-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Bd+h0kWL878FPWacilWzEKZVHpELxxYTrZ304IdXBNY8FwlU38FwH5EvbvxEOAKv xbw8nelS1ugdw24Mg9L3EA== 0000950130-96-002508.txt : 19960709 0000950130-96-002508.hdr.sgml : 19960709 ACCESSION NUMBER: 0000950130-96-002508 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19960708 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NOVA TECHNOLOGIES INC /DE CENTRAL INDEX KEY: 0000776171 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FURNITURE & FIXTURES [2590] IRS NUMBER: 112674603 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-00364 FILM NUMBER: 96592069 BUSINESS ADDRESS: STREET 1: 89 CABOT COURT UNIT L CITY: HAUPPAUGE STATE: NY ZIP: 11788 BUSINESS PHONE: 5164348811 MAIL ADDRESS: STREET 1: 89 CABOT COURT CITY: HAUPPAUGE STATE: NY ZIP: 11788 SB-2/A 1 FORM SB-2/A As filed with the Securities and Exchange Commission on July 8, 1996 REGISTRATION NO. 33-00364 --------------------------------------- U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- AMENDMENT NO. 2 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- NOVA TECHNOLOGIES, INC. (Name of small business issuer in its charter)
DELAWARE 2599 11-2674603 (State or jurisdiction of (Primary Standard (I.R.S. Employer incorporation or organization) Industrial Classification Identification Number) Code Number)
89 CABOT COURT, UNIT L HAUPPAUGE, NEW YORK 11788 (516) 434-8811 (Address and telephone number of principal executive offices) 89 CABOT COURT, UNIT L HAUPPAUGE, NEW YORK 11788 (516) 434-8811 (Address of principal place of business or intended principal place of business) STEPHEN M. FISHER PRESIDENT 89 CABOT COURT, UNIT L HAUPPAUGE, NEW YORK 11788 (516) 434-8811 (Name, address, and telephone number of agent for service) Copy to: DAVID P. TUTTLE, ESQ. WHITMAN BREED ABBOTT & MORGAN 100 FIELD POINT ROAD GREENWICH, CT 06830 (203) 862-2396 Approximate date of proposed sale to the public: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED MAXIMUM MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO OFFERING AGGREGATE AMOUNT OF SECURITIES TO BE BE PRICE PER OFFERING REGISTRATION REGISTERED REGISTERED SHARE(1) PRICE(1) FEE - -------------------------------------------------------------------------------- Common Stock, par value 900,901 $ $ $1,009.55 $.01 per share - --------------------------------------------------------------------------------
(1) Based on the average of the bid and asked prices for the Common Stock on July __, 1996 on the OTC Bulletin Board pursuant to Rule 457(c). THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. NOVA TECHNOLOGIES, INC. 900,901 Shares of Common Stock This Prospectus relates to 900,901 shares of Common Stock, $.01 par value (the "Common Stock") of Nova Technologies, Inc. (the "Company") which may be offered from time to time by any or all of the Selling Stockholders named herein (the "Selling Stockholders"). See "Selling Stockholders." The Company will not receive any proceeds from the sale of shares offered hereby. The Company estimates that the expenses of this offering will be approximately $_______, all of which will be paid by the Company. The Company is not aware of any underwriting arrangements with respect to the offer and sale by the Selling Stockholders of the Common Stock. The Company has been advised by the Selling Stockholders that they or their successors may sell all or a portion of the shares offered hereby from time to time on the OTC Bulletin Board, in privately negotiated transactions, or otherwise, including sales through or directly to a broker or brokers. Sales will be at prices and terms then prevailing or at prices related to the then current market prices or at negotiated prices. In connection with any sales, any broker or dealer participating in such sales may be deemed to be underwriters within the meaning of the Securities Act of 1933. See "Plan of Distribution." The Common Stock is traded on the OTC Bulletin Board under the symbol "NOTL." On July 1, 1996, the bid and asked prices of the Common Stock, as reported by the OTC Bulletin Board, were $3.00 and $4.00, respectively. The market for the Common Stock must be considered limited and there can be no assurance that a meaningful trading market will develop. Furthermore, prices quoted may not represent the true value of the Common Stock. A Securities and Exchange Commission (the "S.E.C.") rule imposes additional sales practice requirements on broker-dealers who sell certain low priced "penny stocks" to persons other than established customers and institutional accredited investors. For transactions covered by this rule, the broker-dealer must make a special suitability determination of the purchaser and have received the purchaser's written consent to the transaction prior to the sale. Since the Common Stock currently is deemed to be "penny stock", an investor may find it more difficult to dispose of, or to obtain accurate quotations as to market value of the securities offered hereby. _____________________________ THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" AT PAGE 7. ______________________________ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSIONER NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSIONER PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is July __, 1996 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in or incorporated by reference into this Prospectus. THE COMPANY Nova Technologies, Inc. ("Nova" or the "Company"), a publicly traded (NASD, NOTL) company, was founded in 1984 to create a methodology of providing for the unassisted transfer of bedridden patients. Nova's objective is to become a fully integrated design, engineering, manufacturing and marketing company addressing a niche market in the medical equipment and supply field. On June 14, 1996, Nova, through its wholly-owned subsidiary, Vivax Medical Corp. a newly formed Delaware corporation ("Vivax"), acquired all of the outstanding capital stock of Comed Systems, Inc., a New Hampshire corporation ("Comed"). Vivax will continue the business of Comed as a distributor of specialized beds, support surfaces and related equipment in the greater Boston area. On and after June 14, 1996, the term the "Company" shall include both Nova and Vivax unless otherwise specifically provided or the context otherwise requires. The Company's engineering and technical staff has developed a patient transfer system (Novabed(R)) to be marketed to the rapidly growing long-term care market. The Nova patient transfer system, with the push of a button on a hand held pendant can automatically, comfortably, and safely transfer a bedridden patient from a lying position in a hospital type bed to a seated position in a wheel chair or commode and transfer the patient back into the bed. A wheelchair backrest must be manually inserted in order to separate the wheelchair from the bed. The system consists of a unique hospital-type bed, a companion wheelchair, accessories, and is designed to be operated by one attendant or, under certain circumstances, by the patient unassisted. At present the Company is not aware of any similar products on the market. The Company has been issued 18 patents related to the transfer system and bed sore prevention and has received United States Food and Drug Administration ("FDA") approval to market the product. The Novabed(R) provides elderly and disabled persons and their care givers with an alternative to manual lifting or conventional hydraulic lifting devices. Such devices are difficult to use and often require special safety precautions. The Company believes its system can significantly help the bedridden to be comfortably and safely cared for in their own homes. The patient transfer system has demonstrated how it may also partially reduce or eliminate transfer related injuries to both staff and patients. Use of Nova's system by institutions can improve patient care and mobility, provide therapeutic benefits, and reduce costs associated with transfer-related labor requirements and injuries. In addition, Novabed(R) can provide a means for many non-ambulatory patients to be cared for in the home, thereby enabling early release from the hospital. In the private home setting, Nova's unique transfer system can significantly delay institutional care, thus saving the high cost of nursing home care and enhancing quality of life. The potential users of the patient transfer system include: the severely physically handicapped; disease related bedridden persons; trauma and stroke victims; post surgical and orthopedic rehabilitation patients; and the elderly disabled. Purchasers of the system can be divided into three segments: hospitals; nursing homes and related care facilities; and the home care market, a rapidly growing segment in the industry. The Company's strategy is to establish, through clinical trials, medical efficacy conditions for the product, determine and establish cost benefit, and demonstrate how the patient transfer system greatly improves quality of life. The Novabed(R) has undergone clinical evaluation in an institutional and home care setting. The Company is focusing its marketing on hospitals, rehabilitation units and nursing homes in order to develop a strong referral base for the large home healthcare market. Concurrent with this effort the Company is developing a program to seek reimbursement authorization by Medicare, Medicaid and other third party payors. See "Business - Beta Site and Field Trials" and "Business - Third Party Reimbursement." Nova commenced field trials of the Novabed with the installation of a prototype in a nursing home in November 1992 and a prototype in a private home in February 1993. In 1993 the Company commenced tooling for and production of its first lot of 40 units for commercial sale. The first sales of these units were recorded in June 1994. Since the commencement of production in 1993, the Company has produced 70 Novabeds(R), of which 56 have been sold and shipped and 8 have been used for field trials and testing. The remaining 6 units are held in inventory for shipment in July 1996. An additional 23 units are currently being assembled for commercial sale. Until recently, Nova relied almost exclusively on distributors with industry experience with specialty beds to sell product to the institutional as well as the home healthcare markets. The Company has entered into seven exclusive distribution agreements to date covering seven regional territories in the United States. -2- 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 "Business - Marketing and Distribution." In September 1995, pursuant to a series of inter-related transactions (the "1995 Financing"), the Company (i) sold 900,901 shares of Common Stock for an aggregate of $1,000,000, (ii) entered into a Grant Agreement with the City of Bristol, Connecticut providing, under certain conditions, for a grant in the amount of $100,000, (iii) entered into a Financing Agreement with Connecticut Innovations Incorporated ("CII"), a State of Connecticut agency to borrow $750,000 in four staged installments, (iv) entered into a Loan Agreement with People's Bank ("People's Bank"), providing for a $1,000,000 revolving credit facility (v) entered into a Loan Agreement with Connecticut Development Authority ("CDA"), a State of Connecticut agency providing for advances up to $100,000 for the purchase of new or used equipment and (vi) entered into an Assistance Agreement with the Department of Economic and Community Development ("DECD"), a State of Connecticut agency providing for a loan in an amount not to exceed $200,000 for the purchase of capital equipment. In September 1995, the Company also sold 126,667 shares of restricted Common Stock for $190,000 to two of its distributors. See "Management's Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources." On June 14, 1996, Nova, through its wholly-owned subsidiary Vivax, acquired from Douglas and Donna Drew all the outstanding capital stock of Comed, a distributor of specialized beds, support surfaces and related equipment in the greater Boston area, and Comed was merged into Vivax. Of the aggregate purchase price of $3,000,000, $1,500,000 was paid in the form of 600,000 shares of Common Stock (using a value of $2.50/share per the Agreement) and the remaining $1,500,000 consisted of two $750,000 promissory notes bearing interest of 8% of Vivax which are guaranteed by Nova. One promissory note is payable on June 14, 1997, and the second promissory note is payable over a period of three years commencing in 1998, with the amount of the installments of principal being dependent on the future results of operations of the acquired business. Payment of the promissory notes is secured by separate security agreements of Vivax and Nova covering, respectively, inventory and equipment of Vivax, and certain technology of Nova. The specialized bed, support surfaces and related equipment distributed by Vivax include the Novabed(R), air therapy beds, air therapy mattresses, enclosure beds, low air loss beds, obese beds, mattress replacement systems and mattress overlay systems. These beds and surfaces are used for the treatment of pressure wounds, burns and trauma and the control of pain. Vivax distributes its products to hospitals, nursing homes and related care facilities and to the home care market. Historically, approximately 95% of Vivax's operating revenues have been derived from the rental, rather than the sale of specialty beds. Rental arrangements typically provide for ongoing service of the beds by Vivax. Most institutions rent specialty beds from Vivax on a daily basis while most of Vivax's home care customers rent specialty beds on a monthly or longer basis. As of June 1996, Vivax was renting specialty beds to approximately 60 institutions and approximately 90 home care customers. Nova was incorporated in Delaware in January 1984. Comed, now known as Vivax, was incorporated in Florida in 1989, reincorporated in New Hampshire in 1996 and merged into Vivax, a Delaware corporation in June, 1996. The Company's principal executive offices are located at 89 Cabot Court, Unit L, Hauppauge, New York 11788, telephone number (516) 434-8811. -3-
THE OFFERING COMMON STOCK OFFERED . . . . . . . . 900,901 shares to be sold by certain Selling Stockholders. COMMON STOCK OUTSTANDING(1) . . . . . 6,411,183 shares as of July 1, 1996. OTC BULLETIN BOARD SYMBOL . . . . . . NOTL USE OF PROCEEDS . . . . . . . . . . . The Company will not receive any proceeds from the sale of shares offered hereby. RISK FACTORS . . . . . . . . . . . . An investment in the Common Stock involves a high degree of risk. Prospective investors should review carefully and consider the factors described in "Risk Factors."
_________________ (1) Unless otherwise indicated, all references in this Prospectus to per share data and number of shares outstanding exclude 435,017 shares of Common Stock issuable upon the exercise of outstanding options and 1,858,654 shares of Common Stock issuable upon exercise of outstanding warrants. -4- SUMMARY FINANCIAL INFORMATION The following tables set forth for the periods indicated selected financial information for Nova, Comed and for the combined companies on a pro forma basis. NOVA TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS DATA: THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, 1994 1995 1995 1996 ------- --------- ---------- ---------- (UNAUDITED) (UNAUDITED) Net Sales ......................................................... $ 233,278 $ 220,368 $ 119,882 $ 82,553 ----------- ----------- ---------- ---------- Costs and expenses: Cost of sales..................................................... 558,262 697,901 171,229 302,706 Research and development expenses................................. 400,202 297,780 67,286 81,619 General, administrative, marketing and consulting expenses........ 421,573 506,124 126,189 152,126 ----------- ----------- ---------- ---------- Total costs and expenses......................................... 1,380,037 1,501,805 364,704 536,451 ----------- ----------- ---------- ---------- (Loss) from operations before other income and (expenses).......... (1,146,759) (1,281,437) (244,822) (453,898) Other income and (expenses): Interest and other income......................................... 5,197 13,201 1,530 24,054 Interest expense and other........................................ (69,575) (33,972) (554) (27,831) ----------- ----------- ---------- ---------- Net Loss........................................................... $(1,211,137) $(1,302,208) $ (243,846) $ (457,675) =========== =========== =========== ========== Net loss per share (1)............................................. $(.31) $(.27) $(.06) $(.08) =========== =========== ========== ========== Weighted average number of common shares outstanding (1)........... 3,964,598 4,783,050 4,355,533 5,796,016 =========== =========== ========== ========== - ---------------------------------------------------
(1) Net loss per share has been computed based on the weighted average number of shares outstanding during each year. No effect has been given to outstanding options and warrants as the effect would be antidilutive.
BALANCE SHEET DATA: DECEMBER 31, MARCH 31, 1996 ---------------------- -------------- 1994 1995 (UNAUDITED) ---------------------- -------------- Current Assets.............. $ 372,737 $ 935,154 $ 920,134 Working Capital............. 160,515 552,048 511,989 Total Assets................ 542,119 1,396,193 1,423,408 Total Liabilities........... 1,244,121 811,987 1,226,082 Stockholders' Equity (deficiency) (702,002) 584,206 197,326
COMED SYSTEMS, INC. STATEMENTS OF OPERATIONS DATA:
NINE MONTHS YEAR ENDED ENDED MAY 31, FEBRUARY 29, 1995 1996 ------------ ------------- Net revenues.................................. $1,758,000 $1,702,000 ---------- ---------- Cost of net revenues.......................... 903,000 881,000 Selling, general and administrative expenses.. 521,000 506,000 Provision for doubtful accounts............... 39,000 30,000 ---------- ---------- 1,463,000 1,417,000 ---------- ---------- Operating income......................... 295,000 285,000 ---------- ----------
-5- Interest income............................... 4,000 6,000 Interest (expense)............................ (75,000) (64,000) Gain (loss) on sale of assets................. (2,000) 19,000 ---------- ---------- Total.................................... (73,000) (39,000) ---------- ---------- Income before income taxes.................... 222,000 246,000 Income tax expense............................ 93,000 94,000 ---------- ---------- NET INCOME.................................... $ 129,000 $ 152,000 ========== ==========
BALANCE SHEET DATA: FEBRUARY 29, 1996 ----------------- Current Assets................................ $ 457,000 Working Capital (Deficiency).................. (45,000) Total Assets.................................. 900,000 Total Liabilities............................. 564,000 Stockholder's Equity.......................... 336,000 NOVA TECHNOLOGIES, INC. AND SUBSIDIARY PRO FORMA UNAUDITED CONDENSED CONSOLIDATED FINANCIAL INFORMATION
STATEMENT OF OPERATIONS DATA: YEAR ENDED DECEMBER 31, 1995 (PRO FORMA UNAUDITED) ---------------------- Net sales..................................... $2,462,000 ---------- Cost of sales................................. 2,044,000 Research and development expenses............. 297,000 Selling, general and administrative expenses.. 1,113,000 ---------- Operating income (loss)....................... (992,000) Interest and other (income)................... (22,000) Interest expense.............................. 245,000 (Gain) on sale of assets...................... (19,000) ---------- NET (LOSS).................................... ($1,196,000) ============ (Loss) per share.............................. ($0.22) ============ Weighted average shares outstanding........... 5,383,000 ============
BALANCE SHEET DATA: MARCH 31, 1996 (PRO FORMA UNAUDITED) --------------------- Current Assets....................... $1,377,000 Working Capital...................... 467,000 Total Assets......................... 4,687,000 Total Liabilities.................... 3,290,000 Stockholder's Equity................. 1,387,000 -6- RISK FACTORS An investment in the Common Stock offered hereby involves a high degree of risk. In analyzing such an investment, the following factors, among others, should be read and considered carefully in conjunction with the detailed information set forth elsewhere herein, furnished as an exhibit hereto or incorporated by reference. Untested Nature of Business. The Company, which began operations in July 1984, is subject to all the risks inherent in the creation of a new business enterprise. The Company has limited experience in commercial exploitation with respect to its patient transfer system, having heretofore concentrated its efforts primarily upon research and development, patent applications, FDA approval and field trials of prototypes. Commencing in the Fall of 1993, the Company shifted its focus to marketing and production. Since that time the Company has entered into seven exclusive distribution agreements, produced an initial lot of 40 units, commenced sale of such 40 systems in June 1994, commenced production of an additional 50 systems in 1995 and acquired the business of Comed, one of its former distributors in June 1996. However, there can be no assurance that the Company's efforts will ever result in the development of a commercially viable product, cost-effective manufacturing of such product, or a profitable business. Accumulated Losses Since Inception; Financial Condition; Anticipated Future Losses. From January 23, 1984 (inception) through December 31, 1995, the Company has experienced net losses in each fiscal period, aggregating $9,321,592. The Company incurred net losses of $1,211,137 and $1,302,208 for the years ended December 31, 1994 and December 31, 1995, respectively, and a net loss of $457,675 for the three months ended March 31, 1996. The Company's working capital requirements have been met from funds provided by management and other investors, the proceeds of a 1992 public offering and the proceeds of the 1995 Financing. The Company expects to incur additional future losses of approximately $2.0 million with respect to its Novabed(R) business prior to achieving operating profitability, if ever, as it undertakes continuing development of its patient transfer system and the start-up of marketing and production operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources." Auditor's "Going Concern" Explanatory Paragraph. The Company has received reports on its financial statements from its independent auditors which include an explanatory paragraph indicating that substantial doubt exists about the ability of the Company to continue as a going concern. The factors referenced by the auditors include the Company's recurring operating losses and the need for additional financing for commercial exploitation of its product. The Company estimates that it will need to obtain additional equity contributions of at least $2,750,000 to finance its operations over the 12 month period following June 30, 1996. These estimates are generated from an internally prepared business plan. The Company has begun to seek additional capital and has retained TimeCapital Securities Corporation ("TimeCapital") as its exclusive agent to assist the Company in raising $1,000,000 by July 19, 1996 through the sale of Common Stock at a price of $2.00 per share in a private placement. The Company has also entered into an agreement with TimeCapital for it to act as the Company's exclusive agent to assist in arranging for one or more qualified broker-dealers to serve as the underwriter(s) on behalf of the Company in connection with a public offering of Common Stock. See "Certain Transactions." The Company also has verbal agreements with three finders, one of whom is Arlindo Jorge a director of the Company, pursuant to which it will pay a commission of 10% of the proceeds of private placement sales obtained by the finders. There can be no assurance that the Company's estimates will prove to be accurate, that the Company will be able to raise such additional capital or that the Company's existing distributors will fulfill their purchase commitments. See "Business - Marketing and Distribution." If such contingencies are not realized, the Company would have to drastically reduce its staff and curtail manufacturing operations which may result in a default under and acceleration of the Company's loan obligations and, ultimately, bankruptcy and/or the discontinuance of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources." Insufficient Financing; Uncertain Financing Sources. The acquisition of the business of Comed, the net proceeds of $888,280 in equity capital and, subject to certain conditions, $1,150,000 in loan and grant availability from the 1995 Financing are presently estimated to satisfy the Company's cash needs through July or August 1996. The Company anticipates that this financing will not be sufficient to carry out its current business plan. The Company anticipates that it will require approximately $2.75 million of additional financing to finance its operations over the 12 month period following June, 1996, including the payment of a $750,000 note of Vivax due June 14, 1997 incurred in connection with the acquisition of Comed. See "Management's Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources." As of the date hereof, the Company has secured no commitments in this regard -7- and no assurances can be given as to either the magnitude or terms of such financing or the availability or commercial reasonability of any such future financing. The absence of additional financing may have a material adverse effect on the Company's achievement of commercial production and its ultimate profitability and may, after the proceeds of the 1995 Financing have been expended hinder the Company's ability to operate efficiently and to deliver product in a timely manner. Specifically, if the Company does not obtain the necessary additional financing it will not be able to produce sufficient product to satisfy the minimum purchase requirements of its distributors. Failure by the Company to produce sufficient product to satisfy its obligations to its distributors would constitute a default under the Company's distribution agreements which may subject the Company to claims for damages and may allow the distributors to terminate such agreements. Failure to Satisfy Requirements of Existing Financings; Prepayment Penalty. The Company's loan with People's Bank requires that it satisfy certain financial covenants at the end of each quarter. The Company believes that it is currently in compliance with these covenants. However, such covenants become more stringent for the quarter ending December 31, 1996. Failure to satisfy any of these financial covenants 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 anticipates that it will require approximately $2.75 million of additional financing to finance its operations over the 12 month period following June, 1996 and to comply with the financial covenants contained in the People's Bank loan agreement. See "Management's Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources." Several of the Company's existing financing arrangements require either (i), subject to certain exceptions, that the Company base fifty percent of its officers and a majority of its employees in Connecticut and conduct a majority of its operations, including subcontracting operations in Connecticut, except in the case where no Connecticut subcontractor is able to produce the products or provide the services called for in the subcontract on commercially reasonable terms, or (ii) that the Company otherwise maintain its operations in Connecticut (the "Connecticut Presence Requirement"). If the Connecticut Presence Requirement is violated, such lenders may require the Company to re-pay such financing and to pay such lenders substantial pre-payment charges. The Company is currently in compliance with these Connecticut Presence Requirements and does not believe that continued compliance will have a material adverse effect on the Company. The CII loan agreement contains a mandatory prepayment provision in the event the Company fails to satisfy the Connecticut Presence Requirement, the Company sells Common Stock for its own account in an underwritten public offering or there is a change in control of the Company or its assets. This provision includes a prepayment penalty in an amount equal to the greater of (i) an amount sufficient to provide a rate of return of 25% compounded annually or (ii) the excess of the market price of the Common Stock underlying the warrant granted to CII over the exercise price of such warrant. See "Management's Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources." The Company's existing financing arrangements are secured by some or all of the Company's assets, including its patents. See "Management's Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources." Dependence on Distributors; Failure of Distributors or Company to Perform. For the year ended December 31, 1995, all of the Company's net sales were made to its distributors. The Company's distributors have agreed to purchase a minimum number of units from the Company over specified periods of up to 31 months from June 1, 1996, which includes approximately 184 units during calendar 1996. During the period January 1, 1996 to June 1, 1996, the Company sold 16 units, all of which were purchased by the Company's distributors. As of July 1, 1996, the Company had unfilled orders for 2 Novabeds(R) and 3 chairs. The distributors have not ordered a pro rata portion of their 1996 minimums. The obligations of such distributors are not supported by financial or performance guaranties. In the event any distributor is unable to achieve sales equivalent to its minimum purchase requirement, either due to its failure to adequately market the Novabed(R) or the inadequacy of the demand for the Novabed(R), the Company will be relying on the financial strength of such distributor to purchase their designated minimum to be held in inventory by the distributor. While the Company believes that these distributors are financially sound, no -8- assurance can be given that such distributors will satisfy their obligations to the Company. If these distributors fail to perform their obligations, the Company will not realize this anticipated revenue and may have to discontinue operations unless it can develop alternative distribution arrangements for its products. See "Business - Marketing and Distribution." Due to the Company's lack of sufficient working capital and the Company's focus on arranging, negotiating and consummating the 1995 Financing and relocating its assembly operations from New York to Connecticut, in 1995 the Company was unable to produce sufficient product to satisfy its distributors' minimum purchase requirements. The Company and the two distributors who were unable to receive their minimum purchase requirements in 1995 agreed to extend the period for selling and purchasing the minimum requirements for 1995 and thereafter by one year. In 1995, the Company decided to alter the way the Novabeds(R) are produced. Through the first quarter of 1995, the Company produced a number of the components of the Novabed(R) in-house. The Company is now subcontracting this work. As a result, the Company will be able to produce Novabeds(R) with less capital for tooling and equipment. However, the Company estimates that it will require approximately $2.75 million of additional financing to finance its operations over the 12 month period following June, 1996. If the Company does not obtain the necessary additional financing it may not be able to produce sufficient product to satisfy the minimum purchase requirements of its distributors. Failure by the Company to produce sufficient product to satisfy its obligations to its distributors would constitute a default under the Company's distribution agreements which may subject the Company to claims for damages and may allow the distributors to terminate such agreements. Dependence Upon Key Personnel. The success of the Company will be largely dependent upon the efforts of Paul DiMatteo, its Chairman of the Board and founder, Stephen M. Fisher, President, Samuel N. Paul, Senior Vice President - Operations, and Douglas Drew, Senior Vice President - Marketing and Sales, each of whom has an employment agreement with the Company. The loss of the services of anyone of them may have a materially adverse effect on the Company's present and proposed business and future prospects. The Company has obtained a key-man insurance policy on the life of each of Messrs. DiMatteo, Fisher and Paul in the amount of $500,000. Limited Marketing Staff and Marketing Experience. The Company has undertaken limited marketing efforts to date with respect to its patient transfer system. Such marketing activity has been initially limited to the efforts of one of the Company's four executive officers. Such officer, however, has had no prior experience in the marketing of any health care products. The Company recently hired Douglas Drew, the founder, President and a significant shareholder of Comed, as its Vice President of Marketing and Sales. No Significant Manufacturing Capacity or Experience. The basic bed and certain other standardized components which comprise integral elements of the Company's patient transfer system are manufactured by non-affiliated persons. In the past, the Company manufactured the remaining ancillary components of its patient transfer system and assembled the system. The Company, however, has undertaken limited manufacturing and assembly activities to date, having completed the assembly of its initial lot of 40 units in June 1994, and started another lot of 50 units in 1995. Recently, the Company decided to subcontract the manufacture of these ancillary components in order to minimize capital requirements. See "Business - Manufacturing." Uncertain Patent Protection. The Company has been issued 18 United States patents related to its patient transfer system and bed sore prevention. Three additional patent applications, relating to transfer system design and associated products, are pending. The Company has also filed a total of 22 patent protection applications in five European countries, Japan and Canada and plans to file additional applications in both the United States and other countries. The Company believes that patent protection will be of material importance to its growth potential. No assurance can be given that additional patents will be issued or, if so issued, that the scope of protection afforded thereby or by the Company's current patents will be adequate to protect the Company from competition. Further, no assurance can be given as to the availability to the Company of adequate financial resources to contest any possible patent infringement by others. Competition. The health care industry in general, and the markets for patient transfer devices, hospital and home care beds and support surfaces and related equipment, and wheelchairs in particular, are highly competitive. Although the Company is unaware of a competitive product performing all of the same functions as those of the Company's patient transfer system, other products perform some of those same functions. Virtually all of the products which may be competitive with the Company's patient transfer system are being manufactured and/or marketed by concerns which have substantially greater financial resources, stronger sales forces and dealer networks, and greater manufacturing capacities and industry experience than the Company. Further, the Company expects that the anticipated sales or rental price of its patient transfer system will be comparably priced to other specialty bed products, such as air- therapy beds, but will be substantially higher than prices for standard hospital beds. The -9- Company believes its Novabed(R) will initially compete on the basis of product features and performance. The Company's Vivax business also competes with concerns which have substantially greater resources and stronger sales forces. Vivax faces competition from manufacturers who distribute similar products directly in the greater Boston area and independent distributors of similar products in this market. Vivax is also facing increased competition from less costly and less sophisticated devices which have gained market acceptance and are being mass marketed. As a result of this increased competition, product pricing has eroded and service demands have increased despite the substantial increase in the population of patients using products of the type distributed by Vivax. No assurances can be given that the Company will be able to compete successfully in any of its prospective markets, or that companies with substantially greater resources than the Company have not developed or are not in the process of developing superior patient transfer technology and products. Failure to Obtain, or Reduction of Government and Third-Party Payor Reimbursement. Third-party payors, such as Medicare, Medicaid, and private insurance companies, reimburse many durable medical equipment purchases and rentals. A conventional home care hospital-type bed and a conventional wheelchair as stand-alone units are presently reimbursed at the rate of 80% of cost as determined by the third-party payor. The Company has not yet attempted to obtain advance approval of third-party reimbursement for its Novabed(R) so that no assurances can be given that an adequate level of third-party reimbursement, or any reimbursement at all, will be available to customers for its patient transfer system. The Company has made a presentation to the Health Care Financing Administration ("HCFA") in anticipation of submitting an application for a new procedure code for the Novabed(R). HCFA has assigned analysts to the Novabed(R) and will assist the Company in preparing the application for the procedure code. A specific new procedure code is required prior to Medicare approval but is not required in order to obtain reimbursement from private insurers or Medicaid reimbursement. The Company will also seek reimbursement authorization from other governmental sources such as Medicaid and from third-party payors such as private insurance carriers. In connection therewith, the Company may be required to present clinical data to demonstrate that its technology is not experimental and that its patient transfer system is both safe and efficacious. In addition, the Company may be required to demonstrate that its patient transfer system is valuable and therapeutically beneficial to the patient and is not a luxury item. Although the Company believes that the cost of its patient transfer system will eventually be reimbursed at meaningful levels under each of, respectively, Medicare, Medicaid and private insurance programs, it can give no assurances to that effect, nor as to the length of time which may elapse prior to a determination of permissible reimbursement by the various persons that administer these programs throughout the country. In particular, applications for new procedure codes currently take approximately a year for processing, with no assurance that any such application will be approved or will not take a substantially longer period of time. Denial of such application will preclude Medicare reimbursement specifically for the Novabed(R). Failure to obtain favorable determinations concerning reimbursement willhave a material adverse effect on the Company's ability to compete on price and are likely to result in a material adverse effect on sales of the Novabed(R) and on the Company's financial performance. See "Business - Third-Party Reimbursement." Approximately 21% and 24%, respectively, of Vivax's (Comed) revenues for the year ended May 31, 1995 and the nine months ended February 29, 1996 were derived from Medicare. Reimbursement can be influenced by the financial instability of private third-party payors and the budget pressure of and cost shifting by governmental payors. In January and April 1996, respectively, Medicare Part B reimbursement (which relates to home care patients) of specialty beds was reduced by 20% and the criteria for determining eligibility of patients for reimbursement for specialized beds were made materially more stringent. Approximately 15% of Vivax's (Comed) revenues is currently derived from Medicare Part B reimbursement. These developments will have a materially adverse effect on future sales of the Company. In addition, the Company believes that the Medicare Part A reimbursement system for nursing home patients is likely to be modified. It is anticipated that the new system will move away from current cost-based reimbursement towards a managed care model with block awards to fewer regional administrators who will rely on fewer suppliers. The impact of any such changes is difficult to determine. Medicare Part A reimbursement currently represents less than 10% of Vivax's (Comed) revenues. However, any reduction in coverage or reimbursement rates will have a material adverse effect on the Company's results of operations. See "Business - Third-Party Reimbursement." Potential Product Liability. The Company may become subject to product liability claims in connection with the use of its patient transfer system. The Company presently maintains product liability insurance of $6 million. There can be no assurance that any loss will be covered by such insurance, that such coverage will continue to be available on commercially reasonable terms or that the extent of coverage will be sufficient to cover any potential liability. Vivax may become subject to product liability claims in connection with the use of the products it distributes. Vivax presently maintains errors and omissions insurance with limits of $1 million per occurrence and $5 million per year. There can be no assurance that any loss will be covered by such insurance, that such coverage will continue to be available on commercially reasonable terms or that the extent of coverage will be sufficient to cover any potential liability. In addition, in accordance with industry practice, the manufacturers of the products Vivax sells maintain product liability insurance and otherwise indemnify it -10- against any product liability claims. There can be no assurance that any product liability claims will be covered by Vivax's manufacturers' product liability insurance, indemnified by such manufacturers, or if indemnified that such manufacturers will have the ability to pay any such claims. Limited Market for Common Stock. The Common Stock is quoted and traded on the OTC Bulletin Board. The market for the Common Stock must be considered limited and there can be no assurance that a meaningful trading market will develop. Furthermore, prices quoted may not represent the true value of the Common Stock. Reduced Liquidity Attendant to Penny Stock Status. S.E.C. rules impose additional sales practice requirements on broker-dealers who recommend certain low priced "penny stocks" to persons other than established customers and institutional accredited investors. For transactions covered by these rules, the broker-dealer must make a determination that based on the purchaser's financial situation, investment experience and investment objectives, an investment in penny stocks is suitable for such purchaser and that such purchaser (or his independent advisor) is capable of evaluating the risks of transactions in penny stocks. The broker-dealer must also provide a prospective purchaser of penny stocks with certain disclosure materials and obtain the purchaser's written consent to the transaction prior to the sale. Since the Common Stock currently is deemed to be "penny stock", an investor may find it more difficult to dispose of, or to obtain accurate quotations as to the market value of the securities offered hereby. An exemption from "penny stock" status will be available, however, as to the Common Stock if and when the market price therefor exceeds $5.00 per share, the Company's net tangible assets exceed $2,000,000 or the Company has average revenue of at least $6,000,000 over the preceding three years. See "Market For Common Stock and Dividend Policy." Control by Management Stockholders. It is less likely that the market price of the Company's Common Stock will reflect a premium for control if at some future date the Company were to become the target of a takeover attempt or subject to a contest for control since approximately 36% of the Company's Common Stock is owned by the executive officers and directors of the Company. Effect of Outstanding Options and Warrants. The Company has outstanding options and warrants to acquire an aggregate of 2,293,671 shares of Common Stock. To the extent that all, or a substantial portion, of such options and warrants are exercised, they will decrease the percentage ownership of the Company by the persons who invest hereunder. The holders of such options and warrants may be expected to exercise them at a time when the Company would be able to obtain needed capital by a new offering of securities on terms more favorable than those provided for by such options and warrants. The possibility of the sale of all the shares of Common Stock issuable upon exercise of the options and warrants may adversely affect the market price of the securities offered. Shares Eligible for Future Sale. Actual sales or the prospect of sales of Common Stock under Rule 144 or otherwise in the future may have a depressive effect upon the price of the Common Stock or any market that may develop, and also render difficult the sale of the Company's securities purchased by investors in this offering. The sale or other transfer or disposition of 1,730,405 of the currently outstanding shares of Common Stock is restricted by the Securities Act of 1933, as amended (the "Securities Act"). In the future, these shares may only be sold in compliance with Rule 144, promulgated under the Securities Act, by the availability of an exemption from registration under the Securities Act or by their registration thereunder. As of January 1, 1996, 126,750 of these shares of Common Stock would have been eligible for sale under Rule 144. During the period commencing January 1, 1996 and ending December 31, 1996, an additional 987,738 of such shares will become eligible for sale under Rule 144. The balance of such shares will become eligible for sale pursuant to Rule 144 upon the expiration of their respective two-year holding periods. In addition, most of the current holders of outstanding Common Stock, options and warrants have "piggy-back" registration rights with respect to their securities should certain conditions be satisfied. Further, the Company intends to file a registration statement covering the 330,000 shares of Common Stock reserved for issuance, and the 435,017 shares of Common Stock issued under its stock option plans after the completion of this offering. Ability to Pay Dividends. The Company has not paid dividends, and does not intend to pay any dividends in the foreseeable future, since earnings, if any, are expected to be retained for use in the development and expansion of the Company's business. The Company's financing arrangements restrict the payment of dividends. -11- MARKET FOR COMMON STOCK AND DIVIDEND POLICY The initial public offering of the Common Stock of the Company was made in 1992. Since that time, the Company's Common Stock has been traded only on a limited basis in the over-the counter market. The following table sets forth the quarterly high bid and low bid prices as reported on the OTC Bulletin Board. Such quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.
PERIOD HIGH BID LOW BID - ------ -------- ------- Quarter ended March 31, 1994 $2 1/2 $2 June 30, 1994 3 2 September 30, 1994 2 1/4 2 December 31, 1994 2 1 3/4 March 31, 1995 2 2 June 30, 1995 2 2 September 30, 1995 2 3/4 2 December 31, 1995 2 3/4 2 1/2 March 31, 1996 2 3/4 2 1/4 June 30, 1996 3 5/8 2 1/4
At July 1, 1996, the bid and asked prices for the Company's Common Stock as so reported were $ 3.00 and $4.00 respectively. On that date, the Company had approximately 370 holders of record of its Common Stock. The Company has outstanding options and warrants to purchase 435,017 shares and 1,858,654 shares, respectively, of Common Stock. The Company also has outstanding 1,730,405 shares of Common Stock the sale or other transfer or disposition of which is restricted by the Securities Act. In the future, these shares may only be sold in compliance with Rule 144, promulgated under the Securities Act, by the availability of an exemption from registration under the Securities Act or by their registration thereunder. As of January 1, 1996, 126,750 of these shares of Common Stock would have been eligible for sale under Rule 144. During the period commencing January 1, 1996 and ending December 31, 1996, an additional 987,738 of such shares will become eligible for sale under Rule 144. The balance of such shares will become eligible for sale pursuant to Rule 144 upon the expiration of their respective two-year holding periods. In addition, most of the current holders of outstanding Common Stock, options and warrants have "piggy-back" registration rights with respect to their securities should certain conditions be satisfied. Further, the Company intends to file a registration statement covering the 330,000 shares of Common Stock reserved for issuance, and the 435,017 shares of Common Stock issued under its stock option plans after the completion of this offering. Sales of outstanding Common Stock pursuant to Rule 144 or otherwise could materially affect the trading price of the Company's Common Stock. See "Risk Factors - Shares Eligible for Future Sale." S.E.C. rules impose additional sales practice requirements on broker-dealers who recommend certain low priced "penny stocks" to persons other than established customers and institutional accredited investors. For transactions covered by these rules, the broker-dealer must make a determination that based on the purchaser's financial situation, investment experience and investment objectives, an investment in penny stocks is suitable for such purchaser and that such purchaser (or his independent advisor) is capable of evaluating the risks of transactions in penny stocks. The broker-dealer must also provide a prospective purchaser of penny stocks with certain disclosure materials and obtain the purchaser's written consent to the transaction prior to the sale. The Common Stock currently is deemed to be "penny stock." Since broker-dealers must create an extensive paper trail to sell penny stocks, many investors are not qualified to purchase penny stocks and classification as a penny stock often carries negative connotations, an investor may find it more difficult to dispose of, or to obtain accurate quotations as to the market value of the securities offered hereby. An exemption from "penny stock" status will be available, however, as to the Common Stock if and when the market price therefor exceeds $5.00 per share, the Company's net tangible assets exceed $2,000,000 or the Company has average revenue of at least $6,000,000 over the preceding three years. The Company has not paid, and does not anticipate paying in the foreseeable future, dividends on the Common Stock. The Company's financing arrangements impose various restrictions on the payment of dividends. -12- CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1996. Long-Term Debt............................................ $ 817,937 ---------- Common Stock; $.01 par value; 14,000,000 shares authorized; 5,798,483 shares issued and outstanding.............. 57,985 Additional paid-in capital................................ 9,918,608 Deficit................................................... (9,779,267) ----------- Total stockholders' equity................................ 197,326 ----------- Total Capitalization...................................... 1,015,263 ========== SELECTED FINANCIAL DATA The selected balance sheet data presented below for Nova as of December 31, 1994 and 1995 and selected financial data for the statements of operations for the years ended December 31, 1994 and 1995 are derived from financial statements included elsewhere in this Prospectus, which have been audited by Richard A. Eisner & Company, LLP, independent auditors, as set forth in their report also included elsewhere herein. The selected balance sheet data presented below for Nova as of March 31, 1995 and 1996 and selected financial data for the statements of operations for the three months ended March 31, 1995 and 1996 are derived from unaudited financial statements (included elsewhere in this Prospectus) which, in the opinion of the Company, reflect all adjustments, consisting of normal recurring adjustments for a fair presentation of the financial position and the results of operations for those periods. The following information should be read in conjunction with such financial statements and related notes thereto and management's discussion and analysis. NOVA TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS DATA: THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, 1994 1995 1995 1996 ------- --------- ---------- ---------- (UNAUDITED) (UNAUDITED) Net Sales ......................................................... $ 233,278 $ 220,368 $ 119,882 $ 82,553 ----------- ----------- ---------- ---------- Costs and expenses: Cost of sales..................................................... 558,262 697,901 171,229 302,706 Research and development expenses................................. 400,202 297,780 67,286 81,619 General, administrative, marketing and consulting expenses........ 421,573 506,124 126,189 152,126 ----------- ----------- ---------- ---------- Total costs and expenses......................................... 1,380,037 1,501,805 193,475 233,745 ----------- ----------- ---------- ---------- (Loss) from operations before other income and (expenses).......... (1,146,759) (1,281,437) (364,704) (536,451) Other income and (expenses): Interest and other income......................................... 5,197 13,201 1,530 24,054 Interest expense and other........................................ (69,575) (33,972) (554) (27,831) ----------- ----------- ---------- ---------- Net Loss........................................................... $(1,211,137) $(1,302,208) $ (243,846) $ (457,675) =========== =========== =========== ========== Net loss per share (1)............................................. $(.31) $(.27) $(.06) $(.08) =========== =========== ========== ========== Weighted average number of common shares outstanding (1)........... 3,964,598 4,783,050 4,355,533 5,796,016 =========== =========== ========== ========== - ---------------------------------------------------
(1) Net loss per share has been computed based on the weighted average number of shares outstanding during each year. No effect has been given to outstanding options and warrants as the effect would be antidilutive.
BALANCE SHEET DATA: DECEMBER 31, MARCH 31, 1996 1994 1995 (UNAUDITED)
-13- Current Assets.............. $ 372,737 $ 935,154 $ 920,134 Working Capital............. 160,515 552,048 511,989 Total Assets................ 542,119 1,396,193 1,423,408 Total Liabilities........... 1,244,121 811,987 1,226,082 Stockholders' Equity (deficiency) (702,002) 584,206 197,326
The selected balance sheet data presented below for Comed as of February 29, 1996 and selected financial data for the statements of operations for the year ended May 31, 1995 and the nine months ended February 29, 1996 are derived from financial statements included elsewhere in this Prospectus, which have been audited by Richard A. Eisner & Company, LLP, independent auditors, as set forth in their report also included elsewhere herein. The following information should be read in conjunction with such financial statements and related notes thereto. COMED SYSTEMS, INC. STATEMENTS OF OPERATIONS DATA:
NINE MONTHS YEAR ENDED ENDED MAY 31, FEBRUARY 29, 1995 1996 ------------ ------------- Net revenues.................................. $1,758,000 $1,702,000 ---------- ---------- Cost of net revenues.......................... 903,000 881,000 Selling, general and administrative expenses.. 521,000 506,000
-14- Provision for doubtful accounts............... 39,000 30,000 ---------- ---------- 1,463,000 1,417,000 ---------- ---------- Operating income......................... 295,000 285,000 ---------- ---------- Interest income............................... 4,000 6,000 Interest (expense)............................ (75,000) (64,000) Gain (loss) on sale of assets................. (2,000) 19,000 ---------- ---------- Total.................................... (73,000) (39,000) ---------- ---------- Income before income taxes.................... 222,000 246,000 Income tax expense............................ 93,000 94,000 ---------- ---------- NET INCOME.................................... $ 129,000 $ 152,000 ========== ==========
BALANCE SHEET DATA: FEBRUARY 29, 1996 ----------------- Current Assets................................ $ 457,000 Working Capital............................... (45,000) Total Assets.................................. 900,000 Total Liabilities............................. 564,000 Stockholder's Equity.......................... 336,000 The selected balance sheet data presented below for Nova as of March 31, 1996 and selected financial data for the statements of operations for the year ended December 31, 1995 are derived from pro forma unaudited condensed financial statements reflecting the acquisition of Comed (included elsewhere in this Prospectus) which, in the opinion of the Company, reflect all pro forma adjustments, for a fair presentation of the pro forma financial position and the pro forma results of operations for those periods. The following information should be read in conjunction with such pro forma financial statements and related notes thereto. NOVA TECHNOLOGIES, INC. PRO FORMA UNAUDITED CONDENSED FINANCIAL INFORMATION
STATEMENT OF OPERATIONS DATA: YEAR ENDED DECEMBER 31, 1995 (PRO FORMA UNAUDITED) ---------------------- Net sales..................................... $2,462,000 ---------- Cost of sales................................. 2,044,000 Research and development expenses............. 297,000 Selling, general and administrative expenses.. 1,113,000 ---------- Operating income (loss)....................... (992,000) Interest and other (income)................... (22,000) Interest expense.............................. 245,000 (Gain) on sale of assets...................... (19,000) ---------- NET (LOSS).................................... ($1,196,000) ============ (Loss) per share.............................. ($0.22) ============ Weighted average shares outstanding........... 5,383,000 ============
BALANCE SHEET DATA: MARCH 31, 1996 (PRO FORMA UNAUDITED) --------------------- Current Assets....................... $1,377,000 Working Capital...................... 467,000 -15- Total Assets......................... 4,687,000 Total Liabilities.................... 3,290,000 Shareholder Equity................... 1,397,000 -16- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION GENERAL - NOVA The Company, from its inception on January 23, 1984 through the fiscal year ended December 31, 1994 had been engaged primarily in research and development of its Novabed(R) patient transfer system and in raising capital to design and develop a marketable product. The Company had been classified as a development stage enterprise since substantially all of its efforts were devoted to research and development and to establishing a new business and there were no significant revenues. In 1994, the Company began taking orders for Novabed(R) units and in June 1994, the Company shipped the first order of Novabed(R) units since its inception and recorded sales of $233,000 in the year ended December 31, 1994. The Company is now manufacturing its second lot of Novabed(R) units and is incorporating certain design changes based on suggestions from its distributors. Since January 1, 1995, the Company is no longer classified as a development stage enterprise. As of March 31, 1996, it had entered into seven distributorship agreements providing for the sale and shipment of Novabeds(R) to each distributor and the granting of an exclusive sales territory to each distributor. See "Business - Marketing and Distribution." In 1994, the three distributors then under contract with the Company ordered and were shipped an aggregate of 20 Novabeds(R) which exceeded their aggregate minimum purchase requirements by 5 units. In 1995, the Company sold and shipped 13 Novabeds(R) and 8 wheelchairs to its six distributors, most of which were shipped in the first quarter. This sales decrease resulted from the Company's lack of sufficient working capital and the Company's focus on arranging, negotiating and consummating the 1995 Financing and relocating its assembly operations from New York to Connecticut. As a result, in 1995 the Company was unable to produce sufficient product to satisfy its distributors' minimum purchase requirements. The Company and the two distributors who were unable to receive their minimum purchase requirements in 1995 agreed to extend the period for selling and purchasing the minimum requirements for 1995 and thereafter by one year. In 1995, the Company decided to alter the way the Novabeds(R) are produced. Through the first quarter of 1995, the Company produced a number of the components of the Novabed(R) in-house. The Company is now subcontracting allof this work, primarily to subcontractors in Connecticut, and is conducting assembly operations. As a result, the Company will be able to produce Novabeds(R) with less capital for tooling and equipment. The Connecticut Presence Requirement (See "Risk Factors - Failure to Satisfy Requirements of Existing Financings; Prepayment Penalty") contained in several of the Company's financing agreements requires that the Company conduct a majority of its operations in Connecticut. Only the Company's agreements with CII also require that the Company conduct a majority of its subcontracting operations in Connecticut. However, the CII agreements provide for an exception in the event no Connecticut subcontractor is able to produce the products or provide the services on commercially reasonable terms. Accordingly, the Company's subcontracts must be fulfilled in Connecticut or pursuant to such exception. The Company does not believe that the Connecticut Presence Requirement will have a material impact on the Company even in light of its new subcontracting policy. The Company's distributors have agreed to purchase a minimum number of units from the Company over specified periods of up to 31 months from June 1, 1996, which includes approximately 184 units during 1996. During the period January 1, 1996 to July 1, 1996, the Company shipped 19 units, all of which were purchased by the Company's distributors. As of July 1, 1996, the Company had unfilled orders for 2 units and 3 wheelchairs. The distributors have not ordered a pro rata portion of their 1996 minimums. See "Risk Factors - Dependence on Distributors; Failure of Distributors or Company to Perform." GENERAL - VIVAX Comed Systems Inc. (now Vivax) was incorporated in December 1989 and began its operation in mid 1991 to distribute specialized beds and support surfaces in eastern New England. These devices are utilized to manage the treatment and prevention of pressure wounds, burns, trauma and pain control. The initial distribution of these products was to the acute and acute rehab facilities. The initial products being distributed were manufactured by Health Products of Houston, Texas. The company later distributed products manufactured by Sunrise Medical, Cardio System, Huntleigh, Creative Medical and Nova Technologies, Inc. The company would purchase the products which ranged in price from $3,000 to $25,000. The device would then be rented on a daily basis to the facility. The initial financing was provided by a loan from an officer and a SBA backed loan for $500,000 through the Hampton Coop Bank. The SBA loan was paid in full in January 1995 and the loan to the officer was paid in full in May 1996. -17- RESULTS OF OPERATIONS - NOVA Three Months Ended March 31, 1996 Compared to Three Months Ended March 31, 1995. In the three months ended March 31, 1996 the Company recorded sales of $83,000 and incurred a net loss of $458,000 ($.08 per share) compared to sales of $120,000 and a net loss, as adjusted, of $244,000 ($.06 per share) in the three months ended March 31, 1995. In the quarter ended March 31, 1996 the Company's cost of sales exceeded its sales and the Company sustained a gross loss of $220,000 compared to a gross loss of $51,000 in the quarter ended March 31, 1995. In September 1995, the Company 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 the Company to meet its manufacturing requirements and sales objectives despite the Company's new policy of subcontracting the manufacture of more of the components that go into a Novabed(R). Manufacturing overhead in the first quarter increased $135,000 from $91,000 in 1995 to $226,000 in 1996. Initially, production levels at the new facility have not been high enough to absorb the additional manufacturing overhead incurred in the new facility. As production and sales levels increase the Company expects gross losses to diminish and thereafter rising gross profits, although no assurance can be given that the Company will be able to achieve such satisfactory production and sales levels. Research and development expenses increased $15,000 from $67,000 (as adjusted for salary accruals) in the first quarter of 1995 to $82,000 in the comparable 1996 quarter. The increase is attributable to a $5,000 increase in an officer's salary rate for the quarter and increased wages devoted to research and development efforts in the first quarter of 1996. General, administrative, marketing and consulting expenses increased $26,000 from $126,000 (as adjusted for salary accruals) in the first quarter of 1995 to $152,000 in the comparable 1996 quarter. The increase is attributable to an $11,000 increase in an officer's salary rate for the quarter and an increase of approximately $16,000 in legal and accounting expenses. Interest expense increased $27,000 from $1,000 in 1995 to $28,000 in 1996, of which $18,000 is attributable to interest expense and amortization of financing costs in connection with the 1995 Financing. In addition, in the first quarter of 1996 two officers, who earned interest aggregating $9,000 on debt due them, waived the accrual of interest on debt due them in the comparable 1995 quarter. The Company's agreements with its distributors generally provide for a fixed purchase price for Novabeds(R) for an initial period that expires June 30, 1997. The Company's agreement with one of its distributors provides for a fixed price through December 31, 1998. If inflation, component parts pricing or other conditions result in an increase in the cost of producing Novabeds(R), the Company will not be able to pass along such increased costs to its distributors. The Company does not expect that these fixed price provisions will have a material impact on the Company. As a result of common stock sales in 1995 the weighted average number of common shares used in computing loss per share increased from 4,355,533 at March 31, 1995 to 5,796,016 at March 31, 1996. Fiscal Year 1996 Compared to Fiscal Year 1995. In the year ended December 31, 1995 the Company recorded sales of $220,000 and incurred a net loss of $1,302,000 ($.27 per share) compared to sales of $233,000 and a net loss of $1,211,000 ($.31 per share) in the year ended December 31, 1994. In the year ended December 31, 1995 the Company's cost of sales exceeded its sales and the Company sustained a gross loss of $478,000 compared to a gross loss of $325,000 in the year ended December 31, 1994. In 1995 and 1994, unfavorable manufacturing variances from the Company's standard cost to manufacture were primarily responsible for the gross loss. A substantial portion of the excessive variance in both years was due to low quantities produced, changes in product design and manufacturing methods and the fact that the units produced were part of the Company's initial production run. As a result, the number of units produced was insufficient to absorb manufacturing overhead and direct labor efficiency was less than it would be if the Company were operating at greater levels of production. In addition, in September 1995 the Company opened its new 28,000 square foot manufacturing facility and incurred start up expenses of approximately $50,000 which were charged to cost of sales. -18- Research and development expenses declined $102,000 from $400,000 in 1994 to $298,000 in 1995. Payroll and payroll-related expenses declined $62,000 due to fewer employees devoted to research and development. Patent development costs declined $21,000. In prior years, patent development costs were charged to expense as incurred. In 1995, the Company began capitalizing patent costs and will amortize these costs over the remaining lives of the related patents. The amount capitalized in 1995 was $37,000 and amortization of new patents received in 1995 aggregated $1,000. General, administrative, marketing and consulting expenses increased $84,000 from $422,000 in 1994 to $506,000 in 1995. An increase in payroll and payroll- related expenses ($50,000) is attributable to the hiring of a Senior Vice President at the end of May 1994, who is devoting most of his energies to marketing and to raising capital. The President's salary increased $14,000 from $78,000 in 1994 to $92,000 in 1995. In 1995, the President waived payment of $75,750 earned in 1994 and $39,000 earned in 1995 and the aggregate amount of $114,750 was charged to expense and credited to additional paid-in capital. Increases in office salaries, travel and entertainment, patent maintenance fees, insurance and professional fees were offset by a reduction in consulting fees. Interest expense declined $36,000 from $70,000 in 1994 to $34,000 in 1995. At January 1, 1995, two officers/stockholders forgave repayment of debt due them by the Company aggregating $762,851 and also waived the accrual of interest on notes payable due them for the first half of 1995. The reduction in interest on the debt that was forgiven and the waiver of interest due for the first half of 1995 resulted in interest expense savings of $51,000. Interest expense and amortization of deferred finance costs and debt discount on new financing offset this expense reduction by $15,000. As a result of common stock sales and the exercise of warrants the weighted average number of common shares used in computing loss per share increased from 3,964,598 at December 31, 1994 to 4,783,050 at December 31, 1995. RESULTS OF OPERATIONS - VIVAX Nine months ended February 28, 1996 compared to twelve months ended May 31, 1995. In the nine months ended February 28, 1996, Vivax recorded sales of $1,702,000 compared to sales for the year ended May 31, 1995 of $1,758,000. The pro rata increase in sales was the result of growth in the nursing home and home care business as a result of aggressive marketing to and working with acute care discharge planners. For the nine months ended February 28, 1996, Vivax earned a pretax profit of $246,000 and a net income of $152,000 as compared to a pretax profit of $222,000 and a net income of $129,000 for the year ended May 31, 1995. The pro rata increase in earnings is attributable to higher sales during the period. Vivax anticipates that sales and earnings in the period March 1, 1996 through May 31, 1996 will be commensurate with the prior nine month period. For the nine month period ended February 28, 1996, net cash used in financing activities was $492,000. Also during the nine months the President received a salary and bonus of $290,000, additional benefit of $36,000 and interest of $61,000. The Company anticipates that in the next year its traditional sales in the acute care and rehab market will remain consistent, there will be growth in the private insurance and nursing home business and that the home care business will stabilize. A substantial increase in new business in the nursing home is expected due to the introduction of and increased marketing effort on the Novabed(R). Vivax expects increased profits in the next twelve months due to an increase in sales, better management of assets, and reduced interest cost. As the sales increase, there will be a need for additional rental equipment, which will be financed from operations. -19- LIQUIDITY AND CAPITAL RESOURCES - NOVA During the first quarter of 1996 the Company used net cash in operating activities aggregating $601,000 compared to $186,000 in the prior year's first quarter. The increase in funds used in operating activities is attributable to the increase in net loss and to increases in inventory, accounts receivable and other assets as the Company began utilizing funds received in the 1995 Financing. The Company purchased equipment and capitalized certain tooling costs aggregating $10,000 compared to $5,000 in the prior year. In the first quarter of 1996 the Company received proceeds of $400,000 from borrowing under the 1995 Financing. During 1995 the Company used net cash in operating activities aggregating $1,210,000 compared to $791,000 in the prior year. The increase in funds used in operating activities is primarily attributable to increases in inventory, accounts receivable and other assets as the Company began to utilize the funds received in the 1995 Financing. The Company purchased equipment and capitalized certain tooling costs aggregating $73,000 compared to $28,000 in the prior year and provided cash from financing activities of $1,667,000 compared to $851,000 in 1994. In 1995, proceeds from the sale of Common Stock net of issuance costs aggregated $1,525,000, proceeds from borrowings net of deferred financing costs aggregated $42,000 and the Company received $100,000 from the exercise of warrants. The Company, since its inception through December 31, 1993 has utilized the issuance of shares of Common Stock as a source of working capital to pay for rent, compensation, professional fees and to repay debt. During this period, the Company issued approximately 457,000 shares of Common Stock to pay such liabilities, aggregating approximately $837,000. In 1994, the Company issued 15,632 shares in payment of rent and professional fees aggregating $25,093. In 1995, the Company did not issue any common stock in payment of any of its liabilities. From January 1, 1995 through August 31, 1995, the Company sold approximately 394,000 shares of Common Stock in private placement sales, from which it derived net proceeds of approximately $545,000. In January 1995 the Company received $99,600 from the purchase of 73,752 shares of Common Stock by holders of warrants issued in 1990 with an exercise price of $3.00 per share and an expiration date of December 31, 1994, which expiration was extended to January 20, 1995 at a revised exercise price of $1.35 per share. The remaining warrants to purchase 77,391 shares of Common Stock on the same terms were not exercised and were permitted to lapse. In May 1996, the Company sold 10,000 shares of Common Stock at $2.00 per share. The ongoing need for working capital has in the past hindered the Company's ability to operate in an efficient manner and to produce sufficient product. During the Company's search for additional capital, it has attempted to alleviate this problem by obtaining waivers of payment or deferring certain salaries, extending repayment dates on officers' loans, reducing exercise prices and extending exercise dates of expiring warrants and by selling restricted shares of Common Stock in private placement sales. As of September 5, 1995, the Company negotiated an equity and debt financing package (the "1995 Financing") consisting of the following: 1. $888,280 in net proceeds after finder's fees and expenses, from the sale of 900,901 shares of Common Stock at a price of $1.11 per share. 2. $1,000,000 loan facility from People's Bank under a two-year revolving line of credit collateralized by a first lien on accounts receivable and inventory and a cash collateral account. Nova is required to maintain an amount equal to the estimated annual debt service on the outstanding People's Bank loan in such cash collateral account. This loan bears interest at People's Bank prime rate plus 1.50%. Advances shall not exceed 80% of eligible accounts receivable plus 50% of eligible inventory. Eligible accounts receivable and eligible inventory only include accounts receivable and inventory related to Nova's Connecticut facility and do not include accounts receivable and inventory of Vivax. Although, People's had no obligation to advance funds until the $100,000 loan from the CDA and the $200,000 loan from the DECD had been fully funded, People's Bank agreed to waive such conditions because the Company temporarily deferred the purchase of capital equipment to be purchased with the CDA and DECD loans. The Company borrowed $250,000 in May and estimates that as of June __, 1996 it had approximately 100,000 of availability under the People's Bank facility. 3. $750,000 loan from CII maturing on September 5, 2001. The loan bears interest at 10% and is collateralized by all of the Company's assets, including a first lien on its intellectual property, a third lien behind People's Bank and three of the Company's distributors on accounts receivable and inventory and a first lien on all other assets. -20- Interest only is payable semi-annually commencing on the earlier of (i) September 5, 1998 or (ii) the date the Company declares any dividend or repurchases any of its outstanding stock. The loan was funded upon achievement of certain milestones and advances of $100,000, $250,000, $150,000 and $250,000 were received by the Company on September 5, 1995, January 26, 1996, March 26, 1996 and June 14, 1996. The final milestone was modified on June 7, 1996. In connection with this loan, CII received warrants to purchase up to 300,000 shares of Common Stock at $1.11 per share. Such warrants vest pro rata as the CII loan is advanced. 4. $100,000 loan from CDA for the purchase of capital equipment, maturing on September 1, 2002. This loan bears interest at 7.94% and is collateralized by a first lien on the equipment to be purchased with the proceeds. The loan is payable in equal monthly installments of principal and interest commencing October 1, 1998 in an amount sufficient to fully amortize the loan over its remaining term. If the Company's full time employment in Connecticut is less than 67 jobs after February 1, 1998, then the Company must prepay $1,500 of the loan for each job below such number and the interest rate will be adjusted upward based on a sliding scale which increases based on the number of jobs below such employment target. CDA also received warrants to purchase 45,000 shares of Common Stock at $2.50 per share in exchange for a guarantee securing the People's loan up to a maximum of $400,000. 5. $200,000 loan from DECD for the purchase of capital equipment, maturing ten years from the date of the first advance. This loan bears interest at 5% and is collateralized by a first lien on the equipment to be purchased with the proceeds. 6. $100,000 grant from the town of Bristol, Connecticut to help the Company relocate its primary manufacturing operations to Bristol, of which $50,000 was paid in October 1995 and $50,000 will be paid upon achievement by the Company of certain employment levels at its Bristol facility. 7. Warrants to purchase an aggregate of 60,000 shares, collectively, of Common Stock at a price of $2.50 per share and a security interest in the Company's accounts receivable and inventory (which lien is subordinate to the lien of People's Bank) were given to three of the Company's distributors, one of whom is Comed, in exchange for their agreeing to issue letters of credit securing the People's loan up to a maximum of $600,000. The Company and two of the distributors also entered into an agreement allowing such distributors to purchase, and allowing the Company to require such distributors to purchase, under certain circumstances an aggregate of up to 126,667 shares of restricted Common Stock at a price of $1.50 per share. The call was exercised by 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 People's, the proceeds received from the distributors reduced their obligation to maintain letters of credit and are being held in a restricted cash account for the benefit of People's Bank. Pursuant to the put/call agreement, the number of warrants issued to the distributors was reduced by 19,000. The remaining warrants to purchase an aggregate of 41,000 shares of Common Stock remain outstanding. The various creditors involved in the 1995 Financing, the Company, Charles F. Chubb and Paul DiMatteo have entered into agreements (the "Intercreditor Agreements") which, among other things, clarify the priority of each creditor's lien on assets of the Company, limit the ability of the creditors to transfer their financing interests in the Company or amend their financing documents without obtaining the consent of CII and People's Bank and establish restrictions and priorities with respect to payments and exercise of remedies. These liens do not relate to assets of Vivax. A lien on all of the assets of Vivax was granted as security for the Acquisition Debt. See "Recent Developments." As of May 29, 1996, the Company had borrowed $250,000 under the revolving line of credit but had not received any funds under the equipment loans, although it plans to begin to borrow from these sources in 1996. Legal fees and commitment fees (excluding the value of warrants) in connection with the 1995 Financing were approximately $90,000. At March 31, 1996 the Company had a net worth of $197,000, working capital of $512,000, including unrestricted cash of $274,000, accounts receivable of $115,000 and inventory aggregating $483,000. At March 31, 1995, the Company had a net worth of $50,000, working capital of $140,000, including cash of $97,000, accounts receivable of $13,000 and inventory aggregating $171,000. The Company -21- has expended less than $40,000 to purchase furniture and equipment for its new manufacturing facility in Bristol, Connecticut. Manufacturing operations commenced in November and at March 31, 1996 the Company employed 11 workers in this facility, including assemblers, welders, supervisors, a purchasing agent and an administrative assistant. The Company is reviewing plans to purchase additional manufacturing equipment and has accelerated manufacturing levels in order to begin shipping meaningful quantities of Novabed(R) units. The Company has no material commitments for capital equipment expenditures. The Company is planning to seek additional distributors and accelerate product engineering research and development. The financing arrangements with CDA and DECD, both of which are instrumentalities of the State of Connecticut, provide that the Company must prepay such loans together with a prepayment penalty equal to 7.5% of the loans and the guaranty if the Company physically transfers the operations of its business located in Connecticut outside of Connecticut within 10 years. The CII loan agreement requires, with certain exceptions, that the Company maintain a "Connecticut presence" by basing at least 50% of its officers in Connecticut, basing a majority of its employees in Connecticut and conducting the majority of its operations in Connecticut. The Company is currently in compliance with this requirement. The CII loan agreement contains a mandatory prepayment provision in the event the Company ceases to maintain a Connecticut presence, the Company sells Common Stock for its own account in an underwritten public offering or there is a change in control of the Company or its assets. This provision includes a prepayment penalty in an amount equal to the greater of (i) an amount sufficient to provide a rate of return of 25% compounded annually or (ii) the excess of the market price of the Common Stock underlying the warrant granted to CII over the exercise price of such warrant. The grant from the City of Bristol must be repaid if prior to August 8, 2005, the Company relocates 60% of the equipment or employees of its manufacturing operations outside of Bristol or the Company defaults in payment of property taxes due to Bristol. The Company has treated the $50,000 grant paid by the Town of Bristol as a grant award, to be recorded as income at a later date, if applicable. In order to comply with these requirements, the Company established its manufacturing facility in Bristol, Connecticut. See "Business - Manufacturing." The Company's loan agreement with People's Bank requires that the Company satisfy at the end of each quarter certain financial covenants as set forth below:
END OF EACH QUARTER DURING END OF EACH QUARTER DURING THE THE PERIOD ENDING SEPTEMBER PERIOD COMMENCING OCTOBER 1, 30, 1996 1996 AND THEREAFTER --------------------------- ------------------------------ Minimum Working Capital $ 500,000 $ 700,000 Minimum Current Ratio 1.50 to 1.00 1.75 to 1.00 Minimum Capital Funds $ 700,000 $1,300,000 Maximum Unsubordinated Debt Ratio 2.00 to 1.00 2.50 to 1.00
For purposes of the agreement, "Working Capital" is defined as current assets minus current liabilities, "Current Ratio" is defined as current assets divided by current liabilities, "Capital Funds" is defined as the sum of tangible net worth plus subordinated debt minus the sum of intangible assets plus loans to officers, directors, employees and affiliates, and "Unsubordinated Debt Ratio" is defined as total unsubordinated debt divided by total capital funds. The Company believes that it is currently in compliance with these covenants. However, such covenants become more stringent for the quarter ending December 31, 1996. Failure to satisfy any of these financial covenants 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 anticipates that it will require approximately $2.75 million of additional financing, $1 million by June 30, 1996 and an additional $1.75 million -22- by December 31, 1996, to finance its operations over the 12 month period following June, 1996 and to comply with the financial covenants contained in the People's Bank loan agreement. The Company intends to continue to explore strategic alliances or mergers in addition to the Comed acquisition as a means of improving the Company's cash flow and capital. In this regard, the Company is engaged in preliminary discussions with several distributors of medical products regarding a potential business combination. The Company cannot state that any of these transactions is probable because no agreement in principle with respect to transaction price and all other material terms has been reached. In addition, any such transaction is likely to be subject to the Company obtaining additional financing and ongoing due diligence. There can be no assurance that any such transaction will be consummated. The Company has received reports on its financial statements from its independent auditors which include an explanatory paragraph indicating that substantial doubt exists about the ability of the Company to continue as a going concern. The factors referenced by the auditors include the Company's recurring operating losses and the need for additional financing for commercial exploitation of its product. The Company estimates that it will need to obtain an additional equity contributions of at least $2,750,000 to finance its operations over the 12 month period following June, 1996. These estimates are generated from an internally prepared business plan. The Company has begun to seek additional capital and has retained TimeCapital Securities Corporation ("TimeCapital") as its exclusive agent to assist the Company in raising $1,000,000 by July 19, 1996 through the sale of Common Stock at a price of $2.00 per share in a private placement. The Company has also entered into an agreement with TimeCapital for it to act as the Company's exclusive agent to assist in arranging for one or more qualified broker-dealers to serve as the underwriter(s) on behalf of the Company in connection with a public offering of Common Stock. See "Certain Transactions." The Company also has verbal agreements with three finders, one of whom is Arlindo Jorge a director of the Company, pursuant to which it will pay a commission of 10% of the proceeds of private placement sales obtained by the finders. There can be no assurance that the Company's estimates will prove to be accurate, that the Company will be able to raise such additional capital or that the Company's existing distributors will fulfill their minimum purchases. See "Business - Marketing and Distribution." If such contingencies are not realized, the Company would have to drastically reduce its staff and curtail manufacturing operations which may result in a default under and acceleration of the Company's loan obligations and, ultimately, bankruptcy and/or the discontinuance of operations. LIQUIDITY AND CAPITAL RESOURCES - VIVAX Since the Inception of the company through February 29, 1996, ongoing working capital has been provided by daily cash flow. Some automobile loans have utilized Ford Motor Credit Company as a source of financing and capital purchases have been financed from SBA backed bank borrowing, loans from shareholders and loans from related parties. In connection with the acquisition of Comed, Vivax issued two promissory notes of $750,000 each to Douglas and Donna Drew which are guaranteed by Nova. The first note bears interest at the rate of 8%, requires monthly interest payments and is due on June 14, 1997. The second note bears interest at 8%, requires quarterly interest payments and matures on January 1, 2001. Principal payments are due quarterly 60 days following each of the first three calendar quarters and 110 days following the fourth calendar quarter, commencing with the calender quarter ending December 31, 1997, in an amount equal to the lesser of (i) $37,500 or (ii) 25% of the operating income of Vivax during the prior calendar quarter. Both notes are secured by a second lien on the accounts receivable and inventory of Vivax and a second lien on Nova's intellectual property. In connection with the 1995 Financing, Vivax posted an irrevocable letter of credit to People's Bank on behalf of Nova for $200,000 which expires on November 5, 1997. Vivax's obligation to reimburse the bank which posted the letter of credit is secured by a first lien on Vivax's accounts receivable and inventory. Nova's obligation to reimburse Vivax is secured by a second lien on Nova's accounts receivable and inventory. -23- As of February 29, 1996, the company has $237,000 in long term debt, of which $197,000 was to the officers and related parties, which paid in full in May 1996. Vivax also had outstanding as of February 29, 1996, two notes payable of approximately $14,000 and $13,000 incurred in connection with the purchase of, and secured by, certain motor vehicles. This debt bears interest at approximately 11% and is payable in monthly installments of principal and interest through February 1997 with respect to the $14,000 principal amount and through April 1998 with respect to the $13,000 amount. -24- BUSINESS INTRODUCTION Nova. The inability to get out of bed or get to the bathroom without requiring physical assistance, or experiencing considerable discomfort, can make a bedridden person feel confined, dependent and depressed. The use of manual transfer procedures can be demeaning to the bedfast person and may cause a significant loss of dignity. Such procedures can cause injury to patients and their aides. The absence of adequate transfer devices for home use and the stress of physical lifting often cause families to seek institutional care for a disabled relative. Such a decision can take an extraordinary emotional toll on all involved. In addition, the high cost of nursing homes often results in the depletion of a family's financial resources. Transfer-related activities of hospital and nursing home personnel constitute a significant portion of the work day and are considered to be a major cause of injury to patients and staff. Further, prolonged immobility in bed has negative effects on a bedridden person's bodily functions and health and is the primary cause of bedsores. Mr. DiMatteo began the research and development program for the Company's patient transfer system in 1974 while employed as President of Dynell Electronics Corporation ("Dynell"). At that time, he applied for and was granted several patents. The program was continued during Mr. DiMatteo's tenure as President of Robotic Vision Systems, Inc. ("RVSI"). At Dynell and RVSI, a prototype was developed in an attempt to achieve an effective system. In 1989, the Company acquired RVSI's transfer bed technology and patents at a cost of approximately $25,000. See "Patents" and "Management". Vivax. Vivax commenced operations in 1991 under the name Comed as a distributor of specialized beds, support surfaces and related equipment in the greater Boston area. The specialized bed, support surfaces and related equipment distributed by Vivax include the Novabed(R), air therapy beds, air therapy mattresses, enclosure beds, low air beds, obese beds, mattress replacement systems and mattress overlay systems. These beds and surfaces are used for the treatment of pressure wounds, burns and trauma and the control of pain. Vivax distributes its products to hospitals, nursing homes and related care facilities and to the home care market. Historically, approximately 95% of Vivax's operating revenues have been derived from the rental, rather than the sale of specialty beds. Rental arrangements typically provide for ongoing service of the beds by Vivax. Most institutions rent specialty beds from Vivax on a daily basis while most of Vivax's home care customers rent specialty beds on a monthly or longer basis. As of June 1996, Vivax was renting specialty beds to approximately 60 institutions and approximately 90 home care customers. PATIENT MANAGEMENT SYSTEM The Company's modular Novabed(R) Patient Management System, consists of a specialized hospital type bed and companion wheelchair which allows the patient to be gently and automatically moved from the bed into the wheelchair and back again. The patient lies on a moveable bed sheet which smoothly moves the patient toward the head or foot end of the bed. The companion wheelchair is positioned at the foot of the bed. When an operating key is depressed on the hand-held pendent, a movable leg and foot rest on the wheelchair moves into place. The patient is then transferred by a conveyer sheet to the foot of the bed, with the feet and legs sliding onto the elevated leg rest. The mattress is then raised to lift the patient to a sitting position as the leg and foot rest moves the legs forward and down to their normal position. When the wheelchair backrest is manually inserted, a release lever can then release the wheelchair from the bed. A patient may be moved from the wheelchair back into the bed by reversing this process. The Company's Patient Management System, with the tilt table option, can also transfer a patient from the bed to a standing position or from a standing position back to the bed. This feature, which is scheduled to be introduced in the fourth quarter of 1996, will allow the Novabed(R) to be used as a tilt table for angular positioning which is beneficial for certain hospital and rehabilitation applications, such as treatment for burns and recovery from spinal fusion, total hip replacement and other orthopedic procedures. -25- An Obese Patient Model for transferring patients up to 450 lbs. is complete. An additional important feature is the Novabed(R) equipped with an air therapy mattress for the prevention or cure of decubitus ulcers (bed sores). Both the Obese Model and the air therapy option have been shipped to customers and have been placed in service. The Company anticipates that its Obese Model will account for more than half of its sales in the proximate future. The Company has completed and is manufacturing its first production model. This model uses a production hospital type bed which is modified to provide transfer capability. The Company's "Standard" Patient Management System is of modular construction and therefore can be taken apart for easy transport and installation in a location. The Company is marketing the Novabed(R) for use in both homes and institutions, including rehabilitation units and hospitals. Additional features and optional equipment of the Novabed(R) include: . Patient Positioning: In additional to the normal tilt functions of a standard hospital bed, by pressing push buttons in sequence, the patient can be repositioned (moved upward toward the head of the bed) in a Novabed(R). . Toilet Access: The wheelchair seat can be replaced by a commode seat, and the wheelchair can be located over a home or institutional toilet, or used with a chamber pot. . Contour positioning: Height adjustment, upper body positioning, leg and knee positioning. . Air therapy mattress for bedsore prevention: The conventional mattress is replaced with a special mattress providing air-support therapy for the healing and prevention of bedsores. In addition to patient transfer, the Company believes that the following benefits may be derived from its patient transfer system: Therapeutic Benefits: Frequent or timely movement of a patient to a sitting or vertical position is extremely important for postoperative recuperation and for preventing deterioration of the cardiovascular, skeletal, muscular, and respiratory systems, the skin, and for the patient's overall physical and psychological well being. Lack of motion can cause pneumonia, accelerated osteoporosis, blood clots and bedsores, among other serious disorders. Pain Management: Reduction of pain during repositioning or transfer caused by, or associated with certain physical or pathological conditions such as severe burns, postoperative care, multiple trauma, arthritis and advanced cancer. Labor Saving Device: Reduction of staffing required to transfer patients, particularly heavy patients. Reduction of the menial tasks of nursing has the potential of enhancing the quality of nursing care and helping reduce the current shortage of nurses. Reduction of Injuries to Patient and Attendant: There is a high incidence of back injury associated with patient transfer, which may cause attendants to lose time on the job, and contribute to the cost of workers compensation insurance. The Company's transfer system may reduce the incidence of such injuries. VIVAX Vivax does not have any exclusive or other contractual arrangements with the manufacturers and suppliers of the products it distributes. Accordingly, Vivax relies on the relationships it has developed with such manufacturers and suppliers, its established distribution relationships, its service performance and its reputation to attract and retain suppliers of product. Historically, Vivax has relied on approximately 4 major suppliers and 2-3 lesser suppliers. Vivax purchases the products it distributes at the prevailing dealer price. Vivax also does not have any exclusive arrangements with any of its customers. Accordingly, Vivax must compete on the basis of price and service performance. The Company owns approximately 420 beds, approximately 60% of which are currently being rented. PROSPECTIVE MARKETS Patient Population -26- The Novabed(R) is designed to assist patients, and has proven to be of particular benefit for obese patients, who require assistance in transferring in or out of a bed or chair. Persons who are bedfast or chair-fast generally come from the following groups: Elderly According to statistics compiled by the United States Bureau of the Census, in 1995 there were 33.4 million Americans age 65 or older and by 2000 this age group is expected to increase to 34.3 million with approximately 6.6 million elderly persons in the United Sates requiring long-term care. Persons Severely Handicapped by Medical Conditions or Trauma The Company believes that many persons who are severely disabled due to muscular dystrophy and related neuromuscular disorders, including amyotrophic lateral sclerosis (Lou Gehrig's disease), cerebral palsy, stroke or severe traumatic spinal cord injury can benefit from the Novabed(R). Based on input from the Company's distributors, the Company's own beta-site testing and limited sales to date, the Company believes that potential users of its patient transfer system fall primarily into three categories: (1) Hospitals and Rehabilitation Centers The Company believes that its patient transfer system may provide needed therapeutic benefits and may be particularly useful in such hospital service areas as those used for post-operative care, rehabilitation, long-term care, chronic disease, orthopedic care and cancer care. The Company considers hospitals to be important potential customers. It believes that successful clinical trials in hospitals are important in seeking medical acceptance and that follow-on sales to hospitals will then spread the product's reputation and produce referrals by hospital discharge planners and physicians for the home care and nursing home markets. The Company has conducted beta site and field trials in non-hospital settings and the Company's distributors are compiling information with respect to utilization in the hospital setting. The Company believes that hospitals which purchase its patient transfer system may be better able to utilize staff, reduce patient transfer staff requirements, reduce workers' compensation claims and reduce staff transfer-related injuries. (2) Nursing Homes The Company believes that many residents in nursing homes require assistance in using the toilet or are chair fast or bedfast. The Company believes that nursing homes which purchase its patient transfer system may be better able to utilize staff, improve quality of care given and reduce patient and staff transfer-related injuries. (3) Home Care Market The Company believes that there are many adults residing at home who need assistance in getting in or out of a bed or a chair. The Company also believes that one of the reasons that some persons are moved from private homes to nursing homes is that their spouse or other caregiver cannot effectively and easily move the person between a bed and a commode or wheelchair with other currently available transfer devices. Nursing home costs are often financially devastating to the patient and family. Many nursing home residents who were not initially indigent require governmental assistance after exhausting their resources on nursing home care. The Company believes that its transfer system would enable many patients to be cared for at a lower per diem cost at home by a family member combined with periodic visits by a nurse or home health care aide. The Company believes that with a growing and relatively affluent elderly population, home care is potentially its largest segment and that many home care families and patients will have strong emotional or financial incentives to use its transfer system to avoid or defer entry to a nursing home. 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 -27- equipment in the greater Boston area since 1991. As a result, the Company now has in-house marketing and distribution capabilities in the greater Boston market. The Company has entered into seven distributorship agreements providing for the sale and shipment of Novabed(R)s to each distributor and the granting of an exclusive sales territory to each distributor. In 1994, the three distributors then under contract with the Company ordered and were shipped an aggregate of 20 Novabeds(R) which exceeded their aggregate minimum purchase requirements by 5 units. In 1995, the Company sold and shipped 13 Novabeds(R) and 8 wheelchairs to its six distributors, most of which were shipped in the first quarter. This sales decrease resulted from the Company's focus on arranging, negotiating and consummating the 1995 Financing and relocating its assembly operations from New York to Connecticut and the Company's lack of sufficient working capital. As a result, in 1995 the Company was unable to produce sufficient product to satisfy its distributors' minimum purchase requirements of 38 Novabeds(R). The Company and the two distributors who were unable to receive their minimum purchase requirements in 1995 agreed to extend the period for selling and purchasing the minimum requirements for 1995 and thereafter by one year and agreed that all prior purchases would count toward their 1996 minimum purchase requirement. To date, the Company has generally encouraged the placement of and accepted orders for product as it envisioned that product would be available shortly. The Company's distributors generally have not placed firm orders until the Company has indicated that product is or will be available. The following table sets forth the number of Novabeds(R) ordered and delivered in each month of 1996 to date: NOVABED(R) ORDERS RECEIVED NOVABED(R) ORDERS SHIPPED -------------------------- ------------------------- January 1996 2 - February 1996 3 2 March 1996 2 3 April 1996 9 2 May 1996 5 9 June 1996 2 3 The Company's distributors have agreed to purchase a minimum number of units from the Company over specified periods of up to 31 months from June 1, 1996, which includes approximately 184 units during 1996. During the period January 1, 1996 to July 1, 1996, the Company shipped 19 units, all of which were purchased by the Company's distributors. As of July 1, 1996, the Company had unfilled orders for 2 units and 3 wheelchairs from a private hospital. The distributors have not ordered a pro rata portion of their 1996 minimums. See "Risk Factors - Dependence on Distributors; Failure of Distributors or Company to Perform." Each distributor's purchase price is fixed for the period of the initial purchase commitment. In addition to being required to satisfy a minimum purchase commitment during an initial period, each distributor is required to maintain certain annual purchase levels and to distribute such purchases throughout the year to retain exclusive rights to sell in his territory. The obligations of such distributors are not supported by financial or performance guaranties. In the event any distributor is unable to achieve sales equivalent to its minimum purchase requirement, either due to its failure to adequately market the Novabed(R) or the inadequacy of the demand for the Novabed(R), the Company will be relying on the financial strength of such distributor to purchase the required minimum to be held in inventory by the distributor. While the Company believes that these distributors are financially sound, no assurance can be given that such distributors will satisfy their obligations to the Company. No assurance can be given that the Company will be able to obtain sufficient capital to meet its obligations under these agreements to supply the number of units required. The Company estimates that it will need to obtain an additional equity contribution of approximately $2.75 million to finance its operations through June 1997. See "Risk Factors - Auditor's "Going Concern" Explanatory Paragraph." If the Company does not obtain the necessary additional financing it may not be able to produce sufficient product to satisfy the minimum purchase requirements of its distributors. Failure by the Company to produce sufficient product to satisfy its obligations to its distributors would constitute a default under the Company's distribution agreements which may subject the Company to claims for damages and may allow the distributors to terminate such agreements. -28- For the year ended December 31, 1995, sales aggregating approximately 87% of the Company's net sales were made to the following distributors:
Advanced Therapeutics, Inc. - $ 64,596 (29%) Comed Systems, Inc. - $ 60,956 (28%) Concept Medical, Inc. - $ 36,194 (16%) Recovercare, Inc. - $ 30,405 (14%)
The names and exclusive territories of all the distributors are as follows:
NAME OF DISTRIBUTOR TERRITORY - ------------------- --------- James J. Brooksbank (Medco Equipment, Inc.)* Minnesota Innovative Medical Systems, Inc. Missouri, Kansas, Arkansas and part of Illinois Advanced Therapeutics, Inc. Parts of Michigan and Wisconsin Recovercare, Inc. Parts of New Jersey, Pennsylvania, Delaware Stat Medical, Inc. Washington Concept Medical Corporation Parts of Florida JCM Capital Corp. New York
* Medco Equipment, Inc. is an affiliate of James J. Brooksbank. The Company is required to train the distributors' service personnel and generally to fill orders within 180 days, although the Company's agreement with one of its distributors requires that orders be filed within 30 days. The distributors are required to service the product they sell in a high quality manner to avoid loss of their right to market the Novabed(R). The Company feels that working initially with distributors is the most expeditious way to generate early sales, lower the Company's working capital requirements by receiving prepayment on required product purchases and reduce the initial cost to market the Novabed(R). Five of the Company's agreements with its distributors require that 50% of the purchase price be paid upon acceptance by the Company of an order and four of the Company's agreements with its distributors require that the balance of the purchase price be paid within 10 days after delivery of the product. One of the Company's distributors is not required to make a prepayment, another distributor is only required to make a 25% prepayment and three of the distributors either have the right to pay the unpaid balance of the purchase price within 30 days of delivery or no payment period is specified. If the Company enforces these payment arrangements, partial payment upon order and accelerated payment upon delivery arrangements will improve the Company's cash flow and reduce its working capital requirements. In the past, the Company has waived these payment provisions under certain circumstances and may do so in the future. The Company recognizes revenue at the time of shipment of product. The Company's ability to satisfy its production requirements will depend upon the Company's ability to obtain additional capital and/or financing. See "Risk Factors - Dependence on Distributors; Failure of Distributors to Perform." The Company's agreement with one of its distributors provides that such distributor shall not be required to meet its minimum purchase requirements during any period that the Company is not able to satisfy such requirements and extends the term of such agreement by one month for every month of delay for each order placed by the distributor. Four of the Company's distributors own in the aggregate 818,784 shares of the Company's Common Stock. Advanced Therapeutics, Inc. and Innovative Medical Systems, Inc. acquired 66,667 and 60,000 shares, respectively, at a cash price of $1.50 per share pursuant to the exercise in September 1995 of certain call option rights granted to them by the Company in connection with the 1995 Financing. See item 7 under "Management's Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources." JCM Capital purchased 450,450 shares of common stock from the Company at a cash price of $1.11 per share as part of the private placement that constituted part of the September 1995 Financing. James J. Brooksbank acquired the following shares as part of private placement transactions:
DATE PURCHASED NUMBER OF SHARES CASH PRICE/SHARE - ---------------- ---------------- ----------------
-29-
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 ========
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. BETA SITE AND FIELD TRIALS Nova commenced its beta-site program in November 1992. The first unit was installed for a clinical field trial in a full service skilled nursing home in Connecticut. The nursing home uses the patient transfer system primarily for stroke patients. Novabed(R) has been in service continually since installation where it has performed very well with the service and nursing staff on the designated floor able to quickly learn to operate the product. The nursing home estimates that 25% of their current patients could use the patient transfer system. They have purchased an additional Novabed(R) and intend to try to purchase other units. In February 1993, a second unit was placed in a private home of a patient recommended by the Multiple Sclerosis Society. The patient, who lives with her husband and daughter in a suburban home, is very debilitated. She has a live-in home care attendant during the week. The family reports that the patient often experiences severe pain after being seated in a chair or lying in bed for as short a time as a half hour. This condition mandates frequent transfers to and from the bed, averaging 10 to 20 times a day. Prior to the installation of the Novabed(R) such frequent transfers placed an enormous, round-the clock, burden on the home care attendant and the family. The family reports that on two occasions, because of Novabed(R), the patient's doctor approved keeping the patient at home during a required change in drug administration regimen instead of requiring a normal 7 to 8 day hospitalization period. Several minor changes in design were the result of feedback from these trials and from considering the special needs of a nursing home. These changes were implemented in the initial production run prior to sale of units to distributors. Design change 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. -30- FOREIGN MARKETS Once the Company has successfully marketed its patient transfer system in the domestic market, the Company plans to seek license or joint venture agreements with foreign manufacturing or trading companies in Canada, Europe and Japan. The Company, however, is not presently engaged in any license or joint venture negotiations. THIRD-PARTY REIMBURSEMENT The market for medical devices is materially affected by the extent to which the purchase price or rental cost will be reimbursed by third-party payors, such as Medicare, Medicaid and private insurance. This is particularly true with home care. Sales of capital equipment, such as the Novabed(R) and the other specialized beds sold or rented by Vivax, to institutions such as hospitals and rehabilitation facilities are not directly reimbursed by Medicare but are indirectly reimbursed through an overhead allocation. In the home care equipment market, third-party reimbursement issues center around whether the patient transfer system will be a covered item, the level of reimbursement available, and for which medical indications reimbursement will be available. In the absence of a national Medicare coverage determination, the local contractors that administer the Medicare program can, within certain guidelines, make their own coverage decisions. Favorable coverage determinations for durable medical equipment are made in those situations where a review concludes that the product is safe (FDA approval required), the product is durable, medical efficacy can be established, and the patient qualifies as needing the product for medical reasons. The Company has made a presentation to the Health Care Financing Administration ("HCFA") in anticipation of submitting an application for a new procedure code for the Novabed(R). HCFA has assigned analysts to the Novabed(R) and will assist the Company in preparing the application for the procedure code. A specific new procedure code is required prior to Medicare approval. To obtain a new procedure code, the Company will be required to demonstrate that its patient transfer system is valuable and medically beneficial to the home care patient and that it is not merely a luxury item. To obtain data to support this position, the Company intends to sponsor a study of home care patients who have each purchased, rented or been supplied with its patient transfer system, and who could benefit from its use, e.g. by improved health, reduced home care cost or postponing or avoiding entry into a nursing home. The Company anticipates that such a study, expected to be performed over a six month period will involve the establishment of appropriate protocols, the assembly and documentation of study data and its presentation to HCFA personnel. The Company believes that it may take a year or more, subsequent to the completion of the study, to obtain a new procedure code for its transfer system, and there is no assurance that it will succeed in these regards. Because of the uncertainty that it can obtain a new procedure code and a reimbursement level which is a major percentage of the sale or rental price of the equipment (e.g. 80%), the Company has assumed in its planning that a new procedure code will not be granted. It believes, although there can be no assurance given, that in view of the number of persons at home who need assistance in getting in and out of a bed or chair, there will be sufficient demand for the Company's patient transfer system to achieve commercial viability absent any reimbursement. The agreement with one of the Company's distributors requires that the Company apply for third party home care, hospital and nursing home reimbursement approval for Medicare and New York State Medicaid no later than April 30, 1997 and that if such approvals are not obtained within one year of the date of application that such distributor's minimum order quantity shall be reduced by 50% until such approval is obtained. Approximately 21% and 24%, respectively, of Vivax's revenues for the year ended May 31, 1995 and the nine months ended February 29, 1996 were derived from Medicare. Reimbursement can be influenced by the financial instability of private third-party payors and the budget pressure of and cost shifting by governmental payors. In January and April 1996, respectively, Medicare Part B reimbursement (which relates to home care patients) of specialty beds was reduced by 20% and the criteria for determining eligibility of patients for reimbursement for specialized beds were made materially more stringent. Approximately 15% of Vivax's revenues is currently derived from Medicare Part B reimbursement. These developments will have a materially adverse effect on future sales of the Company. In addition, the Company believes that the Medicare Part A reimbursement system for nursing home patients is likely to be modified. It is anticipated that the new system will move away from current cost-based reimbursement towards a managed care model with block awards to fewer regional administrators who will rely on fewer suppliers. The impact of any such changes is difficult to determine. Medicare Part A reimbursement currently represents less than 10% of Vivax's revenues. However, any reduction in coverage or reimbursement rates will have a material adverse effect on the Company's results of operations. See "Business - Third-Party Reimbursement." -31- The Company has added an air-therapy mattress as an option to the Novabed(R). There are procedure codes and policies established for the use of support surfaces for the prevention of decubitus ulcers. The distributors who rent the Novabed(R) to their customers assist these customers in obtaining Medicare reimbursement for the Novabed(R) outfitted with the air therapy mattress. In addition, the Company's operations are subject to federal, state and local regulations with respect to environmental and safety matters. The Company has obtained Eastern Testing Laboratories approval relating to certain safety aspects of its Novabed(R). The cost of compliance with such laws and regulations, in the Company's opinion, have not materially affected its operations. RESEARCH AND DEVELOPMENT During the years ended December 31, 1994 and 1995, the Company expended approximately $771,000 and $298,000, respectively on research and development activities. The objective of the Company's research and development program has been to complete development of its patient transfer system, achieve manufacturing efficiencies to make it commercially acceptable, improve its reliability and maintainability and to develop additional patient transfer capabilities to improve the applicability and appeal of Novabed(R). The Company has also developed a pre-production model of a powered wheelchair which is compatible with Novabed(R). MANUFACTURING In the fourth quarter of 1995, the Company moved most of its manufacturing and assembly operations into an approximately 27,750 square foot facility in Bristol, Connecticut. This move consisted of relocating certain equipment from Hauppauge, New York, which was accomplished at an immaterial cost. The Company's New York facility is adequate for the manufacture of only about 150 beds per year. The New York facility will continue to phase out its manufacturing operations as the Connecticut facility continues to be developed and ultimately the New York facility will be used primarily for research and development and corporate offices. Nova purchases off-the-shelf components such as hospital beds, motors, actuators and mattresses, as well as special items such as seat cushions, commode seats and certain electronic and manufactured parts. In the past, the Company manufactured other remaining parts and components in-house. This manufacturing was fairly limited and has been virtually eliminated in favor of subcontracting this work. The Company intends to add in-house manufacturing capabilities only when such efforts will result in cost savings and when it has adequate capital. The Novabed(R) is then assembled and tested in accordance with defined quality control procedures. Assembly includes welding and electrical wiring. It is anticipated that with capital expenditures of approximately $400,000 the Company will be able to manufacture in-house many of the components of the Novabed(R) that are not standard, commercially available parts, and thereby reduce its costs of production. The Company's Connecticut facility has a production capacity of approximately 1,500 Novabeds(R) per year. The Company currently has 11 employees at its Connecticut facility and plans to hire more as production requirements increase. The Company has selected a particular model of a hospital-type home care bed for incorporation into its patient transfer system. This model is currently being produced in large quantities. Although there can be no assurances, the Company believes that this model will continue to be available at reasonable prices for the proximate future. The Company has an agreement with Omni Manufacturing, Inc., its primary supplier of the above-referenced hospital-type bed to furnish the Company with up to 800 beds at a capped price per bed for the two year period ending February 28, 1997. The Company, in the alternative, may obtain such beds from other sources or undertake to manufacture them in house, or modify its product design to use a different manufacturer's bed, which are available from a number of alternative sources. See "Risk Factors - - No Significant Manufacturing Capacity or Experience". PATENTS AND TRADEMARKS The Company has been issued 18 United States patents related to its patient transfer system and bed sore prevention. These patents expire commencing in 2005 through 2014. Three additional patent applications relating to transfer system design and associated products are pending. The Company has also filed a total of 22 patent protection applications in five European countries, Japan, and Canada and plans to file additional applications in both the United States and other countries. 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 -32- approaches and methods which it does not currently plan to utilize but which it believes are material to its patent protection strategy. The Company has spent over $560,000 to date on patent-related expenses and believes that it will obtain protection for the approaches it is attempting to patent. Effective as of January 1, 1995, the Company's policy is to capitalize legal fees for new processes and to write these costs off over the remaining life of any patent, when received or to write them off as soon as a patent application is rejected. No assurance can be given that additional patents will be issued, or if so issued, that the scope of protection afforded thereby or by the Company's current patents will be adequate to protect the Company from competition. Further, no assurance can be given as to the availability to the Company of adequate financial resources to contest any possible patent infringement by others. In 1994, the Company registered the trademark "NOVABED" for use with its product. GOVERNMENT REGULATION The Company's patient transfer system is a "medical device" subject to regulation by the United States Food and Drug Administration (the "FDA"). As in the case with other medical devices, manufacture of such systems are subject to certain "good manufacturing practices" promulgated by the FDA and the Company is subject thereto with regard to the manufacture of its patient transfer systems. The Company believes that it is in compliance with such regulations. The Company received pre-market 510(k) approval for Novabed(R) from the FDA in October 1987. Since the date of such approval the Company has made a number of modifications to the Novabed(R). Such modifications generally comprise cost efficiencies and operational improvements. The Company believes that these modifications individually and in the aggregate, do not significantly affect the safety or effectiveness of the Novabed(R) as described in its original 510(k) application to the FDA. The Company is in the process of preparing a 510(k) application for its new products and expects that the application will be submitted by September 1996. The application will also update the current version of the Novabed(R). The Company anticipates that the approval process will take approximately six (6) months after application is made. Vivax, like other Medicare providers, is subject to governmental audits of its Medicare reimbursement claims. As a provider of services under the Medicare programs, Vivax is also subject to the Medicare fraud and abuse laws. COMPETITION The market for hospital beds, and to some degree, wheelchairs, transfer devices and patient lifts, is dominated by several large companies of which Everest & Jennings International Ltd., Hill-Rom Company Inc. (a subsidiary of Hillenbrand Industries, Inc.), Invacare Corporation, Sunrise Medical Inc. and Stryker Corporation are among the largest. Other smaller companies such as Trans-Aid Corp., Midmark Corp., Medical Laboratory Auto Inc. and American Medical Systems are also engaged in the marketing of transfer and patient lift devices. Virtually all of the Company's competitors have substantially greater financial, manufacturing and marketing resources than the Company. Optimum pricing of Novabed(R) rental and sales units is difficult since the Company believes that nothing in the current marketplace provides the features and benefits of its patient transfer system. The Company's standard model for home care use is being offered for sale to distributors at approximately $11,500 and for rental by the distributor at approximately $75 per day. The Company's Obese Model is offered for sale to distributors at approximately $13,500 and for rental by the distributor at approximately $100 per day. The Company may test various pricing strategies as new sales and service areas are opened. By way of comparison, other specialty bed products such as air-therapy beds are comparably priced while standard hospital beds may cost substantially less. The Company believes that it will be able to initially compete on the basis of product features and performance, particularly with regard to transfer mobility between bed and wheelchair/commode. Although the Company believes that it will be difficult, expensive and time consuming for another concern to develop a product similar to the Company's patient transfer system without infringing on the Company's patents, it is possible that a concern could do so. No assurance can be given, however, that companies with substantially greater resources than the Company have not developed or are not in the process of developing patient transfer technology and products which would be competitive with the Company's patient transfer system in terms of product features, performance and price. -33- Third-party payors, such as Medicare, Medicaid, and private insurance companies, reimburse many durable medical equipment purchases and rentals. A conventional home care hospital-type bed and a conventional wheelchair as stand- alone units are presently reimbursed at the rate of 80% of cost. The Company at this time does not have advance approval of third-party reimbursement and no assurances can be given that an adequate level of third-party reimbursement, or any reimbursement at all, will be available to customers for its patient transfer system. Failure to obtain favorable determinations concerning reimbursement may have a material adverse effect on the Company's competitive position. Although the Company has been able to effect sales and to sign up distributors for minimum purchase commitments without any direct third-party reimbursement, the ability of the Company to achieve adequate sales to become profitable will be adversely affected if direct third party reimbursement for the Company's products is not obtained. Vivax faces competition from manufacturers who distribute similar products directly in the greater Boston area and independent distributors of similar products in this market. Vivax is also facing increased competition from less costly and less sophisticated devices which have gained market acceptance and are being mass marketed. As a result of this increased competition, product pricing has eroded and service demands have increased despite the substantial increase in the population of patients using products of the type distributed by Vivax. EMPLOYEES At the end of June 1996 the Company had twenty-two full-time employees, including four executive officers, working for Nova and thirteen full-time employees devoted to the Vivax business. The Company also employs part-time technicians, when needed. The Company anticipates hiring additional manufacturing personnel as necessary to meet production requirements. APPROVALS AND CERTIFICATIONS The patient transfer system has been tested and examined by ETL Testing Laboratories, Inc. and found to comply with the applicable requirements of the Standard for Personal Care and Health Care Applications - UL1431, for Motor Driven Appliances - UL73, and the Standard for Medical and Dental Equipment - UL544. FACILITIES The Company leases 7,500 square feet of space in Hauppauge, New York which is used for corporate offices, administration, manufacturing, warehousing and research and development. The lease, which provides for a monthly rental of $4,375, expires September 30, 1996. The Company is obligated to pay its proportionate share of the landlord's real estate taxes and increases in the landlord's common area maintenance charges. If the lease is not continued, the Company anticipates no substantial business disruption in securing alternative or expanded facilities. The Company leases approximately 27,750 square feet of space in Bristol, Connecticut which is used for fabricating, assembly, shipping, warehousing and administration. The lease, which provides for a monthly rental of $11,563 is for a term of five years commencing September 1, 1995 and ending August 31, 2000. The Company is required to pay its proportionate share of the landlord's real estate taxes, insurance and common area maintenance charges. The Company has an option to renew the lease for an additional five years and also has the right to lease an additional 2,250 square feet of the building. Vivax leases approximately 6,500 square feet of space in Seabrook, New Hampshire which is used for corporate offices and warehousing. The lease provides for a monthly rental of $3,500 and expires on November 30, 1998. The landlord is the Drew Family Trust, the settlors of which are Douglas and Donna Drew, the owners of all of the outstanding stock of Comed prior to its acquisition by Nova. The Company believes that the terms of the lease are no less favorable to the Company than would be obtainable in an arms length transaction. -34- MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following sets forth information regarding the directors and executive officers of the Company.
NAME AGE POSITION - ---- --- -------- Paul DiMatteo 68 Chairman of the Board Stephen Fisher 49 President, Chief Executive Officer, Chief Financial Officer, Assistant Secretary, Treasurer and Director Charles F. Chubb 76 Senior Vice President, Secretary and Director Samuel N. Paul 57 Senior Vice President and Director Douglas Drew 51 Senior Vice President and Director Harold J. Lash 64 Controller Jay M. Haft 60 Director Arlindo Jorge 72 Director Robert Segnini 53 Director
Mr. Chubb has indicated his intention to retire in the near future. The Company is in discussions with Mr. Chubb to retain him as a part-time consultant after he retires. PAUL DIMATTEO, the founder and principal stockholder of the Company, has been the Company's Chairman since its inception in January 1984 and was President and Chief Executive Officer from the Company's inception until June __, 1996 when he resigned and became Director of Research and Development. From December 1977 until the beginning of the Company's active operations in July 1984, Mr. DiMatteo was Chairman of the Board and President of Robotic Vision Systems, Inc., ("RVSI"). From June 1960 until its merger in December 1977 with United Technologies Corporation ("United"), he was Chairman of the Board and President of Dynell Electronics Corporation ("Dynell"), of which Mr. DiMatteo was a co-founder. The merger of Dynell with United in December 1977 resulted in a spin-off company called Solid Photography, Inc., which later changed its name to RVSI. For his inventions in three-dimensional vision, Mr. DiMatteo was cited by Technology magazine as one of 100 persons responsible for important technical advances during 1981. Mr. DiMatteo holds a Bachelor of Science degree in Electrical Engineering from the University of Rhode Island and is listed as the inventor or co-inventor on 70 patents and patents pending. CHARLES F. CHUBB has served as Senior Vice President and a Director of the Company from 1985, as Treasurer from 1985 to March 1996 and as Secretary from December 1994. From 1962 to 1978, he was Senior Vice President for Research and Development at Dynell. After the merger in 1977 of Dynell and United, he served as Manager of Shipboard Technology until joining the Company in February 1985. Mr. Chubb holds degrees from Princeton University, Massachusetts Institute of Technology and Polytechnic University and is listed as the inventor or co-inventor on 20 patents and patents pending. STEPHEN FISHER became President and Chief Executive Officer of the Company as of June 18, 1996, on which date he ceased to serve as Senior Vice President, a position he assumed in June 1994. Mr. Fisher has served the Company as a Director since June 1994, as Assistant Secretary from December 1994 and as Chief Financial Officer and Treasurer from March 1996. From May 1992 to May 1994 he served as an officer and director of Aztech Corp., which acted as a consultant to the Company during such period. From 1985 to 1992 Mr. Fisher held various positions including President and Director of Memry Corporation, a developer and manufacturer of new products. Prior thereto, he was President of Materials -35- Systems, Ltd., an engineering and management consulting firm. He was an INCRA Fellow at Carnegie-Mellon University and was an Assistant Professor and conducted research at West Virginia Institute of Technology and Virginia Polytechnic Institute. SAMUEL N. PAUL has served the Company as Senior Vice President since September 1995 and as a Director since December 1995. From February 1992 to May 1994 he was President, Chief Operating Officer and Director of Industrial Health Care Company, a provider of occupational health services. From October 1990 to January 1992 he was Manager of International Sales and Marketing for Colt's Manufacturing Company, a manufacturer of firearms. From May 1988 to October 1990 he was a Vice President and Director of Shared Technologies, Inc., a provider of leased communication equipment. Mr. Paul is President and part owner of Meadowbrook, a skilled nursing facility located in Connecticut. Mr. Paul holds a Bachelor of Science degree in Mechanical Engineering from the University of New Hampshire. DOUGLAS DREW became a Senior Vice President and a director of the Company on June 14, 1996 when the acquisition of Comed was consummated. From 1989 to June 1996, he was President, a Director and a substantial stockholder of Comed, a company that he founded. Prior to the founding of Comed, Mr. Drew was Director of North American Sales for Concept, Inc. and prior to that Director of Sales and Marketing for Richards Medical. HAROLD J. LASH has served the Company as Controller since March 1992. From 1989 to 1991 he was Chief Financial Officer of Pen-Tab Industries Inc., a privately-held manufacturer of stationery and school supplies. From 1976 to 1988 he was Vice President-Finance and a Director of Aileen, Inc., a publicly-held apparel manufacturer and retailer. Mr. Lash is a Certified Public Accountant. JAY M. HAFT, a Director of the Company since July 1985 has served as Chief Executive Officer and Co-Chairman of the Board of Directors of Noise Cancellation Technologies, Inc., a developer of noise cancellation technology and products ("NCT"), since November 1994. He also served as President of NCT from November 1994 to July 1995. Since January 1994, Mr. Haft has been of counsel to the law firm of Parker Duryee Rosoff & Haft, the Company's counsel. He has been a practicing lawyer since 1959 and received his law degree from Yale Law School. Mr. Haft also serves as a Director of Extech Inc., RVSI, CAS Medical Systems, Inc., Viragen Inc. and Oryx Technology Inc., all of which are publicly- owned concerns. ARLINDO JORGE has been a Director of Syncor Industries, Inc. since 1972 and, until June 30, 1991, when he retired, had been Executive Vice President of such concern as well as President of Syncor Services, Inc., which provides sales and administrative services to Syncor Industries, Inc. Prior thereto, he was an engineering manager in the Radiation Division of the Sperry Gyroscope Company. Mr. Jorge holds a Bachelor of Science degree from the University of Massachusetts and a Master's degree in Electrical Engineering from the University of Michigan. He has been a Director of the Company since September 1988. ROBERT SEGNINI, has been employed by the State University of New York at Stonybrook as Director of Physical Laboratories in the Department of Physics since 1990. From July 1986 through December 1989, Mr. Segnini was employed by the Company as its Vice President of Operations. Prior to joining the Company, he was a Vice President and a Director of RVSI. In February 1986, Mr. Segnini left RVSI to establish Robotic Automation, Inc., an engineering and consulting company specializing in the field of factory automation. Mr. Segnini holds an Associate's degree in Electrical Engineering from the City University of New York and is listed as the co-inventor on seven patents and patents pending in the health care field. He has been a Director of the Company since July 1986. The term of each director extends until the next annual meeting of stockholders of the Company and until his successor is duly elected and qualified. The term of each officer of the Company extends until the first meeting of the Board of Directors following such next annual meeting, and until his successor is duly elected and qualified. EXECUTIVE OFFICER COMPENSATION The following table sets forth information with respect to the compensation for services rendered in all capacities to the Company during its fiscal years ended December 31, 1995, 1994 and 1993 by its Chief Executive Officer. No executive officer's compensation exceeded $100,000 during the Company's fiscal year ended December 31, 1995.
SUMMARY COMPENSATION TABLE LONG TERM ANNUAL COMPENSATION COMPENSATION AWARDS --------------- -------------
-36-
SECURITIES UNDERLYING NAME AND PRINCIPAL POSITION YEAR SALARY ($) OPTIONS (#) - --------------------------------------- ---- ------------ ------------ Paul DiMatteo-Chief Executive Officer 1995 $92,000 (1) --- 1994 $78,000 (2) --- 1993 $78,000 (2) ---
(1) $39,000 was waived and will not be paid; $2,250 has been paid; $50,750 was deferred. (2) $75,750 was deferred, then waived in 1995 and will not be paid; $2,250 has been paid. (3) $75,750 was deferred, then waived in 1995 and will not be paid; $2,250 has been paid. DIRECTOR COMPENSATION Non-employee directors are entitled to receive $200 for each Board of Directors or committee meeting attended and $50 for participation at a telephone meeting or execution of a consent in lieu of a meeting. EMPLOYMENT AGREEMENTS In 1984 and 1985, respectively, the Company entered into employment agreements with Messrs. DiMatteo and Chubb, each of which provides for a minimum annual compensation of $78,000, which was increased on September 1, 1995 to $120,000 and $100,000, respectively. The agreement with Mr. DiMatteo, as amended(the "Old DiMatteo Employment Agreement"), terminated as of June 18, 1996 when Nova and Mr. DiMatteo entered into a new agreement. The agreement with Mr. Chubb is cancellable by either the Company or Mr. Chubb on 60 days notice. Mr. DiMatteo has waived payment of salaries due under the Old DiMatteo Employment Agreement for the period January 1, 1989 through June 30, 1995 (aggregating approximately $507,000) and Mr. Chubb has waived payment of salaries due under his employment agreement for the period January 1, 1989 through March 31, 1995 (aggregating approximately $487,000). In addition, Mr. DiMatteo has agreed to defer until April 1997, payment of the balance of compensation due under the Old DiMatteo Employment Agreement for the period July 1, 1995 through December 31, 1995 (an aggregate of $50,750) and Mr. Chubb has agreed to defer until April 1997, payment of the balance of compensation due under his employment agreement for 1995 (an aggregate of $17,333). From July 1, 1995 to December 31, 1995 such deferred balances have accrued interest thereon at the rate of 6.5% per annum. As of June 18, 1996, the Company and Paul DiMatteo entered into a new three year Employment Agreement. The Employment Agreement automatically renews for an additional two years unless Nova gives six months prior notice or Mr. DiMatteo gives two months prior notice. Mr. DiMatteo resigned as Chief Executive Officer and President of the Company and assumed the position of Director of Research and Development. Mr. DiMatteo will continue to serve as Chairman of the Board of Directors until his successor is elected and qualified. The Agreement provides for (1) an annual salary of $120,000 adjusted upward annually based on the percentage increase of the Consumer Price Index (the "CPI"), (2) the right to participate in any annual performance bonus program, (3) five weeks vacation and up to one month of unpaid vacation in 1996 and two months in each year after 1996, (4) life insurance coverage equal to the greater of the ratio of coverage to base salary offered generally to other executive officers or, in the event the Company is not required to maintain life insurance pursuant its agreement with People's Bank, $250,000, (5) full pay for up to nine months in the event of absence from work due to sickness or disability, (6) a Novabed free of charge (including service) for use by him or his wife during any period of disability, (7) full pay for the balance of the initial three year term in the event of termination without cause (the "Severance Payments"), and (8) the right to participate immediately in any pension or other employee benefit plan on terms comparable to those available to other executive officers with credit for all purposes for all prior service to Nova. In the event Mr. DiMatteo elects not to participate in any such pension plan, he is entitled to an annual pension of $66,000 adjusted annually based on the CPI until his death (the "Personal Pension"). The Personal Pension shall not be due during any period that Mr. DiMatteo is receiving Severance Payments, shall be suspended with interest accruing at 6.5% during any period of time that the Company is in default, or if any payment of such pension would result in a default, of any agreement relating to borrowed money (other than trade credit), shall be suspended in the same proportion as any voluntary reduction of salary of the other executive officers of the Company with such suspended portion accruing interest at 6.5% per annum and payable when such salary reduction is reversed and shall terminate when Mr. DiMatteo could have, in a practical manner and without any reasonable doubt, received $3 million from the sale of his equity in the Company. -37- The Employment Agreement requires that the Company (i) fund research and development at a minimum of $350,000 per year exclusive of payroll taxes and employee fringe benefits adjusted annually by the CPI and (ii) maintain its current Hauppauge facility or a substitute facility of at least 3,000 square feet devoted exclusively to research and development which shall not be located beyond a ten mile radius of Dix Hills, New York. The Board of Directors retains complete discretion with respect to all aspects of the Company's research and development efforts. However, in the event any reduction in funding or other Board directive materially limits or terminates the research and development operations in Long Island, then such action shall be deemed to constitute an "involuntary termination" entitling Mr. DiMatteo to the Severance Payments. The funding for the research and development operations may be reduced and same shall not constitute an involuntary termination in the event of financial hardship as evidenced by a reduction of greater than 20% in salary of all of the executive officers of the Company. The Employment Agreement requires that the Company use commercially reasonable efforts to attempt to cause Mr. DiMatteo's guarantee of obligations of the Company to the CDA to be terminated and to release his subordination agreement for the benefit of People's Bank. The Agreement requires that during its term and for one year thereafter Mr. DiMatteo not engage in any competing business. In May 1994, the Company entered into an employment agreement with Stephen Fisher, engaging him as Senior Vice President at a salary of $96,000 per annum, of which $36,000 per annum was to be deferred for at least one year (but not more than two years), and of which $60,000 per annum is payable in cash as earned. In 1995, Mr. Fisher was paid $96,617, including $15,617 in deferred compensation earned in 1994. At December 31, 1995, Mr. Fisher is owed deferred compensation aggregating $18,000. The agreement also provides for Mr. Fisher to receive a ten-year stock option to purchase 150,000 shares of the Company's common stock at an exercise price of $2.75 per share. The employment agreement provided for incentive compensation in the event Mr. Fisher obtained certain financing for the Company. No such financing was obtained and no incentive compensation was earned or paid and the term for such payment has elapsed. The agreement with Mr. Fisher is cancellable by Mr. Fisher on 30 days notice, and by the Company at its discretion subject to the payment of six months salary as severance. In September 1995, the Company entered into a three-year employment agreement with Samuel N. Paul, engaging him as Senior Vice President at a salary of $96,000 per annum. The agreement provides for Mr. Paul to receive a stock option to purchase 150,000 shares of the Company's common stock at an exercise price of $2.61 per share, which expires on December 31, 2004. The agreement also provides for Mr. Paul to receive a seven-year warrant to purchase 30,000 shares of the Company's common stock at an exercise price of $2.61 per share. The agreement with Mr. Paul provides for severance payments of six months, nine months and twelve months salary if Mr. Paul is terminated without cause in the first, second or third year, respectively, of his agreement. On June 14, 1996, the Company entered into a three-year employment agreement with Douglas Drew, engaging him as Chief Marketing and Sales Officer of Nova and Chief Operating Officer of Vivax at a salary of $112,800 per annum. The agreement provides for continued payment of Mr. Drew's base salary for one year in the event of his death, disability or termination without cause. STOCK OPTION PLANS The Company's 1994 Stock Option Plan (the "Plan") was adopted by the Board of Directors on November 1, 1994 and approved by the Company's stockholders on December 14, 1994. The Plan provides for (i) the granting to employees of stock options intended to qualify as "incentive stock options" under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") or (ii) the granting to employees and directors of non-statutory stock options not intended to qualify as "incentive stock options". The Plan expires on October 31, 2004 and is administered by a committee of the Board of Directors which is empowered to select the optionees and determine, subject to the provisions of the Plans, among other items, (i) the number of shares subject to each option, (ii) the time at which the option becomes exercisable, (iii) the exercise price, and (iv) the duration of the option. The exercise price for incentive stock options granted under the Plan may not be less than 100% of the fair market value of the shares as of the date of grant (110% for options granted to a participant who owns shares possessing more than 10% of the voting rights of the Company's outstanding capital stock). The exercise price for non- statutory options granted under the Plan is determined by the committee of the Board of Directors at its absolute discretion. The maximum number of shares of Common Stock which may be issued pursuant to options granted under the plan shall not exceed Five Hundred Thousand (500,000) shares. In the year ended December 31, 1995, Mr. Haft, (a director of the Company) was granted stock options to purchase 10,000 shares of Common Stock at $3.13 per share through December 31, 2002 under the Plan and Mr. Paul (an executive -38- officer and a director of the Company) was granted stock options to purchase 150,000 shares of Common Stock at $2.61 per share through December 31, 2004 under the Plan. As of December 31, 1995, options to purchase an aggregate of 162,000 shares at exercise prices ranging from $2.61 to $3.13 per share and expiring at various dates through December 31, 2004 were outstanding under the Plan. Such options included (i) those held by Mr. Haft to purchase 10,000 shares at $3.13 per share through December 31, 2002 and (ii) those held by Mr. Paul to purchase 150,000 shares at $2.61 per share through December 31, 2004. As of December 31, 1995, under the 1985 Incentive Stock Option Plan (the "ISO Plan") and under the 1985 General Stock Option Plan (the "GSO Plan" and collectively with the ISO Plan, the "Plans") (both Plans terminated on February 19,1995 and from which options may no longer be granted), options to purchase an aggregate of 265,017 shares at prices ranging from $1.50 to $4.75 per share and expiring at various dates through May 23, 2004 were outstanding under the Plans. Such options included (i) those held by Mr. Haft to purchase 6,667 shares at $3.37 per share through December 31, 1999 (expiration date extended from December 31, 1995) and 5,333 shares at $2.75 per share through December 31, 1999 pursuant to the GSO Plan, (ii) those held by Mr. Segnini to purchase 6,667 shares at $3.37 per share through December 31, 1999 (expiration date extended from December 31, 1995) and 5,333 shares at $2.75 per share through December 31, 1999 pursuant to the GSO Plan, (iii) those held by Mr. Jorge to purchase 6,667 shares at $3.00 per share through December 1, 1998 and 6,667 shares at $3.37 per share through December 31, 1999 (expiration date extended from December 31, 1995) and 5,333 shares at $2.75 per share through December 31, 1999 pursuant to the GSO Plan, (iv) those held by Mr. Fisher to purchase 150,000 shares at $2.75 per share through May 23, 2004 pursuant to the ISO Plan. No executive officer or director exercised any stock options in the year ended December 31, 1995. 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 April 1, 1996 there were approximately 22 employees (including four officers) of the Company eligible to participate in the 1994 Plan. CERTAIN TRANSACTIONS On December 31, 1993, the balance of outstanding 11% notes payable to Mr. DiMatteo by the Company aggregated $159,669. The balance of the note plus accrued interest was due on October 31, 1993 and was not paid by the Company. Mr. DiMatteo agreed to defer repayment to him of the note plus interest thereon. In consideration thereof, the remaining principal balance of the note plus unpaid accrued at December 31, 1993 was combined into a new note aggregating $202,009 and payable in full at April 1, 1995. No payments were made to Mr. DiMatteo in 1994 and as of January 1, 1995 Mr. DiMatteo agreed to forgive payment of principal aggregating $32,009 resulting in a new principal balance of $170,000 due Mr. DiMatteo by the Company. In addition, accrued interest on the note aggregating $22,221 was forgiven. The maturity date of the note has been rescheduled to April 1, 1997 and the accrual of interest thereon commenced on July 1, 1995. Unpaid accrued interest in the amount of $5,360 was owed to Mr. Chubb on notes payable whose principal balance had been fully paid up in August 1993. In 1993, Mr. Chubb agreed to defer repayment to him of the accrued interest. In consideration thereof, a new note was been given to him in the amount of $5,360, accruing interest at 11% per annum, and payable on demand. No payments were made to Mr. Chubb during 1994 and at December 31, 1994, the amount owed to Mr. Chubb including accrued interest aggregated $5,953. On January 1, 1995, Mr. Chubb waived repayment of the note and the accrued interest thereon. In October and November 1993, Messrs. DiMatteo and Chubb provided loans to the Company of $70,000 and $35,000, respectively, with interest payable at the rate of 12% per annum and maturing in October and November 1996 or on the officers demand, at any date after April 1, 1995, whichever is earlier. Subsequent thereto, the demand date was extended several times. The lenders may select repayment in cash or in the form of three-year warrants (at an exchange rate of $1 per warrant). Such warrants would permit the lenders to purchase the Company's Common Stock at an exercise price of $1.50 per share. No payments were made to Messrs. DiMatteo and Chubb during 1995 and as of January 1, 1995 Messrs. DiMatteo and Chubb agreed to forgive accrued interest aggregating $9,792 and $4,899, respectively. At December 31, 1995 the amounts owed to Messrs. DiMatteo and Chubb aggregated $74,234 and $37,117, respectively. The maturity date of these loans has been extended to January 2, 1997, the demand option has been discontinued and the accrual of interest thereon commenced on July 1, 1995. -39- 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 of the Company of principal in the aggregate amount of $123,082 due from the Company to Messrs. DiMatteo and Chubb pursuant to such notes. The Company and Messrs. DiMatteo and Chubb agreed to subordinate to the payment of the Company's obligations to People's Bank an equal amount of deferred compensation accrued during the period June 1, 1995 through March 31, 1996. Arlindo Jorge, a director of the Company received commissions for acting as a finder in connection with the sale of Common Stock in private placement transactions. These commissions aggregated $2,000 for the period January 1, 1996 through May 31, 1996, $11,905 in 1995, and $24,300 in 1994. In connection with its loan from CII in September 1996, the Company entered into an Officers' Agreement with CII, Paul DiMatteo, Stephen Fisher and Samuel Paul. Pursuant to this Agreement, Messrs. Fisher and Paul agreed that so long as the Company owes any obligations to CII or CII owns any equity securities of the Company they will not sell more than 20% of the equity securities of the Company then owned by them. Mr. DiMatteo agreed that so long as the Company owes any obligations to CII he will not sell more than 40% of the equity securities of the Company then owned by him within the first 2 years from the date of the Agreement or more than 60% of such securities with the first 3 years from such date. Such officers also agreed to continue to serve the Company in their current capacities and not to sell more than 50% of their equity securities of the Company without allowing CII to participate in such sale pro rata. In September 1995, Paul DiMatteo guaranteed (the "DiMatteo Guaranty") 20% of the amount payable by CDA to People's under a guaranty by CDA securing People's loan to the Company up to a maximum of $400,000 (the "CDA Guaranty"). The DiMatteo Guaranty is payable in full at any time after the CDA has paid People's $80,000 under the CDA Guaranty and is limited to a maximum amount of $80,000. In September 1995, three of the Company's distributors, i.e. Advanced Therapeutics, Inc.("Advanced"), Comed and Innovative Medical Systems, Inc. ("Innovative"), each agreed to provide an irrevocable letter of credit in the amount of $200,000 for an aggregate of $600,000, which letters of credit could be drawn down upon the Company's failure to make when due any payment due People's. The Company issued each of these distributors a warrant to purchase 20,000 shares of Common Stock at $2.50 per share and granted them a security interest in the Company's accounts receivable and inventory, which lien is subordinate to the lien of People's Bank and subject to the Intercreditor Agreements described at "Management's Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources." The Company entered into a Stock Put and Call Agreement with Advanced and Innovative granting them the right to purchase 66,667 and 60,000 shares, respectively of Common Stock at $1.50 per share together with a reduction in the number of shares purchasable pursuant to such warrants in exchange for reducing the amount of their outstanding letters of credit. Pursuant to such Stock Put and Call Agreements, Advanced purchased 66,667 shares of Common Stock for an aggregate price of $100,000 and its obligation to post an irrevocable letter of credit was reduced to $100,000 and its warrant was reduced to the right to purchase 10,000 shares of Common Stock, and Innovative purchased 60,000 shares for an aggregate price of $90,000 and its obligation to post an irrevocable letter of credit was reduced to $110,000 and its warrant was reduced to the right to purchase 11,000 shares of Common Stock. Pursuant to the financing agreements with People's Bank, the $190,000 paid by Advanced and Innovative for Common Stock is being held in a restricted cash account for the benefit of People's Bank. Advanced, Innovative and Comed have fulfilled their obligations to post such letters of credit for the benefit of People's Bank. On September 5, 1995, the Company paid a finder's fee to Merolla & Bogar, LLC. in the amount of $60,000, in connection with the sale of 900,901 shares of Common Stock for $1,000,000, pursuant to a consulting agreement engaging Mr. C. R. Merolla, upon consummation of the sale, as a financial consultant to the Board of Directors at a fee of $3,000 per quarter, payable in Common Stock at $1.11 per share for the first year and at the average bid price for the Common Stock for the preceding month for the next two years and in cash, or at Mr. Merolla's option in Common Stock at such average bid price the last two years. In August 1995, the Company entered into an agreement with TimeCapital Securities Corporation ("TimeCapital") which became effective upon the consummation of the sale by the Company of 900,901 shares of its Common Stock in September 1995. The agreement gives TimeCapital for a period of 15 days after notice from Nova (i) the exclusive right to present to the Company a written proposal with respect to any financing sought by the Company and (ii) a right of first refusal to effect any offering of more than $50,000 of the Company's securities on terms as favorable as those offered to Nova in writing by reputable investment bankers. The agreement expires in September 2000 and Nova has the right to terminate by paying TimeCapital $100,000. -40- In April 1996, the Company entered into an agreement (the "Placement Agreement") with TimeCapital for TimeCapital to act as the Company's exclusive agent to assist the Company in raising $1,000,000 by July 19, 1996 through the sale of Common Stock at a price per share to be mutually agreed upon in a private placement. 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. Nova has the right to terminate the exclusive agency if $250,000 has not been raised by July 19, 1996. Also in April 1996, the Company entered into an agreement with TimeCapital for it to act as the Company's exclusive agent for a period of one year 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 or issuing to it 100,000 shares of Common Stock with a deemed value of $2.00 per share or in any combination thereof as determined by TimeCapital (the "Buy-Out Price"). Nova may terminate this Agreement without payment of the Buy-Out Price if Nova does not receive at least $1,000,000 from the placement of its securities by July 19, 1996. On January 24, 1996, the Company entered into a Distributorship Agreement with JCM Capital Corporation giving JCM Capital the exclusive right to distribute Nova's products in the State of New York. Other terms and conditions are similar to the Company's other distributorship agreements. On such date, the Company and JCM Capital also entered into an agreement providing JCM Capital with a nine month option to enter into a distributorship agreement for the States of Ohio, California, Arizona and Georgia on terms substantially similar to other current distribution agreements. In September 1995, the Company sold 450,450 shares of Common Stock to JCM Capital at a cash price of $1.11 per share as part of the private placement that constituted part of the 1995 Financing. On May 23, 1994, the Company signed an employment agreement with Stephen Fisher and retained him as a Senior Vice President. See "Executive Compensation - Employment Agreements." Prior thereto, Mr. Fisher was the President of Aztech Corporation ("Aztech"). Aztech was engaged by the Company for the period April 27, 1992 through May 22, 1994 as a consultant for the Company to assist it in developing a marketing plan, drafting a business plan and raising capital. For its services, Aztech was paid the sum of $3,000 per month plus 1,000 shares of the Company's Common Stock per month. On June 14, 1996 and as of June 18, 1996, respectively, the Company entered into an employment agreement with Douglas Drew and a new employment agreement with Paul DiMatteo. See "Executive Compensation - Employment Agreements." In May, 1994, in connection with the cancellation of certain stock options, the Company issued to Charles Chubb a warrant to purchase 172,599 shares of Common Stock at $2.75 per share, expiring December 31, 1999. In September 1995, the Company issued to Samuel N. Paul a warrant to purchase 30,000 shares of Common Stock at $2.61 per share, expiring September 4, 2002 for financial consulting. In June 1995, Paul DiMatteo, and Charles Chubb, executive officers of the Company and Jay Haft, a director of the Company, were issued seven-year warrants to purchase 180,000, 120,000, and 6,667 shares, respectively, of Common Stock at $2.75 per share. Pursuant to his employment agreement, in May 1994, the Company issued to Stephen Fisher, an executive officer and director, an option pursuant to its ISO Plan to purchase 150,000 shares of Common Stock at $2.75 per share, expiring May 23, 2004. -41- 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:
DIRECTOR DATE OF GRANT # OF SHARES PRICE EXPIRATION DATE -------- ------------- ----------- ----- ------------------ 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
* Extended from December 31, 1995 in June 1994. On April 18, 1996, the Board of Directors of the Company authorized the issuance to each of Jay Haft, Robert Segnini, Arlindo Jorge and Charles Chubb a warrant to purchase 20,000 shares of Common Stock at $2.75 per share, expiring April 18, 2003. Vivax leases its New Hampshire facility from the Drew Family Trust, the settlors of which are Douglas and Donna Drew, the owners of all of the outstanding stock of Comed prior to its acquisition by Nova. See "Business - Facilities." -42- PRINCIPAL STOCKHOLDERS The following table sets forth, as of June 19, 1996, the number and percentage of shares of Common Stock held by (i) all persons who, to the knowledge of the Company, are the beneficial owners of more than five percent (5%) of the Company's outstanding Common Stock; (ii) each director and executive officer of the Company; and (iii) all executive officers and directors of the Company as a group:
AMOUNT OF NAME AND ADDRESS BENEFICIAL OF BENEFICIAL OWNER OWNERSHIP (1) PERCENT OF BENEFICIAL OWNERSHIP ---------------------- ------------- ------------------------------- BEFORE AFTER OFFERING OFFERING ------------ ------------ Paul DiMatteo 1,081,616(2) 16.3% 16.3% c/o Nova Technologies, Inc. 89 Cabot Court, Unit L Hauppauge, NY 11788 Charles F. Chubb 427,724(3) 6.3% 6.3% c/o Nova Technologies, Inc. 89 Cabot Court, Unit L Hauppauge, NY 11788 Stephen Lowenstein 508,400(4) 7.6% 7.6% c/o Jos. H. Lowenstein Sons, Inc. 420 Morgan Avenue Brooklyn, NY 11222 JCM Capital Corp. 450,450 7.0% 0% 555 Broadhollow Road Melville, NY 11747 Stephen M. Fisher 100,692(5) 1.5% 1.5% c/o Nova Technologies, Inc. 89 Cabot Court, Unit L Hauppauge, NY 11788 Harold J. Lash 28,327(6) 0.4% 0.4% c/o Nova Technologies, Inc. 89 Cabot Court, Unit L Hauppauge, NY 11788 Samuel N. Paul 30,000(7) 0.5% 0.5% c/o Nova Technologies, Inc. 89 Cabot Court, Unit L Hauppauge, NY 11788 Jay M. Haft 87,000(8) 1.3% 1.3% c/o Parker Duryee Rosoff & Haft 529 Fifth Avenue New York, NY 10017
-43- Arlindo Jorge 200,499(9) 3.1% 3.1% 33 Robinson Avenue Glen Cove, NY 11742 Robert Segnini 44,745(10) 0.7% 0.7% 19 Shawmont Lane Stonybrook, NY 11790 Douglas & Donna Drew 620,000(11) 9.4% 9.4% c/o Nova Technologies, Inc. 89 Cabot Court, Unit L Hauppauge, NY 11788 All executive officers and 2,620,603(12) 35.7% 35.7% directors as a group (9 persons)
_____________________ (1) Effect has been given to shares issuable upon exercise of stock options or warrants outstanding on and exercisable within 60 days of June 19, 1996. Except as otherwise indicated, the persons named herein have sole voting and dispositive power with respect to the shares beneficially owned. (2) Includes 94,675 shares held of record by members of Mr. DiMatteo's immediate family, including 43,212 shares issuable upon exercise of outstanding options and warrants, held of record by Mr. DiMatteo's son, as to all of which Mr. DiMatteo disclaims beneficial ownership, and 180,000 shares issuable upon exercise of outstanding warrants. (3) Includes 6,000 shares held by Mr. Chubb's wife as to which shares Mr. Chubb disclaims beneficial ownership, and 330,932 shares issuable upon exercise of outstanding warrants. (4) Includes 4,200 shares and 4,200 shares issuable upon exercise of outstanding warrants, both of which are held by Mr. Lowenstein's wife and children, as to all of which Mr. Lowenstein disclaims beneficial ownership, and 300,000 shares issuable upon exercise of outstanding warrants. (5) Includes 100,000 shares issuable upon exercise of outstanding stock options and 692 shares owned by Aztech Corporation, a company controlled by Mr. Fisher. (6) Includes 27,327 shares issuable upon exercise of outstanding options and warrants. (7) Includes 30,000 shares issuable upon exercise of outstanding warrants. (8) Includes 33,333 shares held by Venture Capital Associates, Ltd., of which Cerhaft, Inc. ("Cerhaft") is the sole general partner. Mr. Haft is an officer and director of Cerhaft. Also includes 26,667 shares issuable upon exercise of outstanding options and 22,000 shares issuable upon exercise of outstanding warrants. (9) 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. (10) Includes 12,000 shares issuable upon exercise of outstanding options and 20,000 shares issuable upon exercise of outstanding warrants. (11) Includes 20,000 shares issuable upon exercise of outstanding warrants. (12) Includes 884,748 shares issuable upon exercise of outstanding warrants and options owned by such executive officers and directors. -44- SELLING STOCKHOLDERS The following table shows for each of the Selling Stockholders (i) the number of shares of Common Stock beneficially owned by each of them as of April 1, 1996, (ii) the number of shares of Common Stock covered by this Prospectus, and (iii) the number and the percentage of ownership if all shares of Common Stock covered by this Prospectus were sold.
NUMBER OF NUMBER OF NUMBER OF SHARES SHARES SHARES COVERED OWNED SELLING BENEFICIALLY BY THIS AFTER PERCENTAGE STOCKHOLDER OWNED PROSPECTUS OFFERING OF CLASS - -------------------------- ------------ ---------- --------- ---------- Field Family Trust 225,225 225,225 0 0 JCM Capital Corp. 450,450 450,450 0 0 Kirsch, Jodi 22,522 22,522 0 0 Kula, Adam 22,523 22,523 0 0 Kula, Albert 45,046 45,046 0 0 Kula, Robert 45,045 45,045 0 0 Tower, Leonard 63,090 63,090 0 0 Zeman, Barry T. & Angela 13,500 13,500 0 0 Zeman, Joshua & Barry T. 13,500 13,500 0 0 ------- TOTALS 900,901 =======
To the best of the Company's knowledge, none of the Selling Stockholders has had any material relationship with the Company or any of its affiliates within the past three years except for their purchase of the Common Stock offered hereby and except for JCM Capital Corp. ("JCM"). The Selling Stockholders acquired the Common Stock in a private placement as part of the 1995 Financing described above at "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." The Selling Stockholders' shares are being registered pursuant to the exercise of demand registration rights received in connection with the purchase of such shares. JCM has entered into an agreement to distribute the Company's products in New York on substantially the same terms as the Company's other distributor agreements and holds an option to become the Company's exclusive distributor in Ohio, California, Arizona and Georgia. PLAN OF DISTRIBUTION The shares may be sold by the Selling Stockholders, or by pledgees, donees, transferees or other successors-in-interest. Such sales may be made on the OTC Bulletin Board, in privately negotiated transactions, or otherwise, at market prices or at negotiated prices. The shares may be sold by one or more of the following methods: (a) a block trade in which the broker or dealer so engaged will attempt to sell the shares as agent but may position and resell a portion of the block as principal in order to consummate the transaction; (b) purchase by a broker or dealer as principal, and the resale by such broker or dealer for its account pursuant to this Prospectus, including resale to another broker or dealer; or (c) ordinary brokerage transactions and transactions in which the broker solicits purchasers. In effecting sales, brokers or dealers engaged by the Selling Stockholders may arrange for other brokers or dealers to participate. Any such brokers or dealers may receive commissions or discounts from the Selling Stockholders in amounts to be negotiated immediately prior to the sale. Such brokers or dealers and any other participating brokers or dealers may be deemed to be "underwriters" within the meaning of the Securities Act of 1933, as amended. Any gain realized by such a broker or dealer on the sale of shares which it purchases as a principal may be deemed to be compensation to the broker or dealer in addition to any commissions paid to the broker by the Selling Stockholders. The Company will not receive any portion of the proceeds of the shares sold by the Selling Stockholders. There is no assurance that any of the Selling Stockholders will sell any or all of the shares of Common Stock covered by this Prospectus. The Selling Stockholders have advised the Company that during the time they are engaged in distribution of Common Stock covered by this Prospectus, they will comply with Rules 10b-5 and 10b-6 under the Exchange Act, and pursuant thereto: (i) will not engage in any stabilization activity in connection with the Company's securities; (ii) will furnish each broker through which Common Stock covered by this Prospectus may be offered the number of copies of this Prospectus which are required by each broker; and (iii) will not bid for or purchase any securities of the Company or attempt to induce any person to purchase any of the Company's securities other than as permitted under the Exchange Act. Selling Stockholders who may be an "affiliated purchaser" of the Company as defined in Rule 10b-6 have been further advised that pursuant to Exchange Act Release 34-23611 -45- (September 11, 1986), they must coordinate their sales under this Prospectus with each other and the Company for purposes of Rule 10b-6. DESCRIPTION OF SECURITIES The Company's authorized capital stock consists of 14,000,000 shares of Common Stock, $.01 par value per share, and 1,750,000 shares of Preferred Stock, $2.25 par value per share. COMMON STOCK Holders of shares of Common Stock do not have the right to cumulate their votes in the election of directors and, accordingly, holders who control more than 50% of the outstanding voting power can elect all of the directors of the Company. The shares of Common Stock carry no preemptive or other subscription rights and there are no redemption provisions applicable thereto. In the event of liquidation, dissolution or winding-up of the Company, the holders of all shares of Common Stock are entitled to share ratably in all the assets of the Company available for distribution to the holders of its Common Stock. At June 19, 1996, there were 6,411,183 shares of Common Stock issued and outstanding, held of record by approximately 370 persons. PREFERRED STOCK The Board of Directors is authorized to issue all undesignated shares of Preferred Stock in series and to determine the number, designation, preferences, relative rights and limitations of the shares of each series. Among the determinations which the Board of Directors is authorized to make for each of the shares of Preferred Stock are (a) the number of shares in the series and the designation thereof; (b) the dividend rate and whether dividends would be cumulative; (c) the price and other terms of any redemption; (d) the extent of liquidation rights; (e) whether a sinking fund would be created with respect to the shares and the terms of any such fund; (f) whether there would be conversion rights into shares of Common Stock or other shares of Preferred Stock and the terms of any such conversion; and (g) whether, and the extent to which there would be voting rights, which might include the rights to elect a specified number of directors if dividends on the series were not paid for a specified period of time. The rights of the holders of shares of Preferred Stock may include priorities over the holders of shares of Common Stock. For example, in almost all cases, holders of shares of Preferred Stock of a particular series are entitled to dividends in preference to holders of shares of Common Stock. In addition, holders of shares of Preferred Stock of a particular series generally are entitled to a priority over holders of Common Stock in the distribution of assets available to all stockholders of the Company upon any liquidation, dissolution and winding up of the Company. Further, holders of shares of Preferred Stock of a particular series may be given voting rights on a share-for-share basis with holders of shares of Common Stock and in certain events may be given greater voting rights or voting rights exercisable as a separate class. There are no shares of Preferred Stock outstanding. Although the Company has no present intention to issue shares of Preferred Stock, the issuance of shares of Preferred Stock or the issuance of rights to purchase such shares may have the effect of delaying, deferring or preventing a change in control of the Company or an unsolicited acquisition proposal. REDEEMABLE WARRANTS The Company issued 500,000 redeemable common stock purchase warrants (the "Redeemable Warrants") as part of its Initial Public Offering in February 1992 pursuant to a Warrant Agreement (the "Warrant Agreement") between the Company and the American Stock Transfer & Trust Company (the "Warrant Agent"). Each Redeemable Warrant is in registered form and is saleable, assignable, and conveyable, and entitles the registered holder to purchase one share of Common Stock at an exercise price of $4.00 per share through March 31, 1997. The Company has the right to redeem all, or any portion, of the Redeemable Warrants at any time at a price of $.05 per Redeemable Warrant if the average of the closing bid and asked prices of the Common Stock equals or exceeds $11.00 per share during any consecutive 10-day trading period and notice of redemption is given no later than 20 days after the expiration of such 10-day trading period. The Company has authorized and reserved for issuance 500,000 shares of Common Stock purchasable upon exercise of the Redeemable Warrants. Such shares of Common Stock, when issued, shall be fully paid and non-assessable. -46- The exercise price and the number of shares of Common Stock to be obtained upon exercise of the Redeemable Warrants are subject to adjustment in the event of a stock dividend or of a split of the Common Stock, or in the event of a reorganization or recapitalization of the Company or of the merger or consolidation of the Company, all as more fully set forth in the Warrant Agreement. Fractional shares will not be issued upon exercise of the Redeemable Warrants and, in lieu thereof, a cash adjustment based on the market price of the Common Stock on the date of exercise will be made. The Redeemable Warrants do not confer upon the holder any voting or preemptive rights, or any other rights of a stockholder of the Company unless the Warrants have been exercised. A Redeemable Warrant may be exercised upon the surrender of a duly completed certificate prior to its expiration at the office of the Warrant Agent, accompanied by cash or certified or office bank check payable to the order of the Warrant Agent for the exercise price. The Act requires that the Redeemable Warrants cannot be exercised unless at the time of such exercise the Company shall then have a current effective registration statement under the Act with respect to the shares of Common Stock issuable upon exercise of the Redeemable Warrants. Similar requirements are also imposed by certain state securities regulatory authorities. The Company has not endeavored to keep such a registration statement current because the exercise price of the Redeemable Warrants has exceeded, and continues to exceed the bid price for the Company's Common Stock as reported on the OTC Bulletin Board. No holder of the Redeemable Warrants has attempted to exercise them. Once the offering contemplated hereby has been completed, the Company intends to endeavor to have declared effective, and to maintain in effect a registration statement registering the Common Stock underlying the Redeemable Warrants in order to permit future exercises of such Warrants. The above summary does not purport to be complete. The Warrant Agreement, containing all of the terms and conditions applicable to the Warrants, has been incorporated as an exhibit to the Registration Statement of which this Prospectus is a part. TRANSFER AND WARRANT AGENT The transfer agent for the Warrants is American Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005. REPORTS TO STOCKHOLDERS The Company will furnish to stockholders, after the close of each fiscal year, an Annual Report which will contain audited financial statements. In addition, the Company may furnish unaudited quarterly reports to stockholders for the first three quarters of each fiscal year. SHARES ELIGIBLE FOR FUTURE SALE In general, Rule, 144, promulgated under the Act, permits a stockholder of the Company who has beneficially owned restricted shares of Common Stock for a period of at least two years to sell without registration, within any three month period, such number of shares not exceeding the greater of 1% of the then outstanding shares, or, if the shares are quoted on NASDAQ, the average weekly trading volume during the four calendar weeks preceding such sale, assuming compliance by the Company with certain public information requirements of Rule 144. Furthermore, if the restricted shares are held for a period of at least three years by a person not affiliated with the Company (in general, a person who is not a director, executive officer or principal stockholder of the Company during the three month period prior to resale), such restricted shares can be sold without limitation as to volume or manner of sale. As of April 1, 1996, 5,801,183 shares of Common Stock were outstanding of which 1,730,405 shares are "restricted" securities, as such term is defined under the Act. As of January 1, 1996, 126,750 of these shares of Common Stock would have been eligible for sale under Rule 144. During the period commencing January 1, 1996 and ending December 31, 1996, an additional 987,738 of such shares will become eligible for sale under Rule 144. The balance of such shares will become eligible for sale pursuant to Rule 144 upon the expiration of their respective two-year holding periods. In addition, certain of the current holders of outstanding Common Stock, options and warrants have "piggy-back" registration rights with respect to their securities -47- should certain conditions be satisfied. In addition, the Company intends to file a registration statement covering the 338,000 shares of Common Stock reserved for issuance, and the 427,017 shares of Common Stock issued under its stock option plans after the completion of this offering. Further, once the offering contemplated hereby has been completed, the Company intends to endeavor to have declared effective, and to maintain in effect a registration statement registering the 500,000 shares of Common Stock underlying the Redeemable Warrants in order to permit future exercises of such Warrants. -48- LEGAL PROCEEDINGS There are no material legal proceedings which are currently pending or, to the Company's knowledge, contemplated against the Company or to which it is a party. LEGAL MATTERS Matters relating to the legality of the issuance of the shares of Common Stock offered hereby are being passed upon for the Company by Whitman Breed Abbott & Morgan, 100 Field Point Road, Greenwich, Connecticut 06830. EXPERTS The financial statements of the Company at December 31, 1995 and for each of the years in the two-year period ended December 31, 1995 included in this Prospectus and Registration Statement have been audited by Richard A. Eisner & Company, LLP independent auditors, as set forth in their report with respect thereto, and are included in reliance upon such report given upon the authority of such firm as experts in auditing and accounting. Such report includes an uncertainty regarding the Company's ability to continue as a going concern. The financial statements of Vivax (Comed) at February 29, 1996 and for the nine months ended February 29, 1996 and the year ended May 31, 1995 included in this Prospectus and Registration Statement have been audited by Richard A. Eisner & Company, LLP independent auditors, as set forth in their report with respect thereto, and are included in reliance upon such report given upon the authority of such firm as experts in auditing and accounting. INDEMNIFICATION FOR SECURITIES ACT LIABILITIES The Certificate of Incorporation of the Company provides with respect to the indemnification of directors and officers that the Company shall indemnify to the fullest extent permitted by Section 145 of the Delaware General Corporation Law, as amended from time to time, each person that such Section grants the Company the power to indemnify and that such indemnification shall not be deemed exclusive of any other rights to which such persons may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise. The Certificate of Incorporation of the Company also provides that no director shall be liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (1) for any breach of the director's duty of loyalty to the Company or its stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) under Section 174 of the Delaware General Corporation Law or (4) for any transaction from which the director derived an improper personal benefit. Insofar as indemnification for liabilities arising under the Securities Act of 1993 may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. -49- AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files reports, proxy statements and other information with the Securities and Exchange Commission (the "S.E.C."). Such reports, proxy statements and other information filed by the Company can be inspected and copied at the public reference facilities of the S.E.C. at 450 Fifth Street N.W. (Room 1024), Judiciary Plaza, Washington, D.C. 20549; as well as at the Regional Offices of the S.E.C. located at Northwestern Atrium Center, 500 West Madison Street (Suite 1400), Chicago, Illinois 60661; and Seven World Trade Center (13th Floor), New York, New York 10048. Copies of such material can be obtained from the Public Reference Section of the S.E.C. at 450 Fifth Street N.W., Washington, D.C. 20549 at prescribed rates. The Company has filed with the S.E.C. in Washington, D.C., a Registration Statement on Form SB-2 under the Securities Act of 1933 (the "Act"), as amended, with respect to the Common Stock offered hereby (the "Registration Statement"). This Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the S.E.C.. For further information with respect to the Company and the securities offered hereby, reference is made to the Registration Statement, including the exhibits and financial statements and schedules, if any, filed therewith or incorporated therein by reference. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete, and in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement or incorporated therein by reference, each statement being qualified in its entirety by such reference. The Registration Statement, including the exhibits thereto, may be inspected without charge at the S.E.C.'s principal office in Washington, D.C., and copies of any and all parts thereof may be obtained from such office after payment of the fees prescribed by the S.E.C.. -50- INDEX TO FINANCIAL STATEMENTS
PRO FORMA: NOVA TECHNOLOGIES, INC. Pro Forma Unaudited Condensed Balance Sheet as of March 31, 1996 F-3 Notes to Pro Forma Unaudited Condensed Balance Sheet. . . . . F-5 Pro Forma Unaudited Condensed Statements of Operations for the Year Ended December 31, 1995 and for the Three Months Ended March 31, 1996. . . . . . . . . . . . . . . . . . . . . . . F-6 Pro Forma Unaudited Condensed Statement of Operations for the Year Ended December 31, 1995. . . . . . . . . . . . . . . . F-7 Notes to Pro Forma Unaudited Condensed Statement of Operations for the Year Ended December 31, 1995. . . . . . . . . . . . F-8 Pro Forma Unaudited Condensed Statement of Operations for the Three Months Ended March 31, 1996 . . . . . . . . . . . . . F-9 Notes to Pro Forma Unaudited Condensed Statement of Operations for the Three Months Ended March 31, 1996 . . . . . . . . . F-10 HISTORICAL: NOVA TECHNOLOGIES, INC. Report of Independent Auditors. . . . . . . . . . . . . . . . F-11 Balance Sheets as at December 31, 1995 and December 31, 1994. F-12 Statements of Operations for the Years Ended December 31, 1995 and December 31, 1994 . . . . . . . . . . . . . . . . . . . F-13 Statements of Changes in Stockholders' Equity (Deficiency) for the Years Ended December 31, 1995 and December 31, 1994 . . F-14 Statements of Cash Flows for the Years Ended December 31, 1995 and December 31, 1994. . . . . . . . . . . . . . . . . . . . F-15 Notes to Financial Statements . . . . . . . . . . . . . . . . F-16 NOVA TECHNOLOGIES, INC. Condensed Balanced Sheets (Unaudited) as at March 31, 1996 . . . F-30 Condensed Statements of Operations (Unaudited) for the Three Months Ended March 31, 1996 and March 31, 1995 F-31 Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 1996 and March 31, 1995 F-32 Notes to Condensed Financial Statements (Unaudited) F-33
F-1 Page COMED SYSTEMS, INC. Report of Independent Auditors. . . . . . . . . . . . . . . F-38 Balance Sheet as at February 29, 1996 . . . . . . . . . . . F-39 Statements of Operations for the Nine Months Ended February 29, 1996 and the Year Ended May 31, 1995. . . . . . . . . F-40 Statements of Changes in Stockholders' Equity for the Year Ended May 31, 1995 and the Nine Months Ended February 29, 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . F-41 Statements of Cash Flows for the Nine Months Ended February 29, 1996 and the Year Ended May 31, 1995. . . . . . . . . F-42 Notes to Financial Statements . . . . . . . . . . . . . . . F-43 F-2 NOVA TECHNOLOGIES, INC. PRO FORMA UNAUDITED CONDENSED BALANCE SHEET AS OF MARCH 31, 1996 The following pro forma condensed balance sheet reflects the acquisition of Comed Systems, Inc. ("Comed"). The Company obtained 100 percent of Comed in exchange for 600,000 shares of its common stock and the issuance of $1,500,000 in notes bearing interest at 8%. The acquisition in May 1996 is accounted for as a purchase, and for pro forma presentation purposes as if the acquisition had occurred on March 31, 1996. In the opinion of management of Nova Technologies, Inc. all adjustments necessary to present fairly such pro forma condensed balance sheet have been made. The pro forma unaudited condensed balance sheet should be read in conjunction with the notes thereto, the financial statements of the Company and Comed and the related notes thereto and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" each included elsewhere in the Prospectus. The pro forma condensed balance sheet is not necessarily indicative of what the actual financial position would have been had the transaction occurred at March 31, 1996, nor does it purport to represent the future financial position of the Company. F-3 NOVA TECHNOLOGIES, INC. PRO FORMA UNAUDITED CONDENSED BALANCE SHEET MARCH 31, 1996
Nova Comed Pro forma Technologies, Inc. Systems, Inc. Adjustments Pro forma ------------------ ------------- ----------- --------- March 31, 1996 February 29, 1996 ASSETS Current assets: Cash and cash equivalents $274,000 $15,000 $289,000 Inventories 483,000 18,000 501,000 Accounts receivable 115,000 374,000 489,000 Prepaid expenses and other current assets 48,000 50,000 98,000 ---------- -------- ---------- Total current assets 920,000 457,000 1,377,000 Restricted cash 190,000 0 190,000 Rental equipment, less accumulated depreciation of $1,186,000 0 365,000 $500,000 (A) 865,000 Equipment and leasehold improvements 129,000 67,000 196,000 Deposits and other assets 184,000 11,000 195,000 Goodwill 0 0 1,864,000 (A) 1,864,000 ---------- -------- ---------- ---------- TOTAL $1,423,000 $900,000 $2,364,000 $4,687,000 ========== ======== ========== ========== LIABILITIES Current liabilities: Current portion of long-term debt $0 $228,000 228,000 Accounts payable, accrued expenses and other current liabilities 292,000 274,000 566,000 Notes payable--officers 116,000 0 116,000 ---------- -------- ---------- Total current liabilities 408,000 502,000 910,000 Note payable--other (net of deferred debt discount 436,000 0 436,000 of 75,000) Long-term debt (less current portion) 0 9,000 1,500,000 (A) 1,509,000 Note payable--officers 183,000 0 183,000 Deferred officers' compensation (including accrued 134,000 0 134,000 interest of $2,000) Other liabilities 65,000 53,000 118,000 ---------- -------- ---------- ---------- Total liabilities 1,226,000 564,000 1,500,000 3,290,000 ---------- -------- ---------- ---------- Common stock 58,000 1,000 5,000 (A) 64,000 Additional paid-in capital 9,918,000 0 1,194,000 (A) 11,112,000 Retained earnings (deficit) (9,779,000) 335,000 (335,000) (A) (9,779,000) ---------- -------- ---------- ---------- Total stockholders' equity 197,000 336,000 864,000 1,397,000 ---------- -------- ---------- ---------- TOTAL $1,423,000 $900,000 $2,364,000 $4,687,000 ========== ======== ========== ==========
F-4 NOVA TECHNOLOGIES, INC. NOTES TO PRO FORMA UNAUDITED CONDENSED BALANCE SHEET (A) To reflect the acquisition of Comed Systems, Inc. as of March 31, 1996 as follows: Net book value of assets acquired $ 336,000 Adjustment to record estimated fair value of rental equipment acquired 500,000 Excess of purchase price over net assets acquired 1,864,000 ---------- $2,700,000 ========== Common stock - 600,000 shares valued at $2 per share $1,200,000 Promissory notes - interest at 8% 1,500,000 ---------- $2,700,000 ========== F-5 NOVA TECHNOLOGIES, INC. PRO FORMA UNAUDITED CONDENSED STATEMENTS OF OPERATIONS For the Year Ended December 31, 1995 and For the Three Months Ended March 31, 1996 The following pro forma condensed statements of operations reflect the acquisition of Comed at the beginning of the period presented. In the opinion of management of Nova Technologies, Inc. all adjustments necessary to present fairly such pro forma condensed statements of operations have been made. The pro forma unaudited condensed statements of operations should be read in conjunction with the notes thereto, the financial statements of the Company and Comed and the related notes thereto and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" each included elsewhere in this Prospectus. The pro forma condensed statements of operation are not necessarily indicative of what the actual results of operations would have been had the transaction occurred at the beginning of the period presented nor does it purport to represent the results of future operations of the Company. F-6 NOVA TECHNOLOGIES, INC. PRO FORMA UNAUDITED CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995
Nova Comed Pro forma Technologies, Inc. Systems, Inc. Adjustments Pro forma ------------------ ------------- ----------- --------- December 31, 1995 February 29,1996 Net sales $ 220,000 $2,242,000 $2,462,000 Cost of sales 698,000 1,246,000 $ 100,000 (C) 2,044,000 Research and development expenses 297,000 0 297,000 Selling, general and administrative expenses 506,000 816,000 (302,000) (B) 1,113,000 93,000 (D) ---------- ---------- --------- ---------- Operating income (loss) (1,281,000) 180,000 109,000 (992,000) Interest and other income 13,000 9,000 22,000 Interest expense 34,000 91,000 120,000 (A) 245,000 Gain on sale of assets 0 19,000 19,000 ---------- ---------- -------- ---------- Income (loss) before income taxes (1,302,000) 117,000 (11,000) (1,196,000) Income tax expense 0 52,000 (52,000) (E) 0 ---------- ---------- --------- ---------- NET INCOME (LOSS) ($1,302,000) $65,000 $41,000 ($1,196,000) ========== ========== ========= ========== (Loss) per share ($0.22) ========== Weighted average shares outstanding 4,783,000 600,000 (F) 5,383,000 ========== ========= ==========
F-7 NOVA TECHNOLOGIES, INC. NOTES TO PRO FORMA UNAUDITED CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (A) To reflect interest expense assuming that the promissory notes for $1,500,000 at 8% per annum have been issued at the beginning of the year. (B) To reflect the officers' salaries at the amount in the new employment agreement. (C) To increase depreciation expense on acquired assets. (D) To reflect amortization of goodwill over 20 years. (E) To adjust income taxes. (F) To reflect the issuance of common stock for the acquisition of Comed. F-8 NOVA TECHNOLOGIES, INC. PRO FORMA UNAUDITED CONDENSED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996
Nova Comed Pro forma Technologies, Inc. Systems, Inc. Adjustments Pro forma ------------------ ------------- ----------- --------- Net sales $ 83,000 $499,000 $582,000 Cost of sales 303,000 217,000 $ 25,000 (C) 545,000 Research and development expenses 82,000 82,000 Selling, general and administrative expenses 152,000 398,000 (200,000) (B) 373,000 23,000 (D) -------- -------- ------------- -------- Operating (loss) (454,000) (116,000) 152,000 (418,000) Interest and other income 24,000 2,000 26,000 Interest expense 28,000 15,000 30,000 (A) 73,000 -------- -------- -------- -------- NET LOSS ($458,000) ($129,000) $122,000 ($465,000) ======== ======== ======== ======== (Loss) per share ($0.07) ----- Weighted average shares outstanding 5,796,000 600,000 (E) 6,396,000 ========= ======= =========
F-9 NOVA TECHNOLOGIES, INC. NOTES TO PRO FORMA UNAUDITED CONDENSED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 (A) To reflect interest expense assuming that the promissory notes for $1,500,000 at 8% per annum have been issued at the beginning of the year. (B) To reflect the officers' salaries at the amount in the new employment agreement. (C) To increase depreciation expense on acquired assets. (D) To reflect amortization of goodwill over 20 years. (E) To reflect the issuance of common stock for the acquisition of Comed. F-10 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Nova Technologies, Inc. Hauppauge, New York We have audited the accompanying balance sheets of Nova Technologies, Inc. as at December 31, 1995 and December 31, 1994, and the related statements of operations, changes in stockholders' equity (deficiency), and cash flows for each of the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements enumerated above present fairly, in all material respects, the financial position of Nova Technologies, Inc. as at December 31, 1995 and December 31, 1994, and the results of its operations and its cash flows for each of the years then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has experienced recurring operating losses and will require additional financing for the commercial exploitation of its patient transfer system. These factors raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ Richard A. Eisner & Company, LLP New York, New York February 12, 1996 With respect to the last paragraph of Note 9[a] March 26, 1996 With respect to Note 1 April 26, 1996 F-11 NOVA TECHNOLOGIES, INC. BALANCE SHEETS
December 31, ------------------------- A S S E T S 1995 1994 ----------- ------------ ----------- (Note 9) Current assets: Cash and cash equivalents (Note 2)..................... $ 485,819 $ 102,245 Inventories (Notes 2 and 3)............................ 332,995 206,106 Accounts receivable.................................... 45,155 12,870 Prepaid expenses and other current assets.............. 71,185 51,516 ----------- ----------- Total current assets............................ 935,154 372,737 Restricted cash (Note 9[b])............................... 100,000 Subscription receivable (Note 9[b])....................... 90,000 Equipment and leasehold improvements (net of accumulated depreciation and amortization of $226,576 in 1995 and $138,200 in 1994) (Note 2)............................. 136,256 152,925 Deposits and other assets................................. 64,931 16,457 Deferred financing costs (Note 9)......................... 69,852 ----------- ----------- T O T A L....................................... $ 1,396,193 $ 542,119 =========== =========== L I A B I L I T I E S --------------------- Current Liabilities: Accounts payable and accrued expenses.................. $ 277,430 $ 136,273 Customer prepayments................................... 18,909 51,972 Notes payable - officers (Notes 4)..................... 5,360 Deferred officers' compensation (including accrued interest of $684 in 1995) (Note 10[a])............... 86,767 18,617 ----------- ----------- Total current liabilities....................... 383,106 212,222 Notes payable - other (net of deferred debt discount of $15,111) (Note 9[a])................................... 88,102 Notes payable - officers (including accrued interest of $15,779 in 1995 and $36,917 in 1994) (Note 4).......... 290,779 343,926 Deferred officers' compensation (including accrued interest of $69,523 in 1994) (Note 10[a]).............. 687,973 Grant award (Note 9[e])................................... 50,000 ----------- ----------- Total liabilities............................... 811,987 1,244,121 ----------- ----------- Commitments (Note 10) STOCKHOLDERS' EQUITY (DEFICIENCY) ----------------------------------- (Note 1) Preferred stock (Note 6).................................. Common stock - $.01 par value; 14,000,000 shares authorized; 5,791,083 and 4,295,365 shares issued and outstanding, respectively.............................. 57,911 42,954 Additional paid-in capital................................ 9,847,887 7,274,428 Deficit................................................... (9,321,592) (8,019,384) ----------- ----------- Total stockholders' equity (deficiency)......... 584,206 (702,002) ----------- ----------- T O T A L....................................... $ 1,396,193 $ 542,119 =========== ===========
Attention is directed to the foregoing accountants' report and to the accompanying notes to financial statements. F-12 NOVA TECHNOLOGIES, INC. STATEMENTS OF OPERATIONS
Year Ended December 31, ------------------------- 1995 1994 ----------- ----------- Net sales................................... $ 220,368 $ 233,278 ----------- ----------- Costs and expenses: Cost of sales............................ 697,901 558,262 Research and development expenses........ 297,780 400,202 General, administrative and consulting expenses............................... 506,124 421,573 ----------- ----------- Total costs and expenses.......... 1,501,805 1,380,037 ----------- ----------- (Loss) from operations before other income and (expenses)........................... (1,281,437) (1,146,759) Other income and (expenses): Interest and other income................ 13,201 5,197 Interest expense and other............... (33,972) (69,575) ----------- ----------- NET LOSS.................................... $(1,302,208) $(1,211,137) =========== =========== Net loss per share (Note 2)................. $(.27) $(.31) =========== =========== Weighted average number of common shares outstanding (Note 2)..................... 4,783,050 3,964,598 =========== ===========
Attention is directed to the foregoing accountants' report and to the accompanying notes to financial statements. F-13 NOVA TECHNOLOGIES, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
Common Shares Outstanding ------------------ Additional Number of Paid-in Shares Amount Capital Deficit --------- ------- ----------- ------------ Balance - December 31, 1993....................................... 3,474,963 $34,750 $6,343,418 $(6,808,247) Year ended December 31, 1994: Common stock issued to landlord for rent....................... 10,940 109 10,831 Common stock issued for cash................................... 804,770 8,048 936,607 Costs incurred in connection with issuance of common stock..... (93,465) Common stock issued for professional services rendered......... 4,692 47 14,106 Value assigned to warrants given to employees.................. 62,931 Net loss for the year ended December 31, 1994.................. (1,211,137) --------- ------- ---------- ----------- Balance - December 31, 1994....................................... 4,295,365 42,954 7,274,428 (8,019,384) Year ended December 31, 1995: Exercise of warrants........................................... 73,752 737 98,828 Common stock issued for cash................................... 1,361,966 13,620 1,677,977 Costs incurred in connection with issuance of common stock..... (166,778) Value assigned to warrants given in connection with financing (Note 9)..................................................... 28,000 Subscription receivable from distributor....................... 60,000 600 89,400 Value assigned to warrants given to employees.................. 24,681 Waiver of prior years deferred compensation and forgiveness of debt to officers.......................................... 762,851 Waiver of deferred compensation to officers - current year......................................................... 58,500 Net loss for the year ended December 31, 1995.................. (1,302,208) --------- ------- ---------- ----------- BALANCE - DECEMBER 31, 1995....................................... 5,791,083 $57,911 $9,847,887 $(9,321,592) ========= ======= ========== ===========
Attention is directed to the foregoing accountants' report and to the accompanying notes to financial statements. F-14 NOVA TECHNOLOGIES, INC. STATEMENTS OF CASH FLOWS
Year Ended December 31, -------------------------- 1995 1994 ------------ ------------ Cash flows from operating activities: Net loss.................................................................. $(1,302,208) $(1,211,137) Adjustments to reconcile net loss to net cash (used in) operating activities: Depreciation and amortization........................................... 90,344 76,800 Value assigned to warrants given to employees of the Company............ 24,681 62,931 Increase in grant award................................................. 50,000 Waiver of deferred compensation......................................... 58,500 Common stock issued in lieu of cash payment to landlord for rent........ 10,940 Common stock issued for professional services rendered.................. 14,153 Changes in operating assets and liabilities: (Increase) in inventories............................................. (126,889) (11,519) (Increase) in accounts receivable, prepaid expenses and other assets.. (100,428) (37,577) (Increase) in restricted cash......................................... (100,000) Increase in accounts payable and accrued expenses..................... 108,686 65,412 Increase in deferred officers' compensation........................... 67,466 172,367 Increase in accrued interest payable.................................. 19,676 67,012 ----------- ----------- Net cash (used in) operating activities............................ (1,210,172) (790,618) ----------- ----------- Cash flows from investing activities: Purchase of equipment and capitalized tooling costs....................... (72,786) (27,723) ----------- ----------- Cash flows from financing activities: Proceeds from notes payable............................................... 200,000 Proceeds from sale of common stock........................................ 1,691,597 944,655 Issuance costs incurred in sale of common stock........................... (166,778) (93,465) Proceeds from exercise of warrants........................................ 99,565 Repayment of notes payable................................................ (100,000) Deferred financing costs.................................................. (57,852) ----------- ----------- Net cash provided by financing activities.......................... 1,666,532 851,190 ----------- ----------- INCREASE IN CASH AND CASH EQUIVALENTS........................................ 383,574 32,849 Cash and cash equivalents at beginning of year............................... 102,245 69,396 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR..................................... $ 485,819 $ 102,245 =========== =========== Supplemental disclosures of cash flow information: Interest paid............................................................. $ 3,575 $ 1,451 Noncash transactions: Forgiveness of debt owed to officers.................................... 762,851 Subscription receivable................................................. 90,000 Value of warrants given in connection with financing.................... 28,000
Attention is directed to the foregoing accountants' report and to the accompanying notes to financial statements. F-15 NOVA TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (NOTE 1) - The Company: - ---------------------- Nova Technologies, Inc. (the "Company") developed and manufactures an advanced patient transfer system. The Company, which was in the development stage prior to 1995, is manufacturing, marketing and selling its patient transfer systems and therefore is no longer in the development stage. The Company has experienced significant losses since inception. In order to achieve profitable operations, the Company will have to reach levels of manufacturing and sales, sufficient to cover its operating expenses. In this regard management's plans are to obtain additional financing through equity offerings or debt financings, a strategic alliance or joint venture arrangement. In April 1996, the Company entered into an agreement with a placement agent to pursue a private placement of at least 250,000 shares of its common stock. There is no assurance that such financing or that a strategic alliance or joint venture arrangement will be consummated on terms acceptable to the Company. There is no assurance that the Company can establish profitable operations. (NOTE 2) - Summary of Significant Accounting Policies: - ----------------------------------------------------- [a] Inventories: ----------- Inventories are stated at the lower of cost (first-in, first-out) or market. In estimating the net realizable value of inventories, management considers technological obsolescence as a factor, based on industry trends and developments. [b] Equipment and leasehold improvements: ------------------------------------ Equipment (which includes internally constructed tooling of $51,000 in 1995 and $88,000 in 1994) is recorded at cost and depreciated on the straight-line method over their estimated useful lives of 3 to 5 years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the asset. [c] Cash flow statement: ------------------- For purposes of reporting cash flows, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. (continued) F-16 NOVA TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (NOTE 2) - Summary of Significant Accounting Policies: (continued) - ----------------------------------------------------- [d] Net loss per share: ------------------ Net loss per share has been computed based on the weighted average number of shares outstanding during each year. [e] Rent expense: ------------ The Company for financial accounting purposes, spreads scheduled rent holidays over the term of the lease on a straight-line basis. [f] Revenue recognition: ------------------- Revenues are recognized at the time of the shipment of patient transfer systems. [g] Use of estimates: ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. [h] Nonmonetary transactions: ------------------------ The Company's policy is to record the issuance of common shares for services or to satisfy other obligations at the fair value of the common shares issued. [i] Recently issued accounting standards: ------------------------------------ The Company has not elected to adopt early the provisions of two recently issued accounting standards regarding impairments of long-lived assets ("FAS 121") and stock based compensation ("FAS 123"). FAS 121 requires entities to review long-lived assets and certain identifiable intangibles to be held and used, for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. FAS 123 establishes a fair value based method of accounting for stock-based compensation plans. The Company has not determined the potential impact, if any, of the adoption of these standards on its financial position or results of operations. (Continued) F-17 NOVA TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (NOTE 2) - Summary of Significant Accounting Policies: (continued) - ----------------------------------------------------- [j] Deferred financing costs: ------------------------ The Company amortizes the deferred financing costs of any financings, over the period in which the obligation matures. [k] Warranty obligations: -------------------- The Company provides a warranty on the sale of its products for a period of one year. To date warranty obligations have been insignificant. [l] Patent costs: ------------ The Company, which was in the development stage prior to 1995, expensed patent costs during that stage as incurred since recovery of capitalized patent costs was not reasonably determinable. Subsequently, patent costs are being capitalized and amortized over 17 years. The Company estimates undiscounted future cash flows from products which are covered by these patents. An impairment in the patent would be recognized if those estimated future cash flows were less than the amortized costs. [m] Reclassifications: ----------------- Certain reclassifications have been made to the 1994 financial statements to be comparable to the 1995 financial statements. (NOTE 3) - Inventories: - ---------------------- Inventories comprise the following:
December 31, ------------------ 1995 1994 -------- -------- Raw materials.... $115,907 $ 23,130 Work in process.. 167,714 82,639 Finished goods... 49,374 100,337 -------- -------- T o t a l. . $332,995 $206,106 ======== ========
F-18 NOVA TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (NOTE 4) - Notes Payable - Officers: - ----------------------------------- At December 31, 1995 the notes payable to officers, who are also stockholders, as amended, bear interest at 11% and 12% per annum. The 11% and 12% notes (aggregating $170,000 and $105,000, respectively) are payable on January 2, 1997. At the officers' discretion the notes can be repaid in cash or they may elect to receive one three-year warrant in exchange for each dollar of debt, to purchase the Company's common stock at $1.50 per share. The notes are subordinated to the borrowings under the People's Bank and Connecticut Innovations, Incorporated loan facilities (see Notes 9[a] and [b]). The notes payable to the officers previously aggregated $312,369 and were due in 1996. Of this amount, $37,369 of principal and $36,917 of interest was forgiven in 1995 (see Note 5). (NOTE 5) - Waiver of Deferred Compensation and Forgiveness of Debt: - ------------------------------------------------------------------ During 1995 two officers, who are also stockholders, agreed to waive the payment of their prior year's deferred compensation, and to forgive the repayment of certain notes payable and all accrued interest due to them as of January 1, 1995. The waiver and forgiveness by these officers, aggregating $762,851 was recorded as a contribution to additional paid-in capital and calculated as follows: Waiver of compensation owed . . . . . . . . . . . . . $618,450 Forgiveness of notes payable. . . . . . . . . . . . . 37,369 Forgiveness of accrued interest . . . . . . . . . . . 107,032 These same officers have agreed to waive the payment of a portion of their 1995 salaries in an amount aggregating $58,500, with a corresponding offset to additional paid-in capital. (NOTE 6) - Redeemable Convertible Preferred Stock: - ------------------------------------------------- The Company has 1,750,000 shares of preferred stock authorized; of which 500,000 shares have been designated as Series A Convertible Preferred Stock. F-19 NOVA TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (NOTE 7) - Income Taxes: - ----------------------- At December 31, 1995, the Company has approximate net operating loss and research and development credit carryforwards, for income tax purposes, expiring as follows:
Net Research and Operating Development Expiration Losses Credits - ------------ ---------- ------------ 2000...... $ 121,000 $ 5,000 2001...... 536,000 25,000 2002...... 899,000 44,000 2003...... 802,000 21,000 2004...... 826,000 9,000 2005...... 234,000 12,000 2006...... 327,000 12,000 2007...... 771,000 29,000 2008...... 910,000 36,000 2009...... 940,000 35,000 2010...... 1,171,000 - ---------- -------- $7,537,000 $228,000 ========== ========
The Company's expected tax benefit rate of 34% has been reduced to zero due to its nonutilization of its net operating loss. The provision for income tax benefit and increase in valuation allowance thereon for the years ended December 31, 1995 and December 31, 1994 were $398,000 and $343,000, respectively. The Company has a deferred tax asset of $2,335,000 resulting principally from its net operating loss and research and development credit carryforwards which have been fully reserved due to recurring operating losses and uncertainty about future operating results. Pursuant to the Internal Revenue Code, future utilization of past losses or credits are subject to certain limitations based on changes in ownership of the Company's stock. In addition, pursuant to the Tax Reform Act of 1986, the Company's annual utilization of such limited net operating loss and tax credit carryforwards will be further limited to a 90 percent reduction of its tax liability as a result of the corporate alternative minimum tax. F-20 NOVA TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (NOTE 8) - Stock Warrants and Options: - ------------------------------------- The exercise price for warrants and options issued in connection with services rendered by nonemployees or financing arrangements is determined by negotiations between the Company and the third party. Generally, warrants and options are issued to employees with an exercise price of not less than the quoted market price of the stock. If the Company issues options and warrants to employees at less than the quoted market price, a compensation charge is recorded for the difference between the exercise price and the quoted market price. [a] Common stock warrants: --------------------- The Company has outstanding warrants for the purchase of its common stock as follows:
Number of Exercise Price Expiration Date Shares --------------- --------------------- --------- Conversion of notes payable and sale of common stock $3.00 December 31, 1997 (4) 33,943 Extension of note payable $2.25 March 14, 1997 18,333 Sale of common stock $3.00 December 31, 1997 (4) 6,667 Sale of common stock $4.50 December 31, 1997 (4) 31,333 Sale of units (1) March 31, 1997 500,000 Consulting agreement $2.00 February 4, 1997 100,000 Sale of common stock $7.09 (2) November 21, 1996 100,000 Services rendered $4.00 (3) March 30, 1996 5,500 Replacement of stock options $2.75 (5) December 31, 1999 172,599 Services rendered $1.50 (6) September 30, 1997 54,991 Services rendered $1.50 (6) December 31, 1997 7,941 --------- Warrants outstanding - December 31, 1994 1,031,307 Services rendered $1.50 (6) March 30, 1998 9,141 Services rendered $1.50 (6) June 29, 1998 8,840 Services rendered $1.50 (6) September 29, 1998 6,699 Issued to officers $2.75 (7) December 31, 2002 300,000 Consulting agreement $2.61 (8) September 4, 2002 30,000 Connecticut financing $2.50 (9) September 1, 1997 33,750 Connecticut financing $1.11 (9) September 1, 2001 300,000 Connecticut financing $2.50 (9) September 1, 2002 11,250 Connecticut financing $2.50 (9) September 5, 1996 41,000 Other $2.75 December 31, 2002 6,667 --------- Warrants outstanding - December 31, 1995 1,778,654 =========
(1) May be redeemed by the Company at any time on 30 days prior written notice at a price of $.05 per warrant if the average of the closing bid and asked prices of the common stock equals or exceeds $11.00 per share during any consecutive 10 day trading period and notice of redemption is given no later than 20 days after the expiration of such 10 day trading period. In 1994 the exercise price was reduced to $4.00 per share and the expiration date was extended to March 31, 1997. (continued) F-21 NOVA TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (NOTE 8) - Stock Warrants and Options: (continued) - ------------------------------------- [a] Common stock warrants: (continued) --------------------- (2) In connection with the public offering which occurred in February 1992, the Company sold to the underwriter, at a nominal amount, warrants exercisable over a three-year period commencing November 1993, to purchase 50,000 units at $7.09 per unit, each unit consisting of one share of common stock and one redeemable warrant. (3) In 1994 the Company issued a warrant to purchase 5,500 shares of common stock at an exercise price of $4.00 per share, expiring March 30, 1996, as compensation, which it valued at $5,500. (4) Warrants previously issued with an expiration date of December 31, 1994. (5) In connection with the cancellation of certain stock options the Company in 1994 granted a warrant to purchase 172,599 shares of common stock exercisable at $2.75, which expires at December 31, 1999. (6) The Company issued warrants to purchase 87,612 shares of common stock (62,932 in 1994 and 24,680 in 1995) at an exercise price of $1.50 per share, expiring at various dates through September 29, 1998, which is valued at $88,000 ($63,000 in 1994 and $25,000 in 1995), in exchange for services rendered. (7) The Company granted to two officers, who are also stockholders, warrants to purchase 300,000 shares of common stock at an exercise price of $2.75 per share, expiring December 31, 2002. The exercise price exceeded the market price on the date of grant. (8) The Company issued a warrant to purchase 30,000 shares of common stock at an exercise price of $2.61 per share, expiring September 4, 2002 for financial consulting, which it valued at $7,000. (9) In connection with the various financing agreements entered into in September 1995, the Company issued warrants to purchase up to 386,000 shares of common stock at exercise prices of $1.11 and $2.50 per share expiring at various dates through September 1, 2002. The exercisable portion of such warrants have been valued at $21,000 (see Note 9). The value of such warrants is measured at the time they become exercisable. (continued) F-22 NOVA TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (NOTE 8) - Stock Warrants and Options: (continued) - ------------------------------------- [b] Stock option plans: ------------------ The Company's 1985 incentive and general (nonstatutory) stock option plans as amended, provided for the granting of options to purchase up to 500,000 shares of its common stock to eligible employees and nonemployee directors. Both plans expired in February 1995. The Company's 1994 stock option plan (the "Plan") provides for the granting to employees and directors of both incentive and nonstatutory stock options. Pursuant to the Plan 500,000 shares of the Company's common stock have been reserved for granting at prices and for periods determined by the Company's Board of Directors. The Plan expires on October 31, 2004 and at December 31, 1994 no stock options had been issued under the Plan. Stock options outstanding under these plans are as follows:
Nonstatutory Incentive ------------ --------- Outstanding at December 31, 1993 ($1.50 - $4.75 per share)........ 100,935 207,499 Granted ($2.25 - $2.75 per share). 15,999 152,500 Cancelled........................... (57,600) (132,899) ------- -------- Outstanding at December 31, 1994 ($1.50 - $4.75 per share)........ 59,334 227,100 Granted ($2.13 - $3.13 per share). 10,000 158,000 Cancelled........................... (16,667) (10,750) ------- -------- Outstanding at December 31, 1995 ($1.50 - $4.75 per share)........ 52,667 374,350 ======= ========
At December 31, 1995 all of the nonstatutory stock options and 99,084 of the incentive stock options were exercisable. As at December 31, 1995, options for the purchase of 338,000 shares were available for future grant. F-23 NOVA TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (NOTE 9) - Financing Agreements: - ------------------------------- In September 1995, pursuant to a series of interdependent transactions, the Company sold 900,901 shares of its common stock for an aggregate of $1,000,000 in a private placement, received a grant commitment from the city of Bristol, Connecticut of up to $100,000 and received loan commitments to borrow in the aggregate of up to $2,050,000 from a bank and from various agencies and public authorities of the state of Connecticut in connection with moving its manufacturing facilities to Bristol, Connecticut. The loan commitments are as follows: [a] The Company entered into a financing agreement with Connecticut Innovations, Incorporated ("CII") to borrow up to $750,000 in four stages based on the achievement of certain milestones at an interest rate of 10% per annum. Interest only is payable semi-annually commencing on the earlier of (i) September 5, 1998 or (ii) the date the Company declares any dividends or repurchases any of its outstanding stock. Principal is due on September 5, 2001, collateralized by the assets of the Company, including patents, which security interest except for patents, is subordinated to the security interest of the Company's lending bank. As of December 31, 1995, the Company was eligible and has borrowed $100,000 under this facility. The Company granted CII a warrant to purchase 300,000 shares of common stock at an exercise price of $1.11 per share, expiring on September 1, 2001. The warrant becomes exercisable on a pro rata basis, as the Company achieves its milestones and makes additional borrowings under the facility. As of December 31, 1995, 40,000 of such warrants are exercisable and have been valued at $16,000. As the Company borrows additional amounts and more warrants become exercisable, those warrants will then be valued at the time of such borrowings. The exercise price of the warrant is subject to downward adjustment if any sales of common stock are made at less than $1.11 per share. The warrant may be exercised on a "cashless basis", whereby the Company must pay to the warrantholder an amount equal to the difference between the warrant exercise price and the fair market value of the underlying stock. The agreement contains provisions that provide for repayment of borrowings under the facility in the event of 1) an underwritten public offering, 2) a change of control of the Company, as defined and 3) failure to maintain a Connecticut presence, as defined. The agreement also provides for a prepayment premium in the amount of the greater of 1) return on borrowings recalculated at 25% per annum or 2) the difference between the warrant exercise price (or the underlying common stock if the warrant has been exercised) of the exercisable warrants and the market price of the common stock. Any payments representing the prepayment premium will be charged to expense when incurred. (continued) F-24 NOVA TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (NOTE 9) - Financing Agreements: (continued) - ------------------------------- In January 1996 and March 1996, the Company borrowed $250,000 and $150,000, respectively, under the second and third stages of the financing agreement. The final $250,000 milestone requires 100 percent of the Company's direct labor force to work in Connecticut, 75 percent of all manufacturing operations to be located in Connecticut, 3 medical outcome studies to have been completed and that the Company employ at least 3 sales and service staff, including an insurance reimbursement specialist. The Company believes that it will receive the final stage of funding in mid-year 1996. [b] The Company entered into a loan agreement with People's Bank ("Peoples") providing for a $1,000,000 revolving credit facility expiring on September 5, 1997 at an interest rate of prime plus 1 1/2%. Borrowings available under the facility are limited to 80% of eligible accounts receivable and 50% of eligible inventory and are collateralized by the Company's accounts receivable and inventory. At December 31, 1995 no borrowings were made under this loan agreement. The facility contains restrictive covenants that limit capital expenditures and other financial and ratio requirements with respect to working capital, equity and unsubordinated debt. The facility also requires funds to be held in escrow as a Debt Service Reserve, as defined in the agreement. The agreement also restricts the payment of dividends. The Connecticut Development Authority ("CDA") has guaranteed repayment of 40% of the outstanding balance of the loan. The Company's president has guaranteed repayment of 20% (up to $80,000) of any amounts paid by CDA to Peoples under their guarantee. In addition, three of the Company's product distributors (the "LOC Corporations") each agreed to provide an irrevocable letter of credit in the amount of $200,000 for an aggregate of $600,000, which letters of credit can be drawn down upon the failure of the Company to make when due any payment to Peoples. In exchange for issuing these letters of credit, the Company issued each of the LOC Corporations a warrant to purchase up to 20,000 shares (60,000 in the aggregate) of the Company's common stock at an exercise price of $2.50 per share. Pursuant to a put/call agreement with two of the LOC Corporations, the Company had the right to require the two LOC Corporations to purchase an aggregate of 126,667 shares of common stock (or the LOC corporations had the right to call the Company to issue its common stock) at $1.50 per share for total proceeds of $190,000. The call was exercised by the LOC Corporations in September 1995, and the Company received proceeds of $100,000 in 1995, $50,000 in January 1996. Pursuant to the financing agreement with Peoples, the proceeds received from the LOC Corporations reduce their outstanding letters of credit in that amount and the funds are to be (continued) F-25 NOVA TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (NOTE 9) - Financing Agreements: (continued) - ------------------------------- [b] (continued) held in a restricted cash account by the Company. Under the put/call agreement, the number of warrants issued to the LOC Corporations was reduced by 19,000. The remaining warrants to purchase an aggregate of 41,000 shares of common stock have been valued at $1,400. [c] The Company entered into a loan agreement with CDA providing for a line of credit of up to $100,000 until September 4, 1996 for 80% of the purchase price of new or used equipment, bearing interest at the rate of 7.94%. The loan is repayable in 48 equal monthly installments commencing October 1, 1998 and is collateralized by all the equipment financed. The Company granted CDA warrants to purchase an aggregate of 45,000 shares of common stock at an exercise price of $2.50 per share. The warrants were valued at $3,600. At December 31, 1995 no borrowings were made under this loan agreement. [d] The Company entered into an Assistance Agreement, which was approved November 30, 1995 with the Department of Economic and Community Development ("DECD"), providing for a loan to the Company in an amount not to exceed $200,000 for funding the relocation of the Company's factory (as defined therein) at an interest rate of 5% per annum. The principal and interest of the loan is due in 84 equal monthly payments commencing on the third anniversary of the advancement date, and is collateralized by certain machinery and equipment. At December 31, 1995 no borrowings were made under the Assistance Agreement. [e] The Company entered into a Grant Agreement, dated August 8, 1995 with the city of Bristol, Connecticut, providing, under certain conditions, for a grant in an amount up to $100,000 ($50,000 was received in October 1995 and the balance is to be received on the achievement of certain employment levels). If the Company relocates its equipment or employees of its manufacturing facilities outside the city of Bristol prior to August 8, 2005, the Company will be obligated to immediately repay the grant. (NOTE 10) - Commitments: - ----------------------- [a] Employment agreements: --------------------- At December 31, 1995, the Company has employment agreements with its president and three other officers. The agreement with the president expires on September 30, 1996. One agreement is cancellable by either party on 60-days notice and the other two agreements are cancellable by the Company with six months notice. Aggregate annual salaries pursuant to all the agreements aggregate $412,000. (continued) F-26 NOVA TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (NOTE 10) - Commitments: (continued) - ----------------------- [a] Employment agreements: (continued) --------------------- During the year ended December 31, 1995 the president of the Company and one of its officers, both of whom are stockholders, waived payment of their deferred salaries (along with accrued interest thereon at 6% per annum) due to them under their employment agreements for the period January 1, 1991 through December 31, 1994 (see Note 5) and $58,500 for the year ended December 31, 1995. As at December 31, 1995, the Company owed its president and two of its officers approximately $86,000 in deferred compensation. [b] Lease of premises: ----------------- The Company entered into a five-year lease which commenced in September 1995 for office, warehousing and manufacturing space in Bristol, Connecticut. The terms of the lease provide for the first two months rent to be paid in the fifth year of the lease. Rental expense is recognized by the Company on a straight-line basis over the life of the lease. Minimum annual rental payments required are as follows: Year Ending December 31, ------------ 1996. . . . . . . . . . . . $138,750 1997. . . . . . . . . . . . 138,750 1998. . . . . . . . . . . . 138,750 1999. . . . . . . . . . . . 146,458 2000. . . . . . . . . . . . 107,917 -------- T o t a l . . . . $670,625 ======== The terms of the lease include escalation clauses for increases in real estate taxes. The Company also has the option to extend this lease for an additional five-year period at an adjusted rent based on certain cost of living adjustments. Additional premises are leased on a month-to-month basis at $4,375 per month plus real estate taxes. Beginning January 1, 1994 and until May 31, 1994, the Company's landlord agreed to accept shares of the Company's common stock at a value of $1.00 per share in lieu of payment for approximately one-half of the monthly obligation. Total rent expense aggregated $125,000 and $68,000 for the years ended December 31, 1995 and 1994, respectively (see Note 2[e]). (continued) F-27 NOVA TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (NOTE 10) - Commitments: (continued) - ----------------------- [c] Commission agreements: --------------------- The Company has agreements with three finders pursuant to which it will pay a commission of 10% of the proceeds of any financing obtained by these finders. [d] Consulting agreement: -------------------- In 1995, the Company entered into a five-year consulting agreement with a financial consultant. In year one of the agreement, the Company is required to make quarterly payments of 2,700 shares of common stock. In years two and three of the agreement, the Company is required to make quarterly payments of $3,000, payable in common stock. In years four and five, the Company is required to make quarterly payments of $3,000, payable in cash or common stock at the discretion of the consultant. Shares used to pay for the services rendered by the consultant will be valued based on their fair value when issued. [e] Arbitration proceeding: ---------------------- In 1993, the Company entered into an agreement for the sale of 1,250,000 units; each unit consisting of one share of common stock of the Company and one common stock purchase warrant exercisable at $4.00 per share over a period of three years, for $5,000,000. The Company did not receive any funds and commenced an arbitration proceeding for breach of contract. In 1995, the Company determined that the prospective buyers had no significant assets to pursue and the Company discontinued the proceeding. (NOTE 11) - Major Customers: - --------------------------- For the year ended December 31, 1995, sales to four separate customers $64,596 (29%), $60,956 (28%), $36,194 (16%) and $30,405 (14%) aggregated approximately 87% of the Company's net sales. For the year ended December 31, 1994, sales to three separate customers $90,195 (39%), $65,852 (28%) and $57,615 (25%) aggregated approximately 92% of the Company's net sales. (continued) F-28 NOVA TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (NOTE 12) - Subsequent Events: - ----------------------------- On January 1, 1996, the Company entered into a distribution agreement for the sale of its patient transfer systems whereby the distributor has the exclusive right to sell or lease the systems in specific territories in the state of New York. Pursuant to the agreement, the distributor is required to order 50 of the Company's products in the first year, 75 in the second year and 100 in the third year, subject to the receipt by the Company of 3,000,000 in additional financing by September 30, 1996. If the financing is not received, the distributor's minimum order requirements increase to 150, 200 and 200 Nova products, respectively. (NOTE 13) - Acquisition of Comed Systems, Inc. [Unaudited]: - ---------------------------------------------------------- On May 31, 1996, the Company,through a wholly owned acquisition corporation, acquired all of the outstanding capital stock of Comed Systems, Inc. ("Comed"), in exchange for the issuance of 600,000 shares of its common stock, and two $750,000 promissory notes. The notes, which bear interest at 8% per annum, are guaranteed by the Company. The first note is due in June 1997 and the second note is due on January 1, 2001 subject to quarterly prepayment installments commencing December 31, 1997. Such installments are equal to the lesser of $37,500 or 25 percent of Comed's operating income (as defined). F-29
Item 1. Financial Statements. - ----------------------------- NOVA TECHNOLOGIES, INC. CONDENSED BALANCE SHEETS (Unaudited) March 31, 1996 --------------- ASSETS Current assets: Cash and cash equivalents......................... $273,954 Inventories....................................... 483,365 Accounts receivable............................... 114,519 Prepaid expenses and other current assets......... 48,296 ----------- Total current assets........................... 920,134 Restricted cash........................................ 190,000 Subscription receivable................................ Equipment and leasehold improvements (net of accumu- lated depreciation and amortization of $226,670 in 1996 and $226,576 in 1995)......................... 129,268 Deposits and other assets.............................. 121,594 Deferred financing costs............................... 62,412 ----------- TOTAL.......................................... $1,423,408 =========== LIABILITIES Current liabilities: Accounts payable and accrued expenses............. $273,486 Customer prepayments.............................. 18,909 Deferred officers' compensation (including accrued interest of $684 in 1995)....................... Notes payable-officers............................ 115,750 ----------- Total current liabilities...................... 408,145 Note payable-other (net of deferred debt discount of $74,776 in 1996 and $15,111 in 1995).............. 435,687 Note payable-officers (including accrued interest of $23,582 in 1996 and $15,779 in 1995).............. 182,832 Deferred officers' compensation (including accrued interest of $2,086 in 1996)....................... 134,168 Other liabilities...................................... 15,250 Grant award............................................ 50,000 ----------- Total liabilities............................. 1,226,082 ----------- STOCKHOLDERS' EQUITY Common stock - $.01 par value; 14,000,000 shares authorized; 5,798,483 and 5,791,083 shares issued and outstanding, respectively...................... 57,985 Additional paid-in capital............................. 9,918,608 Deficit................................................ (9,779,267) ----------- Total stockholders' equity .................... 197,326 ----------- TOTAL $1,423,408 ===========
The attached notes are made a part hereof. F-30 NOVA TECHNOLOGIES, INC. CONDENSED STATEMENTS OF OPERATIONS (Unaudited) Three months ended March 31, ----------------------- 1996 1995 * ----------- ----------- Net sales.......................................... $82,553 $119,882 Cost of sales...................................... 302,706 171,229 ----------- ----------- Gross (loss)....................................... (220,153) (51,347) ----------- ----------- Research and development expense................... 81,619 67,286 General, administrative, marketing and consulting expenses.......................... 152,126 126,189 ----------- ----------- Total expenses..................................... (233,745) (193,475) ----------- ----------- (Loss) from operations............................. (453,898) (244,822) Interest and other income.......................... 24,054 1,530 Interest expense................................... (27,831) (554) ----------- ----------- NET LOSS.................................. ($457,675) ($243,846) ======================== Net loss per share................................. ($0.08) ($0.06) ====== ====== Weighted average number of common shares used in computing loss per share........................................ 5,796,016 4,355,533 ========= ========= The attached notes are made a part hereof. * As Adjusted F-31
NOVA TECHNOLOGIES, INC. STATEMENTS OF CASH FLOWS (Unaudited) Three months ended March 31, ----------------------- 1996 1995 * ----------------------- Cash flows from operating activities: Net loss............................................... ($457,675) ($243,846) Adjustments to reconcile net loss to net cash ---------- ----------- (used in) operating activities: Depreciation and amortization.......................... 27,740 20,319 Value assigned to warrants given to employees.......... 9,142 Common stock issued for professional services rendered. 8,214 Changes in operating assets and liabilities: (Increase) decrease in inventories.................... (150,370) 34,952 (Increase) in accounts receivable, prepaid expenses and other assets..................................... (103,138) (17,524) (Increase) in restricted cash......................... (90,000) Decrease in subscription receivable................... 90,000 Increase (decrease) in accounts payable and accrued expenses............................................. 11,305 (36,917) Increase in deferred officers' compensation........... 46,000 48,000 Increase in accrued interest payable.................. 16,455 ----------------------- Net cash (used in) operating activities............. (601,469) (185,874) ----------------------- Cash flows from investing activities: Purchase of equipment and capitalized tooling costs..... (10,396) (4,978) ----------------------- Cash flows from financing activities: Proceeds from notes payable............................. 400,000 Proceeds from sale of common stock...................... 95,100 Issuance costs incurred in sale of common stock......... (9,510) Proceeds from exercise of warrants...................... 99,565 ----------------------- Net cash provided by financing activities........... 400,000 185,155 ----------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... (211,865) (5,697) Cash and cash equivalents at beginning of period......... 485,819 102,245 ----------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD............... $273,954 $96,548 ======================= Supplemental disclosure of cash flow information- Forgiveness of debt owed to officers.................. $762,852 Value of warrants given in connection with financing.. $62,800
The attached notes are made a part hereof. * As Adjusted F-32 NOVA TECHNOLOGIES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 1996 (UNAUDITED) (NOTE A): - --------- The accompanying unaudited financial statements represent condensed financial data and, therefore, do not include all footnote disclosures required to be included in financial statements prepared in conformity with generally accepted accounting principles. (NOTE B): - --------- (1) In management's opinion, all necessary adjustments (consisting only of normal recurring adjustments) have been made in order to present fairly the results for the interim periods. (2) The results of operations for three months ended March 31, 1996 are not necessarily indicative of the results of operations for the year ending December 31, 1996. (3) From inception through December 31, 1994, the Company reported results as a development stage enterprise. Since January 1, 1995, the Company is no longer classified as a development stage enterprise. (NOTE C): - --------- Net loss per share is based on the weighted average number of shares outstanding during each period. No effect has been given to outstanding options and warrants as the effect would be antidilutive. (NOTE D): - --------- Inventories are stated at the lower of cost (first-in, first-out) or market. (NOTE E): - --------- In September 1995, pursuant to a series of interdependent transactions, the Company sold 900,901 shares of its common stock for an aggregate of $1,000,000 in a private placement, received a grant commitment from the city of Bristol, Connecticut of up to $100,000 and received loan commitments to borrow in the aggregate of up to $2,050,000 from a bank and various agencies and public authorities of the state of Connecticut in connection with moving its manufacturing facilities to Bristol, Connecticut. The loan commitments are as follows: F-33 NOVA TECHNOLOGIES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 1996 (UNAUDITED) (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. 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 March 31, 1996, the Company borrowed $500,000 under this facility. The Company granted CII a warrant to purchase 300,000 shares of common stock at an exercise price of $1.11 per share, expiring on September 1, 2001. The warrant becomes exercisable on a pro rata basis, as the Company achieves its March 31, 1996, 200,000 of such warrants are exercisable and have been valued at $78,800. (b) The Company entered into a loan agreement with People's Bank ("Peoples") providing for a $1,000,000 revolving credit facility expiring on September 5, 1997 at an interest rate of prime plus 1 1/2%. Borrowings available under the facility are limited to 80% of eligible accounts receivable and 50% of eligible inventory and are collateralized by the Company's accounts receivable and inventory. At March 31, 1996 no borrowings were made under this loan agreement. This facility contains restrictive covenants that limit capital expenditure and other financial and ratio requirements with respect to working capital, equity and unsubordinated debt. The facility restricts the payment of dividends and also requires funds to be held in escrow as a Debt Service Reserve, as defined in the agreement. The Connecticut Development Authority ("CDA") has guaranteed repayment of 40% of the outstanding balance of the loan. The Company's president has guaranteed repayment of 20% (up to $80,000) of any amounts paid by CDA to Peoples under their guarantee. In addition, three of the Company's product distributors (the "LOC Corporations") each agreed to provide an irrevocable letter of credit in the amount of $200,000 for an aggregate of $600,000, which letters of credit can be drawn down upon the failure of the Company to make when due any payment to Peoples. In exchange for issuing these letters of credit, the Company issued each of the LOC Corporations a warrant to purchase up to 20,000 shares (60,000 in the aggregate) of the Company's common stock at an exercise price of $2.50 per share. Pursuant to a put/call agreement with two of the LOC Corporations, the Company had the right to require the two LOC F-34 NOVA TECHNOLOGIES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) Corporations to purchase an aggregate of 126,667 shares of common stock (or the LOC Corporations had the right to call the Company to issue its common stock) at $1.50 per share for total proceeds of $190,000. The Company received proceeds of $190,000 during the period December 1995 through March 1996. Pursuant to the financing agreement with Peoples, the proceeds received from the LOC Corporations reduce their outstanding letters of credit in that amount and the funds are to be held in a restricted cash account by the Company and the number of shares that could be purchased by LOC Corporations under the warrants was reduced by 19,000. (c) The Company entered into a loan agreement with CDA providing for a line of credit of up to $100,000 until September 4, 1996 for 80% of the purchase price of new or used equipment, bearing interest at the rate of 7.94%. The loan is repayable in 48 equal monthly installments commencing October 1, 1998 and is collateralized by all the equipment purchased with the proceeds. The Company granted CDA warrants to purchase an aggregate 45,000 shares of common stock at an exercise price of $2.50 per share. At March 31, 1996 no borrowings were made under this loan agreement. (d) The Company entered into an Assistance Agreement, which was approved November 30, 1995 with the Department of Economic and Community Development ("DECD") providing for a loan to the Company in an amount not to exceed $200,000 for funding the relocation of the Company's factory (as defined therein) at an interest rate of 5% per annum. The principal and interest of the loan is due in 84 equal monthly payments commencing on the third anniversary of the advancement date, and is collateralized by certain machinery and equipment. At March 31, 1996 no borrowings were made under the Assistance Agreement. (e) The Company entered into a Grant Agreement, dated August 8, 1995 with the city of Bristol, Connecticut ("Bristol"), providing, under certain conditions, for a grant in an amount up to $100,000 ($50,000 was received in October 1995 and the balance is to be received on the achievement of certain employment levels). If the Company relocates 60% of its equipment or employees of its manufacturing facilities outside Bristol prior to August 8, 2005, the Company will be obligated to immediately repay the grant. (NOTE F): - --------- At March 31, 1996 the notes payable to officers, as amended, bear interest at 11% and 12% per annum. The 11% and 12% notes (aggregating $170,000 and $105,000), respectively are payable on April 1, 1997. F-35 NOVA TECHNOLOGIES, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS AS OF MARCH 31, 1996 (UNAUDITED) The notes are subordinated to the borrowings under the People's Bank ("Peoples") and Connecticut Innovations, Incorporated ("CII") loan facilities. The officers received permission from Peoples and CII to substitute deferred compensation aggregating $115,750 due them at March 31, 1996 for an equal amount of subordinated notes payable and in April, a payment of $115,750 was made to the officers reducing the amount owed to them under the notes payable. (NOTE G): - --------- Two officers have agreed to defer until April 1, 1997 payment of salaries due them aggregating $16,332. Two officers have agreed to defer until April 1, 1997 payment of interest on deferred compensation due them aggregating $2,086. Three directors have agreed to defer payment of accrued director's fees until April 1, 1997 aggregating $15,250. (NOTES H): - ---------- In the beginning of May 1996, the Company borrowed $200,000 under its revolving line of credit. F-36 COMED SYSTEMS, INC. FINANCIAL STATEMENTS FEBRUARY 29, 1996 F-37 [LETTERHEAD OF RICHARD A. EISNER & COMPANY, LLP] RAE === REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Comed Systems, Inc. We have audited the accompanying balance sheet of Comed Systems, Inc. as at February 29, 1996 and the related statements of operations, changes in stockholders' equity and cash flows for the nine months ended February 29, 1996 and the year ended May 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements enumerated above present fairly, in all material respects, the financial position of Comed Systems, Inc. at February 29, 1996, and the results of its operations and its cash flows for the nine months ended February 29, 1996 and the year ended May 31, 1995, in conformity with generally accepted accounting principles. /s/ Richard A. Eisner & Company, LLP New York, New York May 17, 1996 With respect to Note G May 30, 1996 F-38 COMED SYSTEMS, INC. BALANCE SHEET FEBRUARY 29, 1996
A S S E T S ----------- Current assets: Cash............................................................. $ 15,000 Accounts receivable, trade - net (Notes C and H)................. 374,000 Inventories (Note B[2]).......................................... 18,000 Prepaid expenses................................................. 16,000 Deferred taxes (Note I).......................................... 34,000 -------- Total current assets...................................... 457,000 Rental equipment, less accumulated depreciation of $1,186,000 (Note B[3])........................... 365,000 Furniture and equipment - net (Notes B[4] and D).................... 67,000 Other assets........................................................ 11,000 -------- T O T A L................................................. $900,000 ======== L I A B I L I T I E S --------------------- Current liabilities: Current portion of long-term debt (Notes E and G)................ $228,000 Accounts payable and accrued expenses............................ 74,000 Income taxes payable (Note I).................................... 200,000 -------- Total current liabilities................................. 502,000 -------- Long-term debt (less current portion)............................... 9,000 Deferred taxes (Note I)............................................. 53,000 -------- Total liabilities......................................... 564,000 -------- Commitments (Note F) STOCKHOLDERS' EQUITY -------------------- Common stock, no par value; 100 shares authorized, issued and outstanding........................................... 1,000 Accumulated earnings................................................ 335,000 -------- Total stockholders' equity................................ 336,000 -------- T O T A L................................................. $900,000 ========
The accompanying notes to financial statements are an integral part hereof. F-39 COMED SYSTEMS, INC. STATEMENTS OF OPERATIONS
Nine Months Ended Year Ended February 29, May 31, 1996 1995 ------------- ----------- Net revenues......................................... $1,702,000 $1,758,000 ---------- ---------- Cost of net revenues................................. 881,000 903,000 Selling, general and administrative expenses ........ 506,000 521,000 Provision for doubtful accounts...................... 30,000 39,000 ---------- ---------- 1,417,000 1,463,000 ---------- ---------- Operating income........................... 285,000 295,000 ---------- ---------- Interest income...................................... 6,000 4,000 Interest (expense)................................... (64,000) (75,000) Gain (loss) on sale of assets........................ 19,000 (2,000) ---------- ---------- Total...................................... (39,000) (73,000) ---------- ---------- Income before income taxes........................... 246,000 222,000 Income tax expense................................... 94,000 93,000 ---------- ---------- NET INCOME........................................... $ 152,000 $ 129,000 ========== ==========
The accompanying notes to financial statements are an integral part hereof. F-40 COMED SYSTEMS, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock -------------- Number of Accumulated Shares Amount Earnings Total ------ ------ ----------- -------- Balance - May 31, 1994.................... 100 $1,000 $ 54,000 $ 55,000 Net income................................ 129,000 129,000 --- ------- -------- -------- Balance - May 31, 1995.................... 100 1,000 183,000 184,000 Net income for the nine months ended February 29, 1996...................... 152,000 152,000 --- ------- -------- -------- BALANCE - FEBRUARY 29, 1996............... 100 $1,000 $335,000 $336,000 === ======= ======== ========
The accompanying notes to financial statements are an integral part hereof. F-41 COMED SYSTEMS, INC. STATEMENTS OF CASH FLOWS
Nine Months Ended Year Ended February 29, May 31, 1996 1995 ----------- ----------- Cash flows from operating activities: Net income......................................... $ 152,000 $ 129,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense........................... 464,000 433,000 Deferred taxes................................. (106,000) 93,000 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable, trade - net............................... (164,000) 110,000 (Increase) decrease in prepaid expenses..... (4,000) 5,000 (Increase) decrease in other assets......... (7,000) 1,000 Increase (decrease) in accounts payable and accrued expenses.......................... (143,000) 61,000 Increase in income taxes payable............ 200,000 --------- --------- Net cash provided by operating activities. 392,000 832,000 --------- --------- Cash flows from investing activities: Acquisition of rental equipment.................... (10,000) (700,000) Disposition of rental equipment.................... 52,000 7,000 Acquisition of property and equipment.............. (20,000) (53,000) --------- --------- Net cash provided by (used in) investing activities.............................. 22,000 (746,000) --------- --------- Cash flows from financing activities: Proceeds from bank borrowings...................... 100,000 139,000 Principal repayment from bank borrowings........... (212,000) (101,000) Proceeds from stockholder's and related parties' loans............................................. 530,000 Principal repayment from stockholder's and related parties' loans................................... (380,000) (615,000) --------- --------- Net cash (used in) financing activities... (492,000) (47,000) --------- --------- NET INCREASE (DECREASE) IN CASH....................... (78,000) 39,000 Cash - beginning of period............................ 93,000 54,000 --------- --------- CASH - END OF PERIOD.................................. $ 15,000 $ 93,000 ========= =========
The accompanying notes to financial statements are an integral part hereof. F-42 COMED SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (NOTE A) - Organization: - ----------------------- The Company was incorporated in December 1989 in the State of Florida. Subsequent to February 29, 1996, the Company reincorporated under the laws of the State of New Hampshire. The Company operates a home health care business which sells and rents durable medical equipment to hospitals, nursing homes and individuals in the northeastern United States. (NOTE B) - Significant Accounting Policies: - ------------------------------------------ Significant accounting policies in the preparation of the financial statements are as follows: [1] Revenue recognition: ------------------- Revenues are recognized when services are rendered and related products are provided to patients and are recorded at amounts estimated to be received under reimbursement arrangements with the medical facility or third party payors, including private insurers, and Medicare. [2] Inventories: ----------- Inventories are stated at the lower of cost (first-in, first-out) or market and consist primarily of medical supplies sold directly to patients for use in their homes. [3] Rental equipment: ---------------- Rental equipment consists of medical equipment rented to patients for use in their homes and hospitals and is stated at cost. Depreciation is provided using the straight-line method over the useful life of the equipment which is stated at three years. [4] Furniture and equipment: ----------------------- Furniture and equipment are stated at cost. The Company computed depreciation using the straight-line method over the useful lives of the assets acquired which is estimated at three years. F-43 COMED SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (NOTE B) - Significant Accounting Policies: (continued) - ------------------------------------------ [5] Management estimates: -------------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. [6] Recently issued accounting standards: ------------------------------------ The Company has not elected to adopt early the provisions of a recently issued accounting standard regarding impairments of long-lived assets ("FAS 121"). FAS 121 requires entities to review long-lived assets and certain identifiable intangibles to be held and used, for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company has not determined the potential impact, if any, of the adoption of the above standard on its financial position or results of operations. (NOTE C) - Accounts Receivable: - ------------------------------ The accounts receivable includes an allowance for doubtful accounts of $86,000 at February 29, 1996. (NOTE D) - Furniture and Equipment: - ---------------------------------- As of February 29, 1996, furniture and equipment consist of the following: Furniture and fixtures. . . . . . . . . $ 63,000 Vehicles. . . . . . . . . . . . . . . . 116,000 -------- 179,000 Less accumulated depreciation . . . . . 112,000 -------- $ 67,000 ======== F-44 COMED SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (NOTE E) - Long-Term Debt: - ------------------------- As of February 29, 1996 long-term debt consists of the following: Ford Credit Corp. payable in monthly installments of $1,141, including interest at 10.9% per annum, due February 1997 (1).................... $ 14,000 Ford Credit Corp. payable in monthly installments of $502, including interest at 10.5% per annum, due April 1998 (1)....................... 13,000 CCC Leasing, Inc. payable in monthly installments of $6,479, including interest at 18% per annum, due January 1997 (Note G).............. 60,000 Note payable to stockholder (Note G).. 150,000 -------- T o t a l................... 237,000 Less current portion.................. 228,000 -------- $ 9,000 ========
(1) Collateralized by vehicles. (NOTE F) - Commitments: - ---------------------- [1] Letter of credit: ---------------- The Company has an irrevocable letter of credit to People's Bank on behalf of Nova Technologies, Inc. ("Nova") for $200,000 which expires on November 5, 1997. The letter of credit is collateralized by accounts receivable and inventory. In exchange for the letter of credit, the Company received a warrant to purchase up to 20,000 shares of Nova's common stock at an exercise price of $2.50 per share. The warrant expires on September 5, 1996. F-45 COMED SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (NOTE F) - Commitments: (continued) - ---------------------- [2] Lease agreements: ---------------- The Company entered into a lease agreement with a related party for corporate offices and warehouse space which commenced on December 1, 1995, and runs for a period of three years. The lease may be extended for additional consecutive periods of one year. Minimum annual rentals are as follows: Twelve Months Ending February 29, ------------- 1997 . . . . . . . . . . . . $ 42,000 1998 . . . . . . . . . . . . 42,000 1999 . . . . . . . . . . . . 31,000 -------- T o t a l . . . . . . $115,000 ======== Rent expense amounted to approximately $25,000 for the nine months ended February 29, 1996 and $36,000 for the year ended May 31, 1995. (NOTE G) - Related Party Transactions: - ------------------------------------- On December 1, 1994, the Company borrowed approximately $130,000 from CCC Leasing, Inc., a company owned by relatives of the principal stockholders. The note, which is payable in 24 equal monthly installments beginning January 15, 1995, bears interest at 18% per annum. As of February 29, 1996, $60,000 of the note remained unpaid. As of May 30, 1996 the note was fully repaid (Note E). During the year ended May 31, 1995, the Company entered into a separate promissory note, payable to one of the stockholders. The note is for $450,000, with interest at 18% per annum due monthly and the principal due May 31, 1998. As of February 29, 1996, only $150,000 of the note remained unpaid. As of May 30, 1996, the note was repaid (Note E). F-46 COMED SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (NOTE H) - Concentration of Risk: - -------------------------------- Revenues from principal sources were as follows:
Nine Months Ended February 29, Year Ended 1996 May 31, 1995 ------------ ------------ Hospitals............... 57% 75% Medicare................ 24 21 Private insurance and other nongovernment agencies............. 19 4 --- --- T o t a l............... 100% 100% === ===
Reimbursements can be influenced by the financial instability of private third-party payors and the budget pressures and cost shifting by governmental payors. A reduction in coverage or reimbursement rates by third-party payors could have a material adverse effect on the Company's results of operations. The Company, like other Medicare providers, is subject to governmental audits of its Medicare reimbursement claims. As a provider of services, under the Medicare programs, the Company is also subject to the Medicare fraud and abuse laws. As of February 29, 1996, the percentage of accounts receivable is as follows: Hospitals. . . . . . . . . . . 60% Medicare . . . . . . . . . . . 32 Private insurers and other nongovernment sources . . . 8 --- T o t a l. . . . . . 100% === F-47 COMED SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (NOTE I) - Income Taxes: - ----------------------- The components of the provision for taxes on income are as follows:
Nine Months Ended February 29, Year Ended 1996 May 31, 1995 ------------- ------------- Current: Federal............................................ $170,000 State.............................................. 30,000 Deferred: Federal............................................ (90,000) $79,000 State.............................................. (16,000) 14,000 -------- ------- T o t a l...................................... $ 94,000 $93,000 ======== ======= A reconciliation between the Company's effective rate and the U.S. Federal income tax rate is as follows: Nine Months Ended February 29, Year Ended 1996 May 31, 1995 ----------- ------------ Statutory rate...................................... 34.0% 34.0% State income tax, net of federal tax benefit................................ 6.0 6.0 Other............................................... (2.0) 2.0 ---- ---- 38.0% 42.0% ==== ====
The deferred tax liability at February 29, 1996 is as follows: Fixed assets. . . . . . . . . $ 53,000 Accounts receivable . . . . . (34,000) -------- $ 19,000 ======== Deferred tax expense results from temporary differences in the recognition of expenses for tax and financial reporting purposes. The principal sources of these differences were depreciation and allowance for doubtful accounts. F-48 COMED SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (NOTE J) - Simplified Employee Pension Plan: - ------------------------------------------- The Company established a Simplified Employee Pension Plan (the "Plan") covering eligible employees who meet certain minimum age and service requirements. Contributions to the Plan are to be determined annually at the discretion of management. Contributions made to the Plan for the nine months ended February 29, 1996 and the year ended May 31, 1995 were $22,500 and $22,500, respectively. (NOTE K) - Prior Period Adjustment: - ---------------------------------- Accumulated earnings at May 31, 1994 has been adjusted to reflect capitalization of certain fixed assets previously expensed. The effect of this adjustment is to increase net income for the year ended May 31, 1994 and retained earnings by approximately $132,000 at May 31, 1994. F-49 ================================================================================ NO DEALER, SALESMAN OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE HEREBY, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. UNTIL ______, 1996 (40 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ___________________________________________ TABLE OF CONTENTS Page ---- Prospectus Summary........................................... 2 Risk Factors................................................. 7 Market For Common Stock and Dividend Policy.................. 12 Capitalization............................................... 13 Selected Financial Data...................................... 13 Management's Discussion and Analysis of Financial Condition and Results of Operation.................................... 17 Business..................................................... 25 Management................................................... 35 Certain Transactions......................................... 39 Principal Stockholders....................................... 43 Selling Stockholders......................................... 45 Plan of Distribution......................................... 45 Description of Securities.................................... 46 Legal Proceedings............................................ 49 Legal Matters................................................ 49 Experts...................................................... 49 Indemnification for Securities Act Liabilities............... 49 Available Information........................................ 50 Index to Financial Statements................................ F-1 ================================================================================ ================================================================================ NOVA TECHNOLOGIES, INC. COMMON STOCK ____________________________________ PROSPECTUS _____________________________________ July __, 1996 ================================================================================ PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS The Certificate of Incorporation of Nova Technologies, Inc. (the "Registrant") provides with respect to the indemnification of directors and officers that the Registrant shall indemnify to the fullest extent permitted by Section 145 of the Delaware General Corporation Law, as amended from time to time, each person that such Section grants the Registrant the power to indemnify and that such indemnification shall not be deemed exclusive of any other rights to which such persons may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise. The Certificate of Incorporation of the Registrant also provides that no director shall be liable to the Registrant or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (1) for any breach of the director's duty of loyalty to the Registrant or its stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) under Section 174 of the Delaware General Corporation Law or (4) for any transaction from which the director derived an improper personal benefit. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the estimated expenses in connection with the offering described in this Registration Statement. None of such expenses will be paid by Selling Stockholders. - -------------------------------------------------------------------------------- Registration Fee Under Securities Act of 1933 $1,009.55 Photocopying/Printing Expenses $ 200.00 Accounting Fees and Expenses $ Legal Fees and Expenses $ Blue Sky Fees and Expenses (including related legal fees) $ Miscellaneous $ 300.00 TOTAL $ - --------------------------------------------------------------------------------
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES The following sets forth information relating to all securities of the Company which were sold by it during the past three years and which were not registered under the Securities Act of 1933, as amended (the "Act"). 1. During the period February through May 1994, the Company issued 10,940 shares of Common Stock, valued at $10,940 per share to First Island Partners L.P., the landlord for the Company's Hauppauge, New York facility, in payment of a portion of its rent. 2. During the period from December 1993, through April 1994, the Company sold 653,000 shares of Common Stock at a price of $1.00 per share to the individuals named below. A commission of 10% was paid by the Company in connection with each of these sales to one or more of Arlindo Jorge and Barry Goldstein. Fermon, Charles M. Schneider, August E. Glaws, Walter Sami, Sherif Eder, Leonard J. II-1 Rieger, Fred Jr. Shapiro, Daniel Teller, Sandy Groginsky, Paula & Stuart Fermon, Charles M. Brooksbank, James J. Helkowski, Barbara Schmitz, John R. Helkowski, Barbara Brooksbank, James J. Cohen, Edward J. & Arlette Fermon, Charles M. Stevenson, Richard C. & Inez I. Brooksbank, James J. La Torre, Susan Russo, Robert & Michelle Gordon, Robert & Sandra Aquila, Santo La Torre, Michael P. La Torre, Michael J. Lehrman, Sol & Shirley Helkowski, Barbara Slaughter, June Reisman, Theodore Ferman, Charles Griffin, E. Adinolfi, J & F Lijoi, Bruno Trustee Scherer, Howard & Rita Jacklin, Honey Ruth Trustee Kowalczik, Douglas J. Shapiro, David 3. During the period from May 1994, through August 1995, the Company sold 744,920 shares of Common Stock at a price of $1.50 per share to the individuals named below. A commission of 10% was paid by the Company in connection with each of these sales to one or more of Arlindo Jorge, Barry Goldstein and Jeremy Wiesen. Melchior, Timothy Bariahtaris, Connie & Arthur Cabble, Steven & Donna Cohen, Wayne Jay Shapiro, Eric Melchior, Timothy Thonsen, William J. Kowalczik, Douglas Groginsky, Paula & Stuart Shapiro, Daniel Sussman, Gerald & Dorothy Kaller, Jerold & Joyce Schaffner, Charles E. Navarro, Vincent & Sheila Rexroad, Susan & Fred Rieger, Fred Trustee Rusnack Pension Plan Melchior, Timothy Kowalczik, Douglas J. II-2 Dean Witter Cust FBO Arlindo Jorge Maher, John Mathews, James F. & Teresa Mathews, Rosemary Kowalczik, Douglas Grazia, Albert W. Shapiro, Ira Jay Mathews, Rosemary Kowalczik, Douglas J. Hartman, David Howfam, Inc. Kowalczik, Douglas J. Wiesen, Jeremy Loscalzo, Michael A. Eder, Lenoard Rieger, Fred R. Mattern, Lynne R. Rusnack, Theodore Wiltsie, Thomas R. Wild, Walter Melchior, Timothy Ziegler, Gordon S. Jr. Sami, Sherif F. Wiesen, Jeremy Shapiro, Daniel Fyman, Philip Cohen, Wayne Schoen, Bruce Fermon, Charles Backer, Jeffrey & Susan Di Matteo, Elizabeth C. Sami, Sherif F. Lepkowsky, Calvin & Irene Shapiro, Daniel Gordon, Robert & Sandra Helkowski, Barbara Helkowski, Barbara Horowitz, Stephen E. Cohen, Wayne Cohen, Michael & Marlene Melchior, Timothy Edwards, Ellen & Philip Dori, Isaac & Judith Lonergan, Michael R. Adib, Banu Republic Bank FBO David Hartman Maher, John Duane, Winifred A. Republic Bank FBO David Hartman Navarro, Sheila Rexroad, Susan & Fred Abrams, Scott D. Rauch, Willard E. Oblas, Robert Melchior, Timothy II-3 Slaughter, June Arca, Bill Nash, Gary & Rhoda Rosenheim, Paul Lefcourt, Richard B. Hartman, David Genovese, Gregory P. Shapiro, Daniel Viviani, Joseph C. Melchior, Timothy Madden, Elizabeth D. Smith Barney Custodian for Louis Di Mateo Sondes, Sharon Bonheim, Paul Grazia, Albert Rieger, Fred Jr. Shapiro, Ira Jay Webster, Jerry Helkowski, Barbara Cohen, Michael & Marlene Harker, Edward Albert, Charles Chubb, Charles Melchior, Timothy Helkowski, Barbara Reisman, Theodore Groginsky, Stuart Navarro, Vincent Suozzi, Joseph A. 4. In 1993 and 1994, the Company issued 12,000 and 12,692 shares, respectively, of Common Stock to Aztech Corp., a company controlled by Stephen Fisher, an executive officer of the Company, in consideration of consulting services. 5. In January 1995, the Company issued 73,752 shares of Common Stock pursuant to the exercise of outstanding warrants to the individuals named below. The warrants were issued in 1990 with an exercise price of $3.00 per share and an expiration date of December 31, 1994. In 1994, the exercise price of these warrants was reduced to $1.35 per share and the expiration date was extended to January 20, 1995. Eder, Leonard Rieger Jr., Fred Rieger, Helene Rusnack, Theodore Wiltsie, Thomas Wild, Walter Ziegler, Gordon Sami, Sherif 6. In May, 1994, in connection with the cancellation of certain stock options, the Company issued to Charles Chubb a warrant to purchase 172,599 shares of Common Stock at $2.75 per share, expiring December 31, 1999. II-4 7. In exchange for services rendered, the Company issued to Harold J. Lash, Paul C. DiMatteo, John Gilden and Steven Kay, employees of the Company, in 1994 and 1995 warrants to purchase 62,932 and 24,680 shares, respectively, of Common Stock at an exercise price of $1.50 per share, expiring at various dates through September 29, 1998. 8. In September 1995, the Company issued to Samuel N. Paul a warrant to purchase 30,000 shares of Common Stock at $2.61 per share, expiring September 4, 2002 for financial consulting. 9. In June 1995, Paul DiMatteo, and Charles Chubb, executive officers of the Company and Jay Haft, a director of the Company, were issued seven-year warrants to purchase 180,000, 120,000, and 6,667 shares, respectively, of Common Stock at $2.75 per share. 10. In September 1995, the Company sold 900,901 shares of Common Stock at a price of $1.11 per share to the persons named as Selling Stockholders herein. The Company paid a commission of $60,000 to Merolla & Bogar LLC and $40,000 to TimeCapital Securities Corporation. 11. In September 1995, the Company issued to Connecticut Innovations Incorporated warrants to purchase 300,000 shares of Common Stock at $1.11 per share, expiring September 1, 2001 in connection with its loan agreement with the Company. 12. In September 1995, the Company issued to Connecticut Development Authority warrants to purchase 33,750 and 11,250 shares of Common Stock at $2.50 per share, expiring September 1, 1997 and September 1, 2002, respectively, in connection with its loan agreement with the Company and its guarantee of the Company's loan agreement with People's Bank. 13. In September 1995, the Company issued to each of Advanced Therapeutics, Inc. ("Advanced"), Comed Systems, Inc. ("Comed") and Innovative Medical Systems, Inc. ("Innovative"), distributors of the Company, a warrant to purchase 20,000 shares of Common Stock at $2.50 per share, expiring the day after such distributor's obligations to People's Bank expire, in connection with each such distributor posting a $200,000 letter of credit as security for the Company's loan facility with People's Bank. Also in September 1995, the Company entered into a Stock Put and Call Agreement with Advanced and Innovative. Pursuant to such agreements, in September 1995, the Company sold 66,667 and 60,000 shares, respectively, of its Common Stock to Advanced and Innovative at $1.50 per share. The proceeds of such sales are held in a restricted account and the letter of credit posted by each of Advanced and Innovative as security for the Company's loan facility with People's Bank was reduced by the amount of such proceeds. In addition, Advanced's warrant was reduced to the right to purchase 10,000 shares of Common Stock and Innovative's warrant was reduced to the right to purchase 11,000 shares of Common Stock. 14. Merolla & Bogar LLC was issued 5400 and 2700 shares of Common Stock in January and March 1996, representing payment of its $12,000 annual fee for the period September 1995 through May 1996 at $1.11 per share pursuant to a consulting agreement with the Company. 15. Pursuant to his employment agreement, in May 1994, the Company issued to Stephen Fisher, an executive officer and director, an option pursuant to its ISO Plan to purchase 150,000 shares of Common Stock at $2.75 per share, expiring May 23, 2004. 16. Pursuant to his employment agreement which became effective in September 1995, the Company issued to Samuel N. Paul, an executive officer and director an option pursuant to its 1994 Stock Option Plan (the "Plan") to purchase 150,000 shares of Common Stock at $2.61 per share, expiring December 31, 2004. 17. In October 1995, Jay Haft, a director of the Company, was granted an option pursuant to the Plan to purchase 10,000 shares of Common Stock at $3.13 per share through December 31, 2002. II-5 18. In October 1995, an employee of the Company, was granted an option pursuant to the Plan to purchase 2,000 shares of Common Stock at $3.13 per share, expiring October 9, 2002. 19. In March 1996, John Maher and John O'Brien were each issued 1,000 shares of Common Stock as finder's fees in connection with certain private placement sales of Common Stock. 20. The following directors were issued the following options to purchase Common Stock pursuant to the Company's GSO Plan:
DIRECTOR DATE OF GRANT # OF SHARES PRICE EXPIRATION DATE - -------------------- ------------- ----------- ----- ------------------ 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
* Extended from December 31, 1995 in June 1994. 21. Fred Rieger, Jr. purchased 10,000 shares of Common Stock in May 1996 at $2.00 per share. Arlindo Jorge received a commission of 10%. Exemption from registration under the Act is claimed for the sales of securities referred to above in reliance upon the exemption afforded by Sections 3(b) or 4(2) of the Act. Each certificate evidencing such securities bears an appropriate restrictive legend and "stop transfer" orders are maintained on the Company's stock transfer records thereagainst. Other than as noted above, none of these sales involved the payment of finder's fees or sales commissions. A subscription agreement indicating that the securities sold were unregistered restricted securities was signed by each purchaser. Such subscription agreements included representations that the purchasers were accredited investors, that they were purchasing the securities for investment and not with a view to distribution, and that they received the Company's filings pursuant to the Exchange Act. No general solicitation or general advertising was conducted by the Company or any of its representatives in connection with the sales of securities referred to above. 22. In October 1993, each of Peter C. Glaws, Nell L. Zandberg, Charles T. Glaws, Walter R. Glaws, and Anna Davenport, purchased 350 shares of Common Stock at a price of $3.00 per share pursuant to the exercise of warrants issued in 1990. Exemption from registration under the Act is claimed for such sales in reliance upon the exemption afforded by Sections 3(b) or 4(2) of the Act. Each certificate evidencing such securities bears an appropriate restrictive legend and "stop transfer" orders are maintained on the Company's stock transfer records thereagainst. None of these sales involved the payment of finder's fees or sales commissions. II-6 ITEM 27. EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------ ----------- 3.1 Certificate of Incorporation, as amended(1) 3.2 By-Laws(1) 4.1 See Exhibit 3.1 and 3.2 4.2 Form of certificate evidencing shares of Common Stock(1) 4.3 Form of certificate evidencing Redeemable Common Stock Purchase Warrant(1) 4.4 Form of Warrant Agreement between the Company and Euro- Atlantic Securities, Inc.(1) 4.5 Form of Redeemable Warrant Agreement between the Company and American Stock Transfer & Trust Company as warrant agent(1) 5 Opinion of Whitman Breed Abbott & Morgan(8) 10.1 1985 General Stock Option Plan(1) 10.2 1985 Incentive Stock Option Plan(1) 10.3 Employment Agreement, dated as of June 18, 1996 between the Company and Paul DiMatteo(8) 10.4 Employment Agreement, dated February 22, 1985, and amendments thereto, between the Company and Charles Chubb(1) 10.5 Promissory Notes of the Company in the principal amounts of $40,000, $20,000, $20,000 $30,000 and $120,000, dated December 18, 1987, December 31, 1987, April 29, 1988, May 26, 1988 and June 15, 1989, respectively, and amendments thereto, payable to Paul DiMatteo and the related Security Agreement, dated June 15, 1989(1) 10.6 Agreement and Restated Stock Purchase Agreement, dated December 31, 1986, between the Company, Transitions Two, Limited Partnership, Nadfa Ltd., Paul DiMatteo and Venture Capital Associates, Ltd(1) 10.7 Lease Agreement, dated March 7, 1986, and amendments thereto, between the Company and First Island Partners, L.P. (the "Lease Agreement")(1) 10.8 Amendment to Lease Agreement, dated February 29, 1992, between the Company and First Island Partners, L.P.(3) II-7 EXHIBIT NUMBER DESCRIPTION - ------ ----------- 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) II-8 EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.22 Consulting and Related Agreements, dated August 24, 1995 between the Company and Merolla & Bogar, LLC(7) 10.23 Distributorship Agreement, dated February 24, 1994 between the Company and James J. Brooksbank(7) 10.24 Employment Agreement, dated June 14, 1996, between the Company and Douglas Drew(8) 10.25 Distributorship Agreement, dated June 20, 1994, between the Company and Innovative Medical Systems, Inc.(7) 10.26 Distributorship Agreement, dated January 24, 1995, between the Company and Advanced Therapeutics, Inc.(7) 10.27 Distributorship Agreement, dated February 15, 1995, between the Company and Recovercare, Inc.(7) 10.28 Distributorship Agreement, dated March 24, 1995, between the Company and Stat Medical, Inc.(7) 10.29 Distributorship Agreement, dated March 17, 1995, between the Company and Concept Medical Corporation(7) 10.30 Distributorship Agreement dated January 1, 1996, between the Company and JCM Capital Corp.(7) 10.31 Agreement, dated August 24, 1995, between the Company and JCM Capital Corp. to enter into a distributorship agreement, together with an amendment thereto dated January 24, 1996(7) 10.32 Agreement, dated November 1, 1994, between the Company and Omni Manufacturing, Inc.(7) 10.33 Financing Agreement, dated September 5, 1995, between the Company and Connecticut Innovations, Incorporated ("CII")(2) 10.34 Senior Note, dated September 5, 1995, by the Company in favor of CII(2) 10.35 Security Agreement, dated September 5, 1995, between the Company and CII(2) 10.36 Collateral Assignment and Grant of License, dated September 5, 1995, between the Company and CII(2) 10.37 Stock Subscription Warrant, dated September 5, 1995, by the Company in favor of CII(2) II-9 EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.38 Warrant Put Agreement, dated September 5, 1995, between the Company and CII(2) 10.39 Officers' Agreement, dated September 5, 1995, among the Company, CII, Paul DiMatteo, Stephen Fisher and Samuel Paul(2) 10.40 Subordination Agreement, dated September 5, 1995, among the Company, CII, Paul DiMatteo and Charles Chubb(2) 10.41 Loan Agreement, dated September 5, 1995, between the Company and People's Bank(2) 10.42 Revolving Credit Note, dated September 5, 1995, by the Company in favor of People's Bank(2) 10.43 Security Agreement, dated September 5, 1995, between the Company and People's Bank(2) 10.44 Guarantee Agreement, dated September 5, 1995, between Connecticut Development Authority and People's Bank and agreed to by the Company(2) 10.45 Guaranty, dated September 5, 1995, by Paul DiMatteo for the benefit of Connecticut Development Authority(2) 10.46 Letter of Credit Agreement, dated September 5, 1995, among the Company, People's Bank and Advanced Therapeutics Inc.(2) 10.47 Letter of Credit Agreement, dated September 5, 1995, among the Company, People's Bank and Innovative Medical Systems, Inc.(2) 10.48 Letter of Credit Agreement, dated September 5, 1995, among the Company, People's Bank and Comed Systems, Inc.(2) 10.49 Letter of Credit Reimbursement, Warrant Grant and Security Agreement, dated September 5, 1995, between the Company and Advanced Therapeutics, Inc.(2) 10.50 Letter of Credit Reimbursement, Warrant Grant and Security Agreement, dated September 5, 1995, between the Company and Innovative Medical Systems, Inc.(2) 10.51 Letter of Credit Reimbursement, Warrant Grant and Security Agreement, dated September 5, 1995, between the Company and Comed Systems, Inc.(2) II-10 EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.52 Loan Agreement, dated September 5, 1995, between the Company and Connecticut Development Authority(2) 10.53 Promissory Note, dated September 5, 1995, by the Company in favor of Connecticut Development Authority(2) 10.54 Security Agreement, dated September 5, 1995, between the Company and Connecticut Development Authority(2) 10.55 Stock Subscription Warrant, dated September 5, 1995, between the Company and Connecticut Development Authority(2) 10.56 Assistance Agreement, approved November 30, 1995, between the Company and the State of Connecticut, acting by the Department of Economic and Community Development(2) 10.57 Promissory Note, dated October 6, 1995, by the Company in favor of the State of Connecticut, acting by the Department of Economic and Community Development(2) 10.58 Intercreditor and Subordination Agreement, dated September 5, 1995, among the Company, People's Bank, CII, Connecticut Development Authority, Comed Systems, Inc., Innovative Medical Systems, Inc., Advanced Therapeutics, Inc., Charles F. Chubb and Paul DiMatteo(7) 10.59 Intercreditor Agreement, dated November __, 1995, among the Company, People's Bank, CII and Department of Economic and Community Development(7) 10.60 Stock Put and Call Agreement, dated September 5, 1995, between the Company and Innovative Medical Systems, Inc.(7) 10.61 Stock Put and Call Agreement, dated September 5, 1995, between the Company and Advanced Therapeutic, Inc.(7) 10.62 Agreement dated August 25, 1995, between the Company and TimeCapital Securities Corporation(9) 10.63 Amendment No. 1 to Loan Agreement, dated as of December 31, 1995, between the Company and People's Bank(9) 10.64 Amendment No. 2 to Loan Agreement, dated as of April __, 1996, between the Company and People's Bank(9) 10.65 Agreement, dated April 26, 1996, between the Company and TimeCapital Securities Corporation(9) 10.66 Amendment to Distributorship Agreement, effective as of October 17, 1995, between the Company and Innovative Medical Systems, Inc.(9) II-11 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* 23.1 Consent of Whitman Breed Abbott & Morgan(9) 23.2 Consent of Richard A. Eisner & Company, LLP* _______________________________________ (1) Incorporated by reference to the exhibits to the Company's Registration Statement on Form S-1 (File No. 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) Previously filed. * Filed herewith. II-12 ITEM 28. UNDERTAKINGS (a) The undersigned Registrant hereby undertakes: (1) That for purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the small business issuer under Rule 424(b)(1), or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time the S.E.C. declared it effective. (2) That for purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new Registration Statement for the securities offered in the Registration Statement, and the offering of the securities at that time shall be deemed to be the initial bona fide offering of those securities. Insofar as indemnification for liabilities arising under the Securities Act of 1993 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions in Item 15 hereof, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless, in the opinion of its counsel, the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-13 SIGNATURES In accordance with the requirements of the Securities Act of 1933, as amended, the Registrant certifies that it has reasonable grounds to believe that it meets all the requirements for filing on Form SB-2 and authorized this Registration Statement to be signed on its behalf by the undersigned, in the City of Hauppauge, New York on the 5th day of July, 1996. NOVA TECHNOLOGIES, INC. By:/s/ Stephen M. Fisher --------------------------------------- Stephen M. Fisher President, Chief Executive Officer, Treasurer, Assistant Secretary and Director (Principal Executive Officer and Principal Financial Officer) In accordance with the requirements of the Securities Act of 1933, as amended, this Registration Statement was signed by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- Paul DiMatteo* Chairman of the Board July 5, 1996 -------------- Paul DiMatteo Charles F. Chubb* Senior Vice President, July 5, 1996 ----------------- Secretary and Director Charles F. Chubb Samuel N. Paul* Senior Vice President and Director July 5, 1996 ----------------- Samuel N. Paul /s/ Douglas Drew Senior Vice President and Director July 5, 1996 ------------------ Douglas Drew Harold J. Lash* Controller (Principal Accounting Officer) July 5, 1996 ------------------ Harold J. Lash Jay M. Haft* Director July 5, 1996 ------------------ Arlindo Jorge* Director July 5, 1996 ------------------ Arlindo Jorge Robert Segnini* Director July 5, 1996 ------------------ Robert Segnini * By: /s/ Stephen M. Fisher ---------------------------------------- Stephen M. Fisher Attorney-in-Fact ================================================================================ ----------------------------------------- EXHIBITS TO REGISTRATION STATEMENT AMENDMENT NO. 2 TO FORM SB-2 UNDER THE SECURITIES ACT OF 1933 ----------------------------------------- NOVA TECHNOLOGIES, INC. ================================================================================ NOVA TECHNOLOGIES, INC. FORM SB-2 FILE NO. 33-00364 INDEX TO EXHIBITS
EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION NUMBERED PAGE - --------- -------------------------------------------------------- ------------- 3.1 Certificate of Incorporation, as amended(1) N.A. 3.2 By-Laws(1) N.A. 4.1 See Exhibit 3.1 and 3.2 N.A. 4.2 Form of certificate evidencing shares of Common Stock(1) N.A. 4.3 Form of certificate evidencing Redeemable Common Stock N.A. Purchase Warrant(1) 4.4 Form of Warrant Agreement between the Company and Euro- N.A. Atlantic Securities, Inc.(1) 4.5 Form of Redeemable Warrant Agreement between the N.A. Company and American Stock Transfer & Trust Company as warrant agent(1) 5 Opinion of Whitman Breed Abbott & Morgan(8) N.A. 10.1 1985 General Stock Option Plan(1) N.A. 10.2 1985 Incentive Stock Option Plan(1) N.A. 10.3 Employment Agreement, dated as of June 18, 1996 between the Company and Paul DiMatteo(8) N.A. 10.4 Employment Agreement, dated February 22, 1985, and amendments thereto, between the Company and Charles Chubb(1) N.A. 10.5 Promissory Notes of the Company in the principal amounts of $40,000, $20,000, $20,000 $30,000 and $120,000, dated December 18, 1987, December 31, 1987, April 29, 1988, May 26, 1988 and June 15, 1989, respectively, and amendments thereto, payable to Paul DiMatteo and the related Security Agreement, dated June 15, 1989(1) N.A. 10.6 Agreement and Restated Stock Purchase Agreement, dated December 31, 1986, between the Company, Transitions Two, Limited Partnership, Nadfa Ltd., Paul DiMatteo and Venture Capital Associates, Ltd(1) N.A.
(i) INDEX TO EXHIBITS (CONTINUED) EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION NUMBERED PAGE - ------ ----------- ------------- 10.7 Lease Agreement, dated March 7, 1986, and amendments thereto, between the Company and First Island Partners, L.P. (the "Lease Agreement")(1) N.A. 10.8 Amendment to Lease Agreement, dated February 29, 1992, between the Company and First Island Partners, L.P.(3) N.A. 10.9 Form of Warrant Agreement between the Company and various persons(1) N.A. 10.10 Extension of Lease Agreement, dated May 5, 1992, between the Company and First Island Partners, L.P.(4) N.A. 10.11 Extension of Lease Agreement, dated July 15, 1992, between the Company and First Island Partners, L.P.(4) N.A. 10.12 Amendment of Lease Agreement, dated September 9, 1992, between the Company and First Island Partners, L.P.(4) N.A. 10.13 Extension of Lease Agreement, dated March 23, 1993 between the Company and First Island Partners, L.P.(5) N.A. 10.14 Amendment to Lease Agreement, dated June 25, 1993 between the Company and First Island Partners, L.P.(5) N.A. 10.15 Promissory Notes of the Company in the principal amounts of $15,000, $15,000 and $5,000 dated October 19, 1993, November 5, 1993 and November 23, 1993, respectively, payable to Charles Chubb and the related Security Agreements, dated October 19, 1993, November 5, 1993 and November 23, 1993(5) N.A. 10.16 Promissory Notes of the Company in the principal amounts of $30,000, $30,000 and $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) N.A. 10.17 1994 Stock Option Plan(6) N.A. 10.18 Employment Agreement, dated May 23, 1994 between the Company and Stephen M. Fisher(6) N.A. (ii) INDEX TO EXHIBITS (CONTINUED) EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION NUMBERED PAGE - ------ ----------- ------------- 10.19 Amendment to Lease Agreement, dated January 13, 1994 between the Company and First Island Partners, L.P.(6) N.A. 10.20 Employment Agreement, dated August 10, 1995 between the Company and Samuel N. Paul(7) N.A. 10.21 Lease Agreement, dated August 25, 1995 between the Company and Industrial Builders & Realty Company together with amendments thereto dated September 5, 1995 and September 6, 1995(7) N.A. 10.22 Consulting and Related Agreements, dated August 24, 1995 between the Company and Merolla & Bogar, LLC(7) N.A. 10.23 Distributorship Agreement, dated February 24, 1994 between the Company and James J. Brooksbank(7) N.A. 10.24 Employment Agreement, dated June 14, 1996, between the Company and Douglas Drew(8) N.A. 10.25 Distributorship Agreement, dated June 20, 1994, between the Company and Innovative Medical Systems, Inc.(7) N.A. 10.26 Distributorship Agreement, dated January 24, 1995, between the Company and Advanced Therapeutics, Inc.(7) N.A. 10.27 Distributorship Agreement, dated February 15, 1995, between the Company and Recovercare, Inc.(7) N.A. 10.28 Distributorship Agreement, dated March 24, 1995, between the Company and Stat Medical, Inc.(7) N.A. 10.29 Distributorship Agreement, dated March 17, 1995, between the Company and Concept Medical Corporation(7) N.A. 10.30 Distributorship Agreement dated January 1, 1996, between the Company and JCM Capital Corp.(7) N.A. 10.31 Agreement, dated August 24, 1995, between the Company and JCM Capital Corp. to enter into a distributorship agreement, together with an amendment thereto dated January 24, 1996(7) N.A. (iii) INDEX TO EXHIBITS (CONTINUED) EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION NUMBERED PAGE - ------ ----------- ------------- 10.32 Agreement, dated November 1, 1994, between the Company and Omni Manufacturing, Inc.(7) N.A. 10.33 Financing Agreement, dated September 5, 1995, between the Company and Connecticut Innovations, Incorporated ("CII")(2) N.A. 10.34 Senior Note, dated September 5, 1995, by the Company in favor of CII(2) N.A. 10.35 Security Agreement, dated September 5, 1995, between the Company and CII(2) N.A. 10.36 Collateral Assignment and Grant of License, dated September 5, 1995, between the Company and CII(2) N.A. 10.37 Stock Subscription Warrant, dated September 5, 1995, by the Company in favor of CII(2) N.A. 10.38 Warrant Put Agreement, dated September 5, 1995, between the Company and CII(2) N.A. 10.39 Officers' Agreement, dated September 5, 1995, among the Company, CII, Paul DiMatteo, Stephen Fisher and Samuel Paul(2) N.A. 10.40 Subordination Agreement, dated September 5, 1995, among the Company, CII, Paul DiMatteo and Charles Chubb(2) N.A. 10.41 Loan Agreement, dated September 5, 1995, between the Company and People's Bank(2) N.A. 10.42 Revolving Credit Note, dated September 5, 1995, by the Company in favor of People's Bank(2) N.A. 10.43 Security Agreement, dated September 5, 1995, between the Company and People's Bank(2) N.A. 10.44 Guarantee Agreement, dated September 5, 1995, between Connecticut Development Authority and People's Bank and agreed to by the Company(2) N.A. 10.45 Guaranty, dated September 5, 1995, by Paul DiMatteo for the benefit of Connecticut Development Authority(2) N.A. (iv) INDEX TO EXHIBITS (CONTINUED) EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION NUMBERED PAGE - ------ ----------- ------------- 10.46 Letter of Credit Agreement, dated September 5, 1995, among the Company, People's Bank and Advanced Therapeutics Inc.(2) N.A. 10.47 Letter of Credit Agreement, dated September 5, 1995, among the Company, People's Bank and Innovative Medical Systems, Inc.(2) N.A. 10.48 Letter of Credit Agreement, dated September 5, 1995, among the Company, People's Bank and Comed Systems, Inc.(2) N.A. 10.49 Letter of Credit Reimbursement, Warrant Grant and Security Agreement, dated September 5, 1995, between the Company and Advanced Therapeutics, Inc.(2) N.A. 10.50 Letter of Credit Reimbursement, Warrant Grant and Security Agreement, dated September 5, 1995, between the Company and Innovative Medical Systems, Inc.(2) N.A. 10.51 Letter of Credit Reimbursement, Warrant Grant and Security Agreement, dated September 5, 1995, between the Company and Comed Systems, Inc.(2) N.A. 10.52 Loan Agreement, dated September 5, 1995, between the Company and Connecticut Development Authority(2) N.A. 10.53 Promissory Note, dated September 5, 1995, by the Company in favor of Connecticut Development Authority(2) N.A. 10.54 Security Agreement, dated September 5, 1995, between the Company and Connecticut Development Authority(2) N.A. 10.55 Stock Subscription Warrant, dated September 5, 1995, between the Company and Connecticut Development Authority(2) N.A. 10.56 Assistance Agreement, approved November 30, 1995, between the Company and the State of Connecticut, acting by the Department of Economic and Community Development(2) N.A. 10.57 Promissory Note, dated October 6, 1995, by the Company in favor of the State of Connecticut, acting by the Department of Economic and Community Development(2) N.A. (v) INDEX TO EXHIBITS (CONTINUED) EXHIBIT SEQUENTIALLY NUMBER DESCRIPTION NUMBERED PAGE - ------ ----------- ------------- 10.58 Intercreditor and Subordination Agreement, dated September 5, 1995, among the Company, People's Bank, CII, Connecticut Development Authority, Comed Systems, Inc., Innovative Medical Systems, Inc., Advanced Therapeutics, Inc., Charles F. Chubb and Paul DiMatteo(7) N.A. 10.59 Intercreditor Agreement, dated November __, 1995, among the Company, People's Bank, CII and Department of Economic and Community Development(7) N.A. 10.60 Stock Put and Call Agreement, dated September 5, 1995, between the Company and Innovative Medical Systems, Inc.(7) N.A. 10.61 Stock Put and Call Agreement, dated September 5, 1995, between the Company and Advanced Therapeutic, Inc.(7) N.A. 10.62 Agreement dated August 25, 1995, between the Company and TimeCapital Securities Corporation(9) N.A. 10.63 Amendment No. 1 to Loan Agreement, dated as of December 31, 1995, between the Company and People's Bank(9) N.A. 10.64 Amendment No. 2 to Loan Agreement, dated as of April __, 1996, between the Company and People's Bank(9) N.A. 10.65 Agreement, dated April 26, 1996, between the Company and TimeCapital Securities Corporation(9) N.A. 10.66 Amendment to Distributorship Agreement, effective as of October 17, 1995, between the Company and Innovative Medical Systems, Inc.(9) N.A. 10.67 Amendment to Distributorship Agreement, effective as of October 17, 1995, between the Company and Concept Medical Corporation(9) N.A. 10.68 Amendment to Distributorship Agreement, effective as of October 17, 1995, between the Company and Advanced Therapeutics Inc.(9) N.A. 10.69 Amendment to Distributorship Agreement, effective as of October 17, 1995, between the Company and Recovercare, Inc.(9) N.A. (vi) 10.70 Amendment to Distributorship Agreement, effective as of October 17, 1995, between the Company and Stat Medical, Inc.(9) N.A. 10.71 Amendment to Distributorship Agreement, dated as of May 6, 1996, between the Company and JCM Capital Corp.(9) N.A. 10.72 Consent and Subordination Agreement, dated as of March 26, 1996, among the Company, Charles F. Chubb, Paul DiMatteo and People's Bank(9) N.A. 10.73 Stock Purchase Agreement, dated as of May 31, 1996, amongthe Company, Vivax, Douglas ) N.A. 10.74 Non-Competition Agreement, dated as of June 14, 1996, between the Company and Douglas Drew(8) Drew and Donna Drew(8 N.A. 10.75 Agreement dated June 28, 1996, between the Company and TimeCapital Securities Corporation* N.A. 23.1 Consent of Whitman Breed Abbott & Morgan(9) N.A. 23.2 Consent of Richard A. Eisner & Company, LLP* _______________________________________ (1) Incorporated by reference to the exhibits to the Company's Registration Statement on Form S-1 (File No. 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) Previously filed. * Filed herewith. (vii) EX-10.75 2 AGREEMENT BETWEEN THE COMPANY & TIMECAPITAL EXHIBIT 10.75 TIMECAPITAL SECURITIES CORPORATION ONE ROOSEVELT AVENUE PORT JEFFERSON STATION, NEW YORK 11776 PHONE (516) 331-1400 FAX (516) 331-1407 June 28, 1996 Nova Technologies, Inc. 89 Cabot Court, Unit L Hauppauge, New York 11788 Attn: Stephen M. Fisher President Dear Sirs: We are parties to two recently executed agreements with respect to our performing certain investment banking services on behalf of Nova Technologies, Inc. ("Nova") the agreement dated April 19, 1996 engaging TimeCapital Securities Corporation ("TimeCapital") as Nova's exclusive, private placement agent (the "Placement Agreement") and the agreement engaging TimeCapital as Nova's exclusive agent to arrange for an underwriter (the "Underwriter Agreement"). Both the Placement Agreement and the Underwriter Agreement were amended by executed agreements dated April 26, 1996 (the "April Amendment") and dated May 21, 1996 (the "May Amendment"), respectively. All of the foregoing are referred to herein collectively as the "Agreements." The Agreements contemplated the completion of a private placement of 500,000 shares of Nova's Common Stock at $2.00 per share and provided Nova with certain rights if such event did not occur within the agreed time. We hereby agree that the Agreements be and hereby are further amended (i) to further extend the initial period in which TimeCapital shall have the exclusive right to effect a private placement of Nova's Capital Stock from June 30, 1996 to and including July 19, 1996 and (ii) to provide that the proposed transaction may be modified to such number of shares of Nova Common Stock at such price as the parties shall agree that shall result in gross proceeds of $1,000,000. Please confirm the foregoing amendments by executing the counterpart of this letter and returning it to TimeCapital. Very truly yours, ACCEPTED AND AGREED TO: TimeCapital Securities Corporation By: /s/ Richard G. Rohman _______________________________ Richard G. Rohman Vice President ACCEPTED AND AGREED TO: Nova Technologies, Inc. By: /s/ Stephen M. Fisher _______________________________ Stephen M. Fisher President EX-23.2 3 CONSENT OF RICHARD A. EISNER & COMPANY EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the inclusion in this Registration Statement on Form SB-2 of our report dated February 12, 1996 based on our audits of the financial statements of Nova Technologies, Inc. and of our report dated May 17, 1996 based on our audits of the financial statements of Comed Systems, Inc. We also consent to the reference to our firm under the captions "Selected Financial Data" and "Experts". Richard A. Eisner & Company, LLP New York, New York July 8, 1996 -----END PRIVACY-ENHANCED MESSAGE-----