<PAGE>
As filed with the Securities and Exchange Commission on September 20, 1996
REGISTRATION NO. 333-11769
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
NOVA TECHNOLOGIES, INC.
(Name of small business issuer in its charter)
DELAWARE 2599 11-2674603
(State or jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Classification Identification Number)
Code Number)
89 CABOT COURT, UNIT L
HAUPPAUGE, NEW YORK 11788
(516) 434-8811
(Address and telephone number of principal executive offices)
89 CABOT COURT, UNIT L
HAUPPAUGE, NEW YORK 11788
(516) 434-8811
(Address of principal place of business or intended principal place of business)
STEPHEN M. FISHER
PRESIDENT
89 CABOT COURT, UNIT L
HAUPPAUGE, NEW YORK 11788
(516) 434-8811
(Name, address, and telephone number of agent for service)
Copy to:
DAVID P. TUTTLE, ESQ.
WHITMAN BREED ABBOTT & MORGAN
100 FIELD POINT ROAD
GREENWICH, CT 06830
(203) 862-2396
Approximate date of proposed sale to the public: AS SOON AS PRACTICABLE AFTER
THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
TITLE OF EACH AMOUNT TO BE PROPOSED PROPOSED AMOUNT OF
CLASS OF REGISTERED MAXIMUM MAXIMUM REGISTRATION FEE
SECURITIES TO BE OFFERING PRICE AGGREGATE
REGISTERED PER SHARE(1) OFFERING PRICE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value 1,005,525 $2.625 $2,639,503.10 $910.17
$.01 per share
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) Based on the average of the bid and asked prices for the Common Stock on
September 19, 1996 on the OTC Bulletin Board pursuant to Rule 457(c).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE>
NOVA TECHNOLOGIES, INC.
1,005,525 Shares of Common Stock
Nova Technologies, Inc. (the "Company") is offering hereby 1,005,525 shares
of its common stock, $.01 par value (the "Common Stock"). Approximately
5,525 of the shares offered hereby will be issued to Northern Associates, L.P.
to pay a placement fee and interest in connection with a $250,000 loan to the
Company. The Company intends to sell all or a portion of the balance of
approximately 1,000,000 shares offered hereby from time to time (i) to
TimeCapital Securities Corporation ("TimeCapital") for its own account and/or
for the account of its customers or (ii) in privately negotiated transactions,
or otherwise, including sales through or directly to a broker or brokers. Sales
will be at prices and terms then prevailing or at prices related to the then
current market prices or at negotiated prices. In connection with any sales,
any broker or dealer participating in such sales, including TimeCapital may be
deemed to be an underwriter within the meaning of the Securities Act of 1933.
See "Plan of Distribution."
The Common Stock is traded on the OTC Bulletin Board under the symbol
"NOTL." On September 19, 1996, the bid and asked prices of the Common Stock, as
reported by the OTC Bulletin Board, were $2.125 and $3.125, respectively. The
market for the Common Stock must be considered limited and there can be no
assurance that a meaningful trading market will develop. Furthermore, prices
quoted may not represent the true value of the Common Stock.
A Securities and Exchange Commission (the "S.E.C.") rule imposes additional
sales practice requirements on broker-dealers who sell certain low priced "penny
stocks" to persons other than established customers and institutional accredited
investors. For transactions covered by this rule, the broker-dealer must make a
special suitability determination of the purchaser and have received the
purchaser's written consent to the transaction prior to the sale. Since the
Common Stock currently is deemed to be "penny stock", an investor may find it
more difficult to dispose of, or to obtain accurate quotations as to market
value of the securities offered hereby.
_____________________________
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" AT PAGE 5.
______________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSIONER NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSIONER PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO SALES PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(3)
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $2.625 $0.2625 $2.3625
- ----------------------------------------------------------------------
Total $2,639,503.10 $262,500 $2,377,003
- ----------------------------------------------------------------------
</TABLE>
(1) Based on the average of the bid and asked prices for the Common Stock on
September 19, 1996 on the OTC Bulletin Board pursuant to Rule 457(c).
(2) The Common Stock will be offered by the Company's officers without
additional compensation to them, by certain of the Company's directors at a
Commission of up to 10%, through brokers and dealers at a Commission of up
to 10% and through TimeCapital, a member of the National Association of
Securities Dealers, Inc. (NASD) acting as sales agent, at a commission of
10% of the price per share of the Common Stock purchased by TimeCapital or
sold by it to the public. The Company also has agreed to grant TimeCapital a
five year warrant to purchase 5% of the number of shares of Common Stock
purchased by it or sold by it to the public at an exercise price equal to
the sale price per share and to indemnify TimeCapital against certain
liabilities, including liabilities under the Securities Act of 1933. No
commissions will be paid with respect to the 5,525 shares which will be
issued to Northern Associates, L.P. See "Plan of Distribution."
(3) Before deducting expenses estimated at $30,000 payable by the company.
The date of this Prospectus is September 20, 1996
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in or incorporated by reference into this Prospectus.
THE COMPANY
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 "Business - Beta Site and Field Trials" and "Business -
Third Party Reimbursement."
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 approximately 80 Novabeds(R), of which approximately 65
have been sold and shipped and 8 have been used for field trials and testing. An
additional approximately 20 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
-2-
<PAGE>
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 "Business - Marketing and
Distribution."
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 of Financial
Condition and Results 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 at 8%
payable by Vivax which are guaranteed by Nova. One promissory note is payable
on July 1, 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.
-3-
<PAGE>
THE OFFERING
COMMON STOCK OFFERED........... 1,005,525 shares
COMMON STOCK OUTSTANDING(1).... 6,411,183 shares as of September 1, 1996
COMMON STOCK TO BE OUTSTANDING
AFTER THE OFFERING(1)......... 7,416,708 shares
OTC BULLETIN BOARD SYMBOL...... NOTL
USE OF PROCEEDS................ The net proceeds to the Company will be used to
repay a $250,000 loan and for working capital
and general corporate purposes. See "Use of
Proceeds."
RISK FACTORS................... An investment in the Common Stock involves a
high degree of risk. Prospective investors
should review carefully and consider the factors
described in "Risk Factors."
_________________
(1) Unless otherwise indicated, all references in this Prospectus to per share
data and number of shares outstanding exclude 435,017 shares of Common Stock
issuable upon the exercise of outstanding options, 1,853,154 shares of Common
Stock issuable upon the exercise of outstanding warrants and up to 100,000
shares issuable to TimeCapital upon the exercise of warrants to be granted in
connection with this offering.
-4-
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following tables set forth for the periods indicated selected financial
information for Nova, Comed and for the combined companies on a pro forma basis.
NOVA TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------------- ----------------------------
1996 1995* 1995* 1994
---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net Sales.................................... $ 462,880 $ 147,543 $ 220,368 $ 233,278
---------- ---------- ----------- -----------
Costs and expenses:
Cost of sales............................... 709,589 275,457 697,901 558,262
Research and development expenses........... 166,168 127,235 297,780 400,202
General, administrative, marketing and
consulting expenses........................ 346,785 239,970 506,124 421,573
---------- ---------- ----------- -----------
Total costs and expenses............... 1,222,542 642,662 1,501,805 1,380,037
---------- ---------- ----------- -----------
(Loss) from operations before other income
and (expenses).............................. (759,662) (495,119) (1,281,437) (1,146,759)
Other income and (expenses):
Interest and other income................... 32,123 2,512 13,201 5,197
Interest expense and other.................. (71,461) (1,108) (33,972) (69,575)
---------- ---------- ----------- -----------
Net Loss..................................... $ (799,000) $ (493,715) $(1,302,208) $(1,211,137)
========== ========== =========== ===========
Net loss per share (1)....................... $(0.14) $(0.11) $(.27) $(.31)
========== ========== =========== ===========
Weighted average number of common shares
outstanding (1)............................. 5,799,816 4,418,076 4,783,050 3,964,598
========== ========== =========== ===========
</TABLE>
- --------------------
* As adjusted.
(1) Net loss per share has been computed based on the weighted average number
of shares outstanding during each period. No effect has been given to
outstanding options and warrants as the effect would be antidilutive.
CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
JUNE 30, 1996 DECEMBER 31,
-------------- -------------------------
(UNAUDITED) 1995 1994
-------------- ------------ -----------
<S> <C> <C> <C>
Current Assets..................... $1,483,315 $ 935,154 $ 372,737
Working Capital.................... 630,072 552,048 160,515
Total Assets....................... 4,552,280 1,396,193 542,119
Total Liabilities.................. 3,437,062 811,987 1,244,121
Stockholders' Equity (deficiency).. 1,115,218 584,206 (702,002)
</TABLE>
COMED SYSTEMS, INC.
STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
FEBRUARY 29, MAY 31,
1996 1995
------------- -----------
<S> <C> <C>
Net revenues.................................. $1,702,000 $1,758,000
---------- ----------
Cost of net revenues.......................... 881,000 903,000
Selling, general and administrative expenses.. 506,000 521,000
Provision for doubtful accounts............... 30,000 39,000
---------- ----------
1,417,000 1,463,000
---------- ----------
</TABLE>
-5-
<PAGE>
<TABLE>
<S> <C> <C>
Operating income............................. 285,000 295,000
---------- ----------
Interest income............................... 6,000 4,000
Interest (expense)............................ (64,000) (75,000)
Gain (loss) on sale of assets................. 19,000 (2,000)
---------- ----------
Total........................................ (39,000) (73,000)
---------- ----------
Income before income taxes.................... 246,000 222,000
Income tax expense............................ 94,000 93,000
---------- ----------
NET INCOME.................................... $ 152,000 $ 129,000
========== ==========
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
FEBRUARY 29, 1996
-----------------
<S> <C>
Current Assets................................ $ 457,000
Working Capital (Deficiencies)................ (45,000)
Total Assets.................................. 900,000
Total Liabilities............................. 564,000
Stockholder's Equity.......................... 336,000
</TABLE>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
PRO FORMA UNAUDITED CONDENSED CONSOLIDATED FINANCIAL INFORMATION
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
(PRO FORMA UNAUDITED)
---------------------
<S> <C>
Net sales..................................... $2,462,000
----------
Cost of sales................................. 2,019,000
Research and development expenses............. 297,000
Selling, general and administrative expenses.. 1,119,000
----------
Operating income (loss)....................... (973,000)
Interest and other (income)................... 22,000
Interest expense.............................. 245,000
(Gain) on sale of assets...................... 19,000
----------
NET INCOME (LOSS)............................. ($1,177,000)
==========
(Loss) per share.............................. ($0.22)
==========
Weighted average shares outstanding........... 5,383,000
==========
</TABLE>
-6-
<PAGE>
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. In analyzing such an investment, the following factors, among others,
should be read and considered carefully in conjunction with the detailed
information set forth elsewhere herein, furnished as an exhibit hereto or
incorporated by reference.
Untested Nature of Business. The Company, which began operations in July
1984, is subject to all the risks inherent in the creation of a new business
enterprise. The Company has limited experience in commercial exploitation with
respect to its patient transfer system, having heretofore concentrated its
efforts primarily upon research and development, patent applications, FDA
approval and field trials of prototypes. Commencing in the Fall of 1993, the
Company shifted its focus to marketing and production. Since that time the
Company has entered into seven exclusive distribution agreements, produced an
initial lot of 40 units, commenced sale of such 40 systems in June 1994,
commenced production of an additional 50 systems in 1995 and acquired the
business of Comed, one of its former distributors in June 1996. However, there
can be no assurance that the Company's efforts will ever result in the
development of a commercially viable product, cost-effective manufacturing of
such product, or a profitable business.
Accumulated Losses Since Inception; Financial Condition; Anticipated Future
Losses. From January 23, 1984 (inception) through December 31, 1995, the Company
has experienced net losses in each fiscal period, aggregating $9,321,592. The
Company incurred net losses of $1,211,137 and $1,302,208 for the years ended
December 31, 1994 and December 31, 1995, respectively, and a net loss of
$799,000 for the six months ended June 30, 1996. The Company's working capital
requirements have been met from funds provided by management and other
investors, the proceeds of a 1992 public offering and the proceeds of the 1995
Financing. The Company expects to incur additional future losses of
approximately $2.0 million with respect to its Novabed(R) business prior to
achieving operating profitability, if ever, as it undertakes continuing
development of its patient transfer system and the start-up of marketing and
production operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation - Liquidity and Capital Resources."
Auditor's "Going Concern" Explanatory Paragraph. 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 additional equity contributions
of at least $2,750,000 to finance its operations over the 12 month period
following June 30, 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 Common
Stock. 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
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 purchase
commitments. See "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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation - Liquidity and Capital
Resources."
Insufficient Financing; Uncertain Financing Sources. The Company's existing
financing and internally generated funds are presently estimated to satisfy the
Company's cash needs through September 1996. The Company anticipates that this
financing will not be sufficient to carry out its current business plan. The
Company anticipates 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 a $750,000 note of Vivax due July
1, 1997 (originally due June 14, 1997) incurred in connection with the
acquisition of Comed. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation -Liquidity and Capital Resources." As of the
date hereof, the Company has secured no commitments in this regard and no
assurances can be given as to either the magnitude or terms of such financing or
the availability or commercial reasonability of any such future financing. The
absence of additional financing may have a material adverse effect on the
Company's achievement of commercial production and its ultimate profitability
and may hinder the Company's ability to operate efficiently and to deliver
product in a timely manner. Specifically, if the Company does not obtain the
necessary additional financing it will not be able to produce sufficient product
to satisfy the minimum purchase
-7-
<PAGE>
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.
Failure to Satisfy Requirements of Existing Financings; Prepayment Penalty.
The Company's loan with People's Bank requires that it satisfy certain financial
covenants at the end of each quarter. The Company is currently in compliance
with these covenants except for the Minimum Capital Funds and the Maximum
Unsubordinated Debt Ratio covenants, for which the Company has obtained a waiver
for the period ended June 30, 1996. The Company's failure to comply with these
two covenants resulted primarily from the accounting for goodwill in connection
with the acquisition of Comed. 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 or about
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 Peoples 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 anticipates that it will require approximately $2.75 million of
additional financing to finance its operations over the 12 month period
following June, 1996 and to comply with the financial covenants contained in the
People's Bank loan agreement. The Company believes that the net proceeds of this
offering, together with internally generated funds and the Company's existing
financing arrangements, will be sufficient to meet the Company's foreseeable
working capital and capital expenditure requirements until July 1, 1997, when
the Company's $750,000 note to Douglas and Donna Drew matures. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Liquidity and Capital Resources."
Several of the Company's existing financing arrangements require either
(i), subject to certain exceptions, that the Company base fifty percent of its
officers and a majority of its employees in Connecticut and conduct a majority
of its operations, including subcontracting operations in Connecticut, except in
the case where no Connecticut subcontractor is able to produce the products or
provide the services called for in the subcontract on commercially reasonable
terms, or (ii) that the Company otherwise maintain its operations in Connecticut
(the "Connecticut Presence Requirement"). If the Connecticut Presence
Requirement is violated, such lenders may require the Company to re-pay such
financing and to pay such lenders substantial pre-payment charges. The Company
is currently in compliance with these Connecticut Presence Requirements and does
not believe that continued compliance will have a material adverse effect on the
Company. The CII loan agreement contains a mandatory prepayment provision in
the event the Company fails to satisfy the Connecticut Presence Requirement, 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Liquidity and Capital Resources."
The Company's existing financing arrangements are secured by some or all of
the Company's assets, including its patents. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation - Liquidity and Capital
Resources."
Dependence on Distributors; Failure of Distributors or Company to Perform.
For the year ended December 31, 1995, all of the Company's net sales were made
to its distributors. 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
calendar 1996. During the period January 1, 1996 to August 31, 1996, the Company
shipped 28 units, 25 of which were purchased by the Company's distributors. As
of August 31, 1996, the Company had unfilled orders for 4 Novabeds(R). The
distributors have not ordered a pro rata portion of their 1996 minimums. 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 their designated 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. If these distributors fail to perform their obligations, the
Company will not realize this anticipated revenue and may have to discontinue
operations unless it can develop alternative distribution arrangements for its
products. See "Business - Marketing and Distribution."
Due to 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, in 1995 the
Company was unable to produce sufficient product to satisfy its distributors'
minimum purchase requirements. The Company and the two
-8-
<PAGE>
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 this work. As a result, the Company
will be able to produce Novabeds(R) with less capital for tooling and equipment.
However, 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. The Company believes that the net proceeds of this
offering, together with internally generated funds and the Company's existing
financing arrangements, will be sufficient to meet the Company's foreseeable
working capital and capital expenditure requirements until July 1, 1997, when
the Company's $750,000 note to Douglas and Donna Drew matures. If this offering
is not sold out or 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.
Dependence Upon Key Personnel. The success of the Company will be largely
dependent upon the efforts of Paul DiMatteo, its Chairman of the Board and
founder, Stephen M. Fisher, President, Samuel N. Paul, Senior Vice President -
Operations, and Douglas Drew, Senior Vice President - Marketing and Sales, each
of whom has an employment agreement with the Company. The loss of the services
of anyone of them may have a materially adverse effect on the Company's present
and proposed business and future prospects. The Company has obtained a key-man
insurance policy on the life of each of Messrs. DiMatteo, Fisher and Paul in the
amount of $500,000.
Limited Marketing Staff and Marketing Experience. The Company has
undertaken limited marketing efforts to date with respect to its patient
transfer system. Such marketing activity has been initially limited to the
efforts of one of the Company's four executive officers. Such officer, however,
has had no prior experience in the marketing of any health care products. The
Company recently hired Douglas Drew, the founder, President and a significant
shareholder of Comed, as its Vice President of Marketing and Sales.
No Significant Manufacturing Capacity or Experience. The basic bed and
certain other standardized components which comprise integral elements of the
Company's patient transfer system are manufactured by non-affiliated persons.
In the past, the Company manufactured the remaining ancillary components of its
patient transfer system and assembled the system. The Company, however, has
undertaken limited manufacturing and assembly activities to date, having
completed the assembly of its initial lot of 40 units in June 1994, and started
another lot of 50 units in 1995. Recently, the Company decided to subcontract
the manufacture of these ancillary components in order to minimize capital
requirements. See "Business - Manufacturing."
Uncertain Patent Protection. The Company has been issued 18 United States
patents related to its patient transfer system and bed sore prevention. 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. 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.
Competition. The health care industry in general, and the markets for
patient transfer devices, hospital and home care beds and support surfaces and
related equipment, and wheelchairs in particular, are highly competitive.
Although the Company is unaware of a competitive product performing all of the
same functions as those of the Company's patient transfer system, other products
perform some of those same functions. Virtually all of the products which may be
competitive with the Company's patient transfer system are being manufactured
and/or marketed by concerns which have substantially greater financial
resources, stronger sales forces and dealer networks, and greater manufacturing
capacities and industry experience than the Company. Further, the Company
expects that the anticipated sales or rental price of its patient transfer
system will be comparably priced to other specialty bed products, such as air-
therapy beds, but will be substantially higher than prices for standard hospital
beds. The Company believes its Novabed(R) will initially compete on the basis of
product features and performance. The Company's Vivax business also competes
with concerns which have substantially greater resources and stronger sales
forces. 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
-9-
<PAGE>
type distributed by Vivax. No assurances can be given that the Company will
be able to compete successfully in any of its prospective markets, or that
companies with substantially greater resources than the Company have not
developed or are not in the process of developing superior patient transfer
technology and products.
Failure to Obtain, or Reduction of Government and Third-Party Payor
Reimbursement. 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 as determined by the third-party payor. The Company has not yet attempted
to obtain advance approval of third-party reimbursement for its Novabed(R) so
that 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. 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 but is not required in order to obtain reimbursement
from private insurers or Medicaid reimbursement. The Company will also seek
reimbursement authorization from other governmental sources such as Medicaid and
from third-party payors such as private insurance carriers. In connection
therewith, the Company may be required to present clinical data to demonstrate
that its technology is not experimental and that its patient transfer system is
both safe and efficacious. In addition, the Company may be required to
demonstrate that its patient transfer system is valuable and therapeutically
beneficial to the patient and is not a luxury item. Although the Company
believes that the cost of its patient transfer system will eventually be
reimbursed at meaningful levels under each of, respectively, Medicare, Medicaid
and private insurance programs, it can give no assurances to that effect, nor as
to the length of time which may elapse prior to a determination of permissible
reimbursement by the various persons that administer these programs throughout
the country. In particular, applications for new procedure codes currently take
approximately a year for processing, with no assurance that any such application
will be approved or will not take a substantially longer period of time. Denial
of such application will preclude Medicare reimbursement specifically for the
Novabed(R). Failure to obtain favorable determinations concerning reimbursement
will have a material adverse effect on the Company's ability to compete on price
and are likely to result in a material adverse effect on sales of the Novabed(R)
and on the Company's financial performance. See "Business - Third-Party
Reimbursement."
Approximately 21% and 24%, respectively, of Vivax's (Comed) 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 (Comed) 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 (Comed) revenues. However, any reduction in
coverage or reimbursement rates will have a material adverse effect on the
Company's results of operations. See "Business - Third-Party Reimbursement."
Potential Product Liability. The Company may become subject to product
liability claims in connection with the use of its patient transfer system. The
Company presently maintains product liability insurance of $6 million. There can
be no assurance that any loss will be covered by such insurance, that such
coverage will continue to be available on commercially reasonable terms or that
the extent of coverage will be sufficient to cover any potential liability.
Vivax may become subject to product liability claims in connection with the
use of the products it distributes. Vivax presently maintains errors and
omissions insurance with limits of $1 million per occurrence and $5 million per
year. There can be no assurance that any loss will be covered by such
insurance, that such coverage will continue to be available on commercially
reasonable terms or that the extent of coverage will be sufficient to cover any
potential liability. In addition, in accordance with industry practice, the
manufacturers of the products Vivax sells maintain product liability insurance
and otherwise indemnify it against any product liability claims. There can be
no assurance that any product liability claims will be covered by Vivax's
manufacturers' product liability insurance, indemnified by such manufacturers,
or if indemnified that such manufacturers will have the ability to pay any such
claims.
-10-
<PAGE>
Limited Market for Common Stock. The Common Stock is quoted and traded on
the OTC Bulletin Board. The market for the Common Stock must be considered
limited and there can be no assurance that a meaningful trading market will
develop. Furthermore, prices quoted may not represent the true value of the
Common Stock.
Reduced Liquidity Attendant to Penny Stock Status. S.E.C. rules impose
additional sales practice requirements on broker-dealers who recommend certain
low priced "penny stocks" to persons other than established customers and
institutional accredited investors. For transactions covered by these rules,
the broker-dealer must make a determination that based on the purchaser's
financial situation, investment experience and investment objectives, an
investment in penny stocks is suitable for such purchaser and that such
purchaser (or his independent advisor) is capable of evaluating the risks of
transactions in penny stocks. The broker-dealer must also provide a prospective
purchaser of penny stocks with certain disclosure materials and obtain the
purchaser's written consent to the transaction prior to the sale. Since the
Common Stock currently is deemed to be "penny stock", an investor may find it
more difficult to dispose of, or to obtain accurate quotations as to the market
value of the securities offered hereby. An exemption from Apenny stock" status
will be available, however, as to the Common Stock if and when the market price
therefor exceeds $5.00 per share, the Company's net tangible assets exceed
$2,000,000 or the Company has average revenue of at least $6,000,000 over the
preceding three years. See "Market For Common Stock and Dividend Policy."
Control by Management Stockholders. It is less likely that the market
price of the Company's Common Stock will reflect a premium for control if at
some future date the Company were to become the target of a takeover attempt or
subject to a contest for control since approximately 35% of the Company's Common
Stock is owned by the executive officers and directors of the Company.
Effect of Outstanding Options and Warrants. The Company has outstanding
options and warrants to acquire an aggregate of 2,288,171 shares of Common
Stock. To the extent that all, or a substantial portion, of such options and
warrants are exercised, they will decrease the percentage ownership of the
Company by the persons who invest hereunder. The holders of such options and
warrants may be expected to exercise them at a time when the Company would be
able to obtain needed capital by a new offering of securities on terms more
favorable than those provided for by such options and warrants. The possibility
of the sale of all the shares of Common Stock issuable upon exercise of the
options and warrants may adversely affect the market price of the securities
offered.
Shares Eligible for Future Sale. Actual sales or the prospect of sales of
Common Stock under Rule 144 or otherwise in the future may have a depressive
effect upon the price of the Common Stock or any market that may develop, and
also render difficult the sale of the Company's securities purchased by
investors in this offering. As of September 1, 1996, the sale or other transfer
or disposition of approximately 2,170,069 of the outstanding shares of Common
Stock was restricted by the Securities Act of 1933, as amended (the "Securities
Act"). In the future, these shares may only be sold in compliance with Rule
144, promulgated under the Securities Act, by the availability of an exemption
from registration under the Securities Act or by their registration thereunder.
As of September 1, 1996, approximately 783,082 of these shares of Common Stock
would have been eligible for sale under Rule 144. During the period commencing
September 1, 1996 and ending August 30, 1997, an additional approximately
415,056 of such shares will become eligible for sale under Rule 144. The
balance of such shares will become eligible for sale pursuant to Rule 144 upon
the expiration of their respective two-year holding periods. In addition, most
of the current holders of outstanding Common Stock, options and warrants have
"piggy-back" registration rights with respect to their securities should certain
conditions be satisfied. Further, the Company intends to file a registration
statement covering the 330,000 shares of Common Stock reserved for issuance, and
the 435,017 shares of Common Stock issued under its stock option plans after the
completion of this offering.
Ability to Pay Dividends. The Company has not paid dividends, and does not
intend to pay any dividends in the foreseeable future, since earnings, if any,
are expected to be retained for use in the development and expansion of the
Company's business. The Company's financing arrangements restrict the payment
of dividends.
USE OF PROCEEDS
Of the shares offered hereby, approximately 5,525 will be issued to Northern
Associates, L.P. in satisfaction of a placement fee in connection with and
interest on a $250,000 loan to the Company which matures on October 14, 1996,
and bears interest at the rate of 10% per annum. The proceeds of the loan were
used for working capital.
The estimated net proceeds to the Company from the sale of the remaining
Common Stock offered by it hereby after payment of anticipated sales commissions
estimated at $262,500 and other anticipated expenses of the offering estimated
at
-11-
<PAGE>
$30,000, will be approximately $2,332,500. The Company anticipates that such
net proceeds will be utilized substantially as follows:
<TABLE>
<S> <C>
Income taxes in connection with the acquisition of Comed.. $ 150,000
Repayment of Northern Associates, L.P. loan............... $ 250,000
Manufacturing equipment and tooling....................... $ 100,000
Engineering for patient transfer system................... $ 350,000
Marketing and promotional expenses........................ $ 140,000
General and administrative expenses....................... $ 290,000
Working capital and general corporate purposes............ $1,052,500
----------
</TABLE>
$2,332,500
==========
Pending their utilization, such net proceeds will be invested in
certificates of deposit or other net short-term interest-bearing securities and
the interest earned will be added to working capital.
The Company believes that the net proceeds of this offering, together with
internally generated funds and the Company's existing financing arrangements,
will be sufficient to meet the Company's foreseeable working capital and capital
expenditure requirements and to comply with the financial covenants contained in
the People's Bank loan agreement until July 1, 1997, when the Company's $750,000
note to Douglas and Donna Drew matures. However, there can be no assurance that
this offering will be sold out, that the assumptions upon which Management based
its projections will prove to be accurate, or that such additional financing, if
needed, will be available upon commercially reasonable terms or otherwise. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The foregoing use of proceeds represents the Company's current expectations
based upon its existing research and development, manufacturing and marketing
activities and plan of operations. The Company may find it necessary or
advisable to reallocate the net proceeds within the above described categories
or to use a portion of such net proceeds for other purposes. If the offering is
not entirely sold, or it is sold in whole or in part at a price below the
average of the bid and asked prices for the Common Stock as of September 4, 1996
($2.625), the Company intends to pay the income taxes in connection with the
acquisition of Comed and then the Northern Associates, L.P. loan and expects to
apply any remaining available proceeds pro rata among the remaining above
described categories of expenses.
-12-
<PAGE>
MARKET FOR COMMON STOCK AND DIVIDEND POLICY
The initial public offering of the Common Stock of the Company was made in
1992. Since that time, the Company's Common Stock has been traded only on a
limited basis in the over-the counter market. The following table sets forth
the quarterly high bid and low bid prices as reported on the OTC Bulletin Board.
Such quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commissions and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
PERIOD HIGH BID LOW BID
- ------------------------ -------- -------
<S> <C> <C>
Quarter ended
March 31, 1994 $ 2 1/2 $ 2
June 30, 1994 3 2
September 30, 1994 2 1/4 2
December 31, 1994 2 1 3/4
March 31, 1995 2 2
June 30, 1995 2 2
September 30, 1995 2 3/4 2
December 31, 1995 2 3/4 2 1/2
March 31, 1996 2 3/4 2 1/4
June 30, 1996 3 5/8 2 1/4
</TABLE>
At September 19, 1996, the bid and asked prices for the Company's Common
Stock as so reported were $2.125 and $3.125 respectively. On that date, the
Company had approximately 370 holders of record of its Common Stock.
The Company has outstanding options and warrants to purchase 435,017 shares
and 1,853,154 shares, respectively, of Common Stock. As of September 1, 1996,
the Company also had outstanding approximately 2,170,069 shares of Common Stock
the sale or other transfer or disposition of which was restricted by the
Securities Act. In the future, these shares may only be sold in compliance with
Rule 144, promulgated under the Securities Act, by the availability of an
exemption from registration under the Securities Act or by their registration
thereunder. As of September 1, 1996, approximately 783,082 of these shares of
Common Stock would have been eligible for sale under Rule 144. During the
period commencing September 1, 1996 and ending August 30, 1997, an additional
approximately 415,056 of such shares will become eligible for sale under Rule
144. The balance of such shares will become eligible for sale pursuant to Rule
144 upon the expiration of their respective two-year holding periods. In
addition, most of the current holders of outstanding Common Stock, options and
warrants have "piggy-back" registration rights with respect to their securities
should certain conditions be satisfied. Further, the Company intends to file a
registration statement covering the 330,000 shares of Common Stock reserved for
issuance, and the 435,017 shares of Common Stock issued under its stock option
plans after the completion of this offering. Sales of outstanding Common Stock
pursuant to Rule 144 or otherwise could materially affect the trading price of
the Company's Common Stock. See "Risk Factors - Shares Eligible for Future
Sale."
S.E.C. rules impose additional sales practice requirements on broker-dealers
who recommend certain low priced "penny stocks" to persons other than
established customers and institutional accredited investors. For transactions
covered by these rules, the broker-dealer must make a determination that based
on the purchaser's financial situation, investment experience and investment
objectives, an investment in penny stocks is suitable for such purchaser and
that such purchaser (or his independent advisor) is capable of evaluating the
risks of transactions in penny stocks. The broker-dealer must also provide a
prospective purchaser of penny stocks with certain disclosure materials and
obtain the purchaser's written consent to the transaction prior to the sale.
The Common Stock currently is deemed to be "penny stock." Since broker-dealers
must create an extensive paper trail to sell penny stocks, many investors are
not qualified to purchase penny stocks and classification as a penny stock often
carries negative connotations, an investor may find it more difficult to dispose
of, or to obtain accurate quotations as to the market value of the securities
offered hereby. An exemption from "penny stock" status will be available,
however, as to the Common Stock if and when the market price therefor exceeds
$5.00 per share, the Company's net tangible assets exceed $2,000,000 or the
Company has average revenue of at least $6,000,000 over the preceding three
years.
The Company has not paid, and does not anticipate paying in the foreseeable
future, dividends on the Common Stock. The Company's financing arrangements
impose various restrictions on the payment of dividends.
-13-
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
June 30, 1996 and (ii) as adjusted to reflect the sale of the Common Stock
offered by the Company hereby assuming a public offering price of $2.625 per
share and the application of the estimated proceeds, after deduction of
estimated sales commissions and estimated offering expenses as described under
"Use of Proceeds."
<TABLE>
<CAPTION>
June 30, 1996
----------------------------
Actual As Adjusted
------------- -------------
<S> <C> <C>
Long-Term Debt.................................................... $ 2,583,819 $ 2,583,819
------------ ------------
Common Stock/1/; $.01 par value;
14,000,000 shares authorized;
6,411,183 shares issued and outstanding................... 64,112 74,168
7,416,708 shares issued and outstanding as adjusted..
Additional paid-in capital........................................ 11,171,698 13,507,195
Deficit........................................................... (10,120,592) (10,120,592)
------------ ------------
Total stockholders' equity........................................ 1,115,218 3,460,771
------------ ------------
Total Capitalization.............................................. $ 3,699,037 $ 6,044,590
============ ============
</TABLE>
/1/ Includes the sale of approximately 105,900 shares offered hereby, the
proceeds of which will be used to repay short term borrowings incurred in
July, 1996 of $250,000.
SELECTED FINANCIAL DATA
The selected balance sheet data presented below for Nova as of
December 31, 1995 and 1994 and selected financial data for the statements of
operations for the years ended December 31, 1995 and 1994 are derived from
financial statements included elsewhere in this Prospectus, which have been
audited by Richard A. Eisner & Company, LLP, independent auditors, as set forth
in their report also included elsewhere herein. The selected consolidated
balance sheet data presented below for Nova as of June 30, 1996 and 1995 and
selected financial data for the Consolidated statements of operations for the
six months ended June 30, 1996 and 1995 are derived from unaudited financial
statements (included elsewhere in this Prospectus) which, in the opinion of the
Company, reflect all adjustments, consisting of normal recurring adjustments for
a fair presentation of the financial position and the results of operations for
those periods. The following information should be read in conjunction with such
financial statements and related notes thereto and management's discussion and
analysis.
NOVA TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------------
JUNE 30, YEAR ENDED DECEMBER 31,
---------------------------- ------------------------
1996 1995 1995 1994
--------- ------------ ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net Sales ......................................................$ 462,880 $ 147,543 $ 220,368 $ 233,278
----------- ---------- ----------- -----------
Costs and expenses:
Cost of sales........................................... 709,589 275,457 697,901 558,262
Research and development expenses....................... 166,168 127,235 297,780 400,202
General, administrative, marketing and consulting
expenses....................................... 346,785 239,970 506,124 421,573
---------- ---------- ----------- -----------
Total costs and expenses....................... 1,222,542 642,662 1,501,805 1,380,037
---------- ---------- ----------- -----------
(Loss) from operations before other income and (expenses)....... (759,662) (495,119) (1,281,437) (1,146,759)
Other income and (expenses):
Interest and other income............................... 32,123 2,512 13,201 5,197
Interest expense and other.............................. (71,461) (1,108) (33,972) (69,575)
---------- ---------- ----------- -----------
</TABLE>
-14-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Net Loss....................................................... $ (799,000) $ (493,715) $(1,302,208) $(1,211,137)
========== ========== =========== ===========
Net loss per share (1)......................................... $(0.14) $(0.11) $(.27) $(.31)
========== ========== =========== ===========
Weighted average number of common shares outstanding (1)....... 5,799,816 4,418,076 4,783,050 3,964,598
========== ========== =========== ===========
</TABLE>
- ----------
(1) Net loss per share has been computed based on the weighted average number
of shares outstanding during each year. No effect has been given to
outstanding options and warrants as the effect would be antidilutive.
<TABLE>
<CAPTION>
BALANCE SHEET DATA:
JUNE 30, 1996 DECEMBER 31,
------------- --------------------------
(UNAUDITED) 1995 1994
------------- ----------- -------------
<S> <C> <C> <C>
Current Assets..................... $1,483,315 $ 935,154 $ 372,737
Working Capital.................... 630,072 552,048 160,515
Total Assets....................... 4,552,280 1,396,193 542,119
Total Liabilities.................. 3,437,062 811,987 1,244,121
Stockholders' Equity (deficiency) 1,115,218 584,206 (702,002)
</TABLE>
COMED SYSTEMS, INC.
STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
FEBRUARY 29, MAY 31,
1996 1995
------------- -----------
<S> <C> <C>
Net revenues.................................. $1,702,000 $1,758,000
---------- ----------
Cost of net revenues.......................... 881,000 903,000
Selling, general and administrative expenses.. 506,000 521,000
Provision for doubtful accounts............... 30,000 39,000
---------- ----------
1,417,000 1,463,000
---------- ----------
Operating income..................... 285,000 295,000
---------- ----------
Interest income............................... 6,000 4,000
Interest (expense)............................ (64,000) (75,000)
Gain (loss) on sale of assets................. 19,000 (2,000)
---------- ----------
Total................................ (39,000) (73,000)
---------- ----------
Income before income taxes.................... 246,000 222,000
Income tax expense............................ 94,000 93,000
---------- ----------
NET INCOME.................................... $ 152,000 $ 129,000
========== ==========
BALANCE SHEET DATA:
FEBRUARY 29, 1996
-----------------
Current Assets................................ $ 457,000
Working Capital............................... (45,000)
Total Assets.................................. 900,000
Total Liabilities............................. 564,000
Stockholder's Equity.......................... 336,000
</TABLE>
The selected financial data for Nova of the statement of operations
for the year ended December 31, 1995 are derived from pro forma unaudited
condensed financial statements reflecting the acquisition of Comed (included
elsewhere in this Prospectus) which, in the opinion of the Company, reflect all
pro forma adjustments, for a fair presentation of the results of operations for
the period. The following information should be read in conjunction with such
pro forma financial statements and related notes thereto.
-15-
<PAGE>
NOVA TECHNOLOGIES, INC.
PRO FORMA UNAUDITED CONDENSED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA:
YEAR ENDED
DECEMBER 31, 1995
(PRO FORMA UNAUDITED)
---------------------
<S> <C>
Net sales..................................... $2,462,000
-----------
Cost of sales................................. 2,019,000
Research and development expenses............. 297,000
Selling, general and administrative expenses.. 1,119,000
-----------
Operating income (loss)....................... (973,000)
Interest and other income..................... 22,000
Interest expense.............................. 245,000
Gain on sale of assets........................ 19,000
-----------
NET INCOME (LOSS)............................. ($1,177,000)
===========
(Loss) per share.............................. ($0.22)
===========
Weighted average shares outstanding........... 5,383,000
===========
</TABLE>
-16-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
GENERAL - NOVA
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 "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 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 (See "Risk Factors - Failure to Satisfy Requirements of
Existing Financings; Prepayment Penalty") 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 August 31, 1996, the Company shipped 28 units, 25 of which
were purchased by the Company's distributors. As of August 31, 1996, the
Company had unfilled orders for 4 units. The distributors have not ordered a
pro rata portion of their 1996 minimums. See "Risk Factors - Dependence on
Distributors; Failure of Distributors or Company to Perform."
On June 14, 1996, the Company, through a wholly-owned acquisition
corporation i.e. Vivax Medical Corp. ("Vivax") acquired all of the outstanding
capital stock of Comed Systems, Inc. ("Comed") in exchange for 600,000 shares of
the Company's common stock and two $750,000 promissory notes.
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.
GENERAL - VIVAX
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Comed Systems Inc. (now Vivax) was incorporated in December 1989 and
began its operation in mid 1991 to distribute specialized beds and support
surfaces in eastern New England. These devices are utilized to manage the
treatment and prevention of pressure wounds, burns, trauma and pain control.
The initial distribution of these products was to the acute and acute rehab
facilities. The initial products being distributed were manufactured by Health
Products of Houston, Texas. The company later distributed products manufactured
by Sunrise Medical, Cardio System, Huntleigh, Creative Medical and Nova
Technologies, Inc. The company would purchase the products which ranged in
price from $3,000 to $25,000. The device would then be rented on a daily basis
to the facility. The initial financing was provided by a loan from an officer
and a SBA backed loan for $500,000 through the Hampton Coop Bank. The SBA loan
was paid in full in January 1995 and the loan to the officer was paid in full in
May 1996.
RESULTS OF OPERATIONS - NOVA
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30,
1995.
In the six months ended June 30, 1996 the Company recorded sales of
$463,000 and incurred a net loss of $799,000 ($.14 per share) compared to sales
of $148,000 and a net loss, as adjusted, of $494,000 ($.11 per share) in the six
months ended June 30, 1995. The results of this period include the operations
of Vivax for the period from the date it was acquired by the Company, i.e. June
14, 1996 through June 30, 1996; as a result of the acquisition, the comparison
between 1996 and 1995 periods may not necessarily be meaningful.
The increase in sales of $315,000 is due to the acquisition of Vivax
($174,000) and increased Nova sales ($141,000).
In the six months ended June 30, 1996 the Company's cost of sales
exceeded its sales and the Company sustained a gross loss of $247,000 compared
to a gross loss of $128,000 in the six months ended June 30, 1995. The Vivax
division's gross profit of $141,000 was offset by a gross loss of $388,000 in
the Nova division. In September 1995, the Nova division opened its new 28,000
square foot manufacturing facility in conjunction with the completion of the
1995 Financing. The new manufacturing facility was necessary to enable the Nova
division to meet its manufacturing requirements and sales objectives despite its
new policy of subcontracting the manufacture of more of the components that go
into a Novabed. Manufacturing overhead in the first half increased $271,000 from
$175,000 in 1995 to $446,000 in 1996. Initially, production levels at the new
facility have not been high enough to absorb the additional manufacturing
overhead incurred in the new facility. Manufacturing in the original facility
was shut down at the end of June 1996 and as production and sales levels
increase the Company expects gross losses to diminish and thereafter rising
gross profits, although no assurance can be given that the Company will be able
to achieve such satisfactory production and sales levels.
Research and development expenses increased $39,000 from $127,000 (as
adjusted for salary accruals) in the first half of 1995 to $166,000 in the
comparable 1996 half. The increase is attributable to an $11,000 increase in an
officer's salary rate for the half and increased wages devoted to research and
development efforts in the six months ended June 30, 1996.
General, administrative, marketing and consulting expenses increased
$107,000 from $240,000 (as adjusted for salary accruals) in the first half of
1995 to $347,000 in the comparable 1996 half. The increase is attributable to an
$21,000 increase in an officer's salary rate for the half, an increase of
approximately $24,000 in legal and accounting expenses and greater travel and
entertainment expenses in connection with marketing and public relations. In
addition, Vivax expenses for the period aggregated $38,000 and $9,000 was
attributable to the amortization of goodwill incurred in connection with the
acquisition of Comed.
Interest expense increased $70,000 from $1,000 in 1995 to $71,000 in
1996, of which $48,000 is attributable to interest on new debt and amortization
of financing costs incurred in the 1995 Financing and $5,000 is attributable to
interest on notes payable issued in conjunction with the acquisition of Comed.
In addition, in the first half of 1996 two officers, who earned interest
aggregating $16,000 on debt due them, waived the accrual of interest on debt due
them in the comparable 1995 half. Interest and other income in the first half of
1996 increased to $32,000 from $3,000 in 1995 due to increased interest income
on larger balances available for investment in money market securities and local
employment incentive payments.
Fiscal Year 1995 Compared to Fiscal Year 1994.
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.
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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.
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.
RESULTS OF OPERATIONS - VIVAX
Nine months ended February 28, 1996 compared to twelve months ended
May 31, 1995.
In the nine months ended February 28, 1996, Vivax recorded sales of
$1,702,000 compared to sales for the year ended May 31, 1996 of $1,758,000.
The pro rata increase in sales was the result of growth in the nursing home and
home care business as a result of aggressive marketing to and working with acute
care discharge planners.
For the nine months ended February 28, 1996, Vivax earned a pretax
profit of $246,000 and a net income of $152,000 as compared to a pretax profit
of $222,000 and a net income of $129,000 for the year ended May 31, 1995. The
pro rata increase in earnings is attributable to higher sales during the period.
For the nine month period ended February 28, 1996, net cash used in
financing activities was $492,000. Also during the nine months the President
received a salary and bonus of $290,000, additional benefits of $36,000 and
interest of $61,000.
Vivax anticipates that in the next year its traditional sales in the
acute care and rehab market will remain consistent, there will be growth in the
private insurance and nursing home business and that the home care business will
stabilize. A substantial increase in new business in the nursing home market is
expected due to the introduction and increased marketing of the Novabed(R).
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the first half of 1996 the Company used net cash in operating
activities aggregating $1,048,000 compared to $387,000 in the prior year's six
month period. In the month of June 1996, after the acquisition of Comed, Vivax
provided $36,000 to operating activities. 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 $12,000 compared to
$27,000 in the prior year. In the first half of 1996 the Company received
proceeds of $900,000 from borrowing under the 1995 Financing, net proceeds of
$18,000 from the sale of common stock and repaid officers loans aggregating
$115,750 pursuant to an amendment to a subordination agreement executed in
connection with the 1995 Financing permitting the substitution of deferred
compensation for notes payable.
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 and proceeds from borrowings net of
deferred financing costs aggregated $42,000. 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.
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. In the six months ended June 30, 1996 the Company issued
8,100 shares in payment of professional fees aggregating $9,000 and 2,000 shares
in payment of finder's fees aggregating $2,200.
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.
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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 have been valued at
$116,800 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.
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 were distributed to
Douglas and Donna Drew, its two former shareholders.
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 June 30, 1996 the
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Company (including Vivax) had a net worth of $1,115,000, working capital of
$630,000, including unrestricted cash of $242,000, accounts receivable of
$503,000 and inventory aggregating $685,000. At June 30, 1995, the Company had a
capital deficiency of $22,000, working capital of $67,000, including cash of
$23,000, accounts receivable of $1,000 and inventory aggregating $227,000. 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 1995 and at June 30, 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 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 "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 is currently in compliance with these covenants except for the Minimum
Capital Funds and Maximum Unsubordinated Debt Ratio Covenants, for which the
Company has obtained a waiver for the period ended June 30, 1996. The Company's
failure to comply with these two covenants resulted primarily from the
accounting for goodwill in connection with the acquisition of Comed. The
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 or about 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 July 1, 1997, and to comply with the financial covenants contained in
the People's Bank loan agreement. The Company believes that the net proceeds of
this offering, together with internally generated funds and the Company's
existing financing arrangements, will be sufficient to meet the Company's
foreseeable working capital and capital expenditure requirements and to comply
with the financial covenants contained in the People's Bank loan agreement
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until July 1, 1997, when the Company's $750,000 note to Douglas and Donna Drew
matures.
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 July 1, 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 calendar 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 September 6, 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.
On July 15, 1996, the Company obtained a $250,000 loan from Northern
Associates, L.P., an affiliate of TimeCapital. 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. This loan is to be repaid with $250,000 of the net proceeds of this
offering. Interest on this loan and the placement fee in connection therewith
are to be discharged with approximately 5,525 of the shares offered hereby.
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 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 "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.
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<PAGE>
BUSINESS
INTRODUCTION
Nova.
The inability to get out of bed or get to the bathroom without
requiring physical assistance, or experiencing considerable discomfort, can make
a bedridden person feel confined, dependent and depressed. The use of manual
transfer procedures can be demeaning to the bedfast person and may cause a
significant loss of dignity. Such procedures can cause injury to patients and
their aides.
The absence of adequate transfer devices for home use and the stress
of physical lifting often cause families to seek institutional care for a
disabled relative. Such a decision can take an extraordinary emotional toll on
all involved. In addition, the high cost of nursing homes often results in the
depletion of a family's financial resources. Transfer-related activities of
hospital and nursing home personnel constitute a significant portion of the work
day and are considered to be a major cause of injury to patients and staff.
Further, prolonged immobility in bed has negative effects on a bedridden
person's bodily functions and health and is the primary cause of bedsores.
Mr. DiMatteo began the research and development program for the
Company's patient transfer system in 1974 while employed as President of Dynell
Electronics Corporation ("Dynell"). At that time, he applied for and was granted
several patents. The program was continued during Mr. DiMatteo's tenure as
President of Robotic Vision Systems, Inc. ("RVSI"). At Dynell and RVSI, a
prototype was developed in an attempt to achieve an effective system. In 1989,
the Company acquired RVSI's transfer bed technology and patents at a cost of
approximately $25,000. See "Patents" and "Management".
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-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.
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.
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<PAGE>
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 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 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.
The Company owns approximately 420 beds, approximately 60% of which are
currently being rented.
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<PAGE>
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, 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.
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<PAGE>
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 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:
NOVABED(R) ORDERS RECEIVED NOVABED(R) ORDERS SHIPPED
-------------------------- -------------------------
<TABLE>
<CAPTION>
<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
July 1996 5 3
August 1996 4 6
</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 August 31, 1996, the Company shipped 28 units, 25 of which were
purchased by the Company's distributors. As of August 31, 1996, the Company had
unfilled orders for 4 units. The distributors have not ordered a pro rata
portion of their 1996 minimums. See "Risk Factors - Dependence on Distributors;
Failure of Distributors or Company to Perform."
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. See "Risk Factors - Auditor's "Going Concern"
Explanatory Paragraph." 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.
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<PAGE>
For the year ended December 31, 1995, sales aggregating approximately 87% of
the Company's net sales were made to the following distributors:
<TABLE>
<CAPTION>
<S> <C> <C>
Advanced Therapeutics, Inc. - $64,596 (29%)
Comed Systems, Inc. - $60,956 (28%)
Concept Medical, Inc. - $36,194 (16%)
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:
NAME OF DISTRIBUTOR TERRITORY
- ------------------- ---------
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
* 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 reducen
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. See "Risk
Factors - Dependence on Distributors; Failure of Distributors to Perform." 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 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 of Financial Condition and Results 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. JCM Capital transferred all of its shares, approximately 206,000 of
which were transferred to the JCM Capital Corp. defined benefit pension plan.
James J. Brooksbank acquired the following shares as part of private placement
transactions:
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<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
-------
</TABLE>
241,667
========
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
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
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<PAGE>
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 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
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<PAGE>
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. See "Business - Third-
Party Reimbursement."
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 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. See "Risk Factors - No
Significant Manufacturing Capacity or Experience".
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.
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<PAGE>
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 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.
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<PAGE>
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.
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.
FACILITIES
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 December 31, 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.
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<PAGE>
MANAGEMENT
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 69 Chairman of the Board
Stephen Fisher 50 President, Chief Executive Officer,
Chief Financial Officer, Treasurer and
Director
Charles F. Chubb 76 Senior Vice President and Director
Samuel N. Paul 57 Senior Vice President and Director
Douglas Drew 51 Senior Vice President and Director
Harold J. Lash 64 Vice President, Controller and Secretary
Arlindo Jorge 73 Director
Robert Segnini 54 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 to September 1996. From 1962 to 1978, he was Senior Vice President
for Research and Development at Dynell. After the merger in 1977 of Dynell and
United, 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 to September
1996 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.
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<PAGE>
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 and as
Vice President and Secretary since September 1996. 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.
EXECUTIVE OFFICER 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.
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<PAGE>
(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.
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.
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 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.
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<PAGE>
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.
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
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<PAGE>
$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.
The Plan is open to participation by full-time employees, including officers
of the Company or of any subsidiary of the Company, as well as by non-employee
Directors of, or consultants to the Company or any subsidiary of the Company.
At August 31, 1996 there were approximately 22 employees (including four
officers) of the Company eligible to participate in the 1994 Plan.
CERTAIN 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 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, People's Bank consented to the payment by the
Company of principal in the aggregate amount of $145,750 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.
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<PAGE>
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 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 registered or
unregistered offering, as TimeCapital may elect. If such shares are
unregistered, 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 purchased or sold by it. The warrants
will have an exercise price equal to the per share price of the Common Stock
sold and will expire 5 years from the closing of the placement. The Company
also agreed to indemnify TimeCapital against certain liabilities, including
liabilities under the Securities Act and to pay TimeCapital's reasonable
expenses in an amount not to exceed
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<PAGE>
$10,000. The Placement Agreement expires 91 days after Nova notifies TimeCapital
that it has at least 500,000 shares of Common Stock duly registered under the
Securities Act 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 July 15, 1996, the Company obtained a $250,000 loan from Northern
Associates, L.P., an affiliate of TimeCapital. 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.
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 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.
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<PAGE>
In October 1995, Jay Haft, a former 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 or former 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 $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 "Business -
Facilities."
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of August 31, 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 1,083,616(2) 16.3% 14.2%
c/o Nova Technologies, Inc.
89 Cabot Court, Unit L
Hauppauge, NY 11788
Charles F. Chubb 427,724(3) 6.3% 5.5%
c/o Nova Technologies, Inc.
89 Cabot Court, Unit L
Hauppauge, NY 11788
Stephen Lowenstein 508,400(4) 7.6% 6.6%
c/o Jos. H. Lowenstein Sons, Inc.
420 Morgan Avenue
Brooklyn, NY 11222
Stephen M. Fisher 100,692(5) 1.5% 1.3%
c/o Nova Technologies, Inc.
89 Cabot Court, Unit L
Hauppauge, NY 11788
Harold J. Lash 28,527(6) 0.4% 0.4%
c/o Nova Technologies, Inc.
89 Cabot Court, Unit L
Hauppauge, NY 11788
Samuel N. Paul 80,000(7) 1.2% 1.1%
c/o Nova Technologies, Inc.
89 Cabot Court, Unit L
Hauppauge, NY 11788
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
Arlindo Jorge 200,499(8) 3.1% 2.7%
33 Robinson Avenue
Glen Cove, NY 11742
Robert Segnini 44,745(9) 0.7% 0.6%
19 Shawmont Lane
Stonybrook, NY 11790
Douglas Drew 620,000(10) 9.6% 8.3%
c/o Nova Technologies, Inc.
89 Cabot Court, Unit L
Hauppauge, NY 11788
All executive officers and 2,585,803(11) 35.4% 31.1%
directors as a group (8 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 August 31, 1996.
Except as otherwise indicated, the persons named herein have sole voting
and dispositive power with respect to the shares beneficially owned.
(2) Includes 96,675 shares held of record by members of Mr. DiMatteo's
immediate family, including 45,212 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 27,527 shares issuable upon exercise of outstanding options and
warrants.
(7) Includes 80,000 shares issuable upon exercise of outstanding options and
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) Owned jointly by Mr. Drew and his wife. Includes 20,000 shares issuable
upon exercise of outstanding warrants.
(11) Includes 888,281 shares issuable upon exercise of outstanding warrants and
options owned by such executive officers and directors.
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<PAGE>
PLAN OF DISTRIBUTION
Approximately 5,525 of the shares offered hereby will be issued to
Northern Associates, L.P. to pay a placement fee and interest in connection with
a $250,000 loan to the Company. The Company intends to sell all or a portion of
the balance of approximately 1,000,000 shares offered hereby from time to time
(i) to TimeCapital for its own account and/or for the account of its customers
or (ii) in privately negotiated transactions, or otherwise, including sales
through or directly to a broker or brokers. Sales will be at prices and terms
then prevailing or at prices related to the then current market prices or at
negotiated prices.
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 registered or
unregistered offering, as TimeCapital may elect. If such shares are
unregistered, 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 purchased or sold by it. The warrants
will have an exercise price equal to the per share price of the Common Stock
sold and will expire 5 years from the closing of the placement. The Company
also agreed to indemnify TimeCapital against certain liabilities, including
liabilities under the Securities Act and 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 duly registered under the Securities Act available for placement
pursuant to the Agreement. It is anticipated that the first 500,000 shares
purchased by or sold through TimeCapital will be sold at a price of $2.00 per
share.
Sales may be made in privately negotiated transactions, or otherwise,
at market prices or at negotiated prices. The shares may be sold by one or more
of the following methods: (a) a block trade in which the broker or dealer so
engaged will attempt to sell the shares as agent but may position and resell a
portion of the block as principal in order to consummate the transaction; (b)
purchase by a broker or dealer as principal, and the resale by such broker or
dealer for its account pursuant to this Prospectus, including resale to another
broker or dealer; or (c) ordinary brokerage transactions and transactions in
which the broker solicits purchasers. In effecting sales, brokers or dealers
engaged by the Company may arrange for other brokers or dealers to participate.
Any such brokers or dealers may receive commissions or discounts from the
Company in amounts to be negotiated immediately prior to the sale not to exceed
10% of the sales price. Such brokers or dealers and any other participating
brokers or dealers may be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, as amended. Any gain realized by such a broker or
dealer on the sale of shares which it purchases as a principal may be deemed to
be compensation to the broker or dealer in addition to any commissions paid to
the broker by the Company.
There is no assurance that the Company will sell any or all of the shares
of Common Stock covered by this Prospectus.
DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 14,000,000 shares of
Common Stock, $.01 par value per share, and 1,750,000 shares of Preferred Stock,
$2.25 par value per share.
COMMON STOCK
Holders of shares of Common Stock do not have the right to cumulate their
votes in the election of directors and, accordingly, holders who control more
than 50% of the outstanding voting power can elect all of the directors of the
Company. The shares of Common Stock carry no preemptive or other subscription
rights and there are no redemption provisions applicable thereto. In the event
of liquidation, dissolution or winding-up of the Company, the holders of all
shares of Common Stock are entitled to share ratably in all the assets of the
Company available for distribution to the holders of its Common Stock.
At August 31, 1996, there were 6,411,183 shares of Common Stock issued and
outstanding, held of record by approximately 370 persons.
PREFERRED STOCK
The Board of Directors is authorized to issue all undesignated shares of
Preferred Stock in series and to determine the number, designation, preferences,
relative rights and limitations of the shares of each series.
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<PAGE>
Among the determinations which the Board of Directors is authorized to
make for each of the shares of Preferred Stock are (a) the number of shares in
the series and the designation thereof; (b) the dividend rate and whether
dividends would be cumulative; (c) the price and other terms of any redemption;
(d) the extent of liquidation rights; (e) whether a sinking fund would be
created with respect to the shares and the terms of any such fund; (f) whether
there would be conversion rights into shares of Common Stock or other shares of
Preferred Stock and the terms of any such conversion; and (g) whether, and
the extent to which there would be voting rights, which might include the rights
to elect a specified number of directors if dividends on the series were not
paid for a specified period of time. The rights of the holders of shares of
Preferred Stock may include priorities over the holders of shares of Common
Stock. For example, in almost all cases, holders of shares of Preferred Stock
of a particular series are entitled to dividends in preference to holders of
shares of Common Stock. In addition, holders of shares of Preferred Stock of a
particular series generally are entitled to a priority over holders of Common
Stock in the distribution of assets available to all stockholders of the Company
upon any liquidation, dissolution and winding up of the Company. Further,
holders of shares of Preferred Stock of a particular series may be given voting
rights on a share-for-share basis with holders of shares of Common Stock and in
certain events may be given greater voting rights or voting rights exercisable
as a separate class. There are no shares of Preferred Stock outstanding.
Although the Company has no present intention to issue shares of Preferred
Stock, the issuance of shares of Preferred Stock or the issuance of rights to
purchase such shares may have the effect of delaying, deferring or preventing a
change in control of the Company or an unsolicited acquisition proposal.
REDEEMABLE WARRANTS
The Company issued 500,000 redeemable common stock purchase warrants (the
"Redeemable Warrants") as part of its Initial Public Offering in February 1992
pursuant to a Warrant Agreement (the "Warrant Agreement") between the Company
and the American Stock Transfer & Trust Company (the "Warrant Agent"). Each
Redeemable Warrant is in registered form and is saleable, assignable, and
conveyable, and entitles the registered holder to purchase one share of Common
Stock at an exercise price of $4.00 per share through March 31, 1997.
The Company has the right to redeem all, or any portion, of the Redeemable
Warrants at any time at a price of $.05 per Redeemable 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. The Company has authorized and reserved for issuance 500,000 shares of
Common Stock purchasable upon exercise of the Redeemable Warrants. Such shares
of Common Stock, when issued, shall be fully paid and non-assessable.
The exercise price and the number of shares of Common Stock to be
obtained upon exercise of the Redeemable Warrants are subject to adjustment in
the event of a stock dividend or of a split of the Common Stock, or in the event
of a reorganization or recapitalization of the Company or of the merger or
consolidation of the Company, all as more fully set forth in the Warrant
Agreement.
Fractional shares will not be issued upon exercise of the Redeemable
Warrants and, in lieu thereof, a cash adjustment based on the market price of
the Common Stock on the date of exercise will be made. The Redeemable Warrants
do not confer upon the holder any voting or preemptive rights, or any other
rights of a stockholder of the Company unless the Warrants have been exercised.
A Redeemable Warrant may be exercised upon the surrender of a duly
completed certificate prior to its expiration at the office of the Warrant
Agent, accompanied by cash or certified or office bank check payable to the
order of the Warrant Agent for the exercise price.
The Act requires that the Redeemable Warrants cannot be exercised unless
at the time of such exercise the Company shall then have a current effective
registration statement under the Act with respect to the shares of Common Stock
issuable upon exercise of the Redeemable Warrants. Similar requirements are
also imposed by certain state securities regulatory authorities. The Company
has not endeavored to keep such a registration statement current because the
exercise price of the Redeemable Warrants has exceeded, and continues to exceed
the bid price for the Company's Common Stock as reported on the OTC Bulletin
Board. No holder of the Redeemable Warrants has attempted to exercise them.
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<PAGE>
Once the offering contemplated hereby has been completed, the Company
intends to endeavor to have declared effective, and to maintain in effect a
registration statement registering the Common Stock underlying the Redeemable
Warrants in order to permit future exercises of such Warrants.
The above summary does not purport to be complete. The Warrant Agreement,
containing all of the terms and conditions applicable to the Warrants, has been
incorporated as an exhibit to the Registration Statement of which this
Prospectus is a part.
TRANSFER AND WARRANT AGENT
The transfer agent for the Warrants is American Stock Transfer & Trust
Company, 40 Wall Street, New York, New York 10005.
REPORTS TO STOCKHOLDERS
The Company will furnish to stockholders, after the close of each fiscal
year, an Annual Report which will contain audited financial statements. In
addition, the Company may furnish unaudited quarterly reports to stockholders
for the first three quarters of each fiscal year.
SHARES ELIGIBLE FOR FUTURE SALE
In general, Rule, 144, promulgated under the Act, permits a stockholder of
the Company who has beneficially owned restricted shares of Common Stock for a
period of at least two years to sell without registration, within any three
month period, such number of shares not exceeding the greater of 1% of the then
outstanding shares, or, if the shares are quoted on NASDAQ, the average weekly
trading volume during the four calendar weeks preceding such sale, assuming
compliance by the Company with certain public information requirements of Rule
144. Furthermore, if the restricted shares are held for a period of at least
three years by a person not affiliated with the Company (in general, a person
who is not a director, executive officer or principal stockholder of the Company
during the three month period prior to resale), such restricted shares can be
sold without limitation as to volume or manner of sale.
As of September 1, 1996, 6,411,183 shares of Common Stock were outstanding
of which approximately 2,170,069 shares were "restricted" securities, as such
term is defined under the Act. As of September 1, 1996, approximately 783,082
of these shares of Common Stock would have been eligible for sale under Rule
144. During the period commencing September 1, 1996 and ending August 30, 1997,
an additional approximately 415,056 of such shares will become eligible for sale
under Rule 144. The balance of such shares will become eligible for sale
pursuant to Rule 144 upon the expiration of their respective two-year holding
periods. In addition, certain of the current holders of outstanding Common
Stock, options and warrants have "piggy-back" registration rights with respect
to their securities should certain conditions be satisfied. In addition, the
Company intends to file a registration statement covering the 338,000 shares of
Common Stock reserved for issuance, and the 435,017 shares of Common Stock
issued under its stock option plans after the completion of this offering.
Further, once the offering contemplated hereby has been completed, the Company
intends to endeavor to have declared effective, and to maintain in effect a
registration statement registering the 500,000 shares of Common Stock underlying
the Redeemable Warrants in order to permit future exercises of such Warrants.
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<PAGE>
LEGAL PROCEEDINGS
There are no material legal proceedings which are currently pending or, to
the Company's knowledge, contemplated against the Company or to which it is a
party.
LEGAL MATTERS
Matters relating to the legality of the issuance of the shares of Common
Stock offered hereby are being passed upon for the Company by Whitman Breed
Abbott & Morgan, 100 Field Point Road, Greenwich, Connecticut 06830.
EXPERTS
The financial statements of the Company at December 31, 1995 and for each
of the years in the two-year period ended December 31, 1995 included in this
Prospectus and Registration Statement have been audited by Richard A. Eisner &
Company, LLP independent auditors, as set forth in their report with respect
thereto, and are included in reliance upon such report given upon the authority
of such firm as experts in auditing and accounting. Such report includes an
uncertainty regarding the Company's ability to continue as a going concern.
The financial statements of Vivax (Comed) at February 29, 1996 and for the
nine months ended February 29, 1996 and the year ended May 31, 1995 included in
this Prospectus and Registration Statement have been audited by Richard A.
Eisner & Company, LLP independent auditors, as set forth in their report with
respect thereto, and are included in reliance upon such report given upon the
authority of such firm as experts in auditing and accounting.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The Certificate of Incorporation of the Company provides with respect to
the indemnification of directors and officers that the Company shall indemnify
to the fullest extent permitted by Section 145 of the Delaware General
Corporation Law, as amended from time to time, each person that such Section
grants the Company the power to indemnify and that such indemnification shall
not be deemed exclusive of any other rights to which such persons may be
entitled under any by-law, agreement, vote of stockholders or disinterested
directors or otherwise. The Certificate of Incorporation of the Company also
provides that no director shall be liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (1) for any breach of the director's duty of loyalty to the Company or
its stockholders, (2) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (3) under Section 174 of
the Delaware General Corporation Law or (4) for any transaction from which the
director derived an improper personal benefit.
Insofar as indemnification for liabilities arising under the Securities Act
of 1993 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
-47-
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "S.E.C."). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities of the S.E.C. at 450 Fifth Street N.W.
(Room 1024), Judiciary Plaza, Washington, D.C. 20549; as well as at the Regional
Offices of the S.E.C. located at Northwestern Atrium Center, 500 West Madison
Street (Suite 1400), Chicago, Illinois 60661; and Seven World Trade Center (13th
Floor), New York, New York 10048. Copies of such material can be obtained from
the Public Reference Section of the S.E.C. at 450 Fifth Street N.W., Washington,
D.C. 20549 at prescribed rates.
The Company has filed with the S.E.C. in Washington, D.C., a Registration
Statement on Form SB-2 under the Securities Act of 1933 (the "Act"), as amended,
with respect to the Common Stock offered hereby (the "Registration Statement").
This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the S.E.C.. For further information with respect
to the Company and the securities offered hereby, reference is made to the
Registration Statement, including the exhibits and financial statements and
schedules, if any, filed therewith or incorporated therein by reference.
Statements contained in this Prospectus as to the contents of any contract or
other document are not necessarily complete, and in each instance, reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement or incorporated therein by reference, each statement
being qualified in its entirety by such reference. The Registration Statement,
including the exhibits thereto, may be inspected without charge at the S.E.C.'s
principal office in Washington, D.C., and copies of any and all parts thereof
may be obtained from such office after payment of the fees prescribed by the
S.E.C..
-48-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PRO FORMA:
NOVA TECHNOLOGIES, INC.
<S> <C>
Pro Forma Unaudited Condensed Statements of Operations for the
Year Ended December 31, 1995 and for the Six Months Ended
June 30, 1996..........................................................F-3
Pro Forma Unaudited Condensed Statement of Operations for the
Year Ended December 31, 1995...........................................F-4
Notes to Pro Forma Unaudited Condensed Statement of Operations
for the Year Ended December 31, 1995...................................F-5
Pro Forma Unaudited Condensed Statement of Operations for the
Six Months Ended June 30, 1996.........................................F-6
Notes to Pro Forma Unaudited Condensed Statement of Operations
for the Six Months Ended June 30, 1996.................................F-6
HISTORICAL:
NOVA TECHNOLOGIES, INC.
Report of Independent Auditors.............................................F-7
Balance Sheets as at December 31, 1995 and December 31, 1994...............F-8
Statements of Operations for the Years Ended December 31, 1995
and December 31, 1994..................................................F-9
Statements of Changes in Stockholders' Equity (Deficiency) for
the Years Ended December 31, 1995 and December 31, 1994................F-10
Statements of Cash Flows for the Years Ended December 31, 1995
and December 31, 1994..................................................F-11
Notes to Financial Statements..............................................F-12
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
Condensed Consolidated Balanced Sheet (Unaudited) as at June 30, 1996......F-26
Condensed Consolidated Statements of Operations (Unaudited) for the Six
Months Ended June 30, 1996 and June 30, 1995...........................F-27
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six
Months Ended June 30, 1996 and June 30, 1995...........................F-28
Notes to Condensed Consolidated Financial Statements (Unaudited)...........F-29
</TABLE>
F-1
<PAGE>
COMED SYSTEMS, INC.
Report of Independent Auditors.............................................F-33
Balance Sheet as at February 29, 1996......................................F-34
Statements of Operations for the Nine Months Ended February
29, 1996 and the Year Ended May 31, 1995...............................F-35
Statements of Changes in Stockholders' Equity for the Year
Ended May 31, 1995 and the Nine Months Ended February 29,
1996...................................................................F-36
Statements of Cash Flows for the Nine Months Ended February
29, 1996 and the Year Ended May 31, 1995...............................F-37
Notes to Financial Statements..............................................F-38
F-2
<PAGE>
NOVA TECHNOLOGIES, INC.
PRO FORMA UNAUDITED CONDENSED
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1995
and For the Six Months Ended June 30, 1996
The following pro forma condensed statements of operations reflect the
acquisition of Comed on June 14, 1996 as if the transaction occurred at January
1, 1995 (the beginning of the periods presented.) The Financial information for
the Company is for the year ended December 31, 1995, while the Financial
information for Comed is for the 12 month period ended February 29, 1996.
Comed's closing date used to prepare this financial data is consistent with its
fiscal periods. In the opinion of management of Nova Technologies, Inc. all
adjustments necessary to present fairly such pro forma condensed statements of
operations have been made.
The pro forma unaudited condensed statements of operations should be
read in conjunction with the notes thereto, the financial statements of the
Company and Comed and the related notes thereto and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" each
included elsewhere in this Prospectus. The pro forma condensed statements of
operation are not necessarily indicative of what the actual results of
operations would have been had the transaction occurred at the beginning of the
period presented nor does it purport to represent the results of future
operations of the Company.
F-3
<PAGE>
NOVA TECHNOLOGIES, INC.
PRO FORMA UNAUDITED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Nova Comed Pro forma
Technologies, Inc. Systems, Inc. Adjustments Pro forma
------------------ ------------- ----------- ---------
December 31, 1995 February 29,1996
<S> <C> <C> <C> <C>
Net sales $ 220,000 $2,242,000 $2,462,000
Cost of sales 698,000 1,246,000 $ 75,000 (C) 2,019,000
Research and development expenses 297,000 0 297,000
Selling, general and administrative expenses 506,000 816,000 (302,000) (B) 1,119,000
99,000 (D)
---------- ---------- --------- ----------
Operating income (loss) (1,281,000) 180,000 128,000 (973,000)
Interest and other income 13,000 9,000 22,000
Interest expense 34,000 91,000 120,000 (A) 245,000
Gain on sale of assets 0 19,000 19,000
---------- ---------- -------- ----------
Income (loss) before income taxes (1,302,000) 117,000 8,000 (1,177,000)
Income tax expense 0 52,000 (52,000) (E) 0
---------- ---------- --------- ----------
NET INCOME (LOSS) ($1,302,000) $65,000 $60,000 ($1,177,000)
========== ========== ========= ==========
(Loss) per share ($0.22)
==========
Weighted average shares outstanding 4,783,000 600,000 (F) 5,383,000
========== ========= ==========
</TABLE>
F-4
<PAGE>
NOVA TECHNOLOGIES, INC.
NOTES TO PRO FORMA UNAUDITED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(A) To reflect interest expense assuming that the promissory notes for
$1,500,000 at 8% per annum have been issued at the beginning of the year.
(B) To reflect the officers' salaries at the amount in the new employment
agreement.
(C) To increase depreciation expense on acquired assets.
(D) To reflect amortization of goodwill over 20 years.
(E) To adjust income taxes.
(F) To reflect the issuance of common stock for the acquisition of Comed.
F-5
<PAGE>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
PRO FORMA UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
Nova Comed
Technologies, Systems, Pro forma
Inc. Inc.(E) Adjustments Pro forma
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales.............................. $ 463,000 $ 838,000 $ 1,301,000
Cost of sales.......................... 710,000 379,000 1,089,000
----------- ---------- -----------
Gross profit (loss).................... (247,000) 459,000 212,000
----------- ---------- -----------
Research and development expenses...... 166,000 166,000
General, administrative, marketing
and consulting expenses............... 347,000 771,000 ($200,000)(A) 961,000
43,000 (B)
----------- ---------- ----------- -----------
Total expenses......................... (513,000) (771,000) 157,000 (1,127,000)
----------- ---------- ----------- -----------
(Loss) from operations................. (760,000) (312,000) 157,000 (915,000)
Interest and other income.............. 32,000 2,000 34,000
Interest expense....................... (71,000) (17,000) (55,000)(C) (143,000)
----------- ---------- ----------- -----------
NET LOSS............................... ($799,000) ($327,000) $ 102,000 ($1,024,000)
=========== ========== =========== ===========
Net loss per share..................... ($0.16)
=======
Weighted average number of common
shares used in computing loss
per share............................. 5,800,000 550,000 (D) 6,350,000
=========== =========== ===========
</TABLE>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO PRO FORMA UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(A) To reflect the officers' salaries at the amount in the new employment
agreement.
(B) To reflect amortization of goodwill over 20 years.
(C) To reflect interest expense assuming that the promissory notes for
$1,500,000 at 8% per annum have been issued at the beginning of the year.
(D) To reflect the issuance of common stock for the acquisition of Comed.
(E) For the period January 1, 1996 through June 13, 1996, which includes an
overlapping period (January 1, 1996 through February 29, 1996), with the
Company's pro forma results of operations for the year ended December 31,
1995.
F-6
<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-7
<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-8
<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-9
<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-10
<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-11
<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-12
<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-13
<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-14
<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-15
<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-16
<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-17
<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-18
<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-19
<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-20
<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-21
<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-22
<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-23
<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-24
<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-25
<PAGE>
<TABLE>
<CAPTION>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET June 30, 1996
(UNAUDITED) --------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 242,063
Inventories.......................................................... 685,370
Accounts receivable.................................................. 502,757
Prepaid expenses and other current assets............................ 53,125
-----------
Total current assets................................................. 1,483,315
Restricted cash............................................................ 209,500
Rental equipment (net of accumulated depreciation of
$8,063).............................................................. 378,937
Equipment and leasehold improvements (net of accumulated
depreciation and amortization of $245,954)........................... 216,392
Deposits and other assets.................................................. 152,197
Deferred financing costs................................................... 63,575
Goodwill................................................................... 2,048,364
-----------
TOTAL................................................................ $ 4,552,280
============
LIABILITIES
Current liabilities:
Accounts payable, customer prepayments and accrued expenses.......... $ 409,143
Income taxes payable................................................. 162,000
Notes payable-bank (including accrued interest of
$2,100).............................................................. 252,100
Notes payable-officer................................................ 30,000
-----------
Total current liabilities............................................ 853,243
Note payable-other (including accrued interest of $29,283
and net of deferred debt discount of $109,113)....................... 2,170,171
Note payable-officers (including accrued interest of
$28,554)............................................................. 157,804
Deferred officers' compensation (including accrued
interest of $4,388).................................................. 166,470
Grant award and other liabilities.......................................... 89,374
-----------
Total liabilities.................................................... 3,437,062
-----------
STOCKHOLDERS' EQUITY
Common stock - $.01 par value; 14,000,000 shares
authorized; 6,411,183 shares issued and outstanding)................. 64,112
Additional paid-in capital................................................. 11,171,698
Deficit.................................................................... (10,120,592)
-----------
Total stockholders' equity........................................... 1,115,218
-----------
TOTAL................................................................ $ 4,552,280
===========
</TABLE>
The attached notes are made a part hereof.
F-26
<PAGE>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
--------- ---------
1996 1995*
--------- ---------
<S> <C> <C>
Net sales........................... $ 462,880 $ 147,543
Cost of sales....................... 709,589 275,457
--------- ---------
Gross (loss)........................ (246,709) (127,914)
--------- ---------
Research and development expenses... 166,168 127,235
General, administrative, marketing
and consulting expenses............ 346,785 239,970
--------- ---------
Total expenses...................... (512,953) (367,205)
--------- ---------
(Loss) from operations.............. (759,662) (495,119)
Interest and other income........... 32,123 2,512
Interest expense.................... (71,461) (1,108)
--------- ---------
NET LOSS............................ ($799,000) ($493,715)
========= =========
Net loss per share.................. ($0.14) ($0.11)
======= ======
Weighted average number of common
shares used in computing loss
per share.......................... 5,799,816 4,418,076
========= =========
</TABLE>
The attached notes are made a part hereof.
* As Adjusted
F-27
<PAGE>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------
1996 1995*
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................. ($799,000) ($493,715)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization............................ 60,156 41,852
Value assigned to warrants given to employees............ 17,982
Common stock issued for professional services rendered. 11,211
Changes in operating assets and liabilities:
(Increase) in inventories................................ (151,077) (20,657)
(Increase) in accounts receivable, prepaid expenses
and other assets......................................... (286,161) (1,954)
(Increase) in restricted cash............................ (109,500)
Decrease in subscription receivable...................... 90,000
Increase (decrease) in accounts payable and accrued
expenses................................................. 15,649 (6,513)
Increase in deferred officers' compensation.............. 75,999 76,500
Increase in accrued interest payable..................... 44,649
----------- ----------
Net cash (used in) operating activities.................. (1,048,074) (386,505)
----------- ----------
Cash flows from investing activities:
Purchase of equipment and capitalized tooling costs...... (11,808) (27,296)
Cash acquired with acquisition of company................ 30,771
Costs incurred with acquisition of company............... (16,895)
----------- ----------
Net cash provided by (used in) investing activities...... 2,068 (27,296)
----------- ----------
Cash flows from financing activities:
Proceeds from notes payable.............................. 900,000
Proceeds from sale of common stock....................... 20,000 259,851
Issuance costs incurred in sale of common stock.......... (2,000) (24,535)
Proceeds from exercise of warrants....................... 99,565
Repayment of notes payable-officers...................... (115,750)
----------- ----------
Net cash provided by financing activities................ 802,250 334,881
----------- ----------
(DECREASE) IN CASH AND CASH EQUIVALENTS................... (243,756) (78,920)
Cash and cash equivalents at beginning of period.......... 485,819 102,245
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................ $ 242,063 $ 23,325
=========== ==========
Supplemental disclosure of cash flow information:
Forgiveness of debt owed to officers..................... $ 762,852
Value of warrants given in connection with financing..... $ 100,800
Issuance of stock for acquisition of company............. 1,200,000
Issuance of debt for acquisition of company.............. 1,500,000
The attached notes are made a part hereof.
</TABLE>
* As Adjusted
F-28
<PAGE>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMETNTS
AS OF JUNE 30, 1996
NOTE A):
- --------
(1) The accompanying unaudited financial statements represent
condensed consolidated financial data and, therefore, do not include all
footnote disclosures required to be included in financial statements prepared in
conformity with generally accepted accounting principles.
(2) The consolidated statements include the accounts of Nova
Technologies, Inc. and its wholly-owned subsidiary, Vivax Medical Corp. All
significant intercompany transactions and accounts have been eliminated in
consolidation.
(NOTE B):
- ---------
(1) In management's opinion, all necessary adjustments (consisting
only of normal recurring adjustments) have been made in order to present fairly
the results for the interim periods.
(2) The results of operations for the six months ended June 30, 1996
are not necessarily indicative of the results of operations for the year ending
December 31, 1996.
(NOTE C):
- ---------
Net loss per share is based on the weighted average number of shares
outstanding during each period. No effect has been given to outstanding options
and warrants as the effect would be antidilutive.
(NOTE D):
- ---------
Inventories are stated at the lower of cost (first-in, first-out) or
market.
(NOTE E):
- ---------
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 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 June 30, 1996, the Company has borrowed the full
amount available 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 became exercisable on a pro rata
basis, as the Company achieved its milestones and made additional borrowings
under the facility. As of June 30, 1996, all 300,000 of such warrants are
exercisable and have been valued at $116,800.
(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 June 30, 1996 the Company had borrowed $250,000 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 restricts the payment of
dividends and also requires funds to be held in escrow as a Debt Service
Reserve, as defined in the agreement. The Company is currently in compliance
with these covenants except for the minimum capital funds and maximum
unsubordinated debt ratio covenants, for which the Company has obtained a
waiver for the period ended June 30, 1996.
F-29
<PAGE>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1996
(UNAUDITED)
The Connecticut Development Authority ("CDA") has guaranteed repayment
of 40% of the outstanding balance of the loan with Peoples. The Company's
chairman of the board 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. Comed (now Vivax), an LOC
Corporation, subsequently distributed the warrant it received to its two former
shareholders after Comed was purchased by the Company.
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 Company received proceeds of $190,000 during the
period December 1995 through March 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 held in a
restricted cash account by the Company and the number of shares that could be
purchased by LOC Corporations under the warrants was reduced by 19,000.
(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 purchased with the proceeds. The Company
granted CDA warrants to purchase 45,000 shares of common stock at an exercise
price of $2.50 per share. At June 30, 1996 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 June 30, 1996 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 ("Bristol"), 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 60% of its equipment or employees
of its manufacturing facilities outside Bristol prior to August 8, 2005, the
Company will be obligated to immediately repay the grant.
(NOTE F):
- ---------
At June 30, 1996 the following loans are outstanding:
(a) Notes Payable-Peoples $ 250,000
(b) Notes Payable-Officer 159,250
(c) Notes Payable-Other 1,500,000
(d) Notes Payable-CII 750,000
----------
Total Notes Payable 2,659,250
Current Portion 280,000
----------
Long-term Portion $2,379,250
==========
(a) revolving credit loan maturing September 5, 1997: interest at prime
plus 1 1/2%.
(b) interest at 11% per annum; $30,000 payable on demand; $129,250
payable July 1, 1997 and subordinated to the borrowings under the Peoples and
CII loan facilities. Two officers received permission from Peoples and CII to
substitute deferred compensation aggregating $145,750 due them for an equal
amount of subordinated notes payable. Payments
F-30
<PAGE>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1996
(UAUDITED)
aggregating $115,750 in April 1996 and $30,000 in July 1996 were made to the
officers reducing the amount owed to them under the notes payable.
(c) comprised of a $750,000 promissory note maturing on July 1, 1997
and a $750,000 promissory note payable over three years, commencing in 1998,
with principal installments dependant on future operating results of an acquired
business; both notes bear interest at 8% per annum and are secured by certain
inventory, equipment and technology.
(d) matures on September 5, 2001, with interest payable semi-annually
at 10% per annum commencing on September 5, 1998.
(NOTE G):
- ---------
Three officers have agreed to defer until July 1, 1997, payment of
salaries due them aggregating $162,082 and payment of interest on deferred
compensation due them aggregating $4,388. Deferred salaries of two officers,
aggregating $145,750 are subordinated to borrowings under Peoples and CII loan
facilities. Three directors have agreed to defer payment of accrued director's
fees until July 1, 1997 aggregating $16,250.
(NOTE H):
- ---------
On June 14, 1996 the Company, through a wholly-owned acquisition
corporation, acquired all of the outstanding capital stock of Comed Systems,
Inc., ("Comed") in exchange for 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 July 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). The transaction
was accounted for as a purchase; therefore the results of operations for Comed
were included in the accompanying financial statements since the date of
acquisition. The cost of the acquisition has been allocated to the fair market
value of the assets acquired and liabilities assumed and resulted in goodwill of
approximately $2,000,000.
(NOTE I):
- ---------
On July 15, 1996 the Company borrowed $250,000 under a Promissory Note
due October 14, 1996 with interest at 10% per annum. The loan is secured by
250,000 shares of the Company's unregistered common stock.
F-31
<PAGE>
COMED SYSTEMS, INC.
FINANCIAL STATEMENTS
FEBRUARY 29, 1996
F-32
<PAGE>
[LETTERHEAD OF RICHARD A. EISNER & COMPANY, LLP]
RAE
===
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Comed Systems, Inc.
We have audited the accompanying balance sheet of Comed Systems, Inc. as at
February 29, 1996 and the related statements of operations, changes in
stockholders' equity and cash flows for the nine months ended February 29, 1996
and the year ended May 31, 1995. 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 Comed Systems, Inc. at
February 29, 1996, and the results of its operations and its cash flows for the
nine months ended February 29, 1996 and the year ended May 31, 1995, in
conformity with generally accepted accounting principles.
/s/ Richard A. Eisner & Company, LLP
New York, New York
May 17, 1996
With respect to Note G
May 30, 1996
F-33
<PAGE>
COMED SYSTEMS, INC.
BALANCE SHEET
FEBRUARY 29, 1996
<TABLE>
<CAPTION>
A S S E T S
-----------
Current assets:
<S> <C>
Cash............................................................. $ 15,000
Accounts receivable, trade - net (Notes C and H)................. 374,000
Inventories (Note B[2]).......................................... 18,000
Prepaid expenses................................................. 16,000
Deferred taxes (Note I).......................................... 34,000
--------
Total current assets...................................... 457,000
Rental equipment, less accumulated
depreciation of $1,186,000 (Note B[3])........................... 365,000
Furniture and equipment - net (Notes B[4] and D).................... 67,000
Other assets........................................................ 11,000
--------
T O T A L................................................. $900,000
========
L I A B I L I T I E S
---------------------
Current liabilities:
Current portion of long-term debt (Notes E and G)................ $228,000
Accounts payable and accrued expenses............................ 74,000
Income taxes payable (Note I).................................... 200,000
--------
Total current liabilities................................. 502,000
--------
Long-term debt (less current portion)............................... 9,000
Deferred taxes (Note I)............................................. 53,000
--------
Total liabilities......................................... 564,000
--------
Commitments (Note F)
STOCKHOLDERS' EQUITY
--------------------
Common stock, no par value; 100 shares authorized,
issued and outstanding........................................... 1,000
Accumulated earnings................................................ 335,000
--------
Total stockholders' equity................................ 336,000
--------
T O T A L................................................. $900,000
========
</TABLE>
The accompanying notes to financial statements
are an integral part hereof.
F-34
<PAGE>
COMED SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
February 29, May 31,
1996 1995
------------- -----------
<S> <C> <C>
Net revenues......................................... $1,702,000 $1,758,000
---------- ----------
Cost of net revenues................................. 881,000 903,000
Selling, general and administrative expenses ........ 506,000 521,000
Provision for doubtful accounts...................... 30,000 39,000
---------- ----------
1,417,000 1,463,000
---------- ----------
Operating income........................... 285,000 295,000
---------- ----------
Interest income...................................... 6,000 4,000
Interest (expense)................................... (64,000) (75,000)
Gain (loss) on sale of assets........................ 19,000 (2,000)
---------- ----------
Total...................................... (39,000) (73,000)
---------- ----------
Income before income taxes........................... 246,000 222,000
Income tax expense................................... 94,000 93,000
---------- ----------
NET INCOME........................................... $ 152,000 $ 129,000
========== ==========
</TABLE>
The accompanying notes to financial statements
are an integral part hereof.
F-35
<PAGE>
COMED SYSTEMS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
--------------
Number
of Accumulated
Shares Amount Earnings Total
------ ------ ----------- --------
<S> <C> <C> <C> <C>
Balance - May 31, 1994.................... 100 $1,000 $ 54,000 $ 55,000
Net income................................ 129,000 129,000
--- ------- -------- --------
Balance - May 31, 1995.................... 100 1,000 183,000 184,000
Net income for the nine
months ended
February 29, 1996...................... 152,000 152,000
--- ------- -------- --------
BALANCE - FEBRUARY 29, 1996............... 100 $1,000 $335,000 $336,000
=== ======= ======== ========
</TABLE>
The accompanying notes to financial statements
are an integral part hereof.
F-36
<PAGE>
COMED SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
February 29, May 31,
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 152,000 $ 129,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense........................... 464,000 433,000
Deferred taxes................................. (106,000) 93,000
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable,
trade - net............................... (164,000) 110,000
(Increase) decrease in prepaid expenses..... (4,000) 5,000
(Increase) decrease in other assets......... (7,000) 1,000
Increase (decrease) in accounts payable and
accrued expenses.......................... (143,000) 61,000
Increase in income taxes payable............ 200,000
--------- ---------
Net cash provided by operating activities. 392,000 832,000
--------- ---------
Cash flows from investing activities:
Acquisition of rental equipment.................... (10,000) (700,000)
Disposition of rental equipment.................... 52,000 7,000
Acquisition of property and equipment.............. (20,000) (53,000)
--------- ---------
Net cash provided by (used in) investing
activities.............................. 22,000 (746,000)
--------- ---------
Cash flows from financing activities:
Proceeds from bank borrowings...................... 100,000 139,000
Principal repayment from bank borrowings........... (212,000) (101,000)
Proceeds from stockholder's and related parties'
loans............................................. 530,000
Principal repayment from stockholder's and related
parties' loans................................... (380,000) (615,000)
--------- ---------
Net cash (used in) financing activities... (492,000) (47,000)
--------- ---------
NET INCREASE (DECREASE) IN CASH....................... (78,000) 39,000
Cash - beginning of period............................ 93,000 54,000
--------- ---------
CASH - END OF PERIOD.................................. $ 15,000 $ 93,000
========= =========
</TABLE>
The accompanying notes to financial statements
are an integral part hereof.
F-37
<PAGE>
COMED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - Organization:
- -----------------------
The Company was incorporated in December 1989 in the State of Florida.
Subsequent to February 29, 1996, the Company reincorporated under the laws of
the State of New Hampshire.
The Company operates a home health care business which sells and rents durable
medical equipment to hospitals, nursing homes and individuals in the
northeastern United States.
(NOTE B) - Significant Accounting Policies:
- ------------------------------------------
Significant accounting policies in the preparation of the financial statements
are as follows:
[1] Revenue recognition:
-------------------
Revenues are recognized when services are rendered and related products are
provided to patients and are recorded at amounts estimated to be received under
reimbursement arrangements with the medical facility or third party payors,
including private insurers, and Medicare.
[2] Inventories:
-----------
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist primarily of medical supplies sold directly to patients for use in
their homes.
[3] Rental equipment:
----------------
Rental equipment consists of medical equipment rented to patients for use in
their homes and hospitals and is stated at cost. Depreciation is provided using
the straight-line method over the useful life of the equipment which is stated
at three years.
[4] Furniture and equipment:
-----------------------
Furniture and equipment are stated at cost. The Company computed
depreciation using the straight-line method over the useful lives of the assets
acquired which is estimated at three years.
F-38
<PAGE>
COMED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE B) - Significant Accounting Policies: (continued)
- ------------------------------------------
[5] Management 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 at the date of the
financial statements and the reported amounts of revenues and expenses during
the reported period. Actual results could differ from those estimates.
[6] Recently issued accounting standards:
------------------------------------
The Company has not elected to adopt early the provisions of a recently
issued accounting standard regarding impairments of long-lived assets ("FAS
121"). 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. The Company has not determined the potential impact, if any, of
the adoption of the above standard on its financial position or results of
operations.
(NOTE C) - Accounts Receivable:
- ------------------------------
The accounts receivable includes an allowance for doubtful accounts of $86,000
at February 29, 1996.
(NOTE D) - Furniture and Equipment:
- ----------------------------------
As of February 29, 1996, furniture and equipment consist of the following:
Furniture and fixtures. . . . . . . . . $ 63,000
Vehicles. . . . . . . . . . . . . . . . 116,000
--------
179,000
Less accumulated depreciation . . . . . 112,000
--------
$ 67,000
========
F-39
<PAGE>
COMED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE E) - Long-Term Debt:
- -------------------------
As of February 29, 1996 long-term debt consists of the following:
<TABLE>
<S> <C>
Ford Credit Corp. payable in monthly
installments of $1,141, including
interest at 10.9% per annum, due
February 1997 (1).................... $ 14,000
Ford Credit Corp. payable in monthly
installments of $502, including
interest at 10.5% per annum, due
April 1998 (1)....................... 13,000
CCC Leasing, Inc. payable in monthly
installments of $6,479, including
interest at 18% per annum, due
January 1997 (Note G).............. 60,000
Note payable to stockholder (Note G).. 150,000
--------
T o t a l................... 237,000
Less current portion.................. 228,000
--------
$ 9,000
========
</TABLE>
(1) Collateralized by vehicles.
(NOTE F) - Commitments:
- ----------------------
[1] Letter of credit:
----------------
The Company has an irrevocable letter of credit to People's Bank on behalf of
Nova Technologies, Inc. ("Nova") for $200,000 which expires on November 5, 1997.
The letter of credit is collateralized by accounts receivable and inventory. In
exchange for the letter of credit, the Company received a warrant to purchase up
to 20,000 shares of Nova's common stock at an exercise price of $2.50 per share.
The warrant expires on September 5, 1996.
F-40
<PAGE>
COMED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE F) - Commitments: (continued)
- ----------------------
[2] Lease agreements:
----------------
The Company entered into a lease agreement with a related party for
corporate offices and warehouse space which commenced on December 1, 1995, and
runs for a period of three years. The lease may be extended for additional
consecutive periods of one year. Minimum annual rentals are as follows:
Twelve Months
Ending
February 29,
-------------
1997 . . . . . . . . . . . . $ 42,000
1998 . . . . . . . . . . . . 42,000
1999 . . . . . . . . . . . . 31,000
--------
T o t a l . . . . . . $115,000
========
Rent expense amounted to approximately $25,000 for the nine months ended
February 29, 1996 and $36,000 for the year ended May 31, 1995.
(NOTE G) - Related Party Transactions:
- -------------------------------------
On December 1, 1994, the Company borrowed approximately $130,000 from CCC
Leasing, Inc., a company owned by relatives of the principal stockholders. The
note, which is payable in 24 equal monthly installments beginning January 15,
1995, bears interest at 18% per annum. As of February 29, 1996, $60,000 of the
note remained unpaid. As of May 30, 1996 the note was fully repaid (Note E).
During the year ended May 31, 1995, the Company entered into a separate
promissory note, payable to one of the stockholders. The note is for $450,000,
with interest at 18% per annum due monthly and the principal due May 31, 1998.
As of February 29, 1996, only $150,000 of the note remained unpaid. As of May
30, 1996, the note was repaid (Note E).
F-41
<PAGE>
COMED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE H) - Concentration of Risk:
- --------------------------------
Revenues from principal sources were as follows:
<TABLE>
<CAPTION>
Nine Months
Ended
February 29, Year Ended
1996 May 31, 1995
------------ ------------
<S> <C> <C>
Hospitals............... 57% 75%
Medicare................ 24 21
Private insurance and
other nongovernment
agencies............. 19 4
--- ---
T o t a l............... 100% 100%
=== ===
</TABLE>
Reimbursements can be influenced by the financial instability of private
third-party payors and the budget pressures and cost shifting by governmental
payors. A reduction in coverage or reimbursement rates by third-party payors
could have a material adverse effect on the Company's results of operations.
The Company, like other Medicare providers, is subject to governmental audits
of its Medicare reimbursement claims. As a provider of services, under the
Medicare programs, the Company is also subject to the Medicare fraud and abuse
laws.
As of February 29, 1996, the percentage of accounts receivable is as follows:
Hospitals. . . . . . . . . . . 60%
Medicare . . . . . . . . . . . 32
Private insurers and other
nongovernment sources . . . 8
---
T o t a l. . . . . . 100%
===
F-42
<PAGE>
COMED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE I) - Income Taxes:
- -----------------------
The components of the provision for taxes on income are as follows:
<TABLE>
<CAPTION>
Nine Months
Ended
February 29, Year Ended
1996 May 31, 1995
------------- -------------
<S> <C> <C>
Current:
Federal............................................ $170,000
State.............................................. 30,000
Deferred:
Federal............................................ (90,000) $79,000
State.............................................. (16,000) 14,000
-------- -------
T o t a l...................................... $ 94,000 $93,000
======== =======
A reconciliation between the Company's effective rate and the
U.S. Federal income tax rate is as follows:
Nine Months
Ended
February 29, Year Ended
1996 May 31, 1995
----------- ------------
Statutory rate...................................... 34.0% 34.0%
State income tax, net of
federal tax benefit................................ 6.0 6.0
Other............................................... (2.0) 2.0
---- ----
38.0% 42.0%
==== ====
</TABLE>
The deferred tax liability at February 29, 1996 is as follows:
Fixed assets. . . . . . . . . $ 53,000
Accounts receivable . . . . . (34,000)
--------
$ 19,000
========
Deferred tax expense results from temporary differences in the recognition
of expenses for tax and financial reporting purposes. The principal sources of
these differences were depreciation and allowance for doubtful accounts.
F-43
<PAGE>
================================================================================
NO DEALER, SALESMAN OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE HEREBY, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SECURITIES OFFERED HEREBY TO
ANY PERSON IN ANY STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS AT ANY
TIME DOES NOT IMPLY THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
UNTIL OCTOBER 30, 1996 ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
--------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary......................................... 2
Risk Factors............................................... 7
Use of Proceeds............................................ 11
Market For Common Stock and Dividend Policy................ 13
Capitalization............................................. 14
Selected Financial Data.................................... 14
Management's Discussion and Analysis of Financial Condition
and Results of Operation.................................. 17
Business................................................... 24
Management................................................. 34
Certain Transactions....................................... 38
Principal Stockholders..................................... 42
Plan of Distribution....................................... 44
Description of Securities.................................. 44
Legal Proceedings.......................................... 47
Legal Matters.............................................. 47
Experts.................................................... 47
Indemnification for Securities Act Liabilities............. 47
Available Information ..................................... 48
Index to Financial Statements.............................. F-1
================================================================================
================================================================================
NOVA TECHNOLOGIES, INC.
COMMON STOCK
--------------------
PROSPECTUS
--------------------
September 20, 1996
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Certificate of incorporation of Nova Technologies, Inc. (the
"Registrant") provides with respect to the indemnification of directors and
officers that the Registrant shall indemnify to the fullest extent permitted by
Section 145 of the Delaware General Corporation Law, as amended from time to
time, each person that such Section grants the registrant the power to indemnify
and that such indemnification shall not be deemed exclusive of any other rights
to which such persons may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors or otherwise. The Certificate of
incorporation of the Registrant also provides that no director shall be liable
to the registrant or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (1) for any breach of the
director's duty of loyalty to the registrant or its stockholders, (2) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (3) under section 174 of the delaware general
corporation law or (4) for any transaction from which the director derived an
improper personal benefit.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection
with the offering described in this Registration Statement. None of such
expenses will be paid by Selling Stockholders.
<TABLE>
=====================================================
<S> <C>
Registration Fee Under Securities Act $ 910.17
of 1933
- -----------------------------------------------------
Photocopying/Printing Expenses $ 2,000.00
- -----------------------------------------------------
Accounting Fees and Expenses $12,000.00
- -----------------------------------------------------
Legal Fees and Expenses $12,000.00
- -----------------------------------------------------
Blue Sky Fees and Expenses (including $ 2,000.00
related legal fees)
- -----------------------------------------------------
Miscellaneous $ 1,089.83
- -----------------------------------------------------
TOTAL $30,000.00
=====================================================
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following sets forth information relating to all securities of the
Company which were sold by it during the past three years and which were not
registered under the Securities Act of 1933, as amended (the "Act").
1. During the period February through May 1994, the Company issued 10,940
shares of Common Stock, valued at $10,940 per share to First Island
Partners L.P., the landlord for the Company's Hauppauge, New York
facility, in payment of a portion of its rent.
2. During the period from December 1993, through April 1994, the Company
sold 653,000 shares of Common Stock at a price of $1.00 per share to
the individuals named below. A commission of 10% was paid by the
Company in connection with each of these sales to one or more of
Arlindo Jorge and Barry Goldstein.
Fermon, Charles M.
Schneider, August E.
Glaws, Walter
Sami, Sherif
Eder, Leonard J.
II-1
<PAGE>
Rieger, Fred Jr.
Shapiro, Daniel
Teller, Sandy
Groginsky, Paula & Stuart
Brooksbank, James J.
Helkowski, Barbara
Schmitz, John R.
Cohen, Edward J. & Arlette
Stevenson, Richard C. & Inez I.
La Torre, Susan
Russo, Robert & Michelle
Gordon, Robert & Sandra
Aquila, Santo
La Torre, Michael P.
La Torre, Michael J.
Lehrman, Sol & Shirley
Slaughter, June
Reisman, Theodore
Griffin, E.
Adinolfi, J & F
Lijoi, Bruno Trustee
Scherer, Howard & Rita
Jacklin, Honey Ruth Trustee
Kowalczik, Douglas J.
Shapiro, David
3. During the period from May 1994, through August 1995, the Company sold
744,920 shares of Common Stock at a price of $1.50 per share to the
individuals named below. A commission of 10% was paid by the Company
in connection with each of these sales to one or more of Arlindo
Jorge, Barry Goldstein and Jeremy Wiesen.
Melchior, Timothy
Bariahtaris, Connie & Arthur
Cabble, Steven & Donna
Cohen, Wayne Jay
Shapiro, Eric
Thonsen, William J.
Kowalczik, Douglas J.
Groginsky, Paula & Stuart
Shapiro, Daniel
Sussman, Gerald & Dorothy
Kaller, Jerold & Joyce
Schaffner, Charles E.
Navarro, Vincent & Sheila
Rexroad, Susan & Fred
Rieger, Fred Trustee
Rusnack Pension Plan
II-2
<PAGE>
Dean Witter Cust FBO Arlindo Jorge
Maher, John
Mathews, James F. & Teresa
Mathews, Rosemary
Grazia, Albert W.
Shapiro, Ira Jay
Hartman, David
Howfam, Inc.
Wiesen, Jeremy
Loscalzo, Michael A.
Eder, Leonard
Rieger, Fred R.
Mattern, Lynne R.
Rusnack, Theodore
Wiltsie, Thomas R.
Wild, Walter
Ziegler, Gordon S. Jr.
Sami, Sherif F.
Fyman, Philip
Schoen, Bruce
Fermon, Charles
Backer, Jeffrey & Susan
Di Matteo, Elizabeth C.
Lepkowsky, Calvin & Irene
Gordon, Robert & Sandra
Helkowski, Barbara
Horowitz, Stephen E.
Cohen, Michael & Marlene
Edwards, Ellen & Philip
Dori, Isaac & Judith
Lonergan, Michael R.
Adib, Banu
Duane, Winifred A.
Republic Bank FBO David Hartman
Rexroad, Susan & Fred
Abrams, Scott D.
Rauch, Willard E.
Oblas, Robert
Slaughter, June
Arca, Bill
Nash, Gary & Rhoda
Rosenheim, Paul
Lefcourt, Richard B.
Genovese, Gregory P.
Viviani, Joseph C.
Madden, Elizabeth D.
Smith Barney Custodian for Louis
Di Mateo
Sondes, Sharon
Bonheim, Paul
Rieger, Fred Jr.
Webster, Jerry
Harker, Edward
Albert, Charles
Chubb, Charles
Reisman, Theodore
Suozzi, Joseph A.
II-3
<PAGE>
4. In 1993 and 1994, the Company issued 12,000 and 12,692 shares, respectively,
of Common Stock to Aztech Corp., a company controlled by Stephen Fisher, an
executive officer of the Company, in consideration of consulting services.
5. In January 1995, the Company issued 73,752 shares of Common Stock pursuant
to the exercise of outstanding warrants to the individuals named below. The
warrants were issued in 1990 with an exercise price of $3.00 per share and
an expiration date of December 31, 1994. In 1994, the exercise price of
these warrants was reduced to $1.35 per share and the expiration date was
extended to January 20,1995.
Eder, Leonard
Rieger Jr., Fred
Rieger, Helene
Rusnack, Theodore
Wiltsie, Thomas
Wild, Walter
Ziegler, Gordon
Sami, Sherif
6. 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.
7. In exchange for services rendered, the Company issued to Harold J. Lash,
Paul C. DiMatteo, John Gildea and Steven Kay, employees of the Company, in
1994 and 1995 warrants to purchase 62,932 and 24,680 shares, respectively,
of Common Stock at an exercise price of $1.50 per share, expiring at various
dates through September 29, 1998.
8. 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.
9. 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.
10. In September 1995, the Company sold 900,901 shares of Common Stock at a
price of $1.11 per share to Field Family Trust, JCM Capital Corp., Jodi
Kirsch, Adam Kula, Albert Kula, Robert Kula, Leonard Tower, Barry T. and
Angela Zeman, and Joshua and Barry T. Zeman. The Company paid a commission
of $60,000 to Merolla & Bogar LLC and $40,000 to TimeCapital Securities
Corporation.
11. In September 1995, the Company issued to Connecticut Innovations
Incorporated warrants to purchase 300,000 shares of Common Stock at $1.1 1
per share, expiring September 1, 2001 in connection with its loan agreement
with the Company.
12. In September 1995, the Company issued to Connecticut Development Authority
warrants to purchase 33,750 and 11,250 shares of Common Stock at $2.50 per
share, expiring September 1, 1997 and September 1, 2002, respectively, in
connection with its loan agreement with the Company and its guarantee of the
Company's loan agreement with People's Bank.
II-4
<PAGE>
13. In September 1995, the Company issued to each of Advanced Therapeutics,
Inc. ("Advanced"), Comed Systems, Inc. ("Comed") and Innovative Medical
Systems, Inc. ("Innovative"), distributors of the Company, a warrant to
purchase 20,000 shares of Common Stock at $2.50 per share, expiring the
day after such distributor's obligations to People's Bank expire, in
connection with each such distributor posting a $200,000 letter of
credit as security for the Company's loan facility with People's Bank.
Also in September 1 995, the Company entered into a Stock Put and Call
Agreement with Advanced and Innovative. Pursuant to such agreements, in
September 1995, the Company sold 66,667 and 60,000 shares, respectively,
of its Common Stock to Advanced and Innovative at $1.50 per share. The
proceeds of such sales are held in a restricted account and the letter
of credit posted by each of Advanced and Innovative as security for the
Company's loan facility with People's Bank was reduced by the amount of
such proceeds. In addition, Advanced's warrant was reduced to the right
to purchase 1 0,000 shares of Common Stock and Innovative's warrant was
reduced to the right to purchase 1 1,000 shares of Common Stock.
14. Merolla & Bogar LLC was issued 5400 and 2700 shares of Common Stock in
January and March 1996, representing payment of its $12,000 annual fee
for the period September 1995 through May 1996 at $1.1 1 per share
pursuant to a consulting agreement with the Company.
15. 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.
16. 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.
17. In October 1995, Jay Haft, a director of the Company, was granted an
option pursuant to the Plan to purchase 1 0,000 shares of Common Stock
at $3.13 per share through December 31, 2002.
18. In October 1995, an employee of the Company, was granted an option
pursuant to the Plan to purchase 2,000 shares of Common Stock at $3.13
per share, expiring October 9, 2002@
19. In March 1996, John Maher and John O'Brien were each issued 1,000 shares
of Common Stock as finder's fees in connection with certain private
placement sales of Common Stock.
20. The following directors or former 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.
21. Fred Rieger, Jr. purchased 10,000 shares of Common Stock in May 1996 at
$2.00 per share. Arlindo Jorge received a commission of 10%.
II-5
<PAGE>
Exemption from registration under the Act is claimed for the sales of
securities referred to above in reliance upon the exemption afforded by Sections
3(b) or 4(2) of the Act. Each certificate evidencing such securities bears an
appropriate restrictive legend and "stop transfer" orders are maintained on the
Company's stock transfer records thereagainst. Other than as noted above, none
of these sales involved the payment of finder's fees or sales commissions. A
subscription agreement indicating that the securities sold were unregistered
restricted securities was signed by each purchaser. Such subscription
agreements included representations that the purchasers were accredited
investors, that they were purchasing the securities for investment and not with
a view to distribution, and that they received the Company's filings pursuant to
the Exchange Act. No general solicitation or general advertising was conducted
by the Company or any of its representatives in connection with the sales of
securities referred to above.
22. In October 1993, each of Peter C. Glaws, Nell L. Zandberg, Charles T.
Glaws, Walter R. Glaws, and Anna Davenport, purchased 350 shares of
Common Stock at a price of $3.00 per share pursuant to the exercise of
warrants issued in 1990. Exemption from registration under the Act is
claimed for such sales in reliance upon the exemption afforded by
Sections 3(b) or 4(2) of the Act. Each certificate evidencing such
securities bears an appropriate restrictive legend and "stop transfer"
orders are maintained on the Company's stock transfer records
thereagainst. None of these sales involved the payment of finder's
fees or sales commissions.
II-6
<PAGE>
ITEM 27. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 Certificate of Incorporation, as amended(l)
3.2 By-Laws(l)
4.1 See Exhibit 3.1 and 3.2
4.2 Form of certificate evidencing shares of Common Stock(l)
4.3 Form of certificate evidencing Redeemable Common Stock Purchase
Warrant(l)
4.4 Form of Warrant Agreement between the Company and EuroAtlantic
Securities, Inc.(l)
4.5 Form of Redeemable Warrant Agreement between the Company and
American Stock Transfer & Trust Company as warrant agent(l)
5 Opinion of VVhitman Breed Abbott & Morgan*
10.1 1985 General Stock Option Plan(l)
10.2 1985 Incentive Stock Option Plan(l)
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(l)
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(l)
10.6 Agreement and Restated Stock Purchase Agreement, dated December
31, 1986, between the Company, Transitions Two, Limited
Partnership, Nadfa Ltd., Paul DiMafteo and Venture Capital
Associates, Ltd(l)
10.7 Lease Agreement, dated March 7, 1986, and amendments thereto,
between the Company and First Island Partners, L.P. (the "Lease
Agreement")(1)
10.8 Amendment to Lease Agreement, dated February 29, 1992, between
the Company and First Island Partners, L.P.(3)
II-7
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.9 Form of Warrant Agreement between the Company and various
persons(l)
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
DiMafteo 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)
11-8
<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, lnc.(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 ("Cli")(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)
II-9
<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,
Cil, Paul DiMafteo, Stephen Fisher and Samuel Paul(2)
10.40 Subordination Agreement, dated September 5, 1995, among the
Company, Cil, 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, lnc.(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)
II-10
<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, lnc.(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)
II-11
<PAGE>
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, lnc.(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 DiMafteo 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)
23.1 Consent of Whitman Breed Abbott & Morgan (contained in Exhibit
5)*
23.2 Consent of Richard A. Eisner & Company, LLP*
- ----------
(1) Incorporated by reference to the exhibits to the Company's Registration
Statement on Form S-1 (File No. 3342880).
(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.
(9) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (File No. 333-364)
* Filed herewith.
II-12
<PAGE>
ITEM 28. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) That for purposes of determining any liability under the
Securities Act, the information omitted from the form of Prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and contained in
a form of Prospectus filed by the small business issuer under Rule 424(b)(1), or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time the S.E.C. declared it effective.
(2) That for purposes of determining any liability under the
Securities Act, each posteffective amendment that contains a form of Prospectus
shall be deemed to be a new Registration Statement for the securities offered in
the Registration Statement, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering of those securities.
Insofar as indemnification for liabilities arising under the
Securities Act of 1993 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions in Item 15 hereof, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by E! director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless,
in the opinion of its counsel, the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-13
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
City of Hauppauge, New York on the 20th day of September, 1996.
NOVA TECHNOLOGIES, INC.
By:/s/ Stephen M. Fisher
------------------------
Stephen M. Fisher
President, Chief Executive
Officer, Treasurer and Director
(Principal Executive Officer and
Principal Financial Officer)
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement was signed by the following persons in the
capacities and on the dates indicated.
Signature TITLE DATE
- --------- ----- ----
Paul DiMatteo* Chairman of the Board September 20, 1996
- ---------------------
Paul DiMatteo
Charles F. Chubb* Senior Vice President September 20, 1996
- --------------------- and Director
Charles F. Chubb
Samuel N. Paul* Senior Vice President and Director September 20, 1996
- ---------------------
Samuel N. Paul
Douglas Drew* Senior Vice President and Director September 20, 1996
- ---------------------
Douglas Drew
Harold J. Lash* Vice President, Controller and September 20, 1996
- --------------------- Secretary (Principal Accounting
Harold J. Lash Officer)
Director September 1996
- ---------------------
Arlindo Jorge
Director September 1996
- ---------------------
Robert Segnini
* By: /s/ Stephen M. Fisher
----------------------
Stephen M. Fisher
Attorney-in-fact
II-14
<PAGE>
<TABLE>
<CAPTION>
NOVA TECHNOLOGIES, INC. FORM SB-2
FILE NO.
INDEX TO EXHIBITS
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBEREDPAGE
- ------ ----------- ------------
<C> <S> <C>
3.1 Certificate of Incorporation, as amended(l) N.A.
3.2 By-Laws(l) N.A.
4.1 See Exhibit 3.1 and 3.2 N.A.
4.2 Form of certificate evidencing shares of Common Stock(l) N.A.
4.3 Form of certificate evidencing Redeemable Common Stock N.A.
Purchase Warrant(l)
4.4 Form of Warrant Agreement between the Company and Euro-
Atlantic Securities, lnc.(l) N.A.
4.5 Form of Redeemable Warrant Agreement between the
Company and American Stock Transfer & Trust Company
as warrant agent(l) N.A.
5 Opinion of Whitman Breed Abbott & Morgan*
10.1 1985 General Stock Option Plan(l) N.A.
10.2 1985 Incentive Stock Option Plan(l) N.A.
10.3 Employment Agreement, dated as of June 18, 1996
between the Company and Paul DiMafteo(8) N.A.
10.4 Employment Agreement, dated February 22, 1985, and
amendments thereto, between the Company and
Charles Chubb(l) N.A.
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(l) N.A.
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(l) N.A.
</TABLE>
(i)
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS (continued)
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBEREDPAGE
- ------ ----------- ------------
<C> <S> <C>
10.7 Lease Agreement, dated March 7, 1986, and amendments
thereto, between the Company and First Island Partners,
L.P. (the "Lease Agreement")(1) N.A.
10.8 Amendment to Lease Agreement, dated February 29, 1992,
between the Company and First Island Partners, L.P.(3) N.A.
10.9 Form of Warrant Agreement between the Company and
various persons(l) N.A.
10.10 Extension of Lease Agreement, dated May 5, 1992, between
the Company and First Island Partners, L.P.(4) N.A.
10.11 Extension of Lease Agreement, dated July 15, 1992, between
the Company and First Island Partners, L.P.(4) N.A.
10.12 Amendment of Lease Agreement, dated September 9, 1992,
between the Company and First Island Partners, L.P.(4) N.A.
10.13 Extension of Lease Agreement, dated March 23, 1993 between
the Company and First Island Partners, L.P.(5) N.A.
10.14 Amendment to Lease Agreement, dated June 25, 1993 between
the Company and First Island Partners, L.P.(5) N.A.
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) N.A.
10.16 Promissory Notes of the Company in the principal amounts
of $30,000, $30,000 and $1 0,000, dated October 19, 1993,
November 5, 1993 and November 23, 1993, respectively,
payable to Paul DiMafteo and the related Security
Agreements, dated October 19, 1993, November 5, 1993
and November 23, 1993(5) N.A.
10.17 1994 Stock Option Plan(6) N.A.
10.18 Employment Agreement, dated May 23, 1994 between the
Company and Stephen M. Fisher(6) N.A.
</TABLE>
(ii)
<PAGE>
INDEX TO EXHIBITS (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBEREDPAGE
- ------ ----------- ------------
<C> <S> <C>
10.19 Amendment to Lease Agreement, dated January 13,
1994 between the Company and First Island Partners, L.P.(6) N.A.
10.20 Employment Agreement, dated August 10, 1995
between the Company and Samuel N. Paul(7) N.A.
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) N.A.
10.22 Consulting and Related Agreements, dated
August 24, 1995 between the Company and
Merolla & Bogar, LLC(7) N.A.
10.23 Distributorship Agreement, dated February 24, 1994
between the Company and James J. Brooksbank(7) N.A.
10.24 Employment Agreement, dated June 14, 1996,
between the Company and Douglas Drew(8) N.A.
10.25 Distributorship Agreement, dated June 20, 1994, between
the Company and Innovative Medical Systems, lnc.(7) N.A.
10.26 Distributorship Agreement, dated January 24, 1995, between
the Company and Advanced Therapeutics, lnc.(7) N.A.
10.27 Distributorship Agreement, dated February 15, 1995, between
the Company and Recovercare, Inc.(7) N.A.
10.28 Distributorship Agreement, dated March 24, 1995, between
the Company and Stat Medical, Inc.(7) N.A.
10.29 Distributorship Agreement, dated March 17, 1995, between
the Company and Concept Medical Corporation(7) N.A.
10.30 Distributorship Agreement dated January 1, 1996, between
the Company and JCM Capital Corp.(7) N.A.
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) N.A.
</TABLE>
(iii)
<PAGE>
INDEX TO EXHIBITS (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBEREDPAGE
- ------ ----------- ------------
<C> <S> <C>
10.32 Agreement, dated November 1, 1994, between the
Company and Omni Manufacturing, Inc.(7) N.A.
10.33 Financing Agreement, dated September 5, 1995,
between the Company and Connecticut Innovations,
Incorporated ("Cil")(2) N.A.
10.34 Senior Note, dated September 5, 1995, by the
Company in favor of C[1(2) N.A.
10.35 Security Agreement, dated September 5, 1995, between
the Company and C[1(2) N.A.
10.36 Collateral Assignment and Grant of License, dated
September 5, 1995, between the Company and C[1(2) N.A.
10.37 Stock Subscription Warrant, dated September 5, 1995, by
the Company in favor of CII(2) N.A.
10.38 Warrant Put Agreement, dated September 5, 1995, between
the Company and CII(2) N.A.
10.39 Officers'Agreement, dated September 5, 1995, among the
Company, CII, Paul DiMafteo, Stephen Fisher and Samuel
Paul(2) N.A.
10.40 Subordination Agreement, dated September 5, 1995, among
the Company, CII, Paul DiMatteo and Charles Chubb(2) N.A.
10.41 Loan Agreement, dated September 5, 1995, between the
Company and People's Bank(2) N.A.
10.42 Revolving Credit Note, dated September 5, 1995, by
the Company in favor of People's Bank(2) N.A.
10.43 Security Agreement, dated September 5, 1995, between
the Company and People's Bank(2) N.A.
10.44 Guarantee Agreement, dated September 5, 1995, between
Connecticut Development Authority and People's Bank and
agreed to by the Company(2) N.A.
10.45 Guaranty, dated September 5, 1995, by Paul DiMatteo for
the benefit of Connecticut Development Authority(2) N.A.
</TABLE>
(iv)
<PAGE>
INDEX TO EXHIBITS (continued)
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBEREDPAGE
- ------ ----------- ------------
<C> <S> <C>
10.46 Letter of Credit Agreement, dated September 5, 1995,
among the Company, People's Bank and Advanced
Therapeutics Inc.(2) N.A.
10.47 Letter of Credit Agreement, dated September 5, 1995,
among the Company, People's Bank and Innovative
Medical Systems, Inc.(2) N.A.
10.48 Letter of Credit Agreement, dated September 5, 1995,
among the Company, People's Bank and Comed Systems, Inc.(2) N.A.
10.49 Letter of Credit Reimbursement, Warrant Grant and
Security Agreement, dated September 5, 1995, between
the Company and Advanced Therapeutics, lnc.(2) N.A.
10.50 Letter of Credit Reimbursement, Warrant Grant and
Security Agreement, dated September 5, 1995, between
the Company and Innovative Medical Systems, lnc.(2) N.A.
10.51 Letter of Credit Reimbursement, Warrant Grant and
Security Agreement, dated September 5, 1995, between
the Company and Comed Systems, lnc.(2) N.A.
10.52 Loan Agreement, dated September 5, 1995, between
the Company and Connecticut Development Authority(2) N.A.
10.53 Promissory Note, dated September 5, 1995, by the Company
in favor of Connecticut Development Authority(2) N.A.
10.54 Security Agreement, dated September 5, 1995, between
the Company and Connecticut Development Authority(2) N.A.
10.55 Stock Subscription Warrant, dated September 5, 1995,
between the Company and Connecticut Development
Authority(2) N.A.
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) N.A.
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) N.A.
</TABLE>
(v)
<PAGE>
INDEX TO EXHIBITS (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBEREDPAGE
- ------ ----------- ------------
<C> <S> <C>
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) N.A.
10.59 lntercreditor Agreement, dated November_, 1995, among
the Company, People's Bank, Cli and Department of Economic
and Community Development(7) N.A.
10.60 Stock Put and Call Agreement, dated September 5, 1995,
between the Company and Innovative Medical Systems, Inc.(7) N.A.
10.61 Stock Put and Call Agreement, dated September 5, 1995,
between the Company and Advanced Therapeutic, Inc.(7) N.A.
10.62 Agreement dated August 25, 1995, between the Company and
TimeCapital Securities Corporation(9) N.A.
10.63 Amendment No. 1 to Loan Agreement, dated as of December
31, 1995, between the Company and People's Bank(9) N.A.
10.64 Amendment No. 2 to Loan Agreement, dated as of April
1996, between the Company and People's Bank(9) N.A.
10.65 Agreement, dated April 26, 1996, between the Company
and TimeCapital Securities Corporation(9) N.A.
10.66 Amendment to Distributorship Agreement, effective as of
October 17, 1995, between the Company and Innovative
Medical Systems, lnc.(9) N.A.
10.67 Amendment to Distributorship Agreement, effective as
of October 17, 1995, between the Company and
Concept Medical Corporation(9) N.A.
10.68 Amendment to Distributorship Agreement, effective as
of October 17, 1995, between the Company and
Advanced Therapeutics Inc.(9) N.A.
10.69 Amendment to Distributorship Agreement, effective as
of October 17, 1995, between the Company and
Recovercare, Inc.(9) N.A.
</TABLE>
(vi)
<PAGE>
10.70 Amendment to Distributorship Agreement, effective as
of October 17, 1995, between the Company and
Stat Medical, Inc.(g) N.A.
10.71 Amendment to Distributorship Agreement, dated
as of May 6, 1996, between the Company and
JCM Capital Corp.(9) N.A.
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) N.A.
10.73 Stock Purchase Agreement, dated as of May 31, 1996, among
the Company, Vivax, Douglas Drew and Donna Drew(8) N.A.
10.74 Non-Competition Agreement, dated as of June 14, 1996,
between the Company and Douglas Drew(8) N.A.
10.75 Agreement dated June 28, 1996, between the Company
and TimeCapital Securities Corporation(9) N.A.
10.76 Loan and Security Agreement dated July 15, 1996, between
the Company and Northern Associates, L.P.(9) N.A.
10.77 Promissory Note dated July 15, 1996 by the Company in
favor of Northern Associates, L.P.(9) N.A.
10.78 Letter Agreement dated July 15, 1996 between the Company and
TimeCapital Securities Corporation(9) N.A.
23.1 Consent of Whitman Breed Abbott & Morgan(contained in
Exhibit 5)*
23.2 Consent of Richard A. Eisner & Company, LLP*
- ----------
(1) Incorporated by reference to the exhibits to the Company's Registration
Statement on Form S-1 (File No. 3342880).
(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
1 O-KSB.
(5) Incorporated by reference to the exhibits to the Company's fiscal 1993 Form
1 O-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.
(9) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (File No. 333-364).
* Filed herewith.
(vii)
<PAGE>
[WHITMAN BREED ABBOTT & MORGAN LETTERHEAD]
EXHIBIT 5
(203) 869-3800
September 20, 1996
Nova Technologies, Inc.
89 Cabot Court, Unit L
Hauppauge, New York 11788
Re: Registration Statement on Form SB-2,
File No. 333-11769
------------------------------------
Gentlemen and Ladies:
We have acted as counsel to Nova Technologies, Inc., a Delaware corporation
(the "Company"), in connection with the registration under the Securities Act of
1933, as amended, on Form SB-2 of 1,005,525 shares of the Company's Common
Stock, $.01 par value (the "Shares").
We have examined the Certificate of Incorporation, and the amendments
thereto, and the By-Laws of the Company, and the corporate proceedings of the
Company relating to the issuance of the Shares, and such records and other
documents as we have deemed relevant and necessary as the basis for the opinion
set forth below.
In such examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, photostatic or facsimile copies and the
authenticity of the originals of such copies. We have also assumed that the
corporate records furnished to us by the Company include all corporate
proceedings taken by the Company relating to the Shares.
Based on the foregoing and in reliance thereon, it is our opinion that upon
the issuance and sale of the Shares in the manner described in the above-
referenced Registration Statement, the Shares
<PAGE>
Nova Technologies, Inc.
September 20, 1996
Page 2
will be legally and validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference made to this firm and the use of its name under
the caption "Legal Matters" in the Registration Statement and the Prospectus
included in the Registration Statement.
Very truly yours,
/S/ WHITMAN BREED ABBOTT & MORGAN
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this Registration Statement on Form SB-2
of our report dated February 12, 1996 (March 26, 1996 and April 26, 1996 as to
Note 9[a] and Note 1, respectively) based on our audits of the financial
statements of Nova Technologies, Inc. and of our report dated May 17, 1996 (May
30, 1996 as to Note G) based on our audits of the financial statements of Comed
Systems, Inc. We also consent to the reference to our firm under the captions
"Selected Financial Data" and "Experts".
/s/ Richard A. Eisner & Company, LLP
New York, New York
September 20, 1996
