<PAGE> 1
This registration statement has been filed with the Securities and
Exchange Commission but has not yet become effective. Information contained
herein us subject to completion or amendment.
As filed with the Securities and Exchange Commission on November 30,
1998.
--------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(B)
OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934
---------------------------------------------
INNOVA PURE WATER, INC.
---------------------------------------------
(Exact Name of Registrant As Specified in Charter)
Florida 59-2567034
- -------------------------------- ------------------------------------
(State or jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
13130 - 56th Court, Suite 605, Clearwater, Florida 33760
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (727) 572-1000
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
To be so registered Each class is to be registered
N/A N/A
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock ($.0001 par value)
(Title of Class)
Total Number of Pages:
Index to Exhibits at Page:
================================================================================
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I
<S> <C>
ITEM 1. DESCRIPTION OF BUSINESS.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
ITEM 3. DESCRIPTION OF PROPERTY.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
ITEM 6. EXECUTIVE COMPENSATION.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
ITEM 8. DESCRIPTION OF SECURITIES.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.
ITEM 2. LEGAL PROCEEDINGS.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
PART F/S
ITEM 1. FINANCIAL STATEMENTS.
PART III
ITEM 1. DESCRIPTION OF EXHIBITS.
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Innova Pure Water, Inc. a Florida corporation (the "Company" or
"Innova") was incorporated August 13, 1985. The Company designs, develops and
manufactures unique consumer water filtration products. These products have been
historically of the portable nature and generally consist of a container serving
as a water reservoir incorporating an integral highly efficient water-filtering
device. The container may be in the shape and size of a bottle, pitcher or
carafe. The Company also has and continues to investigate counter top and
in-line filtration systems.
The Company has become recognized as an innovator in the water
filtration field with numerous patent rights assigned to it from its founder,
John E. Nohren, Jr., which potentially provide the Company with competitive
advantages. It has been the Company's ability to create both new products and
develop technology that has permitted it to differentiate itself from other
competitors within the field. The Company has also demonstrated the ability to
address and open significant new markets previously overlooked or ignored.
Examples of these markets are portable personal and sport type filter bottles;
and products for the infant, children's, and teen market. On the technology
side, Innova has attracted interest from large consumer products companies. This
has led to the Company differentiating itself as a product innovator and creator
as well as product producer, thus making the Company attractive as a strategic
alliance partner to a strong multi-national marketing company such as
Rubbermaid. Such an alliance has been created under which the Company creates
and manufactures while Rubbermaid markets and distributes the products. The
elimination of the need for the Company to finance its own sales and marketing
program has allowed the Company to achieve profitability while attaining
distribution that would otherwise be impossible. However, there is no assurance
that the Company will continue to achieve profitability.
The water filtration products of the Company are designed to provide an
improved quality and much better tasting water for the average consumer at an
affordable price. The Innova filtration process has been shown under independent
taste tests to have no discernible taste or quality differences from the
expensive designer bottled waters, while costing a fraction of the price. The
products currently produced are primarily designed to treat tap water, reducing
chlorine, taste and odor. Portable highly effective filtration products will be
introduced shortly for the removal of biological contaminants including protozoa
and bacteria. Future products are under development, which are focused upon the
removal of heavy metals, such as lead, as well as arsenic, and radioactive
contaminants, which are beyond the capabilities of competitive technology. Also,
the Company has created a unique line of filters to adapt to 5 gallon water
bottles commonly used in conjunction with coolers and crocks. The products are
adaptable to the world market requirements as well as domestic market needs. A
new strategic alliance is being established for the domestic distribution of
water filters adaptable to the 1-5 gallon crock and cooler class of products.
There is no assurance that this alliance will be consummated or that the Company
will be able to commercially exploit its water purification technologies on a
profitable basis.
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CUSTOMERS, STRATEGIC ALLIANCES AND MARKETING
The Company believes that as a result of the diminishing quality of tap
water, both domestically and world wide, the opportunities for the application
of the Company's water filtration products and technology will continue to grow
for a number of years. Domestically, the current annual market for bottled water
is estimated at $4 billion, with the market penetration of bottled water at
approximately 20%. The water filter market is currently estimated to be $1.4
billion with 14% market penetration. The rate of growth of consumer water
filtration products is exceeding that of bottled water. As it is anticipated
that the penetration of water filter products will be at least that of popular
appliances, exceeding 80%, it is management's opinion that the major growth and
sales in the water filtration product category are yet to come. In addition, the
market is worldwide and estimated at more than $20 billion.
It is the Company's opinion that to the consumer, drinking tap water
has become both distasteful and suspect as a result of the use of chlorine,
which forms carcinogenic by-products and is strongly suspected by some members
of the medical community to be a cause of arterial and heart disease. In
addition, the dangers and frequency of lead in tap water, as well as the
presence of Cryptosporidium, or Giardia, harmful protozoa, have made the
consumer aware of the potential dangers associated with drinking tap water. The
typical consumer of the Company's products primarily seeks clean, fresh tasting
water. A growing number of health conscious consumers are also becoming
concerned about the inherent quality of tap water.
The retail customer base for the Company's products consists of all
major consumer product retailers. This includes the mass merchants, grocery,
drug, and department store retailers. This also constitutes the basic domestic
market universe of Rubbermaid, Innova's Strategic Alliance Partner, that
typically has distribution in more than 50,000 retail stores. While there is no
assurance that Innova's products will be purchased by Rubbermaid's customers,
extensive penetration is anticipated.
The Company's products are directly marketed using television and print
media by Goodtimes Licensing & Entertainment ("Goodtimes") with Richard Simmons
as the marketing spokesperson. Last year their infomercial incorporating the
Company's water treatment products was the top rated infomercial for an extended
period.
In order to overcome the disadvantage of being a small company, and
lack of capital to adequately support a national sales program, the Company has
created a series of strategic alliances with nationally recognized companies
referenced above and as set forth below (the "Strategic Alliance Partners"). As
a result, the Company obtains the distribution and sales of its products on a
national and international basis without the costs and burdens associated with
the sales of consumer products, and with a market penetration several magnitudes
beyond what the Company could achieve independently. The Company also benefits
by the consumer acceptance of the brand names and the reputation of the
Strategic Alliance Partners.
On July 21, 1997, the Company entered into a strategic alliance, which
includes manufacturing, developing, marketing, and distributing provisions with
Rubbermaid Incorporated ("Rubbermaid"). This agreement grants Rubbermaid certain
rights to market the products of the Company. The agreement provides for the
marketing and distribution of certain selected products throughout the United
States and internationally, on either an
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exclusive or non-exclusive basis. The exception being distribution agreements
which were in place prior to the Rubbermaid Agreement for specific niche
markets, or distribution agreements covering specific countries which are
excluded from the agreement with Rubbermaid.
The agreement with Rubbermaid provides that the Company will receive an
additional $.10 on each of its filter products for the first 10,000,000 units
sold by Rubbermaid as compensation for previous Innova product research and
development. These payments are in addition to the normal contract sales price.
Rubbermaid, during the summer of 1998,engaged in preliminary
promotional activities for the Company's products. These promotional activities
include especially prepared and painted vans touring the United States, which
demonstrated and provided samples of the Company's filtration products. This is
currently being followed with selected in-store demonstrations, or taste-tests,
and national advertising in publications such as The Reader's Digest.
Management of the Company believes that due to Rubbermaid's commitment
to market and endorse the Innova water filtration products the Company's sales
and profits will increase in fiscal year 1999. However, there is no assurance
that consumers will purchase the Innova water filtration products on a wide
scale. In addition, management of the Company is unable to predict what effects,
if any, Rubbermaid's recent merger announcement with Newell will have on
Rubbermaid's continuing commitment to market and endorse the Company's products.
During the fiscal year ended June 30, 1998 and fiscal first quarter ended
September 30, 1998, sales to Rubbermaid amount to approximately 43% and 78%,
respectively, of the Company's net sales.
On September 26, 1997 the Company entered into a supply agreement with
Bowline Family Products ("Bowline") to furnish Innova's standard water filters
for inclusion into Bowline's tote covered water bottle products. A modified
filter will also be produced for Bowline for inclusion into their new Sports
team licensed products which include three dimensional designs associated with
teams in the NFL, NHL, NBA, Major League Baseball, NASCAR, Sony and others.
Minimum sales for the first year are projected to be 200,000 units. Based upon
orders shipped and in-house, Bowline should substantially exceed their annual
sales requirements.
In October 29, 1997 the Company reached an understanding with Goodtimes
Entertainment and Licensing ("GT") to continue to use Richard Simmons for direct
media sales. In October, 1997 GT obtained 1.5 million shares of the Company's
stock in a cashless exchange for warrants to purchase 11 million shares of
company stock, for which the Company was paid $500,000 for the original warrant
purchase rights in October of 1996.
At the time of issuance in 1996; these warrants had the following
exercise prices: (1) 3,300,000 shares at $.40 per share; (2) 3,300,000 shares at
$.75 per share; and (3) 4,400,000 shares at $1.00 per share.
During the years ended June 30, 1998 and June 30, 1997, sales to GT
amounted to approximately 26% and 65% of the company's net sales, respectively.
For fiscal quarters ended September 30, 1998 and 1997, sales to GT amounted to
approximately 16% and 90% the Company's net sales for the quarter, respectively.
This reduction is due to increased sales under the Rubbermaid agreement and
phase out of the Richard Simmons infomercial.
Due to GT's continuing stock ownership in the Company, management
believes GT has a continuing financial incentive to continue marketing the
Company's products. Accordingly, the Company has agreed not to sell its products
via direct television advertising while promoted by GT. The Company and GT
continue to discuss and evaluate the development of products and advertising
campaigns which could utilize television as a marketing platform to increase
sales. However, at the present time there are no current television advertising
campaigns planned with GT as the Company focuses its resources on fulfillment
obligations under the Rubbermaid campaign.
CURRENT PRODUCTS
The Company currently produces products for distribution and sales
through its Strategic Alliance Partners, as well as directly to select classes
of trade on both a domestic and international basis. All products are patent
protected under one or more issued patents. Additional patents are also pending.
See "Business-Intellectual Property." The products currently in distribution
are:
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1. A 2 liter portable or refrigerator bottle with filter and pour
through sealing cap;
2. A 16 oz. standard 28 mm neck water bottle with replaceable filter
in a push-pull valve cap;
3. A 20 oz. and 30 oz. sport type bottle with integral replacable
filter mounted to the bottle top with a push-pull valve cap;
4. Filters for installation into Rubbermaid Sport type bottles;
5. Replacement filters for sport and refrigerator bottles;
6. Baby bottles with filters for infants;
7. Children's water filtration products; and
8. Filters for sport promotion bottles with three dimensional figural
head designs.
The Company manufactures and assembles its product line In Clearwater,
Florida. It also utilizes several component vendors and contract manufacturers.
As a result of the vendor relationships established over the years, management
believes the Company is assured of reliable and available capacity to sustain
the significant projected growth. However, there is no assurance that such
vendor relationships will continue in such a successful manner.
PRODUCT DEVELOPMENT
The Company is actively engaged in additional new product development
and the application of new and emerging technology primarily for Rubbermaid and
to a lesser degree for its other Strategic Alliance Partners. It is the opinion
of management that the technology and product concepts controlled by the Company
can permit Rubbermaid to become a dominant company in the consumer water
treatment category on an international basis. The Company has a continuing major
product development program to assure, to the degree possible, that the Company
remains the principal source for water treatment products for each of its
Strategic Alliance Partners, and that its Strategic Alliance Partners maintain
competitive product advantages.
Five new products have been prototyped and are ready to
be produced as follows:
1. Drop-in filter to fit 28 mm bottleneck opening, retained in place by
cap.
2. Filter assembly for protozoa adaptable to sports bottles.
3. Reversible filter housing providing suction fill for bottle filters.
4. Single orifice filter for inverted bottle use; i.e., cooler
containers.
5. Filter adapter housing for cooling water.
The drop in filter (#1 above) is currently ready for production. The
protozoa filter (#2 above) will be ready for production in approximately 120
days. The Company anticipates that the remaining new products (#'s 3, 4 and 5
above) will be ready for production by the end of fiscal year 1999.
The Company is also developing a filter manufactured of porous
hydrophilic ceramics. While this filter is effective in removing bacteria and
protozoa it does not remove viruses. Accordingly, its commercial feasibility is
still under evaluation. The Company is testing whether integration with a carbon
element is feasible. The Company does not anticipate it will produce this filter
in the near future.
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In addition, the Company is developing a family of filters to fit one
through five gallon cooler or crock style bottles. These products will be
available with or without the types of biological treatments described in 1 and
2 above. These new Innova filtration products will permit the adaptation of the
millions of cooler bottles currently in the home or office, which are delivered
by truck, to be retrofitted with a high efficiency filtration unit which will
treat approximately 50 bottles or 250 gallons prior to replacement. The user can
refill the 5 gallon bottle with only the quantity of water easily lifted into
place, while at the same time significantly reducing costs and freeing storage
space.
New rapid filtration media adaptable to carafes and pitchers are also
being developed. The major problem with the water filtration carafes currently
being marketed is the slow filtration period required to process water before it
is available for drinking. There is also a useful volume constant as, typically
only 50% of the volume of the carafe is available for filtered water. Thus,
frequently, insufficient amounts of filtered water are available and the process
time to filter additional water to satisfy the demand is simply too long. The
new Company technology under development fills rapidly, fully processing the
water in less than approximately four minutes, and pours freely. The process
used is Static Filtration(TM), which Innova has "stockpiled" as technology for
several years. Patents have been issued and others are pending.
There is also a demand for a means to alert the consumer/user when a
water filter should be replaced. To satisfy the needs of Rubbermaid in this
regard, the Company has under development a "foolproof" counter which will alert
the user that it is time to change the filter.
The Company is a party to a non-exclusive license agreement with A.C.
International which grants A.C. International ("AC") the right to market and
distribute the Company's filters as part of AC's bottle and caps. The Company is
entitled to a royalty of $.30 for each filter sold for sales up to 500,000
units. Total royalties received during fiscal year end June 30, 1998 were
approximately $10,000. Management does not anticipate significant license fees
from this arrangement in the current fiscal year.
SALES AND BACKLOG
The sales for the fiscal year ended June 30, 1998 were $3,194,000. As
of September 30, 1998, sales for the quarter have amounted to $1,504,800 with an
order backlog approximating $300,000.
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Existing orders forecasted (as differentiated from actual order backlog) through
September 30 1998 approximates $2,500,000. As noted in Footnote 1 of the
accompanying financial statements, significant portions of the Company's sales
are to limited customers. The loss of one of these significant customers could
have a significantly disruptive effect on the normal functioning of the Company.
COMPETITION
The Company competes with many other companies that supply water
filtration products. The principal competitive product would be the "pour
through" carafe type product normally kept in the refrigerator and used in the
kitchen.
Several companies, including Brita, Discovery Engineering (Pur),
Rubbermaid and others compete in the pitcher or carafe products market segment
which, while not portable outside the home and decidedly more expensive, are
otherwise directly competitive to the Innova two liter bottle. However, the
Company has the only product in a two liter size that is a truly portable
pitcher type product with a spill proof locking cap. The leading company in the
pitcher category is Brita.
The Company also competes indirectly with other companies that supply
bottled water, including The Perrier Group of America, Inc. (which includes
Arrowhead Mountain Spring Water, Poland Spring, Ozark Spring Water, Zephyrhills
Natural Spring Water, Deer Park, Great Bear and Mountain Ice) and Great Brands
of Europe (which includes Evian Natural Spring Water and Dannon Natural Spring
Water). The Company also competes with numerous regional bottle water companies
located in the United States and Canada.
The Company is the early leader in sales of portable bike, sport and 16
oz. filter water bottles, as well as the two liter portable pitcher. The
category is new and has been promoted by Richard Simmons under contract with the
Company's Strategic Partner, Goodtimes Licensing and Entertainment, who in the
first year sold over 2,000,000 16 oz. personal water filter bottles and
thousands of 30 oz. sport type bottles. Since then, Aladdin Industries and
others have entered this rapidly expanding market. The Company expects that more
competitors will enter the water filtration products market, resulting in even
greater competition for the Company. Many of the companies with whom the Company
currently competes, or may compete in the future, have greater financial,
technical, marketing, and sales resources, as well as greater name recognition
than the Company. There can be no assurance that the Company will have the
resources required to respond effectively to market or technological changes or
to compete successfully in the future, although it's alliances provide certain
advantages in these regards as does the Company's patent position.
INTELLECTUAL PROPERTY
The Company has rights to numerous patents in the consumer product
water treatment field in which twelve issued patents and two pending patents are
specifically related to consumer water treatment products. In total the Company
pursuant to a royalty agreement with its founder, Mr. John E. Nohren, has
obtained more than 20 patents of which the intellectual base may be applicable
to consumer water treatment products. It also has two additional patents pending
both domestically and internationally.
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The Company is the plaintiff in a patent infringement and unfair
competition lawsuit entitled Innova/Pure Water, Inc. v. Aladdin Sales &
Marketing, Inc., Filtex USA, Ltd., ACT Marketing, Inc., ACT Marketing, Ltd.,
Advanced Consumer Technologies, Inc., and Robert Luzenberg, Case No.
97-924-Civ-T-25D (M.D. Fla.). The Company claimed patent infringement and false
advertising on the part of the Defendants. Prior to trial, the Company resolved
the false advertising claims on terms deemed favorable to the Company by
management. On October 7, 1998, the Court entered a Summary Judgment Order
ruling that the Company's patent is not infringed by the Filtex products. While
the Defendants had challenged the validity of the Company's patents, the Court's
ruling did not affect the validity of the Company's patent. The Company has
appealed the lower court's ruling to the United States Court of Appeals for the
Federal Circuit in Washington, D.C. The Company has received an opinion of
patent counsel that there is a "high probability that the lower court's ruling
will be overturned and that the Filtex products will be held to be an
infringement of the Company's patent. Resolution of the Company's appeal may
take between six months and a year.
MANUFACTURING
Operations have been centered between the Company's facility, which
historically has performed the quality assurance, inspection, testing, assembly,
packaging and shipping functions. The Company's products consist principally of:
(1) one or more water treatment media; and (2) injection molded plastic
components, blow molded or injection molded containers which hold the water to
be processed as well as to support and position the water filtration element. In
addition, labels, bags, and a variety of boxes are also used to package various
products. The filtration media consist of proprietary monolithic filter elements
containing activated carbon and one or more other compounds depending upon the
use to which the filter is to be applied. The media compounds may include
ion-exchange resins, zeolytes, iodinated resins, or embody hydrophilic
sub-micron ceramic components. Other process media employed include both high
and low-density non-wovens. The media are obtained from a variety of sources.
Typically, each is procured under the terms of a confidentiality agreement.
In preparation for growth, additional molding capacity is being
acquired both domestically and in China. The Company has enhanced its domestic
filter element production capacity and is expanding filter capacity to over
20,000,000 filters per year. Continental Plastics ("Continental") of Sarasota,
Florida has been the Company's primary contract supplier of molds and injected
molded components for the past ten years. While the Company enjoys a close
working relationship with Continental, several other companies are available to
furnish competitive pricing and added production capacity. There is no
assurance, that such competitive pricing and production capacity will be
available in the future.
Presently, two companies supply the injection molded components. The
bottles and pitchers are secured from various companies, each somewhat of a
specialty. Typically, the Company owns the tooling to produce the injection
molded components.
The Company has changed from principally manual assembly and packaging
operations to mechanized assembly and packaging operations. These operations
include assembling; (1) the media elements into the housings; (2) the closure to
the filter housings; (3) the top and valve components together; and (4) the
variety of components into the bottle or pitcher. Packaging consists of
semi-automatic assembly of certain filters into hermetically sealed bags, date
and lot stamping labels and shipping boxes, packaging the finished products with
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instructions in display boxes and then placing a prescribed quantity into a
shipping box which is, in-turn palletized. The Company intends to add automation
for high speed bagging equipment for filter packaging as demand requires.
Further, filter designs have been altered to adapt to automatic assembly
methods. The Company has a current maximum production capacity of 10,000,000
units a year. Management anticipates that within the next six to eight months,
capacity of over 20,000,000 units will be available.
The Company possesses considerable in-house manufacturing know-how. The
expertise spans from tool and mold design to automated dispensing and compacting
of media, through inspection, assembly, and packaging. As such the Company acts
in an advisory capacity with many of its vendors, or dictates the methodology to
be used. This internal capability also keeps the Company from becoming a
"hostage" to any supplier and permits the Company to make justified "make or
buy" decisions based upon the true economic impact. This permits the Company to
purchase high quality components at a competitive price while remaining
independent.
All Company vendors operate under confidentiality agreements. No
suppliers produce similar competitive products for any third parties. Several
organizations also support the Company in its product development program on an
as needed basis. The Company has relied on a limited number of vendors to supply
the components necessary for its products. A lack of necessary components at
favorable prices would adversely affect the Company.
PRODUCT LIABILITY INSURANCE AND WARRANTIES
The Company maintains a $2,000,000 product liability insurance policy.
In the twelve years in which the Company has produced and furnished products to
the retail trade and consumers, both domestically and internationally, no
product suits have been filed, nor consumer complaints received which would lead
to litigation.
The Company warrants to Rubbermaid that the products will be produced
to mutually acceptable standards. Innova operates a formal quality control
program monitoring through AQL standards, incoming components, in process parts,
and completed units. Detail product specification sheets are in place as well as
"Physical Proofs" which have been signed off and accepted by both parties. In
case of a question, the "Proof' samples are used for comparison purposes to
determine acceptability.
EMPLOYEES
As of September 30, 1998, the Company had 20 employees, including its 4
executive officers. These employees include 2 persons in sales and marketing, 3
persons performing development, and 3 administrative and clerical persons. There
are 8 manufacturing and production personnel which are supplemented by as many
as 25 contract employees, as required.
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INNOVA PURE WATER, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION
THIS REGISTRATION STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS. THE WORDS
"ANTICIPATED," "BELIEVE," "EXPECT," "PLAN," "INTEND," "SEEK," "ESTIMATE,"
"PROJECT," "WILL," "COULD," "MAY," AND SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS. THESE STATEMENTS INCLUDE, AMONG OTHERS,
INFORMATION REGARDING FUTURE OPERATIONS, FUTURE CAPITAL EXPENDITURES, AND
FUTURE NET CASH FLOW. SUCH STATEMENTS REFLECT THE COMPANY'S CURRENT VIEWS WITH
RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE AND INVOLVE RISKS AND
UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, GENERAL ECONOMIC AND BUSINESS
CONDITIONS, CHANGES IN FOREIGN, POLITICAL, SOCIAL, AND ECONOMIC CONDITIONS,
REGULATORY INITIATIVES AND COMPLIANCE WITH GOVERNMENTAL REGULATIONS, THE
ABILITY TO ACHIEVE FURTHER MARKET PENETRATION AND ADDITIONAL CUSTOMERS, AND
VARIOUS OTHER MATTERS, MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL,
INCLUDING, WITHOUT LIMITATION, THE RISKS DESCRIBED UNDER THE CAPTION
"BUSINESS." SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES OCCUR, OR SHOULD
UNDERLYING ASSUMPTIONS PROVE TO BE INCORRECT, ACTUAL RESULTS MAY VARY
MATERIALLY AND ADVERSELY FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, OR
OTHERWISE INDICATED. CONSEQUENTLY, ALL OF THE FORWARD-LOOKING STATEMENTS MADE
IN THIS REGISTRATION STATEMENT ARE QUALIFIED BY THESE CAUTIONARY STATEMENTS AND
THERE CAN BE NO ASSURANCE OF THE ACTUAL RESULTS OR DEVELOPMENTS.
Innova cautions readers that in addition to important factors described
elsewhere, the following important facts, among others, sometimes have
affected, and in the future could affect, the Company's actual results, and
could cause the Company's actual results during 1999 and beyond, to differ
materially from those expressed in any forward-looking statements made by, or
on behalf of, Innova.
INCOME STATEMENT DATA
<TABLE>
<CAPTION>
Three Months Ended Year Ended
September 30, June 30,
----------------------------- ----------------------------
1998 1997 1998 1997
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenue $ 1,504,800 $ 412,400 $ 3,194,100 $ 3,880,100
Net income (loss) $ 238,400 $ (75,600) $ 124,600 $ 682,000
Earnings (loss) per common
share - basic $ .02 $ (.01) $ .01 $ .09
Shares used in per share
computation 10,069,914 8,495,871 9,499,374 7,279,660
Earnings (loss) per common
share - assuming dilution $ .02 $ (.01) $ .01 $ .08
Shares used in diluted
computation 10,469,528 8,495,871 9,933,414 9,063,483
</TABLE>
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BALANCE SHEET DATA
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
---------------------------------
<S> <C> <C>
Total assets $2,492,100 $2,178,600
Working capital $1,258,000 $1,040,800
Long-term debt $27,400 $30,100
Stockholders' equity $1,658,400 $1,415,100
</TABLE>
The Company has conducted a review of its computer systems to identify the
systems that could be affected by the "year 2000" issue. The "year 2000" issue
is the result of computer programs being written using two digits rather than
four to define the applicable year. Programs with this problem may recognize a
date using "00" as the year 1900 rather than the year 2000, resulting in system
failures or miscalculations. Although no assurance can be given, the Company
presently believes that existing software is year 2000 compliant and will not
pose significant operational problems for the Company's computer systems.
RESULTS OF OPERATIONS
Net Sales
Net sales for the three-month period ended September 30, 1998 were $1,504,800,
a 265 percent increase over the $412,400 of net sales for the comparable period
in 1997. The majority of the increase is attributable to the sales to
Rubbermaid under the Company's strategic alliance.
Net sales for the year ended June 30, 1998 were $3,194,100, an 18 percent
decrease over the $3,880,100 of net sales for the comparable period in 1997.
Much of the decrease is attributable to the fact that although the Company's
strategic alliance with Rubbermaid for certain exclusive marketing rights was
signed in July 1997, the new product line was not unveiled until The
International Houseware Show in Chicago in January 1998. The Company was unable
to increase existing retail distribution due to the knowledge that Rubbermaid
was entering the market. Another factor was that the new Richard Simmons
infomercial did not air until December 1997, resulting in a loss of revenue for
that product.
Cost of Sales
For the three months ended September 30, 1998, our cost of sales increased 339
percent to $753,700 from the $171,600 of costs for the three months ended
September 30, 1997. This increase is mainly due to the increase in revenues as
described above.
The 339 percent increase in cost of sales, combined with the 265 percent
increase in net sales, resulted in a reduction in our gross profit margin to 50
percent from 58 percent. This reduction is principally attributable to product
mix purchased by Rubbermaid in the current quarter.
For the year ended June 30, 1998, the cost of sales declined to $1,477,800 from
the $1,811,800 of costs for the year ended June 30, 1997. This decrease is
mainly due to the decrease in revenue and lower volume of filter and bottle
sales for the period.
12
<PAGE> 13
The 18 percent decrease in cost of sales, combined with the decrease in net
sales, resulted in an improvement in our gross profit margin for the year ended
June 30, 1998 of one percent to an overall gross profit margin of 54 percent
for the year ended June 30, 1998. This is principally attributable to higher
percentage sales of filters versus bottles which yield a greater profit to the
Company, as well as switching from a direct sales format managed by the Company
to the use of strategic alliances and the corresponding reduction in sales
personnel and associated costs plus elimination of most marketing expenses.
Operating Expenses
For the three-month period ended September 30, 1998, operating expenses
amounted to $522,000, or 35 percent of net sales. For the comparable period in
1997, operating expenses were $319,800, or 78 percent of net sales. The
decrease in operating expenses as a percentage of sales between these periods
of 43 percent is primarily due to an increase in revenue as described above.
The increase in overall operating expenses is attributed to the increase in
research and development expenditures, as well as the increase in officers'
salary, royalties, and travel and entertainment expenses.
Operating expenses for the year ended June 30, 1998 were $1,558,600, or 49
percent of net sales. For the comparable period in 1997, operating costs
amounted to $1,368,000, or 35 percent of net sales. The 14 percent increase as
a percentage of sales between these periods is attributable to the addition of
a research and development department, as well as an increase in director and
officer insurance, audit expense, rent, travel and entertainment, officers'
salary, and royalty expenses.
Interest Income and Expense
For the three months ended September 30, 1998, net interest income amounted to
$9,100, as compared to net interest income of $3,400 for the three months ended
September 30, 1997. The increase in net interest income is due to investments
of the additional cash generated from operations this quarter.
For the year ended June 30, 1998, net interest income amounted to $15,900 as
compared to net interest expense of $18,300 for the year ended June 30, 1997.
This change is due to the retirement of outstanding loans and the fact that the
Company was earning interest on its increased cash generated from the sale of
common stock warrants in late 1997.
Net Income
Net income for the three months ended September 30, 1998 amounted to $238,400,
as compared to a net loss of $75,600 for the comparable period in 1997. The
improvement in 1998 was primarily a result of the additional sales to
Rubbermaid and Good Times under the Company's strategic alliances.
Net income for the year ended June 30, 1998 decreased by 82 percent to $124,600
from $682,000 for the comparable period in 1997. This decrease is principally
attributable to the reduction in sales and increase in operating expense as
explained above which involved the slow start-up of Rubbermaid and Good Times
with Richard Simmons.
13
<PAGE> 14
Earnings Per Share
Basic and diluted earnings per share were $.02 for the three months ended
September 30, 1998, as compared to basic and diluted loss per share of $(.01)
for the comparable period in 1997. The turnaround of earnings per share in 1998
was due primarily to increased profits between the comparable periods.
For the year ended June 30, 1998, basic and diluted earnings per share amounted
to $.01. For the comparable period in 1997, basic and diluted earnings per
share amounted to $.09 and $.08, respectively. This change is primarily the
result of decreased profits between the comparable periods.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
For the three month period ended September 30, 1998, net cash provided by
operating activities amounted to $974,400, as compared to net cash used by
operating activities of $397,400 for the comparable period in 1997. The
improvement in 1998 is primarily the result of increased profits, as well as
collections on accounts receivable balances.
For the year ended June 30, 1998, net cash provided by operating activities
amounted to $130,700, a decrease over the $395,500 of net cash provided by
operating activities for the comparable period in 1997. The decrease is
primarily a result of decreased profits during the period, as well as the need
to retool for the anticipated production requirements of Rubbermaid and an
increase in management's salary expense.
Investment Activities
The Company's investment activities include equipment sales and purchases,
patent acquisitions, and net changes in related party advances.
Net cash used by investing activities for the three months ended September 30,
1998 was $235,700, as compared to net cash provided by investing activities of
$41,500 for the comparable period in 1997. The change between the comparable
periods is attributable to advances to related parties in 1998.
Net cash used by investing activities for the year ended June 30, 1998 was
$400,700, as compared to net cash used by investing activities of $180,300 for
the comparable period in 1997. The increase in cash expended for investing
activities is due primarily to more purchases of equipment and additional costs
incurred in patent development and defense during the year ended June 30, 1998
as compared to the year ended June 30, 1997.
Financing Activities
The Company's financing activities include proceeds from borrowings, payments
on borrowings and capital leases, and proceeds from sales of common stock
warrants.
14
<PAGE> 15
Net cash of $3,300 was used by financing activities for the three-month period
ended September 30, 1998, as compared to net cash used by financing activities
of $9,700 for the comparable period in 1997. The decrease in cash used between
the comparable periods is due to decreased balances on outstanding debt.
Net cash of $5,500 was provided by financing activities for the year ended June
30, 1998, as compared to net cash provided by financing activities of $535,700
for the year ended June 30, 1997. The Company received net proceeds of $485,300
from the sale of common stock warrants during the quarter ended December 31,
1996.
CAPITAL RESOURCES
At September 30, 1998, the Company does not have any material commitments for
capital expenditures other than for those expenditures incurred in the ordinary
course of business.
The Company believes that its current operations and cash balances will be
sufficient to satisfy its currently anticipated cash requirements for the next
12 months. However, additional capital could be required in excess of the
Company's liquidity, requiring it to raise additional capital through an equity
offering, secured or unsecured debt financing. The availability of additional
capital resources will depend on prevailing market conditions, interest rates,
and the existing financial position and results of operations of the Company.
15
<PAGE> 16
ITEM 3. DESCRIPTION OF PROPERTY
The Company occupies approximately 22,000 feet of air conditioned
office, manufacturing and warehouse space located at 13130 - 56th Court, Suite
604-605, Clearwater, Florida 33760. The product development laboratory is also
located in an adjacent building. The facilities are leased and a new five year
lease commenced March 1, 1998. The monthly rent for these facilities is
approximately $10,000.
16
<PAGE> 17
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of shares of Company Common Stock owned as of September 30,
1998 beneficially by (i) each person who beneficially owns more than 5% of the
outstanding Company Common Stock, (ii) each director of the Company, (iii) the
President and Chief Executive Officer of the Company (the only executive officer
of the Company whose cash and non-cash compensation for services rendered to the
Company for the year ended June 30, 1998, exceeded $100,000) and (iv) directors
and executive officers of the Company as a group:
<TABLE>
<CAPTION>
Amount and Nature of
Name of Beneficial Owner (3) Beneficial Ownership (1) Percent of Class (2)(8)
---------------------------- ------------------------ -----------------------
<S> <C> <C>
John E. Nohren, Jr. and
Francis Weaver Nohren(4)(5) 2,118,216 21.2
Rose C. Smith (6) 590,350 5.9
Peter Christensen (9) 624,500 6.2
Mort Langer (10) 245,000 2.4
Frank Legnaioli (9) 591,000 5.9
C. W. McKee (9) 41,000 .5
Joe Cayre (7) 1,350,000 13.5
Andrew Greenberg (9) 167,000 1.7
Barbara Albin 555,956 5.5
All directors and executive officers
as a group (10 persons) 4,383,066 43.9
</TABLE>
(1) Represents sole voting and investment power unless otherwise
indicated.
(2) Based on approximately 10,074,371 shares of Company Common
Stock outstanding as of September 30, 1998 plus, as to each
person listed, that portion of the unissued shares of Company
Common Stock subject to outstanding options which may be
exercised by such person, and as to all directors and
executive officers as a group, unissued shares of Company
Common Stock as to which the members of such group have the
right to acquire beneficial ownership upon the exercise of
stock options within the next 60 days.
(3) The address of each individual is in care of the Company.
(4) May be deemed to be a "founder" of the Company for the purpose
of the Securities Act.
(5) Represents aggregate shares held between Mr. Nohren
individually, his wife individually and shares held in joint
tenancy. Also includes options to acquire 190,000 shares of
Common Stock exercisable at $.50 held by Mr. Nohren.
(6) 54,350 of the shares of common stock as set forth above are
owned by Elliot Smith, husband of Rose C. Smith, President and
Chief Executive Officer of the Company. Also includes 175,000
shares underlying options issued to Ms. Smith with an exercise
price of $.50.
(7) Represents shares held directly and indirectly by Joe Cayre
and his family pursuant to an agreement reached between the
Company and the Good Times family of companies. See "Certain
Relationships & Related Transactions."
(8) Excludes 1,073,500 shares reserved for issuance under
outstanding options and warrants.
(9) Includes options to acquire 15,000 shares of Common Stock at
an exercise price of $.50 over a 3 year vesting term
conditioned upon continued service as an outside director.
(10) Includes options to acquire up to 115,000 shares of Common
Stock at an exercise price of $.50 per share.
17
<PAGE> 18
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information with respect to each
person who is a director or an executive officer of the Company as of September
30, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John E. Nohren, Jr. 66 Chairman of the Board, Director, Chief Financial
Officer Treasurer
Rose C. Smith 47 President, Chief Executive Officer, Director
James Keene 61 Chief Operating Officer
Robert Connell 42 Controller
Tricia Skoda 47 Secretary
Peter Christensen 46 Director
Andrew Greenberg 43 Director
Mort Langer 55 Director
Frank Legnaioli 67 Director
Clarence W. McKee 73 Director
</TABLE>
Executive officers are elected by the Board of Directors and serve
until their successors are duly elected and qualify, subject to earlier removal
by the Board of Directors. Directors are elected at the annual meeting of
shareholders to serve for their term and until their respective successors are
duly elected and qualify, or until their earlier resignation, removal from
office, or death. The remaining directors may fill any vacancy in the Board of
Directors for an unexpired term. See "Board of Directors" for a discussion of
the Directors' terms.
BUSINESS EXPERIENCE OF EXECUTIVE OFFICERS AND DIRECTORS
John E. Nohren, Jr. has been Chairman of the Board of the Company since
its inception. Effective December 1996, with Mr. Nohren's consent and approval,
he resigned as President and Rose C. Smith was appointed his successor. He
subsequently resigned as Chief Executive Officer in June of 1997 when Rose C.
Smith was appointed his successor. In June 1998, Mr. Nohren was elected
Treasurer and interim Chief Financial Officer. He was also the founder and the
major shareholder of a prior Company, Innova, Inc., founded in 1969 to service
the increasing requirement of the U.S. Department of Defense for sophisticated
automation and hazardous waste management. With government funding, Mr. Nohren
made technological advances for dealing with water contamination of various
nature. The applications included the treatment of water in a chemical,
biological, or nuclear war scenario. Also, the removal of a variety of
contaminants from the production of military products. The obvious voids, and
needs for the application of those technologies to consumers lead to the
formation of the Company in 1985. He is the named inventor on several of the
Company's patents. See "Certain Relationships and Related Transactions."
Rose C. Smith was appointed President in June 1996, and President and
Chief Executive Officer effective June 30, 1997. Ms. Smith began her career in
the financial community at Bache and Co., Inc. (Prudential Securities, Inc.) and
was a financial adviser to the principals of the Moore McCormick Shipping Lines.
She functioned in a number of consulting roles relative to product acquisition,
licensing, and line extensions and has been retained by Aguecheek Ltd. in
England, which owned the licensing rights to Armani, Valentino, Ungaro, Tiffany
and others. Ms. Smith was also a consultant regarding potential corporate
acquisitions for Marubeni in Tokyo. She
18
<PAGE> 19
became associated with the Company in 1993 as a marketing consultant, hence
became the Director of Business Development until elected President in 1996, and
Chief Executive Officer in June 1997.
James Keane, Chief Operating Officer, joined the Company in January,
1998. Prior to joining the Company, he was with Evenflo Company Inc., where he
served for eight years as Vice President of Operations and Engineering for the
Infant Feeding Division. He has over thirty years experience in the design and
manufacturing of plastic consumer products.
Robert Connell, Controller, joined the Company in September 1993. Prior
to joining the Company, he held an accounting position with E.I. DuPont de
Nemours & Company, and other prominent industrial organizations.
Tricia Skoda was elected Corporate Secretary in September 1998. Prior
to joining Innova in July 1998, she was the Business Unit Coordinator for the
Cleveland, Akron, Pittsburgh business unit of Storage Technology Corp. Ms. Skoda
has over 12 years experience in office administration and marketing.
Peter Christensen has been a director of the Company since June 1995.
He is currently the Chief Executive Officer of ComTec, Incorporated, a software
company that provides integrated art print and mail services as well as art
electronic imaging, E-mail delivery, and electronic payment services, integrated
with credit card and personal financial software. Mr. Christensen is also
Chairman of the Board of Digital Privacy, Inc., a smart card based computer and
communications security company, securing communications across the Internet.
Prior to joining ComTec, Incorporated and Digital Privacy, Inc., he was a
managing director at Paine Webber.
Andrew Greenberg has been a director of the Company since 1997. Since
1986, he has been employed as President at GoodTimes Entertainment, a New York
based, privately held company which is a diversified international multimedia
entertainment organization.
Mort Langer has been a director of the Company since 1987. Since 1993,
Mr. Langer has owned and operated Langer Partners, the management arm of Langer
Capital Management, L.L.P. where he serves as a partner. Prior to forming Langer
Partners, he worked at Bear, Stearns & Co., Inc. as Research Director for their
35 other equity analysts.
Frank Legnaioli has been a director of the Company since 1986. Mr.
Legnaioli is presently retired. Prior to his retirement, he worked for Paxton
Van Lines, Inc. in Springfield, Virginia for forty years. During his tenure at
Paxton Van Lines, Inc., it became the top grossing Atlas Van Lines agent in the
United States and abroad. He was one of the architects of the buy out of Atlas
Van Lines and turning it into a public company.
Clarence. W. ("C.W."). McKee was a founding director and remained as a
director until 1987, and again became a director of the Company in 1997. He has
been retired since 1989. Prior to his retirement Mr. McKee was employed by
Florida Progress Corporation and Florida Power Corporation where he served as
Executive Vice President and Chief Financial Officer.
19
<PAGE> 20
BOARD OF DIRECTORS
The Company's Bylaws fix the size of the Board of Directors at no fewer
than one and no more than nine members, to be elected annually by a plurality of
the votes cast by the holders of Common Stock, and to serve until the next
annual meeting of stockholders and until their successors have been elected or
until their earlier resignation or removal. Currently, there are seven directors
who were elected on February 28, 1998.
20
<PAGE> 21
ITEM 6. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table shows the compensation paid or accrued by the
Company for the fiscal years ended June 30, 1997 and June 30, 1998 to or for
the account of the President, Chief Executive Officer and John E. Nohren, Jr.,
Chairman of the Board. No other executive officer or director of the Company
received benefits or an annual salary and bonus in excess of $100,000 or more
during the stated period. Accordingly, the summary compensation table does not
include compensation of other executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
RESTRICTED
OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
NAME & PRINCIPAL SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUTS COMPENSATION
POSITION (1) ($) ($) ($) ($) (#) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C>
Fiscal 1997
- -----------
John E. Nohren, Jr. --- --- --- --- 18,750 --- $150,000 (2)
President and CEO
Fiscal 1998
- -----------
John E. Nohren, --- --- --- --- 20,750 --- $152,900
Chairman BOD
Rose Smith,
President and CEO $211,603 --- --- 31,667 2,000 --- ---
</TABLE>
- ------------------------
(1) Ms. Smith replaced Mr. Nohren as the President in June, 1996, and as CEO,
effective June 30, 1997.
(2) Represents payments made to Mr. Nohren pursuant to his royalty agreement.
EMPLOYMENT AND OTHER AGREEMENTS
The Company entered into an employment agreement with Rose C. Smith
effective June 30,1997, which provides for her employment as President and Chief
Executive Officer for a five year term ending June 29, 2002. Under the agreement
Ms. Smith is to receive a base salary of $150,000 per year. Ms. Smith is also to
receive a bonus of two percent of net sales of the Company adjusted by the
annual gross margin achieved by the Company. The agreement contains a
restrictive covenant not to compete for the term of the agreement and for five
years following termination of service without cause. The agreement provides for
severance payments equal to 200% of the annual base compensation due under the
Agreement in the event there is a "change of control" of the Company, as defined
therein, and she is subsequently terminated without cause.
The Company entered into a royalty agreement with John E. Nohren, Jr.
effective June 30, 1997, expiring on December 31, 2002. This agreement obligates
the Company to pay Mr. Nohren, in return for the assignment of his patent
rights, a minimum of $100,000 of royalties per year, with a cap of $300,000 per
year, during the term of his employment. The royalty payments will be calculated
based on five percent of net sales of products that incorporate these assigned
patents. Upon his termination, a three percent royalty shall be paid over the
residual life of his patents.
21
<PAGE> 22
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The information provided in the table below provides information with
respect to each exercise of stock options during fiscal 1997 and fiscal 1998 by
each of the executive officers named in the summary compensation table and
the fiscal year end value of unexercised options.
<TABLE>
<CAPTION>
=====================================================================================================================
(a) (b) (c) (d) (e)
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Value of
Unexercised
Number of In-the Money
Unexercised Options
Options at FY-End at FY-End($)
Value Exercisable Exercisable
Shares Acquired/ Realized on or after on or after
Name Exercise ($)(1) July 1, 1997 July 1, 1997(1)
or July 1, 1998 or July 1, 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1997
- -----------
John E. Nohren, Jr. 18,750 9,375 18,750 $9,375
Fiscal 1998
- -----------
John E. Nohren 20,750 158 190,000 14,535
Rose Smith 2,000 15 190,000 14,535
=====================================================================================================================
</TABLE>
=================
(1) The aggregate dollar values in column (c) and (e) are calculated by
determining the difference between the fair market value of the Common
Stock underlying the options and the exercise price of the options at
exercise or fiscal year end, respectively. In calculating the dollar
value realized upon exercise, the value of any payment of the exercise
price is not included.
STOCK OPTIONS
The Company has in effect a stock option plan which authorizes the
grant of incentive stock options under Section 422 of the Internal Revenue Code
(the "Plan"). The Plan was adopted in 1996. A total of 750,000 shares have been
reserved under the Plan. As of September 30, 1998, options to purchase a total
of approximately 715,000 shares at $.50 a share were issued and outstanding
under the Plan. The Plan provides that (a) the exercise price of options granted
under the Plan shall not be less than the fair market value of the shares on the
date on which the option is granted unless an employee, immediately before the
grant, owns more than 10% of the total combined voting power of all classes of
stock of the Company or any subsidiaries, whereupon the exercise price shall be
at least 110% of the fair market value of the shares on the date on which the
option is granted; (b) the term of the option may not exceed ten years and may
not exceed five years if the employee owns more than 10% of the total combined
voting power of all classes of stock of the Company or any subsidiaries
immediately before the grant; (c) the shares of stock may not be disposed of for
a period of two years from the date of grant of the option and for a period of
one year after the transfer of such shares to the employee; and (d) at all time
from the date of grant of the option and ending on the date three months before
the date of the exercise, the employee shall be employed by Company, or a
subsidiary of the Company, unless employment is terminated because of
disability, in which cased such disabled employee shall be employed from date of
grant to a year preceding the date of exercise, or unless such employment is
terminated due to death.
22
<PAGE> 23
As of the date of this filing, the Company has outstanding options and
warrants to acquire 1,073,500 shares of Common Stock at an exercise price of
$.50 per share. Options to acquire 715,000 shares of Common Stock vest over a 3
year period commencing with the fiscal year beginning July 1, 1998 and ending
June 30, 2001. Option holders may exercise their option at any time following a
vesting year so long as the individual remains employed. Four years of
employment are required for vesting. All options must be exercised and payment
made no later than June 30, 2001. Unexercised options after that date shall
terminate. Employees have a 60 day period after termination of employment to
exercise options. The vesting schedule is subject to acceleration in the event
of a merger, sale or a change of control of the Company. The remaing 358,500
options and warrants are exerciseable at any time at an exercise price of $.50
per share and expire beginning October 30, 1998 through August 15, 2000. For all
options and warrants issued, the exercise price of $.50 was determined to be
greater than the fair market value as of date of issuance
DIRECTOR COMPENSATION
A director who is an employee of the Company receives no additional
compensation for services as director or for attendance at or participation in
meetings except reimbursement of out-of-pocket expenses. An outside director is
reimbursed for out-of-pocket expenditures incurred in attending or otherwise
participating in meetings. All directors hold options to acquire up to 15,000
shares of Common Stock exercisable at $.50 per share. The Company has no other
arrangements regarding compensation for services as a director.
23
<PAGE> 24
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. John E. Nohren, Jr., Chairman of the Board, has assigned the rights
to certain patents owned by him, to the Company. The patents are used by the
Company for its products. The Company entered into a royalty agreement with John
E. Nohren, Jr. on June 30, 1997, expiring on December 31, 2002. This agreement
obligates the Company to pay Mr. Nohren in return for the assignment of his
patent rights, a minimum of $100,000 of royalties per year, with a cap of
$300,000 per year, during the term of his active involvement. The royalty
payments will be calculated based on five percent of sales of products that
incorporate these assigned patents. Upon his full retirement, a three percent
royalty shall be paid over the residual life of his patents. See "Executive
Compensation-Employment Agreements."
On October 31, 1996, the Company reached an agreement with Innova
Holdings, LLC, a Company owned by the Cayre family who also owns the Good Times
family of companies. Good Times agreed to provide the Company with certain sales
and marketing assistance to sell via direct television, including Richard
Simmons promotions. In connection with this agreement, the Company was paid
$500,000 for warrants for the right to purchase 11,000,000 shares of common
stock. The warrants, which were non-dilutive, had the following exercise prices
and expiration dates: (1) 3,300,000 shares at an exercise price of $.40 per
share expiring one year from date of grant; (2) 3,300,000 share at an exercise
price of $.75 per share expiring two years from date of grant; and (3) 4,400,000
share at an exercise price of $ 1.00 per share expiring three years from date of
grant.
The exercise price of the GT warrants was the result of arms-length
negotiations between the parties and reflected exercise prices substantially
higher than the market value of the shares at the time this agreement was
negotiated.
On October 30, 1997, the Company entered into a stock purchase
agreement with Innova Holdings, LLC. In connection with this agreement, the
Company issued 1,500,000 shares of its common stock to Innova Holdings, LLC in
exchange for the surrender of previously issued warrants to purchase the
11,000,000 shares of the Company's common stock as set forth above. The shares
were subsequently transferred to Joe Cayre and other family members. The
1,500,000 shares cannot be sold, transferred, assigned, or pledged until October
30, 1999.
As of year end June 30, 1997 certain officers, directors and
shareholders converted approximately $338,830.26 of Company convertable
indebtedness into 955,310 shares of common stock at a conversion rate of $.25 or
$.50 per share as determined by the original conversion agreements. The
individuals are set forth below. In all instances the conversion prices were 25%
to 50% below the then current market price of the common stock which reflected
the risks associated with such investments during a period of time the Company
had limited financial resources and was unable to attract capital from other
sources.
<TABLE>
<CAPTION>
Conversion
Loan Amount Per Share Price Shares Issued
<S> <C> <C> <C>
John E. & Frances Nohren, Jr. 88,830.26 0.25 355,310
Frank Legnaioli 25,000.00 0.25 100,000
Barbara Albin 150,000.00 0.50 300,000
Barbara Albin 50,000.00 0.50 100,000
John E. Nohren, Jr. 25,000.00 0.25 100,000
--------- -------
Total 338,830.26 955,310
========== =======
</TABLE>
24
<PAGE> 25
ITEM 8. DESCRIPTION OF SECURITIES
COMMON STOCK
The authorized common capital stock of the Company consists of
50,000,000 shares of Common Stock, $.0001 par value, of which 10,074,371 shares
were outstanding as of September, 1998. As of September, 1998 1,073,500
shares of Common Stock have been reserved for issuance under outstanding options
and warrants.
The holders of Common Stock are entitled to one vote per share for the
selection of directors and all other purposes and do not have cumulative voting
rights. The holders of Common Stock are entitled to receive dividends when, as,
and if declared by the Board of Directors, and in the event of the liquidation
by the Company, to receive pro-rata, all assets remaining after payment of debts
and expenses and liquidation of the preferred stock. Holders of the Common Stock
do not have any pre-emptive or other rights to subscribe for or purchase
additional shares of capital stock, no conversion rights, redemption, or
sinking-fund provisions. In the event of dissolution, whether voluntary or
involuntary, of the Company, each share of the Common Stock is entitled to share
ratably in the assets available for distribution to holders of the equity
securities after satisfaction of all liabilities. All the outstanding shares of
Common Stock are fully paid non-assessable.
The transfer agent for the Company is Continental Stock Transfer &
Trust Company of New York.
PREFERRED STOCK
The Board of Directors of the Company (without further action by the
shareholders) has the option to issue from time to time up to 2,000,000 shares
of authorized but unissued Preferred Stock, $.001 par value and to fix and
determine the terms, limitations, residual rights, and preferences of such
shares ("Blank Check Preferred"). When any shares of Preferred Stock are issued,
certain rights of the holders of Preferred Stock may affect the rights of the
holders of Common Stock. Among other thing, in addition to any other powers
conferred in the Preferred Stock, holders of the Preferred Stock will have,
under the Florida General Corporation Law ("FGCL"), the right to vote as a class
on any increases, decreases, or changes in the rights of the Preferred Stock.
The affirmative vote of at least a majority of the outstanding shares of
Preferred Stock will be required approval of any such increases, decreases, or
change. The authority of the Board of Directors to issues shares of Preferred
Stock with characteristics which it determines (such as preferential voting,
conversion redemption and liquidation rights) may have a deterrent effect on
persons who might wish to make a takeover bid to purchase shares of the Company
at a price which might be attractive to its shareholders. However, the Board of
Directors must fulfill its fiduciary obligation to the Company and its
shareholders in evaluating any takeover bid. No shares of Preferred Stock are
currently outstanding and the Company has no current plans to issue any of the
2,000,000 authorized shares of Preferred Stock, $.001 par value.
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS
The Company's Certificate of Incorporation provides that no director of
the Company shall be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director except as limited by
the FGCL. The Certificate of Incorporation also provides that no amendment or
repeal of such provision shall apply to or have any effect on the right to
indemnification permitted thereunder with respect to claims arising from acts or
omissions occurring in whole or in part before the effective date of such
amendment or repeal whether asserted before or after such amendment or repeal.
The Company's Bylaws provide that the Company shall indemnify to the
full extent authorized by law each of its directors and officers against
expenses incurred in connection with any proceeding arising by reason of the
fact that such person is or was an agent of the corporation. The Company has
entered into indemnification agreements with its directors and certain of its
officers.
Insofar as indemnification for liabilities may be invoked to disclaim
liability for damages arising under the Securities Act of 1933, as amended, or
the Securities Act of 1934, (collectively, the "Acts") as amended, it is the
position of the Securities and Exchange Commission that such indemnification is
against public policy as expressed in the Acts and are therefore, unenforceable.
25
<PAGE> 26
FLORIDA CORPORATE LAW
The Florida General Corporate Law includes the Control Share Act (the
"Act"), which contains provision regulating certain "control share
acquisitions," which are transactions causing the voting power of any person
acquiring beneficial ownership of shares of a public corporation in Florida to
meet or exceed certain threshold percentages of the total votes entitled to be
cast for the election of directors. The Act provides that a control share
acquisition may only be made if: (I) the shareholders of the corporation approve
the proposed acquisition by affirmative vote of a majority of the voting power
of such corporation represented in person or by proxy at a special meeting of
shareholders called for the purpose of voting in the proposed acquisition; and
(ii) a majority of the portion of such voting power excluding the voting power
of interested shares approve the proposed acquisition at such special meeting.
26
<PAGE> 27
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
MARKET PRICE OF THE REGISTRANT'S COMMON STOCK
The Common Stock is traded in the over-the-counter market in the so
called "pink sheets," or on the "Electronic Bulletin Board" of the National
Association of Securities Dealers, Inc. (the "NASD") under the symbol "IPUR."
The transfer agent and registrar for the Common Stock is Continental Stock
Transfer & Trust Company of New York. The following table sets forth for the
periods indicated the high and low sale prices for shares of the Common Stock as
reported on the OTC.
<TABLE>
<CAPTION>
Sales Price
-----------
High Low
---- ---
<S> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1996
Fourth Quarter 1.000 0.500
Third Quarter 1.063 0.125
Second Quarter 0.500 0.125
First Quarter 0.500 0.063
FISCAL YEAR ENDED JUNE 30, 1997
Fourth Quarter 1.325 0.375
Third Quarter 1.835 0.543
Second Quarter 1.750 0.438
First Quarter 0.688 0.438
FISCAL YEAR ENDED JUNE 30, 1998
Fourth Quarter 1.030 0.690
Third Quarter 1.938 1.016
Second Quarter 1.313 1.063
First Quarter 1.938 0.531
FISCAL YEAR ENDED JUNE 30, 1999
First Quarter 1.030 0.380
</TABLE>
The Company's Common Stock is not listed on NASDAQ, but is traded in
the over-the-counter market in the so called "pink sheets," or on the
"Electronic Bulletin Board" of the National Association of Securities Dealers,
Inc. (the "NASD"). Accordingly, an investor may find it more difficult to
dispose of, or obtain accurate quotations as to the market value of the common
stock. Further, in the absence of a security being quoted on NASDAQ, a market
price of at least $5.00 per share or the Company having in excess of $2,000,000
in net tangible assets, trading in the Company's securities may be covered by a
Securities and Exchange Commission ("SEC") rule that imposes additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and accredited investors (generally
institutions with net worth in excess of $1,000,000 or annual income exceeding
$200,000 or $300,000 jointly with their spouse). For transactions covered by the
rule, the broker-dealer must make a special suitability determination for the
purchaser and receive the purchasers' written agreement to the transaction prior
to the sale. Consequently, the rule affects the ability of broker-dealers to
sell the Company's securities and also may affect the
27
<PAGE> 28
ability of purchasers in his offering to sell their securities in the secondary
market.
Previously, the SEC adopted seven rules ("Rules") under the Securities
Exchange Act of 1934 requiring broker/dealers engaging in certain recommended
transactions with their customers in specified equity securities falling within
the definition of "penny stock" (generally non-NASDAQ securities priced below
$5.00 per share) to provide to those customers certain specified information.
Unless the transaction is exempt under the Rules, broker/dealers effecting
customer transactions in such defined penny stocks are required to provide their
customers with: (1) a risk disclosure document; (2) disclosure of current bid
and ask quotations, if any; (3) disclosure of the compensation of the
broker/dealers and its sales person in the transaction; and (4) monthly account
statements showing the market value of each penny stock held in the customer's
account.
As a result of the aforesaid rules regulating penny stocks, the market
liquidity for the Company's securities could be severely adversely affected by
limiting the ability of broker-dealers to sell the Company's securities and the
ability of shareholders sell their securities in the secondary market.
DILUTION AND ABSENCE OF DIVIDENDS
The Company has not paid any cash dividends on its common or preferred
stock and does not anticipate paying any such cash dividends in the foreseeable
future. Earnings, if any, will be retained to finance future growth. The Company
may issue shares of its common stock and preferred stock in private or public
offerings to obtain financing, capital or to acquire other businesses that can
improve the performance and growth of the Company. Issuance and or sales of
substantial amounts of common stock could adversely affect prevailing market
prices in the common stock of the Company.
SHAREHOLDERS
As of September, 1998, and there were approximately 400 beneficial
owners of the Company's common stock with 10,074,871 and 10,074,371 share
issued and outstanding, respectively.
28
<PAGE> 29
ITEM 2. LEGAL PROCEEDINGS
LEGAL PROCEEDINGS
The Company is the plaintiff in a patent infringement and unfair
competition lawsuit entitled Innova/Pure Water, Inc. v. Aladdin Sales &
Marketing, Inc., Filtex USA, Ltd., ACT Marketing, Inc., ACT Marketing, Ltd.,
Advance Consumer Technologies, Inc., and Robert Luzenberg, Case No.
97-924-Civ-T-25D (M.D. Fla.). The Company claimed patent infringement and false
advertising on the part of the Defendants. Prior to the trial, the Company
resolved the false advertising claims on terms deemed favorable to the Company
by management, receiving a cash settlement and an agreement that future
statements and claims would only present factual information. On October 7,
1998, the court entered a summary judgment ruling that the defendants did not
infringe the Company's patent. The Company appealed the lower court's ruling to
the United States Court of Appeals for the Federal Circuit in Washington, D.C.
The Company has received an opinion of patent counsel that there is a "high
probability" that the lower court's ruling will be overturned and that the
Filtex products will be held to be an infringement of the Company's patent.
Resolution of the Company's appeal may take between six months and a year.
The Company is also the defendant in a lawsuit filed by a former
employee who alleges breach of his employment contract. The case is Alan R.
Kelly v. Innova Pure Water, Inc., Pinellas County Circuit Court case no.
98-2771-C1-007. The Plaintiff is seeking severance pay, bonus pay, stock
options, and attorney fees. The Company denies entering into an employment
agreement with the plaintiff and disputes his being entitled to the requested
compensation and damages. The Company is vigorously defending the case while
attempting to settle with Mr. Kelly. Discovery has just commenced and the case
has not yet been set for trial. There is a likelihood of an unfavorable outcome
if the trier of fact determines that the employment agreement existed between
Mr. Kelly and the Company. Mr. Kelly has not provided a complete damages claim;
however, at this time, it appears there is a maximum potential loss of $80,000
plus stock options for 150,000 shares of the Company's stock. While management
believes the plaintiff's claim is meritless, there is no assurance that the
Company will not suffer an adverse outcome in the lawsuit.
29
<PAGE> 30
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
30
<PAGE> 31
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
On October 31, 1996, the Company reached an agreement with Innova
Holdings, LLC, a Company owned by the Cayre family who also owns the Good Times
family of companies. Good Times has agreed to provide the Company with certain
sales and marketing assistance to sell via direct television, including Richard
Simmons promotions. In connection with this agreement, the Company was paid
$500,000 for warrants for the right to purchase 11,000,000 shares of common
stock. The warrants, which are non-dilutive, have the following exercise prices
and expiration dates: (1) 3,300,000 shares at an exercise price of $0.40 per
share expiring one year from date of grant; (2) 3,300,000 share at an exercise
price of $0.75 per share expiring two years from date of grant; and (3)
4,400,000 share at an exercise price of $1.00 per share expiring three years
from date of grant.
On October 30, 1997, the Company entered into a stock purchase
agreement with Innova Holdings, LLC. In connection with this agreement, the
Company issued 1,500,000 shares of its common stock to Innova Holdings, LLC in
exchange for the surrender of previously issued warrants to purchase the
11,000,000 shares of the Company's common stock as set forth above. The
1,500,000 shares cannot be sold, transferred, assigned, or pledged for a two
year period beginning October 30, 1997.
As of year end June 30, 1997 certain officers, directors and
shareholders retired approximately $338,830.26 of Company indebtedness in
exchange for 955,310 shares issued at $.25 or $.50 per share. See "Certain
Relationships and Related Transactions."
For all above enumerated transactions, the Company relied upon Section
4(2) of the Securities Act of 1933 as an exemption available from the
registration requirements of Section 5 of the Securities Act of 1933 for
transactions by an issuer not involving a public offering. The securities were
issued to a purchaser who represented, in a manner satisfactory to the Company,
that it had acquired the securities for investment and not with the view of the
distribution thereof. The transactions described or referred to above did not
involve an underwriter, and no discount or commission was paid in connection
therewith. No advertising or general solicitation was employed by the Company in
offering the securities and no commissions were paid in connection with the
sales thereof. The securities of the Company issued to the purchasers have been
embossed with the legend restricting transfer of such securities. A stop
transfer order concerning the transfer of the certificates representing all the
common stock issued and outstanding as indicated above has been noted on the
Company's stock transfer ledger.
31
<PAGE> 32
ITEM 5. INDEMNIFICATION OF OFFICERS AND DIRECTORS
LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145 of the Florida General Corporation Law (the "FGCL")
provides in relevant part that "a corporation shall have power to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, partnership, joint venture, trust
or other enterprise, against expenses (including attorneys' fees), judgments
fines and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful." With respect to
derivative actions, Section 145(b) of the FGCL provides in relevant part that
"[a] corporation shall have power to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
its favor [by reason of his service in one of the capacities specified in the
preceding sentence against expenses (including attorney's fees) actually and
reasonably incurred by him in connection with the defense or settlement of such
action or suit if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation and except that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Circuit Court or the court in which such
action or suit was bought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
the Circuit Court or such other court shall deem proper." The Company's
Certificate of Incorporation provides for such indemnification to the fullest
extent provided for by the FGCL.
The Company's Certificate of Incorporation provides that no director of
the Company shall be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director except as limited by
the FGCL. The Certificate of Incorporation also provides that no amendment or
repeal of such provision shall apply to or have any effect on the right to
indemnification permitted thereunder with respect to claims arising from acts or
omissions occurring in whole or in part before the effective date of such
amendment or repeal whether asserted before or after such amendment or repeal.
The Company's Bylaws provide that the Company shall indemnify to the
full extent authorized by law each of its directors and officers against
expenses incurred in connection with any proceeding arising by reason of the
fact that such person is or was an agent of the corporation. The Company
anticipates entering into indemnification agreements with its directors and
certain of its officers.
32
<PAGE> 33
Insofar as indemnification for liabilities may be invoked to disclaim
liability for damages arising under the Securities Act of 1933, as amended, or
the Securities Act of 1934, (collectively, the "Acts") as amended, it is the
position of the Securities and Exchange Commission that such indemnification is
against public policy as expressed in the Acts and are therefore, unenforceable.
33
<PAGE> 34
PART F/S
ITEM 1. Financial Statements:
The following is a list of each financial statement filed under ITEM 13
of this Registration Statement:
1. Audited Financial Statements consisting of the Company's statements
of operations, changes in stockholders' equity, and cash flows for the year
ended June 30, 1997, as audited by Pender Newkirk & Company, Certified Public
Accountant, along with its report thereon.
2. Audited Financial Statements consisting of a Balance Sheet as of
June 30, 1998 and the related statements of operations, changes in stockholders'
equity, and cash flows for the year ended June 30, 1998, as audited by Pender
Newkirk & Company, Certified Public Accountant, along with its report thereon.
3. Unaudited Interim Financial Statements consisting of a Balance Sheet
as of September 30, 1998, the last day of the Company's most recent past fiscal
quarter and related statements of operations, changes in stockholders' equity,
and cash flows for the three months ended September 30, 1998 and September 30,
1997.
34
<PAGE> 35
PART III
ITEM 1. Index of Exhibits:
The following exhibits are included as part of this report:
ITEM 15B. EXHIBITS AND SEC REFERENCE NUMBERS
<TABLE>
<CAPTION>
Number Title of Document Location
- ------ ----------------- --------
<S> <C> <C>
3(a) Articles of Incorporation, as amended (1)
3(b) Bylaws (1)
5 Consent of Certified Public Accountants (2)
10(a) [Reserved]
10(b) Agreement with Rubbermaid Incorporated dated July 21, 1997 (2)
10(c) [Reserved]
10(d) Stock Purchase/Warrant Exchange Agreement with Goodtimes
Entertainment, Inc. dated October 11, 1997 (1)
10(e) Employment Agreement with Rose C. Smith dated June 30,
1997 (1)
10(f) Royalty Agreement with John E. Nohren, Jr. dated June
30, 1997 (1)
10(g) License Agreement with A.C. International dated May 21,
1997 (1)
10(h) Supply and Distribution Agreement with Bowline Family
Products, Inc. dated September 26, 1997 (1)
10(i) [Reserved]
10(j) Purchase and Supply Agreement with the Rose Group dated
January 22, 1997 (terminated) (1)
10(k) Real Estate Lease with Carr Rubin Associates dated January 21,
1998 (1)
15 Specimen Certificate (1)
99(a) 1996 Incentive Stock Option Plan (1)
</TABLE>
(1) Previously Filed
(2) Filed herewith
35
<PAGE> 36
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
INNOVA PURE WATER, INC.
<S> <C>
Dated: November 30, 1998 By: /S/ ROSE C. SMITH
-------------------------------------- -----------------------------------------
Rose C. Smith
President, Chief Executive Officer,
Director
Dated: November 30, 1998 By: /S/ JOHN E. NOHREN, JR.
-------------------------------------- -----------------------------------------
John E. Nohren, Jr.
Chairman of the Board of Directors,
Chief Financial Officer
</TABLE>
<PAGE> 37
FINANCIAL STATEMENTS
INNOVA PURE WATER, INC.
September 30, 1998 (Unaudited)
and June 30, 1998
Independent Auditors' Report
<PAGE> 38
Innova Pure Water, Inc.
Financial Statements
September 30, 1998 (Unaudited)
and June 30, 1998
CONTENTS
<TABLE>
<S> <C>
Independent Auditors' Report on Financial Statements..............................................................1
Financial Statements:
Balance Sheets................................................................................................2
Statements of Operations......................................................................................3
Statements of Changes in Stockholders' Equity.................................................................4
Statements of Cash Flows....................................................................................5-6
Notes to Financial Statements..............................................................................7-20
</TABLE>
<PAGE> 39
Independent Auditors' Report
Board of Directors
Innova Pure Water, Inc.
Clearwater, Florida
We have audited the accompanying balance sheet of Innova Pure Water, Inc. as of
June 30, 1998 and the related statements of operations, changes in
stockholders' equity, and cash flows for the years ended June 30, 1998 and
1997. These financial statements are the responsibility of the management of
Innova Pure Water, Inc. 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. These standards require that we plan and perform the audits 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 Innova Pure Water, Inc. as of
June 30, 1998 and the results of its operations and its cash flows for the
years ended June 30, 1998 and 1997 in conformity with generally accepted
accounting principles.
Certified Public Accountants
Tampa, Florida
August 20, 1998 (except for paragraph one of Note 13, as to which the date is
October 7, 1998)
<PAGE> 40
Innova Pure Water, Inc.
Balance Sheets
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,223,600 $ 488,200
Accounts receivable, trade (including related party of
$187,500 and $19,400 at September 30, 1998 and June 30, 1998,
respectively), net of allowance for doubtful accounts of $10,000 at
September 30, 1998 and June 30, 1998 400,700 848,300
Other receivables, related parties 70,100 73,600
Inventories 351,600 354,100
Other current assets 18,300 10,000
----------- -----------
Total current assets 2,064,300 1,774,200
Property and equipment, net 239,900 228,500
Other assets 187,900 175,900
----------- -----------
$ 2,492,100 $ 2,178,600
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 205,000 $ 453,100
Accrued expenses 189,100 88,500
Customer deposits 401,900 180,900
Current portion of obligations under capital leases 4,000 4,800
Current portion of long-term debt 6,300 6,100
----------- -----------
Total current liabilities 806,300 733,400
----------- -----------
Long-term liabilities:
Obligations under capital leases, net of current portion 9,000 10,100
Long-term debt, net of current portion 18,400 20,000
----------- -----------
Total long-term liabilities 27,400 30,100
----------- -----------
Stockholders' equity:
Preferred stock; $.001 par value; 2,000,000 shares authorized; 0 shares
issued and outstanding at September 30, 1998 and June 30, 1998
Common stock; $.0001 par value; 50,000,000 shares authorized; 10,074,871
and 10,064,871 shares issued; 10,074,371 and 10,064,371 shares
outstanding at September 30, 1998 and June 30,
1998, respectively 1,000 1,000
Capital in excess of par value 7,984,900 7,980,000
Accumulated deficit (6,321,800) (6,560,200)
----------- -----------
1,664,100 1,420,800
Treasury stock, at cost; 500 shares at September 30,
1998 and June 30, 1998 (5,700) (5,700)
----------- -----------
Total stockholders' equity 1,658,400 1,415,100
----------- -----------
$ 2,492,100 $ 2,178,600
=========== ===========
</TABLE>
Read independent auditors' report. The accompanying notes are an integral part
of the financial statements.
2
<PAGE> 41
Innova Pure Water, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Three Months
Ended September 30, Year Ended June 30,
---------------------------- -----------------------------
1998 1997 1998 1997
----------- ----------- ----------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales, related parties $ 232,800 $ 5,600 $ 840,700 $ 2,493,100
Net sales, other 1,272,000 406,800 2,353,400 1,387,000
----------- ----------- ----------- -----------
1,504,800 412,400 3,194,100 3,880,100
Cost of sales 753,500 171,600 1,477,800 1,811,800
----------- ----------- ----------- -----------
Gross profit 751,300 240,800 1,716,300 2,068,300
----------- ----------- ----------- -----------
Operating expenses:
Selling expenses 58,600 54,000 203,600 395,000
General and administrative expenses 431,800 241,100 1,265,500 942,000
Research and product development 31,600 24,700 89,500 31,000
----------- ----------- ----------- -----------
522,000 319,800 1,558,600 1,368,000
----------- ----------- ----------- -----------
Net income (loss) from operations 229,300 (79,000) 157,700 700,300
----------- ----------- ----------- -----------
Other (income) expenses:
Interest, net (9,100) (3,400) (15,900) 18,300
Loss on disposal of fixed assets 49,000
----------- ----------- ----------- -----------
(9,100) (3,400) 33,100 18,300
----------- ----------- ----------- -----------
Net income (loss) $ 238,400 $ (75,600) $ 124,600 $ 682,000
=========== =========== =========== ===========
Earnings (loss) per common share $ .02 $ (.01) $ .01 $ .09
=========== =========== =========== ===========
Earnings (loss) per common share,
assuming dilution $ .02 $ (.01) $ .01 $ .08
=========== =========== =========== ===========
</TABLE>
Read independent auditors' report. The accompanying
notes are an integral part of the financial statements.
3
<PAGE> 42
Innova Pure Water, Inc.
Statements of Changes in Stockholders' Equity
For the Periods Ended June 30, 1998 and 1997
and September 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Common Stock
Common Stock Subscribed Capital In
-------------------- ------------------- Excess of Accumulated Treasury
Shares Amount Shares Amount Par Value Deficit Stock
------ ------ -------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996 7,127,561 $ 700 246,000 $ $7,013,200 $(7,366,800) 5,700
Stock issued:
For stock subscriptions 246,000 (246,000)
For services and exercised options 167,500 67,100
Upon conversion of notes payable 955,310 100 338,700
Net proceeds from sale of warrants 485,300
Net income 682,000
---------- -------- -------- -------- ---------- ----------- -----
Balance, June 30, 1997 8,496,371 800 0 7,904,300 (6,684,800) 5,700
Stock surrendered to the Company (91,666)
Stock issued:
In exchange for warrants 1,500,000 200 (200)
For services and exercised options 160,166 75,900
Net income 124,600
---------- -------- -------- -------- ---------- ----------- -----
Balance, June 30, 1998 10,064,871 1,000 7,980,000 (6,560,200) 5,700
Stock issued for services (unaudited) 10,000 4,900
Net income (unaudited) 238,400
---------- -------- -------- -------- ---------- ---------- -----
Balance, September 30, 1998 (unaudited) 10,074,871 $ 1,000 0 $ $7,984,900 $(6,321,800) 5,700
========== ======== ======== ======== ========== =========== =====
</TABLE>
Read independent auditors' report. The accompanying
notes are an integral part of the financial statements.
4
<PAGE> 43
Innova Pure Water, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months
Ended September 30, Year Ended June 30,
------------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 238,400 $ (75,600) $ 124,600 $ 682,000
--------- --------- --------- ---------
Adjustments to reconcile net income (loss)
to net cash and cash equivalents provided
(used) by operating activities:
Depreciation and amortization 47,700 19,800 119,000 75,300
Provision for losses on accounts receivable (45,000) (45,000) 24,800
Loss on disposal of equipment 49,000
Common stock issued or subscribed for
services 4,900 56,600 67,100
(Increase) decrease in:
Accounts receivable 615,700 10,900 (439,900) (284,300)
Inventories 2,500 (42,200) (40,000) (151,200)
Other assets (8,300) 300 (1,500) (10,900)
Increase (decrease) in accounts payable,
accrued expenses, and customer
deposits 73,500 (265,600) 307,900 (7,300)
--------- --------- --------- ---------
Total adjustments 736,000 (321,800) 6,100 (286,500)
--------- --------- --------- ---------
Net cash and cash equivalents provided (used)
by operating activities 974,400 (397,400) 130,700 395,500
--------- --------- --------- ---------
INVESTING ACTIVITIES
Acquisition of property and equipment (39,200) (72,900) (205,200) (156,500)
Acquisition of patents (31,900) 16,200 (157,300) (16,200)
Advances to related parties (164,600) 98,200 (38,200) (7,600)
--------- --------- --------- ---------
Net cash and cash equivalents (used) provided
by investing activities (235,700) 41,500 (400,700) (180,300)
--------- --------- --------- ---------
FINANCING ACTIVITIES
Proceeds from loans 27,000 61,400
Payments on loans (1,400) (8,400) (35,100) (7,700)
Payments on capital lease obligations (1,900) (1,300) (5,700) (3,300)
Proceeds from warrant sales and issuance
of common stock 19,300 485,300
--------- --------- --------- ---------
Net cash and cash equivalents (used) provided
by financing activities (3,300) (9,700) 5,500 535,700
--------- --------- --------- ---------
</TABLE>
Read independent auditors' report. The accompanying
notes are an integral part of the financial statements.
5
<PAGE> 44
Innova Pure Water, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months
Ended September 30, Year Ended June 30,
-------------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ----------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 735,400 (365,600) (264,500) 750,900
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 488,200 752,700 752,700 1,800
---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $1,223,600 $ 387,100 $ 488,200 $ 752,700
========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION AND NONCASH FINANCING
ACTIVITIES:
Cash paid for interest $ 1,100 $ 1,400 $ 4,700 $ 38,600
========== ========== ========== ==========
Common stock issued upon
conversion of notes payable $ 0 $ 0 $ 0 $ 338,700
========== ========== ========== ==========
</TABLE>
During the year ended June 30, 1997, the Company capitalized $25,500 of
equipment under capital leases.
During the year ended June 30, 1998, the Company issued 1,500,000 shares of
common stock in exchange for 11,000,000 outstanding warrants (see Note 12).
Read independent auditors' report. The accompanying
notes are an integral part of the financial statements.
6
<PAGE> 45
Innova Pure Water, Inc.
Notes to Financial Statements
September 30, 1998 (Unaudited)
and June 30, 1998
1. NATURE OF OPERATIONS
Innova Pure Water, Inc. was incorporated in Florida in 1985 for the purpose of
developing, manufacturing, and marketing proprietary, state-of-the-art
effective and economical in-the-house and portable water purification products.
The corporate headquarters is located in Clearwater, Florida. Sales are to both
wholesale and retail markets throughout the United States, principally on
credit and primarily through strategic alliances, two of which are billion
dollar companies. Sales are also made to distributors in several foreign
countries. Significant revenues are also generated by direct television
marketing.
For the three months ended September 30, 1998 and 1997, sales to two and three
customers amounted to approximately 94 and 57 percent of net sales,
respectively. For the years ended June 30, 1998 and 1997, sales to two
customers and one customer amounted to approximately 69 and 65 percent of net
sales, respectively. Accounts receivable from these customers amounted to
approximately $393,000 and $795,000 at September 30, 1998 and June 30, 1998,
respectively. Included in the above net sales amounts for the three months
ended September 30, 1998 and 1997 and for the years ended June 30, 1998 and
1997 are sales to related stockholders of approximately $232,800, $5,600,
$840,700, and $2,493,100, respectively.
For the three months ended September 30, 1998 and 1997, sales to foreign
customers (all transacted in U.S. dollars) amounted to approximately 5 and 23
percent of net sales to unaffiliated customers, respectively. For the years
ended June 30, 1998 and 1997, sales to foreign customers amounted to
approximately 8 and 26 percent of net sales to unaffiliated customers,
respectively. These sales were made to customers in various locations as
follows:
<TABLE>
<CAPTION>
Three Months
Ended September 30, Year Ended June 30,
----------------------- ---------------------
1998 1997 1998 1997
---------- ---------- -------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Brazil $ 500 $ 71,000
Japan 21,300 $ 77,000 $102,100 79,200
New Zealand 3,000 5,400 41,600 29,000
Korea 15,300
Australia 11,300 31,300
Canada 600 48,700
England 7,800 28,300 31,200
Other 31,000 15,000 52,400
-------- -------- -------- --------
$ 63,600 $ 93,700 $187,600 $358,100
======== ======== ======== ========
</TABLE>
Read independent auditors' report.
7
<PAGE> 46
Innova Pure Water, Inc.
Notes to Financial Statements
September 30, 1998 (Unaudited)
and June 30, 1998
1. NATURE OF OPERATIONS (CONTINUED)
On July 21, 1997, the Company entered into a strategic alliance which includes
manufacturing, developing, marketing, and distributing provisions with
Rubbermaid Incorporated(R) ("Rubbermaid"). This agreement grants Rubbermaid
certain rights to the products and technology of the Company as well as to
market and distribute certain products throughout the United States and
specific other countries during the term of the agreement. The Company also
granted Rubbermaid the non-exclusive right to market and distribute certain
products throughout the rest of the world with the exception of specific
products and/or markets reserved under pre-existing agreements under other
strategic alliances. In addition to the product price, the agreement calls for
a limited price adjustment of $.10 per unit for the first ten million units of
product purchased by Rubbermaid. On termination of the agreement, the Company
is entitled to a minimum of $500,000 less any limited price adjustments already
paid. Included in net sales for the three months ended September 30, 1998 and
the year ended June 30, 1998 are approximately $79,000 and $100,000 of revenues
relating to this limited price adjustment.
The Company currently holds numerous patents in the field of water treatment
and has additional domestic and foreign patents pending. The Company pursues an
aggressive product development program with the goal to provide its strategic
partners with unique competitive advantages.
2. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed are:
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 period. Actual results could differ
from those estimates.
In the opinion of management, all adjustments consisting only of normal
recurring adjustments necessary for a fair statement of (a) the results
of operations for the three-month periods ended September 30, 1998 and
1997, (b) the financial position at September 30, 1998, and (c) cash
flows for the three-month periods ended September 30, 1998 and 1997,
have been made.
Read independent auditors' report.
8
<PAGE> 47
Innova Pure Water, Inc.
Notes to Financial Statements
September 30, 1998 (Unaudited)
and June 30, 1998
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash and cash equivalents consist of checking and operating accounts.
The cash deposits are with a single financial institution and are in
excess of the Federal Deposit Insurance Corporation's insurance
coverage limit of $100,000 at September 30, 1998 and June 30, 1998.
Inventory is stated at the lower of cost, determined by the first-in,
first-out method, or market.
Property and equipment are recorded at cost. Depreciation is calculated
by the straight-line method over the estimated useful lives of the
assets, ranging generally from three to ten years. Additions to and
major improvements of property and equipment are capitalized. Repair
and maintenance expenditures are charged to expense as incurred. As
property or equipment is sold or retired, the applicable cost and
accumulated depreciation are eliminated from the accounts and any gain
or loss is recorded.
When the Company has long-lived assets which have a possible impairment
indicator, the Company estimates the future cash flows from the
operation of these assets. If the estimated cash flows recoup the
recorded value of the assets, they remain on the books at that value.
If the net recorded value cannot be recovered, the assets are written
down to their fair market value if lower than the recorded value.
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the
financial statements carrying amounts of existing assets and
liabilities and their respective income tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Intangible assets which are included in other assets in the
accompanying financial statements are being amortized over their
estimated useful life of five years.
The Company recognizes revenue at the time products are shipped. Any
deposits received in advance of product shipment are reflected as
liabilities until the products are shipped.
Read independent auditors' report.
9
<PAGE> 48
Innova Pure Water, Inc.
Notes to Financial Statements
September 30, 1998 (Unaudited)
and June 30, 1998
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising costs are charged to operations as incurred. Approximately
$2,000 of advertising expense was charged to operations for the
three-month period ended September 30, 1998. No advertising expense was
charged to operations for the three-month period ended September 30,
1997. For the years ended June 30, 1998 and 1997, $3,000 and $15,000 of
advertising costs were charged to operations, respectively.
The Financial Accounting Standards Board issued Statement 123 (SFAS
123), Accounting for Stock-Based Compensation, which provides that
expense equal to the fair value of all stock-based awards on the date
of the grant be recognized over the vesting period. Alternatively, this
statement allows entities to continue to apply the provisions of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees, whereby compensation expense is recorded on the date the
options are granted equal to the excess of the market price of the
underlying stock over the exercise price. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide pro
forma disclosure of the provisions of SFAS 123. Under APB Opinion No.
25, the Company recorded $4,900 of compensation expense for the three
months ended September 30, 1998. No compensation expense was recorded
for the three months ended September 30, 1997. The Company recorded
$56,600 and $67,100 of compensation expense for the years ended June
30, 1998 and 1997, respectively.
During the year ended June 30, 1998, the Company adopted Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings per
Share." This statement requires dual presentation of basic and diluted
earnings per share (EPS) for complex capital structures on the face of
the income statement. Basic EPS is computed by dividing income
available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution from the exercise or conversion of securities, such
as stock options and warrants, into common stock. The June 30, 1997
earnings per share amounts have been restated to give effect to the
application of SFAS 128. The effect of the restatement on earnings per
share for the year ended June 30, 1997 was an increase of $.01 per
share.
The Company records shares of common stock as outstanding at the time
the Company becomes contractually obligated to issue shares.
Read independent auditors' report.
10
<PAGE> 49
Innova Pure Water, Inc.
Notes to Financial Statements
September 30, 1998 (Unaudited)
and June 30, 1998
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company has conducted a review of its computer systems to identify
the systems that could be affected by the "Year 2000" issue. The "Year
2000" issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Programs with
this problem may recognize a date using "00" as the year 1900 rather
than the year 2000, resulting in system failures or miscalculations.
Although no assurance can be given, the Company presently believes that
existing software is "Year 2000" compliant and will not pose
significant operational problems for the Company's computer systems.
Certain minor reclassifications have been made in the 1997 financial
statements to conform to the classifications used in 1998.
3. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
-------------- ------------
(Unaudited)
<S> <C> <C>
Raw materials $ 304,300 $ 301,900
Finished goods 39,400 43,000
Work in process 7,900 9,200
-------------- -----------
$ 351,600 $ 354,100
============== ===========
</TABLE>
Read independent auditors' report.
11
<PAGE> 50
Innova Pure Water, Inc.
Notes to Financial Statements
September 30, 1998 (Unaudited)
and June 30, 1998
4. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------------- -----------
(Unaudited)
<S> <C> <C>
Tooling $ 309,600 $ 290,500
Machinery and equipment 373,400 353,300
Vehicles 32,900 32,900
Equipment under capital lease 25,500 25,500
----------- -----------
741,400 702,200
Less:
Accumulated depreciation 493,100 466,400
Accumulated depreciation on equipment
under capital lease 8,400 7,300
----------- -----------
$ 239,900 $ 228,500
=========== ===========
</TABLE>
5. RELATED PARTY TRANSACTIONS AND COMMITMENTS
The Company entered into an employment agreement with its President
and Chief Executive Officer effective June 30, 1997, which provides
for her employment for a five-year term ending June 29, 2002. Under
the agreement, she is to receive a base salary of $150,000 per year
as well as a bonus of two percent of net sales of the Company,
adjusted by the annual gross margin achieved. For the three months
ended September 30, 1998 and the year ended June 30, 1998,
commissions earned under the agreement amounted to approximately
$29,700 and $61,600, respectively, and are included in accrued
expenses in the accompanying financial statements. The agreement
contains a restrictive covenant not to compete for the term of the
agreement and for five years following termination of service without
cause. The agreement provides for severance payments equal to 200
percent of the annual base compensation due under the agreement in
the event there is a "change of control" of the Company, as defined
therein, and she is subsequently terminated without cause.
The Company has been assigned the rights to certain patents owned by
the majority stockholder of the Company who is also the Chairman of
the Board of Directors of the Company. The costs of maintaining these
patents are included in other assets at September 30, 1998 and June
30, 1998 and amount to $180,400 and $168,500, respectively. The costs
are being amortized on a straight-line basis over a five-year period.
Read independent auditors' report.
12
<PAGE> 51
Innova Pure Water, Inc.
Notes to Financial Statements
September 30, 1998 (Unaudited)
and June 30, 1998
5. RELATED PARTY TRANSACTIONS AND COMMITMENTS (CONTINUED)
Effective June 30, 1997, the Company entered into an employment
agreement with the Chairman of the Board of Directors expiring on
December 31, 2002. This agreement obligates the Company to pay him,
in return for the assignment of his patent rights, a minimum of
$100,000 of royalties per year, with a cap of $300,000 per year,
during the term of his employment. The royalty payments will be
calculated based on five percent of sales of products that
incorporate these assigned patents. Upon his termination, a three
percent royalty shall be paid over the residual life of his patents.
In connection with the assignment, the Company paid $74,200, $20,700,
$152,900, and $150,000 to the Chairman for the three months ended
September 30, 1998 and 1997 and the years ended June 30, 1998 and
1997, respectively.
The above employment agreements and assignment of rights to patents
and royalty payments are not necessarily indicative of the agreements
that would have been entered into by independent parties.
6. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------------- ----------
(Unaudited)
<S> <C> <C>
Note payable; 7.25% interest; monthly payments
of principal and interest of $652 through
April 30, 2002; collateralized by a vehicle $ 24,700 $ 26,100
Less amounts currently due 6,300 6,100
---------- ----------
$ 18,400 $ 20,000
========== ==========
</TABLE>
Read independent auditors' report.
13
<PAGE> 52
Innova Pure Water, Inc.
Notes to Financial Statements
September 30, 1998 (Unaudited)
and June 30, 1998
6. LONG-TERM DEBT (CONTINUED)
The following is a schedule by year of the principal payments
required under this note as of September 30, 1998:
<TABLE>
<S> <C>
1999 $ 6,300
2000 6,600
2001 7,100
2002 4,700
-------
$24,700
=======
</TABLE>
7. CAPITAL LEASES
The Company has capitalized rental obligations under leases of
equipment. The obligations, which mature in 1998 and 2002, represent
the total present value of future rental payments discounted at the
interest rates implicit in the leases. Future minimum lease payments
under the capital leases are:
<TABLE>
<CAPTION>
Year Ending
September 30,
-------------
<S> <C>
1999 $ 5,400
2000 4,700
2001 4,700
2002 1,200
-------
Total minimum lease payments 16,000
Less:
Amount representing interest 3,000
Amount currently due 4,000
-------
Present value of net minimum lease payments $ 9,000
=======
</TABLE>
Read independent auditors' report.
14
<PAGE> 53
Innova Pure Water, Inc.
Notes to Financial Statements
September 30, 1998 (Unaudited)
and June 30, 1998
8. LEASE COMMITMENTS
The Company rents its operating facilities under a noncancelable
operating lease expiring in March 2003.
The following is a schedule by year of future minimum rental payments
required under this lease as of September 30, 1998:
<TABLE>
<CAPTION>
Year Ending
September 30,
-------------
<S> <C>
1999 $ 121,400
2000 126,200
2001 131,100
2002 136,300
2003 69,500
----------
$ 584,500
==========
</TABLE>
Rent expense amounted to approximately $29,800 and $19,300 for the
three months ended September 30, 1998 and 1997, respectively. For the
years ended June 30, 1998 and 1997, rent expense amounted to
approximately $99,000 and $71,400, respectively.
9. INCOME TAXES
The Company has incurred significant operating losses since its
inception and, therefore, no tax liabilities have been incurred for
the years presented. These operating losses give rise to a deferred
tax asset at June 30, 1998 and are as follows:
<TABLE>
<S> <C>
Deferred tax asset $ 2,500,000
Allowance (2,500,000)
-------------
$ 0
=============
</TABLE>
The Company has available at June 30, 1998 approximately $6.1 million
of unused operating loss carryforwards that may be applied against
future taxable income which would reduce taxes payable by
approximately $2.5 million in the future. These operating loss
carryforwards expire beginning in 2001. Income tax benefits resulting
from the utilization of these carryforwards will be recognized in the
year in which they are realized for federal and state tax purposes.
For the years ended June 30, 1998 and 1997, the Company utilized
approximately $108,000 and $200,000 of these loss carryforwards,
respectively.
Read independent auditors' report.
15
<PAGE> 54
Innova Pure Water, Inc.
Notes to Financial Statements
September 30, 1998 (Unaudited)
and June 30, 1998
10. EARNINGS PER SHARE
The following data shows the amounts used in computing earnings per
share and the effect on income and the weighted average number of
shares of dilutive potential common stock:
<TABLE>
<CAPTION>
Three Months
Ended September 30, Year Ended June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net income (loss) $ 238,400 $ (75,600) $ 124,600 $ 682,000
=========== =========== =========== ===========
Weighted average number
of common shares used
in basic EPS 10,069,914 8,495,871 9,499,374 7,279,660
Effect of dilutive stock
options and warrants 399,614 434,040 1,783,823
----------- ----------- ----------- -----------
Weighted average number
of common shares and
dilutive potential
common stock used
in diluted EPS 10,469,528 8,495,871 9,933,414 9,063,483
=========== =========== =========== ===========
</TABLE>
11. EQUITY
On September 25, 1996, the Company's Board of Directors approved an
increase in the number of common stock shares authorized from
10,000,000 to 50,000,000, and decreased the par value to $.0001 per
share. All references in the accompanying financial statements to the
number of shares and par value have been restated to reflect the
above transactions.
Effective October 24, 1996, the Board of Directors authorized
2,000,000 shares of preferred stock with a par value of $.001 per
share. The Board of Directors is authorized to issue the preferred
stock in series and to fix, in the manner and to the full extent
provided and permitted by law, the rights, preferences, and
limitations of each series of preferred stock. At September 30, 1998
and June 30, 1998, no preferred stock shares were issued or
outstanding.
Read independent auditors' report.
16
<PAGE> 55
Innova Pure Water, Inc.
Notes to Financial Statements
September 30, 1998 (Unaudited)
and June 30, 1998
12. STOCK OPTIONS AND WARRANTS
On October 31, 1996, the Company reached an agreement with Innova
Holdings, LLC, a company owned by the Cayre family who also owns the
Good Times family of companies. Good Times has agreed to provide the
Company with certain sales and marketing assistance to sell via
direct television, including certain Richard Simmons promotions. In
connection with this agreement, the Company was paid $500,000 for
warrants for the right to purchase 11,000,000 shares of common stock.
The warrants, which were non-dilutive, had the following exercise
prices and expiration dates:
3,300,000 shares at an exercise price of $.40 per share
expiring one year from date of grant;
3,300,000 shares at an exercise price of $.75 per share
expiring two years from date of grant; and
4,400,000 shares at an exercise price of $1.00 per share
expiring three years from date of grant.
On October 30, 1997, the Company entered into a stock purchase
agreement with Innova Holdings, LLC. In connection with this
agreement, the Company issued 1,500,000 shares of its common stock to
Innova Holdings, LLC in exchange for the surrender of these warrants
to purchase 11,000,000 shares of the Company's common stock. The
1,500,000 shares issued cannot be sold, transferred, assigned, or
pledged for a two-year period beginning October 30, 1997.
During the year ended June 30, 1997, the Company reserved 750,000
common shares for issuance under the Company's 1996 incentive stock
plan. During the year ended June 30, 1998, 715,000 stock options, net
of forfeitures, were granted under this plan at an exercise price of
$.50 per share. The options vest over a three-year period beginning
July 1, 1998 and expire on June 30, 2001.
Additionally, the Company has an incentive stock option plan for key
employees and advisory members. The plan allows stock options to be
granted to officers, employees, directors, and members of the
technical and marketing advisory boards of the Company.
Read independent auditors' report.
17
<PAGE> 56
Innova Pure Water, Inc.
Notes to Financial Statements
September 30, 1998 (Unaudited)
and June 30, 1998
12. STOCK OPTIONS AND WARRANTS (CONTINUED)
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
Directors, Technical
Advisory Board, and
Employee Incentive Marketing Advisory Board 1996 Incentive
Stock Option Plan Stock Option Plan Stock Option Plan
------------------------ ------------------------ -----------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Shares Price of Shares Price of Shares Price
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options granted and outstanding,
June 30, 1997 62,500 $.50 122,500 $.50
Options granted during the year 775,000 $.50
Options expired during the year (34,000) (.50) (4,000) (.50)
Options forfeited during the year (60,000) (.50)
Options exercised during the year
(at a price of $.50 per share) (28,500) (.50) (10,000) (.50)
------------------------------------------------------------------------------
Options granted and outstanding,
June 30, 1998 and September 30,
1998 0 $.00 108,500 $.50 715,000 $.50
==============================================================================
</TABLE>
The following table summarizes the status of options outstanding at September
30, 1998:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
---------------------------------- -------------------------
Weighted Weighted
Average Average
Remaining Remaining
Exercise Contractual Contractual
Price Number Life Number Life
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 Incentive Stock
Option Plan .50 715,000 2.75 238,332 2.75
Directors, Technical Advisory
Board, and Marketing
Advisory Board .50 108,500 .17 108,500 .17
--------- --------
823,500 346,832
========= ========
</TABLE>
Read independent auditors' report.
18
<PAGE> 57
Innova Pure Water, Inc.
Notes to Financial Statements
September 30, 1998 (Unaudited)
and June 30, 1998
12. STOCK OPTIONS AND WARRANTS (CONTINUED)
In addition to the above, the Company has outstanding at September 30, 1998 and
June 30, 1998 warrants to purchase 250,000 shares of the Company's common stock
at a price of $.50 per share. The warrants are exercisable at any time through
August 15, 2001, at which time the warrants expire. At September 30, 1998 and
June 30, 1998, 250,000 shares of the Company's common stock have been reserved
for issuance under these warrants.
SFAS 123 requires disclosure of pro forma net income as if the fair value based
method had been applied in measuring compensation costs for common stock
options and warrants granted. Pro forma net income (loss) and net earnings
(loss) per common share are as follows for the three-month periods ended
September 30, 1998 and 1997 and the years ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended
September 30, Year Ended June 30,
------------------------- ----------------------------
1998 1997 1998 1997
----------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
As reported:
Net income (loss) $ 238,400 $ (75,600) $ 124,600 $ 682,000
==========================================================
Basic earnings per
common share $ .02 $ (.01) $ .01 $ .09
==========================================================
Diluted earnings per
common share $ .02 $ (.01) $ .01 $ .08
==========================================================
Pro forma:
Net income (loss) $ 69,500 $ (75,600) $ (50,400) $ (1,424,900)
==========================================================
Basic income (loss) per
common share $ .01 $ (.01) $ (.01) $ (.20)
==========================================================
Diluted income (loss)
per common share $ .01 $ (.01) $ (.01) $ (.20)
==========================================================
</TABLE>
The weighted average fair value of the options and warrants at their grant
during the year ended June 30, 1998 was $.71. The estimated fair value of each
option and warrant granted is calculated using the Black-Scholes option-pricing
model. The following summarizes the weighted average of the assumptions used in
the model:
<TABLE>
<S> <C>
Risk-free interest rate 5.78%
Expected years until exercise 4.0
Expected dividend yield 0
Estimated fair market value of underlying stock $.79
</TABLE>
Read independent auditors' report.
19
<PAGE> 58
Innova Pure Water, Inc.
Notes to Financial Statements
September 30, 1998 (Unaudited)
and June 30, 1998
13. CONTINGENCY
The Company is the plaintiff in a patent infringement and unfair competition
lawsuit entitled Innova/Pure Water, Inc. v. Aladdin Sales & Marketing, Inc.,
Filtex USA, Ltd., ACT Marketing, Inc., ACT Marketing, Ltd., Advanced Consumer
Technologies, Inc., and Robert Luzenberg, Case No. 97-924-Civ-T-25D (M.D.
Fla.). The Company claimed patent infringement and false advertising on the
part of the Defendants. Prior to trial, the Company resolved the false
advertising claims on terms deemed favorable to the Company by management,
receiving a cash settlement and an agreement that future statements and claims
would only present factual information. On October 7, 1998, the Court entered a
summary judgment ruling that the defendants did not infringe the Company's
patent. The Company has appealed the lower court's ruling to the United States
Court of Appeals for the Federal Circuit in Washington, D.C. The Company has
received an opinion of patent counsel that there is a "high probability" that
the lower court's ruling will be overturned and that the Filtex products will
be held to be an infringement of the Company's patent. Resolution of the
Company's appeal may take between six months and a year.
The Company is also the defendant in a lawsuit filed by a former employee who
alleges breach of his employment contract. The case is Alan R. Kelly v. Innova
Pure Water, Inc., Pinellas County Circuit Court Case No. 98-2771-C1-007. The
plaintiff is seeking severance pay, bonus pay, stock options, and attorney
fees. The Company denies entering into an employment agreement with the
plaintiff and disputes his being entitled to the requested compensation and
damages. The Company is vigorously defending the case while attempting to
settle with Mr. Kelly. Discovery has just commenced and the case has not yet
been set for trial. There is a likelihood of an unfavorable outcome if the
trier of fact determines that an employment agreement existed between Mr. Kelly
and the Company. Mr. Kelly has not provided a complete damages claim; however,
at this time, it appears there is a maximum potential loss of $80,000 plus
stock options for 150,000 shares of the Company's stock. While management
believes the plaintiff's claim is meritless, there is no assurance that the
Company will not suffer an adverse outcome in the lawsuit.
Read independent auditors' report.
20
<PAGE> 1
EXHIBIT 5
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use of our Auditors' opinion, dated August 20, 1998, in
the September 30, 1998 Form 10-SB to be filed by Innova Pure Water, Inc.
accompanying the financial statements of Innova Pure Water, Inc. as of June 30,
1998 and the results of operations and its cash flows for the years ended June
30, 1998 and 1997.
/s/ Pender Newkirk & Company
Certified Public Accountants
Tampa, Florida
November 30, 1998
<PAGE> 1
Exhibit 10.B
MARKETING AND DISTRIBUTION AGREEMENT
THIS STRATEGIC MARKETING AND DISTRIBUTION AGREEMENT ("Agreement") is
entered into by and between Rubbermaid Incorporated, Home Products Division, an
Ohio corporation having its principal place of business at 1147 Akron Road,
Wooster, Ohio 44691 ("Rubbermaid") and Innova Pure Water, Inc. a Florida
corporation having its principal place of business at 13160 56th Court, Suite
510, Clearwater, Florida 34620 ("Innova").
WHEREAS, Innova has a proprietary line of existing water filtration
products and the capacity to manufacture those products more particularly
described in Exhibit A ("Product") for Rubbermaid; and has the know-how and the
ability to develop and produce new water filtration products, some of which are
covered by existing or pending patents; and
WHEREAS, Rubbermaid desires to utilize Innova's technology, know-how and
capability to meet some of its requirements for water filtration products;
NOW THEREFORE, in consideration of the premises and the mutual covenants
and agreements herein contained, the parties, intending to be legally bound
hereto, agree as follows:
1 . Term of Agreement. The term of this Agreement shall commence on July
21, 1997 ("Commencement Date") and, except as otherwise provided herein, shall
continue until twenty four (24) months after the date on which either party
provides the other with written notice of termination. Should such notice be
provided by Rubbermaid, Rubbermaid may allow Innova to re-enter the market with
product not bearing the Rubbermaid name during the 24 month period by mutual
agreement, and provide to Innova the option with Rubbermaid consent to acquire
product associated assets which may have been purchased by Rubbermaid including
but not limited to tooling and packaging, at the termination of the 24 month
period. Should such notice be provided by Innova the provisions of Paragraph 2
shall continue to apply during the 24 month termination period.
2. Marketing Rights/Territory. Innova hereby grants to Rubbermaid during
the term of this Agreement and Rubbermaid acknowledges and accepts the exclusive
right to market and distribute Product throughout the United States, Canada,
Mexico, Australia, Japan and the countries of Central America, South America,
and Europe listed on Exhibit "B" attached hereto ("Territory") in all consumer
channels of trade, and the nonexclusive right to market and distribute Product
throughout the rest of the world in all channels of trade and in all other
channels of trade within the Territory, except as herein excluded or modified
and with the exception of pre-existing agreements between Innova and:
a. GT Merchandising and Licensing, Inc. Television direct sales &
Richard Simmons private label.
b. Fun Design, Inc. Water Bottles for the youth market containing
figural designs.
c. The Rose Group, Inc. Baby Bottles and Sippy Cups incorporating
water filtration.
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d. Bowline Family Products, Inc. Markets Bottles containing an Innova
Filter in conjunction with Tote/Carrying Bags.
e. AC International and Abingdon & Associates - London Licensed to
market Bike Bottles with filter to the Bicycle market.
f. Akiyama - Japan Sells Innova's older retail product as provided by
list to Rubbermaid
g. New Zealand. Distribution agreement in place.
h. Korea. Distribution agreement in place.
i. Israel. Distribution agreement under negotiation.
j. Innova retains the right to market product without the Rubbermaid
name on a nonexclusive basis in the following channels of trade:
i. Premiums and Incentives
ii. Electronic Sales
iii. Direct Response Sales
k. Innova retains the right to market product without the Rubbermaid
name on an exclusive basis in the following channels of trade:
i. Schools and bookstores
ii. Non-Consumer Military
iii. Advertising Specialties (except for retail private label
products)
iv. Catalog (Mail Order) (Rubbermaid Catalog Excluded)
Any use of the Rubbermaid name will be subject to approval by Rubbermaid.
In the event that Innova, either directly or through a third party, elects
to enter markets other than those exclusively granted to Rubbermaid under this
Agreement, Rubbermaid shall have a right of first refusal to obtain said markets
as its exclusive market. Innova shall provide Rubbermaid with written notice of
said market entrance. Rubbermaid shall have thirty (30) days from the date it
receives said notice to notify Innova of its decision to refrain from exercising
its right of first refusal or to exercise its right of first refusal, in which
event this Agreement shall be amended to reflect the addition of said market.
Countries assigned to Rubbermaid on an exclusive basis require Rubbermaid
to prepare a business plan to generate sales within a six month time frame.
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In connection with the grant of the marketing licenses to Rubbermaid
hereunder, the parties further agree as follows:
a. Innova hereby grants Rubbermaid on a right of first refusal basis
the right to market any newly developed products of Innova. If
accepted, Rubbermaid will provide an addendum to its product
forecast and launch the product specified within one year.
b. The grant of exclusive marketing rights in Canada is subject to
payment by Rubbermaid of all costs incurred by Innova's current
Canadian distributor not to exceed $20,000 for the release of such
distributor's rights to market Innova products in Canada.
c. Rubbermaid intends to introduce one or more of the Products listed
on Exhibit A, which will be selected by Rubbermaid via written
notice to Innova, via direct response sales/infomercial under the
Rubbermaid name within ninety days after Commencement Date. At the
time of said selection, a new Exhibit A shall be prepared with all
Product not selected by Rubbermaid for its initial launch being
moved to the section of Exhibit A entitled Possible Future
Product. Rubbermaid may, at its option, elect to launch one or
more Possible Future Products by providing Innova of written
notice of the same. All Product and all Possible Future Product
shall be subject to the exclusivity provisions of Paragraph 2.
Until Rubbermaid launches each Product, Innova may continue any
current or prospective sales opportunities excluding KMart, Target
and Wal-Mart.
d. On or before August 15, 1997, Rubbermaid will provide to Innova a
product production requirement schedule through November 1997,
which will be integrated into the other forecast requirements.
Said schedule shall not be deemed to be a commitment on
Rubbermaid's part to purchase said quantities of Product unless
and until said quantities are made a part of Rubbermaid's firm 30
day release schedule.
e. On or before October 15, 1997, Innova will supply to Rubbermaid a
suggested future product list of new products with an estimated
time to complete.
f. By December 31, 1997, Rubbermaid will select and prioritize the
additional products that Rubbermaid would like to introduce in
order in preference and by specific dates.
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g. Anything in this Agreement to the contrary notwithstanding, during
the term of this Agreement Innova shall not market or manufacture
for itself or any third party for sale in the consumer channel of
trade assigned to Rubbermaid Product, Possible Future Product, or
any other water filtration product substantially similar in
functionality and design to any water filtration product
manufactured by or for Rubbermaid, except as set forth in the
exception listing in the first portion of Paragraph 2.
3. Product Specifications. Innova shall produce Product in accordance
with Product specifications contained in Exhibit A hereto (as amended from time
to time by mutual agreement) and an appropriate product PROOF including
packaging which will be submitted and approved by Rubbermaid.
4. Product Packaging. Innova shall package Product in point of purchase
packaging and shipper cartons in accordance with the packaging specifications
contained in Exhibit C hereto; the cost of which is incorporated within the
Product pricing. Rubbermaid may require Innova to modify the existing packaging
as specified in Exhibit C. All packaging design, art, photography and plates,
etc. required to modify existing packaging or to create new packaging will be
either supplied by or paid by Rubbermaid. All Product pricing changes required
due to changes in packaging are subject to the mutual agreement of the parties
as called for under Paragraph 5.
5. Product Price. The price to be paid to Innova by Rubbermaid for
Product is set forth on Exhibit D. Innova shall provide Rubbermaid with 90 days
prior notice of any requested price change. The parties must mutually agree
upon any such price change in order for it to be effective. In the event that
the parties are unable to reach agreement on pricing, either party may
terminate this Agreement as effective 90 days after notice of termination.
During the 90 day termination period, pricing in effect prior to the requested
price change shall apply.
6. Limited Price Adjustment. Rubbermaid will pay Innova an additional
$0.10 per unit for the first 10 million units of Product purchased by
Rubbermaid.
After the initial Product launch with Rubbermaid's retail customers
and filling the "pipeline", and three months of sustained production rate of
three hundred thousand (300,000) units per month, should termination notice be
given by Rubbermaid, Rubbermaid shall pay Innova, at the time of termination
notice, $500,000 less any revenues paid as a result of this $0.10 per unit
payment to that date. If during the 24-month termination notice period, total
unit sales by Rubbermaid exceeds 5 million, the $0.10 per unit payment will
continue up to and including 10 million units of Product or such lesser
quantities as may be sold by Rubbermaid.
7. Production and Marketing Efficiency. The parties shall dedicate human
resources and work jointly to identify raw material, process and conversion
cost improvement opportunities and determine the cost benefits. Savings brought
forth by any means will be equally divided between the parties. Innova shall
use the lowest cost acceptable suppliers identified by either party for all raw
materials and freight provided such raw materials permit Innova to meet
specifications set forth in Exhibit A. Except in the case where Rubbermaid
supplies raw materials as provided for below, if Innova elects to use a
supplier other than the
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lowest cost acceptable supplier Innova shall reduce Product pricing in an
amount equal to 50% of the difference between the lowest cost supplier and the
supplier utilized by Innova. Rubbermaid may, at its option at any time, on
thirty (30) days prior written notice to Innova, require Innova to purchase raw
materials directly from Rubbermaid under the terms of Rubbermaid's standard
security agreement and related documentation, so long as such supply
requirement does not create a liability for Innova as a result of contract
default with an existing supplier, and Rubbermaid is the lowest cost supplier
of an equal quality material.
Should Rubbermaid direct Innova to use certain suppliers, and such
suppliers fail to perform related to quality or timely delivery which impact
Innova's ability to respond to Rubbermaid's needs, Innova will not be held
accountable for such failure, and Rubbermaid agrees to reimburse Innova with
all associated costs incurred.
8. Sales Forecasts. Rubbermaid will provide Innova with an annual
forecast by Product. This forecast does not represent a financial commitment by
Rubbermaid to purchase said quantities of Product unless and until said
quantities are made a part of Rubbermaid's firm 30 day release schedule. To the
degree possible, each party will keep the other advised of pending changes, or
problems of any kind to provide the maximum amount of time for reaction and
cure. Additionally:
a) A 13 week rolling Product forecast will be provided by Rubbermaid
and updated weekly. These forecasts do not represent a commitment
by Rubbermaid to purchase said quantities of Product unless and
until said quantities are made a part of Rubbermaid's firm 30 day
release schedule.
b) Should additional tooling be required to meet the delivery
requirements, such condition will be communicated to Rubbermaid
within 15 days.
c) The details of the 9 week and 13 week forecast will be revised to
more specific 30 day release schedule to which Innova will respond
to the degree possible and immediately note exceptions, if any, to
Rubbermaid.
d) In the event that Rubbermaid's firm 30 day release schedule
requires quantities of Product which are less than 75% of the, 9
week forecast and should purchased goods inventory be accumulated
based upon the 9 week forecast and remain unused, the associated
carrying costs will be passed on to Rubbermaid.
9. Product Shipping. Depending upon Rubbermaid's desires and Innova's
warehousing and shipping capability, Innova may ship either to Rubbermaid for
distribution or directly to the customer, at Rubbermaid's option.
a. Initially, Innova will ship to Rubbermaid by truckload for
distribution to the customer.
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b. FOB point factory, Clearwater, FL unless Innova advises Rubbermaid
of a change. All freight charges will be collect or 3rd party
billing to Rubbermaid.
10. Billing and Payment Procedure. Rubbermaid will pay Innova in advance,
an amount of money approximating Rubbermaid's firm 30 day release schedule,
which will be periodically increased or decreased in accordance with release
schedules. Innova will invoice Rubbermaid for Product upon shipments and
Rubbermaid will pay such invoices within 30 days. Innova agrees to grant
Rubbermaid a security interest in all work in process and finished Product
inventories related to Rubbermaid's orders to secure repayment of any
preshipment payment by Rubbermaid. The parties shall execute a security
agreement in the form attached hereto as Exhibit F to effectuate the grant of
such security interest.
11. Nonconforming Product. Innova shall, within thirty (30) days of the
submission of a claim by Rubbermaid to Innova for non-conforming Product,
credit Rubbermaid with the full purchase price of any unit of Product if it or
its packaging is found not to be in conformance with the specifications set
forth in Exhibits A or C, and approved product PROOF provided that such unit of
Product is, at Innova's option and expense, returned to Innova. Innova has the
right to inspect the product before it is returned. In addition, within thirty
(30) days of the submission of a claim by Rubbermaid to Innova that Rubbermaid
has incurred customer imposed penalties for the receipt of late or
non-conforming Product, reimburse Rubbermaid for the amount of said penalties,
provided Rubbermaid has not previously approved that aspect of the product or
packaging deemed non-conforming. No penalty shall be assessed for delivery
delays beyond Innova's control. Product not conforming to the specifications
contained on Exhibits A or C shall be disposed of in a manner mutually agreed
upon between the parties.
12. New Products. In the event that Innova, either at Rubbermaid's
request or of its own initiative, develops water filtration products other than
Product defined herein ("New Products"), it shall first offer the same to
Rubbermaid. Should Rubbermaid elect to pursue the marketing and distribution of
New Products the parties will negotiate in good faith regarding the allocation
of the costs for the development and manufacturing of New Products. In the
event that Rubbermaid elects to market and distribute New Product, this
Agreement shall be amended accordingly.
13. Default by Innova. Innova shall have 30 days from receipt of due
notice from Rubbermaid to cure any of the following events of default brought
to its attention before Rubbermaid may immediately terminate this Agreement for
cause as herein provided.
a. Product manufactured by Innova consistently fails to meet the
mutually agreed upon then current Product specifications contained
on Exhibits A or C; or
b. Product prices are not competitive with prices available at retail
from other qualified sources meeting similar requirements on an
ongoing basis whose product meets the quality standards set forth
in the Agreement, and Innova is unwilling or unable to meet these
prices;
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c. Innova fails to meet ninety percent (90%) of the expected on time
and complete delivery levels based on the release schedules for
existing (not new) production Products provided by Rubbermaid and
accepted by Innova. Innova will not unreasonably withhold such
acceptance provided the release is within the capacity of Innova
to produce and is in line with prior forecasts to which exceptions
have not been taken. Innova further assumes that no Product
deviations from previous shipments are involved. The thirty day
remedial period IS automatically triggered after the first 30 days
of failure to meet delivery schedule without formal notice by
Rubbermaid.
d. Innova attempts to assign this Agreement or any rights hereunder,
without Rubbermaid's prior written consent; or there is a
fundamental change in the control of Innova without Rubbermaid's
prior written consent, which is unacceptable to Rubbermaid. An
exception is the exercise of warrants by Innova Holdings, LLC,
which is a matter of public record.
e. Innova ceases to function as a going concern; or ceases to conduct
its operation in the normal course of business; or a receiver for
it is appointed; or it otherwise takes advantage of any insolvency
law; or
f. Innova breaches any other material provision of this Agreement.
14. Default by Rubbermaid. Within twelve (12) months of Commencement
Date, should Rubbermaid fail to achieve a minimum distribution with 25% of mass
merchant accounts including at least one of the "majors", Innova shall have the
right to terminate this agreement. Further, should Rubbermaid fail to make
payments as provided for in this agreement Innova may terminate this agreement,
providing due notice has been given and 30 days are allowed for the cure of the
default.
15. Post-termination Procedures. Upon termination of this Agreement,
Rubbermaid and Innova shall develop a strategy to minimize finished Product and
raw and finished material inventories ordered and committed by Rubbermaid in its
firm 30 day release schedule remaining in Innova's possession.
16. Product Standards. All Product shall conform with all federal, state
and local statutes and regulations and all voluntary industry standards.
Filters and product's shall be certified by NSF International under NSF
Standard No. 42, class 2 or better performance. NSF certification will be
contracted by Rubbermaid with the full cooperation of Innova. Costs associated
with NSF certification will be paid by Rubbermaid.
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17. Patent Rights.
a. Should Rubbermaid be the subject of an action for patent
infringement of the rights of third parties by reason of making,
using or selling the Products identified herein, Innova shall be
solely responsible for the defense and damages resulting from such
suit and shall indemnify and hold Rubbermaid harmless from all
damages, costs, and liability resulting from such suit. Rubbermaid
shall have the right at its option and expense to participate
jointly with Innova in the defense of the action. Rubbermaid will
promptly notify Innova of any potential infringement of which they
become aware.
b. In the event Rubbermaid believes a third party is infringing upon
the patent rights in any country, Rubbermaid and Innova may bring
suit jointly to enjoin the same, sharing the costs of such suit
equally and sharing equally in any recovery resulting therefrom.
In the event that either party elects not to participate in such
suit, the other party shall have the right to bring suit at its
sole expense and to any recovery resulting therefrom. Should an
infringing party offer a settlement satisfactory to Innova, Innova
may elect to accept such settlement if satisfactory to both
parties to this agreement and apply 50% of the proceeds and
continuing royalties to the cost of the product supplied to
Rubbermaid. Alternatively, Rubbermaid shall at its option have the
right to pursue the infringing party at its costs and retain any
monies recovered over and above the settlement value which Innova
would otherwise have received.
c. Innova agrees to provide whatever assistance is necessary to
obtain assignments to Rubbermaid and Innova of the patent
applications filed internationally pursuant to this Agreement.
Rubbermaid may at its expense file patent applications in any
country in the Territory it so elects based upon the United States
Patent Rights of Innova. The parties agree to jointly own the
patent applications and subsequent patents which shall be
considered part of the patent rights subject to this Agreement. All
countries in which Rubbermaid elects to file patent applications
shall be considered part of the Territory as defined in this
Agreement with the responsibility to exploit said Territory.
d. In the event that Rubbermaid does not desire to seek protection in
any country, Innova shall have the right to do so at its sole
expense and to own the patent application and subsequent patent.
However, should Rubbermaid either fail to effectively develop any
market covered by a joint patent or choose to terminate this
agreement, Innova can recover all patent rights by reimbursing
Rubbermaid the cost of such patents prorated to the term of
protection remaining.
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Rubbermaid may not grant a license to a third party without the expressed
written approval and consent of Innova.
18. Information Systems. Each party shall be responsible for securing, at
its own expense, the computer software and hardware, as specified by
Rubbermaid, which it requires to transmit data to, or receive data from, the
other party in performing its obligations under this Agreement, provided the
(EDI) equipment and software is cost effective, practical, and current state of
the art. Innova presently has EDI capability covering purchase orders,
invoicing, and shipping information.
19. Access to Records. Innova shall provide Rubbermaid with the records
set forth on Schedule A and access to its books and records relating to the
manufacture and sale of Product. Said records shall be made available during
normal business hours on not less than fifteen (15) days prior written notice.
20. Confidentiality. Each party shall maintain in confidence and
safeguard the identity of the other party and all confidential business and
technical information which becomes available to it from the other in
connection with this Agreement in accordance with the terms of the
confidentiality agreement attached hereto as Exhibit E. Neither party shall
make any public announcement via press release or otherwise regarding the
relationship between the parties without the other party's prior consent.
However, as public companies both companies shall release appropriate notices
to the wire services within the time constraints imposed by the SEC.
21. Service Marks. Innova acknowledges that Rubbermaid owns the worldwide
rights to the mark RUBBERMAID and the distinctive elliptical panel with
parallel ends. Innova agrees that, on Product sold to Rubbermaid, Innova shall
use the mark and panel only in the manner and form prescribed by Rubbermaid. It
shall not use the mark or panel on any product, product packaging or literature
that is not sold directly to Rubbermaid, without the express written consent of
Rubbermaid.
The same provision will be provided to Innova, pertaining to its
trademarks and intellectual property which Rubbermaid shall agree to honor.
22. Independent Contractor Status. Innova is an independent contractor
for Rubbermaid. This Agreement does not constitute Innova as an agent or legal
representative of Rubbermaid for any purpose whatsoever. Innova is not granted
any right or authority to assume or create any obligation or responsibility,
express or implied, on behalf of or in the name of Rubbermaid or to bind
Rubbermaid in any manner or thing whatsoever. Nothing in this Agreement shall
be construed as creating a partnership or joint-venture between the parties.
Nor does this agreement convey any rights for patents and trademarks owned by
Innova beyond their use as a component and accommodation under this agreement.
23. Compliance and Laws. Innova represents and warrants to Rubbermaid
that it is in and shall remain in compliance with all applicable federal, state
and local statues and regulations regarding health, safety and the environment.
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24. Force Majeure. Neither party shall be liable to the other for delay
in the performance of its duties hereunder to the extent that such delay is the
result of an act of God or other conditions beyond that party's control such as
government regulation, embargo, fire, flood, accident, strike, or the like.
25. Entire Agreement. This Agreement, and to the extent not inconsistent
herewith the terms and conditions contained on the face of Rubbermaid's
purchase orders issued hereunder, constitutes the entire understanding between
the parties and there are no other promises or representations made except as
they appear in this Agreement. Further, any amendment or modification of the
terms hereof shall not be effective unless in writing and signed by both
parties.
26. Product Liability. Innova shall indemnify Rubbermaid and defend and
hold Rubbermaid harmless from and against any losses, costs, damages and
expenses whatsoever which Rubbermaid may sustain or incur on account of product
liability claims for defects in the design or manufacture of Product arising in
conjunction with the sale or use of Product. Rubbermaid shall promptly deliver
to Innova any notices or papers served upon it in any proceeding covered by
this indemnity. Innova shall not be responsible for misuse of the Product or
for improper representations made about the Product by Rubbermaid.
27. Insurance Coverage. Innova shall pay for and maintain comprehensive
general liability insurance with products liability, contractual and completed
operations coverages, policies for which shall list Rubbermaid as a named
additional insured and shall reflect minimum bodily injury limits of
$1,000,000.00, each occurrence, and $2,000,000.00, aggregate, and minimum
property damage limits of $500,000.00. Evidence of these coverages shall be
provided, in certificate form, coincident with or prior to execution of this
Agreement.
28. Waiver. The failure of either party to enforce at any time or for any
period of time a provision or provision hereof in accordance with its terms
shall not be construed to be a waiver of such provision(s) or of the rights of
such party thereafter to enforce each and every such Provision(s).
29. Severability. If any part of this Agreement shall be adjudged
invalid, it shall be considered to be severable and the remainder of the
Agreement shall continue in full force and effect to the extent practicable.
30. Applicable Law. This Agreement is subject to, and shall be construed
and interpreted in accordance with, the laws of the State of Ohio. The parties
agree that all disputes may be settled by mediation by which both parties will
make a sincere effort to settle in good faith.
31. Attorneys' Fees. In the event the obligations of the parties
expressed herein are the subject of litigation, the prevailing party shall be
entitled to recover from the other party all reasonable costs and expenses of
such litigation, including reasonable attorneys' fees and costs of appeal.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the dates set forth below.
RUBBERMAID INCORPORATED
By /s/
-----------------------------------
Title
--------------------------------
Date 7/22/97
---------------------------------
INNOVA PURE WATER, INC..
By /s/
-----------------------------------
Title Chairman
--------------------------------
Date July 21, 1997
---------------------------------
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