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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended Commission file number 0-16416
OCTOBER 31, 1997
ELECTROPURE, INC.
(FORMERLY, HOH WATER TECHNOLOGY CORPORATION)
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0056212
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
23251 Vista Grande, Suite A, Laguna Hills, California 92653
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 770-9187
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ].
Indicate by check mark whether any director, officer, beneficial owner of more
than 10 percent of any class of equity securities of the Registrant failed to
file any reports required by Section 16(a) of the Securities Exchange Act of
1934 on a timely basis during the most recent fiscal year. Yes [ ] No [ X ].
The aggregate market value of the voting stock held by non-affiliates of the
Registrant at January 30, 1998 was $5,310,694
At January 30, 1998, 8,000,479 shares of the Registrant's stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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PART I
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ITEM 1. BUSINESS
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BUSINESS
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Electropure, Inc. ("Electropure" or the "Company") manufactures and markets the
"EDI" series of patented electrodeionization water treatment devices for
commercial and industrial high purity water applications. The Company's EDI
product is marketed to original equipment manufacturers ("OEM's) as a
specialized component for water treatment systems designed to provide ultrapure
water to market segments whose major customers include, but are not limited to,
semiconductor, pharmaceutical and cosmetic companies, as well as laboratories
and petrochemical companies.
The Company's current EDI design is able to desalt pre-treated (water filtered
and softened generally by reverse osmosis) tap water to a purity level exceeding
one megohm-cm (roughly less than 0.5 parts per million ("ppm") of total
dissolved solids ("TDS")) at a rate of 3 to 6 gallons per minute on demand.
Modularized designs (connecting additional modules in parallel formations)
increase a system's capacity exponentially to service installations requiring up
to hundreds of gallons per minute. In addition to its cost-effective operation,
a major environmental and competitive benefit of the EDI technology is that it
does not require the addition of salts or other chemicals for regeneration. Most
other competitive processes require the addition of these elements.
The Company recently acquired an exclusive license to certain patent and
intellectual property rights involving laser light scattering techniques to be
utilized in the detection and monitoring of toxicants in drinking water. This
acquisition will provide the basis for Electropure's proposed development of
near "real-time" drinking water monitoring systems primarily for municipal
applications. This technology and the EDI technology are not intended to be
integrated into one product. See "Item 1 - BUSINESS - License Agreements - Wyatt
Technology Corporation" and "BUSINESS - Laser Monitoring Division."
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LICENSE AGREEMENTS
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EDI COMPONENTS
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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
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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 Item 10
- - EXECUTIVE COMPENSATION - Employment Agreement."
WYATT TECHNOLOGY CORPORATION
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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.
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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.
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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.
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.
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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
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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.
POLYMETRICS
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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.
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THE MARKET FOR WATER PURIFICATION
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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 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 annually and given the
general deterioration of the world's water supplies this growth is likely to
continue and expand as the cost of treatment falls. Advanced manufacturing
technologies and the tremendous expansion seen in electronics, pharmaceuticals
and bio-tech firms in the last decade alone, have been the precursors
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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.
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CURRENT TECHNOLOGIES IN WATER PURIFICATION
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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.
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THE EDI TECHNOLOGY
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The need to satisfy the increasing demand for high purity water in a variety of
industries can now be achieved through the Company's patented
electrodeionization process (EDI). The EDI design combines two well-established
water desalination technologies -- electrodialysis and ion exchange
deionization. Through this technique, dissolved salts can be removed at low
energy costs, and without the need for chemical regeneration; the result is high
quality water of multi-megohm/cm resistivity which can be produced continuously
at substantial flow rates.
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.
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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.
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EDI 5 GPM MODULE
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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 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:
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o the EDI technology system operates with variable local water
pressure and no booster pumps are required.
o lower maintenance since nothing is consumed except small amounts of
electricity. If at all necessary, chemicals are added less
frequently than existing equipment.
o large flow rate relative to its size, as compared to conventional
systems that purport to treat the same flow rates.
The Company's belief as to the expected advantages of the EDI technology are
based upon its experience with its prototypes and pilot production units. The
point-of-use EDI technology incorporates a number of design improvements to the
original EDI patent. In October 1990, U.S. Patent No. 4,964,970, was granted on
certain of these developments. 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.
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MARKETING
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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 Item 1 - "BUSINESS - License Agreements - EDI Components"). The Company has
patents for its EDI technology in the following foreign countries: Austria,
Belgium, France, Great Britain, Luxembourg, Switzerland and West Germany.
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.
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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.
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GOVERNMENT REGULATION
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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.
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PRODUCTION METHODS
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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. The membranes utilized in the
EDI product are currently purchased from outside sources. The Company may
acquire rights to certain proprietary technology in the future to develop its
own membranes for the EDI product. However, no assurances can be given that the
Company will be successful in acquiring any such rights or that, if acquired, an
efficient membrane can be developed for use with 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.
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WARRANTY
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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.
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SOURCES OF SUPPLY
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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 Item 1 - "BUSINESS - License
Agreements - Wyatt Technology Corporation."
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PATENTS AND LICENSE AGREEMENT
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Certain technology used by the EDI technology is covered by U.S. Patent No.
4,465,573, issued on August 14, 1984, to Harry M. O'Hare, Sr. Corresponding
patent applications have been filed in certain limited foreign countries. A new
patent application was filed in September, 1988 and in connection therewith U.S.
Patent No. 4,964,970 was granted on October 23, 1990 on design improvement
features of the basic technology patented in 1984. These improvements involve
upgrades of various components, including ion permeable membranes, manifolds
(front and rear), and product water and waste water compartments. Such
improvements will increase performance quality and decrease production costs.
The existence of patents for the EDI technology may not provide any meaningful
protection for the Company because of technological changes, the decision of
courts not to uphold all or part of a patent, or because of the limited
financial resources which may be available to the Company to enforce its patent
rights. The patent does not cover the technology used to make the ion permeable
membranes or the anodes. The Company regards such technologies as trade secrets.
However, since such technologies are not patented, others could attempt to copy
such technologies to the potential detriment of the Company.
The Company has not secured a registered trademark or trade name for the "EDI".
Harry M. O'Hare, Sr., the inventor of the EDI technology, entered into a License
Agreement with the Company and HOH, Inc., dated October 30, 1986. The License
Agreement grants to the Company an exclusive worldwide license to manufacture,
use and sell the EDI technology and other water purification products covered by
the current patent and any improvements thereon or under corresponding foreign
patents for the life of such patents. Under the terms of the License Agreement,
the Company is obligated to pay to the individuals who have royalty rights in
the EDI technology, a royalty of approximately $42.50 for each EDI technology
system, which has a capacity of from six to twenty gallons per minute, sold or
placed in service by the Company and its licensees during the life of the
patent. Royalties of approximately $9.00 per such EDI technology are also
payable until a maximum of approximately $525,600 is paid at which time such
additional royalties will terminate. Royalties of approximately 2.05% of the net
sales price are also payable on EDI products of other flow rates. In May, 1987,
Mr. O'Hare assigned all of his interest, including rights to future royalties,
in the patent covering certain parts of the EDI technology to the Company.
On January 21, 1988, the Company and Harry M. O'Hare, Sr. entered into an
Invention Assignment Agreement for certain payments wherein Mr. O'Hare assigned
to the Company his
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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 Item 1 - "BUSINESS - License Agreements - EDI
Components."
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RESEARCH AND DEVELOPMENT
- ------------------------
The Company has incurred no expense for research and development for the fiscal
years ended October 31, 1996 and 1997. Pursuant to the recently acquired Wyatt
technology, however, the Company anticipates 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 such technology. Further, if the Company acquires
certain rights to proprietary membrane technology from Hydro Components, Inc.
for use with the EDI product, additional research and development costs will be
incurred. See Item 6 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquity and Capital Resources."
For a description of the Wyatt license, see Item 1 - "BUSINESS - License
Agreements - Wyatt Technology Corporation."
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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
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developed (and patented) under that program, market studies, and the
establishment of a marketing plan to target water consumer delivery agencies
(municipalities). Although this market may well represent a major opportunity
(on a worldwide basis) for future growth of the Company's consumer market
products, the current instrumentation and software available from the Wyatt
transfer appears to provide a more immediate path to developing the parasite
detection concept for the technology. It is for this reason that the Company's
initial emphasis will be to conduct a feasibility study for the detection and
monitoring of parasites, primarily Cryptosporidium and Giardia(1), in drinking
water sources. Since these parasites form cysts that 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.
- ---------------------------
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).
12
<PAGE> 13
A system that would provide for "real-time" contaminant detection and monitoring
could prevent or limit outbreaks, saving lives and money in the process. The
availability of this technology would clearly represent a leap forward in water
delivery and monitoring. Under the guidance of Dr. Gregory M. Quist, using the
instrumentation and (some) software acquired through the Wyatt transfer, the
Company will seek to develop software and analytical packages to confirm that
the multiangle light scattering ("MALS") measurements of individual
Cryptosporidium and Giardia cysts can be identified with a certainty greater
than 90% in the presence of various background algal species. The proposed
system would monitor the MALS properties of each particle passing through the
detector region and the software program would examine the measurements and
decide whether or not the particle was one of the two test parasites.
Potential customers for the proposed system would include local water utilities,
both private and municipal; state water utilities and water quality and health
agencies; Federal government agencies such as EPA, DoD, DoE, CDC; wastewater
treatment plants; ground water and well users; and potentially, as the cost of
the sensors and system decrease, homeowners.
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 Item 1 - "BUSINESS - License Agreements - Wyatt Technology
Corporation."
- -----------
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-
13
<PAGE> 14
sized with no substantial cost to the customer. The customer pays for the water
on either a cost-per-gallon basis, or a cost-per-regeneration basis.
Regeneration is done at the service company's facility so that the customer does
not have to handle or dispose of chemical waste.
Many companies in the water treatment market are established in the field,
including the well-known firms mentioned above and others. All of such companies
are larger and better financed than the Company, have established products and
an established customer base and can accordingly devote more resources to
research and development, production and marketing activities. In addition, it
is possible that the water purification industry may be the subject of
technological innovation or other factors which may attract additional
competition in the future. The Company believes, however, that the patents for
the EDI technology and its technical know-how may be significant in its ability
to compete.
With regard to the Company's proposed drinking water monitoring product, there
are established methods of water quality testing currently employed by local and
state water utilities, both private and municipal. However, these methods are
labor intensive, expensive and time consuming and do not provide the near "real
time" monitoring capabilities which the Company's product, if it can be
developed, would purport to offer.
The proposed acquisition of rights to membrane technology from Hydro Components,
Inc. is designed to reduce the Company's dependence on outside suppliers for
this component of the EDI product as well as to significantly reduce the cost of
such component. If the Company can acquire such rights and, if the Company is
successful in developing an efficient membrane, the expected cost reduction in
the membrane component of the EDI product should result in a substantial
increase in the cost competitiveness of the Company's product. See "Item 6 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
- ---------
EMPLOYEES
- ---------
As of January 30, 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 Item 1 -
"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. Additional employees may be
required if the Company successfully acquires rights to certain membrane
technology of Hydro Components, Inc. 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.
14
<PAGE> 15
- -------------------------------------------------------------------------------
ITEM 2. PROPERTIES
- -------------------------------------------------------------------------------
The Company currently leases, from an unaffiliated third party, a 5,600 sq. ft.
facility in Laguna Hills, California on a month-to-month basis at a rental of
$3,892 per month. The Company believes that this facility is adequate to
accommodate its requirements temporarily until it can relocate to its new
facility in Laguna Hills. The Company has entered into a lease with an option to
purchase a 30,201 sq. ft. facility in Laguna Hills and will pay a gross
(including taxes, insurance and major repairs) lease payment of $16,000 per
month beginning February 1, 1998. The Company intends to sub-lease approximately
10,000 sq. ft. of such facility to offset approximately $6,500 of such monthly
rental.
15
<PAGE> 16
- -------------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS
- -------------------------------------------------------------------------------
- -----------
PUERTO RICO
- -----------
In July, 1993, the Company's subsidiary, HOH International, Inc., filed for
protection from its creditors in the United States Bankruptcy Court, Central
District of California. The petition filed by the subsidiary sought to have all
of that entity's debts discharged. On November 18, 1993, such proceedings were
concluded and the subsidiary was declared bankrupt and $2,979,215 in liabilities
were discharged, including all dividends accrued on preferred stock held by the
Economic Development Bank for Puerto Rico (the "Bank").
In October, 1996, the Company was advised that a $3 million default judgment had
been rendered in June, 1996 against the Company, its bankrupt subsidiary (HOH
International, Inc.) and various current and former officers and directors of
such companies. The judgment also was rendered against HOH/CNM2 Enterprises and
its incorporators, Carmen Morales and Radames Torres. Mr. Torres was the former
president and general manager of HOH International, Inc. No personal service or
notice of this action had been served upon the Company, any defendant, or their
respective counsel, prior to the entry of the judgment. The lawsuit, which was
brought by the Economic Development Bank for Puerto Rico (the preferred
stockholder in HOH International, Inc.) in February, 1993 in the San Juan
Superior Court, alleged that the Company, its subsidiary, and the officers and
directors of both, breached their fiduciary duty in entering into a distribution
agreement with HOH/CNM2 Enterprises which ultimately led to the dissolution of
the subsidiary, all to the detriment of the Plaintiff. In April, 1997, the Court
denied a motion to set aside the above judgment based upon the defendants' claim
of lack of notice and inadequate service of process.
In May, 1997, the Company and its licensee, EDI Components, entered into a
settlement agreement with the Economic Development Bank to satisfy the above $3
million judgment on behalf of all of the defendants, in exchange for the
issuance to the Bank of 100,000 shares of common stock and 100,000 five-year
warrants to purchase common stock at $1.00 per share. The Company also issued,
in conjunction with EDI Components, a 10% Convertible Term Note in the sum of
$12,000, payable within one year or upon receipt of a minimum of $300,000 in
equity funding, whichever occurs first. The settlement was conditioned upon
termination of the license relationship with EDI Components and realignment of
the Company's Board of Directors by July 21, 1997. The Boards of Directors of
both parties ratified the settlement agreement in June, 1997.
- -----------------
OTHER PROCEEDINGS
- -----------------
In December, 1993, a default judgment was rendered against the Company in the
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,
16
<PAGE> 17
1994, the Company paid $250 on this judgment; however, the Company has made no
arrangements to satisfy this obligation as of this writing.
The Company is party to 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.
- -------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------------------------
In May, 1996, the Company's shareholders, by written consent, approved a
corporate name change to "Electropure, Inc." by a vote of 9,982,310 for and
283,707 against. The shareholders also approved a one-for-ten reverse stock
split by a vote of 9,983,080 for and 283,707 against.
17
<PAGE> 18
PART II
- -------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS.
- -------------------------------------------------------------------------------
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
retain 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 (through January 30, 1998) 2-1/16 3/4
--------------- -------------------------------------------- ------- -------
</TABLE>
The market for the Company's securities is sporadic and quoted prices may not
represent the true value of such securities.
As of January 30, 1998, the Company had approximately 760 holders of record of
its Common Stock.
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.
- --------------------------
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.
18
<PAGE> 19
On November 12, 1997, the Company issued 60,000 shares of Common Stock in
consideration for an option to purchase a 30,201 square foot building to which
the Company intends to relocate its operations in or around February, 1998. The
estimated fair market value of these restricted shares at that date(1)
aggregates $90,000 and will be expensed and added to additional paid-in
capital for the fiscal quarter ended January 31, 1998. See Item 2 "Properties."
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.
- -----------------------------
1 On November 12, 1997, the bid and ask prices of the Company's common stock
were $1.75 and $2.25, respectively, resulting in a Fair Market Value of
$2.00 per share of common stock. A discount of 25% was applied to the Fair
Market Value, due to the restricted nature of the shares in question,
resulting in a $1.50 per share value on the transaction
19
<PAGE> 20
- -------------------------------------------------------------------------------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
- -------------------------------------------------------------------------------
- --------------------------------------------
FISCAL YEARS ENDED OCTOBER 31, 1996 AND 1997
- --------------------------------------------
License fees received for the fiscal year ended October 31, 1997 decreased by
$3,122 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 Item 6 - "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 $64,473 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.
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 $565,157 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.
20
<PAGE> 21
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 $1,096,034 for
fiscal 1997, representing an increase of $691,762 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.
- -------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At October 31, 1997, the Company had net working capital (total current assets
less total current liabilities) of $330,995, representing an increase of
$379,700 from the prior year end. The increase is due primarily from the
proceeds received by the Company's in September and October, 1997 from a
$500,000 private placement offering of securities initiated in August, 1997. The
private placement offering consisted of 20 Units of securities, each Unit
comprised of 25,000 shares of Common Stock and 12,500 three-year redeemable
warrants to purchase common stock at $2.00 per share. The purchase price of each
Unit was $25,000 and, as of October 31, 1997, the Company sold all 20 Units
(500,000 shares of Common Stock and 250,000 warrants to purchase Common Stock)
for net proceeds of $475,000 and a note receivable on common stock in the sum of
$25,000.
In the opinion of management, available funds will satisfy the Company's working
capital requirements for up to seven (7) months. However, no assurances can be
given that such proceeds will satisfy the working capital needs of the Company
for the period estimated, or; that the Company can obtain additional working
capital through the sale of Common Stock or other securities, the issuance of
indebtedness or otherwise or on terms acceptable to the Company. Further, no
assurances can be given that any such equity financing will not result in a
further substantial dilution to the existing shareholders or will be on terms
satisfactory to the Company.
During fiscal 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. 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 a note
receivable on common stock in the sum of $25,000.
21
<PAGE> 22
Between August and October, 1997, the Company sold twelve (12) EDI modules for
gross sales of $44,989. As of October 31, 1997, the Company had received $950 of
such revenues and has reflected accruals in trade accounts and related party
receivables in the amounts of $7,710 and $36,329, respectively. Currently, the
Company has outstanding orders totaling over $116,000 in net sales (with an
average gross margin of 45%) and has recently received a blanket order from one
customer which will, alone, generate an average of $60,000 in net monthly sales
over the next 10 - 12 months. 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 $100,000 monthly, with
conservative growth, until it can relocate to the larger facilities discussed
below and can expand manufacturing operations. No assurances can be given that
any such sales will actually occur.
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 August,
1997, EDI ceased all manufacturing and marketing operations and it's obligation
to pay the Company any further license fees terminated. The Company maintains
its operations at and has assumed (since October 1, 1997) all lease obligations
on the 5,600 sq. ft. Laguna Hills, California facility previously occupied by
EDI Components. The Company will continue to pay a monthly lease of $3,892 on
such facility through May, 1998 unless the Company relocates to its new facility
and a new tenant for its current facility can be found earlier.
On November 12, 1997, the Company executed a three-year lease, with purchase
option, on a 30,201 square foot facility also in Laguna Hills, CA and plans to
move all of its operations over a period of several months beginning February 1,
1998, at which time the Company will become obligated for monthly lease payments
on such facility in the amount of $16,000. See Item 2 - "Properties."
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 to 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 addition, the Company intends to expend approximately $50,000 to
expand its manufacturing capabilities.
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 Item 9 - Directors and Executive Officers of the Registrant - 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.
22
<PAGE> 23
In January, 1998, the Company began negotiations with Hydro Components, Inc., a
privately-held Pennsylvania corporation, to acquire the rights to use certain
proprietary membrane technology which the Company would develop for use with its
EDI product. Under the terms of the proposed transaction, Hydro Components,
which manufactures and sells light commercial water and wastewater treatment
products, would provide technical assistance to the Company for the membrane
development program. The Company borrowed $400,000 from Mr. Anthony Frank in
anticipation that this transaction will be successfully negotiated and such
funds have been reserved for this purpose. See "Item 12 - "Certain Relationships
and Related Transactions - Mr. Anthony Frank." There can be no assurances,
however, that an agreement can be reached with Hydro Components which will be
satisfactory to the Company. Further, there can be no assurances that the
membrane technology, if acquired, will prove to be efficient or useful to the
Company. However, if the Company is successful in acquiring rights to the
proposed membrane technology, additional funds will be required to develop such
membrane for use with the EDI product.
The Company will be required to raise substantial amounts of new financing, in
the form of additional equity investments or loan financing, in order to carry
out its business objectives. There can be no assurance that the Company will be
able to obtain such additional financing on terms that are acceptable to the
Company and at the time required by the Company, or at all. Further, any such
financing may cause dilution of the interests of the current shareholders in the
Company. If the Company is unable to obtain such additional equity or loan
financing, the Company's financial condition and results of operations will be
materially adversely affected. Moreover, the Company's estimates of its cash
requirements to carry out its current business objectives are based upon certain
assumptions, including certain assumptions as to the Company's revenues, net
income (loss) and other factors, and there can be no assurance that such
assumptions will prove to be accurate or that unbudgeted costs will not be
incurred. Future events, including the problems, delays, expenses and
difficulties frequently encountered by similarly situated companies, as well as
changes in economic, regulatory or competitive conditions, may lead to cost
increases that could have a material adverse effect on the Company and its
plans. If the Company is not successful in obtaining loans or equity financing
for future developments, it is unlikely that the Company will have sufficient
cash to continue to conduct operations as currently planned. The Company
believes that in order to raise needed capital, it may be required to issue debt
or equity securities that are significantly lower than the current market price
of the Company's Common Stock.
- -----------------
PLAN OF OPERATION
- -----------------
The Company recently completed a private placement offering of securities and
realized net proceeds of $475,000 in working capital and a $25,000 note
receivable on common stock. In December, 1997, the Company received a blanket
order for its EDI products from one customer which, on the average, represents
$60,000 in net monthly sales over the next year. The Company currently has
outstanding orders representing net sales of $116,800 and anticipates that it
can maintain an average net monthly sales level in the $100,000 range at its
current manufacturing capacity until relocation, additional financing and
expansion can be accomplished. No assurances can be given that any such sales
will actually occur. The amount raised in the above private
23
<PAGE> 24
placement, as well as anticipated sales revenues are intended to satisfy the
Company's working capital requirements until it can complete additional
financing within the next 4 - 6 months.
With the above private placement proceeds, and with additional working capital
expected from the sale of the Company's EDI products, the Company believes that
it will have adequate sources of working capital for up to seven (7) months,
although it may need additional working capital prior to said date, particularly
if the Company is not successful in selling sufficient quantities of EDI
products.
The Company intends in or around February, 1998 to relocate to larger facilities
and initiate operations with a view toward implementing an expanded production
and marketing program. However, no assurances can be given that the Company will
relocate in a timely manner or that production and sales will be in significant
quantities since such sales may be dependent on obtaining additional working
capital through the sale of common stock or other securities.
- -------------------------------------------------------------------------------
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -------------------------------------------------------------------------------
See Item 14 (a)
- -------------------------------------------------------------------------------
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- -------------------------------------------------------------------------------
- --------------------------------
CHANGE IN CERTIFYING ACCOUNTANTS
- --------------------------------
Effective 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 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).
24
<PAGE> 25
PART III
- -------------------------------------------------------------------------------
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------------------------------------------------------------------------------
- --------------------------------
DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------
The directors and executive officers of Electropure, Inc. are as follows:
<TABLE>
<CAPTION>
---------------------------- --------- --------------------------
NAME AGE POSITION
---------------------------- --------- --------------------------
<S> <C> <C>
William F. Farnam 76 Director
Randall P. Frank 35 Director
Randolph S. Heidmann 46 Director
William H. Lee 57 Director
Floyd H. Panning 69 Director, President and
Chief Executive Officer
Catherine Patterson 45 Chief Financial Officer
and Secretary
</TABLE>
WILLIAM F. FARNAM, 76, was named to the Board of Directors on August 5, 1997.
Mr. Farnam 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").
25
<PAGE> 26
RANDOLPH S. HEIDMANN, 46, was employed by the Company between September, 1990
and November, 1991 as an electronics instrumentation design engineer to continue
development work on innovative electronic components which the Company planned
to engineer into its product line. He was named to the Company's Board of
Directors in September, 1991. Prior to joining the Company, he spent nine years
with Teledyne Electronics where he was responsible for data acquisition
subsystems design for telemetry products. He has participated in the development
of a variety of consumer electronics products and custom production test
equipment. 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, 57, 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 which manufactures 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 Item 10 "Executive Compensation - Employment
Agreement." Officers, subject to any employment agreements, serve at the
pleasure of the Board of Directors.
26
<PAGE> 27
- -------------
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, PHD, 41, 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 PhD from the University of California at Santa Barbara in Applied
Theoretical Physics.
- -------------------------------------------------------------------------------
ITEM 10. EXECUTIVE 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 See Item 10 - "Executive Compensation - Employment Agreement." For the
fiscal year ended October 31, 1997, Mr. Panning received $12,000 in wages from
the Company. The Company has no stock option or other forms of compensation
plans.
- -----------------------------------------------------------
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
- -----------------------------------------------------------
The Company does not have a compensation committee or other committees of the
Board of Directors performing similar functions. Compensation of executive
officers is determined by the Board of Directors. The Board of Directors
negotiated Mr. Floyd Panning's Employment Agreement, whereby he became President
and Chief Executive Officer of the Company, in connection with the License
Termination Agreement with EDI Components and Mr. Panning assuming such
positions with the Company.
27
<PAGE> 28
- --------------------
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>
28
<PAGE> 29
(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.
29
<PAGE> 30
- -------------------------------------------------------------------------------
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------------------------------------------------------------------------------
--------------------------
PRINCIPAL SHAREHOLDERS
--------------------------
The following table sets forth information as of January 30, 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 2,243,269 23.6% - - - - 17.5%
94523
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 * 83,983 100% 931,629 35.8% 12.6%
Floyd H. Panning
23251 Vista Grande,
Suite A
Laguna Hills, CA 92653 566,892 6.0% - - 7,500 * 4.5%
Wyatt Technology
Corporation
802 E. Cota Street
Santa Barbara, CA 2,100,000 22.1% - - - - 16.4%
93103
All officers and
directors
as a group (6 persons) 1,097,125 13.7% - - 10,406 * 8.7%
</TABLE>
-------------------------------------------
* Less than 1%
** Includes address of five percent or more shareholders of any class.
(1) Excludes shares of Common Stock issuable upon conversion of Class B Common
Stock, which carry eight (8) votes per share. If such shares of Common
Stock were included, Mr. O'Hare and all officers and directors, as a group
would own 88,558 shares (1.0%) and 1,097,125 shares (11.4%) of Common
Stock, respectively.
30
<PAGE> 31
(2) Includes currently exercisable warrants or options to purchase an aggregate
of 1,512,437 shares of Common Stock.
(3) The Convertible Preferred Stock was convertible into Common Stock only if
certain earnings or market prices of the Common Stock were achieved prior
to October 31, 1990. Such earnings and market prices were not achieved and
commencing January 31, 1991, the Company was required to redeem such shares
at $0.01 per share. The Company intends to redeem the Convertible Preferred
Stock when it has the funds and can legally do so under California law.
(4) Reflects the voting rights of the Common Stock and Convertible Preferred
Stock, each of which carries one (1) vote per share, and Class B Common
Stock, which carries eight (8) votes per share.
In 1989, the Company issued 40,000 shares in the name of its subsidiary, HOH
International, Inc. as collateral for $200,000 in bank loans. Such shares are
not treated as outstanding for purposes of the above table or the total
outstanding shares of Common Stock of the Company.
In order to comply with conditions imposed by the Commissioner of Corporations
of the State of California (the "Commissioner"), in connection with the public
offering of Units in June, 1987, Harry M. O'Hare, Sr. and Sandra O'Hare (Mr.
O'Hare's former late wife) have agreed that until such conditions are lifted by
order of the Commissioner, all the shares of Class B Common Stock and
Convertible Preferred Stock held by them (except for 107,848 shares of
Convertible Preferred Stock issued in July, 1988 to Harry M. O'Hare, Sr.) and
any Common Stock received upon conversion of the Class B Common Stock and
Convertible Preferred Stock, will be subject to the following conditions (which
shall be referenced in a legend on the certificates for such shares):
(1) such shares will not participate in dividends, other than stock dividends;
(2) such shares will not participate in any distribution of assets in the event
of liquidation; and
(3) such shares may not be transferred without prior written consent of the
Commissioner except for transfer pursuant to order or process of any court.
The issuance of an order lifting such conditions is in the sole discretion of
the Commissioner. However, under the Commissioner's Rules, such an order will
generally be issued when the Company has demonstrated a satisfactory earnings
record, as defined in such Rules, and the Company understands that in practice
such an order will also be issued in the event of a merger, consolidation, or
liquidation in which the holders of the Common Stock have received a
satisfactory return on such shares.
31
<PAGE> 32
- -------------------------------------------------------------------------------
ITEM 12. 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 26, 1998, Mr. Frank loaned the Company, at 10% annual interest, the
sum of $200,000 and on January 29, 1998, he converted such loan into 206,186
shares of the Company's Common Stock at $0.97 per share. On February 4, 1998, he
loaned the Company an additional $200,000 under a two-year note which also
carries the right to convert the principal and interest accrued thereon into
Common Stock at a 25% discount to the fair market value. Under the loan
agreements with Mr. Frank, fair market value is determined as the mean of the
bid and asked prices of the Common Stock
32
<PAGE> 33
for the thirty (30) consecutive trading days prior to the conversion date. The
issuance of 206,186 shares pursuant to Mr. Frank conversion of the first
$200,000 loan on January 29, 1998, resulted in an expense of $6,907 to the
Company which will be reflected as an expense and will be added to common stock
and additional paid-in capital for the fiscal quarter ended January 31, 1998.
The proceeds of the $400,000 in loans from Mr. Frank are to be exclusively
utilized to acquire the right to use certain proprietary membrane technology
from Hydro Components, Inc. See Item 6 - "Management's Discussion and Analysis
of Financial Condition and Results of Operations Liquidity and Capital
Resources."
- -----------------
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 Item 1 - "BUSINESS License Agreements - Wyatt Technology
Corporation."
33
<PAGE> 34
- -------------
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.
- -------------------------------------------------------------------------------
ITEM 13. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
- -------------------------------------------------------------------------------
As of the date of this report, all directors, officers and beneficial owners of
more than 10 percent of any class of equity securities of the Company has filed
all reports required by Section 16(a) of the Securities Exchange Act of 1934,
with the following exceptions: None.
PART IV
- -------------------------------------------------------------------------------
ITEM 14. EXHIBITS
- -------------------------------------------------------------------------------
3.1 Articles of Incorporation of the Registrant, as amended. ***
3.2 By-Laws of the Registrant, as amended. *
10.10.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
(face sheet only)
10.19 Form of Indemnity Agreement with each current Officer and
Director. **
10.47.8 License Termination Agreement with EDI Components dated August
14, 1997 (effective 08/05/97). ******
10.47.9 Employment Agreement with Floyd H. Panning dated August 14, 1997
(effective 08/05/97). ******
10.48 Technology License Agreement with Glegg Water Conditioning, Inc.
dated July 2, 1994. ****
10.48.1 Amended and Restated Technology Licence Agreement with Glegg
Water Conditioning, Inc. dated May 22, 1997. *****
10.51 Settlement Agreement with Economic Development Bank for Puerto
Rico dated May 16, 1997. *****
10.52 Technology Transfer Agreement with Wyatt Technology Corporation
dated October 25, 1997. *******
34
<PAGE> 35
27. Financial Data Schedule.
- --------------------------
* 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.
35
<PAGE> 36
- -------------------------------------------------------------------------------
SIGNATURES
- -------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Act of 1934, as amended, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto.
Dated: January 30, 1998
ELECTROPURE, INC.
BY /S/ CATHERINE PATTERSON
---------------------------------------
CATHERINE PATTERSON
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934, as amended, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
- ----------
SIGNATURES
- ----------
<TABLE>
<S> <C> <C>
/S/ WILLIAM F. FARNAM Director January 30, 1998
--------------------------------------------
WILLIAM F. FARNAM
/S/ RANDALL P. FRANK Director January 30, 1998
--------------------------------------------
RANDALL P. FRANK
Director
--------------------------------------------
RANDOLPH S. HEIDMANN
/S/ WILLIAM H. LEE Director January 30, 1998
--------------------------------------------
WILLIAM H. LEE
/S/ FLOYD H. PANNING Chief Executive Officer January 30, 1998
-------------------------------------------- and Director
FLOYD H. PANNING
Chief Financial
/S/ CATHERINE PATTERSON Officer (Principal January 30, 1998
-------------------------------------------- Financial and
CATHERINE PATTERSON Accounting Officer)
</TABLE>
36
<PAGE> 37
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> 38
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> 39
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 (Note 1) 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> 40
ELECTROPURE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
Year ended
Liabilities and Stockholders' Equity (Deficiency) 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' deficit:
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.
83,983 shares authorized, issued and outstanding in
1996 and 1997 840
Additional paid-in capital 17,999,946
Accumulated deficit (17,121,280)
Notes receivable on common stock (202,766)
-----------
754,083
-----------
Total Liabilities and Stockholders' Equity $ 894,953
(Deficiency)
===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 41
ELECTROPURE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended
October 31,
------------------------------
1996 1997
---------- -----------
<S> <C> <C>
License fees received $ 81,559 $ 78,437
Sales - 44,989
---------- -----------
81,559 123,426
Cost of goods sold - 26,193
---------- -----------
Gross margin 81,559 97,233
Costs and expenses:
Sales and marketing - 16,926
General and administrative 140,202 204,674
---------- -----------
140,202 221,600
---------- -----------
Loss from operations (58,643) (124,367)
---------- -----------
Other income and (expense):
Interest expense (12,155) (2,002)
Interest income 239 -
Financing costs (332,912) (898,069)
Lawsuit settlement costs - (58,875)
Compensatory stock options - (11,719)
Miscellaneous income (expense) (800) (1,001)
---------- -----------
(345,628) (971,666)
---------- -----------
Loss before extraordinary item (404,271) (1,096,033)
Extraordinary item:
Gain on liabilities written off 113,188 -
---------- -----------
Net income (loss) $ (291,082) $(1,096,033)
========== ===========
Net income (loss) per share of common stock
Before extraordinary item (0.21) (0.37)
Extraordinary item:
Gain on liabilities written off 0.06 -
---------- -----------
$ (0.15) $ (0.37)
========== ===========
Weighted average common shares outstanding 1,926,868 2,955,690
========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 42
ELECTROPURE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended
October 31,
----------------------------------
1996 1997
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (291,082) $(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 288,287 950,147
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 (130,073) 30,841
expenses
Increase in interest payable, net 1,430 2,002
------------ -----------
Total adjustments 187,127 947,719
------------ -----------
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> 43
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 288,287 -
------- --------
288,287 447,146
======= ========
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> 44
ELECTROPURE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Common Stock Class B Common Stock
---------------------------------- -----------------------------
Amount Amount
Number ---------------- Number ---------------- Additional
of Per of Per paid-in
shares share Total shares share Total capital
--------- ----- ------- ------ ----- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1995 1,757,943 $ - $17,580 83,983 $ - $ 840 $15,659,685
Issuance of common stock on
exercise of warrants 500 0.50 5 - - - 245
exercise of warrants 8,313 1.50 83 - - - 12,386
exercise of warrants 4,586 2.00 46 - - - 9,120
Issuance of common stock for cash 20,000 2.00 200 - - - 39,800
Issuance of common stock for
services rendered 20,000 1.20 200 - - - 23,800
services rendered 8,696 1.70 87 - - - 14,913
Issuance of common stock for
conversion of debt 253,334 0.60 2,533 - - - 126,667
conversion of debt 151,434 0.90 1,514 - - - 149,467
Issuance of warrants below fair - - - - - - 44,625
market value
Net Loss - - - - - - -
---------- ----- ------- ------- --- ---- -----------
Balance at October 31, 1996 2,224,806 - 22,248 83,983 - 840 16,080,709
Issuance of common stock on
exercise of warrants 107,400 0.50 1,074 - - - 52,626
license termination 1,717,484 0.31 17,175 - - - 520,881
license termination 566,409 0.38 5,664 - - - 206,739
license termination 362,500 2.00 3,625 132,313
Issuance of common stock for:
cash 30,988 0.38 310 - - - 11,310
cash 500,000 1.00 5,000 - - - 495,001
services rendered 20,000 1.00 200 - - - 9,175
services rendered 4,706 1.59 47 - - - 7,453
technology acquisition 2,100,000 0.52 21,000 - - - 426,146
lawsuit settlement 100,000 1.00 1,000 - - - 45,875
Issuance of warrants below
fair market value - - - - - - 11,719
Net Loss - - - - - - -
---------- ----- ------- ------- --- ---- -----------
Balance at October 31, 1997 7,734,293 $ - $77,343 83,983 $ - $840 $17,999,946
</TABLE>
<TABLE>
<CAPTION>
Deficit
Notes accumulated Net
receivable in the stockholders'
on common development equity
stock stage (deficiency)
---------- ------------- -------------
<S> <C> <C> <C>
Balance at October 31, 1995 $(152,766) $(15,734,163) $ (208,824)
Issuance of common stock on
exercise of warrants - - 250
exercise of warrants - - 12,469
exercise of warrants - - 9,166
Issuance of common stock for cash - - 40,000
Issuance of common stock for
services rendered - - 24,000
services rendered - - 15,000
Issuance of common stock for
conversion of debt - - 129,200
conversion of debt - - 150,981
Issuance of warrants below fair - - 44,625
market value
Net Loss - (291,083) (291,083)
--------- ------------ -----------
Balance at October 31, 1996 (152,766) (16,025,246) (74,216)
Issuance of common stock on
exercise of warrants (25,000) - 28,700
license termination - - 538,056
license termination - - 212,403
license termination 135,938
Issuance of common stock for:
cash - - 11,620
cash (25,000) 475,001
services rendered - - 9,375
services rendered - - 7,500
technology acquisition - - 447,146
lawsuit settlement - - 46,875
Issuance of warrants below
fair market value - - 11,719
Net Loss - (1,096,034) (1,096,034)
--------- ------------ -----------
Balance at October 31, 1997 $(202,766) $(17,121,280) $ 754,083
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE> 45
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
$529,991 in license fees from EDI.
F-9
<PAGE> 46
ELECTROPURE, INC.
Notes to Financial Statements, Continued
- ---------
LIQUIDITY
- ---------
As of October 31, 1997, the Company had current assets in excess of current
liabilities of $330,995, a deficit accumulated during the development stage of
$17,121,280 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 $81,559 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."
F-10
<PAGE> 47
ELECTROPURE, INC.
Notes to Financial Statements, Continued
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 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.
F-11
<PAGE> 48
ELECTROPURE, INC.
Notes to Financial Statements, Continued
- ------------------------
RESEARCH AND DEVELOPMENT
- ------------------------
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
F-12
<PAGE> 49
ELECTROPURE, INC.
Notes to Financial Statements, Continued
are significantly past due and the uncertainty of when or if they will be
collected, interest income was not being recognized until received and the
balances at October 31, 1996 are offset by an allowance for doubtful accounts.
A total of $23,763 remains due as of October 31, 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>
F-13
<PAGE> 50
ELECTROPURE, INC.
Notes to Financial Statements, Continued
- -----------
COMMITMENTS
- -----------
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 no
lease expense from such date and 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 $( 291,082) $(1,096, 033)
Pro forma $( 291,082) $(1,111,914)
Loss per share:
As reported $(0.15) $(0.37)
Pro forma $(0.15) $(0.38)
</TABLE>
F-14
<PAGE> 51
ELECTROPURE, INC.
Notes to Financial Statements, Continued
- ----------------------------------
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.
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.
F-15
<PAGE> 52
ELECTROPURE, INC.
Notes to Financial Statements, Continued
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.
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 interest on loans made to that entity and interest accrued thereon.
The transaction resulted in a $288,287 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.
F-16
<PAGE> 53
ELECTROPURE, INC.
Notes to Financial Statements, Continued
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 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
F-17
<PAGE> 54
ELECTROPURE, INC.
Notes to Financial Statements, Continued
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
(Deficiency) and is as follows:
<TABLE>
<CAPTION>
October 31,
Number of Date ----------------------
Holder Shares Exercised Exercised 1995 1996
------------------ ------------------ --------------- --------- ------------
<S> <C> <C> <C> <C>
Former Officer 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.
F-18
<PAGE> 55
ELECTROPURE, INC.
Notes to Financial Statements, Continued
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 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
F-19
<PAGE> 56
ELECTROPURE, INC.
Notes to Financial Statements, Continued
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
- ----------------------
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> 57
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 1,115 0.50 588
- - 1996
Cancelled (500) 0.50 (250)
-------- ---------
Balance at October 31, 1997 615 $ 0.50 $ 338
======== =========
</TABLE>
F-21
<PAGE> 58
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> 59
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
F-23
<PAGE> 60
ELECTROPURE, INC.
Notes to Financial Statements, Continued
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 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
- ------------------------
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> 61
ELECTROPURE, INC.
Notes to Financial Statements, Continued
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>
(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).
F-25
<PAGE> 62
ELECTROPURE, INC.
Notes to Financial Statements, Continued
- ----------------------------
WYATT TECHNOLOGY CORPORATION
- ----------------------------
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
F-26
<PAGE> 63
ELECTROPURE, INC.
Notes to Financial Statements, Continued
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.
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.
F-27
<PAGE> 64
ELECTROPURE, INC.
Notes to Financial Statements, Continued
The Company paid $250 during fiscal year 1994 on this judgment, however, no
further arrangements have been made to satisfy this obligation.
In addition to the above legal proceedings, the Company is a party to 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
F-28
<PAGE> 65
ELECTROPURE, INC.
Notes to Financial Statements, Continued
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 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.
F-29
<PAGE> 66
ELECTROPURE, INC.
Notes to Financial Statements, Continued
Since inception, each year, the Company incurred operating losses that are
carried forward to the fiscal year ended October 31, 1996. The Tax Reform Act of
1986 limits the Company's ability to utilize net operating losses carried
forward when ownership changes in excess of 50% occur. The Company's public
offering, effective June 25, 1987, resulted in a 50.2% ownership change. Thus,
the loss generated between 1979 and June 25, 1987 that can be used to offset the
Company's taxable income will be limited to $522,000 per year. The net operating
loss is carried forward for 15 years. If the net operating loss is not utilized
to offset future taxable income, the loss will expire as follows:
<TABLE>
<CAPTION>
Net operating loss carryforwards
--------------------------------
Federal tax purposes State
Year Year Full Annual tax
generated expiring loss limit * purposes
--------- -------- ---- ------- --------
<S> <C> <C> <C> <C>
10/82 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 -
After 6/25/87 2002 716,000 127,472 -
------- -------
Total Loss: 2,743,000 488,331 -
Before 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
- -------------------------------
* Annual limit due to ownership change on June 25, 1987.
F-30
<PAGE> 67
ELECTROPURE, INC.
Notes to Financial Statements, Continued
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.
- -------------------------------------------------------------------------------
(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> 68
ELECTROPURE, INC.
INDEX TO EXHIBITS
PAGE
SEQUENTIALLY
NUMBERED
------------
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
(face sheet only)
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.10.U; PAGE 1
10% TWO-YEAR CONVERTIBLE TERM NOTE
$200,000 JANUARY 26, 1998
ELECTROPURE, INC., a California corporation (the "COMPANY"), for the
value received, hereby unconditionally and absolutely promises to pay to the
order of ANTHONY M. FRANK, an individual, or holder (the "HOLDER"), upon
presentation and surrender of this Note at its office at 23251 Vista Grande,
Suite A, Laguna Hills, California 92653, or such other place as the Company may,
from time to time, designate, the sum of TWO HUNDRED THOUSAND DOLLARS
($200,000), in lawful money of the United States, on January 26, 2000, or if
such day is not a regular business day, then on the next business day thereafter
(the "Maturity Date"). Accrued interest shall be paid semi-annually in
accordance with the terms set forth in Section 2 hereof.
1. CONVERSION.
(a) The Holder of this Note shall have the right, at his option,
at any time up until 5:00 P.M. Los Angeles time on the fifth (5th) day
immediately before the Maturity Date (except that, with respect to any portion
of this Note which shall be called for prepayment, such right shall as to such
portion terminate at 5:00 P.M. Los Angeles time on the fifth (5th) day
immediately prior to the Prepayment Date (as defined in Section 2 hereof)), to
convert all or any portion of this Note, including interest accrued thereon,
subject to the terms and provisions of this Section 1, into Electropure, Inc.
Common Stock (the "Conversion Shares") at and having a value equal to 72.5% of
the Fair Market Value (as hereinafter defined) of such Common Stock (the
"Conversion Price").
The Conversion Shares shall have the rights, preferences and privileges
set forth in APPENDIX ONE hereto.
(b) As promptly as practicable after the surrender, as herein
provided, of this Note for conversion, the Company shall deliver or cause to be
delivered, to or upon the written order of the Holder of this Note so
surrendered, certificates representing the number of full shares into which this
Note or any portion thereof may be converted in accordance with the provisions
of this Section 1, together with any check in payment for fractional shares.
Such conversion shall be deemed to have been made at the close of business on
the date that this Note shall have been received by the Company for conversion,
with a written Notice of Conversion duly executed, in satisfactory form for
conversion, so that the rights of the Holder of this Note as a Noteholder, to
<PAGE> 2
EXHIBIT 10.10.U; PAGE 2
the extent of that portion of the Note so converted, shall cease at such time
and, subject to the following provisions of this Section 1(b). If this Note
shall be converted in part only, Electropure, Inc. shall, upon surrender of this
Note for cancellation, execute and deliver a new Note evidencing the rights of
the Holder thereof with regard to that portion of the Note not converted. The
person or persons entitled to receive the Conversion Shares of Common Stock upon
conversion of this Note shall be treated for all purposes as having become the
record holder or holders of such Shares of Common Stock at such time and such
conversion shall be at the Conversion Price in effect at such time; provided,
however, that no such surrender upon voluntary conversion on any date when the
stock transfer books of the Company shall be closed shall be effective to
constitute the person or persons entitled to receive the Shares of Common Stock
upon such conversion as the record holder or holders of such Shares of Common
Stock on such date, but such surrender shall be effective to constitute the
person or persons entitled to receive such Shares of Common Stock as the record
holder or holders thereof for all purposes at the close of business on the next
succeeding day on which such stock transfer books are open; and such conversion
shall be at the Conversion Price in effect on the date that this Note shall have
been surrendered for conversion in satisfactory form for conversion, as if the
stock transfer books of the Company had not be closed.
(c) No adjustment in respect of declared but unpaid cash dividends
on the Common Stock shall be made upon the conversion of this Note.
2. PAYMENTS AND PREPAYMENTS.
(a) All payment and prepayments of principal and interest shall be
made in immediately available funds to the Holder at his business address at 101
California Street, Suite 2050, San Francisco, California 94111.
(b) The unpaid principal amount of the Note from time to time
outstanding shall bear interest from the date of this Note at the rate of Ten
Percent (10%) per annum until paid. Accrued interest shall be paid on the last
day of January, beginning on January 31, 1999. Interest shall be computed for
the actual number of days elapsed on the basis of a year consisting of 360 days.
(c) The Company may prepay at any time all or any part of this
Note by notifying the Holder in writing at least fifteen (15) days in advance of
the proposed date for prepayment (the "Repayment Date"). The notice shall state:
(1) The Repayment Date;
<PAGE> 3
EXHIBIT 10.10.U; PAGE 3
(2) that the portion of the Note to be repaid may be converted
at any time before 5:00 P.M. Los Angeles time on the fifth (5th) day immediately
prior to the Repayment Date;
(3) that Holders who want to convert any portion of this Note
must satisfy the requirements in Section (1) hereof;
(4) the Note called for repayment must be surrendered to the
Company to collect the amount being prepaid, and if less than the entire
principal amount is being repaid, to receive a new Note for the remaining
balance; and
(5) that interest on the portion of the Note called for
repayment ceases to accrue on and after the Repayment Date.
(d) Once notice of prepayment is mailed, the part of this Note
called for prepayment, unless converted, becomes due and payable on the
Repayment Date. Upon surrender to the Company, such part of this Note shall be
paid at the Repayment Date, plus accrued interest on the portion of the
principal being prepaid to the Prepayment Date.
(e) Upon surrender of this Note to be prepaid in part, the Company
shall issue to the Holder a new Note equal in principal amount to the nonprepaid
portion of this Note surrendered.
3. FAIR MARKET VALUE OF THE COMMON STOCK.
(a) The Fair Market Value for the Common Stock shall be the
average of the following prices for the 30 consecutive trading days before the
Conversion Date.
(1) If the Common Stock is listed on a National Securities
Exchange or admitted to unlisted trading privileges on such exchange or listed
for trading on the NASDAQ system, the last reported sale price of the Common
Stock on such exchange or system on each such trading day or if no such sale is
made (or reported) on such day, the average closing bid and asked prices for
such day on such exchange or system; or
(2) If the Common Stock is not so listed or admitted to
unlisted trading privileges, the current market value shall be the mean of the
last reported bid and asked prices reported by the Electronic Bulletin Board or
National Quotation Bureau, Inc. on each such trading day.
(b) If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the Fair Market
Value of the Common
<PAGE> 4
EXHIBIT 10.10.U; PAGE 4
Stock shall be an amount, not less than book value thereof as at the end of the
most recent fiscal year of the Company ending prior to the Conversion Date,
determined in such reasonable manner as may be prescribed by the Board of
Directors of the Company.
4. NOTICES TO NOTEHOLDER.
-------------------------
So long as this Note shall be outstanding, if the Company (i)
shall pay any dividend or make any distribution upon the Company Stock or (ii)
shall offer to the holders of Common Stock for subscription or purchase by them
any share of any class or any other rights or (iii) shall effect a capital
reorganization, reclassification of capital stock, consolidation or merger with
or into another corporation, sale, lease or transfer of all or substantially all
of the property and assets of the Company to another corporation, or voluntary
or involuntary dissolution, liquidation or winding up of the Company, then in
any such case, the Company shall cause to be mailed by certified mail to the
Holder, at least fifteen days prior to the date specified in (x) or (y) below,
as the case may be, a notice containing a brief description of the proposed
action and stating the date on which (x) a record is to be taken for the purpose
of such dividend, distribution or rights, or (y) such reclassification,
reorganization, consolidation, merger, conveyance, lease, dissolution,
liquidation or winding up is to take place and the date, if any is to be fixed,
as of which the holders of Common Stock or other securities shall receive cash
or other property deliverable upon such reclassification, reorganization,
consolidation, merger, conveyance, dissolution, liquidation or winding up.
5. RECLASSIFICATION, REORGANIZATION OR MERGER.
----------------------------------------------
In case of any reclassification, capital reorganization or other
change of outstanding shares of Common Stock of the Company, or in case of any
consolidation or merger of the Company with or into another corporation(other
than a merger with a subsidiary in which merger the Company is the continuing
corporation and which does not result in any reclassification, capital
reorganization or other change of outstanding shares of Common Stock of the
class issuable upon conversion of this Note) or in case of any sale, lease or
conveyance to another corporation of the property of the Company as an entirety,
the Company shall, as a condition precedent to such transaction, cause effective
provisions to be made so that the Holder shall have the right thereafter by
converting this Note at any time prior to the payment in full of the Note, to
acquire the kind and amount of shares of stock and other securities and property
receivable upon such reclassification, capital reorganization and other change,
consolidation, merger, sale or conveyance by a holder of the number of shares of
Common Stock which might have been acquired upon conversion of this
<PAGE> 5
EXHIBIT 10.10.U; PAGE 5
Note immediately prior to such reclassification, change, consolidation, merger,
sale or conveyance. Any such provisions shall include provisions for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Note. The foregoing provisions of this Section 5 shall
similarly apply to successive reclassifications, capital reorganizations and
changes of shares of Common Stock and to successive consolidations, mergers,
sales or conveyances.
6. REGISTRATION UNDER THE SECURITIES ACT OF 1933.
-------------------------------------------------
(a) As soon as possible after the date hereof the Company shall,
only on one occasion, use its best efforts to file a registration statement (the
"Registration Statement") pursuant to the Securities Act of 1933, as amended
(the "Act"), to the end that the Conversion Shares may be sold under the Act as
promptly as practicable thereafter and HOH will use its best efforts to cause
such registration to become effective and continue to be effective (current)
(including the taking of such steps as are necessary to obtain the removal of
any stop order) for a period equal to the lesser of two (2) years or until the
holder as advised the Company that all of the Shares have been sold; provided,
that such Holder shall furnish the Company with appropriate information
(relating to the intentions of such Holder) in connection therewith as the
Company shall reasonably request in writing.
(b) The following provision of this Section 6 shall also be
applicable:
(i) Following the effective date of such registration
statement, the Company shall upon the request of any owner of the Note and the
Shares forthwith supply such a number of prospectuses meeting the requirements
of the Act, as shall be requested by such owner to permit such holder to make a
public offering of all the Shares from time to time offered or sold to such
holder, provided that such holder shall from time to time furnish the Company
with such appropriate information (relating to the intentions of such holder) in
connection therewith as the Company shall request in writing.
(ii) The Company shall bear the entire cost and expense of any
registration of securities under this Section 6 notwithstanding that other
shares may be included in any such registration. Any holder whose Shares are
included in any such registration statement pursuant to this Section 6 shall,
however, bear the fees of his own counsel and any registration fees, transfer
taxes or underwriting discounts or commissions applicable to the Shares sold by
it pursuant thereto.
<PAGE> 6
EXHIBIT 10.10.U; PAGE 6
(iii) The Company shall indemnify and hold harmless the holder
and any underwriter who may purchase from or sell for any such holder any Shares
or from and against any and all losses, claims, damages and liabilities caused
by any untrue statement or alleged untrue statement of a material fact contained
in the registration statement or any post-effective amendment thereto under the
Act or any prospectus included therein required to be filed or furnished by
reason of this Section 6 or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein no misleading, except insofar as such losses, claims, damages
or liabilities are caused by any such untrue statement or alleged untrue
statement or omission or alleged omission based upon information furnished or
required to be furnished in writing to the Company by such holder or underwriter
expressly for use therein.
The agreements of the Company with respect to the Shares in this
Section 6 shall continue in effect regardless of the conversion or payment of
this Note.
7. INVESTMENT.
(a) By acceptance of this Note, the Holder agrees that this Note
and the Conversion Shares (collectively, the "Securities") are acquired for the
purpose of investment and not with a present view to the sale or distribution
thereof and that, with respect to the Securities the Holder agrees to the
following representations and covenants:
(1) The Securities are being acquired for the purpose of
investment and not with a present view to the sale or distribution thereof.
(2) The recipient is familiar with the affairs and financial
condition of the Company and is financially capable of holding this Note for
investment.
(3) No sale, transfer, assignment, hypothecation or other
disposition of the Securities will be made except (i) in a transaction in
compliance with the registration requirements of the Act, or (ii) in a
transaction pursuant to an exemption from the registration requirements of the
Act, or (iii) in a transaction or under circumstances to which the registration
requirements of the Act are not applicable.
(b) The Securities and all agreements or certificates with respect
to any Securities shall be subject to the following legend:
`THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 ("ACT"). THEY MAY NOT BE SOLD,
<PAGE> 7
EXHIBIT 10.10.U; PAGE 7
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER THE
ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED."
8. RIGHT OF FIRST REFUSAL.
--------------------------
(a) If Holder proposes to engage in a bona fide Sale, directly or
indirectly, to an unaffiliated, bona fide third party, any of the Shares, then
prior to taking any such action, the Holder shall deliver to the Company a
statement in writing (the "Statement") setting forth (i) the date of the
Statement (the "Statement Date"); (ii) the manner in which the Sale is proposed
to occur; (iii) the consideration for the Sale; (iv) the purchaser's name,
address and telephone number; (v) the purchaser's willingness to supply any
additional information about himself or itself as may be reasonably requested by
the Company; and (vi) a copy of the related legally binding offer (the "Offer")
of purchase. The Company shall thereupon have the irrevocable and exclusive
option, but not the obligation (the "Option"), to purchase all of the Shares
subject to the Option upon the same terms and conditions set forth in the
Statement. The Option shall be exercised by the Company by giving notice (the
"Option Notice") to the Holder, within 15 days following the date of the
Statement, that the Company elects to exercise the Option. Upon exercise of the
Option, the Holder shall have the obligation to consummate the Sale or and
subject to the terms and conditions set forth in the Statement. Failure by the
Company to exercise the Option to give an Option Notice shall be deemed an
election by it not to exercise the Option. A Sale shall mean any sale of the
Conversion Shares.
9. EVENTS OF DEFAULT. If one or more of the following described events
shall occur (each an "Event of Default"):
(a) The Company shall fail to pay the principal of, or interest
on, this Note within five (5) days after the Holder has given written notice to
the Company that the same has become due; or
(b) The Company shall fail to perform or observe any of the
provisions contained in any Section of this Note and such failure shall continue
for more than thirty (30) days after the Holder has given written notice to the
Company; or
<PAGE> 8
EXHIBIT 10.10.U; PAGE 8
(c) Any material representation or warranty made in writing by or
on behalf of the Company in this Note shall prove to have been false or
incorrect in any material respect, or omits to state a material fact required to
be stated therein in order to make the statements contained therein, in the
light of the circumstances under which made, not misleading, on the date as of
which made, and the Company shall have failed to cure such false or incorrect
statement within thirty (30) days after the Holder has given written notice to
Borrower; or
(d) The Company shall be adjudicated a bankrupt or insolvent, or
admit in writing its inability to pay its debts as they mature, or make an
assignment for the benefit of creditors; or the Company shall apply for or
consent to the appointment of a receiver, trustee, or similar officer for it or
for all or any substantial part of its property; or such receiver, trustee or
similar officer shall be appointed without the application or consent of the
Company and such appointment shall continue undischarged for a period of thirty
(30) days; or the Company shall institute (by petition, application, answer,
consent or otherwise) any bankruptcy, insolvency, reorganization, arrangement,
readjustment of debt, dissolution, liquidation or similar proceeding relating to
it under the laws of any jurisdiction; or any such proceeding shall be
instituted (by petition, application or otherwise) against the Company and shall
remain undismissed for a period of ninety (90) days; or any judgment, writ,
warrant of attachment or execution or similar process shall be issued or levied
against a substantial part of the property of the Company and such judgment,
writ, or similar process shall not be released, vacated or fully bonded within
ninety (90) days after its issue or levy; or
(e) The Company shall be enjoined, restrained or in any way
prevented by a court order from continuing to conduct all or any material part
of its business affairs;
(f) Any suit, action or other proceeding (judicial or
administrative) commenced against the Company, or with respect to any assets of
the Company, shall threaten to have a material adverse effect on their future
operations, including, without limitation a final judgment or settlement in
excess of $25,000 in excess of insurance shall be entered in, or agreed to in
respect of any such suit, action or proceeding.
THEN, or at any time thereafter, and in each and every case:
(1) Where the Company is in default under the provisions of
Section 9(d) hereof, the entire unpaid principal amount of the Note, all
interest accrued and unpaid thereon, and all other amounts payable to the Holder
hereunder shall automatically become and be forthwith due
11
<PAGE> 9
EXHIBIT 10.10.U; PAGE 9
and payable without offset or counterclaim of any kind and without presentment,
demand, protest or notice of any kind, and without regard to the running of the
statute of limitations, all of which are hereby expressly waived by the Company;
and
(2) In any other case referred to in this Section 9, the
Holder may, by written notice to the Company, declare the entire unpaid
principal amount of this Note, all interest accrued and unpaid hereon, and all
other amounts payable hereunder to be forthwith due and payable, whereupon the
same shall become immediately due and payable, without offset or counterclaim of
any kind and without presentment, demand, or protest, and without regard to the
running of any statutes of limitation, all of which are hereby expressly waived
by the Company.
Any declaration made pursuant to Section 9(2) hereof is subject to
the condition that, if at any time after the principal of this Note shall have
become due and payable, and before any judgment or decree for the payment of the
moneys so due, or any thereof, shall have been entered, all arrears of interest
upon this Note (except that principal of this Note which by such declaration
shall have become payable) shall have been duly paid, and every Event of Default
shall have been made good, waived or cured, then and in every such case the
Holder shall be deemed to have rescinded and annulled such declaration and its
consequences; but no such rescission or annulment shall extend to or affect any
subsequent Event of Default or impair any right consequent thereon.
10. CORPORATE OBLIGATION.It is expressly understood that this Note is
solely a corporate obligation of the Company and that any and all personal
liability, either at common law or in equity, or by constitution or statute, of,
and any and all rights and claims against, every stockholder, officer, or
director, as such, past, present or future, are expressly waived and released by
the Holder as a part of the consideration for the issuance hereof.
11. AUTHORIZATION; NO CONFLICT. The borrowings hereunder, the execution
and delivery of the Note and the performance by the Company of their respective
obligations under this Agreement and the Note are within the corporate powers of
the Company, have been authorized by all necessary corporate action, have
received all necessary governmental approval (if any shall be required) and do
not and will not contravene or conflict with any provision of law or of the
charter or by-laws of the Company or of any agreement binding upon the Company.
<PAGE> 10
EXHIBIT 10.10.U; PAGE 10
12. TRANSFER. Subject to the appropriate provisions of the Act and of
Section 8 hereof, this Note or any portion of the principal amount hereof in
$200,000 increments thereof (or any remaining balance if any pre-payments have
occurred pursuant to Section 2 hereof) is transferable on the records of the
Company upon presentation of this Note, properly endorsed, at its principal
office; upon such presentation and transfer a new Note or Notes will be issued.
For the purposes of payment and all other purposes, the Company shall deem and
treat the person in whose name this Note is registered as the absolute owner
hereof and the Company shall not be affected by any notice to the contrary.
13. MISCELLANEOUS.
(a) Notwithstanding the foregoing, the Company promises to pay
interest after maturity (whether by acceleration or otherwise, and before as
well as after judgment) at the same rate as above provided prior to maturity on
balances, if any, then outstanding.
(b) Interest under this Note shall be computed on the basis of a
thirty (30) day month and a year of 360 days for the actual number of days
elapsed.
IN WITNESS WHEREOF, the Company and HOH have caused this Note to be
executed in Laguna Hills, California as of the day and year first above written.
THE "COMPANY" THE "HOLDER"
ELECTROPURE, INC.
By /S/ CATHERINE PATTERSON By /S/ ANTHONY M. FRANK
-------------------------------- ----------------------------
Catherine Patterson Anthony M. Frank
Chief Financial Officer
<PAGE> 11
EXHIBIT 10.10.U; PAGE 11
APPENDIX ONE
ELECTROPURE, INC.
COMMON STOCK
RIGHTS, PREFERENCES AND PRIVILEGES
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
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 vote 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 director or may distribute them among any two or more
nominees as he sees fit.
The shares of Common Stock have no preemptive, subscription, conversion or
redemption rights. Upon liquidation, dissolution or winding up of the Company,
the holders of Common Stock are entitled to receive pro rata the assets of the
Company which are legally available for distribution to shareholders, subject to
the liquidation rights held by the Class B Common Stock and the Convertible
Preferred Stock, and the prior rights, if any, which may be established in the
future for the 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 which may be granted in the future to holders of
Preferred Stock.
<PAGE> 1
EXHIBIT 10.10.V; PAGE 1
10% TWO-YEAR CONVERTIBLE TERM NOTE
$200,000 FEBRUARY 4, 1998
ELECTROPURE, INC., a California corporation (the "COMPANY"), for the
value received, hereby unconditionally and absolutely promises to pay to the
order of ANTHONY M. FRANK, an individual, or holder (the "HOLDER"), upon
presentation and surrender of this Note at its office at 23251 Vista Grande,
Suite A, Laguna Hills, California 92653, or such other place as the Company may,
from time to time, designate, the sum of TWO HUNDRED THOUSAND DOLLARS
($200,000), in lawful money of the United States, on February 4, 2000, or if
such day is not a regular business day, then on the next business day thereafter
(the "Maturity Date"). Accrued interest shall be paid semi-annually in
accordance with the terms set forth in Section 2 hereof.
1. CONVERSION.
(a) The Holder of this Note shall have the right, at his option,
at any time up until 5:00 P.M. Los Angeles time on the fifth (5th) day
immediately before the Maturity Date (except that, with respect to any portion
of this Note which shall be called for prepayment, such right shall as to such
portion terminate at 5:00 P.M. Los Angeles time on the fifth (5th) day
immediately prior to the Prepayment Date (as defined in Section 2 hereof)), to
convert all or any portion of this Note, including interest accrued thereon,
subject to the terms and provisions of this Section 1, into Electropure, Inc.
Common Stock (the "Conversion Shares") at and having a value equal to 75% of the
Fair Market Value (as hereinafter defined) of such Common Stock (the "Conversion
Price").
The Conversion Shares shall have the rights, preferences and privileges
set forth in APPENDIX ONE hereto.
(b) As promptly as practicable after the surrender, as herein
provided, of this Note for conversion, the Company shall deliver or cause to be
delivered, to or upon the written order of the Holder of this Note so
surrendered, certificates representing the number of full shares into which this
Note or any portion thereof may be converted in accordance with the provisions
of this Section 1, together with any check in payment for fractional shares.
Such conversion shall be deemed to have been made at the close of business on
the date that this Note shall have been received by the Company for conversion,
with a written Notice of Conversion duly executed, in satisfactory form for
conversion, so that the rights of the Holder of this Note as a Noteholder, to
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