UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1999
[ ]Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No fee required) for the transition period from _________to ________.
Commission file number:000-26927
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NOVAMED, INC
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(Name of Small Business Issuer in Its Charter)
Nevada 58-2027283
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(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
623 Hoover Street N.E., Minneapolis, Minnesota 55413
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(Address of Principal Executive Offices) (Zip Code)
(612) 378-1437
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of each Exchange on Which Registered
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Common Stock ($0.001 Par Value) None
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB[ X ].
The issuer's net sales for the year ended December 31, 1999, were $ 1,635,346.
The aggregate market value of the registrant's Common Stock, $0.001 par value
(the only class of voting stock), held by non-affiliates was approximately
$16,831,896 based on the average closing bid and asked prices for the Common
Stock on March 28, 2000
At March 28, 2000, the number of shares outstanding of the registrant's Common
Stock, $0.001 par value (the only class of voting stock), was 15,231,464.
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TABLE OF CONTENTS
PAGE
PART I
Item 1. Description of Business..........................................1
Item 2. Description of Property.........................................15
Item 3. Legal Proceedings...............................................16
Item 4. Submission of Matters to a Vote of Security-Holders.............16
PART II
Item 5. Market for Common Equity and Related Stockholder Matters........16
Item 6. Management's Discussion and Analysis or Plan of Operation.......17
Item 7. Financial Statements............................................20
Item 8. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure.......................21
PART III
Item 9. Directors and Executive Officer ...............................21
Item 10. Executive Compensation..........................................22
Item 11. Security Ownership of Certain Beneficial
Owners and Management........................................23
Item 12. Certain Relationships and Related Transactions..................24
Item 13. Exhibits, List and Reports on Form 8-K..........................24
Signatures .....................................................25
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PART I
This Report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be covered by
the safe harbors created thereby. Investors are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, the ability of the Company to continue its expansion strategy,
changes in costs of raw materials, labor, and employee benefits, as well as
general market conditions, competition and pricing. Although the Company
believes that the assumptions underlying the forward-looking statements
contained herein are reasonable, any of the assumptions could be inaccurate, and
therefore, there can be no assurance that the forward-looking statements
included in this Annual Report will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved.
ITEM 1. DESCRIPTION OF BUSINESS
A. Corporate Organization
As used herein the term Company refers to NovaMed, Inc., its subsidiaries
and predecessors, unless the context indicates otherwise. NovaMed, Inc. was
incorporated in Nevada on November 26, 1996, as Conceptual Technologies, Inc. On
April 9, 1998, the Company changed its name to reflect the acquisition of the
operating subsidiaries of NovaMed Medical Products Incorporated (NMMP), and the
resultant operational focus to the development, manufacture, and sale of mammary
prosthesis devices.
The Company acquired the operating subsidiaries of NMMP, pursuant to a
Stock Purchase and Sale agreement dated February 25, 1998. NMMP was formed as a
Nevada corporation in October of 1994 with the intent of producing a breast
implant that would provide a safe and credible alternative to silicone gel
filled implants. All of the outstanding shares of the three NMMP subsidiaries,
NovaMed Medical Products Manufacturing Inc., NovaMedical Products GmbH and
NovaMed Medical Supplies Corporation were purchased for 6,301,558 shares of the
Company's common stock.
B. Description of Business
The Company is a medical device holding company that develops,
manufactures, and markets hydrogel and saline filled breast implant products
that are used in primary augmentations, revisions, or reconstructive procedures.
Primary breast augmentation is the process by which breast implants are used to
enhance the size or shape of a woman's breast for aesthetic reasons. Breast
implant surgery is usually performed in an outpatient operating room, either in
a surgeon's office or at a hospital. If the surgery is for augmentation
purposes, the surgery is typically performed on an outpatient basis and general
anesthesia is most commonly used. Augmentation surgery usually lasts one to two
hours during which the surgeon makes an incision and creates a pocket for the
implant. The implant is placed in the pocket and the incision is closed with
stitches and tape. Reconstructive surgery typically occurs at a hospital and can
often require more than one operation over several months.
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The Company currently derives all of its sales revenue from the sale of
prosthesis products outside of North America. The Company expects that sales of
such products will continue to represent a substantial portion of its sales
revenue unless and until the Company develops and markets additional products.
The Company submitted its Investigational Device Exemption (IDE)
application to the Food and Drug Administration ("FDA") on January 9, 1999 for
the purpose of obtaining permission from the FDA to start clinical trial of the
NOVAGOLD(TM) breast implant in the United States. The FDA responded on February
11, 1999 with certain deficiencies related to the IDE submission that required a
Company response. The Company resubmitted its NOVAGOLD(TM) IDE submission on
March 28, 2000 with responses to the FDA's noted deficiencies and additional
information pertaining to the NOVAGOLD(TM). The Company anticipates clinical
trials to start before the end of 2000, subject to FDA's acceptance of the
NOVAGOLD(TM) IDE.
On April 22, 1999, the Company submitted a 510k application to obtain
clearance from the FDA for the NOVASALINE(TM) inflatable breast implant. On June
8, 1999, the Company submitted a 510k application to obtain clearance for the
NOVASALINE(TM) pre-filled breast implant. The Company subsequently obtained
scientific clearance to market both products subject to an audit of the
designated manufacturing facility. However, the FDA announced on August 18, 1999
(21 CFR Part 878), that all companies involved in the sale of saline filled
implants in the United States must evidence the collection of sufficient
clinical information through the submission of a Pre-Market Approval (PMA)
document by November 17, 1999 in order to continue or commence the distribution
of saline filled implants. Since the Company had not at that time commenced the
sale of saline filled implants in the United States, it was unable to produce
the requisite clinical data that would satisfy the FDA's requirement. The
Company is yet to determine whether to pursue an IDE for either of its
NOVASALINE(TM) breast implants due to the high cost of conducting appropriate
clinical trials, in addition to continuing regulatory and competitive marketing
developments.
The Company has also begun efforts to increase its manufacturing
capabilities, based in part upon an expectation of increased sales as a direct
and indirect result of its new relationship with Inamed Corp. which has caused
the Company to seek government guaranteed loans and grants in the amount of
approximately twelve million seven hundred thousand dollars ($12,700,000) for
the purpose of building a new manuacturing facility in Germany. Two million,
five hundred thousand dollars ($2,500,000) of that amount to be offered as a non
repayable grant. The loan program offered by the German state government of
North Rhine Westphalia is designed to attract businesses that utilize new
technologies. The Company's application has been accepted. Management is now in
the process of making a final determination of whether to proceed with the
building program. For more information on this prospective facility, see "Item
3. Description of Property."
Inamed Corporation Strategic Alliance Agreement
A component to the success of the Company will be the realization of the
terms of a Strategic Alliance Agreement entered into on March 25, 1999 with
Inamed Corporation (the "Agreement"), the world's number one seller of breast
implants. The Agreement grants to Inamed the exclusive right to sell the
Company's pre-filled NOVAGOLD(TM) and NOVASALINE(TM) breast implants world wide,
subject to defined criteria, in exchange for Inamed's obligation to purchase a
minimum number of the Company's products over the term of the Agreement and the
satisfaction of certain milestone payments which include Inamed's funding of the
Company's FDA clinical trial of the NOVAGOLD(TM) product. The term of the
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Agreement is defined as the later of March 25, 2014 or the expiration date of
the last significant patent for the Company's products.
Sales outside the United States. The Agreement provides for certain
quantities of the Company's products to be sold in specific territories broadly
divided into U.S. and Non-U.S. with the specific exclusion of Germany. Outside
of the United States, Inamed is required to purchase minimum quantities of the
pre-filled NOVAGOLD(TM) and NOVASALINE(TM) products as follows: Year One 12,000
units, Year Two 24,000 units, Year Three 24,000 units. Minimum quantities for
all years remaining over the term of the Agreement will be based upon a rolling
average of the prior two year's sales, but in no event less than 24,000 units
per year after Year Three. Year One is determined to be a sixteen month period
for the purposes of the Agreement, commencing on the delivery date of Inamed's
first purchase order. The Company is yet to make a delivery of products pursuant
to the Agreement.
The initial pricing under the Agreement for the NOVAGOLD(TM) and
NOVASALINE(TM) products will be $300 and $200 respectively, per unit. Beginning
in the year 2000, the Company and Inamed will review the prices per unit on an
annual basis with discretion to make price adjustments based upon manufacturing
costs, end-user pricing, volume purchases and the competitive environment in the
marketplace. The overall price structure is predicated upon a cost plus basis,
which is designed to ensure that Inamed, receives at least a 50% gross margin
from sales. Therefore, the price per unit subsequent to the year 2000 could
vary, however, the Company does not anticipate any substantial pricing
variation.
Inamed will be required to purchase an aggregate of 342,000 units over the
term of the Agreement outside of the United States in order to maintain sales
exclusivity. The Agreement does not distinguish between the number of
NOVAGOLD(TM) and NOVASALINE(TM) products to be purchased by Inamed, therefore,
the Company can reasonably expect a minimum aggregate gross sales revenue of
$68,400,000, utilizing the lower NOVASALINE(TM) $200 per unit sales price, over
the term of the Agreement. Should Inamed fail to meet the minimum purchase
requirements in any given year, the Agreement permits Inamed to maintain
exclusivity by paying a deficiency payment of $67.50 per unit for the number of
units not purchased pursuant to minimum requirements. The Company has the option
to decline deficiency payments and terminate Inamed's right to exclusivity if
the minimum purchase requirement for the sales outside of the United States
falls 25% below agreed volumes for the first two years of operation or below 20%
of agreed volumes for any year after the second year.
Sales Within Germany and to Current Distributors. The Agreement
specifically exempts Germany from the Non-US sales territory in the near future.
The Company and Inamed have agreed to discuss the option of transitioning the
Company's sales business in Germany to Inamed's German sales subsidiary on a
mutually agreeable basis. The Agreement also permits the Company to continue its
current distribution relationships with third party sales representatives in the
Non-US territory in order to avoid any negative legal consequences of
terminating these relationships. The Company is to use its best efforts in
concluding these relationships by December 31, 2000.
Sales within the United States. The Company's products are not currently
available for sale in the United States. Subject to obtaining FDA clearance to
market the Company's products in the United States, the Company and Inamed have
agreed to form a joint venture for the exclusive manufacture and sale of the
NOVAGOLD(TM) product. Should FDA clearance be obtained, the Agreement obligates
Inamed to purchase through the joint venture a minimum number of NOVAGOLD(TM)
product as follows: Year One 12,000 units, Year Two 18,000 units, Year Three
24,000 units. Minimum quantities for all years remaining over
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the term of the Agreement will be based upon a rolling average of the prior two
year's sales, but in no event less than 24,000 units per year after Year Three.
Further, should the FDA not approve silicone gel for use in cosmetic
augmentation, then Inamed's minimum purchase requirement for sales in the United
States will double starting in the second year subsequent to FDA clearance of
the NOVAGOLD(TM) product.
The Agreement does not fix the price to be paid by the joint venture to the
Company for the NOVAGOLD(TM) product. Certainty as to future decisions of the
FDA related to whether clearance to sell the NOVAGOLD(TM) product in the United
States will ever be granted, or whether silicone gel filled implants will ever
be permitted for use in cosmetic surgery, cannot be determined at this time.
Therefore, the Company cannot provide a minimum aggregate sales revenue figure
for sales of the NOVAGOLD(TM) implant in the United States. However, the Company
can reasonably expect, if FDA clearance to market is obtained, that the price
paid by the joint venture for minimum obligations agreed upon with Inamed will
be at least equal to that price per unit agreed for the sale of NOVAGOLD(TM)
outside of the United States. Therefore, provided FDA approval is received, the
Company expects that the minimum number of units purchased by Inamed for use
within the United States would be 342,000, which would generate income of
$102,600,000. However, the Company cannot guarantee that FDA approval will be
obtained and therefore cannot guarantee the purchase of any units inside the
United States by Inamed. If the Company should not receive FDA approval the
minimum number of units required to be purchased by Inamed would be zero. Should
FDA clearance to market be obtained for the NOVAGOLD(TM) product and Inamed
fails to meet the minimum purchase requirements in any given year, the Agreement
permits Inamed to maintain exclusivity by paying a deficiency payment of $67.50
per unit for the number of units not purchased pursuant to minimum requirements.
The Company has the option to decline deficiency payments and terminate Inamed's
right to exclusivity if the minimum purchase requirement for the sales within
the United States falls 25% below agreed volumes for the first two years of
operation or below 20% of agreed volumes for any year after the second year.
Inamed's Agreement to Fund the NOVAGOLD(TM) FDA Clearance and Milestone
Payments. The Agreement obligates Inamed to fund the FDA clearance for the
NOVAGOLD(TM) product in a process valued at two million dollars ($2,000,000) and
to make certain milestone payments to the Company totaling eight million dollars
($8,000,000). The milestone payments commence upon the FDA's approval of the
Investigative Device Exemption ("IDE") for NOVAGOLD(TM) in the United States.
Inamed will pay two million ($2,000,000) within 30 days after such approval and
an additional two million ($2,000,000) within 30 days after the clinical trials
are fully enrolled. Within 30 days after the FDA approves the Pre-Market
Approval Application ("PMA") for NOVAGOLD(TM), Inamed will pay an additional two
million ($2,000,000) dollars. Inamed will make a final payment of two million
dollars ($2,000,000) upon the FDA's decision to clear the NOVAGOLD(TM) for
market.
C. Description of the Company's Products
The Company manufactures and markets two different pre-filled single lumen
mammary prostheses (breast implants), the NOVAGOLD(TM) and the NOVASALINE(TM) .
These products are designed to address the safety concerns associated with
silicone gel-filled implants, as voiced by the FDA's decision in April of 1992
which mandated that silicone gel implants would thereafter only be available
under controlled clinical studies. Both products are used for routine cosmetic
breast augmentation and for breast reconstruction following either subcutaneous
or modified radical mastectomy. The Company's flagship product is the
NOVAGOLD(TM) breast implant, which utilizes a unique water based filling
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material that is designed to be biocompatible and therefore safe for human use.
The Company has further developed an inflatable NOVASALINE(TM) breast implant
product.
The Company produces its own products through wholly owned subsidiaries
located in Minneapolis, Minnesota and Monheim, Germany. Products are
manufactured pursuant to Company owned patents or patents for which the Company
is the exclusive licensee.
The Company owns the following U.S. Patents:
o #5,067,965 alternative fill material patent
o #5,662,708 alternative fill material patent
o #4,955,909 textured shell surface patent
o #5,630,844 water vapor barrier shell patent
The Company has the following Patents pending:
o 08/924,457 alternative fill material submission
o 08/858,098 biocompatible catheter
o 09/318,036 saline implant with single valve
The Company has the following European Patents pending:
o 96 926 926.5 alternative fill material submission
The products are comprised of two major component parts, the outer shell
and the inner filling material. Shell production is accomplished in Minneapolis,
Minnesota by NovaMed MN. Component parts are then shipped to Monheim, Germany
for final manufacturing and distribution by NovaMed GDR. The Company also
intends to complete, subject to requisite regulatory and manufacturing
approvals, the production process for the pre-filled NOVASALINE(TM) breast
implant from the NovaMed MN facility in Minneapolis.
D. Description of Technology
The Company has researched and developed a range of breast prostheses based
upon patented technology. Confirmation of that technology has been through the
evaluation of results stemming from research protocols conducted by the Company
or contracted by the Company to third party research groups.
The safety and biocompatibility of the fill material used in the
NOVAGOLD(TM) breast implant was proven by the Company after subjecting the
finished product to a battery of biocompatibility testing in accordance with
guidelines in Europe and the United States. The toxicochemistry of the filling
material was evaluated by implanting gel samples in 15 test rabbits for a 28 day
period. The results of these tests indicated that the NOVAGOLD(TM) gel fill
material was non-irritant, non-toxic and biocompatible and therefore suitable
for use in medical devices. The Company's finished products have been subjected
to rigid and strenuous mechanical testing. The most frequently encountered
mechanical load on breast implants is fatigue, the result of oscillations from
ordinary movement, such as walking or jogging. Like other materials, the shell
of breast prostheses are subject to a finite fatigue lifetime when repeatedly
stressed or strained. The Company used an outside laboratory to perform fatigue
testing on 35 samples of the Company's shell
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at a frequency of 1Hz (one cycle per second), which equates to the frequency of
movement experienced under normal conditions in the body. The results of that
test indicated the long term performance of the product to be 5 to 10 years in
accordance with accepted industry standards .
The best indication of the efficacy of the Company's products has come from
patient feedback. Over four years of commercial experience with NOVAGOLD(TM)
around the world, involving the sale of approximately 12,000 implants, patients
have identified a complication rate of 1.37%. Complaints reported included
capsular contracture, seromas and hemotomas. Although any complications are
serious matters, the complaint rate related to Company products is minimal and
not uncommon for any particular medical device. Otherwise, patients that have
the NOVAGOLD(TM) implants are generally pleased with their results.
Despite these affirmations of the Company's technology, there is no
guarantee that the Company will obtain the necessary regulatory clearance to
sell its products in the United States.
Both the NOVAGOLD(TM) and the pre-filled NOVASALINE(TM) prostheses consist
of a single silicone elastomer (rubber) shell filled with either a water based
gel like material or with sterile saline (salt water). Both may be offered as
either a smooth or textured implant, depending on customer demand. Currently,
the products are offered only as textured implants, meaning that the surface of
the implant's shell is patterned through a patented process (US Patents #
4,955,909 and # 5,630,844). This textured pattern provides a surface which has
been shown to help reduce the incidence of capsular contracture, best described
as a hardening of the breast as scar tissue forms around the implant. The
textured surface provides a multi planar surface for the scar tissue to form
around, thus reducing the strength of the scar tissue. However, the Company does
intend to offer smooth NOVAGOLD(TM) and NOVASALINE(TM) implants as part of an
expansion of its present product range.
Pre-filled products consist of a single silicone elastomer (rubber) shell
that is patched and filled by the Company with either a water based gel like
material (NOVAGOLD(TM)) or with sterile saline, salt water, (NOVASALINE(TM)
pre-filled). The pre-filled products are then sealed and delivered to the
physicians ready for use in the augmentation or reconstructive surgery.
Inflatable products also consist of a silicone elastomer (rubber) shell that
incorporates a unique one-piece, self sealing filling valve / filling patch
assemble. Physicians use the shell's valve assembly to fill the implant with
saline during the actual surgery, enabling the physician to make volume
adjustments to the implants once they are placed in the body.
1. NOVAGOLD(TM)
The NOVAGOLD(TM) product is a patented single lumen alternative filling
material breast implant (US Patents # 5,067,965 and # 5,662,708) , developed in
response to demand for a replacement to silicone-gel filled implants. The
filling material is a hydrogel, meaning that is it is a water based gel
material. The current filling material consists of a low molecular weight
polyvinylpyrollidone (PVP, K-17), a rheological control agent, and water. PVP is
a biocompatible polymer which has been used in medical products for decades. PVP
has been used as a plasma expander, as a carrier for pharmaceuticals, and
topically in cosmetics. The rheological control agent is a substance generally
recognized as safe (GRAS) which was added to enhance the feel and thickness of
the gel filling material so that the device would feel more like natural breast
tissue when implanted. Despite the negative health connotations of silicone gel,
the viscosity achieved with silicone is considered the standard by which all
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other fill materials are judged. The viscosity of the PVP filling material gives
the NOVAGOLD(TM) breast implant the feel of silicone gel-filled implants,
enabling it to compete successfully where silicone gel breast implants are still
available for use in routine cosmetic augmentations. Like silicone gel,
PVP-hydrogel filling material acts as a lubricant to the outer silicone shell,
potentially decreasing the effect of biomechanical stresses on the shell over
time. These stresses can lead to early degradation of the shell, and early
rupture or leakage of the implant.
The PVP-hydrogel filling material has additional advantageous design
characteristics:
a. Water Based
NOVAGOLD(TM)'s filling material is water based and therefore is expected to
be excreted from the body in the event of a rupture or leakage of the implant.
While silicone gel appears to be inert, silicone gel is not excretable from the
body and has been shown to migrate throughout the body after a rupture. Further,
it is difficult to remove silicone gel from the body in the event that a
ruptured device should need to be removed.
b. Radiolucent
Another advantage that the PVP-hydrogel filling material has over silicone
gel is that the NOVAGOLD(TM)'s filling material appears to be more radiolucent
to X-rays than silicone or saline fill materials. NOVAGOLD(TM)'s PVP-hydrogel
allows transmission of X-rays during routine mammography, something that
silicone gel does not do easily. More X-rays or a high dose of X-ray is required
during mammography of a woman with silicone gel filled implants. Thus
NOVAGOLD(TM)'s increased radiolucency may allow easier or earlier detection of
breast tumors in women that have implanted the NOVAGOLD(TM) versus silicone gel
implants.
c. Osmotically Balanced
The PVP-hydrogel filling material has been demonstrated to be osmotically
balanced within the body unless a rupture or leak occurs in the implant. The
Company conducted a study utilizing 20 sterilized implants and subjected the
implants to degrees of temperature over time effected to simulate the condition
of the implant within the body. Test results confirmed that the implant did not
take up additional volume from the body over time. The Company's study and an
absence of customer complaints related to volume uptake caused by osmotic
imbalance within the body indicates that osmotic balance has been achieved.
2. Pre-filled NOVASALINE(TM)
The pre-filled NOVASALINE(TM) breast implant was developed as a product to
be marketed in countries where a demand for breast implants existed, but where
no implants other than those filled with saline are permitted for primary
cosmetic augmentations. The primary market for the pre-filled NOVASALINE(TM)
implants is France. The United States is a potential primary market for the
products, pending FDA approval , the pre-filled NOVASALINE(TM) implants are not
presently available for sale in the United States.
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One benefit of the pre-filled NOVASALINE(TM) implant is that it is saline
filled. In the event of rupture, only salt water is released into the body.
Another advantage of the pre-filled NOVASALINE(TM) is that the physician cannot
introduce substances into the device during surgery. Physicians have
independently added steroids and other antibiotics into inflatable prostheses in
the past. The device is sold pre-filled, sealed, and sterilized, thereby
lowering the risk of microbial contamination during surgery.
3. Inflatable NOVASALINE(TM)
The inflatable NOVASALINE(TM) breast implant was also developed to be
marketed in countries where a demand for breast implants existed, but where no
implants other than those filled with saline are permitted for primary cosmetic
augmentations. The potential primary markets for the inflatable NOVASALINE(TM)
implants are the United States and France. The inflatable NOVASALINE(TM)
implants are not presently available for sale in any market.
The inflatable NOVASALINE(TM) implant offers advantages best understood by
the physician in connection with the actual surgery. Since the implant is
inflatable, the incision required to perform the procedure is less intrusive.
Physicians are also able to fill individual implants to insure that an equal
balance is realized for each breast, as many patients approach physicians with
complaints related to disproportionate breast sizes. The inflatable
NOVASALINE(TM) is yet to be marketed.
E. Marketing
The Company believes that it can substantially increase its share of the
worldwide market for the sale of breast implants within five years. This goal is
predicated upon receiving FDA clearance of the Company's products in addition to
implementation of the Strategic Alliance Agreement with Inamed Corporation. FDA
acceptance would enable the Company to sell products in the North American
market, and the agreement with Inamed will ensure effective distribution.
The Company had anticipated being able to sell the inflatable
NOVASALINE(TM) and pre-filled implants into the United States by the end of
1999. However, the FDA announced on August 19, 1999 (21 CFR Part 878) that all
companies involved in the sale of saline filled implants in the United States
must evidence the collection of sufficient clinical information through the
submission to the FDA of a Pre- Market Approval (PMA) document by November 17,
1999 in order to commence or continue distribution of saline filled implants.
The Company is yet to place either the pre-filled or inflatable NOVASALINE(TM)
implants into production for distribution in the United States and as a result
does not have the requisite clinical information that would satisfy the FDA's
call for a PMA. Therefore, the Company does not expect to be able to market in
the United States either the pre-filled NOVASALINE(TM) product nor the
inflatable NOVASALINE(TM) product. Further, the Company must pass an FDA audit
of the Minneapolis, Minnesota facility prior to manufacturing products for sale
in the United States. The Company reasonably expects to pass an FDA audit prior
to obtaining clearance for marketing its products in the United States.
The Company's immediate marketing strategy is to focus on increasing
NOVAGOLD(TM)'s market share in countries where it is currently approved,
registered directly, or working with its distribution partner Inamed. The
Company plans an increased advertising campaign through direct product mailings
to doctors and distributors in countries where the product is approved. The
Company also plans to advertise through the use of press conferences, television
programs, newspaper articles, advertising in
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major consumer and medical journals, and an upgraded Internet site. The Company
regularly attends major scientific meetings and trade show exhibitions
throughout the world. The Company's clinical study investigators have presented
their clinical findings at the annual meeting for Plastic Surgery in Venice,
Italy in 1997, the Annual Meeting of Plastic Surgery in Istanbul, Turkey in
1998, the EQUAM Conference in Regensburg, Germany in 1998, and the Annual
Meeting of Plastic Surgery in Bochum, Germany in 1998. The Company anticipates
that the results of these studies will be published in major plastic surgery and
gynecology journals worldwide.
F. Regulatory Overview
1. Introduction
The two major global regulatory pathways for medical products are the
United States Food and Drug Administration (FDA) regulatory pathway and the
European/EEA type regulatory pathway, which is based on the ISO system of
quality standards. Both systems are based on an assessment of the risk versus
the benefit of a medical product. The trend is towards harmonization, in
international regulatory pathways, though the FDA does not consider the European
regulatory pathway to be as stringent a system as the FDA system. Most countries
accept either FDA clearance or a CE mark as sufficient evidence that the
manufacturer provides a quality product which conforms to international quality
standards appropriate to the particular product.
2. U.S. FDA Approval
Although most recent scientific studies do not support the FDA's 1992 ban
on silicone breast implants, breast implants in general are still under extreme
scrutiny by the FDA, the media, and the public. FDA scrutiny developed from the
philosophy that the safety and efficacy of a product is related to its final
use. The FDA allows devices which save, support, or prolong life, to be marketed
if the calculated benefit to the patient outweighs the risk to the patient. For
cosmetic devices, the FDA has stated that "no risk" is acceptable, and appears
to consider breast implants as strictly cosmetic devices. In the past, breast
implants did not require Pre-Market Approval (PMA) but rather could make a 510k
application which allows manufacturers to claim substantial equivalency to
products which were established in the US marketplace before 1976.
Unfortunately, that route is now not available for breast implant products.
While the Company obtained a CE Mark (the European equivalent of FDA
approval in the United States) on its breast implant products in 1996 allowing
the manufacturing, marketing and sale of its products in the European Union, the
Company has not yet obtained FDA approval for marketing and selling its breast
implant products in the United States. The Company has submitted three products
to the FDA: (1) the NOVAGOLD(TM) pre filled mammary prosthesis; (2) the
NOVASALINE(TM) saline inflatable mammary prosthesis, and; (3) the NOVASALINE(TM)
saline pre filled mammary prosthesis.
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<PAGE>
3. NOVAGOLD(TM) Regulatory Pathway
The 510k process is no longer an option for the NOVAGOLD(TM) mammary
prosthesis. The FDA has informed the Company that NOVAGOLD(TM) is considered an
alternative fill implant. As such, a formal product submission (Investigational
Device Exemption or IDE) must be made and reviewed by FDA. As part of the IDE
submission, the product must be studied in FDA sanctioned and controlled
clinical trials before it can be placed on the market.
After the completion of the clinical study, or after a significant portion
of the study has been completed, the Company must submit a Pre-Market Approval
(PMA) application to the FDA for review. The application consists of all the
scientific data which supports the manufacturer's claims for the product. It
also includes a summary of the device's composition, stability, manufacturing
process and controls, all data collected from animal and human clinical studies,
and all product labeling (including advertising).
The NOVAGOLD(TM) product has been submitted to the FDA for review and
approval under an Investigation Device Exemption ("IDE")/Pre-Market Approval
("PMA") process. The IDE includes the clinical protocol, a risk assessment, and
a strategic plan as to how risks are minimized and handled in the event of
device failure. Upon FDA acceptance of the IDE and the collection of sufficient
clinical data from controlled clinical trials, a PMA summary will be submitted
to the FDA. The FDA reviews the PMA and grants or withholds approval. If
approved, the NOVAGOLD(TM) may be sold freely in the United States. The Company
anticipates that the product could be cleared for full market release in the
U.S. by 2004. There is no guarantee the Company will obtain approval by 2004 or
may never be able to obtain FDA approval.
Data collected from worldwide marketing of the NOVAGOLD(TM) and limited
clinical studies in Germany may be referenced as supportive data for the FDA's
consideration of the Company's submission but is not considered determinative in
respect to the FDA's decision making process.
4. NOVASALINE(TM) Saline Inflatable Breast Implant Regulatory Pathway
The Company had planed to enter the US market in 1999 with the development
of the NOVASALINE(TM) saline inflatable breast implant. This product was
submitted to the FDA pursuant to the 510k regulatory pathway. A 510k submission
requires that the manufacturer demonstrate safety and efficacy characteristics
that are substantially similar to a device available in the U.S. prior to 1976.
On August 18, 1999 (21 CFR Part 878) the FDA announced that all companies
involved in the sale of saline filled implants sold in the United States must
evidence the collection of sufficient information through the submission to the
FDA of a Pre-Market Approval (PMA) document by November 17, 1999 in order to
continue or commence the distribution of saline filled implants. The Company has
no present intention of filing an IDE for the inflatable NOVASALINE(TM), as the
time and expense incurred in bringing such a product to market cannot be
presently justified in view of the fact that several competitive saline
inflatable products are now available in the U.S. market place. The Company's
decision not to proceed at this time with the inflatable NOVASALINE(TM) product
is subject to ongoing regulatory and competitive marketing developments.
10
<PAGE>
5. NOVASALINE(TM) Saline Pre-Filled Breast Implant Regulatory Pathway
The Company had planned to enter the United States market in 1999 with the
development of the NOVASALINE(TM) saline pre-filled breast implant. The product
was submitted to the FDA pursuant to the 510k regulatory pathway and has since
been cleared accordingly. However, on August 18, 1999 (21 CFR Part 878) the FDA
announced that all companies involved in the sale of saline filled implants sold
in the United States must evidence the collection of sufficient clinical
information through the submission to the FDA of a Pre-Market Approval (PMA)
document by November 17, 1999 in order to commence or continue the distribution
of saline filled implants. The Company has not yet decided whether to file an
IDE for the pre-filled NOVASALINE(TM) product . FDA approval of the IDE
application would cause the Company to conduct a clinical trial for the
pre-filled NOVASALINE(TM) product. The clinical trial would enroll five hundred
patients and be conducted for at least eighteen months prior to the submission
of a PMA. Upon the FDA's acceptance of the clinical data contained in the PMA,
the pre-filled NOVASALINE(TM) would be cleared for market in the United States.
Obtaining FDA clearance can be a long and arduous process. While the
Company has retained experienced professionals to assist in the FDA acceptance
process, there is no assurance that the Company will obtain FDA clearance to
market or obtain FDA approval of its manufacturing facilities. If the Company
does not obtain FDA approval, for one or all of its products presently under
submission, it may not market or sell such breast implant products in the United
States. Inability to sell its breast implant products in the United States will
have a significant adverse impact on the financial future of the Company.
6. European Union/ European Economic Area
The Company is authorized to manufacture and sell its NOVAGOLD(TM)and
NOVASALINE(TM)pre- filled products in the European Union , which includes the
following countries: Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Ireland, Italy, Luxembourg, The Netherlands Portugal, Spain, Sweden, and
The United Kingdom
The Company's European regulatory clearance is based upon the European
Medical Device Directive (Council Directive 93/42/EEC, June 14, 1993) which went
into effect on January 1, 1995. This Directive adopted a new classification for
mammary implants. According to this classification, breast implant products are
classified as IIb products. If a manufacturer fulfills all European Union (EU)
guidelines for design, production, and testing of a device and passes a
Certification Audit by a qualified Notified Body, the manufacturer may apply the
CE mark to his product. This Directive was phased in over five years, with a
deadline of June 14, 1998. Medical products manufactured after June 14, 1998 are
not allowed to be distributed in the European Union unless they carry the CE
mark, although medical products manufactured in Europe before June 14, 1998
which do not carry the CE mark may still be distributed until 2001. The
Company's conformity to the Medical Device Directive is monitored by ECM, a
Notified Body (Number 0481) certified by the German government.
The CE mark application and review process for medical products in the IIb
classification requires preparation of a Technical File or "Technical Dossier"
that describes the sum of the knowledge regarding the device, including its
design, manufacturing and sterilization processes, routine and animal testing
results, and clinical experience.
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<PAGE>
Both the NOVAGOLD(TM) and NOVASALINE(TM) saline pre filled product are
manufactured and distributed in conformance with the EU Medical Device and carry
the "CE" mark. The NOVAGOLD(TM) pre-filled mammary prosthesis has been on the
market since February 1996, when the Company obtained the right to apply a CE
mark to that product. The NOVASALINE(TM) pre-filled mammary prostheses has been
sold since November 1996, when it obtained the CE mark.
As part of the CE mark process, the Company agreed to conduct a Post-Market
Surveillance Study of the NOVAGOLD(TM) device. This study is a limited clinical
study conducted at 5-6 sites in Germany. The study examined the rates of
rupture, contracture, and infection for a defined patient group over a two year
post implantation follow-up period. This clinical study was completed at the end
of 1998; final results are to be summarized and presented to ECM.
There is currently no uniform collation of data regarding the size of
markets outside the United States. Estimates as to the size of the market
outside of the U.S. are based upon public information as to the number of
implants sold outside of the U.S. by the major manufacturers of breast implant
(Inamed/Mentor). Based upon our sales experience in Germany the approximate
market for breast implants is 15,000 a year. NovaMed sold 987 breast implants in
Germany in 1997 or 6.6% of the market. Last year the Company captured 8.7% of
this market with sales of 1316 implants. The Company in 1999 has captured 10%
with sales of 1,495 implants. Sales are expected to increase in 2000. German
sales as a percentage of total NovaMed sales in 1997 were 30%, in 1998 were 36%
and in 1999 were 37%.
Since there is no reliable estimate of single markets outside of the U.S.,
we cannot provide accurate figures as the size of our market share in each
market. However, we can note that our only significant penetration of breast
implant markets to date has been in Germany. Elsewhere our sales are not
significant as a measure of market share.
7. Outside The United States - Non EU/EEA
The Company can sell its NOVAGOLD(TM) and NOVASALINE(TM) pre-filled
products in the following countries outside of the European Community: Brazil,
Bulgaria, Cayman Islands, China, Columbia, Dominican Republic, Hong Kong,
Indonesia, Mexico, New Zealand, Poland, Russia, South Korea, Turkey, Venezuela.
These devices have not been approved for sale in the United States, Canada,
Australia, or Japan.
G. Competition
The Company's significant competitors are US based Mentor Corporation and
Inamed Corporation. Combined, these manufacturers account for over three
quarters of the market worldwide and own the majority of FDA approved breast
implant devices. All other major competitors discontinued production of the
breast implants in 1992 largely as the result of regulatory action by the FDA
and the ensuing wave of litigation.
Competition with Inamed is limited to the anticipated sale of the
NOVASALINE(TM) Inflatable breast implant in the US. The Company and Inamed have
executed a Strategic Alliance Agreement for the sale
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<PAGE>
of the Company's NOVAGOLD(TM) implant internationally and the sale of the
NOVASALINE(TM) Pre-Filled in the US, subject to FDA clearance to market.
Internationally, in addition to competing with Mentor, and Inamed in areas
not covered under the Inamed Strategic Alliance Agreement, the Company competes
with several smaller manufacturers including Silimed, Laboratories Sebbin,
L.P.I., PIP and Nagor.
The Company believes that the alternative fill NOVAGOLD(TM) product
distinguishes it in the international marketplace enabling effective marketing
against competing manufacturers. The Strategic Alliance Agreement with Inamed
and US clearance of the NOVAGOLD(TM) product in the United States will ensure
the Company a marked presence in the international marketplace.
H. Research & Development
The Company employs a staff that works in conjunction with outside
consultants to expand already existent product lines and develop new technical
innovations. The expansion of existing product lines would include the
development of anatomical shells for both the NOVAGOLD(TM) and NOVASALINE(TM)
breast implant products. Technological innovations include research into
different hydrogel filling materials along with new means for sterilization and
packaging processes. New product lines would encompass sizers, expanders, and
other forms of plastic surgery related implants.
Breast implant shapes are designed to satisfy different objects for
individual patients, as a result the majority of breast implant shells are
either round or anatomical. Round breast implants generally give a patient a
round curve in the upper part of the breasts. Anatomical shell implants give the
patient a more gentle slope in the curve of the breast often producing a more
natural breast shape.
Sizers are usually silicone elastomer shells filled with silicone that are
used by physicians to assist patients in making decisions as to the desired
breast shape and size augmentation and reconstructive implant procedures. Sizers
do not require regulatory approval and same are not used inside the body but
externally during the decision making process.
Tissue expanders are most often used in connection with reconstructive
surgery. A typical expander is implanted at the site where new tissue is
desired. Once implanted, fluid is injected into a injection port which then
flows into a larger expanding chamber. The increased pressure caused by the
fluid expanding the device results in tissue growth over a reduced period of
time. The expanded tissue can then be used to cover defects, injury sites or
provide a healthy site for an implant. Tissue expanders can either be
permanently implanted in the body or used between procedures.
The Company's Research and Development ("R&D") expenditures increased to
$229,579 for 1999 as compared to $64,000 for 1998, while as a percentage of
sales, R&D expenses were 14% in 1999 as compared to 5% in 1998. The Company
expects the trend towards increased spending related to R&D to continue due to
expenses related to compliance with FDA regulatory requirements. Expenses
associated with the anticipated NOVAGOLD(TM) clinical trials are to be absorbed
by Inamed Corporation as part of the agreement to distribute the product. The
Company also expects to expend limited R&D funds on expanding the Company
product line and on certain projects related to plastic surgery in an effort to
13
<PAGE>
expand the purview of internal R&D. For more information on Inamed agreement,
see "Item 2. Management's Discussion and Analysis or Plan of Operation."
I. Raw Material Supply
The Company obtains certain raw materials and components for its products
from single suppliers. In most cases the Company's sources of supply could be
replaced if necessary without undue disruption, but it is possible that the
process of qualifying new materials and/or vendors for certain raw materials and
components could cause a material interruption in manufacture or sales. No
material interruptions have occurred over the last two years.
Although the Company has had no material interruptions in its supply of raw
materials, there can be no assurances that the Company's suppliers will be able
to supply the Company in quantities needed, or that regulatory or other delays
will not cause disruption in sales of affected products. The Company believes
that its supply of raw materials is adequate for the current fiscal year.
All raw materials are now bought from single suppliers in order to keep
costs down, because the Company is a small manufacturer and must validate each
supplier of raw materials for regulatory purposes. However, for each of these
raw materials there exists competitive sources from which the Company could
purchase appropriate materials.
The Company does not believe that sales of its products would be disrupted
by the loss of a supplier. Inventories of raw materials are kept on a 45 - 60
day basis. The Company believes that a supplier of any given raw material could
be replaced within the time frame provided by inventories.
J. Reports to Security Holders
The Company's annual report will contain audited financial statements. The
Company is not required to deliver an annual report to security holders and will
not voluntarily deliver a copy of the annual report to the security holders. The
Company intends to, from this date forward, to file all of its required
information with the Securities and Exchange Commission ("SEC").
The public may read and copy any materials that are filed by the Company
with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Public may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. The statements
and forms filed by the Company with the SEC have also been filed electronically
and are available for viewing or copy on the SEC maintained Internet site that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The Internet address
for this site can be found at http://www.sec.gov. Additional information can be
found concerning the company on the Internet at http://www.novamedinc.com.
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K. Employees
The Company has 16 full time employees; 6 in Minnesota and 10 in Germany,
with four part time employees.
ITEM 2. DESCRIPTION OF PROPERTY
The Company is headquartered at 623 Hoover St. N.E., Minneapolis, Minnesota
55413 where it leases office and manufacturing space totaling 15,000 square
feet. The Company leases these facilities for $4,791.67 per month until the
January 31, 2001 at which time the lease payments will increase to $5,208.33
until January 31, 2004 at which time the lease will expire.
The Company also leases office and manufacturing space at Am Kieswerk 4,
D-40789 Monheim, Germany totaling 10,000 square feet. The terms of the lease are
month to month. The Company leases these facilities for $8,108 per month
including utilities.
The Company believes that its current facilities are generally suitable and
adequate to accommodate its current operations. However, the Company anticipates
that increased sales as a result of expected regulatory clearances and
distribution agreements will necessitate the need for additional administrative,
manufacturing, and laboratory space.
Consequently, the Company is in the preliminary stages of obtaining
sufficient financing to build a new turn key facility in Germany. The Company
currently has plans to build a 20,000 square foot research and development and
manufacturing facility in a technology park located in the City of Duisburg that
will accommodate the Company's needs outside of North America. The site, if
constructed, is expected to be built on 4,000 square meters of land. The Company
has also negotiated an option to purchase up to an additional 8,000 square
meters of land for future expansions.
The Company is currently considering whether to accept an estimated
DM22,300,000 (approximately US$12.7 million) in government financed loans from
the state government of North Rhine Westphlia to construct the Duisburg
facility. The terms of financing are to include DM17,408,000 (approximately
US$10.2 million) in long term fixed rate government guaranteed loans provided by
IKG AG and a non-repayable grant of DM4,496,000 (approximately US$2.5 million)
provided by the state government of North Rhine Westphalia.
Should the Company make a final decision to proceed with the construction,
it expects to receive the loans and grant monies in the year 2000 and
anticipates that the facilities will be fully operational by September, 2001.
Although the Company has entered into the necessary approvals to obtain the
funding and has been tentatively approved to be funded there are several issues
which must be resolved before the Company can obtain the funding. Those issues
include the Company's equity contribution to the German subsidiary that will be
the recipient of the funding.
In the event the Company does not obtain funding necessary to construct the
new facilities, the Company will consider outsourcing the manufacturing of its
products and will investigate other lease or purchase prospects which will
accommodate the Company's expected increase in sales.
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is currently not a party to any pending legal proceeding
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Security Holders during the period
covered by this report.
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND OTHER SHAREHOLDER MATTERS
The Company's common stock is traded on Over the Counter Bulletin Board
under the symbol "NVMD.OB".
The table below sets forth the high and low sales prices for the Company's
Common Stock for each quarter of 1997, 1998 and 1999. The quotes given for the
third quarter in 1998 and thereafter reflect a 1 for 14 reverse split which the
Company effected on April 14, 1998. The quotations below reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions:
Year Quarter Ended High Low
------------- ---- ---
1997 March 31 $0 $0
- ----
June 30 $0 $0
September 30 $0 $0
December 31 $4.00 $4.00
1998 March 31 $4.50 $0.25
- ----
June 30 $8.00 $1.87
September 30 $5.44 $1.78
December 31 $2.38 $0.94
1999 March 31 $2.63 $1.06
- ----
June 30 $2.06 $1.50
September 30 $2.06 $0.94
December 31 $1.06 $0.62
16
<PAGE>
A. Record Holders
As of March 29, 2000, there were approximately 330 shareholders of record
holding a total of 15,231,464 shares of Common Stock. The holders of the Common
Stock are entitled to one vote for each share held of record on all matters
submitted to a vote of stockholders. Holders of the Common Stock have no
preemptive rights and no right to convert their Common Stock into any other
securities. There are no redemption or sinking fund provisions applicable to the
Common Stock.
B. Dividends
The Company has not declared any cash dividends since inception and does
not anticipate paying any dividends in the foreseeable future. The payment of
dividends is within the discretion of the Board of Directors and will depend on
the Company's earnings, capital requirements, financial condition, and other
relevant factors. There are no restrictions that currently limit the Company's
ability to pay dividends on its Common Stock other than those generally imposed
by applicable state law.
C. Recent Sales of Unregistered Securities
In November of 1999 the Company issued 750,612 shares of common stock
valued at $0.70 per share to Euro Pacific Service GmbH & Co. KG for services
rendered.
In November of 1999 the Company issued 400,000 shares of common stock to
Euro Pacific Service GmbH & Co. KG at $0.70 a share for cash pursuant to a
promissory note. The Company has received $70,000 to date in payments.
In November of 1999 the Company issued 400,000 shares of common stock owned
by Dr. Aydin Dogan at $0.70 a share for cash pursuant to a promissory note. The
Company has received $50,000 to date in payments.
ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
General
As used herein the term Company refers to NovaMed, Inc., its subsidiaries and
predecessors, unless the context indicates otherwise. The Company is a medical
device holding company that develops, manufactures, and markets hydrogel and
saline filled breast implant products that are used in primary augmentations,
revisions, or reconstructive procedures.
The Company manufactures and markets two different pre-filled single lumen
mammary prostheses (breast implants), the NOVAGOLDTM and the NOVASALINETM .
These products are designed to address the safety concerns associated with
silicone gel-filled implants, as voiced by the FDA's decision in April of 1992
which mandated that silicone gel implants would thereafter only be available
under controlled clinical studies. Both products are used for routine cosmetic
breast augmentation and for breast reconstruction following either subcutaneous
or modified radical mastectomy. The Company's flagship product is the NOVAGOLDTM
breast implant, which utilizes a unique water based filling
17
<PAGE>
material that is designed to be biocompatible and therefore safe for human use.
The Company has further developed an inflatable NOVASALINETM breast implant
product. The Company has not obtained FDA approval to sell any of its products
in the United States.
The NOVAGOLDTM product has been submitted to the FDA for review and approval
under an Investigation Device Exemption ("IDE")/Pre-Market Approval ("PMA")
process. The IDE includes the clinical protocol, a risk assessment, and a
strategic plan as to how risks are minimized and handled in the event of device
failure. Upon FDA acceptance of the IDE and the collection of sufficient
clinical data from controlled clinical trials, a PMA summary will be submitted
to the FDA. The FDA reviews the PMA and grants or withholds approval. If
approved, the NOVAGOLDTM may be sold freely in the United States. The Company
anticipates that the product could be cleared for full market release in the
U.S. by 2004. There is no guarantee the Company will obtain approval by 2004 or
may never be able to obtain FDA approval
B. Results of Operations
Sales
Sales for the year ended December 31, 1999 increased to $1,649,327 from
$1,266,821 for the year ended December 31, 1998, an increase of 30.1%. The
increase in revenues is primarily attributable to an increase in the number of
implants sold.
International sales have accounted for 100% of total net sales in 1998 and
1999. The accelerated growth of sales in 1999 is due to increased expenditures
on marketing and a growing public perception in European markets that silicone
gel filled implants can result in negative health consequences. Sales of the
NOVAGOLD(TM) breast implant, which competes directly with silicone gel filled
breast implants, continues to dominate realized income, accounting for over 97%
of all Company revenues.
Losses
Net losses for the year ended December 31, 1999 increased to $1,028,933
from $213,348 for the year ended December 31, 1998, an increase of 382%. The
substantial increase in losses was attributable primarily to a significant
increase in selling, general and administrative expense.
The Company expects to continue to incur losses at least through fiscal
2000 and there can be no assurance that the Company will achieve or maintain
profitability or that its revenue growth can be sustained in the future.
Expenses
Selling, general and administrative expenses for the year ended December
31, 1999, increased to $1,461,941 from $442,204 for the year ended December 31,
1998, an increase of 231%. The substantial increase in selling general and
administrative expenses was the result of a significant increase in fees paid to
consultants, namely Euro Pacific Securities Services GmbH & Co.KG.
18
<PAGE>
The Company pays a royalty equal to 5% of net revenue of the product. A
minimum royalty payment of $42,000 is made for each six month period. Royalty
expense for the year ended December 31, 1999 and 1998 was approximately $93,000
and $42,000, respectively.
Depreciation and amortization expenses for the years ended December 31,
1999 and December 31, 1998 were $0.0 and $3,523, respectively.
The Company expects increases in expenses through 2001 as the Company moves
toward engaging competent management for the anticipated increase in product
manufacturing and regulatory compliance costs.
Cost of Sales
The largest factors in the variation from year to year in the cost of sales
as a percentage of net sales are the cost of raw materials and the yield of
finished goods from the Company's manufacturing facilities.
The cost of sales for the year ended December 31, 1999 was $1,073,400
compared to $973,965 for the year ended December 31, 1998. The increase in the
cost of sales was primarily attributable to an increase in sales. Cost of sales
as a percentage of sales for December 31, 1999 and 1998 respectively, were 65.6%
and 76.8%. The Company believes that the increase in cost of sales was due to
increased production.
C. Income Tax Expense (Benefit)
The Company has an income tax benefit resulting from net operating losses
to offset operating profit.
D. Impact of Inflation
The Company believes that inflation has had a negligible effect on
operations over the past three years. The Company believes that it can offset
inflationary increases in the cost of materials and labor by increasing sales
and improving operating efficiencies.
E. Liquidity and Capital Resources
Historically, the Company has expended significant resources on Research
and Development which includes regulatory compliance expenses. The trend is
likely to continue into the near future as new products seek introduction in the
United States. However, sales are now rising significantly, therefore, the
Company expects a swing from using cash in operating activities to providing
cash from operating activities by the end of 2000.
Cash flow generated by operations were a negative $329,071 for the year
ended December 31, 1999, and a negative $610,303 for the year ended December 31,
1998. Negative cash flows from operating activities for the year ended December
31, 1999 are primarily attributable to losses from operations.
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<PAGE>
Cash flow generated from financing activities was $340,000 for the year
ended December 31, 1999 and $636,000 for the year ended December 31, 1998.
The Company has funded its cash needs from inception through December 31,
1999 with a series of debt and equity transactions, including several private
placements. The bulk of these transactions have taken place outside the United
States. The Company expects its cash needs to be primarily satisfied from sales
of its products over the next twelve months.
F. Capital Expenditures
The Company made no significant capital expenditures on property or
equipment for the year ended December 31, 1999 or 1998.
During 2000 the Company may spend approximately $10,000,0000 on certain
capital projects, including the construction of a new facility in Germany,
management information systems and expanded manufacturing capabilities. Funding
for these capital expenditures are expected through funding provided pursuant to
German government guaranteed loans.
G. Going Concern
The Company's auditors have expressed an opinion as to the Company's
ability to continue as a going concern as a result of an accumulated deficit of
$4,465,025 as of December 31, 1999. The Company's ability to continue as a going
concern is subject to the ability of the Company to obtain a profit and /or
obtaining the necessary funding from outside sources. Management's plan to
address the Company's ability to continue as a going concern, includes: (1)
obtaining funding from strategic partners based upon the Company's strategic
alliance agreement with Inamed. For more infomation on this agreement, see (Item
1. Description of Business; (2)obtaining additional funding from the sale of the
Company's securities; (3) increasing sales in Germany; (4) obtaining FDA
approval to sell its products in the United States; and (5) obtaining loans and
grants from various financial institutions where possible. Although management
believes that it will be able to obtain the necessary funding to allow the
Company to remain a going concern through the methods discussed above, there can
be no assurances that such methods will prove successful.
H. Impact of Year 2000
The year 2000 Issue and the Nature and Effects of the Year 2000 on
Information Technology (IT) and Non- IT Systems was a concern prior to January
1, 2000. As of March 24, 2000, the Company had experienced no problems as a
result of the Year 2000 Issue.
ITEM 7. FINANCIAL STATEMENTS
The Company's financial statements for the fiscal year ended February 28,
1999 are attached hereto as pages F-1 through F-15.
20
NOVAMED, INC.
Consolidated Financial Statements
December 31, 1999 and 1998
<PAGE>
NOVAMED INC.
Index to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Page
Independent auditors' report F-2
Consolidated balance sheet F-3
Consolidated statement of operations F-4
Consolidated statement of stockholders' equity F-5
Consolidated statement of cash flows F-6
Notes to consolidated financial statements F-7
- --------------------------------------------------------------------------------
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Stockholders of
NovaMed, Inc.
We have audited the accompanying consolidated balance sheet of NovaMed, Inc., as
of December 31, 1999, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the two years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NovaMed, Inc., as of
December 31, 1999, and the results of their operations and their cash flows for
the two years then ended, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has an accumulated deficit and
has incurred losses since inception. These conditions raise substantial doubt
about its ability to continue as a going concern. Management's plans regarding
those matters also are described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
TANNER + CO.
/s/ Tanner + Co.
Salt Lake City, Utah
March 28, 2000
F-2
<PAGE>
NOVAMED, INC.
Consolidated Balance Sheet
December 31, 1999
- --------------------------------------------------------------------------------
Assets
Current assets:
Cash $ 16,237
Receivables, net 232,201
Inventories 757,868
Other assets 59,308
------------------
Total current assets 1,065,614
Property and equipment, net 76,780
------------------
$ 1,142,394
------------------
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Cash overdraft $ 40,215
Accounts payable and accrued liabilities 820,164
--------------
Total current liabilities 860,379
--------------
Commitments and contingencies -
Stockholders' equity:
Common stock, $.001 par value,
50,000,000 shares authorized; 15,196,464
shares issued and outstanding 15,197
Additional paid-in capital 5,170,635
Cumulative foreign currency translation
adjustment 1,208
Stock subscription receivable (440,000)
Accumulated deficit (4,465,025)
----------------
Total stockholders' equity 282,015
------------------
$ 1,142,394
------------------
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
NOVAMED, INC.
Consolidated Statement of Operations
Years Ended December 31,
- --------------------------------------------------------------------------------
1999 1998
-----------------------------------
Net sales $ 1,635,346 $ 1,266,821
----------------- --------------
Costs and expenses:
Cost of sales 1,073,400 973,965
Selling, general and administrative 1,461,941 442,204
Research and development 229,579 64,000
----------------- -------------
2,764,920 1,480,169
----------------- -------------
Loss from operations (1,129,574) (213,348)
Other income 100,641 -
----------------- -------------
Loss before income taxes (1,028,933) (213,348)
------------------ -------------
Benefit from income taxes - -
------------------ -------------
Net loss $ (1,028,933 $ (213,348)
------------------ --------------
Loss per common share-basic and diluted $ (.07) $ (.02)
------------------ --------------
Weighted average common shares -
basic and diluted 14,321,000 9,874,000
------------------ --------------
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
NOVAMED, INC.
Consolidated Statement of Stockholders' Equity
Years Ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<CAPTION>
Cumulative
Foreign Stock
Common Stock Additional Currency Subscrip-
--------------------- Paid-in Translation tion Accumulated
Shares Amount Capital Adjustment Receivable Deficit Total
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1998 6,301,558 $ 6,302 $ - $ - 23,293 $ (3,222,744 $ (3,193,149)
Comprehensive income:
Net loss - - - - - (213,348) (213,348)
Other comprehensive
income - foreign
currency translation
adjustment - - - 61,235 - - 61,235
-------------
(152,113)
=============
Acquisition of Conceptual
(see note 1) 144,294 144 (144) - - - -
Issuance of common stock
for cash 7,000,000 7,000 629,000 - - - 636,000
Capital contribution - - 3,070,221 - - - 3,070,221
---------- ------ --------- ------- --------- ------------ -------------
Balance at
December 31, 1998 13,445,852 13,446 3,699,077 84,528 - (3,436,092) 360,959
Comprehensive income:
Net loss - - - - - (1,028,933) (1,028,933)
Other comprehensive
income - foreign
currency translation
adjustment - - - (83,320) - - (83,320)
-------------
(1,112,253)
=============
Issue common stock for:
Cash 200,000 200 219,800 - - - 220,000
Receivable 800,000 800 559,200 - (560,000) - -
Services 750,612 751 604,681 - - - 605,432
Collection of stock
subscription receivable - - - - 120,000 - 120,000
Stock option compensation - - 87,877 - - - 87,877
---------- ------ --------- ------- --------- ------------ -------------
Balance at
December 31, 1999 15,196,464 $ 15,197 $5,170,635 $ 1,208 $ (440,000) $ (4,465,025) $ 282,015
========== ====== =========== ======= ========== ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
NOVAMED, INC.
Consolidated Statement of Cash Flows
- --------------------------------------------------------------------------------
Years Ended December 31,
1999 1998
---------------------------
Cash flows from operating activities:
Net loss $ (1,028,933 $ (213,348)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 422 3,523
Stock issued for services 605,432 -
Stock options issued for services 87,877 -
(Increase) decrease in:
Receivables 98,625 (228,645)
Inventories (274,568) (7,238)
Other assets (57,601) 90,634
Increase (decrease) in:
Cash overdraft 40,215 -
Accounts payable and accrued liabiliti 199,460 (255,229)
----------- ----------
Net cash used in
operating activities (329,071) (610,303)
----------- ----------
Cash flows from investing activities -
purchase of property and equipment (41,126) (3,643)
----------- ----------
Cash flows from financing activities:
Issuance of common stock 220,000 636,000
Collection of stock subscription receivable 120,000 -
----------- ----------
Net cash provided by
financing activities 340,000 636,000
----------- ----------
Effect of exchange rate changes on cash (83,320) 61,235
----------- ----------
Net (decrease) increase in cash (113,517) 83,289
Cash, beginning of year 129,754 46,465
----------- ----------
Cash, end of year $ 16,23 $ 129,754
=========== ==========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NOVAMED, INC.
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
1. Organization
and
Presentation
On June 29, 1998, NovaMed, Inc. (formerly Conceptual Technologies, Inc.)
(Conceptual) closed a Stock Purchase and Sale agreement with International
Medical Products, Inc. (formerly NovaMed Medical Products Incorporated) (IMP)
whereby Conceptual purchased all of the issued and outstanding common stock of
IMP's wholly owned subsidiaries, consisting of NovaMed Medical Products
Manufacturing, Inc., NovaMed Medical Supplies Corporation and Novamedical
Products GmbH (the Subsidiaries) (the Company) in exchange for 6,301,553 common
shares of Conceptual, and the commitment to complete a private placement of its
common stock which occurred prior to December 31, 1998.
Because the shares issued in the acquisition of the Subsidiaries represent
control of the total shares prior to the private placement of Conceptual's
common stock issued and outstanding immediately following the acquisition, the
Subsidiaries are deemed for financial reporting purposed to have acquired
Conceptual in a reverse acquisition. The business combination has been accounted
for as a recapitalization of Conceptual giving effect to the acquisition of 100%
of the outstanding common shares of the Subsidiaries. The surviving entity
reflects the assets and liabilities of Conceptual and the Subsidiaries at their
historical book value and the historical operations of the Company are those of
the Subsidiaries. The issued common stock is that of Conceptual and the
accumulated deficit is that of the Subsidiaries. The statement of operations for
the year ended December 31, 1998 is that of the Subsidiaries and that of
Conceptual form June 29, 1998 (date of acquisition) through December 31, 1998.
Separate breakout of operations for Conceptual have not been presented as the
amounts not related to the Subsidiaries is immaterial.
The Company is engaged primarily in the development, manufacture and sale of
mammary prostheses products. The flagship product is NOVAGOLD, a pre-filled
hydrogel textured single lumen breast implant that utilizes a unique water based
filling material that is designed to be biocompatible, and has been approved for
sale in Europe under the CE Mark regulatory process since February 1996.
- --------------------------------------------------------------------------------
F-7
<PAGE>
NOVAMED, INC.
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
2. Going Concern
At December 31, 1999 the Company had, an accumulated deficit and has incurred
losses since inception as well as negative cash flow from operations. These
conditions raise substantial doubt about the ability of the Company to continue
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
The Company's ability to continue as a going concern is subject to the
attainment of profitable operations and/or obtaining necessary funding from
outside sources. The Company plans to increase sales from obtaining U.S. Food
and Drug Administration (FDA) clearance for the sale of its products in the
United States. The Company is also currently seeking additional capital through
both private and public sources.
However, there can be no assurance they will be successful.
3. Significant
Accounting
Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Cash Equivalents
For purposes of the statement of cash flows, cash includes all cash and
investments with original maturities to the Company of three months or less.
Inventories
Inventories are recorded at the lower of cost or market, cost being determined
on a first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are recorded at cost, less accumulated depreciation.
Depreciation and amortization on property and equipment is determined using the
straight-line method over the estimated useful lives of the assets. Expenditures
for maintenance and repairs are expensed when incurred and betterments are
capitalized. Gains and losses on sale of property and equipment are reflected in
operations.
Revenue Recognition
Revenue is recognized upon shipment of product.
- --------------------------------------------------------------------------------
F-8
<PAGE>
NOVAMED, INC.
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
3. Significant Accounting Policies Continued
Income Taxes
Deferred income taxes are provided in amounts sufficient to give effect to
temporary differences between financial and tax reporting.
Earnings Per Share
The computation of basic earnings per common share is based on the weighted
average number of shares outstanding during each year.
The computation of diluted earnings per common share is based on the weighted
average number of shares outstanding during the year plus the common stock
equivalents, which would arise from the exercise of stock options and warrants
outstanding using the treasury stock method and the average market price per
share during the year. Common stock equivalents are not included in the diluted
earnings per share calculation when their effect is antidilutive.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of
credit risk consist primarily of trade receivables. In the normal course of
business, the Company provides credit terms to its customers. Accordingly, the
Company performs ongoing credit evaluations of its customers and maintains
allowances for possible losses which, when realized, have been within the range
of management's expectations.
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such account and believes it is not exposed to any significant credit risk on
cash and cash equivalents.
Use of Estimates in the Preparation of Financial Statements 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.
- -------------------------------------------------------------------------------
F-9
<PAGE>
NOVAMED, INC.
Notes to Consolidated Financial Statements
Continued
- -------------------------------------------------------------------------------
3. Significant Accounting Policies Continued
Foreign Currency Translation
Revenues and expenses denominated in foreign currencies are translated at
average monthly exchange rates during the year. Assets and liabilities are
translated into U.S. dollars based upon exchange rates prevailing at the end of
each year. The resulting translation adjustment is a component of shareholders'
equity.
Reclassifications
Certain amounts in the 1998 financial statements have been reclassified to
conform with the current year presentation.
4. Detail of Certain Balance Sheet Accounts
Receivables:
Trade receivables $ 170,577
Other receivables 61,624
-----------------
$ 232,201
=================
Inventories:
Finished goods $ 525,632
Work-in-process 185,579
Raw materials 46,657
-----------------
$ 757,868
=================
Accounts payable and accrued liabilities:
Accounts payable, trade $ 445,200
Accrued liabilities 262,433
Related party payables 112,531
-----------------
$ 820,164
=================
Related party payables consist of unsecured non-interest bearing advances from
officers/shareholders of the Company. The amounts are due on demand.
- --------------------------------------------------------------------------------
F-10
<PAGE>
NOVAMED, INC.
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
5. Property and Equipment
Property and equipment consist of the following:
Equipment and fixtures $ 91,799
Less accumulated depreciation (15,019)
------------------
$ 76,780
=================
6. Related Party Transactions
The Company leases one of its facilities from a shareholder. The lease requires
monthly payments of approximately $8,000 per month. Rent expense for the periods
ended December 31, 1999 and 1998 was approximately $96,000 each year. Amounts
due under this lease agreement at December 31, 1999 and 1998 was approximately
$150,000 and $179,000, respectively.
7. Income Taxes
The provision for income taxes is different than amounts which would be provided
by applying the statutory federal income tax rate to loss before the provision
for income taxes for the following reasons:
Years Ended
December 31,
-----------------------------------
1999 1998
-----------------------------------
Federal income tax benefit at
statutory rate $ 350,000 $ 73,000
Change in valuation allowance (350,000) (73,000)
------------------- ---------------
$ - $ -
=================== ================
Deferred tax assets (liabilities) are comprised of the following:
Net operating loss carryforward $ 1,098,000
Valuation allowance (1,098,000)
-----------------
$ -
==================
- --------------------------------------------------------------------------------
F-11
<PAGE>
NOVAMED, INC.
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
7. Income Taxes Continued
A valuation allowance has been established for the net deferred tax asset due to
the uncertainty of the Company's ability to realize such asset.
At December 31, 1999, the Company has a net operating loss carryforward
available to offset future taxable income of approximately $3,200,000, which
begins to expire in 2010. The amount of net operating loss carryforward that can
be used in any one year will be limited by the applicable tax laws which are in
effect at the time such carryforward can be utilized. The change in ownership of
the Company may reduce the amount of loss allowable.
8. Supplemental
Cash Flow
Information
During the year ended December 31, 1999 the Company issued common stock for a
stock subscription receivable of $560,000.
During the year ended December 31, 1998, a note payable of $3,070,221 was
contributed to capital.
Years Ended
December 31
-----------------------------------
1999 1998
-----------------------------------
Interest $ 32,000 $ -
-----------------------------------
Income taxes $ - $ -
-----------------------------------
9. Stock Options and Warrants
During the year ended December 31, 1999 the Company established a stock option
plan (the Plan), which allows a maximum of 500,000 options be granted to
purchase common stock at prices generally not less than the fair market value of
common stock at the date of grant. Under the Plan, grants of options may be made
to selected officers and key employees without regard to any performance
measures. The options may be immediately exercisable or may vest over time as
determined by the Board of Directors.
- --------------------------------------------------------------------------------
F-12
<PAGE>
NOVAMED, INC.
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
9. Stock Options and Warrants Continued
Information regarding the stock options and warrants is summarized below:
Weighted
Average
Number of Exercise
Options Price
----------------------------------
Outstanding at January 1, 1999 - $ -
Granted 500,000 1.30
Exercised - -
Forfeited - -
----------------- --------------
Outstanding at December 31, 1999 500,000 $ 1.30
================= ==============
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation expense has been recognized for stock options
granted to employees. Had compensation expense for the Company's stock options
been determined based on the fair value at the grant date consistent with the
provisions of SFAS No. 123, the Company's results of operations would have been
reduced to the pro forma amounts indicated below:
Years Ended
December 31,
------------------------------
1999 1998
------------------------------
Net loss - as reported $ (1,028,933$ (213,348)
Net loss - pro forma $ (1,329,891 $ (213,348)
Loss per share - as reported $ (.07) $ (.02)
Loss per share - pro forma $ (.09) $ (.02)
------------------------------
- --------------------------------------------------------------------------------
F-13
<PAGE>
NOVAMED, INC.
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
9. Stock Options and Warrants Continued
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
December 31,
1999 1998
-----------------------------
Expected dividend yield $ - $ -
Expected stock price volatility 113% -%
Risk-free interest rate 8% -%
Expected life of options 2 years -
=========== =============
The weighted average fair value of options granted during 1999 and 1998, was
$.78, and $0, respectively.
The following table summarizes information about stock options outstanding at
December 31, 1999:
Outstanding Exercisable
- --------------------------------------------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Contractual Average Average
Exercise Number Life Exercise Number Exercise
Price Outstanding (Years) Price Exercisable Price
- --------------------------------------------------------------------------------
$ 1.30 500,000 1.30$ 1.30 500,000 $ 1.30
- --------------------------------------------------------------------------------
10. Commitments
and
Contingencies
Royalty Agreement
In March of 1998, the Company was assigned the intellectual property and patent
rights to certain products. The term of this license is perpetual and allows for
the worldwide exclusive rights to manufacture and market the product. As part of
this agreement, the Company agrees to pay a royalty equal to 5% of net revenue
of the product. A minimum royalty payment of $21,000 shall be made for each six
month period. Royalty expense for the year ended December 31, 1999 and 1998 was
approximately $81,000 and $59,000, respectively.
- --------------------------------------------------------------------------------
F-14
<PAGE>
NOVAMED, INC.
Notes to Consolidated Financial Statements
Continued
- --------------------------------------------------------------------------------
10. Commitments and Contingencies Continued
Litigation
The Company may become or is subject to investigations, claims or lawsuits
ensuing out of the conduct of its business, including those related to product
safety and health, product liability, commercial transactions, etc. The Company
is currently not aware of any such items which it believes could have a material
adverse effect on its financial position.
11. Sales
Substantially all sales by the Company were made in Europe for the years ending
December 31, 1999 and 1998.
12. Fair Value of Financial Instruments
The Company's financial instruments consist of cash, receivables, and payables.
The carrying amount of cash, receivables, and payables approximates fair value
because of the short-term nature of these items.
13. Recent Accounting Prounounce- ments
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective date of FASB
Statement No. 133." SFAS 133 establishes accounting and reporting standards for
derivative instruments and requires recognition of all derivatives as assets or
liabilities in the statement of financial position and measurement of those
instruments at fair value. SFAS 133 is now effective for fiscal years beginning
after June 15, 2000. The Company believe that the adoption of SFAS 133 will not
have any material effect on the financial statements of the Company.
- -------------------------------------------------------------------------------
F-15
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in accountants or disagreements between the Company
and its accountants.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS
The Officers and Directors of the Company as of December 31, 1999 are as
follows:
Name Age Position
Ruairidh Campbell 36 President/CEO and Director
Dr. Aydin Dogan 46 Vice President and Director
Dr. Howard Bellin 63 Director
Dr. Franz Schain 49 Director
Ruairidh Campbell has lead the Company since his appointment as President
in 1995. Mr. Campbell also performs the duties typically performed by the Chief
Financial Officer. During his tenure as president of the Company, Mr. Campbell
has guided the Company's subsidiaries through product development and
introduction to the international marketplace. Mr. Campbell has a depth of
experience managing and financing public companies, particularly through
start-up phases. He is licensed as an attorney in the State of California with a
Doctor of Jurisprudence from the University of Utah College of Law. Mr. Campbell
sits on the Board of Directors for Bren-Mar Resources, Inc, Allied Resources,
Inc., and Fernsoft Syence Ltd. Plc.
Dr. Aydin Dogan while acting as the Company's Vice-President also serves as
the President of the Company's German subsidiary, NovaMedical Products GmbH.
Prior to his involvement with the Company in 1994, Dr. Dogan was the product
manager for Genetic Laboratories, Inc. of St Paul, Minnesota. He has also held
positions as Sales Marketing Manager and Managing Director of Bioplasty GmbH
located in Cologne, Germany. Dr. Dogan holds a Ph.D. in Chemistry from the
University of Cologne.
Dr. Franz Schain is a physician who owns a private clinic and Ambulatory
Care Centre in Hanover, Germany. He is a specialist in knee diseases who has
been engaged for his expertise by the national football teams of Bulgaria,
Zimbabwe, and Nepal. Dr. Schain holds medical degrees from the Universities of
Bonn, Essen, and Muelheim. He is also a member of the American Association of
Arthroscopy.
Dr. Howard Bellin is a board certified plastic and reconstructive surgeon
with 29 years of private practice experience. He has extensive expertise in
breast augmentation, having performed nearly 2,000 of these procedures. He has
participated in three clinical trials of breast implants for FDA submissions on
behalf of breast implant manufacturers. Dr. Bellin has also published on this
subject in the Journal of Plastic and Reconstructive Surgery. Dr. Bellin is a
graduate of Amherst College and New York Medical College. He interned at the
University of California, San Francisco, had a residency in general surgery at
21
<PAGE>
New York Medical College, and trained in plastic surgery at Columbia
Presbyterian Medical Center in New York City. He has taught at Columbia
University's College of Physicians and Surgeons and at New York Medical College.
Dr. Bellin was chief of plastic surgery at Cabrini Medical Center, and for the
past 15 years has owned and directed the CosMedica Plastic Surgery Center in New
York City.
Compliance with Section 16(a) of the Exchange Act
Based solely upon a review of Forms 3, 4 and 5 furnished to the Company, the
Company is not aware of any person who at any time during the fiscal year ended
December 31, 1999 was a director, officer, or beneficial owner of more than ten
percent of the Common Stock of the Company, and who failed to file, on a timely
basis, reports required by Section 16(a) of the Securities Exchange Act of 1934
during such fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
The following table provides summary information for the years 1999, 1998
and 1997 concerning cash and noncash compensation paid or accrued by the Company
to or on behalf of president and the only other employee to receive compensation
in excess of $100,000.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation Long Term Compensation
Awards Payout
Restricted Securities
Name and Compensation Other Annual Stock Underlying LTIP All Other
Principal Year Salary Bonus Compensation Award(s) Options/ payouts Compensation
Position ($) ($) ($) ($) ($) SARs(#) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ruairidh(1) 1999 $ 120,000 - - - 55,000 - -
Campbell 1998 120,000 - - - - - -
President 1997 61,875 - - - - - -
Dr. Aydin,(2)
President of 1998 - - - - 100,000 - -
NovaMedical 1997 160,000 - - - - - -
Products 1997 160,-00 - - - - - -
GmbH
</TABLE>
Compensation of Directors
The Company's directors are currently not compensated for their
services as director of the Company.
- ------------
(1) Ruairidh Campbell received a grant of 55,000 options with an exercise
of $1.30 a share pursuant to the Company's Stock Option Plan on March 19, 1999
(2) Dr. Aydin Dogan received a grant of 100,000 options with an exercise
price of $1.30 a share pursuant to the Company's Stock Option Plan on March 19,
1999.
22
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the stock of the Company as of March 29, 2000, by each
shareholder who is known by the Company to beneficially own more than 5% of the
outstanding Common Stock, by each director, and by all executive officers and
directors as a group.
<TABLE>
<CAPTION>
Title of Class Name and Address of Beneficial Amount and nature of Beneficial Percent of Class
Ownership Ownership
<S> <C> <C> <C>
Common Stock Ruairidh Campbell 235,000(3) 1.4%(8)
600 Westwood Terrace
Austin, Texas 78746
Common Stock Dr. Aydin Dogan 945,000(4) 5.5%(8)
3 Heinestrasse 3
D-40789
Monheim, Germany
Common Stock Dr. Howard Bellin 75,000(5) 0.4%(8)
105 East 73rd Street
New York, New York 10021
Common Stock Dr. Franz Schain 300,000(6) 1.8%(8)
Kuesterweg 5
D-30826
Garbsen, Germany
Common Stock Euro Pacific Service GmbH & 1,575,903 9.2%(8)
Co. KG
Werdenerstrasse 4
D-40227
Dusseldorf, Germany
Common Stock All Executive Officers and 3,125,903(7) 18.3%(8)
Directors as a Group (four
persons)
- -----------------
</TABLE>
(3)This number includes 55,000 options to purchase shares of the Company at
$1.30 and 30,000 at $0.45.
(4)This number includes 100,000 options to purchase shares of the Company
at $1.30 and 20,000 at $0.45.
(5)This number includes 30,000 options to purchase shares of the Company
at $1.30 and 20,000 at $0.45.
(6)This number represents 300,000 options to purchase shares of the Company
at $0.45.
(7)This number includes 555,000 option shares held by affiliates.
(8)These percentages assume all options by affiliates will be exercised. In
calculating those percentages the Company assumed that 17,046,464 were
issued and outstanding on a fully diluted basis.
23
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases one of its facilities from Gunther Biesel, a
shareholder who may have been deemed to be a control person up until July of
1998 at which time he resigned his position as a Company director. The lease
requires monthly payments of approximately $8,000 per month. Rent expense for
the periods ended December 31, 1999 and 1998 was approximately $96,000 each
year. Amounts due under this lease agreement at December 31, 1999 and 1998 was
approximately $150,000 and $179,400, respectively.
The Company issued a total of 1,575,903 shares of common stock to Euro
Pacific Service GmbH & Co. KG over the last two years. The transactions are as
follows:
In June of 1999, the Company issued 200,000 shares of common stock at
$1.10 per share to Euro Pacific Securities Service GmbH & Co. KG as
compensation for services rendered pursuant to section 4(2) of the
Securities Act of 1933 in a private transaction by the Company which
did not involve a public offering.
In June of 1999, the Company issued 200,000 shares of common stock at
$1.10 per share to Euro Pacific Securities Service GmbH & Co. KG for
cash pursuant to section 4(2) of the Securities Act of 1933 in a
private transaction by the Company which did not involve a public
offering.
In November of 1999 the Company issued 750,612 shares of common stock
valued at $0.70 per share to Euro Pacific Service GmbH & Co. KG for
services rendered.
In November of 1999 the Company issued 400,000 shares of common stock
to Euro Pacific Service GmbH & Co. KG at $0.70 a share for cash
pursuant to a promissory note. The Company has received $70,000 to
date in payment.
In November of 1999 the Company issued 400,000 shares of common stock owned
by Dr. Aydin Dogan at $0.70 a share for cash pursuant to a promissory note. The
Company has received $50,000 to date in payment
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. Exhibits required to be attached by Item 601 of Regulation S-B
are listed in the Index to Exhibits beginning on page 26 of this Form
10-KSB, which is incorporated herein by reference.
(b) Reports on Form 8-K. No report on Form 8K have been filed during the
periods covered by this Form 10-KSB.
[THIS SPACE HAS BEEN LEFT BLANK INTENTIONALLY]
24
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, this 29th day of March, 2000
Novamed, Inc.
/s/ Ruairidh Campbell
-----------------------------------
Ruairidh Campbell, President and Director
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
/s/ Ruairidh Campbell President and Director March 30, 2000
- ------------------------
Ruairidh Campbell
/s/ Aydin Dogan Vice President and Director March 30, 2000
- -----------------------
Dr. Aydin Dogan
/s/Howard Bellin Director March 30, 2000
- ----------------------
Dr. Howard Bellin
/s/Frank Schain
- ---------------------- Director March 30, 2000
Dr Frank Schain
25
<PAGE>
INDEX TO EXHIBITS
EXHIBIT PAGE
NO. NO. DESCRIPTION
3(i) * Articles of Incorporation of the Company
(incorporated herein by reference from Exhibit No.
3(i) to the Company's Form S-18 as filed with the
Securities and Exchange Commission on September 16,
1988 ).
3(ii) * Bylaws of the Company, as amended (incorporated
herein by reference from Exhibit 3(ii) of the
Company's Form S-18 as filed with the Securities
and Exchange Commission on September 16, 1988 ).
4(a) * Form of certificate evidencing shares of "Common
Stock" in the Company (incorporated from Exhibit
4(a) to the Company's Form S-18 as filed with the
Securities and Exchange Commission on September 16,
1988 ).
27 26 Financial Data Schedule "CE"
[THIS SPACE HAS BEEN LEFT BLANK INTENTIONALLY]
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED AUDITED FINANCIAL STATEMENTS FILED WITH THE COMPANY'S
DECEMBER 31, 1999 ANNUAL REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001036478
<NAME> NovaMed, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 16,237
<SECURITIES> 0
<RECEIVABLES> 232,201
<ALLOWANCES> 0
<INVENTORY> 757,868
<CURRENT-ASSETS> 1,065,614
<PP&E> 76,780
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,142,394
<CURRENT-LIABILITIES> 860,379
<BONDS> 0
0
0
<COMMON> 15,197
<OTHER-SE> 268,818
<TOTAL-LIABILITY-AND-EQUITY> 1,142,394
<SALES> 1,635,346
<TOTAL-REVENUES> 1,635,346
<CGS> 1,073,400
<TOTAL-COSTS> 1,073,400
<OTHER-EXPENSES> 1,691,520
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,028,933)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,028,933)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,028,933)
<EPS-BASIC> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
