<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A-1
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1995
-----------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
---------- ----------
Commission file number 33-42880
---------------------------------
NOVA TECHNOLOGIES, INC.
--------------------------------------------------------------------
(Name of small business issuer in its charter)
Delaware 11-2674603
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
89 Cabot Court, Unit L, Hauppauge, New York 11788
------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (516) 434-8811
--------------
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. 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]
State issuer's revenues for its most recent fiscal year. $220,368
--------
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. (See definition of affiliate in Rule 12b-2 of the Exchange Act).
$12,373,360 as of 7/31/96.
- -------------------------
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. 6,411,183 as of 7/31/96.
-----------------------
DOCUMENTS INCORPORATED BY REFERENCE: None
Transitional Small Business Disclosure Format: Yes No X
--- ---
<PAGE>
PART I
Item 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT AND OVERVIEW
Nova Technologies, Inc. ("Nova" or the "Company"), a publicly traded
(NASD, NOTL) company, was founded in 1984 to create a methodology of providing
for the unassisted transfer of bedridden patients. Nova's objective is to
become a fully integrated design, engineering, manufacturing and marketing
company addressing a niche market in the medical equipment and supply field.
On June 14, 1996, Nova, through its wholly-owned subsidiary, Vivax Medical
Corp. a newly formed Delaware corporation ("Vivax"), acquired all of the
outstanding capital stock of Comed Systems, Inc., a New Hampshire corporation
("Comed"). Vivax will continue the business of Comed as a distributor of
specialized beds, support surfaces and related equipment in the greater Boston
area. On and after June 14, 1996, the term the "Company" shall include both
Nova and Vivax unless otherwise specifically provided or the context otherwise
requires.
The Company's engineering and technical staff has developed a
patient transfer system (Novabed(R)) to be marketed to the rapidly growing
long-term care market. The Nova patient transfer system, with the push of a
button on a hand held pendant can automatically, comfortably, and safely
transfer a bedridden patient from a lying position in a hospital type bed to a
seated position in a wheel chair or commode and transfer the patient back into
the bed. A wheelchair backrest must be manually inserted in order to separate
the wheelchair from the bed. The system consists of a unique hospital-type
bed, a companion wheelchair, accessories, and is designed to be operated by
one attendant or, under certain circumstances, by the patient unassisted. At
present the Company is not aware of any similar products on the market. The
Company has been issued 18 patents related to the transfer system and bed sore
prevention and has received United States Food and Drug Administration ("FDA")
approval to market the product.
The Novabed(R) provides elderly and disabled persons and their care
givers with an alternative to manual lifting or conventional hydraulic lifting
devices. Such devices are difficult to use and often require special safety
precautions. The Company believes its system can significantly help the
bedridden to be comfortably and safely cared for in their own homes. The
patient transfer system has demonstrated how it may also partially reduce or
eliminate transfer related injuries to both staff and patients. Use of Nova's
system by institutions can improve patient care and mobility, provide
therapeutic benefits, and reduce costs associated with transfer-related labor
requirements and injuries. In addition, Novabed(R) can provide a means for
many non-ambulatory patients to be cared for in the home, thereby enabling
early release from the hospital. In the private home setting, Nova's unique
transfer system can significantly delay institutional care, thus saving the
high cost of nursing home care and enhancing quality of life.
The potential users of the patient transfer system include: the
severely physically handicapped; disease related bedridden persons; trauma and
stroke victims; post surgical and orthopedic rehabilitation patients; and the
elderly disabled. Purchasers of the system can be divided into three segments:
hospitals; nursing homes and related care facilities; and the home care
market, a rapidly growing segment in the industry.
The Company's strategy is to establish, through clinical trials,
medical efficacy conditions for the product, determine and establish cost
benefit, and demonstrate how the patient transfer system greatly improves
quality of life. The Novabed(R) has undergone clinical evaluation in an
institutional and home care setting. The Company is focusing its marketing on
hospitals, rehabilitation units and nursing homes in order to develop a strong
referral base for the large home healthcare market. Concurrent with this
effort the Company is developing a program to seek reimbursement authorization
by Medicare, Medicaid and other third party payors. See "Beta Site and Field
Trials" and "Third Party Reimbursement" below.
Nova commenced field trials of the Novabed with the installation of
a prototype in a nursing home in November 1992 and a prototype in a private
home in February 1993. In 1993 the Company commenced tooling for and
production of its first lot of 40 units for commercial sale. The first sales
of these units were recorded in June 1994. Since the commencement of
production in 1993, the Company has produced 70
<PAGE>
Novabeds(R), of which 58 have been sold and shipped and 8 have been used for
field trials and testing. The remaining 4 units are held in inventory for
shipment. An additional 23 units are currently being assembled for commercial
sale.
Until recently, Nova relied almost exclusively on distributors with
industry experience with specialty beds to sell product to the institutional
as well as the home healthcare markets. The Company has entered into seven
exclusive distribution agreements to date covering seven regional territories
in the United States. The regions combined cover approximately 25% of the U.S.
population. As a result of the Company's recent acquisition of Comed, one of
the Company's former distributors, the Company now has in-house distribution
capability in the greater Boston area. In the future the Company plans to
grow its own sales force for distribution to the institutional markets and to
continue to work with Home Medical Equipment dealers ("HME"), Durable Medical
Equipment dealers ("DME"), distributors, and home healthcare agencies in
selling to the institutional and home healthcare markets. See "Marketing and
Distribution" below.
In September 1995, pursuant to a series of inter-related
transactions (the "1995 Financing"), the Company (i) sold 900,901 shares of
Common Stock for an aggregate of $1,000,000, (ii) entered into a Grant
Agreement with the City of Bristol, Connecticut providing, under certain
conditions, for a grant in the amount of $100,000, (iii) entered into a
Financing Agreement with Connecticut Innovations Incorporated ("CII"), a State
of Connecticut agency to borrow $750,000 in four staged installments, (iv)
entered into a Loan Agreement with People's Bank ("People's Bank"), providing
for a $1,000,000 revolving credit facility (v) entered into a Loan Agreement
with Connecticut Development Authority ("CDA"), a State of Connecticut agency
providing for advances up to $100,000 for the purchase of new or used
equipment and (vi) entered into an Assistance Agreement with the Department of
Economic and Community Development ("DECD"), a State of Connecticut agency
providing for a loan in an amount not to exceed $200,000 for the purchase of
capital equipment. In September 1995, the Company also sold 126,667 shares of
restricted Common Stock for $190,000 to two of its distributors. See
"Management's Discussion and Analysis or Plan of Operation - Liquidity and
Capital Resources."
On June 14, 1996, Nova, through its wholly-owned subsidiary Vivax,
acquired from Douglas and Donna Drew all the outstanding capital stock of
Comed, a distributor of specialized beds, support surfaces and related
equipment in the greater Boston area, and Comed was merged into Vivax. Of the
aggregate purchase price of $3,000,000, $1,500,000 was paid in the form of
600,000 shares of Common Stock (using a value of $2.50/share per the
Agreement) and the remaining $1,500,000 consisted of two $750,000 promissory
notes bearing interest of 8% of Vivax which are guaranteed by Nova. One
promissory note is payable on June 14, 1997, and the second promissory note is
payable over a period of three years commencing in 1998, with the amount of
the installments of principal being dependent on the future results of
operations of the acquired business. Payment of the promissory notes is
secured by separate security agreements of Vivax and Nova covering,
respectively, inventory and equipment of Vivax, and certain technology of
Nova. The distribution agreement between Nova and Comed was terminated in
connection with the acquisition.
The specialized bed, support surfaces and related equipment
distributed by Vivax include the Novabed(R), air therapy beds, air therapy
mattresses, enclosure beds, low air loss beds, obese beds, mattress
replacement systems and mattress overlay systems. These beds and surfaces are
used for the treatment of pressure wounds, burns and trauma and the control of
pain. Vivax distributes its products to hospitals, nursing homes and related
care facilities and to the home care market. Historically, approximately 95%
of Vivax's operating revenues have been derived from the rental, rather than
the sale of specialty beds. Rental arrangements typically provide for ongoing
service of the beds by Vivax. Most institutions rent specialty beds from
Vivax on a daily basis while most of Vivax's home care customers rent
specialty beds on a monthly or longer basis. As of June 1996, Vivax was
renting specialty beds to approximately 60 institutions and approximately 90
home care customers.
Nova was incorporated in Delaware in January 1984. Comed, now known
as Vivax, was incorporated in Florida in 1989, reincorporated in New Hampshire
in 1996 and merged into Vivax, a Delaware corporation in June, 1996. The
Company's principal executive offices are located at 89 Cabot Court, Unit L,
Hauppauge, New York 11788, telephone number (516) 434-8811.
-2-
<PAGE>
PATIENT MANAGEMENT SYSTEM
The Company's modular Novabed(R) Patient Management System, consists
of a specialized hospital type bed and companion wheelchair which allows the
patient to be gently and automatically moved from the bed into the wheelchair
and back again. The patient lies on a moveable bed sheet which smoothly moves
the patient toward the head or foot end of the bed. The companion wheelchair
is positioned at the foot of the bed. When an operating key is depressed on
the hand-held pendent, a movable leg and foot rest on the wheelchair moves
into place. The patient is then transferred by a conveyer sheet to the foot
of the bed, with the feet and legs sliding onto the elevated leg rest. The
mattress is then raised to lift the patient to a sitting position as the leg
and foot rest moves the legs forward and down to their normal position. When
the wheelchair backrest is manually inserted, a release lever can then release
the wheelchair from the bed. A patient may be moved from the wheelchair back
into the bed by reversing this process.
The Company's Patient Management System, with the tilt table option,
can also transfer a patient from the bed to a standing position or from a
standing position back to the bed. This feature, which is scheduled to be
introduced in the fourth quarter of 1996, will allow the Novabed(R) to be used
as a tilt table for angular positioning which is beneficial for certain
hospital and rehabilitation applications, such as treatment for burns and
recovery from spinal fusion, total hip replacement and other orthopedic
procedures.
An Obese Patient Model for transferring patients up to 450 lbs. is
complete. An additional important feature is the Novabed(R) equipped with an
air therapy mattress for the prevention or cure of decubitus ulcers (bed
sores). Both the Obese Model and the air therapy option have been shipped to
customers and have been placed in service. The Company anticipates that its
Obese Model will account for more than half of its sales in the proximate
future.
The Company has completed and is manufacturing its first production
model. This model uses a production hospital type bed which is modified to
provide transfer capability. The Company's "Standard" Patient Management
System is of modular construction and therefore can be taken apart for easy
transport and installation in a location. The Company is marketing the
Novabed(R) for use in both homes and institutions, including rehabilitation
units and hospitals. Additional features and optional equipment of the
Novabed(R) include:
. Patient Positioning: In additional to the normal tilt functions
of a standard hospital bed, by pressing push buttons in sequence, the patient
can be repositioned (moved upward toward the head of the bed) in a Novabed(R).
. Toilet Access: The wheelchair seat can be replaced by a commode
seat, and the wheelchair can be located over a home or institutional toilet,
or used with a chamber pot.
. Contour positioning: Height adjustment, upper body positioning,
leg and knee positioning.
. Air therapy mattress for bedsore prevention: The conventional
mattress is replaced with a special mattress providing air-support therapy for
the healing and prevention of bedsores.
In addition to patient transfer, the Company believes that the following
benefits may be derived from its patient transfer system:
Therapeutic Benefits: Frequent or timely movement of a patient to a
sitting or vertical position is extremely important for postoperative
recuperation and for preventing deterioration of the cardiovascular,
skeletal, muscular, and respiratory systems, the skin, and for the
patient's overall physical and psychological well being. Lack of motion
can cause pneumonia, accelerated osteoporosis, blood clots and bedsores,
among other serious disorders.
Pain Management: Reduction of pain during repositioning or transfer
caused by, or associated with
-3-
<PAGE>
certain physical or pathological conditions such as severe burns,
postoperative care, multiple trauma, arthritis and advanced cancer.
Labor Saving Device: Reduction of staffing required to transfer patients,
particularly heavy patients. Reduction of the menial tasks of nursing has
the potential of enhancing the quality of nursing care and helping reduce
the current shortage of nurses.
Reduction of Injuries to Patient and Attendant: There is a high incidence
of back injury associated with patient transfer, which may cause
attendants to lose time on the job, and contribute to the cost of workers
compensation insurance. The Company's transfer system may reduce the
incidence of such injuries.
VIVAX
Vivax commenced operations in 1991 under the name Comed as a distributor of
specialized beds, support surfaces and related equipment in the greater Boston
area. The specialized bed, support surfaces and related equipment
distributed by Vivax include the Novabed(R), air therapy beds, air therapy
mattresses, enclosure beds, low air beds, obese beds, mattress replacement
systems and mattress overlay systems. These beds and surfaces are used for the
treatment of pressure wounds, burns and trauma and the control of pain. Vivax
distributes its products to hospitals, nursing homes and related care
facilities and to the home care market. Historically, approximately 95% of
Vivax's operating revenues have been derived from the rental, rather than the
sale of specialty beds. Rental arrangements typically provide for ongoing
service of the beds by Vivax. Most institutions rent specialty beds from
Vivax on a daily basis while most of Vivax's home care customers rent
specialty beds on a monthly or longer basis. As of June 1996, Vivax was
renting specialty beds to approximately 60 institutions and approximately 90
home care customers.
Vivax does not have any exclusive or other contractual arrangements with the
manufacturers and suppliers of the products it distributes. Accordingly,
Vivax relies on the relationships it has developed with such manufacturers and
suppliers, its established distribution relationships, its service performance
and its reputation to attract and retain suppliers of product. Historically,
Vivax has relied on approximately 4 major suppliers and 2-3 lesser suppliers.
Vivax purchases the products it distributes at the prevailing dealer price.
Vivax also does not have any exclusive arrangements with any of its
customers. Accordingly, Vivax must compete on the basis of price and service
performance.
Vivax owns approximately 420 beds, approximately 60% of which are currently
being rented.
PROSPECTIVE MARKETS
Patient Population
The Novabed(R) is designed to assist patients, and has proven to be of
particular benefit for obese patients, who require assistance in transferring
in or out of a bed or chair. Persons who are bedfast or chair-fast generally
come from the following groups:
Elderly
According to statistics compiled by the United States Bureau of the Census,
in 1995 there were 33.4 million Americans age 65 or older and by 2000 this age
group is expected to increase to 34.3 million with approximately 6.6 million
elderly persons in the United Sates requiring long-term care.
Persons Severely Handicapped by Medical Conditions or Trauma
The Company believes that many persons who are severely disabled due to
muscular dystrophy and related neuromuscular disorders, including amyotrophic
lateral sclerosis (Lou Gehrig's disease), cerebral palsy,
-4-
<PAGE>
stroke or severe traumatic spinal cord injury can benefit from the Novabed(R).
Based on input from the Company's distributors, the Company's own beta-site
testing and limited sales to date, the Company believes that potential users
of its patient transfer system fall primarily into three categories:
(1) Hospitals and Rehabilitation Centers
The Company believes that its patient transfer system may provide needed
therapeutic benefits and may be particularly useful in such hospital service
areas as those used for post-operative care, rehabilitation, long-term care,
chronic disease, orthopedic care and cancer care. The Company considers
hospitals to be important potential customers. It believes that successful
clinical trials in hospitals are important in seeking medical acceptance and
that follow-on sales to hospitals will then spread the product's reputation
and produce referrals by hospital discharge planners and physicians for the
home care and nursing home markets. The Company has conducted beta site and
field trials in non-hospital settings and the Company's distributors are
compiling information with respect to utilization in the hospital setting.
The Company believes that hospitals which purchase its patient transfer system
may be better able to utilize staff, reduce patient transfer staff
requirements, reduce workers' compensation claims and reduce staff transfer-
related injuries.
(2) Nursing Homes
The Company believes that many residents in nursing homes require assistance
in using the toilet or are chair fast or bedfast. The Company believes that
nursing homes which purchase its patient transfer system may be better able to
utilize staff, improve quality of care given and reduce patient and staff
transfer-related injuries.
(3) Home Care Market
The Company believes that there are many adults residing at home who need
assistance in getting in or out of a bed or a chair. The Company also believes
that one of the reasons that some persons are moved from private homes to
nursing homes is that their spouse or other caregiver cannot effectively and
easily move the person between a bed and a commode or wheelchair with other
currently available transfer devices.
Nursing home costs are often financially devastating to the patient and
family. Many nursing home residents who were not initially indigent require
governmental assistance after exhausting their resources on nursing home care.
The Company believes that its transfer system would enable many patients to
be cared for at a lower per diem cost at home by a family member combined
with periodic visits by a nurse or home health care aide. The Company
believes that with a growing and relatively affluent elderly population, home
care is potentially its largest segment and that many home care families and
patients will have strong emotional or financial incentives to use its
transfer system to avoid or defer entry to a nursing home.
MARKETING AND DISTRIBUTION
Nova initially engaged, for select regions, distributors with experience in
the specialty bed market. These distributors in turn sell or rent direct to
institutions, to other dealers, and home healthcare service providers. In
addition, the Company recently acquired one of its distributors, Comed, which
has been engaged in the distribution of specialized beds and support surfaces
and equipment in the greater Boston area since 1991. As a result, the Company
now has in-house marketing and distribution capabilities in the greater Boston
market.
The Company has entered into seven distributorship agreements providing for
the sale and shipment of Novabed(R)s to each distributor and the granting of
an exclusive sales territory to each distributor. In 1994, the three
distributors then under contract with the Company ordered and were shipped an
aggregate of 20 Novabeds(R) which exceeded their aggregate minimum purchase
requirements by 5 units. In 1995, the
-5-
<PAGE>
Company sold and shipped 13 Novabeds(R) and 8 wheelchairs to its six
distributors, most of which were shipped in the first quarter. This sales
decrease resulted from the Company's focus on arranging, negotiating and
consummating the 1995 Financing and relocating its assembly operations from
New York to Connecticut and the Company's lack of sufficient working capital.
As a result, in 1995 the Company was unable to produce sufficient product to
satisfy its distributors' minimum purchase requirements of 38 Novabeds(R). The
Company and the two distributors who were unable to receive their minimum
purchase requirements in 1995 agreed to extend the period for selling and
purchasing the minimum requirements for 1995 and thereafter by one year and
agreed that all prior purchases would count toward their 1996 minimum purchase
requirement.
To date, the Company has generally encouraged the placement of and accepted
orders for product as it envisioned that product would be available shortly.
The Company's distributors generally have not placed firm orders until the
Company has indicated that product is or will be available. The following
table sets forth the number of Novabeds(R) ordered and delivered in each month
of 1996 to date:
<TABLE>
<CAPTION>
NOVABED(R) ORDERS RECEIVED NOVABED(R) ORDERS SHIPPED
-------------------------- -------------------------
<S> <C> <C>
January 1996 2 -
February 1996 3 2
March 1996 2 3
April 1996 9 2
May 1996 5 9
June 1996 2 3
</TABLE>
The Company's distributors have agreed to purchase a minimum number of units
from the Company over specified periods of up to 31 months from June 1, 1996,
which includes approximately 184 units during 1996. During the period January
1, 1996 to July 1, 1996, the Company shipped 19 units, all of which were
purchased by the Company's distributors. As of July 1, 1996, the Company had
unfilled orders for 2 units and 3 wheelchairs from a private hospital. The
distributors have not ordered a pro rata portion of their 1996 minimums.
Each distributor's purchase price is fixed for the period of the initial
purchase commitment. In addition to being required to satisfy a minimum
purchase commitment during an initial period, each distributor is required to
maintain certain annual purchase levels and to distribute such purchases
throughout the year to retain exclusive rights to sell in his territory. The
obligations of such distributors are not supported by financial or performance
guaranties. In the event any distributor is unable to achieve sales
equivalent to its minimum purchase requirement, either due to its failure to
adequately market the Novabed(R) or the inadequacy of the demand for the
Novabed(R), the Company will be relying on the financial strength of such
distributor to purchase the required minimum to be held in inventory by the
distributor. While the Company believes that these distributors are
financially sound, no assurance can be given that such distributors will
satisfy their obligations to the Company. No assurance can be given that the
Company will be able to obtain sufficient capital to meet its obligations
under these agreements to supply the number of units required. The Company
estimates that it will need to obtain an additional equity contribution of
approximately $2.75 million to finance its operations through June 1997.
There can be no assurance that the Company's estimates will prove to be
accurate. If the Company does not obtain the necessary additional financing
it may not be able to produce sufficient product to satisfy the minimum
purchase requirements of its distributors. Failure by the Company to produce
sufficient product to satisfy its obligations to its distributors would
constitute a default under the Company's distribution agreements which may
subject the Company to claims for damages and may allow the distributors to
terminate such agreements.
For the year ended December 31, 1995, sales aggregating approximately 87% of
the Company's net sales were made to the following distributors:
<TABLE>
<S> <C> <C>
Advanced Therapeutics, Inc. - $64,596 (29%)
Comed Systems, Inc. - $60,956 (28%)
Concept Medical, Inc. - $36,194 (16%)
</TABLE>
-6-
<PAGE>
<TABLE>
<S> <C> <C>
Recovercare, Inc. - $30,405 (14%)
</TABLE>
The distribution agreement between Nova and Comed was terminated in
connection with the acquisition of Comed by Nova. It is anticipated that Nova
will sell its products to Comed (now Vivax) on substantially the same terms
that Nova sells its products to Nova's independent distributors.
The names and exclusive territories of all the distributors are as
follows:
<TABLE>
<CAPTION>
NAME OF DISTRIBUTOR TERRITORY
------------------- ---------
<S> <C>
James J. Brooksbank (Medco Equipment, Inc.)* Minnesota
Innovative Medical Systems, Inc. Missouri, Kansas, Arkansas and part of Illinois
Advanced Therapeutics, Inc. Parts of Michigan and Wisconsin
Recovercare, Inc. Parts of New Jersey, Pennsylvania, Delaware
Stat Medical, Inc. Washington
Concept Medical Corporation Parts of Florida
JCM Capital Corp. New York
</TABLE>
* Medco Equipment, Inc. is an affiliate of James J. Brooksbank.
The Company is required to train the distributors' service personnel and
generally to fill orders within 180 days, although the Company's agreement
with one of its distributors requires that orders be filed within 30 days.
The distributors are required to service the product they sell in a high
quality manner to avoid loss of their right to market the Novabed(R).
The Company feels that working initially with distributors is the most
expeditious way to generate early sales, lower the Company's working capital
requirements by receiving prepayment on required product purchases and reduce
the initial cost to market the Novabed(R). Five of the Company's agreements
with its distributors require that 50% of the purchase price be paid upon
acceptance by the Company of an order and four of the Company's agreements
with its distributors require that the balance of the purchase price be paid
within 10 days after delivery of the product. One of the Company's
distributors is not required to make a prepayment, another distributor is only
required to make a 25% prepayment and three of the distributors either have
the right to pay the unpaid balance of the purchase price within 30 days of
delivery or no payment period is specified. If the Company enforces these
payment arrangements, partial payment upon order and accelerated payment upon
delivery arrangements will improve the Company's cash flow and reduce its
working capital requirements. In the past, the Company has waived these
payment provisions under certain circumstances and may do so in the future.
The Company recognizes revenue at the time of shipment of product.
The Company's ability to satisfy its production requirements will depend
upon the Company's ability to obtain additional capital and/or financing. The
Company's agreement with one of its distributors provides that such
distributor shall not be required to meet its minimum purchase requirements
during any period that the Company is not able to satisfy such requirements
and extends the term of such agreement by one month for every month of delay
for each order placed by the distributor.
Four of the Company's distributors own in the aggregate 818,784 shares of
the Company's Common Stock. Advanced Therapeutics, Inc. and Innovative
Medical Systems, Inc. acquired 66,667 and 60,000 shares, respectively, at a
cash price of $1.50 per share pursuant to the exercise in September 1995 of
certain call option rights granted to them by the Company in connection with
the 1995 Financing. See item 7 under "Management's Discussion and Analysis or
Plan of Operation - Liquidity and Capital Resources." JCM Capital purchased
450,450 shares of common stock from the Company at a cash price of $1.11 per
share as part of the private placement that constituted part of the September
1995 Financing. James J. Brooksbank acquired the following shares as part of
private placement transactions:
-7-
<PAGE>
<TABLE>
<CAPTION>
DATE PURCHASED NUMBER OF SHARES CASH PRICE/SHARE
- -------------- ---------------- ----------------
<S> <C> <C>
5/91 6,667 $1.50
2/15/94 50,000 1.00
3/17/94 85,000 1.00
4/17/94 100,000 1.00
-------
241,667
=======
</TABLE>
The option exercise price of $1.50 per share was negotiated by the Company
with Advanced and Innovative. The private placement price of $1.11 per share
paid by JCM Capital was negotiated by the Company with TimeCapital, the
private placement agent and is the same price paid by the other participants
in such private placement. The private placement prices paid by James J.
Brooksbank were established by the Company and made available to all
interested and qualified investors.
Because of the Company's desire to grow its business and its concern that
its existing distributors may not be able to fully satisfy their purchase
commitments over the agreed upon time frames, the Company is currently seeking
additional agreements with potential distributors, durable medical equipment
dealers or other organizations which have access to disabled persons who are
candidates for the Novabed(R) Patient Transfer System. The Company may also
consider entering into a license agreement or a joint venture agreement or
merger with a strategic partner. The Company also plans to retain the rights
to distribute its products and to set up its own regional distribution
systems, which it intends to do in the greater Boston market through its
acquisition of Comed. Nova intends to employ a direct sales force to sell to
hospitals, nursing homes, and other health care institutions. Sales to the
home healthcare market will be made through home medical equipment (HME) and
durable medical equipment dealers (DME), and home healthcare agencies. Nova
will cooperate with these dealers to install and service the product through
the dealer network.
In addition, the Company will also investigate a rental program, provided
that sufficient capital to finance the rental inventory can be obtained.
Equipment rentals to institutions would be handled directly by the Company.
For the home care market Nova would maintain ownership of the product and
would work with dealers where the dealer acts as a commissioned sales and
collection agent on equipment rental to the home.
The marketing operations of the Company are currently carried out by one
of the Company's executive officers assisted by service personnel. The
Company plans to hire additional marketing, sales and service personnel in the
near future.
The Company presently warrants the material and workmanship of its
patient transfer systems for a period of one year from the date of their sale.
The Company has fulfilled its warranty obligations in connection with its
initial production lot and retrofitted these units to correct design
deficiencies, improve reliability and incorporate product enhancements. These
and other design changes have been incorporated in the Company's subsequent
production runs.
BETA SITE AND FIELD TRIALS
Nova commenced its beta-site program in November 1992. The first unit was
installed for a clinical field trial in a full service skilled nursing home in
Connecticut. The nursing home uses the patient transfer system primarily for
stroke patients. Novabed(R) has been in service continually since installation
where it has performed very well with the service and nursing staff on the
designated floor able to quickly learn to operate the product. The nursing
home estimates that 25% of their current patients could use the patient
transfer system. They have purchased an additional Novabed(R) and intend to
try to purchase other units.
In February 1993, a second unit was placed in a private home of a patient
recommended by the Multiple Sclerosis Society. The patient, who lives with her
husband and daughter in a suburban home, is very debilitated. She has a live-
in home care attendant during the week. The family reports that the patient
often
-8-
<PAGE>
experiences severe pain after being seated in a chair or lying in bed for as
short a time as a half hour. This condition mandates frequent transfers to and
from the bed, averaging 10 to 20 times a day. Prior to the installation of the
Novabed(R) such frequent transfers placed an enormous, round-the clock, burden
on the home care attendant and the family. The family reports that on two
occasions, because of Novabed(R), the patient's doctor approved keeping the
patient at home during a required change in drug administration regimen
instead of requiring a normal 7 to 8 day hospitalization period.
Several minor changes in design were the result of feedback from these
trials and from considering the special needs of a nursing home. These changes
were implemented in the initial production run prior to sale of units to
distributors. Design change suggestions have come from current distributors
who have been using the production model. Certain of these changes have been
incorporated in the current production lot of 50 units.
FOREIGN MARKETS
Once the Company has successfully marketed its patient transfer system in
the domestic market, the Company plans to seek license or joint venture
agreements with foreign manufacturing or trading companies in Canada, Europe
and Japan. The Company, however, is not presently engaged in any license or
joint venture negotiations.
THIRD-PARTY REIMBURSEMENT
The market for medical devices is materially affected by the extent to
which the purchase price or rental cost will be reimbursed by third-party
payors, such as Medicare, Medicaid and private insurance. This is
particularly true with home care. Sales of capital equipment, such as the
Novabed(R) and the other specialized beds sold or rented by Vivax, to
institutions such as hospitals and rehabilitation facilities are not directly
reimbursed by Medicare but are indirectly reimbursed through an overhead
allocation.
In the home care equipment market, third-party reimbursement issues
center around whether the patient transfer system will be a covered item, the
level of reimbursement available, and for which medical indications
reimbursement will be available. In the absence of a national Medicare
coverage determination, the local contractors that administer the Medicare
program can, within certain guidelines, make their own coverage decisions.
Favorable coverage determinations for durable medical equipment are made in
those situations where a review concludes that the product is safe (FDA
approval required), the product is durable, medical efficacy can be
established, and the patient qualifies as needing the product for medical
reasons.
The Company has made a presentation to the Health Care Financing
Administration ("HCFA") in anticipation of submitting an application for a new
procedure code for the Novabed(R). HCFA has assigned analysts to the
Novabed(R) and will assist the Company in preparing the application for the
procedure code. A specific new procedure code is required prior to Medicare
approval.
To obtain a new procedure code, the Company will be required to
demonstrate that its patient transfer system is valuable and medically
beneficial to the home care patient and that it is not merely a luxury item.
To obtain data to support this position, the Company intends to sponsor a
study of home care patients who have each purchased, rented or been supplied
with its patient transfer system, and who could benefit from its use, e.g. by
improved health, reduced home care cost or postponing or avoiding entry into a
nursing home. The Company anticipates that such a study, expected to be
performed over a six month period will involve the establishment of
appropriate protocols, the assembly and documentation of study data and its
presentation to HCFA personnel. The Company believes that it may take a year
or more, subsequent to the completion of the study, to obtain a new procedure
code for its transfer system, and there is no assurance that it will succeed
in these regards. Because of the uncertainty that it can obtain a new
procedure code and a reimbursement level which is a major percentage of the
sale or rental price of the equipment (e.g. 80%), the Company has assumed in
its planning that a new procedure code will not be granted. It believes,
although there can be no assurance given, that in view of the number of
persons at home who need assistance in getting in and out of a bed or chair,
there will be sufficient demand for the Company's patient transfer system to
achieve commercial viability absent
-9-
<PAGE>
any reimbursement.
The agreement with one of the Company's distributors requires that the
Company apply for third party home care, hospital and nursing home
reimbursement approval for Medicare and New York State Medicaid no later than
April 30, 1997 and that if such approvals are not obtained within one year of
the date of application that such distributor's minimum order quantity shall
be reduced by 50% until such approval is obtained.
Approximately 21% and 24%, respectively, of Vivax's revenues for the year
ended May 31, 1995 and the nine months ended February 29, 1996 were derived
from Medicare. Reimbursement can be influenced by the financial instability
of private third-party payors and the budget pressure of and cost shifting by
governmental payors. In January and April 1996, respectively, Medicare Part B
reimbursement (which relates to home care patients) of specialty beds was
reduced by 20% and the criteria for determining eligibility of patients for
reimbursement for specialized beds were made materially more stringent.
Approximately 15% of Vivax's revenues is currently derived from Medicare Part
B reimbursement. These developments will have a materially adverse effect on
future sales of the Company. In addition, the Company believes that the
Medicare Part A reimbursement system for nursing home patients is likely to be
modified. It is anticipated that the new system will move away from current
cost-based reimbursement towards a managed care model with block awards to
fewer regional administrators who will rely on fewer suppliers. The impact of
any such changes is difficult to determine. Medicare Part A reimbursement
currently represents less than 10% of Vivax's revenues. However, any
reduction in coverage or reimbursement rates will have a material adverse
effect on the Company's results of operations.
The Company has added an air-therapy mattress as an option to the
Novabed(R). There are procedure codes and policies established for the use of
support surfaces for the prevention of decubitus ulcers. The distributors who
rent the Novabed(R) to their customers assist these customers in obtaining
Medicare reimbursement for the Novabed(R) outfitted with the air therapy
mattress.
In addition, the Company's operations are subject to federal, state and
local regulations with respect to environmental and safety matters. The
Company has obtained Eastern Testing Laboratories approval relating to certain
safety aspects of its Novabed(R). The cost of compliance with such laws and
regulations, in the Company's opinion, have not materially affected its
operations.
RESEARCH AND DEVELOPMENT
During the years ended December 31, 1994 and 1995, the Company expended
approximately $771,000 and $298,000, respectively on research and development
activities. The objective of the Company's research and development program
has been to complete development of its patient transfer system, achieve
manufacturing efficiencies to make it commercially acceptable, improve its
reliability and maintainability and to develop additional patient transfer
capabilities to improve the applicability and appeal of Novabed(R). The
Company has also developed a pre-production model of a powered wheelchair
which is compatible with Novabed(R).
MANUFACTURING
In the fourth quarter of 1995, the Company moved most of its
manufacturing and assembly operations into an approximately 27,750 square
foot facility in Bristol, Connecticut. This move consisted of relocating
certain equipment from Hauppauge, New York, which was accomplished at an
immaterial cost. The Company's New York facility is adequate for the
manufacture of only about 150 beds per year. The New York facility will
continue to phase out its manufacturing operations as the Connecticut facility
continues to be developed and ultimately the New York facility will be used
primarily for research and development and corporate offices.
Nova purchases off-the-shelf components such as hospital beds, motors,
actuators and mattresses, as well as special items such as seat cushions,
commode seats and certain electronic and manufactured parts. In the past, the
Company manufactured other remaining parts and components in-house. This
manufacturing
-10-
<PAGE>
was fairly limited and has been virtually eliminated in favor of
subcontracting this work. The Company intends to add in-house manufacturing
capabilities only when such efforts will result in cost savings and when it
has adequate capital. The Novabed(R) is then assembled and tested in
accordance with defined quality control procedures. Assembly includes welding
and electrical wiring. It is anticipated that with capital expenditures of
approximately $400,000 the Company will be able to manufacture in-house many
of the components of the Novabed(R) that are not standard, commercially
available parts, and thereby reduce its costs of production. The Company's
Connecticut facility has a production capacity of approximately 1,500
Novabeds(R) per year. The Company currently has 11 employees at its
Connecticut facility and plans to hire more as production requirements
increase.
The Company has selected a particular model of a hospital-type home care
bed for incorporation into its patient transfer system. This model is
currently being produced in large quantities. Although there can be no
assurances, the Company believes that this model will continue to be available
at reasonable prices for the proximate future. The Company has an agreement
with Omni Manufacturing, Inc., its primary supplier of the above-referenced
hospital-type bed to furnish the Company with up to 800 beds at a capped price
per bed for the two year period ending February 28, 1997. The Company, in the
alternative, may obtain such beds from other sources or undertake to
manufacture them in house, or modify its product design to use a different
manufacturer's bed, which are available from a number of alternative sources.
PATENTS AND TRADEMARKS
The Company has been issued 18 United States patents related to its
patient transfer system and bed sore prevention. These patents expire
commencing in 2005 through 2014. Three additional patent applications relating
to transfer system design and associated products are pending. The Company has
also filed a total of 22 patent protection applications in five European
countries, Japan, and Canada and plans to file additional applications in both
the United States and other countries.
The Company believes that patent protection will be of material
importance to its growth potential. In addition to patents and patent
applications covering the principles of its transfer system, the Company has
applied for patents on alternative approaches and methods which it does not
currently plan to utilize but which it believes are material to its patent
protection strategy. The Company has spent over $560,000 to date on patent-
related expenses and believes that it will obtain protection for the
approaches it is attempting to patent. Effective as of January 1, 1995, the
Company's policy is to capitalize legal fees for new processes and to write
these costs off over the remaining life of any patent, when received or to
write them off as soon as a patent application is rejected.
No assurance can be given that additional patents will be issued, or if
so issued, that the scope of protection afforded thereby or by the Company's
current patents will be adequate to protect the Company from competition.
Further, no assurance can be given as to the availability to the Company of
adequate financial resources to contest any possible patent infringement by
others.
In 1994, the Company registered the trademark "NOVABED" for use with its
product.
GOVERNMENT REGULATION
The Company's patient transfer system is a "medical device" subject to
regulation by the United States Food and Drug Administration (the "FDA"). As
in the case with other medical devices, manufacture of such systems are
subject to certain "good manufacturing practices" promulgated by the FDA and
the Company is subject thereto with regard to the manufacture of its patient
transfer systems. The Company believes that it is in compliance with such
regulations. The Company received pre-market 510(k) approval for Novabed(R)
from the FDA in October 1987. Since the date of such approval the Company has
made a number of modifications to the Novabed(R). Such modifications generally
comprise cost efficiencies and operational improvements. The Company believes
that these modifications individually and in the aggregate, do not
significantly affect the safety or effectiveness of the Novabed(R) as
described in its original 510(k) application to the FDA. The Company is in the
process of preparing a 510(k) application for its new products and expects
that the
-11-
<PAGE>
application will be submitted by September 1996. The application will also
update the current version of the Novabed(R). The Company anticipates that the
approval process will take approximately six (6) months after application is
made.
Vivax, like other Medicare providers, is subject to governmental audits
of its Medicare reimbursement claims. As a provider of services under the
Medicare programs, Vivax is also subject to the Medicare fraud and abuse laws.
COMPETITION
The market for hospital beds, and to some degree, wheelchairs, transfer
devices and patient lifts, is dominated by several large companies of which
Everest & Jennings International Ltd., Hill-Rom Company Inc. (a subsidiary of
Hillenbrand Industries, Inc.), Invacare Corporation, Sunrise Medical Inc. and
Stryker Corporation are among the largest. Other smaller companies such as
Trans-Aid Corp., Midmark Corp., Medical Laboratory Auto Inc. and American
Medical Systems are also engaged in the marketing of transfer and patient lift
devices. Virtually all of the Company's competitors have substantially greater
financial, manufacturing and marketing resources than the Company.
Optimum pricing of Novabed(R) rental and sales units is difficult since
the Company believes that nothing in the current marketplace provides the
features and benefits of its patient transfer system. The Company's standard
model for home care use is being offered for sale to distributors at
approximately $11,500 and for rental by the distributor at approximately $75
per day. The Company's Obese Model is offered for sale to distributors at
approximately $13,500 and for rental by the distributor at approximately $100
per day. The Company may test various pricing strategies as new sales and
service areas are opened. By way of comparison, other specialty bed products
such as air-therapy beds are comparably priced while standard hospital beds
may cost substantially less.
The Company believes that it will be able to initially compete on the
basis of product features and performance, particularly with regard to
transfer mobility between bed and wheelchair/commode. Although the Company
believes that it will be difficult, expensive and time consuming for another
concern to develop a product similar to the Company's patient transfer system
without infringing on the Company's patents, it is possible that a concern
could do so. No assurance can be given, however, that companies with
substantially greater resources than the Company have not developed or are not
in the process of developing patient transfer technology and products which
would be competitive with the Company's patient transfer system in terms of
product features, performance and price.
Third-party payors, such as Medicare, Medicaid, and private insurance
companies, reimburse many durable medical equipment purchases and rentals. A
conventional home care hospital-type bed and a conventional wheelchair as
stand-alone units are presently reimbursed at the rate of 80% of cost. The
Company at this time does not have advance approval of third-party
reimbursement and no assurances can be given that an adequate level of third-
party reimbursement, or any reimbursement at all, will be available to
customers for its patient transfer system. Failure to obtain favorable
determinations concerning reimbursement may have a material adverse effect on
the Company's competitive position. Although the Company has been able to
effect sales and to sign up distributors for minimum purchase commitments
without any direct third-party reimbursement, the ability of the Company to
achieve adequate sales to become profitable will be adversely affected if
direct third party reimbursement for the Company's products is not obtained.
Vivax faces competition from manufacturers who distribute similar
products directly in the greater Boston area and independent distributors of
similar products in this market. Vivax is also facing increased competition
from less costly and less sophisticated devices which have gained market
acceptance and are being mass marketed. As a result of this increased
competition, product pricing has eroded and service demands have increased
despite the substantial increase in the population of patients using products
of the type distributed by Vivax.
-12-
<PAGE>
EMPLOYEES
At the end of June 1996 the Company had twenty-two full-time employees,
including four executive officers, working for Nova and thirteen full-time
employees devoted to the Vivax business. The Company also employs part-time
technicians, when needed. The Company anticipates hiring additional
manufacturing personnel as necessary to meet production requirements.
APPROVALS AND CERTIFICATIONS
The patient transfer system has been tested and examined by ETL Testing
Laboratories, Inc. and found to comply with the applicable requirements of the
Standard for Personal Care and Health Care Applications - UL1431, for Motor
Driven Appliances - UL73, and the Standard for Medical and Dental Equipment -
UL544.
Item 2. DESCRIPTION OF PROPERTY
The Company leases 7,500 square feet of space in Hauppauge, New York
which is used for corporate offices, administration, manufacturing,
warehousing and research and development. The lease, which provides for a
monthly rental of $4,375, expires September 30, 1996. The Company is obligated
to pay its proportionate share of the landlord's real estate taxes and
increases in the landlord's common area maintenance charges. If the lease is
not continued, the Company anticipates no substantial business disruption in
securing alternative or expanded facilities.
The Company leases approximately 27,750 square feet of space in Bristol,
Connecticut which is used for fabricating, assembly, shipping, warehousing and
administration. The lease, which provides for a monthly rental of $11,563 is
for a term of five years commencing September 1, 1995 and ending August 31,
2000. The Company is required to pay its proportionate share of the landlord's
real estate taxes, insurance and common area maintenance charges. The Company
has an option to renew the lease for an additional five years and also has the
right to lease an additional 2,250 square feet of the building.
Vivax leases approximately 6,500 square feet of space in Seabrook, New
Hampshire which is used for corporate offices and warehousing. The lease
provides for a monthly rental of $3,500 and expires on November 30, 1998. The
landlord is the Drew Family Trust, the settlors of which are Douglas and Donna
Drew, the owners of all of the outstanding stock of Comed prior to its
acquisition by Nova. The Company believes that the terms of the lease are no
less favorable to the Company than would be obtainable in an arms length
transaction.
Item 3. LEGAL PROCEEDINGS
The Company is not a party to, nor is it aware of any threatened
litigation of a material nature.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on December 7, 1995.
The following matters were acted upon by the shareholders at the annual
meeting:
1. Paul DiMatteo, Charles F. Chubb, Stephen Fisher, Samuel N. Paul, Jay
M. Haft, Arlindo Jorge and Robert Segnini, were each elected to serve as
Directors of the Company for a term of one year or until their respective
successors are elected and qualified. Each Director received at least
3,623,918 votes.
2. The selection of Richard A. Eisner & Company, LLP as the Company's
independent auditors for 1995 was approved. There were 3,599,746 votes for
approval and 5,883 votes against approval.
-13-
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) The Company's Common Stock, $.01 par value, commenced trading on
March 30, 1992 and is traded sporadically on the OTC Bulletin Board under the
symbol "NOTL". The high and low bid information for the specified
quarterly period as reported on a computer database is set forth below:
<TABLE>
<CAPTION>
1995 1994
----------------- ------------------
High Low High Low
- ----------------- -----------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter 2 2 2 1/2 2
Second Quarter 2 2 3 2
Third Quarter 2 3/4 2 2 1/4 2
Fourth Quarter 2 3/4 2 1/2 2 1 3/4
- --------------------------------------------------------------------------
</TABLE>
The above bid quotations represent prices between dealers and do not
include retail markups, markdowns or commissions and may not represent actual
transactions.
(b) At December 31, 1995, there were approximately 370 record holders of
the Company's Common Stock.
(c) The Company's financing arrangements impose various restrictions on
the payment of dividends. The Company has neither declared nor paid any
dividends on its shares of Common Stock since inception. Any decision as to
the future payment of dividends will depend on the earnings and the
financial position of the Company and such other factors as the Board of
Directors deems relevant. The Company anticipates that it will retain
earnings, if any, in order to finance expansion of its operations.
Item 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
The Company, from its inception on January 23, 1984 through the fiscal
year ended December 31, 1994 had been engaged primarily in research and
development of its Novabed(R) patient transfer system and in raising capital
to design and develop a marketable product. The Company had been classified
as a development stage enterprise since substantially all of its efforts were
devoted to research and development and to establishing a new business and
there were no significant revenues. In 1994, the Company began taking orders
for Novabed(R) units and in June 1994, the Company shipped the first order of
Novabed(R) units since its inception and recorded sales of $233,000 in the
year ended December 31, 1994. The Company is now manufacturing its second lot
of Novabed(R) units and is incorporating certain design changes based on
suggestions from its distributors.
Since January 1, 1995, the Company is no longer classified as a
development stage enterprise. As of July 1, 1996, it had entered into seven
distributorship agreements providing for the sale and shipment of
Novabeds(R) to each distributor and the granting of an exclusive sales
territory to each distributor. See "Description of Business - Marketing and
Distribution."
In 1994, the three distributors then under contract with the Company
ordered and were shipped an aggregate of 20 Novabeds(R) which exceeded their
aggregate minimum purchase requirements by 5 units. In 1995, the Company sold
and shipped 13 Novabeds(R) and 8 wheelchairs to its six distributors, most of
which were shipped in the first quarter. This sales decrease resulted from
the Company's lack of sufficient working capital and the Company's focus on
arranging, negotiating and consummating the 1995 Financing and relocating its
assembly operations from New York to Connecticut. As a result, in 1995 the
Company was
-14-
<PAGE>
unable to produce sufficient product to satisfy its distributors' minimum
purchase requirements. The Company and the two distributors who were unable to
receive their minimum purchase requirements in 1995 agreed to extend the
period for selling and purchasing the minimum requirements for 1995 and
thereafter by one year.
In 1995, the Company decided to alter the way the Novabeds(R) are
produced. Through the first quarter of 1995, the Company produced a number of
the components of the Novabed(R) in-house. The Company is now subcontracting
all of this work, primarily to subcontractors in Connecticut, and is
conducting assembly operations. As a result, the Company will be able to
produce Novabeds(R) with less capital for tooling and equipment. The
Connecticut Presence Requirement contained in several of the Company's
financing agreements requires that the Company conduct a majority of its
operations in Connecticut. Only the Company's agreements with CII also
require that the Company conduct a majority of its subcontracting operations
in Connecticut. However, the CII agreements provide for an exception in the
event no Connecticut subcontractor is able to produce the products or provide
the services on commercially reasonable terms. Accordingly, the Company's
subcontracts must be fulfilled in Connecticut or pursuant to such exception.
The Company does not believe that the Connecticut Presence Requirement will
have a material impact on the Company even in light of its new subcontracting
policy.
The Company's distributors have agreed to purchase a minimum number of
units from the Company over specified periods of up to 31 months from June 1,
1996, which includes approximately 184 units during 1996. During the period
January 1, 1996 to July 1, 1996, the Company shipped 19 units, all of which
were purchased by the Company's distributors. As of July 1, 1996, the Company
had unfilled orders for 2 units and 3 wheelchairs. The distributors have not
ordered a pro rata portion of their 1996 minimums.
Prior to the acquisition of Comed by Nova, Comed was an independent
distributor of Nova Products. The distribution agreement between Nova and
Comed was terminated in connection with the acquisition of Comed by Nova. It
is anticipated that Nova will sell its products to Comed (now Vivax) on
substantially the same terms that Nova sells its products to Nova's
independent distributors. Historically, margins have been greater in the
business of distributing specialty medical beds than in the business of
manufacturing specialty medical beds for sale to distributors. Accordingly,
the Company anticipates that the acquisition of Vivax will have a positive
impact on revenues, income and the Company's margin.
RESULTS OF OPERATIONS
In the year ended December 31, 1995 the Company recorded sales of
$220,000 and incurred a net loss of $1,302,000 ($.27 per share) compared to
sales of $233,000 and a net loss of $1,211,000 ($.31 per share) in the year
ended December 31, 1994.
In the year ended December 31, 1995 the Company's cost of sales exceeded
its sales and the Company sustained a gross loss of $478,000 compared to a
gross loss of $325,000 in the year ended December 31, 1994. In 1995 and 1994,
unfavorable manufacturing variances from the Company's standard cost to
manufacture were primarily responsible for the gross loss. A substantial
portion of the excessive variance in both years was due to low quantities
produced, changes in product design and manufacturing methods and the fact
that the units produced were part of the Company's initial production run. As
a result, the number of units produced was insufficient to absorb
manufacturing overhead and direct labor efficiency was less than it would be
if the Company were operating at greater levels of production. In addition, in
September 1995 the Company opened its new 28,000 square foot manufacturing
facility and incurred start up expenses of approximately $50,000 which were
charged to cost of sales.
Research and development expenses declined $102,000 from $400,000 in 1994
to $298,000 in 1995. Payroll and payroll-related expenses declined $62,000
due to fewer employees devoted to research and development. Patent
development costs declined $21,000. In prior years, patent development costs
were charged to expense as incurred. In 1995, the Company began capitalizing
patent costs and will amortize these costs over the remaining lives of the
related patents. The amount capitalized in 1995 was $37,000 and amortization
of new patents received in 1995 aggregated $1,000.
-15-
<PAGE>
General, administrative, marketing and consulting expenses increased
$84,000 from $422,000 in 1994 to $506,000 in 1995. An increase in payroll and
payroll-related expenses ($50,000) is attributable to the hiring of a Senior
Vice President at the end of May 1994, who is devoting most of his energies to
marketing and to raising capital. The President's salary increased $14,000
from $78,000 in 1994 to $92,000 in 1995. In 1995, the President waived
payment of $75,750 earned in 1994 and $39,000 earned in 1995 and the aggregate
amount of $114,750 was charged to expense and credited to additional paid-in
capital. Increases in office salaries, travel and entertainment, patent
maintenance fees, insurance and professional fees were offset by a reduction
in consulting fees.
Interest expense declined $36,000 from $70,000 in 1994 to $34,000 in
1995. At January 1, 1995, two officers/stockholders forgave repayment of debt
due them by the Company aggregating $762,851 and also waived the accrual of
interest on notes payable due them for the first half of 1995. The reduction
in interest on the debt that was forgiven and the waiver of interest due for
the first half of 1995 resulted in interest expense savings of $51,000.
Interest expense and amortization of deferred finance costs and debt discount
on new financing offset this expense reduction by $15,000.
As a result of common stock sales and the exercise of warrants the
weighted average number of common shares used in computing loss per share
increased from 3,964,598 at December 31, 1994 to 4,783,050 at December 31,
1995.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1996 the Company used net cash in operating
activities aggregating $601,000 compared to $186,000 in the prior year's first
quarter. The increase in funds used in operating activities is attributable
to the increase in net loss and to increases in inventory, accounts receivable
and other assets as the Company began utilizing funds received in the 1995
Financing. The Company purchased equipment and capitalized certain tooling
costs aggregating $10,000 compared to $5,000 in the prior year. In the first
quarter of 1996 the Company received proceeds of $400,000 from borrowing under
the 1995 Financing.
During 1995 the Company used net cash in operating activities aggregating
$1,210,000 compared to $791,000 in the prior year. The increase in funds used
in operating activities is primarily attributable to increases in inventory,
accounts receivable and other assets as the Company began to utilize the funds
received in the 1995 Financing. The Company purchased equipment and
capitalized certain tooling costs aggregating $73,000 compared to $28,000 in
the prior year and provided cash from financing activities of $1,667,000
compared to $851,000 in 1994. In 1995, proceeds from the sale of Common Stock
net of issuance costs aggregated $1,525,000, proceeds from borrowings net of
deferred financing costs aggregated $42,000 and the Company received $100,000
from the exercise of warrants.
The Company, since its inception through December 31, 1993 has utilized
the issuance of shares of Common Stock as a source of working capital to pay
for rent, compensation, professional fees and to repay debt. During this
period, the Company issued approximately 457,000 shares of Common Stock to pay
such liabilities, aggregating approximately $837,000. In 1994, the Company
issued 15,632 shares in payment of rent and professional fees aggregating
$25,093. In 1995, the Company did not issue any common stock in payment of any
of its liabilities.
From January 1, 1995 through August 31, 1995, the Company sold
approximately 394,000 shares of Common Stock in private placement sales, from
which it derived net proceeds of approximately $545,000. In January 1995 the
Company received $99,600 from the purchase of 73,752 shares of Common Stock by
holders of warrants issued in 1990 with an exercise price of $3.00 per share
and an expiration date of December 31, 1994, which expiration was extended to
January 20, 1995 at a revised exercise price of $1.35 per share. The
remaining warrants to purchase 77,391 shares of Common Stock on the same terms
were not exercised and were permitted to lapse. In May 1996, the Company
sold 10,000 shares of Common Stock at $2.00 per share.
-16-
<PAGE>
The ongoing need for working capital has hindered the Company's ability
to operate in an efficient manner and to produce sufficient product. During
the Company's search for additional capital, it has attempted to alleviate
this problem by obtaining waivers of payment or deferring certain salaries,
extending repayment dates on officers' loans, reducing exercise prices and
extending exercise dates of expiring warrants and by selling restricted shares
of Common Stock in private placement sales.
As of September 5, 1995, the Company negotiated an equity and debt
financing package (the "1995 Financing") consisting of the following:
1. $888,280 in net proceeds after finder's fees and expenses, from the
sale of 900,901 shares of Common Stock at a price of $1.11 per share.
2. $1,000,000 loan facility from People's Bank under a two-year
revolving line of credit collateralized by a first lien on accounts receivable
and inventory and a cash collateral account. Nova is required to maintain an
amount equal to the estimated annual debt service on the outstanding People's
Bank loan in such cash collateral account. This loan bears interest at
People's Bank prime rate plus 1.50%. Advances shall not exceed 80% of
eligible accounts receivable plus 50% of eligible inventory. Eligible
accounts receivable and eligible inventory only include accounts receivable
and inventory related to Nova's Connecticut facility and do not include
accounts receivable and inventory of Vivax. Although, People's had no
obligation to advance funds until the $100,000 loan from the CDA and the
$200,000 loan from the DECD had been fully funded, People's Bank agreed to
waive such conditions because the Company temporarily deferred the purchase of
capital equipment to be purchased with the CDA and DECD loans. The Company
borrowed $250,000 in May and estimates that as of June 30, 1996 it had
approximately 80,000 of availability under the People's Bank facility.
3. $750,000 loan from CII maturing on September 5, 2001. The loan
bears interest at 10% and is collateralized by all of the Company's assets,
including a first lien on its intellectual property, a third lien behind
People's Bank and three of the Company's distributors on accounts receivable
and inventory and a first lien on all other assets. Interest only is payable
semi-annually commencing on the earlier of (i) September 5, 1998 or (ii) the
date the Company declares any dividend or repurchases any of its outstanding
stock. The loan was funded upon achievement of certain milestones and
advances of $100,000, $250,000, $150,000 and $250,000 were received by the
Company on September 5, 1995, January 26, 1996, March 26, 1996 and June 14,
1996. The final milestone was modified on June 7, 1996. In connection with
this loan, CII received warrants to purchase up to 300,000 shares of Common
Stock at $1.11 per share. Such warrants vested pro rata as the CII loan was
advanced. The warrants to purchase 200,000 shares which vested prior to March
31, 1996 have been valued at $78,800 using the Black-Scholes pricing model and
the fair market value of the Common Stock at the time of vesting of the
warrants.
4. $100,000 loan from CDA for the purchase of capital equipment,
maturing on September 1, 2002. This loan bears interest at 7.94% and is
collateralized by a first lien on the equipment to be purchased with the
proceeds. The loan is payable in equal monthly installments of principal and
interest commencing October 1, 1998 in an amount sufficient to fully amortize
the loan over its remaining term. If the Company's full time employment in
Connecticut is less than 67 jobs after February 1, 1998, then the Company must
prepay $1,500 of the loan for each job below such number and the interest rate
will be adjusted upward based on a sliding scale which increases based on the
number of jobs below such employment target. CDA also received warrants to
purchase 45,000 shares of Common Stock at $2.50 per share in exchange for a
guarantee securing the People's loan up to a maximum of $400,000.
5. $200,000 loan from DECD for the purchase of capital equipment,
maturing ten years from the date of the first advance. This loan bears
interest at 5% and is collateralized by a first lien on the equipment to be
purchased with the proceeds.
-17-
<PAGE>
6. $100,000 grant from the town of Bristol, Connecticut to help the
Company relocate its primary manufacturing operations to Bristol, of which
$50,000 was paid in October 1995 and $50,000 will be paid upon achievement by
the Company of certain employment levels at its Bristol facility.
7. Warrants to purchase an aggregate of 60,000 shares, collectively, of
Common Stock at a price of $2.50 per share and a security interest in the
Company's accounts receivable and inventory (which lien is subordinate to the
lien of People's Bank) were given to Comed (now Vivax), Innovative Medical
Systems, Inc. and Advanced Therapeutics, Inc., three of the Company's
distributors, in exchange for each of them agreeing to issue $200,000 letters
of credit securing the People's loan up to a maximum of $600,000. The letters
of credit were established for one year and must be replaced or extended for
an additional year. The Company and Innovative and Advanced also entered into
an agreement allowing such distributors to purchase, and allowing the Company
to require such distributors to purchase, under certain circumstances an
aggregate of up to 126,667 shares of restricted Common Stock at a price of
$1.50 per share. The call was exercised by such distributors in September
1995, and the Company received proceeds of $100,000 in 1995, $50,000 in
January 1996 and $40,000 in March 1996. Pursuant to the financing agreement
with People's, the proceeds received from the distributors reduced their
respective obligations to maintain letters of credit and are being held in a
restricted cash account for the benefit of People's Bank. Pursuant to the
put/call agreement, the number of warrants issued to the distributors was
reduced by 19,000. The remaining warrants to purchase an aggregate of 41,000
shares of Common Stock remain outstanding. The warrants issued to Comed have
been distributed to Douglas and Donna Drew.
The various creditors involved in the 1995 Financing, the Company,
Charles F. Chubb and Paul DiMatteo have entered into agreements (the
"Intercreditor Agreements") which, among other things, clarify the priority of
each creditor's lien on assets of the Company, limit the ability of the
creditors to transfer their financing interests in the Company or amend their
financing documents without obtaining the consent of CII and People's Bank and
establish restrictions and priorities with respect to payments and exercise of
remedies. These liens do not relate to assets of Vivax. A lien on all of the
assets of Vivax was granted as security for the Acquisition Debt.
As of June 30, 1996, the Company had borrowed $250,000 under the
revolving line of credit but had not received any funds under the equipment
loans, although it plans to begin to borrow from these sources in 1996. Legal
fees and commitment fees (excluding the value of warrants) in connection with
the 1995 Financing were approximately $90,000. At March 31, 1996 the Company
had a net worth of $197,000, working capital of $512,000, including
unrestricted cash of $274,000, accounts receivable of $115,000 and inventory
aggregating $483,000. At March 31, 1995, the Company had a net worth of
$50,000, working capital of $140,000, including cash of $97,000, accounts
receivable of $13,000 and inventory aggregating $171,000. The Company has
expended less than $40,000 to purchase furniture and equipment for its new
manufacturing facility in Bristol, Connecticut. Manufacturing operations
commenced in November and at March 31, 1996 the Company employed 11 workers in
this facility, including assemblers, welders, supervisors, a purchasing agent
and an administrative assistant. The Company is reviewing plans to purchase
additional manufacturing equipment and has accelerated manufacturing levels in
order to begin shipping meaningful quantities of Novabed(R) units. The Company
has no material commitments for capital equipment expenditures. The Company is
planning to seek additional distributors and accelerate product engineering
research and development.
The financing arrangements with CDA and DECD, both of which are
instrumentalities of the State of Connecticut, provide that the Company must
prepay such loans together with a prepayment penalty equal to 7.5% of the
loans and the guaranty if the Company physically transfers the operations of
its business located in Connecticut outside of Connecticut within 10 years.
The CII loan agreement requires, with certain exceptions, that the
Company maintain a "Connecticut
-18-
<PAGE>
presence" by basing at least 50% of its officers in Connecticut, basing a
majority of its employees in Connecticut and conducting the majority of its
operations in Connecticut. The Company is currently in compliance with this
requirement. The CII loan agreement contains a mandatory prepayment provision
in the event the Company ceases to maintain a Connecticut presence, the
Company sells Common Stock for its own account in an underwritten public
offering or there is a change in control of the Company or its assets. This
provision includes a prepayment penalty in an amount equal to the greater of
(i) an amount sufficient to provide a rate of return of 25% compounded
annually or (ii) the excess of the market price of the Common Stock underlying
the warrant granted to CII over the exercise price of such warrant. The grant
from the City of Bristol must be repaid if prior to August 8, 2005, the
Company relocates 60% of the equipment or employees of its manufacturing
operations outside of Bristol or the Company defaults in payment of property
taxes due to Bristol. The Company has treated the $50,000 grant paid by the
Town of Bristol as a grant award, to be recorded as income at a later date, if
applicable. In order to comply with these requirements, the Company
established its manufacturing facility in Bristol, Connecticut. See
"Description of Business - Manufacturing."
The Company's loan agreement with People's Bank requires that the Company
satisfy at the end of each quarter certain financial covenants as set forth
below:
<TABLE>
<CAPTION>
END OF EACH QUARTER DURING END OF EACH QUARTER DURING THE
THE PERIOD ENDING SEPTEMBER PERIOD COMMENCING OCTOBER 1,
30, 1996 1996 AND THEREAFTER
--------------------------- ------------------------------
<S> <C> <C>
Minimum Working Capital $ 500,000 $ 700,000
Minimum Current Ratio 1.50 to 1.00 1.75 to 1.00
Minimum Capital Funds $ 700,000 $1,300,000
Maximum Unsubordinated Debt Ratio 2.00 to 1.00 2.50 to 1.00
</TABLE>
For purposes of the agreement, "Working Capital" is defined as current assets
minus current liabilities, "Current Ratio" is defined as current assets
divided by current liabilities, "Capital Funds" is defined as the sum of
tangible net worth plus subordinated debt minus the sum of intangible assets
plus loans to officers, directors, employees and affiliates, and
"Unsubordinated Debt Ratio" is defined as total unsubordinated debt divided by
total capital funds. The Company believes that it is currently in compliance
with these covenants. However, such covenants become more stringent for the
quarter ending December 31, 1996. The People's Bank loan is secured in part
by three letters of credit which must be replaced or extended in September
1996 for an additional one year. Failure to satisfy any of these financial
covenants or to replace or renew the letters of credit constitutes a default
under the People's Bank financing which allows People's Bank to terminate its
obligation to provide financing to the Company and to accelerate all loans
outstanding to the Company. A default under the People's Bank financing also
constitutes a default under the Company's other financing arrangements. The
Company estimates that it will require approximately $2.75 million of
additional financing to finance its operations over the 12 month period
following June, 1996, including the payment of the $750,000 note of Vivax due
June 14, 1997, and to comply with the financial covenants contained in the
People's Bank loan agreement.
In connection with the acquisition of Comed, Vivax issued two promissory
notes of $750,000 each to Douglas and Donna Drew which are guaranteed by Nova.
The first note bears interest at the rate of 8%, requires monthly interest
payments and is due on June 14, 1997. The second note bears interest at 8%,
requires quarterly interest payments and matures on January 1, 2001.
Principal payments are due quarterly 60 days following each of the first three
calendar quarters and 110 days following the fourth calendar quarter,
commencing with the calender quarter ending December 31, 1997, in an amount
equal to the lesser of (i) $37,500 or (ii) 25% of the operating income of
Vivax during the prior calendar quarter. Both notes are secured by a second
lien on the accounts receivable and inventory of Vivax and a second lien on
Nova's intellectual property.
In connection with the 1995 Financing, Vivax posted an irrevocable letter
of credit to People's Bank on behalf of Nova for $200,000 which expires on
November 5, 1997. Vivax's obligation to reimburse the bank which posted the
letter of credit is secured by a first lien on Vivax's accounts receivable and
inventory. Nova's obligation to reimburse Vivax is secured by a second lien
on Nova's accounts receivable and inventory.
-19-
<PAGE>
On July 15, 1996, the Company obtained a $250,000 loan from Northern
Associates, L.P., an affiliate of TimeCapital Securities Corporation. The
loan bears interest at the rate of 10% per annum payable in registered Common
Stock, is due on October 14, 1996, is secured by 250,000 shares of
unregistered Common Stock and is convertible at the lender's option into
registered shares of Common Stock at the rate of $2.00 per share. If the
Company does not have registered shares available, it is obligated to register
sufficient shares of Common Stock to satisfy its obligations. The lender's
recourse with respect to the Company's payment obligations is limited to the
Common Stock pledged as collateral. The Company is obligated to deliver 2,500
shares of Common Stock to the lender as a fee.
The Company intends to continue to explore strategic alliances or
mergers in addition to the Comed acquisition as a means of improving the
Company's cash flow and capital. In this regard, the Company is engaged in
preliminary discussions with several distributors of medical products
regarding a potential business combination. The Company cannot state that any
of these transactions is probable because no agreement in principle with
respect to transaction price and all other material terms has been reached.
In addition, any such transaction is likely to be subject to the Company
obtaining additional financing and ongoing due diligence. There can be no
assurance that any such transaction will be consummated.
The Company has received reports on its financial statements from its
independent auditors which include an explanatory paragraph indicating that
substantial doubt exists about the ability of the Company to continue as a
going concern. The factors referenced by the auditors include the Company's
recurring operating losses and the need for additional financing for
commercial exploitation of its product. The Company estimates that it will
need to obtain an additional equity contributions of at least $2,750,000 to
finance its operations over the 12 month period following June, 1996. These
estimates are generated from an internally prepared business plan. The
Company has begun to seek additional capital and has retained TimeCapital
Securities Corporation ("TimeCapital") as its exclusive agent to assist the
Company in raising $1,000,000 through the sale of at least 500,000 shares of
Common Stock in a private placement or a registered offering. The Company has
also entered into an agreement with TimeCapital for it to act as the Company's
exclusive agent to assist in arranging for one or more qualified broker-
dealers to serve as the underwriter(s) on behalf of the Company in connection
with a public offering of Common Stock. See "Certain Relationships and
Related Transactions." The Company also has verbal agreements with three
finders, one of whom is Arlindo Jorge a director of the Company, pursuant to
which it will pay a commission of 10% of the proceeds of private placement
sales obtained by the finders. There can be no assurance that the Company's
estimates will prove to be accurate, that the Company will be able to raise
such additional capital or that the Company's existing distributors will
fulfill their minimum purchases. See "Description of Business - Marketing and
Distribution." If such contingencies are not realized, the Company would have
to drastically reduce its staff and curtail manufacturing operations which may
result in a default under and acceleration of the Company's loan obligations
and, ultimately, bankruptcy and/or the discontinuance of operations.
-20-
<PAGE>
Item 7. FINANCIAL STATEMENTS
PAGE Table of Contents
---- -----------------
F-1 Report of Independent Auditors.
F-2 Balance Sheets as at December 31, 1995 and December 31, 1994.
F-3 Statements of Operations for the two years ended December 31, 1995.
F-4 Statement of Changes in Stockholders' Equity (Deficiency) for the
two years ended December 31, 1995.
F-5 Statements of Cash Flows for the two years ended December 31, 1995.
F-6 Notes to Financial Statements.
-21-
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Nova Technologies, Inc.
Hauppauge, New York
We have audited the accompanying balance sheets of Nova Technologies, Inc. as
at December 31, 1995 and December 31, 1994, and the related statements of
operations, changes in stockholders' equity (deficiency), and cash flows for
each of the years then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in
all material respects, the financial position of Nova Technologies, Inc. as at
December 31, 1995 and December 31, 1994, and the results of its operations and
its cash flows for each of the years then ended in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has experienced recurring operating losses and
will require additional financing for the commercial exploitation of its patient
transfer system. These factors raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Richard A. Eisner & Company, LLP
New York, New York
February 12, 1996
With respect to the last paragraph
of Note 9[a]
March 26, 1996
With respect to Note 1
April 26, 1996
F-1
<PAGE>
NOVA TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------
A S S E T S 1995 1994
----------- ------------ -----------
(Note 9)
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 2)..................... $ 485,819 $ 102,245
Inventories (Notes 2 and 3)............................ 332,995 206,106
Accounts receivable.................................... 45,155 12,870
Prepaid expenses and other current assets.............. 71,185 51,516
----------- -----------
Total current assets............................ 935,154 372,737
Restricted cash (Note 9[b])............................... 100,000
Subscription receivable (Note 9[b])....................... 90,000
Equipment and leasehold improvements (net of accumulated
depreciation and amortization of $226,576 in 1995 and
$138,200 in 1994) (Note 2)............................. 136,256 152,925
Deposits and other assets................................. 64,931 16,457
Deferred financing costs (Note 9)......................... 69,852
----------- -----------
T O T A L....................................... $ 1,396,193 $ 542,119
=========== ===========
L I A B I L I T I E S
---------------------
Current Liabilities:
Accounts payable and accrued expenses.................. $ 277,430 $ 136,273
Customer prepayments................................... 18,909 51,972
Notes payable - officers (Notes 4)..................... 5,360
Deferred officers' compensation (including accrued
interest of $684 in 1995) (Note 10[a])............... 86,767 18,617
----------- -----------
Total current liabilities....................... 383,106 212,222
Notes payable - other (net of deferred debt discount of
$15,111) (Note 9[a])................................... 88,102
Notes payable - officers (including accrued interest of
$15,779 in 1995 and $36,917 in 1994) (Note 4).......... 290,779 343,926
Deferred officers' compensation (including accrued
interest of $69,523 in 1994) (Note 10[a]).............. 687,973
Grant award (Note 9[e])................................... 50,000
----------- -----------
Total liabilities............................... 811,987 1,244,121
----------- -----------
Commitments (Note 10)
STOCKHOLDERS' EQUITY (DEFICIENCY)
-----------------------------------
(Note 1)
Preferred stock (Note 6)..................................
Common stock - $.01 par value; 14,000,000 shares
authorized; 5,791,083 and 4,295,365 shares issued and
outstanding, respectively.............................. 57,911 42,954
Additional paid-in capital................................ 9,847,887 7,274,428
Deficit................................................... (9,321,592) (8,019,384)
----------- -----------
Total stockholders' equity (deficiency)......... 584,206 (702,002)
----------- -----------
T O T A L....................................... $ 1,396,193 $ 542,119
=========== ===========
</TABLE>
Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.
F-2
<PAGE>
NOVA TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1995 1994
----------- -----------
<S> <C> <C>
Net sales................................... $ 220,368 $ 233,278
----------- -----------
Costs and expenses:
Cost of sales............................ 697,901 558,262
Research and development expenses........ 297,780 400,202
General, administrative and consulting
expenses............................... 506,124 421,573
----------- -----------
Total costs and expenses.......... 1,501,805 1,380,037
----------- -----------
(Loss) from operations before other income
and (expenses)........................... (1,281,437) (1,146,759)
Other income and (expenses):
Interest and other income................ 13,201 5,197
Interest expense and other............... (33,972) (69,575)
----------- -----------
NET LOSS.................................... $(1,302,208) $(1,211,137)
=========== ===========
Net loss per share (Note 2)................. $(.27) $(.31)
=========== ===========
Weighted average number of common shares
outstanding (Note 2)..................... 4,783,050 3,964,598
=========== ===========
</TABLE>
Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.
F-3
<PAGE>
NOVA TECHNOLOGIES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Common Shares
Outstanding
------------------ Additional
Number of Paid-in
Shares Amount Capital Deficit
--------- ------- ----------- ------------
<S> <C> <C> <C> <C>
Balance - December 31, 1993....................................... 3,474,963 $34,750 $6,343,418 $(6,808,247)
Year ended December 31, 1994:
Common stock issued to landlord for rent....................... 10,940 109 10,831
Common stock issued for cash................................... 804,770 8,048 936,607
Costs incurred in connection with issuance of common stock..... (93,465)
Common stock issued for professional services rendered......... 4,692 47 14,106
Value assigned to warrants given to employees.................. 62,931
Net loss for the year ended December 31, 1994.................. (1,211,137)
--------- ------- ---------- -----------
Balance - December 31, 1994....................................... 4,295,365 42,954 7,274,428 (8,019,384)
Year ended December 31, 1995:
Exercise of warrants........................................... 73,752 737 98,828
Common stock issued for cash................................... 1,361,966 13,620 1,677,977
Costs incurred in connection with issuance of common stock..... (166,778)
Value assigned to warrants given in connection with financing
(Note 9)..................................................... 28,000
Subscription receivable from distributor....................... 60,000 600 89,400
Value assigned to warrants given to employees.................. 24,681
Waiver of prior years deferred compensation and forgiveness
of debt to officers.......................................... 762,851
Waiver of deferred compensation to officers - current
year......................................................... 58,500
Net loss for the year ended December 31, 1995.................. (1,302,208)
--------- ------- ---------- -----------
BALANCE - DECEMBER 31, 1995....................................... 5,791,083 $57,911 $9,847,887 $(9,321,592)
========= ======= ========== ===========
</TABLE>
Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.
F-4
<PAGE>
NOVA TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1995 1994
------------ ------------
Cash flows from operating activities:
<S> <C> <C>
Net loss.................................................................. $(1,302,208) $(1,211,137)
Adjustments to reconcile net loss to net cash (used in)
operating activities:
Depreciation and amortization........................................... 90,344 76,800
Value assigned to warrants given to employees of the Company............ 24,681 62,931
Increase in grant award................................................. 50,000
Waiver of deferred compensation......................................... 58,500
Common stock issued in lieu of cash payment to landlord for rent........ 10,940
Common stock issued for professional services rendered.................. 14,153
Changes in operating assets and liabilities:
(Increase) in inventories............................................. (126,889) (11,519)
(Increase) in accounts receivable, prepaid expenses and other assets.. (100,428) (37,577)
(Increase) in restricted cash......................................... (100,000)
Increase in accounts payable and accrued expenses..................... 108,686 65,412
Increase in deferred officers' compensation........................... 67,466 172,367
Increase in accrued interest payable.................................. 19,676 67,012
----------- -----------
Net cash (used in) operating activities............................ (1,210,172) (790,618)
----------- -----------
Cash flows from investing activities:
Purchase of equipment and capitalized tooling costs....................... (72,786) (27,723)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable............................................... 200,000
Proceeds from sale of common stock........................................ 1,691,597 944,655
Issuance costs incurred in sale of common stock........................... (166,778) (93,465)
Proceeds from exercise of warrants........................................ 99,565
Repayment of notes payable................................................ (100,000)
Deferred financing costs.................................................. (57,852)
----------- -----------
Net cash provided by financing activities.......................... 1,666,532 851,190
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS........................................ 383,574 32,849
Cash and cash equivalents at beginning of year............................... 102,245 69,396
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR..................................... $ 485,819 $ 102,245
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid............................................................. $ 3,575 $ 1,451
Noncash transactions:
Forgiveness of debt owed to officers.................................... 762,851
Subscription receivable................................................. 90,000
Value of warrants given in connection with financing.................... 28,000
</TABLE>
Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.
F-5
<PAGE>
NOVA TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE 1) - The Company:
- ----------------------
Nova Technologies, Inc. (the "Company") developed and manufactures an advanced
patient transfer system. The Company, which was in the development stage prior
to 1995, is manufacturing, marketing and selling its patient transfer systems
and therefore is no longer in the development stage.
The Company has experienced significant losses since inception. In order to
achieve profitable operations, the Company will have to reach levels of
manufacturing and sales, sufficient to cover its operating expenses. In this
regard management's plans are to obtain additional financing through equity
offerings or debt financings, a strategic alliance or joint venture arrangement.
In April 1996, the Company entered into an agreement with a placement agent to
pursue a private placement of at least 250,000 shares of its common stock. There
is no assurance that such financing or that a strategic alliance or joint
venture arrangement will be consummated on terms acceptable to the Company.
There is no assurance that the Company can establish profitable operations.
(NOTE 2) - Summary of Significant Accounting Policies:
- -----------------------------------------------------
[a] Inventories:
-----------
Inventories are stated at the lower of cost (first-in, first-out) or market.
In estimating the net realizable value of inventories, management considers
technological obsolescence as a factor, based on industry trends and
developments.
[b] Equipment and leasehold improvements:
------------------------------------
Equipment (which includes internally constructed tooling of $51,000 in 1995
and $88,000 in 1994) is recorded at cost and depreciated on the straight-line
method over their estimated useful lives of 3 to 5 years. Leasehold
improvements are amortized using the straight-line method over the shorter of
the lease term or the estimated useful life of the asset.
[c] Cash flow statement:
-------------------
For purposes of reporting cash flows, the Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
(continued)
F-6
<PAGE>
NOVA TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE 2) - Summary of Significant Accounting Policies: (continued)
- -----------------------------------------------------
[d] Net loss per share:
------------------
Net loss per share has been computed based on the weighted average number of
shares outstanding during each year.
[e] Rent expense:
------------
The Company for financial accounting purposes, spreads scheduled rent
holidays over the term of the lease on a straight-line basis.
[f] Revenue recognition:
-------------------
Revenues are recognized at the time of the shipment of patient transfer
systems.
[g] Use of estimates:
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
[h] Nonmonetary transactions:
------------------------
The Company's policy is to record the issuance of common shares for services
or to satisfy other obligations at the fair value of the common shares issued.
[i] Recently issued accounting standards:
------------------------------------
The Company has not elected to adopt early the provisions of two recently
issued accounting standards regarding impairments of long-lived assets ("FAS
121") and stock based compensation ("FAS 123"). FAS 121 requires entities to
review long-lived assets and certain identifiable intangibles to be held and
used, for impairment whenever changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. FAS 123 establishes a fair
value based method of accounting for stock-based compensation plans. The
Company has not determined the potential impact, if any, of the adoption of
these standards on its financial position or results of operations.
(Continued)
F-7
<PAGE>
NOVA TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE 2) - Summary of Significant Accounting Policies: (continued)
- -----------------------------------------------------
[j] Deferred financing costs:
------------------------
The Company amortizes the deferred financing costs of any financings, over
the period in which the obligation matures.
[k] Warranty obligations:
--------------------
The Company provides a warranty on the sale of its products for a period of
one year. To date warranty obligations have been insignificant.
[l] Patent costs:
------------
The Company, which was in the development stage prior to 1995, expensed
patent costs during that stage as incurred since recovery of capitalized patent
costs was not reasonably determinable. Subsequently, patent costs are being
capitalized and amortized over 17 years.
The Company estimates undiscounted future cash flows from products which are
covered by these patents. An impairment in the patent would be recognized if
those estimated future cash flows were less than the amortized costs.
[m] Reclassifications:
-----------------
Certain reclassifications have been made to the 1994 financial statements to
be comparable to the 1995 financial statements.
(NOTE 3) - Inventories:
- ----------------------
Inventories comprise the following:
<TABLE>
<CAPTION>
December 31,
------------------
1995 1994
-------- --------
<S> <C> <C>
Raw materials.... $115,907 $ 23,130
Work in process.. 167,714 82,639
Finished goods... 49,374 100,337
-------- --------
T o t a l. . $332,995 $206,106
======== ========
</TABLE>
F-8
<PAGE>
NOVA TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE 4) - Notes Payable - Officers:
- -----------------------------------
At December 31, 1995 the notes payable to officers, who are also stockholders,
as amended, bear interest at 11% and 12% per annum. The 11% and 12% notes
(aggregating $170,000 and $105,000, respectively) are payable on January 2,
1997. At the officers' discretion the notes can be repaid in cash or they may
elect to receive one three-year warrant in exchange for each dollar of debt, to
purchase the Company's common stock at $1.50 per share. The notes are
subordinated to the borrowings under the People's Bank and Connecticut
Innovations, Incorporated loan facilities (see Notes 9[a] and [b]). The notes
payable to the officers previously aggregated $312,369 and were due in 1996. Of
this amount, $37,369 of principal and $36,917 of interest was forgiven in 1995
(see Note 5).
(NOTE 5) - Waiver of Deferred Compensation and Forgiveness of Debt:
- ------------------------------------------------------------------
During 1995 two officers, who are also stockholders, agreed to waive the
payment of their prior year's deferred compensation, and to forgive the
repayment of certain notes payable and all accrued interest due to them as of
January 1, 1995. The waiver and forgiveness by these officers, aggregating
$762,851 was recorded as a contribution to additional paid-in capital and
calculated as follows:
Waiver of compensation owed . . . . . . . . . . . . . $618,450
Forgiveness of notes payable. . . . . . . . . . . . . 37,369
Forgiveness of accrued interest . . . . . . . . . . . 107,032
These same officers have agreed to waive the payment of a portion of their 1995
salaries in an amount aggregating $58,500, with a corresponding offset to
additional paid-in capital.
(NOTE 6) - Redeemable Convertible Preferred Stock:
- -------------------------------------------------
The Company has 1,750,000 shares of preferred stock authorized; of which
500,000 shares have been designated as Series A Convertible Preferred Stock.
F-9
<PAGE>
NOVA TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE 7) - Income Taxes:
- -----------------------
At December 31, 1995, the Company has approximate net operating loss and
research and development credit carryforwards, for income tax purposes, expiring
as follows:
<TABLE>
<CAPTION>
Net Research and
Operating Development
Expiration Losses Credits
- ------------ ---------- ------------
<S> <C> <C>
2000...... $ 121,000 $ 5,000
2001...... 536,000 25,000
2002...... 899,000 44,000
2003...... 802,000 21,000
2004...... 826,000 9,000
2005...... 234,000 12,000
2006...... 327,000 12,000
2007...... 771,000 29,000
2008...... 910,000 36,000
2009...... 940,000 35,000
2010...... 1,171,000 -
---------- --------
$7,537,000 $228,000
========== ========
</TABLE>
The Company's expected tax benefit rate of 34% has been reduced to zero due to
its nonutilization of its net operating loss. The provision for income tax
benefit and increase in valuation allowance thereon for the years ended December
31, 1995 and December 31, 1994 were $398,000 and $343,000, respectively.
The Company has a deferred tax asset of $2,335,000 resulting principally from
its net operating loss and research and development credit carryforwards which
have been fully reserved due to recurring operating losses and uncertainty about
future operating results.
Pursuant to the Internal Revenue Code, future utilization of past losses or
credits are subject to certain limitations based on changes in ownership of the
Company's stock. In addition, pursuant to the Tax Reform Act of 1986, the
Company's annual utilization of such limited net operating loss and tax credit
carryforwards will be further limited to a 90 percent reduction of its tax
liability as a result of the corporate alternative minimum tax.
F-10
<PAGE>
NOVA TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE 8) - Stock Warrants and Options:
- -------------------------------------
The exercise price for warrants and options issued in connection with services
rendered by nonemployees or financing arrangements is determined by negotiations
between the Company and the third party. Generally, warrants and options are
issued to employees with an exercise price of not less than the quoted market
price of the stock. If the Company issues options and warrants to employees at
less than the quoted market price, a compensation charge is recorded for the
difference between the exercise price and the quoted market price.
[a] Common stock warrants:
---------------------
The Company has outstanding warrants for the purchase of its common stock as
follows:
<TABLE>
<CAPTION>
Number of
Exercise Price Expiration Date Shares
--------------- --------------------- ---------
<S> <C> <C> <C>
Conversion of notes payable
and sale of common stock $3.00 December 31, 1997 (4) 33,943
Extension of note payable $2.25 March 14, 1997 18,333
Sale of common stock $3.00 December 31, 1997 (4) 6,667
Sale of common stock $4.50 December 31, 1997 (4) 31,333
Sale of units (1) March 31, 1997 500,000
Consulting agreement $2.00 February 4, 1997 100,000
Sale of common stock $7.09 (2) November 21, 1996 100,000
Services rendered $4.00 (3) March 30, 1996 5,500
Replacement of stock options $2.75 (5) December 31, 1999 172,599
Services rendered $1.50 (6) September 30, 1997 54,991
Services rendered $1.50 (6) December 31, 1997 7,941
---------
Warrants outstanding -
December 31, 1994 1,031,307
Services rendered $1.50 (6) March 30, 1998 9,141
Services rendered $1.50 (6) June 29, 1998 8,840
Services rendered $1.50 (6) September 29, 1998 6,699
Issued to officers $2.75 (7) December 31, 2002 300,000
Consulting agreement $2.61 (8) September 4, 2002 30,000
Connecticut financing $2.50 (9) September 1, 1997 33,750
Connecticut financing $1.11 (9) September 1, 2001 300,000
Connecticut financing $2.50 (9) September 1, 2002 11,250
Connecticut financing $2.50 (9) September 5, 1996 41,000
Other $2.75 December 31, 2002 6,667
---------
Warrants outstanding -
December 31, 1995 1,778,654
=========
</TABLE>
(1) May be redeemed by the Company at any time on 30 days prior written
notice at a price of $.05 per warrant if the average of the closing bid and
asked prices of the common stock equals or exceeds $11.00 per share during any
consecutive 10 day trading period and notice of redemption is given no later
than 20 days after the expiration of such 10 day trading period. In 1994 the
exercise price was reduced to $4.00 per share and the expiration date was
extended to March 31, 1997.
(continued)
F-11
<PAGE>
NOVA TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE 8) - Stock Warrants and Options: (continued)
- -------------------------------------
[a] Common stock warrants: (continued)
---------------------
(2) In connection with the public offering which occurred in February 1992,
the Company sold to the underwriter, at a nominal amount, warrants exercisable
over a three-year period commencing November 1993, to purchase 50,000 units at
$7.09 per unit, each unit consisting of one share of common stock and one
redeemable warrant.
(3) In 1994 the Company issued a warrant to purchase 5,500 shares of common
stock at an exercise price of $4.00 per share, expiring March 30, 1996, as
compensation, which it valued at $5,500.
(4) Warrants previously issued with an expiration date of December 31, 1994.
(5) In connection with the cancellation of certain stock options the Company
in 1994 granted a warrant to purchase 172,599 shares of common stock exercisable
at $2.75, which expires at December 31, 1999.
(6) The Company issued warrants to purchase 87,612 shares of common stock
(62,932 in 1994 and 24,680 in 1995) at an exercise price of $1.50 per share,
expiring at various dates through September 29, 1998, which is valued at $88,000
($63,000 in 1994 and $25,000 in 1995), in exchange for services rendered.
(7) The Company granted to two officers, who are also stockholders, warrants
to purchase 300,000 shares of common stock at an exercise price of $2.75 per
share, expiring December 31, 2002. The exercise price exceeded the market price
on the date of grant.
(8) The Company issued a warrant to purchase 30,000 shares of common stock
at an exercise price of $2.61 per share, expiring September 4, 2002 for
financial consulting, which it valued at $7,000.
(9) In connection with the various financing agreements entered into in
September 1995, the Company issued warrants to purchase up to 386,000 shares of
common stock at exercise prices of $1.11 and $2.50 per share expiring at various
dates through September 1, 2002. The exercisable portion of such warrants have
been valued at $21,000 (see Note 9). The value of such warrants is measured at
the time they become exercisable.
(continued)
F-12
<PAGE>
NOVA TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE 8) - Stock Warrants and Options: (continued)
- -------------------------------------
[b] Stock option plans:
------------------
The Company's 1985 incentive and general (nonstatutory) stock option plans as
amended, provided for the granting of options to purchase up to 500,000 shares
of its common stock to eligible employees and nonemployee directors. Both plans
expired in February 1995.
The Company's 1994 stock option plan (the "Plan") provides for the granting
to employees and directors of both incentive and nonstatutory stock options.
Pursuant to the Plan 500,000 shares of the Company's common stock have been
reserved for granting at prices and for periods determined by the Company's
Board of Directors. The Plan expires on October 31, 2004 and at December 31,
1994 no stock options had been issued under the Plan.
Stock options outstanding under these plans are as follows:
<TABLE>
<CAPTION>
Nonstatutory Incentive
------------ ---------
<S> <C> <C>
Outstanding at December 31, 1993
($1.50 - $4.75 per share)........ 100,935 207,499
Granted ($2.25 - $2.75 per share). 15,999 152,500
Cancelled........................... (57,600) (132,899)
------- --------
Outstanding at December 31, 1994
($1.50 - $4.75 per share)........ 59,334 227,100
Granted ($2.13 - $3.13 per share). 10,000 158,000
Cancelled........................... (16,667) (10,750)
------- --------
Outstanding at December 31, 1995
($1.50 - $4.75 per share)........ 52,667 374,350
======= ========
</TABLE>
At December 31, 1995 all of the nonstatutory stock options and 99,084 of the
incentive stock options were exercisable.
As at December 31, 1995, options for the purchase of 338,000 shares were
available for future grant.
F-13
<PAGE>
NOVA TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE 9) - Financing Agreements:
- -------------------------------
In September 1995, pursuant to a series of interdependent transactions, the
Company sold 900,901 shares of its common stock for an aggregate of $1,000,000
in a private placement, received a grant commitment from the city of Bristol,
Connecticut of up to $100,000 and received loan commitments to borrow in the
aggregate of up to $2,050,000 from a bank and from various agencies and public
authorities of the state of Connecticut in connection with moving its
manufacturing facilities to Bristol, Connecticut. The loan commitments are as
follows:
[a] The Company entered into a financing agreement with Connecticut
Innovations, Incorporated ("CII") to borrow up to $750,000 in four stages based
on the achievement of certain milestones at an interest rate of 10% per annum.
Interest only is payable semi-annually commencing on the earlier of (i)
September 5, 1998 or (ii) the date the Company declares any dividends or
repurchases any of its outstanding stock. Principal is due on September 5,
2001, collateralized by the assets of the Company, including patents, which
security interest except for patents, is subordinated to the security interest
of the Company's lending bank. As of December 31, 1995, the Company was
eligible and has borrowed $100,000 under this facility. The Company granted CII
a warrant to purchase 300,000 shares of common stock at an exercise price of
$1.11 per share, expiring on September 1, 2001. The warrant becomes exercisable
on a pro rata basis, as the Company achieves its milestones and makes additional
borrowings under the facility. As of December 31, 1995, 40,000 of such warrants
are exercisable and have been valued at $16,000. As the Company borrows
additional amounts and more warrants become exercisable, those warrants will
then be valued at the time of such borrowings.
The exercise price of the warrant is subject to downward adjustment if any
sales of common stock are made at less than $1.11 per share. The warrant may be
exercised on a "cashless basis", whereby the Company must pay to the
warrantholder an amount equal to the difference between the warrant exercise
price and the fair market value of the underlying stock.
The agreement contains provisions that provide for repayment of borrowings
under the facility in the event of 1) an underwritten public offering, 2) a
change of control of the Company, as defined and 3) failure to maintain a
Connecticut presence, as defined. The agreement also provides for a prepayment
premium in the amount of the greater of 1) return on borrowings recalculated at
25% per annum or 2) the difference between the warrant exercise price (or the
underlying common stock if the warrant has been exercised) of the exercisable
warrants and the market price of the common stock. Any payments representing
the prepayment premium will be charged to expense when incurred.
(continued)
F-14
<PAGE>
NOVA TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE 9) - Financing Agreements: (continued)
- -------------------------------
In January 1996 and March 1996, the Company borrowed $250,000 and $150,000,
respectively, under the second and third stages of the financing agreement. The
final $250,000 milestone requires 100 percent of the Company's direct labor
force to work in Connecticut, 75 percent of all manufacturing operations to be
located in Connecticut, 3 medical outcome studies to have been completed and
that the Company employ at least 3 sales and service staff, including an
insurance reimbursement specialist. The Company believes that it will receive
the final stage of funding in mid-year 1996.
[b] The Company entered into a loan agreement with People's Bank ("Peoples")
providing for a $1,000,000 revolving credit facility expiring on September 5,
1997 at an interest rate of prime plus 1 1/2%. Borrowings available under the
facility are limited to 80% of eligible accounts receivable and 50% of eligible
inventory and are collateralized by the Company's accounts receivable and
inventory. At December 31, 1995 no borrowings were made under this loan
agreement.
The facility contains restrictive covenants that limit capital expenditures
and other financial and ratio requirements with respect to working capital,
equity and unsubordinated debt. The facility also requires funds to be held in
escrow as a Debt Service Reserve, as defined in the agreement. The agreement
also restricts the payment of dividends.
The Connecticut Development Authority ("CDA") has guaranteed repayment of 40%
of the outstanding balance of the loan. The Company's president has guaranteed
repayment of 20% (up to $80,000) of any amounts paid by CDA to Peoples under
their guarantee. In addition, three of the Company's product distributors (the
"LOC Corporations") each agreed to provide an irrevocable letter of credit in
the amount of $200,000 for an aggregate of $600,000, which letters of credit can
be drawn down upon the failure of the Company to make when due any payment to
Peoples. In exchange for issuing these letters of credit, the Company issued
each of the LOC Corporations a warrant to purchase up to 20,000 shares (60,000
in the aggregate) of the Company's common stock at an exercise price of $2.50
per share.
Pursuant to a put/call agreement with two of the LOC Corporations, the
Company had the right to require the two LOC Corporations to purchase an
aggregate of 126,667 shares of common stock (or the LOC corporations had the
right to call the Company to issue its common stock) at $1.50 per share for
total proceeds of $190,000. The call was exercised by the LOC Corporations in
September 1995, and the Company received proceeds of $100,000 in 1995, $50,000
in January 1996. Pursuant to the financing agreement with Peoples, the proceeds
received from the LOC Corporations reduce their outstanding letters of credit in
that amount and the funds are to be
(continued)
F-15
<PAGE>
NOVA TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE 9) - Financing Agreements: (continued)
- -------------------------------
[b] (continued)
held in a restricted cash account by the Company. Under the put/call agreement,
the number of warrants issued to the LOC Corporations was reduced by 19,000.
The remaining warrants to purchase an aggregate of 41,000 shares of common stock
have been valued at $1,400.
[c] The Company entered into a loan agreement with CDA providing for a line of
credit of up to $100,000 until September 4, 1996 for 80% of the purchase price
of new or used equipment, bearing interest at the rate of 7.94%. The loan is
repayable in 48 equal monthly installments commencing October 1, 1998 and is
collateralized by all the equipment financed. The Company granted CDA warrants
to purchase an aggregate of 45,000 shares of common stock at an exercise price
of $2.50 per share. The warrants were valued at $3,600. At December 31, 1995
no borrowings were made under this loan agreement.
[d] The Company entered into an Assistance Agreement, which was approved
November 30, 1995 with the Department of Economic and Community Development
("DECD"), providing for a loan to the Company in an amount not to exceed
$200,000 for funding the relocation of the Company's factory (as defined
therein) at an interest rate of 5% per annum. The principal and interest of the
loan is due in 84 equal monthly payments commencing on the third anniversary of
the advancement date, and is collateralized by certain machinery and equipment.
At December 31, 1995 no borrowings were made under the Assistance Agreement.
[e] The Company entered into a Grant Agreement, dated August 8, 1995 with the
city of Bristol, Connecticut, providing, under certain conditions, for a grant
in an amount up to $100,000 ($50,000 was received in October 1995 and the
balance is to be received on the achievement of certain employment levels). If
the Company relocates its equipment or employees of its manufacturing facilities
outside the city of Bristol prior to August 8, 2005, the Company will be
obligated to immediately repay the grant.
(NOTE 10) - Commitments:
- -----------------------
[a] Employment agreements:
---------------------
At December 31, 1995, the Company has employment agreements with its
president and three other officers. The agreement with the president expires on
September 30, 1996. One agreement is cancellable by either party on 60-days
notice and the other two agreements are cancellable by the Company with six
months notice. Aggregate annual salaries pursuant to all the agreements
aggregate $412,000.
(continued)
F-16
<PAGE>
NOVA TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE 10) - Commitments: (continued)
- -----------------------
[a] Employment agreements: (continued)
---------------------
During the year ended December 31, 1995 the president of the Company and one
of its officers, both of whom are stockholders, waived payment of their deferred
salaries (along with accrued interest thereon at 6% per annum) due to them under
their employment agreements for the period January 1, 1991 through December 31,
1994 (see Note 5) and $58,500 for the year ended December 31, 1995. As at
December 31, 1995, the Company owed its president and two of its officers
approximately $86,000 in deferred compensation.
[b] Lease of premises:
-----------------
The Company entered into a five-year lease which commenced in September 1995
for office, warehousing and manufacturing space in Bristol, Connecticut.
The terms of the lease provide for the first two months rent to be paid in
the fifth year of the lease. Rental expense is recognized by the Company on a
straight-line basis over the life of the lease.
Minimum annual rental payments required are as follows:
Year Ending
December 31,
------------
1996. . . . . . . . . . . . $138,750
1997. . . . . . . . . . . . 138,750
1998. . . . . . . . . . . . 138,750
1999. . . . . . . . . . . . 146,458
2000. . . . . . . . . . . . 107,917
--------
T o t a l . . . . $670,625
========
The terms of the lease include escalation clauses for increases in real
estate taxes. The Company also has the option to extend this lease for an
additional five-year period at an adjusted rent based on certain cost of living
adjustments.
Additional premises are leased on a month-to-month basis at $4,375 per month
plus real estate taxes. Beginning January 1, 1994 and until May 31, 1994, the
Company's landlord agreed to accept shares of the Company's common stock at a
value of $1.00 per share in lieu of payment for approximately one-half of the
monthly obligation.
Total rent expense aggregated $125,000 and $68,000 for the years ended
December 31, 1995 and 1994, respectively (see Note 2[e]).
(continued)
F-17
<PAGE>
NOVA TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE 10) - Commitments: (continued)
- -----------------------
[c] Commission agreements:
---------------------
The Company has agreements with three finders pursuant to which it will pay a
commission of 10% of the proceeds of any financing obtained by these finders.
[d] Consulting agreement:
--------------------
In 1995, the Company entered into a five-year consulting agreement with a
financial consultant. In year one of the agreement, the Company is required to
make quarterly payments of 2,700 shares of common stock. In years two and three
of the agreement, the Company is required to make quarterly payments of $3,000,
payable in common stock. In years four and five, the Company is required to
make quarterly payments of $3,000, payable in cash or common stock at the
discretion of the consultant. Shares used to pay for the services rendered by
the consultant will be valued based on their fair value when issued.
[e] Arbitration proceeding:
----------------------
In 1993, the Company entered into an agreement for the sale of 1,250,000
units; each unit consisting of one share of common stock of the Company and one
common stock purchase warrant exercisable at $4.00 per share over a period of
three years, for $5,000,000. The Company did not receive any funds and
commenced an arbitration proceeding for breach of contract. In 1995, the
Company determined that the prospective buyers had no significant assets to
pursue and the Company discontinued the proceeding.
(NOTE 11) - Major Customers:
- ---------------------------
For the year ended December 31, 1995, sales to four separate customers $64,596
(29%), $60,956 (28%), $36,194 (16%) and $30,405 (14%) aggregated approximately
87% of the Company's net sales. For the year ended December 31, 1994, sales to
three separate customers $90,195 (39%), $65,852 (28%) and $57,615 (25%)
aggregated approximately 92% of the Company's net sales.
(continued)
F-18
<PAGE>
NOVA TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE 12) - Subsequent Events:
- -----------------------------
On January 1, 1996, the Company entered into a distribution agreement for the
sale of its patient transfer systems whereby the distributor has the exclusive
right to sell or lease the systems in specific territories in the state of New
York. Pursuant to the agreement, the distributor is required to order 50 of the
Company's products in the first year, 75 in the second year and 100 in the third
year, subject to the receipt by the Company of 3,000,000 in additional financing
by September 30, 1996. If the financing is not received, the distributor's
minimum order requirements increase to 150, 200 and 200 Nova products,
respectively.
(NOTE 13) - Acquisition of Comed Systems, Inc. [Unaudited]:
- ----------------------------------------------------------
On May 31, 1996, the Company,through a wholly owned acquisition corporation,
acquired all of the outstanding capital stock of Comed Systems, Inc. ("Comed"),
in exchange for the issuance of 600,000 shares of its common stock, and two
$750,000 promissory notes. The notes, which bear interest at 8% per annum, are
guaranteed by the Company. The first note is due in June 1997 and the second
note is due on January 1, 2001 subject to quarterly prepayment installments
commencing December 31, 1997. Such installments are equal to the lesser of
$37,500 or 25 percent of Comed's operating income (as defined).
F-19
<PAGE>
Item 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements with or changes in accountants during the
twenty-four months ended December 31, 1995.
PART III
Item 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The following sets forth information regarding the directors and
executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Paul DiMatteo 68 Chairman of the Board
Stephen Fisher 49 President, Chief Executive Officer,
Chief Financial Officer, Assistant Secretary,
Treasurer and Director
Charles F. Chubb 76 Senior Vice President, Secretary and Director
Samuel N. Paul 57 Senior Vice President and Director
Douglas Drew 51 Senior Vice President and Director
Harold J. Lash 64 Controller
Arlindo Jorge 72 Director
Robert Segnini 53 Director
</TABLE>
Jay M. Haft resigned as a director in July 1996 citing the press of
personal and business obligations. Mr. Chubb has indicated his intention to
retire in the near future. The Company is in discussions with Mr. Chubb to
retain him as a part-time consultant after he retires.
PAUL DIMATTEO, the founder and principal stockholder of the Company, has
been the Company's Chairman since its inception in January 1984 and was
President and Chief Executive Officer from the Company's inception until June
18, 1996 when he resigned and became Director of Research and Development.
From December 1977 until the beginning of the Company's active operations in
July 1984, Mr. DiMatteo was Chairman of the Board and President of Robotic
Vision Systems, Inc., ("RVSI"). From June 1960 until its merger in December
1977 with United Technologies Corporation ("United"), he was Chairman of the
Board and President of Dynell Electronics Corporation ("Dynell"), of which Mr.
DiMatteo was a co-founder. The merger of Dynell with United in December 1977
resulted in a spin-off company called Solid Photography, Inc., which later
changed its name to RVSI. For his inventions in three-dimensional vision, Mr.
DiMatteo was cited by Technology magazine as one of 100 persons responsible
for important technical advances during 1981. Mr. DiMatteo holds a Bachelor of
Science degree in Electrical Engineering from the University of Rhode Island
and is listed as the inventor or co-inventor on 70 patents and patents
pending.
CHARLES F. CHUBB has served as Senior Vice President and a Director of
the Company from 1985, as Treasurer from 1985 to March 1996 and as Secretary
from December 1994. From 1962 to 1978, he was Senior Vice President for
Research and Development at Dynell. After the merger in 1977 of Dynell and
United,
-41-
<PAGE>
he served as Manager of Shipboard Technology until joining the Company in
February 1985. Mr. Chubb holds degrees from Princeton University,
Massachusetts Institute of Technology and Polytechnic University and is listed
as the inventor or co-inventor on 20 patents and patents pending.
STEPHEN FISHER became President and Chief Executive Officer of the
Company as of June 18, 1996, on which date he ceased to serve as Senior Vice
President, a position he assumed in June 1994. Mr. Fisher has served the
Company as a Director since June 1994, as Assistant Secretary from December
1994 and as Chief Financial Officer and Treasurer from March 1996. From May
1992 to May 1994 he served as an officer and director of Aztech Corp., which
acted as a consultant to the Company during such period. From 1985 to 1992 Mr.
Fisher held various positions including President and Director of Memry
Corporation, a developer and manufacturer of new products. Prior thereto, he
was President of Materials Systems, Ltd., an engineering and management
consulting firm. He was an INCRA Fellow at Carnegie-Mellon University and was
an Assistant Professor and conducted research at West Virginia Institute of
Technology and Virginia Polytechnic Institute.
SAMUEL N. PAUL has served the Company as Senior Vice President since
September 1995 and as a Director since December 1995. From February 1992 to
May 1994 he was President, Chief Operating Officer and Director of Industrial
Health Care Company, a provider of occupational health services. From October
1990 to January 1992 he was Manager of International Sales and Marketing for
Colt's Manufacturing Company, a manufacturer of firearms. From May 1988 to
October 1990 he was a Vice President and Director of Shared Technologies,
Inc., a provider of leased communication equipment. Mr. Paul is President and
part owner of Meadowbrook, a skilled nursing facility located in Connecticut.
Mr. Paul holds a Bachelor of Science degree in Mechanical Engineering from the
University of New Hampshire.
DOUGLAS DREW became a Senior Vice President and a director of the Company
on June 14, 1996 when the acquisition of Comed was consummated. From 1989 to
June 1996, he was President, a Director and a substantial stockholder of
Comed, a company that he founded. Prior to the founding of Comed, Mr. Drew
was Director of North American Sales for Concept, Inc. and prior to that
Director of Sales and Marketing for Richards Medical.
HAROLD J. LASH has served the Company as Controller since March 1992.
From 1989 to 1991 he was Chief Financial Officer of Pen-Tab Industries Inc.,
a privately-held manufacturer of stationery and school supplies. From 1976 to
1988 he was Vice President-Finance and a Director of Aileen, Inc., a publicly-
held apparel manufacturer and retailer. Mr. Lash is a Certified Public
Accountant.
ARLINDO JORGE has been a Director of Syncor Industries, Inc. since 1972
and, until June 30, 1991, when he retired, had been Executive Vice President
of such concern as well as President of Syncor Services, Inc., which provides
sales and administrative services to Syncor Industries, Inc. Prior thereto, he
was an engineering manager in the Radiation Division of the Sperry Gyroscope
Company. Mr. Jorge holds a Bachelor of Science degree from the University of
Massachusetts and a Master's degree in Electrical Engineering from the
University of Michigan. He has been a Director of the Company since September
1988.
ROBERT SEGNINI, has been employed by the State University of New York at
Stonybrook as Director of Physical Laboratories in the Department of Physics
since 1990. From July 1986 through December 1989, Mr. Segnini was employed by
the Company as its Vice President of Operations. Prior to joining the Company,
he was a Vice President and a Director of RVSI. In February 1986, Mr. Segnini
left RVSI to establish Robotic Automation, Inc., an engineering and consulting
company specializing in the field of factory automation. Mr. Segnini holds an
Associate's degree in Electrical Engineering from the City University of New
York and is listed as the co-inventor on seven patents and patents pending in
the health care field. He has been a Director of the Company since July 1986.
The term of each director extends until the next annual meeting of
stockholders of the Company and until his successor is duly elected and
qualified. The term of each officer of the Company extends until the first
meeting of the Board of Directors following such next annual meeting, and
until his successor is duly elected
and qualified.
-42-
<PAGE>
Item 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table sets forth information with respect to the
compensation for services rendered in all capacities to the Company during its
fiscal years ended December 31, 1995, 1994 and 1993 by its Chief Executive
Officer. No executive officer's compensation exceeded $100,000 during the
Company's fiscal year ended December 31, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
------------ -------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) OPTIONS (#)
---------------------------- ---- ---------- ------------
<S> <C> <C> <C>
Paul DiMatteo-Chief Executive Officer 1995 $92,000(1) ---
1994 $78,000 (2) ---
1993 $78,000 (2) ---
</TABLE>
(1) $39,000 was waived and will not be paid; $2,250 has been paid; $50,750 was
deferred.
(2) $75,750 was deferred, then waived in 1995 and will not be paid; $2,250 has
been paid.
(3) $75,750 was deferred, then waived in 1995 and will not be paid; $2,250 has
been paid.
EMPLOYMENT AGREEMENTS
In 1984 and 1985, respectively, the Company entered into employment
agreements with Messrs. DiMatteo and Chubb, each of which provides for a
minimum annual compensation of $78,000, which was increased on September 1,
1995 to $120,000 and $100,000, respectively. The agreement with Mr. DiMatteo,
as amended(the "Old DiMatteo Employment Agreement"), terminated as of June 18,
1996 when Nova and Mr. DiMatteo entered into a new agreement. The agreement
with Mr. Chubb is cancellable by either the Company or Mr. Chubb on 60 days
notice. Mr. DiMatteo has waived payment of salaries due under the Old DiMatteo
Employment Agreement for the period January 1, 1989 through June 30, 1995
(aggregating approximately $507,000) and Mr. Chubb has waived payment of
salaries due under his employment agreement for the period January 1, 1989
through March 31, 1995 (aggregating approximately $487,000). In addition, Mr.
DiMatteo has agreed to defer until April 1997, payment of the balance of
compensation due under the Old DiMatteo Employment Agreement for the period
July 1, 1995 through December 31, 1995 (an aggregate of $50,750) and Mr. Chubb
has agreed to defer until April 1997, payment of the balance of compensation
due under his employment agreement for 1995 (an aggregate of $17,333). From
July 1, 1995 to December 31, 1995 such deferred balances have accrued interest
thereon at the rate of 6.5% per annum.
As of June 18, 1996, the Company and Paul DiMatteo entered into a new
three year Employment Agreement. The Employment Agreement automatically
renews for an additional two years unless Nova gives six months prior notice
or Mr. DiMatteo gives two months prior notice. Mr. DiMatteo resigned as Chief
Executive Officer and President of the Company and assumed the position of
Director of Research and Development. Mr. DiMatteo will continue to serve as
Chairman of the Board of Directors until his successor is elected and
qualified.
The Agreement provides for (1) an annual salary of $120,000 adjusted
upward annually based on the percentage increase of the Consumer Price Index
(the "CPI"), (2) the right to participate in any annual performance bonus
program, (3) five weeks vacation and up to one month of unpaid vacation in
1996 and two months in each year after 1996, (4) life insurance coverage equal
to the greater of the ratio of coverage to base
-43-
<PAGE>
salary offered generally to other executive officers or, in the event the
Company is not required to maintain life insurance pursuant its agreement with
People's Bank, $250,000, (5) full pay for up to nine months in the event of
absence from work due to sickness or disability, (6) a Novabed free of charge
(including service) for use by him or his wife during any period of
disability, (7) full pay for the balance of the initial three year term in the
event of termination without cause (the "Severance Payments"), and (8) the
right to participate immediately in any pension or other employee benefit plan
on terms comparable to those available to other executive officers with credit
for all purposes for all prior service to Nova. In the event Mr. DiMatteo
elects not to participate in any such pension plan, he is entitled to an
annual pension of $66,000 adjusted annually based on the CPI until his death
(the "Personal Pension"). The Personal Pension shall not be due during any
period that Mr. DiMatteo is receiving Severance Payments, shall be suspended
with interest accruing at 6.5% during any period of time that the Company is
in default, or if any payment of such pension would result in a default, of
any agreement relating to borrowed money (other than trade credit), shall be
suspended in the same proportion as any voluntary reduction of salary of the
other executive officers of the Company with such suspended portion accruing
interest at 6.5% per annum and payable when such salary reduction is reversed
and shall terminate when Mr. DiMatteo could have, in a practical manner and
without any reasonable doubt, received $3 million from the sale of his equity
in the Company.
The Employment Agreement requires that the Company (i) fund research and
development at a minimum of $350,000 per year exclusive of payroll taxes and
employee fringe benefits adjusted annually by the CPI and (ii) maintain its
current Hauppauge facility or a substitute facility of at least 3,000 square
feet devoted exclusively to research and development which shall not be
located beyond a ten mile radius of Dix Hills, New York. The Board of
Directors retains complete discretion with respect to all aspects of the
Company's research and development efforts. However, in the event any
reduction in funding or other Board directive materially limits or terminates
the research and development operations in Long Island, then such action
shall be deemed to constitute an "involuntary termination" entitling Mr.
DiMatteo to the Severance Payments. The funding for the research and
development operations may be reduced and same shall not constitute an
involuntary termination in the event of financial hardship as evidenced by a
reduction of greater than 20% in salary of all of the executive officers of
the Company.
The Employment Agreement requires that the Company use commercially
reasonable efforts to attempt to cause Mr. DiMatteo's guarantee of obligations
of the Company to the CDA to be terminated and to release his subordination
agreement for the benefit of People's Bank. The Agreement requires that
during its term and for one year thereafter Mr. DiMatteo not engage in any
competing business.
In May 1994, the Company entered into an employment agreement with
Stephen Fisher, engaging him as Senior Vice President at a salary of $96,000
per annum, of which $36,000 per annum was to be deferred for at least one year
(but not more than two years), and of which $60,000 per annum is payable in
cash as earned. In 1995, Mr. Fisher was paid $96,617, including $15,617 in
deferred compensation earned in 1994. At December 31, 1995, Mr. Fisher is owed
deferred compensation aggregating $18,000. The agreement also provides for Mr.
Fisher to receive a ten-year stock option to purchase 150,000 shares of the
Company's common stock at an exercise price of $2.75 per share. The employment
agreement provided for incentive compensation in the event Mr. Fisher obtained
certain financing for the Company. No such financing was obtained and no
incentive compensation was earned or paid and the term for such payment has
elapsed. The agreement with Mr. Fisher is cancellable by Mr. Fisher on 30 days
notice, and by the Company at its discretion subject to the payment of six
months salary as severance.
In September 1995, the Company entered into a three-year employment
agreement with Samuel N. Paul, engaging him as Senior Vice President at a
salary of $96,000 per annum. The agreement provides for Mr. Paul to receive a
stock option to purchase 150,000 shares of the Company's common stock at an
exercise price of $2.61 per share, which expires on December 31, 2004. The
agreement also provides for Mr. Paul to receive a seven-year warrant to
purchase 30,000 shares of the Company's common stock at an exercise price of
$2.61 per share. The agreement with Mr. Paul provides for severance payments
of six months, nine months and twelve months salary if Mr. Paul is terminated
without cause in the first, second or third year, respectively, of his
agreement.
-44-
<PAGE>
On June 14, 1996, the Company entered into a three-year employment
agreement with Douglas Drew, engaging him as Chief Marketing and Sales Officer
of Nova and Chief Operating Officer of Vivax at a salary of $112,800 per
annum. The agreement provides for continued payment of Mr. Drew's base salary
for one year in the event of his death, disability or termination without
cause.
STOCK OPTION PLANS
The Company's 1994 Stock Option Plan (the "Plan") was adopted by the
Board of Directors on November 1, 1994 and approved by the Company's
stockholders on December 14, 1994. The Plan provides for (i) the granting to
employees of stock options intended to qualify as "incentive stock options"
under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code") or (ii) the granting to employees and directors of non-statutory stock
options not intended to qualify as "incentive stock options". The Plan expires
on October 31, 2004 and is administered by a committee of the Board of
Directors which is empowered to select the optionees and determine, subject to
the provisions of the Plans, among other items, (i) the number of shares
subject to each option, (ii) the time at which the option becomes exercisable,
(iii) the exercise price, and (iv) the duration of the option. The exercise
price for incentive stock options granted under the Plan may not be less than
100% of the fair market value of the shares as of the date of grant (110% for
options granted to a participant who owns shares possessing more than 10% of
the voting rights of the Company's outstanding capital stock). The exercise
price for non-statutory options granted under the Plan is determined by the
committee of the Board of Directors at its absolute discretion. The maximum
number of shares of Common Stock which may be issued pursuant to options
granted under the plan shall not exceed Five Hundred Thousand (500,000)
shares.
In the year ended December 31, 1995, Mr. Haft, (a director of the
Company) was granted stock options to purchase 10,000 shares of Common Stock
at $3.13 per share through December 31, 2002 under the Plan and Mr. Paul (an
executive officer and a director of the Company) was granted stock options to
purchase 150,000 shares of Common Stock at $2.61 per share through December
31, 2004 under the Plan.
As of December 31, 1995, options to purchase an aggregate of 162,000
shares at exercise prices ranging from $2.61 to $3.13 per share and expiring
at various dates through December 31, 2004 were outstanding under the Plan.
Such options included (i) those held by Mr. Haft to purchase 10,000 shares at
$3.13 per share through December 31, 2002 and (ii) those held by Mr. Paul to
purchase 150,000 shares at $2.61 per share through December 31, 2004.
As of December 31, 1995, under the 1985 Incentive Stock Option Plan (the
"ISO Plan") and under the 1985 General Stock Option Plan (the "GSO Plan" and
collectively with the ISO Plan, the "Plans") (both Plans terminated on
February 19,1995 and from which options may no longer be granted), options to
purchase an aggregate of 265,017 shares at prices ranging from $1.50 to $4.75
per share and expiring at various dates through May 23, 2004 were outstanding
under the Plans. Such options included (i) those held by Mr. Haft to purchase
6,667 shares at $3.37 per share through December 31, 1999 (expiration date
extended from December 31, 1995) and 5,333 shares at $2.75 per share through
December 31, 1999 pursuant to the GSO Plan, (ii) those held by Mr. Segnini to
purchase 6,667 shares at $3.37 per share through December 31, 1999
(expiration date extended from December 31, 1995) and 5,333 shares at $2.75
per share through December 31, 1999 pursuant to the GSO Plan, (iii) those held
by Mr. Jorge to purchase 6,667 shares at $3.00 per share through December 1,
1998 and 6,667 shares at $3.37 per share through December 31, 1999 (expiration
date extended from December 31, 1995) and 5,333 shares at $2.75 per share
through December 31, 1999 pursuant to the GSO Plan, (iv) those held by Mr.
Fisher to purchase 150,000 shares at $2.75 per share through May 23, 2004
pursuant to the ISO Plan.
No executive officer or director exercised any stock options in the year
ended December 31, 1995.
DIRECTOR COMPENSATION
Non-employee directors are entitled to receive $200 for each Board of
Directors or committee meeting attended and $50 for participation at a
telephone meeting or execution of a consent in lieu of a meeting.
-45-
<PAGE>
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of July 30, 1996, the number and
percentage of shares of Common Stock held by (i) all persons who, to the
knowledge of the Company, are the beneficial owners of more than five percent
(5%) of the Company's outstanding Common Stock; (ii) each director and
executive officer of the Company; and (iii) all executive officers and
directors of the Company as a group:
<TABLE>
<CAPTION>
AMOUNT OF
NAME AND ADDRESS BENEFICIAL
OF BENEFICIAL OWNER OWNERSHIP (1) PERCENT OF BENEFICIAL OWNERSHIP
- --------------------- ------------- -------------------------------
BEFORE AFTER
OFFERING OFFERING
-------- --------
<S> <C> <C> <C>
Paul DiMatteo 1,081,616(2) 16.3% 16.3%
c/o Nova Technologies, Inc.
89 Cabot Court, Unit L
Hauppauge, NY 11788
Charles F. Chubb 427,724(3) 6.3% 6.3%
c/o Nova Technologies, Inc.
89 Cabot Court, Unit L
Hauppauge, NY 11788
Stephen Lowenstein 508,400(4) 7.6% 7.6%
c/o Jos. H. Lowenstein Sons, Inc.
420 Morgan Avenue
Brooklyn, NY 11222
JCM Capital Corp. 450,450 7.0% 0%
555 Broadhollow Road
Melville, NY 11747
Stephen M. Fisher 100,692(5) 1.5% 1.5%
c/o Nova Technologies, Inc.
89 Cabot Court, Unit L
Hauppauge, NY 11788
Harold J. Lash 28,327(6) 0.4% 0.4%
c/o Nova Technologies, Inc.
89 Cabot Court, Unit L
Hauppauge, NY 11788
Samuel N. Paul 30,000(7) 0.5% 0.5%
c/o Nova Technologies, Inc.
89 Cabot Court, Unit L
Hauppauge, NY 11788
Arlindo Jorge 200,499(8) 3.1% 3.1%
33 Robinson Avenue
Glen Cove, NY 11742
</TABLE>
-46-
<PAGE>
<TABLE>
<S> <C> <C> <C>
Robert Segnini 44,745(9) 0.7% 0.7%
19 Shawmont Lane
Stonybrook, NY 11790
Douglas & Donna Drew 620,000(10) 9.4% 9.4%
c/o Nova Technologies, Inc.
89 Cabot Court, Unit L
Hauppauge, NY 11788
All executive officers and 2,533,603(11) 34.4% 34.4%
directors as a group (9 persons)
</TABLE>
_____________________
(1) Effect has been given to shares issuable upon exercise of stock options
or warrants outstanding on and exercisable within 60 days of July 30,
1996. Except as otherwise indicated, the persons named herein have sole
voting and dispositive power with respect to the shares beneficially
owned.
(2) Includes 94,675 shares held of record by members of Mr. DiMatteo's
immediate family, including 43,212 shares issuable upon exercise of
outstanding options and warrants, held of record by Mr. DiMatteo's son,
as to all of which Mr. DiMatteo disclaims beneficial ownership, and
180,000 shares issuable upon exercise of outstanding warrants.
(3) Includes 6,000 shares held by Mr. Chubb's wife as to which shares Mr.
Chubb disclaims beneficial ownership, and 330,932 shares issuable upon
exercise of outstanding warrants.
(4) Includes 4,200 shares and 4,200 shares issuable upon exercise of
outstanding warrants, both of which are held by Mr. Lowenstein's wife and
children, as to all of which Mr. Lowenstein disclaims beneficial
ownership, and 300,000 shares issuable upon exercise of outstanding
warrants.
(5) Includes 100,000 shares issuable upon exercise of outstanding stock
options and 692 shares owned by Aztech Corporation, a company controlled
by Mr. Fisher.
(6) Includes 27,327 shares issuable upon exercise of outstanding options and
warrants.
(7) Includes 30,000 shares issuable upon exercise of outstanding warrants.
(8) Includes 15,000 shares held by Mr. Jorge's wife as to which shares Mr.
Jorge disclaims beneficial ownership, and 18,667 shares issuable upon
exercise of outstanding options and 53,943 shares issuable upon exercise
of outstanding warrants. Also includes 30,000 shares held in Mr. Jorge's
Individual Retirement Account.
(9) Includes 12,000 shares issuable upon exercise of outstanding options and
20,000 shares issuable upon exercise of outstanding warrants.
(10) Includes 20,000 shares issuable upon exercise of outstanding warrants.
(11) Includes 884,748 shares issuable upon exercise of outstanding warrants
and options owned by such executive officers and directors.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 31, 1993, the balance of outstanding 11% notes payable to Mr.
DiMatteo by the Company aggregated $159,669. The balance of the note plus
accrued interest was due on October 31, 1993 and was not paid by the Company.
Mr. DiMatteo agreed to defer repayment to him of the note plus interest
thereon. In consideration thereof, the remaining principal balance of the note
plus unpaid accrued at December 31, 1993 was combined into a new note
aggregating $202,009 and payable in full at April 1, 1995. No payments were
made to Mr. DiMatteo in 1994 and as of January 1, 1995 Mr. DiMatteo agreed to
forgive payment of principal aggregating $32,009 resulting in a new principal
balance of $170,000 due Mr. DiMatteo by the Company. In addition, accrued
interest on the note aggregating $22,221 was forgiven. The maturity date of
the note has been rescheduled to July 1, 1997 and the accrual of interest
thereon commenced on July 1, 1995. As of June 30, 1996, the outstanding
principal balance of this note together with unpaid accrued interest equalled
$159,250.
Unpaid accrued interest in the amount of $5,360 was owed to Mr. Chubb on
notes payable whose
-47-
<PAGE>
principal balance had been fully paid up in August 1993. In 1993, Mr. Chubb
agreed to defer repayment to him of the accrued interest. In consideration
thereof, a new note was been given to him in the amount of $5,360, accruing
interest at 11% per annum, and payable on demand. No payments were made to Mr.
Chubb during 1994 and at December 31, 1994, the amount owed to Mr. Chubb
including accrued interest aggregated $5,953. On January 1, 1995, Mr. Chubb
waived repayment of the note and the accrued interest thereon.
In October and November 1993, Messrs. DiMatteo and Chubb provided loans
to the Company of $70,000 and $35,000, respectively, with interest payable at
the rate of 12% per annum and maturing in October and November 1996 or on the
officers' demand, at any date after April 1, 1995, whichever is earlier.
Subsequent thereto, the demand date was extended several times. The lenders
may select repayment in cash or in the form of three-year warrants (at an
exchange rate of $1 per warrant). Such warrants would permit the lenders to
purchase the Company's Common Stock at an exercise price of $1.50 per share.
No payments were made to Messrs. DiMatteo and Chubb during 1995 and as of
January 1, 1995 Messrs. DiMatteo and Chubb agreed to forgive accrued interest
aggregating $9,792 and $4,899, respectively. At June 30, 1996, except for
$3,348 of accrued interest due Mr. Chubb, these notes had been paid in full.
The above referenced notes issued to Messrs. DiMatteo and Chubb by the
Company are subordinated to the obligations of the Company under the People's
Bank and CII loans. However, by agreement dated as of March 26, 1996,
People's Bank consented to the payment by the Company of principal in the
aggregate amount of $123,082 due from the Company to Messrs. DiMatteo and
Chubb pursuant to such notes. The Company and Messrs. DiMatteo and Chubb
agreed to subordinate to the payment of the Company's obligations to People's
Bank an equal amount of deferred compensation accrued during the period June
1, 1995 through March 31, 1996, which accrued compensation bears interest at
the rate of 6.5% per annum.
Arlindo Jorge, a director of the Company received commissions for acting
as a finder in connection with the sale of Common Stock in private placement
transactions. These commissions aggregated $2,000 for the period January 1,
1996 through May 31, 1996, $11,905 in 1995, and $24,300 in 1994.
In connection with its loan from CII in September 1996, the Company
entered into an Officers' Agreement with CII, Paul DiMatteo, Stephen Fisher
and Samuel Paul. Pursuant to this Agreement, Messrs. Fisher and Paul agreed
that so long as the Company owes any obligations to CII or CII owns any equity
securities of the Company they will not sell more than 20% of the equity
securities of the Company then owned by them. Mr. DiMatteo agreed that so
long as the Company owes any obligations to CII he will not sell more than 40%
of the equity securities of the Company then owned by him within the first 2
years from the date of the Agreement or more than 60% of such securities with
the first 3 years from such date. Such officers also agreed to continue to
serve the Company in their current capacities and not to sell more than 50% of
their equity securities of the Company without allowing CII to participate in
such sale pro rata.
In September 1995, Paul DiMatteo guaranteed (the "DiMatteo Guaranty") 20%
of the amount payable by CDA to People's under a guaranty by CDA securing
People's loan to the Company up to a maximum of $400,000 (the "CDA Guaranty").
The DiMatteo Guaranty is payable in full at any time after the CDA has paid
People's $80,000 under the CDA Guaranty and is limited to a maximum amount of
$80,000.
In September 1995, three of the Company's distributors, i.e. Advanced
Therapeutics, Inc.("Advanced"), Comed and Innovative Medical Systems, Inc.
("Innovative"), each agreed to provide an irrevocable letter of credit in the
amount of $200,000 for an aggregate of $600,000, which letters of credit could
be drawn down upon the Company's failure to make when due any payment due
People's. The Company issued each of these distributors a warrant to purchase
20,000 shares of Common Stock at $2.50 per share and granted them a security
interest in the Company's accounts receivable and inventory, which lien is
subordinate to the lien of People's Bank and subject to the Intercreditor
Agreements described at "Management's Discussion and Analysis of Financial
Condition and Results of Operation - Liquidity and Capital Resources." The
Company entered into a Stock Put and Call Agreement with Advanced and
Innovative granting them the right to purchase 66,667 and 60,000 shares,
respectively of Common Stock at $1.50 per share together with a reduction in
the number of shares purchasable pursuant to such warrants in exchange for
reducing the amount of their outstanding letters of credit. Pursuant to such
Stock Put and Call Agreements, Advanced purchased 66,667
-48-
<PAGE>
shares of Common Stock for an aggregate price of $100,000 and its obligation
to post an irrevocable letter of credit was reduced to $100,000 and its
warrant was reduced to the right to purchase 10,000 shares of Common Stock,
and Innovative purchased 60,000 shares for an aggregate price of $90,000 and
its obligation to post an irrevocable letter of credit was reduced to $110,000
and its warrant was reduced to the right to purchase 11,000 shares of Common
Stock. Pursuant to the financing agreements with People's Bank, the $190,000
paid by Advanced and Innovative for Common Stock is being held in a restricted
cash account for the benefit of People's Bank. Advanced, Innovative and Comed
have fulfilled their obligations to post such letters of credit for the
benefit of People's Bank.
On September 5, 1995, the Company paid a finder's fee to Merolla & Bogar,
LLC. in the amount of $60,000, in connection with the sale of 900,901 shares
of Common Stock for $1,000,000, pursuant to a consulting agreement engaging
Mr. C. R. Merolla, upon consummation of the sale, as a financial consultant to
the Board of Directors at a fee of $3,000 per quarter, payable in Common Stock
at $1.11 per share for the first year and at the average bid price for the
Common Stock for the preceding month for the next two years and in cash, or at
Mr. Merolla's option in Common Stock at such average bid price the last two
years.
In August 1995, the Company entered into an agreement with TimeCapital
Securities Corporation ("TimeCapital") which became effective upon the
consummation of the sale by the Company of 900,901 shares of its Common Stock
in September 1995. The agreement gives TimeCapital for a period of 15 days
after notice from Nova (i) the exclusive right to present to the Company a
written proposal with respect to any financing sought by the Company and (ii)
a right of first refusal to effect any offering of more than $50,000 of the
Company's securities on terms as favorable as those offered to Nova in writing
by reputable investment bankers. The agreement expires in September 2000 and
Nova has the right to terminate by paying TimeCapital $100,000.
In April 1996, the Company entered into an agreement (the "Placement
Agreement") with TimeCapital which, as amended, provides for TimeCapital to
act as the Company's exclusive agent to assist the Company in raising
$1,000,000 through the sale of at least 500,000 shares of Common Stock in a
private placement or a registered offering. The majority of such shares will
be entitled to one demand registration on or after January 1, 1997 and to
piggyback registration. If a transaction is consummated during the term of
the agreement or within 12 months after the term if such transaction is with a
party introduced to Nova or contacted by TimeCapital during the term,
TimeCapital will receive a cash placement fee of 10% of the money raised and
warrants to purchase Common Stock equal to 5% of the shares of Common Stock
sold in the private placement. The warrants will have an exercise price of
$2.00 per share and will expire 5 years from the closing of the placement.
The Company also agreed to pay TimeCapital's reasonable expenses in an amount
not to exceed $10,000. The Placement Agreement expires 91 days after Nova
notifies TimeCapital that it has at least 500,000 shares of Common Stock
available for placement pursuant to the Agreement.
Also in April 1996, the Company entered into an agreement with
TimeCapital which, as amended, provides for it to act as the Company's
exclusive agent for a period of one year from July 15, 1996 to assist in
arranging for one or more qualified broker-dealers to serve as the
underwriter(s) on behalf of the Company in a public offering of Common Stock
anticipated to produce gross proceeds in the $5-$10 million range. If a
transaction is consummated during the term or within 18 months after the term
if such transaction is with a party introduced to Nova or contacted by
TimeCapital during the term, TimeCapital will receive a fee of 10% of the
gross proceeds. Such fee is payable in cash or Common Stock (valued at market
if such shares are registered or 75% of market if unregistered) or in any
combination thereof as determined by TimeCapital. The Company also agreed to
pay TimeCapital's reasonable expenses in an amount not to exceed $10,000.
Nova has the right to terminate this agreement by paying TimeCapital $100,000
in cash and issuing to it 150,000 shares of Common Stock with a deemed value
of $1.00 per share. If such shares are not registered, then TimeCapital shall
have piggyback registration rights.
On January 24, 1996, the Company entered into a Distributorship Agreement
with JCM Capital Corporation giving JCM Capital the exclusive right to
distribute Nova's products in the State of New York. Other terms and
conditions are similar to the Company's other distributorship agreements. On
such date, the
-49-
<PAGE>
Company and JCM Capital also entered into an agreement providing JCM Capital
with a nine month option to enter into a distributorship agreement for the
States of Ohio, California, Arizona and Georgia on terms substantially similar
to other current distribution agreements. In September 1995, the Company sold
450,450 shares of Common Stock to JCM Capital at a cash price of $1.11 per
share as part of the private placement that constituted part of the 1995
Financing.
On May 23, 1994, the Company signed an employment agreement with Stephen
Fisher and retained him as a Senior Vice President. See "Executive
Compensation - Employment Agreements." Prior thereto, Mr. Fisher was the
President of Aztech Corporation ("Aztech"). Aztech was engaged by the Company
for the period April 27, 1992 through May 22, 1994 as a consultant for the
Company to assist it in developing a marketing plan, drafting a business plan
and raising capital. For its services, Aztech was paid the sum of $3,000 per
month plus 1,000 shares of the Company's Common Stock per month.
On June 14, 1996 and as of June 18, 1996, respectively, the Company
entered into an employment agreement with Douglas Drew and a new employment
agreement with Paul DiMatteo. See "Executive Compensation - Employment
Agreements."
In May, 1994, in connection with the cancellation of certain stock
options, the Company issued to Charles Chubb a warrant to purchase 172,599
shares of Common Stock at $2.75 per share, expiring December 31, 1999.
In September 1995, the Company issued to Samuel N. Paul a warrant to
purchase 30,000 shares of Common Stock at $2.61 per share, expiring September
4, 2002 for financial consulting.
In June 1995, Paul DiMatteo, and Charles Chubb, executive officers of the
Company and Jay Haft, a director of the Company, were issued seven-year
warrants to purchase 180,000, 120,000, and 6,667 shares, respectively, of
Common Stock at $2.75 per share.
Pursuant to his employment agreement, in May 1994, the Company issued to
Stephen Fisher, an executive officer and director, an option pursuant to its
ISO Plan to purchase 150,000 shares of Common Stock at $2.75 per share,
expiring May 23, 2004.
Pursuant to his employment agreement which became effective in September
1995, the Company issued to Samuel N. Paul, an executive officer and director
an option pursuant to its 1994 Stock Option Plan (the "Plan") to purchase
150,000 shares of Common Stock at $2.61 per share, expiring December 31, 2004.
In October 1995, Jay Haft, a director of the Company, was granted an
option pursuant to the Plan to purchase 10,000 shares of Common Stock at $3.13
per share through December 31, 2002.
The following directors were issued the following options to purchase
Common Stock pursuant to the Company's GSO Plan:
<TABLE>
<CAPTION>
DIRECTOR DATE OF GRANT # OF SHARES PRICE EXPIRATION DATE
- -------- ------------- ----------- ----- ------------------
<S> <C> <C> <C> <C>
Jay Haft 12/06/91 6,667 $3.37 December 31, 1999*
05/23/94 5,333 $2.75 December 31, 1999
Robert Segnini 12/06/91 6,667 $3.37 December 31, 1999*
05/23/94 5,333 $2.75 December 31, 1999
Arlindo Jorge 12/06/91 6,667 $3.37 December 31, 1999*
05/23/94 5,333 $2.75 December 31, 1999
</TABLE>
* Extended from December 31, 1995 in June 1994.
On April 18, 1996, the Board of Directors of the Company authorized the
issuance to each of Jay Haft, Robert Segnini, Arlindo Jorge and Charles Chubb
a warrant to purchase 20,000 shares of Common Stock at
-50-
<PAGE>
$2.75 per share, expiring April 18, 2003.
Vivax leases its New Hampshire facility from the Drew Family Trust, the
settlors of which are Douglas and Donna Drew, the owners of all of the
outstanding stock of Comed prior to its acquisition by Nova. See "Description
of Property."
-51-
<PAGE>
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
--------
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Certificate of Incorporation, as amended(1)
3.2 By-Laws(1)
4.1 See Exhibit 3.1 and 3.2
4.2 Form of certificate evidencing shares of Common Stock(1)
4.3 Form of certificate evidencing Redeemable Common Stock
Purchase Warrant(1)
4.4 Form of Warrant Agreement between the Company and Euro-
Atlantic Securities, Inc.(1)
4.5 Form of Redeemable Warrant Agreement between the Company and
American Stock Transfer & Trust Company as warrant agent(1)
5 Opinion of Whitman Breed Abbott & Morgan(8)
10.1 1985 General Stock Option Plan(1)*
10.2 1985 Incentive Stock Option Plan(1)*
10.3 Employment Agreement, dated as of June 18, 1996
between the Company and Paul DiMatteo(8)*
10.4 Employment Agreement, dated February 22, 1985, and
amendments thereto, between the Company and
Charles Chubb(1)*
10.5 Promissory Notes of the Company in the principal amounts of
$40,000, $20,000, $20,000 $30,000 and $120,000, dated
December 18, 1987, December 31, 1987, April 29, 1988,
May 26, 1988 and June 15, 1989, respectively, and
amendments thereto, payable to Paul DiMatteo and the
related Security Agreement, dated June 15, 1989(1)
10.6 Agreement and Restated Stock Purchase Agreement, dated
December 31, 1986, between the Company, Transitions Two,
Limited Partnership, Nadfa Ltd., Paul DiMatteo and Venture
Capital Associates, Ltd(1)
10.7 Lease Agreement, dated March 7, 1986, and amendments
thereto, between the Company and First Island Partners,
L.P. (the "Lease Agreement")(1)
-52-
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.8 Amendment to Lease Agreement, dated February 29, 1992,
between the Company and First Island Partners, L.P.(3)
10.9 Form of Warrant Agreement between the Company and
various persons(1)
10.10 Extension of Lease Agreement, dated May 5, 1992, between
the Company and First Island Partners, L.P.(4)
10.11 Extension of Lease Agreement, dated July 15, 1992, between
the Company and First Island Partners, L.P.(4)
10.12 Amendment of Lease Agreement, dated September 9, 1992,
between the Company and First Island Partners, L.P.(4)
10.13 Extension of Lease Agreement, dated March 23, 1993 between
the Company and First Island Partners, L.P.(5)
10.14 Amendment to Lease Agreement, dated June 25, 1993 between
the Company and First Island Partners, L.P.(5)
10.15 Promissory Notes of the Company in the principal amounts
of $15,000, $15,000 and $5,000 dated October 19, 1993,
November 5, 1993 and November 23, 1993, respectively,
payable to Charles Chubb and the related Security
Agreements, dated October 19, 1993, November 5, 1993
and November 23, 1993(5)
10.16 Promissory Notes of the Company in the principal amounts
of $30,000, $30,000 and $10,000, dated October 19, 1993,
November 5, 1993 and November 23, 1993, respectively,
payable to Paul DiMatteo and the related Security Agreements,
dated October 19, 1993, November 5, 1993
and November 23, 1993(5)
10.17 1994 Stock Option Plan(6)*
10.18 Employment Agreement, dated May 23, 1994 between the
Company and Stephen M. Fisher(6)*
10.19 Amendment to Lease Agreement, dated January 13,
1994 between the Company and First Island Partners,
L.P.(6)
10.20 Employment Agreement, dated August 10, 1995
between the Company and Samuel N. Paul(7)*
10.21 Lease Agreement, dated August 25, 1995 between
the Company and Industrial Builders & Realty
Company together with amendments thereto dated
September 5, 1995 and September 6, 1995(7)
-53-
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.22 Consulting and Related Agreements, dated
August 24, 1995 between the Company and
Merolla & Bogar, LLC(7)
10.23 Distributorship Agreement, dated February 24, 1994
between the Company and James J. Brooksbank(7)
10.24 Employment Agreement, dated June 14, 1996,
between the Company and Douglas Drew(8)
10.25 Distributorship Agreement, dated June 20, 1994, between
the Company and Innovative Medical Systems, Inc.(7)
10.26 Distributorship Agreement, dated January 24, 1995, between
the Company and Advanced Therapeutics, Inc.(7)
10.27 Distributorship Agreement, dated February 15, 1995, between
the Company and Recovercare, Inc.(7)
10.28 Distributorship Agreement, dated March 24, 1995, between
the Company and Stat Medical, Inc.(7)
10.29 Distributorship Agreement, dated March 17, 1995, between
the Company and Concept Medical Corporation(7)
10.30 Distributorship Agreement dated January 1, 1996, between
the Company and JCM Capital Corp.(7)
10.31 Agreement, dated August 24, 1995, between the Company
and JCM Capital Corp. to enter into a distributorship
agreement, together with an amendment thereto dated January 24,
1996(7)
10.32 Agreement, dated November 1, 1994, between the
Company and Omni Manufacturing, Inc.(7)
10.33 Financing Agreement, dated September 5, 1995, between
the Company and Connecticut Innovations, Incorporated
("CII")(2)
10.34 Senior Note, dated September 5, 1995, by the
Company in favor of CII(2)
10.35 Security Agreement, dated September 5, 1995, between
the Company and CII(2)
10.36 Collateral Assignment and Grant of License, dated
September 5, 1995, between the Company and CII(2)
10.37 Stock Subscription Warrant, dated September 5, 1995, by
the Company in favor of CII(2)
-54-
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.38 Warrant Put Agreement, dated September 5, 1995, between
the Company and CII(2)
10.39 Officers' Agreement, dated September 5, 1995, among the
Company, CII, Paul DiMatteo, Stephen Fisher and Samuel
Paul(2)
10.40 Subordination Agreement, dated September 5, 1995, among
the Company, CII, Paul DiMatteo and Charles Chubb(2)
10.41 Loan Agreement, dated September 5, 1995, between the
Company and People's Bank(2)
10.42 Revolving Credit Note, dated September 5, 1995, by
the Company in favor of People's Bank(2)
10.43 Security Agreement, dated September 5, 1995, between
the Company and People's Bank(2)
10.44 Guarantee Agreement, dated September 5, 1995,
between Connecticut Development Authority and
People's Bank and agreed to by the Company(2)
10.45 Guaranty, dated September 5, 1995, by Paul DiMatteo
for the benefit of Connecticut Development
Authority(2)
10.46 Letter of Credit Agreement, dated September 5, 1995,
among the Company, People's Bank and Advanced
Therapeutics Inc.(2)
10.47 Letter of Credit Agreement, dated September 5, 1995,
among the Company, People's Bank and Innovative
Medical Systems, Inc.(2)
10.48 Letter of Credit Agreement, dated September 5, 1995,
among the Company, People's Bank and Comed
Systems, Inc.(2)
10.49 Letter of Credit Reimbursement, Warrant Grant and
Security Agreement, dated September 5, 1995, between
the Company and Advanced Therapeutics, Inc.(2)
10.50 Letter of Credit Reimbursement, Warrant Grant and
Security Agreement, dated September 5, 1995, between
the Company and Innovative Medical Systems, Inc.(2)
10.51 Letter of Credit Reimbursement, Warrant Grant and
Security Agreement, dated September 5, 1995, between
the Company and Comed Systems, Inc.(2)
-55-
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.52 Loan Agreement, dated September 5, 1995, between
the Company and Connecticut Development Authority(2)
10.53 Promissory Note, dated September 5, 1995, by the Company
in favor of Connecticut Development Authority(2)
10.54 Security Agreement, dated September 5, 1995, between
the Company and Connecticut Development Authority(2)
10.55 Stock Subscription Warrant, dated September 5, 1995,
between the Company and Connecticut Development
Authority(2)
10.56 Assistance Agreement, approved November 30, 1995,
between the Company and the State of Connecticut, acting
by the Department of Economic and Community Development(2)
10.57 Promissory Note, dated October 6, 1995, by the Company
in favor of the State of Connecticut, acting by the
Department of Economic and Community Development(2)
10.58 Intercreditor and Subordination Agreement, dated September
5, 1995, among the Company, People's Bank, CII, Connecticut
Development Authority, Comed Systems, Inc., Innovative
Medical Systems, Inc., Advanced Therapeutics, Inc., Charles
F. Chubb and Paul DiMatteo(7)
10.59 Intercreditor Agreement, dated November __, 1995, among
the Company, People's Bank, CII and Department of Economic
and Community Development(7)
10.60 Stock Put and Call Agreement, dated September 5, 1995,
between the Company and Innovative Medical Systems, Inc.(7)
10.61 Stock Put and Call Agreement, dated September 5, 1995,
between the Company and Advanced Therapeutic, Inc.(7)
10.62 Agreement dated August 25, 1995, between the Company and
TimeCapital Securities Corporation(9)
10.63 Amendment No. 1 to Loan Agreement, dated as of December
31, 1995, between the Company and People's Bank(9)
10.64 Amendment No. 2 to Loan Agreement, dated as of April __,
1996, between the Company and People's Bank(9)
10.65 Agreement, dated April 26, 1996, between the Company
and TimeCapital Securities Corporation(9)
10.66 Amendment to Distributorship Agreement,
effective as of October 17, 1995, between the
Company and Innovative Medical Systems, Inc.(9)
-56-
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.67 Amendment to Distributorship Agreement, effective as
of October 17, 1995, between the Company and
Concept Medical Corporation(9)
10.68 Amendment to Distributorship Agreement, effective as
of October 17, 1995, between the Company and
Advanced Therapeutics Inc.(9)
10.69 Amendment to Distributorship Agreement, effective as
of October 17, 1995, between the Company and
Recovercare, Inc.(9)
10.70 Amendment to Distributorship Agreement, effective as
of October 17, 1995, between the Company and
Stat Medical, Inc.(9)
10.71 Amendment to Distributorship Agreement, dated
as of May 6, 1996, between the Company and
JCM Capital Corp.(9)
10.72 Consent and Subordination Agreement, dated as of
March 26, 1996, among the Company, Charles F. Chubb,
Paul DiMatteo and People's Bank(9)
10.73 Stock Purchase Agreement, dated as of May 31, 1996, among
the Company, Vivax, Douglas Drew and Donna Drew(8)
10.74 Non-Competition Agreement, dated as of June 14, 1996,
between the Company and Douglas Drew(8)
10.75 Agreement dated June 28, 1996, between the Company
and TimeCapital Securities Corporation(9)
10.76 Loan and Security Agreement dated July 15, 1996, between the
Company and Northern Associates, L.P.(9)
10.77 Promissory Note dated July 15, 1996 by the Company in favor of
Northern Associates, L.P.(9)
10.78 Letter Agreement dated July 15, 1996 between the Company and
TimeCapital Securities Corporation(9)
_______________________________________
(1) Incorporated by reference to the exhibits to the Company's Registration
Statement on Form S-1 (File No. 33-42880).
(2) Incorporated by reference to the exhibits to the Company's Current Report
on Form 8-KSB dated December 27, 1995.
(3) Incorporated by reference to the exhibits to the Company's fiscal 1991
Form 10-K.
(4) Incorporated by reference to the exhibits to the Company's fiscal 1992
Form 10-KSB.
(5) Incorporated by reference to the exhibits to the Company's fiscal 1993
Form 10-KSB.
(6) Incorporated by reference to the exhibits to the Company's fiscal 1994
Form 10-KSB.
(7) Incorporated by reference to the exhibits to the Company's fiscal 1995
Form 10-KSB.
(8) Incorporated by reference to the exhibits to the Company's Form 8-KSB
filed June 27, 1996.
-57-
<PAGE>
(9) Incorporated by reference to the exhibits to the Company's Registration
Statement on Form SB-2 (File No. 333-364).
* Management contract or compensatory plan or arrangement required to be
filed as an Exhibit to the Form 10-KSB.
(b) REPORTS ON FORM 8-K
-------------------
Form 8-K dated December 27, 1995.
-58-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
NOVA TECHNOLOGIES, INC.
By: /s/ Stephen M. Fisher
-------------------------------------------
Stephen M. Fisher
President
Date: August 1, 1996
-----------------------------------------
In accordance with Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURES CAPACITY DATE
---------- -------- ----
<S> <C> <C>
/s/ Paul DiMatteo Chairman of the Board August 1, 1996
- -----------------------
Paul DiMatteo
/s/ Charles F. Chubb Senior Vice President, August 1, 1996
- ----------------------- Secretary and Director
Charles F. Chubb
/s/ Stephen M. Fisher President, Chief Executive August 1, 1996
- ----------------------- Officer, Treasurer,
Stephen M. Fisher Assistant
Secretary and Director
(Principal Executive
Officer and Principal
Financial Officer)
/s/ Harold J. Lash Controller August 1, 1996
- ----------------------- (Principal Accounting
Harold J. Lash Officer)
/s/ Samuel N. Paul Senior Vice President August 1, 1996
- ----------------------- and Director
Samuel N. Paul
/s/ Douglas Drew Senior Vice President August 1, 1996
- ----------------------- and Director
Douglas Drew
______________________ Director August 1, 1996
Arlindo Jorge
______________________ Director August 1, 1996
Robert Segnini
</TABLE>
-59-
