<PAGE> 1
----------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-------------------------
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
--------------------------
For the quarterly period Commission file
ended January 31, 1998 number 0-16416
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)
23456 South Pointe Drive, Laguna Hills, California 93653
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 770-9347
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 [ ].
At February 27. 1998, 8,000,479 shares of the
Registrant's stock were outstanding.
---------------------------------------------------------
<PAGE> 2
ELECTROPURE, INC.
BALANCE SHEETS
<TABLE>
October 31, January 31,
Assets 1997 1998
--------- ---------
(Unaudited)
<S> <C> <C>
Current assets:
Cash $ 367,680 $ 360,421
Receivables:
Trade accounts 14,988 77,079
Due from related parties 115,227 78,898
Allowance for doubtful receivables (85,528) (85,528)
--------- ---------
44,687 70,449
Inventory:
Raw materials 7,498 12,857
Other current assets 26,001 69,141
--------- ---------
Total Current Assets 445,865 512,868
--------- ---------
Propery and equipment, at cost:
Office equipment 3,584 15,950
Leasehold improvements -- 2,457
--------- ---------
3,584 18,407
Less accumulated depreciation and amortization 172 687
--------- ---------
3,412 17,720
Acquired technology, net 445,676 423,319
--------- ---------
Total Assets $ 894,953 $ 953,907
========= =========
</TABLE>
See accompanying notes to financial statements.
2
<PAGE> 3
ELECTROPURE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, January 31,
Liabilities and Stockholders' Equity 1997 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Notes payable to stockholders $ 29,736 $ 17,740
Accounts payable 37,843 36,743
Accrued liabilities 23,960 8,386
Allowance for loss on lawsuit settlements 23,331 23,331
------------ ------------
Total Current Liabilities 114,870 86,200
Litigation, claims, commitments and contingencies
Redeemable convertible preferred stock, $.01 assigned par
value. Authorized 2,600,000 shares; issued and outstanding
2,600,000 shares in 1997 and 1998 26,000 26,000
Stockholders' equity:
Common stock, $.01 assigned par value. Authorized 20,000,000 shares; 7,774,293
shares issued and 7,734,293 shares outstanding in 1997; 8,040,479 shares
issued and 8,000,479 shares outstanding in 1998 77,343 80,005
Class B common stock, $.01 assigned par value. Authorized
83,983 shares; issued and outstanding 83,983 shares in 1997 and 1998 840 840
Additional paid-in capital 18,075,947 18,370,502
Accumulated deficit (17,197,281) (17,431,874)
Notes receivable on common stock (202,766) (177,766)
------------ ------------
754,083 841,707
------------ ------------
Total Liabilities and Stockholders' Equity $ 894,953 $ 953,907
============ ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 4
ELECTROPURE, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
January 31,
----------------------------
1997 1998
----------- ---------
<S> <C> <C>
License fees received $ 20,300 $ --
Sales -- 125,257
----------- ---------
20,300 125,257
Cost of goods sold -- 69,055
----------- ---------
Gross margin 20,300 56,202
Costs and expenses:
Research and development -- 43,902
Sales and marketing -- 35,172
General and administrative 24,174 113,890
----------- ---------
24,174 192,964
----------- ---------
Loss from operations (3,874) (136,762)
----------- ---------
Other income and (expense):
Interest expense (393) (615)
Financing costs -- (97,217)
----------- ---------
(393) (97,832)
----------- ---------
Net income (loss) $ (4,267) $ (234,594)
=========== =========
Net income (loss) per share of common stock $ -- $ (0.05)
=========== =========
Weighted average common shares outstanding 1,926,868 4,358,663
=========== =========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
ELECTROPURE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Class B Common Stock
------------------------------------- ----------------------------------
Amount Amount
Number ---------------------- Number ---------------------
of Per of Per
shares share Total shares share Total
--------- ----- ------------ ------ ----- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1997 7,734,293 $-- $ 77,343 83,983 $-- $ 840
Payment on receivable on common stock -- -- -- -- -- --
Issuance of common stock for option
on building purchase 60,000 -- 600 -- -- --
Issuance of common stock for
conversion of debt 206,186 -- 2,062 -- -- --
Net Loss -- -- -- -- -- --
Balance at January 31, 1998 8,000,479 80,005 83,983 -- 840
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Notes
Additional receivable Net
paid-in on common Accumulated stockholders'
capital stock deficit equity
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at October 31, 1997 $ 18,075,947 $ (202,766) $(17,197,281) $ 754,083
Payment on receivable on common stock -- 25,000 -- 25,000
Issuance of common stock for option
on building purchase 89,400 -- -- 90,000
Issuance of common stock for
conversion of debt 205,155 -- -- 207,217
Net Loss -- -- (234,594) (234,594)
------------ ------------ ------------ ------------
Balance at January 31, 1998 18,370,502 (177,766) (17,431,874) 841,707
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
ELECTROPURE, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
January 31,
--------------------------
1997 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,267) $(234,594)
--------- ---------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 27 22,872
Financing costs related to issuance of common stock -- 97,217
Change in assets and liabilities, net of noncash transactions:
Decrease (increase) in receivables 236 (25,762)
Decrease (increase) in inventory -- (5,359)
Decrease (increase) in other assets -- (57,964)
Increase (decrease) in notes payable -- (12,429)
Increase (decrease) in accounts payable and accrued expenses 3,391 (16,856)
Increase in interest payable, net 393 615
--------- ---------
Total adjustments 4,047 2,335
--------- ---------
Net cash used in operating activities (220) (232,260)
Cash flows from investing activities: None
Cash flows from financing activities:
Proceeds from issuance of common stock -- 200,000
Proceeds from collection of receivables on common stock -- 25,000
--------- ---------
Net cash provided by financing activities -- 225,000
--------- ---------
Net (decrease) in cash (220) (7,260)
Cash at beginning of period 674 367,680
--------- ---------
Cash at end of period $ 454 $ 360,421
========= =========
</TABLE>
6
<PAGE> 7
(1) INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed financial statements include all
adjustments which management believes are necessary for a fair presentation of
the results of operations for the periods presented, except those which may be
required to adjust assets and liabilities to the net realizable value should the
Company not be able to continue operations. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. It
is suggested that the accompanying condensed financial statements be read in
conjunction with the Company's audited financial statements and footnotes as of
and for the year ended October 31, 1997.
In February, 1996, the Company issued 253,334 shares of Common Stock upon the
conversion of $152,000 in loans payable by its former licensee, EDI Components.
Although the shares were issued at a below fair market value of $0.60 per share,
resulting in an expense of $228,000, the Company mistakenly reflected the
expense at $152,000. Pursuant to such error, the Company has made a prior period
adjustment to increase additional paid-in capital and the accumulated deficit by
$76,000. In addition, the Company has made a prior period adjustment for the
fiscal year ended October 31, 1996 to impute a $500 per month rent expense to
account for the expense of occupying offices sub-leased by the Company from EDI
Components until September, 1997. The expense has been credited toward license
fees paid by EDI Components. Similar adjustments have been made for the interim
periods ended January 31, 1997, April 30, 1997 and July 31, 1997, respectively.
The above prior period adjustments did not materially impact the Company's
retained earnings, net shareholders' equity, net loss or net loss per share. The
comparative financial statements contained in this report have been adjusted to
reflect retroactive application of the prior period adjustments discussed above.
LIQUIDITY
As of January 31, 1998, the Company had current assets in excess of current
liabilities of $426,668, an accumulated deficit of $17,431,874 and a
stockholders' equity of $841,707. In July, 1992, the Company entered into a
License Agreement with EDI Components, a California corporation, to grant an
exclusive license to manufacture and market the Company's patented Electropure
("EDI") technology. Since entering into such license relationship, the Company
funded its working capital needs from license fees paid by EDI Components until
the license was terminated in August, 1997. In September, 1997, the Company
began limited manufacturing and sales of its patented EDI product. During the
three months ended January 31, 1998, the Company booked $125,257 in gross sales
of its EDI products and realized therefrom $55,456 in cash and $69,801 in
accounts receivable. The Company also collected $7,710 and $19,500 in
receivables from trade accounts and related parties, respectively, during the
period. The Company received an additional $25,000 payment in January, 1998 on a
note receivable on common stock.
In January 26, 1998, the Company received $200,000 in loans from a principal
shareholder. Such proceeds, along with an additional $200,000 in loans from the
same shareholder, were utilized to purchase the rights to certain proprietary
membrane technology from Hydro Components, Inc., a
7
<PAGE> 8
Pennsylvania manufacturer of light commercial water and wastewater treatment
products. See Note (7) - "Subsequent Events." Pursuant to the terms of the loan
agreement, the shareholder elected to convert the $200,000 principal amount of
the loan into 206,186 shares of Common Stock. See Note (5) - "Stockholders'
Equity."
(2) DUE FROM RELATED PARTIES
The Company has balances remaining due, including interest, on notes receivable
from related parties. The balance includes net amounts remaining on a $30,000
loan made to a former shareholder and an $80,000 loan made to a corporation
whose significant stockholder was James E. Cruver, a former officer and director
of the Company. The Company received partial payments representing principal
and/or interest on these loans, however, due to the fact that they are
significantly past due and the uncertainty of when or if they will be collected,
interest income was not being recognized until received and the balances at
January 31, 1998 are offset by an allowance for doubtful accounts.
A total of $23,763 remains due as of January 31, 1998 from former officers and
directors, Harry M. O'Hare, Sr. and David C. Kravitz. Such amount is secured by
37,565 shares of the Company's common stock resulting in an unsecured receivable
in the amount of $23,351, which has been offset by an allowance for doubtful
accounts.
Between August, 1997 (when the license relationship with EDI Components was
terminated) and October 31, 1997, the Company sold products for which the
Company's former licensee, EDI Components, mistakenly received a total of
$36,329 in payments. In January, 1998, EDI Components satisfied the receivable
in full by paying the Company $19,500 in cash and transferring $16,829 in raw
materials it had purchased for the EDI product prior to the license termination.
(3) INVENTORY
Inventory, stated at the lower of cost (determined using the first in, first out
method) or replacement market, consists of components for EDI water purification
modules.
(4) COMMITMENTS AND CONTINGENCIES
The original cost and accumulated depreciation of assets at January 31, 1998 are
as follows.
<TABLE>
<S> <C>
Furniture and fixtures $15,950
Leasehold improvements 2,457
-------
18,407
Less accumulated depreciation and amortization 687
-------
$17,720
=======
</TABLE>
8
<PAGE> 9
COMMITMENTS
On October 1, 1997, the Company assumed the month-to-month lease obligation from
EDI Components on its previous facility at 23251 Vista Grande, Laguna Hills,
California and is obligated to make monthly lease payments in the sum of $4,086
through April, 1998. For the fiscal quarter ended January 31, 1998, the Company
paid an aggregate of $15,955 in lease payments on such facility.
In November, 1997, the Company entered into a three-year lease agreement on a
30,201 sq. ft. facility located at 23456 South Pointe Drive, Laguna Hills,
California. The lease commenced on February 1, 1998 at a lease rate of $16,000
per month, with pre-negotiated annual increases in the second and third years of
the lease approximating three percent of the then base monthly lease payment. On
November 14, 1997, the Company paid the Lessor $48,000, representing the first
month's lease payment, plus a $32,000 security deposit which shall be applied to
one-half of the monthly lease payments in months 6, 12, 18 and 24 of the initial
lease term. Such first month's rent and security deposit have been recorded as a
prepaid deposit in the sum of $48,000 and will be credited to rent expense when
utilized over the next 24 months.
(5) STOCKHOLDERS' EQUITY
On November 12, 1997, the Company issued 60,000 shares of Common Stock to the
Lessors of its new facility in exchange for a three-year option to purchase the
building for the pre-negotiated purchase price of $2,300,000 through August,
1999. If the option is exercised after August, 1999, the purchase price will be
$2,300,000 plus the cumulative change in Consumer Price Index from February 1,
1998 to the date of exercise. The issuance, which was made at a fair market
value of $1.50 per share, resulted in an increase in common stock and additional
paid in capital and a $90,000 financing expense.
On January 29, 1998, Anthony Frank exercised his option to convert, at a 27.5%
discount to fair market value(1), a $200,000 principal loan made to the Company
on January 26, 1998. The conversion resulted in the issuance of 206,186 shares
of Common Stock at $0.97 per share. Accordingly, the difference between
conversion price and the fair market value of similar restricted common stock
on the date of issuance, aggregating $7,217, was expensed and added to
additional paid-in capital for the fiscal period ended January 31, 1998.
(6) NET LOSS PER SHARE OF COMMON STOCK
Net loss per share of common stock is based on the weighted average number of
shares outstanding during each of the respective periods. No effect has been
given to common stock equivalents as the effect to loss per share would be
anti-dilutive.
- --------
(1) The loan agreement with Mr. Frank provided that, upon conversion of the
note, the "fair market value" of common stock would be determined as the
average of the bid and asked prices of such common stock for the thirty
consecutive trading days prior to the conversion date.
9
<PAGE> 10
(7) SUBSEQUENT EVENTS
On February 4, 1998, the Company received a loan of $200,000 from Anthony Frank,
the proceeds of which, in addition to a previous $200,000 loan made on January
26, 1998, would be utilized to acquire the rights to certain membrane technology
from Hydro Components, Inc. The January, 1998 loan was converted by Mr. Frank
into common stock on January 29, 1998 [see Note (5) - "Stockholders' Equity].
The February 4, 1998 loan, at 10% annual interest, is due to be repaid on or
before February 4, 2000. Mr. Frank has the right to convert such loan into
Common Stock at a 25% discount to the fair market value, utilizing a 30-day
average of the bid and asked prices of such Common Stock prior to the conversion
date.
On February 11, 1998, the Company entered into a one-year consulting agreement
with Hamilton Partners Incorporated of Newport Beach, California ("Hamilton"),
to provide the Company with consulting services on various administrative,
financial, marketing and/or sales matters. Pursuant to such agreement, the
Company will pay Hamilton a monthly fee of $3,500 and has granted the firm
25,000 three-year warrants to purchase Common Stock at $1.78 per share. The fair
market value of similar Common Stock was equal to the exercise price of such
warrants on the date of issuance.
On February 17, 1998, the Company entered into an Assignment Agreement with
Hydro Components, Inc. ("HCI"), a Pennsylvania manufacturer of light commercial
water and wastewater treatment products, for the exclusive worldwide rights to
proprietary membrane technology. The Company intends to utilize the acquired
technology to develop ion permeable membranes for use with its EDI product. The
agreement provides that HCI will furnish all technical support required by the
Company for the development program. If development efforts are successful, such
membranes would open additional markets for the Company's EDI product in
industry segments which require purity levels of process water which are lower
than that provided by the current EDI design. The Company paid HCI $200,000 for
the above rights and loaned HCI an additional $200,000, secured by all assets of
the borrower. The loan is to be repaid, with interest at 10%, on or before April
17, 1998.
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
References to 1997 and 1998 are for the three months ended January 31, 1997 and
1998, respectively, and reflect the prior period adjustments discussed in Note
(1) - "Interim Financial Statements."
License fees received from EDI Components for fiscal 1997 were $20,300 as
compared to no activity for fiscal 1998. Pursuant to the August, 1997 License
Termination Agreement, the obligation of EDI Components to pay license fees to
the Company terminated at that time.
10
<PAGE> 11
The Company realized a gross margin of $56,202 on the sale of EDI products in
fiscal 1998, as compared to no sales activities in fiscal 1997. The Company had
not initiated manufacturing and marketing operations until September, 1997,
after the license agreement with EDI Components had been terminated.
Research and development expenses for fiscal 1998 were $43,902 as compared to no
activity for fiscal 1997. These expenses arise from the research and development
program which the Company initiated in December, 1997 on the drinking water
monitoring technology acquired from Wyatt Technology Corporation in late
October, 1997.
Sales and marketing expenses were $35,172 for fiscal 1998, as compared to no
activity for fiscal 1997. These expenses represent the costs associated with
marketing the Company's EDI product, which activities began in September, 1997.
General and administrative expenses for fiscal 1998 increased by $89,716 as
compared to fiscal 1997. The increase is due to various factors, including the
expenses associated with hiring additional employees in late 1997, the
assumption of lease obligations on the facilities occupied by the Company, and
legal and accounting fees resulting from the audit conducted on the Company's
financial statements for the fiscal year ended October 31, 1997.
Interest expense for fiscal 1998 increased by $222 as compared to fiscal 1997,
due to the additional interest accrued on a note payable issued in settlement of
a lawsuit in May, 1997. Such note was paid in full in January, 1998.
Financing costs for fiscal 1998 were $97,217, as compared to no activity for
fiscal 1997. Of such expense, $90,000 resulted from the issuance of 60,000
shares of common stock to the lessor of the Company's current facility in
exchange for an option to purchase the building during the term of the
three-year lease. An additional $7,217 financing expense was incurred as a
result of the issuance, at below fair market value, of 206,186 common shares in
cancellation of a $200,000 loan made to the Company in January, 1998.
No additional provision for loss on lawsuit settlement has been made in fiscal
1998 as the Company believes that adequate provision has been made to settle
pending lawsuits.
Net loss of $234,594 for fiscal 1998 represents an increase of $230,327 from the
prior year level. This is primarily due to the initiation of research and
development activities on the Company's proposed drinking water monitoring
product and the increase in marketing and administrative activities resulting
from production and sales of the Company's EDI product beginning in late 1997.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1998, the Company had net working capital (total current assets
less total current liabilities) of $426,668. The increase in working capital,
compared to that reported at October 31, 1997,
11
<PAGE> 12
results primarily from financing activities and sales during the period. At
January 31, 1998, the Company had net cash assets of $360,421, of which amount
$200,000 has subsequently been utilized to acquire the rights to certain
membrane technology from Hydro Components, Inc. See Note (7) - "Subsequent
Events."
During fiscal 1998, the Company received $55,456 on the sale of EDI product
during the period and has accrued an additional $69,801 in receivables pursuant
to such product sales. The Company collected $44,039 during the period
(including $16,829 in raw materials transferred by EDI Components) on trade
accounts and related party receivables accrued in connection with products sold
between September and October, 1997.
In February, 1998, the Company relocated to its current 30,201 sq. ft. facility
with a view toward expanding its production capabilities for the EDI product.
The additional space will also be required if the Company's research program for
the drinking water monitoring program proves successful. The Company has
sub-leased, as of March 1, 1998, approximately 10,000 sq. ft. of such facility
at a monthly rental of $6,500, to offset a portion of its $16,000 monthly lease
obligation. The remaining facilities will allow the Company to increase its
production capabilities and, in turn, its marketing efforts for sales of the EDI
product. Recently, the Company received a blanket order from one customer which
will, alone, generate an average of $60,000 in net monthly sales over the next
9-10 months. Since January 31, 1998, exclusive of such "blanket order", the
Company has received orders totaling over $132,000 in net sales. Coupled with
orders from other current customers and those customers which it believes it can
attract in the near term, the Company projects that it can generate net sales of
EDI products in excess of $150,000 monthly until expanded operations can be
implemented at its new facility. However, no assurances can be given that any
such sales will actually occur.
The Company will be required to raise substantial amounts of new financing, in
the form of additional equity investments or loan financing, in order to carry
out its business objectives. There can be no assurance that the Company will be
able to obtain such additional financing on terms that are acceptable to the
Company and at the time required by the Company, or at all. Further, any such
financing may cause dilution of the interests of the current shareholders in the
Company. If the Company is unable to obtain such additional equity or loan
financing, the Company's financial condition and results of operations will be
materially adversely affected. Moreover, the Company's estimates of its cash
requirements to carry out its current business objectives are based upon certain
assumptions, including assumptions as to the Company's revenues, net income
(loss) and other factors, and there can be no assurance that such assumptions
will prove to be accurate or that unbudgeted costs will not be incurred. Future
events, including the problems, delays, expenses and difficulties frequently
encountered by similarly situated companies, as well as changes in economic,
regulatory or competitive conditions, may lead to cost increases that could have
a material adverse effect on the Company and its plans. If the Company is not
successful in obtaining loans or equity financing for future developments, it is
unlikely that the Company will have sufficient cash to continue to conduct
operations as currently planned. The Company believes that in order to raise
needed capital, it may be required to issue debt or equity securities that are
significantly lower than the current market price of the Company's Common Stock.
12
<PAGE> 13
PLAN OF OPERATION
Between January and February, 1998, the Company borrowed a total of $400,000
from Anthony M. Frank and utilized such funds in February, 1998 to acquire
certain rights to the proprietary membrane technology of Hydro Components, Inc.
Of such funds, $200,000 was in the form of a loan and is due to be repaid to the
Company, with interest at 8%, on or about April 17, 1998. See Note (7) -
"Subsequent Events."
With the above loan proceeds repaid, together with its current cash assets,
projected sales revenues and collections anticipated on accounts receivable, the
Company believes that it will have adequate sources of working capital for up
six (6) months, although it may need additional working capital prior to said
date, particularly if the Company is not successful in selling sufficient
quantities of EDI products. In addition, the Company may require additional
funding to implement the development of membrane technology recently acquired
from Hydro Components, Inc.
The above discussion is based largely on the Company's expectations; contains
forward looking statements, and is subject to a number of risks and
uncertainties, many of which are beyond the Company's control. Actual results
could differ materially as a result of a variety of factors, including market
acceptance of the Company's products, the success of the Company's research and
development activities, prevailing economic conditions as they effect the water
purification industry in general and the ability to raise sufficient working
capital. In light of these risks and uncertainties, there can be no assurance
that the Company's expectations will, in fact, transpire or prove to be
accurate.
PART II - OTHER INFORMATION
ITEM 1.
In December, 1993, a default judgment was rendered against the Company in the
sum of $20,270 for unpaid corporate credit card charges the majority of which
accrued from 1989. The lawsuit was brought in the Los Angeles County Municipal
Court. During the fiscal year ended October 31, 1994, the Company paid $250 on
this judgment, however, the Company has made no arrangements to satisfy this
obligation as of this writing.
In January, 1998, the Company satisfied the principal and interest due on a
$12,000 promissory note issued in May, 1997 to the Economic Development Bank for
Puerto Rico (the "Bank") under the terms of a settlement reached on a $3 million
default judgment rendered against the Company in June, 1996. The lawsuit, which
was brought by the Bank in February, 1993 in the San Juan Superior Court,
alleged that the Company, its bankrupt Puerto Rico subsidiary (HOH
International, Inc.), 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. With
payment of such note, the Company believes that it has satisfied all of its
obligations under the settlement and expects to receive a conditional
satisfaction of the judgment within the next sixty (60) days.
13
<PAGE> 14
As disclosed in the Company's Form 10-KSB for the fiscal year ended October 31,
1997, 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 status of
this matter has not materially changed from that which was previously reported
and 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 2.
Since November 1, 1997, the Company has issued or sold the following securities:
On November 12, 1997, the Company issued 60,000 shares of Common Stock as
consideration for an option to purchase the building to which it relocated in
February, 1998. The Common Stock was valued at $1.50 per share and resulted in
an expense to the Company during the fiscal quarter ended January 31, 1998 in
the sum of $90,000.
On January 29, 1998, the Company issued 206,186 shares of Common Stock upon the
conversion of a $200,000 loan made by principal shareholder, Anthony Frank. The
shares were issued at the below fair market value of $0.97 per share, resulting
in an expense as of January 31, 1998 in the sum of $7,217.
The issuance of securities in these transactions were exempt from registration
under the Securities Act of 1933, as amended (the "Act"), by virtue of Sections
3(b) and 4(2) of the Act, including Regulation D promulgated thereunder. The
Company believes that the recipients in each case acquired the securities for
investment only and not with a view to the distribution thereof and legends were
affixed to the stock certificates. No underwriters or brokers were involved in
either transaction.
ITEMS 3 THROUGH 6 OMITTED AS NOT APPLICABLE.
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 duly authorized.
Dated: February 27, 1998
ELECTROPURE, INC.
By /s/ CATHERINE PATTERSON
-----------------------------------------
Catherine Patterson
(Secretary and Chief Financial Officer
with responsibility to sign on behalf of
Registrant as a duly authorized officer
and principal financial officer)
14
<PAGE> 15
ELECTROPURE, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
PAGE
SEQUENTIALLY
NUMBERED
------------
<S> <C> <C>
10.53 8% Sixty-Day Term Note from Hydro Components,
Inc. dated February 17, 1998, including Assignment
Agreement, Security Agreement and Unlimited
Personal Guaranty
27 Financial Data Schedule
</TABLE>
15
<PAGE> 1
EXHIBIT 10.53; PAGE 1
8% SIXTY-DAY TERM NOTE
$200,000
FEBRUARY 17, 1998
HYDRO COMPONENTS, INC., a Pennsylvania corporation (the "BORROWER" or
"HCI"), for the value received, hereby unconditionally and absolutely promises
to pay to the order of ELECTROPURE, INC., a California Corporation, or holder
(the "HOLDER"), upon presentation and surrender of this Note at its office at P.
O. Box 1096, Blue Bell, PA 19422, or such other place as the Borrower may, from
time to time, designate, the sum of TWO HUNDRED THOUSAND DOLLARS ($200,000), in
lawful money of the United States, on April 17, 1998, 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 on the Maturity Date in accordance with
the terms set forth in Section 2 hereof.
1. CONDITIONS PRECEDENT.
The Borrower and Holder hereby represent and warrant that
concurrent with the execution of this Note:
A. Borrower will enter into Stock Purchase Agreements with the
stockholders of Hydro Components, Inc., a Pennsylvania corporation ("HCI"), to
redeem and retire such stockholders' capital stock of such corporation to the
end that Joseph M. Bernatowicz, the Guarantor of this Note ("Guarantor"), will
then become the sole and separate shareholder of all issued and outstanding
stock of HCI, thereby vesting all right, title and interest in and to all assets
of any kind whatsoever, tangible and intangible, of such corporation free and
clear of all encumbrances.
B. Borrower and HCI, on the date hereof, shall enter into an
Assignment Agreement, in the form of Exhibit "A" hereto, granting Holder, in
exchange for a payment of $200,000.00, all right, title and interest in and to
certain proprietary membrane technology of HCI, free and clear of all
encumbrances thereon.
C. Borrower shall utilize all proceeds received from Holder
pursuant to this Note and the above Assignment Agreement, for total proceeds of
$400,000.00, to complete the acquisition of the assets and capital stock of HCI
as contemplated under Paragraph 1A above.
2. PAYMENTS AND PREPAYMENTS.
(a) All payment and prepayments of principal and interest shall
be made in immediately available funds to the Holder at its office at 23456
Southpointe, Laguna Hills, California 92653.
(b) The unpaid principal amount of the Note from time to time
outstanding shall bear interest from the date of this Note at the rate of Eight
(8%) per annum until paid. Accrued interest shall be paid on the Maturity Date
and shall be computed for the actual number of days elapsed on the basis of a
year consisting of 360 days.
<PAGE> 2
EXHIBIT 10.53; PAGE 2
(c) The Borrower may prepay at any time all or any part of this
Note without penalty.
3. EVENTS OF DEFAULT. If one or more of the following described events
shall occur (each an "Event of Default"):
(a) The Borrower shall fail to conclude the purchase of the capital
stock of HCI concurrent with the execution of this Note; or
(b) The Borrower 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 Borrower that the same has become due; or
(c) The Borrower 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
Borrower; or
(d) Any material representation or warranty made in writing by or
on behalf of the Borrower 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 Borrower shall have failed to cure such false or incorrect
statement within thirty (30) days after the Holder has given written notice to
Borrower; or
(e) The Borrower 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 Borrower 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 (including assets or capital
stock of HCI); or such receiver, trustee or similar officer shall be appointed
without the application or consent of the Borrower and such appointment shall
continue undischarged for a period of thirty (30) days; or the Borrower 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 Borrower 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 Borrower 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
(f) The Borrower 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;
(g) Any suit, action or other proceeding (judicial or
administrative) commenced against the Borrower, or with respect to any assets of
the Borrower (including assets and capital stock of HCI), shall threaten to have
a material adverse effect on its future financial condition, including, without
<PAGE> 3
EXHIBIT 10.53; PAGE 3
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 Borrower is in default under the provisions
of Section 3(e) hereof, the entire unpaid principal amount of the Note, all
interest accrued and unpaid thereon, and all other amounts payable to the Holder
hereunder shall automatically become and be forthwith due and payable without
offset or counterclaim of any kind and without presentment, demand, protest or
notice of any kind, and without regard to the running of the statute of
limitations, all of which are hereby expressly waived by the Borrower; and
(2) In any other case referred to in this Section 3, the
Holder may, by written notice to the Borrower, 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 Borrower.
Any declaration made pursuant to Section 3(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.
4. SECURITY INTERESTS. To secure Holder's rights under this Agreement
and the other agreements contemplated in Paragraph 1 hereof, HCI shall:
(a) grant Electropure a fully perfected, first interest on all
assets of HCI pursuant to a separate Security Agreement, Exhibit "B" hereto; and
(b) cause the delivery to Holder of the Unlimited Personal
Guaranty of Joseph M. Bernatowicz (the "Guarantor"), Exhibit "C" hereto.
5. TRANSFER. Subject to the applicable law, this Note or any portion of
the principal amount hereof (or any remaining balance if any pre-payments have
occurred pursuant to Section 2 hereof) is transferable on the records of the
Borrower upon presentation of this Note, properly endorsed, at his 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 Borrower shall deem and
treat the person in
<PAGE> 4
EXHIBIT 10.53; PAGE 4
whose name this Note is registered as the absolute owner hereof and the Borrower
shall not be affected by any notice to the contrary.
6. MISCELLANEOUS.
(a) Notwithstanding the foregoing, the Borrower 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 Borrower and Holder caused this Note to be
executed as of the day and year first above written.
"HOLDER" "BORROWER"
ELECTROPURE, INC. HYDRO COMPONENTS, INC.
By /S/ FLOYD H. PANNING By /S/ JOSEPH M. BERNATOWICZ
----------------------------------- -----------------------------------
Floyd H. Panning, President Joseph M. Bernatowicz, President
<PAGE> 5
EXHIBIT 10.53; PAGE 5
ASSIGNMENT AGREEMENT
(Exhibit "A" to 8% Sixty-Day Term Note)
This agreement is effective as of February 17, 1998, by and between ELECTROPURE,
INC., a California Corporation, of 23456 Southpointe, Laguna Hills, CA 92653
(hereinafter called "ELECTROPURE") and HYDRO COMPONENTS, INC., a Pennsylvania
Corporation, of P. O. Box 1096, Blue Bell, PA 19422 (hereinafter called "HCI").
WITNESSETH:
Whereas HCI has developed various techniques and intellectual properties and
know-how based on proprietary ion exchange membrane technology using specially
prepared ion exchange powders and polymers and the know-how to extrude these
materials into a homogeneous sheet form (hereinafter, collectively referred to
as the "Intellectual Property"); and
Whereas ELECTROPURE has long been active in the development of equipment for the
production of high quality industrial water utilizing ion exchange membranes and
is desirous of developing the HCI membrane for use with its own equipment; and
WHEREAS, HCI has the right and has offered to assign to ELECTROPURE said
Intellectual Property and to provide all necessary technical training for the
development and use thereof all in exchange for the payment by ELECTROPURE of
Two Hundred Thousand ($200,000) Dollars (the "Purchase Price").
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. ASSIGNMENT OF RIGHTS
1.1 Subject to the terms and conditions of this Agreement, HCI hereby
assigns all of its rights, title and interest in and to the Intellectual
Property to ELECTROPURE in perpetuity and without limitation of any kind
whatsoever.
1.2 This AGREEMENT is irrevocable, and HCI may not terminate this
AGREEMENT by reason of ELECTROPURE's material breach; provided, however, that in
no event shall this provision be construed to nullify any other remedy for a
material breach by ELECTROPURE which is expressly provided herein or otherwise
available at law or in equity.
1.3 The assignment granted herein is exclusive in that HCI represents
that it has not granted to another person, firm, entity, or governmental agency
any rights to the Intellectual Property that are in conflict with the assignment
of rights granted to ELECTROPURE above. HCI further represents and warrants that
such Intellectual Property is free and clear of all claims, liens, encumbrances,
security interests and restrictions and that it has full right and authority to
assign the Intellectual Property to ELECTROPURE.
<PAGE> 6
EXHIBIT 10.53; PAGE 6
1.4 HCI holds no patents, copyrights or trademarks on the Intellectual
Property and does not purport to assign or license any such rights to
ELECTROPURE. HCI does, however, hereby grant ELECTROPURE a continuing,
irrevocable and exclusive right, to the extent that it is within its legal right
to do so, a continuing, irrevocable and exclusive right to use the name "Hydro
Components" and/or "HCI". Such use shall be at the sole option and discretion of
ELECTROPURE, whether in conjunction with the Intellectual Property or otherwise,
without further or additional consideration by ELECTROPURE.
1.5 Retained Rights. All rights that are not expressly granted to
ELECTROPURE herein are retained by HCI.
2. DELIVERY OF PURCHASE PRICE
2.1 ELECTROPURE represents that it will transfer the Purchase Price by
bank wire transfer to HCI's banking institution upon the completion of this
AGREEMENT, but in no case later than 24 hours after this Agreement has been
returned to ELECTROPURE, fully executed by HCI.
3. HCI WARRANTIES AND TECHNICAL SUPPORT
3.1 HCI shall at its expense, unless otherwise provided, furnish to
ELECTROPURE all necessary technical support and training at ELECTROPURE'S
facility regarding the use, application and operation of the Intellectual
Property as required, with all travel and lodging expenses to be the sole
responsibility of HCI.
3.2 The parties have determined that it is in the best interest of the
parties that HCI disclaim any and all performance warranties regarding the
Intellectual Property, and provide in lieu thereof, technical support services
as set forth above. Accordingly, the disclaimer of performance warranties
provided below does not nullify HCI's obligations to provide such technical
support.
3.3 The Intellectual Property is assigned to ELECTROPURE on an "AS-IS"
basis. HCI does not warrant, guarantee or make any representation regarding the
use or the results of the use of the Intellectual Property in terms of
correctness, accuracy, reliability, currentness or otherwise. ELECTROPURE
assumes the entire risk as to the performance and results of the Intellectual
Property.
3.4 ELECTROPURE EXPRESSLY ACKNOWLEDGES THAT NO REPRESENTATIONS OTHER
THAN THOSE CONTAINED IN THIS AGREEMENT HAVE BEEN MADE RESPECTING THE
INTELLECTUAL PROPERTY TO BE PROVIDED HEREUNDER, AND THAT ELECTROPURE HAS NOT
RELIED ON ANY REPRESENTATION NOT EXPRESSLY SET OUT HEREIN.
4. CHOICE OF LAW AND VENUE
4.1 This AGREEMENT shall be governed by and construed under the Laws of
the State of California in force from time to time. Any proceeding arising out
of this AGREEMENT shall be brought in Orange County, California.
<PAGE> 7
EXHIBIT 10.53; PAGE 7
5. GENERAL PROVISIONS
5.1 Notices. All notices shall be given in writing and shall be
effective when either (i) served by personal delivery, (ii) upon receipt of mail
sent as certified mail, return receipt requested, or (iii) upon receipt of
facsimile transmission if verified by a written or electronic record of the
transmission, provided that any such communication is addressed to the parties
at their respective addresses and/or facsimile numbers set forth below, or to
such other address or numbers as either party may later specify by written
notice or provide as part of the performance of this Agreement.
If to HCI:
Hydro Components, Inc.
P. O. Box 1096
Blue Bell, PA 19422
If to ELECTROPURE:
Electropure, Inc.
23456 Southpointe
Laguna Hills, CA 92653
5.2 This Agreement shall not be considered an offer by either party, and
it shall not be effective until signed by both parties. This Agreement
constitutes the entire understanding of the parties with respect to the subject
matter of this Agreement and merges all prior communications, understandings,
and agreements. This Agreement may be modified only by a written agreement
signed by the parties.
5.3 The relationship of the parties is that of independent contractor,
and nothing herein shall be construed to create a partnership, joint venture,
franchise, employment, or agency relationship between the parties. ELECTROPURE
shall have no authority to enter into agreements of any kind on behalf of HCI
and shall not have the power or authority to bind or obligate HCI in any manner
to any third party.
5.4 If any provision of this Agreement is held to be invalid or
unenforceable for any reason, such provision shall be ineffective to the extent
of such invalidity or unenforceability; provided, however, that the remaining
provisions will continue in full force without being impaired or invalidated in
any way unless such invalid or unenforceable provision or clause shall be so
significant as to materially affect the Parties' expectations regarding this
Agreement. Otherwise, the Parties hereto agree to replace any invalid or
unenforceable provision with a valid provision which most closely approximates
the intent and economic effect of the invalid or unenforceable provision.
5.5 The failure of either party to enforce at any time any of the
provisions hereof shall not be a waiver of such provision, or any other
provision, or of the right of such party thereafter to enforce any provision
hereof.
<PAGE> 8
EXHIBIT 10.53; PAGE 8
5.6 This AGREEMENT may be executed simultaneously in two or more
counterparts, each one of which shall be deemed an original, but all of which
shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed below.
ELECTROPURE, INC. HYDRO COMPONENTS, INC.
By /S/ FLOYD H. PANNING By /S/ JOSEPH M. BERNATOWICZ
--------------------------------- -----------------------------------
Floyd H. Panning, President Joseph M. Bernatowicz, President
23456 Southpointe Drive P. O. Box 1096
Laguna Hills, CA 92653 Blue Bell, PA 19422
<PAGE> 9
EXHIBIT 10.53; PAGE 9
SECURITY AGREEMENT
(Exhibit "B" to 8% Sixty-Day Term Note)
THIS SECURITY AGREEMENT (the "Agreement") is entered into as of
this 17th day of February, 1998 by and between ELECTROPURE, INC., a California
corporation, as the secured party hereunder ("Secured Party"), and HYDRO
COMPONENTS, INC., a Pennsylvania corporation ("HCI") as the company granting the
security interest hereunder, with reference to the following facts:
A. Concurrently herewith, Secured Party, HCI and Joseph M.
Bernatowicz ("Guarantor"), have entered into a $200,000 8% Sixty-Day Term Note
upon the terms and conditions set forth therein (the "Note").
B. In order to induce Secured Party to enter into the Note, HCI
desires to grant to Secured Party a security interest in the Collateral (as
defined below) upon the terms and subject to the conditions hereinafter
provided.
NOW, THEREFORE, in consideration of the foregoing recitals of
facts and the mutual agreements set forth below, the parties hereto agree as
follows:
SECTION 1. Definitions. As used in this Agreement, the following
terms shall have the meanings assigned to them in this Section 1. References in
this Agreement to "Sections" are references to Sections hereof.
1.1 "Collateral" means all of that property identified on
Exhibit "A" attached hereto and all proceeds arising out of the sale, lease,
license, exchange, collection or other disposition thereof.
1.2 "Secured Party Indebtedness" means all indebtedness
and obligations of HCI to the Secured Party described or referred to in Section
3.
1.3 "Security Interest" means that security interest in
the Collateral granted to the Secured Party pursuant to Section 2.
SECTION 2. Grant of Security Interest. To secure the payment of
all Secured Party Indebtedness and the due and punctual performance by HCI of
all the obligations described in Section 3, HCI hereby creates, grants and
assigns to the Secured Party a continuing security interest in and to all the
Collateral.
SECTION 3. Obligations Secured. The Security Interest secures the
following:
3.1 The performance and payment of the Note.
3.2 Payment of all amounts spent by the Secured Party to
preserve or to protect the Collateral, including, but not limited to, taxes,
maintenance fees and reasonable attorneys' fees.
<PAGE> 10
EXHIBIT 10.53; PAGE 10
SECTION 4. Collateral Covenants. HCI hereby represents and
warrants to, and agrees with, the Secured Party that:
4.1 It will properly maintain and care for the Collateral,
including the payment of any fees required to continue in force any of the
Collateral, and defend the Collateral against any adverse lien, charge,
encumbrance, claim or demand;
4.2 It will notify the Secured Party in writing prior to
any change in its business office or the office or offices where books and
records concerning the Collateral are kept;
4.3 It will provide the Secured Party with evidence within
five (5) days of the date of this Agreement that any security interest granted
in any of the Collateral to persons who held shares in or loaned HCI any funds
terminated of record as of February 15, 1998. Except for the security interest
granted above, it has not granted and will not grant any security interest in
any of the Collateral to any person with a preference over the security interest
granted hereby to the Secured Party, it has not executed and will not execute
any security agreement or financing statement or other documents which can be
filed in any public office covering any Collateral and the Secured Party will
have, so long as any Secured Party Indebtedness remains unpaid, a first
priority, perfected security interest in all of the Collateral.
4.4 It will not sell, contract for sale or otherwise
dispose of any of the Collateral;
4.5 It will notify the Secured Party of any event which
adversely affects the value of the Collateral as a whole, the ability of it or
the Secured Party to dispose of the Collateral, or the rights and remedies of
the Secured Party in relation thereto, including, but not limited to, the levy
of any legal process against the Collateral or any portion thereof, whether
governmental or otherwise;
4.6 It will execute and deliver to the Secured Party all
documents and instruments necessary or advisable, in the opinion of the Secured
Party, to perfect and maintain the Security Interest in favor of the Secured
Party in and to all Collateral, including, but not limited to, delivery to
Secured Party of financing statements and other documents which can be filed
pursuant to the Uniform Commercial Code, the United States Code or any other
applicable law, all in form and substance acceptable to the Secured Party; and
the Secured Party may file in the appropriate public office any such document or
instrument; and
4.7 It will pay when due or prior to delinquency, as the
case may be, all debts relating to or affecting the Collateral and all taxes,
charges, encumbrances and assessments against the Collateral, and upon the
failure of HCI to make such payments, the Secured Party, at its option, may pay
any of them and shall be the judge of the legality or validity thereof and the
amount necessary to discharge the same. Any amounts so paid the Secured Party
shall be immediately due and payable by HCI to the Secured Party and shall
become a part of the Secured Party Indebtedness secured hereunder.
<PAGE> 11
EXHIBIT 10.53; PAGE 11
SECTION 5. Events of Default. An "Event of Default" as used in
this Agreement shall mean any of the following events: (a) the failure by Joseph
M. Bernatowicz or HCI to pay the Secured Party Indebtedness or any portion
thereof when the same is due or to perform any covenant, agreement or duty
relating to the Secured Party Indebtedness, (b) any representation or warranty
of HCI in any agreement or document relating to the Secured Party Indebtedness
shall prove to have been false or misleading in any material respect when made
or when deemed to have been made, (c) Secured Party shall fail to have a valid
and enforceable first priority perfected security interest in any Collateral,
except where such failure results from Secured Party's action or failure to act
with respect to the filing of financing statements, (d) a judgment or judgments
shall be entered against Joseph M. Bernatowicz or HCI in the aggregate amount of
Twenty Five Thousand Dollars ($25,000) or more on a claim or claims not
substantially covered by insurance other than such judgments that are being
contested in good faith and as to which, in Secured Party's reasonable judgment,
an adequate reserve has been provided on financial statements, (e) HCI or
Bernatowicz shall fail to pay its debts generally as they come due or shall file
any petition or action for relief under any bankruptcy, reorganization,
insolvency or moratorium law, or any other law or laws for the relief of
debtors, (f) an involuntary petition shall be filed under any bankruptcy statute
against HCI or Bernatowicz or a custodian, receiver, trustee, assignee for the
benefit of creditors (or other similar official) shall be appointed to take
possession, custody, or control of the properties of HCI or Bernatowicz, unless
such petition or appointment is set aside or withdrawn or ceases to be in effect
within sixty (60) days from he date of said filing or appointment, or (g) HCI
shall fail to fund the prompt and timely payment of any fees to maintain the
Collateral in force.
SECTION 6. Remedies on Default. Notwithstanding any provision to
the contrary in any agreements executed contemporaneously herewith, upon the
occurrence of any Event of Default hereunder, the Secured Party shall notify HCI
in writing of the nature and extent of such default and of the period of time,
which shall be not less than thirty (30) days, during which HCI or Bernatowicz
will be expected to remedy such default or defaults; provided, of course, that a
remedy is available. If, at the expiration of the period specified in such
notice, such default or defaults have not been substantially remedied, Secured
Party shall be entitled to:
6.1 Enforce the Security Interest pursuant to the
applicable Uniform Commercial Code, the United States Code, or any other
applicable law, and for purposes hereof ten (10) days' notice shall be deemed to
be reasonable notice of any intent to sell the Collateral at public or private
sale;
6.2 Require HCI to assemble the Collateral and the records
pertaining thereto and make them available to the Secured Party at a place
designated by the Secured Party;
6.3 To the fullest extent permitted by law, enter any
premises of HCI and take possession of the Collateral and of the records
pertaining to the Collateral;
6.4 Grant extensions, compromise claims and settle
accounts for less than the face value thereof in good faith and in a
commercially reasonable manner, all without prior notice to HCI;
<PAGE> 12
EXHIBIT 10.53; PAGE 12
6.5 Use, in connection with any assembly or disposition of
the Collateral, any trademark, trade name, trade style, copyright, patent right
or technical process used or utilized by HCI, including "Hydro Components;"
6.6 Take such measures as the Secured Party shall deem
necessary or advisable to preserve, process, develop, maintain, protect, care
for or insure the Collateral or any portion thereof, and Hci hereby irrevocably
constitutes and appoints the Secured Party as its attorney-in-fact to perform
all acts and things in connection therewith;
6.7 Cause the Collateral to be transferred to the Secured
Party's name or to the name of its nominee;
6.8 Exercise as to the Collateral all the rights, powers
and remedies of any owner necessary to the exercise of its rights under this
Agreement; and
6.9 In addition to being entitled to proceed to exercise
with respect to the Collateral all of the rights and remedies available to a
secured party upon default under the applicable Uniform Commercial Code, the
United States Code or applicable law, the Secured Party shall have those other
rights and remedies provided herein and such other rights and remedies as may be
provided by law.
Each purchaser at any sale of the Collateral shall hold such
Collateral absolutely free from any claim or right on the part of HCI. To the
full extent permitted by law, HCI hereby waives (i) all rights of redemption,
stay or appraisal which it now has or may at any time in the future have under
any rule of law or statute now existing or hereafter enacted and (ii) any right
which it may have to demand a hearing or other judicial or administrative
proceeding prior to the enforcement of the Secured Part of any of its rights and
remedies hereunder. Any public or private sale of the Collateral or any portion
thereof shall be held at such time or times within ordinary business hours and
at such place or places as the Secured Party may fix in the notice of sale, and
at any such sale the Collateral, or the portion thereof to be sold, may be sold
in one block, as an entirety or separately, as the Secured Party may determine.
Any sale may be conducted by an auctioneer or by an officer, attorney or agent
of the Secured Party. The parties hereto agree that five (5) days' notice of any
proposed sale is acceptable and reasonable. The Secured Party may be a purchaser
at any public or private sale. The Secured Party shall not be obligated to make
any sale of the Collateral or any portion thereof if it determines not to do so,
regardless of the fact that notice of sale of the Collateral may have been
given. The Secured Party may, without notice or publication, adjourn a public or
private sale of the Collateral or cause the same to be adjourned from time to
time by announcement, at the time and place fixed for sale, and such sale may,
without further notice, be made at the time and place to which the same was so
adjourned.
SECTION 7. Application of the Proceeds. All proceeds of any sale
of the Collateral by the Secured Party pursuant to Section 6 shall be applied as
follows:
<PAGE> 13
EXHIBIT 10.53; PAGE 13
First, to the payment of all fees and expenses incurred by the
Secured party in connection with any such sale including, but not limited to,
all court costs and fees of counsel to the Secured Party in connection
therewith;
Second, to the payment of any amounts owing to the Secured Party
by HCI hereunder; and
Third, to HCI.
SECTION 8. Miscellaneous Provisions.
8.1 All advances, charges, costs and expenses, including
reasonable attorney's fees, incurred or paid by the Secured Party in exercising
any right, power or remedy conferred by this Agreement or in the enforcement
hereof, shall become a part of the Secured Party Indebtedness secured hereunder
and shall be paid to the Secured party by HCI immediately and without demand,
with interest thereon at the rate provided in the Note.
8.2 Certain Waivers. HCI, to the extent permitted by law,
waives any right to require the Secured Party to (a) proceed against person, (b)
proceed against or exhaust the Collateral, or (c) pursue any other remedy in the
Secured Party's power, and waives any defense arising by reason of any
disability or any other defense of HCI or any other person, or by reason of the
cessation from any cause whatsoever of the liability of HCI or any other person.
Until such times as full payment is made to the Secured Party of all Secured
Party Indebtedness and full performance of all obligations relating to the
Secured Party Indebtedness, HCI shall have no right of subrogation and waives
any right to enforce any remedy which the Secured Party now has or may hereafter
have against any other person and waives any benefit of and any right to
participate in the Collateral now or hereafter held by the Secured Party. HCI
authorizes the Secured Party, without notice or demand and without affecting
HCI's liability hereunder or on the Secured Party Indebtedness, from time to
time to: (1) renew, extend, accelerate or otherwise change the time for payment
of, or otherwise change the terms of, the Secured Party Indebtedness or any part
thereof, including, without limitation, to increase or decrease the rate of
interest thereon; (2) take and hold security, other than the Collateral herein
described or any part thereof or any such other security; and (3) release or
substitute any guarantors of the Secured Party Indebtedness or any part thereof,
or any other parties thereto.
8.3 Amendments, Waivers and Consents. No amendment to,
modification or waiver of, or consent with respect to, any provision of this
Agreement shall be effective unless the same shall be in writing and signed by
the party against whom enforcement of the amendment, modification, waiver or
consent is sought.
8.4 Notices. All notice, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered or mailed by first class mail, postage prepaid, to the
address set forth below, or to such other address as any party may specify in
writing to all other parties:
<PAGE> 14
EXHIBIT 10.53; PAGE 14
(a) If to the Secured party, to:
Electropure, Inc.
23456 Southpointe
Laguna Hills, California 92653
Attn: Floyd H. Panning, President
(b) If to HCI, to:
Hydro Components, Inc.
P. O. Box 1096
Blue Bell, PA 19422
Attn: Joseph M. Bernatowicz
8.5 Applicable Law. This Agreement shall be construed and
enforced in accordance with the laws of the State of California, except to the
extent the security interest in the Collateral is governed by United States law
or the law of any other jurisdiction.
8.6 Section Headings. The section headings contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of the Agreement.
8.7 Successors and Assigns. This Agreement shall be
binding upon HCI and its permitted successors and assigns.
8.8 Survival. All covenants, agreements, representations
and warranties made by HCI herein shall survive the execution and delivery of
this Agreement and such covenants, agreements, representations and warranties
shall continue in full force and effect until all Secured Party Indebtedness is
paid and performed in full.
8.9 Severability. In case any one or more provision or
portions hereof should be determined to be invalid, illegal or unenforceable in
any respect, the validity, legality and enforceability of the remaining
provisions contained herein shall not in any way be affected or impaired
thereby.
8.10 Attorney's Fees. In the event of any dispute
regarding the obligations or the respective rights and interests of the parties
hereunder, the prevailing party shall recover, upon demand, from the other
party, all reasonable fees, costs and expenses (including, without limitation,
such fees, costs and expenses of litigation and appeals) incurred by such
prevailing party in enforcing any provision hereof, whether or not litigation
has commenced with respect thereto and without regard to any schedule or the
determination by a court as to the fees, costs and expenses of such enforcement.
<PAGE> 15
EXHIBIT 10.53; PAGE 15
8.11 Complete Agreement. The foregoing constitutes the
full and complete agreement between the parties with respect to the subject
matter hereof, or contemplated hereby, and there are no other oral or written
agreements in relation to the subject matter hereof.
8.12 Waivers and Consents. To the fullest extent permitted
by law, the Secured Party reserves the right in the exercise of its discretion
to refuse to (a) waive any of its rights hereunder of (b) consent to the taking
of any action (or the failure to take any action) on the part of HCI which, if
taken (or upon the failure to so act), will result with or without giving
notice, the passage of time or both in the occurrence of an Event of Default
under this Agreement. Where any of the provisions of this Agreement provide that
any matter, document, instrument, item or thing is subject to the discretion,
consent, satisfaction, waiver, approval or determination of the Secured Party,
then (unless expressly otherwise provided herein) such discretion, consent,
satisfaction, waiver, approval or determination may be exercised, and or
withheld by the Secured Party in the exercise of its reasonable good faith
discretion.
IN WITNESS WHEREOF, the parties hereto have signed this
Agreement on the date first above written.
"SECURED PARTY" "HCI"
ELECTROPURE, INC. HYDRO COMPONENTS, INC.
By /S/ FLOYD H. PANNING By /S/ JOSEPH M. BERNATOWICZ
------------------------------ -----------------------------------------
Floyd H. Panning, President Joseph M. Bernatowicz, President and sole
shareholder of Hydro Components, Inc.
<PAGE> 16
EXHIBIT 10.53; PAGE 16
EXHIBIT "A"
TO SECURITY AGREEMENT
DESCRIPTION OF THE COLLATERAL
All rights, title and interest of HCI and/or Joseph M. Bernatowicz
relating to the ownership of the following property, whether now owned or
existing or hereafter acquired or arising and regardless of where located,
collectively referred to as the "Collaterial":
(1) All accounts (including accounts receivable), contract rights, letters
of credit, chattel paper, instruments, notes, documents, and documents
of title;
(2) All inventory;
(3) All moneys, securities, and other property of any kind;
(4) All deposit accounts, credits, and balances with any financial
institution;
(5) All books, records and other property relating to or referring to any of
the foregoing, including, without limitation, all books, records, ledger
cards, data processing records, computer software and other property and
general intangibles at any time evidencing or relating to any of the
foregoing; and
(6) All accessions to, substitutions for and replacements, products and
proceeds of any of the foregoing, including, but not limited to,
proceeds of any insurance policies, claims against third parties, and
condemnation or requisition payments with respect to all or any of the
foregoing.
<PAGE> 17
EXHIBIT 10.53; PAGE 17
UNLIMITED PERSONAL GUARANTY
(EXHIBIT "C" TO 8% SIXTY-DAY TERM NOTE)
Blue Bell, Pennsylvania February 17, 1998
FOR VALUABLE CONSIDERATION and to induce ELECTROPURE, INC., its
successors and assigns (hereinafter collectively referred to as "ELECTROPURE"),
at its option, to make a loan for the account of HYDRO COMPONENTS, INC.
(hereinafter referred to as the "Borrower" or "HCI"), the undersigned, and each
of them, jointly and severally with the Borrower, hereby unconditionally
guarantee(s) to Electropure that all loans hereinabove referred to, including
all other indebtedness of any kind which may be owning by the Borrower to
Electropure, now or hereafter and that any and all Instruments herein referred
to (whether heretofore or hereafter issued) in which Electropure may now or
hereafter hold any interest either as owner or as security, or otherwise, will
be promptly paid in full when due, whether at maturity or earlier by reason of
acceleration or otherwise, or if now due, when payment thereof shall be demanded
by Electropure, together with interest and any and all legal and other costs and
expenses paid or incurred in connection therewith by Electropure, and that in
case of one or more extensions of time of payment or renewals, in whole or in
part, of any such loans and other obligations, that the same will be promptly
paid when due according to each such extension or renewal, whether at maturity
or earlier by reason of acceleration or otherwise.
2. The undersigned hereby waives notice of acceptance of this guaranty,
and also of presentment, demand, protest and notice of dishonor for
non-acceptance or non-payment of any and all of said instruments, hereinbefore
referred to and likewise waives demand for payment and notice of non-payment of
any and all loans and other obligations hereinbefore referred to, and promptness
in commencing suit against any party hereto or liable thereon and/or in giving
any notice to or of making any claim or demand hereunder upon the undersigned.
This guaranty and all rights, obligations and liabilities arising hereunder
shall be construed according to the laws of the State of California.
3. The undersigned hereby consents and agrees that Electropure may at
any time, or from time to time in its discretion, (1) extend or change the time
of payment, and/or the manner, place or terms of payments of all or any such
Instruments, loans and other obligations, or any part or parts thereof, or of
any renewal or renewals thereof, (2) exchange, release, and/or surrender all or
any of the collateral security, or any part or parts thereof, (by whomsoever
deposited) which is now or may hereafter be held by Electropure in connection
with this guaranty, or in connection with any or all Instruments, loans and
other obligations hereinabove referred to, (3) in the event of default, sell
and/or purchase all or any part of such collateral at public or private or
notarial sale, or at any broker's board, and after deducting all costs and
expenses of every kind for collection, sale and delivery, the proceeds of such
sale or sales may be applied by Electropure upon any obligation or obligations
of the Borrower, payment of which is guaranteed by the undersigned or upon any
other debt or liability of the respective undersigned to Electropure, (4) settle
or compromise with the Borrower, and/or any other person or persons liable
thereon, any and all instruments, loans and other obligations, payment of which
is hereby guaranteed by the undersigned, and/or subordinate the payment of the
same or any part thereof to the payment of any other debt or claim which may at
any time be due or owing to Electropure and/or any other person or
<PAGE> 18
EXHIBIT 10.53; PAGE 18
corporation, all in such manner and upon such terms as Electropure may
determine, and without notice to or further assent from any of the undersigned,
who hereby agree to be and remain bound by this guaranty, irrespective of the
existence, value or conditions of any collateral, and notwithstanding any such
exchange, settlement, compromise, surrender, release, sale application, renewal
or extension.
4. The liability of the undersigned hereunder shall be unlimited. No
payment by the undersigned pursuant to any provision hereof shall entitle the
undersigned, by subrogation to the rights of Electropure or otherwise, to any
payment by the Borrower or out of the property of the Borrower, except after
payment in full of all sums (including interest, costs and expenses) which may
be or become payable by the Borrower to Electropure at any time or from time to
time. It being further understood that, until such time as all obligations of
the Borrower to Electropure have been paid in full, the undersigned agrees that
neither he, nor his respective executors, administrators, successors or assigns,
shall exercise any right to proceed against the Borrower under applicable law.
5. As security for the obligations of the undersigned hereunder, the
undersigned hereby pledges to Electropure and gives it a general lien upon
and/or right of set-off any assets and/or capital stock of Borrower held by the
undersigned, now or at any time hereafter existing.
6. No delay on the part of Electropure in exercising or enforcing any
rights or liens hereunder or in taking any action to collect or enforce any of
the indebtedness or other obligation hereby guaranteed, shall operate as waiver
of any such rights or liens or prejudice in any manner the rights of Electropure
hereunder, as against the undersigned.
7. In case of insolvency or bankruptcy in the affairs of the Borrower,
or of the undersigned, or in case a petition in bankruptcy or for the
appointment of a receiver should be filed in any court by or against the
Borrower or by or against the undersigned, or application should be made for the
attachment of any properties of any of them, all of the instruments, loans or
other obligations hereinbefore referred to shall be deemed for the purpose of
this guaranty immediately due and payable, and the responsibility of the
undersigned in this document shall be demandable, all without demand or notice.
8. This is a continuing guaranty and shall remain in full force and
effect until Electropure has, in fact, received notice in writing at its office
that the same has been revoked by the undersigned. This guaranty may not be
cancelled or revoked in any other manner, and it is expressly agreed that the
fact that no use if made of this guaranty for a period or various periods of
time shall not be construed as amounting to a revocation or cancellation
thereof. The revocation of this guaranty shall not release the undersigned from
any liability as to any Instruments, loans or other obligations hereinbefore
referred to which may be held by Electropure or in which Electropure may have
any interest at the time of the receipt of such notice. No act or omission of
any kind on the part of Electropure in the premises shall in any event affect or
impair this guaranty, nor shall the same be affected by any change which may
arise by reason of the death of any partner or partners of the undersigned, or
of the Borrower, or of the accession to any such partnership of one or more new
partners.
<PAGE> 19
EXHIBIT 10.53; PAGE 19
9. This guaranty shall be binding upon the undersigned, and his
respective heirs, administrators, successors and assigns, as soon as any loan is
made by Electropure, the undersigned hereby consenting and agreeing that the
loan which Electropure hereafter makes shall be deemed to be made by request of
the undersigned and in reliance upon this guaranty.
IN WITNESS WHEREOF, this instrument has been duly executed by the
undersigned on the day and date first above written.
/S/ JOSEPH M. BERNATOWICZ
----------------------------------------------
JOSEPH M. BERNATOWICZ
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-01-1997
<PERIOD-START> NOV-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 360,421
<SECURITIES> 0
<RECEIVABLES> 155,977
<ALLOWANCES> 85,528
<INVENTORY> 12,857
<CURRENT-ASSETS> 512,868
<PP&E> 18,407
<DEPRECIATION> 2,457
<TOTAL-ASSETS> 953,907
<CURRENT-LIABILITIES> 86,200
<BONDS> 0
0
26,000
<COMMON> 80,005
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 953,907
<SALES> 125,257
<TOTAL-REVENUES> 125,257
<CGS> 69,055
<TOTAL-COSTS> 192,964
<OTHER-EXPENSES> 97,217
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 615
<INCOME-PRETAX> (234,594)
<INCOME-TAX> 0
<INCOME-CONTINUING> (234,594)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (234,594)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
