<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended December 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from __________, 19__, to __________, 19__.
Commission File Number 0-29746
INNOVA PURE WATER, INC.
(Exact Name of Registrant as Specified in Charter)
Florida 59-2567034
------- ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
13130 56th Court, Suite 604, Clearwater, Florida 33760
------------------------------------------------------
(Address of Principal Executive Offices, Including Zip Code)
(727) 572-1000
--------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and has been subject to such
filing requirements for the past 90 days.
___ YES ___ NO
There were 10,066,971 shares of the Registrant's $.0001 par value common stock
as of December 31, 1998.
Transitional Small Business Format (check one) Yes ___ No ___
<PAGE> 2
INNOVA PURE WATER, INC.
CONTENTS
<TABLE>
<S> <C>
Part I - Financial Information
Item 1. Financial Statements:
Item 2. Management's Discussion & Analysis of Financial
Condition and Results of Operations...............................................
Part II
Item 1. Legal Proceedings.................................................
Item 2. Changes in Securities and Use of Proceeds.........................
Item 3. Changes in Securities.............................................
Item 4. Submission of Matters to a Vote of Security Holders...............
Item 5. Other Matters.....................................................
Item 6. Exhibits and Reports on Form 8-K..................................
Signatures ...................................................................................
</TABLE>
<PAGE> 3
FINANCIAL STATEMENTS
INNOVA PURE WATER, INC.
Six Months Ended December 31, 1998 and 1997
(Unaudited)
<PAGE> 4
Innova Pure Water, Inc.
Financial Statements
Six Months Ended December 31, 1998 and 1997
(Unaudited)
CONTENTS
Financial Statements:
<TABLE>
<S> <C>
Balance Sheet for December 31, 1998 (Unaudited)...............................................................1
Statements of Operations for the three and six months ended
December 31, 1998 and 1997 (Unaudited)....................................................................2
Statement of Changes in Stockholders' Equity for the six months
ended December 31, 1998 (Unaudited).......................................................................3
Statements of Cash Flows for the six months ended
December 31, 1998 and 1997 (Unaudited)....................................................................4
Notes to Financial Statements..............................................................................5-18
</TABLE>
<PAGE> 5
Innova Pure Water, Inc.
Balance Sheet
December 31, 1998
(Unaudited)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,121,800
Accounts receivable, trade (including related party of $54,250),
net of allowance for doubtful accounts of $8,800 128,500
Other receivables, related parties 87,000
Inventories 295,500
Other current assets 19,700
------------
Total current assets 1,652,500
Property and equipment, net 224,700
Other assets 208,000
------------
$ 2,085,200
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 33,100
Accrued expenses 94,700
Customer deposits 401,900
Current portion of obligations under capital leases 3,500
Current portion of long-term debt 6,400
------------
Total current liabilities 539,600
------------
Long-term liabilities:
Obligations under capital leases, net of current portion 8,400
Long-term debt, net of current portion 16,700
------------
Total long-term liabilities 25,100
------------
Stockholders' equity:
Preferred stock; $.001 par value; 2,000,000 shares authorized;
0 shares issued and outstanding 0
Common stock; $.0001 par value; 50,000,000 shares authorized;
10,077,471 shares issued; 10,066,971 shares outstanding 1,000
Capital in excess of par value 7,996,600
Accumulated deficit (6,468,000)
------------
1,529,600
Treasury stock, at cost; 500 shares (9,100)
------------
Total stockholders' equity 1,520,500
------------
$ 2,085,200
============
</TABLE>
The accompanying notes are an integral part of the financial statements. 1
<PAGE> 6
Innova Pure Water, Inc.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------ ------------------------------
1998 1997 1998 1997
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales, related parties $ 96,200 $ 316,700 $ 329,000 $ 322,300
Net sales, other 193,500 277,600 1,465,500 684,400
-----------------------------------------------------------------
289,700 594,300 1,794,500 1,006,700
Cost of sales 241,700 242,300 995,200 413,900
-----------------------------------------------------------------
Gross profit 48,000 352,000 799,300 592,800
-----------------------------------------------------------------
Operating expenses:
Selling expenses 15,700 38,800 74,300 92,800
General and administrative expenses 185,800 219,200 617,600 460,300
Research and product development 38,000 17,400 69,600 42,100
-----------------------------------------------------------------
239,500 275,400 761,500 595,200
-----------------------------------------------------------------
Net (loss) income from operations (191,500) 76,600 37,800 (2,400)
-----------------------------------------------------------------
Other income:
Interest, net (12,700) (5,700) (21,800) (9,100)
Income, other (25,000) (25,000)
Gain on disposal of fixed assets (7,600) (7,600)
-----------------------------------------------------------------
(45,300) (5,700) (54,400) (9,100)
-----------------------------------------------------------------
Net (loss) income $ (146,200) $ 82,300 $ 92,200 $ 6,700
=================================================================
(Loss) earnings per common share $(.01) $.01 $.01 $.00
=================================================================
(Loss) earnings per common share,
assuming dilution $(.01) $.01 $.01 $.00
=================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements. 2
<PAGE> 7
Innova Pure Water, Inc.
Statement of Changes in Stockholders' Equity
Six Months Ended December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Capital In
--------------------------- Excess of Accumulated Treasury
Shares Amount Par Value Deficit Stock
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1998 10,064,871 $1,000 $7,980,000 $(6,560,200) $5,700
Stock issued for services and
exercised options 12,600 6,200
Stock repurchase (10,000
shares) 3,400
Compensation for stock
options issued 10,400
Net income 92,200
---------------------------------------------------------------------------
Balance, December 31, 1998 10,077,471 $1,000 $7,996,600 $(6,468,000) $9,100
===========================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements. 3
<PAGE> 8
Innova Pure Water, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
----------------------------
1998 1997
---------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 92,200 $ 6,700
----------------------------
Adjustments to reconcile net income to net cash and cash
equivalents provided (used) by operating activities:
Depreciation and amortization 49,100 46,800
Compensation expense for stock and stock options 15,300
(Increase) decrease in:
Accounts receivable 754,700 131,800
Inventories 58,600 (10,600)
Other assets (2,300) (22,700)
Decrease in accounts payable, accrued expenses,
and customer deposits (192,800) (240,900)
----------------------------
Total adjustments 682,600 (95,600)
----------------------------
Net cash and cash equivalents provided (used)
by operating activities 774,800 (88,900)
----------------------------
INVESTING ACTIVITIES
Acquisition of property and equipment (40,600) (116,500)
Acquisition of patents (44,200)
Advances to related parties (48,300) 14,800
----------------------------
Net cash and cash equivalents used by investing activities (133,100) (101,700)
----------------------------
FINANCING ACTIVITIES
Repurchase of stock (3,400)
Payments on loans (3,000) (16,900)
Payments on capital lease obligations (3,000) (2,700)
Proceeds from issuance of common stock 1,300
----------------------------
Net cash and cash equivalents used by financing activities (8,100) (19,600)
----------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 633,600 (210,200)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 488,200 752,700
----------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $1,121,800 $ 542,500
============================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND
NONCASH FINANCING ACTIVITIES:
Cash paid for interest $ 1,800 $ 4,700
============================
</TABLE>
The accompanying notes are an integral part of the financial statements. 4
<PAGE> 9
Innova Pure Water, Inc.
Notes to Financial Statements
Six Months Ended December 31, 1998 and 1997
(Unaudited)
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 six months ended December 31, 1998 and 1997, sales to two and three
customers amounted to approximately 89 and 53 percent of net sales,
respectively. Sales to two customers for the three months ended December 31,
1998 and two customers for the three months ended December 31, 1997 amounted to
approximately 74 and 69 percent of net sales, respectively. Accounts receivable
from these customers amounted to approximately $114,800 at December 31, 1998.
For the six months ended December 31, 1998 and 1997, sales to foreign customers
(all transacted in U.S. dollars) amounted to approximately 9 and 19 percent of
net sales to unaffiliated customers, respectively. For the three months ended
December 31, 1998 and 1997, sales to foreign customers amounted to
approximately 35 and 13 percent of net sales to unaffiliated customers,
respectively. These sales were made to customers in various locations as
follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended December 31, Ended December 31,
---------------------- ---------------------
1998 1997 1998 1997
-------------------------------------------------
<S> <C> <C> <C> <C>
Brazil $ 500
Japan $51,500 72,800 $ 77,000
New Zealand 12,000 $12,000 15,000 17,400
Australia 11,300
England 9,400 7,800 9,400
Other 3,900 14,000 34,900 14,000
-------------------------------------------------
$67,400 $35,400 $131,000 $129,100
=================================================
</TABLE>
5
<PAGE> 10
Innova Pure Water, Inc.
Notes to Financial Statements
Six Months Ended December 31, 1998 and 1997
(Unaudited)
1. NATURE OF OPERATIONS (CONTINUED)
On July 21, 1997, the Company entered into a strategic alliance which includes
manufacturing, developing, marketing, and distributing provisions with
Rubbermaid Incorporated(R) ("Rubbermaid"). This agreement grants Rubbermaid
certain rights to the products and technology of the Company as well as to
market and distribute certain products throughout the United States and
specific other countries during the term of the agreement. The Company also
granted Rubbermaid the non-exclusive right to market and distribute certain
products throughout the rest of the world with the exception of specific
products and/or markets reserved under pre-existing agreements under other
strategic alliances. In addition to the product price, the agreement calls for
a limited price adjustment of $.10 per unit for the first ten million units of
product purchased by Rubbermaid. On termination of the agreement, the Company
is entitled to a minimum of $500,000 less any limited price adjustments already
paid. Included in net sales for the six months ended December 31, 1998 and 1997
are approximately $83,500 and $0, respectively, of revenues relating to this
limited price adjustment. Included in net sales for the three months ended
December 31, 1998 and 1997 are approximately $4,500 and $0, respectively, of
revenues relating to this limited price adjustment.
The Company currently holds numerous patents in the field of water treatment
and has additional domestic and foreign patents pending. The Company pursues an
aggressive product development program with the goal to provide its strategic
partners with unique competitive advantages.
2. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed are:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
6
<PAGE> 11
Innova Pure Water, Inc.
Notes to Financial Statements
Six Months Ended December 31, 1998 and 1997
(Unaudited)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In the opinion of management, all adjustments consisting only of normal
recurring adjustments necessary for a fair statement of (a) the results of
operations for the six and three month periods ended December 31, 1998 and
1997, (b) the financial position at December 31, 1998, and (c) cash flows
for the six month periods ended December 31, 1998 and 1997, have been
made.
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 December 31, 1998.
Inventory is stated at the lower of cost, determined by the first-in,
first-out method, or market.
Property and equipment are recorded at cost. Depreciation is calculated by
the straight-line method over the estimated useful lives of the assets,
ranging generally from three to ten years. Additions to and major
improvements of property and equipment are capitalized. Repair and
maintenance expenditures are charged to expense as incurred. As property
or equipment is sold or retired, the applicable cost and accumulated
depreciation are eliminated from the accounts and any gain or loss is
recorded.
When the Company has long-lived assets which have a possible impairment
indicator, the Company estimates the future cash flows from the operation
of these assets. If the estimated cash flows recoup the recorded value of
the assets, they remain on the books at that value. If the net recorded
value cannot be recovered, the assets are written down to their fair
market value if lower than the recorded value.
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statements carrying amounts of existing assets and liabilities and their
respective income tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes
the enactment date.
7
<PAGE> 12
Innova Pure Water, Inc.
Notes to Financial Statements
Six Months Ended December 31, 1998 and 1997
(Unaudited)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Advertising costs are charged to operations as incurred. Approximately
$2,000 and $0 of advertising expense was charged to operations for the six
months ended December 31, 1998 and 1997, respectively. There were no
advertising costs for the three months ended December 31, 1998 and 1997.
The Financial Accounting Standards Board issued Statement 123 (SFAS 123),
Accounting for Stock-Based Compensation, which provides that expense equal
to the fair value of all stock-based awards on the date of the grant be
recognized over the service period. Alternatively, this statement allows
entities to continue to apply the provisions of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, whereby
compensation expense is recorded on the date the options are granted equal
to the excess of the market price of the underlying stock over the
exercise price. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma disclosure of the
provisions of SFAS 123. Under APB Opinion No. 25, the Company recorded
$10,400 and $0 of compensation expense for the six months ended December
31, 1998 and 1997, respectively. The Company recorded $10,400 and $0 of
compensation expense for the three months ended December 31, 1998 and
1997, respectively.
During the year ended June 30, 1998, the Company adopted Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings per Share."
This statement requires dual presentation of basic and diluted earnings
per share (EPS) for complex capital structures on the face of the income
statement. Basic EPS is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution from the
exercise or conversion of securities, such as stock options and warrants,
into common stock.
The Company records shares of common stock as outstanding at the time the
Company becomes contractually obligated to issue shares.
8
<PAGE> 13
Innova Pure Water, Inc.
Notes to Financial Statements
Six Months Ended December 31, 1998 and 1997
(Unaudited)
3. INVENTORIES
Inventories at December 31, 1998 consist of:
<TABLE>
<S> <C>
Raw materials $250,900
Finished goods 5,900
Work in process 38,700
--------
$295,500
========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 consist of:
<TABLE>
<S> <C>
Tooling $309,600
Machinery and equipment 374,600
Vehicles 32,900
Equipment under capital lease 25,500
--------
742,600
Less:
Accumulated depreciation 508,400
Accumulated depreciation on equipment under capital lease 9,500
--------
$224,700
========
</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
six months ended December 31, 1998 and 1997, respectively, bonuses earned under
the agreement amounted to approximately $34,200 and $19,500. For the three
months ended December 31, 1998 and 1997, respectively, bonuses earned amounted
to approximately $4,500 and $11,300. 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.
9
<PAGE> 14
Innova Pure Water, Inc.
Notes to Financial Statements
Six Months Ended December 31, 1998 and 1997
(Unaudited)
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 costs of maintaining these patents are included
in other assets at December 31, 1998 and amount to approximately $208,000. The
costs are 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, during the term of his employment. The royalty payments will
be calculated based on five percent of sales of products that incorporate these
assigned patents. Upon his termination, a three percent royalty shall be paid
over the residual life of his patents. In connection with the assignment, the
Company paid $85,300, $48,800, $11,100, and $28,100 to the Chairman for the six
months ended December 31, 1998 and 1997 and the three months ended December 31,
1998 and 1997, respectively.
The above employment agreement 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 at December 31, 1998 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 $23,100
Less amounts currently due 6,400
-------
$16,700
=======
</TABLE>
10
<PAGE> 15
Innova Pure Water, Inc.
Notes to Financial Statements
Six Months Ended December 31, 1998 and 1997
(Unaudited)
6. LONG-TERM DEBT (CONTINUED)
The following is a schedule by year of the principal payments required under
this note as of December 31, 1998:
<TABLE>
<S> <C>
1999 $ 3,100
2000 6,600
2001 7,100
2002 6,300
-------
$23,100
=======
</TABLE>
7. CAPITAL LEASES
The Company has capitalized rental obligations under leases of equipment. The
obligations, which mature in 1998 and 2002, represent the total present value
of future rental payments discounted at the interest rates implicit in the
leases. Future minimum lease payments under the capital leases are:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1999 $ 4,700
2000 4,700
2001 4,700
-------
Total minimum lease payments 14,100
Less:
Amount representing interest 2,200
Amount currently due 3,500
-------
Present value of net minimum lease payments $ 8,400
=======
</TABLE>
8. LEASE COMMITMENTS
The Company rents its operating facilities under a noncancelable operating
lease expiring in March 2003.
11
<PAGE> 16
Innova Pure Water, Inc.
Notes to Financial Statements
Six Months Ended December 31, 1998 and 1997
(Unaudited)
8. LEASE COMMITMENTS (CONTINUED)
The following is a schedule by year of future minimum rental payments required
under this lease as of December 31, 1998:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1999 $122,500
2000 127,300
2001 132,400
2002 137,600
2003 34,700
--------
$554,500
========
</TABLE>
Rent expense amounted to approximately $59,500 and $38,300 for the six months
ended December 31, 1998 and 1997, respectively. For the three months ended
December 31, 1998 and 1997, rent expense amounted to approximately $29,700 and
$19,000, respectively.
9. INCOME TAXES
The Company has incurred significant operating losses since its inception and,
therefore, no tax liabilities have been incurred for the periods presented.
These operating losses give rise to a deferred tax asset at June 30, 1998 and
are as follows:
<TABLE>
<S> <C>
Deferred tax asset $ 2,500,000
Allowance (2,500,000)
-----------
$ 0
===========
</TABLE>
The Company has available at June 30, 1998 approximately $6.1 million of unused
operating loss carryforwards that may be applied against future taxable income
which would reduce taxes payable by approximately $2.5 million in the future.
These operating loss carryforwards expire beginning in 2001. 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
12
<PAGE> 17
Innova Pure Water, Inc.
Notes to Financial Statements
Six Months Ended December 31, 1998 and 1997
(Unaudited)
9. INCOME TAXES (CONTINUED)
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. 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.
10. EARNINGS PER SHARE
The following data shows the amounts used in computing earnings per share and
the effect on income and the weighted average number of shares of dilutive
potential common stock:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------ ----------------------------
1998 1997 1998 1997
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Net (loss) income $ (146,200) $ 82,300 $ 92,200 $ 6,700
===============================================================
Weighted average number
of common shares used
in basic EPS 10,074,351 9,523,045 10,072,133 9,009,458
Effect of dilutive stock
options and warrants 57,703 97,355 304,329
---------------------------------------------------------------
Weighted average number
of common shares and
dilutive potential
common stock used
in diluted EPS 10,074,351 9,580,748 10,169,488 9,313,787
===============================================================
</TABLE>
13
<PAGE> 18
Innova Pure Water, Inc.
Notes to Financial Statements
Six Months Ended December 31, 1998 and 1997
(Unaudited)
11. EQUITY
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 December 31, 1998, no
preferred stock shares were issued or outstanding.
12. STOCK OPTIONS AND WARRANTS
On August 1, 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
October 31, 1997;
3,300,000 shares at an exercise price of $.75 per share expiring
October 31, 1998; and
4,400,000 shares at an exercise price of $1.00 per share expiring
October 31, 1999.
On October 30, 1997, the Company entered into a stock purchase agreement with
Innova Holdings, LLC. In connection with this agreement, the Company issued
1,500,000 shares of its common stock to Innova Holdings, LLC in exchange for
the surrender of these warrants to purchase 11,000,000 shares of the Company's
common stock. The 1,500,000 shares issued cannot be sold, transferred,
assigned, or pledged for a two-year period beginning October 30, 1997.
During the year ended June 30, 1997, the Company reserved 750,000 common shares
for issuance under the Company's 1996 incentive stock plan. During the year
ended June 30, 1998, 715,000 stock options, net of forfeitures, were granted
under this plan at an exercise price of $.50 per share. The options vest over a
three-year period beginning July 1, 1998 and expire on June 30, 2001.
Additionally, the Company has an incentive stock option plan for key employees
and advisory members. The plan allows stock options to be granted to officers,
employees, directors, and members of the technical and marketing advisory
boards of the Company.
14
<PAGE> 19
Innova Pure Water, Inc.
Notes to Financial Statements
Six Months Ended December 31, 1998 and 1997
(Unaudited)
12. STOCK OPTIONS AND WARRANTS (CONTINUED)
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
Directors, Technical
Advisory Board, and
Marketing Advisory Board 1996 Incentive
Stock Option Plan Stock Option Plan
------------------------ ------------------------
Weighted Weighted
Average Average
Number Exercise Number Exercise
of Shares Price of Shares Price
----------------------------------------------------
<S> <C> <C> <C> <C>
Options granted and outstanding,
June 30, 1998 108,500 $.50 715,000 $.50
Options expired during the period (100,000)
Options exercised during the period
(at a price of $.50 per share) (2,600) .50
----------------------------------------------------
Options granted and outstanding,
December 31, 1998 8,500 $.50 712,400 $.50
====================================================
</TABLE>
The following table summarizes the status of options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
------------------------------------- ----------------------
Weighted Weighted
Average Average
Remaining Remaining
Exercise Contractual Contractual
Price Number Life Number Life
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 Incentive Stock
Option Plan .50 712,400 2.5 235,733 2.5
Directors, Technical Advisory
Board, and Marketing
Advisory Board .50 8,500 .9 8,500 .9
------- -------
720,900 244,233
======= =======
</TABLE>
In addition to the above, the Company has outstanding at December 31, 1998
warrants to purchase 250,000 shares of the Company's common stock at a price of
$.50 per share. The warrants are exercisable at any time through August 15,
2001, at which time the warrants expire. At December 31, 1998, 250,000 shares
of the Company's common stock have been reserved for issuance under these
warrants.
15
<PAGE> 20
Innova Pure Water, Inc.
Notes to Financial Statements
Six Months Ended December 31, 1998 and 1997
(Unaudited)
12. STOCK OPTIONS AND WARRANTS (CONTINUED)
SFAS 123 requires disclosure of pro forma net income as if the fair value based
method had been applied in measuring compensation costs for common stock
options and warrants granted. Pro forma net income (loss) and net earnings
(loss) per common share are as follows for the six months ended December 31,
1998 and 1997 and the three months ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Six Months
Ended December 31, Ended December 31,
------------------------ ------------------------
1998 1997 1998 1997
--------------------------------------------------------
<S> <C> <C> <C> <C>
As reported:
Net (loss) income $(146,200) $82,300 $92,200 $6,700
========================================================
Basic earnings per
common share $(.01) $.01 $.01 $0
========================================================
Diluted earnings per
common share $(.01) $.01 $.01 $0
========================================================
Pro forma:
Net (loss) income $(188,700) $67,000 $7,100 $(8,600)
========================================================
Basic (loss) income per
common share $(.02) $.01 $0 $0
========================================================
Diluted (loss) income
per common share $(.02) $.01 $0 $0
========================================================
</TABLE>
The weighted average fair value of the options and warrants at their grant
during the year ended June 30, 1998 was $.71. The estimated fair value of each
option and warrant granted is calculated using the Black-Scholes option-pricing
model. The following summarizes the weighted average of the assumptions used in
the model:
<TABLE>
<S> <C>
Risk-free interest rate 5.78%
Expected years until exercise 4.0
Expected dividend yield 0
Estimated fair market value of underlying stock $.79
</TABLE>
16
<PAGE> 21
Innova Pure Water, Inc.
Notes to Financial Statements
Six Months Ended December 31, 1998 and 1997
(Unaudited)
13. CONTINGENCY
The Company is the plaintiff in a patent infringement and unfair competition
lawsuit entitled Innova/Pure Water, Inc. v. Aladdin Sales & Marketing, Inc.,
Filtex USA, Ltd., ACT Marketing, Inc., ACT Marketing, Ltd., Advanced Consumer
Technologies, Inc., and Robert Luzenberg, Case No. 97-924-Civ-T-25D (M.D.
Fla.). The Company claimed patent infringement and false advertising on the
part of the Defendants. Prior to trial, the Company resolved the false
advertising claims on terms deemed favorable to the Company by management,
receiving a cash settlement and an agreement that future statements and claims
would only present factual information. On October 7, 1998, the Court entered a
summary judgment ruling that the defendants did not infringe the Company's
patent. The Company has appealed the lower court's ruling to the United States
Court of Appeals for the Federal Circuit in Washington, D.C. The Company has
received an opinion of patent counsel that there is a "high probability" that
the lower court's ruling will be overturned and that the Filtex products will
be held to be an infringement of the Company's patent. Resolution of the
Company's appeal may take between six months and a year.
The Company is also the defendant in a lawsuit filed by a former employee who
alleges breach of his employment contract. The case is Alan R. Kelly v. Innova
Pure Water, Inc., Pinellas County Circuit Court Case No. 98-2771-C1-007. The
plaintiff is seeking severance pay, bonus pay, stock options, and attorney fees.
The Company denies entering into an employment agreement with the plaintiff and
disputes his being entitled to the requested compensation and damages. The
Company is vigorously defending the case while attempting to settle with Mr.
Kelly. Discovery has just commenced and the case has not yet been set for trial.
There is a likelihood of an unfavorable outcome if the trier of fact determines
that an employment agreement existed between Mr. Kelly and the Company. Mr.
Kelly claims damages of $240,000 plus attorney fees and costs. While management
believes the plaintiff's claim is meritless, there is no assurance that the
Company will not suffer an adverse outcome in the lawsuit.
14. 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
17
<PAGE> 22
Innova Pure Water, Inc.
Notes to Financial Statements
Six Months Ended December 31, 1998 and 1997
(Unaudited)
14. YEAR 2000 (CONTINUED)
analysis. During the year ended June 30, 1998, the Company replaced all
non-compliant systems with updated hardware and software at a cost of
approximately $20,000. The Company does not anticipate any further costs to
make existing systems compliant. In addition, the Company is in the process of
assessing the Year 2000 readiness of its key suppliers and customers. This
assessment is expected to be completed by June 30, 1999. The Company has not
established a contingency plan with respect to the Year 2000 issue. Although
the Company believes that any changing conditions will not create any
unforeseen Year 2000 problems, they will continue to review the Company's Year
2000 status on a quarterly basis.
18
<PAGE> 23
INNOVA PURE WATER, INC.
ITEM 2 - MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION
THIS REGISTRATION STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS. THE WORDS
"ANTICIPATED," "BELIEVE," "EXPECT," "PLAN," "INTEND," "SEEK," "ESTIMATE,"
"PROJECT," "WILL," "COULD," "MAY," AND SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY FORWARD-LOOKING STATEMENTS. THESE STATEMENTS INCLUDE, AMONG OTHERS,
INFORMATION REGARDING FUTURE OPERATIONS, FUTURE CAPITAL EXPENDITURES, AND
FUTURE NET CASH FLOW. SUCH STATEMENTS REFLECT THE COMPANY'S CURRENT VIEWS WITH
RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE AND INVOLVE RISKS AND
UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, GENERAL ECONOMIC AND BUSINESS
CONDITIONS, CHANGES IN FOREIGN, POLITICAL, SOCIAL, AND ECONOMIC CONDITIONS,
REGULATORY INITIATIVES AND COMPLIANCE WITH GOVERNMENTAL REGULATIONS, THE
ABILITY TO ACHIEVE FURTHER MARKET PENETRATION AND ADDITIONAL CUSTOMERS, AND
VARIOUS OTHER MATTERS, MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL,
INCLUDING, WITHOUT LIMITATION, THE RISKS DESCRIBED UNDER THE CAPTION
"BUSINESS." SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES OCCUR, OR SHOULD
UNDERLYING ASSUMPTIONS PROVE TO BE INCORRECT, ACTUAL RESULTS MAY VARY
MATERIALLY AND ADVERSELY FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, OR
OTHERWISE INDICATED. CONSEQUENTLY, ALL OF THE FORWARD-LOOKING STATEMENTS MADE
IN THIS REGISTRATION STATEMENT ARE QUALIFIED BY THESE CAUTIONARY STATEMENTS AND
THERE CAN BE NO ASSURANCE OF THE ACTUAL RESULTS OR DEVELOPMENTS.
Innova cautions readers that in addition to important factors described
elsewhere, the following important facts, among others, sometimes have
affected, and in the future could affect, the Company's actual results, and
could cause the Company's actual results during 1999 and beyond, to differ
materially from those expressed in any forward-looking statements made by, or
on behalf of, Innova.
INCOME STATEMENT DATA
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------- ----------------------------
1998 1997 1998 1997
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenue $ 289,700 $ 594,300 $ 1,794,500 $1,006,700
==============================================================
Net (loss) income $ (146,200) $ 82,200 $ 92,200 $ 6,700
==============================================================
Earnings (loss) per common
share - basic $(.01) $.01 $.01 $.00
==============================================================
Shares used in per share
computation 10,074,351 9,523,045 10,072,133 9,009,458
==============================================================
(Loss) earnings per common
share - assuming dilution $(.01) $.01 $.01 $.00
==============================================================
Shares used in diluted
computation 10,074,351 9,580,748 10,169,488 9,313,787
==============================================================
</TABLE>
<PAGE> 24
BALANCE SHEET DATA
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Total assets $2,085,200
Working capital $1,112,900
Long-term debt $ 25,100
Stockholders' equity $1,520,500
</TABLE>
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.
The Company has analyzed its information technology systems ("IT") and has
replaced all non-compliance systems with updated hardware and software that is
Year 2000 compliant. The costs to replace the existing hardware and software
amounted to approximately $20,000, with $10,000 each relating to hardware and
software. Funds expended to replace existing hardware and software were
generated from the Company's operations. The Company does not anticipate any
further costs to be spent on hardware and software compliance. The Company does
not employ any equipment that contains microchips or which is computer
controlled and, therefore, believes that the Year 2000 issue will not affect
the Company's non-IT systems.
The Company is currently in the process of assessing the Year 2000 readiness of
its key suppliers and customers. With respect to suppliers, the Company has
only four to six major suppliers, each of whom have been sent a Year 2000
screening memorandum. Concurrently, the Company is soliciting potential
alternate competitive suppliers that are Year 2000 compliant. The Company plans
to complete its assessment of suppliers by June 30, 1999. Should any current
supplier not be able to prove their compliance by that time, the Company will
switch to an alternate compliant supplier. With respect to customers, the
Company has had conversations with its customers and formal information forms
have or will be sent to ascertain each customer's state of compliance and to
assess their condition upon the Company's continuing business.
In addition, the Company is aware of the potential for claims against it and
other companies for damages arising from products and services that were not
Year 2000 ready. Currently, there are no performance contracts in existence. In
addition, the Company has retained the right to provide notification upon order
receipt that the order requirements cannot be met. Such notification may be
provided if within 30 to 60 days of shipment date. Therefore, the Company
believes that there will be no significant claims against it arising from the
Year 2000 issue.
The Company has not established a formal contingency plan with respect to the
Year 2000 issue. This is due to the fact that, at this time, the Company does
not know of any scenarios which, as a result of the Year 2000 issue, would
seriously impact the business except the possibility of failure to receive
timely payments from major customers. The Company has established direct
personal relationships with the key personnel at each of these major customers
with the capability of directly releasing such funds as may be due to the
Company. The Company does not anticipate any lost revenue due to Year 2000
issues. Although the Company believes that any changing conditions will not
create any unforeseen Year 2000 problems, we will continue to review the
Company's Year 2000 status on a quarterly basis.
<PAGE> 25
RESULTS OF OPERATIONS
Net Sales
Net sales for the three-month period ended December 31, 1998 was $289,000, a 51
percent decrease from the $594,300 of net sales for the comparable period in
1997. The majority of this decrease is attributable to the success of certain
major sales promotional efforts being achieved during different quarters between
1998 and 1997. In the prior year, these promotional efforts resulted in a major
sale during the 2nd quarter ending December 31, 1997, while in the current
fiscal year, this was achieved earlier during the first quarter.
Net sales for the six-month period ended December 31, 1998 was $1,794,500, a 78
percent increase over the $1,006,700 of net sales for the comparable period in
1997. Much of this increase is attributable to the sales to Rubbermaid and
Goodtimes under strategic alliances.
Cost of Sales
For the three months ended December 31, 1998, our cost of sales remained the
same at $241,700 compared to the $242,300 of costs for the three months ended
December 31, 1997.
The constant cost of sales, combined with the 51 percent decrease in net sales,
resulted in a reduction in our gross profit margin to 17 percent from 59
percent. This reduction is principally attributable to the costs associated
with our investment in new facilities and increased production capabilities
which are intended to sustain the anticipated higher sales volume from our two
major strategic alliances. The reduced lower than expected, sales volume
eliminated much of the efficiency of scale previously obtained at the higher
sales level which the company is positioned to perform. In addition, to
maintaining competitive pricing at the retail level, certain prices for
independent filtration units to our strategic alliances were set at a slightly
reduced level. Also, for the current period ending December 31, 1998, the
product mix varied substantially with increased sales of lower margin items.
Management considers this more of an aberration which may periodically occur.
As new, more sophisticated products are introduced which may command a higher
perceived value, it is anticipated that margins will be significantly improved.
For the six months ended December 31, 1998, the cost of sales increased to
$995,200 from the $413,900 of costs for the six months ended December 31, 1997.
This increase is mainly due to the increase in sales as well as the factors
described in the preceding paragraph.
The 140 percent increase in cost of sales, offset with the increase in net
sales of 78 percent, resulted in a decline in our gross profit margin for the
six months ended December 31, 1998 of 14 percent to an overall gross profit
margin of 45 percent for the six months ended December 31, 1998. This is
principally attributable to the increased costs associated with the enhanced
production capabilities. The rise in sales volume and efficiencies that have
been incorporated were not sufficient to offset the increase in costs
associated as a result of enhancing the production facilities. Additionally,
the competitive pricing offered, as stated above combined with slightly higher
component costs also contributed to the decrease in gross margin.
Operating Expenses
For the three-month period ended December 31, 1998, operating expenses amounted
to $239,500, or 83 percent of net sales. For the comparable period in 1997,
operating expenses were $275,400, or 46 percent of net sales. The increase in
operating expenses as a percentage of sales between these periods of 37 percent
is primarily due to a decrease in revenue as described above.
The decrease in overall operating expenses is attributed to the cutback of
certain lower and middle management personnel whose function had become
underutilized or less critical to the operations of the Company. The reduction
in personnel followed our plan to concentrate on the marketing of our products
via the strategic alliances with dominant and multi-national consumer products
companies that each market to particular segments of the industry.
Operating expenses for the six months ended December 31, 1998 was $761,500, or
42 percent of net sales. For the comparable period in 1997, operating costs
amounted to $595,200, or 59 percent of net sales. The 17 percent decrease as a
percentage of sales between these periods is principally attributable to the
large increase in sales.
Other Income
For the three months ended December 31, 1998, net interest income amounted to
$12,700, as compared to net interest income of $5,700 for the three months
ended December 31, 1997. The increase in net interest income is due to
investments of the additional cash generated from operations this quarter.
<PAGE> 26
For the six months ended December 31, 1998, net interest income amounted to
$21,800 as compared to net interest income of $9,100 for the six months ended
December 31, 1997. This change is due to the increase in cash invested in
interest bearing securities or accounts with a major National bank. Invested
cash increased from approximately $542,500 at December 31, 1997 to $1,121,800
at December 31, 1998.
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 (Loss)
Net loss for the three months ended December 31, 1998 amounted to $146,200, as
compared to net income of $82,300 for the comparable period in 1997. The
decline in 1998 was primarily a result of the reduction of sales and gross
profit, as indicated above.
Net income for the six months ended December 31, 1998 increased by 1,276
percent to $92,200 from $6,700 for the comparable period in 1997. This increase
is principally attributable to increased sales, as indicated above.
Earnings (Loss) Per Share
Basic and diluted loss per share was $(.01) for the three months ended December
31, 1998, as compared to basic and diluted earnings per share of $.01 for the
comparable period in 1997. The decline of earnings per share in 1998 was due
primarily to decreased profits between the comparable periods.
For the six months ended December 31, 1998, basic and diluted earnings per
share amounted to $.01. For the comparable period in 1997, basic and diluted
earnings per share amounted to $0. This turnaround is primarily the result of
increased profits between the comparable periods.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
For the six months ended December 31, 1998, net cash provided by operating
activities amounted to approximately $770,000, an increase over the net cash
used by operating activities of approximately $89,000 for the comparable period
in 1997. The increase is primarily a result of collections on accounts
receivable and increased profits during the period.
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 six months ended December 31,
1998 was approximately $133,000, as compared to net cash used by investing
activities of approximately $102,000 for the comparable period in 1997. The
increase in cash expended for investing
<PAGE> 27
activities is due primarily to additional costs incurred in patent development
and defense during the six months ended December 31, 1998 as compared to the
six months ended December 31, 1997.
Financing Activities
The Company's financing activities include proceeds from borrowings, payments
on borrowings and capital leases, and proceeds from sales of common stock
warrants.
Net cash of approximately $8,000 was used by financing activities for the six
months ended December 31, 1998, as compared to net cash used by financing
activities of approximately $20,000 for the six months ended December 31, 1997.
CAPITAL RESOURCES
At December 31, 1998, the Company does not have any material commitments for
capital expenditures other than for those expenditures incurred in the ordinary
course of business.
The Company believes that its current operations and cash balances will be
sufficient to satisfy its currently anticipated cash requirements for the next
12 months. However, additional capital could be required in excess of the
Company's liquidity, requiring it to raise additional capital through an equity
offering, secured or unsecured debt financing. The availability of additional
capital resources will depend on prevailing market conditions, interest rates,
and the existing financial position and results of operations of the Company.
<PAGE> 28
PART II
OTHER INFORMATION
Part 1. Legal Proceedings.
See Note 13 to the attached financial statement.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
27 - Financial Data Schedule for SEC use only.
<PAGE> 29
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
INNOVA PURE WATER, INC.
<S> <C>
Dated: 2-12-99 By: /s/ Rose C. Smith
-------------------------------------- -----------------------------------------
Rose C. Smith
President, Chief Executive Officer,
Director
Dated: 2-12-99 By: /s/ John E. Nohren, Jr.
-------------------------------------- -----------------------------------------
John E. Nohren, Jr.
Chairman of the Board of Directors,
Chief Financial Officer, Treasurer
Dated: 2-12-99 By: /s/ Robert Connell
-------------------------------------- -----------------------------------------
Robert Connell
Controller
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INNOVA PURE WATER, INC. FOR THE SIX MONTHS ENDED
DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 1,121,800
<SECURITIES> 0
<RECEIVABLES> 224,300
<ALLOWANCES> (8,800)
<INVENTORY> 295,000
<CURRENT-ASSETS> 1,652,500
<PP&E> 742,600
<DEPRECIATION> (517,900)
<TOTAL-ASSETS> 2,085,200
<CURRENT-LIABILITIES> 593,600
<BONDS> 25,100
0
0
<COMMON> 1,000
<OTHER-SE> 7,996,600
<TOTAL-LIABILITY-AND-EQUITY> 2,085,200
<SALES> 1,794,500
<TOTAL-REVENUES> 1,794,500
<CGS> 995,200
<TOTAL-COSTS> 995,200
<OTHER-EXPENSES> 761,500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (21,800)
<INCOME-PRETAX> 92,200
<INCOME-TAX> 0
<INCOME-CONTINUING> 92,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 92,200
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
