SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended February 29, 2000
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-13187
NOVACON CORPORATION
(exact name of Registrant as specified in its charter)
Delaware 13-3074570
(state of incorporation) (IRS Employer ID Number)
5451 Hilltop Avenue
Lake Elmo, MN 55042
(address of principal executive offices)
(651) 704-9160
(Registrant's telephone number, including area code)
The number of shares outstanding of the Registrant's Common Stock, par value
$.0l, as of February 29, 2000 was 14,650,000 shares.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
[ ]Yes [X] No
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: Following are the financial statements
(unaudited) of Novacon Corporation for the nine months ended February 29,
2000 and 1999.
NOVACON CORPORATION
INDEX TO FINANCIAL STATEMENTS
For the Nine Months Ended February 29, 2000 and 1999
(Unaudited)
Balance Sheet 1
Statement of Operations 2
Statement of Cash Flows 3
Selected Information 4
NOVACON CORPORATION
BALANCE SHEET
February 29, 2000 and 1999
(unaudited)
Assets
2000 1999
Current Assets
Cash 140 (541)
Accounts Receivable 13,188 3,004
Inventories 92,355 122,533
Other Current Assets 2,000 3,840
Total Current Assets 107,682 128,836
Property & Equipment 10,895 11,555
Total Assets 118,578 140,391
Liabilities & Shareholders Equity
Current Liabilities
Accounts Payable 48,266 3,329
Accrued Compensation & Payroll Taxes 247,711 362,711
Total Current Liabilities 295,977 366,040
Long-Term Liabilities
Notes Payable 44,181 116,919
Total Long-Term Liabilities 44,181 116,919
Total Liabilities 340,159 482,959
Shareholders' Equity (Deficit)
Common Shares $.01 par value;
15,000,000 shares authorized;
14,650,000 shares issued,
and outstanding 107,229 146,500
Paid-in Capital 8,509,434 8,509,434
Retained Earnings (8,765,526) (8,866,092)
Net Income (loss) (76,318) (92,675)
Total Shareholders' Equity (Def) (221,581) (342,568)
Total Liabilities & Shareholders' Equity 118,578 140,391
(Deficit)
NOVACON CORPORATION
STATEMENT OF OPERATIONS
For the Three Months and Nine Months Ended February 29, 2000 and 1999
(Unaudited)
For the Three For the Nine
Months Ended Feb 28 Months Ended Feb 28
1999 2000 1999 2000
Net Sales 10,070 22,352 56,107 76,600
Cost of goods sold 3,893 11,704 15,068 28,287
Gross Profit 6,177 10,648 41,039 48,313
General & admin expenses 40,424 40,904 117,357 140,989
Loss from operations (34,247) (30,255) (76,318) (92,675)
Misc Income
Net income (loss) (34,247) (30,255) (76,318) (92,675)
Per share data:
Income (loss) per share: 0 0 0 0
Income (loss) before
extra item 0 0 0 0
Extraordinary item 0 0 0 0
Net income (loss) per share 0.00 0.00 0.00 0.00
Weighted average number
of shares outstanding 10,722,904 14,650,000 10,722,904 14,650,000
NOVACON CORPORATION
STATEMENT OF CASH FLOWS
For the Nine Months Ended February 29, 2000 and 1999
(Unaudited)
1999 2000
Cash flows from operating activities:
Net Income (Loss) (76,318) (92,675)
Adjustments to reconcile net income to net
cash used in operating activities:
Extraordinary item 0 0
Depreciation
Increase (decrease) in assets: 0 0
Accounts receivable 612 5,722
Inventory (701) (38,597)
Other current assets 0 0
Increase (decrease) in liabilities:
Accounts payable 746 (17,675)
Accrued liabilities 73,951 77,600
Total Adjustments 74,608 27,048
Net cash used in operations (1,710) (65,627)
Cash flows from investing activities:
Purchase of property & equipment (43) (660)
Payments received on contract receivable 0 0
Net cash provided by investing activities (43) (660)
Cash flows from financing activities:
Net issuance (repayment) of notes
payable-related parties 2,481 (67,603)
Net cash provided by financing activities 2,481 (67,603)
Increase in cash 729 216
Cash - beginning of period (711) 758
Cash - end of period 140 542
NOVACON CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Nine Months Ended February 28, 2000
(unaudited)
Basis of Presentation
The accompanying unaudited financial statements have been prepared by
Novacon Corporation ("Novacon" or the "Company") pursuant to the rules
and regulations of the Securities Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. Although
management believes the disclosures are adequate to avoid misleading
information, it is suggested that these interim financial statements be
read in conjunction with the Company's most recent Form 10-KSB and notes
thereto for the period ended May 31, 1999. In the opinion of management,
all adjustments necessary for a fair presentation of the financial position,
results of operations, and cash flows for this interim period have been made.
Operating results for the nine months ended February 29, 2000 are not
necessarily indicative of the results that may be expected for the year
ending May 31, 2000.
Inventories
Inventories consist of: February 28, 1999 February 29, 2000
Raw Materials $29,667 $39,300
Finished Goods $62,688 $83,233
$92,355 $122,533
Net Loss per Share
The Company's net loss per share amounts have been computed by dividing
the net loss by the weighted average number of outstanding shares of common
stock. The Company has no exercisable stock options outstanding and
therefore does not compute any diluted loss per share.
Item 2. Management's Discussion and Analysis
Overview
Novacon Corporation is engaged in the manufacture and distribution of
disposable infusion balloon pumps designed for epidural, intravenous and
subcutaneous drug infusions for acute and chronic pain management,
chemotherapy and other drug regimens. The Company has a non-exclusive U.S.
manufacturing and marketing agreement with the Japanese developer of the
proprietary technology employed in the design of these medical devices.
Sales for the three month period ended February 29, 2000 and 1999 were
$22,352 and $10,070, respectively, reflecting the continued U.S. clinical
evaluation of the Company's dibTM Drug Infusion Balloon. Sales for the nine
month periods ended February 29, 2000 and 1999 were $76,600 and $56,107,
respectively. The Company is engaged in the development of an independent
distributor network in the United States marketplace. Approximately 33% of
the U.S. market was under distribution coverage at the end of this quarter.
The net loss was $30,255 and $34,247, respectively, for the three month
periods ended February 29, 2000 and 1999. The net loss for the nine month
periods ended February 29, 2000 and 1999 was $92,675 and $76,318,
respectively. Net operating losses for these periods were associated with
sales revenue only and no extraordinary items.
Operating expenses for the three month periods ended February 29, 2000 and
1999 were $40,904 and $40,424, respectively. For the nine month periods
ended February 29, 2000 and 1999 operating expenses were $140,989 and
$117,357, respectively.
Cost of goods sold during the three month periods ended February 29, 2000 and
1999 were $11,704 and $3,893, respectively, representing 52% and 39% of
sales, respectively. For the nine month periods ended February 29, 2000 and
1999, cost of goods sold was $28,287 and $15,068, respectively, representing
37% and 27% of sales, respectively.
For the three and nine month periods ended February 29, 2000 and 1999, the
Company did not incur any expenses for research and development. Any future
modification to the current dibTM design may result in expenditures for
research and development.
Liquidity and Capital Resources
The Company's cash position did not improve during fiscal 1999. The Company
had a working capital deficit of $249,429 as of May 31, 1999, compared to a
working capital deficit on May 31, 1998 of $118,016. At February 29, 2000
the Company had a working capital deficit of $237,204. As of February 29,
2000 the Company had negative cash ($541), compared to $1,282 at May 31,
1999.
During the nine months ended February 29, 2000 the Company borrowed $75,000
from a director on a long term note payable. The Company has no bank
borrowings and no lines of credit with any financial institutions.
Management believes that the Company's current level of cash and cash
equivalents are not sufficient to meet its needs for working capital and
capital expenditures for the next twelve months. The Company's recurring
losses, negative cash flow from operations and net working capital deficiency
raise substantial doubt about its ability to continue as a going concern
without internal restructuring and obtaining additional capital. The Company
has an accumulated deficit of $8,866,092 as of May 31, 1999 and has incurred
annual operating losses for the past five years. If the Company does not
achieve an operating profit during 2000, it may be unable to continue in
business.
.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Risk Factors
Cautionary Factors That May Affect Future Results. Certain statements
contained in this Quarterly Report by Novacon do not relate strictly to
historical or current facts. As such, they are considered "forward-looking
statements" which provide current expectations or forecasts of future events.
Such statements can be identified by the use of terminology such as
"anticipate," "believe," "estimate," "expect," "intend," "may," "could,"
"possible," "plan," "project," "will," "forecast" and similar words or
expressions. Novacon's forward-looking statements generally relate to its
growth strategies, financial results, product development and regulatory
approval programs, and sales efforts. One must carefully consider forward-
looking statements and understand that such statements involve a variety of
risks and uncertainties, known and unknown, and may be affected by inaccurate
assumptions. Consequently, no forward-looking statement can be guaranteed
and actual results may vary materially. It is not possible to foresee or
identify all factors affecting Novacon's forward-looking statements and
investors therefore should not consider any list of such factors to be an
exhaustive statement of all risks, uncertainties or potentially inaccurate
assumptions. Novacon undertakes no obligation to update any forward-looking
statement.
Although it is not possible to create a comprehensive list of all
factors that may cause actual results to differ from Novacon's forward-
looking statements, such factors include, among others, (i) trends toward
managed care, healthcare cost containment and other changes in government
and private sector initiatives, in the U.S. and other countries in which
Novacon does business, that are placing increased emphasis on the delivery
of more cost-effective medical therapies; (ii) the trend of consolidation
in the medical device industry as well as among customers of medical device
manufacturers, resulting in more significant, complex and long-term
contracts than in the past and potentially greater pricing pressures; (iii)
the difficulties and uncertainties associated with the lengthy and costly
new product development and foreign and domestic regulatory approval
processes, such as delays, difficulties or failures in achieving acceptable
clinical results or obtaining foreign or FDA marketing clearances, which may
result in lost market opportunities or postpone or preclude product
commercialization; (iv) efficacy or safety concerns with respect to marketed
products, whether scientifically justified or not, that may lead to product
recalls, withdrawals or declining sales; (v) changes in governmental laws,
regulations and accounting standards and the enforcement thereof that may be
adverse to Novacon; (vi) increased public interest in recent years in product
liability claims for implanted medical devices; (vii) other legal factors
including environmental concerns and patent disputes with competitors; (viii)
agency or government actions or investigations affecting the industry in
general or Novacon in particular; (ix) the development of new products or
technologies by competitors, technological obsolescence and other changes
in competitive factors; (x) risks associated with maintaining and expanding
international operations; (xi) business acquisitions, dispositions,
discontinuations or restructurings by Novacon; (xii) the integration of
businesses acquired by Novacon; and (xiii) economic factors over which
Novacon has no control, including changes in inflation, foreign currency
rates and interest rates. More detailed discussions of many of these factors
are including in the following sections.
Novacon notes these factors as permitted by the Private Securities
Litigation Reform Act of 1995.
Substantial, Continuing Operating Losses. Novacon has incurred losses
for the fiscal years ended May 31, 1999, 1998 and 1997 in the amounts of
approximately $100,566, $102,712, and $132,526, respectively, and there is
no assurance that substantial operating losses will not continue
indefinitely. Novacon has incurred an accumulated deficit since its
inception of approximately $8,958,767 as of February 28, 1999.
Consequently, there can be no assurance that Novacon will achieve profitable
operations. In the event Novacon is unable to eliminate continuing operating
losses and acquire substantial new working capital, Novacon's business
operations will cease and its stockholders will lose their entire investment.
Limited Financial Resources. Novacon has only limited financial resources.
Novacon's continuing business operations are dependent on the acquisition of
substantial new working capital
Working Capital Deficit. As of the quarter ended February 29, 2000,
Novacon had a working capital deficit of approximately $(237,204). At that
date, the company's total liabilities were approximately $482,959 and
exceeded its total assets of approximately $140,391, yielding a shareholders'
deficit of approximately $342,568. Approximately $362,711 of the company's
debt represents accrued salaries payable to David P. Lang and John D. Lang.
Novacon immediately requires substantial working capital for which there is
no assurance. In the event Novacon is unable to acquire substantial new
working capital, Novacon's business operations will cease and its
stockholders will lose their entire investment.
Government Regulation and Other Related Matters. Government and private
sector initiatives to limit the growth of health care costs, including price
regulation and competitive pricing, are continuing in many countries where
Novacon expects to conduct business, including the United States. These
changes are causing the marketplace to put increased emphasis on the delivery
of more cost-effective medical therapies. Although Novacon believes it is
well positioned to respond to changes resulting from this worldwide trend
toward cost containment, the uncertainty as to the outcome of any proposed
legislation or changes in the marketplace precludes Novacon from predicting
the impact these changes may have on future operating results.
In keeping with the increased emphasis on cost effectiveness in health
care delivery, the current trend among hospitals and other customers of
medical device manufacturers is to consolidate into larger purchasing groups
to enhance purchasing power. The medical device industry has also been
consolidating rapidly, partly in order to offer a broader range of products
to large purchasers. As a result, transactions with customers are more
significant, more complex and tend to involve more long-term contracts than
in the past. This enhanced purchasing power may also increase the pressure
on product pricing, although management is unable to estimate the potential
impact at this time.
In the United States, the Food and Drug Administration (the "FDA"),
among other governmental agencies, is responsible for regulating the
introduction of new medical devices, including laboratory and manufacturing
practices, labeling and recordkeeping for medical devices, and review of
manufacturers' required reports of adverse experience to identify potential
problems with marketed medical devices. The FDA can ban certain medical
devices, detain or seize adulterated or misbranded medical devices, order
repair, replacement, or refund of such devices, and require notification of
health professionals and others with regard to medical devices that present
unreasonable risks of substantial harm to the public health. The FDA may also
enjoin and restrain certain violations of the Food, Drug and Cosmetic Act and
the Safe Medical Devices Act pertaining to medical devices, or initiate action
for criminal prosecution of such violations. Moreover, the FDA administers
certain controls over the export of such devices from the United States. All
of the medical devices that Novacon markets, or expects to market are in a
Medical device laws are also in effect in many of the countries in
which Novacon will do business outside the United States. These range from
comprehensive device approval requirements for some or all of Novacon's
medical device products to requests for product data or certifications. The
number and scope of these requirements are increasing.
In the early 1990's the review time by the FDA to clear medical devices for
commercial release lengthened and the number of clearances, both of 510(k)
submissions and pre-market approval applications ("PMA's"), decreased. In
response to public and congressional concern, the FDA Modernization Act of
1997 was adopted with the intent of bringing better definition to the
clearance process. Although it is expected that the 1997 Act will result in
improved cycle times for product clearance, there can be no assurance that
the FDA review process will not involve delays or that clearances will be
granted on a timely basis.
Novacon is also subject to various environmental laws and regulations
both within and outside the United States. The operations of the company,
like those of other medical device companies, involve the use of substances
regulated under environmental laws, primarily in manufacturing and
sterilization processes. While it is difficult to quantify the potential
impact of compliance with environmental protection laws, management believes
that such compliance will not have a material impact on the company's
financial position, results of operations or liquidity.
Competition and Industry. Novacon sells therapeutic medical devices in
the United States and expects to sell around the world. In the product lines
in which Novacon competes, the company faces a mixture of competitors ranging
from large multi-national industrial manufacturers to national or regional
manufacturers that offer a limited selection of products. In addition, the
company faces competition from providers of alternative medical therapies
such as pharmaceutical companies. Important factors to Novacon's customers
will include product reliability and performance, product technology that
provides for improved patient benefits, product price, and breadth of product
lines and related product services provided by the manufacturer. Major
shifts in industry market share have occurred in connection with product
problems, physician advisories and safety alerts, reflecting the importance
and risks of product quality in the medical device industry.
Market complexity continues to intensify in the medical device industry.
Factors such as buyer groups, government reimbursement systems for health
care costs, relative patent portfolios, government regulation (including the
regulatory approval process for medical devices), a more rigorous enforcement
climate at the FDA, health care reform, product liability litigation and the
rapid rate of technological change are increasingly important considerations
for existing medical device manufacturers and any potential entrants to the
industry such as Novacon.
Litigation. The medical device industry has been characterized by
extensive litigation regarding patents and other intellectual property
rights, and companies in the medical device industry have employed
intellectual property litigation to gain a competitive advantage. There can
be no assurance that Novacon will not become subject to patent infringement
claims or litigation or interference proceedings declared by the United
States Patent and Trademark Office ("USPTO") to determine the priority of
inventions. The defense and prosecution of intellectual property suits,
USPTO interference proceedings and related legal and administrative
proceedings are both costly and time-consuming.
Uncertainty of United States Market Acceptance. There can be no
assurance that any of the medical device products will gain any significant
United States market acceptance among physicians, surgeons and health care
payors, even if required FDA regulatory approvals are obtained. Novacon
believes that ultimately achieving market acceptance of such products will
depend heavily on the results of clinical trials and the company's ability to
demonstrate, through such trials, a significant improvement in patient health
using these medical devices. There can be no assurance that such clinical
trials will achieve such results.
Company Medical Device Products May Be Dependent On Third-Party Payor
Approvals. United States health care providers, including hospitals and
physicians, that purchase medical devices generally rely on third party
payors, principally federal Medicare, state Medicaid and private health
care insurance plans, to reimburse all or part of the costs and fees
associated with the procedures performed using these devices. Novacon's
success will depend upon, among other things, the ability of health care
providers to obtain satisfactory reimbursement from third party payors for
medical procedures in which the company's medical device products are used.
Third party payors may deny reimbursement if they determine that a
prescribed device has not received appropriate regulatory clearances or
approvals, is not used in accordance with cost-effective treatment methods
as determined by the payor, or is experimental, unnecessary or inappropriate.
If FDA clearance or approval were received, third party reimbursement would
also depend upon decisions by the United States Health Care Financing
Administration for Medicare, as well as individual health maintenance
organizations, private insurers and other payors. Reimbursements in
international markets vary significantly by country and by region within some
countries, and reimbursement approvals may be obtained on a country-by-
country basis. Many international markets have government managed health
care systems that control reimbursement for new devices and procedures. In
most markets, there are private insurance systems as well as government
managed systems. There can be no assurance that reimbursement for Novacon's
product lines will be available or, if available, that such reimbursement
will be available in sufficient amounts in the United States or
international markets under either government or private reimbursement
systems, or that physicians will support and advocate reimbursement for
procedures using the company's product lines. Failure by hospitals and
physicians and other users of Novacon's product lines to obtain
reimbursement from third party payors or changes in government and private
party payor policies toward reimbursement for procedures employing
Novacon's product lines would have a material adverse effect on the
Company's business, financial condition and results of operations. Moreover,
Novacon is unable to predict what additional legislation or regulation, if
any, relating to the health care industry or third party coverage and
reimbursement may be enacted in the future, or what effect such legislation
or regulation would have on the Company.
Novacon expects to purchase all of its sole and limited source medical
device products pursuant to purchase orders placed from time to time and may
have no guaranteed supply arrangements. The inability to obtain sufficient
medical device products, to obtain or develop alternative sources of supply
at competitive prices and quality, or to avoid manufacturing delays could
prevent Novacon from selling sufficient quantities of its medical device
products to satisfy market demand, result in delays in product shipments,
increase Novacon's products costs or cause an imbalance in the inventory
level of certain products. Any or all of these problems could in turn result
in the loss of customers, provide an opportunity for competing products to
achieve greater market acceptance and otherwise adversely affect Novacon's
business and financial results.
Dependence on Non-Binding Strategic Marketing Alliances; Need to
Establish Alliances. Novacon's business strategy depends in significant part
on establishing successful strategic alliances with a variety of key
companies within the medical device distribution industry. Among the types
of alliances contemplated by Novacon's business strategy are supply
arrangements with surgeons and physicians, healthcare institutions, health
care maintenance organizations, and third-party reimbursement firms.
Novacon expects to commence negotiating strategic alliances of this nature
in the immediate future. However, there is no assurance that such
relationships will be achieved, or if achieved that they produce the benefits
anticipated by Novacon. Moreover, Novacon believes that establishing
strategic alliances is critical to the success of its business, and there is
no assurance that it will be successful in doing so. In addition, Novacon
expects most of its strategic alliances will not be covered by binding
contracts, contain no minimum purchase commitments and may be subject to
unilateral termination by such strategic partners, and there is no assurance
as to the future success or significance of such alliances, if any. Also,
some strategic alliances may require Novacon to share control over its
marketing programs
In order to support increased levels of sales in the future and to augment
its long-term competitive position, Novacon anticipates that it will be
required to make significant expenditures in sales and marketing.
Risks Associated with International Sales. International sales will account
for a substantial portion of Novacon's revenues in the foreseeable future. A
number of risks are inherent in international transactions. International
sales may be limited or disrupted by the imposition of government controls,
export license requirements, economic or political instability, trade
restrictions, changes in tariffs or difficulties in staffing and management.
Additionally, fluctuations in currency exchange rates as well as increases
in duty rates may adversely affect Novacon's business, financial condition
and results of operations and difficulties in obtaining export licenses. The
financial condition, expertise and performance of Novacon's future
international sub-distributors could affect sales of its product lines
internationally and could have a material adverse effect on Novacon's
business, financial condition and results of operations. The proposed
international nature of Novacon's business also subjects it and its
representatives, agents and sub-distributors to laws and regulations of
international jurisdictions in which they operate or in which Novacon's
product lines may be sold. The regulation of medical devices in a number
of such jurisdictions, particularly in the European Union, continues to
develop, and there can be no assurance that new laws or regulations will
not have an adverse effect on Novacon's business, financial condition and
results of operations. Foreign regulatory agencies often establish product
standards different from the United States and any inability to obtain
foreign regulatory approvals on timely basis could have a material adverse
effect on the company's international business and its financial condition
and results of operations.
Risks Associated with Growth of Business; Scale-up Risks. If Novacon's
line of medical products achieve commercial success, the growth of Novacon's
business, including its internal operations, will place significant demands
on the systems and management of the company. Such business growth will
result in additional personnel needs and an increased level of responsibility
for management personnel. To manage its growth effectively, Novacon will be
required to continue to expand and improve its internal operations and
systems (including logistics, management information systems, accounting
systems and sales and marketing) and to expand and manage its employee base.
Novacon will have to add key managers, and there is no assurance as to the
rate at which such managers will be effectively assimilated into its
business or operate effectively as a management team. Novacon will also be
required to effectively expand and manage the independent contractors that
it may have to use to distribute its medical device products in the future.
Novacon's inability to manage growth effectively could have a material
adverse effect on its operating results.
Certain Marketing and Sales Risks. Novacon may make arrangements with
its customers who will generally allow their customers, in the event of a
price decrease, credit equal to the difference between the price originally
paid for products and the new decreased price on products in the customers'
inventories on the date of the price decrease. When a price decrease is
anticipated, Novacon will be required to establish reserves for amounts
estimated to be reimbursed to qualifying customers. There can be no
assurance that these reserves will be sufficient or that any future returns
or price protection charges will not have a material adverse effect on
Novacon's results of operations, particularly because future results will be
heavily dependent on recently introduced products for which Novacon has
little or no operating history. In addition, customers generally will have
the right to return excess inventory within specified time periods. Any
build-up of inventory at Novacon or in its distribution channels that does
not sell through to end-users could have a material adverse effect on its
operating results and financial condition.
Novacon from time to time may experience product defects and product
returns. There can be no assurance that Novacon will not experience quality
or reliability problems in the future that have an adverse effect on its
business or financial results.
Novacon expects to market its products through product distributors.
Novacon will grant credit to its customers, and a substantial portion of
outstanding accounts receivable will be due from time to time from
distributors. If any one or a group of these customers' receivable balances
should be deemed uncollectible, it would have a material adverse effect on
Novacon's results of operations and financial condition.
Product Liability Claims. Novacon operates in an industry susceptible
to significant product liability claims. In recent years, there has been an
increased public interest in product liability claims for implanted medical
devices. These claims may be brought by individuals seeking relief for
themselves or, increasingly, by groups seeking to represent a class. Product
liability claims may be asserted against the company in the future relative
to events not known to management at the present time. Novacon presently
maintains no product liability insurance and there is no assurance that it
will be able to acquire product liability insurance with adequate coverage
terms, if at all. Consequently, any claims that may be asserted against
Novacon would have a material adverse effect on the company.
Dividends Not Likely. Novacon has not paid any dividends on its capital
stock since its incorporation and does not intend to pay any cash dividends
in the foreseeable future.
Dependence On Key Executive Management. Novacon's success will depend
in large part upon the services of David P. Lang and other key employees.
The loss of the services of one or more key executives, and particularly Mr.
Lang, could have a material adverse effect on Novacon. Novacon's success
will also depend in significant part upon its ability to attract and retain
highly skilled management, marketing and other personnel. Competition for
such personnel in the medical device industry is intense, and the company
expects difficulty in finding sufficient numbers of qualified professional
and marketing personnel. There can be no assurance that Novacon will be
successful in attracting and retaining the quantity and quality of
personnel that it needs.
Novacon does not presently maintain key-man life insurance on its
principal executives; however, it intends to secure such insurance during
2000. However, there is no assurance that the proceeds from such insurance,
if any, would be adequate to identify and employ a successor and to
compensate Novacon for the loss of such key executive.
Suspension Of Trading of Company Common Stock. Novacon suspended
filing its periodic reports required under the Securities Exchange Act of
1934, as amended, since 1996 primarily because of its lack of financial
resources. The SEC may initiate investigation or commence enforcement
proceedings against the company and its management for violation of the
periodic reporting requirements. Any such action undertaken by the SEC
could result in the imposition of fines or suspension of trading of the
company's Common Stock.
Limited Public Trading Market And No Assurance Of Ability To Resell
Company Common Stock. There is no assurance that any public market for the
company's Common Stock will not be volatile. There have been periods of
extreme fluctuation in the stock markets that, in many cases, were unrelated
to the operating performance of, or announcements concerning, the issuers of
the affected securities. Securities of issuers having relatively limited
capitalization or securities recently offered in a public offering or being
publicly traded are particularly susceptible to change based on short-term
trading strategies of certain investors. Accordingly, there can be no
assurance that stockholders will be able to resell the shares of company
Common Stock at any price.
Although Novacon's Common Stock is eligible for public trading, it may
be relevant for company stockholders that Novacon's Common Stock be eligible
for inclusion on the NASDAQ Small-Cap Market(r). Under the current adopted
rules of the National Association of Securities Dealers, Inc. ("NASD"), in
order to qualify for initial quotation of securities on NASDAQ, a company,
among other things, must have at least $4,000,000 in total assets, 1,000,000
shares in the public float, $5,000,000 in market value of public float and a
minimum bid of $4.00 per share. For continued listing, a company, among
other things, must have $2,000,000 in total assets, 500,000 shares in the
public float, $1,000,000 in market value of public float and a minimum bid
price of $1.00 per share.
Generally, holders of securities not eligible for NASDAQ Small-Cap
Market(r) inclusion may have difficulty in selling their securities should
they desire to do so. In such event, due to the low price of the securities,
many brokerage firms will not effect transactions in such securities and it
is unlikely that any bank or financial institution will accept such
securities as collateral, which would have an adverse effect in developing
or sustaining any market for such securities.
The SEC has adopted regulations which generally define "penny stock"
to be any equity security that has a market price (as defined) less than
$5.00 per share or an exercise price less than $5.00 per share, subject to
certain exceptions. During periods when Novacon's Common Stock does not
qualify for inclusion on the NASDAQ Small-Cap Market or is removed therefrom,
the Common Stock may become subject to rules that impose additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and accredited investors (generally those
with assets in excess of $1,000,000 or annual income exceeding $200,000, or
$300,000 together with their spouse). For transactions covered by these
rules, the broker dealer must make a special suitability determination for
the purchase of such securities and have received the purchaser's written
consent to the transaction prior to the purchase. Additionally, for any
transaction involving a penny stock, unless exempt, the rules require the
delivery, prior to the transaction, of a disclosure schedule prepared by the
SEC relating to the penny stock market. The broker-dealer also must disclose
the commissions payable to both the broker dealer and the registered
representative, current quotations for the securities and, if the broker-
dealer is the sole market-maker, the broker-dealer must disclose this fact
and the broker-dealer's presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny
stock held in the account and information on the limited market in penny
stocks. Consequently, the "penny stock" rules may restrict the ability of
broker-dealers to sell Novacon's securities and may affect the ability of
company stockholders to sell such securities in the secondary market.
Recently, the SEC has proposed regulations which, if adopted, will
impose additional sales practice requirements on broker-dealers who sell
securities whose issuers are not subject to the periodic reporting
requirements of the Securities Exchange Act of 1934, as amended. For
transactions covered by these proposed rules, the broker dealer must
undertake special actions with respect to the market of such stocks.
Consequently, these proposed rules may restrict the ability of broker-
dealers to sell Novacon's securities and may affect the ability of
purchasers to sell their shares in the secondary market.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Pending Patent Litigation. On July 23, 1999, Novacon was served with a
complaint filed in the United States District Court, Central District of
California, Santa Ana, California, by I-Flow Corporation alleging various
causes of action for patent interference against Novacon with respect to its
elastomeric infusion pump technology. Novacon has taken the position that
the California court lacked jurisdiction, elected not to appear, and intends
to commence patent interference litigation against I-Flow Corporation in
Minnesota. During the interim, I-Flow Corporation petitioned the court for a
default judgment against Novacon on October 10, 1999, which if granted,
Novacon believes is unenforceable. Novacon believes that it has meritorious
defenses to the claims asserted by I-Flow Corporation, including patent
infringement by I-Flow Corporation. Novacon believes that such proceedings
would likely have a material adverse effect on its business or financial
condition if it cannot successfully overturn the default judgment and
prosecute its claims against I-Flow Corporation.
On February 14, 2000, the above United States District Court granted
I-Flow Corporation, through a default judgment, a permanent injunction
restraining Novacon Corporation from importing, manufacturing and selling
its Dib(tm) Drug Infusion Balloon in the United States. I-Flow Corporation
claimed the Dib(tm) infusion pump design violated its patents and was
awarded damages, legal fees and costs in amounts to be determined. Novacon
denies the Dib(tm) design infringes any I-Flow patents and regards this legal
action as strictly anti-competitive. However, the Company was financially
unable to respond to this lawsuit in California and therefore I-Flow was
granted a default judgment. If the default judgment is not successfully
overturned, Novacon will be forced to immediately cease its infusion pump
business.
Item 2. Changes in Securities and Use of Proceeds
NONE
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
NONE
Item 5. Other Information
On March 16, 2000 the Company was notified by Mitek Products, a Johnson &
Johnson Company subsidiary, that it terminated the three year Supply
Agreement entered into between Novacon Corporation and Innovasive Devices,
Inc. in June, 1999. Johnson & Johnson, through its Mitek Products
subsidiary, closed on the acquisition of Innovasive Devices, Inc. on
February 10, 2000.
In view of the default judgment granted I-Flow Corporation (see Item 1.
Legal Proceedings) and the termination of its Supply Agreement with
Innovasive Devices, Inc., Novacon and Santerra Medical Technology, Inc. are
reconsidering the January, 2000 Letter of Intent (see Form 10-QSB for the
period ended November 30, 1999) announcing the acquisition of Santerra by
Novacon Corporation. No final decision on this matter has been taken.
Item 6. Exhibits and Reports on Form 8-K
Press Release dated February 16, 2000: "Novacon Defaults in
Patent Litigation..."
Press Release dated March 23, 2000: "Novacon Supply Agreement
Terminated by Johnson & Johnson"
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NOVACON CORPORATION
April 10, 2000 ____________________________
Date David P. Lang
President & Chairman of the Board
Chief Financial Officer
