month rent expense to account for the
expense of occupying offices sub-leased by the Company from EDI Components for
the fiscal year ended October 31, 1996. Pursuant to these errors, adjustments to
prior period balances have been reflected in the Company's quarterly report for
the three month period ended January 31, 1998 to 1) increase additional paid-in
capital and the accumulated deficit for the financing expense of $76,000, and 2)
to credit license fees received and debit rent expense in the sum of $6,000 to
account for the imputed cost of occupying the Company's sub-leased offices.
The above prior period adjustments did not materially impact the Company's
retained earnings, net shareholders' equity, net loss or net loss per share. The
information contained in this Registration Statement, and the financial
statements filed in connection herewith, has been adjusted to reflect
retroactive application of the prior period adjustments discussed above.
FISCAL YEARS ENDED OCTOBER 31, 1996 AND 1997
License fees received for the fiscal year ended October 31, 1997 decreased by
$9,122 compared to 1996, due primarily to the fact that the license relationship
between the Company and its licensee, EDI Components, terminated in August,
1997. Under the terms of the July, 1992 license agreement, the Company's former
licensee was obligated to pay all necessary administrative operational expenses
which, through the date the license was terminated, approximated the $78,437 in
license fees paid by EDI Components for the fiscal year ended October 31, 1997.
Subsequent to the license termination, the Company has financed its working
capital requirements through the sale of securities - See "MANAGEMENTS'
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
Liquidity and Capital Resources."
Sales and marketing expense for fiscal 1997 was $16,926, as compared to no
expense for 1996. These expenses represent the costs incurred for the sales and
marketing activities initiated by the Company in September, 1997.
General and administrative expenses for fiscal 1997 increased by $58,473 as
compared to fiscal 1996, primarily due to an increase in salaries pursuant to
the hiring of additional employees after the license with EDI Components
terminated. The Company also experienced an increase in legal fees during fiscal
1997 associated with the above license termination and in connection with the
May, 1997 settlement with the Economic Development Bank for Puerto Rico.
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<PAGE> 22
Interest expense for fiscal 1997 decreased by $10,153 as compared to fiscal 1996
primarily as a result of the $10,725 expensed as accounts payable in fiscal 1996
for interest accrued on a December, 1993 judgment rendered for credit card debt.
This decrease was partially offset by the interest accrued on a $12,000 note
issued to the Economic Development Bank for Puerto Rico as part of the May, 1997
settlement of a $3 million judgment rendered against the Company and others.
Interest income for fiscal 1997 decreased by $239 as compared to fiscal 1996,
reflecting a lack of the Company's investment capital during the period.
Financing costs for fiscal 1997 increased by $489,157 as compared to fiscal
1996, reflecting the cost of issuing shares in exchange for debt assumed by the
Company from EDI Components pursuant to the license termination agreement.
Lawsuit settlement costs for fiscal 1997 were $58,875, as compared to no expense
for fiscal 1996. This expense represents the fair market value of the 100,000
shares ($46,875) and the principal amount of the $12,000 promissory note issued
to the Economic Development Bank for Puerto Rico on the lawsuit settlement.
Compensatory stock options increased by $11,719 as compared to fiscal 1996. This
expense represents the difference between the exercise price and the fair market
value of 125,000 warrants issued to Floyd Panning pursuant to his August, 1997
employment agreement with the Company.
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.
The Company realized a net loss before extraordinary item of $1,096,033 for
fiscal 1997, representing an increase of $615,762 from the prior year level due,
primarily, to the financing costs relating to the issuance of common stock both
for the Puerto Rico lawsuit settlement and in connection with the August, 1997
license termination agreement with EDI Components.
During fiscal 1996, the Company realized an extraordinary gain of $113,188 on
settlement of debt as compared to no activity for fiscal 1997. This gain
resulted from the Company writing off accounts payable and accrued liabilities
which had been carried on its books from past years.
THREE MONTHS ENDED JANUARY 31, 1997 AND 1998
References to 1997 and 1998 are for the three months ended January 31, 1997 and
1998, respectively.
License fees received from EDI Components for fiscal 1997 were $20,300 as
compared to no activity for fiscal 1998. Pursuant to the August, 1997 License
Termination Agreement, the obligation of EDI Components to pay license fees to
the Company terminated at that time.
The Company realized a gross margin of $56,202 on the sale of EDI products in
fiscal 1998, as compared to no sales activities in fiscal 1997. The Company had
not initiated manufacturing and
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<PAGE> 23
marketing operations until September, 1997, after the license agreement with EDI
Components had been terminated.
Research and development expenses for fiscal 1998 were $43,902 as compared to no
activity for fiscal 1997. These expenses arise from the research and development
program which the Company initiated in December, 1997 on the drinking water
monitoring technology acquired from Wyatt Technology Corporation in late
October, 1997.
Sales and marketing expenses were $35,172 for fiscal 1998, as compared to no
activity for fiscal 1997. These expenses represent the costs associated with
marketing the Company's EDI product, which activities began in September, 1997.
General and administrative expenses for fiscal 1998 increased by $89,716 as
compared to fiscal 1997. The increase is due to various factors, including the
expenses associated with hiring additional employees in late 1997, the
assumption of lease obligations on the facilities occupied by the Company, and
legal and accounting fees resulting from the audit conducted on the Company's
financial statements for the fiscal year ended October 31, 1997.
Interest expense for fiscal 1998 increased by $222 as compared to fiscal 1997,
due to the additional interest accrued on a note payable issued in settlement of
a lawsuit in May, 1997. Such note was paid in full in January, 1998.
Financing costs for fiscal 1998 were $97,217, as compared to no activity for
fiscal 1997. Of such expense, $90,000 resulted from the issuance of 60,000
shares of common stock to the lessor of the Company's current facility in
exchange for an option to purchase the building during the term of the
three-year lease. An additional $7,217 financing expense was incurred as a
result of the issuance, at below fair market value, of 206,186 common shares in
cancellation of a $200,000 loan made to the Company in January, 1998.
No additional provision for loss on lawsuit settlement has been made in fiscal
1998 as the Company believes that adequate provision has been made to settle
pending lawsuits.
Net loss of $234,594 for fiscal 1998 represents an increase of $230,327 from the
prior year level. This is primarily due to the initiation of research and
development activities on the Company's proposed drinking water monitoring
product and the increase in marketing and administrative activities resulting
from production and sales of the Company's EDI product beginning in late 1997.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal year ended October 31, 1997, the Company received $78,437 in
license fees from EDI Components, including $5,500 credited for eleven months
during the fiscal year (through September, 1997) of sub-lease expense at $500
per month. Since July, 1992, the Company had primarily relied on license fees
from EDI Components, a privately-owned California corporation, for its
administrative operating expenses. When the license relationship was terminated
in
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<PAGE> 24
August, 1997, EDI ceased all manufacturing and marketing operations and it's
obligation to pay the Company any further license fees terminated.
The Company also realized net proceeds of $11,620 during fiscal 1997 from the
sale of 30,988 shares of common stock at $0.375 per share. The Company issued an
additional 107,400 shares of its Common Stock during fiscal 1997 upon the
exercise of warrants at $0.50 per share and realized net proceeds of $28,700 and
notes receivable on common stock in the sum of $50,000. Between August and
October, 1997, the Company sold twelve (12) EDI modules for gross sales of
$44,989.
On October 25, 1997, the Company acquired certain proprietary technology from
Wyatt Technology Corporation in exchange for 2,100,000 shares of its Common
Stock and in December, 1997 initiated a research program to develop a drinking
water monitoring technology utilizing Wyatt's proprietary multi-angle laser
light scattering instrumentation and techniques. The Company has budgeted
$100,000 to cover all costs (including salaries and equipment) associated with
the research program to be conducted over a five to six month period. However,
if a commercially viable product is developed, the Company may need to raise
substantial additional funds, purchase additional equipment and hire more
employees to bring such a product to market and to commercially exploit such a
product. No assurances can be given that the Company would be able to raise such
funds.
In December, 1997, the Company hired Gregory M. Quist, PhD to conduct its
research program for the laser monitoring device at an salary of $132,000
annually. See "Management - Key Employees - Gregory M. Quist, PhD." Concurrent
with the research program, Dr. Quist will conduct a market feasibility study to
determine that an adequate market exists for the intended monitoring device
before any additional funds are allocated to this program.
At January 31, 1998, the Company had net working capital (total current assets
less total current liabilities) of $426,668. The increase in working capital
compared to that reported at October 31, 1997, results primarily from financing
activities and sales during the period. At January 31, 1998, the Company had net
cash assets of $360,421, of which amount $200,000 has subsequently been utilized
to acquire the rights to certain membrane technology from HCI. See "RECENT
SIGNIFICANT DEVELOPMENTS - Assignment Agreement."
During the three months ended January 31, 1998, the Company received $55,456 on
the sale of EDI product during the period and has accrued an additional $69,801
in receivables pursuant to such product sales. The Company collected $44,039
during the period (including $16,829 in raw materials transferred by EDI
Components) on trade accounts and related party receivables accrued in
connection with products sold between September and October, 1997.
The Company proposes to conduct research and development activities with regard
to the membrane technology acquired from Hydro Components in February, 1998 out
of the loan proceeds due to be repaid to the Company by HCI in April, 1998. The
Company has budgeted $25,000 for the initial research phase and will support
additional development activities as funds become available.
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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 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
In February, 1998, the Company relocated to its current 30,201 sq. ft. facility
with a view toward expanding its production capabilities for the EDI product.
The additional space will also be required if the Company's research program for
the drinking water monitoring program proves successful. The Company has
sub-leased, as of March 1, 1998, approximately 10,000 sq. ft. of such facility
at a monthly rental of $6,500, to offset a portion of its $16,000 monthly lease
obligation. The remaining facilities will allow the Company to increase its
production capabilities and, in turn, its marketing efforts for sales of the EDI
product. Recently, the Company received a blanket order from one customer which
will, alone, generate an average of $60,000 in net monthly sales over the next
9-10 months. Since January 31, 1998, exclusive of such "blanket order", the
Company has received orders totaling over $132,000 in net sales. Coupled with
orders from other current customers and those customers which it believes it can
attract in the near term, the Company projects that it can generate net sales of
EDI products in excess of $150,000 monthly until expanded operations can be
implemented at its new facility. However, no assurances can be given that any
such sales will actually occur.
Between January and February, 1998, the Company borrowed a total of $400,000
from Anthony M. Frank and utilized such funds in February, 1998 to acquire
certain rights to the proprietary membrane technology of Hydro Components, Inc.
Of such funds, $200,000 was in the form of a loan and is due to be repaid to the
Company, with interest at 8%, on or about April 17, 1998. See "RECENT
SIGNIFICANT DEVELOPMENTS - Assignment Agreement."
With the above loan proceeds repaid, together with its current cash assets,
projected sales revenues and collections anticipated on accounts receivable, the
Company believes that it will have adequate sources of working capital for up
six (6) months, although it may need additional
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working capital prior to said date, particularly if the Company is not
successful in selling sufficient quantities of EDI products. In addition, the
Company may require additional funding to implement the development of membrane
technology recently acquired from Hydro Components, Inc.
The above discussion is based largely on the Company's expectations; contains
forward looking statements, and is subject to a number of risks and
uncertainties, many of which are beyond the Company's control. Actual results
could differ materially as a result of a variety of factors, including market
acceptance of the Company's products, the success of the Company's research and
development activities, prevailing economic conditions as they effect the water
purification industry in general and the ability to raise sufficient working
capital. In light of these risks and uncertainties, there can be no assurance
that the Company's expectations will, in fact, transpire or prove to be
accurate.
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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 the exclusive rights to certain ion permeable
membrane technology to be utilized, in an EDI configuration, for applications
other than ultrapure water treatment. The HCI membrane technology will allow the
Company to offer a very cost-sensitive version of the EDI product to a broader
range of customers for a wider range of uses. See "RECENT SIGNIFICANT
DEVELOPMENTS - Assignment Agreement."
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" in situ drinking water monitoring systems primarily for
municipal applications. This technology and the EDI technology are not intended
to be integrated into one product. 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 in 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
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<PAGE> 28
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.
According to a 1996 report by Environmental Business International, Inc., the
San Diego-based market research and consulting firm, the water/wastewater
environmental services sector in the United States will grow from its current
annual level of $75 billion to $96 billion by the year 2000. The report projects
this growth on the basis of two expanding areas of the business: the expansion
in the use of outsourcing for industrial water and wastewater treatment
activities, and the trend toward privatization of municipal treatment
facilities. The firm also sees an annual growth of about five percent in the
water treatment equipment and chemicals market, which is currently around $18
billion a year and wherein the EDI technology finds its market segment.
The market is currently growing at a steady annual rate 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. Advanced manufacturing technologies
and the tremendous expansion seen in electronics, pharmaceuticals and bio-tech
firms in the last decade alone, have been the precursors of an increased need
for high purity process water and for water purification equipment. 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. Besides the U.S. patent, the Company holds patents for the EDI
technology in Austria, Belgium, France, Great Britain, Luxembourg, Switzerland
and West Germany.
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
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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.
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
[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
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or holding tanks and the EDI module achieves a high flow rate with relatively
smaller sized and less expensive equipment.
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"). The Company has patents for its EDI
technology in the following foreign countries: Austria, Belgium, France, Great
Britain, Luxembourg, Switzerland and West Germany.
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ULTRAPURE MARKET. The Company believes that a substantial market
currently exists for EDI technology in the commercial and light industrial
market sector where ultrapure water is a necessity in manufacturing and where
chemically pure water is demanded for laboratory uses. The electro-regeneration
feature of the EDI technology is considered a significant advantage over
existing demineralization technology. The 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
marketing to these various end users. This model and the proposed larger scale
version of the EDI will access a market segment of approximately $340 million of
which $170 million is immediately accessible.
The Company's marketing strategy is to identify and target independent operating
water equipment manufacturers where the EDI technology can either be
incorporated into or replace certain components in the water treatment systems
currently offered by such manufacturers. The Company has initiated its marketing
strategy both in the U.S. market and overseas, but has no current intentions of
entering into formal supply agreements with any such potential customers.
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. The Company may, in the future, develop membranes
utilizing the technology recently acquired from Hydro Components for other
models of the EDI product. 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. The Company is not dependent upon any one or more
principal supplier, except as described under "RECENT SIGNIFICANT DEVELOPMENTS -
Technology Transfer Agreement."
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.
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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 $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. The
license provided to Glegg relates to sales throughout the world.
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, with the exception that Polymetrics may sell the
licensed product to its end-user customers only.
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. If
the initial efforts are successful, future efforts will be directed to
include detection and early warning of 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
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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 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, including those associated with
Cryptosporidium and Giardia contamination. However, this system relies upon
standard water sample gathering and analysis and recognition of outbreaks after
they occur. The CDC documents an average of 15 to 20 waterborne outbreaks
throughout the country each year. Experts speculate, however, that the numbers
are much higher since illnesses caused by waterborne diseases are often mistaken
for the stomach flu or intestinal disorders. In 1997, the CDC reported 1,770(2)
cumulative Cryptosporidiosis cases in the U.S. alone. Cryptosporidiosis was
brought to national attention in 1993 in a Milwaukee incident, when 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
- ----------
(1) Cryptosporidium (Cryptosporidium parvum) and Giardia (Giardia lamblia) are
waterborne protozoan parasites which contaminate water sources such as
wells, rivers, streams, and lakes, generally through animal and fowl fecal
deposits.
(2) CDC Morbidity and Mortality Weekly Report 46(47):1121, 1997 (week ending
November 22, 1997).
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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.
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
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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" in situ monitoring capabilities which the Company's product, if it can be
developed, would purport to offer.
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".
In addition, the membrane technology which the Company acquired from HCI in
February, 1998 is not patented.
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
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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).
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."
The Company incurred no research and development expense for the fiscal years
ended October 31, 1996 and 1997. However, the Company projects that a minimum of
$100,000 will be expended during fiscal 1998 on a research program to develop a
drinking water monitoring system derived from the recently acquired Wyatt
technology and, as of the three-month period ended January 31, 1998, had
expended $43,902 on such program. An additional expense, projected at a minimum
of $25,000, is contemplated for research and development activities relating to
the membrane technology acquired from Hydro Components in February, 1998.
See "RECENT SIGNIFICANT DEVELOPMENTS - Technology Transfer Agreement and
Assignment Agreement" for a description of the Wyatt license and the HCI
membrane technology acquired from Hydro Components, Inc., respectively.
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. Other states have
similar laws.
The Company believes that the EDI ultrapure industrial technology 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
34
<PAGE> 37
As of March 6, 1998, the Company employed nine full-time employees, of which
five were engaged in development, production and design and three in
administrative, marketing and clerical functions. Dr. Gregory Quist, who
commenced employment with the Company on December 1, 1997, is 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, with an option to purchase, a 30,201 sq. ft.
facility in Laguna Hills and pays a gross (including taxes, insurance and major
repairs) lease payment of $16,000 per month. The Company has sub-leased as of
March 15, 1998, at a monthly rate of $6,500, approximately 10,000 sq. ft. of
such facility to offset the lease expense until the Company's operations can
utilize such additional space. Management believes that its facilities are
adequate for all of its current operations, and those contemplated for the
foreseeable future.
The Company has the option to purchase the above building until January 31,
2001. If the option is exercised between month one and month 18 of the lease
term, the purchase price will be $2,300,000. If the option is exercised between
month 19 and month 36, the purchase price will be $2,300,000, plus the
cumulative change in the Consumer Price Index, all Urban Consumers for Los
Angeles area, from month 1 to the date the option is exercised. If the Company
should exercise its option to purchase the building after month 18, and the
closing date of escrow extends beyond month 36, the Company will continue to pay
rent as set forth in the lease with applicable increases.
35
<PAGE> 38
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. Such note, was satisfied, with interest,
in January, 1998. 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 and the Company has subsequently complied
with all conditions of the settlement.
OTHER PROCEEDINGS
In December, 1993, a default judgment was rendered against the Company in the
Los Angeles County Municipal Court (Case No. 92K46050) in the sum of $20,270 for
unpaid corporate credit card charges the majority of which accrued from 1989.
During the fiscal year ended October 31, 1994, the Company paid $250 on this
judgment; however, the Company has made no arrangements to satisfy this
obligation as of this writing.
36
<PAGE> 39
The Company is party to one other lawsuit (Case No. 92219, Ventura County
Municipal Court) claiming a total of $13,007 of past due payments. The Company
and its counsel expect the Company to prevail in this lawsuit.
No assurances can be given as to the ultimate outcome of any such litigation or
legal proceeding.
37
<PAGE> 40
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 77 Director
Randall P. Frank 35 Director
Randolph S. Heidmann 47 Director
William H. Lee 58 Director
Director, President and
Floyd H. Panning 69 Chief Executive Officer
Catherine Patterson 45 Chief Financial Officer
and Secretary
</TABLE>
WILLIAM F. FARNAM, 77, was named to the Board of Directors on August 5, 1997.
Mr. Farnam spent 1967 through 1968 as General Manager on construction of The
Forum (Los Angeles) for sports entrepreneur Jack Kent Cooke. He served the City
of Inglewood, California for 20 (cumulative) years, as Public Works Director and
City Engineer and went on to become the Assistant City Manager there from 1980
to 1982. Between 1983 and 1984, he served as Project Engineer for the Park Place
Associates Poker Casino in Southern California. He provided engineering
consulting services for various municipalities from 1985 through 1990 when 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. Between 1992
and 1995, he worked in sales and marketing for Sonnet Systems, a Northern
California firm which offers computerized currency exchange services. Randall
Frank has been engaged since 1995 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").
38
<PAGE> 41
RANDOLPH S. HEIDMANN, 47, was employed by the Company between September, 1990
and November, 1991 as an electronics instrumentation design engineer to continue
development work on innovative electronic components which the Company planned
to engineer into its product line. He was named to the Company's Board of
Directors in September, 1991. Prior to joining the Company, he spent nine years
with Teledyne Electronics where he was responsible for data acquisition
subsystems design for telemetry products. He has participated in the development
of a variety of consumer electronics products and custom production test
equipment. Since 1991, Mr. Heidmann has served 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, 58, was named to the Board in June, 1996. Mr. Lee has been 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 since 1995. Mr. Lee
has a background in microbiology and water treatment. He served as Director of
North American Sales Operations from 1990 through 1994 at Molecular Devices
Corporation, a Menlo Park, CA, a manufacturer of state-of-the-art bio-analytical
measurement instruments. In 1994, Mr. Lee took a position as Vice President for
the Spectrum Companies in Laguna Hills, CA, a $12 million laboratory membrane
separations products business. 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. He has been the president of EDI Components since 1992. 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.
39
<PAGE> 42
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 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, Ph.D., 42, joined 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. In
1989, he joined Science Applications International Corporation ("SAIC") in San
Diego, becoming Vice President and Director of Technology Applications there in
1995, and was responsible for a variety of spin-off businesses based on SAIC
technology. In 1997, before joining the Company, Dr. Quist founded the OLMS
Product Group, a California division of Profile Systems of Merrillville, IN, a
start-up company specializing in wireless data products and systems integration.
Dr. Quist received a B.S. degree from Yale University in Astronomy and Physics
and a Ph.D. from the University of California at Santa Barbara in Applied
Theoretical Physics.
MANAGEMENT COMPENSATION
During fiscal 1997, the Company had no executive officer whose annual
compensation was more than $100,000 per year. Floyd Panning, who joined the
Company as Chief Executive Officer in August, 1997, is being compensated at the
rate set forth in his Employment Agreement with the Company that is described
under "MANAGEMENT - Employment Agreement." For the fiscal year ended October 31,
1997, Mr. Panning received $12,000 in wages from the Company and $21,000 for the
three months ended January 31, 1998. 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
40
<PAGE> 43
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 whereby he became 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 as his nominee.
(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>
41
<PAGE> 44
(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).
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.
An additional 10,000 ten-year warrants were issued, at an exercise price of
$0.68 per share, to Randall P. Frank, who joined the Board of Directors in
October, 1997.
42
<PAGE> 45
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
The following table sets forth information as of March 6, 1998, 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 2,243,269 23.5% -- -- -- -- 17.5%
Randall P. Frank 394,121 4.1% -- -- -- -- 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 * 83,893 100% 931,629 35.8% 12.6%
Floyd H. Panning
23251 Vista Grande, Ste. A
Laguna Hills, CA 92653 566,892 5.9% -- -- 7,500 * 4.5%
Wyatt Technology Corporation
30 S. La Patera Ln., Ste. B-7
Santa Barbara, CA 93117 2,100,000 22.0% -- -- -- -- 16.4%
All officers and directors 1,097,125 13.7% -- -- 10,406 * 8.6%
as a group (6 persons)
</TABLE>
- ----------
* Less than 1%
** Includes address of five percent or more shareholders of any class.
(1) Excludes shares of Common Stock issuable upon conversion of Class B Common
Stock, which carry eight (8) votes per share. If such shares of Common
Stock were included, Mr. O'Hare and all officers and directors, as a group
would own 88,558 shares (1.0%) and 1,097,125 shares (11.4%) of Common
Stock, respectively.
(2) Includes currently exercisable warrants or options to purchase an
aggregate of 1,537,437 shares of Common Stock.
43
<PAGE> 46
(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.
44
<PAGE> 47
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MR. WILLIAM FARNAM
On October 1, 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.
On January 29, 1998, Mr. Frank received 206,186 shares of Common Stock, at $0.97
per share, upon conversion of a $200,000 principal loan made to the Company on
January 26, 1998.
45
<PAGE> 48
On February 4, 1998, Mr. Frank made an additional loan to the Company in the sum
of $200,000, the proceeds of which, along with the previous loan proceeds, were
utilized to acquire the Hydro Components membrane technology. The outstanding
loan is payable, with 10% annual interest, on or before February 4, 2000 and may
be converted, at Mr. Frank's option, into Common Stock of the Company at a 25%
discount to the fair market value of similar common stock.
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."
46
<PAGE> 49
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.
47
<PAGE> 50
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 March 6, 1998, 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> <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)
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 12,500 33,334
Economic Development Bank
for Puerto Rico(3) 200,000 200,000(2)
</TABLE>
48
<PAGE> 51
<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, Terry L. 172,500 137,500(2) 35,000
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) 2,175,060 1,879,226(2) 295,834 3.1%
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)
Givner, Ronald P. 25,000 25,000(2)
Hamera, Tracy Carlyle 5,000 5,000
Hamilton Partners, Inc. 25,000 25,000
Hartley, E. Dale - Former Director 316,759 68,900 247,859
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) 89,000 84,000(2) 5,000
Ovando, Paul J. - Former Director 66,647 48,807(2) 17,840
Panning, Floyd - Director, President
and Chief Executive Officer(4) 564,202 514,202(2) 50,000
</TABLE>
49
<PAGE> 52
<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 81,706(2) 23,223
Powell, Charles 16,973 7,500(2) 9,473
Quist, Gregory - General Manager
Laser Division(4) 300,000 300,000(2)
Reason, Robert 37,500 37,500(2)
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 37,500 50,779
Tarlow, Herbert D. 31,432 18,210(2) 13,222
Textile Apparel Corp. 1,112 1,112(2)
TNKRGK Family Trust 2,362 2,362(2)
Traub, Gordon 6,243 1,112(2) 5,131
Veraldi, William 1,112 1,112(2)
von Leesen, John 21,918 12,918(2) 9,000
Waldman Family Trust 115,157 102,615(2) 12,542
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)
Yamada, Kenneth 938 938(2)
--------- --------- ---------
6,070,868 5,172,536 898,332
========= ========= =========
</TABLE>
50
<PAGE> 53
- ----------------
(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 12.6% of the voting power of
Electropure, Inc. See "PRINCIPAL SHAREHOLDERS."
(6) See "RECENT SIGNIFICANT DEVELOPMENTS - Technology Transfer Agreement."
The Common Stock may be sold by the Selling Shareholders or their pledgees,
donees, transferees, or other successors-in-interest. 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. While this Prospectus covers the sale of Common
Stock received upon exercise of options and warrants by the Selling
Shareholders, it does not cover the exercise of such options and warrants.
51
<PAGE> 54
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 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.
52
<PAGE> 55
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 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 March 6, 1998, 8,000,479 shares of the Company's Common Stock were
outstanding.
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
53
<PAGE> 56
preemptive rights or other rights to subscribe for additional securities and
there are no redemption or sinking fund provisions with respect to such shares.
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
5,775,673 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 932,726 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 80,005 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.
MISCELLANEOUS
54
<PAGE> 57
While the Company has indemnification agreements with its officers and
directors, the Company understands that the Securities and Exchange Commission
believes that, to the extent such agreement seeks to provide for indemnification
under the federal securities laws, such indemnification may be contrary to
public policy.
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. as of October 31, 1996 and 1997,
and for the years in the two-year period ended October 31, 1997, included herein
and elsewhere in the Registration Statement, have been included herein and in
the Registration Statement in reliance upon the report of Alex N. Chaplan &
Associates, independent auditors, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing. The report of Alex
N. Chaplan & Associates contained explanatory paragraphs as to the Company's
ability to continue as a going concern and an uncertainty as to the outcome of
certain litigation and claims.
CHANGE IN CERTIFYING ACCOUNTANTS
Effective January 29, 1998, the Company's independent public accountants,
Southland Business Service, resigned. On January 29, 1998, the Company retained
the independent accounting firm of Alex N. Chaplan & Associates to conduct an
audit of its books and records for the fiscal years ended October 31, 1996 and
1997. For the Company's fiscal years ended October 31, 1995 and 1996, the
financial statements were subject to going concern qualifications and an
uncertainty as to the outcome of certain litigation and claims, but were not
otherwise qualified or modified as to audit scope, or accounting principles by
Southland Business Service. During the two fiscal years ended October 31, 1995
and 1996, and since October 31, 1996, there were not any disagreements with
Southland Business Service 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 Southland Business
Service, 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, 1995 and 1996, and between October 31, 1996 and January
29, 1998, Registrant did not consult with Alex N. Chaplan & Associates 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).
55
<PAGE> 58
ALEX N. CHAPLAN & ASSOCIATES
- --------------------------------------------------------------------------------
Certified Public Accountant 23622 Calabasas Road, Suite 107 A
Calabasas, California 91302
(818) 591-1901
FAX (818) 222-0727
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.
("the Company") as of October 31, 1996 and 1997, and the related statements of
operations, stockholders' equity (deficiency) and cash flows for the years in
the two-year period ended October 31, 1997. 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, 1996 and 1997 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> 59
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. Except for a
$23,331 allowance for lawsuit settlement accrued by the Company, no provision
has been made in the financial statements and financial statement schedules for
the effects, if any, of such claims and litigation.
/S/ ALEX N. CHAPLAN
Calabasas, California
January 29, 1998
F-2
<PAGE> 60
ELECTROPURE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
Year ended
Assets October 31, 1997
- ------------------------------------------------------- ----------------
<S> <C>
Current assets:
Cash 367,680
Receivables:
Trade accounts 14,988
Due from related parties 115,227
Allowance for doubtful receivables (85,528)
---------
44,687
Inventory:
Raw materials 7,498
Other current assets 26,001
---------
Total Current Assets 445,865
---------
Propery and equipment, at cost:
Office equipment 3,584
---------
3,584
Less accumulated depreciation and amortization 172
---------
3,412
Acquired technology, net (Note 7) 445,676
---------
Total Assets $ 894,953
=========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 61
ELECTROPURE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
Year ended
Liabilities and Stockholders' Equity October 31, 1997
- ----------------------------------------------------------- ----------------
<S> <C>
Current liabilities:
Notes payable to stockholders $ 29,736
Accounts payable 37,843
Accrued liabilities 23,960
Allowance for loss on lawsuit settlements 23,331
------------
Total Current Liabilities 114,870
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
Stockholders' equity:
Common stock, $.01 assigned par value. Authorized 20,000,000
shares; 2,264,806 shares issued and 2,224,806 shares
outstanding in 1996; 7,774,293 shares issued and 7,734,293
shares outstanding in 1997 77,343
Class B common stock, $.01 assigned par value. Authorized
83,983 shares authorized, issued and outstanding in
1996 and 1997 840
Additional paid-in capital 18,075,947
Accumulated deficit (17,197,281)
Notes receivable on common stock (202,766)
------------
754,083
------------
Total Liabilities and Stockholders' Equity $ 894,953
============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 62
ELECTROPURE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended October 31,
------------------------------
1996 1997
------------ ------------
<S> <C> <C>
License fees received $ 87,559 $ 78,437
Sales -- 44,989
------------ ------------
87,559 123,426
Cost of goods sold -- 26,193
------------ ------------
Gross margin 87,559 97,233
Costs and expenses:
Sales and marketing -- 16,926
General and administrative 146,202 204,674
------------ ------------
146,202 221,600
------------ ------------
Loss from operations (58,643) (124,367)
------------ ------------
Other income and (expense):
Interest expense (12,155) (2,002)
Interest income 239 --
Financing costs (408,912) (898,069)
Lawsuit settlement costs -- (58,875)
Compensatory stock options -- (11,719)
Miscellaneous income (expense) (800) (1,001)
------------ ------------
(421,628) (971,666)
------------ ------------
Loss before extraordinary item (480,271) (1,096,033)
Extraordinary item:
Gain on liabilities written off 113,188 --
------------ ------------
Net income (loss) $ (367,082) $ (1,096,033)
============ ============
Net income (loss) per share of common stock
Before extraordinary item (0.25) (0.37)
Extraordinary item:
Gain on liabilities written off 0.06 --
------------ ------------
$ (0.19) $ (0.37)
============ ============
Weighted average common shares outstanding 1,926,868 2,955,690
============ ============
</TABLE>
F-5
<PAGE> 63
ELECTROPURE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended October 31,
-------------------------------
1996 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (367,082) $ (1,096,033)
------------ ------------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 49 1,593
Financing costs related to issuance of warrants 44,625 11,719
Financing costs related to issuance of common stock 364,287 950,147
Change in assets and liabilities, net of noncash transactions:
Decrease (increase) in receivables 3,348 (44,039)
Decrease (increase) in inventory -- (7,498)
Decrease (increase) in other assets (20,539) (9,046)
Increase in notes payable -- 12,000
Increase (decrease) in accounts payable and accrued expenses (130,073) 30,841
Increase in interest payable, net 1,430 2,002
------------ ------------
Total adjustments 263,127 947,719
------------ ------------
Net cash used in operating activities (103,955) (148,314)
Cash flows from investing activities: None
Cash flows from financing activities:
Proceeds from issuance of common stock 100,886 515,320
------------ ------------
Net cash provided by financing activities 100,886 515,320
------------ ------------
Net increase (decrease) in cash (3,069) 367,006
Cash at beginning of period 3,743 674
------------ ------------
Cash at end of period $ 674 $ 367,680
============ ============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 64
ELECTROPURE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended October 31,
----------------------
1996 1997
-------- --------
<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 technology acquisition -- 447,146
Issuance of common stock for lawsuit settlements -- --
Issuance of common stock for debt settlement 364,287 --
-------- --------
364,287 447,146
======== ========
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 -- 11,719
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 -- --
-------- --------
$ -- $ 11,719
======== ========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE> 65
ELECTROPURE, INC.
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, 1995 1,757,943 $ -- $ 17,580 83,983 $ -- $ 840
Issuance of common stock on
exercise of warrants 500 0.50 5 -- -- --
exercise of warrants 8,313 1.50 83 -- -- --
exercise of warrants 4,586 2.00 46 -- -- --
Issuance of common stock for cash 20,000 2.00 200 -- -- --
Issuance of common stock for
services rendered 20,000 1.20 200 -- -- --
services rendered 8,696 1.70 87 -- -- --
Issuance of common stock for
conversion of debt 253,334 0.60 2,533 -- -- --
conversion of debt 151,434 0.90 1,514 -- -- --
Issuance of warrants below fair market value -- -- -- -- -- --
Net Loss -- -- -- -- -- --
--------- --------- --------- ------ ------ --------
Balance at October 31, 1996 2,224,806 -- 22,248 83,983 -- 840
Issuance of common stock on
exercise of warrants 107,400 0.50 1,074 -- -- --
license termination 1,717,484 0.31 17,175 -- -- --
license termination 566,409 0.38 5,664 -- -- --
license termination 362,500 2.00 3,625 -- -- --
Issuance of common stock for:
cash 30,988 0.38 310 -- -- --
cash 500,000 1.00 5,000 -- -- --
services rendered 20,000 1.00 200 -- -- --
services rendered 4,706 1.59 47 -- -- --
technology acquisition 2,100,000 0.52 21,000 -- -- --
lawsuit settlement 100,000 1.00 1,000 -- -- --
Issuance of warrants below
fair market value -- -- -- -- -- --
Net Loss -- -- -- -- -- --
--------- --------- --------- ------ ------ --------
Balance at October 31, 1997 7,734,293 $ -- $ 77,343 83,983 $ -- $ 840
========= ========= ========= ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
Notes Net
Additional receivable stockholders'
paid-in on common Accumulated equity
capital stock deficit (deficiency)
----------- --------- ------------ -----------
<S> <C> <C> <C> <C>
Balance at October 31, 1995 $15,651,581 $(152,766) $(15,734,163) $ (216,931)
Issuance of common stock on
exercise of warrants 245 -- -- 250
exercise of warrants 12,386 -- -- 12,469
exercise of warrants 9,120 -- -- 9,166
Issuance of common stock for cash 39,800 -- -- 40,000
Issuance of common stock for
services rendered 23,800 -- -- 24,000
services rendered 14,913 -- -- 15,000
Issuance of common stock for
conversion of debt 225,467 -- -- 228,000
conversion of debt 134,773 -- -- 136,287
Issuance of warrants below fair market value 44,625 -- -- 44,625
Net Loss -- -- (367,082) (367,082)
----------- --------- ------------ -----------
Balance at October 31, 1996 16,156,710 (152,766) (16,101,246) (74,215)
Issuance of common stock on
exercise of warrants 52,626 (25,000) -- 28,700
license termination 520,881 -- -- 538,056
license termination 206,739 -- -- 212,403
license termination 132,313 -- -- 135,938
Issuance of common stock for:
cash 11,310 -- -- 11,620
cash 495,001 (25,000) -- 475,001
services rendered 9,175 -- -- 9,375
services rendered 7,453 -- -- 7,500
technology acquisition 426,146 -- -- 447,146
lawsuit settlement 45,875 -- -- 46,875
Issuance of warrants below
fair market value 11,719 -- -- 11,719
Net Loss -- -- (1,096,034) (1,096,034)
----------- --------- ------------ -----------
Balance at October 31, 1997 $18,075,947 $(202,766) $(17,197,281) $ 754,083
=========== ========= ============ ===========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE> 66
ELECTROPURE, INC.
Notes to Financial Statements
October 31, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
H OH, 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 H OH, 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 H
OH, 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 ARE REFLECTED IN POST-REVERSE
SPLIT AMOUNTS.
On July 29, 1992, the Company granted EDI Components ("EDI"), a privately-held
California corporation, an exclusive license to manufacture and market its
patented EDI technology in exchange for the payment of license fees by EDI.
Pursuant to an agreement between the parties, such license was terminated
effective August 5, 1997 and the obligation of EDI to pay further license fees
also terminated. See Note 7 - "License Agreement - EDI Components." Under the
terms of the 1992 license, as amended, the Company received an aggregate of
$535,991 in license fees from EDI.
LIQUIDITY
F-9
<PAGE> 67
ELECTROPURE, INC.
Notes to Financial Statements, Continued
As of October 31, 1997, the Company had current assets in excess of current
liabilities of $330,995, an accumulated deficit of $17,197,281 and a
stockholders' equity of $754,083. In July, 1992, due to a lack of working
capital, the Company entered into a License Agreement 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 1996,
the Company funded its working capital needs from license fees received from EDI
in the sum of $87,559 and $21,886 from the exercise of 13,396 warrants at prices
ranging from $0.50 to $2.00 per share. The Company realized an additional
$24,000 on the issuance of 200,000 shares in consideration for services rendered
during fiscal 1996 and $55,000 in net proceeds from the sale of 28,696 shares of
common stock. During the fiscal year ended October 31, 1997, the Company
received an additional $78,437 in license fees from EDI Components. Of such
amount, $5,500 was credited as lease payments through September 30, 1997 on the
facility sub-leased by EDI to the Company. The Company received an additional
$486,620 and a note receivable on common stock in the sum of $25,000 from the
sale of 530,988 shares of common stock during fiscal 1997, as well as $28,700 in
net proceeds and a $50,000 note receivable on the exercise of 107,400 warrants
at $0.50 per share. See Note 5 - "Stockholders' Deficit - Common Stock
Activity."
During the fiscal year ended October 31, 1996, the Company prepaid $20,000 for
accounting and auditing fees in anticipation of the expenses to be incurred for
the audit of its financial statements for such fiscal year end. During the
fiscal year ended October 31, 1997, the Company incurred $15,100 in fees and
expenses for such audit, as well as for corporate income tax preparation, which
reduced the prepaid deposit for accounting and auditing fees to $4,900 as of the
fiscal year ended October 31, 1997. Additionally, during the fiscal year ended
October 31, 1997, the Company prepaid $21,101 for certain manufacturing
equipment and inventory which the Company will purchase from EDI Components. The
purchase, which is expected to be concluded within sixty (60) days, has been
delayed until a complete inventory of the equipment and parts can be
accomplished. The purchase price is not expected to exceed a total of $25,000,
including the prepaid amount, and will be based on the net book value of the
equipment and fair market value of the physical inventory.
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."
The Company entered into an agreement in August, 1997 terminating the 1992
license relationship with EDI Components. Such agreement provided for an initial
issuance of 362,500 shares of the Company's Common Stock to the investors of EDI
and additional issuances of up to 516,479 shares if the Company's Common Stock
reaches certain "trigger values" in the future. See Note 7 - "Agreements - EDI
Components."
In October, 1997, the Company entered into a Technology Transfer Agreement with
Wyatt Technology Corporation ("Wyatt"). Such agreement provides the Company with
an exclusive worldwide licenses to use and commercially exploit certain
intellectual property in an effort to
F-10
<PAGE> 68
ELECTROPURE, INC.
Notes to Financial Statements, Continued
develop drinking water monitoring technology based on Wyatt's proprietary
multi-angle laser light scattering instrumentation and techniques. The agreement
provided for the issuance to Wyatt of 2,100,000 shares of the Company's Common
Stock, with certain registration rights. See Note 7 - "Agreements - Wyatt
Technology Corporation."
Prior to the above License Termination Agreement, the Company's licensee, EDI
Components, had initiated sales and marketing operations for the EDI technology
and had begun preliminary training of original equipment manufacturers who will
be the primary distributors of the Company's product. Since the license was
terminated, the Company hired the staff of EDI Components and has begun
producing and selling EDI products. The Company has also begun a research
program to develop a drinking water monitoring device based upon the technology
acquired from Wyatt Technology Corporation in October, 1997. Working capital was
raised to carry on both sales and marketing of the EDI product and the research
and development of the Wyatt technology through approximately August, 1998,
although additional funds may be required earlier. The Company anticipates that
it will seek to secure additional operating capital, initially, through private
funding sources as an intermediate step to a secondary public offering of the
Company's securities. No assurances can be given that the Company can or will
obtain 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 products and well as 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. When applicable, leasehold
improvements and equipment under capital lease obligations will be amortized
using the straight-line method over the lesser of the terms of the respective
leases or estimated useful lives. The technology acquired from Wyatt Technology
Corporation on October 25, 1997 is amortized on a straight-line method over five
years, which is the remaining life of the primary patent covering such
technology.
INVENTORY
Inventory, stated at the lower of cost (determined using the first in, first out
method) or replacement market, consists of components for EDI water purification
modules.
RESEARCH AND DEVELOPMENT
F-11
<PAGE> 69
ELECTROPURE, INC.
Notes to Financial Statements, Continued
Research and development expenditures are charged to expense as incurred. The
Company has not conducted any research and development activities since entering
into the license relationship with EDI Components and the financial statements
for the fiscal years ended October 31, 1996 and 1997 reflect that fact. However,
the Company may in the future conduct research and development activities on its
EDI-related technology. Additionally, the Company will reflect research and
development expenses pursuant to the research program begun in December, 1997 on
the technology acquired from Wyatt Technology Corporation in October, 1997.
RECENT ACCOUNTING PRONOUNCEMENTS
In June, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS
130"). This statement is effective for the Company's fiscal year ending October
31, 1999. The statement establishes presentation and disclosure requirements for
reporting comprehensive income. Comprehensive income consists of net income or
loss for the current period and other comprehensive income, revenue, expenses,
gains, and losses that by pass the income statement and are reported directly in
a separate component of equity. Other comprehensive income includes, for
example, foreign currency items, minimum pension liability adjustments, and
unrealized gains and losses on certain investment securities. SFAS 130 does not
apply to an entity that has no items of other comprehensive income in any period
presented. The Company plans to adopt the disclosure requirements and report
comprehensive income as part of the Statements of Shareholders' Equity
(Deficiency) as needed, as required under SFAS 130. Management expects there to
be no material impact on the Company's financial position and results of
operations as a result of the adoption of this new accounting standard.
In June, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of An
Enterprise and Related Information" ("SFAS 131"). SFAS 131 revises the required
information regarding the reporting of operating segments. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. 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
presently expects to adopt the new Standard for the fiscal year beginning
November 1, 1998.
(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.
F-12
<PAGE> 70
ELECTROPURE, INC.
Notes to Financial Statements, Continued
A total of $23,763 remains due as of October 31, 1997 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.
Between August, 1997 (when the license relationship with EDI Components was
terminated) and October 31, 1997, the Company sold products for which the
Company's former licensee (EDI) mistakenly received some payments. A total of
$36,329 remained due from EDI as of October 31, 1997. In January, 1998, the
Company received a total of $19,500 in payments from EDI to reduce the
outstanding receivable.
(3) NOTES PAYABLE TO STOCKHOLDERS
Notes Payable to Stockholders are summarized as follows:
<TABLE>
<CAPTION>
October 31,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Unsecured note payable to one
individual, with interest at 10% $ 15,734 $ 17,307
Unsecured note payable to one
entity, with interest at 8% -- 12,429
-------- --------
$ 15,734 $ 29,736
</TABLE>
The Company issued a note in the principal sum of $12,000, at 8% annual
interest, to the Economic Development Bank for Puerto Rico as part of the May,
1997 agreement to settle a $3 million judgment rendered against the Company. See
Note 8 - "Litigation and Claims." The principal amount of such note was expensed
as a cost for lawsuit settlement for the fiscal year ended October 31, 1997.
Such note, plus all interest accrued thereon, was satisfied in January, 1998.
The balance of notes payable reflected above remains outstanding and, as of
October 31, 1997, is past due.
(4) COMMITMENTS AND CONTINGENCIES
The original cost and accumulated depreciation of assets recorded under capital
leases at October 31, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
October 31,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Furniture and fixtures $ 539 $ 3,584
Less accumulated depreciation
and amortization 49 172
-------- --------
$ 490 $ 3,412
-------- --------
</TABLE>
COMMITMENTS
F-13
<PAGE> 71
ELECTROPURE, INC.
Notes to Financial Statements, Continued
The Company has occupied its present office in Laguna Hills, California through
a sub-lease arrangement with its former licensee, 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. Since, 1995, the
Company occupied such premises without payment to EDI Components and accrued a
$6,000 imputed lease expense, credited to license fees received, for the fiscal
year ended October 31, 1996. Between November 1, 1996 and September 30, 1997,
the Company accrued an expense of $500 per month for the sub-lease of the
premises and has recorded a $5,500 credit for license fees received from EDI
Components during the fiscal year ended October 31, 1997. As of October 1, 1997,
the Company assumed the lease obligation on its present facility and paid a
monthy lease payment in the sum of $3,892 for the month of October, 1997.
Consequently, during the fiscal year ended October 31, 1997, the Company
reflected lease payments on the facility which it currently occupies in the sum
of $9,392.
In November, 1997, the Company entered into a three-year lease agreement on a
30,201 sq. ft. facility located in Laguna Hills, California to which it intends
to relocate beginning in February, 1998. See Note 11 - "Subsequent Events." The
Company has committed to monthly lease payments, pursuant to such lease
agreement, in the sum of $16,000 and intends to sub-lease approximately 10,000
sq. ft. of such facility in order to defer its monthly lease obligations.
(5) STOCKHOLDERS' DEFICIT
STOCK BASED COMPENSATION PLANS
Under APB 25 no compensation expense has been recorded. The Company adopted the
disclosure only option under Statement of Financial Accounting Standards (SFAS)
123 "Accounting for Stock-Based Compensation" as of November 1, 1996. Pro forma
information regarding net income and earnings per share is required by SFAS 123,
and has been determined as if the Company had accounted for its stock options
under the fair value method of that Statement. Consistent with the method of
SFAS 123, the Company's net loss and net loss per share would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
October 31,
--------------------------
1996 1997
--------- ------------
<S> <C> <C>
Net Loss:
As reported $(367,082) $(1,096,033)
Pro forma $(367,082) $(1,111,914)
Loss per share:
As reported $ (0.19) $ (0.37)
Pro forma $ (0.19) $ (0.38)
</TABLE>
NET LOSS PER SHARE OF COMMON STOCK
F-14
<PAGE> 72
ELECTROPURE, INC.
Notes to Financial Statements, Continued
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.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ('SFAS No. 128") in February
1997. The Company is required to implement SFAS No. 128 for interim and annual
periods ending after December 15, 1997. SFAS No. 128 prescribes a presentation
of basic net income per share, which is calculated utilizing only weighted
average common shares outstanding, and a net income per share - assuming
dilution. After the effective date, all prior period earnings per share data
must be restated to conform with SFAS No. 128. There is no impact expected to
net income (loss) per share for the periods ended October 31, 1996 and 1997.
GAIN ON LIABILITIES WRITTEN OFF
During fiscal 1996, the Company settled an account payable to its former lawfirm
for the reduced sum of $25,000, which was paid by EDI Components, the Company's
licensee and recorded as license fees received. The Company realized a gain in
the sum of $113,188 pursuant to such settlement. The Company recognized an
additional gain of $11,899 on writing off a 1992 bill for services rendered
which was forgiven by the Company's patent counsel during fiscal year 1996 when
the Company settled its patent litigation action against Millipore Corporation.
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.
COMMON STOCK ACTIVITY
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 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 $0.50 to
$2.00 per share.
F-15
<PAGE> 73
ELECTROPURE, INC.
Notes to Financial Statements, Continued
In February, 1996, the Company sold 20,000 shares of common stock to two
individuals in a private placement offering at $2.00 per share, resulting in net
proceeds to the Company in the sum of $40,000. The Company issued an additional
20,000 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 $0.60 and $0.90 per share to six
(6) individuals, all of whom are investors in EDI Components, to cancel
principal loans made to that entity and interest accrued thereon. The
transaction resulted in a $364,287 finance expense to the Company.
FISCAL 1997
In May, 1997, the Company issued 100,000 shares of Common Stock to the Economic
Development Bank for Puerto Rico (the "Bank") in settlement of a $3 million
judgment rendered against the Company and various current officers and former
directors. The settlement also provided for the issuance of 100,000 five-year
warrants to purchase Common Stock at $1.00 per share and a $12,000 promissory
note to the Bank to cover certain costs and attorneys fees. See Note (8)
"Litigation and Claims." The fair market value of similar common stock at the
date of the settlement agreement was used as the best indication of the value of
the shares issued; accordingly, $46,875 was expensed and added to common stock
and additional paid-in capital.
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. The fair market value of the Common
Stock, aggregating $9,375, has been added to common stock and additional paid-in
capital and recorded as an expense.
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. The fair market
value of such shares, totaling $538,055, was expensed and added to common stock
and additional paid-in capital for the fiscal year ended October 31, 1997.
In August, 1997, the Company issued 566,409 shares of Common Stock on the
conversion of $200,000 in principal, plus $12,404 in accrued interest, on loans
made to EDI Components and assumed by the Company under the terms of the License
Termination Agreement with that entity. The fair market value of similar Common
Stock, aggregating $212,404 or $0.375 per
F-16
<PAGE> 74
share, was expensed and added to common stock and additional paid-in capital.
Mr. Anthony Frank received 418,960 of such shares issued, on the conversion of
$150,000 in principal loans, plus $7,110 in accrued interest. He sold, at his
cost of $0.375 per share, 100,000 of such shares to his daughter and 50,000
shares each to the Company's Chief Financial Officer, Catherine Patterson, and
to Ronald O'Hare, the Company's Manager of Engineering and Product Design.
In August, 1997, the Company sold 30,988 shares of Common Stock, at $0.375 per
share, for net proceeds of $11,620. The fair market value of similar Common
Stock on the date of issuance was equal to the $0.375 per share purchase price.
Consequently, no expense was recorded for this transaction.
As of August, 1997, the Company began a private placement offering of units
consisting of 25,000 shares of Common Stock and 12,500 redeemable three-year
warrants to purchase Common Stock at $2.00 per share. See Note (5) -
"Stockholders' Deficit Warrants." As of October 31, 1997, the Company had issued
units representing 500,000 shares of Common Stock and 250,000 warrants for net
proceeds of $475,000 and a note in the amount of $25,000. In October, 1997, the
Company issued 4,706 shares of Common Stock as a commission related to the sale
of two of the above private placement units. The fair market value of the Common
Stock was $7,500 and was expensed and added to common stock and additional
paid-in capital.
Between August and October, 1997, the Company issued 107,400 shares of Common
Stock on the exercise of warrants at $0.50 per share and realized net proceeds
in the amount of $28,700 and a note receivable on common stock in the sum of
$25,000. The note was issued by the Company's President, Floyd Panning, on the
exercise of 50,000 of such warrants. See Note (7) "Agreements -Floyd Panning."
Of such 107,400 warrants exercised, 95,400 represented warrants that had been
issued to various investors of EDI Components, including 40,000 issued to Floyd
Panning, under the terms of the 1992 license agreements. Such warrants were to
expire upon termination of the license and were extended, per the August, 1997
termination agreement, until October 1, 1997.
See Note 7 - "Agreements - EDI Components."
On October 25, 1997, the Company issued 2,100,000 shares of its Common Stock to
Wyatt Technology Corporation pursuant to acquire exclusive rights to certain
proprietary technology. The fair market value of the Common Stock was
independently appraised at $447,146. Consequently, the Company reflected an
increase in acquired technology, common stock and additional paid-in capital
totaling that amount. See Note 7 - "Agreements - Wyatt Technology Corporation."
On various dates through October 31, 1997, the Company has allowed certain
individuals, including current and former officers and directors, to purchase
shares and to exercise options or warrants held by them in exchange for notes.
See Note (5) - "Notes Receivable on Common Stock." The balance of notes
receivable on common stock is reflected as a reduction of equity in the
accompanying Statement of Stockholders' Equity and is as follows:
F-17
<PAGE> 75
ELECTROPURE, INC.
Notes to Financial Statements, Continued
<TABLE>
<CAPTION>
October 31,
Number of Date ---------------------
Holder Shares Exercised Exercised 1995 1996
---------------- ---------------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Former Officer 6,650 09/07/89 $108,395 $108,395
Former Officer 1,350 02/02/90 6,075 6,075
Former Director 2,500 05/01/90 1,250 1,250
Former Director 5,000 10/06/93 2,500 2,500
Trust 2,000 10/11/89 1,250 1,250
Others 6,004 Various 1990 842 842
Others 10,604 Various 1991 32,454 32,454
Officer/Director 50,000 08/22/97 25,000 25,000
Others 25,000 10/14/97 25,000 25,000
-------- --------
$202,766 $202,766
======== ========
</TABLE>
WARRANTS
On February 23, 1996, the Company and its (now former) 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. The fair market value of
the Company's Common Stock was less than the exercise price of the Warrants and
no expense was recorded for the issuance. At the time such warrants were
granted, the fair market value of similar restricted Common Stock was $0.90 per
share and the exercise price of such warrants was chosen in anticipation of the
Company effecting a one-for-ten reverse stock split. Consequently, pursuant to
the terms of the loan, no adjustment in the number or exercise price of such
warrants would be made pursuant to the reverse stock split which was effected on
July 25, 1996. Such warrants, however, carry other anti-dilution provisions and
may, in the future, be subject to changes in the Company's capital structure.
Under the terms of the loan agreement, in June, 1997, the lender converted the
principal and interest accrued on such loan into the Company's common stock.
See Note (5) - "Stockholders' Deficit - Common Stock Activity."
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. The difference between the fair
market value of the Company's Common Stock and the purchase price of the
warrants, aggregating $44,625, was expensed as of the fiscal year ended October
31, 1996.
In May, 1997, the Company issued 100,000 warrants to purchase Common Stock to
the Economic Development Bank for Puerto Rico in settlement of a $3 million
judgment rendered against the Company and various current and former officers
and directors. The warrants are exercisable, at $1.00 per share, until June 13,
2002. Also in May, 1997, the Company's Board of Directors authorized the
issuance of 20,000 shares of Common Stock and 20,000 ten-year
F-18
<PAGE> 76
ELECTROPURE, INC.
Notes to Financial Statements, Continued
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. The
fair market value of the Company's Common Stock was less than the exercise price
of the above warrants and, as a result, no expense was recorded on these warrant
issuances.
In August, 1997, pursuant to the terms of an Employment Agreement, the Company
granted Floyd Panning 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 August 5, 1997 effective date of the agreement. See Note (8) -
"Agreements - Floyd Panning." The difference between the fair market value of
similar Common Stock on the date of grant and the exercise price of such
warrants resulted in an expense of $11,719 on the issuance.
On August 14, 1997, the Board of Directors authorized the granting 10,000
warrants to purchase Common Stock to each Director as annual consideration for
service on the Board. Pursuant thereto, 50,000 ten-year warrants were issued to
five (5) Directors on August 14, 1997 at an exercise price of $0.375 per share.
An additional 10,000 ten-year warrants were issued to Randall Frank, who joined
the Board on October 25, 1997, at an exercise price of $0.68 per share. No
expense was incurred pursuant to the issuance of these warrants inasmuch as the
fair market value of similar Common Stock equaled the exercise price of such
warrants on the respective dates of grant.
In October, 1997, the Company issued 10,000 five-year warrants, at an exercise
price of $0.68 per share, to an employee as a bonus. Concurrently, the Company
issued 25,000 five-year warrants to a second employee exercisable at $0.68 per
share over a five-year period; provided, however, the individual remained
employed with the Company. The fair market value of similar Common Stock equaled
the exercise price of all such warrants.
On October 25, 1997, the Company granted 300,000 warrants to purchased Common
Stock to Gregory Quist in conjunction with an employment arrangement which
commenced on December 1, 1997. The warrants are exercisable at $0.68 per share
in 60,000 annual increments commencing one year after the grant date. Any
warrants which remain unexercised at termination of the employment relationship
will automatically expire. Otherwise, such warrants are scheduled to expire in
October, 2003. No expense was recorded on the issuance of these warrants as the
fair market value of similar Common Stock equaled the exercise price of the
warrants as of the date of grant.
Between September and October, 1997, the Company issued 250,000 three-year
warrants to purchase Common Stock to various subscribers in the Company's
August, 1997 private placement offering. The warrants, exercisable at $2.00 per
share, are redeemable by the Company at any time the closing bid price of the
Company's Common Stock exceeds $4.00 per share for any thirty consecutive
business days. The redemption price is $0.05 per warrant.
1987 STOCK OPTION PLAN
F-19
<PAGE> 77
ELECTROPURE, INC.
Notes to Financial Statements, Continued
The following discussion and table has been reclassified to conform to 1997
presentation to give effect to the Company's one-for-ten reverse stock split in
July, 1996.
A total of 50,000 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, 11,000 qualified and 2,500 non-qualified options were reduced from the
original exercise prices to $.50 per share resulting in additional expense as
indicated below.
The following activity has occurred under the Company's 1987 stock
option plan:
F-20
<PAGE> 78
ELECTROPURE, INC.
Notes to Financial Statements, Continued
<TABLE>
<CAPTION>
EXERCISE PRICE
QUALIFIED STOCK OPTIONS SHARES PER SHARE EXTENSION
- ----------------------------------- ------- --------------- ---------
<S> <C> <C> <C>
Granted Fiscal year end 1987 4,000 $ 13.80 $ 55,200
------- --------
Balance at October 31, 1987 4,000 13.80 55,200
Granted 23,050 13.80 - 16.30 375,715
Exercised (50) 13.80 (690)
Cancelled (1,000) 13.80 (13,800)
------- --------
Balance at October 31, 1988 26,000 13.80 - 16.30 416,425
Exercised (8,850) 13.80 - 16.30 (119,430)
Cancelled (1,250) 13.80 - 16.30 (19,815)
Exercise price reduction -- -- (169,110)
------- --------
Balance at October 31, 1989 15,900 .50 - 16.30 108,070
Granted 700 10.30 7,210
Exercised (5,000) 0.50 (2,500)
------- --------
Balance at October 31, 1990 11,600 .50 - 16.30 112,780
Exercised (4,000) 0.50 (2,000)
------- --------
Balance at October 31, 1991 7,600 .50 - 16.30 110,780
Cancelled (7,100) 10.30 - 16.30 (110,530)
------- --------
Balance at October 31, 1992 - 1997 500 $0.50 $ 250
======= ========
NONQUALIFIED STOCK OPTIONS
Granted fiscal year end 1987 4,500 $11.70 $ 52,650
------- --------
Balance at October 31, 1987 4,500 11.70 52,650
Granted 1,500 7.00 - 13.90 15,675
Exercised (1,000) 11.70 (11,700)
------- --------
Balance at October 31, 1988 5,000 7.00 - 13.90 56,625
Exercise price reduction -- -- (39,200)
------- --------
Balance at October 31, 1989 5,000 .50 - 13.90 17,425
Granted 3,500 8.80 - 9.00 31,300
Exercised (1,385) 0.50 (693)
------- --------
Balance at October 31, 1990 7,115 .50 - 13.90 48,033
Granted 14,700 3.70 - 6.10 73,430
Exercised (15,700) .50 - 6.10 (73,930)
------- --------
Balance at October 31, 1991 6,115 .50 - 13.90 47,533
Cancelled (5,000) 7.00 - 13.90 (46,945)
------- --------
Balance at October 31, 1992 - 1996 1,115 0.50 588
Cancelled (500) 0.50 (250)
------- --------
Balance at October 31, 1997 615 $0.50 $ 338
======= ========
</TABLE>
F-21
<PAGE> 79
ELECTROPURE, INC.
Notes to Financial Statements, Continued
Incentive stock options are not exercisable for one year from the date of grant,
but are exercisable in four equal annual installments thereafter. Generally,
nonqualified stock options are exercisable in four equal annual installments
commencing on the date of grant.
Between 1987 and October 31, 1990, the Company granted a combined total of
48,885 qualified and nonqualified options at prices ranging from $0.50 and
$16.30 per share. At October 31, 1997, options to purchase 3,475 and 6,315
shares of common stock under qualified and nonqualified agreements,
respectively, remain exercisable.
NOTES RECEIVABLE ON COMMON STOCK
As of October 31, 1997, the Company was due $202,766 from various individuals,
including current and former employees, officers and directors, on the purchase
of shares and upon the exercise of options and warrants at prices ranging from
$0.50 to $16.30 per share. Of such amount, $25,000 is due from the Company's
current President, Floyd Panning, on the exercise of 50,000 warrants at $0.50
per share. Payment is due from Mr. Panning either from the proceeds of the sale
of such shares or at such time as the Company has paid him amounts accrued as
deferred wages while employed by EDI Components. See Note (8) "Agreements -
Floyd Panning." An additional $25,000 is due from one individual who purchased
25,000 shares in the Company's August, 1997 private placement offering and is
expected to be received in February, 1998. The balance of notes receivable on
Common Stock is due from the remaining individuals from the proceeds of any sale
of the shares in question.
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.
The Company did not achieve certain after-tax earning and/or market prices and
as of January 31, 1991, the redeemable 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.
F-22
<PAGE> 80
ELECTROPURE, INC.
Notes to Financial Statements, Continued
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:
<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) AGREEMENTS
EDI COMPONENTS
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, with an agreed value by the parties of $2.00 per share,
were issued to the investors of EDI Components in amounts commensurate with
their
F-23
<PAGE> 81
ELECTROPURE, INC.
Notes to Financial Statements, Continued
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(1) of the
Company's restricted 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 has reflected 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 an
additional 566,409 shares of Common Stock, at $0.375 per share, upon conversion
of $200,000 in indebtedness, plus $12,404 in related interest, on notes payable
assumed by the Company from EDI Components. An additional $10,000 principal
loan, plus $1,620 in accrued interest, was assumed by the Company and was paid
in September, 1997 with the proceeds realized from the sale of an additional
30,983 shares of Common Stock at $0.375 per share.
The License Termination Agreement provided for an extension, until October 1,
1997, on 95,400 warrants to purchase common stock granted to various investors
of EDI Components pursuant to the July, 1992 license agreement. As of October 1,
1997, all of such warrants were exercised at $0.50 per share, including 44,000
warrants which had been assigned to William Farnam, a Director of the Company,
and 40,000 warrants held by Floyd Panning, president of EDI. Mr. Panning also
exercised 10,000 warrants to purchase common stock previously issued to him in
February, 1993 at $0.50 per share as a bonus for services rendered. See Note 7
"Agreements - Floyd Panning."
FLOYD PANNING
On August 14, 1997, the Company entered into a five-year Employment Agreement
(effective August 5, 1997) with Floyd Panning whereby he became 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
- ----------
(1) The Company has consistently determined the Fair Market Value of its
publicly-traded common stock as the mean of the bid and ask prices
of such common stock on the date of issuance. In the case of
restricted common stock issued by the Company, unless otherwise
noted, the Company applies a 25% discount to such Fair Market Value.
On August 14, 1997, the bid and ask prices of the Company's common
stock were $0.3125 and $0.6875, respectively.
F-24
<PAGE> 82
ELECTROPURE, INC.
Notes to Financial Statements, Continued
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 as his nominee.
(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).
WYATT TECHNOLOGY CORPORATION
F-25
<PAGE> 83
ELECTROPURE, INC.
Notes to Financial Statements, Continued
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. The Company has agreed
to register 630,000 of the shares issued to Wyatt to the end that a sufficient
number of shares may be sold by Wyatt to pay federal and state income taxes on
the transaction. Any shares not required to be sold for this purpose will remain
restricted and must be held by Wyatt for a period of two years from the
transaction date.
The value of the 2,100,000 shares issued to Wyatt are reflected in the Company's
financial statements for the fiscal year ended October 31, 1997 as a $447,146
increase in acquired technology, less $1,470 in amortization, which will be
conducted over a five-year period - the remaining life of the primary patent
covering the technology. The valuation, which was established through an
independent appraisal, utilized a weighted average calculation using the last
trade prior to and subsequent to the transaction date (October 25, 1997, a
Saturday), resulting in a $1.175 value per share . A 28% discount to such value
was then applied to 115,000 of the shares - the estimated number of shares which
must be sold by Wyatt to pay income taxes on the transaction. An 85% discount
was applied to the balance of the shares issued (1,985,000), which must be held
for two years from the date of the transaction. In summary, the appraisal
concluded that the 115,000 and 1,985,000 shares were worth $97,290 and $349,856,
respectively, for a total value of $447,146.
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 required for this research phase which is anticipated to run
approximately five (5) months. A market feasibility study will be conducted
concurrently.
For a period of three years from the date of the transfer agreement, Wyatt will
manufacture and sell to the Company (at a price to be agreed upon) the
components required for any product developed by Electropure utilizing the
transferred technology. Thereafter, the Company may, at its option, manufacture
all such components (except an optical component to which Wyatt will retain all
rights), purchase them from others, or continue to purchase said components from
Wyatt under terms to be agreed upon. Pricing of the component parts, as well as
the optical product proprietary to Wyatt, will be dependent upon their design
and features and can only be determined if the research and development phase
discussed above has been successfully concluded.
F-26
<PAGE> 84
ELECTROPURE, INC.
Notes to Financial Statements, Continued
As a result of the issuance of the 2,100,000 shares in the above transaction,
Wyatt Technology Corporation owns 22.1% of the common stock of the Company, with
16.4% of the voting control as of January 30, 1998.
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.
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 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.
F-27
<PAGE> 85
ELECTROPURE, INC.
Notes to Financial Statements, Continued
In addition to the above legal proceedings, the Company is a party to one other
claim seeking $13,007 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
made the $25,000 in payments required under the arrangement (reflected as
license fees received by the Company) and, as a result, the Company realized a
gain of $101,289 on settlement of the debt.
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 in June,
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 former licensee, EDI Components
issued a $12,000 promissory note to the Bank to cover certain costs and
attorneys fees. Such note, plus interest, was paid in full by the Company in
January, 1998. The settlement was also conditioned upon termination of the
license
F-28
<PAGE> 86
ELECTROPURE, INC.
Notes to Financial Statements, Continued
agreement between the Company and EDI Components and conveyance of all assets
back to the Company, which was accomplished in August, 1997.
(9) SECURITIES LAWS
The Company has, since incorporation, raised a substantial amount of private
capital, which is now represented by common stock, notes and royalty interests
in the water purification unit. Some of these transactions, or portions thereof,
occurred under circumstances in which they may have been subject to state and
Federal securities laws requiring prior authorization, approval or review.
On February 11, 1987, the California Department of Corporations issued a Desist
and Refrain Order ordering the Company and its majority stockholder to cease
violating the qualification provisions of the California Corporate Securities
Law of 1968, as amended. In the opinion of management and its legal counsel, the
Desist and Refrain Order will not have an adverse effect on the financial
position or results of operations of the Company.
Additionally, the Commissioner or Corporations of the State of California has
placed the following restrictions on most of the shares of stock held by the
majority shareholder:
o Such shares will not participate in dividends other than stock dividends
o Such shares will not participate in any distribution of assets in the event
of liquidation
o Such shares may not be transferred without prior written consent of the
Commissioner, except for transfer pursuant to order or process of any
court.
The issuance of an order lifting such conditions is at the sole discretion of
the Commissioner.
(10) INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards (SFAS) 109, "Accounting for Income Taxes," which provides that a
valuation allowance should be recognized to reduce the deferred tax asset to the
amount that is more likely than not to be realized. The Company's deferred tax
assets, arising principally from net operating loss carryforwards, will be
partially offset by deferred tax liabilities in accordance with guidelines
established under SFAS No. 109. Implementation of the Standard had no material
effect on the Company's financial statements for the fiscal years ended October
31, 1996 and 1997. The Company will periodically review and adjust the valuation
allowance as needed.
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,
F-29
<PAGE> 87
ELECTROPURE, INC.
Notes to Financial Statements, Continued
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:
<TABLE>
<CAPTION>
Net operating loss carryforwards
Federal tax purposes State
Year Year Full Annual tax
generated expiring loss limit * purposes
- --------- -------- ---------- ---------- ----------
<S> <C> <C> <C>
10/82 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 --
<06/25/87 2002 716,000 127,472 --
---------- ----------
Total Loss: 2,743,000 488,331 --
>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 357,000 915,000 403,000
10/97 2012 1,096,000 1,096,000 548,000
---------- ---------- ----------
Total Loss: 13,771,000 12,131,000 4,400,000
========== ========== =========
</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 for the fiscal
year ending October 31, 1996 reflects a $357,000 and $254,000 reduction for
federal and state tax purposes, respectively, to account for the amount of gain
not recognized for income tax purposes. The treatment is similar for California
state income tax purposes. 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.
- ----------
* Annual limit due to ownership change on June 25, 1987.
F-30
<PAGE> 88
ELECTROPURE, INC.
Notes to Financial Statements, Continued
(11) SUBSEQUENT EVENTS (UNAUDITED)
In November, 1997, the Company entered into a three-year lease agreement on a
30,201 sq. ft. facility located in Laguna Hills, California to which it intends
to relocate beginning in February, 1998. The Company has committed, pursuant to
the lease agreement, to monthly lease payments through January, 2001 in the sum
of $16,000. The Company has an option to extend the lease for two (2) three-year
terms at pre-negotiated lease rates. The Company intends to sub-lease
approximately 10,000 sq. ft. of such facility in order to defer its monthly
lease obligations. Also, in connection with such lease, the Company issued
60,000 shares of its Common Stock in exchange for an option to purchase such
building at any time prior to January 31, 2001 for the pre-negotiated purchase
price of $2,300,000, or $2,300,000 plus the cumulative change in the Consumer
Price Index (from month one to the date of exercise) if the option is exercised
after August, 1999. If the Company elects to exercise the option to purchase,
the owners of the building have eighteen (18) months from the date notice is
given to transfer title to consummate the sale to the Company.
On January 26, 1998 and February 4, 1998, the Company received two loans, each
in the sum of $200,000, from Anthony M. Frank. The $400,000 total proceeds of
such loans have been reserved by the Company for the possible acquisition of
rights to certain proprietary membrane technology from a privately-held
Pennsylvania company. On January 29, 1998, Mr. Frank converted the first loan in
the sum of $200,000 into 206,186 shares of the Company's Common Stock at a 27.5%
discount to fair market value, resulting in a $6,907 expense. The remaining
$200,000 loan is due to be repaid, with 10% interest payable annually, on or
before February 4, 2000, unless Mr. Frank elects to convert such loan and/or
interest accrued thereon. Mr. Frank has the right to convert such loan into
Common Stock at a 25% discount to the fair market value, utilizing a 30-day
average of the bid and asked prices of such Common Stock prior to the conversion
date.
F-31
<PAGE> 89
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, 1997, 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 regulation.
In the opinion of managements, the accompanying unaudited interim condensed
Financial Statements contain all adjustments (consisting of normal recurring
accruals and prior period adjustments) necessary to present fairly the Company's
financial position as of January 31, 1998, and the results of its operations and
its cash flows for the three months ended January 31, 1997 and 1998. The results
of operations for the three-month period ended January 31, 1998 are not
necessarily indicative of the results to be expected for the full year.
F-32
<PAGE> 90
ELECTROPURE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, January 31,
Assets 1997 1998
--------- ---------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 367,680 $ 360,421
Receivables:
Trade accounts 14,988 77,079
Due from related parties 115,227 78,898
Allowance for doubtful receivables (85,528) (85,528)
--------- ---------
44,687 70,449
Inventory:
Raw materials 7,498 12,857
Other current assets 26,001 69,141
--------- ---------
Total Current Assets 445,865 512,868
--------- ---------
Propery and equipment, at cost:
Office equipment 3,584 15,950
Leasehold improvements -- 2,457
--------- ---------
3,584 18,407
Less accumulated depreciation and amortization 172 687
--------- ---------
3,412 17,720
Acquired technology, net 445,676 423,319
--------- ---------
Total Assets $ 894,953 $ 953,907
========= =========
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE> 91
ELECTROPURE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, January 31,
Liabilities and Stockholders' Equity 1997 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Notes payable to stockholders $ 29,736 $ 17,740
Accounts payable 37,843 36,743
Accrued liabilities 23,960 8,386
Allowance for loss on lawsuit settlements 23,331 23,331
------------ ------------
Total Current Liabilities 114,870 86,200
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 1997 and 1998 26,000 26,000
Stockholders' equity:
Common stock, $.01 assigned par value. Authorized 20,000,000
shares; 7,774,293 shares issued and 7,734,293 shares
outstanding in 1997; 8,040,479 shares issued and 8,000,479
shares outstanding in 1998 77,343 80,005
Class B common stock, $.01 assigned par value. Authorized
83,983 shares; issued and outstanding 83,983 shares in
1997 and 1998 840 840
Additional paid-in capital 18,075,947 18,370,502
Accumulated deficit (17,197,281) (17,431,874)
Notes receivable on common stock (202,766) (177,766)
------------ ------------
754,083 841,707
------------ ------------
Total Liabilities and Stockholders' Equity $ 894,953 $ 953,907
============ ============
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE> 92
ELECTROPURE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
January 31,
1997 1998
----------- -----------
<S> <C> <C>
License fees received $ 20,300 $ --
Sales -- 125,257
----------- -----------
20,300 125,257
Cost of goods sold -- 69,055
----------- -----------
Gross margin 20,300 56,202
Costs and expenses:
Research and development -- 43,902
Sales and marketing -- 35,172
General and administrative 24,174 113,890
----------- -----------
24,174 192,964
----------- -----------
Loss from operations (3,874) (136,762)
----------- -----------
Other income and (expense):
Interest expense (393) (615)
Financing costs -- (97,217)
----------- -----------
(393) (97,832)
----------- -----------
Net income (loss) $ (4,267) $ (234,594)
=========== ===========
Net income (loss) per share of common stock $ -- $ (0.05)
=========== ===========
Weighted average common shares outstanding 1,926,868 4,358,663
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE> 93
ELECTROPURE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(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>
Balance at October 31, 1997 7,734,293 $ -- $ 77,343 83,983 $ -- $ 840
Payment on receivable on common stock -- -- -- -- -- --
Issuance of common stock for option
on building purchase 60,000 -- 600 -- -- --
Issuance of common stock for
conversion of debt 206,186 -- 2,062 -- -- --
Net Loss -- -- -- -- -- --
--------- ---- --------- --------- ---- ---------
Balance at January 31, 1998 8,000,479 -- 80,005 83,983 -- 840
========= ==== ========= ========= ==== =========
</TABLE>
<TABLE>
<CAPTION>
Notes
Additional receivable Net
paid-in on common Accumulated stockholders'
capital stock deficit equity
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at October 31, 1997 $ 18,075,947 $ (202,766) $(17,197,281) $ 754,083
Payment on receivable on common stock -- 25,000 -- 25,000
Issuance of common stock for option
on building purchase 89,400 -- -- 90,000
Issuance of common stock for
conversion of debt 205,155 -- -- 207,217
Net Loss -- -- (234,594) (234,594)
------------ ------------ ------------ ------------
Balance at January 31, 1998 18,370,502 (177,766) (17,431,874) 841,707
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE> 94
ELECTROPURE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
January 31,
1997 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,267) $(234,594)
--------- ---------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 27 22,872
Financing costs related to issuance of common stock -- 97,217
Change in assets and liabilities, net of noncash transactions:
Decrease (increase) in receivables 236 (25,762)
Decrease (increase) in inventory -- (5,359)
Decrease (increase) in other assets -- (57,964)
Increase (decrease) in notes payable -- (12,429)
Increase (decrease) in accounts payable and accrued expenses 3,391 (16,856)
Increase in interest payable, net 393 615
--------- ---------
Total adjustments 4,047 2,335
--------- ---------
Net cash used in operating activities (220) (232,260)
Cash flows from investing activities: None
Cash flows from financing activities:
Proceeds from issuance of common stock -- 200,000
Proceeds from collection of receivables on common stock -- 25,000
--------- ---------
Net cash provided by financing activities -- 225,000
--------- ---------
Net (decrease) in cash (220) (7,260)
Cash at beginning of period 674 367,680
--------- ---------
Cash at end of period $ 454 $ 360,421
========= =========
</TABLE>
See accompanying notes to financial statements.
F-37
<PAGE> 95
(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, 1997.
In February, 1996, the Company issued 253,334 shares of Common Stock upon the
conversion of $152,000 in loans payable by its former licensee, EDI Components.
Although the shares were issued at a below fair market value of $0.60 per share,
resulting in an expense of $228,000, the Company mistakenly reflected the
expense at $152,000. Pursuant to such error, the Company has made a prior period
adjustment to increase additional paid-in capital and the accumulated deficit by
$76,000. In addition, the Company has made a prior period adjustment for the
fiscal year ended October 31, 1996 to impute a $500 per month rent expense to
account for the expense of occupying offices sub-leased by the Company from EDI
Components until September, 1997. The expense has been credited toward license
fees paid by EDI Components. Similar adjustments have been made for the interim
periods ended January 31, 1997, April 30, 1997 and July 31, 1997, respectively.
The above prior period adjustments did not materially impact the Company's
retained earnings, net shareholders' equity, net loss or net loss per share. The
comparative financial statements contained in this report have been adjusted to
reflect retroactive application of the prior period adjustments discussed above.
LIQUIDITY
As of January 31, 1998, the Company had current assets in excess of current
liabilities of $426,668, an accumulated deficit of $17,431,874 and a
stockholders' equity of $841,707. In July, 1992, the Company entered into a
License Agreement with EDI Components, a California corporation, to grant an
exclusive license to manufacture and market the Company's patented Electropure
("EDI") technology. Since entering into such license relationship, the Company
funded its working capital needs from license fees paid by EDI Components until
the license was terminated in August, 1997. In September, 1997, the Company
began limited manufacturing and sales of its patented EDI product. During the
three months ended January 31, 1998, the Company booked $125,257 in gross sales
of its EDI products and realized therefrom $55,456 in cash and $69,801 in
accounts receivable. The Company also collected $7,710 and $19,500 in
receivables from trade accounts and related parties, respectively, during the
period. The Company received an additional $25,000 payment in January, 1998 on a
note receivable on common stock.
F-38
<PAGE> 96
In January 26, 1998, the Company received $200,000 in loans from a principal
shareholder. Such proceeds, along with an additional $200,000 in loans from the
same shareholder, were utilized to purchase the rights to certain proprietary
membrane technology from Hydro Components, Inc., a Pennsylvania manufacturer of
light commercial water and wastewater treatment products. See Note (7) -
"Subsequent Events." Pursuant to the terms of the loan agreement, the
shareholder elected to convert the $200,000 principal amount of the loan into
206,186 shares of Common Stock. See Note (5) - "Stockholders' Equity."
(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
January 31, 1998 are offset by an allowance for doubtful accounts.
A total of $23,763 remains due as of January 31, 1998 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 $23,351, which has been offset by an allowance for doubtful
accounts.
Between August, 1997 (when the license relationship with EDI Components was
terminated) and October 31, 1997, the Company sold products for which the
Company's former licensee, EDI Components, mistakenly received a total of
$36,329 in payments. In January, 1998, EDI Components satisfied the receivable
in full by paying the Company $19,500 in cash and transferring $16,829 in raw
materials it had purchased for the EDI product prior to the license termination.
(3) INVENTORY
Inventory, stated at the lower of cost (determined using the first in, first out
method) or replacement market, consists of components for EDI water purification
modules.
(4) COMMITMENTS AND CONTINGENCIES
F-39
<PAGE> 97
The original cost and accumulated depreciation of assets at January 31, 1998 are
as follows.
<TABLE>
<CAPTION>
<S> <C>
Furniture and fixtures $15,950
Leasehold improvements 2,457
-------
18,407
Less accumulated depreciation and amortization 687
-------
$17,720
=======
</TABLE>
COMMITMENTS
On October 1, 1997, the Company assumed the month-to-month lease obligation from
EDI Components on its previous facility at 23251 Vista Grande, Laguna Hills,
California and is obligated to make monthly lease payments in the sum of $4,086
through April, 1998. For the fiscal quarter ended January 31, 1998, the Company
paid an aggregate of $15,955 in lease payments on such facility.
In November, 1997, the Company entered into a three-year lease agreement on a
30,201 sq. ft. facility located at 23456 South Pointe Drive, Laguna Hills,
California. The lease commenced on February 1, 1998 at a lease rate of $16,000
per month, with pre-negotiated annual increases in the second and third years of
the lease approximating three percent of the then base monthly lease payment. On
November 14, 1997, the Company paid the Lessor $48,000, representing the first
month's lease payment, plus a $32,000 security deposit which shall be applied to
one-half of the monthly lease payments in months 6, 12, 18 and 24 of the initial
lease term. Such first month's rent and security deposit have been recorded as a
prepaid deposit in the sum of $48,000 and will be credited to rent expense when
utilized over the next 24 months.
(5) STOCKHOLDERS' EQUITY
On November 12, 1997, the Company issued 60,000 shares of Common Stock to the
Lessors of its new facility in exchange for a three-year option to purchase the
building for the pre-negotiated purchase price of $2,300,000 through August,
1999. If the option is exercised after August, 1999, the purchase price will be
$2,300,000 plus the cumulative change in Consumer Price Index from February 1,
1998 to the date of exercise. The issuance, which was made at a fair market
value of $1.50 per share, resulted in an increase in common stock and additional
paid in capital and a $90,000 financing expense.
On January 29, 1998, Anthony Frank exercised his option to convert, at a 27.5%
discount to fair market value(1), a $200,000 principal loan made to the Company
on January 26, 1998. The conversion resulted in the issuance of 206,186 shares
of Common Stock at $0.97 per share.
- ----------
(1) The loan agreement with Mr. Frank provided that, upon conversion of the
note, the "fair market value" of common stock would be determined as the
average of the bid and asked prices of such common stock for the thirty
consecutive trading days prior to the conversion date.
F-40
<PAGE> 98
Accordingly, the difference between conversion price and the fair market value
of similar restricted common stock on the date of issuance, aggregating $7,217,
was expensed and added to additional paid-in capital for the fiscal period ended
January 31, 1998.
(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
On February 4, 1998, the Company received a loan of $200,000 from Anthony Frank,
the proceeds of which, in addition to a previous $200,000 loan made on January
26, 1998, would be utilized to acquire the rights to certain membrane technology
from Hydro Components, Inc. The January, 1998 loan was converted by Mr. Frank
into common stock on January 29, 1998 [see Note (5) -"Stockholders' Equity]. The
February 4, 1998 loan, at 10% annual interest, is due to be repaid on or before
February 4, 2000. Mr. Frank has the right to convert such loan into Common Stock
at a 25% discount to the fair market value, utilizing a 30-day average of the
bid and asked prices of such Common Stock prior to the conversion date.
On February 11, 1998, the Company entered into a one-year consulting agreement
with Hamilton Partners Incorporated of Newport Beach, California ("Hamilton"),
to provide the Company with consulting services on various administrative,
financial, marketing and/or sales matters. Pursuant to such agreement, the
Company will pay Hamilton a monthly fee of $3,500 and has granted the firm
25,000 three-year warrants to purchase Common Stock at $1.78 per share. The fair
market value of similar Common Stock was equal to the exercise price of such
warrants on the date of issuance.
On February 17, 1998, the Company entered into an Assignment Agreement with
Hydro Components, Inc. ("HCI"), a Pennsylvania manufacturer of light commercial
water and wastewater treatment products, for the exclusive worldwide rights to
proprietary membrane technology. The Company intends to utilize the acquired
technology to develop ion permeable membranes for use with its EDI product. The
agreement provides that HCI will furnish all technical support required by the
Company for the development program. If development efforts are successful, such
membranes would open additional markets for the Company's EDI product in
industry segments which require purity levels of process water which are lower
than that provided by the current EDI design. The Company paid HCI $200,000 for
the above rights and loaned HCI an additional $200,000, secured by all assets of
the borrower. The loan is to be repaid, with interest at 10%, on or before April
17, 1998.
F-41
<PAGE> 99
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
<TABLE>
<CAPTION>
<S> <C>
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 .....................................................................
CHANGE IN CERTIFYING ACCOUNTANTS ............................................
ACCOUNTANTS' REPORT .........................................................
FINANCIAL STATEMENTS ........................................................
UNAUDITED INTERIM FINANCIAL STATEMENTS ......................................
</TABLE>
ELECTROPURE, INC.
COMMON STOCK
PROSPECTUS
_____________ __, 1998
<PAGE> 100
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.
See also "DESCRIPTION OF COMMON STOCK - Miscellaneous."
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>
ITEM 26. RECENT SALE OF UNREGISTERED SECURITIES
II-1
<PAGE> 101
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 Resources."
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.
10.10.U 10% Two-Year Convertible Term Note with Anthony M. Frank dated
January 26, 1998. ********
10.10.V 10% Two-Year Convertible Term Note with Anthony M. Frank dated
February 4, 1998. ********
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
II-2
<PAGE> 102
October 25, 1997.*******
10.53 8% Sixty-Day Term Note from Hydro Components, Inc. dated February
17, 1998, including Assignment Agreement, Security Agreement and
Unlimited Personal Guaranty. *********
24.1 Consent of Alex N. Chaplan & Associates.
24.2 Consent of Jeffer, Mangles, Butler & Marmaro, LLP (included in
Exhibit 5.0).
25 Power of Attorney (see page II-5).
- ----------
* Previously filed on December 15, 1986 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, as filed on May 4, 1988.
*** Previously filed on February 28, 1989 in connection with
Registrant's Form 10-K for the fiscal year ended October 31,
1988.
**** Previously filed on October 11, 1995 in connection with
Registrant's Form 10-KSB for the fiscal year ended October 31,
1994.
***** Previously filed on July 16, 1997 in connection with Registrant's
Form 10-KSB for the fiscal year ended October 31, 1996.
****** Previously filed on September 11, 1997 in connection with
Registrant's Form 10-QSB for the fiscal quarter ended July 31,
1997.
******* Previously filed on November 14, 1997 in connection with Schedule
13-D filed by Wyatt Technology Corporation.
******** Previously filed on February 11, 1998 in connection with
Registrant's Form 10-KSB for the fiscal year ended October 31,
1997.
********* Previously filed on March 13, 1998 in connection with Registrants
Form 10-QSB for the fiscal quarter ended January 31, 1998.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
II-3
<PAGE> 103
(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;
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> 104
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 this Amendment No. 1 on Form SB-2 and authorized this
Registration Statement and any and all amendments thereto to be signed on its
behalf by the undersigned thereunder duly authorized, in the City of Laguna
Hills, California, on March 6, 1998.
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
<TABLE>
<CAPTION>
<S> <C> <C>
/S/ WILLIAM F. FARNAM Director March 6, 1998
----------------------------
WILLIAM F. FARNAM
/S/ RANDALL P. FRANK Director March 6, 1998
----------------------------
RANDALL P. FRANK
Director
----------------------------
RANDOLPH S. HEIDMANN
/S/ WILLIAM H. LEE Director March 6, 1998
----------------------------
WILLIAM H. LEE
/S/ FLOYD H. PANNING Chief Executive Officer March 6, 1998
---------------------------- and Director
FLOYD H. PANNING
/S/ CATHERINE PATTERSON Chief Financial Officer March 6, 1998
---------------------------- (Principal Financial and
CATHERINE PATTERSON Accounting Officer)
</TABLE>
II-5
<PAGE> 105
Exhibit Page No.
- ------- --------
5.0 Opinion of Jeffer, Mangels, Butler & Marmaro, LLP.
24.1 Consent of Alex N. Chaplan & Associates
<PAGE> 1
EXHIBIT 5.0
[JEFFER, MANGELS, BUTLER & MARMARO LLP LETTERHEAD]
March 10, 1998 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 5,172,536 shares (the "Shares")
of the Company's common stock, including 1,537,437 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 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.
March 10, 1998
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 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 except for the initial purchasers of the Shares under
the Registration Statement, (iii) may not
<PAGE> 3
JEFFER, MANGELS, BUTLER & MARMARO LLP
Electropure, Inc.
March 10, 1998
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
[ALEX N. CHAPLAN & ASSOCIATES LETTERHEAD]
To the Board of Directors and
Stockholders of Electropure, Inc.
The audits referred to in our report dated January 29, 1998 included the related
financial statements as of October 31, 1997 and for each of the years in the
two-year period ended October 31, 1997 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 January 29, 1998 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/ ALEX N. CHAPLAN
Calabasas, California
March 10, 1998
