SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF
1934 [Fee Required]
For the fiscal year ended May 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: 0-13187
NOVACON CORPORATION
(Name of small business issuer in its charter)
DELAWARE 13-3074570
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5451 HILLTOP AVENUE NO., SAINT PAUL, MN 55042
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (651) 704-9160
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(Title of class)
Check whether the issuer(1)has filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes[ ] No[X]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B 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 referenced in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for the fiscal year ended May 31, 1999 were $80,776.
As of February 15, 2000, 14,650,000 shares of the issuer's Common Stock were
deemed outstanding, and the aggregate market value of the Common Stock of the
issuer (based upon the average of the closing bid and asked prices of the Common
Stock at that date), excluding outstanding shares beneficially owned by the
directors and executive officers was approximately $1,174,049.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following document are incorporated herein by reference:
Part III -- The Registrant's Information Statement for its 1999 Annual Meeting
(the "1999 Statement") to the extent specific sections are referred to herein.
Exhibit Index is located at page 60
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
PART I
This Annual Report on Form 10-KSB contains statements that are forward-
looking, including statements relating to anticipated operating results, growth,
financial resources, the development of new markets, the development, regulatory
approval, manufacture, distribution, and commercial acceptance of new products
and new applications for Novacon's existing product lines. Investors are
cautioned that, although Novacon believes that its expectations are based on
reasonable assumptions, forward-looking which involve risks and uncertainties
which may affect Novacon's business and prospects, including changes in
economic and market conditions, acceptance of Novacon's products by the health
care and reimbursement communities, health care legislation and regulation, new
developments in pain management therapy, administrative and regulatory approval
and related considerations, competitive developments, maintenance of strategic
alliances and other factors discussed under the caption In addition Novacon
expects to have a high concentration of business with one major customerer,
but has not yet begun shipments. Reductions in prospective shipments to this
customer will substantially reduce Novacon's ability to continue business
operations.
These risks and uncertainties include, but are not limited to, Novacon's ability
to obtain substantial working capital and the risks and uncertainties described
in "Risk Factors" in this Report.
ITEM 1. DESCRIPTION OF BUSINESS
History, Discontinued Business Operations and Recent Corporate Events
Discontinued Business Operations. Novacon Corporation ("Novacon" or the
"Company"), formerly known as Cardio-Pace Medical, Inc., was organized in April
1981 to develop, manufacture and market its proprietary Durapluse(tm) cardiac
pacemaker and accessory products. Although the Company achieved sales of its
pacemaker medical device and accessories products, it did not achieve
profitability. The Company suspended manufacturing the cardiac pacemaker in
1990. During 1985, the Company entered into an agreement with Qinling
Semiconductor Company to establish Qinming Medical, Inc., a Sino-American joint
venture in Baoji, China, for the manufacture and distribution of cardiac
pacemakers and accessory products, which are still manufactured and distributed
in China. In 1992 the Company sold its 49% interest in the joint venture to
Qinming.
Pending Discontinued Business Operations. On February 14, 2000, Novacon was
notified the U.S. District Court, Central District of California, granted
I-Flow Corporation, through a default judgment, a permanent injunction
restraining Novacon from importing, manufacturing, and selling its Dib Drug
Infusion Balloon in the United States. I-Flow Corporation claimed the Dib
infusion pump design violated its patents and was awarded damages, legal fees
and costs in amounts to be determined. Novacon denies the Dib design infringes
any I-Flow patents and believes the Dib patents protect its design. However,
Novacon is financially unable to respond to this lawsuit and therefore I-Flow
was able to obtain a default judgment. If the default judgment is not
successfully overturned, Novacon will be forced to immediately cease its
infusion pump business. This development will have a serious adverse impact
on Novacon and may cause the Company to go out of business.
Lapsed Corporate Charter and Revival; Delinquent SEC Periodic Reports. During
1993 Novacon permitted its Delaware corporate charter to lapse and 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.
Novacon revived its Delaware corporate charter on August 20, 1999 and all
corporate activities conducted during the interim lapse period were
automatically ratified back to the charter lapse date. Upon holding its annual
stockholders meeting in April, 2000 to elect new directors, Novacon will be in
compliance with the provisions of the Delaware General Corporation Law.
Current Business Operations. Novacon designs, develops, manufactures and markets
low-cost, disposable elastomeric infusion pumps for pain management and is
developing other applications for its elastomeric infusion pump technology.
Substantially all of the Company's revenues since 1995 have been derived from
the sale of elastomeric infusion pumps that are designed to deliver small
quantities of pain medication at a nominally constant flow rate. Novacon's
elastomeric infusion pumps, marketed as the dib(tm) Drug Infusion Balloon Pump,
authorized by the United States FDA for sale in the United States for epidural,
intravenous and percutaneous infusion of a wide range of medications, including
narcotic and non-narcotic anesthetics, chemotherapy agents and antibiotics.
Novacon believes that its elastomeric infusion pump technology is well suited
for the delivery of a number of anesthesia and pain medication drugs that are
difficult to administer, including drugs that require site-specific delivery or
require a profiled delivery pattern. See Pending Discontinued Business
Operations (above).
Pending Acquisition; New, Additional Business Operations. During November, 1999
Novacon entered into a preliminary agreement to acquire a recently organized,
international medical trading company, Santerra Medical Technology, Inc.
("Santerra"). Santerra is a development stage medical technology trading company
specializing in implantable and interventional medical device products. Primary
products include those for coronary and peripheral vascular disease, heart valve
replacement, orthopedic reconstruction, and minimally invasive surgery. These
products are manufactured by MicroVal, S.A. ("MicroVal") and Fabrique
d'Implants et d'Instruments Chirurgicaux ("Fii"), affiliates of Ste. Francaise
d'Etude et Realisation d'Outillage ("SFERO"), St. Etienne, France. Santerra
operates in a single industry segment --- providing medical device products.
The company will operate worldwide distributing three primary product line
platforms---cardiovascular, orthopedic and general surgery in three primary
geographic areas---the Americas, Europe/Middle East/Africa, and Asia/Pacific.
Santerra's alliance with MicroVal and Fii provides for Santerra's exclusive
distribution of MicroVal's Carbilit(tm) Bileaflet Heart Valve, Effix(tm)
intravascular stents, GRF(r) Biological Glue, laparoscopic surgical instruments
and Fii's reconstructive orthopedic prosthetic implants. The distribution and
sub-assembly agreements provide for representation and distribution of all
current and future medical device products from Fii and MicroVal in the Americas
(United States, Canada, Mexico, Central America and South America) and Asia/
Pacific (Australia, Japan, China, India as well as smaller markets). These are
renewable, long-term agreements that include the rights of sub-distributor
appointments and product assembly and licensing rights under certain
circumstances. In addition, under certain circumstances Santerra has the right
to purchase Fii and MicroVal technology with respect to the medical devices and
to make capital investments in Fii and MicroVal. This mutually beneficial
alliance facilitates MicroVal and Fii's medical device product presence in the
lucrative Americas, Asia/Pacific and other international markets on the one
hand, and on the other hand Santerra will acquire distribution control over
innovative medical device products in these lucrative markets without expending
millions of dollars in research and product development. The Santerra/MicroVal/
Fii strategic alliance transcends a mere distribution relationship. Santerra
and MicroVal/Fii will jointly seek regulatory approvals in markets where
required; Santerra has the right to establish subdistribution channels and,
under certain conditions such as U.S.-origin requirements, Santerra is licensed
to assemble MicroVal/Fii manufactured components into completed medical devices.
The Santerra/MicroVal/Fii alliance agreements contemplate a long-term
relationship conditioned upon Santerra's annual performance. Additionally,
Santerra believes that if it evidences substantial market entry in its licensed
territories Micro Val/Fii may grant Santerra exclusive distribution rights in
the European Union territory, except France.
Santerra may resell the MicroVal and Fii cardiovascular, surgical and
interventional cardiology medical devices (Carbilit(tm) Bileaflet Heart Valve,
intravascular stent and the biological glue) in the Americas, Asia/Pacific and
other international markets under its own tradename in order to establish an
United States origin identified medical device which may be advantageous in
those markets. Generally, United States-based surgeons and physicians are more
inclined to employ U.S.-origin medical devices. In the event Santerra elects to
develop its independent brand with a U.S.-origin product designation it will be
required to make a significant input into the final medical device products.
Although Santerra presently has not considered what that input may be, at a
minimum it would include component assembly and sterile packaging at Santerra's
U.S.-based facilities.
Santerra has adopted a strategy for the initial introduction of certain of its
new medical device products and applications in selected foreign countries
because of potentially less extensive and less time-consuming governmental
regulatory procedures. Recently, Santerra entered into a preliminary
distribution agreement for its MicroVal and Fii medical device product lines
with Qinming Medical, Inc., Baoji, China, and Qinming Medical agreed to invest
$1,500,000 in Santerra.
Santerra does not intend to engage in research and development activities. It is
focused on two activities: medical device regulatory approvals and distribution.
Santerra has focused on the development and implementation of its alliance with
MicroVal and Fii since its inception in April, 1998. Since November, 1998 the
company has focused on the preparation, filing and prosecution of United States
and Canadian medical device approvals and the negotiation of distribution
alliances in the United States, Canada, Japan, China and India. Santerra will
continue to execute its business plan through developing marketing and
distribution alliances with major medical device companies and when appropriate,
sublicense its rights acquired under its MicroVal and Fii agreements.
Risk Factors
Cautionary Factors That May Affect Future Results. Certain statements contained
in this Annual 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,
including the proposed acquisition of Santerra Medical Technologies, Inc. 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 sible 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 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 marketinging 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 productliability claims for
implanted medical devices; (vii) other legal factors including environmental
concerns and patent disputes with competitors; (viii) agencyor 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 Ny 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.
Although Novacon and Santerra have entered into an agreement providing for the
acquisition of Santerra through a stock exchange and the information contained
in this Quarterly Report assumes that such acquisition will be timely
consummated, Novacon presently has an insufficient number of authorized shares
of capital stock in order to effect the stock exchange. Moreover, Novacon is
required to arrange $1,000,000 in start-up capital for Santerra as a condition
of the acquisition agreement. Completion of any acquisition is subject to
approval of Santerra and Novacon shareholders and the absenceof any regulatory
enforcement action instituted by the SEC because of Novacon's delinquent
periodic reporting required under the Securities Exchange Act of 1934, as
amended.
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, 1997 and 1996 in the amounts of
approximately $(100,566), $(102,712), $(132,526) and $(95,229), 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 $(8,866,092) as of May 31, 1999. Santerra has yet to begin the
marketing and sales of its medical device products, and there is no assurance
that it will generate any revenues or contribute profits to its parent Novacon.
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 implementation of the
Innovasive Devices (See Medical Device Products, Elastomeric Infusion Pumps, New
Application) supply agreement and the acquisition of substantial new working
capital. Although Santerra has recently entered into a preliminary distribution
agreement for its MicroVal and Fii medical device product lines with Qinming
Medical, Inc., Baoji, China, and Qinming Medical agreed to invest $1,500,000
in Santerra, there is no assurance that the Qinming Medical investment will
be consummated. The Qinming Medical investment is dependent upon, among other
factors, approval of local and regional Chinese governmental authorities for
which there is no assurance.
Working Capital Deficit. As of the fiscal year ended May 31, 1999, Novacon had
a stockholders' deficit of approximately $(249,429). At that date, the
company's liabilities were approximately $(361,387) and exceeded its assets of
approximately $111,958 by approximately $249,429. Although approximately
$272,711 of the company's debt represented accrued salaries payable to David P.
Lang and John D. Lang, Novacon had a working capital deficit of approximately
$260,324. 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 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
vacon markets, or expects to market are in a category for which the FDA has
implemented stringent clinical investigation and pre-market clearance
requirements. Any delay or acceleration experienced by Novacon in obtaining
regulatory approvals to conduct clinical trials or in obtaining required market
clearances may affect Novacon's operations or the market's expectations for the
timing of such events and, consequently, the market price for Novacon's common
stock.
Medical device laws are also in effect in many of the countries in which
Novacon will do business outside the United States. These range
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 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
operations or liquidity.
Implantable Medical Device Regulation; MicroVal and Fii Medical Devices. All
MicroVal and Fii medical devices distributed by Novacon pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA, certain United States state agencies and foreign regulatory
authorities. Foreign and United States regulatory approvals, if granted, may
include significant limitations on the indicated uses for which the product may
be marketed. FDA enforcement policy strictly prohibits the promotion
and/or marketing of approved medical devices for unapproved uses. In addition,
product approvals could be withdrawn for failure to comply with regulatory
standards or the occurrence of unforeseen problems following the initial
marketing. In addition, the FDA and certain United States state and foreign
regulatory authorities impose numerous other requirements with which medical
devices manufacturers must comply.
MicroVal and Fii are also required to adhere to applicable FDA regulations set
forth in current Good Manufacturing Practices ("GMP") requirements, which
include testing, control and documentation requirements. Ongoing compliance
with GMP and other applicable regulatory requirements are monitored through
periodic inspections by state and federal agencies, including the FDA, and by
comparable agencies in other countries. Failure to comply with applicable
regulatory requirements, including marketing products for unapproved uses,
could result in, among other things, warning letters, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, refusal of government regulatory agencies to grant approvals,
withdrawal of approvals and criminal prosecution. Changes in existing
regulations or adoption of new regulations or policies could prevent MicroVal,
Fii, and Novacon from obtaining, or affect the timing of, future regulatory
approvals or clearances.
Novacon will not be able to commence marketing or commercial sales of any of
the MicroVal and Fii medical device products in the United States until it
receives approval from the FDA. Santerra expects to file FDA applications on
the following projected schedule:
1st Quarter 2000: Fii reconstructive orthopedic prosthetic implants;
1st Quarter 2000: MicroVal laparoscopic surgical instruments;
4th Quarter 2000: MicroVal intravascular stents; and
1st Quarter 2001: MicroVal Carbilit(tm) Bileaflet Heart Valve.
The company filed an FDA application for the MicroVal 3D Anatomical Mesh in
March, 1999 and received FDA approval in July, 1999 to commence marketing and
sale of the 3D Anatomical Mesh in the United States.
Even if the FDA accepts the applications for filing, there can be no assurance
that the FDA will approve the applications. Accordingly, there can be no
assurance as to when, or if, Novacon's other MicroVal and Fii products will be
approved for sale in the United States, if at all. Novacon's inability to
receive FDA approvals on a timely basis, or at all, would have a material
adverse effect on Novacon's business, financial condition and results of
operation.
Novacon will not be able to commence marketing or commercial sales of any of the
MicroVal and Fii medical device products in foreign countries until it receives
approval from their respective regulatory authorities. Novacon expects to file
foreign regulatory applications on the following projected schedule:
2nd Quarter 2000: Fii reconstructive orthopedic prosthetic implants in the
Americas (other than the United States) and Asia/Pacific;
2nd Quarter 2000: MicroVal laparoscopic surgical instruments in the Americas
(other than the United States) and Asia/Pacific;
2nd Quarter 2000: MicroVal G.R.F. Biological Glue in the Americas (other than
the United States) and Asia/Pacific;
3rd Quarter 2000: MicroVal intravascular stents in the Americas (other than the
United States) and Asia/Pacific; and
4th Quarter 2000: MicroVal Carbilit(tm) Bileaflet Heart Valve in the Americas
(other than the United States) and Asia/Pacific.
Fii has obtained certifications necessary to enable the Conformite Europeene
(CE) mark to be affixed to the Fii orthopedic products and MicroVal has obtained
the CE mark for its laparoscopic surgical instruments and G.R.F. Biological Glue
to market the devices throughout the European Union. However, Novacon expects to
assist MicroVal to obtain the CE mark for the MicroVal intravascular stents and
Carbilit(tm) Bileaflet Heart Valve medical devices. Novacon may be required to
spend significant capital and time to respond to requests for additional
information by foreign regulatory bodies, or otherwise be required to
spend significant amounts of capital and time to obtain foreign regulatory
approvals. Any such events could substantially delay or preclude Novacon from
marketing MicroVal and Fii products in foreign countries.
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
marketshare 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 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
MicroVal, Fii or 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
proceedingsand related legal and administrative proceedings are both costly and
time- consuming. Litigation may be necessary to enforce patents issued to Micro
Val and Fii to protect trade secrets or know-how owned by them or to determine
the enforceability, scope and validity of the proprietary rights of others.
Any litigation or interference proceedings may result in expense to Novacon and
delay and/or adversely affect its its marketing efforts with respect to MicroVal
or Fii medical device products. Any adverse determination in litigation or
interference proceedings to which Novacon may become a party could subject it to
significant liabilities to third parties, could prevent Novacon from selling
MicroVal and Fii medical device products, which would have a material adverse
effect on the company's business, financial condition and results of operations.
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 infringement against Novacon with respect to its elastomeric infusion
pump technology. Novacon believes that it has meritorious defenses to the
claims asserted by I-Flow Corporation, however, Novacon lacks the financial
resources to defend itself in the U.S. District Court in California. On
February 14, 2000, Novacon was notified the U.S. District Court, Central
District of California, granted I-Flow Corporation, through a default judgment,
a permanent injunction restraining Novacon from importing, manufacturing, and
selling its Dib Drug Infusion Balloon in the United States. I-Flow Corporation
claimed the Dib infusion pump design violated its patents and was awarded
damages, legal fees and costs in amounts to be determined. Novacon denies the
Dib design infringes any I-Flow patents and believes the Dib patents protect
its design. However, Novacon is financially unable to respond to this lawsuit
and therefore I-Flow was able to obtain a default judgment. If the default
judgment is not successfully overturned, Novacon will be forced to immediately
cease its infusion pump business. This development will have a serious adverse
impact on Novacon and may cause the Company to go out of business.
against Novacon.
Uncertainty of United States Market Acceptance of MicroVal and Fii Products.
There can be no assurance that any of the MicroVal and Fii 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
ent in patient health using these medical devices. There can be no assurance
that such clinical trials will achieve such results.
Market acceptance of MicroVal and Fii medical devices may also depend on
educating physicians regarding the use of new procedures, overcoming physicians
objections to new medical device products, overcoming physicians bias in favor
of existing medical devices, and convincing health care payors and health care
providers of the benefits of using MicroVal and Fii medical device products.
There can be no assurance that Novacon will be successful in achieving these
goals.
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 chan
arty 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.
Dependence On MicroVal And Fii Medical Devices. Novacon's line of medical device
products may be only available from sole or limited source suppliers, and in the
case of MicroVal and Fii medical device products only from them. Moreover, the
principal component of its elastomeric infusion pumps is available from only one
source. Consequently, Novacon may experience difficulty in obtaining a
sufficient supply of medical device products on a timely basis and there is no
assurance that it will be able obtain a sufficient supply to fully satisfy
the company's demands for such products at any given time.
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.
Carbilit(tm) Bileaflet Heart Valve and MicroVal Intravascular Stent Regulatory
Approval. Various factors, including delays in laboratory and animal testing,
difficulties in enrolling patients or physicians, and the problems in producing
the number of heart valves and stents required to conduct the human clinical
trials, could delay the start of trials for an indeterminate amount of time.
The human clinical trials will require the treatment of a statistically
significant number of patients, and clinical follow-ups with such patients
after eight months or more. r eight months or more. It is only after completion
of these trials that MicroVal and Novacon would apply for the regulatory
approvals required to commence marketing of the Carbilit(tm) Bileaflet Heart
Valve and Effix(tm)Intravascular Stents in the United States and Europe.
Moreover, even if FDA and European Union approval is granted to market the
MicroVal Carbilit(tm) Bileaflet Heart Valve and Effix(tm) Intravascular Stent,
subsequent experience may uncover unforeseen problems with the therapy require
removal of the product from the market or additional testing. There can be no
assurance that the MicroVal Carbilit(tm) Bileaflet Heart Valve or Effix(tm)
Intravascular Stent or any of the other medical device products to be marketed
by Novacon will prove to be safe and effective in clinical trials or ultimately
will be approved for marketing by the United States or foreign regulatory
authorities.
Novacon does not expect MicroVal and it to submit an application for pre-market
approval ("PMA") in the United States for the MicroVal Carbilit(tm) Bileaflet
Heart Valve and Effix(tm) Intravascular Stent until late 2000, and there can be
no assurance that a PMA will be ever be submitted with respect to either medical
device or that, if submitted, such PMAs would be approved by the FDA.
If either the MicroVal Carbilit(tm) Bileaflet Heart Valve or Effix(tm)
Intravascular Stent do not prove to be safe and effective in clinical trials,
Novacon's business, financial condition and results of operations may be
materially adversely affected. In addition, the clinical trials may identify
significant technical or other obstacles to be overcome prior to obtaining
necessary regulatory approvals. Even if such obstacles are identified and
overcome, commercialization of either the MicroVal Carbilit Bileaflet Heart
Valve or Effix Intravascular Stent may be delayed.
Neither the Carbilit(tm) Bileaflet Heart Valve or Effix(tm) Intravascular Stent
have commenced human clinical testing, nor can there be any assurance as to
when, if ever, their respective safety and efficacy in cardiovascular disease
treatment will be demonstrated. The Fii G.R.F. Biological Glue has been in
clinical use in France for 22 years and in Canada for more than 5 years with
excellent clinical results, but is not presently approved for commercial sale in
the United States.
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 most of its
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. Moreover, Novacon may be required to grant large distributors, among
others, the right to sell for their own account significant quantities of the
MicroVal or Fii products thereby reducing the supply of such products for
Novacon to directly market and thereby increasing competitionsince Novacon will
not control the price at which such distributors sell MicroVal and Fii products
for their own account.
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 agents and sub-distributors to laws and
regulations of internationaljurisdictions 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
approvalson 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
couldhave 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 sufficientor 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 insuranceand 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 sufficientnumbers 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.
Control by Principal Stockholders. Assuming the consummation of the proposed
Santerra acquisition, David P. Lang and Jean Cuilleron and their affiliates may
own beneficially more than 50% of Novacon's outstanding Common Stock.
Furthermore, even if they do not own a majority of the company's Common Stock,
they may in effect control the outcome of stockholder votes, including the
election of directors. This concentration of ownership also may have the effect
of delaying, deferring, or preventing a change in control of Novacon.
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 susceptibleto 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
$4.00per 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
accreditedinvestors (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.
Year 2000. Novacon is aware of the issues that many computer systems will face
as the Year 2000 approaches. Novacon, however, believes that its internal
software and hardware will be Year 2000 compliant. Novacon believes that any
Year 2000 problems encountered by procurement agencies, hospitals and other
customers and vendors are not likely to have a material adverse effect on its
operations. There can be no assurance, however, that such problems will not
arise.
Business Strategy
Novacon's primary business goal will be to achieve consistent growth in revenues
and profitability through the acquisition of Santerra and its exclusive
distribution and assembly licenses for a diverse medical device product line.
The keys to its success will be fivefold:
Identify and consummate affiliations with medical device design and
manufacturing partners that possess innovative medical device technology;
Secure timely medical device marketing approvals from applicable government
regulatory agencies;
Structure effective medical device marketing and distribution alliances;
tay rigidly focused on the company philosophy of minimizing research and
development expenditures; and
Invest company resources primarily in product fulfillment, not medical device
development.
Novacon's business strategy has been to design, develop, manufacture
and market disposable infusion pumps for pain management applications. Due to
the default judgment described in Pending Discontinued Business Operations and
Risk Factors, Novacon plans to diversify its medical device products to areas
outside the infusion pump business.
Diversification Into New Markets: Novacon believes that there are substantial
opportunities to use its medical device marketing experience in technologies
other than infusion pumps. While the Novacon may be forced to exit the
infusion pump sector, it believes that it can now consider pursuing other
medical device applications. In this connection, Novacon has entered into
a preliminary agreement to acquire Santerra Medical Technology, Inc. Santerra
has adopted a strategy for the initial introduction of certain of its new
medical device products and applications in selected foreign countries because
of potentially less extensive and less time-consuming governmental regulatory
procedures. Recently, Santerra entered into a preliminary distribution
agreement for its MicroVal and Fii medical device product lines with Qinming
Medical, Inc., Baoji, China.
Seek and Expand Strategic Alliances. Novacon intends to continue efforts to
expand the market for its elastomeric infusion pump products through strategic
alliances with key partners. In the orthopedic and sports medicine pain
management marketplace, Novacon will attempt to continue to collaborate and
expand its relationship with Innovasive Devices.
Medical Device Products
Elastomeric Infusion Pumps
Novacon acquired rights to manufacture and market the dib(tm) infusion balloon
pump technology from DIB International Company, Ltd., Tokyo, Japan, in February,
1993. The agreement was renewed during September, 1998 for an additional 4-year
term ending August 30, 2002.
On February 14, 2000, Novacon was notified the U.S. District Court, Central
District of California, grantedI-Flow Corporation, through a default judgment,
a permanent injunction restraining Novacon from importing, manufacturing, and
selling its Dib Drug Infusion Balloon in the United States. I-Flow Corporation
claimed the Dib infusion pump design violated its patents and was awarded
damages, legal fees and costs in amounts to be determined. Novacon denies the
Dib design infringes any I-Flow patents and believes the Dib patents protect
its design. However, Novacon is financially unable to respond to this lawsuit
and therefore I-Flow was able to obtain a default judgment. If the default
judgment is not successfully overturned, Novacon will be forced to immediately
cease its infusion pump business. This development will have a serious adverse
impact on Novacon and may cause the Company to go out of business.
Pain Management Therapies. Novacon's primary business is currently directed at
the epidural (spinal column) management of pain associated with labor and
delivery, surgery, and cancer. dib(tm) is also used for morphine trials to
qualify patients for permanent, implantable infusion systems. Toward this end,
Novacon manufactures and markets its infusion pump systems for delivery of
powerful narcotic drugs such as morphine, fentanyl, and bupivicaine and
chemotherapy agents such as 5FU.
New Application. During May, 1999 Novacon entered into an exclusive three year
Supply Agreement with Innovasive Devices, Inc. to furnish its elastomeric
infusion pumps for Innovasive Device's post-operative Freedom(tm) Infusion
System in the North, Central and South American markets. The agreement is
annually renewable after its initial term. It requires Innovasive Devices to
purchase a minimum of 10,000 infusion pumps in the first contract year, and
annually thereafter an increasing minimum number not less than 110 percent of
the prior year's sales. Innovasive Devices develops, manufactures and markets
medical devices for orthopedic and sports medicine surgery.
Novacon and Innovasive devices were engaged in discussions leading to an
expansion of the exclusive territory to include the European Union. On November
9, 1999 Innovasive Devices advised Novacon that it entered into an agreement to
be acquired by a wholly-owned subsidiary of Johnson & Johnson Company.
Innovasive Devices further advised Novacon that Johnson & Johnson was reviewing
the Innovasive Devices Freedom(tm) medical device and would inform Innovasive
Devices whether Johnson & Johnson intends to have Innovasive Devices continue
its planned Freedom medical product rollout. As of February 15, 2000 Novacon
has received no further information from Innovasive Devices except that
scheduled delivery of its elastomeric pumps to Innovasive Devices has been
indefinitely postponed. Johnson & Johnson, through a wholly-owned subsidiary,
completed the acquisition of Innovasive Devices, Inc. on February 11, 2000.
On September 10, 1999, the FDA issued authorization to Novacon for full
commercial distribution of the Freedom(tm) Infusion System for percutaneous
infusion of medication directly into the surgical site, primarily following
arthroscopic surgery.
dib(tm) Drug Infusion Balloon Pumps. Novacon's dib(tm) Drug Infusion Balloon
systems are designed to provide the patient with an easy, comfortable and
flexible means of epidural or intravenous infusion. They are generally worn by
the patient attached to a belt, placed in a pocket, strapped to an arm or worn
on a cord around the neck. The dib(tm) Drug Infusion Balloon pumps accurately
deliver throughout a prescribed delivery period a controlled profile of pain
medication to meet individual patient needs. The pain medication is delivered
from the elastomericinfusion pump through either an epidural catheter inserted
into the spinal column or an intravenous tubing set. The dib(tm) pump is loaded
by syringe injection through a one-way filling port of the prescribed amount of
drug solution into an enclosed silicone balloon reservoir. The medication
solution, now under elastomeric pressure inside the silicone balloon, is
released to flow when the outflow three-way stopcock is opened. The solution is
metered through an in-line, ceramic, micro-flow regulator that, depending on the
dib(tm) model, will accurately control flow rates at 0.5 ml/hr, 1 ml/hr,
2 ml/hr, 4 ml/hr, and 10 ml/hr.
Novacon's dib(tm) Infusion Balloon Pumps are prescribed by physicians for both
hospital and at-home use. Most dib(tm) Infusion Balloon Pumps are used in a
hospital setting for epidural infusion applications. When a dib(tm) Infusion
Balloon Pump is prescribed for at-home use, a nurse typically assists in
teaching the patient how to use the pump. After the infused medicine is
exhausted a patient typically returns to the physician's office for removal of
the catheter or tubing set and the infusion pump or acquisition of a new
infusion pump with medication. Attachment and removal of catheters and tubing
sets are normally undertaken by trained personnel. While Novacon believes that
its elastomeric infusion pumps significantly improve the quality of life of
their users and are relatively easy to use, physicians do not prescribe external
infusion pumps for certain patients because the pumps are a relatively
sophisticated means of delivering medication and some patients may not have the
motivation and ability to understand and correctly use them. Also some
patients, particularly in their teenage and early adult years, may object to
pumps because they do not like the idea of having a device attached to their
bodies. Moreover, elastomeric infusion pumps may not be appropriate for certain
patients because of considerations of medication capacity, flow rate and
adjustability concerns.
Novacon believes that its success in the future will depend on introducing new
products from the acquisition of Santerra Medical Technologies, Inc.
Ranger(tm) Infusion Balloon Pumps. Novacon has designed a flow-rate adjustable
model of its elastomeric infusion pump that is an upgrade from its current
versions of the dib(tm) models. It is intended primarily for those
circumstances where clinicians are required to change the flow rate of the
infusion pump. Novacon believes the Ranger(tm) infusion balloon pumps offer
physicians concerned with medication flow rates the opportunity to select and
vary flow rates during the correctly use them. Ranger(tm) was authorized for
commercial distribution in the United States in August, 1996.
line during the first quarter 2000.
Reconstructive Orthopedic Prosthetic Implants
Reconstructive orthopedic prosthetic implants are used to replace joints --
including hips, knees, shoulders, elbows, and wrists -- that are worn, damaged
or diseased. Reconstructive surgery began in earnest in the late 1960s and,
over the years, implant technology has improved demonstrably, allowing patients
to live longer, more active lives. Hips represent the largest procedure in
units, with roughly 320,000 implants performed each year worldwide. Industry
estimates are that there were 320,000 total hip arthroplasty (THA) procedures
performed worldwideduring 1997. The human hip is a ball-and-socket joint
connecting the femur (thighbone) to the pelvis. Implants are made of cobalt
chromium alloy, titanium alloy or stainless steel, (used as the "ball" and
"stem") and ultra-high molecular weight polyethylene (i.e., a medical grade
plastic) which is placed between the stem and the acetabulum and takes over the
roll of the "socket." Over 60% of total hip arthroplasty procedures are
performed on women with an average age of 69 (for men the average age are 63).
Three hundred thousand (300,000) total knee arthroplasty (TKA) procedures were
performed worldwide during 1997. The knee (the largest joint in the body,
hinge-like function) is subjected to constant pounding, bending, and twisting
from everyday activities. Depending on condition, treatments for knee problems
range from simply altering lifestyle to total knee arthroplasty.
Generally, reconstructive implants are categorized as cemented, cementless or
revision. Cemented implants, which represent about 60-65% of implants, are
secured to bone with grout made of polymethylmethacrylate (cement) and generally
used on older, less active patients. Although less costly than cementless
implants, useful life is shorter. Cementless implants, which represent about
30-35% of implants, are biologically fixed whereby surrounding bony tissue grows
into the implant thereby securing thereby securing the implant to bone without
the use of cement. Cementlessimplants are used on younger, more active patients
who expect higher and longer performance.
Reconstructive implants represent the largest piece of the orthopedic market at
roughly 45% of total revenue or an estimated $3.8 billion in 1998, growing at 4-
5% rate. Hip and knee implants are the largest segment (95% of total) with
other reconstructive implants (shoulders, ankles, elbow, wrists, fingers) making
up the rest. The 1998 $3.8 billion worldwide market was dominated by Zimmer
(16%), DePuy (14%), Howmedica (13%), Biomet (10%), Sulzer Medica (10%), JNJ
(9%), Smith & Nephew (6%), Stryker (6%), and Wright (2%). The balance of the
market(14%, $532 million) is shared by smaller manufacturers. Santerra will
compete directly in this reconstructive segment with the Fii product line.
The reconstructive sector, having weathered some price pressure in recent years,
is now poised for solid growth of 3%-5% per year according to industry sources.
Fii reconstructive orthopedic prosthetic devices are CE marked for sale in the
European Union countries and have been marketed and sold in France for over 16
years. Fii also manufactures such devices for private label distributors in
Europe. Novacon believes that past French clinical use will facilitate FDA
approval and expects to begin shipping in the third quarter of 2000 in the
United States and Canada, and in the fourth quarter in China. The company
intends to distribute Fii orthopedic medical devices through independent
distributors.
Biological Glue
A variety of devices have been developed to assist the surgeon with the surgical
closure and sealing of vascular tissue, including sutures, staples, and
commercial biological glues (which until 1998 were available only outside the
United States). Sutures and staples facilitate healing by joining wound edges
and allowing the body to heal naturally. Industry sources estimate that the
worldwide market for sutures and staples is approximately $2.7 billion.
In recent years, numerous products, including topical hemostats and fibrin
glues, have been used, often in conjunction with sutures and staples, to control
bleeding. However, these products are generally ineffective on actively
bleeding tissue surfaces. Topical hemostats in sponge or strip form may require
manual pressure to be effective and are generally removed prior to closing the
surgical incision. They can also be awkward and difficult to place precisely.
Commercially available fibrin glues are derived from pooled human blood plasma
and, because of concerns about possible viral transmission, were only recently
approved during 1998 for use in the United States. While fibrin glues can be
produced from a patient's own blood (autologous glues), these glues typically
adhere to tissue less effectively than commercially available glues, take
approximately an hour to prepare, and thus must be mixed prior to surgery,
irrespective of whether or not they are actually used in the procedure.
MicroVal and Fii developed and commercialized the G.R.F.(r) Biological Glue
which has an excellent 22-year clinical experience in France and Canada. The
G.R.F. Biological Glue is employed in the intraoperative repair of dissected
aortic tissues. Aortic dissection is a life-threatening disease that involves
the separation of tissue layers in the aorta that eventually divert normal blood
flow into these diseased tissue layers. The condition always requires emergency
surgery. G.R.F.(r) Biological Glue is shown to be a fast, effective adhesive
without immunological reaction. MicroVal has advised the company that it
is presently researching additional surgical uses for its G.R.F.(r) Biological
Glue and intends to undertake clinical studies for pulmonary and renal
applications. MicroVal and Novacon believe that G.R.F.(r) Biological Glue may
enhance the efficacy of these procedures through more effective and rapid
closure.
MicroVal G.R.F.(r) Biological Glue is CE marked for sale in the European Union
countries and is approved for sale in Canada. Novacon expects to begin shipping
G.R.F. Biological Glue for distribution in Canada during first quarter of 2000.
Novacon has implemented the FDA approval process in the United States and
anticipates that past 22 year French clinical use will facilitate FDA approval
in order to commence United States marketing during 2001.
Novacon has initiated G.R.F. Biological Glue distribution discussions with
several multinational medical products companies for the United States,
Japanese, Chinese and Canadian markets and expects to conclude marketing
arrangements during second quarter 2000. Novacon is also investigating other
international markets focusing on India and South America and expects to
conclude marketing arrangements in those markets during 2000.
Laparoscopic Instruments
Open surgery is an invasive procedure that generally requires large incisions
and significant tissue manipulation in order to provide the surgeon with direct
access to the intended surgical site. Much of the trauma suffered in connection
with open surgery is a result of gaining access to the surgical site and is not
caused by the surgical repair itself. For example, the surgeon often must make
large incisions through layers of muscle and tissue, which may cause muscle or
nerve damage, bleeding, scarring and other complications such as infection,
temporary or permanent debilitation and pain. As a result, many open surgical
procedures require extended operating times, expose the patient to the risks of
general anesthesia and involve lengthy hospitalization and patient recovery
times. In addition, because of the severe trauma often associated with open
surgical procedures, a significant population of patients, including the elderly
and weak, are not considered good candidates for these surgical procedures and
are thus deprived of treatment.
In order to reduce the complications associated with open surgery, surgical
techniques referred to as minimally invasive surgery ("MIS") have been
developed. These techniques allow surgeons to access the surgical site through
the body's natural openings (e.g. mouth, urethra or rectum) or by making small
incisions to access body cavities such as the abdominal cavity (the peritoneal
cavity). The performance of MIS generally involves five basic steps. First, a
small incision (approximately 1cm) is made for insertion of a trocar, a valved
tube with a blunt or sharp insertion device. Next, additional trocars are
introduced to gain increased access to the surgical site and permit the
introduction of surgical instruments. Third, the surgeon creates a working
space through the use of dissection tools or by insufflating a natural body
cavity (such as the abdominal cavity). Fourth, the surgeon utilizes a device
such as an endoscope or laparoscope to visualize the surgical field. Finally,
the surgeon utilizes specialized MIS instruments to perform the surgical
procedure.
Studies published in the NEW ENGLAND JOURNAL OF MEDICINE and THE JOURNAL OF
VASCULAR SURGERY support the benefits of MIS as compared to open surgery, which
generally include reduced patient trauma (including less muscle, nerve and other
tissue damage), reduced blood loss, reduced post-operative infection, reduced
scarring at the site of the incision (which in turn reduces reintervention
requirements), shorter patient recovery time and ultimately lower medical costs.
Despite the documented benefits of MIS, its adoption to date has been limited to
a select number of surgical procedures, and, in the aggregate, represented only
an estimated 15% of all surgical procedures performed in the United States in
1997. The most widely adopted MIS procedure, laparoscopic cholecystectomy
(removal of the gall bladder), has been successfully adopted and is used in an
estimated 93% of such cases largely because the target surgical site lies within
the abdominal cavity, the only natural body cavity that provides a working space
when insufflated. Application of MIS techniques to other surgical procedures
and the ability to exploit the clinical benefits of MIS have been limited by the
lack of a natural body cavity proximate to the surgical site and the inability
of the surgeon to easily and atraumatically access the surgical site or
establish a surgical working space where no natural body cavity exists. MIS
conducted outside of a natural body cavity requires the surgeon to tunnel
through tissue to reach the target surgical site and to dissect a working space.
If conventional dissection techniques are utilized, the resulting working space
is often relatively bloody and affords only poor visualization.
As a result of these limitations, many common types of surgical repairs cannot
be effectively performed using traditional blunt dissection MIS techniques,
including hernia repairs, and procedures performed on organs such as the
bladder, kidney, spine, aorta or other sites that lie outside the abdominal
cavity. For other procedures, although MIS techniques may exist for the
performance of the repair itself, gaining access to the target surgical site is
invasive, thereby reducing many of the clinical benefits of MIS. For example,
currently utilizedMIS for spinal fusion requires making small incisions at the
midline of the patient's abdomen, entering the peritoneum, retracting bowel and
other organs to one side, exiting the back of the peritoneum and continuing
down to the front of the spine.
Novacon believes that a significant opportunity exists for technologies and
surgical instruments that can effectively address the limitations of MIS and
facilitate the adoption of MIS for a wider range of surgical procedures.
Hernia Repair: MicroVal 3D Anatomical Mesh. A hernia, a condition that commonly
occurs in the groin, is a protrusion of normal abdominal contents through a
muscle defect, usually in the tissue layers overlying the abdomen. The
peritoneum and/or bowel often project into this defect, causing pain and
potential major complications. Hernias affect over 650,000 people in the United
States and approximately 1.3 million people worldwide each year.
The open surgical procedure for hernia repair is a herniorrhaphy, which involves
making a 10 to 15 cm open incision in the groin over the muscle defect to be
repaired. As in most invasive surgical procedures, recovery periods tend to be
long, typically extending between three and six weeks. Over the last few years,
in an effort to reduce post-operative pain and recovery times, several
laparoscopic techniques have been developed to repair hernias. Despite these
advances, MIS has not been optimized for hernia repair. For example, in certain
MIShernia repair procedures, a surgeon must first make an incision in the
abdominal wall to gain access to the abdominal cavity. The surgeon then must
make an additional incision in the peritoneum enabling the surgeon to reach the
surgical site and create the working space required to conduct the surgical
repair.
Novacon believes that MicroVal's proprietary 3D Anatomical Mesh technology can
significantly improve the outcomes of laparoscopic hernia repair procedures.
Utilizing a trocar, the surgeon tunnels the device through a small incision at
the umbilicus and then inflates the balloon to create a large and relatively
bloodless space at the site of the hernia. The surgeon inserts the 3D
Anatomical Mesh through the trocar into the target surgical site, releases it in
the cavity, and the 3D Anatomical Mesh spreads out to perfectly conform to the
inguino-pelvic region allowing the surgeon to reduce, and in some cases
eliminate, the number of staples needed to secure the prosthesis. This
procedure reduces the risk of organ damage, adhesion formation and morbidity,
and eliminates the requirement for general anesthesia. The company believes
that MicroVal 3D Anatomical Mesh hernia repair procedures will result in lower
cost, fewer complications and faster recovery time as compared to open surgical
hernia repair procedures.
Trocars: MicroVal Tulip(tm) Universal Trocars. MicroVal's proprietary Tulip(tm)
surgical trocars allow a surgeon to rapidly access and relatively atraumatically
create a working space at a target surgical site where none previously existed.
The body is largely made up of tissue layers (skin, fat, and muscle, for
example) with distinct planes between layers. The Company's surgical trocars
allow the surgeon to exploit this anatomy using minimally invasive techniques.
By following such a plane withdeflated and rolled balloon, and then inflating
the balloon to dissect and separate the two adjacent layers, a new working space
is created. Because MIS techniques are employed, there is little damage
compared that likely encountered with open surgery and its related long
incisions and collateral trauma to tissues and nerves.
The MicroVal Tulip(tm) is a cartridge-loaded universal trocar utilizing a
single-use, disposable cartridge containing all the components that are normally
difficult to dismantle and decontaminate. The cartridge attaches directly to
the resterilizable, stainless steel insertion tube equipped with a deflation
port and luer cone connector. The Tulip(tm) trocar design also affords single-
handed operation.
MicroVal Serticlip. MicroVal's proprietary Serticlip is a unique system for
atraumatic insertion of metal staples for secure closures following surgery
through a pincer device. The titanium staples are radiopaque and easily loaded
into the pincer by extracting the staples directly from a box of staples.
Novacon believes that MicroVal Tulip(tm) trocars, 3D Anatomical Mesh and
Serticlip medical device products provide a platform for increasing the
conversion of open hernia repair procedures to laparoscopic procedures.
According to Medical Data International, Inc., laparoscopic hernia repair
procedures represented approximately 160,000 or 25% of total hernia repair
procedures in 1995. The company estimates that approximately half of these
laparoscopic hernia repair procedures are now performed using balloon
MicroVal Tulip(tm) trocars, 3D Anatomical Mesh and Serticlip are CE marked for
sale in European Union countries. MicroVal commenced commercial sales of its 3D
Anatomical Mesh products in the European Union during 1999 through a
distribution agreement with Ethicon Europe (a Johnson & Johnson Company
subsidiary). Santerra obtained FDA approval to commence marketing MicroVal 3D
Anatomical Mesh in United States in June, 1999 and is currently discussing
distribution arrangements with a major distributor.
Research and Product Development
Elastomeric Infusion Pumps
Novacon's research and development activities are primarily related to prototype
development of alternative applications for its elastomeric infusion pump
technology. Novacon obtains its product ideas from health care professionals
whose opinions on products are actively solicited through field visits and
personal relationships. All research and development costs are expensed as
incurred, and for 1997, 1998, and 1999, research and development expenses were
$5,000, $8,000 and $20,000 respectively.
MicroVal and Fii Medical Devices
Although Novacon will not engage in any implantable medical device research and
product development, it will use its understanding of the needs of the
cardiovascular, vascular and orthopedic surgery medical specialties to assist
MicroVal and Fii to develop or acquire implantable products and technologies for
these fields. Novacon will identify market areas that can benefit from MicroVal
and Fii medical devices and other related technologies, to assist them to
develop innovative techniques and products within these areas, to secure their
commercial protection, to establish their efficacy and then to market these
techniques and products on behalf of MicroVal and Fii. To the extent that
Novacon identifies additional applications for these products it may attempt to
co-license these products to corporate partners for further development of such
applications.
Intravascular Stents
Intravascular stents are small stainless steel or nitinol coils which are
implanted in coronary and peripheral arteries to maintain vessel opening and
arterial blood flow. Once implanted, stents support the vessel wall and prevent
future occlusions. The MicroVal Effix(tm) intravascular stent system offers a
full range of stent-mounted PTCA and peripheral catheters. The patented
MicroVal Effix(tm) intravascular stent designs are laser crafted and trimmed to
exacting specifications. MicroVal Effix(tm) intravascular stents feature low
metal to artery ratios, no recoil and no length increase.
The MicroVal Effix(tm) intravascular stent system has been under design and
development at MicroVal since 1996. In-vitro (laboratory) testing in 1997
progressed to animal studies in 1998. Six stents mounted on PTCA balloon
catheters were implanted in six animals during February, 1998 in Paris. Four
stents were removed in April, 1998 and specimens were evaluated for patency and
histological data. Results on the explanted stents were very favorable. The
two remaining stents were explanted during June, 1998 with equally favorable
results.MicroVal is presently evaluating the feasibility of developing micro-
stents in the diameter range of less than 2.5 millimeters. It is again
noteworthy thatall MicroVal Effix(tm) intravascular stent in-vitro (laboratory)
and animal studies have been, and will continue to be, conducted in accordance
with FDA guidelines for intravascular stent testing. Moreover, it is
contemplated that an FDA-approved protocol will be employed for both European
and U.S. clinical evaluations. Novacon anticipates commencing international
sales of the MicroVal Effix(tm) intravascular stents during the third quarter
2000 and initiating a U.S. clinical evaluation during the fourth quarter of
2000.
Mechanical Heart Valves
Prosthetic heart valves have been in general use since the 1960's and represent
an estimated $600 million worldwide market. The worldwide prosthetic heart
valve market has consistently grown at a rate of over 5 percent annually over
the last 20 years, principally due to the expansion of cardiovascular surgery
facilities and the acceptance of valve replacement. The worldwide prosthetic
heart valve market is projected to continue to increase at annual rates of 4 to
5 percent due to the aging of the population and the expansion of cardiovascular
surgery in international markets. One of the principal causes of valve
replacement is the deterioration of natural valves through the aging process,
with the average age of valve replacement patients in excess of 50 years. As
this segment of the population increases, the market for prosthetic heart valves
is expected to increase. In addition, rheumatic heart disease is a principal
cause of valve replacement, particularly in areas where penicillin has been
unavailable until relatively recently. As cardiovascular surgery facilities
expand in developing markets, the number of prosthetic heart valve implants is
expected to increase. The countries of Eastern Europe, the Middle East and
South America all offer the potential for greater than 10 percent annual growth
in the number of implants of prosthetic valves.
Over 70 percent of the prosthetic valves implanted worldwide are mechanical
valves. Outside the United States, mechanical valves represent approximately 75
percent of the prosthetic valve implants. Furthermore, as life expectancies
continue to increase, cardiac surgeons have been less likely to use tissue
valves in older patients and thereby subject the patient to the risks of a
possible re-operation. Mechanical valves are used in many instances to replace
degenerative prosthetic tissue valves.
The mechanical heart valve market is highly competitive with one dominant
company. According to industry estimates, St. Jude represented approximately
64% of the mechanical heart valves sold worldwide. St. Jude was founded in 1976
and has sold substantially the same bileaflet valve since it was first
introduced in 1977, although certain minor alterations have recently been made
to the valve. Companies that sell mechanical valves include Medtronic, Inc.,
CarboMedics, Inc. ("CMI"), Baxter Edwards, ATS Medical, and Sorin Biomedica Spa.
Medtronic, Inc. sells a monoleaflet mechanical valve that was introduced in the
late 1970's as well as a tissue valve. CMI, which manufactures pyrolytic carbon
components for ATS Medical, markets a bileaflet pyrolytic carbon valve with
cavity pivot areas resembling those in the St. Jude valve. CMI introduced its
bileaflet valve in international markets in 1986 and in 1993 received FDA
approval to sell the valve in the United States. Baxter Edwards reintroduced a
bileaflet valve in international markets. Sorin Biomedica Spa is an Italian
company that sells a monoleaflet and a bileaflet mechanical valve. These
competitors have significantly greater financial resources than Novacon. The
company is also aware of several companies that are developing new prosthetic
heart valves. Several companies are developing and testing new autologous
(created from the patient's own tissue) valves, more durable tissue valves and
new bileaflet and trileaflet mechanical valves. Advancements also are being
made in surgical procedures such as mitral valve reconstruction, whereby the
natural mitral valveis repaired, thereby delaying the need for a replacement
valve. Other companies are pursuing biocompatible coatings to be applied to
mechanical valves in an effort to reduce the incidence of thromboembolic events.
Background of the Carbilit(tm) Bileaflet Heart Valve. The research, design and
development of the Carbilit(tm) Bileaflet Heart Valve have been underway since
1990 under the auspices of Eugene M. Baudet, M.D. and Jean Cuilleron. Numerous
revisions and refinements have occurred throughout this period. Recently, the
Carbilit(tm) Bileaflet Heart Valve was tested at the Helmholtz-Institut for
Biomedical Engineering at the Aachen University of Technology, Aachen, Germany,
the world renown institute for its sophisticated capabilities for testing
mechanical heart valve designs. The Carbilit(tm) Bileaflet Heart Valve in-
vitro test (artificial heart chamber) results were superior to the market-
dominant heart valve in all categories. The Carbilit(tm) Bileaflet Heart Valve
is scheduled to begin in vitro testing program and animal studies (Paris) during
2000. Novacon anticipates the first human implant of Carbilit(tm) Bileaflet
Heart Valve will occur at Bordeaux University Heart Hospital, Bordeaux, France
during 2000. It is noteworthy that all Carbilit Bileaflet Heart Valve in-vitro
(laboratory) and animal studies have been, and will continue to be, conducted in
accordance with FDA guidelines for heart valve testing. Moreover, it is
contemplated that an FDA-approved protocol will be employed for both European
and U.S. clinical evaluations. Santerra anticipates commencing international
sales of Carbilit(tm) Bileaflet Heart Valve during the fourth quarter of 2000 in
selected international markets and initiating an U.S. clinical evaluation during
the second quarter of 2001.
Design Characteristics. Prosthetic heart valves are surgically implanted to
replace diseased human heart valves, normally in the aortic and mitral position.
The Carbilit(tm) Bileaflet Heart Valve incorporates a patented bileaflet design
which offers unique hinge and leaflet configurations that maximize the valve's
effective orifice area. The Helmholtz-Institut in-vitro tests confirm the
hemodynamic performance of Carbilit(tm) Bileaflet Heart Valve is superior to all
currently available prosthetic heart valves. The Carbilit Bileaflet Heart
Valve employs the SFERO/MicroVal proprietary substrate biomaterial and carbon
coating process that requires laser-manufacturing tolerances/designs offering
high velocity, super-thin leaflets presently not possible with other current
valve designs. The general criteria for superior valve performance are:
Hemodynamic flow: laminar, non-turbulent blood flow reduces the incidence of
thromboembolic complications (strokes) and minimizes hemolysis (red blood cell
destruction). The nature of hemodynamic flow is determined by the internal
orifice design of the valve. Smooth, non-pooling and minimally obstructive
surfaces produce more favorable hemodynamic flow and increased cardiac output.
Pressure gradients: The degree of blood flow resistance through the valve
orifice is measured by the gradient created between the valve inflow and outflow
pressures. Low gradients are highly desirable and indicative of an efficient
orifice area free of obstructive hinges, leaflets and rings. Clinically, low
resistance has the important benefit of lowering the pumping workload on the
heart and reducing the enlarged left ventricle (chamber).
Design features: Durability is a must and extensive fatigue testing usually
confirms device longevity. Low profile valves are preferable. A rotatable
sewing cuff is desirable and allows the surgeon to optimize leaflet orientation
after the valve has been sutured into the heart. Competitive valves must be
adequately radiopaque (easily visible under X-ray) for diagnostic follow-up
procedures. Rapid opening and closing velocities of valvular leaflets will also
promote increased cardiac output (stroke volume
Commercially available prosthetic heart valves that, to a greater or lesser
degree, satisfy the above criteria are: St. Jude Medical Bileaflet Heart Valve;
Baxter International/Sorin Heart Valves; Carbomedics, Inc. Heart Valves and ATS
Open Pivot Heart Valves. In-vitro testing at the Helmholtz-Institute
demonstrated that the Carbilit"(tm) Bileaflet Heart Valve is superior, in all
parameters, to the St. Jude Heart Valve, the dominant and most widely used
mechanical heart valve in the world. Carbilit Bileaflet Heart Valve will have
the thinnest, lightest and fastest leaflets of any available heart valve,
generating the lowest pressure gradients and the highest cardiac output.
The Carbilit(tm) Bileaflet Heart Valve is designed to improve upon existing
mechanical heart valves by combining a proprietary bileaflet design and
composite material. Based on preliminary testing results conducted at the
Helmholtz Institut, MicroVal believes that the Carbilit(tm) Bileaflet Heart
Valve offers superior performance compared to other commercially available
mechanical heart valves. The following characteristics are the primary advances
of the Carbilit(tm) Bileaflet Heart Valve:
Potential for Reduced Rates of Thromboembolic Complications. The Carbilit(tm)
Bileaflet Heart Valve's pivot areas are designed to be exposed to the washing
action of the blood flowing through the valve. MicroVal believes the improved
washing action lowers the likelihood of blood clot formation and the resulting
incidence of thromboembolism. The design also results in low levels of
hemolysis (damage to blood cells) which MicroVal believes further contributes to
a low rate of thromboembolic complications.
Improved Blood Flow Efficiencies. MicroVal believes the Carbilit(tm) Bileaflet
Heart Valve has several features that result in improved blood flow efficiency
as compared to other commercially available valves. MicroVal believes that this
design results in lower pressure gradients in the valve. The valve also has
less regurgitation (backflow of blood when the valve is closing and closed) than
other valves due to geometries that minimize the direct leakage paths. These
design characteristics result in super
t should reduce the workload on the heart.
Ease of Implant. The Carbilit(tm) Bileaflet Heart Valve and its supporting
materials are designed for ease of use by the implanting cardiac surgeon. The
valve has a low profile design to avoid complications associated with impinging
on cardiac anatomy. The orifice ring also is rotatable, thereby allowing the
surgeon to optimize valve position by adjusting the orientation of the leaflets
after the valve has been sutured in the natural anatomical position in the
patient's heart. The packaging and accessories of the valve will also be
designed to facilitate the implant procedure by including all of the required
items pre-assembled in a sterilized dual barrier container.
Improved Follow-up Diagnostic Capability. The Carbilit(tm) Bileaflet Heart Valve
eases the follow-up diagnostic process by being more visible to x-rays than
other commercially available valves. The proprietary carbon substrate component
provides a clear image on x-rays taken from any angle thus making them more
visible. This increased visibility to x-rays assists cardiologists during
follow-up examinations.
The North American market of $ 475 million is increasing annually at 4-5%.
Industry sources estimate that of all heart valve replacement surgeries
performed in the U.S. in 1997, 69%, 30% and 1% involved the replacement of
diseased or damaged aortic valves, mitral valves and pulmonary valves,
respectively. Novacon estimates that the total heart valve and conduit
replacement market in the U.S. in 1997 was approximately $395 million and is
informed that approximately 95,000 heart valve and conduit surgeries were
conducted in the U. S. in 1997.Of the total number of heart valve and conduit
surgeries, approximately 64,000, or 67%, involved mechanical heart valves, and
approximately 31,500, or 33%, involved tissue heart valves or conduits,
including porcine, bovine and cryopreserved human tissues. Since 1993, the
total U.S. replacement heart valve market grew at a compound annual growth rate
of approximately 7%.
Supplies and Manufacturing
Elastomeric Infusion Pumps
Novacon purchases from outside vendors all of the elastomeric infusion pump
components and various services used in the manufacture of its products. The
purchased items are produced to its specifications and in many instances to its
designs, except for the balloon/shaft assembly and ceramic flow controller
purchased from DIB International Company, Ltd., which is the owner of this
patented technology and sole source supplier. Novacon then contracts for the
assembly of its components into finished products.
Novacon relies on single sources for certain critical components, including the
balloon/shaft assembly and ceramic flow controller, as well as a sole source
subcontract arrangement for sterilization services. The loss of any of these
critical sole source vendors could have a material adverse effect on the
Company's business, financial condition and results of operations.
The other components used in the manufacture of the elastomeric infusion pumps
are generally available from multiple sources. The availability of such
components could affect Novacon's ability to fill customer's orders on a timely
basis. However, Novacon believes that the interruption of its relationships
with such suppliers would not have a material adverse effect over the long-term,
as such components are available from other suppliers.
Novacon does not assemble its elastomeric infusion pumps. It outsources the
assembly with firms specializing in contract medical manufacturing. Contract
medical manufacturing services are generally available from multiple sources and
although interruption of its relationships with such firms could effect
Novacon's ability to fill customer's orders on a timely basis, Novacon believes
that the interruption of its relationships with such suppliers would not have a
material adverse effect over the long-term.
MicroVal and Fii Medical Device Products
The implantable medical device products distributed by Novacon will be
manufactured in France by MicroVal and Fii. Novacon is informed by them that
raw materials used in the production of their medical device products are
purchased from various qualified suppliers, subjected to stringent quality
specifications and assembled by them. Quality audits of suppliers are
conducted, and they have adopted supplier qualification programs.
Novacon will purchase all of the MicroVal and Fii medical device products
directly from them on a single source basis. The loss of this critical sole
source vendor would have a material adverse effect on the company's business,
financial condition and results of operations.
The continuing availability of these medical devices is critical to Novacon's
implantable medical device business because no other similar technology is
presently available to the company. The availability of such medical device
products affects Novacon's ability to fill customers' orders on a timely basis.
Moreover, an interruption of Novacon's relationship with MicroVal and Fii would
have a material adverse effect on the company's operations and financial
condition.
Novacon does not intend to carry MicroVal and Fii medical device products in
United States inventory to meet forecasted delivery requirements to customers.
Its supply agreement with MicroVal and Fii will involve maintaining products in
their facility. However, in order to meet Novacon's rapid delivery requirements
and to assure a continuous allotment of medical device products it may be
required to inventory such products for United States customers.
Quality Assurance
MicroVal and Fii's operations encompass the manufacturing of bioprosthetics,
bioadhesives and single-use medical devices. In all of their facilities, they
are subject to regulatory standards for good manufacturing practices, including
current Quality System Regulations, which are FDA regulatory requirements for
medical device manufacturers. The FDA periodically inspects such facilities to
ensure compliance with these regulations. MicroVal and Fii also operate
according to ISO 9001 Quality System Requirements, an internationally recognized
voluntary system of quality management for companies that design, develop,
manufacture, distribute and service products. MicroVal and Fii maintain a
Certification of Approval to the ISO 9001, as well as EN46001 and ANSI/ISO/ASQC/
Q9001, the European and U.S. versions of the international standard,
respectively. This approval is issued by Lloyd's Register Quality Assurance
Limited ("LRQA"). LRQA is a Notified Body officially recognized by the European
Union to perform assessments of compliance with ISO 9001 and its derivative
standards. LRQA performs semi-annual on-site inspections of their respective
quality systems.
Novacon believes that MicroVal and Fii are in compliance with all FDA
requirements including FDA Good Manufacturing Practices ("GMP") for medical
devices. There can be no assurance, however, that MicroVal and Fii will remain
in compliance with GMP, and failure to do so could have a material adverse
effect on Novacon's business, operating results or financial condition.
Backlog
Elastomeric Infusion Pumps
Novacon makes product forecasts from future delivery based upon frequently
updated information from customers; such forecasts are then adjusted or replaced
by actual purchase orders or production releases. On January 31, 2000, Novacon's
backlog of infusion pump orders and releases was approximately $180,000, of
which $172,250 was related to the Innovasive Devices supply agreement. Novacon
expects the current backlog to be filled during the current fiscal year.
Novacon expects that its backlog with respect to the Innovasive Devices supply
agreement will change from time to time during the contract. However, none of
the order backlog may be shipped unless the default judgment against Novacon
is successfully overturned. (See Pending Discontinued Business Operations and
Risk Factors.)
MicroVal and Fii Medical Device Products
Novacon presently has no firm orders for any of the MicroVal and Fii medical
device products. Novacon commenced discussions concerning distribution of
MicroVal and Fii medical device products during mid-1999 with several
distribution companies. Although these companies have indicated a strong
interest in the medical device products, no marketing arrangements can be made
until the medical devices have received government approval for commercial
sales.
Marketing and Sales
Elastomeric Infusion Pumps
Novacon sells its dib(tm) elastomeric infusion pumps both directly and through
independent distributors. Direct orders for Novacon's infusion pumps in the
U.S. are typically placed by a physician or health care institution. Distributor
orders are similarly generated.
MicroVal and Fii Medical Device Products
Novacon management believes there is a substantial worldwide market potential
for MicroVal and Fii proprietary medical device products. However, there are
significant competitive problems facing an emerging medical device manufacturer
such as MicroVal and Fii in medical device product markets. Although Fii has
achieved reconstructive orthopedic prosthetic implant market entry in France and
MicroVal's medical devices evaluation and market interest are encouraging, there
is no assurance that the MicroVal and Fii medical device market entry will be
successful. MicroVal's medical devices, when approved for human use, are to be
considered early, introductory medical device products with a prospective market
acceptance and, therefore, there is no assurance that such medical device
products will be well received by the medical and healthcare industry and
achieve sufficient sales to cover Novacon's costs incurred in connection with
the distribution and marketing of such products or to permit the company to
operate profitability.
Novacon is informed that the current worldwide annual market for its MicroVal
and Fii medical device products exceeds $7.5 billion and is growing. Novacon
intends to enter into distribution alliances with major medical device companies
and when appropriate, sublicense its rights acquired under its MicroVal and Fii
agreements.
Novacon is implementing its distribution of medical device products through
strategic alliances with a variety of medical device companies. For example,
Novacon expects to appoint a major multinational medical company as exclusive
distributor for the MicroVal G.R.F. Biological Glue in the United States and
Canada and another such company in Japan and China. Novacon expects to appoint
a major multinational medical company as exclusive distributor for the MicroVal
3D Anatomical mesh in the North American market and another such company in
Japan, China and India. Novacon expects to appoint a exclusive distributor of
MicroVal laprascopic instruments in the United States. Distribution alliances
with major medical device distributors will be a crucial element in the
company's objective of establishing MicroVal and Fii medical device products in
the international medical device industry.
Novacon will also seek arrangements with surgeons and physicians, healthcare
institutions, healthcare maintenance organizations, and third-party healthcare
reimbursement organizations.
Novacon may also seek to enter into sub-licensing arrangements with other
medical device product companies to sell private or co-branded versions of
MicroVal and Fii medical device products. For example, the company expects to
license both the MicroVal Carbilit(tm) Bileaflet Heart Valve and Effix(tm)
intravascular stents to major medical device companies that may distribute the
medical devices under their own name.
Novacon, together with MicroVal and Fii, is developing a program to disseminate
clinical and technical information worldwide to educate surgeons about the
benefits of the MicroVal and Fii medical device products and to encourage
surgeons to perform procedures utilizing the medical device products. In support
of this program, Novacon will produce and distribute to surgeons procedure
demonstration videos and educational videos for hernia repair, cardiac and
vascular surgery and reconstructive surgery. In addition, Novacon has and will
continue to developedrelationships with several leading surgeons in each of the
company's targeted major medical device specialty areas who provide input on
clinical and product development, as well as surgical procedures that are
candidates for MicroVal and Fii medical device products. In addition, Novacon
will actively sponsor a number of marketing-related clinical evaluations
designed to demonstrate the utility and ease of use of the MicroVal and Fii
medical device products.
Foreign Operations
The MicroVal and Fii medical device products distributed by Novacon will be
manufactured in France and sold generally worldwide except in the European
Union. The principal markets for Novacon's medical device products outside of
the European Union are North America (the United States, Canada, and Mexico) and
Asia/Pacific.
Foreign economic conditions and exchange rate fluctuations generally have caused
profitability from foreign revenues to fluctuate more than profitability from
domestic revenues. Novacon believes that its proposed activities in some
countries outside of the United States will involve greater risk that its
anticipated domestic business due to the forgoing factors as well as local
commercial and economic policies and political uncertainties.
Competition
Elastomeric Infusion Pumps
At present Novacon considers its primary competition in the pain management
market for its disposable infusion pump systems to be permanent, external
electro/mechanical infusion pumps. The Company competes against electro/
mechanical infusion pump technology primarily by educating doctors, nurses,
managed care organizations and other third-party payers about the cost effective
and patient-comfort advantages of disposable infusion pump therapy over electro/
mechanical infusion pumps.
In the sale of its elastomeric infusion pumps for pain management, Novacon
believes presently that no other disposable, elastomeric infusion pump companies
have FDA approval for the epidural infusion of drugs. However, several large
medical products companies such as Baxter Healthcare Corporation, Abbott
Laboratories, Inc., and I-Flow Corporation manufacture and distribute
functionally similar disposable infusion pumps for intravenous pain management
and other therapies, including antibiotic, chemotherapy and nutrient infusions.
Baxter and I-Flow compete directly in the at-home antibiotic market. Novacon
never has, nor does it intend in the future, to enter this high volume, price
driven market segment. Although such competitive infusion pumps have similar
function, Novacon believes that its dib(tm) flow accuracy and biomaterial
(latex free) composition provide the optimum compatibility for a broad range
of narcotic and non-narcotic drugs.
Novacon competes with other pump makers primarily on the basis of product
design, quality and utility, customer service and price. There can be no
assurance that past, current and potential makers of competitive pumps, all of
which may have substantially greater financial, technical, marketing and other
resources than Novacon, will not become more significant factors in the future.
Novacon believes that it may be faced with additional competition in the near
future.
Numerous companies, all of which have substantially greater financial,
technical, manufacturing, marketing and other resources than Novacon, are
attempting to develop a variety of products for pain management. Some of these
products are infusion systems, both electro/mechanical and infusion pumps.
The distribution of infusion pumps is a highly competitive business. All of
these companies have substantially greater resources than Novacon. Moreover, the
health care industry generally, and the provider segment in particular, has
experienced, and is expected to continue to experience, consolidation. This
trend could produce additional competitors having larger and substantially
greater resources than Novacon. Competitive pressure could cause Novacon to
lose or fail to gain market share or experience significant price erosion.
Novacon competeson the basis of customer service, convenience, product
availability and price.
A number of companies and medical researchers are pursuing new delivery devices,
delivery technologies, procedures, drugs and bioengineered therapeutics for pain
management treatment. If successful, these technologies and/or medical
procedures could have a material adverse effect on Novacon's business, financial
condition and results of operations and could possibly render Novacon's products
obsolete.
MicroVal and Fii Medical Device Products
Competition in the medical device industry, and especially the markets for
cardiovascular and orthopedic medical devices, is intense. Novacon will compete
with many domestic and foreign medical device, pharmaceutical and
biopharmaceutical companies, and medical device distributors. Many of Novacon's
current and potential competitors have substantially greater financial,
regulatory, marketing and sales, and personnel resources than the company.
These competitors may also have greater experience in market
The intensity and form of competition may vary by medical device product
platform. Novacon believes that customer service is the principal key to
successful medical device product marketing. Medical centers and physicians/
surgeons demand constant attention and service. Although product pricing is
important, to a large degree pricing is dependent on the criticality of the
medical device application. For example, simpler, non-life support medical
devices are very price sensitive and prices are significant in the buying
decision. Implantable, life-supportmedical devices, however, generally compete
on the basis of reliability and performance rather than price. For these
reasons Novacon's business plan is to focus on developing marketing and
distribution alliances with major multinational medical device companies rather
than create its own direct sales forces.
Other recently developed technologies or procedures are, or may in the future
be, the basis of competitive products. There can be no assurance that Novacon's
current competitors or other parties will not succeed in developing alternative
technologies and products that are more effective, easier to use or more
economical than those which have or are being developed by MicroVal and Fii or
that would render their respective technology and products obsolete and non-
competitive in these fields. In such event,
condition and results of operations could be materially adversely affected.
Among the major competitors for MicroVal and Fii medical device products are the
following companies:
Reconstructive Orthopedic Implants. Major companies include Zimmer (subsidiary
of Bristol-Myers-Squibb Co.), Howmedica (subsidiary of Pfizer, Inc.), Smith &
Nephew, DePuy, Inc., Stryker Corporation, Biomet, Sofamor Danek Group, Inc.,
Wright Medical, and Johnson & Johnson
G.R.F. Biological Glue. Although only CryoLife Corporation presently markets a
bioglue adhesive for aortic dissection, Santerra is aware that several companies
have surgical adhesive products under development.
Laparoscopic Surgical Instruments. Major market participants include Johnson &
Johnson, U.S. Surgical Corporation and C.R. Bard, Inc.
Intravascular Stents. Major companies include Boston Scientific, Inc., Arterial
Vascular Engineering, Inc., Cordis (subsidiary of Johnson & Johnson), Guidant,
Inc., Medtronic, Inc., and U.S. Surgical Corporation.
Mechanical Heart Valves. A few companies dominate portions of the mechanical
heart valve market, including St. Jude Medical, Inc., Medtronic, Inc., Sorin
Biomedica, Spa., CMI (Carbomedics) division of Sulzer Medica, Spa., ATS Medical,
Inc., and Baxter International, Inc.
Any implantable medical device product marketed by Novacon will have to compete
for market acceptance and market share. An important factor in such competition
may be the timing of market introduction of competitive medical device products.
Accordingly, the relative speed with which MicroVal, Fii and Novacon gain
regulatory approval and reimbursement acceptance are important competitive
factors. In addition, Novacon believes that the primary competitive factors for
medical device products include safety, efficacy, and ease of use, reliability,
and suitability for use, service and price. Novacon also believes that
physician relationships, especially relationships with leaders in the
cardiovascular surgery and interventional cardiology community, are important
competitive factors.
Special Competitive Factors Concerning Heart Valves. The mechanical heart valve
market is highly competitive with one dominant company. During 1998, according
to industry estimates, St. Jude represented approximately 70% of the mechanical
heart valves sold worldwide. St. Jude was founded in 1976 and has sold
substantially the same bileaflet valve since it was first introduced in 1977,
although certain minor alterations have recently been made to the valve.
Companies that sell mechanical valves include Medtronic, Inc., CarboMedics, Inc.
("CMI"), Baxter Edwards, ATS Medical, and Sorin Biomedica Spa. Medtronic, Inc.
sells a monoleaflet mechanical valve that was introduced in the late 1970's as
well as a tissue valve. CMI, which manufactures pyrolytic carbon components for
ATS Medical, markets a bileaflet pyrolytic carbon valve with cavity pivot areas
resembling those in the St. Jude valve. CMI introduced its bileaflet valve in
international markets in 1986 and in 1993 received FDA approval
to sell the valve in the United States. Baxter Edwards reintroduced a bileaflet
valve in international markets. Sorin Biomedica Spa is an Italian company that
sells a monoleaflet and a bileaflet mechanical valve. These competitors have
significantly greater financial resources than Novacon.
Novacon also is aware of several companies that are developing new prosthetic
heart valves. Several companies are developing and testing new autologous
(created from the patient's own tissue) valves, more durable tissue valves and
new bileaflet and trileaflet mechanical valves. Advancements also are being
made in surgical procedures such as mitral valve reconstruction, whereby the
natural mitral valve is repaired, thereby delaying the need for a replacement
valve. Other companies are pursuing biocompatible coatings to be applied to
mechanical valves in an effort to reduce the incidence of thromboembolic events.
Novacon believes that the most important factors in a physician's selection of a
particular prosthetic valve are the physician's perceived benefits of the valve
and the physician's confidence in the valve design. As a result, valves that
have developed a favorable clinical performance record have a significant
marketing advantage over new valves. In addition, negative publicity resulting
from isolated incidents can have a significant negative effect on a valve's
overall acceptance. Novacon's success will be dependent upon the surgeon's
willingness to use a new prosthetic heart valve as well as the future clinical
performance of the Carbilit(tm) Bileaflet Heart Valve compared with the more
established competition.
Novacon believes that mechanical heart valves are currently being marketed to
hospitals at prices that vary significantly from country to country due to
market conditions, currency valuations, distributor mark-ups and government
regulations. Novacon believes that, after distributor mark-up, the Carbilit(tm)
Bileaflet Heart Valve will sell at or above the current price of other valves in
most markets. In many markets, government agencies are imposing or proposing
price controls or restrictions on medical products. Novacon will work with its
independent distributors to price the valve in each market to meet these
limitations. In addition, Novacon's primary competitors have the ability, due
to their internal manufacturing facilities and economies of scale, to
manufacture their valves at lower cost than MicroVal can manufacture the
Carbilit(tm) Bileaflet Heart Valve.
Patents, Proprietary Rights and Trademarks
Novacon owns no patents to protect technology, inventions and improvements that
it considers important to the development of its business. However, its has a
non-exclusive license to utilize the balloon/shaft assembly and ceramic flow
controller purchased from DIB International Company, Ltd., which is the owner of
this patented technology under a number of patents. Moreover, Novacon relies
primarily on trade secrets and know-how with respect to its infusion pump
products.
Novacon holds significant rights under its agreements with MicroVal and Fii.
Santerra's distribution and sub-assembly agreements provide for exclusive
representation and distribution of all current and future MicroVal and Fii
medical device products in the Americas and Asia/Pacific as well as lesser
markets, and non-exclusive rights in the European Union. These renewable, long-
term agreements also include rights of sub-distributor appointments and product
assembly and licensing rights under certain circumstances. The company has
rights to resell MicroVal and Fii medical device products under the Santerra
tradename, purchase and license MicroVal and Fii medical device technology and
make capital investments in MicroVal and Fii. Additionally, all governmental
regulatory approvals are secured in Novacon's name and, as such, only the
company (and its sub-distributors and licensees) will have the right and
authority to sell the medical device products approved in any jurisdiction.
MicroVal and Fii rely on a combination of patents, trade secrets, trademarks and
confidentiality agreements to protect their respective proprietary products,
processing technology, rights and know-how. Novacon believes that MicroVal and
Fii's respective patents, trade secrets, trademarks and technology rights and
know-how provide them with important competitive advantages that in turn benefit
Novacon as the distributor of their medical device products. However, there can
be no assurance that the claims allowed in any of MicroVal or Fii's existing
or future patents will provide competitive advantages for their
respective products, processes and technologies or will not be successfully
challenged or circumvented by competitors. To the extent that any of MicroVal
and Fii's medical device products are not patent protected, their respective
business, financial condition and results of operations, as well as those of
Novacon, could be materially adversely affected.
Novacon has entered into confidentiality agreements with MicroVal and Fii, and
in turn all of Novacon's employees, consultants and sub-distributors have, or
will be required to, to maintain the confidentiality of trade secrets and
proprietary information of MicroVal, Fii and Novacon. There can be no
assurance, however, that the obligations of employees of Novacon and third
parties with whom the company has entered into confidentiality agreements will
effectively prevent disclosure of MicroVal, Fii and Novacon's confidential
information or provide meaningful protection for such confidential information
if there is unauthorized use or disclosure, or that such trade secrets or
proprietary information will not be independently developed by competitors.
Litigation may be necessary to defend against claims of infringement, to
enforce patents and trademarks, or to protect trade secrets and could result
in substantial cost to, and diversion of effort by, Novacon. There can be no
assurance that Novacon would prevail in any such litigation. In addition,
the laws of some foreign countries do not protect Novacon's proprietary rights
to the same extent, as do the laws of the United States.
Litigation may be necessary to protect trade secrets or know-how owned by
Novacon or to determine the enforceability, scope and validity of the
proprietary rights of others. Although Novacon believes that it owns or has the
right to use all technology incorporated into its elastomeric infusion pump
products, I-Flow Corporation commenced patent interference litigation against
Novacon in United States District Court, Central District of California, in
July, 1999. On February 14, 2000, Novacon was notified the U.S. District Court,
Central District of California, granted I-Flow Corporation, through a default
judgment, a permanent injunction restraining Novacon from importing,
manufacturing, and selling its Dib Drug Infusion Balloon in the United States.
I-Flow Corporation claimed the Dib infusion pump design violated its patents
and was awarded damages, legal fees and costs in amounts to be determined.
Novacon denies the Dib design infringes any I-Flow patents and believes the
Dib patents protect its design. However, Novacon is financially unable to
respond to this lawsuit and therefore I-Flow was able to obtain a default
judgment. If the default judgment is not successfully overturned, Novacon
will be forced to immediately cease its infusion pump business. This
development will have a serious adverse impact on Novacon and may cause the
Company to go out of business.
Novacon knows of no other claims asserted by any other person for infringement
of patents, but it is always possible that a third-party may assert
infringement.
Although patent and intellectual property disputes in the medical device area
have often been settled through licensing or similar arrangements, associated
costs may be substantial and could include ongoing royalties. Furthermore, there
can be no assurance that necessary licenses would be available to Novacon on
satisfactory terms or at all. Accordingly, an adverse determination in a
judicial or administrative proceeding or failure to obtain necessary licenses
could prevent Novacon from manufacturing and selling certain of its products
or its planned products, which would have a material adverse effect on
Novacon's business, diversification opportunities, financial condition and
results of operations.
Novacon owns no trademarks. The Company relies on certain trade secrets and
proprietary know-how that it seeks to protect, in part, through confidentiality
agreements with its employees and consultants. There can be no assurances that
any unprotected information will not also be developed by others.
Government Regulation
Clinical testing, manufacture and sale of Novacon's products are subject to
regulation by numerous governmental authorities, principally the FDA and
corresponding state agencies. Novacon s required to register as a medical
device manufacturer with the FDA. Novacon is subject to inspection on a routine
basis by the FDA for compliance with the FDA's Quality Systems Regulation
("QSR"). These regulations impose certain procedural and documentation
requirements upon Novacon with respect to manufacturing and quality assurance
activities.
Under the Federal Food, Drug and Cosmetic Act (the "Act"), as amended, medical
devices are classified into one of three classes (i.e., Class I, II, or
III) on the basis of the controls necessary to reasonably ensure their safety
and effectiveness. Safety and effectiveness can reasonably be assured for Class
I devices through general controls (e.g., labeling, premarket notification and
adherence to QSRs) and for Class II devices through the use of general and
special controls (e.g., performance standards, postmarket surveillance, patient
registries, and FDA guidelines). Generally, Class III devices are those which
must receive PMA by the FDA to ensure their safety and effectiveness (e.g.,
life-sustaining, life-sustaining, life-supporting and implantable devices, or
new devices which have been found not to be substantially equivalent to legally
marketed Class I or Class II devices).
Before a new device can be introduced to the market, the manufacturer generally
must obtain FDA clearance through either a 510(k) premarket notification or a
PMA. A 510(k) clearance will be granted if the submitted data establishes that
the proposed device is "substantially equivalent" to a legally marketed Class I
or Class II medical device, or to a pre-amendment Class III medical device for
which the FDA has not called for PMAs. Generally an application for 510(k)
clearance only requires submission of a file, including design, manufacturing,
test and marketing information, including labeling. However, in some cases the
FDA requires clinical trials under an IDE (as defined below), even for products
to be cleared under the 510(k) process. There can be no assurance that Novacon
will obtain premarket clearance for any of the devices for which it may file a
510(k) notice. The FDA may determine that the proposed device is not
substantially equivalent, or that additional data are needed before a
substantial equivalence determination can be made. A "not substantially
equivalent" determination, or a request for additional data, could delay the
market introduction of new products that fall into this category and could have
a material adverse effect on Novacon's business, financial condition and results
of operations.
The FDA currently regulates disposable infusion pumps as Class II devices.
Disposable infusion pumps have generally qualified for clearance under Section
510(k), although certain features of advanced pumps may require clinical
validation. Novacon's elastomeric infusion pumps have all been cleared by the
FDA pursuant to the Section 510(k) premarket notification process. Modifications
or enhancements to Novacon's products that are cleared through the 510(k)
process that could significantly affect safety or effectiveness will require new
submissions. There can be no assurance that the FDA will approve new 510(k)
notifications for any of these modifications.
Novacon does not currently manufacture or market Class III medical devices or
devices requiring PMA filings with the FDA. However, should any of the
Company's future products be accorded PMA filing requirements, compliance with
the following procedures is mandatory. A PMA must be filed if the proposed
device is not substantially equivalent to a legally marketed device or if it is
a pre-amendment Class III device for which the FDA has called for PMAs.
In order to obtain a PMA, a device that poses a significant risk to patients
must undergo clinical evaluation under an Investigational Device Exemption
("IDE") that is granted by the FDA to permit testing of the device in
a limited number of humans in clinical trials conducted at a restricted group of
clinical sites. In addition to obtaining from the FDA an IDE approval to conduct
a clinical trial, the sponsor of the investigational research must also obtain
approval for the clinical research from an institutional review board or
committee established for this purpose by each medical center where the trials
will be conducted. Clinical trials leading to a PMA are intensive and costly
activities that usually extend over two or more years. As the clinical trial
progresses under an IDE, the FDA may at certain milestones allow expansion of
the scope of the trial to allow additional patients or additional clinical
sites or both.
Clinical trial results are presented to the FDA in a PMA application. In
addition to the results of clinical investigations, the applicant must submit
other information relevant to the safety and efficacy of the device and/or the
drug, including the results of non-clinical tests, a full description of the
device and its components, a full description of the methods, facilities and
controls used for manufacturing, and proposed labeling. Such submissions are
extremely detailed and complex, often involving thousands of pages. The FDA
staff then reviews the submitted application and determines whether or not to
accept the application for filing. There is no assurance that either the safety
or efficacy data in these submissions will be deemed sufficiently complete and
adequate by the FDA, and if they are not, a final determination by the FDA could
be delayed while additional trials are performed or the project could be
abandoned. Such trials would add significant new costs to such a program, which
would have a material adverse effect on Novacon's business, financial condition
and results of operations.
If accepted for filing, the applications are further reviewed first by the FDA
staff and, if appropriate, subsequently by an FDA scientific advisory panel
comprised of physicians and others with expertise in the relevant field. A
public meeting is held before the advisory panel in which the PMA application is
reviewed and discussed. The scientific advisory panel then issues a
recommendation of approval or denial to the FDA or recommends approval with
conditions. Although the FDA is not bound by the opinion of the advisory panel,
the FDA tends to give considerable weight to panel recommendations. If the
FDA's evaluations of the application are favorable, the FDA will subsequently
publish an order approving the PMA application. Interested parties can file
comments on the order and seek further FDA review.
Although by statute the FDA is granted 180 days in which to review a PMA NDA and
either approve or disapprove it, in practice the FDA has often taken much
longer. Generally, during the review, the FDA will request additional data and
the applicant will agree to extend the review time. The FDA will make an
initial assessment as to whether the PMA is sufficiently complete for review and
may require the development and submission of additional data or analyses. The
PMA processing in the past has typically lasted more than a year from the time
of filing, and in some cases several years, but the FDA is being pressured to
meet its statutory timelines. Many such reviews are now being completed within
six months, but others are not, and there is no assurance when or if an
application will be approved.
New PMA applications or PMA supplements are required for certain modifications
to a device that is approved through the PMA process. Supplements to a PMA
application often require submission of the same type of information as for a
PMA application except that the supplement is limited to information needed to
support any changes from the product covered by the original PMA application and
may not require the submission of clinical data or the convening of an advisory
committee and corresponding revie
The PMA processes can be expensive, uncertain and lengthy, and a number of
devices for which PMA approval has been sought have never been approved for
marketing. There can be no assurance that Novacon will be able to obtain
necessary regulatory approvals or clearances on a timely basis or at all for any
of its products under development, and delays in receipt of or failure to
receive such approvals, the loss of previously received approvals, or failure to
comply with existing or future regulatory requirements would have a material
adverse effect on Novacon's business, financial condition and results of
operations.
Approvals restrict devices to specifically labeled uses. The FDA actively
enforces regulations prohibiting marketing of products for unapproved uses.
The FDA also conducts inspections to determine whether Novacon conforms with
QSR, and subsequent QSR inspections will continue after the FDA approval.
Failure to comply with applicable regulatory requirements can result in, among
other things, fines, injunctions, civil penalties, failure of the government to
grant premarket clearance or premarket approval of devices or drugs, delays or
suspensions or withdrawals of approvals, seizures or recalls of products,
operating restrictions and criminal prosecutions. Changes in existing
requirements or adoption of new requirements could have a material adverse
effect on Novacon's business, financial condition and results of operations.
The FDA can withdraw a PMA approval if new evidence or new information shows the
device is no longer safe or effective, or if the FDA discovers that the PMA
contains any untrue statement of material fact. Other reasons justifying
withdrawal of a PMA by the FDA include, but are not limited to, failure to
maintain required records or to file records and reports, new questions
regarding manufacturing, and whether labeling is false or misleading.
There can be no assurance that the necessary approvals for the use of new
generations of Novacon's elastomeric infusion pumps will be granted by the FDA
or other authorities on a timely basis or at all, and delays in receipt of or
failure to receive such approvals, or the loss of previously received approvals,
could result in significant delays, substantial costs or even the cessation of
operations relating to a product or group of products, and any of these could
have a material adverse effect on the business, financial condition and results
of operations of Novacon.
Exports of products subject to 510(k) notification requirements, but not yet
cleared to market, are permitted without FDA export approval, provided that
certain requirements are met. Unapproved products subject to PMA requirements
must receive prior FDA export approval unless they are approved for use by any
member country of the EU and certain other countries, including Australia,
Canada, Israel, Japan, New Zealand, Switzerland and South Africa, in which case
they can be exported to any country without prior FDA approval. International
sales are subject to foreign government regulation, the requirements of which
vary substantially from country to country. The time required to obtain
approval by a foreign country may be longer or shorter than that required for
FDA approval, and the requirements may differ. A medical device company must
obtain the CE Mark prior to sale within the EU of certain medical devices,
including implantable products. During this process, the sponsor must
demonstrate compliance with ISO manufacturing and quality requirements.
As is the case with QSR inspections in the U.S., inspections by various foreign
bodies will continue in the EU on a periodic basis after receipt of the CE Mark.
Novacon also is subject to numerous federal, state and local laws relating to
such matters as safe working conditions, manufacturing practices, environmental
protection, fire hazard control and disposal of hazardous or potentially
hazardous substances. Additionally, Novacon must comply with various FDA, and
in some cases Federal Trade Commission, requirements for design, safety,
advertising, labeling, record keeping and reporting of adverse experiences with
the use of a product. There can no assurance that Novacon will not be required
to incur significant costs to comply with such laws and regulations in
the future or that such laws or regulations will not have a material adverse
effect upon Novacon's ability to do business.
Third Party Reimbursement
In the U.S., Novacon's products are generally purchased directly by physicians,
physician groups, hospitals, and/or dealers. There is widespread concern that
health care market initiatives in the U.S. may lead third-party payors to
decline or further limit reimbursement. The extent to which third-party payors
may determine that use of Novacon's products will save costs or will at least be
cost effective is highly uncertain, and it is possible that they will merely
focus on the lower initial costs associated with injection therapy or will
otherwiselimit reimbursement for infusion pumps or other products developed by
Novacon. Because of uncertainties regarding the possible health care reform
measures that could be proposed in the future and initiatives to reduce costs
by private payors, Novacon cannot predict whether reimbursement for its products
will be affected or, if affected, the extent of any effect. The unavailability
of third-party coverage or the inadequacy of reimbursement for Novacon's
products would materially and adversely affect its business, financial condition
and results of operations.
Product Liability
Novacon's business involves the inherent risk of product liability claims.
Novacon does not presently maintain product liability insurance, nor there can
be no assurance that insurance coverage will be available on terms acceptable to
Novacon or that such coverage will be adequate for liabilities actually
incurred.
Employees
As of February 15, 2000, Novacon employed 2 full-time persons: David P. Lang,
Chief Executive Officer and President; and John D. Lang, Manager, Operations.
Additionally, the company engages consultants from time-to-time for marketing,
regulatory and other business matters. As the company's operations expand it
expects to employ an administrative assistant, one or more product managers,
regulatory/legal counsel and part-time warehouse staff as circumstances warrant
during the next 24 months. None of the Company's employees are expected to be
subjectto collective bargaining agreements.
ITEM 2. DESCRIPTION OF PROPERTY
Novacon leases approximately 500 square feet of administrative office space in
Lake Elmo, Minnesota, from David P. Lang, Novacon's Chairman and Chief Executive
Officer, on a $700 monthly rental basis. Novacon believes its space
requirements for the foreseeable future are adequate.
ITEM 3. LEGAL PROCEEDINGS
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
alleging various causes of action for patent interference against Novacon.
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
obtained a default judgment against Novacon on October 10, 1999, which 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 intends to prosecute its claim against I-Flow
Corporation and defend against enforcement of the default judgment. As of
January 31, 2000 no default judgment has been issued against Novacon.
Novacon is not presently a party to any other material pending legal
proceedings. Novacon may be subject from time to time to various other legal
proceedings, including product liability and employment claims, which arise in
the ordinary course of its business. Novacon believes that such proceedings,
individually or in the aggregate, would likely have a material adverse effect on
its business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMN EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ OTCBB (Bulletin Board) market
under the symbol "NVCNE". Novacon common stock began trading publicly in
January, 1985 following its initial public stock offering. Trading in the
Company's common stock was de-listed to OTCBB (Bulletin Board) in 1987. The
following table shows for the period indicated the high and low quotations per
share of common stock. These OTCBB (Over-the-Counter-Bulletin Board) quotations
reflect inter-dealer prices, without retail ma
and may not necessarily represent actual transactions.
Common Stock
HIGH LOW
1999
Fourth Quarter Ended May 31, 1999......................... $ .05 .03
Third Quarter Ended February 28 1999...................... .04 .02
Second Quarter Ended November 30, 1998.................... .03 .01
First Quarter Ended August 30, 1998....................... .03 .01
1998
Fourth Quarter Ended May 31, 1998........................ $ .02 .01
Third Quarter Ended February 28, 1998.................... .02 .01
Second Quarter Ended November 30,1997.................... .01 .01
First Quarter Ended August 30, 1997...................... .01 .01
Record Holders
The last reported sale price of the Common Stock on the Nasdaq Bulletin Board on
February 14, 2000 was $0.11. As of February 15, 2000, there were approximately
1,250 stockholders of record of the Company's Common Stock.
Dividends
Novacon has never declared or paid any cash dividends on its Common Stock.
Novacon currently intends to retain all available funds for use in its business
and therefore does not anticipate paying any cash dividends in the foreseeable
future. Any future determination relating to dividend policy will be made in
the discretion of the Board of Directors of the Company and will depend on a
number of factors, including the future earnings, capital requirements,
financial condition and future prospects of Novacon and such other factors as
the Board of Directors may deem relevant.
Sales of Unregistered Securities
On November 25, 1999, Novacon sold 2,927,096 shares of its Common Stock to David
P. Lang for approximately $77,568 and 1,000,000 shares to John D. Lang for
$26,500, both in payment of accrued salaries. Upon completion of the
transaction, David P. Lang owned 3,976,827 shares, or approximately 27% of the
outstanding shares of Common Stock, and John D. Lang owned 1,090,000 shares, or
approximately 7% of the Common Stock of Novacon. Novacon relied upon Section
4(6) of the Securities Act of 1933, as amended, and Regulation D promulgated
thereunder, in effectingthese sales of unregistered securities.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain selected financial data, which should be
read in conjunction with the Company's financial statements and notes thereto
included elsewhere herein and with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS." The selected consolidated
financial data as of May 31, 1999, 1998, 1997 and 1996, have been derived from
the financial statements of Novacon Corporation, which have not been audited by
independent auditors.
Year Ended Year Ended Year Ended Year Ended
May 31,1999 May 31,1998 May 31,1997 May 31,1996
STATEMENT OF
OPERATIONS:
REVENUES $ 80,776 61,740 76,509 77,083
COST OF GOODS SOLD 27,475 24,314 43,016 28,098
GROSS PROFIT 53,301 37,426 33,493 48,985
OPERATING EXPENSES
Selling, G & A 146,417 135,421 156,648 174,066
OPERATING
INCOME (LOSS) (93,115) (97,995) (123,155) (125,081)
INTEREST
INCOME (EXPENSE) (7,451) (4,717) (9,371) (6,293)
EXTRAORDINARY ITEM 0 0 0 36,145
NET INCOME (LOSS) (100,566) (102,712) (132,526) (95,229)
NET INCOME (LOSS)
PER SHARE $ (0.01) (0.01) (0.01) (0.01)
WEIGHTED
AVERAGE SHARES 10,722,904 10,722,904 10,722,904 10,722,904
OUTSTANDING
OTHER DATA:
Order backlog
as of 1/31/00 $ 180,000 0 0 0
CASH FLOW DATA:
Cash flow
from (used in)
Operations (7,002) (7,120) (137,050) (140,564)
Cash flow used in
investing activities (42) (1,480) 185,475 128,799
Cash flow from (used in)
financing activities 7,616 (5,500) (93,410) 56,838
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Novacon designs, develops, manufactures, and markets disposable elastomeric
infusion pumps for pain management and other developing infusion therapies.
Substantially all the Company's product revenues since 1994 have been generated
by sales of these infusion pumps.
The Company's series of Dib(tm), Ranger(tm) and Freedom(tm) infusion pumps are
FDA authorized for full commercial distribution in the United States and are
indicated for a wide range of epidural, intravenous and subcutaneous infusion of
drugs. These indications include obstetrical anesthesia (labor & delivery),
post-operative and chronic pain management, morphine trials, chemotherapies, and
antibiotic infusions. Management believes the versatility and accuracy of its
models position the Company to address a wide range of applications for
ambulatory drug infusion regimens.
On February 14, 2000, Novacon was notified the U.S. District Court, Central
District of California, granted I-Flow Corporation, through a default judgment,
a permanent injunction restraining Novacon from importing, manufacturing, and
selling its Dib Drug Infusion Balloon in the United States. I-Flow Corporation
claimed the Dib infusion pump design violated its patents and was awarded
damages, legal fees and costs in amounts to be determined. Novacon denies the
Dib design infringes any I-Flow patents and believes the Dib patents protect
its design. However, Novacon is financially unable to respond to this lawsuit
and therefore I-Flow was able to obtain a default judgment. If the default
judgment is not successfully overturned, Novacon will be forced to immediately
cease its infusion pump business. This development will have a serious adverse
impact on Novacon and may cause the Company to go out of business.
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.
New Products
The Company expects to introduce the following new products during the year
2000:
Model Description Introduction
Ranger(tm) user selected flow rates February, 2000
Rate Adjustable Pump from 5ml/hr-15ml/hr
Freedom(tm) 2 or 3 day ambulatory pump on hold
Infusion System for pain following arthroscopic surgery
Product development and manufacturing operations have focused on disposable
elastomeric infusion pumps. Future development of the infusion pump product line
will focus upon improving the existing technology for its current use in pain
management treatment and the utilization of this technology for the treatment of
other medical conditions. However, none of these products will be introduced to
the market unless the default judgment described above is successfully
overturned.
Results of Operations
The following table sets forth for the years indicated the percentage
relationship to net sales of certain items in the Company's statements of
operations and the percentage changes in the dollar amounts of such items on a
comparative basis for the three fiscal years ended May 31, 1999:
May 31, 1999 May 31, 1998 May 31, 1997
% sales % change % sales % change %sales % change
Net Sales
$80,776 +31 $61,740 -19 $76,509 -1
Cost of
Goods Sold
34 $27,475 +13 39 $24,314 -43 56 $43,016 +53
Operating
Expenses
181 $146,417 +8 219 $135,421 -14 205 $156,648 -10
Fiscal Year 1999 and Fiscal Year 1998:
Net Sales. Net sales increased 31% in 1999 over 1998 to $80,776 from $61,740.
Cost of Sales and Operating Expenses. Cost of sales increased 13% in 1999 over
1998 to $27,475 from $24,314.
As a percentage of net sales, selling and general and administrative expenses
were 181%, which included research and development expenses of $20,000, or 25%
of sales.
Fiscal Year 1998 and Fiscal Year 1997
Net Sales. Net sales decreased 19% in 1998 over 1997 to $61,740 from $76,509.
Cost of Sales and Operating Expenses. Cost of sales decreased 43% in 1998 over
1997 to $24,314 from $43,016.
As a percentage of net sales, selling and general and administrative expenses
were 219%, which included research and development expenses of $8,000, or 13% of
sales.
Fiscal Year 1997 and Fiscal Year 1996
Net Sales. Net sales decreased 1% in 1997 over 1996 to $76,509 from $77,083.
Cost of Sales and Operating Expenses. Cost of sales increased 53% in 1997 over
1996 to $43,016 from $28,098.
As a percentage of net sales, selling and general and administrative expenses
were 205%, which included research and development expenses of $5,000, or 6% of
sales.
Liquidity and Capital Resources
Novacon has financed its operations in recent years primarily through cash flows
from operations and loans from a director. The Company has not secured any
equity funding since its initial public offering in 1985 and a secondary
offering in 1987. In 1996 the Company obtained $30,000 from three individuals
through the issuance of convertible promissory notes. In 1999, the Company
obtained an unsecured loan of $75,000 from a director. Approximately 75% of the
Company's current liabilities accrue to unpaid salaries to management.
For 1999 the Company had net cash used in operations of a negative $7,002,
compared to net cash used in operations in 1998 of $7,120 and net cash used in
operations of a negative $137,050 in 1997.
Capital expenditures were less than $2,500 for fiscal 1997, 1998 and 1999,
respectively. The Company's 1998 and 1999 capital expenditures included computer
and software equipment.
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 1999 financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. Furthermore, the majority of the Company purchases of raw
materials are paid for in the Japanese yen currency. The exchange rate between
the U.S. dollar and the Japanese yen has demonstrated serious volatility over
the past year, which could have an adverse affect on the Company's effort to
achieve profitable operations. The Company's ability to continue operations is
dependent upon its ability to obtain additional capital and working capital,
which is subject to and will depend upon numerous factors, including the
commencement of shipments under the Innovasive agreement in early 2000, the
successful overturning of the default judgment in California, increased sales
for existing infusion pump product line, the timely acquisition of Santerra
Medical Technology, Inc. and the achievement of profitable operations.
Year 2000 Compliance
The Year 2000 problem ("Y2K") refers to the potential of all electronic devices
containing microprocessors to improperly calculate dates in and beyond the year
2000. Novacon has not established an action plan to facilitate the Company's
Y2K compliance and minimize the potential effects of Y2K on the Company's
operations. However the Company has completed its evaluation of all of its
current product offerings. The evaluation has shown that Y2K will not pose
operating problems for the products.
Novacon's most reasonably likely worst case scenario in the event of a failure
to correct a material Y2K problem could be an interruption in, or failure of,
certain normal business activities. Such failures or interruptions could
materially impact the Company's results of operations, liquidity and financial
position. Due to the general uncertainty inherent in the Y2K problem, the
Company is unable to determine at this time whether the consequences of Y2K
failures will have a material adverse impact on the Comapny.
Readers are cautioned that forward looking statements contained in this Year
2000 Compliance section should be read in conjunction with the Company's
cautionary language relating to forward-looking statements preceding Item 1
"Business."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
The following financial statements of Novacon Corporation are included in Item
8:
Balance Sheet for the years ended May 31, 1999 and 1998................ page 52
Statement of operations for the years ended May 31, 1999 and 1998.......page 53
Statement of Changes in Shareholder Equity (Deficit)....................page 54
Notes to Financial Statements.......................................... page 56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to Directors and Executive Officers of the Company is
incorporated by reference to the Company's definitive Information Statement for
its annual meeting of stockholders to be filed with the Securities and Exchange
Commission (the "Information Statement").
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item is incorporated by reference to the
Company's Information Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item is incorporated by reference to the
Company's Information Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Information with respect to this item is incorporated by reference to the
Company's Information Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
See index to financial statements under Item 8, on page __ for a list of
all financial statements filed as part of this report.
2. FINANCIAL STATEMENT SCHEDULES
All other schedules are omitted because they are not applicable, not required,
or because the required information is included in the financial statements or
notes thereto.
3. EXHIBITS REQUIRED TO BE FILED BY ITEM 601 OF REGULATION S-K
The following exhibits are filed as part of this Annual Report on Form 10-KSB or
are incorporated herein by reference:
Exhibit I: Schedule 14C Information
Exhibit II: Information Statement for 1999 Shareholders' Meeting
(b) 1. REPORTS ON FORM 8-K
Novacon Corporation Press Release dated February 15, 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Action of 1934, as amended, the registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NOVACON CORPORATION
Date: February 15, 2000 By: /s/ David P. Lang
------------------------------------
David P. Lang, Chairman of the Board,
Chief Executive Officer (Principal
Executive Officer), Chief Financial
Officer (Principal Financial and
Accounting Officer)
______________
David P. Lang
Director
February 15, 2000
NOVACON CORPORATION
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
MAY 31, 1999 and 1998
NOVACON CORPORATION
BALANCE SHEET
(unaudited)
For the years ended May 31, 1999 and 1998
ASSETS
1999 1998
Current assets:
Cash $ 1,282 711
Accounts Receivable 8,726 13,800
Inventory 83,936 91,653
Other current assets 7,119 700
Total current assets 101,063
Property and Equipment (Note 2) 10,895 10,853
Total assets $ 111,958 117,717
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Notes Payable-related parties (Note 3) 0 4,700
Notes payable-third parties (Note 4) 49,316 37,000
Accounts payable 39,360 52,169
Accrued compensation and payroll taxes 272,711 172,711
Total Liabilities 361,387 266,580
Commitments (Note 5)
Shareholders' equity (deficit)
Common stock, $.01 par value,
15,000,000 shares authorized,
10,722,904 shares issued, and outstanding 107,229 107,229
Paid-in capital 8,509,434 8,509,434
Accumulated deficit (8,866,092) (8,765,526)
Total shareholders' equity (deficit) (249,429) (148,863)
Total liabilities &
shareholders' equity (deficit) 111,958 117,717
See accompanying notes to financial statements
NOVACON CORPORATION
STATEMENT OF OPERATIONS
(unaudited)
For the years ended May 31, 1999 and 1998
1999 1998
Net sales $80,776 61,740
Cost of Goods Sold 27,475 24,314
Gross profit 53,301 37,426
General & Administrative expenses 146,417 135,421
Loss from operations (93,115) (97,995)
Other income (expenses):
Interest expense (7,451) (4,717)
Net loss (100,566) (102,712)
Per share data:
Loss per share of common stock: $(0.01) (0.01)
Weighted average number of
shares outstanding 10,722,904 10,722,904
See accompanying notes to financial statements
NOVACON CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the years ended May 31, 1999 and 1998
Total
Additional Shareholders'
Common Stock Paid-in Accumulated Equity
Shares Amount Capital Deficit (Deficit)
Balances at
May 31, 1997 10,722,904 $107,229 $8,509,434 $(8,662,814) $(46,151)
Net loss (102,712) (102,712)
Balances at
May 31, 1998 10,722,904 $107,229 $8,509,434 $(8,765,526) $(148,863)
Net loss (100,566) (100,566)
Balances at
May 31, 1999 10,722,904 $107,229 $8,509,434 $(8,866,092) $(249,429)
See accompanying notes to financial statements
NOVACON CORPORATION
STATEMENT OF CASH FLOWS
For the years ended May 31, 1999 and 1998
1999 1998
Cash flows from operating activities:
Net loss $ (100,566) (102,712)
Adjustments to reconcile net loss to
Net cash used in operating activities:
Accumulated depreciation 0 0
(Increase) decrease in assets:
Accounts receivable 5,073 41,155
Inventory 36,219 (16,169)
Prepaid inventory (28,502)
(Increase (decrease) in liabilities:
Accounts payable (19,226) 10,837
Accrued expenses 100,000 74,009
Net cash used in operating activities: (7,002) 7,120
Cash flows from investing activities:
Purchase of property and equipment (43) (1,480)
Net cash provided by investing activities: (43) (1,480)
Cash flows from financing activities:
Net issuance (repayment) of notes
payable-related parties (5,315) (4,500)
Net issuance (repayment) of notes
payable-third parties 12,931 (1,000)
Net cash used in financing 7,616 (5,500)
Increase (decrease) in cash) 571 140
Cash - beginning of year (711) (571)
Cash - end of year (758) 711
See accompanying notes to financial statements
NOVACON CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the years ended May 31, 1999 and 1998
Note 1: Significant Accounting Policies
Nature of Organization:
Novacon Corporation manufactures and distributes disposable, elastomeric
infusion pumps designed for hospital and home applications in pain management,
chemotherapy and antibiotics. The Company has a non-exclusive United States
manufacturing and marketing agreement with the Japanese developer of the
proprietary technology used in the design of these pumps.
Accounts Receivable:
The Company considers its accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required. If amounts become
uncollectible, they will be charged to operations when that determination is
made.
Inventory:
Inventory was recorded at the lower of cost (determined on a first-in, first-out
basis) or market. Inventory on hand consisted of both finished goods and raw
material components.
Property and Equipment:
Property and equipment is stated at cost. Depreciation is computed using
straight-line methods and is expensed based upon the estimated useful lives of
the assets.
Income Taxes:
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes, if
any. Deferred taxes represent the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Use of Estimates:
The preparation of financial statements requires management to make certain
estimates and assumptions about the future outcome of current transactions which
may affect the reporting and disclosure of these transactions. Accordingly,
actual results could differ from those estimates used in the preparation of
these financial statements.
Net Income (loss) Per Share:
The net income (loss) per share was computed based on the weighted average
number of shares outstanding during the year without taking into effect
outstanding options as their effect would be anti-dilutive.
Note 2: Continued Existence and Management's Plan
During 1999, the Company incurred a net loss of $100,566 and a negative cash
flow from operations of $7,002, resulting in a negative working capital position
of $249,429 and an accumulated deficit totaling $8,866,092 at May 31, 1999.
Given these circumstances and the Company's expected cash requirements in 2000,
significant internal restructuring and additional capital investment will be
necessary to sustain the Company's operations.
In these regards, the Company expects its new distribution alliances will
substantially increase sales. Management plans to expand indications for use of
the Company's infusion pumps with several new product offerings. Successful
execution of these plans may result in profitable operations.
In the event that management's plans as described above are not successful, the
Company may be forced to delay or curtail its new product development activities
or be forced to further reduce its inventory and distribution operations. The
financial statements do not contain any adjustments which might be necessary if
the Company is unable to continue as a going concern.
Note 3: Property and Equipment
Property and equipment consisted of the following at May 31:
Office equipment
Computer equipment
Exhibit booth
Less accumulated depreciation
Property and equipment, net
No depreciation expense was recognized in 1999 and 1998.
Note 4: Notes Payable-Related Parties
Notes payable-related parties consisted of various notes payable to an officer/
shareholder. The notes bear interest at variable rates from 0% to 12%, are
unsecured and due upon demand.
Note 5: Notes Payable-Third Parties
Notes payable-third parties consisted of the following at May 31:
Convertible notes payable-interest bearing at 18%, unsecured and due in
November, 1997 and March, 1998. The notes are convertible into 300,000 shares
of common stock at the option of the note holder at maturity or until paid in
full.
1999 1998
Notes payable $ 30,000 $ 30,000
Note 6: Commitments
The Company's stock option plan expired in August, 1998. During fiscal 1999 and
1998, no shares of common stock were purchased or issued through the exercise of
options.
Note 7: Significant Suppliers and Customers
During 1999 and 1998, the Company purchased substantially all its component
inventory of infusion balloon/shaft assemblies and related supplies from a
Japanese corporation. Total purchases from this supplier aggregated $21,980 and
$18,965 in 1999 and 1998, respectively.
During 1999, the Company made sales to three customers representing
approximately 25%, 15%, and 12% of total sales. In 1998, the Company made sales
to two customers representing approximately 27% and 14% of total sales.
Note 8: Income taxes
For financial statement purposes, no tax benefit has been reported in 1999 and
1998 as realization of the tax benefits is uncertain. Accordingly, a valuation
allowance has been established for the full amount of the deferred tax asset.
At May 31, 1999, the Company had net operating loss carryforwards as follows for
income tax purposes:
Carryforward Net Operating
Expires Loss
May 31 Carryforwards
2000 1,756,000
2001 2,387,000
2002 803,000
2003 532,000
2004 83,000
2005 763,000
2006 46,000
2007 22,000
2008 131,000
2009 125,000
2010 95,000
2011 133,000
2012 102,000
2013 100,000
Total $ 7,078,000
The utilization of the carryforwards is dependent upon the ability to generate
sufficient taxable income during the carryforward period. In addition,
utilization of these carryforwards may be limited due to ownership changes as
defined in the Internal Revenue Code
NOVACON CORPORATION
INDEX TO EXHIBITS
I. Schedule 14C Information..............................................page 61
II. Information Statement for 1999 Shareholders' Meeting.................page 63
SCHEDULE 14C INFORMATION
Proxy Statement Pursuant to Section 14(c) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
Novacon Corporation
- -------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- ------------------------------------------------------------------------------
Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
common stock
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
14,650,000
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
Exhibit II
February 15, 2000
Dear Stockholder:
You are cordially invited to attend the 1999 Annual Meeting of Stockholders of
Novacon Corporation. The meeting will be held on Wednesday, April 19, 2000, at
4:00 p.m. local time at 2116 Second Avenue South, Minneapolis, Minnesota 55404.
We suggest that you carefully read the enclosed Notice of Annual Meeting and
Information Statement.
We hope that you will be able to attend the Annual Meeting. However, whether or
not you plan to attend, we urge you to complete, sign, date and return the
enclosed proxy card in the enclosed envelope in order to make certain that your
shares will be represented at the Annual Meeting.
Very truly yours,
David P. Lang
Chief Executive Officer and President
NOVACON CORPORATION
5451 Hilltop Avenue
Lake Elmo, Minnesota 55042-9539
--------------------------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
April 19, 2000
---------------------------------------------------
TO OUR STOCKHOLDERS:
Please take notice that the Annual Meeting of the Stockholders of Novacon
Corporation, a Delaware corporation (the "Company"), will be held at 2116 Second
Avenue South, Minneapolis, Minnesota 55404, on Wednesday, April 19, 2000, at
4:00 p.m. Minneapolis time, to consider and vote upon the following matters:
1. Election of three directors to serve a one-year term, or until their
respective successors are elected and qualified.
2. To amend the Company's articles of incorporation to: (a) change the Company's
name to Santerra Corporation; and (b) increase the Company's authorized capital
stock from 15,000,000 shares of common stock, $0.01 par value, to authorized
capital stock of 45,000,000 shares of common stock, $0.01 par value.
3. To amend the Company's bylaws.
4. To ratify the appointment of Silverman Olson Thorvilson & Kaufmann, Ltd., as
the Company's independent auditors for the current fiscal year ending May 31,
2000.
5. To transact such other business as may be properly brought before the Annual
Meeting or any adjournments thereof.
The Board of Directors of the Company has fixed the close of business on
February 25, 2000, as the record date for the determination of stockholders
entitled to notice of and to vote at the Annual Meeting. The transfer books of
the Company will not be closed.
Stockholders who do not expect to be present personally at the Annual Meeting
are urged to complete, date, sign, and return the accompanying Proxy in the
enclosed, self-addressed envelope. The Board of Directors of the Company
sincerely hopes, however, that all stockholders who can attend the Annual
Meeting will do so. It is important that your shares be represented and voted at
the Annual Meeting. If you are not able to attend the Annual Meeting, please
return your completed Proxy at your earliest convenience.
BY THE ORDER OF THE BOARD OF DIRECTORS
John D. Lang, Secretary
Dated: February 15, 2000
NOVACON CORPORATION
5451 Hilltop Avenue
Lake Elmo, Minnesota 55042
------------------------------------------
INFORMATION STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
April 19, 2000
------------------------------------------
INTRODUCTION
The Annual Meeting of Stockholders of Novacon Corporation (the "Company") will
be held on Wednesday, April 19, 2000, at 4:00 p.m. local time at 2116 Second
Avenue South, Minneapolis, Minnesota 55404, or at any adjournments thereof (the
"Annual Meeting"), for the purposes set forth in the Notice of Meeting.
A proxy card is enclosed for your use. You are not being solicited on behalf of
the Board of Directors to sign and return the enclosed proxy card in favor of
management. However, if you are not able to attend the Annual Meeting, please
return your completed proxy card in the accompanying envelope at your earliest
convenience. No postage is required if mailed within the United States. The
cost of the preparation, assembly and mailing of the Information Statement, as
well as the cost of forwarding such material to the beneficial owners of Common
Stock, will be borne by the Company. The Company may reimburse brokers, banks,
and others holding shares in their names for others for the costs of forwarding
proxy material to, and obtaining Proxies from, beneficial owners.
The person giving the enclosed Proxy has the power to revoke it at any time
prior to the convening of the Annual Meeting. Revocation must be in writing,
signed in exactly the same manner as the Proxy, and dated. Revocations of Proxy
will be honored if received at the offices of the Company, addressed to John D.
Lang, Secretary, on or before April 10, 2000. In addition, on the day of the
meeting, prior to the convening thereof, revocations may be delivered to the
tellers, who will be seated at the door of the meeting room. Revocation may
also be effected by delivery prior to commencementof the meeting of an
executed, later dated Proxy. Unless revoked, all properly executed Proxies
received in time will be voted.
Proxies not revoked will be voted in accordance with the choice specified by
stockholders on the Proxies. Proxies which are signed but which lack any such
specification will not be voted. If a stockholder abstains from voting as to any
matter, then the shares held by such stockholder shall be deemed present at the
meeting for purposes of determining a quorum and for purposes of calculating the
vote with respect to such matter, but shall not be deemed to have been voted in
favor of such matter. Abstentions, therefore, as to any proposal will havethe
same effect as votes against such proposal. If a broker turns in a "non-vote"
Proxy, indicating a lack of voting instruction by the beneficial holder of the
shares and lack of discretionary authority on the part of the broker to vote on
a particular matter, then the shares covered by such non-vote Proxy shall be
deemed present at the meeting for purposes of determining a quorum but shall
not be deemed to be represented at the meeting for purposes of calculating the
vote required for approval of such matter.
The Annual Report of the Company on Form 10-KSB, including financial statements,
for the fiscal year ended May 31, 1999, and a Quarterly Report, including
financial statements for the six months ended November 30, 1999, is being mailed
with this Information Statement. Copies of this Information Statement and
Proxies will first be mailed to stockholders beginning on or about March 1,
2000.
VOTING OF SHARES
Only stockholders of record at the close of business on February 25, 2000 are
entitled to notice of and to vote at the Annual Meeting or any adjournment
thereof. As of that date, there were issued and outstanding 14,650,000 shares
of Common Stock of the Company, the only class of securities of the Company
entitled to vote at the meeting. Each stockholder of record is entitled to one
vote for each share registered in his or her name as of the record date. The
Articles of Incorporation of the Company do not grant stockholders the right to
vote cumulatively for the election of directors. No stockholder will have
appraisal rights or similar dissenter's rights as a result of any matters
expected to be voted on at the meeting. The presence in person or by proxy of
holders of a majority of shares of the Common Stock entitled to vote at the
Annual Meeting will constitute a quorum for the transaction of business.
PRINCIPAL STOCKHOLDERS AND BENEFICIAL OWNERSHIP OF MANAGEMENT
The following table sets forth certain information as of February 15, 2000
derived from the Company's records or provided by the holders with respect to
the stock ownership of all persons known by the Company to be beneficial owners
of more than five percent of its outstanding Common Stock, all directors and
nominees to become directors, all Named Executive Officers (as defined herein),
and all officers and directors of the Company as a group. Except where
otherwise indicated, all persons have sole voting power and sole investment
power with respect to the shares indicated:
NAME AND ADDRESS OF NUMBER OF SHARES PERCENTAGE
BENEFICIAL OWNER OWNED (1)(2)(3) OF CLASS
- ------------------------------------------------------------------------------
David P. Lang 3,976,827 27%
5451 Hilltop Avenue
Lake Elmo, Minnesota 55042
John D. Lang 1,090,000 7%
6087 45th St.
Oakdale, MN 55128
Paul D. Rieff 25,000(3) <1%
8/F Wyler Centre 1
200 Tai Lin Pai Road
Kwai Chung, NT, Hong Kong
John S. Salstrom, Ph.D. 25,000(3) <1%
110 First Ave NE, Suite 1006
Minneapolis, MN 55413
All officers and directors 4,026,827 27%
as a group (3 persons)
(1) As of February 15, 2000, unless noted. Unless otherwise noted, all of the
shares shown are held by individuals or entities possessing sole voting power
and investment power with respect to such shares.
(2) Shares not outstanding but deemed beneficially owned by virtue of the right
of a person or member of a group to acquire them within 60 days are treated as
outstanding only when determining the amount and percent owned by such person or
group.
(3) Includes stock option as a Director
ELECTION OF DIRECTORS
(Proposal No. 1)
Nomination
The Company's Articles of Incorporation provide that the Board of Directors
shall consist of not less than three or more than seven members, as determined
from time to time by the Board. Directors serve a one-year term. At the 1999
Annual Meeting, three directors will be elected to hold office for a term
expiring at the Annual Meeting of stockholders to be held in 2001, and until his
successor has been elected and qualified, or until his death, resignation, or
removal, if earlier.
David P. Lang has been nominated by the Board of Directors for reelection.
Paul D. Rieff and John S. Salstrom have been nominated for election to the
Board. Unless instructed not to vote for the election of the nominee, the
Proxies will vote to elect the nominees named above. If the nominee is not a
candidate for election at the meeting, which is not currently anticipated, the
Proxies may vote for such other person as they, in their discretion, may
determine.
Certain information regarding the nominees and the continuing director of
the Company is set forth below:
Nominees For Director (Term Expiring In 2001)
David P. Lang, age 53, has been the Chief Executive Officer, President and Chief
Financial Officer of Novacon Corporation since April 1986. Mr. Lang has held
international marketing management positions with Medtronic Europe, S.A., Paris,
France (a subsidiary of Medtronic, Inc.) (1970 to 1975); Medical Europe GmbH,
Munich, Germany (a subsidiary of Medical, Inc. (1975 to 1977), Cyberex
Corporation (1979-1981), and Novacon (1982 to present). Mr. Lang has over 15
years experience of doing business in China, having negotiated the first Sino-
Americanmedical electronics joint venture in 1985; he has lectured at the
University of Minnesota and taught Chinese and international business courses at
Metropolitan State University. Mr. Lang is a founder of Santerra Medical
Technology, Inc. and serves as a director and its chief executive officer. He
is also Vice Chairman, Qinming Medical, Inc. Mr. Lang is a graduate of Harvard
College, B.A. 1968.
Paul D. Rieff, age 63, has been Managing Director of Asia Cardiovascular
Products (ACP), Hong Kong, a wholly-owned subsidiary of Getz Bros. & Co., Inc.,
San Francisco, CA since 1985. ACP is a multinational distributor of
cardiovascular medical devices in the Austral-Asian region. Mr. Rieff has held
previous international management positions with several medical device
manufacturers, including Medtronic, Inc., and Medical, Inc. Mr. Rieff is a
graduate of the University of Minnesota, B.A. 1959.
John S. Salstrom, Ph.D., age 54, is CEO of Salstrom & Associates, a Minneapolis-
based international consulting firm. He is a co-founder and Director of
Energene, Inc., a firm engaged in the introduction of biotechnology and
pharmaceuticals in Southeast Asia. In 1987 he co-founded and was Vice President
of Scientific Affairs (1987-1991) at Helix BioCore, Inc. (now ATS Medical,
Inc.). He previously held research director positions at Endotronics, Inc. and
Molecular Genetics, Inc., both Minneapolis biotechnology firms. Dr. Salstrom
has an AB fromMiami University, MS from University of Wisconsin, Ph.D from
University of Wisconsin and Postdoctorate degree from Harvard.
Meetings And Committees Of The Board Of Directors
During fiscal 1999, the Board of Directors held one meeting.
The Company presently has no committees, but intends to form a compensation
committee and audit committee after the seating of the Board of Directors
following the Annual Meeting to consist of non-employee directors.
Compensation To Directors
Directors' Fees and Bonuses. For services rendered in fiscal 1999, no member of
the Company's Board of Directors received any fees or other compensation.
During fiscal 2000, The Company does not intend to pay any cash compensation to
its Directors.
Stock Options/Consulting Fees To Directors. The Company intends to grant stock
options for 25,000 shares to each elected Board member except David P. Lang
during fiscal year 2000.
AMENDMENT OF ARTICLES OF INCORPORATION
(Proposal No. 2)
The Company's current Articles of Incorporation were adopted in 1987 and have
not been amended to reflect changes in the Delaware General Business Law. The
Company believes the following described amendments to its articles of
incorporation and bylaws are appropriate and in the best interests of the
Company and its stockholders.
Name Change. During 1993 the Company permitted its Delaware corporate charter to
lapse. The Company revived its Delaware corporate charter during 1999, but is
required to change its corporate name in connection with the revival. Company
management has determined that changing the Company's name to Santerra
Corporation will reflect the broadening of the Company's product lines after
consummation of the proposed acquisition of Santerra Medical Technology, Inc.
A copy of the proposed, amended Articles of Incorporation are appended to this
shareholder announcement.
Increase in Authorized Capital Stock. The Company's Articles of Incorporation
currently authorize the issuance of 15,000,000 shares of Common Stock, $0.01 par
value, all of which are issued and outstanding. In order to consummate the
proposed acquisition of Santerra Medical Technology, Inc. the Company may be
required to issue 30,000,000 shares of Common Stock. Consequently, the Company's
authorized capital stock is to be increased to 45,000,000 shares of Common Stock
to provide sufficient shares to consummate the proposed acquisition and provide
a pool of authorized shares for future issuance.
AMENDMENT OF BYLAWS
(Proposal No. 3)
The Company's current Bylaws were adopted in 1987 and have not been amended to
reflect changes in the Delaware General Business Law or the proposed Restated
Articles of Incorporation. The Company believes the proposed amended bylaws are
appropriate and in the best interests of the Company and its stockholders.
A copy of the proposed, amended Bylaws of the Corporation are appended to this
shareholder announcement.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation paid
during each of the Company's last three fiscal years to the Company's current
chief executive officer (the "Named Executive Officers"). No other executive
officer had total annual compensation in fiscal 1998 (based on salary and bonus)
exceeding $100,000.
Summary Compensation Table
Name and Annual Compensation Long-Term All Other
Principal Position Year Salary($) Compensation Compensation
David P. Lang 1999 75,000 0 0
Chief Executive 1998 75,000 0 0
Officer 1997 75,000 0 0
Options Grants and Exercises During Fiscal 1999
The Company granted no options to Named Executive Officers during fiscal 1999,
nor were any options exercised. The Company does not have any outstanding stock
appreciation rights or stock options.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During November, 1999, the Company partially satisfied its compensation
obligations with David P. Lang and John D. Lang by issuing to them 2,927,096 and
1,000,000 shares of Common Stock, respectively, having a fair market value of
$0.0265 per share on the date of Board approval ($77,568 and $26,5000 in the
aggregate, respectively).
During January, 1999, the Company entered into a stock exchange agreement to
acquire all of the issued and outstanding shares of capital stock of Santerra
Medical Technology, Inc. ("Santerra") in exchange for an unspecified number of
shares of Company Common Stock. Santerra was organized in April 1998 to acquire
distribution and subassembly rights to medical devices (reconstructive
orthopedic prosthetic implants, bileaflet heart valve, intravascular stents,
vascular sealant adhesives, laparoscopic surgical instruments, and other medical
devices developed and manufactured by MicroVal and Fii. David P. Lang and
John Cuilleron, each major holders of Santerra's issued and outstanding capital
stock, will receive together the majority of shares of Common Stock issued upon
consummation of the proposed transaction. In the event Qinming Medical, Inc.
fails to make its $1,500,000 investment in Santerra, the number of shares to be
issued will be ratably reduced.
The Company leases approximately 500 square feet of office space from David P.
Lang on a monthly rental of $700.
COMPLIANCE WITH REPORTING REQUIREMENTS OF EXCHANGE ACT
Section 16 of the Securities Exchange Act of 1934, and the rules promulgated
thereunder, requires the Company's officers, directors, and holders of 10% or
more of its outstanding Common Stock to file certain reports with the Securities
and Exchange Commission. To the Company's best knowledge, based solely on
information provided to it by the reporting individuals, all of the reports
required to be filed by these individuals have been filed, except that Initial
Reports on Form 3 for John D. Lang were fi
OTHER MATTERS
The Board of Directors is not aware that any matter other than those described
in the Notice will be presented for action at the meeting.
RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS
Silverman Olson Thorvilson & Kaufmann, Ltd. has served as the Company's
principal independent accountants to audit the Company's financial statements
for the fiscal years 1992 through 1995. The Company is not required to have its
financial statements audited for fiscal years 1996, 1997, 1998 and 1999 because
of insufficient revenues. However, representatives of Silverman Olsen Thorvilson
& Kaufmann are expected to be present at the Annual Meeting and will have the
opportunity to make a statement, if they desire to do so, and to respond to
appropriate questions. The Company has engaged Silverman Olsen Thorvilson &
Kaufmann, Ltd. to conduct the audit of the Company's financial statements for
the current fiscal year.
STOCKHOLDER PROPOSALS FOR 2000 ANNUAL MEETING
All stockholder proposals intended to be presented at the 2000 Annual
Stockholders' Meeting must be received by the Company at its offices on or
before July 31, 2000.
In addition, a stockholder must give notice to the Company prior to July 31,
2000, of any proposal which such stockholder intends to raise at the 2000 Annual
Meeting. If the Company receives notice of such proposal after July 31, 2000,
the persons named in the proxy solicited by the Company's Board of Directors for
the 2000 Annual Meeting may exercise discretionary voting powers with respect to
such proposal.
Further, under the Company's proposed Restated Articles of Incorporation, for
business to be properly brought before the 2000 Annual Meeting, a stockholder
must give notice in writing to the Secretary of the Company no later than 50
days prior to the date of the meeting. Any proposal not submitted by such date
will not be considered at the 2000 Annual Meeting.
REPORT ON FORM 10-KSB
A copy of the Company's Annual Report on Form 10-KSB for the fiscal year ended
May 31, 1999, accompanies the Notice of Annual Meeting and Information
Statement.
It is important that Proxies be returned promptly. Stockholders who do not plan
to attend the meeting in person are urged to complete, sign, date, and forward
the Proxy by return mail.
BY THE ORDER OF THE BOARD OF DIRECTORS
February 15, 2000 John D. Lang, Secretary
[attachments]
Articles of Incorporation (amended)
Bylaws of the Corporation (amended)
NOVACON COPRORATION
ANNUAL MEETING OF STOCKHOLDERS
WEDNESDAY, April 19, 2000
4:00 PM
PROXY
THIS PROXY IS FOR USE AT THE ANNUAL MEETING ON APRIL 19, 2000.
IF NO CHOICE IS SPECIFIED FOR A PROPOSAL, THE PROXY WILL NOT BE VOTED.
By signing the proxy, you revoke all prior proxies and vote your shares on the
matters shown on the reverse side at the Annual Meeting and all adjournments.
SEE REVERSE FOR VOTING INSTRUCTIONS
1. Election of directors for Vote FOR Vote WITHHELD
term ending in 2001:
David P. Lang [ ] [ ]
Paul D. Rieff [ ] [ ]
John S. Salstrom [ ] [ ]
2. Amendment of the Articles of
Incorporation [ ] [ ]
3. Amendment of the Bylaws [ ] [ ]
4. Ratification of Auditors [ ] [ ]
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION
IS GIVEN, IT WILL NOT BE VOTED.
Address Change? Mark Box [ ]
Indicate changes below: Dated: _______________,2000
Signature(s) in Box
________________________
Print Last Name ______________________
______________________
Please sign exactly as your name(s) appear on Proxy. Trustees, administrators,
etc., should include title and authority. Corporations should provide full name
or corporation and title of authorized officer signing the proxy.
