<PAGE> 1
As Filed with the Securities and Exchange Commission on March 31, 2000
Registration Statement No. 33-41289
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
AMENDMENT NO. 2 to
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
--------------------------
ELECTROPURE, INC.
(Name of Small Business Issuer as specified in its charter)
CALIFORNIA
(State of Other 3589 33-0065212
Jurisdiction or (Primary Standard (IRS Employer
Incorporation Industrial Classification ID No.)
of Organization) Code Number)
23456 South Pointe, Laguna Hills, California 92653
(949) 770-9347
(Address and telephone number of principal executive offices)
--------------------------
FLOYD H. PANNING, President
ELECTROPURE, INC.
23456 South Pointe
Laguna Hills, California 92653
(949) 770-9347
(Name, address and telephone number of Agent for service of process)
--------------------------
Copies of communications to:
Ronald P. Givner, Esq.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM, LLP
300 South Grand Avenue, 34th Floor
Los Angeles, California 90071
(213) 687-5329
Approximate date of commencement of proposed sale to public:
As soon as practicable after the registration
statement becomes effective.
--------------------------
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE> 2
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed
Maximum Maximum
Offering Aggregate Amount of
Title of Each Class of Securities Amount to be Price Per Offering Registration
to be Registered Registered Share(1) Price Fee
- --------------------------------- ------------ ---------- ------------ -------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value ....... 7,547,459 $ 1.25 $ 9,434,324 $ 2,471.79
Previously paid ................ 2,743.02
------------
Amount Due .......................... None
</TABLE>
- ------------------------------------
(1) Based on the closing sale price as reported on the Electronic Bulletin Board
on March 28, 2000.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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P R O S P E C T U S
7,547,459 SHARES OF COMMON STOCK
ELECTROPURE, INC.
The selling stockholders described in this prospectus may offer and sell from
time to time up to 7,547,459 shares of Common Stock of Electropure, Inc.
Electropure, Inc. will not receive any proceeds from the sale of such shares of
Common Stock, but may receive proceeds upon the exercise of options and warrants
for such shares.
The selling stockholders may sell the Common Stock offered hereby from time to
time through the facilities of the Electronic Bulletin Board, through negotiated
transactions or otherwise at market prices prevailing at the time of the sale or
at negotiated prices.
The Common Stock is quoted on the Electronic Bulletin Board under the symbol
"ELTP." On March 28, 2000 the high and low bid prices of the Common Stock on the
Electronic Bulletin Board were $1.25 and $1.125 per share.
Investing in the Common Stock involves certain risks. See "Risk Factors"
beginning on Page 8.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus.
THE COMPANY
We have developed a point-of-use model of an electrodeionization ("EDI") water
purification system. The EDI system is aimed at the high purity water treatment
segment of the commercial (especially semiconductor, pharmaceutical, and
cosmetic companies), and industrial (pulp and paper, laboratories, and
petrochemical companies) water treatment markets. We believe that the EDI design
will give the same output capacity at one-third to one-fifth the cost of current
technologies. We also believe that the design allows for the ability to
"modularize" the technology's capacity to service installations up to 20 times
(or more) the size of current output levels (1/4 to 10 gallons per minute
[gpm]). Limited sales of this product began in 1997. In late 1999, we redesigned
the EDI module to improve its integration into water treatment systems. The new
EDI module, named "XL by Electropure," will be offered for sale beginning in
March, 2000.
On February 17, 1998, we acquired the rights to certain proprietary membrane
technology from Hydro Components, Inc., that we have successfully developed into
ion permeable membranes utilizing the acquired technology. We intend to
incorporate such membranes into our EDI product. These new ion permeable
membranes will allow us to offer more cost-sensitive models of our EDI product
to a broader range of users for a wider range of uses.
In October, 1997, we acquired an exclusive license to certain patent and
intellectual property rights involving laser light scattering techniques for use
in the detection and monitoring of toxicants in drinking water. We have
successfully developed near "real-time" monitoring systems as a result of our
research program. Our EDI product and this new technology are not intended to be
integrated into one product.
In May, 1998, our Hydro Components Division began offering a line of water and
wastewater treatment products for light commercial/industrial customers,
including optical lens manufacturers, pharmaceutical and biotechnical firms. We
also offer solvent-based coated membranes used in electrodeposition of paint.
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<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Securities Offered ...................... 7,547,459 shares of Common Stock.
Number of Shares of Common
Stock Outstanding ....................... 8,877,341 shares*, with one vote per share.
Number of Shares of Class B Common
Stock Outstanding ....................... 83,983 shares, with eight votes per share.
Number of Shares of Series B
Convertible Preferred Stock Outstanding. 1,000,000 shares, with four votes per share.
Number of Shares of Convertible
Preferred Stock Outstanding ............. 2,600,000 shares, with one vote per share.
Use of Proceeds ......................... Any proceeds received by the Company upon exercise of options
or warrants held by Selling Shareholders will be used for
working capital.
Electronic Bulletin Board Symbol ........ ELTP: Common Stock.
</TABLE>
RISK FACTORS
The securities offered hereby involve a high degree of risk, including limited
working capital, and possible dilution. There can be no assurance that we can
successfully manufacture and market its EDI water purification product or any
other proposed product or sell such products at prices that will result in net
income. Actual results of manufacturing, marketing and competitive conditions
and other factors may require significant modification of our future operations
from those planned operations described herein.
- ------------------------------
* Excludes 83,983 shares of Common Stock issuable upon conversion of Class B
Common Stock, 1,000,000 shares of Common Stock issuable upon conversion of
Series B Preferred Stock and 5,151,327 shares issuable upon exercise of
outstanding options or warrants. Also excludes 2,600,000 shares of Convertible
Preferred Stock that became redeemable by the Company as of January 31, 1991 for
$0.01 per share.
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SUMMARY FINANCIAL DATA
We began sales of our patented EDI product in September, 1997 and currently have
orders for additional products pending. We do not anticipate that we will
generate substantial revenues from the sale of these products until we can raise
sufficient working capital to expand our manufacturing operations. In
anticipation of such expansion, we relocated to our current, larger facilities
in February, 1998.
SUMMARY OPERATING STATEMENT DATA:
<TABLE>
<CAPTION>
Fiscal Year Three Months
Ended October 31, Ended January 31,
-------------------------------- --------------------------------
1999 1998 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales ............................... $ 695,565 $ 805,513 $ 224,570 $ 279,971
Cost of goods sold .................. 898,386 704,365 280,750 252,746
Gross profit (loss) ................. (202,821) 101,148 (56,180) 27,225
Net loss ............................ (1,958,644) (1,506,943) (432,532) (286,037)
Net loss per share, basic and diluted (0.23) (0.19) (0.06) (0.03)
</TABLE>
SUMMARY BALANCE SHEET:
<TABLE>
<CAPTION>
October 31, 1999 January 31, 2000
---------------- ----------------
<S> <C> <C>
Working capital ..................... $ 199,456 $ (193,268)
Total assets ........................ 1,415,285 1,303,651
Total current liabilities ........... 412,012 719,684
Accumulated deficit ................. (21,018,249) (21,450,781)
Stockholders' equity ................ 971,292 557,967
Stockholders' equity per common share 0.11 0.07
</TABLE>
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RECENT SIGNIFICANT DEVELOPMENTS
MICRO IMAGING TECHNOLOGIES
In July, 1999, we settled a lawsuit we filed against Wyatt Technology
Corporation for breach of the October, 1997 agreement that provided us with
exclusive rights to patented laser-based technology. Pursuant to the settlement,
we recovered 1.95 million of the 2.1 million shares of Common Stock issued to
Wyatt and retained the right to utilize the technology as developed through our
Phase 1 research program which was successfully concluded in April, 1998. Our
Micro Imaging Technologies Division has recently filed for a new patent
application on the method that we have developed since Phase 1 was completed to
identify microorganisms such as Cryptosporidium and Giardia. Subsequent research
efforts have demonstrated that the process can identify E.coli, salmonella and
listeria. Consequently, we believe that our Micro Imaging Technology may result
in commercial applications in the clinical laboratory and food processing
sectors
ANTHONY M. FRANK
Between December, 1999 and in February 10, 2000, Mr. Anthony M. Frank, a
majority shareholder, loaned us the principal sum of $400,000 at the rate of 10%
per annum. In March, 2000, the loans, plus $5,206 in interest accrued, were
converted into 405,206 shares of common stock and 202,603 three-year warrants to
purchase common stock at $2.00 per share. The warrants are redeemable by us at
$0.05 per warrant if the common stock equals or exceeds $4.00 per share for
thirty consecutive trading days. The securities were issued pursuant to a
private placement offering authorized in February, 2000.
In March, 2000, Mr. Frank purchased an additional 500,000 shares and 250,000
warrants of the private placement offering for the purchase price of $500,000.
STOCK ISSUANCES
Between September 21, 1999 and November 1, 1999, we issued 20,710 shares of
Common Stock upon the exercise of options and warrants. We received $3,071 in
net proceeds from such exercises.
In March, 2000, an additional 110,000 shares of common stock and 55,000
three-year warrants were issued pursuant to subscriptions to the private
placement offering by three individuals. We realized $110,000 in net proceeds
from these transactions.
In March, 2000, we issued 2,500 shares of common stock as partial payment for
public relations services to be rendered.
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WHOLLY-OWNED SUBSIDIARIES
In February, 2000 we filed the initial documents to form two Nevada corporations
which will be wholly-owned subsidiaries of Electropure, Inc. Micro Imaging
Technology was formed to conduct our research and development operations on
the detection and identification of fluid-borne microorganisms. Electropure EDI,
Inc. will conduct manufacturing and sales operations for our EDI line of
products.
LIMITED WORKING CAPITAL
As a result of the delays in bringing the EDI water purification product to
market, as well as delays in expanding production of the EDI product and the
various legal matters we encountered over the past several years, we have
limited working capital. We have sold our Common Stock and warrants to reduce
this working capital shortfall. We believe we have adequate sources of working
capital to support operations through approximately August 2000. However, we may
need additional financing prior to that time and we are currently seeking
investments through private placement offerings of securities. In addition, we
propose to seek additional financing through corporate borrowing, strategic
alliances and/or a public offering of securities through an underwriter. No
assurances can be given that we 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 us. Further, no assurances can be given that
any such equity financing will not result in a further dilution to the existing
shareholders.
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RISK FACTORS
An investment in the common stock involves a high degree of risk and should be
made only by investors who can afford the loss of their entire investment.
Prospective purchasers, prior to making an investment in the common stock,
should carefully consider, along with other matters referred to herein, the
following risk factors and should consult with their own legal, tax and
financial advisors with respect thereto.
This Prospectus contains forward-looking statements that involve risk and
uncertainties. Our actual results may differ materially from the results
discussed in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in "Risk Factors."
Prospective purchasers should carefully consider, among other factors, the
following:
1. STAGE OF DEVELOPMENT OF THE COMPANY. We have redesigned certain components of
our EDI product. In fiscal 2000 we plan to begin sales of the redesigned EDI
using membranes which we have developed utilizing the technology acquired from
Hydro Components, Inc. in February 1998. Although we believe that the redesigned
EDI product will enhance our ability to compete, no assurances can be given that
we can manufacture sufficient EDI products at an economical cost, or sell such
products at a net profit. Further, no assurances can be given that EDI products
or other products we offer will receive market acceptance. We are subject to all
the risks inherent in the establishment of a new enterprise and the marketing
and manufacturing of new products, any of which risks are beyond our control.
Further, with regard to the technology we recently acquired, they are also
subject to all the risks inherent in trying to adapt a technology for a new use.
No assurances can be given that we can successfully develop or market any such
products.
While units of the high purity point-of-use EDI product have been placed in
operation and have been operating efficiently for over two years, there is no
assurance that the redesigned EDI will be commercially viable. Actual results of
the development activities, manufacturing processes, technological developments,
market and competitive conditions, financial resources, results of operations
and other factors may require significant modifications to all or part of our
proposed business.
2. ACCUMULATED DEFICIT; OPERATING LOSSES; GOING CONCERN. From our inception in
1979 through January 31, 2000, we have accumulated a loss of $21,450,782 and a
net stockholders' equity of $557,967. The accumulated loss is principally due to
expenses incurred in the development of the EDI product, initial manufacturing
start-up costs, initial marketing efforts, administrative expenses and interest,
as well as the expenses associated with the research and development of the
laser-based monitoring technology acquired in 1997. The report of our
independent auditors for the fiscal year ended October 31, 1999 contains an
explanatory paragraph as to our ability to continue as a going concern. Our
financial statements have been prepared assuming that we will continue as a
going concern. As discussed in the notes to the financial statements, our
negative cash flows from operations raise substantial doubt about our ability to
continue as a going concern. Management's plans in regard to these matters are
also described in the notes and in "MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
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3. COMPETING PATENT CLAIMS DELAYING SALES; LIMITED PATENT PROTECTION. Delays
incurred in marketing our EDI product may have allowed other companies to
develop and commence production of similar products. Due to potential
competitive pressures, our ability to capitalize on the features of the EDI
product in the marketplace may be dependent on our ability to deliver products
in the near future. Besides Ionpure Technologies (now U.S. Filter), other
companies are believed to have developed or are developing products using
electrodeionization or similar technology.
We own a U.S. patent and limited foreign patents, with respect to certain
aspects of our technology for the EDI. The U.S. patent was granted in 1984 and,
subject to payment of certain maintenance fees, will expire in 2001. In the
absence of significant patent protection, competitors could legally imitate our
design approaches. We may not be able to afford the expenses required to enforce
any patent we may have now or in the future and no assurances can be given that
any patents would be upheld if challenged, or if upheld, would provide us with
meaningful protection. We believe that the patent for the EDI and our technical
know-how may be significant in our ability to compete.
4. NECESSITY FOR ADDITIONAL FINANCING. From time to time we have experienced and
continue to experience working capital shortfalls that slowed the development of
the EDI product. We will be required to raise substantial amounts of new
financing, in the form of additional equity investments or loan financing, to
carry out our business objectives. There can be no assurance that we will be
able to obtain such additional financing on terms that are acceptable to us and
at the time we require, or at all. Further, any such financing may cause
dilution of the interests of our current shareholders. If we are unable to
obtain such additional equity or loan financing, our financial condition and
results of operations will be materially adversely affected. Moreover, our
estimates of cash requirements to carry out our current business objectives are
based upon certain assumptions, including certain assumptions as to 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 us and our plans. If we
are not successful in obtaining loans or equity financing for future
developments, it is unlikely that we will have sufficient cash to continue to
conduct operations as currently planned. We believe that to raise needed
capital, we may be required to issue debt or equity securities that are
significantly lower than the current market price of our common stock.
In the opinion of management, available funds will satisfy our working capital
requirements through August, 2000. However, no assurances can be given that such
proceeds will satisfy our working capital needs for the period estimated, or;
that we 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 us. 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 us.
5. PRIOR AND POSSIBLE FUTURE DELAYS IN DEVELOPING THE EDI TECHNOLOGY. The
original concept for the EDI technology was a point-of-entry system to treat the
entire house or facility. However, inherent difficulties in developing this
model due to pre-treatment requirements and high production costs, led to the
development of a smaller, point-of-use model of the EDI
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technology aimed at the high purity water treatment segment of the commercial
and industrial water treatment markets. Further, at times we have been forced to
significantly reduce operations or suspend sales activities due to limited
resources or patent disputes. While we have resolved the patent disputes,
limited resources could again delay the development and marketing of products.
Further, delays can occur in the development or improvement of potential
products. Therefore, no assurances can be given as to when we will have the
resources to fully market the current EDI technology or any other product.
6. RISK OF NEW PRODUCT AND TECHNOLOGY; PRODUCT LIABILITY. The proposed
manufacturing and marketing of the EDI product, incorporating relatively new and
unproved membrane technology, has inherent risks. No one can be sure how the
products will operate over time under various conditions of actual use. Only a
limited number of the EDI products have been placed in operation since 1991,
with the majority of EDI products placed in operation since August, 1997. We
have successfully built and tested in-house, without independent verification,
several prototypes of the redesigned EDI product utilizing new membranes
developed from the Hydro Components technology.
Even if the product is successfully manufactured and marketed, the occurrence of
warranty or product liability, or retraction of market acceptance due to product
failure or failure of the product to meet expectations could prevent us from
ever becoming profitable. Failure of the product to operate as expected could
lead to potential product liability suits. Development of new technologies for
manufacture is frequently subject to unforeseen expenses, difficulties and
complications and in some cases such development cannot be accomplished. Ionpure
and its licensor have significantly greater marketing and financial resources
than us.
In the opinion of management, the new EDI demonstrates positive attributes, but
any such attributes of the EDI product must be balanced against the lack of any
significant field operating experience of such product, the existence of
established companies in the water purification field with greater financial
resources, experience and developed products, the fact that the new EDI product
has not been tested on a wide variety of water conditions, including hard water
and unknown technological difficulties.
The same risks, as well as many of the risks set forth in the other Risk Factors
discussed below, do or will also apply to the development of the Micro Imaging
Technology for use in detecting dangerous items in water. Further, since the
Micro Imaging Technology has not yet been adapted for its intended use, there is
a risk that such technology cannot be adapted as contemplated. Further, even if
we successfully adapt such technology as intended, there can be no assurances
that the developed product will be commercially viable.
7. STATUS OF THE ELECTROPURE "EDI". In late 1990, we developed the point-of-use
module of the EDI, aimed at the high purity water treatment market, which is
able to desalt 1/4 - 10 gallons of water per minute of pre-treated tap water to
a purity level exceeding one-megohm-cm (roughly less than 0.5 parts per million
("ppm") of total dissolved solids ("TDS"). We believe that this model, which has
been sold in limited quantities, is significant in its ability to compete in
terms of capital cost and product efficiency. In mid-2000, we plan to begin the
manufacture and sale of a redesigned model of the EDI utilizing membranes
developed using the technology acquired from Hydro Components Inc. ("HCI") at a
more competitive cost. Additional models of the EDI which will
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provide higher flow rates are contemplated for development. Additional models of
the EDI, for applications other than high purity water treatment, may also
result from the development of the HCI membrane technology.
No assurances can be given that the EDI will not need additional development
work or require further modifications that may require re-engineering of parts
and additional delays in mass marketing of the product. Further, no assurances
can be given that we will successfully develop additional models of the EDI
product.
We acquired the right to use the Micro Imaging Technology in water monitoring
and successfully completed the first phase of trying to adapt the technology for
such use. Additional research and development is currently being conducted on
such technology.
8. UNCERTAINTY OF MARKET ACCEPTANCE. While we believe that our EDI product
should offer advantages over traditional water purification methods and
indications of interest from potential customers is evident, there is no
assurance that the product will attain significant market acceptance and
generate adequate revenues. Generally, market acceptance of a new technology
requires substantial efforts to inform potential customers of the new
technology's distinctive characteristics. This effort will be crucial in
marketing the EDI product. We will seek to have potential purchasers invest in
the EDI product instead of currently available equipment or to treat water that
is currently not being treated. While we believe that the redesigned EDI product
will be able to be sold at a lower capital cost per gallon of water treated and
will have lower operating and maintenance costs than existing competitive
products, we have not yet demonstrated that cost savings from frequent use over
an extended time period in actual production models. We have also not
demonstrated that the EDI product can justify this capital cost or that the
demand for high purity water equipment is sufficient to justify the cost. The
price of the product is a critical factor in marketing. We believe that the
redesigned EDI product will positively address this price factor.
Similar risks will apply to the use of any product which may be developed using
the Micro Imaging Technology.
9. GOVERNMENT REGULATIONS AND CERTIFICATION. Requirements of a California law
provide that water treatment devices which are sold for residential use be
certified by the State Department of Health Services, or approved certification
facility, if claims are made that the device will remove or reduce a contaminant
for which a primary drinking water standard has been established. In addition,
California law makes it illegal to make any false claims in connection with the
sale of any water treatment product. Other states have similar laws.
We believe that the EDI ultrapure technology, which is not intended for drinking
water applications, is not subject to these regulations. However, if we offer
industrial applications of the EDI point-of-use technology, i.e., hospitals,
such products will require approval by Underwriter's Laboratory or equivalent
organization. We will seek all necessary approvals or certifications.
10. LARGER AND BETTER FINANCED COMPETITORS. There are many firms in the water
purification and related industries, substantially all with financial resources,
experience and technical staffs larger than ours. Large competitors include U.S.
Filter and GE Power Systems. Several firms have successfully developed products
that meet some or most of the needs intended to be met by the
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EDI and have established strong market positions in these areas. These
competitors may respond vigorously to any threat to their established market
shares. In addition, other companies may be developing or planning the
development of devices competitive with our current product.
11. CONTINUED TECHNOLOGICAL CHANGE. The technology upon which the EDI water
purification product relies may undergo rapid development and change. There can
be no assurance that the technology utilized by us will be competitive in light
of possible future technological developments. Further, we cannot assure that
our technology will not become obsolete or that we will have adequate funds to
meet technological changes.
12. NEED FOR ADDITIONAL EMPLOYEES AND FACILITIES. We relocated our operations to
a 30,201 sq. ft. facility in Laguna Hills, California in March 1998. Management
estimates that the current facility will be adequate to conduct needed
manufacturing activities. Our current employees are sufficient to conduct the
manufacturing and administrative functions required at the present time.
However, additional employees will be required once manufacturing operations
increase and if we are successful in developing a product utilizing the Micro
Imaging Technology. No assurance can be given that we can obtain such employees
when required.
13. REQUIRED ROYALTIES. The total royalties granted per EDI sold is
approximately $42.00, plus approximately $9.00 (until such additional $9.00 of
royalties paid equals approximately $525,600 of royalties) for each
point-of-entry EDI sold. Royalties for the point-of-use EDI are expected to be
approximately 2.05% of net sales. Mr. Harry O'Hare, the founder of the Company,
does not hold any royalties in the EDI but does have certain royalty rights in
connection with two products he sold to the Company in 1987. Royalties of from
1% to 1-1/2% are payable on certain other EDI products. There can be no
assurances that our profitability will not be adversely affected by such royalty
payments. As of the fiscal year ended October 31, 1999, we had accrued $8,190 in
royalties due pursuant to the above arrangements.
14. FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS. Our revenues in the next
several years may be uneven depending on the timing and sales of products or the
potential licensing of technology. The timing of such events, if they occur,
could have a significant effect on results of operations. The results of one
quarter of operations are not necessarily indicative of results of operations
for any subsequent quarters.
15. CONTROL OF THE COMPANY. As of March 28, 2000 Anthony M. Frank, Harry M.
O'Hare, Sr. and the current officers and directors of the Company owned
approximately 43.1%, 7.5%, and 7.6% of the voting power of the Company,
respectively. As a result, these individuals, if they agreed to act in concert,
are in a position to materially influence, if not control, the outcome of all
matters requiring shareholder approval, including the election of directors.
16. DEPENDENCE ON MANAGEMENT. We are significantly dependent upon the continued
availability of Floyd H. Panning, our President and Chief Executive Officer. The
loss or unavailability of Mr. Panning for an extended period of time could have
a material adverse effect on our business operations and prospects. To the
extent that his services are unavailable for any reason, we will be required to
procure other management and operating personnel. There can be no assurance that
we will be able to locate or employ such qualified personnel on acceptable
terms. We
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have entered into an employment agreement with Mr. Panning. However, we do not
maintain key employee insurance on Mr. Panning or on any other employee of the
Company.
17. POSSIBLE VOLATILITY OF COMMON STOCK PRICE. The trading prices of the common
stock may respond to variations in operating results and other events or
factors, including, but not limited to, the sale or attempted sale of a large
amount of the common stock into the market, as could occur from sales by the
Selling Shareholders. In addition, the stock market has experienced price and
volume fluctuations in recent years, particularly in the securities of smaller
companies. These fluctuations have had a substantial effect on the market prices
of many companies, often unrelated to the operating performance of the specific
companies, and similar events in the future may adversely affect the market
prices of the common stock.
18. RISK OF LOW PRICED STOCKS; INABILITY TO MEET NASDAQ LISTING REQUIREMENTS.
The common stock is currently traded in the over-the-counter market and is
listed on the Electronic Bulletin Board under the symbol "ELTP."
Our common stock is currently defined as a "penny stock." Unless exempt, for any
transaction involving a penny stock, the broker/dealer must deliver, prior to
any transaction, a disclosure schedule prepared by the Securities and Exchange
Commission explaining important concepts involving:
- the penny stock market,
- the nature of such market,
- the terms used in such market,
- the broker/dealer's duties to the customer,
- a toll-free telephone number for inquiries about the broker/dealer's
disciplinary history, and
- the customer's rights and remedies in cause of fraud or abuse in the
sale.
Disclosure also has to be made about commissions payable to both the
broker/dealer and the registered representative and current quotations for the
securities. In addition, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Non-NASDAQ stocks are not covered by the
definition of penny stock for (i) issuers who have $2,000,000 in tangible
assets, we do not meet this criteria, (ii) transaction in which the customer is
an institutional accredited investor and (iii) transactions that are not
recommended by the broker/dealer.
For penny stocks, there are additional sales practice requirements on
broker-dealers who recommend such securities to persons other than established
customers and accredited investors (generally institutions with assets in excess
of $5,000,000 or individuals with net worth in excess of $1,000,000 or annual
income exceeding $200,000 or $300,000 jointly with their spouse). For such
transactions, the broker-dealer must make a special written suitability
determination for the purchaser and receive the purchaser's written agreement to
the transaction prior to sale. Securities are also exempt from such requirements
if the market price is over $5.00 per share or, for warrants, they must be
exercisable for more than $5.00.
As a result of the above requirements, trading in the common stock, which
currently is a penny stock, may be severely limited and holders may experience
difficulties in selling such securities, the market
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<PAGE> 15
price for the securities may be less than they may otherwise be, news coverage
regarding us may be more limited and we may find obtaining new financing to be
more difficult. Such reduced liquidity could result in a material adverse impact
on the value of such securities. Currently, only a sporadic market exists for
the common stock.
NASDAQ has recently significantly increased the requirements for initial and
continued listing on the NASDAQ Small Cap Market and National Market. It is
unlikely that the Company, in the near future, will be able to meet even the
initial listing requirements for the Small Cap Market. The recently announced
proposed changes to listing on the Electronic Bulletin Board will not effect the
Company, but would require brokers to deliver an explanation of the differences
between the Electronic Bulletin Board and NASDAQ.
19. LARGE NUMBER OF EXISTING WARRANTS AND OPTIONS. Currently, there are
5,151,327 warrants and options outstanding, exercisable at prices ranging from
$0.28 to $15.00 per share and expiring through August, 2009. For the term of
such options and warrants, the holders thereof will have an opportunity to
profit from the rise in the market price of the common stock without assuming
the risks of ownership. The existence of all of these options and warrants may
have an adverse effect on the terms upon which we may be able to obtain
additional capital. Furthermore, it might be expected that the holders of all of
such options and warrants would exercise their options at a time when we could
obtain equity capital on terms more favorable than those provided for by the
options and warrants.
20. NO DIVIDENDS. We have not paid cash dividends on the common stock and do not
anticipate paying any cash dividends for the foreseeable future.
DIVIDEND POLICY
We have not paid any dividends on the common stock since incorporation. We
anticipate 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:
- - 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
- - 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.
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USE OF PROCEEDS
We will not receive any proceeds upon the sale of any shares of common stock by
the Selling Shareholders, but will receive funds upon the exercise of options or
warrants held by the Selling Shareholders. Any such proceeds will be used to pay
the estimated expenses of this offering (approximately $20,000) and for working
capital, including, salaries, rent, overhead, marketing, production and costs
associated with our research and development programs.
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<PAGE> 17
MARKET PRICES
Our 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 common stock, as reported on the Bulletin Board
or "pink sheets," for the quarters that the securities were traded. The
quotations reflect inter-dealer prices, without retail mark-up or mark-down or
commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
COMMON STOCK
BID PRICES
----------------------
HIGH LOW
----- ---
<S> <C> <C> <C>
FISCAL 1998 First Quarter 2-1/8 1/2
Second Quarter 3-3/4 7/8
Third Quarter 3 1-3/8
Fourth Quarter 1-3/4 13/16
FISCAL 1999 First Quarter 1-1/2 1/2
Second Quarter 1-6/16 1
Third Quarter 1-3/16 1/2
Fourth Quarter 13/16 11/16
FISCAL 2000 First Quarter 7/8 11/16
Second Quarter (through March 28, 2000) 1-25/32 15/32
</TABLE>
The market for the common stock is sporadic and quoted prices may not represent
the true value of such securities.
As of March 28, 2000 the Company had approximately 760 holders of record of its
common stock.
MANAGEMENTS' DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FISCAL YEARS ENDED OCTOBER 31, 1998 AND 1999
Sales decreased for the fiscal year ended October 31, 1999 by $109,948 as
compared to fiscal 1998 primarily due to several factors: (a) the current
economic downturn in Japan and Europe accounted for an approximate 10% reduction
in sales; (b) we lowered the selling price to be more cost competitive during
the latter part of fiscal 1999, and (c) marketing efforts to sell the EDI
products were reduced during the latter part of the fiscal year as design
changes for such products were being completed. We anticipate EDI sales to
recover and increase in fiscal year 2000 once the EDI design modifications have
been completed and marketing activities increased.
Cost of goods sold increased during the fiscal year ended October 31, 1999 by
$194,021 as compared to fiscal 1998 due to an increase of manufacturing
overhead and the write-off of obsolete inventory during the current fiscal year.
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<PAGE> 18
Research and development expenses for fiscal 1999 increased by $205,787 compared
to fiscal 1998 due to an increase in salaries and pursuant to the allocation of
overhead expenses to the program which we initiated in December 1997 to develop
the Micro Imaging Technology acquired from Wyatt Technology Corporation in late
October 1997. In addition, approximately $60,000 was expended on research and
development of our ion permeable membranes and a power supply being developed by
Mr. Heidmann for the EDI product. No such development activities occurred during
fiscal 1998.
General and administrative expenses for fiscal 1999 increased compared to fiscal
1998 by $305,071, the primary component of which resulted from increased
expenses relating to outside consultants, legal and accounting fees, and the
issuance of a $67,127 bonus to Hydro Components upon the successful development
of our new EDI membranes. In addition, during fiscal 1999, we realized $78,000
in income on the sub-lease of approximately 10,000 square feet of the facility
which we currently lease. We will continue to sub-lease such premises until we
require the use of the area involved.
Interest income and expense activity is reflected as a net figure and represents
a decrease of $408,706 in interest expense for the fiscal year ended 1999 as
compared to the prior year. Interest income for fiscal 1999, in the sum of
$14,252, arose from short-term investments. The primary component of interest
expense in fiscal 1998 was a $400,175 expense realized pursuant to the issuance
of convertible debt of $400,000 in loans by a principal shareholder.
We realized a net loss of $1,958,644 for fiscal 1999, representing an increase
of $451,701 from the prior year level. The increase was primarily due to a
reduction in sales, the bonus issued to Hydro Components and increases in
salaries, consulting fees, legal and accounting expenses.
THREE MONTHS ENDED JANUARY 31,1999 AND 2000
References to 1999 and 2000 are for the three months ended January 31, 1999 and
2000, respectively.
Sales decreased in fiscal 2000 by $55,401 as compared to fiscal 1999 primarily
due to several factors: (a) the current economic downturn in Japan and Europe
accounted for an approximate 10% reduction in sales; (b) we lowered the EDI
selling price to be more cost competitive during the latter part of fiscal 1999
and; (c) marketing efforts to sell EDI products were reduced during the latter
part of the fiscal year as design changes for such products were being
completed. We anticipate EDI sales to recover and increase through fiscal year
2000 since the EDI design modifications have been completed and marketing
activities have been increased.
Costs of goods sold for fiscal 2000 increased by $28,004 as compared to 1999
although sales for the comparative period decreased. The increase relates,
primarily, to the allocation to cost of goods sold of depreciation expense on
new manufacturing equipment placed in service in the first quarter of fiscal
2000.
Research and development expenses for fiscal 2000 decreased by $66,655 compared
to fiscal 1999. These expenses arise from the program which we initiated in
December 1997 to develop the micro imaging technology acquired from Wyatt
Technology Corporation in late October 1997. The
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<PAGE> 19
decrease primarily results from a reduction in equipment expenditures and
consulting expenses related to the program as well as a reduction in
amortization expense relating to proprietary technology which was fully
amortized as of the fiscal year ended October 31, 1999.
General and administrative expenses for fiscal 2000 increased by $131,855 as
compared to fiscal 1999. The increase results primarily from the addition of
manufacturing and research and development personnel, causing an increase of
$83,693 in salaries; an increase of $72,899 in operating expenses such as in
legal and accounting fees and rent expense. These increases were partially
offset by a $24,737 decrease in consulting expenses in fiscal 2000.
Interest income arose from short-term investments and increased by $5,634 for
the fiscal period ended January 31, 2000 as compared to the prior year period.
Interest expense for fiscal 2000 was $3,524, with no comparable activity during
the prior period. Interest expense arises, primarily, from equipment and
automobile financing activities as well as loans made to us during the current
period.
We realized a net loss before income taxes of $432,532 for fiscal 2000,
representing an increase of $146,495 from the prior year level. The increase was
primarily due, as noted above, to increases in operating expenses and costs of
goods sold and a decrease in gross sales.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1999, we had net working capital (total current assets less total
current liabilities) of $199,456, representing a decrease of $85,501 from the
prior year end. We accrued $168,755 pursuant to the prepayment by a customer for
EDI products to be delivered at a later date. We delivered products totaling
$105,300 in the first quarter of fiscal 2000 and expect to deliver the balance
of such products under this arrangement in the second quarter.
We funded our working capital and other cash needs during fiscal 1998 from the
sale of securities. We received net proceeds of $550,000 pursuant to a private
placement offering whereby we issued 278,363 shares of common stock and 137,500
three-year warrants to purchase common stock. We received an additional $155,928
on the exercise of warrants to purchase common stock pursuant to a private
offering to temporarily reduce, to $1.00, the exercise prices of such warrants
originally granted at prices ranging from $2.00 to $15.00. Finally, we received
notes in the amount of $6,000 and $29,750 on the exercise of 12,000 and 25,000
warrants during fiscal 1998.
During fiscal 1999, we funded our working capital requirements by acquiring
$1,020,000 from the private placement issuance of 1,020,000 shares of common
stock and 510,000 three-year warrants to purchase common stock at $2.00 per
share. We also received an additional $1,250 in cash upon the exercise of 2,500
options to purchase common stock.
On January 15, 1999, we received $1 million in net proceeds upon the sale to
Anthony M. Frank of one million shares of Series B Convertible Preferred Shares.
See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" - Mr. Anthony Frank."
We began selling our EDI products during the latter part of fiscal 1997 and
initiated sales of its Hydro Components line of products in May 1998. We
experienced a small gross profit of $93,265 and $16,016 on sales of its Hydro
Components products in fiscal years 1998 and 1999, respectively.
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<PAGE> 20
Sales of EDI products were adversely effected by economic factors in Europe and
Japan and sales efforts were reduced during the latter part of fiscal year 1999.
We experienced a loss of $218,837 in fiscal 1999 as compared to a gross profit
of $7,883 for the prior year period. We curtailed marketing activity on the EDI
product while modifications could be effected to the EDI design and the ion
permeable membrane derived from the Hydro Components acquisition could be
developed. Sales of the EDI product are expected to increase in fiscal 2000
since the new EDI module design has been completed and now incorporates the more
cost-effective ion permeable membranes we have developed. No assurances can be
given that we can successfully produce or market the new EDI product.
At January 31, 2000, we had working capital deficit (total current assets less
total current liabilities) of $196,371. The decrease in working capital,
compared to that reported at October 31, 1999, reflects diminished EDI sales
activities during our redesign of the product and an increase in liabilities
resulting from short term loans.
Our primary sources of working capital have been from short term loans and from
the sale of securities. In February 2000, we began a private placement offering
of securities to generate up to $1.5 million in equity financing. As of March 9,
2000, the Company had received $1.1 million in subscriptions to the offering, of
which $400,000 represented the conversion of principal loans we had received as
of that date. The private placement offering is scheduled to expire on May 23,
2000.
During the latter part of fiscal year 1999, we curtailed our marketing activity
on the EDI product while modifications could be effected to the EDI design and
the ion permeable membrane derived from the Hydro Components acquisition could
be developed. Sales of the EDI product are expected to increase through fiscal
2000 since the new EDI module design has been completed and now incorporates the
more cost-effective ion permeable membranes we have developed.
PLAN OF OPERATION
In the opinion of management, available funds and funds to be realized from the
private placement subscriptions discussed above will satisfy our working capital
requirements through August 2000. We intend to fund our working capital
requirements by focusing on selling our EDI product. In addition, we have taken
the initial steps to form two Nevada corporations which will be wholly-owned
subsidiaries of Electropure. Micro Imaging Technology was formed in February
2000 and will conduct our research and development operations on the detection
and identification of fluid-borne microorganisms. We formed Electropure EDI,
Inc. in February 2000 to conduct manufacturing and sales operation for our EDI
line of products. We are seeking to establish strategic alliances with potential
joint venture partners for these subsidiaries and/or for specific products under
development or now being produced by Electropure. We have had preliminary
discussions with potential strategic partners regarding our EDI product,
membrane technology, and with regard to our micro imaging technology. We believe
that, if necessary, we will be able to raise additional working capital by the
private sale of our securities.
No assurances can be given that currently available funds will satisfy our
working capital needs for the period estimated, or that we 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 us.
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<PAGE> 21
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 us.
We will be required to raise substantial amounts of new financing, in the form
of additional equity investments, loan financing, or from strategic
partnerships, to carry out our business objectives. There can be no assurance
that we will be able to obtain such additional financing on terms that are
acceptable to us and at the time required by us, or at all. Further, any such
financing may cause dilution of the interests of our current shareholders. If we
are unable to obtain such additional equity or loan financing, our financial
condition and results of operations will be materially adversely affected.
Moreover, estimates of our cash requirements to carry out our current business
objectives are based upon certain assumptions, including certain assumptions as
to our 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 us and
our plans. If we are not successful in obtaining loans or equity financing for
future developments, it is unlikely that we will have sufficient cash to
continue to conduct operations, particularly research and development programs,
as currently planned. We believe that in order to raise needed capital, we may
be required to issue debt at higher interest rates or equity securities at
prices that are significantly lower than the current market price of our common
stock.
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BUSINESS
We manufacture and market the "EDI" series of patented electrodeionization water
treatment devices for commercial and industrial high purity water applications.
The EDI product is marketed to original equipment manufacturers, also known as
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 power generation
companies, as well as laboratories and petrochemical companies.
The current EDI design is able to desalt pre-treated tap water, filtered and
generally softened by reverse osmosis, to a purity level exceeding ten megohm-cm
(roughly less than 0.2 parts per million ("ppm") of total dissolved solids) at a
rate of up to 10 gallons per minute on demand. Modularized designs, which allows
for the connection of 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 chemicals (acids and bases) for resin
regeneration. Most other competitive processes require the addition of these
elements.
We also began sales of light commercial/industrial water and waste water
treatment equipment in May 1998. Included in the product line, known as the
Hydro Components line of products, are high quality sanitary heat exchangers,
sample coolers for sterile steam and water, ion exchange filter cartridges, and
ion exchange membranes for electrodialysis, electrodeposition, and
electrochemical separations.
In February 1998, we acquired the rights to certain proprietary membrane
technology from Hydro Components, Inc. See "BUSINESS - Acquisition of
Intellectual Properties - Ion Exchange Membrane Technology." We then began a
research project utilizing the acquired technology to develop ion permeable
membranes for use with the EDI product. We have successfully developed membranes
which will allow us to offer more cost-sensitive models of the EDI product to a
broader range of users for a wider range of uses.
In October 1997, we 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 provides the basis for our proposed development of near "real-time"
drinking water monitoring systems. This technology and the EDI technology are
not intended to be integrated into one product. See "BUSINESS - Acquisition of
Intellectual Property - Micro Imaging Technology" and "BUSINESS - Micro Imaging
Technologies Division."
We were incorporated in December, 1979 in California under the name HOH Water
Technology Corporation and changed our name to Electropure, Inc. in 1996. Our
address and telephone number is: 23456 South Pointe Drive, Laguna Hills,
California 92653, (949) 770-9347.
THE MARKET FOR WATER PURIFICATION
Water is essential to life and potable water, that which is fit for human
consumption, is a necessity for which a market will always exist. Growing
population has increased demand for potable water just as the waste and
pollution created by the enlarging population has reduced nature's ability to
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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 that interfere with the intended use. In fact,
examination of municipal water use reveals that less than one percent of the
water is actually used for human consumption, the remainder being 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
Environmental Protection Agency ("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 then 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 three largest markets for ultrapure water, wherein the
EDI product finds it market, are power generation, semiconductor and
pharmaceutical industries. According to the Journal of Ultrapure Water, the
total capital to be spent for ultrapure water in the year 2000 is approximately
$2.5 billion, with almost $2.2 billion being spent by these three segments.
The market is currently growing at a steady annual rate and, given the general
deterioration of the world's water supplies, this growth is likely to continue
and expand as the cost of treatment falls. Advanced manufacturing technologies
and the tremendous expansion seen in electronics, pharmaceuticals and bio-tech
firms in the last decade alone, have been the precursors of an increased need
for high purity process water and for water purification equipment. The industry
is in a major growth cycle and there are about 40 major companies in the world
active in supplying goods and services with an estimated 13,500 customers in the
United States.
CURRENT TECHNOLOGIES IN WATER PURIFICATION
Water purification is a relative term referring to removing selected, but not
all, of a limited number of contaminants depending on the expected use to be
made of the water. There are three general types of water purification
processes:
1. Physical processes which depend simply on physical properties of the
impurities, such as particle size, specific gravity and viscosity.
Examples of this type of process are reverse osmosis, distillation,
screening, sedimentation, filtration and gas transfer.
2. Chemical processes which depend on the chemical properties of an
impurity or utilize the chemical properties of added reagents. Examples
are ion exchange, electrodialysis, chlorination, coagulation and
precipitation.
3. Biological processes which utilize biochemical reactions to remove
soluble or colloidal organic impurities. Examples are biological
filtration and the activated sludge process.
THE EDI TECHNOLOGY
The need to satisfy the increasing demand for high purity water in a variety of
industries can now be
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achieved through our patented electrodeionization process. 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 that 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
microelectronics 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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We have recently redesigned the EDI module, now called "XL by Electropure", to
improve integration into water treatment systems with all water connections on
the module face and all electrical connections on the rear of the module. The
EDI module is 9" wide and 22" high and ranges in depth from 6" to 14" for flow
rates ranging from 1/4 gallons per minute (gpm) to 10 gpm, respectively. The
product has no moving parts and is capable of continuously producing ultrapure
water. The module is marketed to original equipment manufacturers of water
treatment equipment for incorporation into a water supply 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, to a drain line and to an electrical
source. A singular module 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 multi-gallons per minute of
multi-megohm quality water. Larger systems, which produce 25 - 200 gpm, would be
marketed to medium scale users. We plan to design a higher capacity version of
the EDI module that will be intended to provide volumes of high purity water at
15 gpm or more from a single module. We believe that this model, if it can be
developed, will become the primary product line for desired high purity flow
rates in the 25-200 gpm market segment.
XL-500 MODULE
[GRAPHIC]
(6 to 10 GPM Flow Rate)
We believe that the major advantage of the EDI technology over systems utilizing
ion exchange resins only is the efficient recharging of the resins without the
extensive use of caustic and acid chemicals which add excessive contamination
and cost to the system's waste water. We believe 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.
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:
- lower maintenance since nothing is consumed except small amounts of
electricity. If at
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all necessary, chemicals are added less frequently than existing
equipment.
- large flow rate relative to its size, as compared to conventional
systems that purport to treat the same flow rates.
Our belief as to the expected advantages of the EDI technology is based upon our
experience with prototypes, pilot production units, products sold by our former
licensee, and the approximately 150 EDI products sold through October 31, 1999.
The EDI technology incorporates a number of design improvements to the original
EDI patent. We intend to conduct continued product development on the EDI
technology, with an eye toward improving the technology while reducing
manufacturing costs, and allowing us to expand our market reach.
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.
Similar risks will apply to the use of any product which may be developed using
the Micro Imaging technology and the ion permeable membrane which has been
developed using the Hydro Components technology and is now being incorporated
into the EDI module.
THE HYDRO COMPONENTS LINE
We began offering for sale our Hydro Components line of products in May 1998.
The Hydro Components line includes water and wastewater treatment products for
light commercial/industrial markets such as optical lens manufacturers; sterile
steam samplers for pharmaceutical and biotechnical firms; industrial steam
samplers for power plants, pulp and paper mills and refineries; and high-flow
deionizers sold through catalog houses for humidification, rinse water, cooling
water and small laboratories. The Hydro Components line also offers
solvent-based coated membranes which are sold to OEM's of stabilizing equipment
for electrodeposition automotive and appliance painting.
MARKETING
The EDI module was developed for the ultrapure light industrial segment of the
water treatment market, i.e., pharmaceuticals, electronics, medical and research
laboratories. We sell these products through manufacturers of commercial water
treatment equipment in the United States and in foreign countries. We have
patents for its EDI technology in the following foreign countries: Austria,
Belgium, France, Great Britain, Luxembourg, Switzerland and Germany.
ULTRAPURE MARKET. We believe 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-
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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 10 gallons per minute (and higher volumes in
parallel formations), which is generally ample for the needs of the OEM's
marketing to these various end users. This model and the proposed larger scale
version of the EDI will access a water system capital equipment market segment
of $2.2 billion of which $200 million is immediately accessible.
Our 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. We have initiated this marketing strategy both in the
U.S. market and overseas, but have no current intentions of entering into formal
supply agreements with any such potential customers.
GOVERNMENT REGULATION
A California law provides that water treatment devices that are sold for
residential use be certified by the State Department of Health Services, or
approved certification facility, if claims are made that the device will remove
or reduce a contaminant for which a primary drinking water standard has been
established. In addition, California law makes it illegal to make any false
claims in connection with the sale of any water treatment product. Other states
have similar laws.
We believe that the EDI ultrapure technology, which is not intended for drinking
water applications, is not subject to the above laws. However, if we offer
industrial applications of the EDI point-of-use technology, i.e., hospitals,
such products will require approval by Underwriter's Laboratory or equivalent
organization. We will seek all necessary approvals or certifications.
PRODUCTION METHODS
EDI TECHNOLOGY - The EDI module is composed of various components. All
internal parts are made of engineered thermoplastics, except the membranes,
electrodes and electronics. We have previously purchased certain tooling and
molds required for component plastic parts and contracts for the production of
the plastic parts and electrodes for the EDI product. The membranes utilized in
the EDI product were purchased from outside sources until we recently began
manufacturing membranes based on the technology acquired from Hydro Components.
No assurances can be given that the membrane that we have recently developed
will prove to be efficient for long term use with the EDI product. All final
assembly is completed at our Laguna Hills, California manufacturing facility.
Production and assembly functions have been designed with the flexibility to
produce customized variations of the EDI for specialized usage.
HYDRO COMPONENTS LINE - Except for the membranes offered by us, the
Hydro Components line of products consists of component parts purchased from
unaffiliated third party suppliers or sub-contractors and assembled by us into
the finished product. The membranes sold under the Hydro Components line (which
are not the ion permeable membranes utilized in the EDI product) are specially
treated by us and currently are fabricated by an outside source.
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<PAGE> 28
WARRANTY
We offer a one year limited parts and labor warranty for the EDI module and may,
in the future, contract with others to provide warranty service. However, we
have not made any arrangements with any persons to provide such service and we
may not be able to locate competent persons to perform the services at an
acceptable price. We have not experienced significant warranty returns to date;
however, no assurances can be given that future warranty expenses will not be
significant.
Suppliers of components utilized in the Hydro Components line of products
provide certain limited parts and labor warranties which we pass on to our
customers. No additional warranties are offered by us at this time.
SOURCES OF SUPPLY
We believe that material to build the products that we currently offer are
readily available from at least two sources. We currently have two sources for
all such material and are not dependent upon any one or more principal supplier.
ACQUISITION OF INTELLECTUAL PROPERTIES
EDI COMPONENTS
Effective August 5, 1997, we entered into a License Termination Agreement with
EDI Components terminating the July 1992 agreements which granted EDI Components
a security interest in and exclusive manufacturing and marketing rights to the
our patented water purification technology. Pursuant to the termination
agreement, 362,500 shares of our common stock were issued to the investors of
EDI Components in amounts commensurate with their capital investment in such
entity. We have agreed to issue Additional Shares upon the common stock 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
362,500 shares issued and the additional 516,479 contingently issuable shares
were valued at $0.3125, the market price per share at the date of termination of
the agreement, which totals $274,681. This amount was recorded as research and
development expense.
ION EXCHANGE MEMBRANE TECHNOLOGY
On February 17, 1998, we paid Hydro Components, Inc. ("HCI") the sum of
$200,000 under the terms of an Assignment Agreement to acquire the rights to
certain proprietary ion exchange membrane technology for use with its EDI water
treatment technology. Pursuant to the agreement, HCI was to provide the know-how
and technical support to develop extruded membranes with ion exchange materials.
In April 1999, pursuant to an addendum to such agreement, HCI was granted a
$65,000 bonus for the successful development of such membrane technology that is
now being incorporated into a new EDI module.
MICRO IMAGING TECHNOLOGY
On October 25, 1997, we issued 2,100,000 shares of common stock, valued
at $447,146 by independent appraisal, to Wyatt Technology Corporation as
consideration for the transfer by Wyatt
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<PAGE> 29
of an exclusive worldwide license to certain intellectual property related to
drinking water monitoring technology. The agreement encompassed 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. We refer to this technology as the
"Micro Imaging Technology."
In May 1998, the initial research phase proved, in a laboratory environment, a
capability of the technology for identification and measurement of
Cryptosporidium and Giardia cysts. We initiated further research efforts based
on these successful results. See "LEGAL PROCEEDINGS."
PATENTS AND LICENSE AGREEMENT
Certain technology used by the EDI technology is covered by U.S. Patent No.
4,465,573, issued on August 14, 1984, to Harry M. O'Hare, Sr. Such patents
expire in 2001. Corresponding patent applications have been filed in certain
limited foreign countries. Improvements in the EDI technology involve upgrades
of various components, including ion permeable membranes, manifolds (front and
rear), and product water and waste water compartments. Such improvements
increase performance quality and decrease production costs. The existence of a
patent for the EDI technology may not provide us any meaningful protection
because of technological changes, the decision of courts not to uphold all or
part of a patent, or because of the limited financial resources that may be
available to enforce our patent rights. We have recently filed a patent
application with regard to the ion permeable membrane technology acquired from
Hydro Components.
We have not secured a registered trademark or trade name for "EDI" or "Micro
Imaging Technologies."
Harry M. O'Hare, Sr., the inventor of the EDI technology, entered into a License
Agreement with us in 1986. The License Agreement grants to us 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, we are obligated to pay to the
individuals who have royalty rights in the EDI technology, a royalty of
approximately $42.00 for each EDI technology system, which has a capacity of
from six to twenty gallons per minute, sold or placed in service by us and our
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. 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 us.
RESEARCH AND DEVELOPMENT
During fiscal 1999, we expended $650,897 primarily on our research program to
develop a drinking water monitoring system derived from the technology acquired
from Wyatt in October 1997. We concluded Phase 1 research on the proposed
drinking water monitoring technology and initiated phase two of our research
program in 1998. During the three-month period ended January 31, 2000 we
expended an additional $110,284 on such program and we expect to continue to
incur additional
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<PAGE> 30
research and development costs on this Micro Imaging Technology project through
product development. See "MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Liquidity and Capital Resources."
We also conducted minimal research and development activities to develop the ion
permeable membrane with technology acquired from Hydro Components, Inc. in
February 1998. We have successfully developed such membrane and will shortly
incorporate it into the EDI product.
MICRO IMAGING TECHNOLOGIES DIVISION
The technology transferred under the October 25, 1997 agreement with Wyatt
Technology Corporation had (at inception) two main areas for exploitation:
- - and early warning of dangerous particulate materials such as parasites
and other organisms, i.e., bacteria, viruses, spores, etc. If the
initial efforts were successful, future efforts were to be directed to
include detection and early warning of asbestos fibers and similar
materials that pose a health hazard to the consumer.
- - and early warning of dangerous soluble substances such as mutagens,
carcinogens and metabolic poisons.
The latter technology area had 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
transform the latter area into a viable product line will require the
development of specialized instrumentation for the implementation of the methods
developed (and patented) under that program, market studies, and the
establishment of a marketing plan to target water consumer delivery agencies
(municipalities). Although this market may well represent a major opportunity on
a worldwide basis for future growth of consumer market products, the currently
available instrumentation and methods being developed by us appear to provide a
more immediate path to developing the parasite detection concept for the
technology. It is for this reason that the current research and development
efforts have focused on, and have thus far proven successful in a laboratory
setting, 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 and the Environmental Protection Agency 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
- ---------------------
(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.
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<PAGE> 31
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
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 (a few hours) 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 the water already has been
delivered. By the time positive detection is made, it is not possible to take
corrective action to prevent exposure. Corrective actions are limited to often
overblown solutions such as general boil orders or a total water system
shutdown. These actions serve to only limit the initial outbreaks, rather than
to prevent them.
A system that would provide for "real-time" contaminant detection and monitoring
could prevent or limit outbreaks, save lives and be less expensive. The
availability of this technology would clearly represent a leap forward in water
delivery and monitoring. The proposed system would monitor the laser light
scattering properties of each particle passing through the detector region and
software would examine the measurements and decide whether the particle was a
parasite.
Potential customers for the proposed water monitoring 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 decreases, homeowners.
We are also researching applications for our Micro Imaging technology in the
clinical laboratory and food processing areas, each of which would reap cost and
efficiency benefits similar to the proposed water monitoring device under
development. This technology has already demonstrated identification of the
bacteria E.coli, listeria and salmonella.
Based on a very preliminary evaluation of market needs and the size and number
of potential customers, the market size in the water monitoring market is
estimated to be greater than $20 million per year. Markets for a device which
will address the needs of clinical laboratories and food processing operations
are estimated to be in the range of $200 million and $55 million per year,
respectively. Detailed market validation has not been completed; however,
management
- ---------------------
(2) CDC Morbidity and Mortality Weekly Report 46(47):1121, 1997 (week ending
November 22, 1997).
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<PAGE> 32
believes that these estimates are conservative and that market penetration of
10% is achievable within the first several years of introducing a viable
product. Concurrent with conducting its research program, the Company will
continue to conduct more comprehensive market studies for this proposed
technology.
COMPETITION
The EDI technology competes with only three principal competitors: on-site
regeneration, service deionization and electrodeionization. U.S. Filter licensed
electrodeionization technology from Millipore Corporation in 1989 and continues
to work closely with its technical staff. U.S. Filter(3) manufactures and
markets electrodeionization systems for the high purity industrial segment with
capacities ranging from 20 liters/hours to 100 gallons/minute. Compared to our
point-of-use EDI technology, the U.S. Filter (Ionpure, Inc.) equipment is more
expensive, but still offers substantial operating cost savings over service
deionization. Comparison tests have shown that our EDI technology is also more
efficient than the Ionpure product, resulting in better performance and a lower
operating cost. Ionics, Inc., Glegg/Ecell Inc., and Christ, Ltd. also
manufacture and market electrodeionization technology.
The technology directly competitive with electrodeionization is service
deionization. The service deionization industry is composed of a few larger
companies such as Arrowhead Industrial Water, Polymetrics (acquired by U. S.
Filter), and Continental Water, as well as hundreds of smaller entities, some of
which are dealerships of Culligan (also recently acquired by U. S. Filter) 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.
Our marketing challenge will be to convince water equipment manufacturers to
utilize the EDI technology rather than conventional ion exchange resin
deionization. With service deionization, the customer does not have to purchase
capital equipment as he does with EDI, so the service deionization system can be
upgraded or down-sized with no substantial cost to the customer. The customer
pays for the water on either a cost-per-gallon basis, or a cost-per-regeneration
basis. Regeneration is done at the service company's facility so that the
customer does not have to handle or dispose of chemical waste.
Substantially all 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, 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 that may attract additional
competition in the future. We believe, however, that the EDI technology and our
technical know-how may be significant in our ability to compete.
Our ion permeable membrane technology is intended to reduce dependence on
outside suppliers for this component of the EDI product as well as to
significantly reduce the cost of such component. The cost reduction in the
membrane component of the EDI product has resulted in a substantial increase in
the cost competitiveness of our product. See "MANAGEMENTS' DISCUSSION AND
- ----------------------------
(3) Pursuant to a March, 1999 acquisition, U.S. Filter became a wholly owned
subsidiary of Vivendi, a French environmental service provider and leader in
water treatment and distribution services.
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<PAGE> 33
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and
Capital Resources."
With regard to the proposed Micro Imaging product, there are established methods
of testing currently employed by both public and private agencies. However,
these methods are labor intensive, expensive and time consuming, and do not
provide the near "real time" monitoring capabilities which our product, if it
can be developed, would purport to offer.
EMPLOYEES
As of March 28, 2000, we employed sixteen full-time employees, of which eight
were engaged in marketing, development, production and design; five in
administrative, accounting and clerical functions; and three are engaged in
research and development of the Company's proposed Micro Imaging Technology
products(s). To implement its proposed business, we will have to hire additional
employees in 2000. However, we cannot predict with any certainty when we will
hire such personnel. We believe that our relationship with our employees is good
and we are not a party to any collective bargaining agreement. Our future
success will be dependent upon our ability to attract and retain qualified
personnel.
PROPERTIES
We currently lease, with an option to purchase, a 30,201 sq. ft. facility in
Laguna Hills, California and pay a gross (including taxes, insurance and major
repairs) lease payment of $16,480 per month. In March 1998, we sub-leased
approximately 10,000 sq. ft. of such facility to an unaffiliated third party
which utilizes such space to warehouse and distribute heating and cooling parts
and equipment. Under the terms of the two-year agreement, extended through
December, 2000, the sub-lessee pays us $7,000 per month. Management believes
that its present facilities are adequate for all of its current operations, and
those contemplated for the foreseeable future.
On July 29, 1999, we exercised an option under the lease to purchase the
building for the sum of $2,300,000 and paid $15,000 as part of the purchase
price therefor. Under the lease, the Lessor has 18 months within which to
complete the sale. We will continue to pay rent as set forth in the lease with
applicable increases until the sale has been completed.
LITIGATION
In July 1999, we entered into an agreement to settle the February 1999 lawsuit
we brought against Wyatt Technology Corporation for breach of the October 1997
Technology Transfer Agreement by which we obtained a license to use and develop
certain laser-based technology and patents held by Wyatt. The lawsuit, brought
in the Orange County Superior Court of California, Case No. 805529, alleged that
Wyatt had failed and refused to provide the technical support indicated under
the original agreement in an attempt to bring about a rescission of the license.
The settlement with Wyatt Technology provided that each party has the right to
utilize the licensed technology as developed through Phase I of our research
program which proved, in principle, that
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<PAGE> 34
the instrument under development can perform instantaneous microbe
identification by measuring the light scattered by particles as they pass
through a laser beam. The settlement also provided for the return by Wyatt of
1.95 million of the 2.1 million common shares it received from us under the
original license agreement. Warrants to purchase 10,000 shares of common stock
at $1.38 per share issued to Clifford Wyatt, an officer of Wyatt, were also
cancelled pursuant to the settlement. Mr. Clifford Wyatt resigned as a Director
in April 1999.
In August 1999, a Cross Complaint for breach of contract, misrepresentation and
negligence was filed against us and other unaffiliated defendants by Douglas B.
Platt d/b/a East-West Technic Group ("Platt"), the defendant in a Los Angeles
Superior Court action, Case No. GC 023410, brought by Starr Surgical Company,
Inc. The cross-complaint charges us with breach of contract, misrepresentation
and negligence in connection with the sale to Platt of an EDI module
subsequently provided by Platt to Starr Surgical. The cross-complaint seeks
unspecified damages. We intend to vigorously defend this matter. We and our
counsel believe that we will prevail on the merits if this matter should go to
trial.
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<PAGE> 35
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William F. Farnam * 79 Director (Chairman)
Randall P. Frank * 37 Director
Randolph S. Heidmann * 49 Director
Arthur Lipper III * 68 Director
Floyd H. Panning * 71 Director, President and
Chief Executive Officer
Catherine Patterson 47 Chief Financial Officer and Secretary
</TABLE>
- ---------------------------
* All directors currently serve as members of the Audit Committee, with
Mr. Lipper as the Chairman of such Committee.
WILLIAM F. FARNAM, 79, 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 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, 37, 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. Between 1992 and 1995,
Randall Frank worked in sales and marketing for Sonnet Systems, a Northern
California firm which offers computerized currency exchange services. He 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").
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<PAGE> 36
RANDOLPH S. HEIDMANN, 49, was employed by us between September 1990 and November
1991 as an electronics instrumentation design engineer to continue development
work on innovative electronic components which we planned to engineer into our
product line. He was named to the Board of Directors in September 1991. Prior to
joining us, 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. Between 1991 and June 1999, Mr.
Heidmann served as an electrical engineer for Photonic Detectors, Inc. in Simi
Valley, California. Currently, Mr. Heidmann provides independent electrical
engineering consulting services. He holds a BS degree in Physics from the
University of California at Davis.
ARTHUR LIPPER III, 68, has provided financial and management consulting services
to us since May 1998 and was elected to the Company's Board of Directors in June
1999. Mr. Lipper is an internationally known investment banker, financier and
management consultant. He is Chairman of British Far East Holdings Ltd. and
President of Communications Management Associates, privately owned companies
which provide and arrange financing and offer financial and management advisory
services. Mr. Lipper has been affiliated with the international financial
community since 1954 and currently serves as an officer, director or advisor to
a number of publicly traded and privately owned companies including, among
others, Lion Brothers, an embroidered emblem manufacturer with facilities in the
United States and China; MeterNet, providing set top box Internet access to
television sets, Cargo4less.com, an internet marketed international freight
forwarding service matching customer bids and service offerings; and Cavion.Com
which services the electronic communications and processing needs of credit
unions.
Mr. Lipper is the author of numerous financial and investment-related books and
publications and has served as the Chairman, Publisher and Editor-In-Chief of
Venture Magazine. He is a member of the Financial Analysts Society of San Diego,
the San Diego Press Club, and the University of California, San Diego (UCSD)
Faculty Club. He has been a Trustee of the Kenan Institute of Private Enterprise
of the Kenan-Flagler Business School at the University of North Carolina. Mr.
Lipper has also served as a Director of the National Schools Committee for
Economic Education and has served as Chairman of the New York & Foreign
Securities Corporation (co-founder) and the Arthur Lipper Corporation and
international subsidiaries, both New York Stock Exchange member firms. Mr.
Lipper's stock and commodity exchange memberships have included the New York
Stock Exchange, American, Midwest, Pacific Coast, Detroit, Boston, Philadelphia,
Bangkok, NY Comex and NY Futures Exchange.
FLOYD H. PANNING, 71, joined the Board of Directors and was engaged by us 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 us 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 that 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
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<PAGE> 37
organization by establishing major national and international accounts with
Fortune 100 companies and major municipalities.
CATHERINE PATTERSON, 47, became our Secretary 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. From 1971 until she joined us 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. See "MANAGEMENT - Employment Agreement." Officers, subject to any
employment agreements, serve at the pleasure of the Board of Directors.
Key Employees
Michael Snow, 43, a Ph.D. in Chemical Engineering, is General Manager of
Electropure EDI, Inc., a wholly owned subsidiary. Dr. Snow has eight years
experience in water purification industries and twelve years experience in
product development and marketing of consumer, environmental, and membrane
separation devices. Dr. Snow has an extensive background in manufacturing and
quality control as well as budget and profit and loss responsibility. He
received his Bachelor of Science degree in Engineering from U.C.L.A., and his
Master of Science and Ph.D. degrees in Chemical Engineering from M.I.T.
David Haavig, 45, a Ph.D. in Physics, is General Manager of Micro Imaging
Technology, a wholly owned subsidiary, Dr. Haavig has over 25 years experience
in instrument design in computer software with applications in optical
measurements and analysis. He received his Bachelor of Science Degree in Physics
(Cum Laude) from the University of Seattle and his Master of Science and Ph.D.
degrees in Physics from Purdue University.
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<PAGE> 38
Section 16(a) Beneficial Ownership Reporting Compliance
As of the date of this report, all current directors, officers and beneficial
owners of more than 10 percent of any class of equity securities have filed all
reports required by Section 16(a) of the Securities Exchange Act of 1934. The
following table provides information regarding any of such reports which were
filed late:
<TABLE>
<CAPTION>
NAME OF TYPE OF NO. OF TRANSACTIONS
REPORTING PERSON REPORT FILED LATE REPORTED LATE
---------------- ----------------- -------------------
<S> <C> <C>
William F. Farnam Form 4 - Statement of Changes in
Beneficial Ownership 2
Anthony M. Frank Form 4 - Statement of Changes in
Beneficial Ownership 2
Randall P. Frank Form 4 - Statement of Changes in
Beneficial Ownership 2
Randolph S. Heidmann Form 4 - Statement of Changes in
Beneficial Ownership 2
Arthur Lipper III Form 4 - Statement of Changes in
Beneficial Ownership 1
Floyd H. Panning Form 4 - Statement of Changes in
Beneficial Ownership 2
Catherine Patterson Form 4 - Statement of Changes in
Beneficial Ownership 1
Clifford D. Wyatt (1) Form 3 - Initial Statement of
Beneficial Ownership 1
</TABLE>
(1) Clifford D. Wyatt resigned from the Board of Directors on April 14,
1999.
MANAGEMENT COMPENSATION
In November 1999, the Board of Directors established a Compensation and Benefits
Committee to oversee compensation and benefits, i.e., option and warrant grants,
to employees and service providers. The following Directors currently serve on
such Committee: William F. Farnam (Chairman), Randall P. Frank and Arthur Lipper
III.
We had no executive officer whose annual compensation was more than $100,000 per
year for the fiscal years ended October 31, 1999, 1998 and 1997. Floyd Panning,
who joined us as Chief Executive Officer in August 1997, is being compensated at
the rate set forth in his employment agreement that is described below under
"Employment Agreement."
The following table sets forth summary information regarding
compensation paid for the years ended October 31, 1999, 1998 and 1997 to the
chief executive officer.
37
<PAGE> 39
<TABLE>
<CAPTION>
NAME AND OTHER ANNUAL AWARDS
PRINCIPAL POSITION YEAR SALARY ($) COMPENSATION ($) (1) OPTIONS (#)
------------------ ---- ---------- -------------------- -----------
<S> <C> <C> <C> <C>
FLOYD H. PANNING
President and 2000* $25,200 - -
Chief Executive Officer
1999 $97,751 - -
1998 87,346 - 250,000 (2)
From August 1997 $12,000 - 125,000 (3)
</TABLE>
* Through January 31, 2000.
(1) We are not required to report the value of personal benefits unless the
aggregate dollar value for 1999 was at least 10 percent of the executive
officer's salary and bonus or $50,000.
(2) In March 1998, we granted Mr. Panning 250,000 options to purchase common
stock at an exercise price of $1.125 per share. The options, which expire in
March 2008, vest in increments of 50,000 over a five-year period commencing on
the grant date.
(3) See "Employment Agreement."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
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, in connection with the License
Termination Agreement with EDI Components and Mr. Panning assuming such
positions with the Company.
EMPLOYMENT AGREEMENT
On August 14, 1997, we entered into a five-year Employment Agreement (effective
August 5, 1997) with Floyd Panning whereby he became the 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 car and cellular telephone and
participation in any benefit programs offered by us (none at this time).
Pursuant to the terms of the 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
agreement also provides for the following:
- A base monthly salary of $6,500 increasing to $8,000 per month
once we had 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. Mr. Panning's base salary
is $8,400 per month as of February 2000.
38
<PAGE> 40
- Upon realizing the above minimum financing, we 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.
- Mr. Panning has the right to nominate, subject to shareholder
approval, one person to the Board of Directors during the term
of his employment. In the meantime, Mr. Panning has been named
to the Board of Directors as his nominee.
- 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>
- Any termination of employment by us shall immediately vest all
125,000 warrants granted to Mr. Panning under the agreement. In
addition, termination by us 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, we authorized an annual issuance of 10,000 ten-year warrants to
purchase common stock to each Director for service to the Company at a 25%
discount to the fair market value of the common stock as of the date of grant.
In August 1998, 10,000 warrants to purchase common stock were issued to each of
the then five (5) Directors (including Clifford Wyatt who resigned from the
Board and surrendered such warrants in April 1999) at an exercise price of
$1.375 per share.
In August 1999, pursuant to the above resolution, we issued 10,000 ten-year
warrants to purchase common stock to each of the five Directors at an exercise
price of $0.9375 per share.
39
<PAGE> 41
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
The following table sets forth information as of March 28, 2000 with respect to
the common stock, Class B common stock, Series B Preferred Stock and Convertible
Preferred Stock owned by the only persons known by us 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 SERIES B
STOCK % OF COMMON % OF PREFERRED % OF
NAME (1)(2) CLASS STOCK CLASS STOCK(3) CLASS
---- ------ ----- ------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
William F. Farnam 126,918 1.0% -- -- -- --
Anthony M. Frank
320 Meadowood Court
Pleasant Hill, CA 94523 5,187,551 36.9% -- -- 1,000,000 100%
Randall P. Frank 413,898 2.9% -- -- -- --
Randolph S. Heidmann 30,000 * -- -- -- --
Arthur Lipper III (6) -- -- -- -- -- --
Harry M. O'Hare, Sr
2035 Huntington Dr. #1
S. Pasadena, CA 91030 2,500 * 83,983 100% -- --
Floyd H. Panning
23456 South Pointe Drive
Laguna Hills, CA 92653 836,792 6.0% -- -- -- --
Catherine Patterson 210,112 1.5% -- -- -- --
All officers and directors
as a group (6 persons) 1,617,720 11.5% -- -- -- --
<CAPTION>
CONVERTIBLE % OF
PREFERRED % OF VOTING
NAME STOCK(4) CLASS POWER 5)
---- ----------- ----- --------
<S> <C> <C> <C>
William F. Farnam -- -- *
Anthony M. Frank
320 Meadowood Court
Pleasant Hill, CA 94523 -- -- 43.1%
Randall P. Frank -- -- 1.9%
Randolph S. Heidmann -- -- *
Arthur Lipper III (6) -- -- --
Harry M. O'Hare, Sr
2035 Huntington Dr. #1
S. Pasadena, CA 91030 931,629 35.8% 7.5%
Floyd H. Panning
23456 South Pointe Drive
Laguna Hills, CA 92653 7,500 * 4.0%
Catherine Patterson 2,906 * 1.0%
All officers and directors
as a group (6 persons) 10,406 * 7.6%
</TABLE>
- ----------------------------------------
* Less than 1%
** Includes address of five percent or more shareholders of any class.
(1) Excludes 83,983 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 86,483 shares (1.0%) and 1,617,720 shares (11.4%)
of common stock, respectively.
(2) Includes currently outstanding warrants or options to purchase an
aggregate of 5,151,327 shares of common stock.
(3) The Series B Convertible Preferred Stock is convertible into common
stock, on a share-for-share basis, at the option of the holder or
automatically if (a) we make a public
40
<PAGE> 42
offering of its securities, or (2) if our securities are listed on
NASDAQ or a national securities exchange market system.
(4) The Convertible Preferred Stock was convertible into common stock only
if certain earnings or market prices of the common stock were achieved
prior to October 31, 1990. Such earnings and market prices were not
achieved and commencing January 31, 1991, we were required to redeem
such shares at $0.01 per share. We intend to redeem the Convertible
Preferred Stock during fiscal 2000.
(5) Reflects the voting rights of the common stock and Convertible Preferred
Stock, each of which carries one (1) vote per share; Class B common
stock, which carries eight (8) votes per share; and Series B Convertible
Preferred Stock, which carries four (4) votes per share.
(6) Excludes warrants to purchase 175,000 shares of common stock at $1.06
per share, expiring on May 14, 2006 and 10,000 options to purchase
common stock at $0.9375 per share, expiring on August 13, 2009, all of
which are beneficially owned by Communications Management Associates for
which Arthur Lipper III disclaims beneficial ownership. Arthur Lipper
III is an executive officer of Communications Management and has no
control over the disposition or the voting control, if any, of the
securities.
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) 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):
- - shares will not participate in dividends, other than stock dividends;
- - shares will not participate in any distribution of assets in the event
of liquidation; and
- - 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 we have demonstrated a satisfactory earnings record, as
defined in such Rules, and we understand 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.
In October 1998, we agreed to seek the approval of our shareholders to enter
into an agreement with Mr. O'Hare and two of his creditors which would support a
petition to the Commissioner for removal of the above restrictions. The petition
is currently under review by the Commissioner and, if approved, the agreement
provides for the transfer of all our securities held
41
<PAGE> 43
by Mr. O'Hare's to such creditors, including us, in exchange for certain monthly
cash payments and extinguishment of debt owed by Mr. O'Hare. Our shareholders
approved such agreement at the Annual Meeting of Shareholders held on June 26,
1999.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MR. WILLIAM FARNAM
On October 8, 1998, Mr. Farnam exercised 1,250 and 1,668 warrants to purchase
common stock that had been assigned to him by the original holder of such
warrants on October 2, 1998. Pursuant to a private placement offering authorized
in September 1998, the original exercise price of such warrants ($9.00 and
$15.00, respectively) had been reduced to $1.00 per share.
MR. ANTHONY FRANK
In fiscal year 1998, we borrowed $400,000 from Mr. Frank and issued notes which
provided for conversion of the loans into shares of our common stock at any
time. The intrinsic value of the beneficial conversion features was determined,
and additional paid-in capital and interest expense of $400,000 was recognized.
We issued 342,659 shares of common stock to Mr. Frank at fair market value of
$672,897 in connection with the conversion of the notes payable and accrued
interest totaling $409,847.
On January 15, 1999, Mr. Frank purchased 1,000,000 shares of Series B
Convertible Preferred Stock, $1 par value, for $1 million. Each share of Series
B Stock carries four (4) votes per share and is convertible into common stock,
on a share-for-share basis, at any time at Mr. Frank's option. Such Series B
Preferred Stock is also automatically convertible, however, if either of the
following events occur:
- - shall make a public offering of any of its securities under the terms of
an underwriting agreement with a securities dealer or underwriter; or
- - common stock shall be admitted for listing on a national securities
exchange market system or the NASDAQ System where it may then be traded.
In July 1999, Mr. Frank purchased 900,000 shares of common stock and 450,000
three-year warrants to purchase common stock in a private placement offering and
paid the sum of $900,000. The warrants are exercisable at $2.00 per share and
are redeemable by us for $0.05 each if the common stock shall equal or exceed
$4.00 per share for thirty consecutive trading days.
On December 13, 1999 Mr. Frank executed a two-year convertible term note by
which Mr. Frank has agreed to loan to us $200,000 at the rate of 10% annual
interest. Mr. Frank loaned us an additional $100,000 under similar terms on
January 25, 2000 and on February 10, 2000. On February 25, 2000 Mr. Frank
converted these principal loans, plus $5,206 in accrued interest thereon, into
16.2 Units of a private placement offering, each Unit consisting of 25,000
shares of
42
<PAGE> 44
common stock and 12,500 three-year warrants to purchase common stock at $2.00
per share. The warrants are redeemable by us at $0.05 per warrant at any time
the common stock shall equal or exceed $4.00 per share for thirty (30)
consecutive trading days.
On March 6, 2000 Mr. Frank purchased an additional twenty (20) Units of the
above private placement offering for the purchase price of $25,000 per Unit, or
a total of $500,000.
MR. RANDALL FRANK
On September 21, 1998, Mr. Frank exercised 1,250 and 1,112 warrants to purchase
common stock at $1.00 per share pursuant to a private placement offering to
temporarily reduce the exercise price (originally $9,00 and $15.00,
respectively) of such warrants.
MR. RANDOLPH S. HEIDMANN
Between August 1998 and October 31, 1999, we paid Mr. Heidmann a total of
$42,000 pursuant to an arrangement to develop certain proprietary technology
relating to a new design of a power supply which may be used with the EDI water
treatment product. The parties intend to negotiate an agreement whereby we will
acquire the rights to said technology once a prototype has been developed. Funds
paid to Mr. Heidmann under this arrangement will be credited toward the
acquisition price to be negotiated. Since November 1, 1999, an additional
$11,500 has been paid to Mr. Heidmann pursuant to this arrangement.
MR. ARTHUR LIPPER III
In May 1998,we entered into a three-year agreement with Communications
Management Associates for financial and management consulting services at the
rate of $2,500 per month. Mr. Lipper is the president of Communications
Management and is the primary contact for us under the consulting arrangement.
Concurrent with the commencement of the agreement, we granted Communications
Management 25,000 warrants to purchase common stock and 50,000 warrants each
year thereafter for a period of three years. The warrants are exercisable at
$1.06 per share and expire on May 13, 2006.
MR. PANNING
On March 25, 1998, Mr. Panning was granted 250,000 ten-year warrants to purchase
common stock at $1.125 per share. Such warrants are exercisable in annual
increments of 50,000, commencing on the grant date, to vest over a five-year
period; provided, however, that Mr. Panning is employed by us on the exercise
date.
MISCELLANEOUS
The Board of Directors has adopted a policy that no transaction between us 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
43
<PAGE> 45
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 us (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.
SELLING SHAREHOLDERS
The following table shows the names and positions, if any, with us of the
Selling Shareholders, the number of shares of common stock beneficially owned by
each of them as of March 28, 2000, the number of shares covered by this
Prospectus and the number of shares (and percentage, if over 1%) such
individuals would beneficially own if all of the shares covered by this
Prospectus were fully sold:
44
<PAGE> 46
<TABLE>
<CAPTION>
Number of After
Number of Shares Offering
Number of Shares Owned After Percent of
Name and Position Shares Covered by This Class, if
with us, if any Owned (1) Prospectus Offering (1) Greater than 1%
- --------------- --------- ---------- ------------ ---------------
<S> <C> <C> <C> <C>
Addison, John 14,946 3,612 (2) 11,334
Aguirre, Gilbert G. 56,250 18,750 37,500
AM-FM Enterprises 4,446 1,112 (2) 3,334
Amato, Frank L. 2,100 500 (2) 1,600
Arndt, Douglas 2,673 2,000 (2) 673
Austin, Jackson 5,250 1,250 (2) 4,000
Barber, George 8,890 2,223 (2) 6,667
Barrett, Robert 5,250 1,250 (2) 4,000
Belk, John 13,337 3,335 (2) 10,002
Bias, Alan 2,223 556 (2) 1,667
Blaine Group, The 6,603 6,603 --
Bone, Alan 890 223 (2) 667
Boston, E. A. 5,576 112 (2) 5,464
Brown, Michael 10,846 1,112 (2) 9,734
Campbell, Eric 2,667 667 (2) 2,000
Carrillo, Ciro 104,167 39,167 (2) 65,000
Clanin, Thomas 2,625 625 (2) 2,000
Communications Mgmt. Assoc. (5) 185,000 175,000 (2) 10,000
Crosson, Albert 5,250 1,250 (2) 4,000
Cruver, James E. - Former Director
and Former President 4,446 1,112 (2) 3,334
Cummus, Ann 4,446 1,112 (2) 3,334
Curtis, Tom 1,050 250 (2) 800
Danna, Gay 1,779 445 (2) 1,334
Dargenzio, Alfonso 158,971 50,000 108,971
</TABLE>
45
<PAGE> 47
<TABLE>
<CAPTION>
Number of After
Number of Shares Offering
Number of Shares Owned After Percent of
Name and Position Shares Covered by This Class, if
with us, if any Owned (1) Prospectus Offering (1) Greater than 1%
- ----------------- ---------- ---------- ------------- ---------------
<S> <C> <C> <C> <C>
Das, Philip 2,625 625 (2) 2,000
Economic Development Bank
for Puerto Rico 200,000 100,000 (2) 100,000
Edwards, Heather Tarlow 4,552 4,552 --
Egan, William 2,667 667 (2) 2,000
Ensch, Thomas 662 125 (2) 537
Farnam Living Trust - Director (3) 126,918 22,918 (2) 104,000
Fiducia Trading Co. - Former Director 8,890 2,223 (2) 6,667
Fishman, Richard L. 30,779 3,612 (2) 27,167
Fleming Profit Sharing Plan 273,000 187,500 (2) 85,500
Fleming, Ana Leigh 20,250 5,000 (2) 15,250
Fleming, Michael 25,250 10,000 (2) 15,250
Fleming, Terry L. 399,100 205,000 (2) 194,100 1.4%
Fleming, Jr., Terry L. 32,750 17,500 (2) 15,250
Fonmin, John L. 5,780 1,112 (2) 4,668
Foti, A. Bert 4,446 1,112 (2) 3,334
Foti, Andrew 4,446 1,112 (2) 3,334
Frank, Anthony M. (3) (6) 6,187,551 4,057,809 (2) 2,129,742 15.7%
Frank, Randall P. - Director (3) 413,898 32,362 (2) 381,536 2.8%
Frank, Tracy F. 142,196 12,362 (2) 129,834
Frisenda, Quinton & Nicholson 110,696 100,000 (2) 10,696
Fuja, Megan 90,000 10,000 (2) 80,000
Haavig, David (3) 275,000 85,000 (2) 190,000 1.4%
Heidmann, Randolph S. - Director (3) 30,000 20,000 (2) 10,000
Hughes, Martin 4,446 1,112 (2) 3,334
</TABLE>
46
<PAGE> 48
<TABLE>
<CAPTION>
Number of After
Number of Shares Offering
Number of Shares Owned After Percent of
Name and Position Shares Covered by This Class, if
with us, if any Owned (1) Prospectus Offering (1) Greater than 1%
- ----------------- ---------- ---------- ------------- ---------------
<S> <C> <C> <C> <C>
Illes, Steve G. 100,446 1,112 (2) 99,334
J & L Enterprises 50,000 50,000 (2) --
Jepson, Joanne 2,223 556 (2) 1,667
Johnson, Craig 30,000 4,000 (2) 26,000
Johnson Associates, Keith M. 8,600 8,600 (2) --
Johnston, Heidi Tarlow 4,552 4,552 --
Jones, Larry 50,000 50,000 (2) --
Kearns, Jeanne M. 2,100 500 (2) 1,600
Kwan Pension Plan 4,848 1,181 (2) 3,667
Kwan Profit Sharing Plan 4,848 1,181 (2) 3,667
Landrace Corporation 4,446 1,112 (2) 3,334
Lee, William H. - former Director 10,000 10,000 (2) --
Link, F. Steven 2,788 556 (2) 2,232
Littlewood, Ken 4,446 1,112 (2) 3,334
Lorden, Gary A. 175,000 70,000 (2) 105,000
Lupo, Vince 4,446 1,112 3,334
Maichaud, Chubb 30,000 20,000 (2) 10,000
Maroka, Inc. 325,000 250,000 (2) 75,000
Martinez, Susan 446 112 (2) 334
Meier, Lon 223 223 (2)
Metals Precision 1,212 303 (2) 909
Meylor, Tom 334 63 (2) 271
Mihama Corporation 150,000 50,000 (2) 100,000
MSN Securities 131,250 43,750 (2) 87,500
Nance, Edward 4,446 1,112 (2) 3,334
</TABLE>
47
<PAGE> 49
<TABLE>
<CAPTION>
Number of After
Number of Shares Offering
Number of Shares Owned After Percent of
Name and Position Shares Covered by This Class, if
with us, if any Owned (1) Prospectus Offering (1) Greater than 1%
- ----------------- ---------- ---------- ------------- ---------------
<S> <C> <C> <C> <C>
Nathaniel, Sheldon 18,750 6,250 (2) 12,500
Neff, Merlin L. 12,020 2,223 (2) 9,797
Nemerovski, Harold 4,446 1,112 (2) 3,334
Newhuis, Gregg 56,250 18,750 (2) 37,500
O'Connell, George 112,500 37,500 (2) 75,000
O'Hare, Harry M. - Former Director
and Former Chief Financial Officer (4) 86,483 83,983 2,500
O'Hare, Ronald J. - Former Director
and Design Engineer 229,500 99,500 (2) 130,000
Orlandini, Jeff 20,000 20,000 (2) --
Osenblok, Johann 100,000 25,000 (2) 75,000
Ovando, Paul J. - Former Director 220,849 70,000 (2) 150,849 1.1%
Panning, Floyd - Director, President
and Chief Executive Officer (3) 811,792 649,202 (2) 162,590 1.2%
Panning, Scott 100,000 30,000 (2) 70,000
Patterson, Catherine - Secretary
and Chief Financial Officer (3) 210,112 210,000 (2) 112
Pett, Robert A. 122,838 25,000 (2) 97,838
Poss Family Trust 75,000 75,000 (2) --
Powell, Charles 16,973 7,500 (2) 9,473
Ratcliffe, Martyn 150,000 40,000 (2) 110,000
Reason, Robert 37,500 12,500 (2) 25,000
Romig, Richard 5,815 1,250 (2) 4,565
Schaeffer, Richard 788 88 (2) 700
Schmitt, Daryl 4,446 1,112 (2) 3,334
</TABLE>
48
<PAGE> 50
<TABLE>
<CAPTION>
Number of After
Number of Shares Offering
Number of Shares Owned After Percent of
Name and Position Shares Covered by This Class, if
with us, if any Owned (1) Prospectus Offering (1) Greater than 1%
- ----------------- ---------- ---------- ------------- ---------------
<S> <C> <C> <C> <C>
Shani, Ruth - Admin. Asst 41,125 37,000 (2) 4,125
Shirley, Terry 50,000 30,000 (2) 20,000
Sikora, Thaddeus S. 7,875 1,875 (2) 6,000
Skalski, Ken 2,223 556 (2) 1,667
Snow, Michael (3) 370,000 140,000 (2) 230,000 1.7%
Spencer, Charles 32,307 2,223 (2) 30,084
Stegall, Sam Ray 22,500 22,500 (2) --
Tarlow, Gardner 4,553 4,553 --
Tarlow, Garth 4,553 4,553 --
Textile Apparel Corp. 4,446 1,112 (2) 3,334
TNKRGK Family Trust 9,696 2,362 (2) 7,334
Traub, Gordon 11,751 1,112 (2) 10,639
Veraldi, William 6,546 1,112 (2) 5,434
von Leesen, Joan 22,050 6,250 (2) 15,800
von Leesen, John 28,001 10,000 (2) 18,001
Waldman Family Trust 123,157 2,500 (2) 120,657
Waldman, Jill 5,250 1,250 (2) 4,000
Wenc, Henry S. 2,625 625 (2) 2,000
White, Bryan L. 1,000 1,000 (2) --
White, Kevin C. 31,000 7,000 (2) 24,000
White, Kristi, A . 1,000 1,000 (2) --
White, Leroy - Production Manager 70,000 10,000 (2) 60,000
White, Sally J. 1,000 1,000 (2) --
Whiting, Mikel 5,576 1,112 (2) 4,464
Weider, Harriett 75,000 50,000 (2) 25,000
Wilson, Carly 7,500 2,500 5,000
Wilson, Patricia 12,750 2,500 10,250
Winokur Water Trust 91,084 18,750 72,334
Worley, Samantha L. 1,000 1,000 (2) --
Yamada, Kenneth 4,938 938 (2) 4,000
---------- --------- ---------
13,553,805 7,547,459 6,006,346
========== ========= =========
</TABLE>
49
<PAGE> 51
- --------------------------------
(1) Includes 3,626,327 shares currently issuable upon exercise of options or
warrants or exercisable within 60 days of the date hereof. Also includes
83,983 shares issuable upon conversion of Class B common stock and
1,000,000 shares issuable upon conversion of Series B Convertible
Preferred Stock. Excludes Convertible Preferred Stock owned by the
Selling Shareholders.
(2) Includes common stock underlying options or warrants.
(3) See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and "MANAGEMENT -
Directors, Officers and Key Employees."
(4) Includes 83,983 shares issuable upon conversion of Class B common stock.
Through ownership of common stock, Class B common stock and Convertible
Preferred Stock, Mr. O'Hare controls 7.5% of the voting power. See
"PRINCIPAL SHAREHOLDERS."
(5) See "PRINCIPAL SHAREHOLDERS" and CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS - Mr. Arthur Lipper III."
(6) Includes 1,000,000 shares issuable upon conversion of Series B
Convertible Preferred Stock. Through ownership of common stock and
Series B Convertible Preferred Stock, Mr. Frank controls 43.1% of the
voting power. See "PRINCIPAL SHAREHOLDERS" and CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS - Mr. Anthony Frank."
Plan of Distribution
The common stock may be sold by the Selling Shareholders or their pledgees,
donees, transferees, or other successors-in-interest. The sale of common stock
may be effected from time to time in transactions (which may include block
transactions by or for the account of the Selling Shareholder) in the
over-the-counter market or in negotiated transactions, through the writing of
options on the common stock, through a combination of such methods of sale, or
otherwise. Sales may be made at fixed prices that may be changed, at market
prices prevailing at the time of sale, or at negotiated prices. If any Selling
Shareholder sells his, her or its shares, or options thereon, pursuant to this
Prospectus at a fixed price or at a negotiated price which is, in either case,
other than the prevailing market price or in a block transaction to a purchaser
who resells, or if any Selling Shareholder pays compensation to a broker-dealer
that is other than the usual and customary discounts, concessions or
commissions, or if there are any arrangements either individually or in the
aggregate that would constitute a distribution of the shares, a post-effective
amendment to the Registration Statement of which this Prospectus is a part would
need to be filed and declared effective by the Securities and Exchange
Commission before such Selling Shareholder could make such sale, pay such
compensation or make such a distribution. We are under no obligation to file a
post-effective amendment to the Registration Statement of which this Prospectus
is a part under such circumstances.
50
<PAGE> 52
The Selling Shareholders may effect transactions in their common stock by
selling their securities directly to purchasers, through broker-dealers acting
as agents for the Selling Shareholders or to broker-dealers who may purchase the
Selling Shareholder's shares as principals and thereafter sell such securities
from time to time in the over-the-counter market, in negotiated transactions, or
otherwise. Such broker-dealers, if any, may receive compensation in the form of
discounts, concessions or commissions from the Selling Shareholders and/or the
purchasers for whom such broker-dealers may act as agents or to whom they may
sell as principals or both. While this Prospectus covers the sale of common
stock received upon exercise of options and warrants by the Selling
Shareholders, it does not cover the exercise of such options and warrants.
The Selling Shareholders and broker-dealers, if any, acting in connection with
such sales might be deemed to be "underwriters" within the meaning of Section
2(11) of the Act and any commission received by them and any profit on the
resale of such securities might be deemed to be underwriting discounts and
commissions under the Act.
The Selling Shareholders have been advised that during the time each is engaged
in "distribution" (as defined under Regulation M under the Securities Exchange
Act of 1934, as amended) of the securities covered by this Prospectus, each must
comply with Regulation M under the Securities Exchange Act of 1934, as amended,
and pursuant thereto: (i) shall not engage in any stabilization activity in
connection with our securities; and (ii) shall not bid for or purchase any of
our securities or attempt to induce any person to purchase any of our securities
other than as permitted under the Securities Exchange Act of 1934, as amended.
Any Selling Shareholder who may be an "affiliated purchaser" as defined in
Regulation M has been further advised that he must coordinate his sales under
this Prospectus with each other and us for purposes of Regulation M. Each
Selling Shareholder must also furnish each broker through which common stock is
sold copies of this Prospectus.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
We are authorized to issue up to 20,000,000 shares of $0.01 par value common
stock. In May 1996, the Company's shareholders approved a one-for-ten reverse
stock split of its then currently outstanding Class A and Class B common stock.
Consequently, on July 25, 1996 the currently outstanding 18,960,695 shares of
Class A common stock were reconstituted and converted into 1,896,070 shares of
$0.01 par value Class A common stock. The issued and outstanding shares of
common stock and the shares being offered hereby and the shares issuable upon
exercise of warrants and options when exercised and issued, will be validly
issued, fully paid and nonassessable.
Holders of common stock are entitled to one vote per share on all matters to be
voted upon by the shareholders and except as may otherwise be required by law or
as set forth under "DESCRIPTION OF CAPITAL STOCK - Class B Common Stock," will
vote with the holders of the Class B common stock, Series B Convertible
Preferred Stock and Convertible Preferred Stock as one class. Under California
law, separate class voting is required for mergers or sales
51
<PAGE> 53
of substantially all of our assets. If, prior to the election of directors, any
shareholder has given notice that he intends to cumulate his votes, then for the
election of directors each shareholder may cumulate votes for any nominee, if
the nominee's name was placed in nomination prior to the voting. In cumulative
voting, each shareholder is entitled in the election of directors to one vote
for each voting share held by him multiplied by the number of directors to be
elected and may cast all such votes for a single nominee for directors or may
distribute them among any two or more nominees as he sees fit.
The shares of common stock have no preemptive, subscription, conversion or
redemption rights. Upon liquidation, dissolution or winding up, the holders of
common stock are entitled to receive pro rata our assets which are legally
available for distribution to shareholders, subject to the liquidation rights
held by the Class B common stock, Series B Convertible Preferred Stock and the
Convertible Preferred Stock, and the prior rights, if any, that may be
established in the future for Preferred Stock, if any. See "DESCRIPTION OF
CAPITAL STOCK - Preferred Stock". Holders of common stock are entitled to
dividends when, as and if declared by the Board of Directors out of funds
legally available therefor along with the holders of the Class B common stock,
subject to any prior rights when may be granted in the future to holders of
Preferred Stock.
As of March 28, 2000, 8,877,341 shares of the Company's common stock were
outstanding.
CLASS B COMMON STOCK
Pursuant to the July 25, 1996 one-for-ten reverse stock split, 839,825
authorized and outstanding shares of Class B common stock (all of which are
issued and owned by Harry M. O'Hare, Sr.) were reconstituted and converted into
83,983 authorized and outstanding shares of $0.01 par value Class B common
stock. The Class B common stock, the common stock, the Series B Convertible
Preferred Stock, and the Convertible Preferred Stock vote as a single class on
all matters except as required by law and except if a reverse stock split or
stock split is effected on the common stock and a similar reverse stock split or
stock split is not effected on the Class B common stock or if a stock dividend
in Class B common stock is not declared equal to a stock dividend declared on
the common stock. In the latter situations, a separate class vote of the Class B
common stock is required.
Each share of Class B common stock carries eight votes per share and is entitled
to non-stock dividends and liquidation payments equal to 80% of those paid on
the common stock. The Class B common stock may not be transferred or assigned by
the owner thereof. If a transfer is made of a share of Class B common stock in
contravention of such restrictions, such share will automatically be converted
into a share of common stock. Class B common stock will automatically convert,
on a share-for-share basis, into shares of common stock upon the death of Harry
M. O'Hare, Sr.
52
<PAGE> 54
CONVERTIBLE PREFERRED STOCK
We can also issue 2,600,000 shares of Convertible Preferred Stock, $0.01 par
value. In March, 1987, an aggregate of 2,492,152 shares of Convertible Preferred
Stock had been issued pro rata to all of the shareholders of the then currently
outstanding common stock and Class B common stock. On July 28, 1988, the balance
of 107,848 Convertible Preferred Shares were issued to Harry M. O'Hare, Sr. as a
bonus. Each share of Convertible Preferred Stock has one vote per share and
except as otherwise may be required by law or set forth in "DESCRIPTION OF
CAPITAL STOCK - Class B Common Stock," will vote as a class on all matters with
the common stock, Class B common stock, and the Series B Convertible Preferred
Stock. The Convertible Preferred Stock is not entitled to receive any dividends,
and in the event of liquidation, dissolution or winding up, each share is
entitled to share ratably in all assets available for distribution at the rate
equal to one share of common stock up to a maximum of $0.01 per share. The
shares of Convertible Preferred Stock have no preemptive rights or other rights
to subscribe for additional securities and there are no redemption or sinking
fund provisions with respect to such shares.
We did not achieve certain after-tax earnings and/or market prices and as of
January 31, 1991, the Convertible Preferred Stock became redeemable by us for
$0.01 per share.
The Convertible Preferred Stock is not assignable or transferable (except upon
death or upon approval of a majority of the members of the Board of Directors
not holding shares of Convertible Preferred Stock).
PREFERRED STOCK
On January 15, 1999, we issued 1,000,000 shares of its Series B Convertible
Preferred Stock out of the 1,000,000 shares of authorized Preferred Stock, $1.00
par value. Series B Convertible Preferred Stock provides for a $1.00 per share
liquidation preference over the common stock, Class B common stock and
Convertible Preferred Stock and each share of Series B Convertible Preferred
Stock entitles the holder thereof to four (4) votes per share and is to vote as
a class along with holders of the common stock, Class B common stock and
Convertible Preferred Stock. The shares of Series B Convertible Preferred Stock
are convertible, in whole or in part, into common stock on a share for share
basis at any time at the option of the holder, Mr. Anthony M. Frank. Each share
of Series B Convertible Preferred Stock is automatically convertible into one
share of common stock upon five days' written notice from us if either of the
following events shall occur:
- - shall make a public offering of any of its securities under the terms of
an underwriting agreement with a securities dealer or underwriter; or
- - securities shall be admitted for listing on a national securities
exchange market system or the NASDAQ System where the common stock may
then be traded.
53
<PAGE> 55
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the common stock is American Stock Transfer
Company, 40 Wall Street, New York, New York 10005.
SHARES ELIGIBLE FOR FUTURE SALE
2,837,149 of the shares of common stock owned by our shareholders are
"restricted securities" as such term is defined in the Securities Act of 1933
(the "Act"). An aggregate of approximately 429,531 shares of common stock are
eligible for sale under Rule 144. In general, Rule 144 permits a shareholder who
has held his shares for at least one year after payment therefor to sell within
any three-month period a number of shares that does not exceed the greater of 1%
of the outstanding shares of common stock (currently approximately 88,248
shares) or the average weekly trading volume of such shares for the four weeks
preceding the sale. Any shareholder who is not an affiliate and has not been an
affiliate for the preceding three months and who has held his shares of common
stock for at least two years after payment may sell his shares under Rule 144,
without any volume limitations. If a substantial number of shares of common
stock are sold pursuant to Rule 144, registration statements or otherwise, the
price at which the shares of common stock are traded may be adversely affected.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We are subject to the reporting requirements of the Securities Exchange Act of
1934, as amended, and, in accordance therewith, file reports, proxy statements
and other information with the SEC. Such reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the SEC's regional offices located at the Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, IL 60661 and Seven World Trade Center, 13th
Floor, New York, NY 10048. Copies of such material can be obtained from the
Public Reference Section of the SEC upon payment of certain fees prescribed by
the SEC. The SEC's Web site contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
SEC. The address of that site is http://www.sec.gov.
We have filed a registration statement on Form SB-2 with the SEC under the
Securities Act of 1933, as amended, in respect of the common stock offered
pursuant to this prospectus. This prospectus, which is a part of the
registration statement, omits certain information contained in the registration
statement as permitted by the SEC's rules and regulations. For further
information with respect to us and the common stock offered hereby, please
reference the registration statement, including its exhibits. Statements in this
prospectus concerning the contents of any contract or other document filed with
the SEC as an exhibit to the registration statement are summaries of the
material provisions of those documents and we recommend that you also refer to
those exhibits in evaluating us. Copies of the registration statement, including
all related exhibits and schedules, may be inspected without charge at the
public reference facilities maintained by the SEC, or obtained at prescribed
rates from the Public Reference Section of the SEC at the address set forth
above.
54
<PAGE> 56
LEGAL OPINION
Skadden, Arps, Slate, Meagher & Flom, LLP, 300 South Grand Avenue, 34th Floor,
Los Angeles, California 90071, securities counsel to Electropure, will render an
opinion with respect to the valid issuance and nonassessability of the Common
Stock being offered hereby.
EXPERTS
The Financial Statements of Electropure, Inc. as of October 31, 1999 and 1998,
and the related statements of operations, shareholders' equity, and cash flows
for each of the years in the two-year period ended October 31, 1999, included
herein and elsewhere in the Registration Statement, have been included herein
and in the Registration Statement in reliance upon the report of Kelly &
Company, independent auditors, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing. The report of
Kelly & Company contained explanatory paragraphs as to the Company's ability
to continue as a going concern.
CHANGE IN CERTIFYING ACCOUNTANTS
On June 16, 1998, due to a need for expanded accounting requirements and
location of accountants, the Board of Directors approved the recommendation of
management to (i) engage Kelly & Company as the independent auditors for
Electropure, Inc. and (ii) dismiss Alex Chaplan & Associates as such independent
accountants.
For the Company's fiscal years ended October 31, 1996 and 1997, 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 Alex N. Chaplan &
Associates. During the two fiscal years ended October 31, 1996 and 1997, and
since October 31, 1997, there were not any disagreements with Alex N. Chaplan &
Associates 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 Alex N. Chaplan & Associates, 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, 1996 and 1997, and between October 31, 1997 and June 16, 1998, Registrant
did not consult with Kelly & Company on the application of accounting principles
to a specified transaction, or the type of audit opinion that might be rendered
on the Registrant's financial statements or any disagreements (as defined in
Item 304(a)(1)(iv) of Regulation S-K) or a reportable event (as defined above).
55
<PAGE> 57
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Electropure, Inc.
We have audited the accompanying balance sheets of Electropure, Inc. as of
October 31, 1999 and 1998, and the related statements of operations,
shareholders' equity and cash flows for each of the two years in the period
ended October 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Electropure, Inc. as of October
31, 1999 and 1998, and the results of its operations and its cash flows for each
of the two years in the period ended October 31, 1999, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the Company
has suffered recurring losses from operations, has negative cash flow from
operations and an accumulated deficit. In addition, the Company has relied
primarily on the sale of its securities and borrowings to provide the cash
needed for operations. These conditions raise substantial doubt about its
ability to continue as a going concern. Management's plan in regard to these
matters is discussed in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Kelly & Company
Kelly & Company
Newport Beach, California
December 23, 1999
<PAGE> 58
ELECTROPURE, INC.
BALANCE SHEETS
OCTOBER 31, 1999 AND 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Current assets:
Cash and equivalents $ 204,328 $ 57,440
Trade accounts receivable 97,745 161,225
Note receivable, related party -- 3,500
Note receivable, individual -- 67,127
Inventories 204,888 320,532
Prepaid legal fees 92,500 --
Other prepaid expenses 12,007 24,505
---------- ----------
Total current assets 611,468 634,329
Property and equipment, net 566,872 134,045
Acquired technology, net of accumulated amortization 131,945 528,192
Building purchase option 105,000 90,000
---------- ----------
TOTAL ASSETS $1,415,285 $1,386,566
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE> 59
ELECTROPURE, INC.
BALANCE SHEETS
OCTOBER 31, 1999 AND 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Current liabilities:
Trade accounts payable $ 86,544 $ 126,843
Current portion of obligations under capital leases 9,465 --
Note payable to officer 7,632 6,216
Customer deposit 168,755 100,000
Accrued payroll 87,986 79,345
Other accrued liabilities 51,630 36,968
Total current liabilities 412,012 349,372
Obligations under capital leases, net of current portion 1,298 --
Note payable to officer, net of current portion 4,683 12,315
------------ ------------
TOTAL LIABILITIES 417,993 361,687
------------ ------------
Commitments and contingencies
Redeemable preferred stock; $.01 par value; 2,600,000
shares authorized, issued and outstanding 26,000 26,000
Shareholders' equity:
Series B convertible preferred stock; $1.00 par
value; 1,000,000 and no shares authorized,
issued and outstanding (Notes 2 and 25) 1,000,000 --
Common stock; $.01 par value; 20,000,000 shares
authorized; 7,791,425 and 8,618,925 shares
issued and outstanding 77,914 86,189
Class B common stock; $.01 par value; 83,983 shares
authorized, issued and outstanding 840 840
Additional paid-in capital 20,971,537 20,032,205
Accumulated deficit (21,018,249) (19,059,605)
Notes receivable on common stock (60,750) (60,750)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 971,292 998,879
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,415,285 $ 1,386,566
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 60
ELECTROPURE, INC.
STATEMENTS OF OPERATIONS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Net sales $ 695,565 $ 805,513
Cost of sales 898,386 704,365
----------- -----------
Gross profit (loss) (202,821) 101,148
----------- -----------
Operating costs and expenses:
Research and development 650,897 445,110
Salaries 364,697 263,953
Consulting 243,392 142,919
Other operating expenses 512,793 407,939
----------- -----------
Total operating expenses 1,771,779 1,259,921
----------- -----------
Loss from operations (1,974,600) (1,158,773)
Other income (expense):
Interest income 14,252 7,556
Other income 3,920 22,449
Interest expense (1,416) (403,426)
----------- -----------
Other income (expense), net 16,756 (373,421)
----------- -----------
Loss before provision for income
taxes and extraordinary item (1,957,844) (1,532,194)
Provision for income tax (800) (800)
Extraordinary gain -- 26,051
------------ -----------
NET LOSS $(1,958,644) $(1,506,943)
=========== ===========
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.23) $ (0.19)
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 61
ELECTROPURE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
<TABLE>
<CAPTION>
Series B Series B
Convertible Class B Convertible
Preferred Common Common Preferred Common
Shares Shares Shares Stock Stock
----------- ------ ------- ----------- ------
<S> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1997, AS RESTATED -- 7,734,293 83,983 -- $ 77,343
Common shares issued for convertible debt to a
related party -- 342,659 -- -- 3,427
Common shares issued on the exercise of
warrants with beneficial conversion features -- 155,928 -- -- 1,559
Paid-in capital arising from beneficial conversion
features on convertible debt issued -- -- -- -- --
Common shares issued on exercise of warrants -- 25,000 -- -- 250
Common shares issued on exercise of options -- 12,000 -- -- 120
Common shares and warrants issued in a private
placement offering -- 278,363 -- -- 2,784
Common shares issued for an option to purchase
real estate -- 60,000 -- -- 600
Common shares issued for real estate broker
commission -- 6,579 -- -- 66
Common shares issued for consulting and public
relations services -- 4,103 -- -- 40
Payment of note receivable arising from an earlier
issuance of common stock -- -- -- -- --
Warrants granted on common stock to employees
and consultants for services -- -- -- -- --
Net loss -- -- -- -- --
---- --------- ------ ---- --------
BALANCE, OCTOBER 31, 1998 -- 8,618,925 83,983 -- $ 86,189
==== ========= ====== ==== ========
<CAPTION>
Note
Class B Additional Receivable
Common Paid-in Accumulated Common
Stock Capital Deficit Stock Total
------- ---------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1997, AS RESTATED $ 840 $18,244,073 $(17,552,662) $(50,000) $719,594
Common shares issued for convertible debt to a
related party -- 406,420 -- -- 409,847
Common shares issued on the exercise of
warrants with beneficial conversion features -- 154,369 -- -- 155,928
Paid-in capital arising from beneficial conversion
features on convertible debt issued -- 400,175 -- -- 400,175
Common shares issued on exercise of warrants -- 29,500 -- (29,750) --
Common shares issued on exercise of options -- 5,880 -- (6,000) --
Common shares and warrants issued in a private
placement offering -- 547,216 -- -- 550,000
Common shares issued for an option to purchase
real estate -- 89,400 -- -- 90,000
Common shares issued for real estate broker
commission -- 9,934 -- -- 10,000
Common shares issued for consulting and public
relations services -- 7,460 -- -- 7,500
Payment of note receivable arising from an earlier
issuance of common stock -- -- -- 25,000 25,000
Warrants granted on common stock to employees
and consultants for services -- 137,778 -- -- 137,778
Net loss -- -- (1,506,943) -- (1,506,943)
-------- ----------- ------------- --------- ----------
BALANCE, OCTOBER 31, 1998 $ 840 $20,032,205 $(19,059,605) $(60,750) $998,879
======== =========== ============= ========= ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 62
ELECTROPURE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
<TABLE>
<CAPTION>
Series B Series B
Convertible Class B Convertible
Preferred Common Common Preferred Common
Shares Shares Shares Stock Stock
----------- --------- ------ ----------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1998 -- 8,618,925 83,983 -- $ 86,189
Common shares issued upon exercise of options -- 2,500 -- -- 25
Common shares and warrants issued in private
placement -- 1,020,000 -- -- 10,200
Common shares issued as prepaid legal fees -- 100,000 -- -- 1,000
Common shares cancelled pursuant to a
settlement -- (1,950,000) -- -- (19,500)
Class B convertible preferred shares issued in
private placement to a related party 1,000,000 -- -- $1,000,000 --
Options and warrants granted to employees and
consultants for services -- -- -- -- --
Net loss -- -- -- -- --
--------- ---------- ------ ---------- ----------
BALANCE, OCTOBER 31, 1999 1,000,000 7,791,425 83,983 $1,000,000 $ 77,914
========= ========== ====== ========== ==========
<CAPTION>
Note
Class B Additional Receivable
Common Paid-in Accumulated Common
Stock Capital Deficit Stock Total
---------- ------------ ------------- ------------- ----------
<S> <C> <C> <C>
BALANCE, OCTOBER 31, 1998 $ 840 $20,032,205 $(19,059,605) $ (60,750) $ 998,879
Common shares issued upon exercise of options -- 1,225 -- -- 1,250
Common shares and warrants issued in private
placement -- 1,009,800 -- -- 1,020,000
Common shares issued as prepaid legal fees -- 99,000 -- -- 100,000
Common shares cancelled pursuant to a
settlement -- (273,000) -- -- (292,500)
Class B convertible preferred shares issued in
private placement to a related party -- -- -- -- 1,000,000
Options and warrants granted to employees and
consultants for services -- 102,307 -- -- 102,307
Net loss -- -- (1,958,644) -- (1,958,644)
---------- ----------- ------------- ----------- ----------
BALANCE, OCTOBER 31, 1999 $ 840 $20,971,537 $(21,018,249) $ (60,750) $ 971,292
========== =========== ============= =========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 63
ELECTROPURE, INC.
STATEMENTS OF CASH FLOWS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,958,644) $(1,506,943)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 43,080 11,937
Amortization 103,747 117,484
Provision for (recovery on) uncollectible accounts 560 (7,278)
Issuance of warrants for services 102,307 137,778
Interest expense arising from issuance of convertible debt -- 400,175
Services provided in payment of note receivable - related party 70,627 69,627
Issuance of common stock for services -- 17,500
Extraordinary gain on settlement of debt -- (26,051)
(Increase) decrease in assets:
Trade accounts receivable 62,920 (145,965)
Accounts receivable - related party -- 19,500
Prepaid legal and other expenses 19,998 (19,606)
Inventories 115,644 (216,239)
Building purchase - option (15,000) --
Increase (decrease) in liabilities:
Trade accounts payable (40,299) 70,668
Customer deposit 68,755 100,000
Accrued payroll and other liabilities 23,303 70,884
----------- -----------
CASH USED IN OPERATING ACTIVITIES (1,403,002) (906,529)
----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE> 64
ELECTROPURE, INC.
STATEMENTS OF CASH FLOWS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows used in investing activities:
Purchase of property and equipment $ (471,360) $ (117,670)
Purchase of acquired technology -- (200,000)
Increase in notes receivable, related parties -- (203,500)
----------- -----------
CASH USED IN INVESTING ACTIVITIES (471,360) (521,170)
----------- -----------
Cash flows provided by (used in) financing activities:
Principal payments on notes payable -- (13,469)
Proceeds from the issuance of notes payable to a related party -- 400,000
Payments on notes receivable for common stock -- 25,000
Proceeds from exercise of warrants 1,250 155,928
Proceeds from issuance of stock - private placement 1,020,000 550,000
Proceeds from issuance of preferred stock to a related party 1,000,000 --
----------- -----------
CASH PROVIDED BY FINANCING ACTIVITIES 2,021,250 1,117,459
----------- -----------
NET INCREASE (DECREASE) IN CASH 146,888 (310,240)
CASH AT BEGINNING OF PERIOD 57,440 367,680
----------- -----------
CASH AT END OF PERIOD $ 204,328 $ 57,440
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-8
<PAGE> 65
ELECTROPURE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
Supplemental Disclosure of Cash Flow Information
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Interest paid $ 2,543 $ 3,251
Income taxes paid $ 1,600 $ 800
Supplemental Schedule of Non-Cash Investing and Financing Activities
Acquisition of assets in non-cash transactions:
Assets acquired -- $ 200,108
Accounts receivable, related party satisfied -- $ (19,306)
Notes receivable satisfied -- $ (70,802)
Issuance of note payable to officer -- $ (20,000)
Issuance of common stock -- $ (90,000)
Litigation settlement:
Return and cancellation of common stock $ 292,500 --
Surrender of acquired technology $(292,500) --
Issuance of common stock for prepaid legal fees:
Prepaid legal fees $ 100,000 --
Issuance of common stock $(100,000) --
Issuance of common stock for note receivable:
Notes receivable received -- $ 35,750
Issuance of common stock -- $ (35,750)
Convertible debt retired by issuance of common stock:
Reduction of liabilities -- $ 409,847
Issuance of common stock -- $(409,847)
</TABLE>
F-9
<PAGE> 66
ELECTROPURE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
1. DESCRIPTION OF BUSINESS
Electropure, Inc. (the "Company") manufactures and markets
electrodeionization ("EDI") water treatment devices for commercial and
industrial high purity water applications. The Company holds an
exclusive patent on its EDI product and markets it to original equipment
manufacturers as a specialized component for water treatment systems,
whose major customers include semiconductor, pharmaceutical and cosmetic
companies, as well as laboratories and petrochemical companies. The
Company's Hydro Components ("HC") products are sanitary heat exchangers,
sample coolers for sterile steam and water, based on ion exchange
membrane technology for electrodialysis, electrodeposition, and
electrochemical separations. The Company's Micro Imaging ("MI")
technology is in the development phase, which, when completed, will
provide a product that will enable real time identification of
contamination in water.
2. MANAGEMENT'S PLAN (UNAUDITED)
The Company incurred net losses of $1,958,644 and $1,506,943 in fiscal
years October 31, 1999 and 1998, respectively, and at October 31, 1999
had an accumulated deficit of $21,018,249 and is in default under the
redemption provisions of its redeemable preferred stock (Note 24).
Despite negative cash flows from operations of $1,403,002 and $906,529
in the years ended October 31, 1999 and 1998, respectively, the Company
has been able to secure additional operating capital through private
equity funding sources, a significant portion of which is from an
individual who is a related party and the largest shareholder. No
assurances can be given that the Company can or will continue to obtain
sufficient working capital through the sale of the Company's securities,
borrowing, or through the sale of products that will generate sufficient
revenues in the future to sustain ongoing operations. The Company's
ability to continue as a going concern will be reliant upon its ability
to gain access to equity and debt capital or achieve profitable
operations. The Company believes, however, that the current market
interest in its products is strong and will enhance its ability to
generate the funds necessary through equity and debt capital and the
sale of its products to meet its needs.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenues on the sale of the Company's products are recognized when the
products are shipped.
F-10
<PAGE> 67
ELECTROPURE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Cash and Cash Equivalents
The Company invests portions of its excess cash in highly liquid
investments. Cash and equivalents include time deposits and commercial
paper with original maturities of three months or less. The Company has
no requirements for compensating balances. The Company maintains cash
balances in accounts which exceeded the federally insured limits by
$166,684 and $0 at October 31, 1999 and 1998, respectively; however, the
Company has not experienced any losses in such accounts.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts
receivable. Exposure to losses on accounts receivable is principally
dependent on the individual customer's financial condition, as credit
sales are not collateralized. The Company monitors its exposure to
credit losses and reserves for those accounts receivable that it deems
to be not collectible.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined on a standard cost basis, which approximates the first in -
first out method of valuation. The Company's management monitors
inventories for excess and obsolete items and makes necessary valuation
corrections when such adjustments are required.
Property and Equipment
Property and equipment are recorded at cost and are depreciated using
the straight-line method over the expected useful lives noted below.
Expenditures for normal maintenance and repairs are charged to
operations. The cost and related accumulated depreciation of assets are
removed from the accounts upon retirement or other disposition, and the
resulting profit or loss is reflected in the Statement of Operations.
Renewals and betterments that materially extend the life of the assets
are capitalized.
<TABLE>
<CAPTION>
Estimated Useful
Lives
----------------
<S> <C>
Machinery and equipment 5 years
Automobiles 5 years
Furniture and fixtures 5 years
Leasehold improvements 3 years
</TABLE>
F-11
<PAGE> 68
ELECTROPURE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Intangible Assets
Intangible assets represent the cost of intellectual properties
described as acquired patented technology and unpatented process
technology that are amortized on a straight-line method over the shorter
of the estimated useful life of the technology or the remaining term of
the patent.
Impairment of Long-Lived Assets
The Company annually evaluates its long-lived assets, including
identifiable intangible assets for potential impairment. When
circumstances indicate that the carrying amount of an asset is not
recoverable, as demonstrated by the projected undiscounted cash flows,
an impairment loss is recognized. The Company's management has
determined that there was no such impairment present at October 31, 1999
and 1998.
Debt Issued with Stock Purchase Warrants
Proceeds from debt issued were allocated between the debt and the
warrants based on their relative fair values. The value ascribed to the
warrants, based on the Black-Scholes Option Pricing Model, is amortized
to interest expense over the term of the related debt using the
effective interest method.
Induced Conversion of Debt
The Company in certain instances will grant or modify conversion
privileges of debt to equity after its issuance. These grants or
modifications take the form of new or reduced conversion prices of the
debt into the Company's common stock available to the applicable debt
holders. When the debt is converted into equity, the Company recognizes,
as debt conversion expense, the excess of the fair value of the common
stock issued at that time over the fair value of the common stock that
would be issuable under the original terms.
Income Taxes
The Company accounts for income taxes under the liability method. Under
the liability method, deferred income taxes are determined based on
differences between the financial reporting and tax bases of assets and
liabilities. They are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse. The
Company is required to adjust its deferred tax liabilities in the period
when tax rates or the provisions of the income tax laws change.
Valuation allowances are established to reduce deferred tax assets to
the amounts expected to be realized.
F-12
<PAGE> 69
ELECTROPURE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Stock Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting
for Stock-Based Compensation ("SFAS No. 123"), established accounting
and disclosure requirements using a fair value based method of
accounting for stock-based employee compensation plans. As permitted by
SFAS No. 123, the Company will continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to
Employees ("APB No. 25"). Compensation cost for stock options, if any,
will be measured as the excess of the quoted market price of the
Company's stock at the date of grant over the amount an employee must
pay to acquire the stock. Compensation cost is amortized over the
requisite vesting periods.
Product Warranty Cost
Provision for estimated warranty cost is recorded at the time of sale
and periodically adjusted to reflect actual experience.
Research and Development
Research and development expenditures are charged to expense as they are
incurred. The Company's research and development activities include
ongoing work on various uses of the micro imaging multi-angle laser
light scattering technology. Additionally, efforts are continuing on
development of improved production processes and cost reduction
techniques for the ion permeable membranes for their application in the
HC products. Contract research and development expenditures are expensed
as incurred.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual amounts could differ from those
estimates.
Financial Statement Classification
Certain amounts presented within the 1998 financial statements have been
reclassified in order to conform to the 1999 financial statement
presentation.
F-13
<PAGE> 70
ELECTROPURE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
4. NOTE RECEIVABLE, INDIVIDUAL
In February 1998, the Company received a note receivable from an
individual with a fixed annual interest rate of 8%. During the year
ended October 31, 1999, the unpaid balance of the note plus the accrued
interest was offset against a vendor contract incentive bonus earned by
the same individual (Notes 11 and 26).
5. INVENTORIES
At October 31, 1999 and 1998, inventories consisted of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Raw materials $125,292 $320,532
Finished goods 79,596 --
-------- --------
INVENTORIES $204,888 $320,532
======== ========
</TABLE>
6. PROPERTY AND EQUIPMENT
At October 31, 1999 and 1998, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Machinery and equipment $ 424,999 --
Automobiles 39,797 $ 23,000
Furniture and fixtures 111,018 94,711
Leasehold improvements 45,954 28,443
--------- ---------
621,768 146,154
Less: accumulated depreciation (54,896) (12,109)
--------- ---------
TOTAL PROPERTY AND EQUIPMENT, NET $ 566,872 $ 134,045
========= =========
</TABLE>
Depreciation expense for the years ended October 31, 1999 and 1998 was
$43,080 and $11,937, respectively.
F-14
<PAGE> 71
ELECTROPURE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
7. ACQUIRED TECHNOLOGY
At October 31, 1999 and 1998, intangible assets consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Micro imaging multi-angle laser light
scattering instrumentation (Note 26) -- $ 447,146
Ion exchange membrane technology (Note 26) $ 200,000 200,000
--------- ---------
Total acquired technology 200,000 647,146
Less: accumulated amortization (68,055) (118,954)
--------- ---------
TOTAL ACQUIRED TECHNOLOGY, NET $ 131,945 $ 528,192
========= =========
</TABLE>
Amortization expense for the years ended October 31, 1999 and 1998 was
$103,747 and $117,484, respectively.
The Company currently holds a patent on certain electrodeionization
water treatment technology. This patent was issued in 1984 and will
expire in 2001.
8. CAPITAL LEASE OBLIGATIONS
The Company acquired machinery and equipment under the provisions of two
long-term leases during the year ended October 31, 1999. For financial
reporting purposes, minimum lease payments relating to the equipment
have been capitalized. One of the leases expires in 2000, and one
expires in 2001. The leased property under capital leases as of October
31, 1999, has a cost of $17,594, accumulated amortization of $1,787, and
a net book value of $15,807. Amortization of the leased property is
included in depreciation expense.
The future minimum lease payments under capital leases and the net
present value of the future minimum lease payments at October 31, 1999
are as follows:
<TABLE>
<S> <C>
2000 $ 10,347
2001 1,394
--------
Total minimum lease payments 11,741
Less: amount representing interest (978)
--------
Present value of net minimum lease payments 10,763
Less: current maturities (9,465)
--------
LONG-TERM CAPITAL LEASE OBLIGATION $ 1,298
========
</TABLE>
F-15
<PAGE> 72
ELECTROPURE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
9. NOTE PAYABLE TO AN OFFICER
At October 31, 1999 and 1998, a note payable to an officer consisted of
the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Note payable to officer, collateralized by an automobile, with
interest at 9% per annum, payable in monthly installments of
$636 through July 15, 2001 $ 12,315 18,531
Less: current portion (7,632) (6,216)
-------- --------
LONG TERM PORTION OF NOTE PAYABLE TO AN OFFICER $ 4,683 12,315
======== ========
</TABLE>
Maturities of notes payable to an officer as of October 31, 1999 are as
follows:
<TABLE>
<S> <C>
2000 $7,632
2001 $4,683
</TABLE>
10. INCOME TAXES
At October 31, 1999 and 1998, the components of the provision for income
taxes are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current tax expense:
Federal -- --
State $800 $800
---- ----
800 800
---- ----
Deferred tax expense (benefit):
Federal -- --
State -- --
---- ----
TOTAL PROVISION $800 $800
==== ====
</TABLE>
F-16
<PAGE> 73
ELECTROPURE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
10. INCOME TAXES, CONTINUED
Significant components of the Company's deferred income tax assets and
liabilities at October 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforward $ 5,527,023 $ 4,536,592
Allowance for doubtful accounts -- 9,902
Amortization 19,635 35,989
Other 4,473 1,026
Accrued expenses 38,536 6,553
----------- -----------
Total deferred income tax asset 5,589,667 4,590,062
Valuation allowance (5,589,667) (4,590,062)
----------- -----------
NET DEFERRED INCOME TAX ASSET -- --
=========== ===========
</TABLE>
The Company, based upon its history of losses and management's
assessment of when operations are anticipated to generate taxable
income, has concluded that it is more likely than not that none of the
net deferred income tax assets will be realized through future taxable
earnings and has established a valuation allowance for them.
Reconciliation of the effective income tax rate to the U.S. statutory
income tax rate is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Tax expense at U.S. statutory income tax rate (34.0)% (34.0)%
State tax provision 0.1 0.1
Increase in the valuation allowance 34.0 34.0
---- ----
EFFECTIVE INCOME TAX RATE 0.1% 0.1%
==== ====
</TABLE>
The Company has federal and state net operating loss carryforwards of
$14,579,267 and $6,448,779, respectively. The federal and state net
operating loss carryforwards will begin to expire in 2000 and will
continue to lapse through 2019.
F-17
<PAGE> 74
ELECTROPURE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
11. COMMITMENTS
Facilities Lease Agreement
The Company entered into a three year lease agreement that began on
February 1, 1998 for its facility located in Laguna Hills, California.
Monthly lease payments were $16,000 through January 1999, $16,480
through January 2000 and $16,974 through January 2001. The Company has
an option to extend the lease for two additional three year terms. In
March 1998, the Company entered into a two year sub-lease agreement for
a portion of the facility to a third party at the rate of $6,500 per
month.
Future minimum facilities lease payments and facilities sublease rental
income as of October 31, 1999, are as follows:
<TABLE>
<CAPTION>
Minimum Minimum
Lease Sublease
Payments Rental Income
-------- -------------
<S> <C> <C>
2000 $202,206 $ 26,000
2001 50,922 --
-------- --------
TOTAL $253,128 $ 26,000
======== ========
</TABLE>
Rent expense was $196,320 and $151,956 for the years ended October 31,
1999 and 1998, respectively. Sublease rental income was $78,000 and
58,500 for the years ended October 31, 1999 and 1998, respectively. The
sublease rental income has been treated as a reduction of the rent
expense on the Statement of Operations.
Building Purchase Escrow
As part of the original facilities lease agreement, the Company issued
60,000 shares of its common stock for an option to purchase the Laguna
Hills building at any time prior to January 31, 2001 for $2,300,000. The
value of the facility purchase option for which the shares were issued
was $90,000.
In July 1999, the Company notified the lessor of its intent to exercise
its purchase option by opening an escrow with a $15,000 deposit. The
purchase option provides the Company with 18 months within which to
close the escrow and complete the sale. The Company will continue to
make lease payments as prescribed by the lease agreement until the sale
transaction is completed. If the sales transaction is not completed, the
terms of the lease agreement remain in effect. To date, financing for
the building purchase has not been obtained.
F-18
<PAGE> 75
ELECTROPURE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
11. COMMITMENTS, CONTINUED
Consulting Agreement
In May 1998, the Company entered into a three year agreement for
financial consulting services for which it pays $2,500 per month and
granted warrants to purchase 175,000 shares of common stock (Note 16).
Agreement with Harry O'Hare
In October 1998, the Company entered into an agreement with Mr. Harry
O'Hare, a significant shareholder and founder of the Company. In June
1999, the shareholders approved the agreement at the annual
shareholders' meeting. The agreement provides for the Company to pay
into a special bank account, controlled by Mr. O'Hare's wife, $1,000 per
month for ten years and to issue to her a warrant to purchase 10,000
shares of the Company's common stock at $.50 per share with a ten year
term. Also, the Company will cancel $9,105 owed by Mr. O'Hare to the
Company, for which 2,500 of his shares of the Company's common stock is
pledged as collateral.
In exchange, the Company is to receive from Mr. O'Hare all of his
931,629 shares of redeemable preferred stock, 31,205 shares of his Class
B common stock, and all the 2,500 shares of his common stock pledged for
payment of the $9,105 he owes the Company. Mr. O'Hare will transfer
52,678 of his remaining Class B common stock (52,778 shares) to others
in satisfaction of claims against him. Mr. O'Hare will also waive any
claims he may have to any royalties for technology the Company now owns,
and he will not seek any modification of this agreement.
The agreement also provides for the full mutual release of any and all
claims between the Company and Mr. O'Hare.
In connection with a public offering made by the Company in 1987, the
California Commissioner of Corporations (the "Commissioner") imposed
transfer and other restrictions on Mr. O'Hare's Class B common stock and
redeemable preferred stock. Even though the agreement was executed by
the parties and approved by the shareholders, the closing, and therefore
the effectiveness of this agreement, is subject to approval from the
Commissioner for the transfer of the shares as described above. The
Company and Mr. O'Hare agreed to jointly prepare an application to
obtain authorization from the Commissioner to transfer the shares, and
in October 1999 the application was filed. There is no assurance such
authorization will be obtained.
F-19
<PAGE> 76
ELECTROPURE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
11. COMMITMENTS, CONTINUED
Agreement with Harry O'Hare, Continued
During the year ended October 31, 1999, the Company made advances of the
monthly payments contemplated under the agreement totaling $12,000 to
the special bank account controlled by Mr. O'Hare's wife.
12. GAIN ON THE EXTINGUISHMENT OF DEBTS
Lapse in Statutory Collection Period
In the year ended October 31, 1998, the Company received a legal
determination that applicable state statutes with regard to enforcement
of the collectability of a $17,308 note payable due from the Company had
lapsed. Accordingly, the resulting gain on the lapsing of the
enforceability of the debt has been recognized as an extraordinary item.
There is no income tax effect on this extraordinary item.
Settlement of Judgment
In the year ended October 31, 1998, the Company settled a $30,744
liability it recognized as an account payable resulting from a 1993
default judgment rendered against the Company for unpaid corporate
credit card charges. The Company paid a total of $22,000 to satisfy the
judgment. The resulting gain on settlement of $8,744 has been recognized
as an extraordinary item. There is no income tax effect on this
extraordinary item.
13. ROYALTIES
In 1986, the former owner of the EDI patents and an original officer of
the Company, entered into agreements to pay two separate royalties of
$42 and $9 to a group of individuals for each EDI water purification
unit sold by the Company or any sublicensees. The royalty at $42 per
unit continues until the last patent related to these products expires.
The last patent expires in August 2001. The second royalty at $9 per
unit is payable until a maximum of $525,600 has been paid.
The Company sold 68 and 81 EDI water purification units in fiscal years
1999 and 1998, respectively. No units affected by these royalty
agreements were sold prior to fiscal year 1997. The amounts due under
the $42 per unit royalty totaled $6,249 and $3,402 in fiscal years 1999
and 1998, respectively. Under the $9 per unit royalty the amounts
totaled $1,341 and $729 in fiscal years 1999 and 1998, respectively.
These royalties have been accrued and have not been paid.
F-20
<PAGE> 77
ELECTROPURE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
14. LICENSED TECHNOLOGY AGREEMENTS
Nonexclusive licenses for the worldwide use of the EDI technology were
issued to Glegg Water Consulting, Inc. ("Glegg") and to Polymetrics,
Inc. ("Polymetrics"). The license granted to Glegg is a paid up license
with no continuing royalty requirements. The license provides Glegg the
right to sublicense the technology to its subsidiaries and affiliates
and to a Japanese entity. The license granted to Polymetrics has
continuing royalty requirements with royalty fee percentages of five (5)
percent of net sales of "greater than 100 gallon per minute ("gpm")"
systems and ten (10) percent of the "less than 100 gpm" systems.
Polymetrics has not sold any units subject to the license since
inception of the agreement.
15. CONTINGENCIES
Litigation
In August 1999, the Company was named as a cross defendant in a cross
complaint by Douglas B. Platt doing business as East-West Technic Group
("Platt") arising from a lawsuit brought by Staar Surgical Company, Inc.
("Staar") against East-West Technic Group, Douglas B. Platt, and Does 1
through 100. The cross complaint alleges breach of contract, breach of
implied duty of good faith and fair dealing, misrepresentation,
negligence and common counts. More specifically, Platt claims that in
December 1997, the Company and Platt entered into a written agreement
wherein the Company agreed to supply, service, and support an
electrodeionization module to be part of a system installed by Platt for
Staar. Platt claims that the Company knew the details and specifications
of the systems and participated in its design, but failed to provide a
module that could be operated as part of the system.
As a result, Platt seeks to recover damages he suffered under the
contract. The amount of such damages has not yet been determined.
The Company believes the lawsuit is without merit and intends to
vigorously defend itself. While it is not practical to estimate a range
of possible loss, if any, for the Company's litigation of this matter, a
loss could have a material adverse effect on the Company's results of
operations, liquidity and financial position.
Concentrations of Risk
One customer represents 35% and 67% of the Company's sales of its HC
products for the years ended October 31, 1999 and 1998, respectively,
and at October 31, 1999 accounts receivable included $11,800 due from
this customer, which represents 12% of trade accounts receivable.
F-21
<PAGE> 78
ELECTROPURE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
15. CONTINGENCIES, CONTINUED
Concentrations of Risk, Continued
During the years ended October 31, 1999 and 1998, two customers
accounted for 48% and 10% and 23% and 10% of EDI product sales,
respectively. At October 31, 1999 and 1998, no amounts were due from
either of these customers.
Management believes the trade accounts receivable are fully collectible,
and therefore no provision has been recorded for uncollectable trade
accounts receivable at the years ended October 31, 1999 and 1998.
16. STOCK OPTIONS AND WARRANTS
In May 1999, the Company adopted the Electropure, Inc. 1999 stock option
plan (the "plan"), for officers, directors, employees, consultants, and
advisors of the Company. The plan authorizes the granting of options on
up to 1,000,000 shares of common stock. The exercise price per share on
options granted may not be less than the fair market value per share of
the Company's common stock at the date of grant. The exercise price per
share of options granted to anyone who owns more than 10% of the voting
power of all classes of the Company's common stock is a minimum of 110%
of the fair market value per share at the date of grant. The options
exercise price may be paid in cash or its equivalent including cashless
exercises as determined and approved by the plan administrator. The plan
provides two types of options: (i) Incentive Stock Options and (ii)
Non-Qualified Stock Options. In fiscal year 1999, the Company granted
options to purchase 455,000 shares of its common stock under this plan.
The term of each stock option granted is fixed by the plan administrator
and shall not exceed 10 years, except that for those who own 10% of the
voting power of the Company the term of the option may be no more than 5
years. The vesting period is determined by the administrator at or after
the date of grant.
From time-to-time prior to the adoption of the plan, the Company has
granted warrants to officers, key employees, consultants, advisors and
vendors to attract and retain personnel, provide for performance
incentives, and promote the success of the Company by providing warrant
holders the opportunity to acquire an equity interest. Only
non-employees have been granted warrants outside the stock option plan
since its adoption.
F-22
<PAGE> 79
ELECTROPURE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
16. STOCK OPTIONS AND WARRANTS, CONTINUED
Issued to Employees
The following table summarizes information about options granted to
employees. Unless otherwise noted, options vest on an annual pro rata
basis over various periods of time and are exercisable, upon proper
notice, in whole or in part at any time upon vesting. Generally,
unvested options terminate when an employee leaves the Company. The
options granted have contractual lives ranging from 3 to 10 years.
The weighted average fair value of the options granted during the years
ended October 31, 1999 and 1998 were $.94 and $1.31, respectively.
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Options Price
---------- ----------
<S> <C> <C>
BALANCE AT OCTOBER 31, 1997 518,478 $ 0.57
Granted 1,265,000 1.05
Exercised (12,000) 0.50
Canceled (4,978) 2.80
---------- ----------
OUTSTANDING AT OCTOBER 31, 1998 1,766,500 0.91
Granted 890,000 0.96
Exercised (2,500) 0.50
Repriced (25,000) 1.78
Canceled (500,000) 0.86
---------- ----------
OUTSTANDING AT OCTOBER 31, 1999 2,129,000 $ 0.93
========== ==========
</TABLE>
The Company continues to account for stock-based compensation to employees using
the intrinsic value method prescribed in APB No. 25 whereby no compensation cost
is recognized for options granted at or above fair market value. Had
compensation expense for options awards been determined based upon fair values
at the grant dates in accordance with SFAS No. 123, the Company's pro forma net
loss and net loss per share would have been the amounts indicated in the
following schedule. For purposes of pro forma disclosures, the estimated fair
value of the options is amortized over their vesting periods. The pro forma
effects of applying SFAS No. 123 are not indicative of future results because
this statement does not apply to awards granted prior to fiscal year 1997.
F-23
<PAGE> 80
ELECTROPURE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
16. STOCK OPTIONS AND WARRANTS, CONTINUED
Issued to Employees, Continued
<TABLE>
<CAPTION>
October 31
------------------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Net loss:
As reported $ (1,958,644) $ (1,506,943)
Pro forma $ (2,382,137) $ (1,811,487)
Loss per share:
As reported $ (0.23) $ (0.19)
Pro forma $ (0.28) $ (0.20)
</TABLE>
For purposes of the above pro forma calculation, the fair value of
options granted by the Company during the years ended October 31, 1999
and 1998, is estimated using the Black-Scholes Option Pricing Model with
the weighted average assumptions listed below:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Risk-free interest rate 5.51% 4.99%
Expected dividend yield 0 0
Expected stock price volatility 2.042 2.125
Expected life in years 10 10
</TABLE>
Summary information about the Company's options outstanding at October
31, 1999:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range of Options Remaining Average Options Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices October 31, 1999 Life Price October 31, 1999 Price
- ------------ ---------------- ----------- -------- ---------------- --------
<S> <C> <C> <C> <C> <C>
$.28 - $.58 164,000 7.3 $ 0.32 114,000 $ 0.33
$.58 - $.88 455,000 4.9 $ 0.76 100,000 $ 0.79
$.88 - $1.78 1,510,000 6.0 $ 1.07 321,000 $ 1.10
--------- ---------
2,129,000 535,000
========= =========
</TABLE>
F-24
<PAGE> 81
ELECTROPURE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
16. STOCK OPTIONS AND WARRANTS, CONTINUED
Issued to Non-Employees
The Company accounts for stock-based compensation awards to
non-employees based upon fair values at the grant dates in accordance
with SFAS No. 123. The consideration received for the issuance of stock
purchase warrants is based on the fair value of the warrants or of the
goods or services received for the warrants issued, whichever is more
reliably measurable. When the value of the services is based on the fair
value of the warrants, the value is calculated using the Black-Scholes
Option Pricing Model. The fair value of the options or warrants is
amortized over the period the Company received the goods or services.
In this connection, during the years ended October 31, 1999 and 1998 the
Company granted warrants as follows:
Issued to Directors for Services
In August 1998, the Board of Directors granted to each of four
Directors of the Company 10,000 warrants, each with a ten year
term to purchase common stock at $1.375 per share. The issuance
of these warrants for services resulted in an aggregate expense
of $6,000 in fiscal year 1998.
In August 1999, the Board of Directors granted to each of four
Directors of the Company 10,000 warrants, each with a ten year
term to purchase common stock at $1.375 per share. The issuance
of these warrants for services resulted in aggregate expense of
$3,000 in fiscal year 1999.
Issued for Consulting Services
In March 1998, the Company granted 20,000 warrants at $1.125 per
share for consulting services. The warrants expire on March 31,
2002. The fair value of the services provided was $2,000 and is
recorded as a consulting expense in fiscal year 1998.
In May 1998, as part of a financial consulting contract, the
Company granted warrants to purchase 175,000 shares of common
stock at an exercise price of $1.06 per share. The warrants
issued have a term of five years. The value of the warrants
issued in conjunction with this agreement is $90,000 and is
being recognized as a consulting expense ratably over its life.
F-25
<PAGE> 82
ELECTROPURE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
16. STOCK OPTIONS AND WARRANTS, CONTINUED
Issued to Non-Employees, Continued
Issued for Consulting Services, Continued
During the year ended October 31, 1999, the Company granted a
total of 303,600 warrants to purchase common stock to various
individuals for consulting services. The warrants have exercise
prices ranging from $.94 to $1.00, and have contractual lives
ranging from 5 to 10 years. The fair value of the consulting
services received was $94,700 and is being charged to expense
over the life of the consulting arrangements. Consulting expense
of $28,380 relating to these services was recognized for the
year ended October 31, 1999.
The following table summarizes the information relating to warrants
granted to non-employees as of October 31, 1999 and 1998 and changes
during the years then ended:
<TABLE>
<CAPTION>
Weighted
Average
Warrants Exercise
Outstanding Price
----------- ----------
<S> <C> <C>
BALANCE AT OCTOBER 31, 1997 991,362 $ 2.60
Granted 382,500 1.80
Exercised (180,928) 0.44
Canceled (51,600) 0.07
---------- ----------
OUTSTANDING AT OCTOBER 31, 1998 1,141,334 2.35
Granted 853,600 1.59
Exercised -- --
Canceled (12,000) 0.01
---------- ----------
OUTSTANDING AT OCTOBER 31, 1999 1,982,934 $ 2.03
========== ==========
</TABLE>
The values of the consideration received were based on the values of the
warrants, which granted were estimated using the Black-Scholes Option
Pricing Model with the following weighted average assumptions for grants
made in 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Risk-free interest rate 5.51 % 4.99%
Expected dividend yield 0 0
Expected stock price volatility 2.042 2.125
Expected life in years 10 10
</TABLE>
F-26
<PAGE> 83
ELECTROPURE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
16. STOCK OPTIONS AND WARRANTS, CONTINUED
Issued to Non-Employees, Continued
Summary information about the Company's warrants outstanding at October
31, 1999 is as follows:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range of Warrants Remaining Average Warrants Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices October 31, 1999 Life Price October 31, 1999 Price
-------- ---------------- ----------- --------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
$.10 - $.50 48,210 4.89 $ 0.28 48,210 $ 0.28
$.50 - $1.00 473,600 5.26 $ 0.98 238,600 $ 0.97
$1.00 - $1.50 322,500 5.61 $ 1.16 222,500 $ 1.20
$1.50 - $3.00 1,071,250 1.95 $ 2.14 1,071,250 $ 2.14
$3.00 - $10.00 22,376 1.50 $ 9.00 22,376 $ 9.00
$10.00 - $15.00 44,998 1.50 $ 15.00 44,998 $ 15.00
--------- ---------
1,982,934 1,647,934
========= =========
</TABLE>
Private Placement Offerings
During the year ended October 31, 1998, the Company issued 137,500
detachable warrants as part of a private placement offering. The
warrants have a three year term to purchase common stock at $3.00 per
share. These warrants were valued at $1.97 and resulted in an offsetting
increase and decrease to additional paid-in capital. The warrants are
redeemable by the Company at $.05 per warrant if the price of the common
stock equals or exceeds $4.00 per share for 30 consecutive business
days.
During the year ended October 31, 1999, the Company issued 510,000
detachable warrants as part of a private placement offering. The
warrants have a three year term to purchase common stock at $2.00 per
share. These warrants were valued at $.90 and resulted in an offsetting
increase and decrease to additional paid-in capital. The warrants are
redeemable by the Company at $.05 per warrant if the price of the common
stock equals or exceeds $4.00 per share for 30 consecutive business
days.
Issuances by the Company of warrants from all sources at exercise prices
below fair market value at the date of grant resulted in an expense to
the Company of $102,307 and $116,920 for the years ended October 31,
1999 and 1998, respectively.
F-27
<PAGE> 84
ELECTROPURE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
17. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair value amounts of all financial instruments on the
Company's October 31, 1999 and 1998 balance sheets have been determined
by using available market information and appropriate valuation
methodologies. Fair value is described as the amount at which the
instrument could be exchanged in a current transaction between informed
willing parties, other than in a forced liquidation. However,
considerable judgment is necessarily required in interpreting market
data to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the
Company could realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts. The Company does not have
any off balance sheet financial instruments.
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial statements:
Cash and equivalents, trade accounts receivable,
notes receivable, inventories, prepaid expenses,
trade accounts payable, current portion of notes
payable and capital leases, and certain other
current liability amounts are reported in the
balance sheet at approximate fair value due to
the short term maturities of these instruments.
The fair value of non-current notes payable is
estimated by determining the net present value of
future payments. The carrying amount on the
balance sheet approximates the fair value as the
interest rates approximate current market rates.
18. RELATED PARTY TRANSACTIONS
Note Receivable
In August 1998, the Company acquired a note receivable for $3,500 from a
director resulting from cash advances. The note was unsecured and had an
annual interest rate of 5.58%, which became due in October 1998. The
note became delinquent but was eventually satisfied by offsetting it
against consulting fees due to the same individual for services during
the year ended October 31, 1999.
F-28
<PAGE> 85
ELECTROPURE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
18. RELATED PARTY TRANSACTIONS
Purchase of a Vehicle
During the year ended October 31, 1998, the Company purchased an
automobile from an officer for $23,000. The Company paid $3,000 in cash
and issued a note payable collateralized by the automobile for the
balance. In the year ended October 31, 1999, the Company exchanged the
automobile for another automobile. The Company paid $7,797 in cash and
issued a note payable for $16,008.
19. LOSS PER COMMON SHARE
In accordance with the disclosure requirements of SFAS No. 128, Earnings
per Share, a reconciliation of the numerator and denominator of the
basic and diluted loss per share calculation and the computations of net
loss per common share for the years ended October 31, 1999 and 1998 are
as follows.
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Net loss available to common shareholders:
Loss before extraordinary gain $(1,958,644) $(1,532,994)
Extraordinary gain -- 26,051
----------- -----------
Net loss available to common shareholders $(1,958,644) $(1,506,943)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 8,404,713 8,240,951
=========== ===========
Basic and diluted loss per common share:
Loss before extraordinary gain $ (0.23) $ (0.19)
Extraordinary gain -- --
----------- -----------
NET LOSS $ (0.23) $ (0.19)
=========== ===========
</TABLE>
The following securities and contingently issuable shares are excluded
in the calculation of diluted shares outstanding as their effects would
be antidilutive for the years ended October 31, 1999 and 1998 as
follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Stock options and warrants 4,111,934 2,607,834
Convertible preferred stock 1,000,000 --
</TABLE>
F-29
<PAGE> 86
ELECTROPURE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
20. SHARE TRANSACTIONS
Common Shares Issued for Debt with a Beneficial Conversion Feature
During the year ended October 31, 1998, the Company borrowed $400,000
from a related party who is the largest shareholder. The terms of the
notes provided for conversion into shares of the Company's common stock
at any time after their issuance. The intrinsic value of the beneficial
conversion features was determined, and additional paid-in capital and
interest expense of $400,000 was recognized. The Company issued 342,659
shares of common stock to the major shareholder of the Company at fair
market value of $672,897 in connection with the conversion of
convertible notes payable and accrued interest totaling $409,847.
Common Shares Issued for Warrants Exercised with a Beneficial Conversion
Feature
During the year ended October 31, 1998, the Company offered to reduce
the exercise price to $1.00 per share on any warrants with original
exercise prices greater than $2.00 per share. As a result of this
beneficial conversion feature, warrants were exercised for the purchase
of 155,928 shares of common stock for $155,928.
Common Shares Issued for Options and Warrants Exercised
During the year ended October 31, 1998, warrants were exercised
resulting in the purchase of 25,000 shares of common stock for $29,750.
A note receivable of $29,750 was acquired in payment for the shares
issued. The note receivable is recorded as a reduction of shareholders'
equity. During the year ended October 31, 1998, options were exercised
to purchase 12,000 shares of common stock for $6,000. A note receivable
for $6,000 was acquired in payment of the shares issued. The note
receivable is recorded as a reduction of shareholders' equity.
During the year ended October 31, 1999, warrants were exercised
resulting in the purchase of 2,500 shares of common stock for $1,250.
Private Placement Offering - Common Stock
In April 1998, a private placement offering resulted in the issuance of
275,000 shares of common stock and 137,500 detachable warrants to
purchase common stock at an exercise price of $3.00 per share, and the
Company received net proceeds of $550,000. In connection with this
private placement offering, the Company issued 3,363 shares of common
stock as a finder's fee valued at $7,500, which was treated as a
reduction of the proceeds from the private placement offering.
F-30
<PAGE> 87
ELECTROPURE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
20. SHARE TRANSACTIONS, CONTINUED
Private Placement Offering - Common Stock, Continued
During the year ended October 31, 1999, a private placement offering
resulted in the issuance of 1,020,000 shares of common stock and 510,000
detachable warrants to purchase common stock at $2.00 per share, and the
Company received net proceeds of $1,020,000.
Common Shares Issued in Consideration of an Option to Purchase Real
Estate
During the year ended October 31, 1998, the Company issued 60,000 shares
of common stock with a fair market value of $90,000 at the date of issue
to the lessors of the Company's new facility in exchange for a three
year option to purchase the building. The $90,000 value attributable to
the option to purchase the building has been recorded as a building
purchase option.
Common Shares Issued for Services
In the year ended October 31, 1998, the Company issued 6,579 shares of
common stock to the real estate broker who negotiated the lease on the
Company's current facility in satisfaction of a $10,000 commission. The
value of the services involved in the transaction has been expensed and
added to common stock and additional paid-in capital.
In the year ended October 31, 1998, the Company issued 4,103 shares of
common stock, valued at $7,500, to a consulting firm in partial payment
for public relations services to be rendered. The value of the services
involved in the transaction has been expensed and added to common stock
and additional paid-in capital.
Prepaid Legal Services
In May 1999, the Company issued to a law firm involved with its patent
work, 100,000 shares of common stock with a fair value of $100,000 as a
retainer against which fees and expenses incurred will be paid. The
value of the services to be received in this transaction has been
recorded as prepaid legal services and added to common stock and
additional paid-in capital.
Settlement
In July 1999, pursuant to the terms of a settlement, the Company
cancelled 1,950,000 shares of common stock previously held by Wyatt
Technology Corporation (Note 26).
F-31
<PAGE> 88
ELECTROPURE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
20. SHARE TRANSACTIONS, CONTINUED
Private Placement Offering - Preferred Shares
In January 1999, the Company sold 1,000,000 shares of its Series B
convertible preferred stock to a related party who is the largest
shareholder of the Company in a private transaction for $1,000,000. The
Series B convertible preferred stock is convertible into 1,000,000
shares of the Company's common stock in whole or in part at any time by
its holder. The Series B convertible preferred stock is automatically
convertible on the same basis if either of two events occur: a) the
Company makes a public offering of any of its securities, or b) the
Company's securities are admitted for listing on a national securities
exchange market system. In the event the number of shares of the
Company's common stock is increased or decreased as a result of a stock
split, stock dividend, reverse stock split, or otherwise, the number of
shares of common stock into which each share of Series B convertible
preferred stock may be converted shall concurrently be proportionately
increased or decreased. The Series B convertible preferred stock has no
rights for participation in any new or additional issuances of any
Company equity instruments.
Each share of Series B convertible preferred stock is entitled to four
votes on all matters, including the election of directors and shall vote
as a single class along with the common stock, Class B common stock and
redeemable preferred stock.
In any liquidation or dissolution of the Company, the holders of the
Series B convertible preferred stock will be entitled to a liquidation
preference of $1 per share.
21. NOTES RECEIVABLE FOR ISSUANCE OF COMMON STOCK
On various dates during the years ended October 31, 1998 and 1997, the
Company allowed certain individuals, who were current or former officers
and directors, to purchase shares and to exercise options or warrants
held by them in exchange for notes receivable at fixed interest rates
ranging from 5.49% to 5.63%. As of October 31, 1999 and 1998, the notes
receivable related to the issuance of common stock are reflected as a
reduction in equity and are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Note receivable from an officer and director of the Company for the
issuance of 50,000 shares of common stock in August 1997, with
interest at 5.49% per annum, due in July 2002. The note receivable
is collateralized by the shares issued resulting from the exercise
of warrants $25,000 $25,000
</TABLE>
F-32
<PAGE> 89
ELECTROPURE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
21. NOTES RECEIVABLE FOR ISSUANCE OF COMMON STOCK, CONTINUED
<TABLE>
<S> <C> <C>
Note receivable from a former director of the Company for the
issuance of 12,000 shares of common stock in July 1998, with
interest at 5.51% per annum. The note receivable is collateralized
by the shares issued resulting from the exercise of warrants and is
due 90 days after their registration $ 6,000 $ 6,000
Note receivable from a former director of the Company for the
issuance of 25,000 shares of common stock in July 1998, with
interest at 5.63% per annum. The note receivable is collateralized
by the shares issued resulting from the exercise of warrants and is
due 90 days after their registration 29,750 29,750
------- -------
TOTAL $60,750 $60,750
======= =======
</TABLE>
22. EQUITY RIGHTS AND PREFERENCES
Voting Rights
Each share of the Company's 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 holders of the outstanding redeemable preferred
stock of the Company are entitled to one vote per share. Each share of
Series B convertible preferred stock is entitled to four votes per
share.
Liquidation Preferences
In the event of liquidation or dissolution of the Company, the holders
of the common stock, Class B common stock and redeemable preferred
stock, subject to the rights of the holders of the Series B convertible
preferred stock, shall be entitled to receive an equal amount per share,
provided, however, in no instance shall a share of redeemable preferred
stock receive more than $0.01 per share and in no instance shall each
share of Class B common stock receive an amount greater than 80% of the
amount each share of common stock receives, subject to the restrictions
imposed by the Commissioner as described in Note 23.
F-33
<PAGE> 90
ELECTROPURE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
23. CLASS B COMMON STOCK
The Class B common stock is entitled to non-stock dividends and
liquidation payments equal to 80% of those paid to the common stock. All
of the Class B common stock is held by one individual (a significant
shareholder and the founder of the Company) and may not be transferred
or assigned. These shares automatically convert on a share for share
basis into common stock upon the death of the current owner. However, in
connection with an order imposed by the Commissioner, all shares held by
this individual will not participate in dividends, other than for stock
in distribution of assets in the event of liquidation and may not be
transferred without prior consent of the Commissioner or pursuant to a
court order.
24. REDEEMABLE PREFERRED STOCK
The redeemable preferred stock was issued in 1987 to the then holders of
the common and Class B common stock had a redemption date in 1991. The
redeemable preferred stock has not been redeemed due to a lack of
"legally available funds." These shares must be redeemed by the Company
as soon as possible for $0.01 per share at any time the Company has the
"legally available funds" for the redemption. There was a conversion
feature to this redeemable preferred stock, which, with the passing of
time, has lapsed. The Company believes the definition of "legally
available funds" to be the amount under California law from which
dividends could be paid by a corporation that does not have retained
earnings. In general, California law provides that to the extent a
corporation's assets, excluding intangible and deferred assets, are at
least equal to 1.25 times its liabilities, excluding deferred taxes,
deferred income, and deferred credits, a corporation may pay dividends.
Under this definition, the Company had "legally available funds" as of
October 31, 1999 and 1998. As a result, the Company is in default under
the redemption provisions of the redeemable preferred stock. The impact
of this default on the Company's financial position is uncertain.
The redeemable 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 such shares and are not entitled to receive any
dividends. In the event of liquidation, dissolution, or winding up of
the Company, each share is entitled to share ratably in all assets
available for distribution equal to that of a share of common stock up
to a maximum of $.01 per share.
25. SERIES B CONVERTIBLE PREFERRED STOCK
Each share of Series B convertible preferred stock is entitled to four
votes on all matters, including the election of directors and shall vote
as a single class along with the common stock, Class B common stock, and
redeemable preferred stock. In any liquidation or dissolution of the
Company, the holders of the Series B convertible preferred stock will be
entitled to a liquidation preference of $1 per share.
F-34
<PAGE> 91
ELECTROPURE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
26. ACQUISITION AND DISPOSITION OF TECHNOLOGY
Micro Imaging Technology
In October 1997, the Company completed a technology transfer agreement
(the "Agreement") for the acquisition of certain intellectual property
described in seven patents from Wyatt Technology Corporation ("Wyatt").
The intellectual property acquired relates to clean water monitoring
through the utilization of multi-angle laser light scattering
instrumentation, which the Company refers to as its "micro imaging
technology." The cost of the intellectual property acquired was
2,100,000 shares of the Company's common stock valued at $447,146. As
part of the Agreement, Wyatt was to manufacture and sell at prices
including a reasonable profit all components involving the intellectual
property that the Company requires for a period of three years.
During year ended October 31, 1999, disagreements arose between the
Company and Wyatt regarding the performance of each under the terms of
the Agreement. In February 1999, the Company filed a lawsuit claiming
Wyatt breached the terms of the Agreement. Wyatt filed a counter suit
claiming the Company breached the Agreement. In July 1999, the Company
and Wyatt entered into a settlement agreement whereby the Company and
Wyatt each retain the right to commercially exploit the technology that
was the subject of the Agreement, including that which was developed
during "Phase I" (as defined) of the Agreement (the "Retained Rights").
The Company's Retained Rights are limited to use in detection of harmful
substances in drinking water and may not be transferred or assigned
except to resellers and end users of products developed by the Company
from such Retained Rights.
As consideration for the settlement, the Company delivered to Wyatt
items obtained from Wyatt during the term of the agreement and copies of
the technology, consisting of certain papers and software, developed by
the Company through April 1998.
Wyatt in turn, delivered all remaining shares it held of the Company's
common stock, which it received for entering into the Agreement, and all
stock purchase warrants received by Clifford Wyatt for services as a
member of the Company's Board of Directors. The settlement has been
recorded at $292,500, the fair value at the settlement date of the
1,950,000 shares returned.
The Company believes there is no remaining value in the Retained Rights.
Since the fair value of the shares received in the settlement is equal
to the net book value of the related intangible assets at the settlement
date, no gain or loss has been recognized as a result of the settlement.
F-35
<PAGE> 92
ELECTROPURE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
26. ACQUISITION AND DISPOSITION OF TECHNOLOGY, CONTINUED
Ion Exchange Membrane Technology
In February 1998 the Company acquired the HC ion exchange membrane
process technology for $200,000. The process technology is comprised of
certain production processes, intellectual properties, and know-how.
None of the acquired intangible assets are protected by patent,
copyright or trademark.
27. BUSINESS SEGMENTS
The Company has three reportable segments: water purification ("EDI"),
hydro components ("HC"), and clean water monitoring (Micro Imaging
["MI"]) (a start up segment). The water purification segment produces
water treatment modules for sale to manufacturers. The hydro component
segment sells water and wastewater treatment products to the light
commercial/industrial markets. The clean water monitoring segment is
developing technology that is anticipated will enable real time
identification of contamination in water.
The Company's reportable segments are strategic business units that
offer different products, are managed separately, and require different
technology and marketing strategies. The accounting policies of the
segments are those described in the summary of significant accounting
policies. The Company evaluates performance based on results from
operations before income taxes not including nonrecurring gains and
losses.
Business Segment Information:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revenue
EDI $ 278,943 $ 372,742
HC 416,622 432,771
MI -- --
----------- -----------
TOTAL REVENUE $ 695,565 $ 805,513
=========== ===========
Operating Loss
EDI $ (642,835) $ 7,883
HC (239,768) 93,265
MI (650,897) (445,110)
Corporate (437,180) (792,362)
----------- -----------
TOTAL OPERATING LOSS $(1,970,680) $(1,136,324)
=========== ===========
</TABLE>
F-36
<PAGE> 93
ELECTROPURE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
27. BUSINESS SEGMENTS, CONTINUED
Business Segment Information, Continued:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Depreciation and Amortization
EDI $ 1,418 $ 8,952
HC 40,717 31,040
MI 65,425 89,429
Corporate 39,271 --
---------- ----------
TOTAL DEPRECIATION AND AMORTIZATION $ 146,831 $ 129,421
========== ==========
Identifiable Assets
EDI $ 426,103 $ 292,806
HC 634,154 522,734
MI 122,374 356,247
All others 232,654 214,779
---------- ----------
Total identifiable assets $1,415,285 $1,386,566
========== ==========
Expenditures for Long Lived Assets
EDI $ 122,258 $ 86,227
HC 292,368 200,000
MI 10,373 --
Corporate 17,809 --
---------- ----------
TOTAL EXPENDITURES FOR LONG LIVED ASSETS $ 442,808 $ 286,227
========== ==========
Geographic Information:
Revenues
United States $ 502,228 $ 506,996
Japan 132,490 183,117
Ireland 28,668 83,600
Other foreign countries 32,179 31,800
---------- ----------
TOTAL REVENUES $ 695,565 $ 805,513
========== ==========
</TABLE>
F-37
<PAGE> 94
ELECTROPURE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE TWO YEARS IN THE PERIOD ENDED OCTOBER 31, 1999
28. SUBSEQUENT EVENT
Financial Arrangement with a Related Party
In December 1999, the Company entered into a financing arrangement with
the principal shareholder. The terms of the agreement are for the
principal shareholder to lend the Company $200,000 and receive in return
from the Company an unsecured convertible note with a term of two years
and an annual interest rate of 10%. The conversion terms and the number
of warrants have not as of yet been described and then approved by the
Company's Board of Directors. The $200,000 note payable has been issued,
and $100,000 of the proceeds therefrom have been received. The remainder
of the proceeds is anticipated by the Company in January 2000.
F-38
<PAGE> 95
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying interim condensed Financial Statements are unaudited and have
been prepared in accordance with the rules and regulations of the Securities and
Exchange Commission. These statements should be read in connection with the
Financial Statements for the two years ended October 31, 1999, and the notes
thereto included in this Prospectus. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations.
In our opinion, the accompanying unaudited interim condensed Financial
Statements contain all adjustments (consisting of normal recurring accruals and
prior period adjustments) necessary to present fairly our financial position as
of January 31, 2000, and the results of its operations and its cash flows for
the three months ended January 31, 2000 and 1999. The results of operations for
the three-month period ended January 31, 2000 are not necessarily indicative of
the results to be expected for the full year.
F-39
<PAGE> 96
ELECTROPURE, INC.
Balance Sheets
ASSETS
<TABLE>
<CAPTION>
January 31, October 31,
2000 1999
---------- ----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and equivalents $ 109,118 $ 204,328
Trade accounts receivable 91,720 97,745
Inventories 208,650 204,888
Prepaid legal fees 92,500 92,500
Other prepaid expenses 21,325 12,007
---------- ----------
Total current assets 523,313 611,468
Property and equipment, net 553,393 566,872
Acquired technology, net of accumulated amortization 121,945 131,945
Building purchase option 105,000 105,000
---------- ----------
TOTAL ASSETS $1,303,651 $1,415,285
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-40
<PAGE> 97
ELECTROPURE, INC.
Balance Sheets
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
January 31, October 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current liabilities:
Trade accounts payable $ 164,074 $ 86,544
Current portion of obligations under capital leases 8,585 9,465
Notes payable to shareholder 302,849 --
Note payable to officer 7,632 7,632
Customer deposit 63,455 168,755
Accrued payroll 105,602 87,986
Other accrued liabilities 64,384 51,630
------------ ------------
Total current liabilities 716,581 412,012
Obligations under capital leases, net of current portion 64 1,298
Note payable to officer, net of current portion 3,039 4,683
------------ ------------
TOTAL LIABILITIES 719,684 417,993
------------ ------------
Commitments and contingencies
Redeemable preferred stock; $0.01 par value;
2,600,000 shares authorized, issued and
outstanding 26,000 26,000
Stockholders' equity:
Series B convertible preferred stock; $1.00 par
value; 1,000,000 and no shares
authorized, issued and outstanding 1,000,000 1,000,000
Common stock; $0.01 par value; 20,000,000
shares authorized; 7,791,415 and 7,809,635
shares issued and outstanding 78,096 77,914
Class B common stock; $0.01 par value; 83,983
shares authorized, issued and outstanding 840 840
Additional paid-in capital 20,996,942 20,971,537
Accumulated deficit (21,450,781) (21,018,249)
Notes receivable on common stock (67,130) (60,750)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 557,967 971,292
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,303,651 $ 1,415,285
------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-41
<PAGE> 98
ELECTROPURE, INC.
Statements of Operations
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
January 31,
-----------------------------
2000 1999
--------- ---------
<S> <C> <C>
Net sales $ 224,570 $ 279,971
Cost of sales 280,750 252,746
--------- ---------
Gross profit (loss) (56,180) 27,225
--------- ---------
Operating costs and expenses:
Research and development 100,284 166,939
Salaries 116,262 32,569
Consulting 27,809 52,546
Other operating expenses 135,057 62,158
--------- ---------
Total operating expenses 379,412 314,212
--------- ---------
Loss from operations (435,592) (286,987)
Other income (expense):
Interest income 6,584 950
Other income
Interest expense (3,524) --
--------- ---------
Other income (expense), net 3,060 950
--------- ---------
NET LOSS $(432,532) $(286,037)
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.06) $ (0.03)
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-42
<PAGE> 99
ELECTROPURE, INC.
Statements of Stockholders' Equity
(UNAUDITED)
<TABLE>
<CAPTION>
Series B Series B
Convertible Class B Convertible
Preferred Common Common Preferred Common
Shares Shares Shares Stock Stock
----------- --------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1999 1,000,000 7,791,425 83,983 $1,000,000 $ 77,914
Common shares issued upon exercise of options -- 18,210 -- -- 182
Options and warrants granted to employees and
consultants for services -- -- -- -- --
Increase in notes receivable on common stock -- -- -- -- --
Net loss -- -- -- -- --
BALANCE, JANUARY 31, 2000 1,000,000 7,809,635 83,983 $1,000,000 $ 78,096
========= ========= ====== ========== ==========
<CAPTION>
Note
Class B Additional Receivable
Common Paid-in Accumulated Common
Stock Capital Deficit Stock Total
---------- ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1999 $ 840 $20,971,537 (21,018,249) $ (60,750) $ 971,292
Common shares issued upon exercise of options -- 1,639 -- -- 1,821
Options and warrants granted to employees and
consultants for services -- 23,766 -- -- 23,766
Increase in notes receivable on common stock -- -- (6,380) (6,380)
Net loss -- -- (432,532) -- (432,532)
BALANCE, JANUARY 31, 2000 $ 840 $20,996,942 $(21,450,781) $ (67,130) $ 557,967
========== =========== ============ ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-43
<PAGE> 100
ELECTROPURE, INC.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
January 31,
--------------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(432,532) $(286,037)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 33,511 8,422
Amortization 10,000 32,357
Provision for (recovery on) uncollectible accounts -- 560
Issuance of warrants for services 23,766 20,542
Services provided in payment of note
receivable - related party -- (6,353)
(Increase) decrease in assets:
Trade accounts receivable 6,025 85,320
Prepaid legal and other expenses (9,318) 8,000
Inventories (3,762) (46,298)
Increase (decrease) in liabilities:
Trade accounts payable 77,530 4,773
Customer deposit (105,300) 70,000
Accrued payroll and other liabilities 29,461 (23,395)
--------- ---------
CASH USED IN OPERATING ACTIVITIES (370,619) (132,109)
--------- ---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-44
<PAGE> 101
ELECTROPURE, INC.
Statements of Cash Flows
(UNAUDITED)
<TABLE>
<S> <C> <C>
Cash flows used in investing activities
Purchase of property and equipment (20,032) (5,146)
Purchase of acquired technology --
Interest accrued on notes receivable on common stock (6,380) --
----------- -----------
CASH USED IN INVESTING ACTIVITIES (26,412) (5,146)
----------- -----------
Cash flows provided by (used in) financing activities:
Principal payments on notes payable -- (505)
Proceeds from the issuance of notes payable to
a related party 300,000 --
Proceeds from exercise of warrants 1,821 --
Proceeds from issuance of preferred stock to a
related party -- 1,000,000
----------- -----------
Cash provided by financing activities 301,821 999,495
----------- -----------
Net increase (decrease) in cash (95,210) 862,240
Cash at beginning of period 204,328 57,440
----------- -----------
Cash at end of period $ 109,118 $ 919,680
----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-45
<PAGE> 102
1. BASIS OF PRESENTATION
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.
The results of operations for the periods presented are not necessarily
indicative of the results to be expected for the full year. 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, 1999, included in the
Company's Annual Report on Form 10-KSB.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Classification Certain amounts presented within the
1999 financial statements have been reclassified in order to conform to
the 2000 financial statement presentation.
3. NOTES PAYABLE TO OFFICER AND SHAREHOLDERS
At January 31, 2000 and 1999, notes payable to officer and shareholders
consisted of the following:
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
NOTES PAYABLE TO SHAREHOLDER
Notes payable to shareholder, without collateral, with an
interest rate of 10% per annum, originally due beginning
December 13, 2001 (Note 5) $ 302,849 --
--------- ---------
NOTE PAYABLE TO OFFICER
Note payable to officer, collateralized by an automobile, with
interest at 9% per annum, payable in monthly installments of
$636 through July 15, 2001 10,671 18,026
Less: Current portion (7,632) (6,357)
--------- ---------
LONG TERM PORTION OF NOTES PAYABLE TO OFFICER $ 3,039 11,669
</TABLE>
Maturities of notes payable to an officer as of January 31, 2000 are as
follows:
<TABLE>
<S> <C>
2000 $7,632
2001 $3,039
</TABLE>
F-46
<PAGE> 103
4. CONTINGENCIES
Litigation
In August 1999, the Company was named as a cross defendant in a cross
complaint by Douglas B. Platt doing business as East-West Technic Group
("Platt") arising from a lawsuit brought by Staar Surgical Company, Inc.
("Staar") against East-West Technic Group, Douglas B. Platt, and Does 1
through 100. The cross complaint alleges breach of contract, breach of
implied duty of good faith and fair dealing, misrepresentation,
negligence and common counts. More specifically, Platt claims that in
December 1997, the Company and Platt entered into a written agreement
wherein the Company agreed to supply, service, and support an
electrodeionization module to be part of a system installed by Platt for
Staar. Platt claims that the Company knew the details and specifications
of the systems and participated in its design, but failed to provide a
module that could be operated as part of the system.
As a result, Platt seeks to recover damages he suffered under the
contract. The amount of such damages has not yet been determined.
The Company believes the lawsuit is without merit and intends to
vigorously defend itself. While it is not practical to estimate a range
of possible loss, if any, for the Company's litigation of this matter, a
loss could have a material adverse effect on the Company's results of
operations, liquidity and financial position.
Concentration of Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts
receivable. Exposure to losses on accounts receivable is principally
dependent on the individual customer's financial condition, as credit
sales are not collateralized. The Company monitors its exposure to
credit losses and reserves for those accounts receivable that it deems
to be not collectible.
Approximately 88% of the Company's sales of EDI products during the
three months ended January 31, 2000 were made to foreign customers. One
such foreign customer accounted for 81% of EDI product sales. The
Company makes all sales and receives all payments in U.S. dollars on all
foreign sales. Management believes that trade accounts receivable,
aggregating $91,720 for the period ended January 31, 2000, are fully
collectable, and therefore no provision has been recorded for
uncollectable trade accounts receivable.
5. SUBSEQUENT EVENTS
In February 2000, the Board of Directors authorized a private placement
offering of Units of Electropure's securities, each Unit consisting of
25,000 shares of common stock and 12,500 three-year warrants to purchase
common stock at $2.00 per share. The warrants are redeemable by us at
any time that the common stock of Electropure shall equal or exceed
$4.00 per share for thirty (30) consecutive trading days.
On February 25, 2000, Mr. Anthony Frank, a majority shareholder,
converted $300,000 in principal loans made to us as of January 31, 2000,
plus interest accrued thereon through the
F-47
<PAGE> 104
conversion date, into the above private placement Units. Mr. Frank
received 304,822 shares of common stock and 152,411 two-year warrants to
purchase common stock at $2.00 per share pursuant to such conversion.
On February 10, 2000, Mr. Anthony Frank loaned us an additional $100,000
at 10% annual interest for two years which was also converted into
private placement Units on February 25, 2000. We issued an additional
100,384 shares of common stock and 50,192 two-year warrants pursuant to
this conversion.
On March 6, 2000, Mr. Frank purchased an additional 20 Units of the
above-described private placement offering for the sum of $500,000.
In March 2000, we realized an additional $110,000 on the sale of 110,000
shares of common stock and 55,000 warrants pursuant to the above private
placement offering.
In March 2000, we issued 2,500 shares of common stock, valued at $2,500,
as partial payment for public relations services to be rendered.
In February 2000, we entered into a one-year agreement for
administrative and financial consulting services for which we pay $1,000
per month for the first six months and $1,500 per month for the last six
months of the agreement. We also granted 75,000 warrants to purchase
common stock at $0.625 per share. The warrants vest in 25,000 annual
increments commencing on February 1, 2000 and will expire on February 1,
2006. The fair value of the warrants was $46,500 and will be recorded as
a consulting expense over the period we receive the services.
F-48
<PAGE> 105
No dealer, salesman or other person is authorized to give any information or to
make any representations not contained in this Prospectus in connection with the
offer made hereby, and if given or made, such information or presentations must
not be relied upon as having been authorized by the Company. This Prospectus
does not constitute an offer to sell or a solicitation of any offer to buy the
securities offered hereby to any person in any state or other jurisdiction in
which such offer or solicitation would be unlawful. The delivery of this
Prospectus at any time does not imply that information contained herein is
correct as of any time subsequent to its date.
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION ..............................................
PROSPECTUS SUMMARY .................................................
THE COMPANY ........................................................
RECENT SIGNIFICANT DEVELOPMENTS ....................................
RISK FACTORS .......................................................
DILUTION ...........................................................
DIVIDEND POLICY ....................................................
USE OF PROCEEDS ....................................................
MARKET PRICES ......................................................
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS .....
BUSINESS ...........................................................
LITIGATION .........................................................
MANAGEMENT .........................................................
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT ...............................
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .....................
SELLING SHAREHOLDERS ...............................................
DESCRIPTION OF CAPITAL STOCK........................................
LEGAL OPINION ......................................................
EXPERTS ............................................................
CHANGE IN CERTIFYING ACCOUNTANTS....................................
ACCOUNTANTS' REPORT ................................................
FINANCIAL STATEMENTS ...............................................
UNAUDITED INTERIM FINANCIAL STATEMENTS .............................
</TABLE>
ELECTROPURE, INC.
COMMON STOCK
PROSPECTUS
__________ __, 2000
<PAGE> 106
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 317 of the California Corporations Code allows a corporation to advance
expenses incurred by an officer or director in defending any proceeding prior to
the final disposition of such proceeding upon receipt of an undertaking to repay
such amount if such person is not ultimately entitled to indemnification. In
non-derivative actions, an officer or director is entitled to reimbursements for
expenses, fines, judgments and settlements if such individual has acted in good
faith and in a manner he believed to be in the best interests of the corporation
and in the case of criminal proceedings, he had no reasonable cause to believe
the conduct was unlawful. With regard to derivative actions (a suit brought on
behalf of the Registrant), such person is entitled to reimbursements for
expenses if the officer or director acted in good faith, in a manner the officer
or director believed to be in the best interests of the corporation and with
such care, including reasonable injury, as an ordinary and prudent person in
like position would use in similar circumstances; provided, however, that no
indemnification shall be made (1) if the officer or director is found liable to
the corporation, except as may be determined by the court in which the action is
pending; (2) for amounts paid in settling an action without court approval; or
(3) for amounts paid in defending such action which is terminated without court
approval.
If indemnification is authorized by Section 317, but not required, then it shall
be determined by (i) a majority vote of the disinterested members of the Board
of Directors, (ii) a majority vote of the disinterested shareholders, (iii) the
court in which the action is pending; or (iv) if a quorum of independent
directors is not available, by independent legal counsel in a written opinion.
If the officer or director is successful in the defense of an action, Section
317 provides that such individual shall be entitled to indemnification. Finally,
Section 317 authorizes a corporation to maintain officers' and directors'
liability insurance.
Article III, Section 16 of the By-Laws of Registrant provides for
indemnification of officers and directors in the situations authorized by
Section 317.
See also "WHERE YOU CAN FIND ADDITIONAL INFORMATION."
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection with the
offering described in this Registration Statement.
<TABLE>
<S> <C>
Registration Fee Under Securities
Act of 1933 .............................................. $ 4,000
Accounting Fees and Expenses .................................. 1,500
Legal Fees and Expenses ....................................... 10,000
Miscellaneous ................................................. 4,500
-------
Total .................................... $20,000
</TABLE>
II-1
<PAGE> 107
ITEM 26. RECENT SALE OF UNREGISTERED SECURITIES
During the past three years, the Registrant has issued or sold the securities
set forth in "RECENT SIGNIFICANT DEVELOPMENTS - Stock Issuances," "BUSINESS -
Acquisition of Intellectual Properties - EDI Components and Micro Imaging
Technology," "LITIGATION," "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS," and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS Liquidity and Capital Resources."
The issuance of securities in these transactions, except as described below,
were exempt from registration under the Securities Act of 1933, as amended (the
"Act"), by virtue of Sections 3(b) and 4(2) of the Act, including Regulation D
promulgated thereunder. The Company believes that the recipients in each case
acquired the securities for investment only and not with a view to the
distribution thereof and legends were affixed to the stock certificates.
ITEM 27. EXHIBITS
<TABLE>
<S> <C>
3.1 Articles of Incorporation of the Registrant, as amended. ***
3.2 By-Laws of the Registrant, as amended. *
5.0+ Opinion of Skadden, Arps, Slate Meagher & Flom, LLP.
10.19 Form of Indemnity Agreement with each current Officer and
Director. **
10.47.8 License Termination Agreement with EDI Components dated August 14,
1997 (effective 08/05/97). *****
10.47.9 Employment Agreement with Floyd H. Panning dated August 14, 1997
(effective 08/05/97). *****
10.52 Technology Transfer Agreement with Wyatt Technology Corporation
dated October 25, 1997. ******
10.53 8% Sixty-Day Term Note from Hydro Components, Inc. dated February
17, 1998, including Assignment Agreement, Security Agreement and
Unlimited Personal Guaranty.*******
24.1 Consent of Kelly & Company.
24.2 Consent of Skadden, Arps, Slate, Meagher & Flom, LLP (included in
Exhibit 5.0).
25 Power of Attorney (see page II-5).
</TABLE>
II-2
<PAGE> 108
- --------------------
+ To be filed in an amendment.
* Previously filed on December 15, 1986 in connection with
Registration Statement of Registrant on Form S-1, File No. 33-10669.
** Incorporated by reference to Exhibit "B" to Registrant's Definitive
Proxy Statement, dated April 20, 1988, for the Annual Meeting held
May 18, 1988, as filed on May 4, 1988.
*** Previously filed on February 28, 1989 in connection with
Registrant's Form 10-K for the fiscal year ended October 31, 1988.
**** Previously filed on October 11, 1995 in connection with Registrant's
Form 10-KSB for the fiscal year ended October 31, 1994.
***** Previously filed on July 16, 1997 in connection with Registrant's
form 10-KSB for the fiscal year ended October 31, 1996.
****** Previously filed on September 11, 1997 in connection with
Registrant's Form 10-QSB for the fiscal quarter ended July 31, 1997.
******* Previously filed on November 14, 1997 in connection with Schedule
13-D filed by Wyatt Technology Corporation.
******** Previously filed on February 11, 1998 in connection with
Registrant's Form 10-KSB for the fiscal year ended October 31, 1997.
********* Previously filed on March 5, 1998 in connection with Registrant's
Form 10-QSB for the fiscal quarter ended January 31, 1998.
II-3
<PAGE> 109
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events
arising after the effective date of the Registration Statement
(or the most recent post-effective amendment thereto) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the Registration Statement;
(iii) To include any material information with respect
to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such
information in the Registration Statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do
not apply if the registration statement is on Form S-3, Form S-8
or Form F-3 and the information required to be included in a
post-effective amendment by those paragraphs is contained in
periodic reports filed with or furnished to the Securities and
Exchange Commission by the registrant pursuant to Section 13 or
Section 13(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions in Item 14 hereof, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless, in the opinion of its counsel, the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE> 110
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing this Amendment No. 2 on Form SB-2 and authorized this
Registration Statement and any and all amendments thereto to be signed on its
behalf by the undersigned thereunder duly authorized, in the City of Laguna
Hills, California, on March 28, 2000.
ELECTROPURE, INC.
BY /S/ CATHERINE PATTERSON
--------------------------------
CATHERINE PATTERSON
Chief Financial Officer
POWER OF ATTORNEY
Each person whose individual signature appears below hereby constitutes and
appoints Catherine Patterson and Floyd H. Panning as his true and lawful
attorneys-in-fact with full power of substitution to execute in the name and on
behalf of such person, individually and in each capacity stated below, and to
file, any and all amendments to this Registration Statement, including any and
all post-effective amendments.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURES
<TABLE>
<S> <C> <C>
/S/ WILLIAM F. FARNAM Director March 28, 2000
- ------------------------------------
WILLIAM F. FARNAM
Director
- ------------------------------------
RANDALL P. FRANK
/S/ RANDOLPH S. HEIDMANN Director March 28, 2000
- ------------------------------------
RANDOLPH S. HEIDMANN
/S/ ARTHUR LIPPER III Director March 28, 2000
- ------------------------------------
ARTHUR LIPPER III
/S/ FLOYD H. PANNING Chief Executive Officer March 28, 2000
- ------------------------------------ and Director
FLOYD H. PANNING
Chief Financial Officer
/S/ CATHERINE PATTERSON (Principal Financial and March 28, 2000
- ------------------------------------ Accounting Officer)
CATHERINE PATTERSON
</TABLE>
II-5
<PAGE> 111
<TABLE>
<CAPTION>
Exhibit Page No.
- ------- --------
<S> <C> <C>
5.0+ Opinion of Skadden, Arps, Slate, Meagher & Flom, LLP.
24.1 Consent of Kelly & Company.
</TABLE>
- ----------------
+ To be filed in an amendment.
II-6
<PAGE> 1
EXHIBIT 24.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this registration statement on Form SB-2 (File
No. 33-41289) Amendment No. 2 of our report, which includes an explanatory
paragraph as to the Company's ability to continue as a going concern, dated
December 23, 1999, on our audits of the financial statements of Electropure,
Inc. We also consent to the references to our firm under the captions "Experts"
and "Change in Certifying Accountants".
Kelly & Company
Kelly & Company
Newport Bach, California
March 30, 2000
