<PAGE>2
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report pursuant to Section 13 or 15 (d) of the
Securities and Exchange Act of 1934
For the Fiscal Year Ended: December 31, 1999
Commission File No. -
NOVA PHARMACEUTICAL, INC.
(Exact name of Registrant as specified in its charter)
Nevada 510380412
(State of Incorporation) (Federal identification No.)
31712 Casino Drive
Suite 7B
Lake Elsinore, Ca 92530
(Address of principal executive office)
Registrant's Telephone No. with area code: 909-245-4657
NONE
(Title of class)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act
Common Stock, $.001 par value
(Title of Class)
Check whether the registrant (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of
1934 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. Yes [X] 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 or information statements
incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [x]
As of December 31, 1999, the Registrant had outstanding
12,715,282 shares of common stock. The aggregate market
value of the registrant's common stock on such date held by
those persons deemed to be non-affiliates was approximately
$1,149,437. The aggregate market value was computed using the
average bid and asked price on the NQB Pink Sheets as of
December 31, 1999.
<PAGE>3
PART I
Item 1. Description of Business
Organization.
Nova Pharmaceutical, Inc., a Nevada corporation, was incorporated on
January 8, 1998. On January 8, 1998, subsequent to incorporation, the
Company purchased a portion of the assets and liabilities of Canyon
Fitness Center, Inc., a California corporation. Canyon Fitness Center,
Inc. was doing business as Canyon Fitness Center, Canyon Fitness
Center Weight Loss Clinic, Nova Weight Loss Clinic and Nova
International. Nova purchased the assets and liabilities related to
the weight loss management and weight loss supplement businesses.
Nova did not purchase the fitness center operations of Canyon Fitness
Center, Inc., which was then owned by Showtime Partners. Included in
the liabilities assumed in the purchase from Canyon Fitness
Center was a group of debtors, who, by converting their debt into
common stock, along with minor negotiated equity adjustments, formed
the initial capitalization of Nova Pharmaceutical, Inc.
Ralph Mann 1,400,000 shares $ 618,995 debt
Showtime Partners 1,037,000 shares $ 333,840 debt
Dr Carlos Schmidt 250,000 shares $ -
Ralph Mann is a Director and Chief Executive Officer of the Company.
Dr. Carlos Schmidt is a Director of the Company. Showtime Partners is
a partnership consisting of 21 irrevocable trusts the beneficiaries of
which are all related to Ralph Mann.
Included in the assets purchased were: formulation ($450,000), prepaid
royalties ($200,000), and prepaid licensing ($300,000). The
formulation and prepaid licensing assets reflect the capitalized costs
incurred by Canyon Fitness Center in the development, testing, and
patent registration of the formula, NxTrim. These assets were
purchased subject to a license and royalty agreement. Under the terms
of the agreement, the Company obtained world wide manufacturing and
marketing rights to the formula, NxTrim. In exchange, the Company is
obligated to pay a royalty of .00625% of net sales on the product
NxTrim, after the amortization of $200,000 prepaid royalties purchased
from Canyon Fitness Center. The term of the agreement is 10 years,
with a 10-year renewal at the option of the licensor. The terms also
include a minimum annual royalty of $25,000, and a cost of living
adjustment. The license and royalty agreement was issued to Canyon
Fitness Center, Inc. by a group consisting of Ralph Mann, Showtime
Partners, and Ralph Mann Trusts 1-21 (partners in Showtime Partners).
The royalty agreement was assigned to Nova in the asset purchase
transaction. On Aug 7, 1997, a patent application had been filed for
the NxTrim formula for use as a weight loss supplement. The patent
was subsequently issued on July 20, 1999 (Patent Number 5,925,377).
Nova Pharmaceutical, Inc. completed a reverse acquisition as of May 7,
1998. Nalbando Enterprises, Inc. (an inactive Nevada Corporation )
purchased all the assets and liabilities of Nova Pharmaceutical, Inc.
(an operating Nevada Corporation). Nalbando Enterprises, Inc., the
surviving corporation, immediately changed its name to Nova
Pharmaceutical, Inc. The original Nova Pharmaceutical, Inc., having
sold all assets and liabilities, became an inactive corporation.
Financial results as presented represent the activity for the entire
reporting period of the original operating Nova Pharmaceutical, Inc.
and the minimal incorporation activity for Nalbando Enterprises, Inc.
To reflect the true substance of the transaction, the acquisition was
treated financially as a purchase of Nalbando stock by Nova
Pharmaceutical, Inc, accompanied by a reorganization to the resulting
Nalbando capital structure. No goodwill or intangible assets were
recorded in this transaction. The purpose of this merger was to
provide additional capital expansion opportunities to the company.
Industry Overview.
According to the Nutrition Business Journal (NBJ), the U.S. nutrition
industry grew 11% to $23.2 billion in 1997. Growth rates ranged from
13% to 16% from 1994 to 1996. Future growth is forecasted to continue
to add $2.2 to $2.8 billion a year up to the year 2001. Growth in the
past few years has been accomplished by expansion in distribution as
more products have found their way into more health food stores,
penetrated further into the mass market, and into the still expanding
non-retail channels. NBJ has estimated the growth of the supplement
segment at 13% in 1997 to $12.7 billion, which, when compared to the
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6% growth in the $92 billion drug and medicine market, indicates that
the expansion is continuing at the expense of the traditional markets.
Per NBJ, continuation of this cycle could result in the nutrition
industry growing to over $90 billion or 10% of the food, drug, and
health store markets by the year 2012. Over the past several years,
public awareness of the positive effects of nutritional supplements on
health has been heightened by widely publicized reports and medical
research findings indicating a correlation between the consumption of
nutrients and the reduced incidence of certain diseases. These reports
have indicated that the United States government and universities
generally have increased sponsorship of research relating to
nutritional supplements. In addition, Congress has established the
Office of Alternative Medicine within the National Institutes of
Health to foster research into alternative medical treatment
modalities, which may include natural remedies. Congress has also
recently established the Office of Dietary Supplements in the National
Institutes of Health to conduct and coordinate research into the role
of dietary supplements in maintaining health and preventing disease.
According to NBJ, the percentage of U.S. households that purchase
supplements (30% for herbs to 65% for multivitamins) is expected to
rise to 50% to 75% depending on which of the many consumer surveys you
believe. The number of shoppers who have consumed supplements,
alternative medicines, or natural products, or who have a high
awareness of them are also rising, paving the way for even greater
numbers of paying customers.
Brands and Products.
Nova markets its branded products in three principal categories of
nutritional supplements: sports nutrition; vitamins, minerals and
herbs; and diet. Nova believes that offering its customers a wide
variety of products provides Nova an opportunity to capture an
increasing share of the growing nutritional supplement market.
Nova's brand names are supported by significant advertising and
marketing expenditures. Nova launched its Gold's Gym Nutrition line
of products in July of 1999. The Gold's Gym name has been a highly
recognized name in the health and fitness Industry. The conclusion of
a consumer awareness study conducted by Colton Bernard Inc. was:
"Clearly, Gold's Gym is perceived as a national brand by a
national public. Only the "sneaker" brands, with their huge
advertising and marketing budgets and deep product penetration of
multiple tiers, have a significantly greater awareness among consumers
than Gold's Gym."
Sports Nutrition
Nova's Gold's Gym sports nutrition line includes a wide variety of
products designed to enhance athletic performance and support the
results derived from exercise programs. Nova's Gold's Gym sports
nutrition products deliver nutritional supplements through a variety
of forms, including powdered drink mixes, tablets, capsules, and
nutrition bars. The price range for these products is, retail $10.80
to $39.96 with a wholesale of $5.40 to $19.98
Vitamins, Mineral and Herbs
Nova markets a complete line of vitamins and minerals, including
multivitamins, multiminerals, and antioxidants. These products are
offered in various forms, including tablets, capsules, and softgels.
Herbs and phytonutrients, which are a growing category in the
nutritional supplement industry, are alternatives or complements to
over-the-counter pharmaceutical products for consumers who seek a more
natural and preventative approach to their health care.
The price range of these products is, retail $7.00 to $14.60 with a
wholesale of $3.50 to $7.30
Diet
According to the Information Resources Inc. report (52 week ending
October 10, 1999), Nova's diet aid item, NxTrim, is California's
number one selling diet item per store in the drug class of trade, and
the nation's number 18 selling diet item. NxTrim utilizes amino
acids, vitamins, and herbs to promote weight control. In a 90 day
double-blind clinical study conducted by Nova, subjects using NxTrim
combined with a sensible diet and exercise program, lost an average of
27 pounds with no adverse side-effects. Participants using a placebo
<PAGE>5
lost an average of 10 pounds. Nova is also currently marketing NxBloc,
its second release in the diet aid category. NxBloc contains a fiber
blend that is designed to bind to ingested fat, making fat particles
too large to be absorbed by the body. NxBloc is currently available
in over 5,000 retail outlets nationwide.
Nova's diet aid products are specifically formulated, packaged and
priced to appeal to a wide variety of consumers with different
demographic characteristics and physiological needs. The price range
for these products is, retail $15.99 to $19.99 with a wholesale price
of $7.50 to $12.50.
Sales and Distribution.
Nova's products are currently sold in over 15,000 retail outlets
nationwide. Nova's customers in the mass volume retail channel
include: Mass merchandisers - Wal-Mart and Fedco; Drug stores -
American Stores, Rite Aid, Longs Drug Stores, Drug Emporium;
Supermarkets - Albertson's, Giant, Fred Meyer, Ralph's, Smith's.
Customers exceeding 10% of Nova's volume in the year ended 12-31-98
include, Longs Drug Stores, American Stores, and Wal-Mart. Customers
exceeding 10% of Nova's volume in the year ended 12-31-99 include,
Longs Drug Stores, American Stores, and Rite-Aid. These chains are
among the first in which Nova attained distribution. As Nova's
expansion into other chains continues, there should be no chains
exceeding 10% of the total volume. Nova pursues a multi-channel
distribution strategy in order to participate in the growth being
experienced in each of these channels
Contracted Services.
Nova's has established a nation wide network of brokers which provides
existing key relationships with major chain buyers in all classes of
trade. Nova utilizes contract manufacturers to provide high quality,
effective research and manufacturing capabilities. In addition Nova
utilizes a large distribution fulfillment house to provide excellent,
cost efficient distribution services. The team of brokers,
manufacturers, and distribution specialists established by Nova
provides an efficient, competitive, cost effective, low fixed overhead
base from which Nova can effectively increase it's share of the
growing nutritional supplement markets. Nova is able to take
advantage of the experience and talent pool of these contracted larger
firms on an as needed basis without having the fixed expense of
internal staffing. In the areas of raw material and freight
purchasing, Nova is able to share in the cost savings related to the
purchasing power of their larger contractors.
Marketing and Customer Sales Support.
As noted above, Nova has demonstrated it's leadership ability in the
supplement industry through NxTrim's attainment of the number one
ranking in the California drug trade, and number 18 nationally. Nova
intends to broaden its leadership position in the nutritional
supplement industry. Nova's strategy includes: (i) expanding
distribution of its portfolio of established brands through effective
consistent advertising to increase its share of the nutritional
supplement market, (ii) developing new brands and product line
extensions through efficient utilization of research capabilities of
internal staff, contract manufacturers, raw material suppliers, and
consultants, (iii) increasing national distribution through effective
management of broker network.
The target customers for Nova's Gold's Gym sports nutrition products
are athletes, bodybuilders and fitness enthusiasts. Nova's Gold's Gym
sports nutrition products are intended to generally enhance the
consumer's ability to control weight, support muscle growth, lose fat
and increase energy levels and stamina. A key part of Nova's strategy
is to help educate consumers about innovative, safe and beneficial
nutritional supplement products. Nova's marketing and advertising
expenditures totaled $616,991 in fiscal 1999 and $658,327 in fiscal
1998. Nova has promoted its products in consumer magazines (VOGUE and
WOMAN'S DAY), and trade magazines (BETTER NUTRITION, LET'S LIVE, CHAIN
DRUG REVIEW, NATURAL HEALTH, AND NATURAL LIVING). In addition, Nova
advertises in most major market newspapers (LA TIMES, NEW YORK TIMES,
BOSTON GLOBE, and CHICAGO TRIBUNE). Nova also utilizes national free
standing inserts, which include a coupon, to add additional consumer
incentive to purchase Nova's products.
<PAGE>6
Nova maintains Internet web sites at www.novanx.com, and
www.goldsgymnutrition.com.
Manufacturing and Product Quality.
Nova is very selective in choosing manufacturers, requiring
experienced technical and research staffs, sufficient manufacturing
capability, good manufacturing practices, and an excellent contract
manufacturing reputation. Management of the Company verifies, through
product sample review, reference checks, and production equipment
review, that the manufacturers are capable of obtaining the highest
quality raw materials in the world, and that they have the productive
capability to meet the growing demand for nutritional supplement
products while maintaining high product quality standards. In order
to assure adequate capacity and product availability Nova maintains
on-going contact with additional manufacturers of similar
capabilities.
Nova's contracted manufacturers are equipped with microbiological and
quality control laboratories. Production is evaluated using state of
the art testing procedures and equipment. Additional testing includes,
shelf life stability testing to determine the effects of aging,
certified outside laboratories to evaluate Nova's manufacturers
laboratory performance and to supplement testing capabilities, and
certification of raw material quality of critical ingredients. Nova
currently utilizes two different contract manufacturers to manufacture
all of its products. Universal Nutrition,Inc. manufactures NxTrim on a
purchase order by purchase order basis. The purchase order requires
that Nova be named additional insured on their product liability
insurance policy. The contract with Nutripharmaceuticals, Inc.
requires exclusive manufacturing right for all Gold's Gym products
developed in conjunction with Nutripharmaceuticals for the life of the
Gold's contract. Other significant terms of the contract include;
price increases are limited to raw material cost increases,
termination is due only for cause not rectifiable in 30 days, and
Nutripharmaceuticals must maintain product liability of at least
$10,000,000 and name Nova as an additional insured. Research and
development of products is done by Nutripharmaceuticals for Nova at no
charge. This service is provided in order to attain future production
revenues as a result of developing successful new products.
Product Research and Development.
Nova believes it is important to develop new products in the
nutritional supplement industry in order to increase market share by
capitalizing on new market opportunities, and to strengthen
relationships with customers by meeting their constantly changing
demands. To support its commitment to research and development, Nova
utilizes the capabilities of its internal staff coupled with the
staffs of each of their contract manufacturers. In addition, Nova
maintains strong relationships with raw material suppliers, who are
often the first entities to identify innovative new opportunities.
Because of the competitiveness in the contract manufacturing industry
and in the raw material supply industry, Nova is able to obtain
excellent research and development without cost to Nova. Beyond the
research and formulation done by Nova's contract manufacturers, Nova
`s internal expenditures for research and development are estimated at
$88,000 for the year ended 12-31-98, and $30,000 for the year ended
6-30-99.
Competition.
The market for the sale of nutritional supplements is highly
competitive. Competition is based principally upon price, quality of
products, customer service and marketing support. Nova's position on
pricing is to reach parity, unless the particular product has a
significant marketing point of difference warranting a premium to
competition. Nova's position on quality as described in the above
section is to utilize the highest quality raw materials and to have
product manufactured consistently according to good manufacturing
practices. Nova's customer service is supported by very conscientious
employees, and by a large, professional distribution fulfillment
house. Nova's marketing support includes an aggressive newspaper and
magazine advertising programs, coupons, customer cooperative
advertising, and customer product display programs.
<PAGE>7
In the future, Nova believes that it will be able to compete
effectively in the nutritional supplement industry. Essential to being
able to compete effectively is the continuation of Nova's aggressive
advertising and promotion programs, which have made NxTrim the number
one selling item in the California Drug trade. Utilizing this
approach, Nova anticipates attaining profitability when the number of
stores selling Nova products exceed 35,000 of the more than 117,000
stores in the drug, food, health, and mass merchandise trades. When
the stores exceed 35,000, the national advertising campaign costs are
covered, and stores above that number require significantly less
additional advertising dollars. Currently Nova is selling in
approximately 15,000 stores.
As the nutritional supplement industry grows and evolves, Nova
believes retailers will rely heavily on suppliers, such as Nova, that
can respond quickly to new opportunities, support them with production
capacity and flexibility, and provide innovative and high margin
products. Nova's staff constantly stays in tune with consumers,
seeking new product ideas from the various news sources, magazines,
gyms, internet research, suppliers, and manufacturers. Utilizing the
resources of it's staff, manufacturers, and suppliers, Nova is able to
quickly and effectively develop the kind of imaginative, multi
functional, value added products which meet current consumer needs and
provide high margins required for support by the retail trades. As a
result of this process, Nova believes that it can function profitably
while competing with other nutritional supplement companies.
Government Regulation.
The manufacturing, packaging, labeling, advertising, distribution and
sale of Nova's products are subject to regulation by one or more
governmental agencies, the most active of which is the Food and Drug
Administration, which regulates Nova's products under the Federal
Food, Drug, and Cosmetic Act and related regulations. The FDCA has
been amended several times with respect to dietary supplements, most
recently, by the Nutrition Labeling and Education Act of 1990, and
DSHEA. Nova's products are also subject to regulation by the Federal
Trade Commission, the Consumer Product Safety Commission, the United
States Department of Agriculture and the Environmental Protection
Agency. Nova's activities are also regulated by various agencies of
the states, and localities to which Nova distributes its products. The
FTC, which exercises jurisdiction over the advertising of nutritional
and dietary supplements under the Federal Trade Commission Act, has in
the past several years instituted enforcement actions against several
nutritional supplement companies alleging false and misleading
advertising of certain products. These enforcement actions have
resulted in the payment of fines and/or consent decrees by certain of
the companies involved.
Nova may be subject to additional laws or regulations administered by
the FDA or other federal, state or foreign regulatory authorities, to
the repeal or amendment of laws or regulations, or to more stringent
interpretations of current laws or regulations. Nova is unable to
predict the nature of such future laws, regulations, interpretations
or
applications, nor can it predict what effect additional governmental
regulations or administrative orders, when and if promulgated, would
have on its business in the future. They could, however, require
reformulation of certain products to meet new standards, recall or
discontinuance of certain products not able to be reformulated,
imposition of additional record keeping requirements, expanded
documentation of the properties of certain products, expanded or
different labeling and scientific substantiation. Any or all such
requirements could have a material adverse effect on Nova's results of
operations and financial condition.
Product Liability Insurance.
Because Nova's products are ingested, it faces the risk that materials
used may be contaminated with substances that may cause sickness or
other injury to persons who have used them. Although Nova's
manufacturing alliances maintain production and operating standards
designed to prevent such events, certain portions of the process of
product development, including the production, harvesting, storage and
transportation of raw materials and finished goods are not within the
control of Nova. Furthermore, sickness or injury to persons may occur
if products manufactured by Nova are ingested in a manner exceeding
the dosage recommended on the product label. Nova cannot control
misuse of its products by consumers, or the marketing, distribution
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and resale of its products by its customers. With respect to product
liability claims, Nova has product liability insurance of $5 million,
and Nova's manufacturing alliances carry product liability insurance
coverage up to $10 million. Nova's product liability insurance does
not cover non-safety claims relating to Nova's products, such as
noncompliance with label claims or similar matters.
Patent and Trademarks
Nova has received a patent on the formula for NxTrim as a 100% all
natural weight loss aid with a composition containing amino acids,
minerals, vitamins, herbs, and essential nutrients along with gentle
diuretics and digestive enzymes. Patent number 5,925,377 was obtained
on July 20, 1999.
The following table displays Nova's current US trademark status:
<TABLE>
<CAPTION>
Mark Registration Date Serial / Reg. No Status
<S> <C> <C> <C>
PHENTRIM 04/06/99 2,237,644 REGISTERED
NOVA NATURALS 08/11/97 75/338,870 PENDING
NXTRIM 12/31/97 75/413,422 PENDING
RC90 03/29/99 75/671,036F PENDING
</TABLE>
Nova relies on common law trademark rights to protect its unregistered
trademarks. Common law trademark rights do not provide Nova with the
same level of protection as afforded by a United States federal
registration of a trademark. In addition, common law trademark rights
are limited to the geographic area in which the trademark is actually
used, while a United States federal registration of a trademark
enables the registrant to stop the unauthorized use of the trademark
by any third party anywhere in the United States even if the
registrants never used the trademark in the geographic area wherein
the unauthorized use is being made; provided however, that an
unauthorized third party user has not, prior to the registration date,
perfected its common law rights in the trademark in that geographical
area. Nova intends to register its trademarks in certain foreign
jurisdictions where Nova's products are sold. However, the protection
available in such jurisdictions may not be as extensive as the
protection available to Nova in the United States.
Employees
Nova currently has ten (5) full time employees:, Chief Executive
Officer, Chief Financial Officer, , Vice President of Operations,
Product Development, Vice President of Sales and Marketing,
Receptionist / Accounts Receivable Clerk.
Item 2. Description of Property
Nova owns no property. Nova currently leases a 3,800 square foot
office suite. Under an operating lease terminating June 11, 2002, Nova
pays monthly rental of $2,750 plus Common Area Maintenance of $1,084
per month.
Item 3. Legal Proceedings
D & F Industries, Inc. a California Corporation v. Nova
Pharmaceuticals [sic] Inc., a Nevada Corporation, et. al. Orange
County Superior Court Case No. 814076.
This is an action by a former contract supplier. Plaintiff contends
that defendant Nova agreed to use plaintiff D & F to supply the
products under the Gold's Gym contract, that D & F prepared certain
formulations to accommodate that contract, that Nova breached the
contract by not using D & F to supply the products under the Gold's
Gym contract and that Nova misappropriated plaintiff's trade secrets
by
using plaintiffs formulations to fulfill the Gold's Gym contract.
Plaintiff also claims that Nova owes it for some product shipped. The
complaint states that it alleges six causes of action: two for breach
of contract, one for common counts, one for misappropriation of trade
secrets, one for unfair business practices, and one for interference
with economic advantage. Plaintiff seeks an injunction against the
use of the trade secrets and damages of lost profits (which of course
would depend on what Nova sells under the Gold's Gym contract),
<PAGE>9
unstated punitive damages, statutory damages, attorneys fees and the
amount allegedly due for the product shipped and not yet paid for
(claimed to be $52,000). Discovery has not yet begun. At the time of
this writing, defendants have filed their answer to the complaint,
which denies the relevant material allegations of the complaint and
filed a cross complaint for intentional interference with contractual
relations and breach of contract. Defendants believe the action is
generally without merit, that they will prevail on their cross
complaint and have a very good chance to prevail on a claim for
malicious prosecution. Should the outcome of this litigation be
resolved in favor the plaintiff, it could have a materially adverse
effect on the Company's results of operations.
Nova is a defendant in two other minor matter of litigation in the
area of debt collection. As of this time, litigation has been
suspended pending Nova's compliance with agreed upon payment terms.
Should the outcome of this litigation be resolved in favor the
plaintiff, it would not have a materially adverse effect on the
Company's results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1999.
PART II
Item 5. Market for Common Equity and related shareholder matters
In February of 1999 Nova's common stock was cleared for quotation on
the NQB Pink Sheets. In January of 2000, Nova's common stock was
cleared for quotation on the OTC Bulletin Board. A very limited
market exists for trading of the Company's common stock. Sales prices
reflected in the table below are based on very small quantities of
shares bought and sold.
The table below sets forth the per share high and low sales prices
recorded on the NQB Pink Sheets in the respective quarters indicated.
The source of the data is the National Quotations Board OTC Market
Report. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down, or commission and may not represent actual
transactions.
Quarter Fiscal Year High Bid Low Bid
First 1999 $ 4.00 $3.50
Second 1999 $ 4.00 $1.50
Third 1999 $ 4.00 $4.00
Fourth 1999 $ .15 $ .15
The approximate number of holders of common stock at December 31, 1999
was 94.
Holders of common stock are entitled to receive such dividends as the
board of directors may from time to time declare out of funds legally
available for the payment of dividends. No dividends have been paid
on our common stock, and we do not anticipate paying any dividends on
our common stock in the foreseeable future.
Item 6 Management's Discussion and Analysis
Nova believes that statements in this Report concerning the Company's
outlook or future economic performance; anticipated profitability,
revenues, expenses and other financial items; and statements
concerning assumptions made or exceptions to any future events,
conditions, performance or other matters are "forward looking" as that
term is defined in Federal Securities Laws. Although, the safe harbor
for "forward looking" statements does not apply to initial public
offerings, it does apply to this particular filing. Forward looking
statements are subject to risks, uncertainties, and other factors,
which would cause actual results to differ materially from those
stated in such statements. Such risks, uncertainties and factors
include, but are not limited to:
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are outside the control of the Company,
(i) the Company has grown rapidly and there can be no assurance that
the Company will continue to be able to grow profitably or manage it's
growth, (ii) the Company's quarterly operating results have fluctuated
<PAGE>10
in the past and are expected to fluctuate in the future, (iii) the
Company's business experiences seasonality, (iv) the loss of services
of key individuals could have a material adverse effect on the
Company's business, financial condition, or operating results.
The time frame for market success for the Company's new products is
potentially long and uncertain. There can be no assurance that the
retail trade will accept the Company's new products, or if accepted,
whether the Company's marketing efforts will result in consumer
initial and repeat purchase of these products.
Changing government regulations relative to the Company's products
could result in the inability to continue marketing one or more of
it's products, or could cause changes in packaging, resulting in
unfavorable affect on the financial position or results of operations
of the Company.
The Company faces substantial competition from a variety of sources,
most of which are better capitalized and have more resources than the
Company. There can be no assurance that the efforts of one or more of
these competitors will not render one or more of the Company's
products non-competitive in the marketplace.
The Company relies on third party organizations for its manufacturing,
distribution, and sales. There can be no assurances that these
organizations will continue to meet the Company's growing need to
expand it's product lines on a commercially feasible basis. Should
one or more of these critical organizations not fulfill the growing
needs, there can be no assurance that the Company will be able to find
an economically feasible replacement on a timely basis.
Liquidity and Capital Resources
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. At
December 31, 1999, the Company had cash and cash equivalents of $24
thousand and negative working capital of $590 thousand. The Company
generated a net loss of $582 thousand for the fiscal year ended
December 31, 1998, and a net loss of $2.4 million for the year ended
December 31, 1999. Because of the advertising and promotion investment
required to expand nationally, the Company is anticipating net losses
to continue for the first nine months of fiscal 2000. The Company
will require a significant amount of capital to continue its planned
operations. Accordingly, the Company's ability to continue as a going
concern is dependent upon its ability to secure an adequate amount of
capital to finance its anticipated losses and planned principal
operations.
Subsequent to year end, Nova has successfully concluded a written debt
restructuring plan in which $1,118,155 of shareholder and vendor debt
was agreed to be converted into common stock, and $363,499 of past due
vendor debt was agreed to be converted to payment plans over 12 to 18
months beginning June 1, 2000.
Subsequent to December 31, the Company has obtained written
commitments from major shareholders to purchase up to $1.5 million of
additional SEC Rule 144 restricted common shares. The purchase
commitment is for stock purchases during the period February 14th to
May 31st 1999. Purchase commitment is contingent upon Nova's ability
to create an active market for Nova's common stock on the OTC Bulletin
Board. An active market is defined as average daily trading volume of
10-20 thousand shares per day.
In the event the Company receives minimal or no proceeds from these
efforts, the Company will seek alternative funding sources and would
adjust expenditures required for implementing its planned operations.
However these factors, among others, may indicate that the Company
would be unable to continue as a going concern for a period of time in
excess of six months from the date of this filing.
Nova's liquidity is currently limited because generation of additional
capital from outside investors has been delayed. The current
operations are being conducted with minimum funding support of major
shareholders. Accordingly, Nova's national expansion plans have been
delayed because Nova has substantially reduced the advertising and
promotion funds. This reduction of support has resulted in a
<PAGE>11
reduction in sales to current customers and a reduction in sales
generated from new accounts. Nova has communicated the funding delays
to brokers and key customers in explanation of the reduced support
that is evident in their respective markets. Despite the reduction of
support, the continuing strong I R I data on NxTrim's movement has
generally swayed Nova's brokers and most key customers to remain
patient, and await the additional marketing support promised after
Nova's successful attainment of additional funds. I R I data referred
to above indicates that, in the drug trade for the 52 weeks ended
October 10,1999, NxTrim is the number one selling weight control aid
in the California markets, and number 18 nationally.
In the twelve months ended December 31, 1999, Nova used cash from
operations in the amount of $950 thousand. The funding for this
investment has been obtained through increased long term borrowing
from major shareholders of $886 thousand. In the twelve months ended
December 31, 1999, accounts receivable was reduced by $269 thousand as
a result of lower sales in 1999 versus 1998. In the same period
accounts payable was increased by $569 thousand due to cash flow
constraints related to reduced sales, while maintaining the
administrative infrastructure to generate rapid growth upon successful
attainment of additional capital.
On March 31, 1999, the Company negotiated with a shareholder to
exchange of 204,082 shares of common stock for $500,000 in long term
notes payable. The shares were issued at the market price based on
the NQB Pink Sheets at March 31, 1999. The difference between the
carrying value of the notes payable, and the market value of the
shares, which totaled $214 thousand, was recorded as interest expense
on March 31, 1999.
In the twelve months ended December 31,1999, Nova issued 10,000 shares
of common stock for legal services and consulting services related to
investor relations. The shares were issued at market value of $37
thousand. In the fourth quarter of fiscal 1999, Due to changes legal
and consulting requirements, the Company negotiated the return of
76,814 shares previously issued at a market value of $268 thousand.
Related contracts were cancelled or revised and amounts previously
expensed or deferred as a prepaid expense were reversed.
In the twelve months ended December 31, 1999, Nova shareholders
contributed shares of common stock to investor relation firms on
behalf of Nova. The market value of these shares on the date of
transfer ($653 thousand) was recorded as an expense, or deferred as a
prepaid expense, with a corresponding offset to paid in capital.
Nova issued 100,000 shares of common stock, and accrued $45 thousand
for services rendered in the sale of stock, and for the subsequent
15c211 registration of that stock in March of 1999. Shares were
issued at market value ($350 thousand), with a corresponding entry to
reduce paid in capital for both the accrued amount and the shares
issued.
In the twelve months ended December 31, 1998, the Company used cash
from operations in the amount of $464 thousand. The funding of this
investment was obtained substantially through shareholder loans.
Accounts receivable increased due to revenue growth. Inventory was
reduced due to working off an initial large inventory purchase through
the revenue growth. Prepaid expense increased due to deferral of
prepaid advertising and promotion services to the period of actual
usage of the purchased services.
Results of Operations
Revenues for the twelve months ended December 31, 1999 totaled $767
thousand, a decrease of $1.2 million from the same period in the prior
year. The decline is due to a highly successful promotional event,
which generated $406 thousand in revenues in the prior year, and did
not occur in the current year. Additional revenue decline is due to
the reduction of advertising and promotion funding related to delay in
obtaining additional capital to support the planned national expansion
programs.
Gross profit for the year ended December 31, 1999 totaled $431
thousand, a decrease of $810 thousand from the same period in 1998.
Reduction of revenues substantially caused the gross profit decline.
Gross profit margin declined on a percentage basis due to write off of
<PAGE>12
obsolete packaging of an estimated $30,thousand, and due to costs
estimated at $31 thousand related to return and rework of excess
product sold on end cap display promotions.
Selling and marketing expenses totaled $970 thousand in the year ended
December 31, 1999, a decline of $16 thousand from the same period in
1998. Advertising in 1998 was expended throughout the year with a
concentration in the California markets, generating revenues of almost
$2 million. In 1999 advertising was expanded nationally in the first
four months, initially fueling growth through distribution to new
accounts. However, as stated earlier, the national advertising
program was halted due delay in obtaining additional capital for
continued expansion, resulting in reduced sales in both existing and
new markets.
General and Administrative expenses totaled $1.5 million in the year
ended December 31, 1999, an increase of $801 thousand from the same
period in 1998. The increase is due to legal, accounting and
consulting fees of $595 thousand related to seeking funding in the
public markets, preparing SEC documents to become a reporting public
company, and to investor relations consulting. The professional fees
noted above were funded by shareholder contribution of common stock in
the amount of $495 thousand, by issuance of common stock of $42
thousand, and by current operating funds of $58 thousand dollars. The
remaining increase in General and Administrative expenses resulted
from an accumulation of smaller dollar amounts in the areas of
salaries, rents, insurance and travel related to building the
organizational infrastructure required to execute Nova's aggressive
growth plans.
Interest expense totaled $322 thousand in the year ended December 31,
1999, an increase of $244 thousand over the prior year. The increase
is substantially due to imputed interest expense of $214 thousand
generated from the conversion of shareholder debt to common stock.
The remainder of increase in interest expense is due to higher
borrowings on notes payable to shareholders in 1999.
The provision for income taxes reflects minimum tax payment
requirements. The tax benefit of operating losses from inception to
December 31, 1999 has not been recorded. Recognition of any tax
benefits from losses will be delayed until such time as Nova's
operating results indicate the ability to take advantage of the losses
through future earnings.
During the year ended December 31, 1998, quarterly revenues have grew
steadily as a result of increasing distribution to new customers, and
repeat sale to existing customers. On a quarter to quarter basis,
this trend was masked by the timing of promotional events in the
quarters.
For the fiscal year ended December 31, 1998, cost of sales as a
percent of revenues declined steadily each quarter as the higher cost
first quarter purchase prices were sold through. The cost of product
was significantly reduced due to the lower cost of a new supplier, as
well as purchases of greater quantities. Promotional reduction of
invoice pricing partially offset the percentage decline in cost of
sales due to the aforementioned lower purchase cost.
During the fiscal year ended December 31, 1998, sales and marketing
expenses fluctuated significantly from quarter to quarter due to the
timing of advertising relative to sales to the trade. Throughout the
year, the Company increased the selling expenses, building to the
point at which an experienced Senior Vice President of Sales and
Marketing was on board with a sales staff capable of managing the
national network of brokers.
General and Administrative expenses increased steadily throughout the
year ended December 31, 1998 as the Company built the infrastructure
required to support the planned rapid revenue growth. In the fourth
quarter, administrative expenses grew significantly due to expenses
for presentations to new customers, professional fees related to
becoming a public company, and to insurance costs related to becoming
a public company and increased revenues.
The provision for income taxes reflects minimum tax payment
requirements. The tax benefit of operating losses from inception to
December 31, 1998 has not been recorded. Recognition of any tax
<PAGE>13
benefits from losses will be delayed until such time as Nova's
operating results indicate the ability to take advantage of the losses
through future earnings.
For the 12 months ended December 31, 1999 and 1998, Nova incurred
losses of $2.5 million and $582 thousand respectively. In 1998, Nova
has reflected losses in the results of operations due to the
advertising and promotional expenditures to build brand equity, and
due to the selling and administrative expenditures necessary to build
the organizational infrastructure required to accomplish Nova's
aggressive growth plans. Nova has incurred similar advertising,
promotional and administrative expenditures in 1999, plus has expended
significant amounts related to investment counseling fees to raise
additional capital, and investor relations fees in order to
communicate to potential shareholders the growth opportunity in Nova.
It is Nova's belief that, given success in the efforts to raise
additional capital, Nova will be able to expand its revenues
significantly to new markets, and increase the sales per store in all
markets through continued advertising and promotion. Nova also
believes that continuation of the national advertising program would
result in rapid expansion into new accounts. At the 35,000 store
level, the national advertising costs are substantially covered.
Stores above that would require significantly less additional
advertising dollars. Because of the selling and administrative
staffing already committed, expansion begins to incrementally add
profit without significant additional general and administrative
costs. Profitability will be attained with expansion to approximately
35,000 of the 117,000 potential retail outlets.
Item 7 Financial Statements
The required financial statements are included in this document
beginning at page F-1
Item 8 Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure
Not Applicable
<PAGE>14
Part III
Item 9. Directors, Executive Officers, Promoters, and
Control Persons; Compliance With Section 16(a)
of the Exchange Act
The names and ages of our executive officers and directors as of
December 31, 1999, are as follows:
Name Age Position Term
Ralph Mann 58 CEO/Director Inception to
Present
James Ayres 28 Sr. Vice President,
Secretary,Director Inception to
Present
Robert Eggering 55 Chief Financial From 4-30-98
Officer to Present
Fred Zinos 56 Sr. Vice President From 11-2-98
Sales & Marketing Present
Carlos Schmidt, M.D. 52 Director Inception to
Present
Mr. Ralph Mann, President and Chief Executive Officer, founded Nova
Pharmaceutical in January 1998 and became the Chairman of the Board in
February 1998. From September 1992 to December 1997, Mr. Mann owned
and acted as President for Canyon Fitness Center, Inc., a health club
business. From May 1975 to July 1989, Mr. Mann was the majority
shareholder and Chief Executive Officer of the Glen Ivy Financial
Group, a time share business.
Mr. James Ayres, Senior Vice President & Secretary joined us in
January 1998 and became a board member in February 1998. From November
1989 to December 1997, Mr. Ayres was Vice President and acting General
Manager of Canyon Fitness Center, Inc., a health club business. Mr.
Ayres received an Associate Arts degree and an Associate of Science
degree (1993) from San Jacinto College, California.
Mr. Robert Eggering, Chief Financial Officer, joined us in April of
1998. From May of 1997 to April of 1998, Mr. Eggering was Controller
of Coast Converters, Inc., a custom plastic bag manufacturer. From
April 1996 to April 1997, Mr. Eggering was Controller of Tempo/Pacific
Coast One Stop, a wholesale and retail recorded music distributor.
Prior to joining Pacific Coast, Mr. Eggering held positions with
ConAgra, Inc., a conglomerate with grain commodity trading, meat and
food processing businesses. Mr. Eggering received a Bachelor's Degree
(1966) in Psychology from St. Louis University and a Master's Degree
(1971) in Accounting from Missouri University.
Mr. Fred Zinos, Senior Vice President of Sales & Marketing, joined us
in November of 1998. From June of 1997 to October of 1998, Mr. Zinos
was Vice President of Sales and Marketing for Enforma Natural
Products, Inc., a natural product manufacturer. From January of 1996
to May of 1997, Mr. Zinos was Vice President of Sales for Nature's
Products Inc., a natural product manufacturer. Prior to joining
Nature's Products, Mr. Zinos held positions with Shelby Health
Systems, a natural products manufacturer. Mr. Zinos received a
Bachelor's Degree (1965) in Business Administration from the
University of Wisconsin.
Dr. Carlos Schmidt, M.D., Supervising Physician, joined us in January
of 1998, and became a board member in February of 1998. From July of
1996 to present, Dr. Schmidt is a Medical Director at the Bristol Park
Medical Group. From July of 1987 to June of 1996, Dr. Schmidt was an
ER Physician and Assistant Director of Emergency Services at Mission
Hospital. Dr. Schmidt received a Bachelor's Degree in Science and a
Medical Degree (1973) from the University of Guadalajara School of
Medicine.
<PAGE>15
Item 10 Executive Compensation
The following table sets forth summary information concerning the
compensation received for services rendered to us during the years
ended December 31, 1999 and 1998 by the chief executive officer, as
well as all other executive officers of the Company who received
compensation in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name and Principal Position Year Annual Compensation All Other
Salary Bonus Compensation*
<S> <C> <C> <C> <C>
Ralph Mann, President 1998 $32,756 N/A $2,852
1999 $50,104 N/A $1,146
Fred Zinos, Vice President 1999 $90,000 N/A $8,347
Robert Eggering 1999 $90,000 N/A $35,466
</TABLE>
* Other compensation includes payment for medical and dental
benefits. In Mr. Eggering's case, the amounts additionally include
contracted life insurance amount of 25,808, ($15,000 for 1999 and
$10,808 payment in arrears for 1998)
During the 1998 fiscal year, we entered into an employment agreement
with Fred Zinos. The agreement is on an at-will basis. Under the
terms of the agreement, Mr. Zinos is required to devote his full time
to our business. We have agreed to pay him a base salary of $90,000
annually. We will pay him cash bonuses based upon the following: 10%
of annual salary for attainment of gross sales within 80% of plan, 20%
for 100% attainment of plan gross sales, and 30% for attainment of 20%
above gross sales plan. The plan is prepared annually by Nova
employees and approved by the president. The only deduction from
gross sales used in computing this compensation is returned goods. In
addition, we have agreed to grant him the option to purchase common
stock at $2.00 per share, based upon the following: 5,000 shares for
80% attainment of plan sales, 10,000 shares for 100% attainment of
plan gross sales, and 25,000 shares for attainment of 25% above plan
gross sales.
During the 1998 fiscal year, we entered into an employment agreement
with Robert Eggering. The agreement is on an at-will basis. Under the
terms of the agreement, Mr. Eggering is required to devote his full
time to our business. We have agreed to pay him a base salary of
$90,000 annually. In addition, we have agreed to pay him $15,000
annually toward a whole life insurance policy maintained by his spouse
on his life.
Item 11 Security Ownership of Certain Beneficial
Owners and Management
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of December 31,1999 by
each shareholder known by us to own beneficially more than 5% of the
common stock and by each director and all directors and executive
officers as a group:
Number of
Name, Title & Address Shares(1) Percentage
Ralph Mann, Chief Executive
Officer and Director
3811 Stone Meadow
Murrieta, Ca 92562 5,600,000 44.04%
Ralph Mann Trust # 1, shareholder (2)
31712 Casino Dr Suite 7B
Lake Elsinore, Ca 92530 1,006,724 7.92%
Ralph Mann Trust # 2, shareholder (2)
31712 Casino Dr Suite 7B
Lake Elsinore, Ca 92530 1,006,724 7.92%
Ralph Mann Trust # 3, shareholder (2)
31712 Casino Dr Suite 7B
Lake Elsinore, Ca 92530 1,006,724 7.92%
<PAGE>16
Ralph Mann Trust # 21, shareholder (2)
31712 Casino Dr Suite 7B
Lake Elsinore, Ca 92530 1,006,724 7.92%
Carlos Schmidt M.D., Director
613 Avenida Acapulco
San Clemente, Ca 92672 250,000 1.97%
James Ayres, Senior Vice President,
and Director
25573 Dorval Ct
Menifee, Ca 92584 100 (3)
Robert Eggering, Chief Financial Officer
23089 Joaquin Ridge Dr
Murrieta, Ca 92562 600 (3)
Fred Zinos, Senior Vice President
24375 Jackson Ave
Murrieta, Ca 92562 100 (3)
All Directors and Officers
as a group (6 persons) 5,850,700 46.01%
(1) This table is based upon information derived from our stock
records. Unless otherwise indicated in the footnotes to this table
and subject to community property laws where applicable, we believe
that each of the shareholders named in this table has sole or shared
voting and investment power with respect to the shares indicated as
beneficially owned. Applicable percentages are based upon 12,715,282
shares of Common Stock outstanding as of December 31,1999.
(2) Ralph Mann Trusts #1, #2, #3, & #21 are irrevocable trusts whose
beneficiaries are relatives of Ralph Mann, Director and Chief
Executive Officer
(3) Individual owns less than 1%
Item 12 Certain Relationships and Related Transactions
Private Placement of Securities.
On May 8, 1998 Nova Pharmaceutical, Inc did a reverse merger with
Nalbando Enterprises, Inc. Nalbando Enterprises Inc. was the
surviving corporation and it immediately changed its name to Nova
Pharmaceutical, Inc. In conjunction with that merger, Ralph Mann,
Director and President obtained 5,600,000 shares of restricted common
stock in surviving corporation, named Nova Pharmaceutical Inc. in
exchange for common stock in the former Nova Pharmaceutical, Inc. In
the same transaction, Showtime Partners (a general partnership
consisting of 21 irrevocable trusts established in 1989 whose
beneficiaries are all related to Ralph Mann) received 4,150,000 shares
of restricted common stock in the surviving corporation in exchange
for common stock in the former Nova Pharmaceutical, Inc. In
conjunction with the same transaction, Dr Carlos Schmidt, M.D.,
Director received 250,000 shares of restricted common stock in the
surviving corporation in exchange for stock in the former Nova
Pharmaceutical, Inc.
Transactions with Directors and Officers
A royalty agreement exists between the Company and a licensing group
consisting of Showtime Partners (shareholder), Ralph Mann (Director,
Chief Executive Officer, shareholder), and Ralph Mann Trusts 1-21,
shareholders and partners in Showtime Partners. The terms of the
royalty agreement were outlined in the Organization section above.
The company amortized the prepaid royalty of $4,412 in the twelve
months ended December 31, 1999, and $11,684 in the same period of
1998.
Ralph Mann has lent Nova money for operating funds under a note
payable agreement. The principal balance of the Note was $700,400 at
December 31, 1999 and zero at December 31, 1998. Interest accrued
totaled $19,239 at December 31, 1999. The terms of the Note Payable
include an annual interest rate of 6%, principal and accrued interest
due and payable on January 31, 2001. Subsequent to December 31, 1999,
<PAGE>17
Ralph Mann agreed to convert the principal and accrued interest
expense on this note to common stock in conjunction with a debt
restructuring plan conducted by the Company.
Showtime Partners has lent Nova money for operating funds under a note
payable agreement. Showtime, a shareholder in Nova, is a general
partnership consisting of 21 irrevocable trusts established in 1989
whose beneficiaries are all related to Ralph Mann (shareholder,
officer, and director of Nova). The principal balance of the Note was
$311,097 at December 31, 1999 and $625,730 at December 31, 1998.
Interest accrued totaled $35,623 at December 31, 1999 and $13,025 at
December 31, 1998. The original date of the note payable was May 7,
1998 in the amount of $203,000. The terms of the Note Payable include
an annual interest rate of 6%, principal and accrued interest due and
payable on January 31, 2001. Ralph Mann negotiated with Showtime
Partners trustee to convert $500,000 of notes payable to 204,082
shares of Rule 144 restricted common stock. The conversion was made
on March 31, 1999. Subsequent to December 31, 1999, Showtime agreed
to convert the principal and interest accrued on this note to common
stock in conjunction with a debt restructuring plan conducted by the
Company.
As of December 31, 1999 and December 31, 1998, Nova has a Note Payable
to Ralph Mann, CEO, and Director in the amount of $5,000. The Note,
dated May 6, 1998, bears interest at an annual rate of 7%, with
principal and interest due and payable on December 31, 1999. The Note
was given in exchange for Mr. Mann's shares of preferred stock. The
preferred stock was issued and subsequently exchanged for notes by
Nova Pharmaceutical prior to the reverse acquisition with Nalbando
Enterprises, Inc in May of 1998. Subsequent to December 31, 1999,
Ralph Mann agreed to convert the principal and interest accrued on
this note to common stock in conjunction with a debt restructuring
plan conducted by the Company
As of December 31, 1999 and December 31, 1998, Nova holds a Promissory
Note Receivable dated August 31, 1998 from Dr Carlos Schmidt, MD,
Director, in the amount of $5,000. The Note bears interest at an
annual rate of 6% and has a stated principal payment date of December
31, 1998. The Company has agreed to extend the principal and accrued
interest payment date to March 5, 2000. As of December 31, 1998 and
December 31, 1999, the Company also holds a Promissory Note Receivable
dated March 5, 1998 from Dr Carlos Schmidt, MD, Director, in the
amount of $10,000. The Note bears interest at an annual rate of 6%
with principal and accrued interest payable on March 5, 2000.
We have utilized the services of the J Mann Studios for professional
artwork, packaging development, printed materials, packaging samples,
and print advertising development. John Michael, owner of J Mann
Studios, is the brother of Ralph Mann, Director and Chief Executive
Officer of Nova. Payments to J Mann Studios totaled $104,682 in the
calendar year 1998, and $41,067 for the twelve months ended December
31, 1999. We believe that the above transactions were entered into on
terms no less favorable than would be obtained from unrelated third
parties.
Item 13 Exhibits, Financial Statements, and Reports on Form 8K
Index to financial statements filed with this report
F-1 Report of Independent Certified Accountants
F-2 Balance Sheets as of December 31, 1999 & 1998
F-3 Statement of Operations and Accumulated Defecit for
Years Ended December 31, 1999 & 1998
F-4 Statement of Changes in Stockholders' Equity for the
Years Ended December 31, 1999& 1998
F-5 Statement of Cash Flows for the Years Ended December
31, 1999 & 1998
F-7 Footnotes to the Financial Statements for the Years
Ended December 31, 1999 & 1998
<PAGE>18
To the Board of Directors
Nova Pharmaceutical, Inc.
We have audited the accompanying balance sheet of Nova Pharmaceutical,
Inc., as of December 31, 1999 and 1998 and the related statements of
operations and accumulated deficit, changes in stockholders' deficit,
and statement of cash flows for the years then ended. These financial
statements are the responsibility of management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
consolidated 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 Nova
Pharmaceutical, Inc. as of December 31, 1999 and 1998, and the result
of its operations, changes in stockholders' deficit and cash flows for
the years ended December 31, 1999 and 1998, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the company will continue as a going concern. At December 31, 1999 the
Company had cash and equivalents of $23,928, and negative working
capital of $689,890. The Company generated losses of $582,184 for the
fiscal year ended December 31, 1998 and $2,523,982 for fiscal 1999.
The Company will require a significant amount of capital to continue
its planned operations. The Company's ability to continue as a going
concern is dependent upon its ability to secure an adequate amount of
capital to finance its anticipated losses and planned principal
operations. There is no assurance that the Company will be successful
in these efforts. These factors, among others indicate that the
Company may be unable to continue as a going concern. These financial
statements do not include any adjustments that might result from the
outcome of these uncertainties.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental statement of
operating expenses is presented for the purposes of additional analysis
and is not a required part of the basic financial statements and, in
our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
Sarna & Company
Westlake Village, California
March 28, 2000
<PAGE>19
NOVA PHARMACEUTICAL, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
Assets DECEMBER 31,
1999 1998
<S> <C> <C>
Current Assets
Cash $ 23,928 $ 103,644
Accounts Receivable, Net 130,292 399,527
Inventory 72,548 66,751
Prepaid Expenses 256,425 146,251
Other Receivables - Related Party 15,000 15,736
----------- ---------
Total Current Assets 498,193 731,909
Property and Equipment 45,700 39,490
Other Assets
Formulations 430,000 460,000
Prepaid Royalties 183,724 188,136
Prepaid Licensing 260,000 280,000
Refundable Deposits 6,089 2,600
Organizational Costs 0 7,375
----------- ---------
Total Other Assets 879,813 938,111
----------- ---------
Total Assets $1,423,706 $1,709,510
=========== ==========
Liabilities and Stockholders' Deficit
Current Liabilities
Current Portion of Long Term Debt $ 5,000 $ 5,000
Accounts Payable and
Accrued Expenses 1,183,083 694,565
Total Current Liabilities 1,188,083 699,565
Long Term Debt - Related Party 1,011,497 625,730
Stockholders' Equity
Common Stock $.001 Par Value, 25,000,000
Shares Authorized, 12,715,282 and
12,400,000 shares issued in 1999 and 1998
respectively 12,715 12,400
Additional Paid in Capital 2,317,577 953,999
Accumulated Deficit <3,106,166> <582,184>
----------- ----------
Total Stockholders' Deficit <775,874> 384,215
---------- ---------
Total Liabilities and Stockholders' Deficit $1,423,706 $1,709,510
=========== ==========
</TABLE>
See Notes to Financial Statements
<PAGE>20
NOVA PHARMACEUTICAL, INC.
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1999 1998
---------- -----------
<S> <C> <C>
Revenues $ 766,972 $ 1,934,529
Cost of Sales
Beginning Inventory 66,751 <0>
Direct Labor 42,167 28,045
Purchases 399,557 732,507
Total Available 508,475 760,552
Less: Ending Inventory < 72,548> <66,751>
--------- --------
Total Cost of Sales 435,927 693,801
--------- --------
Gross Profit 331,045 1,240,728
Operating Expenses
Sales and Marketing 969,935 985,044
General and Administrative 1,549,836 748,028
Royalty Expense - Related Party 4,412 11,864
--------- ---------
Total Operating Expenses 2,524,183 1,744,936
--------- ---------
Interest Expense 279,732 64,951
Interest Expense - Related Party 42,137 13,025
Write Off Deferred Organizational
Expense 7,375 0
--------- ---------
Total 329,244 77,976
Loss Before Provision for Income Taxes <2,522,382> <582,184>
Provision for Income Taxes <1,600> <0>
--------- -------
Net Loss <2,523,982> <582,184>
========= =======
Deficit, Beginning of Year <582,184> <0>
Accumulated Deficit, End of Year $<3,106,166> $<582,184>
Net Loss per Share $ <0.20> $ <0.05>
Weighted Average Shares Outstanding 12,690,419 in 1999, and 11,733,333
in 1998.
</TABLE>
See Notes to Financial Statements
PAGE 21
NOVA PHARMACEUTICAL, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional
Par Value $.001 Par Value $.01 Paid in Accumulated Total
Shares Amount Shares Amount Capital Deficit Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Common Stock Issued
Commencement of
Operations 2,500,000 $ 2,500 500,000 $ 5,000 $945,335 <0> $952,835
Retirement of
Preferred Stock <500,000> <5,000> <5,000>
Reverse Acquisition and
Recapitalization -
Nalbando Enterprises 8,900,000 8,900 <336> 8,564
Sale of Common Stock
Reg D 504 Private
Placement Offering 1,000,000 1,000 9,000 10,000
Net Loss Year Ended
December 31, 1998 <582,184> <582,184>
---------- ------- ---- ---- ------- -------- -------
Balance December 31,
1998 12,400,000 12,400 <0> <0> 953,999 <582,184> 384,215
Common Stock Issued
In Exchange For
Services 110,000 110 37,390 37,500
Fees For Services
Raising Capital <45,000> <45,000>
Employee Stock
Bonus 1,200 1 4,199 4,200
Conversion Debt to
Common Stock 204,082 204 714,082 714,286
Contributions to
Capital from
Shareholders 652,907 652,907
Net Loss Year Ended
December 31, 1999 <2,523,982> <2,523,982>
---------- ------- --- --- ---------- ----------- ----------
Balance December 31,
1999 12,715,282 $12,715 <0> $<0> $2,317,577 $<3,106,166> $ <775,874>
</TABLE>
See Notes to Financial Statements
<PAGE>22
NOVA PHARMACEUTICAL, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
1999 1998
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss $(2,523,982) $(582,184)
Adjustments to Reconcile Net Income to
Net Cash Used by Operating Activities
Depreciation 8,857 5,245
Royalty Expense Amortization 4,412 11,864
Other Asset Amortization 50,000 51,231
Cash Acquired - Weight Loss Supplement Business 23,208
Non-Cash Expenses
Consulting Fees exchanged for Common Stock 41,700
Consulting Fees contributed by Shareholders 95,407
Accounting Change - Write Off Organization
Expense 7,375
Imputed Interest Expense on Debt Conversion 214,286
Change in Assets and Liabilities Net Of Effects of
Purchase of Weight Loss Supplement Business
in 1998 (Increase) Decrease in:
Accounts Receivable 269,235 (397,428)
Inventory (5,797) 47,721
Prepaid Expenses 22,326 (129,155)
Other Receivable 736 (9,428)
Other Assets (3,489) (3,606)
Increase in:
Accounts Payable and Accrued Expenses 68,518 518,245
-------- --------
Net Cash Used by Operating Activities 950,416) (464,287)
Cash Flow from Investing Activities
Acquisition of Formulations (40,000)
Purchase of Property and Equipment (15,067) (37,364)
-------- -------
Net Cash Used by Investing Activities (15,067) (77,364)
Cash Flow from Financing Activities
Debt Financing 885,767 630,730
Issuance of Common Stock 14,565
-------- -------
Net Cash Provided from Financing Activities 885,767 645,295
Net Increase (Decrease) in Cash (79,716) 103,644
Cash at Beginning of Period 103,644 <0>
Cash at End of Period $ 23,928 $ 103,644
Supplemental Disclosure:
Interest Paid $ 107,583 $ 77,976
</TABLE>
See Notes to Financial Statements
<PAGE>23
NOVA PHARMACEUTICAL, INC.
STATEMENT OF CASH FLOWS - (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
The Company purchased assets and liabilities of the weight loss
supplement business from Canyon Fitness Center, Inc. on January 8,1998.
The initial capitalization of the Company substantially consisted of
conversion of notes payable acquired in this transaction into common
and preferred stock.
Fair Value of Assets Acquired $ 1,128,154
Notes Payable Assumed (952,835)
Liabilities Assumed (175,319)
Other Purchase Compensation $ -0-
Conversion of Notes Payable into Common Stock
Common Stock $ 2,500
Preferred Stock 5,000
Paid in Capital 945,335
Total Notes Converted $ 952,835
In May of 1998, the Company exchanged preferred stock of $5,000 for a
note payable to a shareholder. The market value of the preferred stock
was estimated to be face value at the date of the exchange.
On March 31, 1999 the Company exchanged 204,082 shares of common stock
for $500,000 long term debt to a shareholder. The difference between
the carrying value of the debt and the market value of the shares
($214,286) was recorded as interest expense.
In the 12 months ended December 31, 1999 the Company issued 10,000
shares of common stock for legal and investor relation services. The
shares were recorded at a market value $37,500, and charged to legal or
consulting expenses.
In the 12 months ended December 31, 1999, Shareholders contributed
shares of common stock to investor relation and investment counseling
firms on behalf of the Company. These contributions were recorded at a
share market value of $652,907, and either expensed, or deferred as a
prepaid expense, depending on the terms of the related contracts.
In the twelve months ended December 31, 1999, the Company accrued
$45,000 and issued 100,000 shares of common stock in exchange for
services related to the sale of stock and the subsequent 15c211
registration of that stock in March of 1999. The common shares were
issued at a market value of $350,000. A corresponding entry was made
to reduce paid in capital for both the amount accrued and the market
value of the common stock.
See Notes to Financial Statements
<PAGE>24
NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Nova Pharmaceutical, Inc. (referred to as the "Company" or "Nova"), was
incorporated on January 8, 1998 under the laws of the state of Nevada.
The incorporation consisted of a purchase of a portion of the assets
and liabilities of Canyon Fitness Center, Inc., a California
corporation. Canyon Fitness Center, Inc., was then owned by Showtime
Partners. Included in the liabilities assumed in the purchase from
Canyon Fitness Center was a group of debtors, who, by converting their
debt into common stock, along with negotiated equity adjustments,
formed the initial capitalization of Nova. The group forming the
initial capitalization of the Company includes: Ralph Mann, a Director
and Chief Executive Officer of the Company, Dr. Carlos Schmidt, a
Director of the Company, and Showtime Partners. Showtime Partners is a
partnership consisting of 21 irrevocable trusts, the beneficiaries of
which are all related to Ralph Mann. Included in the assets purchased
were: formulation ($450,000), prepaid royalties ($200,000), and prepaid
licensing ($300,000). The formulation and prepaid licensing assets
reflect the capitalized costs incurred by Canyon Fitness Center in the
development, testing, and patent registration of the formula, NxTrim.
These assets were purchased subject to a license and royalty agreement.
Under the terms of the agreement, the Company obtained worldwide
manufacturing and marketing rights to the formula, NxTrim. In exchange,
the Company is obligated to pay a royalty of .00625% of the net sales
on the product, NxTrim, after the amortization of the $200,000 prepaid
royalties purchased from Canyon Fitness Center. The term of the
agreement is 10 years, with a 10 year renewal, which includes a cost of
living adjustment at the option of the licensor. The terms also include
a minimum annual royalty of $25,000 subsequent to full amortization of
the prepaid royalty amount. The license and royalty agreement, which
was issued to Canyon Fitness Center, Inc. by a group consisting of
Ralph Mann, Showtime Partners, and Ralph Mann Trusts 1-21 (partners in
Showtime Partners), was assigned to Nova in the aforementioned asset
purchase transaction.
Merger
Nova Pharmaceutical, Inc. completed a reverse acquisition as of May
7,1998. Nalbando Enterprises, Inc. (an inactive Nevada Corporation)
purchased all the assets and liabilities of Nova Pharmaceutical,
Inc.(an operating Nevada Corporation. Nalbando Enterprises, Inc., the
surviving corporation, immediately changed its name to Nova
Pharmaceutical, Inc. The original Nova Pharmaceutical, Inc., having
sold all assets and liabilities, became an inactive corporation.
Financial results as presented represent the activity for the entire
reporting period of the original operating Nova Pharmaceutical, Inc.
and the minimal incorporation activity of Nalbando Enterprises, Inc.
To reflect the true substance of the transaction, the acquisition was
treated financially as a purchase of Nalbando stock by Nova
Pharmaceutical, Inc., accompanied by a reorganization to the resulting
Nalbando capital structure.
<PAGE>25
NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Nature Of Operations
The Company develops and sells various licensed medical and nutritional
supplement products. Products are manufactured and packaged on a
contract basis by others. The Company maintains executive and sales
offices at Lake Elsinore, California.
Prior Operations
Nalbando Enterprises, Inc. was incorporated on February 6, 1998, and
therefore had no operations in the prior year. In the year ended
December 31, 1997, prior to Nova's purchase of the Weight Loss segment
from Canyon Fitness Center, this segment was in a start up mode,
substantially engaged in formula development, clinical testing, and
licensing the formula NxTrim. These efforts were capitalized and are
reflected on Nova's statements through Nova's purchase of assets from
Canyon Fitness Center. Operations for the same period consisted of
immaterial sales related to test marketing of the formula NxTrim.
Operations of Canyon Fitness Center Weight Loss segment prior to
January 1, 1998 were not material, and as such, are not reported in
these financial statements.
Going Concern
The accompanying financial statements have been prepared assuming that
the company will continue as a going concern. At December 31,1999 the
Company had cash and equivalents of $23,928, and negative working
capital of $689,890. The Company generated losses of $582,184 for the
fiscal year ended December 31,1998 and $2,523,982 for fiscal 1999. The
Company will require a significant amount of capital to continue its
planned operations. Accordingly, the Company's ability to continue as a
going concern is dependent upon its ability to secure an adequate
amount of capital to finance its anticipated losses and planned
principal operations. The Company's plans include sale of common stock
to existing shareholders in amounts up to $1,500,000. There is no
assurance that the Company will be successful in these efforts. In the
event the Company receives minimal or no proceeds from these efforts,
the Company will seek alternative funding sources and may adjust its
focus and expenditures required for implementing its planned
operations. The Company has obtained written commitments from major
shareholders to purchase up to 1.5 million dollars worth of additional
shares at market price of the Company's common stock during the time
period February 14th to May 31st 1999. These commitments are subject to
an active market being made in Nova's common stock on the OTC Bulletin
Board. An active market is defined as average daily trading volume of
10-20 thousand shares per day. In order to help eliminate
aforementioned unfavorable working capital position, the Company is
planning a debt restructuring program. The program will seek to
convince existing vendors to convert current debt to either common
stock, or to l2 to 18 month payment plans. These factors, among others
indicate that the Company may be unable to continue as a going concern
for a reasonable period of time. These financial statements do not
include any adjustments that might result from the outcome of the above
mentioned uncertainties.
<PAGE>26
NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Basis of Presentation
The Company reports revenue and expenses using the accrual method of
accounting for financial and tax reporting purposes. Revenues are
recorded upon delivery of products and expenses are recorded when
incurred
Use of Estimates
Management uses estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principals.
Those estimates and assumptions affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities,
and the reported revenues and expenses.
Significant Risk and Uncertainties
Nova relies on two contract manufacturers for the production of all the
Company's products. Should the relations between the Company and one or
both the manufacturers become strained, there is a risk of interruption
of product available for sale. There are numerous other competent
manufacturers capable of handling Nova's production. Nova maintains a
line of communication with several manufacturers who are capable of
handling Nova's needs to hedge the unlikely event that relations with
current manufacturers may deteriorate.
Pro Forma Compensation Expense
Nova accounts for costs of stock-based compensation in accordance with
APB No. 25, "Accounting for Stock Based Compensation" instead of the
fair value based method in SFAS No. 123. No stock options have been
issued. Accordingly, no pro forma compensation expense is reported in
these financial statements.
Cash and Cash Equivalents
The company considers temporary, highly liquid investments with an
original maturity of three months or less to be cash equivalents.
Inventories
Inventory is stated at the lower of cost (first in, first out) or
market value. Inventory consists of products and packaging held for
resale.
Property and Equipment
Property and equipment are stated at historical cost.
Depreciation, Amortization and Capitalization
The Company records depreciation and amortization using both straight-
line and declining balance methods over the estimated useful life of
the assets (three to seven years). Expenditures for maintenance and
repairs are charged to expense as incurred. Additions, major renewals
and replacements that increase the property's useful life are
capitalized. Property sold or retired, together with the related
accumulated depreciation, is removed from the appropriate accounts, and
the resultant gain or loss is included in net income.
<PAGE>27
NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Other Assets
Prepaid licenses and prepaid formulation costs are amortized on a
straight-line basis over a period of ten years. Prepaid royalty is
amortized at a rate of .00625% of net sales of the product NxTrim.
Income Taxes
The company accounts for its income taxes in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". Under statement 109, a liability method is used whereby
deferred tax assets and liabilities are determined based on temporary
differences between the basis used for financial reporting and income
tax reporting purposes. Income taxes are provided based on tax rates in
effect at the time such temporary differences are expected to reverse.
A valuation allowance is provided for certain deferred tax assets if it
is more likely than not, that the Company will not realize the tax
assets through future operations.
Fair Value of Financial Instruments
Financial Accounting Standards Statement No. 107, "Disclosures About
Fair Value of Financial Instruments", requires the Company to disclose,
when reasonably attainable, the fair market values of its assets and
liabilities which are deemed to be financial instruments. The Company's
financial instruments consist primarily of cash and certain
investments.
Stock Option Plan
The company has a stock option agreement with one employee. The
agreement grants certain options to this employee based upon
achievement of predetermined levels of sales performance. Those levels
of performance are as follows: If eighty percent (80%) of the sales
volume based on the sales plan is achieved then the employee shall be
entitled to five thousand (5,000) shares of stock at a value of $2.00 a
share which will become vested immediately. If one hundred percent
(100%) of the sales volume based on the sales plan is achieved then the
employee shall be entitled to ten thousand (10,000) shares of stock at
$2.00 a share. Should one hundred and twenty five percent (125%) or
more of sales volume based on the sales plan be achieved, then the
employee shall be entitled to twenty five thousand (25,000) shares of
stock at $2.00 per share. At December 31, 1999 and 1998 no stock
options had been granted under this plan.
Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements will have no significant
impact on the company and its reporting methods.
<PAGE>28
NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTTINUED
Per Share Information
The Company computes per share information by dividing the net loss for
the period presented by the weighted average number of shares
outstanding during such period.
Advertising Expense
The company generally expenses advertising costs as they are incurred.
Advertising expenses incurred for the 12 months ended December 31, 1999
and 1998 were $471,866 and $574,095 respectively.
NOTE 2 - RECEIVABLE FINANCING
The company has entered into a receivable financing arrangement whereby
the company borrows against certain receivables. The company receives
immediate advances of 50% to 70% of the receivable balance, and the
company pays interest at the approximate rate of 2% per month. Financed
receivables that are unpaid to Nova after 90 days must be replaced, or
paid by the company.
NOTE 3 - LONG TERM DEBT
Long term debt at December 31, 1999 and 1998 consists of:
<TABLE>
<S> <C> <C>
Note payable stockholder, unsecured, accruing
interest at a rate of 6% per annum.
All remaining principal and accrued interest
balance of long term debt to stockholder is due
on January 31, 2001. Subsequent to year end 1999,
shareholder has agreed to convert debt and 1999 1998
accrued interest into common stock. $ 311,039 $ 625,730
Note payable stockholder, unsecured, accruing
interest at a rate of 6% per annum.
All remaining principal and accrued interest
balance of long term debt to stockholder is due
on January 31, 2001. Subsequent to year end,
shareholder has agreed to convert debt accrued
interest into common stock. 700,458 <0>
Note payable related party, unsecured, accruing
interest at a rate of 7% per annum. Principal and
accrued interest are due and payable on
December 31, 1999. Subsequent to year end, share-
holder has agreed to convert debt and accrued
interest into common stock. 5,000 5,000
Total 1,016,497 630,730
Less amount included in current liabilities <5,000> <5,000>
Net Long Term Debt $1,011,497 $625,730
</TABLE>
<PAGE>29
NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 4 - PROVISION FOR INCOME TAXES
The provision for income taxes for the years ended December 31, 1999
and 1998 represents the minimum state income tax expense of the
company, which is not considered significant. Deferred income taxes
have been provided for in the accompanying balance sheets as follows:
Deferred income tax assets 12-31-99 12-31-98
Reserve for bad debts $ 8,000 $ 6,800
Reserve for obsolescence 8,000 4,000
Operating losses 1,130,034 222,074
Valuation reserve <1,146,034> $ <232,874>
Total deferred income tax assets $ <0> $ <0>
The Company established a valuation allowance to fully reserve the
deferred tax asset. The realization of the asset did not meet the
required asset recognition standard established by Financial Accounting
Standard Statement No. 109 "Accounting for Income Taxes". The company
has not yet demonstrated the ability to generate the required income to
take advantage of the deferred tax benefit. For the twelve months ended
December 31, 1999 and 1998, the Company had a net operating loss carry
forward for income tax purposes of $2,169,900 and $555,184,
respectively, which will be available to offset future taxable income
through the year 2019.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The company leases sales and office space under a non-cancelable
operating lease terminating on June 11, 2002. In connection with the
lease arrangement, the Company is obligated to make rental payments of
$2750 per month. The company also leases furniture and equipment under
various operating leases. Future annual minimum rental and lease
commitments are as follows:
Year Office Rent Furniture and Equipment
1999 $ 33000 $ 5194
2000 $ 33000 $ 4128
2001 $ 33000 $ 1996
2002 $ 16500 $ 1996
2003 $ 0 $ 1331
2004 $ 0 $ 0
Litigation
Subsequent to December 31, 1998, a lawsuit was filed against Nova by a
former supplier. Nova has responded to the lawsuit with a cross
complaint against the supplier. Nova believes that the supplier's
action is generally without merit. Since the discovery process has not
yet begun, a possible range of a gain or loss from the litigation is
not feasible at this time.
<PAGE>30
NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 5 - COMMITMENTS AND CONTINGENCIES - CONTINUED
Licensing and Consulting Agreements
The Company has currently entered into, and will continue to enter
into, product licensing and royalty agreements that the Company's board
of directors determine will enhance the Company's ability to market
innovative products in a competitive field. Minimum annual commitments
under these agreements amount to:
YEAR AMOUNT
2000 $ 246,666
2001 $ 316,665
2002 $ 200,000
2003 $ 25,000
2004 $ 25,000
2005 $ 25,000
2006 $ 25,000
2007 $ 25,000
2008 $ 25,000
The company has also entered into various employment agreements. Known
obligations on these contracts are included on these financial
statements.
NOTE 6 - RELATED PARTY TRANSACTIONS
Notes Receivable - Related Party
As of December 31, 1999 and 1998, Nova holds a Promissory Note
Receivable dated August 31, 1998 from a Director, in the amount of
$5,000. The Note bears interest at an annual rate of 6% and has a
stated principal payment date of December 31, 1998. The Company has
agreed to extend the principal and accrued interest payment date to
March 5, 2000. As of December 31, 1999 and 1998 the Company also holds
a Promissory Note Receivable dated March 5, 1998 from the same
Director, in the amount of $10,000. The note bears interest at an
annual rate of 6% with principal and accrued interest payable on March
5, 2000.
Notes Payable - Related Party
Ralph Mann Officer, Director, and Shareholder, exchanged a note payable
for shares of preferred stock on May 7, 1998. The principal balance of
the note was $5,000 at December 31, 1999 and 1998. Interest expense
totaled $300 and $195 for the twelve months ended December 31, 1999 and
1998 respectively. The terms of the note payable include an annual
interest rate of 7%, with principal and accrued interest due and
payable on December 31, 1999. Subsequent to December 31, 1999, Ralph
Mann agreed to convert the principal and interest on this note to
common stock in conjunction with a debt-restructuring plan conducted by
the Company.
Notes Payable - Related Party
Ralph Mann, officer, director, and shareholder, has lent Nova money for
operating funds under a note payable agreement. The principal balance
of the
<PAGE>31
NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 6 - RELATED PARTY TRANSACTIONS - CONTINUED
Note was $700,458 at December 31, 1999. Interest expense accrued at
December 31, 1999 was $19,240. Interest expense totaled $19,240 for
the year ended December 31, 1999. The original date of the note payable
was January 31, 1999 in the amount of $91,000. The terms of the Note
Payable include an annual interest rate of 6%, principal and accrued
interest due and payable on January 31, 2001. Subsequent to December
31, 1999, Ralph Mann agreed to convert the principal and interest on
this note to common stock in conjunction with a debt-restructuring plan
conducted by the Company.
Notes Payable - Related Party
Showtime Partners, shareholder, has lent Nova money for operating funds
under a note payable agreement. Showtime Partners is a general
partnership consisting of 21 irrevocable trusts established in 1989
whose beneficiaries are all related to Ralph Mann, shareholder,
officer, and director of the Company. The principal balance of the Note
was $311,097 and $625,730 at December 31, 1999 and 1998. Interest
expense accrued was $35,623 and $13,025 at December 31, 1999 and 1998.
Interest expense totaled $22,597 and $13,025 for the years ended
December 31, 1999 and 1998. The original date of the note payable was
May 7, 1998 in the amount of $203,000. The terms of the Note Payable
include an annual interest rate of 6%, principal and accrued interest
due and payable on January 31, 2001. Subsequent to December 31, 1999,
Showtime Partners agreed to convert the principal and interest on this
note to common stock in conjunction with a debt-restructuring plan
conducted by the Company.
Royalty Expense - Related Party
A royalty agreement exists between the Company and a licensing group
consisting of Showtime Partners, a shareholder, Ralph Mann, a director,
officer, shareholder, and Ralph Mann Trusts 1-21, partners in Showtime
Partners. Under the terms of the agreement, the Company obtained
worldwide manufacturing and marketing rights to the formula, NxTrim. In
exchange, the Company is obligated to pay a royalty of .00625% of net
sales on the product NxTrim, after the amortization of $200,000 prepaid
royalties purchased from Canyon Fitness Center. The term of the
agreement is 10 years, with a 10-year renewal at the option of the
licensor. The terms also include a minimum annual royalty of $25,000,
and a cost of living adjustment. The company amortized the prepaid
royalty of $4,412 and $11,864 in the years ended December 31, 1999 and
1998.
NOTE 7 - SUBSEQUENT EVENTS
In January 2000, the Company became a fully reporting company with the
Securities and Exchange Commission. In February of 2000 Nova common
shares began trading on the OTC Bulletin Board
<PAGE>32
NOVA PHARMACEUTICAL, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE 7 - SUBSEQUENT EVENTS - CONTINUED
In March 2000, the Company completed a written debt restructuring with
current vendors and shareholders. The Company obtained the following
concessions from vendors and shareholders:
Conversion of shareholder debt, including
accrued interest expense to common stock $ 1,071,854
Conversion of accounts payable to common stock 46,301
Total debt converted to equity $ 1,118,155
Conversion of currently due accounts payable
To twelve month payment plan beginning June 2000 $ 76,852
Conversion of currently due accounts payable
To eighteen month payment plan beginning June 2000 286,647
Total current debt converted to extended
payment terms $ 363,499
<PAGE>33
NOVA PHARMACEUTICAL, INC
STATEMENT OF OPERATING EXPENSES
FOR THE YEARS ENDED DECEMBER 31,
1999 1998
Sales and Marketing
Advertising $ 471,866 $ 574,095
Commissions 71,298 129,959
Promotional Expense 145,125 84,232
Printing 27,126 36,673
Salaries 155,280 134,690
Royalty Expense 70,002 -
Telephone Expense 29,238 25,395
Total Sales and Marketing $ 969,935 $ 985,044
General and Administrative
Allowance for Uncollectable Accounts $ 25,561 $ 20,133
Amortization Expense 50,000 51,231
Bank Charges 7,780 4,568
Contract Services 4,523 -
Depreciation Expense 9,320 5,245
Dues and Subscriptions 2,923 -
Employers Tax Expense 37,162 39,971
Insurance Expense 102,219 74,517
Legal and Accounting 154,985 63,630
Licenses, Permits & Fees 3,278 3,177
Office Supplies, Postage, Office Exps 49,460 34,128
Product Testing - 1,792
Professional Fees - Investor Relations 534,234 -
Rent Expense 52,472 27,779
Salaries - Administration 273,527 230,670
Shipping Expenses 110,684 122,345
Travel and Trade Shows 126,456 66,673
Utilities 5,252 2,169
------------ ----------
Total General and Administrative $ 1,549,836 $ 748,028
See Notes to Financial Statements
<PAGE>34
(B) Reports on Form 8-K - None
(C) Index to Exhibits
Articles of Incorporation incorporated by reference
to Form 10-SB filed on October 13, 1999, SEC file
No.0-30288.
3.1 Bylaws incorporated by reference to Form 10-SB
filed on October 13, 1999, SEC file No. 0-30288.
3.2 Articles of Merger incorporated by reference to
Form 10-S filed on October 13, 1999, SEC file No.
0-30288.
3.3 Plan of Merger incorporated by reference to Form
10-SB filed on October 13, 1999, SEC file No. 0-
30288.
4.1 Registration rights for preferred shares
incorporated by reference to Form 10-SB filed on
October 13,1999 SEC file no. 0-30288.
9.0 Voting Trust Agreement - NONE
10.1 Employment contract - Fred Zinos incorporated by
reference to Form 10-SB filed on October 13, 1999
SEC file No. 0-30288.
10.2 Employment contract - R. Eggering incorporated by
reference to Form 10-SB filed on October 13, 1999
SEC file No. 0-30288.
10.3 Master Purchase and Sale Agreement - Sun Capital
Incorporated by reference to Form 10-SB filed on
October 13, 1999 SEC file no. 0-30288.
10.4 Gold's Gym International, Inc Merchandising License
Agreement incorporated by reference to Form 10-SB filed
On October 13, 1999 SEC file no. 0-30288.
10.5 Nutripharmaceutical, Inc Manufacturing Agreement
Incorporated by reference to Form 10-SB filed on October
13, 1999 SEC file no. 0-30288.
10.6 National Broker Dealer Service Corp. Consulting
Agreement incorporated by reference to Form 10-SB
Filed on October 13, 1999 SEC file no. 0-30288.
10.7 Compass Point Group, Inc. Consulting Agreement
Investor Relations Production incorporated by reference
To Form 10-SB filed on October 13, 1999 SEC file no.
0-30288.
10.8 Compass Point Group, Inc. Consulting Agreement
Investor Relations incorporated by reference
To Form 10-SB filed on October 13, 1999 SEC file no.
0-30288.
10.9 Note Payable to Showtime Partners, Shareholder
With Amendments incorporated by reference to Form 10-SB
Filed on October 13, 1999 SEC file no. 0-30288.
10.10 Note Receivable Dr. Carlos Schmidt, M.D., Director
Incorporated by reference to Form 10-SB dated October
13, 1999 SEC file no. 0-30288.
10.11 Note Payable Ralph Mann incorporated by reference to
Form 10-SB dated October 13, 1999 SEC file no. 0-30288.
10.12 License and Royalty Agreement - NxTrim incorporated by
Reference to Form 10-SB dated November 24, 1999 SEC file
No. 0-30288.
10.13 Share Purchase Agreements - Diana Snow Trust & Gerald
Romero Trust
27 Financial Data Schedule
<PAGE>35
Signature
BY: /S/ Ralph Mann
----------------------
Ralph Mann, Chief Executive Officer,
Director,
Dated: March 31, 2000
Share Purchase Agreement - Diana Snow Trust
Share Purchase Agreement - Gerald Romero Trust
Nova Pharmaceutical, Inc.
Share Purchase Agreement
Over the period February 14, 2000 and May 31, 2000, the
Diana Snow Trust (Tone Lamkin, Trustee) agrees to purchase
up to $500,000 in Nova Pharmaceutical, Inc common stock.
The Stock shall be SEC rule 144 restricted stock. The
commitment to purchase this stock is subject to an active
market being made in Nova's common stock on the OTC
Bulletin Board during the aforementioned period. An active
market is defined as average daily trading volume of 10-20
thousand shares per day.
The purpose of this commitment is to provide Nova
Pharmaceutical, Inc additional capital to survive it's
current cash flow problems, and to provide funds for Nova to
take advantage of it's business opportunities in the
expansion of NxTrim and the Gold's Gym Nutrition line of
health supplements. In providing Nova with these funds, The
trust is protecting the value of stock currently held in
Nova Pharmaceutical, Inc. by providing both survival capital
and growth capital in a time of critical need.
Nova agrees to register the stock purchased by the trust in
conjunction with the debt restructuring program, which is
currently underway. In the debt restructuring, Nova has
committed to register shares as soon as legally and
administratively possible upon successful completion of the
debt restructuring.
____________________________ Date: __________________
Diana Snow Trust
Tone Lamkin, Trustee
<PAGE>37
Nova Pharmaceutical, Inc.
Share Purchase Agreement
Over the period February 14, 2000 and May 31, 2000, the
Gerald Romero Trust (Tone Lamkin, Trustee) agrees to purchase
up to $1,000,000 in Nova Pharmaceutical, Inc common stock.
The Stock shall be SEC rule 144 restricted stock. The
commitment to purchase this stock is subject to an active
market being made in Nova's common stock on the OTC
Bulletin Board during the aforementioned period. An active
market is defined as average daily trading volume of 10-20
thousand shares per day.
The purpose of this commitment is to provide Nova
Pharmaceutical, Inc additional capital to survive it's
current cash flow problems, and to provide funds for Nova to
take advantage of it's business opportunities in the
expansion of NxTrim and the Gold's Gym Nutrition line of
health supplements. In providing Nova with these funds, The
trust is protecting the value of stock currently held in
Nova Pharmaceutical, Inc. by providing both survival capital
and growth capital in a time of critical need.
Nova agrees to register the stock purchased by the trust in
conjunction with the debt restructuring program, which is
currently underway. In the debt restructuring, Nova has
committed to register shares as soon as legally and
administratively possible upon successful completion of the
debt restructuring.
____________________________ Date: __________________
Gerald Romero Trust
Tone Lamkin, Trustee
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