UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: September 30, 1997
Commission File No.: 0-18900
EVEREST MEDICAL CORPORATION
(Exact name of small business issuer as specified in its charter)
13755 1st Avenue North, Suite 500, Minneapolis, MN 55441-5454
(Address of Principal executive offices) (Zip Code)
(612) 473-6262
(Issuer's Telephone number, including area code)
MINNESOTA 41-1454928
(State of incorporation) (IRS Employer I.D.#)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
As of November 4, 1997, 7,028,002 shares of Common Stock of the Registrant were
outstanding.
Transitional Small Business Disclosure Format (check one): YES___ NO X
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
EVEREST MEDICAL CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
(Unaudited) (Note)
ASSETS
Current assets
<S> <C> <C>
Cash and cash equivalents $ 141,844 $ 712,810
Accounts receivable, net 1,174,990 1,135,545
Inventories 1,068,931 780,129
Prepaid insurance and deposits 89,529 167,739
----------- -----------
Total current assets 2,475,294 2,796,223
Equipment
Office and display equipment 387,919 396,794
Research and development equipment 188,224 188,715
Production equipment 1,165,266 1,040,134
----------- -----------
1,741,409 1,625,643
Less allowance for depreciation (1,444,902) (1,376,389)
----------- -----------
296,507 249,254
Patents, net of amortization 4,964 15,491
----------- -----------
Total assets $ 2,776,765 $ 3,060,968
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Customer advances $ 18,000 $ 18,000
Accounts payable 376,896 241,766
Accrued compensation and related taxes 176,640 165,917
Other accrued liabilities 108,446 171,490
Bank borrowings, short-term 400,000 --
Capital lease obligations, current portion 2,945 5,409
----------- -----------
Total current liabilities 1,082,927 602,582
Capital lease obligations, net of current portion -- 2,496
Other accrued liabilities, net of current portion -- 16,250
Convertible notes, net of current portion -- --
Shareholders' equity
Convertible preferred stock series A, ($.01 par value,
$2.50 liquidation value) 1,400,000 authorized; outstanding:
1997 - 636,937 shares; 1996 - 636,937 shares 1,561,717 1,561,717
Convertible preferred stock series B, ($.01 par value,
$2.75 liquidation value) authorized and outstanding:
1997 - 637,273 shares; 1996 - 652,273 shares 1,545,313 1,586,563
Convertible preferred stock series C, ($.01 par value,
$2.75 liquidation value) authorized and outstanding:
1997 - 410,906 shares; 1996 - 410,906 shares 1,002,832 1,002,832
Convertible preferred stock series D, ($.01 par value,
$2.875 liquidation value) authorized and outstanding:
1997 - 471,500 shares; 1996 - 471,500 shares 1,205,808 1,205,808
Common stock, ($.01 par value) 12,461,821 authorized; outstanding:
1997 - 7,028,002 shares; 1996 - 6,970,912 shares 70,280 69,709
Additional paid-in capital 17,214,675 16,240,199
Retained deficit (20,906,787) (19,227,188)
----------- -----------
1,693,838 2,439,640
----------- -----------
Total liabilities and shareholders' equity $ 2,776,765 $ 3,060,968
=========== ===========
</TABLE>
Note: The balance sheet at December 31, 1996 is derived from the audited
financial statements at that date.
<PAGE>
EVEREST MEDICAL CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
3 Months Ended September 30 9 Months Ended September 30
1997 1996 1997 1996
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Net sales $ 1,762,395 $ 1,521,472 $ 5,052,515 $ 4,291,896
Cost of goods sold 970,272 869,312 2,874,760 2,409,456
----------- ----------- ----------- -----------
Gross margin 792,123 652,160 2,177,755 1,882,440
Cost and expenses:
Sales and marketing 516,886 365,431 1,620,002 1,108,439
Research and development 162,170 136,924 493,084 453,701
General and administrative 174,136 189,503 622,939 553,568
----------- ----------- ----------- -----------
Total operating expenses 853,192 691,858 2,736,025 2,115,708
Interest and other income (2,949) (10,685) (14,896) (45,943)
Interest expense 21,115 613 27,266 150,889
----------- ----------- ----------- -----------
Net loss (79,235) (29,626) (570,640) (338,214)
Less preferred stock dividends 85,065 86,714 258,498 268,132
----------- ----------- ----------- -----------
Loss applicable to common stock $ (164,300) $ (116,340) $ (829,138) $ (606,346)
=========== =========== =========== ===========
Net loss per common share $ (0.02) $ (0.02) $ (0.12) $ (0.10)
=========== =========== =========== ===========
Weighted average number of shares
outstanding during the period 7,026,235 6,709,014 7,011,925 6,170,246
=========== =========== =========== ===========
</TABLE>
<PAGE>
EVEREST MEDICAL CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30
1997 1996
----------- -----------
OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (570,639) $ (338,266)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 123,821 128,592
Loss on sale and disposal of equipment -- --
Provision for losses on accounts receivable 750 22,500
Provision for inventory obsolescence 10,899 52,810
Changes in operating assets and liabilities
Accounts receivable (40,196) (200,411)
Inventories (299,701) (241,598)
Prepaid expenses 78,984 (57,172)
Customer advances -- --
Accounts payable and accrued expenses 66,037 95,439
----------- -----------
Net cash used in operating activities (630,045) (538,106)
INVESTING ACTIVITIES
Purchase of equipment (161,318) (98,382)
----------- -----------
Net cash used in investing activities (161,318) (98,382)
FINANCING ACTIVITIES
Dividends paid (258,499) (302,021)
Proceeds from debt 400,000 500,000
Proceeds from warrants and options 67,928 939,456
Principal payments on debt and capital leases (4,438) (647,817)
Net proceeds from sale of common stock 15,408 19,584
----------- -----------
Net cash provided by financing activities 220,399 509,202
----------- -----------
Decrease in cash and cash equivalents (570,964) (127,286)
Cash and cash equivalents at beginning of period 712,810 1,028,476
----------- -----------
Cash and cash equivalents at end of period $ 141,846 $ 901,190
=========== ===========
</TABLE>
<PAGE>
EVEREST MEDICAL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1997
Note A - Business Activity
Everest Medical Corporation is engaged in the development, manufacturing and
marketing of bipolar electrosurgical devices for the gastrointestinal endoscopy,
laparoscopy, cardiovascular and other minimally invasive surgery markets. The
Company no longer considers itself in the development stage.
Note B - Basis of Presentation
The accompanying unaudited, condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine month period ended September 30,
1997 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1997. For further information, refer to the financial
statements and footnotes thereto included in the Company's annual report on Form
10-KSB for the year ended December 31, 1996.
Note C - Net Loss Per Share
Net loss per share is computed using the weighted average number of common
shares outstanding during the period. Common equivalent shares from stock
options and warrants are excluded from the computations as their effect is
antidilutive. In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share. This statement replaces the presentation
of primary earnings per share (EPS) with basic EPS and also requires dual
presentation of basic and diluted EPS for entities with complex capital
structures. This Statement is effective for fiscal years ending on or after
December 31, 1997. For the quarter and nine months ended September 30, 1997,
there is no difference between the basic earnings per share under Statement No.
128 and the primary net loss per share as reported.
<PAGE>
Part I - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
RESULTS OF OPERATIONS
Net Sales. Net sales in the third quarter of 1997 were $1,762,395, an increase
of $240,923, or 16%, from the third quarter of 1996. This sales increase
resulted from increased revenues from the Everest-branded laparoscopy product
line and initial shipments to Guidant Corporation for cardiovascular products.
The overall increase was offset by declines in the Company's OEM business for
laparoscopy products and gastrointestinal (GI) products.
Net sales for the nine months ended September 30,1997 were $5,052,515, an
increase of $760,619, or 18%, from the same period of 1996. The sales for the
period reflect the 43% growth in sales of Everest-branded laparoscopy products
and sales of cardiovascular products approaching $100,000. These increases were
offset by a 39% decrease in shipments to the Company's OEM laparoscopy customers
and flat sales of the Company's GI products.
The Company realized an increase of 43% in its Everest-branded laparoscopy
product sales during the first nine months of 1997. This growth reflected the
impact of the BiCOAG(R) Bipolar Cutting Forceps, which has become the largest
product line for the Company and led the Everest-branded laparoscopy segment to
its fourth consecutive $1,000,000 plus quarter in sales. The sales of
EVERSHEARS(R) II Bipolar Scissors decreased 9% from the same period of 1996 and
the balance of the product line grew 5% from the same period of 1996. For the
first nine months of 1997, this segment accounted for 62% of the Company's
revenues as compared to 53% for the first nine months of 1996.
In September 1997, the Company commenced shipments to Guidant Corporation
consisting of versions of the Company's bipolar scissors and bipolar cutting
forceps for the minimally invasive cardiac surgery market. The shipments
approached $100,000 for the quarter, representing 6% of the sales for the
period. The Company expects these revenues to impact positively the Company's
sales in the near term.
The Company experienced a 39% decline for the first nine months in its OEM
shipments of a private label version of the Company's classic tip forceps to
Ethicon Endo-Surgery, and Origin Medsystems, as these customers continue to
balance their inventory levels to be more reflective of end-user demand. Sales
of the Company's GI product line, including polypectomy snares to Japan and a
version of the coagulating probe to C.R. Bard, increased 1%, as compared to the
first nine months of 1996.
<PAGE>
The Company expects that as it continues to invest in sales and marketing
support programs, increased revenues will result from the Everest-branded
laparoscopy business as it gains market share. There are no assurances that the
Company will be successful in increasing its market share as it competes with
large, well-capitalized companies who have the ability to enter into contract
purchasing agreements with large institutions due to broader product offerings
which may exclude the Company's products.
Gross Margin. Gross margin in the third quarter of 1997 was 44.9% of sales
compared to 42.9% of sales for the third quarter of 1996. The improved gross
margin resulted primarily from the changing sales mix, with Everest-branded
products representing 62% of the sales compared to 53% in the third quarter of
1996.
The gross margin for the first nine months of 1997 was 43.1%, as compared to
43.9% for the same period of 1996. The decrease in gross margin was caused by
early product-cycle costs as the Company increased production of the 5mm BiCOAG
Cutting Forceps to meet the strong demand. The impact of such decline was
partially offset by the benefits realized from increased sales of
Everest-branded products.
The Company expects its gross margins to improve in the fourth quarter of 1997
as a result of expected production efficiencies and higher sales levels.
Sales and Marketing. Sales and marketing expenses for the third quarter of 1997
were $516,886, an increase of $151,455, or 41%, from the same period in 1996.
The increase resulted from (i) additional staffing and other costs related to
the Company's reorganization efforts in its sales and marketing department
designed to support the growing Everest-branded product sales, (ii) marketing
initiatives aimed at the Company's participation in the emerging minimally
invasive cardiovascular market, (iii) increases in sales commissions, and (iv)
additional sales training costs associated with new representation, both
domestically and internationally. For the first nine months, sales and marketing
expenses were $1,620,002, an increase of $511,563, or 46%, from the same period
of 1996 for the same reasons identified for the third quarter of 1997.
Research and Development. Research and development expenses for the third
quarter of 1997 were $162,170, an increase of $25,246, or 18%, from the same
period in 1996. For the first nine months of 1997, research and development
expenses were $493,084, an increase of $39,383, or 9% from the same period of
1996. The Company experienced such increase primarily due to its efforts toward
ISO 9000 and CE Mark certification for its products, which the Company believes
is important for continued participation in the international market.
General and Administrative. General and administrative expenses for the third
quarter of 1997 were $174,136, a decrease of $15,367, or 8%, from the same
period of 1996. For the first nine months of 1997, general and administrative
expenses were $622,939, an increase of $69,371, or 13% from the same period of
1996. Such increases resulted primarily from increased costs for D&O insurance,
increased activities in investor relations, including the retention of an
investor relations firm, and the costs associated with securing a line of credit
from the bank.
<PAGE>
Net Loss. Net loss for the third quarter was $79,235, compared to a net loss of
$29,626 for the same quarter in 1996. Despite higher revenues, the third quarter
loss was higher than 1996 due to the increases in operating expenses as the
Company continues to pursue key initiatives in the areas of sales and marketing,
the ISO 9000 and CE Mark certifications, and implements initiatives in the
emerging minimally invasive cardiac surgery market. The net loss for the first
nine months of 1997 was $570,640, compared to a net loss of $338,214 in the same
period of 1996. The increased loss reflects the unfavorable impact of early
product-cycle costs and related manufacturing inefficiencies from the first
quarter (related to the BiCOAG Bipolar Cutting Forceps). Operating expenses also
increased because of costs related to the Company's initiatives discussed above,
combined with higher sales and marketing expenditures necessary to support the
sales growth and to increase the productivity of the Company's independent sales
force and the expenses related to securing financing vehicles to meet the
Company's financial needs.
LIQUIDITY and CAPITAL RESOURCES
Cash and short-term investments were $141,844 on September 30, 1997, compared to
$712,810 on December 31, 1996. The Company used $630,045 of cash in operating
activities in the first nine months of 1997, compared to $538,106 for the same
period of 1996. Operating activities in the first nine months generated an
increase in working capital related to the sales growth.
The Company invested $161,318 on capital equipment in the first nine months and
expects to increase its level of production equipment as the Company expands its
facility an additional 5,500 square feet in the fourth quarter and (ii) moves
ahead with new product designs to meet the demands of the emerging minimally
invasive cardiac surgery market. During the first nine months, the Company also
met its obligation on preferred stock dividends of $258,499, and raised $83,336
from the exercise of outstanding options and warrants.
The Company secured a $1,000,000 line of credit with Riverside Bank on May 6,
1997. The Company has borrowed $400,000 against this line since May 1997. The
line carries a rate of interest equal to prime.
The Company believes that its current cash and short-term investments, cash
generated from operations and funds available from its line of credit will be
sufficient to fund operations at least for the next two quarters, assuming that
its sales goals are met and there are no significant unexpected expenditures.
<PAGE>
EFFECT OF INFLATION
The Company does not believe that inflation will have a significant effect on
operations.
CAUTIONARY STATEMENTS
This Management's Discussion and Analysis contains certain forward looking
statements relating primarily to: (i) significant sales to Guidant Corporation;
(ii) increased revenues from Everest-branded laparoscopy products; (iii)
improved gross margins due to product efficiencies and higher sales levels; and
(iv) the ability of the Company to meet its working capital needs at least
through March 31, 1998. These statements are subject to certain risks and
uncertainties which could cause results to differ from those projected. These
risks and uncertainties, in addition to those discussed above, include: (i) a
continuing mutually beneficial relationship with Guidant and a significant
demand from Guidant; (ii) successful and efficient marketing efforts and a
resulting demand for Everest-branded laparoscopy product; (iii) the Company's
ability to compete with well-capitalized companies to increase market share;
(iv) more widespread acceptance of bipolar technology; and (v) greater revenues
without any material unexpected expenditures which would adversely affect the
Company's working capital.
<PAGE>
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule (filed in electronic format only)
(b) Reports on Form 8-K:
None filed in the period.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
EVEREST MEDICAL CORPORATION
November 10, 1997 By: /s/ John L. Shannon, Jr.
John L. Shannon, Jr.,
President and Chief Executive Officer
November 10, 1997 By: /s/ Thomas F. Murphy
Thomas F. Murphy
Vice President of Finance and
Assistant Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 141,844
<SECURITIES> 0
<RECEIVABLES> 1,174,990
<ALLOWANCES> 0
<INVENTORY> 1,068,931
<CURRENT-ASSETS> 2,475,294
<PP&E> 1,741,409
<DEPRECIATION> 1,444,902
<TOTAL-ASSETS> 2,776,765
<CURRENT-LIABILITIES> 1,082,927
<BONDS> 0
0
5,315,670
<COMMON> 70,280
<OTHER-SE> (3,692,112)
<TOTAL-LIABILITY-AND-EQUITY> 2,776,765
<SALES> 5,052,515
<TOTAL-REVENUES> 5,052,515
<CGS> 2,874,760
<TOTAL-COSTS> 2,874,760
<OTHER-EXPENSES> 2,736,025
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,266
<INCOME-PRETAX> (570,640)
<INCOME-TAX> 0
<INCOME-CONTINUING> (570,640)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (570,640)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
