<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-29746
INNOVA PURE WATER, INC.
--------------------------------------------------
(Exact name of registrant as specified in charter)
Florida 59-2567034
--------------------------------- -------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
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 registered pursuant to Section 12(b) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy of information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [ X ]
State issuer's revenues for its most recent reporting period June 30,
1999........$2,587,400.
Aggregate market value of the voting stock held by non-affiliates of the
registrant at June 30, 1999 was $2,313,730
N/A
-------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
INNOVA PURE WATER, INC.
FORM 10-KSB - INDEX
PART I
Page
----
Item 1. Description of Business 1
Item 2. Description of Property 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market of the Registrant's Securities and Related
Stockholder Matters 9
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 7. Financial Statements and Supplementary Data 14
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures 14
PART III
Item 9. Directors and Executive Officers of the Registrant 14
Item 10. Executive Compensation 16
Item 11. Security Ownership of Certain Beneficial Owners
and Management 18
Item 12. Certain Relationships and Related Transactions 19
Item 13. Exhibits, Consolidated Financial Statements,
Schedules and Reports on Form 8-K 20
Signatures 22
<PAGE> 3
INNOVA PURE WATER, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This Annual Report on Form 10-KSB and the documents incorporated herein by
reference contain forward-looking statements that have been made pursuant to
the provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are based on current expectations, estimates and
projections about Innova Pure Water's industry, management's beliefs, and
assumptions made by management. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates," variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict; therefore, actual results and outcomes may differ materially from what
is expressed or forecasted in any such forward-looking statements.
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 and treatment 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 and others. Such an alliance was created under which the Company
creates and manufactures while Rubbermaid markets and distributes the products.
Additional alliances of the same nature are being negotiated. 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.
1
<PAGE> 4
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. There is no assurance that additional alliances will be
consummated or that the Company will be able to commercially exploit its water
purification technologies on a profitable basis.
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, approximating 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 Partners, that
typically have wide distribution in retail stores. While there is no assurance
that Innova's products will be purchased by retail 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.
2
<PAGE> 5
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. In June of 1999, Rubbermaid released Innova
from the exclusive provisions of the agreement permitting Innova to seek
markets and distribute the Innova line of products as Innova may wish including
through other strategic alliances marketing through the same channels.
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.
The last quarter ending June 30, 1999 suffered from a major reduction
in sales to Rubbermaid and the redefining of priorities and product lines.
These changes were directed by the Newell Co. who acquired control of
Rubbermaid in May 1999. Although the sales of Innova Water Filtration Products
had increased significantly over the preceding year (Wal-Mart +97%) strategic
focus was to be placed elsewhere, on Rubbermaid's historic product lines.
As a result while Innova will continue to supply Rubbermaid with their
Water Filtration Product requirements, Rubbermaid has released Innova from all
provisions of our Strategic Alliance agreement relative to exclusivity, as well
as to any rights to the several new and advanced products created for
Rubbermaid but not introduced into the market. It had been the goal of Innova
to make Rubbermaid pre-eminent in both the domestic and the international
market with products and new technology which Innova believed was advantaged
over competitive products and technology. This array of products has been
covered by pending patents both domestically as well as internationally.
Thus, Innova has embarked upon a mission to establish new Strategic
Alliance Partners to market Innova products both domestically and
internationally. In this regard Innova has reestablished negotiations with
companies that had previously solicited Innova during our period of exclusivity
with Rubbermaid, and other major and multi national companies headquartered
both domestically and abroad.
The validation of Innova's patent covering the portable personal and
sport bottle segment as a result of winning Innova's patent infringement suit
against Aladdin Industries, and others provides a strong incentive to seek an
alliance with Innova for any company contemplating or desirous of entering into
this market. Innova also possesses unique proprietary technology and product
designs which out perform and have significantly greater utility than present
carafe products currently in the market. This also provides a significant
negotiating advantage for Innova. Continuing along product lines Innova has
also created a family of Sport type water treatment products operating on the
systems principal. Under the "System" approach the user of an Innova Sport type
bottle, so designed, may incorporate any one or more of a series of filters and
treatment devices designed to treat most problems faced by users, including
biological contamination.
At present negotiations are underway with potential Strategic Alliance
partners in the United States, China, India, and Europe. A number of major
distributors in several other countries have agreed to distribute Innova
products.
While revenue for the first quarter will be quite low, we believe that
the steps being taken and the new alliances being formed will place Innova in a
very strong position. Innova will continue to continue to supply Rubbermaid for
Canadian as well as domestic accounts. Although the relationship is continuing
Rubbermaid has agreed to pay Innova $256,000 as unpaid R&D costs, which they
had agreed to previously pay for the rights to use existing technology and
patents created by Innova prior to the entry into the Alliance agreement.
3
<PAGE> 6
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, HNL, NBA, Major League Baseball, NASCAR, Sony
and others.
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 then held to purchase 11
million shares of company stock, for which the Company was paid $500,000 in
August of 1996.
During the years ended June 30, 1999 and June 30, 1998, sales to GT
amounted to approximately 13% and 26% of the Company's net sales, respectively.
This reduction was due to the completion of the infomercial cycle and the
inclusion of the Company's products in a combined retail promotion, which is
still ongoing.
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. The Company is completing the
development of new products which it believes GT could market profitably and
successfully as they represent a major step forward in the field meeting the
desires and needs of water conscious consumers.
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:
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. sport type bottle with integral replaceable
filter mounted to the bottle to 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. Filters for sport promotion bottles.
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 for its Strategic Alliance
Partners. It is the opinion of management that the technology and product
concepts controlled by the Company can permit its strategic alliance partners
to become or remain the dominant companies in the consumer water treatment
category on a domestic as well as 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.
4
<PAGE> 7
Four new products have been developed or are production ready. The
products providing the opportunity to access new markets as a result of new
technology and products are as follows:
1. Drop-in filter to fit 28 mm bottleneck opening, retained in place
by cap. To be used with baby bottles and figural bottle top
designs, i.e., football helmets, etc.
2. Filter assembly for protozoa adaptable to sports bottles
incorporating a high performance carbon composite filter.
3. Reversible filter housing or shroud providing suction fill to the
surface surrounding a radial flow for bottle filter when used at
either the top or base of a bottle.
4. Single orifice filter for inverted bottle use; i.e., cooler crock
containers of 2-5 gallon nominal size.
Several additional products and technologies are in various stages of
development with the goal to be production ready within 6 - 18 months.
1. A sport type bottle employing the "System Concept" utilizing
interchangeable filter elements to fill numerous consumer needs.
i. Biological filters
ii. Heavy metal filters
iii. Nitrate filters
iv. Filter adapter housing for cooling water
v. Filter with Dispensing Element
2. Products using new proprietary Macro-Porous technology.
i. High performance Carafe
ii. High performance Carafe with Biological capability
iii. High performance Table Bottle
iv. High performance "Chug" Bottle
3. Chemical disinfection for the devitalization of bacteria and virus
in conjunction with Innova's product line.
The Company has developed a family of filters to fit one through five
gallon cooler or crock style bottles. These products will be available with or
without biological treatments for the removal of protozoa and, potentially, the
devitalization of bacteria and virus. 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 between 10 and 50 bottles or 250
gallon, depending upon designs, 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. In the
developing countries the ability to disinfect the water could be very
advantageous as well as cost effective.
New rapid filtration media adaptable to carafes and pitchers has also
been 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 constraint as,
typically only 50% of the volume of the carafe is available for filtered water.
Thus, frequently, insufficient amounts of filtered water is 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 three minutes, and pours
freely. The process used is Static Filtration(TM). 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 this requirement the Company has
reviewed and prototyped several devices and is currently in the process of
evaluating technology available for license.
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
5
<PAGE> 8
units. Total royalties received during fiscal year ended June 30, 1999 were
approximately $7,000. Management does not anticipate significant license fees
from this arrangement in the current fiscal year.
SALES AND BACKLOG
The sales for fiscal year ended June 30, 1999 were $2,587,400. The
sales for the preceding fiscal year ending June 30, 1998 were $3,194,000. Total
revenue for fiscal year ending June 30, 1999 was $3,021,000 as compared with
total revenue of $3,210,000 for the preceding year ended June 30, 1998.
Revenue was enhanced in the past fiscal year by the receipt of
$100,000 as a result of the successful litigation of a patent suit against
Aladdin Industries, and other parties. The findings of the court validating the
Innova Patent covering personal water filter bottles places the company in
possession of owning the only validated patent for products of this nature with
the water treatment element mounted at the top or neck of the bottle.
Rubbermaid also paid $256,000 to the Company as a result of contractual
commitments.
Orders forecasted (as differentiated from actual order backlog)
through September 30 1999 are very low as a result of the decision of
Rubbermaid to de-emphasize the category. This was primarily a result of the
acquisition by Newell of Rubbermaid and a sizable inventory that had previously
been accumulated by Rubbermaid anticipating a major growth and expansion of the
business into Canada and Europe. 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 Clorox, selling the Brita line under license from Brita
GmbH, Germany.
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 was the early leader in sales of portable bike, sport and
16 oz. personal filter water bottles, as well as the two liter portable pitcher
all of which are covered by patents held by the Company. The category remains
relatively new and embryonic with the majority of growth to come over the next
several years. The portable personal water filter bottles were initially
introduced by Richard Simmons under contract with the Company's Strategic
Partner, Goodtimes Licensing and Entertainment, in the first year over
2,000,000 16 oz. personal water filter bottles and thousands of 30 oz. sport
type bottles were sold. Since then, Aladdin Industries and others have entered
this expanding new market. The Company's position in this market has been
vigorously defended against competition attempting to enter this market. Innova
has been victorious in litigation, protecting its patent position which has
caused most companies with potentially infringing products to withdraw from
this market. As a result the Company is now in an excellent position to
structure strategic alliances with other major companies to capitalize upon its
strengthened patent and plethora of new products. However, 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 existing and pending 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 four 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 four additional
patents pending both domestically and internationally.
The Company was 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.)
6
<PAGE> 9
filed by the Company on April 18, 1997. The Company claimed patent infringement
for one patent 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. Effective June 30, 1999, the United
States Appellate Court entered a judgment in favor of the Company. A subsequent
judgment was handed down by the Circuit Court ruling that the Company's patent
was infringed by the Aladdin and Filtex products. Damage payments were
negotiated for payment of damages to the satisfaction of the Company.
The termination of a former employee led to a claim filed for
termination compensation. While the Company contended that such compensation
was not due rather than to litigate and face the exposure to potentially higher
costs, the Company settled the suite for $35,000 and options for 100,000 shares
of the Company's stock exercisable at $.50 per share through April 2009.
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 Company developed proprietary macro filtration media. The media are
obtained from a variety of sources. Typically, each is procured under the terms
of a confidentiality agreement and to the Company's specifications.
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 may expand filter capacity to over
20,000,000 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 blow 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 and certain of the blow molding 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 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 increasing capacity to over
20,000,000 units as demand requires.
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.
7
<PAGE> 10
All Company vendors operate under confidentiality agreements. No
suppliers produce directly 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 thirteen 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 its strategic alliance partners 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 June 30, 1999, the Company had 14 employees, including its 4
executive officers. These employees include 2 persons in sales and marketing, 4
persons performing development, and 4 administrative and clerical persons.
There are 3 manufacturing and production supervisors which are supplemented by
as many as 35 contract employees, as required.
ITEM 2. 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.
ITEM 3. LEGAL PROCEEDINGS
The Company was a defendant in a lawsuit filed by a former employee
who alleged breach of his employment contract. The case was Alan R. Kelley v.
Innova Pure Water, Inc., Pinellas County Circuit Court Case No. 98-2771-C1-007.
The plaintiff was seeking severance pay, bonus pay, stock options, and attorney
fees. In April 1999, the Company and the former employee reached a settlement
agreement. In accordance with the settlement agreement, the Company paid Mr.
Kelley $35,000 and issued him options to purchase 100,000 shares of the
Company's common stock at an exercise price of $.50 per share. The options
expire in April 2009.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None.
8
<PAGE> 11
PART II
ITEM 5. 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, 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
Fourth Quarter 0.906 0.25
Third Quarter 0.531 0.23
Second Quarter 0.812 0.25
First Quarter 0.968 0.50
- --------------------------------------------------------------------------------
</TABLE>
The Company's Common Stock is not listed on NASDAQ, but is traded in
the over-the-counter market 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 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.
9
<PAGE> 12
Recent SEC and NASD revisions and interpretations of Rule 15c2-11
require us to maintain our status as a reporting company under Section 12(q) of
the Securities Exchange Act of 1934. Our failure to timely file annual,
quarterly or other reports may affect our ability to maintain listing in the
OTC "Electronic Bulletin Board".
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 June 30, 1999, and there were approximately 400 beneficial
owners of the Company's common stock with 10,078,401 shares issued and
outstanding.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THIS FILING 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 FILING 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.
10
<PAGE> 13
INCOME STATEMENT DATA
<TABLE>
<CAPTION>
Year Ended June 30,
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Total revenue $2,587,400 $3,194,100
Net income $ 161,300 $ 124,600
Earnings per common share - basis $ .02 $ .01
Shares used in per share computation 10,067,847 9,499,374
Earnings per common share - assuming dilution $ .02 $ .01
Shares used in diluted computation 10,211,539 9,933,414
- --------------------------------------------------------------------------------
</TABLE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
June 30, 1999
- --------------------------------------------------------------------------------
<S> <C>
Total assets $1,745,100
Working capital $1,243,400
Long-term debt $ 19,800
Stockholders' equity $1,621,500
- --------------------------------------------------------------------------------
</TABLE>
YEAR 2000
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. Given this
uncertainty, the Company has recognized the need to remain vigilant in its Year
2000 analysis.
DETERMINATION OF YEAR 2000 READINESS
The Company has completed a review of its information technology (IT)
and non-information technology systems (non-IT). An inventory was taken of the
Company's essential data processing equipment as well as the equipment used in
the Company's manufacturing processes.
The Company has information on the Year 2000 compliance of its
essential data processing hardware, which include its computers, printers,
scanners, modems, copiers, and facsimile machines or any other equipment that
may process date data. This information was gathered by actual testing by the
Company or from the manufacturer either by direct correspondence or information
that is available from the manufacturer's Internet website. The Company has
found that all essential data processing hardware is Year 2000 compliant.
A review of the Company's essential data processing equipment firmware
and software has found it to be either Year 2000 compliant when it was
purchased or was able to be fixed by the download of a "patch" from the
software manufacturer's Internet website.
A review of the equipment used in the Company's manufacturing
processes did not find any potential problem areas due to date processing,
including embedded technologies. The potential for problems occurring in this
area is decreased because the Company essentially assembles complete components
from outside manufacturers into its finished products.
The manufacturer of the Company's telephone equipment does not list
our particular system as Year 2000 compliant. The flaw concerns the printing
out of voicemail reports where the year would be listed as 00 instead of 2000.
Since the system should operate fine after January 1, 2000 and the Company does
not use this particular reporting function, it is not necessary to replace the
telephone system. This was the only potential problem area found in the review
of the Company's non-information technology systems.
As a result of these reviews, the Company feels that we are Year 2000
compliant and that nothing further must be done to our IT and non-IT systems in
order to be prepared for the Year 2000 internally.
11
<PAGE> 14
An assessment of external risks, which are outside the Company's
control, was conducted. The Company has identified four major suppliers and two
major customers that were contacted and asked to fill out a questionnaire about
their Year 2000 capabilities and remediation programs. All but one responded
that they were Year 2000 compliant as of June 30, 1999. The Company feels that
the one unresponsive supplier could be replaced without any major interruption
to the business should the need arise.
A survey of the Company's financial institution and utility companies,
by direct correspondence, Internet website, or published statements, found that
they are or will be Year 2000 compliant by December 31, 1999 with little risk
of service interruption due to untested systems or processes.
CONTINGENCIES
At this time, the Company has determined that it does not need to have
increased inventory levels on December 31, 1999 or purchase any additional
liability insurance due to any litigation that may result from the Year 2000
changeover.
The Company feels that the internal risk of a Year 2000 system failure
is minimal, but is going to take the following steps in order to recover from
such a failure:
1. All records will be backed up before the end of business on
December 31, 1999.
2. Some essential systems will have their internal system clocks
turned back two weeks and maintained in December 1999 "time" until
a determination can be made if there were any system failures,
related to the Year 2000 changeover, on similar systems on January
1, 2000. This will cause an error in date reporting, but essential
services can still be performed.
RESULTS OF OPERATIONS
NET SALES
Net sales for the twelve-month period ended June 30, 1999 were
$2,587,400, a decrease of 18 percent from the $3,194,100 of net sales for the
comparable period in 1998. This decrease is attributable to a decrease in sales
during the fourth quarter to Rubbermaid under our strategic alliances.
COST OF SALES
For the year ended June 30, 1999, the cost of sales decreased to
$1,458,500 from the $1,477,800 of costs for the year ended June 30, 1998. This
decrease is mainly due to the decrease in sales volume offset by increased
investment in new facilities and increased production capabilities intended to
sustain the anticipated higher sales volume from our strategic alliances.
Gross profit margin decreased 10 percent for the year ended June 30,
1999, to 44 percent from an overall gross profit margin of 54 percent for the
year ended June 30, 1998. This is principally attributable to the decrease in
sales volume and the increased costs associated with the enhanced production
capabilities, combined with the constant cost of sales.
OPERATING EXPENSE
Operating expenses for the year ended June 30, 1999 were $1,401,200,
or 47 percent of net sales. For the comparable period in 1998, operating costs
amounted to $1,558,600, or 49 percent of net sales. The two percent decrease as
a percentage of sales between these periods is principally attributable to the
cutback of lower and middle management personnel whose function had become
under-utilized or less critical to the operation of the Company.
12
<PAGE> 15
OTHER INCOME
For the year ended June 30, 1999, net interest income amounted to
$39,100 as compared to net interest income of $15,900 for the year ended June
30, 1998. This increase is due to the increase in cash invested in interest
bearing securities or accounts with a major national bank.
Other income for the year ended June 30, 1999 of $366,900 was due to
billings to Rubbermaid for research and development price recovery adjustments,
as well as settlements of patent infringement lawsuits.
INCOME TAXES
Due to the Company's history of operating losses, management has
established a valuation allowance in the full amount of the deferred tax assets
arising from these losses because management believes it is more likely than
not that the Company will not generate sufficient taxable income within the
appropriate period to offset these operating loss carryforwards.
NET INCOME
Net income for the year ended June 30, 1999 increased by 29 percent to
$161,300 from $124,600 for the comparable period in 1998. This increase is
principally attributable to billings to Rubbermaid for research and development
price recovery adjustments and settlements of patent infringement lawsuits.
EARNINGS PER SHARE
For the year ended June 30, 1999, basic and diluted earnings per share
amounted to $.02. For the comparable period in 1998, basic and diluted earnings
per share amounted to $.01. The increase in earnings per share is due
principally to an increase in income during the year ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
For the year ended June 30, 1999, net cash provided by operating activities
amounted to approximately $311,600, an increase over the net cash provided by
operating activities of approximately $130,700 for the comparable period in
1998. The increase is primarily a result of collections on accounts receivable
and increased profits for the year.
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 year ended June 30, 1999
was approximately $89,400, as compared to net cash used by investing activities
of approximately $400,700 for the comparable period in 1998. The decrease in
cash expended for investing activities is due primarily to a decrease in
equipment purchases and a decrease in expenditures on patent infringement
litigation.
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.
13
<PAGE> 16
Net cash of approximately $17,700 was used by financing activities for
the year ended June 30, 1999, as compared to net cash provided by financing
activities of approximately $5,500 for the year ended June 30, 1998. The
increase in cash used for financing activities results from the Company's
repurchase of shares of its common stock and a decrease in proceeds from the
issuance of common stock.
CAPITAL RESOURCES
At June 30, 1999, 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.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is presented at page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
PART III
ITEM 9. 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 June
30, 1999.
<TABLE>
<CAPTION>
Name Age Position
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
John E. Nohren, Jr. 67 Chairman of the Board, Director, Chief Financial Officer
Rose C. Smith 47 President, Chief Executive Officer, Director
James Keene 62 Chief Operating Officer
Robert Connell 43 Controller
Tricia Skoda 48 Secretary
Peter Christensen 49 Director
Andrew Greenberg 44 Director
Mort Langer 56 Director
Frank Legnaioli 68 Director
Clarence W. McKee 74 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
14
<PAGE> 17
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 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, 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. Mr. Keane resigned subsequent to June 30, 1999.
Robert Connell, Controller, joined Innova Pure Water, Inc. September
1, 1993 as a corporate accountant and was appointed company controller in
August, 1996. Mr. Connell began his career in August 1978 with Consolidated
Coal Company, a subsidiary of E.I. du Pont de Nemours and Company. He left the
company as a senior accountant in the cost and budget section of the Northern
West Virginia Region Controller's Department in September, 1988. Mr. Connell
then attended Santa Fe Community College in Gainesville, Florida, taking
computer programming languages and application courses until May, 1990. From
1990 to 1993, he was employed by Florida Savings and Loan (1990/91); Main
Street Mortgage (1991/92); and Kmart Corporation (1992 until hired by Innova).
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. for the
period of July 1996 through May, 1998. From January, 1994 through July, 1995
she was the executive assistant to the president of PDI Ground Support, Inc., a
specialty manufacturer of axle systems. Ms. Skoda has over 12 years experience
in office administration and marketing.
Peter Christensen has been a director of the Company since June 1995.
Since September 1997, he has been the Chief Executive Officer of ComTech,
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.
Since August 1995, Mr. Christensen has been a member of the board of Digital
Privacy, Inc., a smart card based computer and communications security company,
securing communications across the internet. Prior to joining ComTech,
Incorporated in 1997 he was a managing director at Paine Webber, for the period
1993 through 1997.
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.
15
<PAGE> 18
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.
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.
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table shows the compensation paid or accrued by the
Company for the fiscal years ended June 30, 1998 and June 30, 1999 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 1999
John E. Nohren, Jr. --- --- --- --- 190,000 --- $122,133(2)
Chairman, BOD
Rose Smith $176,353 --- --- --- 190,000 ---
President and CEO
- ---------------------
Fiscal 1998
John E. Nohren, Jr. --- --- --- --- 190,000 --- $152,908(2)
Chairman BOD
Rose Smith $211,603 --- --- --- 190,000 ---
President and CEO (1)
- --------------------------------------------------------------------------------------------------------------
<FN>
(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.
</FN>
</TABLE>
16
<PAGE> 19
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
$300,000 per year, during the term of his employment. The royalty payments will
be calculated based on five percent of net sales of products that incorporate
these assigned patents. Upon his termination, a three percent royalty shall be
paid over the residual life of his patents.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The information provided in the table below provides information with
respect to each exercise of stock options during fiscal 1999 and fiscal 1998 by
each of the executive officers named in the summary compensation table and the
fiscal year end value of unexercised options.
<TABLE>
<CAPTION>
Value of
Unexercised
Number of In-the Money
Unexercised Options
Options at FY-End at FY-End($)
Exercisable Exercisable
Value on or after on or after
Shares Acquired/ Realized July 1, 1998 July 1, 1998(1)
Name Exercised ($) (1) or July 1, 1999 or July 1, 1999
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1999
John E. Nohren, Jr. --- --- 190,000 14,535
Rose Smith 190,000 14,535
- -------------------
Fiscal 1998
John E. Nohren, Jr. 20,750 158 190,000 14,535
Rose Smith 2,000 15 190,000 14,535
- ------------------------------------------------------------------------------------------
<FN>
(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.
</FN>
</TABLE>
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 "1996 Plan"). The Plan was adopted in 1996. A total of 750,000 shares have
been reserved under the Plan. As of June 30, 1999, options to purchase a total
of approximately 606,500 shares at $.50 a share were issued and outstanding
under the 1996 Plan. The 1996 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%
17
<PAGE> 20
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.
In April, 1999, the Board of Directors adopted a new stock option plan
(the "1999 Plan"). Under the 1999 Plan, 1,000,000 shares have been reserved for
issuance. The Plan provides that the exercise price of options cannot be less
than the greater of $.50 or the fair market value of the shares from the date
on which the option is granted. The 1999 plan is similar to all of the other
terms and conditions as described above for the 1996 Plan. As of June 30, 1999,
options to purchase a total of approximately 103,000 shares at $.50 a share
were issued and outstanding under the 1999 Plan.
As of the date of this filing, the Company has outstanding options and
warrants to acquire 1,079,500 shares of Common Stock at an exercise price of
$.50 per share. Options to acquire 606,500 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 remaining 473,000
options and warrants are exercisable at various times at an exercise price of
$.50 per share and expire beginning October 30, 1998 through April 1, 2001.
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.
ITEM 11. 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 June 30,
1999 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, 1999, exceeded $100,000)
and (iv) directors and executive officers of the Company as a group:
18
<PAGE> 21
<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) 2,143,216 21.2
Rose C. Smith (6) 604,850 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
- ------------------------------------------------------------------------------------------
<FN>
(1) Represents sole voting and investment power unless otherwise
indicated.
(2) Based on approximately 10,078,401 shares of Company Common Stock
outstanding as of June 30, 1999 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 190,000 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 1,079,500 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.
</FN>
</TABLE>
ITEM 12. 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 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.
19
<PAGE> 22
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1)(2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
Financial Statements filed as part of this Report are set forth in Item 7
and are presented at page F-1 of this Report; which list is incorporated
herein by reference. The Financial Statement Schedules and the Report of
Independent Auditors as to Schedules follow the Exhibits.
(a)(3) EXHIBITS.
(b) Reports on Form 8-K
None
(c) Exhibits. See the Indexes to Exhibits below.
INDEX TO EXHBITS
(1) All of the items below are incorporated by reference to the Registrant's
Registration Statement on Form 10SB, File No. 0-29746, except for Exhibit
99(b), which is included with the filing.
(2) Filed herewith.
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)
10(a) [Reserved]
10(b) Agreement with Rubbermaid Incorporated dated July 21, 1998 (1)
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, 1998 (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 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)
99(b) 1999 Incentive Stock Option Plan (2)
- --------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 23
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, 1998, 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, 1999 and the related statements of operations, changes in
stockholders' equity, and cash flows for the year ended June 30, 1999, as
audited by Pender Newkirk & Company, Certified Public Accountant, along with
its report thereon.
21
<PAGE> 24
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.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
INNOVA PURE WATER, INC.
Dated: October 8, 1999 By: /s/ Rose C. Smith
----------------------------------------
Rose C. Smith
President, Chief Executive Officer,
Director
Dated: October 8, 1999 By: /s/ John E. Nohren, Jr.
----------------------------------------
John E. Nohren, Jr.
Chairman of the Board of Directors,
Chief Financial Officer
Dated: October 8, 1999 By: /s/ Robert Connell
----------------------------------------
Robert Connell
Principal Accounting Officer
22
<PAGE> 25
FINANCIAL STATEMENTS
INNOVA PURE WATER, INC.
Years Ended June 30, 1999 and 1998
Independent Auditors' Report
<PAGE> 26
Innova Pure Water, Inc.
Financial Statements
Years Ended June 30, 1999 and 1998
CONTENTS
<TABLE>
<S> <C>
Independent Auditors' Report on Financial Statements........................1
Financial Statements:
Balance Sheet...........................................................2
Statements of Operations................................................3
Statements of Changes in Stockholders' Equity...........................4
Statements of Cash Flows................................................5
Notes to Financial Statements........................................6-16
</TABLE>
<PAGE> 27
(PNCCPA'S LETTERHEAD)
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, 1999 and the related statements of operations, changes in
stockholders' equity, and cash flows for the years ended June 30, 1999 and
1998. 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, 1999 and the results of its operations and its cash flows for the
years ended June 30, 1999 and 1998 in conformity with generally accepted
accounting principles.
/s/ Pender Newkirk & Company
Certified Public Accountants
Tampa, Florida
September 2, 1999
PENDER NEWKIRK & COMPANY * CERTIFIED PUBLIC ACCOUNTANTS
100 South Ashley Drive * Suite 1650
Tampa, Florida 33602
(813) 229-2321 * Fax (813) 229-2359
Web Site: www.pnccpa.com
MEMBER OF PRIVATE COMPANIES PRACTICE SECTION AND SEC PRACTICE SECTION OF
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
<PAGE> 28
Innova Pure Water, Inc.
Balance Sheet
June 30, 1999
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 692,700
Accounts receivable, trade, net of allowance for
doubtful accounts of $8,800 52,000
Other receivables, including related party of $84,200 461,600
Inventories 124,900
Other current assets 16,000
-----------
Total current assets 1,347,200
Property and equipment, net 168,600
Other assets 229,300
-----------
$ 1,745,100
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 51,800
Accrued expenses 41,700
Current portion of obligation under capital lease 3,700
Current portion of long-term debt 6,600
-----------
Total current liabilities 103,800
-----------
Long-term liabilities:
Obligation under capital lease, net of current portion 6,400
Long-term debt, net of current portion 13,400
-----------
Total long-term liabilities 19,800
-----------
Stockholders' equity:
Preferred stock; $.001 par value; 2,000,000 shares
authorized; 0 shares issued and outstanding
Common stock; $.0001 par value; 50,000,000 shares
authorized; 10,078,401 shares issued and outstanding 1,000
Capital in excess of par value 8,019,400
Accumulated deficit (6,398,900)
-----------
Total stockholders' equity 1,621,500
-----------
$ 1,745,100
===========
</TABLE>
Read independent auditors' report. The accompanying
notes are an integral part of the financial statements. 2
<PAGE> 29
Innova Pure Water, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------
1999 1998
-----------------------------
<S> <C> <C>
Net sales, related parties $ 329,000 $ 840,700
Net sales, other 2,258,400 2,353,400
-----------------------------
2,587,400 3,194,100
Cost of sales 1,458,500 1,477,800
-----------------------------
Gross profit 1,128,900 1,716,300
-----------------------------
Operating expenses:
Selling expenses 137,300 203,600
General and administrative expenses 1,114,200 1,265,500
Research and product development 149,700 89,500
-----------------------------
1,401,200 1,558,600
-----------------------------
Net (loss) income from operations (272,300) 157,700
-----------------------------
Other (income) expenses:
Interest, net (39,100) (15,900)
(Gain) loss on disposal of fixed assets (27,600) 49,000
Other (366,900)
-----------------------------
(433,600) 33,100
-----------------------------
Net income $ 161,300 $ 124,600
=============================
Earnings per common share $ .02 $ .01
=============================
Earnings per common share, assuming dilution $ .02 $ .01
=============================
</TABLE>
Read independent auditors' report. The accompanying
notes are an integral part of the financial statements. 3
<PAGE> 30
Innova Pure Water, Inc.
Statements of Changes in Stockholders' Equity
Years Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
Common Stock Capital In
------------------------- Excess Of Accumulated Treasury
Shares Amount Par Value Deficit Stock
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1997 8,496,371 $ 800 $ 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
Compensation for stock
options issued 31,200
Stock issued for services
and exercised options 14,230 7,900
Acquisition of treasury
stock, 23,500 shares 8,000
Issuance of treasury stock
for services, 23,333
shares 6,000 (8,000)
Retirement of treasury
stock (700) (5,700) (5,700)
Net income 161,300
---------------------------------------------------------------------------
Balance, June 30, 1999 10,078,401 $ 1,000 $ 8,019,400 $(6,398,900) $ 0
===========================================================================
</TABLE>
Read independent auditors' report. The accompanying
notes are an integral part of the financial statements. 4
<PAGE> 31
Innova Pure Water, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------
1999 1998
----------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 161,300 $ 124,600
----------------------------
Adjustments to reconcile net income to net cash and
cash equivalents provided by operating activities:
Depreciation and amortization 132,100 119,000
Provision for losses on accounts receivable (1,200) (45,000)
(Gain) loss on disposal of equipment (27,600) 49,000
Stock issued or subscribed for services 51,900 56,600
(Increase) decrease in:
Accounts and other receivables 400,700 (439,900)
Inventories 229,200 (40,000)
Other assets (5,800) (1,500)
Increase (decrease) in accounts payable and
accrued expenses (629,000) 307,900
----------------------------
Total adjustments 150,300 6,100
----------------------------
Net cash and cash equivalents provided by operating activities 311,600 130,700
----------------------------
INVESTING ACTIVITIES
Proceeds from sale of equipment 49,800
Acquisition of equipment (70,200) (205,200)
Acquisition of patents (77,800) (157,300)
Advances to related parties 8,800 (38,200)
----------------------------
Net cash and cash equivalents used by investing activities (89,400) (400,700)
----------------------------
FINANCING ACTIVITIES
Acquisition of treasury stock (8,000)
Proceeds from long-term debt 27,000
Payments on long-term debt (6,100) (35,100)
Payments on capital lease obligations (4,800) (5,700)
Proceeds from issuance of common stock 1,200 19,300
----------------------------
Net cash and cash equivalents (used) provided by
financing activities (17,700) 5,500
----------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 204,500 (264,500)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 488,200 752,700
----------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 692,700 $ 488,200
============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
AND NONCASH FINANCING ACTIVITIES:
Cash paid during the year for interest $ 3,300 $ 4,700
============================
</TABLE>
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. 5
<PAGE> 32
Innova Pure Water, Inc.
Notes to Financial Statements
Years Ended June 30, 1999 and 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 years ended June 30, 1999 and 1998, sales to two customers amounted to
approximately 89 and 69 percent of net sales, respectively. Accounts receivable
from these customers amounted to approximately $50,600 at June 30, 1999.
Included in the above amounts for the years ended June 30, 1999 and 1998 are
sales to related stockholders of approximately $329,000 and $840,700,
respectively.
For the years ended June 30, 1999 and 1998, sales to foreign customers amounted
to approximately seven and eight percent of net sales to unaffiliated
customers, respectively. These sales were made to customers in various
locations as follows:
<TABLE>
<CAPTION>
1999 1998
-----------------------
<S> <C> <C>
Brazil $ 1,000
Japan 72,800 $ 102,100
New Zealand 31,000 41,600
England 7,800 28,300
Other 40,690 15,600
--------- ---------
$ 153,290 $ 187,600
========= =========
</TABLE>
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 10 million units of
products purchased by Rubbermaid. During the year ended June 30, 1999,
Rubbermaid and the Company agreed that the
Read independent auditors' report. 6
<PAGE> 33
Innova Pure Water, Inc.
Notes to Financial Statements
Years Ended June 30, 1999 and 1998
1. NATURE OF OPERATIONS (CONTINUED)
Company is entitled to a minimum of $500,000 less any limited price adjustments
already paid. Included in net sales for the years ended June 30, 1999 and 1998
are approximately $144,000 and $100,000, respectively, of revenues relating to
this limited price adjustment. In addition, included in other income for the
year ended June 30, 1999 is $256,000 for the remaining balance of the agreed
upon payment. As of June 30, 1999, Rubbermaid had informally waived the
exclusive terms of this agreement.
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.
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 June 30, 1999.
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. Depreciation expense amounted to
approximately $107,900 and $93,000 for the years ended June 30, 1999
and 1998, respectively.
Read independent auditors' report. 7
<PAGE> 34
Innova Pure Water, Inc.
Notes to Financial Statements
Years Ended June 30, 1999 and 1998
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Financial Accounting Standards Board Statement 123 (FASB 123),
"Accounting for Stock-Based Compensation," 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 (APB) 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 FASB 123. Under APB Opinion No.
25, the Company recorded approximately $31,200 of compensation expense
for the year ended June 30, 1999. No compensation expense under APB
Opinion No. 25 was recognized by the Company for the year ended June
30, 1998.
The Company records shares of common stock as outstanding at the time
the Company becomes contractually obligated to issue shares.
Read independent auditors' report. 8
<PAGE> 35
Innova Pure Water, Inc.
Notes to Financial Statements
Years Ended June 30, 1999 and 1998
3. INVENTORIES
Inventories consist of:
<TABLE>
<S> <C>
Raw materials $ 83,100
Finished goods 36,500
Work in process 5,300
---------
$ 124,900
=========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<S> <C>
Tooling $ 309,700
Machinery and equipment 285,100
Vehicles 32,900
Equipment under capital lease 18,100
---------
645,800
Less:
Accumulated depreciation 473,000
Accumulated depreciation on equipment under capital lease 4,200
---------
$ 168,600
=========
</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 years ended June 30, 1999 and 1998, commissions earned under the agreement
amounted to approximately $26,400 and $61,600 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.
Read independent auditors' report. 9
<PAGE> 36
Innova Pure Water, Inc.
Notes to Financial Statements
Years Ended June 30, 1999 and 1998
5. RELATED PARTY TRANSACTIONS AND COMMITMENTS (CONTINUED)
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 cost of maintaining these and other patents are
included in other assets and amounts to $222,200. The cost is being amortized
on a straight-line basis over a five-year period.
Effective June 30, 1997, the Company entered into an 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. 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 $122,100 and
$152,900 to the Chairman for the years ended June 30, 1999 and 1998,
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>
<S> <C>
Note payable; 7.25% interest; monthly payments
of principal and interest of $652 through
April 30, 2002; collateralized by a vehicle $ 20,000
Less amounts currently due 6,600
----------
$ 13,400
==========
</TABLE>
The following is a schedule by year of the principal payments required under
this note as of June 30, 1999:
<TABLE>
<S> <C>
2000 $ 6,600
2001 7,100
2002 6,300
----------
$ 20,000
==========
</TABLE>
Read independent auditors' report. 10
<PAGE> 37
Innova Pure Water, Inc.
Notes to Financial Statements
Years Ended June 30, 1999 and 1998
7. CAPITAL LEASE
The Company has capitalized a rental obligation under a lease of equipment. The
obligation, which matures in 2002, represents the total present value of future
rental payments discounted at the interest rate implicit in the lease. Future
minimum lease payments under the capital lease are as follows:
<TABLE>
<S> <C>
Year Ending
June 30,
-----------
2000 $ 4,700
2001 4,700
2002 2,300
---------
Total minimum lease payments 11,700
Less:
Amount representing interest 1,600
Amount currently due 3,700
---------
Present value of net minimum lease payments $ 6,400
=========
</TABLE>
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 June 30, 1999:
<TABLE>
<S> <C>
Year Ending
June 30,
2000 $ 124,900
2001 129,800
2002 134,900
2003 104,200
-----------
$ 493,800
===========
</TABLE>
Rent expense amounted to approximately $120,200 and $99,000 for the years ended
June 30, 1999 and 1998, respectively.
Read independent auditors' report. 11
<PAGE> 38
Innova Pure Water, Inc.
Notes to Financial Statements
Years Ended June 30, 1999 and 1998
9. INCOME TAXES
Other than the three most recent reporting years, the Company has incurred
operating losses since its inception that have been carried forward and,
therefore, no tax liabilities have been incurred for the years presented. These
operating losses and timing differences due to the excess of amortization for
financial reporting purposes over the amount for tax purposes give rise to a
deferred tax asset and are as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------
<S> <C> <C>
Deferred tax asset $ 2,409,500 $ 2,480,000
Allowance (2,409,500) (2,480,000)
---------------------------------
$ 0 $ 0
=================================
</TABLE>
The Company has available at June 30, 1999 approximately $6,024,000 of unused
operating loss carryforwards that may be applied against future taxable income
which would reduce taxes payable by approximately $2.4 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, 1999 and 1998, the Company utilized
approximately $148,500 and $108,000 of these loss carryforwards, respectively.
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>
1999 1998
-------------------------------
<S> <C> <C>
Net income $ 161,300 $ 124,600
===============================
Weighted average number of common
shares used in basic EPS 10,067,847 9,499,374
Effect of dilutive stock options and warrants 143,692 434,040
-------------------------------
Weighted average number of common shares
and dilutive potential common stock used
in diluted EPS 10,211,539 9,933,414
===============================
</TABLE>
Read independent auditors' report. 12
<PAGE> 39
Innova Pure Water, Inc.
Notes to Financial Statements
Years Ended June 30, 1999 and 1998
11. PREFERRED STOCK
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 June 30, 1999, no shares
of preferred stock were issued or outstanding.
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.
On April 22, 1999, the Company adopted a "1999 Stock Option Plan." Under the
plan, options to issue up to 1,000,000 shares of the Company's common stock may
be granted. The option price shall not be less than the greater of $.50 per
share or 100 percent of the fair market value of the underlying common stock on
the date of grant. As of June 30, 1999, 103,000 options had been granted under
the plan with various terms and expiration dates.
Read independent auditors' report. 13
<PAGE> 40
Innova Pure Water, Inc.
Notes to Financial Statements
Years Ended June 30, 1999 and 1998
12. STOCK OPTIONS AND WARRANTS (CONTINUED)
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. During
the year ended June 30, 1999, 12,600 stock options were exercised under this
plan and 95,900 stock options were forfeited due to termination of employment.
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. As of June 30, 1999, all options under this plan had
expired.
In addition to the above stock option plans, the Company grants options to
various individuals to purchase the Company's common stock at the discretion of
the Board of Directors. During the year ended June 30, 1999, the Company
granted 120,000 stock options to certain individuals. These options are
exercisable at $.50 per share and may be exercised at any time through April
2001.
The following is a summary of stock option activity during 1999 and 1998:
<TABLE>
<CAPTION>
Directors, Technical
Advisory Board, and
Employee Incentive Marketing Advisory 1996 and 1999
Stock Option Plan Board Stock Option Plan Stock Option Plans Other
-------------------- ----------------------- -------------------- ---------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Number Exercise Number Exercise Number Exercise Number Exercise
of Shares Price of Shares Price of Shares Price of Shares Price
---------------------------------------------------------------------------------------------
<S> <C> <C> <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 0 .00 108,500 .50 715,000 .50
</TABLE>
Read independent auditors' report. 14
<PAGE> 41
Innova Pure Water, Inc.
Notes to Financial Statements
Years Ended June 30, 1999 and 1998
12. STOCK OPTIONS AND WARRANTS (CONTINUED)
<TABLE>
<CAPTION>
Directors, Technical
Advisory Board, and
Employee Incentive Marketing Advisory 1996 and 1999
Stock Option Plan Board Stock Option Plan Stock Option Plans Other
-------------------- ----------------------- -------------------- ---------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Number Exercise Number Exercise Number Exercise Number Exercise
of Shares Price of Shares Price of Shares Price of Shares Price
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Options granted during
the year 103,000 .50 120,000 $ .50
Options expired during
the year (108,500) (.50)
Options forfeited during
the year (95,900) (.50)
Options exercised during
the year (at a price of
$.50 per share) (12,600) (.50)
--------------------------------------------------------------------------------------------
Options granted and
outstanding,
June 30, 1999 0 $ .00 0 $ .00 709,500 $ .50 120,000 $ .50
============================================================================================
</TABLE>
The following table summarizes the status of options outstanding at June 30,
1999:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
------------------------------------- -------------------------
Weighted Weighted
Average Average
Remaining Remaining
Exercise Contractual Contractual
Price Number Life Number Live
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 and 1999 Stock
Option Plans $ .50 709,500 3.09 years 303,166 4.56 years
Other $ .50 120,000 2.75 years 120,000 2.75 years
------- -------
829,500 423,166
======= =======
</TABLE>
In addition to the above, the Company has outstanding at June 30, 1999 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 June 30, 1999, 250,000 shares of the
Company's common stock have been reserved for issuance under these warrants.
Read independent auditors' report. 15
<PAGE> 42
Innova Pure Water, Inc.
Notes to Financial Statements
Years Ended June 30, 1999 and 1998
12. STOCK OPTIONS AND WARRANTS (CONTINUED)
FASB 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 income (loss)
per common share are as follows for the years ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------------------------
<S> <C> <C>
As reported:
Net income $161,300 $124,600
============================
Basic earnings per common share $ .02 $ .01
============================
Diluted earnings per common share $ .02 $ .01
============================
Pro forma:
Net income (loss) $ 43,600 $(50,400)
============================
Basic income (loss) per common share $ .00 $ (.01)
============================
Diluted income (loss) per common share $ .00 $ (.01)
============================
</TABLE>
The weighted average fair value of the options and warrants at their grant date
during 1999 and 1998 was $.17 and $.71, respectively. 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>
<CAPTION>
1999 1998
--------------------
<S> <C> <C>
Risk-free interest rate 5.44% 5.78%
Expected years until exercise 5.0 4.0
Expected dividend yield 0 0
Estimated fair market value of underlying stock $ .21 $ .79
</TABLE>
Read independent auditors' report. 16
<PAGE> 1
Exhibit 99(b)
1999
STOCK OPTION PLAN
OF
INNOVA PURE WATER, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. PURPOSE 1
2. ADMINISTRATION 1
2.1 The Board 1
2.2. The Committee 1
2.3 No Liability 2
3. STOCK 2
4. ELIGIBILITY 2
5. EFFECTIVE DATE AND TERM OF THE PLAN 2
5.1. Effective Date 2
5.2. Term 3
6. GRANT OF OPTIONS 3
7. LIMITATION ON INCENTIVE STOCK OPTIONS 3
8. OPTION AGREEMENTS 3
9. OPTION PRICE 3
10. TERM AND EXERCISE OF OPTIONS 4
10.1. Term and Exercise 4
10.2. Option Period and Limitations on Exercise 4
10.3. Method of Exercise 4
11. TRANSFERABILITY 5
11.1. Transferability of Options 5
11.2. Transferability of Shares 5
11.3. Repurchase Rights 6
11.4. Put Rights 6
11.5. Legend Describing Restrictions and Obligations 6
12. TERMINATION OF EMPLOYMENT 7
13. RIGHTS IN THE EVENT OF DEATH OR DISABILITY 7
13.1. Death 7
13.2. Disability 8
14. USE OF PROCEEDS 8
15. SECURITIES ACT OF 1933 8
16. SECURITIES EXCHANGE ACT OF 1934: RULE 16B-3 9
16.1. General 9
16.2. Stock Option Committee 9
16.3. Action by the Board 9
16.4. Additional Restriction on Transfer of Stock 9
16.5. Additional Requirement of Stockholders Approval 9
17. AMENDMENT AND TERMINATION OF THE PLAN 10
18. EFFECT OF CHANGES IN CAPITALIZATION 10
18.1. Changes in Stock 10
18.2. Reorganization With Corporation Surviving 10
18.3. Other Reorganizations; Sale of Assets/Stock 11
18.4. Adjustments 11
18.5. No Limitations on Corporation 11
19. DISCLAIMER OF RIGHTS 12
20. NONEXCLUSIVITY OF THE PLAN 12
</TABLE>
<PAGE> 3
STOCK OPTION PLAN
Innova Pure Water, Inc., a Florida corporation (the "Corporation"),
sets forth the terms of this Stock Option Plan (the "Plan") as follows:
1. PURPOSE
The Plan is intended to advance the interests of the Corporation by
providing eligible individuals (as designated pursuant to Section 4 below) an
opportunity to acquire (or increase) a proprietary interest in the Corporation,
which thereby will create a stronger incentive to expend maximum effort for the
growth and success of the Corporation and its subsidiaries and will encourage
such eligible individuals to remain in the employ or service of the Corporation
or that of one or more of its subsidiaries. Each stock option granted under the
Plan (an "Option") is intended to be an "incentive stock option" ("Incentive
Stock Option") within the meaning of Section 422 of the Internal Revenue Code
of 1986, or the corresponding provision of any subsequently enacted tax
statute, as amended from time to time (the "Code"), except to the extent that
any such Option would exceed the limitations set forth in Section 7 below and
except for Options specifically designated at the time of grant as not being
"incentive stock options."
2. ADMINISTRATION
2.1. THE BOARD
The Plan shall be administered by the Board of Directors of the
Corporation (the "Board"), which shall have the full power and authority to
take all actions and to make all determinations required or provided for under
the Plan or any Option granted or Option Agreement (as defined in Section 8
below) entered into hereunder and all such other actions and determinations not
inconsistent with the specific terms and provisions of the Plan deemed by the
Board to be necessary or appropriate to the administration of the Plan or any
Option granted or Option Agreement entered into hereunder. The interpretation
and construction by the Board of any provision of the Plan or of any Option
granted or Option Agreement entered into hereunder shall be final and
conclusive.
2.2. THE COMMITTEE
The Board may from time to time appoint a Stock Option
Committee (the "Committee"). The Board, in its sole discretion, may provide
that the role of the Committee shall be limited to making recommendations to
the Board concerning any determinations to be made and actions to be taken by
the Board pursuant to or with respect to the Plan, or the Board may delegate to
the Committee such powers and authorities related to the administration of the
Plan, as set forth in Section 2.1 above, as the Board shall determine,
consistent with the Certificate of Incorporation and Bylaws of the Corporation
and applicable law. In the event that the Plan or any Option granted or Option
Agreement entered into hereunder provides for any action to be taken by or
determination to be made by the Board, such action may be taken by or such
determination may be made by the Committee if the power and authority to do so
has been delegated to the Committee by the Board as provided for in this
Section. Unless
<PAGE> 4
otherwise expressly determined by the Board, any such action or determination
by the Committee shall be final and conclusive.
2.3. NO LIABILITY
No member of the Board or of the Committee shall be liable for
any action or determination made, or any failure to take or make an action or
determination, in good faith with respect to the Plan or any Option granted or
Option Agreement entered into hereunder.
3. STOCK
The stock that may be issued pursuant to Options granted under the
Plan shall be shares of Common Stock and/or shares of Preferred Stock of the
Corporation (such shares of Common Stock and Preferred Stock being collectively
referred to herein as the "Stock"), which shares may be treasury shares or
authorized but unissued shares. The number of shares of Stock that may be
issued pursuant to Options granted under the Plan shall not exceed in the
aggregate 1,000,000 shares of Stock, which number of shares is subject to
adjustment as provided in Section 18 below. If any Option expires, terminates
or is terminated for any reason prior to exercise in full, the shares of Stock
that were subject to the unexercised portion of such Option shall be available
for future Options granted under the Plan.
4. ELIGIBILITY
Options may be granted under the Plan to any employee of the
Corporation or any "subsidiary corporation" thereof within the meaning of
Section 424(f) of the Code (a "Subsidiary") (including any such employee who is
an officer or director of the Corporation or any Subsidiary) as the Board shall
determine and designate from time to time prior to expiration or termination of
the Plan. An individual may hold more than one Option, subject to such
restrictions as are provided herein. The maximum number of shares of Stock
subject to Options that may be granted under the Plan to any employee of the
Corporation or any Subsidiary is 200,000 shares in any calendar year (subject
to adjustment pursuant to Section 18 hereof).
5. EFFECTIVE DATE AND TERM OF THE PLAN
5.1. EFFECTIVE DATE
The Plan shall become effective as of the date of adoption by
the Board ("effective date"), subject to stockholders' approval of the Plan
within one year of such effective date by a majority of the votes cast at a
duly held meeting of the stockholders of the Corporation at which a quorum
representing a majority of all outstanding stock is present, either in person
or by proxy, and voting on the matter, or by written consent in accordance with
applicable state law and the articles of incorporation and by-laws of the
Corporation; provided, however, that upon approval of the Plan by the
stockholders of the Corporation as set forth above, all options granted under
the Plan on or after the effective date shall be fully effective as if the
stockholders of the Corporation had approved the Plan on the effective date. If
the stockholders fail to approve the Plan within one year of such effective
date, any options granted hereunder shall be null, void and of no effect.
2
<PAGE> 5
5.2. TERM
The Plan shall terminate on the date ten years after the
effective date.
6. GRANT OF OPTIONS
Subject to the terms and conditions of the Plan, the Board may, at any
time and from time to time prior to the date of termination of the Plan, grant
to such eligible individuals as the Board may determine ("Optionees") Options
to purchase such number of shares of the Stock on such terms and conditions as
the Board may determine, including any terms or conditions which may be
necessary to qualify such Options as "incentive stock options" under Section
422 of the Code. The date on which the Board approves the grant of an Option
shall be considered the date on which such Option is granted.
7. LIMITATION ON INCENTIVE STOCK OPTIONS
An Option shall constitute an Incentive Stock Option only to the
extent that the aggregate fair market value (determined at the time the Option
is granted) of the Stock with respect to which Incentive Stock Options are
exercisable for the first time by any Optionee during any calendar year (under
the Plan and all other plans of the Optionee's employer corporation and its
parent and subsidiary corporations within the meaning of Section 422(d) of the
Code) does not exceed $100,000.
8. OPTION AGREEMENTS
All Options granted pursuant to the Plan shall be evidenced by written
agreements ("Option Agreements") to be executed by the Corporation and by the
Optionee, in such form or forms as the Board shall from time to time determine.
Option Agreements covering Options granted from time to time or at the same
time need not contain similar provisions; provided, however, that all such
Option Agreements shall comply with all terms of the Plan.
9. OPTION PRICE
The purchase price of each share of the Stock subject to an Option
(the "Option Price") shall be fixed by the Board and stated in each Option
Agreement. In the case of an Option that is intended to constitute an Incentive
Stock Option, the option price shall be not less than the greater of fifty
cents ($.50) per share or 100 percent of the fair market value of a share of
the Stock covered by the Option on the date the Option is granted (as
determined below); provided, however, that in the event the Optionee would
otherwise be ineligible to receive an Incentive Stock Option by reason of the
provisions of Sections 422(b)(6) and 424(d) of the Code (relating to stock
ownership of more than ten percent), the Option Price of an Option which is
intended to be an Incentive Stock Option shall be not less than the greater of
fifty cents ($.50) per share or 110 percent of the fair market value of a share
of the Stock covered by the Option at the time such Option is granted. In the
event that the Stock is listed on an established national or regional stock
exchange, is admitted to quotation on the National Association of Securities
Dealers Automated Quotation System, or is publicly traded in an established
securities market, in determining the fair market value of the Stock, the Board
shall use the closing price of the
3
<PAGE> 6
Stock on such exchange or System or in such market (the highest such closing
price if there is more than one such exchange or market) on the date the Option
is granted (or, if there is no such closing price, then the Board shall use the
highest bid price on such date), or, if no sale of the Stock has been made on
such day, on the next preceding day on which any such sale shall have been
made. In the case of an Option not intended to constitute an Incentive Stock
Option, the Option Price shall be not less than the par value of the Stock
covered by the Option.
10. TERM AND EXERCISE OF OPTIONS
10.1. TERM AND EXERCISE
Each Option granted under the Plan shall terminate and all
rights to purchase shares thereunder shall cease upon the expiration of ten
years (ten years and 30 days, in the case of an Option which is not designated
as an Incentive Stock Option) from the date such Option is granted, or on such
date prior thereto as may be fixed by the Board and stated in the Option
Agreement relating to such Option; provided , however, that in the event the
Optionee would otherwise be ineligible to receive an Incentive Stock Option by
reason of the provisions of Sections 422(b)(6) and 424(d) of the Code (relating
to stock ownership of more than ten percent), an Option granted to such
Optionee which is intended to be an Incentive Stock Option shall in no event be
exercisable after the expiration of five years from the date it is granted.
10.2. OPTION PERIOD AND LIMITATIONS ON EXERCISE
Each Option granted under the Plan shall be exercisable, in
whole or in part, at any time and from time to time over a period commencing on
or after the date of grant and ending upon the expiration or termination of the
Option, as the Board shall determine and set forth in the Option Agreement
relating to such Option. Without limiting the foregoing, the Board, subject to
the terms and conditions of the Plan, may in its sole discretion provide that
an Option may not be exercised in whole or in part for a stated period or
periods of time during which such Option is outstanding; provided, however,
that any such limitation on the exercise of an Option contained in any Option
Agreement may be rescinded, modified or waived by the Board, in its sole
discretion, at any time and from time to time after the date of grant of such
Option, so as to accelerate the time at which the Option may be exercised.
Notwithstanding any other provisions of the Plan, no Option shall be
exercisable in whole or in part prior to the date the Plan is approved by the
stockholders of the Corporation as provided above.
10.3. METHOD OF EXERCISE
An Option that is exercisable hereunder may be exercised by
delivery to the Corporation on any business day, at its principal office
addressed to the attention of the President, of written notice of exercise,
which notice shall specify the number of shares with respect to which the
Option is being exercised and shall be accompanied by payment in full of the
Option Price of the shares for which the Option is being exercised. The minimum
number of shares of Stock with respect to which an Option may be exercised, in
whole or, in part, at any time shall be the lesser of 100 shares or the maximum
number of shares available for purchase under the Option at the time of
exercise. Payment of the Option Price for the shares of Stock purchased
pursuant to the exercise of an Option shall be made, as determined by the Board
and set forth in the Option Agreement pertaining to an Option, either (i) in
cash or by check
4
<PAGE> 7
payable to the order of the Corporation (which check may, in the discretion of
the Corporation, be required to be certified); (ii) through the tender to the
Corporation of shares of Stock, which shares shall be valued, for purposes of
determining the extent to which the Option Price has been paid thereby, at
their fair market value (determined in the manner described in Section 9 above)
on the date of exercise; or (iii) by a combination of the methods described in
(i) and (ii); provided, however, that the Board may in its discretion impose
and set forth in the Option Agreement pertaining to an Option such limitations
or prohibitions on the use of shares of Stock to exercise Options as it deems
appropriate. An attempt to exercise any Option granted hereunder other than as
set forth above shall be invalid and of no force and effect. Promptly after the
exercise of an Option and the payment in full of the Option Price of the shares
of Stock covered thereby, the individual exercising the Option shall be
entitled to the issuance of a Stock certificate or certificates evidencing his
or her ownership of such shares. A separate Stock certificate or certificates
shall be issued for any shares purchased pursuant to the exercise of an Option
which is an Incentive Stock Option, which certificate or certificates shall not
include any shares which were purchased pursuant to the exercise of an Option
which is not an Incentive Stock Option. An individual holding or exercising an
Option shall have none of the rights of a stockholder until the shares of Stock
covered thereby are fully paid and issued to him, and, except as provided in
Section 18 below, no adjustment shall be made for dividends or other rights for
which the record date is prior to the date of such issuance.
11. TRANSFERABILITY
11.1. TRANSFERABILITY OF OPTIONS
During the lifetime of an Optionee, only such Optionee (or, in
the event of legal incapacity or incompetency, the Optionee's guardian or legal
representative) may exercise the Option. No Option shall be assignable or
transferable by the Optionee to whom it is granted, other than by will or the
laws of descent and distribution.
11.2. TRANSFERABILITY OF SHARES
An Optionee (or any other person who is entitled to exercise an
Option pursuant to the terms of this Plan) shall not sell, pledge, assign, give
or otherwise transfer or dispose of any Stock acquired pursuant to an Option
without first offering such Stock to the Corporation for purchase on the same
terms and conditions as those offered to the proposed transferee. Any
individual who proposes such a transfer (the "Transferor") shall notify the
Corporation, in writing of the identity of the proposed transferee and the
terms and conditions of the proposed transfer. The Corporation may exercise its
right of first refusal under this Subsection within 30 days after receiving
such notice of the proposed transfer. The Corporation may assign its right of
first refusal under this Subsection, in whole or in part, to a Stockholder, a
Plan or an Affiliate. The Corporation shall give reasonable written notice to
the Transferor of any such assignment of its rights. If the Corporation (or its
permitted assignee) fails to exercise such right of first refusal during this
30-day period, the Transferor may proceed with the proposed transfer at any
time within the next 45 days, and such transfer is not completed within such
time, the restrictions of this Subsection shall re-apply. These restrictions
also shall re-apply to any person to whom Stock that was originally acquired
pursuant to an Option is sold, pledged, assigned, bequeathed, given or
otherwise transferred, without regard to the number of such subsequent
transferees or the manner in which they acquire the Stock. Notwithstanding the
foregoing, the
5
<PAGE> 8
restrictions of this Subsection shall not apply to a transfer of Stock that
occurs as a result of the death of the Transferor or of any subsequent
transferee, as defined in the Code or the Employee Retirement Income Security
Act of 1974, as amended, but such restrictions shall apply to the executor,
administrator or personal representative, the estate and the legatees,
beneficiaries and assigns thereof.
11.3. REPURCHASE RIGHTS
Upon the termination of employment with the Corporation of an
employee who has been granted one or more Option(s) hereunder, the Corporation
shall have the right, for a period of 60 days following such termination, to
repurchase any or all of the shares of Stock acquired by the employee pursuant
to such Option(s), at a price equal to the fair market value of such shares on
the date of termination (or at such lower price as shall have been specified by
the Board and set forth in the applicable Option Agreement(s)). Upon the
exercise of one or more Option(s) granted hereunder following termination of
employment, the Corporation shall have the right, for a period of 60 days
following such exercise, to repurchase any or all of the shares of Stock
acquired by the employee pursuant to such Option(s), at a price equal to the
fair market value of such shares on the date of exercise (or at such lower
price as shall have been specified by the Board and set forth in the applicable
Option Agreement(s)). In the event that the Corporation determines that it
cannot or will not exercise its right to purchase Stock pursuant to this
Subsection, in whole or in part, the Corporation may assign its rights
hereunder, in whole or in part, to (1) any stockholder of the Corporation who
owns stock or securities of the Corporation having more than 50% of the
combined voting power of all classes of stock of the Corporation (a
"Stockholder"), (2) any employee benefit plan (within the meaning of Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended)
maintained by the Corporation for the benefit of employees of the Corporation
(a "Plan"), or (3) any corporation or other trade or business that is
controlled by or under common control with the Corporation (determined in
accordance with the principles of Section 414(b) and (c) of the Cod and the
regulations thereunder) (an "Affiliate"). The Corporation shall give reasonable
written notice to the employee of any assignment of its rights. "Fair market
value," for purposes of this Subsection, shall be determined by the Board in
the same manner specified for determining the Option Price pursuant to Section
9 above.
11.4. PUT RIGHTS
The Board, by inclusion of appropriate language in an Option
Agreement, may grant the right to put Stock acquired pursuant to an Option to
the Corporation at the fair market value of such Stock (as determined by the
Board in the same manner specified for determining the Option Price pursuant to
Section 9 above) at the time of exercise of such put, or at such other value as
shall be specified in the Option Agreement. Any such put shall be subject to
such further terms and conditions as the Board shall include in the Option
Agreement.
11.5. LEGEND DESCRIBING RESTRICTIONS AND OBLIGATIONS
The Board may cause a legend to be placed prominently on
certificates representing Stock issued pursuant to this Plan in order to give
notice of the transferability restrictions and obligations imposed by this
Section.
6
<PAGE> 9
12. TERMINATION OF EMPLOYMENT
On the 30th day following the termination of the employment of an
Optionee with the Corporation or a Subsidiary, other than by reason of the
death or "permanent and total disability" (within the meaning of Section
22(e)(3) of the Code) of such Optionee, any Option granted to an Optionee
pursuant to the Plan shall terminate, and such Optionee shall have no further
right to purchase shares of Stock pursuant to such Option; provided, however,
that in the event that such termination of employment is by reason of the
Optionee's retirement with the consent of the Corporation or a Subsidiary in
accordance with the normal retirement policies of the Corporation or a
Subsidiary, as the case may be, then such Optionee shall have the right
(subject to the general limitations on exercise set forth in Section 10 above),
at any time within three months after such retirement and prior to termination
of the Option pursuant to Section 10 above, to exercise, in whole or in part,
any Option held by such Optionee at the date of such retirement, whether or not
such Option was exercisable immediately prior to such retirement; provide
further, that the Board may provide, by inclusion of appropriate language in
any Option Agreement, that an Optionee may (subject to the general limitations
on exercise set forth in Section 10 above), in the event of termination of
employment of the Optionee with the Corporation or a Subsidiary, exercise an
Option, in whole or in part, at any time subsequent to such termination of
employment and prior to termination of the Option pursuant to Section 10 above,
either subject to or without regard to any installment limitation on exercise
imposed pursuant to Section 10 above, as the Board, in its sole and absolute
discretion, shall determine and set forth in the Option Agreement. Whether a
termination of employment is to be considered by reason of retirement with the
consent of the Corporation or a Subsidiary in accordance with the normal
retirement policies of the Corporation, or a Subsidiary, as the case may be,
and whether a leave of absence or leave on military or government service shall
constitute a termination of employment for purposes of the Plan, shall be
determined by the Board, which determination shall be final and conclusive. For
purposes of the Plan, a termination of employment with the Corporation or a
Subsidiary shall not be deemed to occur if the Optionee is immediately
thereafter employed with the Corporation or any other Subsidiary.
13. RIGHTS IN THE EVENT OF DEATH OR DISABILITY
13.1. DEATH
If an Optionee dies while employed by the Corporation or a
Subsidiary, the executors or administrators or legatees or distributees of such
Optionee's estate shall have the right (subject to the general limitations on
exercise set forth in Section 10 above), at any time within one year after the
date of such Optionee's death and prior to termination of the Option pursuant
to Section 10 above, to exercise any Option held by such Optionee at the date
of such Optionee's death, whether or not such Option was exercisable
immediately prior to such Optionee's death; provided, however, that the Board
may provide by inclusion of appropriate language in any Option Agreement that,
in the event of the death of an Optionee, the executors or administrators or
legatees or distributees of such Optionee's estate may exercise an Option
(subject to the general limitations on exercise set forth in Section 10 above),
in whole or in part, at any time subsequent to such Optionee's death and prior
to termination of the Option pursuant to Section 10 above, either subject to or
without regard to any installment limitation on exercise imposed pursuant to
Section 10 above, as the Board, in its sole and absolute discretion, shall
determine and set forth in the Option Agreement.
7
<PAGE> 10
13.2. DISABILITY
If an Optionee terminates employment with the Corporation or a
Subsidiary by reason of the "permanent and total disability" (within the
meaning of Section 22(e)(3) of the Code) of such Optionee, then such Optionee
shall have the right (subject to the general limitations on exercise set forth
in Section 10 above), at any time within one year after such termination of
employment and prior to termination of the Option pursuant to Section 10 above,
to exercise, in whole or in part, any Option held by such Optionee at the date
of such termination of employment, whether or not such Option was exercisable
immediately prior to such termination of employment; provided, however, that
the Board may provide, by inclusion of appropriate language in any Option
Agreement, that an Optionee may (subject to the general limitations on exercise
set forth in Section 10 above), in the event of the termination of employment
of the Optionee with the Corporation or a Subsidiary by reason of the
"permanent and total disability" (within the meaning of Section 22(e)(3) of the
Code) of such Optionee, exercise an Option, in whole or in part, at any time
subsequent to such termination of employment and prior to termination of the
Option pursuant to Section 10 above, either subject to or without regard to any
installment limitation on exercise imposed pursuant to Section 10 above, as the
Board, in its sole and absolute discretion, shall determine and set forth in
the Option Agreement. Whether a termination of employment is to be considered
by reason of "permanent and total disability" for purposes of this Plan shall
be determined by the Board, which determination shall be final and conclusive.
14. USE OF PROCEEDS
The proceeds received by the Corporation from the sale of Stock
pursuant to Options granted under the Plan shall constitute general funds of
the Corporation
15. SECURITIES ACT OF 1933
The Corporation shall not be required to sell or issue any shares of
Stock under any Option if the sale or issuance of such shares would constitute
a violation by the individual exercising the Option or the Corporation of any
provisions of any law or regulation of any governmental authority, including
without limitation any federal or state securities laws or regulations.
Specifically in connection with the Securities Act of 1933, as amended (the
"Securities Act"), upon exercise of any Option, unless a registration statement
under such Act is in effect with respect to the shares of Stock covered by such
Option, the Corporation shall not be required to sell or issue such shares
unless the Corporation has received evidence satisfactory to it that the holder
of such Option may acquire such shares pursuant to an exemption from
registration under such Act. Any determination in this connection by the
Corporation shall be final, binding, and conclusive. The Corporation may, but
shall in no event be obligated to, register any securities covered hereby
pursuant to the Securities Act. The Corporation shall not be obligated to take
any affirmative action in order to cause the exercise of an Option or the
issuance of shares pursuant thereto to comply with any law or regulation of any
governmental authority. As to any jurisdiction that expressly imposes the
requirement that an Option shall not be exercisable unless and until the shares
of Stock covered by such Option are registered or are subject to an available
exemption from registration, the exercise of such
8
<PAGE> 11
Option (under circumstances in which the laws of such jurisdiction apply) shall
be deemed conditioned upon the effectiveness of such registration or the
availability of such an exemption.
16. SECURITIES EXCHANGE ACT OF 1934: RULE 16b-3
16.1. GENERAL
The Plan is intended to comply with Rule 16b-3 ("Rule 16b-3")
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
from and after the date on which the Corporation first registers a class of
equity security under Section 12 of the Exchange Act (the "Registration Date").
From and after the Registration Date, any provision inconsistent with Rule
16b-3 (as in effect on the Registration Date) shall, to the extent permitted by
law and determined to be advisable by the Committee (constituted in accordance
with Section 10) or the Board (acting pursuant to Section 10), be inoperative
and void. Moreover, in the event that the Plan does not include a provision
required by Rule 16b-3 to be stated therein, such provision (other than one
relating to eligibility requirements and the amount or timing of awards) shall
be deemed automatically to be incorporated into the Plan insofar as
participants subject to Section 16 are concerned. In addition, from and after
the Registration Date the provisions set forth in Sections 16.2 through 16.5
shall apply.
16.2. STOCK OPTION COMMITTEE
From and after the Registration Date, the Committee appointed
pursuant to Section 2.2 shall consist of not fewer than two members of the
Board, neither of whom, during the twelve months prior to service on such
Committee, shall have been granted an Option under this Plan and each of whom
shall qualify (at the time of appointment to the Committee and during all
periods of service on the Committee) in all respects as a "disinterested
person" as defined in Rule 16b-3.
16.3. ACTION BY THE BOARD
From and after the Registration Date, the Board may act under
the Plan other than by, or in accordance with the recommendations of, the
Committee, constituted as set forth in Section 2.2 above, only if all members
of the Board are "disinterested persons" as defined in Rule 16b-3.
16.4. ADDITIONAL RESTRICTION ON TRANSFER OF STOCK
From and after the Registration Date, no director, officer or
other "insider" of the Corporation subject to Section 16 of the Exchange Act
shall be permitted to sell Stock (which such "insider" had received upon
exercise of an Option) during the six months immediately following the grant of
such Option.
16.5. ADDITIONAL REQUIREMENT OF STOCKHOLDERS' APPROVAL
From and after the Registration Date, no amendment by the Board
shall, without approval by a majority of the votes cast at a duly held meeting
of the stockholders of the Corporation at which a quorum representing a
majority of all outstanding stock is present, either
9
<PAGE> 12
in person or by proxy, and voting on the amendment, or by written consent in
accordance with applicable state law and the articles of incorporation and
by-laws of the Corporation, materially increase the benefits accruing to
eligible individuals under the Plan or take any other action that would require
the approval of such stockholders pursuant to Rule 16b-3.
17. AMENDMENT AND TERMINATION OF THE PLAN
The Board may, at any time and from time to time, amend, suspend or
terminate the Plan as to any shares of Stock as to which Options have not been
granted; provided, however, that no amendment by the Board shall, without
approval by a majority of the votes cast at a duly held meeting of the
stockholders of the Corporation at which a quorum representing a majority of
all outstanding stock is present, either in person or by proxy, and voting on
the amendment, or by written consent in accordance with applicable state law
and the articles of incorporation and by-laws of the Corporation, materially
change the requirements as to eligibility to receive Options or increase the
maximum number of shares of Stock in the aggregate that may be sold pursuant to
Options granted under the Plan (except as permitted under Section 18 hereof.
Except as permitted under Section 18 hereof, no amendment, suspension or
termination of the Plan shall, without the consent of the holder of the Option,
alter or impair rights or obligations under any Option theretofore granted
under the Plan.
18. EFFECT OF CHANGES IN CAPITALIZATION
18.1. CHANGES IN STOCK
If the outstanding shares of Stock are increased or decreased
or changed into or exchanged for a different number or kind of shares or other
securities of the Corporation by reason of the conversion of the outstanding
shares of Preferred Stock to shares of Common Stock of the Corporation pursuant
to the terms of the Certificate of Incorporation of the Corporation, or by
reason of any recapitalization, reclassification, stock split-up, combination
of shares, exchange of shares, stock dividend or other distribution payable in
capital stock, or other increase or decrease in such shares effected without
receipt of consideration by the Corporation, occurring after the effective date
of the Plan, the number and kinds of shares for the purchase of which Options
may be granted under the Plan shall be adjusted proportionately and accordingly
by the Corporation. In addition, the number and kind of shares for which
Options are outstanding shall be adjusted proportionately and accordingly, so
that the proportionate interest of the holder of the Option immediately
following such event shall, to the extent practicable, be the same as
immediately prior to such event. Any such adjustment in outstanding Options
shall not change the aggregate Option Price payable with respect to shares
subject to the unexercised portion of the Option outstanding shall include a
corresponding proportionate adjustment in the Option Price per share.
18.2. REORGANIZATION WITH CORPORATION SURVIVING
Subject to Section 18.3 hereof, if the Corporation shall be the
surviving corporation in any reorganization, merger or consolidation of the
Corporation with one or more other corporations, any Option theretofore granted
pursuant to the Plan shall pertain to and apply to the securities to which a
holder of the number of shares of Stock subject to such Option would have been
entitled immediately following such reorganization, merger or
10
<PAGE> 13
consolidation, with a corresponding proportionate adjustment of the Option
Price per share so that the aggregate Option Price thereafter shall be the same
as the aggregate Option Price of the shares remaining subject to the Option
immediately prior to such reorganization, merger or consolidation.
18.3. OTHER REORGANIZATIONS; SALE OF ASSETS/STOCK
Upon the dissolution or liquidation of the Corporation, or upon
a merger, consolidation or reorganization of the Corporation with one or more
other corporations in which the Corporation is not the surviving corporation,
or upon a sale of substantially all of the assets of the Corporation to another
corporation, or upon any transaction (including, without limitation, a merger
or reorganization in which the Corporation is the surviving corporation)
approved by the Board which results in any person or entity owning 80 percent
or more of the combined voting power of all classes of stock of the
Corporation, the Plan and all Options outstanding hereunder shall terminate,
except to the extent provision is made in writing in connection with such
transaction for the continuation of the Plan and/or the assumption of the
Options theretofore granted, or for the substitution for such Options of new
options covering the stock of a successor corporation, or a parent or
subsidiary thereof, with appropriate adjustments as to the number and kinds of
shares and exercise prices, in which event the Plan and Options theretofore
granted shall continue in the manner and under the terms so provided. In the
event of any such termination of the Plan, each individual holding an Option
shall have the right (subject to the general limitations on exercise set forth
in Section 10 above), immediately prior to the occurrence of such termination
and during such period occurring prior to such termination as the Board in its
sole discretion shall designate, to exercise such Option in whole or in part,
whether or not such Option was otherwise exercisable at the time such
termination occurs and without regard to any installment limitation on exercise
imposed pursuant to Section 10 above, but subject to any additional limitations
that the Board may, in its sole discretion, include in any Option Agreement.
The Board shall send written notice of an event that will result in such a
termination to all individuals who hold Options not later than the time at
which the Corporation gives notice thereof to its stockholders.
18.4. ADJUSTMENTS
Adjustments under this Section related to stock or securities
of the Corporation shall be made by the Board, whose determination in that
respect shall be final, binding and conclusive. No fractional shares of Stock
or units of other securities shall be issued pursuant to any such adjustment,
and any fractions resulting from any such adjustment shall be eliminated in
each case by rounding downward to the nearest whole share or unit.
18.5. NO LIMITATIONS ON CORPORATION
The grant of an Option pursuant to the Plan shall not affect or
limit in any way the right or power of the Corporation to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge, consolidate, dissolve or liquidate, or to sell or
transfer any or an part of its business or assets.
11
<PAGE> 14
19. DISCLAIMER OF RIGHTS
No provision in the Plan or in any Option granted or Option Agreement
entered into pursuant to the Plan shall be construed to confer upon any
individual the right to remain in the employ of the Corporation or any
Subsidiary, or to interfere in any way with the right and authority of the
Corporation or any Subsidiary either to increase or decrease the compensation
of any individual at any time, or to terminate any employment or other
relationship between any individual and the Corporation or any Subsidiary.
20. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan nor the submission of the Plan to the
stockholders of the Corporation for approval shall be construed as creating any
limitations upon the right and authority of the Board to adopt such other
incentive compensation arrangements (which arrangements may be applicable
either generally to a class or classes of individuals or specifically to a
particular individual or individuals) as the Board in its discretion determines
desirable, including, without limitation, the granting of stock options
otherwise than under the Plan.
*******************
12
<PAGE> 15
INNOVA PURE WATER, INC.
INCENTIVE, STOCK OPTION AGREEMENT
This Stock Option Agreement (the "Option Agreement") is made as of
_______________________, by and between Innova Pure Water, Inc., a Florida
corporation (the "Corporation"), and ___________________________ an employee of
the Corporation or one or more of its subsidiaries (the "Optionee").
WHEREAS, the Board of Directors of the Corporation have duly adopted
and approved the Stock Option Plan (the "Plan"), which authorizes the
Corporation to grant to eligible individuals options for the purchase of shares
of the Corporation's Common Stock (the "Stock"); and
WHEREAS, the Corporation has determined that it is desirable and in
its best interests to grant to the Optionee, pursuant to the Plan, an option to
purchase a certain number of shares of Stock, in order to provide the Optionee
with an incentive to advance the interests of the Corporation, all according to
the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties hereto do hereby agree as follows:
1. GRANT OF OPTION
Subject to the terms of the Plan, the Corporation hereby grants to the
Optionee the right and option (the "Option") to purchase from the Corporation,
on the terms and subject to the conditions set forth in the Plan and in this
Option Agreement, shares of Stock. The date of grant of this Option is
__________________________, the date on which the grant of the Option was
approved by the Board of Directors of the Corporation (the "Board") or by the
Board's Stock Option Committee.
2. TERMS OF PLAN
The Option granted pursuant to this Option Agreement is granted
subject to the terms and conditions set forth in the Plan (a copy of which is
available from the Corporation upon request and has previously been provided to
the Optionee or is attached hereto). All terms and conditions of the Plan, as
may be amended from time to time, are hereby incorporated into this Option
Agreement by reference and shall be deemed to be part of this Option Agreement,
without regard to whether such terms and conditions (including, for example,
provisions relating to exercise or termination of the Option following the
Optionee's termination of employment, disability, death, or retirement or
certain changes in capitalization of the Corporation) are not otherwise set
forth in this Option Agreement. In the event that there is any inconsistency
between the provisions of this Option Agreement and of the Plan, the provisions
of the Plan shall govern.
<PAGE> 16
3. PRICE
The purchase price (the "Option Price") for the shares of Stock
subject to the Option granted by this Option Agreement is $_________ per share.
4. EXERCISE OF OPTION
Except as otherwise provided herein, and subject to the provisions of
the Plan (including, for example, provisions relating to exercise or
termination of the Option following the Optionee's termination of employment,
disability, death, or retirement or certain changes in capitalization of the
Corporation), the Option granted pursuant to this Option Agreement shall be
subject to exercise as follows:
4.1. TIME OF EXERCISE OF OPTION
The Optionee may exercise the Option (subject to the
limitations on exercise set forth in this Option Agreement and in the Plan), in
installments as follows: on the second anniversary of the date of grant of the
Option, as set forth in Section 1 above, the Option shall be exercisable in
respect of 50% of the number of shares specified in Section 1 above; the option
shall be exercisable in respect of an additional 25% of the number of shares
specified in Section 1 above on the third anniversary of the date of the grant;
and the option shall be exercisable in respect of the remaining 25% of the
number of shares specified in Section 1 above on the fourth anniversary of the
date of the grant. The foregoing installments, to the extent not exercised,
shall accumulate and be exercisable, in whole or in part, at any time and from
time to time, after becoming exercisable and prior to the termination of the
Option; provided, that no single exercise of the Option shall be for fewer than
100 shares, unless the number of shares purchased is the total number at the
time available for purchase under this Option.
4.2. TERMINATION OF OPTION
The Option shall terminate upon the earlier of (i) the
expiration of a period of ten years from the date of grant of the Option, as
set forth in Section 1 above, or (ii) the Optionee's termination of employment
with the Corporation or a subsidiary thereof, provided, however, that if such
termination of employment falls within the scope of one of the provisions of
the Plan providing for an extended exercise period, the Option shall terminate
upon the expiration of the period after the Optionee's termination of
employment with the Corporation or a subsidiary thereof within which the Option
is exercisable as specified in such provision.
4.3. LIMITATIONS ON EXERCISE OF OPTION
Notwithstanding the foregoing Subsections, in no event may the
Option be exercised, in whole or in part, prior to the date on which the Plan
is approved by the stockholders of the Corporation, or after ten years
following the date upon which the Option is granted, as set forth in Section 1
above, or after the occurrence of an event that results in termination of the
Option under the Plan. In no event may the Option be exercised for a fractional
share of Stock.
<PAGE> 17
4.4. METHOD OF EXERCISE OF OPTION
Subject to the terms and conditions of this Option Agreement,
the Option may be exercised by delivering written notice of exercise to the
Corporation, at its principal office, addressed to the attention of the
President, which notice shall specify the number of shares for which the Option
is being exercised, and shall be accompanied by payment in. full of the Option
Price of the shares for which the Option is being exercised. Payment of the
Option Price for the shares of Stock purchased pursuant to the exercise of the
Option shall be made either (i) in cash or by check payable to the order of the
Corporation; (ii) through the tender to the Corporation of shares of Stock,
which shares shall be valued, for purposes of determining the extent to which
the Option Price has been paid thereby, at their fair market value (determined
in the manner specified in the Plan) on the date of exercise; or (iii) by a
combination of the methods described in (i) and (ii). If the person exercising
the Option is not the Optionee, such person shall also deliver with the notice
of exercise appropriate proof of his or her right to exercise the Option. An
attempt to exercise the Option granted hereunder other than as set forth above
shall be invalid and of no force and effect. Promptly after exercise of the
Option as provided for above, the Corporation shall deliver to the person
exercising the Option a certificate or certificates for the shares of Stock
being purchased.
4.5. PARACHUTE LIMITATION'S
Notwithstanding any other provision of this Option Agreement or
of any other agreement, contract, or understanding heretofore or hereafter
entered into by the Optionee with the Corporation (or any subsidiary or
affiliate thereof), except an agreement, contract, or understanding hereafter
entered into that expressly modifies or excludes application of this Subsection
(the "Other Agreements"), and notwithstanding any formal or informal plan or
other arrangement heretofore or hereafter adopted by the Corporation (or any
such subsidiary or affiliate) for the direct or indirect compensation of the
Optionee (including groups or classes of participants or beneficiaries of which
the Optionee is a member), whether or not such compensation is deferred, is in
cash, or is in the form of a benefit to or for the Optionee (an "Other Benefit
Plan"), the Optionee shall not have any right to exercise an Option or to
receive any payment or other benefit under this Option Agreement, any Other
Agreement, or any Other Benefit Plan if such right to exercise, payment, or
benefit, taking into account all other rights, payments, or benefits to or for
the Optionee under this Option Agreement, all Other Agreements, and all Other
Benefit Plans would cause any right, payment, or benefit to the Optionee under
this Option Agreement to be considered a "parachute payment" within the meaning
of Section 28OG(b)(2) of the Internal Revenue Code as then in effect (a
"Parachute Payment"). In the event that the receipt of any such right to
exercise or any other payment or benefit under this Option Agreement, any Other
Agreement, or any Other Benefit Plan would cause the Optionee to be considered
to have received a Parachute Payment under this Option Agreement, then the
Optionee shall have the right, in the Optionee's sole discretion, to designate
those rights, payments, or benefits under this Option Agreement, any Other
Agreements, and/or any Other Benefit Plans, which should be reduced or
eliminated so as to avoid having the right, payment, or benefit to the Optionee
under this Option Agreement be deemed to be a Parachute Payment.
<PAGE> 18
5. TRANSFERABILITY
5.1. TRANSFERABILITY OF OPTIONS
During the lifetime of an Optionee, only such Optionee (or, in
the event of legal incapacity or incompetence, the Optionee's guardian or legal
representative) may exercise the Option. No Option shall be assignable or
transferable by the Optionee to whom it is granted, other than by will or the
laws of descent and distribution.
5.2. TRANSFERABILITY OF SHARES
An Optionee (or any other person who is entitled to exercise an
option pursuant to the terms of this Plan) shall not sell, pledge, assign,
give, or otherwise transfer or dispose of any Stock acquired pursuant to an
Option without first offering such Stock to the Corporation for purchase on the
same terms and conditions as those offered to the proposed transferee. Any
individual who proposes such a transfer (the "Transferor") shall notify the
Corporation, in writing, of the identity of the proposed transferee and the
terms and conditions of the proposed transfer. The Corporation may exercise its
right of first refusal under this Subsection within 90 days after receiving
such notice of the proposed transfer. The Corporation may assign its right of
first refusal under this Subsection, in whole or in part, to (1) any
stockholder of the Corporation who owns stock or securities of the Corporation
having more than 50% of the combined voting power of all classes of stock of
the Corporation (a "Stockholder"); (2) any. employee benefit plan (within the
meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended) maintained by the Corporation for the benefit of employees of the
Corporation (a "Plan"); or (3) any corporation or other trade or business that
is controlled by or under common control with the Corporation (determined in
accordance with the principles of Section 414(b) and (c) of the Code and the
regulations thereunder) (an "affiliate"). The Corporation shall give reasonable
written notice to the Transferor of any such assignment of its rights. If the
Corporation (or its permitted assignee) fails to exercise such right of first
refusal during this 90-day period, the Transferor may proceed with the proposed
transfer at any time within the next 45 days, and if such transfer is not
completed within such time, the restrictions of this Subsection shall re-apply.
These restrictions also shall re-apply to any person to whom Stock that was
originally acquired pursuant to an Option is sold, pledged, assigned,
bequeathed, given, or otherwise transferred, without regard to the number of
such subsequent transferees or the manner in which they acquire the Stock.
Notwithstanding the foregoing, the restrictions of this Subsection shall not
apply to a transfer of Stock that occurs as a result of the death of the
Transferor or of any subsequent transferee, but such restrictions shall apply
to the executor, administrator, or personal representative, the estate, and the
legatees, beneficiaries, and assigns thereof.
5.3. REPURCHASE RIGHTS
Upon the termination of employment with the Corporation or a
subsidiary thereof (including without limitation termination resulting from
death or disability of the Optionee) of an employee who has been granted one or
more Option(s) hereunder, the Corporation shall have the right, for a period of
six months following such termination, to repurchase any or all of the shares
of Stock acquired by such Optionee pursuant to
<PAGE> 19
such Option(s), at a price equal to the fair market value of such shares on the
date of such termination (or at such lower price as shall have been specified
by the Board and set forth in this Option Agreement(s)). Upon the exercise,
pursuant to the terms of the Plan, of one or more Option(s) granted hereunder
following such termination of the Optionee's employment (including without
limitation termination resulting from death or disability of the Optionee), the
Corporation shall have the right, for a period of six months following such
termination, to repurchase any or all of the shares of Stock acquired pursuant
to such Option(s), at a price equal to the fair market value of such shares on
the date of such exercise (or at such lower price as shall have been specified
by the Board and set forth in this Option Agreement(s)). In the event that the
Corporation determines that it cannot or will not exercise its right to
purchase Stock pursuant to this Subsection, in whole or in part, the
Corporation may assign its rights hereunder, in whole or in part, to a
Stockholder, a Plan, or an Affiliate. The Corporation shall give reasonable
written notice to the Optionee of any assignment of its rights under this
Subsection. "Fair market value," for purposes of this Subsection, shall be
determined by the Board in the same manner specified for determining the Option
Price pursuant to the Plan.
5.4. PUBLICLY TRADED STOCK
If the Stock is listed on an established national or regional
stock exchange or is admitted to quotation on the Nasdaq, or is publicly traded
in an established securities market (as determined by the Board), the foregoing
restrictions of this Section 5 shall terminate as of the first date that the
Stock is so listed, quoted, or publicly traded.
5.5. INSTALLMENT PAYMENTS
In the case of any purchase of Stock pursuant to this Section
5, at the option of the Corporation or its permitted assignee or delegee, the
Corporation or its permitted assignee or delegee may pay the Optionee or other
registered owner of the Stock the purchase price in five or fewer annual
installments. Interest shall he credited on the installments at the applicable
federal rate (as determined for purposes of Section 1274 of the Code) in effect
on the date on which the purchase is made. The Corporation or its permitted
assignee or delegee shall pay at least one-fifth of the total purchase price
each year, plus interest on the unpaid balance, with the first payment being
made on or before the 60th day after the purchase.
5.6. LEGEND DESCRIBING RESTRICTIONS AND OBLIGATIONS
The Board may cause a legend to be placed prominently on
certificates representing Stock issued pursuant to this Plan, in order to give
notice of the transferability restrictions and obligations imposed pursuant to
this Section 5 and applicable securities laws.
<PAGE> 20
6. RIGHT OF SUBSTITUTION
The Corporation reserves the right to replace the Option with options,
shares, or other rights having an equivalent value at the time of exchange and
a comparable potential for appreciation based on the Corporation's future
operations.
7. RIGHTS AS STOCKHOLDER
Neither the Optionee nor any executor, administrator, distributee, or
legatee of the Optionee's estate shall be, or have any of the rights or
privileges of, a stockholder of the Corporation in respect of any shares of
Stock issuable hereunder unless and until such shares have been fully paid for
and certificates representing such shares have been endorsed, transferred, and
delivered, and the name of the Optionee (or of such other person or entity) has
been entered as the stockholder of record on the books of the Corporation.
8. WITHHOLDING OF TAXES
The parties hereto recognize that the Corporation or a subsidiary
thereof may be obligated to withhold federal and local income taxes and Social
Security taxes to the extent that the Optionee realizes ordinary income in
connection with the exercise of the Option or in connection with a disposition
of any shares of Stock acquired by exercise of the Option. The Optionee agrees
that the Corporation or a subsidiary thereof may withhold amounts needed to
cover such taxes from payments otherwise due an owing to the Optionee, and also
agrees that upon demand the Optionee will promptly pay to the Corporation or a
subsidiary thereof having such obligation any additional amounts as may be
necessary to satisfy such withholding tax obligation. Such payment shall be
made in cash or by certified check payable to the order of the Corporation or a
subsidiary thereof.
9. NOTIFICATION OF DISPOSITION
The Optionee agrees to notify the Corporation in writing within 30
days of any disposition of shares of Stock acquired by the Optionee pursuant to
the exercise of this Option, if such disposition occurs within two years of the
date of grant, or one year of the date of exercise, of the Option.
10. DISCLAIMER OF RIGHTS
No provision in this Option Agreement shall be construed to confer
upon the Optionee the right to be employed by the Corporation or any subsidiary
thereof, or to interfere in any way with the right and authority of the
Corporation or any subsidiary thereof either to increase or decrease the
compensation of the Optionee at any time, or to terminate any employment or
other relationship between the Optionee and the Corporation or any subsidiary
thereof.
<PAGE> 21
11. INTERPRETATION OF THIS OPTION AGREEMENT
This Option shall constitute an incentive stock option within the
meaning of Section 422 of the Code. All decisions and interpretations made by
the Board or the Stock Option Committee thereof with regard to any question
arising under the Plan or this Option Agreement shall be binding and conclusive
on the Corporation and the Optionee and any other person entitled to exercise
the Option as provided for herein.
12. GOVERNING LAW
This Option Agreement shall be governed by the laws of the State of
Florida (but not including the choice of law rules thereof).
13. BINDING EFFECT
Subject to all restrictions provided for in this Option Agreement and
the Plan and by applicable law relating to assignment and transfer of this
Option Agreement and the Option provided for herein, this Option Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective heirs, executors, administrators, successors, and assigns.
14. NOTICES
Any notice hereunder by the Optionee to the Corporation shall be in
writing and shall be deemed duly given if mailed or delivered to the
Corporation, at its principal office, addressed to the attention of the
President, or if so mailed or delivered to such other address as the
Corporation may hereafter designate by notice to the Optionee. Any notice
hereunder by the Corporation to the Optionee shall be in writing and shall be
deemed duly given if mailed or delivered to the Optionee at the address
specified in this Option Agreement, or if so mailed or delivered to such other
address as the Optionee may hereafter designate by written notice given to the
Corporation.
15. ENTIRE AGREEMENT
This Option Agreement and the Plan together constitute the entire
agreement and supersede all prior understandings and agreements, written or
oral, of the parties hereto with respect to the subject matter hereof. Neither
this Option Agreement nor any term hereof may be amended, waived, discharged,
or terminated except by a written instrument signed by the Corporation and the
Optionee; provided, however, that the Corporation unilaterally may waive any
provisions hereof in writing to the extent that such waiver does not adversely
affect the interests of the Optionee hereunder or otherwise cause the Option
granted hereunder not to qualify as an "incentive stock option" within the
meaning of Section 422 of the Code, but no such waiver shall operate as or be
construed to be a subsequent waiver of the same provision or a waiver of any
other provision hereof.
IN WITNESS WHEREOF, the parties hereto have duly executed this Option
Agreement, or caused this Option Agreement to be duly executed on their behalf,
as of
<PAGE> 22
the day and year first above written.
Optionee Name:
------------------------------
Date of Grant:
------------------------------
Number of Shares:
---------------------------
Price per Share:
----------------------------
INNOVA PURE WATER, INC.
By:
----------------------------------
Title:
-------------------------------
OPTIONEE:
Name:
--------------------------------
X
------------------------------------
OPTIONEE ADDRESS:
-------------------------------------
-------------------------------------
