U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1996 Commission file number 0-22096
NOVATEK INTERNATIONAL, INC.
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(Exact name of the small businee issuer as specified in its charter)
Colorado 84-1074891
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(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
1401 Neptune Drive, Boynton Beach, Florida 33426
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (561) 736-6659
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 No X
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: Common stock, no par value;
outstanding shares at August 2, 1996 13,706,869.
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Transitional Small Business Disclosure Format (Check one): Yes No X
--- ---
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NOVATEK INTERNATIONAL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Part I FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Consolidated Balance Sheets
June 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations
Three Months Ended and Six Months Ended
June 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 8
Part II OTHER INFORMATION
Items 1 through 6 10
Signatures 11
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NOVATEK INTERNATIONAL, INC. AND SUBSIDIARIES
PART 1 FINANCIAL INFORMATION
ITEM 1 Financial Statements
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
30-Jun-96 31-Dec-95
Unaudited Audited
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<S> <C> <C>
ASSETS
- ------
Current assets
Cash $ 17,637 $ 58,234
Contract Receivables (Net of Allowance) 27,686 164,705
Costs in excess of billing on uncompleted contracts 101,329 285,103
Current maturities of notes receivable 1,064,450 64,450
Deposits on Contracts 415,000 --
Prepaid Expenses 79,214 111,329
Refundable Deposits 250,000 --
Other current assets 117,192 143,766
------------ ------------
TOTAL CURRENT ASSETS 2,072,508 827,587
Property and equipment, net 1,014,434 1,055,920
Distribution license 54,124,835 --
Notes receivable less current maturities 1,975,579 225,579
Deferred Financing Costs (Net) 167,708 --
Other assets 73,891 66,201
------------ ------------
TOTAL ASSETS $ 59,428,955 $ 2,175,287
------------ ============ ============
LIABILITIES AND STOCKHOLDERS EQUITY
- -----------------------------------
Current Liabilities
Accounts payable $ 257,077 $ 79,691
Notes payable and other current liabilities 77,615 84,936
Billings and est losses in excess of costs
on uncompleted contracts 7,356 78,742
Current maturities of long-term debt 751,129 7,472
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TOTAL CURRENT LIABILITIES 1,093,177 250,841
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Long-term debt, less current maturities 395,000 322,777
Convertible debenture payable 38,500,000 --
Sales contracts to be acquired (36,000,000) --
Shareholders' Equity
Preferred stock, 10,000,000 shares authorized;
5,000 shares designates series A 10%
cumulative and convertible; $1,000 stated value 1,887,000 1,887,000
Common stock, no par value;
250,000,000 shares authorized 71,168,532 6,228,185
Additional paid-in capital 1,076 1,076
Accumulated (deficit) (10,115,830) (6,514,592)
Deferred consulting fees (7,500,000) --
Shareholders' Equity, Net 55,440,778 1,601,669
------------ ------------
TOTAL LIABILITIES AND EQUITY $ 59,428,955 $ 2,175,287
---------------------------- ============ ============
See accompanying notes to condensed consolidated financial statements
</TABLE>
3
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NOVATEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
30-Jun 30-Jun 30-Jun 30-Jun
1996 1995 1996 1995
Unaudited Unaudited
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<S> <C> <C> <C> <C>
Revenue $ 410,000 $ 550,437 $ 447,775 $ 1,189,749
Contract Costs 461,885 740,463 664,119 1,440,621
----------- ----------- ----------- -----------
Gross Loss (51,885) (190,026) (216,344) (250,872)
General and Administrative Expenses 317,340 352,102 931,518 576,031
----------- ----------- ----------- -----------
Operating Loss (369,225) (542,128) (1,147,862) (826,903)
----------- ----------- ----------- -----------
Non-operating Income (Expense)
Financing costs related to convertible notes
and other interest expense (30,909) -- (2,407,349) --
Other expense (26,974) (31,596) (46,026) (113,536)
----------- ----------- ----------- -----------
Total non-operating expense (57,883) (31,596) (2,453,375) (113,536)
----------- ----------- ----------- -----------
Net Loss $ (427,108) $ (573,724) $(3,601,237) $ (940,439)
=========== =========== =========== ===========
Loss Per Share $ (0.03) $ (0.32) $ (0.40) $ (0.52)
=========== =========== =========== ===========
Weighted Average Number of 12,625,993 1,816,165 8,921,936 1,816,165
Shares Outstanding
See accompanying notes to condensed consolidated financial statements
</TABLE>
4
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NOVATEK INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended
30-Jun-96 30-Jun-95
Unaudited
Net cash (used in) operating activities $ (1,173,021) $ (1,141,534)
------------ ------------
Cash Flows from Investing Activities
Purchase of property and equipment (4,811) (6,023)
Redemption of certificate of deposit -- 500,000
Collections on notes receivable 250,000 --
Proceeds from sale of investment in -- --
equity securities 27,234 --
Acquisition of subsidiary, net cash acquired 4,691 --
Decrease in due from affiliates 11 8,797
Purchase of distribution license (2,000,000) --
Decrease in other assets 24,331 --
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Net cash provided by (used in) investing -- --
activities $ (1,698,544) $ 502,774
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Cash Flows from Financing Activities
- ------------------------------------
Decrease in outstanding checks in excess of
bank balances -- (55,196)
Proceeds from short and long-term debt 4,672,500 626,653
Principal pmts on short and long-term debt (1,817,668) (1,997,678)
Proceeds from issuance of common stock -- 3,531,938
Public offering costs -- (368,362)
Loan closing costs (23,864) --
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Net cash provided by financing activities $ 2,830,968 $ 1,737,355
------------ ------------
Net increase (decrease) in cash (40,597) 828,595
Cash, beginning of period 58,234 11,946
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Cash, end of period $ 17,637 $ 840,541
============ ============
Supplemental Disclosure of Cash Flow Information
- ------------------------------------------------
Cash payments for interest $ 42,838 $ 143,273
============ ============
Schedule of Non-cash Investing and Financing Activities
- -------------------------------------------------------
Common stock issued as payment on
long-term debt $ 30,056,300 $ 722,758
============ ============
Common stock issued in advance for
future consulting fees $ 7,500,000 --
============ ============
Acquisition of business
Fair value of assets acquired $ 55,380,432 --
Fair value of liabilities assumed $(30,358,748) --
Common stock issued to purchase business $(25,026,375) --
Net cash received $ (4,691) --
See accompanying notes to condensed consolidated financial statements
5
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NOVATEK INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
1. Statement of Information Furnished
The accompanying unaudited financial statements have been prepared in accordance
with Form 10-QSB instructions and in the opinion of management contain all
normal recurring adjustments necessary to present fairly the financial position
as of June 30, 1996, the results of operations for the three month and six month
periods ended June 30, 1996 and 1995 and the cash flows for the six month
periods ended June 30, 1996 and 1995. These results have been determined on the
basis of generally accepted accounting principles and practices applied
consistently with those used in the preparation of the Company's 1995 Annual
Report on Form 10-KSB. Operating results for the quarter ended June 30, 1996 are
not necessarily indicative of the results that may be expected for any future
periods.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that the accompanying financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-KSB for fiscal year
ended December 31, 1995.
2. Acquisition of Business
On March 5, 1996, a merger was effected between Novatek International, Inc.
("Company"), its wholly-owned subsidiary Novatek International Holdings, Inc.,
("Holdings"), Medical Products, Inc. ("MPI") and its shareholders, The Celentano
Limited Partnership and Pickeral Cove Trust ("Shareholder"). MPI held an
exclusive license to market and distribute Medical diagnostic devices in South
America and the Bahamas. The distribution license is valued in excess of
$50,000,000. As a result of this merger, the business of MPI will be conducted
by Holdings as a wholly-owned subsidiary of the Company. To purchase MPI the
Company issued 2,002,638 shares of its common stock to The Celentano Limited
Partnership and 2,002,637 shares of its common stock to Pickeral Cove Trust in
exchange for all of the outstanding shares (7,500 shares of common stock) of
MPI. The Company issued to Joseph Roberts & Co., Inc. 1,000,000 shares of its
common stock for its assistance in arranging the merger. The Company also issued
3,453,125 shares of its common stock, $125,000 in short term notes and paid
$1,300,000 to New England Diagnostics ("NED") and MPI previously paid $950,000
to NED which resulted in payment in full of the balance due NED of a promissory
note in the original face amount of $30,000,000 owing from MPI to NED. NED
subsequently sold its shares in the Company.
3. Current Maturities of Long-term Debt
In connection with the merger, the Company issued convertible notes payable in
the amount of $2,354,000 convertible into the Company's common stock at $2.50
per share. These notes were converted subsequent to March 31, 1996. The
financing costs related to convertible notes included in the Consolidated
Statement of Operations contains $2,354,000 of incremental interest expense
attributable to the issuance of the convertible notes payable. These notes were
converted into 941,600 shares issued on April 30, 1996.
4. Convertible Debenture Payable
a) The Company issued a $36,000,000 face amount, 9% convertible debenture,
convertible into 7,200,000 shares of the Company's common stock, to NED as
consideration for NED acquiring for the Company certain sales contracts for
products for which the Company holds a license to distribute. This debenture has
been placed in escrow pending the performance by NED of its obligation to
acquire these certain sales contracts. Interest on debenture begins at the time
the related sales contracts are delivered. b) The Company issued 10 - 2 year
$250,000 face amount 5% convertible debentures due 5-28-98 with interest payable
semi-annually in arrears, or at conversion. The debentures are convertible as
6
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follows: 1/3 - 60 days after date; 2/3 - 90 days after date; 100% - 120 days
after date. The conversion price is the lesser of 130% of the closing bid price
on 5-28-96, or 85% of the 5 day average closing price prior to conversion. The
debentures were issued with registration rights and under the provision of
Regulation S. The proceeds, net of the broker loan fee, were used to pay New
England Diagnostics $2,000,000 for the purchase of the license agreement for
Central America (excluding Mexico), their notes, and accounts payable due.
5. Deferred Consulting Fees
The Company issued 1,000,000 shares of its common stock and paid a $250,000
retainer to four consultants who are to obtain sales contracts for the Company
and further the Company's interests in Honduras, Costa Rica and Colombia. The
$250,000 retainer is included in Administrative and General Expenses in the
Consolidated Statement of Operations. The stock portion of the compensation is
being held in escrow and will be earned based on a percentage of the Company's
gross revenue produced by sales contracts obtained by the consultants,
calculated annually.
6. Pro Forma Data for Acquisition
Pro forma data for the current interim period and the corresponding interim
period for the preceding fiscal year for the acquisition outlined in Note 2 has
not been presented since MPI was not formed until November 3, 1995.
7. Sale of License Agreement
During January 1996, the Company completed the sale of a license agreement to
distribute medical diagnostic devices in the Bahamas. The Company recognized
$3,000,000 of revenue on this transaction with a related cost of $3,000,000
which represents the value allocated to the Bahamian license upon the
acquisition of MPI.
8. Provision for income taxes
There is no current provision for income taxes due to operating losses. The
company has fully allowanced for its deferred tax asset arising from these
loses.
9. Litigation
Reported on 8-K dated March 5, 1996 - Preferred Restoration Case No. CL
93-7986 AD PB City
10. Earnings (Loss) Per Common and Common Share Equivalent
Earnings (loss) per common and common share equivalent is based on the combined
weighted average number of common shares and common share equivalents
outstanding which includes the assumed exercise of those stock options and other
convertible securities which are dilutive.
For the three and six months ended June 30, 1996 and 1995, primary weighted
average common and common share equivalents include only common shares
outstanding. The inclusion of common share equivalents would be antidilutive
and, as such, they are not included in the primary weighted average number of
shares outstanding. For the three and six months ended June 30, 1996 and 1995,
no fully diluted loss per common share equivalent has been disclosed as it would
be antidilutive.
11. Subsequent Events
The company has negotiated a 5% convertible debenture brokered by Cameron
Capital of Bermuda for $5,000,000, which is expected to be completed by August
15, 1996.
7
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NOVATEK INTERNATIONAL, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
Since inception, the Company has not been able to generate cash flow from
operations to cover expenses without advances from affiliates and private
placements of securities. This casts significant doubt upon the Company's
ability to continue as a going concern with its past business methodology. As a
result, the Company executed an agreement and plan of merger with Medical
Products, Inc. (See Note 2 to the condensed consolidated financial statements).
The Company is negotiating to sell its existing construction contracts that have
not been profitable, and is refocusing its attentions to the recently acquired
medical division and reassessing its future efforts in the light gauge steel and
construction business.
The Company is focusing its resources on developing sales of rapid medical
diagnostic devices for which the Company acquired rights to sell and distribute
in South America and the Bahamas. These test devices include test kits for HIV,
cholera, diabetes, as well as nine other viruses. In addition to having sold a
$3,000,000 license for the Bahamas, the Company has executed a five year
contract valued at $5,000,000 per year with a drug distribution company in Chile
for Cholera test kits. The Company is also acting as a co-broker in an agreement
to ship HIV test kits to a distributor in Mexico. The first shipment of these
devices was made on May 14, 1996.
In April 1996, the Company negotiated and reached an agreement in principle to
acquire the exclusive license to market and distribute the medical diagnostic
devices in Canada, Mexico and Central America. In May the license for Central
America was purchased for $2,000,000 and management anticipates the purchase of
the Mexican license to occur in August 1996.
RESULTS OF OPERATIONS
Revenue and expenses
Revenue for the second quarter and first half of 1996 decreased from $550,437 in
1995 to $410,000 in 1996, and from $1,189,749 in 1995 to $447,775 in 1996
respectively. The decrease in revenues is due to the completed contract method
of accounting, for which revenues related to various Bimini contracts will not
be recognized until the third and future quarters. No revenues from sales of
medical test kits to date.
During January 1996, the Company completed the sale of a license agreement to
distribute medical diagnostic devices in the Bahamas. The Company recognized
$3,000,000 of revenue on this transaction with a related cost of $3,000,000
which represents the value allocated to the Bahamian license upon the
acquisition of MPI.
Management believes that revenues in the third quarter will improve
significantly as a result of completed contracts related to the construction
division and revenues generated from initial shipments of medical diagnostic
devices.
Net loss decreased for the second quarter of 1996 from ($573,724) in 1995 to
($427,108) in 1996. Net loss increased during the first half of 1996 from
($940,439) in 1995 to ($3,601,237) in 1996. The improvement during the second
quarter of 1996 is attributable to improved gross margins as well as a reduction
in general and administrative expenses.
The Company incurred non-operating expenses of $57,883 during the second quarter
of 1996 and $2,453,375 during the first half of 1996, primarily due to financing
costs attributable to the convertible notes (See Note 3 to the Consolidated
Financial Statements).
8
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Liquidity and Capital Resources
The Company's net cash used in operating activities for the first half of 1996
decreased from $1,411,534 in 1995 to $1,173,021 in 1996 respectively.
Net cash provided by investing activities during the first half of 1996
decreased from $502,774 in 1995 to ($1,698,544) in 1996 respectively. During the
second quarter of 1996 the Company purchased a license agreement to sell medical
devices in Central America for $2,000,000.
Net cash provided by financing activities during the first half of 1996
increased from $1,737,355 in 1995 to $2,830,968 in 1996. During 1996, the
Company received $4,672,500 of proceeds from short and long term debt while
making principal payments on short and long term debt of $1,817,668. During
1995, the Company received proceeds from long term debt of $626,653, and
received $3,531,938 in proceeds from the issuance of common stock.
Without positive cash flow from operations, the Company has historically needed
to obtain debt and equity capital funding to finance its operations. During
1996, cash has been raised through debt issuance's and private equity
placements. Management believes that the merger with Medical Products, Inc.,
through the anticipated future sale of the medical diagnostic devices, combined
with the planed debenture placement discussed in Note 11, will provide
sufficient cash flow to meet the Company's operating needs during the remainder
of 1996. Additionally, the Company is seeking a buyer for various construction
contracts held by it's construction division, which may raise additional cash.
9
<PAGE>
NOVATEK INTERNATIONAL, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
Item 1. Legal Proceedings: None
Item 2. Changes in Securities: 1,887 shares of series A 10% cumulative and
convertible preferred stock valued at $1,887,000 was converted July
2, 1996 to 628,371 shares of common stock. As discussed in Note
4(b) in the condensed consolidated financial statement, the company
has issued convertible debentures which will dilute common shares
outstanding if converted.
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Securities Holders: None
Item 5. Other Information:
The Company is contemplating filing a Form S-1 Registration Statement to
register certain restricted shares of its common stock, including shares of
common stock underlying outstanding warrants.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits attached
(1) Chile Contract
(2) Debenture Notes
(3) Financial Data Schedule (Electronic filing only)
(b) Reports on Form 8-K.
(1) On January 3, 1996, the Company filed Form 8-K regarding an
Agreement and Plan of Merger.
(2) On March 19, 1996, the Company filed Form 8-K regarding its
March 5, 1996 Merger.
(3) On April 2, 1996, the Company filed Form 8-KA which amended Form
8-K dated March 19, 1996, to provide the following required
financial statements relating to such acquisition.
(i) Financial statements of business acquired:
Independent Auditor's Report on the Financial Statements
Balance Sheet as of December 31, 1995.
Statement of Operations for the period from November 3,
1995, (Date of Incorporation) through December 31, 1995.
Statement of Stockholder's deficit for the period from
November 3, 1995, (Date of Incorporation) through
December 31, 1995.
Notes to Financial Information
(ii) Pro Forma financial information:
Unaudited Pro Forma Balance Sheet as of December 31,
1995.
Unaudited Pro Forma condensed Consolidated Statement of
Operations for the year ended December 31, 1995.
(4) On June 19, 1996 the company filed form 8-K regarding the change
in accountants.
10
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NOVATEK INTERNATIONAL, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
Dated: August 13, 1996
---------------
Novatek International, Inc.
(Registrant)
By: /s/Gaston Oxman
---------------------------
Dr. Gaston Oxman, President
11
EXHIBIT 6A1
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PURCHASE AGREEMENT
------------------
This Agreement made and entered into this 9th day of April, 1996, by and between
IMPORTADORA Y EXPORTADORA ACCMED. LTD., (BUYER) with offices at Avda 11 De
Septiembre 2266, Santiago, Chile, S.A., and NOVATEK INTERNATIONAL INC. with
offices at 1401 Neptune Drive, Boynton Beach, Florida 33426.
TERMS & CONDITIONS
PRODUCT: QUIXtm Rapid Cholera Strip Test
UNIT PRICE: $12.50 per unit
QUANTITY: 400,000 units per year
TERMS: 5 years, deliveries to be made on a monthly
basis, beginning on May 1, 1996 as specified in
a purchase order to be submitted by the buyer
on a monthly basis.
PAYMENT TERMS: Billing statements will be closed as of the
last day of each month and submitted to the
buyer no later than the 10th day of the
following month. All payments must be received
into the account of the seller, no later than
the 25th day of the month in which the
statement was posted.
All purchase orders for products delivered under
this agreement must be accompanied by a LETTER
OF CREDIT, acceptable to the seller, guarantee-
ing the payment for the product shipped under
the purchase order.
READ AND AGREED TO BY:
Importadora y Exportadora Accmed. Ltd. Novatek International,
Inc.
/s/Juan de Dios Jimenez /s/Frank J. Cooney, President
- -------------------------------------- -----------------------------
Juan de Dios Jimenez Frank J. Cooney, President
Importadora y Exportadora Accmed. Ltd.
13
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED
STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE UNITED STATES OR TO OR FOR THE
ACCOUNT OR BENEFIT OF U.S. PERSONS UNLESS THE SECURITIES ARE REGISTERED UNDER
THE SECURITIES ACT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT IS AVAILABLE. IT IS THE RESPONSIBILITY OF ANY INVESTOR PURCHASING
THESE SECURITIES TO SATISFY ITSELF AS TO FULL OBSERVANCE OF THE LAWS OF ANY
RELEVANT TERRITORY OUTSIDE THE UNITED STATES IN CONNECTION WITH ANY SUCH
PURCHASE, INCLUDING OBTAINING ANY REQUIRED GOVERNMENTAL OR OTHER CONSENTS AND
OBSERVING ANY OTHER APPLICABLE REQUIREMENTS. THE SECURITIES REPRESENTED HEREBY
ARE ALSO SUBJECT TO AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, ENCUMBERED OR
OTHERWISE DISPOSED OF EXCEPT UPON SATISFACTION OF CERTAIN TERMS AND CONDITIONS
SET FORTH IN A CERTAIN REGULATION S SUBSCRIPTION AGREEMENT DATED AS OF MAY 28,
1996 BETWEEN THE COMPANY AND THE PURCHASER NAMED THEREIN.
US$2,500,000
NOVATEK INTERNATIONAL, INC.
5 % CONVERTIBLE DEBENTURE DUE MAY 28, 1998
THIS DEBENTURE is one of a duly authorized issue of Debentures of
Novatek International, Inc., a corporation duly organized and existing under the
laws of the State of Colorado (the "Company"), designated as its 5% Convertible
Debentures due May 28, 1998, in an aggregate principal amount not exceeding US
$2,500,000. .
FOR VALUE RECEIVED, the Company promises to pay to Cameron Capital
Ltd. registered holder hereof (the "Holder"), the principal sum of US $2,500,000
on May 28, 1998 (the "Maturity Date") and to pay interest on the principal sum
outstanding from time to time in arrears at the rate of 5% per annum, compounded
annually and payable on a semi-annual basis commencing six months after the date
of this Debenture, computed on the basis of the actual number of days elapsed in
a 365-day year. Any accrued and unpaid interest shall be payable in full on the
Maturity Date or, if earlier, on each Conversion Date (hereinafter defined).
Accrual of interest shall commence on the date hereof until payment in full of
the principal sum has been made or duly provided for. All accrued and unpaid
interest shall bear interest at the same rate from and after the due date of the
interest payment until so paid. The interest so payable, less any amounts
required by law to be deducted or withheld, will be paid on the Maturity Date
or, if earlier, on each Conversion Date, to the person in whose name this
Debenture is registered on the records of the Company regarding registration and
transfers of the Debentures (the "Debenture Register"); provided, however, that
the Company's obligation to a transferee of this Debenture arises only if such
<PAGE>
transfer, sale or other disposition is made in accordance with the terms and
conditions of Regulation S promulgated under the Securities Act and the
Regulation S Subscription Agreement executed by the original Holder in
connection with the purchase of this Debenture (the "Subscription Agreement").
The principal of, and interest on, this Debenture is payable in such coin or
currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts, at the address last appearing on
the Debenture Register of the Company as designated in writing by the Holder
from time to time. In lieu of a cash interest payment, the Company may, in the
sole discretion of the Board of Directors, issue shares of its Common Stock or a
combination of Common Stock and cash as payment of the interest then due and
payable. If the Company elects to pay all or a portion of the interest in Common
Stock, the Company shall issue to the Holder such number of fully paid and
non-assessable shares of Common Stock as shall have an aggregate Closing Price
(hereinafter defined) value (determined as of the date such interest is payable)
equal in amount to the interest which the Company has elected to pay in kind.
This Debenture is subject to the following additional provisions:
1. The Debentures are issuable in denominations of Two Hundred Fifty
Thousand Dollars (US$250,000) and integral multiples thereof. The Debentures are
exchangeable for an equal aggregate principal amount of Debentures of different
authorized denominations, as requested by the Holders surrendering the same. No
service charge will be made for such registration or transfer or exchange.
2. The Company shall be entitled to withhold from all payments of
interest on this Debenture any amounts required to be withheld under the
applicable provisions of the United States income tax laws or any other
applicable laws at the time of such payments.
3. This Debenture has been issued subject to certain investment
representations of the original Holder hereof and may be offered, sold,
transferred or exchanged only in compliance with the Securities Act. Prior to
due presentment for transfer of this Debenture, the Company and any agent of the
Company may treat the person in whose name this Debenture is duly registered on
the Debenture Register as the owner hereof for the purpose of receiving payment
as herein provided and for all other purposes, whether or not this Debenture be
overdue, and neither the Company nor any such agent shall be affected by notice
to the contrary.
4. Subject to the provisions of Section 5 hereof, the Holder of this
Debenture shall have the option to convert up to (i) Thirty-three and one-third
percent (331/3%) at any time from and after the 60th day following the date of
this Debenture, (ii) Sixty-six and two-thirds percent (662/3%) at any time from
and after the 90th day following the date of this Debenture and (iii) One
Hundred percent (100%) at any time from and after the 120th day following the
date of this Debenture, of the original principal amount of this Debenture (in
increments of not less than One Hundred Thousand Dollars (US $100,000) into
shares of the Company's common stock, no par value (the "Common Stock"), at a
conversion price for each share of Common Stock equal to the lesser of (i) One
Hundred Thirty Percent (130%) of the closing bid price (as reported by The
Nasdaq Stock Market) of the Common Stock on the date of this Debenture (the
"Closing Price") or, (ii) Eighty-Five Percent (85%) of the average closing bid
-2-
<PAGE>
price of the Company's Common Stock for the five (5) trading days immediately
prior to the Conversion Date (hereinafter defined) (such lesser value is
hereinafter referred to as the "Conversion Price"). Such conversion shall be
effectuated by surrendering the Debenture to be converted to the Company with
the form of conversion notice attached hereto as Exhibit A, executed by the
Holder of this Debenture evidencing such Holder's intention to convert this
Debenture or a specified portion (as provided for above) hereof. The amount of
accrued but unpaid interest as of the Conversion Date shall be subject to
conversion and paid in shares of Common Stock valued at the Conversion Price;
provided, however, that accrued interest shall not be payable upon conversion
prior to six months after the date of this Debenture. No fractional shares of
the Common Stock or scrip representing fractional shares will be issued on
conversion, but the number of shares of Common Stock issuable shall be rounded
to the nearest whole share. The date on which notice of conversion is given
shall be deemed to be the date on which the Holder has delivered this Debenture,
with the conversion notice duly executed, to the Company, or if earlier, the
date such notice of conversion is delivered to the Company provided the
Debenture is received by the Company within three (3) business days thereafter.
Such date is referred to herein as the "Conversion Date." Facsimile delivery of
the conversion notice shall be accepted by the Company. Certificates
representing the shares of Common Stock issuable upon conversion will be
delivered to the Holder within three (3) business days from the date the
Debenture and notice of conversion are delivered to the Company.
5. The Conversion Price and number of shares of Common Stock
issuable upon conversion shall be subject to adjustment from time to time as
provided in this Section 5.
(a) In the event the Company should at any time or from time to time
after the date of this Debenture fix a record date for the effectuation of a
split or subdivision of the outstanding shares of Common Stock or the
determination of holders of Common Stock entitled to receive a dividend or other
distribution payable in additional shares of Common Stock or other securities or
rights convertible into, or entitling the holder thereof to receive directly or
indirectly, additional shares of Common Stock (hereinafter referred to as
"Common Stock Equivalents") without payment of any consideration by such holder
for the additional shares of Common Stock or the Common Stock Equivalents
(including the additional shares of Common Stock issuable upon conversion or
exercise thereof), then, as of such record date (or the date of such dividend,
distribution, split or subdivision if no record date is fixed), the Conversion
Price shall be appropriately decreased so that the number of shares of Common
Stock issuable on conversion of this Debenture shall be increased in proportion
to such increase in the aggregate number of shares of Common Stock outstanding
and those issuable with respect to such Common Stock Equivalents.
(b) If the number of shares of Common Stock outstanding at any time
after the date of this Debenture is decreased by a combination of the
outstanding shares of Common Stock, then, following the record date of such
combination, the Conversion Price shall be appropriately increased so that the
number of shares of Common Stock issuable on conversion of this Debenture shall
be decreased in proportion to such decrease in outstanding shares.
6. The Company shall at all times reserve and keep available out of
its authorized but unissued shares of Common Stock, solely for the purpose of
-3-
<PAGE>
effecting the conversion of this Debenture, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
of the outstanding principal amount and accrued interest thereon; and if at any
time the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of this Debenture, in addition to such other
remedies as shall be available to the Holder, the Company will take such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purposes, including, without limitation, using its
best efforts to obtain the requisite stockholder approval necessary to increase
the Company's authorized Common Stock.
7. In no event shall the holder of this Debenture be entitled to
convert the outstanding principal of this Debenture to the extent such
conversion would result in such holder's beneficially owning more than five
percent (5%) of the outstanding shares of the Company's Common Stock. For these
purposes, beneficial ownership shall be defined and calculated in accordance
with Rule 13d-3, promulgated under the Securities Exchange Act of 1934, as
amended.
8. Any of the following shall constitute an "Event of Default":
a. The Company shall fail to make any payment (whether principal,
interest or otherwise) on this Debenture as and when the same
shall be due and payable and such default shall continue for
five (5) business days after the due date thereof;
b. Any of the representations or warranties made by the Company
herein, in the Subscription Agreement, or in any certificate
or financial or other written statements heretofore or
hereafter furnished by or on behalf of the Company in
connection with the execution and delivery of this Debenture
or the Subscription Agreement shall be false or misleading in
any material respect as of the date made;
c. The Company shall fail to perform or observe, in any material
respect, any other covenant, term, provision, condition,
agreement or obligation of the Company under this Debenture or
the Subscription Agreement and such failure shall continue
uncured for a period of five (5) business days after the first
date on which such failure arises (it being understood that in
the case of defaults which can not reasonably be cured within
a 5-day period no grace period shall be necessary as a
precondition to the failure to perform such covenant
constituting an Event of Default);
d. The Company shall (1) make an assignment for the benefit of
its creditors or commence proceedings for its dissolution; or
(2) apply for or consent to the appointment of a trustee,
liquidator, custodian or receiver thereof, or for a
substantial part of its property or business;
-4-
<PAGE>
e. A trustee, liquidator, custodian or receiver shall be
appointed for the Company or for a substantial part of its
property or business without its consent and shall not be
discharged within sixty (60) days after such appointment;
f. Bankruptcy, reorganization, insolvency or liquidation
proceedings or other proceedings for relief under any
bankruptcy law or any law for the relief of debtors shall be
instituted by or against the Company and, if instituted
against the Company, shall not be dismissed within sixty (60)
days after such institution or the Company shall by any action
or answer approve of, consent to, or acquiesce in any such
proceeding or admit the material allegations of, or default in
answering a petition filed in any such proceeding;
g. The Company shall have its Common Stock delisted from The
Nasdaq Stock Market or suspended from trading thereon, and
shall not have its Common Stock relisted or have such
suspension lifted, as the case may be, within five (5)
business days;
h. The Company shall defaul on the payment of any debts in
excess of $100,000 beyond any applicable grace period;
i. Any judgments, levies or attachments shall be rendered against
the Company or any of its assets or properties in an aggregate
amount in excess of $100,000 and such judgments, levies or
attachments shall not be dismissed, stayed, bonded or
discharged within thirty (30) days of the date of entry
thereof; or
j. The Company shall be a party to any merger or consolidation or
shall dispose of all or substantially all of its assets in one
or more transactions or shall redeem more than a de minimis
amount of its outstanding shares of capital stock.
Upon the occurrence of any Event of Default or at any time thereafter, and in
each and every such case, unless such Event of Default shall have been waived in
writing by the Holder (which waiver shall not be deemed to be a waiver of any
subsequent Event of Default) at the option of the Holder in the Holder's sole
discretion, the Holder may, upon written notice to the Company, accelerate the
maturity hereof, whereupon all principal and interest hereunder shall be
immediately due and payable without presentment, demand, protest or notice of
any kind, all of which are hereby expressly waived, anything herein or in any
note or other instruments contained to the contrary notwithstanding, and the
Holder may immediately, and without expiration of any period of grace, enforce
any and all of the Holder's rights or remedies afforded by law.
9. The Company expressly waives demand and presentment for payment,
notice of nonpayment, protest, notice of protest, notice of dishonor, notice of
-5-
<PAGE>
acceleration or intent to accelerate, bringing of suit and diligence in taking
any action to collect amounts called for hereunder and shall be directly and
primarily liable for the payment of all sums owing and to be owing hereon,
regardless of and without any notice, diligence, act or omission as or with
respect to the collection of any amount called for hereunder.
10. No provision of this Debenture shall alter or impair the
obligation of the Company, which is absolute and unconditional, to pay the
principal of, and interest on, this Debenture at the time, place, and rate, and
in the coin or currency, herein prescribed. This Debenture and all other
Debentures now or hereafter issued of similar terms are direct obligations of
the Company. This Debenture ranks equally with all other Debentures now or
hereafter issued under the terms set forth herein.
11. This Debenture shall be governed by and construed in accordance
with the laws of the State of Colorado without regard to the choice of law
provisions thereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
[SIGNATURE PAGE FOLLOWS]
-6-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be
duly executed by an officer thereunto duly authorized.
Dated: May 28, 1996 NOVATEK INTERNATIONAL, INC.
By: /s/Frank J. Cooney
--------------------------
Name: Frank J. Cooney
Title: Title
-7-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF NOVATEK INTERNATIONAL INC. FOR THE SIX MONTHS ENDED JUNE
30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 18
<SECURITIES> 0
<RECEIVABLES> 28
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,073
<PP&E> 1,050
<DEPRECIATION> 366
<TOTAL-ASSETS> 59,429
<CURRENT-LIABILITIES> 1,093
<BONDS> 38,500
0
1,887
<COMMON> 71,168
<OTHER-SE> (17,615)
<TOTAL-LIABILITY-AND-EQUITY> 59,429
<SALES> 448
<TOTAL-REVENUES> 448
<CGS> 664
<TOTAL-COSTS> 932
<OTHER-EXPENSES> 2,453
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,601)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,601)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,601)
<EPS-PRIMARY> (.40)
<EPS-DILUTED> (.40)
</TABLE>
