<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
-------------- -------------
Commission file number 33-42880
--------------------------------------
NOVA TECHNOLOGIES, INC.
------------------------------------------------------------
(Name of small business issuer in its charter)
Delaware 11-2674603
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
545 Middle Street, Bristol, CT 0601 06010
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (860) 589-8200
--------------
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $1,650,913
----------
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. (See definition of affiliate in Rule 12b-2 of the Exchange Act).
$14,785,971 as of 3/31/97.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. 7,689,657 as of 3/31/97
DOCUMENTS INCORPORATED BY REFERENCE: None
Transitional Small Business Disclosure Format: Yes No X
--- ---
<PAGE>
PART I
Item 1. DESCRIPTION OF BUSINESS
Business Development and Overview
Nova Technologies, Inc. ("Nova" or the "Company"), a publicly traded (NASD,
NOTL) company, was founded in 1984 to create a methodology of providing for the
unassisted transfer of bedridden patients. Nova's objective is to become a fully
integrated design, engineering, manufacturing and marketing company addressing a
niche market in the medical equipment and supply field. On June 14, 1996, Nova,
through its wholly-owned subsidiary, Vivax Medical Corp. a newly formed Delaware
corporation ("Vivax"), acquired all of the outstanding capital stock of Comed
Systems, Inc., a New Hampshire corporation ("Comed"). Vivax will continue the
business of Comed as a distributor of specialized beds, support surfaces and
related equipment in the greater Boston area. On and after June 14, 1996, the
term the "Company" shall include both Nova and Vivax unless otherwise
specifically provided or the context otherwise requires.
The Company's engineering and technical staff has developed a patient
transfer system (Novabed(R)) to be marketed to the rapidly growing long-term
care market. The Nova patient transfer system, with the push of a button on a
hand held pendant can automatically, comfortably, and safely transfer a
bedridden patient from a lying position in a hospital type bed to a seated
position in a wheel chair or commode and transfer the patient back into the bed.
A wheelchair backrest must be manually inserted in order to separate the
wheelchair from the bed. The system consists of a unique hospital-type bed, a
companion wheelchair, accessories, and is designed to be operated by one
attendant or, under certain circumstances, by the patient unassisted. At present
the Company is not aware of any similar products on the market. The Company has
been issued 20 patents related to the transfer system and bed sore prevention
and has received United States Food and Drug Administration ("FDA") approval to
market the product.
The Novabed(R) provides elderly and disabled persons and their care givers
with an alternative to manual lifting or conventional hydraulic lifting devices.
Such devices are difficult to use and often require special safety precautions.
The Company believes its system can significantly help the bedridden to be
comfortably and safely cared for in their own homes. The patient transfer system
has demonstrated how it may also partially reduce or eliminate transfer related
injuries to both staff and patients. Use of Nova's system by institutions can
improve patient care and mobility, provide therapeutic benefits, and reduce
costs associated with transfer-related labor requirements and injuries. In
addition, Novabed(R) can provide a means for many non-ambulatory patients to be
cared for in the home, thereby enabling early release from the hospital. In the
private home setting, Nova's unique transfer system can significantly delay
institutional care, thus saving the high cost of nursing home care and enhancing
quality of life.
The potential users of the patient transfer system include: the severely
physically handicapped; disease related bedridden persons; trauma and stroke
victims; post surgical and orthopedic rehabilitation patients; and the elderly
disabled. Purchasers of the system can be divided into three segments:
hospitals; nursing homes and related care facilities; and the home care market,
a rapidly growing segment in the industry.
The Company's strategy is to establish, through clinical trials, medical
efficacy conditions for the product, determine and establish cost benefit, and
demonstrate how the patient transfer system greatly improves quality of life.
The Novabed(R) has undergone clinical evaluation in an institutional and home
care setting. The Company is focusing its marketing on hospitals, rehabilitation
units and nursing homes in order to develop a strong referral base for the large
home healthcare market. Concurrent with this effort the Company is developing a
program to seek reimbursement authorization by Medicare, Medicaid and other
third party payors. See "Beta Site and Field Trials" and "Third Party
Reimbursement" below.
Nova commenced field trials of the Novabed with the installation of a
prototype in a nursing home in November 1992 and a prototype in a private home
in February 1993. In 1993 the Company commenced tooling for and production of
its first lot of 40 units for commercial sale. The first sales of these units
were recorded in June 1994. The Company has produced approximately 100
Novabeds(R), as of March 31, 1997.
<PAGE>
Until recently, Nova relied almost exclusively on distributors with
industry experience with specialty beds to sell product to the institutional as
well as the home healthcare markets. The Company has entered into seven
exclusive distribution agreements to date covering seven regional territories in
the United States. The regions combined cover approximately 25% of the U.S.
population. As a result of the Company's recent acquisition of Comed, one of the
Company's former distributors, the Company now has in-house distribution
capability in the greater Boston area. In the future the Company plans to grow
its own sales force for distribution to the institutional markets and to
continue to work with Home Medical Equipment dealers ("HME"), Durable Medical
Equipment dealers ("DME"), distributors, and home healthcare agencies in selling
to the institutional and home healthcare markets. See "Marketing and
Distribution" below.
In September 1995, pursuant to a series of inter-related transactions (the
"1995 Financing"), the Company (i) sold 900,901 shares of Common Stock for an
aggregate of $1,000,000, (ii) entered into a Grant Agreement with the City of
Bristol, Connecticut providing, under certain conditions, for a grant in the
amount of $100,000, (iii) entered into a Financing Agreement with Connecticut
Innovations Incorporated ("CII"), a State of Connecticut agency to borrow
$750,000 in four staged installments, (iv) entered into a Loan Agreement with
People's Bank ("People's Bank"), providing for a $1,000,000 revolving credit
facility (v) entered into a Loan Agreement with Connecticut Development
Authority ("CDA"), a State of Connecticut agency providing for advances up to
$100,000 for the purchase of new or used equipment and (vi) entered into an
Assistance Agreement with the Department of Economic and Community Development
("DECD"), a State of Connecticut agency providing for a loan in an amount not to
exceed $200,000 for the purchase of capital equipment. In September 1995, the
Company also sold 126,667 shares of restricted Common Stock for $190,000 to two
of its distributors. See "Management's Discussion and Analysis or Plan of
Operation - Liquidity and Capital Resources."
On June 14, 1996, Nova, through its wholly-owned subsidiary Vivax, acquired
from Douglas and Donna Drew all the outstanding capital stock of Comed, a
distributor of specialized beds, support surfaces and related equipment in the
greater Boston area, and Comed was merged into Vivax. Of the aggregate purchase
price of $3,000,000, $1,500,000 was paid in the form of 600,000 shares of Common
Stock (using a value of $2.50/share per the Agreement) and the remaining
$1,500,000 consisted of two $750,000 promissory notes bearing interest of 8% of
Vivax which are guaranteed by Nova. One promissory note is payable on 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. On December 30, 1996, $450,000 of the first note was
exchanged for 225,000 shares of the Company's Common Stock. 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 December 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 545 Middle Street, Bristol,
Connecticut 06010, telephone number (860) 589-8200.
Patient Management System
<PAGE>
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.
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.
Additional features and optional equipment of the Novabed(R) include:
. Scales for weighting the patients (to be introduced in June 1997).
. 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
<PAGE>
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.
Soma Safe Enclosure
The Company received FDA approval for the Soma Safe Enclosure Bed, which is
a bed secured with netting to provide a safe, humane and cost-effective
alternative to caring for a patient that otherwise would need to be restrained.
By creating a more secure, manageable environment, the patient becomes much
less disturbed. By freeing the patient's extremities from restraints, the
patient can vent their restlessness with little or no danger of inflicting
injury on themselves or others. Thus, the patient regains dignity and autonomy,
thereby increasing their quality of life.
This is a product that can be used in the acute, sub-acute, long term and
home care for the neurological impaired and disorientated patient including
Alzheimer's and Alzheimer's related diseases, head injuries, Ritts syndrome and
Parkinson's disease.
The Company began shipping this product in September 1996 and at December
31, 1996 had shipped 26 Soma Safe Enclosures of which two were shipped on
consignment.
Vivax
Vivax commenced operations in 1991 under the name Comed as a distributor of
specialized beds, support surfaces and related equipment in the greater Boston
area. The specialized bed, support surfaces and related equipment distributed by
Vivax include the Novabed(R), air therapy beds, air therapy mattresses,
enclosure beds, low air beds, obese beds, mattress replacement systems and
mattress overlay systems. These beds and surfaces are used for the treatment of
pressure wounds, burns and trauma and the control of pain. Vivax distributes its
products to hospitals, nursing homes and related care facilities and to the home
care market. Historically, approximately 95% of Vivax's operating revenues have
been derived from the rental, rather than the sale of specialty beds. Rental
arrangements typically provide for ongoing service of the beds by Vivax. Most
institutions rent specialty beds from Vivax on a daily basis while most of
Vivax's home care customers rent specialty beds on a monthly or longer basis. As
of December 1996, Vivax was renting specialty beds to approximately 60
institutions and approximately 90 home care customers.
Vivax does not have any exclusive or other contractual arrangements with
the manufacturers and suppliers of the products it distributes. Accordingly,
Vivax relies on the relationships it has developed with such manufacturers and
suppliers, its established distribution relationships, its service performance
and its reputation to attract and retain suppliers of product. Historically,
Vivax has relied on approximately 4 major suppliers and 2-3 lesser suppliers.
Vivax purchases the products it distributes at the prevailing dealer price.
Vivax also does not have any exclusive arrangements with any of its
customers. Accordingly, Vivax must compete on the basis of price and service
performance.
Vivax owns approximately 420 beds, approximately 60% of which are currently
being rented.
Prospective Markets
Patient Population
The Novabed(R) is designed to assist patients, and has proven to be of
particular benefit for obese patients, who require assistance in transferring in
or out of a bed or chair. Persons who are bedfast or chair-fast
<PAGE>
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.
<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.
<TABLE>
<S> <C> <C>
Concept Medical, Inc. - $280,000 (17%)
Advanced Therapeutics, Inc. - $97,000 (6%)
Recovercare, Inc. - $57,000 (3%)
</TABLE>
The distribution agreement between Nova and Comed was terminated in
connection with the acquisition of Comed by Nova. It is anticipated that Nova
will sell its products to Comed (now Vivax) on substantially the same terms that
Nova sells its products to Nova's independent distributors.
The names and exclusive territories of all the distributors are as follows:
<TABLE>
<CAPTION>
Name of Distributor Territory
- ------------------- ---------
<S> <C>
James J. Brooksbank (Medco Equipment, Inc.)* Minnesota
Innovative Medical Systems, Inc. Missouri, Kansas, Arkansas and part of Illinois
Advanced Therapeutics, Inc. Parts of Michigan and Wisconsin
Recovercare, Inc. Parts of New Jersey, Pennsylvania, Delaware
Stat Medical, Inc. Washington
Concept Medical Corporation Parts of Florida
JCM Capital Corp. New York
</TABLE>
* Medco Equipment, Inc. is an affiliate of James J. Brooksbank.
The Company is required to train the distributors' service personnel and
generally to fill orders within 180 days, although the Company's agreement with
one of its distributors requires that orders be filed within 30 days. The
distributors are required to service the product they sell in a high quality
manner to avoid loss of their right to market the Novabed(R).
The Company feels that working initially with distributors is the most
expeditious way to generate early sales, lower the Company's working capital
requirements by receiving prepayment on required product purchases and reduce
the initial cost to market the Novabed(R). Five of the Company's agreements with
its distributors require that 50% of the purchase price be paid upon acceptance
by the Company of an order and four of the Company's agreements with its
distributors require that the balance of the purchase price be paid within 10
days after delivery of the product. One of the Company's distributors is not
required to make a prepayment, another distributor is only required to make a
25% prepayment and three of the distributors either have the right to pay the
unpaid balance of the purchase price within 30 days of delivery or no payment
period is specified. If the Company enforces these payment arrangements, partial
payment upon order and accelerated payment upon delivery arrangements will
improve the Company's cash flow and reduce its working capital requirements. In
the past, the Company has waived these payment provisions under certain
circumstances and may do so in the future. The Company recognizes revenue at the
time of shipment of product.
Four of the Company's distributors own in the aggregate 818,784 shares of
the Company's Common Stock. Advanced Therapeutics, Inc. and Innovative Medical
Systems, Inc. acquired 66,667 and 60,000 shares, respectively, at a cash price
of $1.50 per share pursuant to the exercise in September 1995 of certain call
option rights granted to them by the Company in connection with the 1995
Financing.
<PAGE>
JCM Capital purchased 450,450 shares of common stock from the Company at a cash
price of $1.11 per share as part of the private placement that constituted part
of the September 1995 Financing. James J. Brooksbank acquired the following
shares as part of private placement transactions:
<PAGE>
<TABLE>
<CAPTION>
Date Purchased Number of Shares Cash Price/Share
-------------- ---------------- ----------------
<S> <C> <C>
5/91 6,667 $1.50
2/15/94 50,000 1.00
3/17/94 85,000 1.00
4/17/94 100,000 1.00
--------
241,667
========
</TABLE>
The option exercise price of $1.50 per share was negotiated by the Company with
Advanced and Innovative. The private placement price of $1.11 per share paid by
JCM Capital was negotiated by the Company with TimeCapital, the private
placement agent and is the same price paid by the other participants in such
private placement. The private placement prices paid by James J. Brooksbank were
established by the Company and made available to all interested and qualified
investors.
Because of the Company's desire to grow its business and its concern that
its existing distributors may not be able to fully satisfy their purchase
commitments over the agreed upon time frames, the Company is currently seeking
additional agreements with potential distributors, durable medical equipment
dealers or other organizations which have access to disabled persons who are
candidates for the Novabed(R) Patient Transfer System. The Company may also
consider entering into a license agreement or a joint venture agreement or
merger with a strategic partner. The Company also plans to retain the rights to
distribute its products and to set up its own regional distribution systems,
which it intends to do in the greater Boston market through its acquisition of
Comed. Nova intends to employ a direct sales force to sell to hospitals, nursing
homes, and other health care institutions. Sales to the home healthcare market
will be made through home medical equipment (HME) and durable medical equipment
dealers (DME), and home healthcare agencies. Nova will cooperate with these
dealers to install and service the product through the dealer network.
In addition, the Company will also investigate a rental program, provided
that sufficient capital to finance the rental inventory can be obtained.
Equipment rentals to institutions would be handled directly by the Company. For
the home care market Nova would maintain ownership of the product and would work
with dealers where the dealer acts as a commissioned sales and collection agent
on equipment rental to the home.
The marketing operations of the Company are currently carried out by one of
the Company's executive officers assisted by service personnel. The Company
plans to hire additional marketing, sales and service personnel in the near
future.
The Company presently warrants the material and workmanship of its patient
transfer systems for a period of one year from the date of their sale. The
Company has fulfilled its warranty obligations in connection with its initial
production lot and retrofitted these units to correct design deficiencies,
improve reliability and incorporate product enhancements. These and other design
changes have been incorporated in the Company's subsequent production runs.
Beta Site and Field Trials
Nova commenced its beta-site program in November 1992. The first unit was
installed for a clinical field trial in a full service skilled nursing home in
Connecticut. The nursing home uses the patient transfer system primarily for
stroke patients. Novabed(R) has been in service continually since installation
where it has performed very well with the service and nursing staff on the
designated floor able to quickly learn to operate the product. The nursing home
estimates that 25% of their current patients could use the patient transfer
system. They have purchased an additional Novabed(R) and intend to try to
purchase other units.
In February 1993, a second unit was placed in a private home of a patient
recommended by the Multiple Sclerosis Society. The patient, who lives with her
husband and daughter in a suburban home, is very debilitated. She has a live-in
home care attendant during the week. The family reports that the patient often
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
<PAGE>
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. The trial was discontinued upon the
death of the patient in October 1996.
Several minor changes in design were the result of feedback from these
trials and from considering the special needs of a nursing home. These changes
were implemented in the initial production run prior to sale of units to
distributors. Design change suggestions have come from current distributors who
have been using the production model. Certain of these changes have been
incorporated in the current production lot of 50 units.
Foreign Markets
Once the Company has successfully marketed its patient transfer system in
the domestic market, the Company plans to seek license or joint venture
agreements with foreign manufacturing or trading companies in Canada, Europe and
Japan. The Company, however, is not presently engaged in any license or joint
venture negotiations.
Third-Party Reimbursement
The market for medical devices is materially affected by the extent to
which the purchase price or rental cost will be reimbursed by third-party
payors, such as Medicare, Medicaid and private insurance. This is particularly
true with home care. Sales of capital equipment, such as the Novabed(R) and the
other specialized beds sold or rented by Vivax, to institutions such as
hospitals and rehabilitation facilities are not directly reimbursed by Medicare
but are indirectly reimbursed through an overhead allocation.
In the home care equipment market, third-party reimbursement issues center
around whether the patient transfer system will be a covered item, the level of
reimbursement available, and for which medical indications reimbursement will be
available. In the absence of a national Medicare coverage determination, the
local contractors that administer the Medicare program can, within certain
guidelines, make their own coverage decisions. Favorable coverage determinations
for durable medical equipment are made in those situations where a review
concludes that the product is safe (FDA approval required), the product is
durable, medical efficacy can be established, and the patient qualifies as
needing the product for medical reasons.
Nova recognizes the importance of its products being reimbursable by
Medicare, Medicaid and Third Party payers, in the health care industry.
Presently, all of the Company's Air Therapy Products qualify for reimbursement
from Medicare, Medicaid, and Third Party health care payers on the basis of
existing and approved per diem allowances or usage fees.
The Health Care Finance Administration (HCFA) is responsible for
establishing reimbursement levels for products and services provided under
Medicare A and B. They manage an established process for doing this which
involves the Statistical Analysis Durable Medical Equipment Regional Carrier
(SADMERC), Blue Cross/Blue Shield Assoc. and the Health Insurance Association of
America (HIAA).
In anticipation of submitting an application the Company exposed the
Novabed to HCFA Management to determine their receptiveness to our applying for
a specific code for the Novabed and to gain their support to this approach.
This was accomplished in 1996 through established relationships at the HCFA
Deputy Administrators level.
To assure that the HCFA's focus and support is sustained, the Company in
1996 demonstrated the Novabed to a key Connecticut Representative in Congress
who is a member of the Congressional Health Care Committee. During this
demonstration the Company presented an analysis of the financial impact that the
Novabed would have in reducing US Healthcare costs. As a result of this
demonstration NOva was assured that its request for specific code approval will
be given HCFA's immediate attention. The door was also opened for Nova to
demonstrate the Novabed to other key Legislators in Washington. This will be
arranged as necessary in 1997.
<PAGE>
In preparing its application the Company received from its current
Novabed distributors qualitive and quantitive information in the form of case
studies, medical reports, provider inputs and user testimonials based on the
current applications of the Novabed in the Institutional and Home Care settings,
within each of their regions. To date the Novabeds when combined with Air
Therapy Support Surfaces have demonstrated a high degree of medical efficacy
which is a major consideration by HCFA.
<PAGE>
The application for a modification to the existing HCFA Common Procedure
Coding System (HCPCS) to specify the Novabed was submitted March 11, 1997.
Although it takes eight to nine months to gain approval for a new code, existing
codes may be assigned much sooner. Therefore, although the Company's application
justified a modification to the existing code based on its unique features and
medical efficacy, it also requested that in the interim the Novabed be approved
for reimbursement under an existing temporary code, when used in conjunction
with equivalent Air Therapy Support Surfaces, based on its experience to date in
this environment. The current reimbursement under this existing code is
substantial and will have a positive short term impact on Distributor sales in
the Medicare Part A and B arena. The Company believes HCFA will grant this
request while it evaluates the application for approval of a specific Novabed
code.
During the review process the Company will utilize its established
relationships at all levels of HCFA and SADMERC to assure that no major
obstacles stand in the way of being granted approval. The Company will also
utilize its political relationships to assure expeditious treatment. If approval
of a Novabed specific code is obtained it is expected to be received by
January 1, 1998.
Whereas Medicare is administered by the US Department of Health via HCFA,
Medicaid is administered on a state by state basis. Therefore, each state must
be contacted and approval gained. Although this appears like an enormous task,
it should be recognized that the states look to HCFA's approval process for
justification and support during their approval process. Furthermore, once one
State has approved a product for reimbursement other states tend to follow their
lead thereby reducing the approval cycle time.
The approval process is currently underway in Connecticut. Nova has
solicited and received the support of two key Connecticut Legislators who are
familiar with and are advocates of the Novabed. Prior to the submission of its
application the Company met with the key Connecticut Health Care Legislators and
Administrators to convince them of the financial and quality of life impact the
Novabed will have on the state's Medicaid System. A video presentation of the
Novabed features and benefits for Medicaid was also used to enhance our
presentation. The Company's request for Connecticut Medicaid approval, was
submitted to the Connecticut Commissioner of Social Services in February, 1997.
Subsequent to this submission the Company has met with the Connecticut
Commissioner and Deputy Commissioner to discuss the details of its proposal. If
approval is obtained the Company believes it will receive Connecticut's approval
by the end of 1997.
<PAGE>
Nova has also identified a Consultant, for the States of Massachusetts and
New Jersey, with established relationships in each state. If Connecticut
approval is obtained this Consultant will be retained to take the Connecticut
Medicaid experience and begin execution of this plan in Massachusetts and New
Jersey.
The major Health Care Insurance Carriers comprise the largest group of
third party payers. This group relies a great deal on HCFA's approvals and
procedures in determining their reimbursement guidelines.
The Company is in the process of directly exposing the Novabed benefits and
features presented to HCFA, to the key third party payers. These have been
identified through established HCFA relationships and the Company's Connecticut
Insurance contacts. In addition to direct contact with third party payers, the
Company will utilize the HCFA approval process to expose the benefits directly
to the Health Insurance Association of America (HIAA).
Approximately 21% and 24% respectively, of Virax'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 speciality beds was
reduced by 20% and the criteria for determining eligibility of patients for
reimbursement for specialized beds were made more stringent. Approximately 15%
of Vivax's revenues are currently derived from Medicare Part B reimbursement.
These developments will have a materially adverse effect on future sales of the
Company. In addition, the Company believes that the Medicare Part A
reimbursement system for nursing home patients is likely to be modified. It is
anticipated that the new system will move away from current cost-based
reimbursement towards a managed care model with block awards to fewer regional
administrators who will rely on fewer suppliers. The impact of any such changes
is difficult to determine. Medicare Part A reimbursement currently represents
less than 10% of Vivax's revenues. However, any reduction in coverage or
reimbursement rates will have a material averse effect on the Company's result
of operations.
The Company has added an air-therapy mattress as an option to the
Novabed(R). There are procedure codes and policies established for the use of
support surfaces for the prevention of decubitus ulcers. The distributors who
rent the Novabed(R) to their customers assist these customers in obtaining
Medicare reimbursement for the Novabed(R) outfitted with the air therapy
mattress.
In addition, the Company's operations are subject to federal, state and
local regulations with respect to environmental and safety matters. The Company
has obtained Eastern Testing Laboratories approval relating to certain safety
aspects of its Novabed(R). The cost of compliance with such laws and
regulations, in the Company's opinion, have not materially affected its
operations.
Research and Development
During the years ended December 31, 1995 and 1996, the Company expended
approximately $298,000 and $487,000, respectively on research and development
activities. The objective of the Company's research and development program has
been to complete development of its Patient mobility 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
<PAGE>
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 was
adequate for the manufacture of only about 150 beds per year. The New York
facility phased out its manufacturing operations as the Connecticut facility
developed and as of July 1, 1996 the New York facility was used primarily for
research and development. The corporate offices were transferred to Bristol,
Connecticut.
Nova purchases off-the-shelf components such as motors, actuators and
mattresses, as well as special items such as seat cushions, commode seats and
certain electronic and manufactured parts. The Company manufactures other
remaining parts and components in-house. The Novabed(R) is then assembled and
tested in accordance with defined quality control procedures. The Company's
Connecticut facility has a production capacity of approximately 1,500
Novabeds(R) per year. The Company currently has 14 employees at its Connecticut
facility and plans to hire more as production requirements increase.
Patents and Trademarks
The Company has been issued 20 United States patents related to its patient
transfer system and bed sore prevention. These patents expire commencing in 2005
through 2014. Three additional patent applications relating to transfer system
design and associated products are pending. The Company has also filed a total
of 22 patent protection applications in five European countries, Japan, and
Canada and plans to file additional applications in both the United States and
other countries.
The Company believes that patent protection will be of material importance
to its growth potential. In addition to patents and patent applications covering
the principles of its transfer system, the Company has applied for patents on
alternative approaches and methods which it does not currently plan to utilize
but which it believes are material to its patent protection strategy. The
Company has spent over $560,000 to date on patent-related expenses and believes
that it will obtain protection for the approaches it is attempting to patent.
Effective as of January 1, 1995, the Company's policy is to capitalize legal
fees for new processes and to write these costs off over the remaining life of
any patent, when received or to write them off as soon as a patent application
is rejected.
No assurance can be given that additional patents will be issued, or if so
issued, that the scope of protection afforded thereby or by the Company's
current patents will be adequate to protect the Company from competition.
Further, no assurance can be given as to the availability to the Company of
adequate financial resources to contest any possible patent infringement by
others.
In 1994, the Company registered the trademark "NOVABED" for use with its
product.
Government Regulation
The Company's patient transfer system is a "medical device" subject to
regulation by the United States Food and Drug Administration (the "FDA"). As in
the case with other medical devices, manufacture of such systems are subject to
certain "good manufacturing practices" promulgated by the FDA and the Company is
subject thereto with regard to the manufacture of its patient transfer systems.
The Company believes that it is in compliance with such regulations. The Company
received pre-market 510(k) approval for Novabed(R) from the FDA in October 1987.
Since the date of such approval the Company has made a number of modifications
to the Novabed(R). Such modifications generally comprise cost efficiencies and
operational improvements. The Company believes that these modifications
individually and in the aggregate, do not significantly affect the safety or
effectiveness of the Novabed(R) as described in its original 510(k) application
to the FDA. An updated version containing these modifications was submitted in a
510(k) application to the FDA and approval was obtained on January 22, 1997.
<PAGE>
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.
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 December 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.
Therapy Concepts Agreement
On January 13, 1997, the Company signed an agreement that provides it with
an option to purchase Therapy Concepts, Inc. ("Therapy") a manufacturer and
distributor of air therapy support surfaces and other related medical products
with approximately $10 million in annual revenues.
Under the terms of the agreement, Nova has the right to purchase and Therapy has
the right to sell either or both the manufacturing and the distribution business
of Therapy at a purchase price based on a multiple of earnings before interest,
taxes and depreciation (EBITD) for the 12 months preceding the exercise of the
option. The term of the option period is from December 1, 1997 to October 1,
1999. In order to exercise its option, Nova must obtain an additional $10
million of equity and be listed on the NASDAQ national market system.
Nova issued warrants to Therapy's stockholders to purchase 250,000 shares of
Nova's common stock at an exercise price of $2.00 per share for the option to
purchase Therapy. Nova has also agreed to issue to Therapy's stockholders, upon
exercise of an option, warrants to purchase up to an additional 750,000 shares
of Nova's common stock at an exercise price of $2.00 per share based on Therapy
obtaining an EBITD of $2,000,000. Stock purchased pursuant to these warrants
shall apply toward the purchase of Therapy. Nova will receive an additional
credit against the purchase price, not to exceed the lesser of $1 million or the
purchase price, for any gain with respect to the warrants as of the closing of
the exercise of an option. Up to one-half of the balance of the purchase price
may be paid in common stock of Nova at Nova's option.
The Agreement also encompasses: a product development arrangement whereby
Therapy will develop and manufacture new propietary products for Nova; a
manufacturing supply arrangement whereby Nova will purchase certain of Therapy's
current products on an agreed upon cost plus basis; and a distribution agreement
whereby Therapy has agreed to purchase $1.1 million in Novabeds (over a 24 month
period) and has been given the exclusive right to distribute Nova's products in
the state of Ohio.
<PAGE>
Item 2. DESCRIPTION OF PROPERTY
The Company leases 7,500 square feet of space in Hauppauge, New York
which was used for corporate offices, administration, manufacturing, warehousing
and research and development. The lease, which provided for a monthly rental of
$4,375, was closed on March 31, 1997. In May 1997 the Company will open a 1500
square foot facility for research and development in Brentwood, New York.
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 in
March 1997 exercised its right to lease an additional 2,250 square feet of the
building.
Vivax leases approximately 6,500 square feet of space in Seabrook, New
Hampshire which is used for corporate offices and warehousing. The lease
provides for a monthly rental of $3,500 and expires on November 30, 1998. The
landlord is the Drew Family Trust, the settlors of which are Douglas and Donna
Drew, the owners of all of the outstanding stock of Comed prior to its
acquisition by Nova. The Company believes that the terms of the lease are no
less favorable to the Company than would be obtainable in an arms length
transaction.
Item 3. LEGAL PROCEEDINGS
The Company is not a party to, nor is it aware of any threatened
litigation of a material nature.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on December 7,
1995. The following matters were acted upon by the shareholders at the annual
meeting:
1. Paul DiMatteo, Charles F. Chubb, Stephen Fisher, Samuel N. Paul, Jay
M. Haft, Arlindo Jorge and Robert Segnini, were each elected to serve as
Directors of the Company for a term of one year or until their respective
successors are elected and qualified. Each Director received at least 3,623,918
votes.
2. The selection of Richard A. Eisner & Company, LLP as the Company's
independent auditors for 1995 was approved. There were 3,599,746 votes for
approval and 5,883 votes against approval.
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) The Company's Common Stock, $.01 par value, commenced trading on
March 30, 1992 and is traded sporadically on the OTC Bulletin Board under the
symbol "NOTL". The high and low bid information for the specified quarterly
period as reported on a computer database is set forth below:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
High Low High Low
- ----------------- ---------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter 2 3/4 2 1/4 2 2
Second Quarter 2 1/2 2 1/4 2 2
Third Quarter 3 1/2 2 1/8 2 3/4 2
Fourth Quarter 2 7/8 2 2 3/4 2 1/2
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
The above bid quotations represent prices between dealers and do not
include retail markups, markdowns or commissions and may not represent actual
transactions.
(b) At December 31, 1996, there were approximately 375 record holders of
the Company's Common Stock.
(c) The Company's financing arrangements impose various restrictions on the
payment of dividends. The Company has neither declared nor paid any dividends on
its shares of Common Stock since inception. Any decision as to the future
payment of dividends will depend on the earnings and the financial position of
the Company and such other factors as the Board of Directors deems relevant. The
Company anticipates that it will retain earnings, if any, in order to finance
expansion of its operations.
<PAGE>
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company, from its inception on January 23, 1984 through the fiscal
year ended December 31, 1994 had been engaged primarily in research and
development of its NOVABED(R) Patient Mobility 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
units and in June 1994, the Company shipped the first order of Novabed units
since its inception and recorded sales of $233,000 in the year ended December
31, 1994 and sales of $220,000 in the year ended December 31, 1995.
Since January 1, 1995, the Company is no longer classified as a
development stage enterprise. As of December 31, 1996 it had entered into seven
distributorship agreements providing for the sale and shipment of Novabeds to
each distributor and the granting of an exclusive sales territory to each
distributor.
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. On December 30,
1996, $450,000 of one of the notes was exchanged for 225,000 shares of the
Company's common stock.
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 devices 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.
Comed Systems, Inc. (now Vivax) was incorporated in December 1989 and
began operations 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
<PAGE>
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 Small
Business Administration ("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
In the year ended December 31, 1996 the Company recorded sales of
$1,651,000 and incurred a net loss of $2,054,000 ($.33 per share)compared to
sales of $220,000 and a net loss of $1,302,000 ($.27 per share) in the year
ended December 31, 1995. The results of 1996 include the operations of Vivax
since its acquisition on June 14, 1996; as a result of the acquisition, the
comparison between 1996 and 1995 periods may not necessarily be meaningful.
The increase in sales of $1,431,000 is due to the acquisition of Vivax
($1,119,000) and increased Nova sales ($312,000). Nova incurred a loss for the
year of $2,191,000 which was partly offset by a profit in Vivax, from June 14
through December 31 in the amount of $137,000.
In the year ended December 31, 1996 the Company's cost of sales exceeded
its sales and the Company sustained a gross loss of $101,000 compared to a gross
loss of $478,000 in the year ended December 31,1995. Vivax's gross profit of
$739,000 was offset by a $840,000 gross loss by Nova. In September 1995, Nova
opened its new 28,000 square foot manufacturing facility in conjunction with the
completion of an equity and debt financing package (the "1995 Financing"). The
new manufacturing facility was necessary to enable Nova to meet its
manufacturing requirements and sales objectives. Initially, production levels at
the new facility have not been high enough to absorb the higher overhead
incurred in the new facility and the cost of servicing units sold has increased
as more units are shipped to customers. Manufacturing in the Hauppauge facility
was shut down at the end of June 1996. As production and sales levels increase
the Company expects Nova's gross losses to diminish and thereafter rising gross
profits, although no assurance can be given that Nova will be able to achieve
such satisfactory production and sales levels.
Research and development expenses increased $189,000 from $298,000 in
1995 to $487,000 in 1996. The increase is attributable to the transfer of an
officers's primary responsibility in the third quarter of 1996 from
administrative to research and development, the change in the Hauppauge
facility's function from manufacturing to research and development, consulting
fees and increased wages and expenses applicable to research and development
efforts both before and after the change in the Hauppauge facility's function
from manufacturing to research and development.
<PAGE>
General, administrative and marketing expenses increased $760,000 from
$506,000 in 1995 to $1,266,000 in 1996. The increase is attributable to
expansion of the sales force ($95,000), increases in officers' salaries
($28,000), professional fees ($61,000) and greater travel and entertainment and
sundry expenses in connection with marketing and public relations ($44,000). In
addition, Vivax expenses since the acquisition on June 14,1996 aggregated
$532,000 of which $37,000 was attributable to the amortization of goodwill
incurred in connection with the acquisition of Comed.
Interest expense increased $212,000 from $34,000 in 1995 to $246,000 in
1996, of which approximately $130,000 is attributable to interest on new debt
and amortization of financing costs incurred in the 1995 Financing and $70,000
is attributable to interest on notes payable issued in conjunction with the
acquisition of Comed. Interest and other income in 1996 increased to $45,000
from $13,000 in 1995 due to increased interest income on larger balances
available for investment in money market securities and local employment
incentive payments.
As a result of the issuance of common stock the weighted average number
of common shares used in computing loss per share increased from 4,783,000 at
December 31, 1995 to 6,170,000 at December 31, 1996.
Liquidity and Capital Resources
During 1996 the Company (including Vivax for the period from June 14,
1996 through December 31, 1996) used net cash in operating activities
aggregating $1,664,000. The increase in funds used in operating activities is
the net result of the increase in net loss and increases in inventory and
accounts receivable less depreciation and increased liabilities. The Company
purchased equipment aggregating $264,000 (of which $160,000 was used in the
Bristol facility). In the prior year equipment purchases were $73,000.
In 1996 net cash provided by financing activities aggregated $1,865,000
compared to $1,667,000 in the prior year. In 1996, the Company received proceeds
of $1,100,000 from borrowing under the 1995 Financing, net proceeds of $964,000
from the sale of common stock and $250,000 from Northern Associates, L.P.
("Northern") under a Loan and Security Agreement dated July 15, 1996 which was
repaid on November 1,1996. During the period the Company repaid officers' loans
aggregating $175,750 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. The cash was primarily used to fund increases in
inventory and other assets as the Company began to utilize the monies received
in the 1995 Financing. Proceeds from the sale of common stock net of issuance
costs aggregated $1,525,000 and proceeds
<PAGE>
from borrowing 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.
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 restricted Common Stock at a price of
$1.11 per share.
2. $1,000,000 loan facility from the People's Bank ("Peoples") 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 loan in such cash
collateral account. This loan bears interest at People's 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,
Peoples had no obligation to advance funds until the $100,000 loan
from the Connecticut Development Authority ("CDA") and the $200,000
loan from the Department of Economic and Community Development
("DECD") had been fully funded, Peoples agreed to waive such
conditions because the Company temporarily deferred the purchase of
capital equipment to be purchased with CDA and DECD loans. During
1996, the Company borrowed $250,000 in May and $10,000 in September.
The Company estimates that as of December 31, 1996 it had utilized
all of its available borrowing under the Peoples facility.
3. $750,000 loan from CII maturing on September 5, 2001. The loan bears
interest at 10% and is collateralized by all of the Company's
assets, including a first lien on its intellectual property, a third
lien behind People's Bank and three of the Company's distributors on
accounts receivable and inventory and a first lien on all other
assets. Interest only is payable semi-annually commencing on the
earlier of (i) September 5,1998 or (ii) the date the Company
declares any dividend or repurchases any of its outstanding stock.
The loan was funded upon achievement of certain milestones and
advances of $100,000, $250,000, $150,000 and $250,000 were received
by the Company on September 5, 1995, January 26, 1996, March 26,
1996
<PAGE>
and June 14, 1996. In connection with this loan, CII received warrants to
purchase 300,000 shares of Common Stock at $1.11 per share. Such warrants
vested pro rata as the CII loan was advanced. The warrants to purchase
300,000 shares 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 granting
of the warrants.
4. $100,000 loan from CDA for the purchase of capital equipment, maturing on
September 1, 2002. The loan bears interest at 7.94% and is collateralized by
a first lien on the equipment 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 repay $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. The funds of this
loan were advanced to the Company in December 1996.
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. The funds of this loan were advanced to the Company in January
1997.
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. ("Innovative") and Advanced Therapeutics, Inc. ("Advanced"), 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 bank has agreed to accept substitute collateral from the
Company and to release these letters of credit. 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,
<PAGE>
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 the 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 Peoples, the proceeds
received from the distributors reduced their 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 were allowed to
expire by the warrant holders.
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 the 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 December 31, 1996, the Company had borrowed $260,000 under the revolving
line of credit and $100,000 under the equipment loans. In January 1997 the
Company borrowed the remaining $200,000 available under the equipment loans. At
December 31, 1996 the Company (including Vivax) had a net worth of $2,009,000,
net rental equipment of $936,000, working capital of $794,000, including
unrestricted cash of $374,000, accounts receivable of $582,000 and inventory
aggregating $584,000.
At December 31, 1995, the Company had a net worth of $584,000, working capital
of $642,000, including unrestricted cash of $486,000, accounts receivable of
$45,000 and inventory aggregating $333,000.
The Company has expended approximately $188,000 to purchase furniture and
equipment for its new manufacturing facility in Bristol, Connecticut.
Manufacturing operations commenced in November 1995 and at December 31, 1996 the
Company employed 14 workers in this facility, including assemblers, supervisors,
a purchasing agent, an administrative assistant and executive officers. The
Company has no material commitments for capital expenditures. The Company is
planning to seek additional distributors and has accelerated 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
<PAGE>
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
and a majority of its employees in Connecticut, as well as 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 (which was waived for the September 1996 Registration) 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 prepaid 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 City 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.
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>
REQUIRED ACTUAL
<S> <C> <C>
Min. Working Capital $750,000 $794,007
Min. Current Ratio 1.75 to 1.00 1.48 to 1.00
Min. Capital Funds $1,300,000 $1,736,614
Max. Unsubord.Debt Ratio 2.50 to 1.00 1.30 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 a total unsubordinated debt divided by total capital
funds. At December 31, 1996, the Company was not in compliance with the Minimum
Current Ratio covenant. The bank has agreed to waive this covenant at December
31, 1996 and the Company is currently in discussion with People's Bank with
regard to changes in the financial covenants. The People's Bank loan is secured
in part by three letters of credit which must be replaced or extended for an
additional year. The Bank has agreed to accept substitute collateral from the
Company and to release these letters of credit. The Company is in discussion
with People's Bank with regard to changing the requirement for the letters of
<PAGE>
credit. Failure to satisfy any of these financial covenants or a failure 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 $2.0 million of additional financing to finance its
operations over the 12 month period following December 1996, including the
payment of the $350,000 note of Vivax due July 1, 1997,and to comply with the
financial covenants contained in the People's Bank loan agreement.
In connection with the acquisition of Comed, Vivax issued two promissory
notes of $750,000 each to Douglas and Donna Drew, the former shareholders of
Comed, which are guaranteed by the Company. The first note bears interest at the
rate of 8%, payable at maturity. The maturity date of the note was extended from
June 14, 1997 to July 1,1997. On December 30, 1996 $450,000 of the note was
converted to 225,000 shares of the Company's common stock. 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) $37,000 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, Comed (now Vivax) posted an
irrevocable letter of credit to People's Bank on behalf of Nova for $200,000
which expired in September 1996. Vivax's obligation to reimburse the bank which
posted the letter of credit was secured by a first lien on Vivax's accounts
receivable and inventory. Nova's obligation to reimburse Vivax was 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., ("Northern") an affiliate of Time Capital Securities
Corporation ("Time Capital"). The note bears interest at the rate of 10% per
annum payable in registered Common Stock. The loan was repaid by the Company on
November 1, 1996. The Company delivered 2,500 shares of common stock to the
lender as a fee. Interest on the loan and the placement fee in connection
therewith was discharged with 5,525 shares of common stock.
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
<PAGE>
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.
At December 31, 1996 an $800,000 subscription receivable for the sale of
400,000 shares of the Company's common stock was outstanding. The Company
received net proceeds of this subscription in the first quarter of 1997
aggregating $720,000.
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 or debt contributions of at least $2,000,000 to finance its
operations over the 12 month period following December 1996. These estimates are
generated from an internally prepared business plan. In the month of October
1996 Time Capital purchased 500,000 shares of the Company's Common Stock at $2
per share and remitted net proceeds to the Company of $900,000. The Company has
also entered into an agreement with Time Capital 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. The Company also has verbal agreements with two
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. 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.
PART II. OTHER INFORMATION
-----------------
Not Applicable
<PAGE>
Item 7. FINANCIAL STATEMENTS
PAGE Table of Contents
- ---- -----------------
F-1 Report of Independent Auditors.
F-2 Consolidated Balance Sheets as at December 31, 1996 and
December 31, 1995.
F-3 Consolidated Statements of Operations for the two years ended
December 31, 1996.
F-4 Consolidated Statements of Changes in Stockholders' Equity
for the two years ended December 31, 1996.
F-5 Consolidated Statements of Cash Flows for the two years ended
December 31, 1996.
F-6 Notes to Financial Statements.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Nova Technologies, Inc.
Hauppauge, New York
We have audited the accompanying consolidated balance sheets of Nova
Technologies, Inc. and subsidiary as at December 31, 1996 and December 31, 1995,
and the related consolidated statements of operations, changes in stockholders'
equity, 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 consolidated financial position of Nova
Technologies, Inc. and subsidiary as at December 31, 1996 and December 31, 1995,
and the consolidated results of their operations and their consolidated cash
flows for each of the years then ended in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated 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 consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Richard A. Eisner & Company, LLP
New York, New York
March 20, 1997
With respect to Note 10[b]
April 15, 1997
F-1
<PAGE>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------------------
A S S E T S 1996 1995
----------- ----------------- -----------------
(Note 10)
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 2[f])......................................... $ 373,526 $ 485,819
Inventories (Notes 2[b] and 4)................................................ 584,026 332,995
Accounts receivable (net of reserve for doubtful
accounts of $193,484 in 1996)............................................... 581,815 45,155
Prepaid expenses and other current assets..................................... 95,278 71,185
Subscription receivable....................................................... 800,000 90,000
----------------- -----------------
Total current assets................................................... 2,434,645 1,025,154
Restricted cash (Note 10[b])..................................................... 216,300 100,000
Rental equipment (net of accumulated depreciation of
$222,576) (Note 2[c])......................................................... 935,821
Equipment and leasehold improvements (net of accumulated
depreciation and amortization of $294,954 in 1996 and
$226,576 in 1995) (Note 2[d])................................................. 319,905 136,256
Deposits and other assets........................................................ 93,868 64,931
Deferred financing costs (Note 10)............................................... 54,083 69,852
Excess of cost over fair value of assets acquired (net of
accumulated amortization of $37,151) (Note 2[e]).............................. 1,296,591
----------------- -----------------
T O T A L.............................................................. $ 5,351,213 $ 1,396,193
================= =================
<CAPTION>
L I A B I L I T I E S
---------------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses......................................... $ 705,105 $ 296,339
Income taxes payable.......................................................... 30,000
Notes payable - bank.......................................................... 260,000
Notes payable - stockholders (including accrued
interest of $35,359) (Note 5)............................................... 134,609
Notes payable - acquisition debt (Note 3)..................................... 300,000
Deferred officers' compensation (including accrued
interest of $10,341 in 1996 and $684 in 1995)............................... 210,924 86,767
----------------- -----------------
Total current liabilities.............................................. 1,640,638 383,106
Note payable - CII (including accrued interest of $62,616 and $3,213 and net of
deferred debt discount of $99,298 and $15,111 in 1996 and 1995, respectively)
(Note 10[a]).................................................................. 713,318 88,102
Notes payable - stockholders (including accrued interest
of $15,779) (Note 5).......................................................... 290,779
Note payable - acquisition debt (including accrued
interest of $35,000) (Note 3)................................................. 785,000
Note payable - CDA (including accrued interest of
$243) (Note 10[c])............................................................ 100,243
Deferred tax liability........................................................... 30,000
Grant award and other liabilities (Note 10[e])................................... 73,124 50,000
----------------- -----------------
Total liabilities...................................................... 3,342,323 811,987
----------------- -----------------
<CAPTION>
Commitments (Note 11)
STOCKHOLDERS' EQUITY
--------------------
(Note 1)
<S> <C> <C>
Preferred stock (Note 7)........................................................
Common stock - $.01 par value; 14,000,000 shares
authorized; 7,669,657 and 5,791,083 shares issued and
outstanding, respectively.................................................... 76,697 57,911
Additional paid-in capital...................................................... 13,307,542 9,847,887
Deficit......................................................................... (11,375,349) (9,321,592)
----------------- -----------------
Total stockholders' equity............................................ 2,008,890 584,206
----------------- -----------------
T O T A L............................................................. $ 5,351,213 $ 1,396,193
================= =================
</TABLE>
Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.
F-2
<PAGE>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1995
----------------- -----------------
<S> <C> <C>
Revenues:
Net sales..................................................................... $ 531,498 $ 220,368
Rental income................................................................. 1,119,415 --
----------------- -----------------
Total revenues......................................................... 1,650,913 220,368
----------------- -----------------
Costs and expenses:
Cost of revenues.............................................................. 1,751,716 697,901
Research and development expenses............................................. 486,635 297,780
General, administrative and marketing expenses................................ 1,265,646 506,124
----------------- -----------------
Total costs and expenses............................................... 3,503,997 1,501,805
----------------- -----------------
(Loss) from operations before other income and (expenses)........................ (1,853,084) (1,281,437)
Other income and (expenses):
Interest and other income..................................................... 44,830 13,201
Interest and other expense.................................................... (245,503) (33,972)
----------------- -----------------
NET LOSS......................................................................... $ (2,053,757) $ (1,302,208)
================= =================
Net loss per share (Note 2)...................................................... $ (.33) $ (.27)
================= =================
Weighted average number of common shares outstanding (Note 2).................... 6,171,646 4,783,050
================= =================
</TABLE>
Attention is directed to the foregoing accountants' report
and to the accompanying notes to financial statements.
F-3
<PAGE>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Shares
Outstanding
------------------------ Additional
Number of Paid-in
Shares Amount Capital Deficit Total
----------- ---------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1994....................... 4,295,365 $42,954 $ 7,274,428 $ (8,019,384) $ (702,002)
Year ended December 31, 1995:
Exercise of warrants........................... 73,752 737 98,828 99,565
Issuance of common stock....................... 1,361,966 13,620 1,677,977 1,691,597
Costs incurred in connection with issuance of
common stock................................. (166,778) (166,778)
Value assigned to warrants given in connection
with financing (Note 10)..................... 28,000 28,000
Subscription receivable........................ 60,000 600 89,400 90,000
Value assigned to warrants given to employees.. 24,681 24,681
Waiver of prior years deferred compensation
and forgiveness of debt to officers.......... 762,851 762,851
Waiver of deferred compensation to officers -
current year................................. 58,500 58,500
Net loss for the year ended December 31, 1995.. (1,302,208) (1,302,208)
---------- -------- ------------ ------------- ------------
Balance - December 31, 1995....................... 5,791,083 57,911 9,847,887 (9,321,592) 584,206
Year ended December 31, 1996:
Issuance of common stock....................... 618,500 6,185 1,226,835 1,233,020
Costs incurred in connection with issuance of
common stock................................. (349,118) (349,118)
Value assigned to warrants given in connection
with financing (Note 9)...................... 100,800 100,800
Subscription receivable........................ 400,000 4,000 796,000 800,000
Common stock issued for acquisition of
subsidiary................................... 600,000 6,000 1,194,000 1,200,000
Conversion of notes payable into common stock.. 225,000 2,250 447,750 450,000
Common stock issued for services rendered and
director fees................................ 35,074 351 43,388 43,739
Net loss for the year ended December 31, 1996.. (2,053,757) (2,053,757)
---------- -------- ------------ ------------- ------------
BALANCE - DECEMBER 31, 1996....................... 7,669,657 $76,697 $13,307,542 $(11,375,349) $ 2,008,890
========== ======== ============ ============= ============
</TABLE>
Attention is directed to the foregoing accountants' report and to the
accompanying notes to financial statements.
F-4
<PAGE>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1996 1995
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,053,757) $ (1,302,208)
Adjustments to reconcile net loss to net cash (used in) operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 399,263 90,344
Value assigned to warrants given to employees of the Company . . . . . . . . . . . . . 24,681
Increase in grant award. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Waiver of deferred compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,500
Common stock issued for services rendered and director fees. . . . . . . . . . . . . . 43,739
Changes in operating assets and liabilities, net of effects from purchase
of subsidiary:
(Increase) in inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (43,391) (126,889)
(Increase) in accounts receivable, prepaid expenses and other current assets . . . (322,775) (100,428)
(Increase) in restricted cash. . . . . . . . . . . . . . . . . . . . . . . . . . . (116,300) (100,000)
Increase in accounts payable and accrued expenses. . . . . . . . . . . . . . . . . 156,215 108,686
Increase in deferred officers' compensation. . . . . . . . . . . . . . . . . . . . 114,500 67,466
Increase in accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . 158,883 19,676
------------ ------------
Net cash (used in) operating activities . . . . . . . . . . . . . . . . . . . . . (1,663,623) (1,210,172)
------------ ------------
Cash flows from investing activities:
Purchase of equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (264,271) (72,786)
Cost of acquisition net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . (49,305)
------------ ------------
Net cash (used in) investing activities . . . . . . . . . . . . . . . . . . . . . (313,576) (72,786)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of notes payable. . . . . . . . . . . . . . . . . . . . . . . . . 1,260,000 200,000
Proceeds from sale of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,233,020 1,691,597
Issuance costs incurred in sale of common stock. . . . . . . . . . . . . . . . . . . . . (269,118) (166,778)
Proceeds from exercise of warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,565
Repayment of notes payable - officers. . . . . . . . . . . . . . . . . . . . . . . . . . (175,750) (100,000)
Repayment of notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (250,000)
Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23,246) (57,852)
Decrease in subscription receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000
------------ ------------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . 1,864,906 1,666,532
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . . . . . . (112,293) 383,574
Cash and cash equivalents at beginning of year. . . . . . . . . . . . . . . . . . . . . . . 485,819 102,245
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR. . . . . . . . . . . . . . . . . . . . . . . . . . $ 373,526 $ 485,819
============ ============
Supplemental disclosures of cash flow information:
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,723 $ 3,575
Noncash transactions:
Forgiveness of debt owed to officers . . . . . . . . . . . . . . . . . . . . . . . . . 762,851
Subscription receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800,000 90,000
Value of warrants given in connection with financing . . . . . . . . . . . . . . . . . 100,800 28,000
Issuance of stock for acquisition of subsidiary. . . . . . . . . . . . . . . . . . . . 1,200,000
Issuance of debt for acquisition of subsidiary . . . . . . . . . . . . . . . . . . . . 1,500,000
Conversion of notes payable into common stock . . . . . . . . . . . . . . . . . . . . 450,000
</TABLE>
Attention is directed to the foregoing accountants' report and to the
accompanying notes to financial statements.
F-5
<PAGE>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(NOTE 1) - The Company:
- ----------------------
Nova Technologies, Inc. ("Nova") developed and manufactures an advanced
patient transfer system and through its wholly owned subsidiary Vivax Medical
Corp. ("Vivax") (together the "Company") operates a home healthcare business
which sells and rents durable medical equipment to hospitals, nursing homes and
individuals in the northeastern United States.
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 of its patient transfer systems sufficient to cover its
operating expenses. There is no assurance that the Company can establish
profitable operations.
The Company will require additional funding to meet its working capital
requirements. In this regard management's plans are to obtain additional
financing through equity offerings, debt financings, or joint venture
arrangements. There is no assurance that such financing or joint venture
arrangements will be consummated on terms acceptable to the Company.
(NOTE 2) - Summary of Significant Accounting Policies:
- -----------------------------------------------------
[a] Principles of consolidation:
---------------------------
The consolidated financial statements include the accounts of
Nova and Vivax since its acquisition in June 1996. All significant intercompany
transactions and accounts have been eliminated.
[b] 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.
[c] Rental equipment:
----------------
Depreciation of the cost of rental equipment, (i.e. medical
equipment for use in home or hospital settings) is provided using the
straight-line method over the equipment's estimated useful life of 3 to 5 years.
(continued)
F-6
<PAGE>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(NOTE 2) - Summary of Significant Accounting Policies: (continued)
- -----------------------------------------------------
[d] Equipment and leasehold improvements:
------------------------------------
Equipment (which includes internally constructed tooling with a
remaining book value of $15,000 in 1996 and $51,000 in 1995) 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.
[e] Excess of cost over fair value of assets acquired:
-------------------------------------------------
The Company amortizes costs in excess of fair value of net assets
of the subsidiary acquired using the straight-line method over a period of 20
years. Recoverability is reviewed periodically and whenever events or changes in
circumstances indicate that the carrying amount may be impaired based on cash
flows of the subsidiary.
[f] 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.
[g] Net loss per share:
------------------
Net loss per share has been computed based on the weighted average
number of shares outstanding during each year. As required by the modified
treasury stock method common stock equivalents have not been considered as their
effect would be anti-dilutive. In February 1997, the Financial Accounting
Standards Board issued Statement No. 128, "Earnings per Share", which will
provide for the period ending December 31, 1997 a simplified standard for
calculating earnings per share.
[h] Rent expense:
------------
Rent expense for financial reporting purposes, is calculated by
allocating total rental payments over the term of the lease on a straight-line
basis.
[i] Revenue recognition:
-------------------
Revenues from product sales are recognized at the time of shipment
and revenues from equipment rentals are recognized as the equipment is supplied.
Equipment rentals are recorded at amounts estimated to be received under
reimbursement arrangements with the medical facility or third party payors,
including private insurers and Medicare. The Company operates in one segment,
the sale and rental of advanced patient transfer systems and durable medical
equipment to certain select healthcare providers and individuals.
(continued)
F-7
<PAGE>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(NOTE 2) - Summary of Significant Accounting Policies: (continued)
- -----------------------------------------------------
[j] 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.
[k] Nonmonetary transactions:
------------------------
The Company's policy is to record the issuance of common stock
for services or to satisfy other obligations at the fair value of the common
stock issued.
[l] Stock based compensation:
------------------------
During 1996, the Company implemented Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"). The provisions of SFAS No. 123 allow companies to either expense the
estimated fair value of stock options or to continue to follow the intrinsic
value method set forth in Accounting Principles Board Opinion 25, "Accounting
for Stock Issued to Employees" ("APB 25") but disclose the pro forma effects on
net loss had the fair value of the options been expensed. The Company has
elected to continue to apply APB 25 in accounting for its employee stock option
plans (see Note 9).
[m] Deferred financing costs:
------------------------
The Company amortizes the deferred financing costs of any
financing, over the period in which the obligation matures.
[n] Warranty obligations:
--------------------
The Company provides a warranty on the sale of its products for a
period of one year. Management estimates that the Company's obligations are
insignificant.
[o] Patent costs:
------------
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.
[p] Research and Development:
------------------------
Research and development costs are charged to expense as incurred.
(continued)
F-8
<PAGE>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(NOTE 2) - Summary of Significant Accounting Policies: (continued)
- -----------------------------------------------------
[q] Concentration of credit risks:
-----------------------------
For the year ended December 31, 1996, approximately $280,000 (17%)
of the Company's sales were to one customer. For the year ended December 31,
1995, sales to this customer and three others were, $64,596 (29%), $60,596
(28%), $36,194 (16%) and $30,045 (14%), respectively. This aggregated
approximately 87% of the Company's net sales.
[r] Impairment of long-lived assets:
-------------------------------
The Company adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of" ("SFAS 121") during 1996. SFAS 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable assets and goodwill related to those assets. There was no financial
statement impact from the adoption of SFAS 121.
[s] Reclassification:
----------------
Certain items in the prior year have been reclassified to conform
to the current year's presentation.
(NOTE 3) - Acquisition:
- ----------------------
In June 1996, Nova, through a wholly owned subsidiary, acquired all of
the outstanding capital stock of Comed Systems, Inc., now called Vivax, in
exchange for 600,000 shares of Nova's common stock, and two $750,000 promissory
notes issued by the acquisition corporation. The notes, which bear interest at
8% per annum, are guaranteed by Nova. 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 Vivax's operating income (as defined). On
December 30, 1996 $450,000 of the first note was exchanged for 225,000 shares of
Nova's common stock.
(continued)
F-9
<PAGE>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(NOTE 3) - Acquisition: (continued)
- ----------------------
The acquisition was accounted for as a purchase. The purchase price
paid for the net assets acquired was allocated in accordance with relative fair
values as follows:
<TABLE>
<S> <C>
Rental equipment. . . . . . . . . . . . $1,084,000
Property and equipment. . . . . . . . . 77,000
Accounts receivable . . . . . . . . . . 267,000
Inventory and equipment held for sale . 208,000
Cash. . . . . . . . . . . . . . . . . . 31,000
Excess of cost over fair value. . . . . 1,334,000
-----------
Total assets. . . . . . . . . 3,001,000
Assumption of accounts payable. . . . . (48,000)
Assumption of other liabilities . . . . (173,000)
-----------
Net assets acquired . . . . . . . . . . $2,780,000
===========
Acquisition costs . . . . . . . . . . . $ 80,000
Notes payable issued. . . . . . . . . . 1,500,000
Fair value of stock issued. . . . . . . 1,200,000
-----------
$2,780,000
===========
</TABLE>
The following unaudited pro forma information assumes that the
acquisition had taken place at the beginning of 1995:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Total revenue . . . . . . . . $ 2,596,000 $ 2,462,000
============ ============
Net (loss). . . . . . . . . . $(2,046,000) $(1,177,000)
============ ============
Net (loss) per share. . . . . $(0.32) $(0.22)
======= =======
</TABLE>
(continued)
F-10
<PAGE>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(NOTE 4) - Inventories:
- ----------------------
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1996 1995
----------- ----------
<S> <C> <C>
Raw materials . . . . . . . . $120,935 $115,907
Work in process . . . . . . . 121,251 167,714
Finished goods. . . . . . . . 341,840 49,374
----------- ----------
Total . . . . . . . $584,026 $332,995
=========== ==========
</TABLE>
(NOTE 5) - Notes Payable - Stockholders:
- ---------------------------------------
Notes payable to stockholders consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1996 1995
----------- ----------
<S> <C> <C>
Note payable - 11% - due on
October 1, 1997. . . . . . $ 99,250 $170,000
Note payable - 12%. . . . . . -0- 105,000
Accrued interest. . . . . . . 35,359 15,779
----------- ----------
$134,609 $290,779
=========== ==========
</TABLE>
At the stockholder's discretion the note can be repaid in cash or he
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 note is
subordinated to the borrowings under the People's Bank and Connecticut
Innovations, Incorporated loan facilities (see Notes 10[a] and [b]). The notes
payable to the stockholders 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 6).
(NOTE 6) - 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:
<TABLE>
<S> <C>
Waiver of compensation owed . . . . . . . . . . . . . $618,450
Forgiveness of notes payable. . . . . . . . . . . . . 37,369
Forgiveness of accrued interest . . . . . . . . . . . 107,032
</TABLE>
(continued)
F-11
<PAGE>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(NOTE 6) - Waiver of Deferred Compensation and Forgiveness of Debt:
- ------------------------------------------------------------------
(continued)
These same officers waived 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 7) - 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. None of these shares have been issued.
(NOTE 8) - Income Taxes:
- -----------------------
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities.
They are measured using the enacted tax rates and laws that will be in effect
when such differences are expected to reverse.
Components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
Current:
Federal . . . . . . . . . - -
State . . . . . . . . . . $ 30,000 -
Deferred:
Federal . . . . . . . . . - -
State . . . . . . . . . . <30,000> -
-------- -------
Total provision for
income taxes. . . . . . . $ - $ -
======== =======
</TABLE>
(continued)
F-12
<PAGE>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(NOTE 8) - Income Taxes: (continued)
- -----------------------
Expected tax (benefit) based on the statutory rate is reconciled with
actual tax expense (benefit) as follows:
<TABLE>
<CAPTION>
Percent of Pre-Tax
Earnings (Loss)
Year Ended December 31,
----------------------------------
1996 1995
---------- ----------
<S> <C> <C>
"Expected" tax (benefit) . . . . . . . . . . . . . (34.0)% (34.0)%
Increase in taxes resulting from change in
valuation allowance . . . . . . . . . . . . . . 34.0 34.0
---- ----
0.0% 0.0%
==== ====
</TABLE>
The principal components of deferred tax assets, liabilities and the
valuation allowance are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1996 1995
---------- ----------
<S> <C> <C>
Deferred taxes assets:
Federal and state net operating loss
carryforwards . . . . . . . . . . . . $3,743,000 $2,970,000
Research and development credits 228,000 228,000
---------- ----------
Total deferred tax assets,
before valuation allowance . . 3,971,000 3,198,000
Less valuation allowance . . . . . . . . . (3,701,000) (3,198,000)
---------- ----------
Total deferred tax assets. . . . 270,000 -0-
Deferred tax liability:
Difference in book and tax basis of
fixed assets. . . . . . . . . . . . . 300,000 -0-
---------- ----------
Net deferred tax liability. . . . $ (30,000) $ -0-
========== ==========
</TABLE>
(continued)
F-13
<PAGE>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(NOTE 8) - Income Taxes: (continued)
- -----------------------
At December 31, 1996, 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 . . . . . . . . . . 1,059,000 -
2011 . . . . . . . . . . 1,933,000 -
----------- ---------
$9,358,000 $228,000
=========== =========
</TABLE>
Pursuant to the Internal Revenue Code, future utilization of past
losses or credits is 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.
(NOTE 9) - Stockholders' Equity:
- -------------------------------
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options. Under APB 25, where the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation is recognized.
Pro forma information regarding net income and earnings per share as
required by SFAS No. 123 has been determined as if the Company had accounted for
its employee stock options under the fair value method of that statement. The
effect of applying SFAS No. 123 on 1996 and 1995 pro forma net loss is not
necessarily representative of the
(continued)
F-14
<PAGE>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(NOTE 9) - Stockholders' Equity: (continued)
- -------------------------------
effects on reported net loss for future years due to, among other things: (1)
the vesting period of the stock options and the (2) fair value of additional
stock options in future years. Had compensation cost for the Company's stock
option plans been determined based upon the fair value at the grant date for
awards under the plans consistent with the methodology prescribed under SFAS No.
123, the Company's net loss in 1996 and 1995 would have been approximately
$(2,349,000) and $(1,899,000) or $(.37) per share and $(.33) per share,
respectively. The weighted average fair value of the option and warrants granted
during 1996 and 1995 are estimated as $ 1.24 and $ .65, respectively, on the
date of grant using the Black-Scholes option-pricing model with the following
assumptions: expected dividend yield in both of the years 0%, expected
volatility of 50% in both of the years, risk-free interest rate of 6.1% for 1996
and 6.2% for 1995 and estimated life of 1 to 10 years in 1996 and 1995.
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.
[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 (2) 33,943
Extension of note payable $2.25 March 14, 1997 18,333
Sale of common stock $3.00 December 31, 1997 (2) 6,667
Sale of common stock $4.50 December 31, 1997 (2) 31,333
Sale of units (1) June 30, 1998 500,000
Consulting agreement $2.00 June 30, 1998 (8) 100,000
Replacement of stock options $2.75 (3) December 31, 1999 172,599
Services rendered $1.50 (4) September 30, 1997 54,991
Services rendered $1.50 (4) December 31, 1997 7,941
Services rendered $1.50 (4) March 30, 1998 9,141
Services rendered $1.50 (4) June 29, 1998 8,840
Services rendered $1.50 (4) September 29, 1998 6,699
Issued to officers $2.75 (5) December 31, 2002 300,000
Consulting agreement $2.61 (6) September 4, 2002 30,000
Connecticut financing $2.50 (7) September 1, 1997 33,750
Connecticut financing $1.11 (7) September 1, 2001 300,000
Connecticut financing $2.50 (7) September 1, 2002 11,250
Other $2.75 December 31, 2002 6,667
Services rendered $2.75 (9) April 18, 2003 80,000
----------
Warrants outstanding -
December 31, 1996 1,712,154
==========
</TABLE>
(continued)
F-15
<PAGE>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(NOTE 9) - Stockholders' Equity: (continued)
- -------------------------------
[a] Common stock warrants: (continued)
---------------------
At December 31, 1995 the Company had warrants outstanding aggregating
1,778,654 shares of common stock. During 1996, warrants aggregating 146,500
shares of common stock at exercise prices from $2.50 to $7.09 expired.
(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 1996, the
exercise price was reduced to $4.00 per share, and the warrants which were to
expire at March 31, 1997 were extended to June 30, 1998.
(2) Warrants previously issued with an expiration date of December 31,
1994.
(3) 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.
(4) 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.
(5) 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.
(6) 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.
(7) 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.
(8) Warrants previously issued with an expiration date of February
1997.
(continued)
F-16
<PAGE>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(NOTE 9) - Stockholders' Equity: (continued)
- -------------------------------
[a] Common stock warrants: (continued)
---------------------
(9) In recognition of past services the Company issued to certain
directors warrants to purchase an aggregate of 80,000 shares of common stock at
an exercise price of $2.75 per share, expiring April 18, 2003. The exercise
price exceeded the market price on the date of grant.
[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 vesting period of the options is also determined by the
Board of Directors and is generally 3 to 7 years. The Plan expires on
October 31, 2004.
Stock options outstanding under these plans are as follows:
<TABLE>
<CAPTION>
Nonstatutory Incentive
------------------------ -----------------------
Weighted- Weighted-
Number Average Number Average
-------- ---------- -------- -----------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1994
($1.50 - $4.75 per share) . . . 59,334 $ 3.06 227,100 $ 3.00
Granted ($2.13 - $3.13 per share). 10,000 3.13 158,000 2.60
Cancelled . . . . . . . . . . . . (16,667) (3.00) (10,750) (3.67)
------- -------
Outstanding at December 31, 1995
($1.50 - $4.75 per share) . . . 52,667 3.09 374,350 2.81
Granted ($2.13 - $2.88 per share) 158,000 2.17
Cancelled. . . . . . . . . . . . (1,850) (3.29)
------- -------
Outstanding at December 31, 1996
($1.50 - $4.75 per share). . . 52,667 3.09 530,500 2.62
======= =======
</TABLE>
At December 31, 1996 all of the nonstatutory stock options and 262,067
of the incentive stock options were exercisable.
As at December 31, 1996, options for the purchase of 180,800 shares
were available for future grant.
(continued)
F-17
<PAGE>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(NOTE 10) - 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, 1996 and December 31, 1995, the
Company was eligible and has borrowed $750,000 and $100,000, respectively, 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
December 31, 1996 and December 31, 1995, 300,000 and 40,000, respectively, of
such warrants are exercisable and have been valued at $116,800 and $16,000,
respectively.
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-18
<PAGE>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(NOTE 10) - Financing Agreements: (continued)
- ---------------------------------
[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, 1996 and December 31, 1995 borrowings in the
amount of $260,000 and $0 were outstanding under this loan agreement,
respectively.
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. At December 31, 1996 the
Company was not in compliance with a particular covenant which, on April 15,
1997, Peoples agreed to waive through March 31, 1997.
The Connecticut Development Authority ("CDA") has guaranteed repayment
of 40% of the outstanding balance of the loan. 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"), in 1995, 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 failure of the
Company to make any payment to Peoples when due. The letters of credit expired
during 1996. Peoples has agreed to accept substitute collateral from the
Company. 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. Such warrants expired during 1996.
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 on the Company to issue its common stock) at $1.50 per share for
total proceeds of $190,000. Pursuant to the financing agreement with Peoples,
any 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. 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 had been valued at
$1,400. Such warrants expired during 1996.
(continued)
F-19
<PAGE>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(NOTE 10) - Financing Agreements: (continued)
- --------------------------------
[c] The Company entered into a loan agreement with CDA providing for a
line of credit of up to $100,000 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, 1996 and December 31,
1995 borrowings in the amount of $100,000 and $0 were outstanding under this
loan agreement, respectively.
[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, 1996 and December 31, 1995 no borrowings were made under the
Assistance Agreement. In January 1997, the Company borrowed $200,000 from DECD.
[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.
[f] The long-term portion of the Company's debt at December 31, 1996 is
payable as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
-----------
<S> <C>
1998 ..................... $ 150,000
1999 ..................... 176,000
2000 ..................... 178,000
2001 ..................... 1,080,000
2002 ..................... 16,000
----------
TOTAL ............ $1,600,000
==========
</TABLE>
(NOTE 11) - Commitments:
- -----------------------
[a] Employment agreements:
---------------------
At December 31, 1996, the Company has employment agreements with
its president, two officers and the Chairman of the Board (who are stockholders
of the Company). The agreement with the president provides for six months
severance pay in the event of termination by the Company without cause. One
officer's agreement is cancelable by the Company with nine months notice and
the other officer's agreement is cancelable with twelve months notice. The
Chairman's employment agreement expires in June 1999. Aggregate minimum annual
salaries pursuant to all the agreements aggregate $449,000.
(continued)
F-20
<PAGE>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(NOTE 11) - Commitments: (continued)
- -----------------------
[a] Employment agreements: (continued)
---------------------
During the year ended December 31, 1995 the chairman of the
Company and a director, 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, 1995. As at December 31, 1996 and at December 31, 1995, the Company
owed its chairman and two of its officers approximately $210,000 (including
interest) and $86,000 in accrued compensation, respectively.
[b] Lease of premises:
-----------------
Vivax entered into a five-year lease with an affiliate which
commences January 1997 for office and warehouse space in Seabrook, New
Hampshire. The terms of the lease provide for a 5% increase adjustment in the
base rent each year. The lease automatically renews for an additional five-year
period unless either party gives notice of termination 90 days prior to the
expiration of the lease.
During 1995 the Company entered into a five-year lease 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 and 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.
Minimum annual rental payments required are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1997. . . . . . . . . . . . $209,259
1998. . . . . . . . . . . . 143,771
1999. . . . . . . . . . . . 151,730
2000. . . . . . . . . . . . 113,453
2001. . . . . . . . . . . . 5,813
--------
T o t a l . . . . $624,026
========
</TABLE>
Rental expense is recognized by the Company on a straight-line
basis over the life of the lease.
Total rent expense aggregated $234,000 and $125,000 for the years
ended December 31, 1996 and December 31, 1995, respectively (see Note 2[h]).
(continued)
F-21
<PAGE>
NOVA TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(NOTE 11) - 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] Acquisition and Service Agreement:
---------------------------------
In January 1997 the Company entered into an agreement with Therapy
Concepts, Inc. ("Therapy") pursuant to which 1) the Company is committed to
purchase certain of Therapy's products in 1997 for an amount defined in the
agreement, 2) The Company has the option (from December 1, 1997 to October 1,
1999) (the "Option") to acquire a part or all of Therapy's business for an
amount defined in the agreement. The purchase price is payable in a combination
of cash and the Company's common stock. Prior to exercising the Option the
Company must raise additional capital of $10,000,000 and must be listed on the
NASDAQ national market system, 3) Therapy has the right to put (the "Put") a
part or all of its business to the Company from December 1, 1997 to October 1,
1999 for an amount less than if the Company exercises its option to acquire part
or all of Therapy's business.
In connection with the agreement, the Company paid Therapy $62,500
upon signing and issued warrants to purchase 250,000 shares of the Company's
stock at an exercise price of $2.00 per share expiring December 31, 2000.
Therapy is to develop blueprints for certain mattresses and submit applications
for FDA approval.
If the Company exercises the Option or Therapy exercises the Put,
the Company will issue warrants to purchase up to 750,000 shares of common stock
at an exercise price of $2.00 per share, expiring the earlier of the closing of
sale of the business or December 31, 1999. The Company will also receive a
credit against the purchase price not to exceed the lesser of $1,000,000 or the
purchase price, and as reduced for any gain in the value of the warrants
previously issued.
If Nova is in default of this agreement, then Nova may grant to
Therapy at Nova's option a license to manufacture 100 Nova beds or the right for
Therapy to purchase up to 100 Nova beds at $2,500 each.
If Therapy is in default, Nova may be entitled to a return of up
to $62,500 which was paid under the agreement.
(NOTE 12) - Fair Value of Financial Instruments:
- -----------------------------------------------
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial statements:
Cash and cash equivalents approximate fair value.
Short-term loan payable - the carrying amount approximates fair value due
to the short-term maturities of these instruments.
Long-term debt - fair value is estimated based on borrowing rates offered
to the Company.
F-22
<PAGE>
Item 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no disagreements with or changes in accountants during the
twenty-four months ended December 31, 1996.
PART III
Item 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers and Directors
The following sets forth information regarding the directors and executive
officers of the Company.
Name Age Position
---- --- --------
Paul DiMatteo 69 Chairman of the Board
Stephen Fisher 51 President, Chief Executive Officer,
Chief Financial Officer, Treasurer and
Director
Samuel N. Paul 58 Executive Vice President and Director
Douglas Drew 51 Senior Vice President and Director
Harold J. Lash 65 Vice President,Controller and Secretary
Arlindo Jorge 73 Director
Robert Segnini 54 Director
Charles F. Chubb 76 Director
Jay M. Haft resigned as a director in July 1996 citing the press of
personal and business obligations. Mr Chubb retired in October 1996 and resigned
as Senior Vice President and Secretary..
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.
Stephen Fisher became President and Chief Executive Officer of the Company
as of June 18, 1996, on which date he ceased to serve as Senior Vice President,
a position he assumed in June 1994. Mr. Fisher has served the Company as a
Director since June 1994, as Assistant Secretary from December 1994 and as
<PAGE>
Chief Financial Officer and Treasurer from March 1996. From May 1992 to May 1994
he served as an officer and director of Aztech Corp., which acted as a
consultant to the Company during such period. From 1985 to 1992 Mr. Fisher held
various positions including President and Director of Memry Corporation, a
developer and manufacturer of new products. Prior thereto, he was President of
Materials Systems, Ltd., an engineering and management consulting firm. He was
an INCRA Fellow at Carnegie-Mellon University and was an Assistant Professor and
conducted research at West Virginia Institute of Technology and Virginia
Polytechnic Institute.
Samuel N. Paul has served the Company as Senior Vice President since
September 1995 and as a Director since December 1995. From February 1992 to May
1994 he was President, Chief Operating Officer and Director of Industrial Health
Care Company, a provider of occupational health services. From October 1990 to
January 1992 he was Manager of International Sales and Marketing for Colt's
Manufacturing Company, a manufacturer of firearms. From May 1988 to October 1990
he was a Vice President and Director of Shared Technologies, Inc., a provider of
leased communication equipment. Mr. Paul is President and part owner of
Meadowbrook, a skilled nursing facility located in Connecticut. Mr. Paul holds a
Bachelor of Science degree in Mechanical Engineering from the University of New
Hampshire.
Douglas Drew became a Senior Vice President and a director of the Company
on June 14, 1996 when the acquisition of Comed was consummated. From 1989 to
June 1996, he was President, a Director and a substantial stockholder of Comed,
a company that he founded. Prior to the founding of Comed, Mr. Drew was Director
of North American Sales for Concept, Inc. and prior to that Director of Sales
and Marketing for Richards Medical.
Harold J. Lash has served the Company as Controller since March 1992 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.
Charles F. Chubb has served as Senior Vice President and a Director of the
Company from 1985, as Treasurer from 1985 to March 1996 and as Secretary from
December 1994. From 1962 to 1978, he was Senior Vice President for Research and
Development at Dynell. After the merger in 1977 of Dynell and United, 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. Mr. Chubb retired in October 1996.
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.
<PAGE>
Item 10. EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth information with respect to the compensation
for services rendered in all capacities to the Company during its fiscal years
ended December 31, 1996, 1995 and 1994 by its Chief Executive Officer.
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-Director of Research
And Development 1996 $120,000(1)
-- 1995 $92,000 (2) --
1994 $78,000 (3)
</TABLE>
(1) $107,500 was deferred and has not been paid; $12,500 has been paid.
(2) $39,000 was waived and will not be paid; $2,250 has been paid; $50,750
was deferred.
(3) $75,750 was deferred, then waived in 1995 and will not be paid; $2,250
has been paid.
<TABLE>
<S> <C> <C>
Stephen M. Fisher - Chief Executive
Officer 1996 $108,641(1)
1995 $96,000 (2)
1994 $49,646 (3)
</TABLE>
(1) $126,461 was paid, including $18,000 deferred in prior years.
(2) $96,617 was paid including net deferred salary of $18,617.
(3) $18,617 was deferred; $31,029 was paid.
Employment Agreements
In 1984 and 1985, respectively, the Company entered into employment
agreements with Messrs. DiMatteo and Chubb, each of which provides for a minimum
annual compensation of $78,000, which was increased on September 1, 1995 to
$120,000 and $100,000, respectively. The agreement with Mr. DiMatteo, as
amended(the "Old DiMatteo Employment Agreement"), terminated as of June 18, 1996
when Nova and Mr. DiMatteo entered into a new agreement. The agreement with Mr.
Chubb is cancellable by either the Company or Mr. Chubb on 60 days notice. Mr.
DiMatteo has waived payment of salaries due under the Old DiMatteo Employment
Agreement for the period January 1, 1989 through June 30, 1995 (aggregating
approximately $507,000) and Mr. Chubb has waived payment of salaries due under
his employment agreement for the period January 1, 1989 through March 31, 1995
(aggregating approximately $487,000). In addition, Mr. DiMatteo has agreed to
defer until October 1997, payment of compensation due him aggregating $158,250
at December 31, 1996. Mr. Chubb has agreed to defer until October 1997, payment
of compensation due him aggregating $35,000. From July 1, 1995 to December 31,
1996 such deferred balances have accrued interest thereon at the rate of 6.5%
per annum.
<PAGE>
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.
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 was 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. Mr. Fisher was engaged as
President in June 1996 at a salary of $120,000 per annum. Mr. Fisher received a
stock option to purchase 150,000 shares of the Company's common stock at an
exercise price of $2.13 per share, which expires on November 12, 2006. The
Company has agreed to increase Mr. Fisher's salary to $150,000 per annum when
the Company raises
<PAGE>
$2,000,000 in additional capital subsequent to June 1996 and to grant a year-end
bonus of $10,000 upon such occurrence. The agreement also calls for a cash bonus
of $50,000 and the granting of a stock option for 100,000 shares of common stock
at an exercise price of $2.50 in 1997 if sales of $12,000,000 and a profit of
$1,000,000 are achieved. A similar incentive will be earned by Mr. Fisher in
1998 if sales of $27,500,000 and a profit of $4,600,000 are achieved
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, 1996, Mr. Fisher, an executive officer and
director of the Company, was granted stock options to purchase 150,000 shares of
Common Stock at $2.13 per share through November 12, 2006 under the Plan.
As of December 31, 1996, options to purchase an aggregate of 319,200 shares
at exercise prices ranging from $2.13 to $3.13 per share and expiring at various
dates through November 12, 2006 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 and (iii) those held by Mr.
Fisher to purchase 150,000 shares at $2.13 per share.
As of December 31, 1996, 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 263,967 shares at prices ranging from $1.50 to $4.75 per share and
expiring at various dates through May 23, 2004 were outstanding under the Plans.
Such options included (i) those held by Mr. Haft to purchase 6,667 shares at
$3.37 per share through December 31, 1999 (expiration date extended from
<PAGE>
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, 1996.
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 December 31, 1996 there were approximately 30 employees
(including four officers) of the Company eligible to participate in the 1994
Plan
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.
<PAGE>
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 1, 1997, 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
- ------------------------------ ------------- -------------------------------
<S> <C> <C>
Paul DiMatteo 1,084,866(2) 13.7%
c/o Nova Technologies, Inc.
89 Cabot Court, Unit L
Hauppauge, NY 11788
Charles F. Chubb 427,724(3) 5.3%
c/o Nova Technologies, Inc.
89 Cabot Court, Unit L
Hauppauge, NY 11788
Stephen Lowenstein 508,400(4) 6.4%
c/o Jos. H. Lowenstein Sons, Inc.
420 Morgan Avenue
Brooklyn, NY 11222
JCM Capital Corp. 450,450 5.9%
555 Broadhollow Road
Melville, NY 11747
Stephen M. Fisher 150,692(5) 1.9%
c/o Nova Technologies, Inc.
89 Cabot Court, Unit L
Hauppauge, NY 11788
Harold J. Lash 28,527(6) 0.4%
c/o Nova Technologies, Inc.
89 Cabot Court, Unit L
Hauppauge, NY 11788
Samuel N. Paul 80,000(7) 1.0%
c/o Nova Technologies, Inc.
89 Cabot Court, Unit L
Hauppauge, NY 11788
Arlindo Jorge 206,749(8) 2.7%
33 Robinson Avenue
Glen Cove, NY 11742
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Robert Segnini 49,595(9) 0.6%
19 Shawmont Lane
Stonybrook, NY 11790
Douglas & Donna Drew 825,000 10.7%
c/o Nova Technologies, Inc.
89 Cabot Court, Unit L
Hauppauge, NY 11788
All executive officers and 2,853,153(10) 33.1%
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 March 1, 1997.
Except as otherwise indicated, the persons named herein have sole voting and
dispositive power with respect to the shares beneficially owned.
(2) Includes 94,926 shares held of record by members of Mr. DiMatteo's immediate
family, including 46,462 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 150,000 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) Includes 919,531 shares issuable upon exercise of outstanding warrants and
options owned by such executive officers and directors.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 31, 1993, the balance of outstanding 11% notes payable to Mr.
DiMatteo by the Company aggregated $159,669. The balance of the note plus
accrued interest was due on October 31, 1993 and was not paid by the Company.
Mr. DiMatteo agreed to defer repayment to him of the note plus interest thereon.
In consideration thereof, the remaining principal balance of the note plus
unpaid accrued at December 31, 1993 was combined into a new note aggregating
$202,009 and payable in full at April 1, 1995. No payments were made to Mr.
DiMatteo in 1994 and as of January 1, 1995 Mr. DiMatteo agreed to forgive
payment of principal aggregating $32,009 resulting in a new principal balance of
$170,000 due Mr. DiMatteo by the Company. In addition, accrued interest on the
note aggregating $22,221 was forgiven. In 1996, the Company repaid $70,750 of
this note. The maturity date of the note has been rescheduled to October 1, 1997
and the accrual of interest thereon commenced on July 1, 1995. As of December
31, 1996, the outstanding principal balance of this note together with unpaid
accrued interest equalled $124,564.
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
<PAGE>
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 had
the option to 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 December 31, 1996, except for
$6,697 and $3,348 of accrued interest due Mr. DiMatteo and Mr. Chubb,
respectively, these notes have been paid in full.
The above referenced notes issued to Messrs. DiMatteo and Chubb by the
Company are subordinated to the obligations of the Company under the People's
Bank and CII loans. However, by agreement dated as of March 26, 1996, People's
Bank consented to the payment by the Company of principal in the aggregate
amount of $123,082 due from the Company to Messrs. DiMatteo and Chubb pursuant
to such notes. The Company and Messrs. DiMatteo and Chubb agreed to subordinate
to the payment of the Company's obligations to People's Bank an equal amount of
deferred compensation accrued during the period June 1, 1995 through September
30, 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 December 31, 1996, $11,905 in 1995, and $24,300 in 1994.
In connection with its loan from CII in September 1996, the Company entered
into an Officers' Agreement with CII, Paul DiMatteo, Stephen Fisher and Samuel
Paul. Pursuant to this Agreement, Messrs. Fisher and Paul agreed that so long as
the Company owes any obligations to CII or CII owns any equity securities of the
Company they will not sell more than 20% of the equity securities of the Company
then owned by them. Mr. DiMatteo agreed that so long as the Company owes any
obligations to CII he will not sell more than 40% of the equity securities of
the Company then owned by him within the first 2 years from the date of the
Agreement or more than 60% of such securities with the first 3 years from such
date. Such officers also agreed to continue to serve the Company in their
current capacities and not to sell more than 50% of their equity securities of
the Company without allowing CII to participate in such sale pro rata.
In September 1995, Paul DiMatteo guaranteed (the "DiMatteo Guaranty") 20%
of the amount payable by CDA to People's under a guaranty by CDA securing
People's loan to the Company up to a maximum of $400,000 (the "CDA Guaranty").
The DiMatteo Guaranty is payable in full at any time after the CDA has paid
People's $80,000 under the CDA Guaranty and is limited to a maximum amount of
$80,000.
In September 1995, three of the Company's distributors, i.e. Advanced
Therapeutics, Inc.("Advanced"), Comed and Innovative Medical Systems, Inc.
("Innovative"), each agreed to provide an irrevocable letter of credit in the
amount of $200,000 for an aggregate of $600,000, which letters of credit could
be drawn down upon the Company's failure to make when due any payment due
People's. The Company issued each of these distributors a warrant to purchase
20,000 shares of Common Stock at $2.50 per share and granted them a security
interest in the Company's accounts receivable and inventory, which lien is
subordinate to the lien of People's Bank and subject to the Intercreditor
Agreements described at "Management's Discussion and Analysis of Financial
Condition and Results of Operation - Liquidity and Capital Resources." The
Company entered into a Stock Put and Call Agreement with Advanced and Innovative
granting them the right to purchase 66,667 and 60,000 shares, respectively of
Common Stock at $1.50 per share together with a reduction in the number of
shares purchasable pursuant to such warrants in exchange for reducing the amount
of their outstanding letters of credit. Pursuant to such Stock Put and Call
Agreements, Advanced purchased 66,667 shares of Common Stock for an aggregate
price of $100,000 and its obligation to post an irrevocable letter of
<PAGE>
credit was reduced to $100,000 and its warrant was reduced to the right to
purchase 10,000 shares of Common Stock, and Innovative purchased 60,000 shares
for an aggregate price of $90,000 and its obligation to post an irrevocable
letter of credit was reduced to $110,000 and its warrant was reduced to the
right to purchase 11,000 shares of Common Stock. Pursuant to the financing
agreements with People's Bank, the $190,000 paid by Advanced and Innovative for
Common Stock is being held in a restricted cash account for the benefit of
People's Bank. Advanced, Innovative and Comed have fulfilled their obligations
to post such letters of credit for the benefit of People's Bank.
On September 5, 1995, the Company paid a finder's fee to Merolla & Bogar,
LLC. in the amount of $60,000, in connection with the sale of 900,901 shares of
Common Stock for $1,000,000, pursuant to a consulting agreement engaging Mr. C.
R. Merolla, upon consummation of the sale, as a financial consultant to the
Board of Directors at a fee of $3,000 per quarter, payable in Common Stock at
$1.11 per share for the first year and at the average bid price for the Common
Stock for the preceding month for the next two years and in cash, or at Mr.
Merolla's option in Common Stock at such average bid price the last two years.
In August 1995, the Company entered into an agreement with TimeCapital
Securities Corporation ("TimeCapital") which became effective upon the
consummation of the sale by the Company of 900,901 shares of its Common Stock in
September 1995. The agreement gives TimeCapital for a period of 15 days after
notice from Nova (i) the exclusive right to present to the Company a written
proposal with respect to any financing sought by the Company and (ii) a right of
first refusal to effect any offering of more than $50,000 of the Company's
securities on terms as favorable as those offered to Nova in writing by
reputable investment bankers. The agreement expires in September 2000 and Nova
has the right to terminate by paying TimeCapital $100,000.
In April 1996, the Company entered into an agreement (the "Placement
Agreement") with TimeCapital which, as amended, provides for TimeCapital to act
as the Company's exclusive agent to assist the Company in raising $1,000,000
through the sale of at least 500,000 shares of Common Stock in a private
placement or a registered offering. The majority of such shares will be entitled
to one demand registration on or after January 1, 1997 and to piggyback
registration. If a transaction is consummated during the term of the agreement
or within 12 months after the term if such transaction is with a party
introduced to Nova or contacted by TimeCapital during the term, TimeCapital will
receive a cash placement fee of 10% of the money raised and warrants to purchase
Common Stock equal to 5% of the shares of Common Stock sold in the private
placement. The warrants will have an exercise price of $2.00 per share and will
expire 5 years from the closing of the placement. The Company also agreed to pay
TimeCapital's reasonable expenses in an amount not to exceed $10,000. The
Placement Agreement expires 91 days after Nova notifies TimeCapital that it has
at least 500,000 shares of Common Stock available for placement pursuant to the
Agreement.
Also in April 1996, the Company entered into an agreement with TimeCapital
which, as amended, provides for it to act as the Company's exclusive agent for a
period of one year from July 15, 1996 to assist in arranging for one or more
qualified broker-dealers to serve as the underwriter(s) on behalf of the Company
in a public offering of Common Stock anticipated to produce gross proceeds in
the $5-$10 million range. If a transaction is consummated during the term or
within 18 months after the term if such transaction is with a party introduced
to Nova or contacted by TimeCapital during the term, TimeCapital will receive a
fee of 10% of the gross proceeds. Such fee is payable in cash or Common Stock
(valued at market if such shares are registered or 75% of market if
unregistered) or in any combination thereof as determined by TimeCapital. The
Company also agreed to pay TimeCapital's reasonable expenses in an amount not to
exceed $10,000. Nova has the right to terminate this agreement by paying
TimeCapital $100,000 in cash and issuing to it 150,000 shares of Common Stock
with a deemed value of $1.00 per share. If such shares are not registered, then
TimeCapital shall have piggyback registration rights.
On January 24, 1996, the Company entered into a Distributorship Agreement
with JCM Capital Corporation giving JCM Capital the exclusive right to
distribute Nova's products in the State of New York. Other terms and conditions
are similar to the Company's other distributorship agreements. On such date, the
Company and JCM Capital also entered into an agreement providing JCM Capital
with a nine month option to
<PAGE>
enter into a distributorship agreement for the States of Ohio, California,
Arizona and Georgia on terms substantially similar to other current distribution
agreements. In September 1995, the Company sold 450,450 shares of Common Stock
to JCM Capital at a cash price of $1.11 per share as part of the private
placement that constituted part of the 1995 Financing.
On May 23, 1994, the Company signed an employment agreement with Stephen
Fisher and retained him as a Senior Vice President. See "Executive Compensation
- - Employment Agreements." Prior thereto, Mr. Fisher was the President of Aztech
Corporation ("Aztech"). Aztech was engaged by the Company for the period April
27, 1992 through May 22, 1994 as a consultant for the Company to assist it in
developing a marketing plan, drafting a business plan and raising capital. For
its services, Aztech was paid the sum of $3,000 per month plus 1,000 shares of
the Company's Common Stock per month.
On June 14, 1996 and as of June 18, 1996, respectively, the Company entered
into an employment agreement with Douglas Drew and a new employment agreement
with Paul DiMatteo. See "Executive Compensation - Employment Agreements."
In May, 1994, in connection with the cancellation of certain stock options,
the Company issued to Charles Chubb a warrant to purchase 172,599 shares of
Common Stock at $2.75 per share, expiring December 31, 1999.
In September 1995, the Company issued to Samuel N. Paul a warrant to
purchase 30,000 shares of Common Stock at $2.61 per share, expiring September 4,
2002 for financial consulting.
In June 1995, Paul DiMatteo, and Charles Chubb, executive officers of the
Company and Jay Haft, a director of the Company, were issued seven-year warrants
to purchase 180,000, 120,000, and 6,667 shares, respectively, of Common Stock at
$2.75 per share.
Pursuant to his employment agreement, in May 1994, the Company issued to
Stephen Fisher, an executive officer and director, an option pursuant to its ISO
Plan to purchase 150,000 shares of Common Stock at $2.75 per share, expiring May
23, 2004.
Pursuant to his employment agreement which became effective in September
1995, the Company issued to Samuel N. Paul, an executive officer and director an
option pursuant to its 1994 Stock Option Plan (the "Plan") to purchase 150,000
shares of Common Stock at $2.61 per share, expiring December 31, 2004.
In October 1995, Jay Haft, a director of the Company, was granted an option
pursuant to the Plan to purchase 10,000 shares of Common Stock at $3.13 per
share through December 31, 2002.
The following directors were issued the following options to purchase
Common Stock pursuant to the Company's GSO Plan:
<TABLE>
<CAPTION>
Director Date of Grant # of Shares Price Expiration Date
- -------- ------------- ----------- ----- ---------------
<S> <C> <C> <C> <C>
Jay Haft 12/06/91 6,667 $3.37 December 31, 1999*
05/23/94 5,333 $2.75 December 31, 1999
Robert Segnini 12/06/91 6,667 $3.37 December 31, 1999*
05/23/94 5,333 $2.75 December 31, 1999
Arlindo Jorge 12/06/91 6,667 $3.37 December 31, 1999*
05/23/94 5,333 $2.75 December 31, 1999
</TABLE>
<PAGE>
* 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.
In November 1996, the Company issued to Stephen M. Fisher, an executive
officer and director of the Company, an option to purchase 150,000 shares of
Common Stock at $2.13 per share, expiring November 12, 2006.
In October 1996, the Company paid a finders fee to Merolla & Bogar, LLC in
the amount of $50,000 in connection with the sale of 500,000 shares of Common
Stock for $1,000,000.
In October 1996, the Company paid a finders fee to TimeCapital in
connection with the sale of 500,000 shares of Common Stock for $1,000,000.
On December 30, 1996, the Company issued 225,000 shares of its common stock
to Mr. Douglas Drew (an executive officer and director) in exchange for the
reduction of debt owed to him aggregating $450,000.
As of December 31, 1996, the Company issued 17,700 shares of common stock
in lieu of cash payment of unpaid directors fees to (i) Jay Haft (6,600), (ii)
Arlindo Jorge (6,250) and (iii) Robert Segnini (4,850).
Vivax leases its New Hampshire facility from the Drew Family Trust, the
settlors of which are Douglas and Donna Drew, the owners of all of the
outstanding stock of Comed prior to its acquisition by Nova. See "Description of
Property."
<PAGE>
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
3.1 Certificate of Incorporation, as amended(1)
3.2 By-Laws(1)
4.1 See Exhibit 3.1 and 3.2
4.2 Form of certificate evidencing shares of Common Stock(1)
4.3 Form of certificate evidencing Redeemable Common Stock
Purchase Warrant(1)
4.4 Form of Warrant Agreement between the Company and Euro-
Atlantic Securities, Inc.(1)
4.5 Form of Redeemable Warrant Agreement between the
Company and American Stock Transfer & Trust Company
as warrant agent(1)
5 Opinion of Whitman Breed Abbott & Morgan(8)
10.1 1985 General Stock Option Plan(1)*
10.2 1985 Incentive Stock Option Plan(1)*
10.3 Employment Agreement, dated as of June 18, 1996
between the Company and Paul DiMatteo(8)*
10.4 Employment Agreement, dated February 22, 1985, and
amendments thereto, between the Company and
Charles Chubb(1)*
10.5 Promissory Notes of the Company in the principal amounts of
$40,000, $20,000, $20,000 $30,000 and $120,000, dated
December 18, 1987, December 31, 1987, April 29, 1988, May 26, 1988 and June 15,
1989, respectively, and amendments thereto, payable to Paul DiMatteo and the
related Security Agreement, dated June 15, 1989(1)
10.6 Agreement and Restated Stock Purchase Agreement, dated
December 31, 1986, between the Company, Transitions Two,
Limited Partnership, Nadfa Ltd., Paul DiMatteo and Venture
Capital Associates, Ltd(1)
10.7 Lease Agreement, dated March 7, 1986, and amendments
thereto, between the Company and First Island Partners,
L.P. (the "Lease Agreement")(1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.8 Amendment to Lease Agreement, dated February 29, 1992,
between the Company and First Island Partners, L.P.(3)
10.9 Form of Warrant Agreement between the Company and various
persons(1)
10.10 Extension of Lease Agreement, dated May 5, 1992, between the
Company and First Island Partners, L.P.(4)
10.11 Extension of Lease Agreement, dated July 15, 1992, between
the Company and First Island Partners, L.P.(4)
10.12 Amendment of Lease Agreement, dated September 9, 1992,
between the Company and First Island Partners, L.P.(4)
10.13 Extension of Lease Agreement, dated March 23, 1993 between
the Company and First Island Partners, L.P.(5)
10.14 Amendment to Lease Agreement, dated June 25, 1993 between the
Company and First Island Partners, L.P.(5)
10.15 Promissory Notes of the Company in the principal amounts of
$15,000, $15,000 and $5,000 dated October 19, 1993, November
5, 1993 and November 23, 1993, respectively, payable to
Charles Chubb and the related Security Agreements, dated
October 19, 1993, November 5, 1993 and November 23, 1993(5)
10.16 Promissory Notes of the Company in the principal
amounts of $30,000, $30,000 and $10,000, dated October 19,
1993, November 5, 1993 and November 23, 1993, respectively,
payable to Paul DiMatteo and the related Security Agreements,
dated October 19, 1993, November 5, 1993 and November 23,
1993(5)
10.17 1994 Stock Option Plan(6)*
10.18 Employment Agreement, dated May 23, 1994 between the Company
and Stephen M. Fisher(6)*
10.19 Amendment to Lease Agreement, dated January 13, 1994 between
the Company and First Island Partners, L.P.(6)
10.20 Employment Agreement, dated August 10, 1995 between the
Company and Samuel N. Paul(7)*
10.21 Lease Agreement, dated August 25, 1995 between the Company
and Industrial Builders & Realty Company together with
amendments thereto dated September 5, 1995 and September 6,
1995(7)
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.22 Consulting and Related Agreements, dated August 24, 1995
between the Company and
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Merolla & Bogar, LLC(7)
10.23 Distributorship Agreement, dated February 24, 1994 between
the Company and James J. Brooksbank(7)
10.24 Employment Agreement, dated June 14, 1996, between the
Company and Douglas Drew(8)
10.25 Distributorship Agreement, dated June 20, 1994, between the
Company and Innovative Medical Systems, Inc.(7)
10.26 Distributorship Agreement, dated January 24, 1995, between
the Company and Advanced Therapeutics, Inc.(7)
10.27 Distributorship Agreement, dated February 15, 1995, between
the Company and Recovercare, Inc.(7)
10.28 Distributorship Agreement, dated March 24, 1995, between the
Company and Stat Medical, Inc.(7)
10.29 Distributorship Agreement, dated March 17, 1995, between the
Company and Concept Medical Corporation(7)
10.30 Distributorship Agreement dated January 1, 1996, between the
Company and JCM Capital Corp.(7)
10.31 Agreement, dated August 24, 1995, between the Company and JCM
Capital Corp. to enter into a distributorship agreement,
together with an amendment thereto dated January 24, 1996(7)
10.32 Agreement, dated November 1, 1994, between the Company and
Omni Manufacturing, Inc.(7)
10.33 Financing Agreement, dated September 5, 1995, between the
Company and Connecticut Innovations, Incorporated ("CII")(2)
10.34 Senior Note, dated September 5, 1995, by the Company in favor
of CII(2)
10.35 Security Agreement, dated September 5, 1995, between the
Company and CII(2)
10.36 Collateral Assignment and Grant of License, dated September
5, 1995, between the Company and CII(2)
10.37 Stock Subscription Warrant, dated September 5, 1995, by
the Company in favor of CII(2)
</TABLE>
<PAGE>
<TABLE>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.38 Warrant Put Agreement, dated September 5, 1995, between the
Company and CII(2)
10.39 Officers' Agreement, dated September 5, 1995, among the
Company, CII, Paul DiMatteo, Stephen Fisher and Samuel
Paul(2)
10.40 Subordination Agreement, dated September 5, 1995, among the
Company, CII, Paul DiMatteo and Charles Chubb(2)
10.41 Loan Agreement, dated September 5, 1995, between the Company
and People's Bank(2)
10.42 Revolving Credit Note, dated September 5, 1995, by the
Company in favor of People's Bank(2)
10.43 Security Agreement, dated September 5, 1995, between the
Company and People's Bank(2)
10.44 Guarantee Agreement, dated September 5, 1995, between
Connecticut Development Authority and People's Bank and
agreed to by the Company(2)
10.45 Guaranty, dated September 5, 1995, by Paul DiMatteo for the
benefit of Connecticut Development Authority(2)
10.46 Letter of Credit Agreement, dated September 5, 1995, among
the Company, People's Bank and Advanced Therapeutics Inc.(2)
10.47 Letter of Credit Agreement, dated September 5, 1995, among
the Company, People's Bank and Innovative Medical Systems,
Inc.(2)
10.48 Letter of Credit Agreement, dated September 5, 1995, among
the Company, People's Bank and Comed Systems, Inc.(2)
10.49 Letter of Credit Reimbursement, Warrant Grant and Security
Agreement, dated September 5, 1995, between the Company and
Advanced Therapeutics, Inc.(2)
10.50 Letter of Credit Reimbursement, Warrant Grant and Security
Agreement, dated September 5, 1995, between the Company and
Innovative Medical Systems, Inc.(2)
10.51 Letter of Credit Reimbursement, Warrant Grant and Security
Agreement, dated September 5, 1995, between the Company and
Comed Systems, Inc.(2)
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
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)
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.56 Assistance Agreement, approved November 30, 1995, between the
Company and the State of Connecticut, acting by the
Department of Economic and Community Development(2)
10.57 Promissory Note, dated October 6, 1995, by the Company in
favor of the State of Connecticut, acting by the Department
of Economic and Community Development(2)
10.58 Intercreditor and Subordination Agreement, dated September 5,
1995, among the Company, People's Bank, CII, Connecticut
Development Authority, Comed Systems, Inc., Innovative
Medical Systems, Inc., Advanced Therapeutics, Inc., Charles
F. Chubb and Paul DiMatteo(7)
10.59 Intercreditor Agreement, dated November __, 1995, among the
Company, People's Bank, CII and Department of Economic and
Community Development(7)
10.60 Stock Put and Call Agreement, dated September 5, 1995,
between the Company and Innovative Medical Systems, Inc.(7)
10.61 Stock Put and Call Agreement, dated September 5, 1995,
between the Company and Advanced Therapeutic, Inc.(7)
10.62 Agreement dated August 25, 1995, between the Company and
TimeCapital Securities Corporation(9)
10.63 Amendment No. 1 to Loan Agreement, dated as of December 31,
1995, between the Company and People's Bank(9)
10.64 Amendment No. 2 to Loan Agreement, dated as of April __,
1996, between the Company and People's Bank(9)
10.65 Agreement, dated April 26, 1996, between the Company and
TimeCapital Securities Corporation(9)
10.66 Amendment to Distributorship Agreement, effective as of
October 17, 1995, between the Company and Innovative Medical
Systems, Inc.(9)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.67 Amendment to Distributorship Agreement, effective as of
October 17, 1995, between the Company and Concept Medical
Corporation(9)
10.68 Amendment to Distributorship Agreement, effective as of
October 17, 1995, between the Company and Advanced
Therapeutics Inc.(9)
10.69 Amendment to Distributorship Agreement, effective as of
October 17, 1995, between the Company and Recovercare,
Inc.(9)
10.70 Amendment to Distributorship Agreement, effective as of
October 17, 1995, between the Company and Stat Medical,
Inc.(9)
10.71 Amendment to Distributorship Agreement, dated as of May 6,
1996, between the Company and JCM Capital Corp.(9)
10.72 Consent and Subordination Agreement, dated as of March 26,
1996, among the Company, Charles F. Chubb, Paul DiMatteo and
People's Bank(9)
10.73 Stock Purchase Agreement, dated as of May 31, 1996, among the
Company, Vivax, Douglas Drew and Donna Drew(8)
10.74 Non-Competition Agreement, dated as of June 14, 1996, between
the Company and Douglas Drew(8)
10.75 Agreement dated June 28, 1996, between the Company and
TimeCapital Securities Corporation(9)
10.76 Loan and Security Agreement dated July 15, 1996, between the
Company and Northern Associates, L.P.(9)
10.77 Promissory Note dated July 15, 1996 by the Company in favor
of Northern Associates, L.P.(9)
10.78 Letter Agreement dated July 15, 1996 between the Company and
TimeCapital Securities Corporation(9)
---------------------------------------
</TABLE>
(1) Incorporated by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 33-42880).
(2) Incorporated by reference to the exhibits to the Company's Current
Report on Form 8-KSB dated December 27, 1995.
(3) Incorporated by reference to the exhibits to the Company's fiscal
1991 Form 10-K.
(4) Incorporated by reference to the exhibits to the Company's fiscal
1992 Form 10-KSB.
(5) Incorporated by reference to the exhibits to the Company's fiscal
1993 Form 10-KSB.
(6) Incorporated by reference to the exhibits to the Company's fiscal
1994 Form 10-KSB.
(7) Incorporated by reference to the exhibits to the Company's fiscal
1995 Form 10-KSB.
(8) Incorporated by reference to the exhibits to the Company's Form 8-KSB
filed June 27, 1996.
(9) Incorporated by reference to the exhibits to the Company's
Registration Statement on Form SB-2 (File
<PAGE>
No. 333-364).
* Management contract or compensatory plan or arrangement required to
be filed as an Exhibit to the Form 10-KSB.
(b) REPORTS ON FORM 8-K
-------------------
Form 8-K dated December 27, 1995.
<PAGE>
SIGNATURES
In accordance with the Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NOVA TECHNOLOGIES, INC.
By: /s/ Stephen M. Fisher
---------------------------------
Stephen M. Fisher
President
Date: April 15, 1997
-------------------------------
In accordance with Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signatures Capacity Date
---------- -------- ----
<S> <C> <C>
/s/ Paul DiMatteo Chairman of the Board April 15, 1997
- ------------------------- and Director
Paul DiMatteo
/s/ Stephen M. Fisher President, Chief Executive April 15, 1997
- ------------------------- Officer, Treasurer and
Stephen M. Fisher Director (Principal
Executive Officer)
/s/ Harold J. Lash Vice President, April 15, 1997
- ------------------------- Controller and Secretary
Harold J. Lash
/s/ Samuel N. Paul Senior Vice President April 15, 1997
- ------------------------- and Director
Samuel N. Paul
/s/ Douglas Drew Senior Vice President April 15, 1997
- ------------------------- and Director
Douglas Drew
/s/ Charles F. Chubb Director April 15, 1997
- -------------------------
Charles F. Chubb
/s/ Arlindo Jorge Director April 15, 1997
- -------------------------
Arlindo Jorge
/s/ Robert Segnini Director April 15, 1997
- -------------------------
Robert Segnini
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 373,526
<SECURITIES> 0
<RECEIVABLES> 775,299
<ALLOWANCES> 193,484
<INVENTORY> 584,026
<CURRENT-ASSETS> 2,434,645
<PP&E> 1,773,256
<DEPRECIATION> 517,530
<TOTAL-ASSETS> 5,351,213
<CURRENT-LIABILITIES> 1,640,638
<BONDS> 0
0
0
<COMMON> 76,697
<OTHER-SE> 1,932,193
<TOTAL-LIABILITY-AND-EQUITY> 5,351,213
<SALES> 1,650,913
<TOTAL-REVENUES> 1,650,913
<CGS> 1,751,716
<TOTAL-COSTS> 3,503,997
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 245,503
<INCOME-PRETAX> (2,053,757)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,053,757)
<EPS-PRIMARY> (.33)
<EPS-DILUTED> (.33)
</TABLE>
