SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended: Commission file number:
December 31, 1996 0-18900
EVEREST MEDICAL CORPORATION
(Name of small business issuer in its charter)
Minnesota 41-1454928
(State of Incorporation) (I.R.S. Employer Identification No.)
13755 First Avenue North
Minneapolis, Minnesota 55441
(Address of principal executive offices)
Issuer's telephone number: (612) 473-6262
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the Issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No___
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 Issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The Issuer's revenues for fiscal year 1996 were $6,001,779.
As of March 5, 1997, there were 7,005,934 shares of Common Stock of the
Issuer outstanding, and the aggregate market value of the Common Stock of the
Issuer (based upon the closing sale price of the Common Stock at that date, as
reported by NASDAQ), excluding shares owned beneficially by executive officers
and directors, was approximately $17,385,515.
Part II of this Annual Report on Form 10-KSB incorporates by reference
information (to the extent specific sections are referred to herein) from the
Issuer's Annual Report to Shareholders for the year ended December 31, 1996 (the
"1996 Annual Report"). Part III of this Annual Report on Form 10-KSB
incorporates by reference information (to the extent specific sections are
referred to herein) from the Issuer's Proxy Statement for its annual meeting to
be held April 21, 1997 (the "1997 Proxy Statement").
Transitional Small Business Disclosure Format (check one) Yes No X
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PART I
ITEM 1 DESCRIPTION OF BUSINESS
General Development of Business
Everest Medical Corporation (the "Company" or "Everest") is engaged
primarily in the development, manufacturing and marketing of bipolar
electrosurgical devices for use in minimally invasive surgical procedures.
Minimally invasive procedures have a growing range of surgical applications in
such areas as gynecology, gastroenterology, cardiovascular and general surgery.
The Company commenced commercial sales of laparoscopic surgical
products in October 1991. The first product sold was the BiLAP Probes. The
Company added the BiCOAG(R) Bipolar Forceps in September 1992, the EVERSHEARS(R)
Straight Bipolar Scissors in November 1992 and the EVERSHEARS Curved Bipolar
Scissors in September 1993. The Company introduced three additional products to
the laparoscopic market in 1994, including the EVERSHEARS II Bipolar
Metal-on-Metal Curved Scissors, the BiCOAG Bipolar Dissecting Forceps and the
BiLAP(R) Bipolar Needle Electrode. In 1995, the Company commenced sales of the
innovative, patented, multi-functional BiCOAG Cutting Forceps, and in 1996 added
additional versions, including a 5mm version of the BiCOAG Cutting Forceps. In
December 1996, the Company introduced the BiCOAG Forceps in a 3mm version for
the emerging microlaparoscopy market. The Company is targeting these existing
and new products to the laparoscopic general surgery and gynecology markets.
As minimally invasive surgical techniques have evolved to increasingly
complex surgery in anatomically crowded areas of the human body, the need for
safer instrumentation has become more evident. The Company believes that bipolar
electrosurgery is gaining increasing scientific recognition and acceptance in
the growing minimally invasive surgery ("MIS") markets which predominately
utilize monopolar energy. Bipolar energy offers the surgeon more control, less
tissue damage, effective hemostasis and performance, eliminating the dangers
associated with monopolar energy. The Company believes that bipolar technology
will become the standard in electrosurgery in all MIS procedures and the Company
will be a beneficiary of this trend.
The Company continues to market a line of disposable products for use
in selected gastrointestinal endoscopic interventional procedures. These
procedures are performed by gastroenterologists using endoscopes through which
Everest's products are inserted into the body. These products are the BiSNARE(R)
Polypectomy Snare for removing colon polyps and the BiCOAG Probe(R)
Gastrointestinal Coagulator for treating intestinal bleeding.
The electrosurgical products currently under development or being
marketed by Everest operate in a bipolar mode providing an improved margin of
patient safety in minimally invasive surgical procedures. Many of these
procedures are typically performed using monopolar electrosurgery which has
inherent characteristics that may pose certain risks for patients. In
electrosurgery, radio frequency (or RF energy) is used both to cut and coagulate
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tissue. With monopolar devices, the RF energy must pass from the surgical
instrument through the patient's body to a separate return electrode attached to
a large surface area, generally the buttocks or thigh. With monopolar
electrosurgery, there is a greater potential for injury to body tissues as the
electrical current passes through to the surface or return electrode (grounding
pad) where skin burns can also occur. With bipolar devices, the RF energy is
contained at the surgical site because both the active and return electrodes are
located on the surgical instrument. In minimally invasive surgery, there is even
greater potential for complications when using monopolar instruments due to the
combined effects of the surgeon's limited field of vision, the proximity of
other organs and the inherent tendency of the surgical instruments to conduct
monopolar RF energy.
The Company has developed extensive expertise in the control and
containment of bipolar radio frequency energy to affect both surgical cutting
and coagulation of blood in a variety of surgical and interventional procedures.
The Company's strategy is to leverage its expertise to design, develop and
manufacture proprietary surgical instruments for use in selected minimally
invasive surgical procedures where the safety and other features of bipolar
electrosurgery have demonstrable advantages.
The Company was incorporated in Minnesota on April 19, 1983. The
Company's address is 13755 First Avenue North, Minneapolis, Minnesota 55441, and
its telephone number is (612) 473-6262.
Business
Laparoscopic Surgical Products
The Company believes laparoscopy is a rapidly growing market in the
United States. Laparoscopic procedures, such as gall bladder removal,
hysterectomies, hernia repair and removal can now be routinely performed through
a trocar cannula. The cutting and coagulating instruments most often utilized
are either electrosurgical or lasers. Each of these methods involves certain
patient risks. With monopolar electrosurgical devices, there is a risk that the
passage of electrical current through the body will result in unintended lateral
tissue damage. Tissue damage can occur in laparoscopic procedures performed with
monopolar instruments due to RF current from the monopolar instrument inducing
current on one of the trocar cannulas or other surgical instruments. This tissue
damage, which can include severe burning, may not be visible to the surgeon
during surgery, but may result in post-operative complications such as bowel
perforation. Lasers are sometimes difficult to control and have limited
coagulation effect, particularly in the closed conditions of a laparoscopic
procedure. They are also expensive to acquire and may be inconvenient for the
clinician due to the problems of scheduling the limited number available in a
hospital and the high level of expertise required. To the Company's knowledge,
the EVERSHEARS Bipolar Scissors and the BiLAP Probe were the first bipolar
electrosurgical devices commercially available for the purpose of providing
cutting and coagulation in laparoscopic procedures. In the past two years, there
have been additional products introduced to the market by competitors that may
address the need for cutting and coagulation during laparoscopic procedures.
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Current Laparoscopic Surgical Products
EVERSHEARS Bipolar Scissors. The EVERSHEARS II Bipolar Scissors is used
to cut and coagulate tissue during laparoscopic surgery, combining mechanical
cutting with electrosurgical coagulation. The EVERSHEARS II Bipolar Scissors
consists of a handle and a long tube with blades at the distal end. The
EVERSHEARS II also contains a spindle which allows the physician to rotate the
device. The patented EVERSHEARS II design consists of metal cutting blades and
stainless steel support member which serves as the coagulation electrodes. The
conductive metal cutting blade is isolated from the support member by a
nonconductive adhesive. The EVERSHEARS II Bipolar Scissors is designed to
utilize the bipolar coagulating output of most standard electrosurgical
generators on the market. The EVERSHEARS II Bipolar Scissors is available in a
dual action curved design which allow the physician better visualization of the
surgical site.
The Company currently distributes the EVERSHEARS II Bipolar scissors to
hospitals and physicians only through its network of distributors and
independent marketing representatives. Sales of EVERSHEARS Bipolar Scissors
exceeded $1,300,000 for the year. It is expected to continue its sales growth
for 1997 due to customer demand, increased awareness of the benefits of bipolar
electrosurgery and ongoing product performance improvements.
BiCOAG Forceps. The BiCOAG Forceps is used to coagulate tissue and
blood vessels during laparoscopic surgery. The BiCOAG Forceps consists of a
handle and a long tube containing two electrodes and a spindle which allows the
physician to rotate the device to more easily accomplish its function. The
forceps is available in two models, a macro version which has large paddles
attached to the end of the electrodes for coagulating large areas, and the micro
version which has a small electrode surface for more precise coagulation. The
BiCOAG Forceps is designed to operate on the bipolar coagulating output of most
standard electrosurgical generators on the market.
The BiCOAG Forceps were reintroduced to the Company's independent sales
channel in September 1995 after an 18-month hiatus. Sales of the BiCOAG Forceps
were previously restricted from the Company's independent sales channel due to a
now-terminated exclusivity provision in the product supply agreement with
Ethicon Endo-Surgery, a division of Johnson & Johnson. The sales impact of the
reintroduction of the BiCOAG Forceps for 1995 was nominal, but in 1996 revenues
exceeded $200,000.
In addition to the Company's independent sales channel, the BiCOAG
Forceps are also marketed and distributed by Ethicon Endo-Surgery and Origin
MedSystems, a subsidiary of Guidant Corporation. Sales to these OEM customers
represented 16% of the Company's revenue in 1995 and 19% in 1996.
BiLAP BiPolar Probes. Everest markets the BiLAP Bipolar Probes in three
different configurations. The BiLAP Probe consists of a handle and a long rigid
tube. The three models contain cutting electrodes to accommodate clinician
preference and an area to provide spot coagulation on the distal end. All of the
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models have features that allow suction and irrigation to the operative site.
The BiLAP Probe was released for general sale in the United States in October
1991. Initially the BiLAP Probes were designed to work only on an Everest-made
Bipolar generator; however, in 1996, with product modifications, the device is
now compatible with most common electrosurgical generators, eliminating the need
for an Everest Generator. Although the Company believes that this device will
continue to contribute to the ongoing growth of Everest-branded laparoscopy
products, sales of the BiLAP System to date have been nominal.
BiCOAG Dissecting Forceps. The BiCOAG Dissecting Forceps is similar to
the bipolar forceps described above, but combines the ability to grasp and
dissect tissue in the surgical procedure with the benefits of bipolar
coagulation. This product provides the surgeon with a versatile and high-utility
instrument, and is compatible with most electrosurgical generators.
Sales of this product in 1996 exceeded $325,000.
BiLAP Bipolar Needle Electrode. The BiLAP Bipolar Needle Electrode is
similar to the BiLAP product line and features an adjustable needle electrode
that advances and retracts for precise cutting that preserves surrounding
tissues. The device utilizes the safety of bipolar energy and provides the
surgeon with precision cutting performance. This device is compatible with most
common electrosurgical generators.
Sales of the BiLAP Needle Electrode in 1996 were in line with
expectations. The sales of this product are not expected to reach significant
levels since this product has a small niche of the market based on current
surgical techniques.
BiCOAG Bipolar Cutting Forceps. The Company introduced this patented
new product in September 1995 in a 10mm version. This innovative product
incorporates a precision bipolar forceps for grasping and coagulation of tissue
with a surgical cutting blade positioned between the forceps jaws to allow
transection of coagulated tissue. The Company was issued a patent from the
United States Patent Office on August 29, 1995 for this design.
The BiCOAG Cutting Forceps allows the laparoscopic surgeon the ability
to grasp and coagulate safely with bipolar energy and transect tissue with one
instrument. This product minimizes the number of surgical instruments needed and
the need for instrument exchanges, resulting in a reduction of surgical time.
Additionally, the use of bipolar energy to safely and effectively seal vessels
may result in the elimination of costly stapling devices in many laparoscopic
procedures.
In the second quarter of 1996, the Company added a locking feature to
the device which enables the device to be used for retraction and increases
surgeon ease and comfort. The Company also commenced shipments of the new 5mm
version of the BiCOAG Cutting Forceps during the last half of 1996. The Company
believes this device is the first commercially available 5mm cutting forceps.
The 5mm version of the BiCOAG Cutting Forceps complements the 10mm device,
offering surgeons the advantage of using smaller trocars, reducing incision
size, cost and potential complications.
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The Company realized a significant portion of its growth in 1996 from
the revenues generated from this product line. Revenues grew from under $200,000
in 1995 to in excess of $1,000,000 in 1996. The Company expects this product
line to continue to be a source of revenue growth in 1997.
BiCOAG 3mm BiPolar Forceps. In December 1996, the Company introduced
what it believes to be the world's first 3mm Bipolar laparoscopic forceps
targeted for the emerging microlaparoscopy market. This device allows for secure
grasping, effective coagulation, the use of smaller trocar ports and improved
outcomes. Procedures such as diagnostic laparoscopy are being moved out of
traditional hospital settings to alternate sites, including surgical-centers and
physicians' offices. The Company believes smaller instrumentation will improve
the success rate of these procedures by allowing the use of smaller ports,
reducing complications. Revenues from this product line in 1996 were limited.
The Company also plans to introduce a 3mm Bipolar scissors in 1997 to complement
the 3mm forceps, thereby providing additional functionality to the clinician in
the area of microlaparoscopy.
Laparoscopic Surgical Products Under Development. The Company has
ongoing development projects to optimize the ergonomics of the current scissors
and forceps handle and to offer a thinner, higher-quality blade design for its
bipolar scissors.
GI Endoscopic Products
Current GI Endoscopic Products
BiSNARE Polypectomy Snare. Lower gastrointestinal polyp removal
procedures are performed to reduce the risk of cancerous lesion formation. When
performed with a monopolar snare, this procedure may have the undesirable side
effects of colon wall perforation and delayed hemorrhage. The Company is
marketing a device designed to make the removal of polyps easier and safer. The
BiSNARE Polypectomy Snare consists of a bipolar wire loop on a long catheter
which is inserted through an endoscope. The wire loop is placed over the polyp
by the endoscopist, RF energy is activated, and, as the polyp is cut from the
intestinal wall, the exposed blood vessels are coagulated. The Company believes
that, compared to competing monopolar devices, the BiSNARE presents less
potential for burns and intestinal perforations because it requires less power
and the energy is localized to the lesion. In addition, it is easier to prepare
the patient for the procedure than with competing devices because the BiSNARE
does not require a grounding pad.
The BiSNARE polypectomy device was released for general sale in the
United States market in August 1990 after limited marketing during the first
half of the year in the United States and in Japan. In 1996, the BiSNARE
experienced a decline in sales as the Company transitioned to a new distributor
in Japan, KK Adachi, in January 1996 and experienced a delay in obtaining
regulatory approval. Sales of this product line approached $500,000 in 1996 as
compared to almost $600,000 in 1995. The Company expects this sales level to
remain unchanged in 1997 as the Japanese business competes to regain market
share lost as a result of the regulatory delays. The BiSNARE is currently
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offered in several models to address physician preferences. The Company is
currently focusing on increasing its market share in laparoscopy, therefore, the
BiSNARE is sold to hospitals and physicians in the United States through a
limited network of independent marketing representatives and distributors.
BiCOAG Probe Coagulator. In a common endoscopic procedure, a
coagulating tip on the distal end of a catheter is used to treat ulcers and
other intestinal bleeding. The BiCOAG Coagulator is a catheter with a spiral
electrode tip and a flushing port designed to facilitate the endoscopic
visualization and coagulation of gastrointestinal bleeding. The BiCOAG Probe has
a spiral bipolar electrode designed to permit the endoscopist to use any surface
of the tip for therapy while reducing the incidence of tissue adhesion. The
BiCOAG Probe was released for general sale to the United States market in August
1990 and to the Japanese market in September 1990.
The Company has entered into an agreement with Bard Interventional, a
division of C.R. Bard, Inc., and is providing a private label version of the
coagulating probe for sale in the United States and Canada. Bard has no
obligation to purchase a minimum number of units under this agreement. Sales
under this agreement in 1996 decreased 9% over 1995 levels.
GI Endoscopic Products Under Development
Biopsy Forceps. The Company has developed a bipolar instrument that
will enable the endoscopist to obtain a tissue sample for pathology and
coagulate the site while maintaining the integrity of the sample. The market
potential for the product is under evaluation. The Company has entered into a
development agreement with a leading international distributor of surgical
instruments to refine the product design and explore the market potential.
Minimally Invasive Cardiac Surgery
The Company has identified the emerging minimally invasive cardiac
surgery market as an opportunity to export its bipolar technology to many
companies which are investing in new procedures to reduce the invasiveness of
the current cardiac procedures. The Company believes the inherent safety of
bipolar technology offers the cardiovascular surgeon the cost-effective
electrosurgical solution to meet the challenges of these new procedures. The
Company also believes strongly that bipolar electrosurgery has the potential to
become the standard of care for the new minimally invasive cardiac surgery
marketplace.
The Company is exploring two applications for bipolar technology in
cardiac surgery-bipolar dissection of the internal mammary artery during
coronary artery bypass surgery, and bipolar "clipping" of side branches during
minimally invasive saphenous vein harvesting. The Company believes it can
leverage its existing products to these procedures without significant
obstacles. The applicable products may include the BiCOAG Cutting Forceps and
the EVERSHEARS II Metal-on-Metal Bipolar Scissors.
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General Market Trends
The MIS market continues to grow. According to MedPro Month (October
1995), the worldwide laparoscopy market experienced a 12% growth in 1995 to
nearly $1 billion. The U.S. sales of laparoscopy related equipment was projected
to increase 11% in 1996. Factors accounting for this growth include: (a)
increasing concern by employers and healthcare providers regarding the total
system costs associated with surgery; (b) higher degree of awareness of patients
regarding the benefits of MIS; and (c) improved technology for use by clinicians
in these procedures.
At present, many physicians, hospitals and third party payers do not
fully appreciate the favorable economics of MIS. There is a growing body of data
to support the conclusion that MIS procedures will significantly reduce the
total system healthcare-related costs of surgery. These potential cost savings
include reduced hospital stays and patient recovery time. From an employer's
perspective, savings are evident in lower costs of short-term disability and
workers' compensation. In addition, employers may realize savings in costs
associated with the hiring of replacement workers--training expense, reduced
productivity and additional compensation. The Company believes that large
employers will become more aggressive in managing their total system
healthcare-related costs and indicate a preference for MIS procedures. This may
include employers limiting reimbursement to laparoscopic procedures only, unless
clearly contraindicated.
Today, patients are better informed with respect to the benefits of
MIS--returning to an active lifestyle sooner, potentially reduced risks due to
anesthesia and infection, and obvious cosmetic advantages--and are requesting
less invasive procedures.
Because of these market trends, the Company believes that the minimally
invasive surgical market should experience a high rate of growth in the next
several years. Some industry analysts are predicting that well over one-half of
all general surgical procedures will be performed in this manner within the next
two to five years. Laparoscopic removal of the gall bladder has experienced the
most dramatic increase in the number of procedures performed. The new method can
reduce the average hospital stay from three or more days to one day, or even
eliminate an overnight stay, and results in as little as one week of lost work
time, compared to up to one month for the open surgical method.
The Company believes endoscopy also has significant growth potential.
Gastrointestinal endoscopists are typically internal medicine sub-specialists or
colo-rectal surgeons. As the trend toward minimally invasive procedures has
strengthened, the gastrointestinal endoscopists have added endoscopic surgical
procedures to their endoscopic diagnostic practices. This therapeutic use has
reduced the need for more invasive surgical procedures. The Company anticipates
that, as additional devices offering features of safety and ease-of-use are
introduced, more procedures will be performed by endoscopists.
The current health care debate by the federal government has the
potential to tremendously impact the system of delivery of health care in this
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country. While the ultimate outcome is uncertain at this time, the Company feels
it will be well-positioned to take advantage of any change that may occur. In
order to reduce the overall rate of growth of spending on health care, any new
or revised system will need to encourage the ongoing trend to MIS due to the
overall efficiency of these procedures. The Company also expects that the trend
towards managed health care will bring into the procedural equation important
factors such as safety, efficacy, cost effectiveness and ease of use resulting
in a greater demand for bipolar energy.
Competition
The medical device industry is intensely competitive in almost all
segments and tends to be dominated in large, more mature markets by a relatively
small group of large and well-financed companies. The Company also competes with
smaller, entrepreneurial companies, some of which are better financed than
Everest and already have established positions in certain markets.
Minimally Invasive Surgical Markets
A number of major medical products suppliers, including United States
Surgical Corporation, Ethicon Endo-Surgery (a division of Johnson & Johnson,
Inc.), Valleylab, Inc. (a subsidiary of Pfizer, Inc.), CONMED Corporation,
Origin MedSystems (a subsidiary of Guidant Corporation) Karl Storz
Endoscopy-America Inc., Urohealth and Circon Corporation are currently selling
devices for minimally invasive surgical procedures. For the most part, the
electrosurgical products sold by these companies are monopolar devices. The
Company also believes that a number of companies are developing bipolar devices
for laparoscopic applications. Competitors are selling a bipolar coagulating
forceps. The Company believes, however, that it is the only manufacturer
currently marketing a full line of bipolar devices specifically designed for
laparoscopy.
Due to the expected rapid growth in the market for minimally invasive
surgical products, the Company anticipates that additional competitors will
enter the market. It also expects that there will be a consolidation of existing
competitors, including acquisitions of small companies by large medical products
companies. This trend will mean increasing competition for the Company.
Endoscopic Markets
The principal competitors of the BiSNARE polypectomy device are
Microvasive, Inc. (subsidiary of Boston Scientific Corp.), Wilson Cook Medical
Inc., Bard Interventional (a division of C.R. Bard, Inc.) and Olympus Corp. All
of these companies market monopolar systems. BEI, Inc. makes a bipolar snare
that is currently sold to customers at a significantly higher price than the
BiSNARE.
The principal competitors to the BiCOAG Probe are Microvasive, Circon
Corporation and Olympus. All of these companies market bipolar devices, with the
exception of Olympus, which offers a device using heat for coagulation.
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The Company believes that the principal competitive factors in both the
MIS and endoscopic markets are product features, physician familiarity with the
products and their function, the ability of products to address cost containment
issues, product quality, distribution strength and price. Competitors to each of
the Company's products market both disposable and reusable products. All of the
Company's current surgical instruments are intended for single use, a feature
which the Company believes provides the benefits of less risk of infection to
patients and reduced labor costs to hospitals.
Marketing and Distribution
The Company markets and promotes its products through advertising in
medical journals, publication of scientific papers, direct mail, attendance at
trade shows and participation by Everest's personnel in training sessions for
physicians. The Company also provides promotional information for its
independent sales representatives and distributors. In addition, the Company,
its independent representatives and its distributors provide physicians with
assistance in learning the proper use of the Company's laparoscopic products.
The Company has pursued two distribution strategies over the recent
years. They include OEM relationships on certain products and distribution
through a network of independent commissioned representatives and distributors.
Over the past 2 years, the Company has focused on developing its
independent sales channel whereby the Company works with independent sales
organizations which have expertise in the Company's primary markets of general
surgery and gynecologic laparoscopy. The Company, in many cases, retains direct
billing to the hospital and pays a commission based on orders shipped. The
Company has seen this distribution channel grow to represent 58% of its sales
volume in 1996 as compared to 54% of its volume in 1995. The Company believes
that continued management focus, ongoing product development and increased sales
and marketing efforts will continue to grow this independent sales channel in
1997.
The Company continues to maintain its non-exclusive product supply
agreement with Ethicon Endo-Surgery, a division of Johnson & Johnson, Inc.,
whereby Ethicon was granted a license to market the Company's laparoscopic
forceps. In addition, the Company sells the product through its independent
sales channel. The Company also has a non-exclusive agreement with Origin
MedSystems, a subsidiary of Guidant Corporation, established in 1993 to market
the Company's laparoscopic forceps. Sales to Ethicon and Origin increased in
1996 due to lower than desired inventory levels. The Company expects sales to
these customers to decline in 1997 as such companies manage the inventory levels
to meet current demand.
Everest currently markets its GI endoscopic products in the United
States through a minimum number of independent distributors. These distributors
do not have written agreements with the Company and serve on a non-exclusive
basis. The Company also services a growing number of accounts directly. The
Company continues to provide Bard Interventional (a division of C.R. Bard, Inc.)
with its gastrointestinal coagulating probe.
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The Company's sales and marketing department consists of the Vice
President of Sales and Marketing, three regional sales managers, one clinical
specialist for the laparoscopic product line, one marketing manager focusing on
the minimally invasive cardiac market and two sales and marketing support
individuals. The Company expects to continue to invest in the growing
distribution strategy in 1997.
The Company intends to continue to utilize independent distributors for
foreign sales. During 1996, the Company concentrated its sales and marketing
efforts primarily in the United States market. The Company expects sales in 1997
to increase domestically, as well as internationally as the Company expands
efforts to find and retain independent distributors in order to provide a market
presence in new territories, including Japan and South America.
Manufacturing
The manufacturing process for the Company's current products consists
primarily of the assembly of parts and components purchased from outside
vendors, final testing and packaging. The Company currently produces the
majority of its injection molded plastic parts. It is probable that the Company
primarily will assemble its future products from parts bought from outside
suppliers. However, management may determine that certain parts should be
produced by the Company due, for instance, to a desire to control quality or to
reduce cost. The Company is currently subcontracting sterilization functions
with third parties. During 1993, the Company installed a class 10,000 clean room
in its facility which gives the Company the capability to package its products
in house at considerable savings compared to subcontracting that function.
Most of the parts and components used in the Company's current products
are purchased from multiple vendors or are available from additional vendors the
Company has qualified. However, in some instances the Company purchases, and may
in the future purchase, only from a single vendor. Although the Company believes
it would be able to obtain such parts from alternative vendors if required,
there could be some interruption in the Company's ability to supply products to
customers. If, as in the past, the Company finds itself with a single source of
supply for a critical component, it will, to the extent possible, take steps to
protect itself from a shortage of supply. Such steps include increased safety
stock, working to qualify additional vendors, and alternative designs which
utilize currently available components.
Research and Development
The Company's research and development activities are conducted at its
headquarters facility and at laboratory and clinical facilities at various
universities and hospitals. The Company attempts to coordinate its research and
development activities with those of its scientific advisors and other physician
contacts. The objective of the Company is to direct those coordinated efforts to
use its base of technology and expertise to develop products which meet
identified market needs. The principal research activities are concept and
prototype development and human clinical studies. The Company funds human
studies that are carried out in various institutions having the necessary
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facilities and personnel. For the years ended December 31, 1996 and 1995, the
Company's research and development expenditures were $606,970 and $555,804,
respectively. The Company expects spending in the research and development area
to increase as the Company attempts to expand its laparoscopic product offering
and to capitalize on certain opportunities in the minimally invasive
cardiovascular arena, microlaparoscopy and other surgical specialties.
Regulation
The medical devices manufactured and marketed by the Company are
subject to regulation by the U.S. Food and Drug Administration (the "FDA") and,
in some instances, by state and foreign authorities. Pursuant to the Medical
Device Amendments of 1976 (the "1976 Amendments") to the Federal Food, Drug and
Cosmetic Act, and regulations promulgated thereunder, medical devices intended
for human use are classified into three categories (Classes I, II, and III),
depending upon the degree of regulatory control to which they would be subject.
The Company's current GI endoscopic and laparoscopic surgical products have been
classified as Class II devices, and the Company believes that its planned
electrosurgical devices will also be in that class.
If a new device, irrespective of whether it is a Class II or III
device, is substantially equivalent to an existing device that has been
continuously marketed since the effective date of the 1976 Amendments (May 28,
1976) (a "Substantially Equivalent Device"), FDA requirements may be satisfied
through a Premarket Notification Submission (a "510(k) Submission"), under which
the applicant provides product information supporting its claim of substantial
equivalence. In a 510(k) Submission, the FDA may also require that it be
provided with clinical test results demonstrating the safety and efficacy of the
device. Under certain circumstances, that clinical data can be obtained only
after submitting to the FDA an application for an Investigational Device
Exemption ("IDE"). Marketing may commence when the FDA issues a letter finding
substantial equivalence. The Company has received 510(k) marketing clearances
finding substantial equivalence from the FDA, without submission of clinical
testing data, for all of its current products.
If a medical device does not qualify for the 510(k) Submission
procedure, the manufacturer must file a premarket approval application ("PMA").
This requires more extensive prefiling testing than the 510(k) Submission and
involves a significantly longer FDA review process. FDA approval of a PMA occurs
after the applicant has established the safety and efficacy of the device to the
satisfaction of the FDA under an IDE Procedure requiring preclinical laboratory
and animal tests and human clinical studies. The Company does not believe that
any of its products currently under development will be subject to this more
time-consuming FDA review process.
The United States Congress has enacted legislation which substantially
changes certain aspects of the regulation of the sale of medical devices and
which, depending on how it is interpreted and enforced, could make it
substantially more difficult and time-consuming to comply with premarketing
clearance and approval processes.
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<PAGE>
As a manufacturer of medical devices, the Company is also subject to
certain other FDA regulations, and its manufacturing processes and facilities
are subject to continuing review by the FDA to ensure compliance with Good
Manufacturing Practices regulations. The Company believes that its manufacturing
and quality control procedures substantially conform to the requirements of FDA
regulation.
The financial arrangements through which the Company markets, sells and
distributes its products may be subject to certain federal and state laws and
regulations with respect to the provision of services or products. These
so-called "fraud and abuse" laws and regulations prohibit certain direct or
indirect payment arrangements that are designed to induce or encourage the
purchase or recommendation of products reimbursable under Medicare or Medicaid.
Violations of these laws and regulations may result in civil and criminal
penalties, including substantial fines and imprisonment. The Company believes
that its operations and its marketing, sales and distribution practices
currently comply in all respects with the fraud and abuse laws and regulations,
to the extent they are applicable.
The Company's devices are also subject to regulation in foreign
countries.
Third Party Reimbursement
In 1983, Congress amended the Social Security Act to establish a
prospective reimbursement system for Medicare which limits the reimbursement
that hospitals receive for treating certain medical conditions by setting
maximum fees that can be charged for Medicare patients. Under this system,
hospitals are paid a fixed amount for treating each patient with a particular
diagnosis. This differs from the previous system under which Medicare providers
were reimbursed for actual costs of providing services up to a stated maximum on
each procedure performed. In addition, certain private insurers have initiated
prospective reimbursement systems designed to slow the escalation of health care
costs. The Company does not believe that these reimbursement limitations will
have an adverse effect on future sales of its existing or currently proposed
product lines, although the Company has become aware of pressure to limit
reimbursement for single-use devices.
Intellectual Property
Due to the rapid technology change that characterizes the medical
device industry, the Company believes that the improvement of existing products,
reliance upon trade secrets and unpatented proprietary know-how and the
development of new products are generally as important as patent protection in
establishing and maintaining a competitive advantage. Nevertheless, the Company
has made, and continues to make, efforts to obtain patents, when available, in
connection with its product development program. There can be no assurance,
however, that any patents obtained will provide substantial protection or be of
commercial benefit to the Company, or that their validity will not be
successfully challenged.
In 1994, the Company was awarded a patent for its second generation
bipolar scissors design, EVERSHEARS II. Although there were two opposing patents
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<PAGE>
issued to another company in 1994 involving ceramic bipolar scissors, the
Company believes that the patented EVERSHEARS II is a strong marketing
alternative in the bipolar scissors market. After review of the allowed claims
of the two opposing patents and the related files, the Company, based on the
advice of its patent counsel, believes that its metal-on-metal design
incorporated in the EVERSHEARS II does not infringe on either of the opposing
patents issued. The Company commenced shipment of the EVERSHEARS II on a limited
basis in the third quarter of 1994 and full market introduction in January 1995.
In 1995, the Company was awarded two patents for its dissecting forceps
design and its bipolar cutting forceps design. The Company was awarded three
additional patents in 1996, two of which relate to the bipolar scissors
technology. The third patent, a methods patent, was granted to the Company which
allows for the interchangeability of monopolar and bipolar currents to an
instrument.
The Company currently has two patent issues outstanding. First, the US
Patent and Trademark Office (PTO) has granted the Company's request for
re-examination--a review of an issued patent in the context of newly discovered
prior art--of its issued bipolar cutting forceps patent. The Company took this
action in an effort to ensure the long-term viability of the bipolar cutting
forceps patent. Secondly, the Company was notified of a declared patent
interference action--an action to determine who is entitled to the patent on the
same invention-that has been filed with the PTO on the Company's metal-on-metal
bipolar scissors patent by an unknown party. The Company believes it will
ultimately prevail in both actions; however, an unfavorable result could
adversely affect to the Company's ability to use certain of its technology in
the manner expected.
The Company generally requires its consultants and each of its
employees to agree in writing to keep its proprietary information confidential
and, within certain limitations, to assign all inventions relating to the
Company's business to the Company.
The Company has registered its trademark logo, Everest Medical, and the
trademarks BiSNARE, BiTOME, BiCOAG, EVERSHEARS, BiLAP and BiBx on the principal
register in the United States Patent and Trademark Office. In addition, the
Company has filed trademark applications on some of its other products.
Employees
As of March 14, 1997, the Company had 56 employees, of which 55 are
full-time and one is part-time. The employees include three in research and
development, 24 in production, 17 in manufacturing support, six in sales and
marketing and six in general and administrative functions. The Company's
employees are not represented by a union, and the Company considers its
relationship with its employees to be good.
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<PAGE>
Outlook and Risks
As provided for under the Private Securities Litigation Reform Act of
1995, the Company wishes to caution investors that the following important
factors, among others, in some cases have affected and in the future could
affect the Company's actual results of operations and cause such results to
differ materially from those anticipated in forward-looking statements made in
this document and its 1996 Annual Report by or on behalf of the Company.
The Company expects that as it continues to invest in sales and
marketing support programs increased revenues will result from the
Everest-branded laparoscopy as it gains market share. The Company also expects
that surgeons will increase their use of bipolar technology as an alternative to
existing monopolar and ultrasonic technologies because bipolar technology
provides a safe and effective way of cutting and coagulating tissue in minimal
invasive laparoscopy and gynecology procedures. 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 contact
purchasing agreements with large institutions due to their broad product
offerings which may exclude the Company's products.
The Company also faces issues regarding the status of two key patents
that are currently undergoing patent office actions. Based on advice of counsel
and published statistics, the Company believes that it will prevail in both the
patent re-examination of its Bipolar Cutting Forceps patent and the patent
interference action involving its metal-on-metal bipolar scissors patent. There
can be no assurances, however, that the Company's patents may not be limited
based on these actions or other unknown actions that may arise. Unfavorable
outcomes may limit gain in market share that the Company expects in the future.
The Company also plans to expand its efforts relating to minimally
invasive cardiac surgery, an emerging market segment. Although the Company
intends to investigate and commence market activities in 1997, there are no
assurances that it will be successful in demonstrating its bipolar products as
superior in this market. In addition, the Company cannot guarantee that this
market segment will evolve to a significant market size.
The Company also faces ongoing issues related to its working capital
needs. The capital structure under which the Company operates requires quarterly
dividend payments to three outstanding series of preferred convertible stock.
These requirements, necessary capital expenditures, growth in inventory as the
Company expands its product offering and increased operating expenses due to its
exploration of the minimally invasive cardiac market opportunity will challenge
the Company to meet its capital needs for 1997. The Company has a $300,000
revolving line of credit that matures on March 31, 1997. There are no assurances
that this credit facility will be renewed on terms favorable to the Company nor
that the Company would be able to receive other sources of capital it may need
should there be any significant deviations from the plan in 1997.
There are only a limited number of competitive bipolar instruments
currently on the market. However, the Company's current and future products will
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in most cases compete not only with competitive bipolar devices, but also with
devices based on monopolar, laser and other technologies. Companies which
currently manufacture electrosurgical and other competitive products can be
expected to engage in continuing research and development which will result in
new products, some of which will be bipolar, that will be competitive with the
Company's products. The Company is aware of several U.S. and European companies
which have developed or are developing bipolar laparoscopic devices, one of
which is designed for cutting and several of which are designed for coagulation.
Circon Corporation, for example, has a cutting and coagulation forceps, though
such product is not yet patented. At the present time, the Company is unable to
predict the impact that these products may have on foreign or domestic sales of
the Company's products. The Company's known and potential competitors are
well-established and have substantially more experience and financial resources
than the Company. The Company's ability to compete will depend upon a number of
factors, including its ability to manufacture, market and distribute its bipolar
electrosurgical devices at commercially acceptable prices, to supply product
under its remaining OEM contracts, its success in generating market acceptance
for the products and the establishment of an effective marketing organization.
Many of the Company's products are reimbursed by Medicare, private
insurers and other third parties. Changes in reimbursement policies or payment
levels would likely adversely affect the Company.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently rents facilities consisting of approximately
17,985 square feet located at Carlson Technical Center, Suite 500, 13755 First
Avenue North, Minneapolis, Minnesota 55441. The Company pays monthly rent of
approximately $9,000, plus operating expenses and taxes, under the lease which
extends through December 1998. The Company uses approximately 65% of the space
for production, 15% for research and development and 10% for each of sales and
marketing and administration. The Company believes this space will adequately
meet its needs for the foreseeable future, and, in management's opinion, the
property is adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to, nor is its property the subject of, any
material pending legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
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<PAGE>
Executive Officers of the Company
The Company's executive officers, along with their ages and positions
as of March 14, 1997, are as follows:
Name Age Position
John L. Shannon, Jr. 43 President and Chief Executive Officer
David J. Parins 45 Vice President, Engineering, Quality Assurance
and Regulatory Affairs
Michael Geraghty 49 Vice President, Sales and Marketing
Steven M. Blakemore 42 Vice President, Operations
Thomas F. Murphy 37 Vice President, Finance and Administration
and Assistant Secretary
John L. Shannon, Jr. Mr. Shannon was elected President and Chief
Executive Officer in August 1993. From May 1989 to June 1993, Mr. Shannon was
President and Chief Executive Officer of EdenTec Corporation, a medical device
manufacturer. From November 1985 to May 1989, Mr. Shannon was employed by
Threshold Ventures, Inc., a venture capital firm, most recently as President.
From September 1984 to November 1985, Mr. Shannon was Marketing Manager for
SciMed Life Systems, Inc., a medical device manufacturer. From June 1979 to
September 1984, Mr. Shannon was employed by The Toro Company, a lawn and garden
manufacturer, in a variety of financial, planning and marketing positions, most
recently as Marketing Manager.
David J. Parins. Mr. Parins has been employed by the Company since
November 1988, most recently as Vice President of Engineering, Quality Assurance
and Regulatory Affairs. From September 1983 to November 1988, Mr. Parins was
employed by Angiomedics Incorporated (now Schneider (USA), Inc.) in a variety of
product and business development positions, including Product Marketing Manager
and Director of Research. Mr. Parins has a degree in mechanical engineering from
Marquette University and is the inventor on several patents covering
cardiovascular and RF device technology.
Michael E. Geraghty. Mr. Geraghty joined the Company as Vice President
of Sales and Marketing in January 1997. From August 1995 to January 1997, Mr.
Geraghty was Director of Marketing - Advance Products at ArthroCare Corporation,
a start-up bipolar electrosurgical medical device manufacturer. From March 1994
to August 1995, Mr. Geraghty was the National Sales Manager of Laser
Peripherals, and from December 1990 to October 1993, he was the Sales Manager
for Intramed Labs, Inc., both of which are medical device manufacturers.
Steven M. Blakemore. Mr. Blakemore has been employed by the Company
since November 1992, most recently as Vice President of Operations. From October
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<PAGE>
1989 to February 1992, Mr. Blakemore was employed by Clarus Medical Systems, a
medical device manufacturer, as Vice President of Operations and Research and
Development. From March 1986 to October 1989, Mr. Blakemore was employed by
Medical Graphics Corporation, a medical device manufacturer, most recently as
Vice President of Operations. Mr. Blakemore is the inventor on one patent in
medical technology.
Thomas F. Murphy. Mr. Murphy has served as Vice President of Finance
and Administration of the Company since January 1997, prior to which he served
as Chief Financial Officer since joining the Company in July 1994. Mr. Murphy
has also served as Assistant Secretary of the Company since February 1995. From
December 1992 to July 1994, he was Vice President of Finance for DaVinci
Medical, Inc., a manufacturer of laparoscopic surgical instruments. From October
1990 to May 1992, Mr. Murphy was employed by Tsumura International, a consumer
goods manufacturer of home fragrance and bath products, as Vice President of
Finance. From 1986 to October 1990, Mr. Murphy held various positions in sales
operations, administration and finance for Minnetonka Corporation, a consumer
goods manufacturer.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by Item 5 is incorporated by reference from
the Company's 1996 Annual Report, portions of which are filed herewith in
Exhibit 13.1.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
The information required by Item 6 is incorporated by reference from
the Company's 1996 Annual Report, portions of which are filed herewith in
Exhibit 13.1.
ITEM 7. FINANCIAL STATEMENTS
An index to and the Financial Statements of the Company for the year
ended December 31, 1996 are incorporated by reference from the Company's 1996
Annual Report, portions of which are filed herewith in Exhibit 13.1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT
The information required by Item 9 regarding the Company's executive
officers is set forth in Part I of this report.
The information required by Item 9 regarding the Company's directors is
incorporated by reference from the Company's 1997 Proxy Statement under the
caption "Information About Nominees." The Company's proxy statement will be
filed pursuant to Rule 14a within 120 days after the close of the fiscal year
for which this report is filed.
The information relating to compliance with Section 16(a) of the
Exchange Act is incorporated by reference from the Company's 1997 Proxy
Statement under the caption "Compliance with Section 16(a) of the Exchange Act."
The Company's proxy statement will be filed pursuant to Rule 14a within 120 days
after the close of the fiscal year for which this report is filed.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is incorporated by reference from
the Company's 1997 Proxy Statement under the caption "Executive Compensation."
The Company's proxy statement will be filed pursuant to Rule 14a within 120 days
after the close of the fiscal year for which this report is filed.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by Item 11 is incorporated by reference from
the Company's 1997 Proxy Statement under the caption "Security Ownership of
Management and Certain Beneficial Owners." The Company's proxy statement will be
filed pursuant to Rule 14a within 120 days after the close of the fiscal year
for which this report is filed.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 is incorporated by reference from
the Company's 1997 Proxy Statement under the caption "Certain Transactions." The
Company's proxy statement will be filed pursuant to Rule 14a within 120 days
after the close of the fiscal year for which this report is filed.
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<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The exhibits to this Report are listed in the Exhibit Index immediately
following the signature pages to this Report.
A copy of any of the exhibits listed or referred to above will be
furnished at a reasonable cost to any person who was a shareholder of
the Company as of March 5, 1997, upon receipt from any such person of a
written request for any such exhibit. Such request should be sent to
Everest Medical Corporation, 13755 First Avenue North, Minneapolis,
Minnesota 55441, Attention: Shareholder Information.
(b) Reports on Form 8-K: None filed during the fourth quarter of the fiscal
year ended December 31, 1996.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Issuer has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: March 27, 1997 EVEREST MEDICAL CORPORATION
By /s/ John L. Shannon, Jr.
John L. Shannon, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Issuer and in the capacities indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints John
L. Shannon, Jr. and Thomas F. Murphy as his true and lawful attorneys-in-fact
and agents, each acting alone, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments to this Annual Report on Form 10-KSB
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, each acting alone, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
Signature Title Date
/s/ John L. Shannon, Jr. Chief Executive Officer, March 27, 1997
John L. Shannon, Jr. President (Principal Executive
Officer) and Director
/s/ David D. Koentopf Chairman of the Board March 27, 1997
David D. Koentopf
(Signatures continued on following page)
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<PAGE>
Signature Title Date
/s/ Thomas F. Murphy Chief Financial Officer March 27, 1997
Thomas F. Murphy (Principal Financial and
Accounting Officer)
/s/ Donald R. Brattain Director March 27, 1997
Donald R. Brattain
/s/ Richard J. Migliori, M.D. Director March 27, 1997
Richard J. Migliori, M.D.
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<PAGE>
EVEREST MEDICAL CORPORATION
EXHIBIT INDEX TO ANNUAL REPORT
ON FORM 10-KSB
For the Fiscal Year Ended December 31, 1996
Item No. Item
3.1 Restated Articles of Incorporation of the Company, as amended
(Incorporated by reference to Exhibit 3.1 to the Company's Form 10-KSB
for the fiscal year ended December 31, 1995)
3.2 Restated Bylaws of the Company, as amended (Incorporated by reference
to Exhibit 3.2 to the Company's Registration Statement on Form S-18
(File No. 33-37352-C))
4.1 Specimen form of the Company's Common Stock Certificate (Incorporated
by reference to Exhibit 4.1 to the Company's Registration Statement on
Form S-18 (File No. 33-37352-C))
4.2 Restated Articles of Incorporation of the Company, as amended (See
Exhibit 3.1)
4.3 Restated Bylaws of the Company, as amended (See Exhibit 3.2)
10.1 1986 Incentive Stock Option Plan, as amended (Incorporated by reference
to Exhibit 10.6 to the Company's Registration Statement on Form S-18
(File No. 33-37352-C))**
10.2 1986 Non-Statutory Stock Option Plan, as amended (Incorporated by
reference to Exhibit 10.7 to the Company's Registration Statement on
Form S-18 (File No. 33-37352-C))**
10.3 Form of Incentive Stock Option Agreement (Incorporated by reference to
Exhibit 10.8 to the Company's Registration Statement on Form S-18 (File
No. 33-37352-C))**
10.4 Form of Non-Statutory Option Agreement (Incorporated by reference to
Exhibit 10.9 to the Company's Registration Statement on Form S-18 (File
No. 33-37352-C))**
10.5 Employee Stock Purchase Plan (Incorporated by reference to Exhibit
10.10 to the Company's Registration Statement on Form S-18 (File No.
33-37352- C))**
10.6 Employee Incentive Savings and Profit Sharing Plan (Incorporated by
reference to Exhibit 10.11 to the Company's Registration Statement on
Form S-18 (File No. 33-37352-C))**
10.7 Employee Incentive Savings and Profit Sharing Trust (Incorporated by
reference to Exhibit 10.12 to the Company's Registration Statement on
Form S-18 (File No. 33-37352-C))**
E-1
<PAGE>
10.8 1992 Stock Option Plan (Incorporated by reference to Exhibit 10.37 to
the Company's Registration Statement on Form S-1 (File No. 33-45872))**
10.9 Lease Agreement dated September 20, 1989 between the Company and
Carlson Center Industrial II Limited Partnership (Incorporated by
reference to Exhibit 10.36 to the Company's Registration Statement on
Form S-18 (File No. 33-37352-C))
10.10 Amendment #1 dated December 7, 1992 to Lease Agreement dated September
20, 1989 between the Company and Carlson Center Industrial II Limited
Partnership (Incorporated by reference to Exhibit 10.13 to the
Company's Form 10-KSB for the fiscal year ended December 31, 1994)
10.11 Amendment #2 dated December 9, 1993 to Lease by and between the Company
and the Estate of James Campbell (Incorporated by reference to Exhibit
10.14 to the Company's Form 10-KSB for the fiscal year ended December
31, 1994)
10.12 Supply Agreement dated April 2, 1991 between the Company and C.R. Bard,
Inc. (Incorporated by reference to Exhibit 10.36 to the Company's
Registration Statement on Form S-1 (File No. 33-45872))
10.13 First Amendment to Supply Agreement dated April 2, 1991 between the
Company and C.R. Bard, Inc. (Incorporated by reference to Exhibit 10.36
to the Company's Registration Statement on Form S-1 (File No.
33-45872))
10.14 Stock Purchase Agreement dated July 15, 1993 between the Company and
Johnson & Johnson Development Corporation, including Distribution and
License Agreement between the Company and Ethicon Endo-Surgery
(Incorporated by reference to Exhibit 10.29 to the Company's Form
10-KSB for the fiscal year ended December 31, 1993)
10.15 Employment Agreement with John L. Shannon, Jr. dated August 9, 1993
(Incorporated by reference to Exhibit 10.31 to the Company's Form
10-KSB for the fiscal year ended December 31, 1993)**
10.16 Amendment to Employment Agreement with John L. Shannon, Jr.
(Incorporated by reference to Exhibit 10.25 to the Company's Form
10-KSB for the fiscal year ended December 31, 1994)**
10.17 Amendment to Employment Agreement with John L. Shannon, Jr. dated
August 25, 1995 (Incorporated by reference to Exhibit 10.19 to the
Company's Form 10-KSB for the fiscal year ended December 31, 1995)**
10.18* Amendment to Employment Agreement with John L. Shannon, Jr. dated
December 11, 1996**
10.19 Form of Warrant dated February 18, 1994 issued pursuant to agreement to
certain purchasers (Incorporated by reference to Exhibit 10.38 to the
Company's Form 10-KSB for the fiscal year ended December 31, 1993)
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<PAGE>
10.20 Exclusive Distribution Agreement dated January 1, 1996 with KK Adachi
(Incorporated by reference to Exhibit 10.21 to the Company's Form
10-KSB for the fiscal year ended December 31, 1995)
10.21 Note Purchase Agreement dated February 16, 1996 between the Company and
Okabena Partnership K (Incorporated by reference to Exhibit 10.22 to
the Company's Form 10-KSB for the fiscal year ended December 31, 1995)
10.22 13% Secured Convertible Note in the principal amount of $500,000 dated
February 16, 1996 in favor of Okabena Partnership K (Incorporated by
reference to Exhibit 10.23 to the Company's Form 10-KSB for the fiscal
year ended December 31, 1995)
10.23 Security Agreement dated February 16, 1996 between the Company and
Okabena Partnership K (Incorporated by reference to Exhibit 10.24 to
the Company's Form 10-KSB for the fiscal year ended December 31, 1995)
10.24 Warrant to purchase 290,909 shares of Common Stock dated February 16,
1996 issued to Okabena Partnership K (Incorporated by reference to
Exhibit 10.25 to the Company's Form 10-KSB for the fiscal year ended
December 31, 1995)
10.25* Separation Agreement dated October 12, 1996 between the Company and R.
Keith Poppe**
10.26* Letter dated November 29, 1996 from Company to Michael Geraghty
regarding terms of employment.**
11.1* Statement Re Computation of Per Share Loss
13.1* Portions of 1996 Annual Report
23.1* Consent of Independent Auditors
24.1* Power of Attorney of John L. Shannon, Jr., David D. Koentopf, Thomas F.
Murphy, Donald R. Brattain and Richard J. Migliori (included on the
signature pages of this Form 10-KSB)
27 Financial Data Schedule (filed with electronic version only)
- -------------------
* Filed herewith.
** Management contract or compensatory plan or arrangement.
E-3
EVEREST MEDICAL CORPORATION
13755 First Avenue North
Minneapolis, Minnesota 55441-5454
612-473-6262, Facsimile: 612-473-6465
December 11, 1996
John L. Shannon, Jr.
Everest Medical Corporation
13755 First Avenue North
Minneapolis, MN 55441-5444
Dear John,
On behalf of the Everest Medical Corporation Board of Directors, I am hereby
notifying you that your employment agreement is being extended for two (2) years
until December 31, 1998. Your base salary for the period from January 1, 1997
until December 31, 1997 will remain at $150,000 per year. At this time, your
base salary will be reviewed by the Compensation Committee of the Board of
Directors, but in no event will it be reduced below $150,000. If, during this
period, your employment is terminated for any reason other than cause or your
resignation, you will receive twelve months severance payable over twelve months
in accordance with Everest Medical normal payroll practices. If for any reason
Everest Medical does not extend your employment past December 31, 1998, other
than your stated desire not to continue to be employed by the Company, you will
also be paid twelve months severance over a twelve month period. In addition, if
the Company is acquired by another entity, either pursuant to a purchase of
assets or the acquisition of 50% or more of the Company's outstanding capital
stock, you will be paid $250,000 within ten (10) days of the closing of the
purchase of assets or acquisition of stock. Other than modified above, your
employment agreement dated August 9, 1993 as amended on May 10, 1994, and as
amended on August 25, 1995 continues to be in full force and effect.
Sincerely,
EVEREST MEDICAL CORPORATION
/s/ David D. Koentopf
David D. Koentopf
Chairman of the Board of Directors
SEPARATION AGREEMENT
This Agreement is made by and between EVEREST MEDICAL CORPORATION
("Employer") and R. KEITH POPPE ("Employee").
RECITALS
A. WHEREAS, Employee has been employed by Employer in the position of
Vice- President of Sales; and
B. WHEREAS, Employee has been granted incentive stock options pursuant
to Incentive Stock Option Agreements as follows:
(1) Agreement dated February 6, 1995 for 15,000 shares of
common stock, a true and correct copy of which is attached hereto as Exhibit A;
(2) Agreement dated July 19, 1994 for 25,000 shares of common
stock, a true and correct copy of which is attached hereto as Exhibit B;
(3) Agreement dated June 15, 1993 for 5,000 shares of common
stock, a true and correct copy of which is attached hereto as Exhibit C; and
(4) Agreement dated July 31, 1992 for 10,000 shares of common
stock, a true and correct copy of which is attached hereto as Exhibit D; and
C. WHEREAS, Employer and Employee have decided that it is mutually
beneficial for their employment relationship to terminate; and
D. WHEREAS, the parties are mindful of the costs and uncertainties of
litigation and wish to effect a full and final resolution of any and all
disputes between them;
NOW THEREFORE, the parties agree as follows.
AGREEMENTS
1. In exchange for and consideration of the mutual promises and
covenants contained herein, Employer will:
A. Continue to employ Employee in his current position with
his current responsibilities at his current level of compensation and
benefits through October 25, 1996; provided that Employee's last date
of work shall be October 15, 1996 and he shall use vacation for the
period October 16 through October 25, 1996;
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<PAGE>
B. Pay to Employee, in accordance with Employer's normal
policies and procedures, commissions on all orders placed on or before
October 15, 1996 including those orders which are delivered after that
date;
C. Pay, on October 25, 1996, to Employee the total sum of
$10,800.00, less required withholding for taxes, as and for 240 hours
of accrued vacation pay;
D. Provide Employee with reasonable amounts of time away from
the work premises to pursue his search for employment to begin after
October 15, 1996;
E. Pay to Employee the total gross amount of $4,130.00, less
required withholding for taxes, per Employer's normal biweekly pay
period during the "Severance Period," pursuant to Employer's normal
payroll procedures; provided that any payment(s) that would otherwise
be due prior to the Effective Date of this Agreement, as defined in
Paragraph 11 hereof, shall become due and payable on the normal payroll
date next following that Effective Date.
F. Continue to pay the employer portion of monthly premiums
for Employee's group medical and life insurance policies as were in
effect on August 1, 1996, during the "Severance Period," provided that
Employee timely exercises his election to continue such insurance
coverages pursuant to those federal and state laws providing for
continuation of such insurance upon separation from employment;
Employer further agrees to provide to Employee in a timely manner the
necessary documents to allow Employee to make such election;
G. Provide outplacement services to Employee through an
outplacement counseling service to be named by Employer; and
H. Reimburse Employee's ordinary and reasonable business
expenses provided that documentation of such expenses is received by
Employer on or before November 15, 1996; provided that Employee shall
not incur any such expenses after October 15, 1996 and Employer shall
have no liability to reimburse Employee for any expenses incurred after
that date.
I. Issue a grant of a non-qualified option to purchase a
certain number of shares of Employer's common stock, represented by
"S," in the following formula to be used to calculate the number of
shares to be included within such option.
(9,000N - 16,830) + (10,000N - 15,600) + (1250N - 2737.6) = S
----------------- ------------------ ----------------
( 1.87 ) ( 1.56 ) ( 2.19 )
"N" equals the market price per share at the close of trading on the
Effective Date of this Agreement as defined in Paragraph 11 hereof,
which shall also be the date on which such option is granted.
- 2 -
<PAGE>
The option will expire on December 31, 1999. In consideration therefor,
Employee hereby agrees to the cancellation of and waives and releases
any and all rights with regard to all nonvested options pursuant to
Exhibits A through C hereof.
J. To pay one-half of Employee's reasonable attorney's fees
and costs incurred by Employee for legal services in connection with
review and execution of this Separation Agreement; provided that
Employer's obligation under this Paragraph 1.K. shall not exceed
$250.00. Payment shall be made to Joseph A. O'Brien on the thirtieth
day following Employer's receipt of a statement delineating such fees,
or on the Effective Date of this Agreement as described in Paragraph 11
hereof, whichever date occurs later.
2. In exchange for and consideration of the mutual promises and
covenants contained herein, Employee will:
A. Remain employed by Employer as provided in Paragraphs 1.A.
and 1.B. hereof and use his best efforts to fulfill the
responsibilities of that position;
B. Notify Employer promptly when Employee becomes re-employed
and eligible for group health insurance coverage through his new
employer.
C. Return to Employer, by the close of business on October 15,
1996, all of Employer's property within Employee's custody or control;
provided that the parties agree that Employee may keep Employer's
laptop computer which is currently assigned to Employee and within his
possession.
D. Take no action which would in any way cause any question to
arise with respect to the validity of any patent held by Employer.
3. The parties further agree that Employee shall remain available, at
times which are reasonably convenient to Employee, during the "Severance Period"
to respond to Employer's inquiries and provide services to Employer related to
those services which he has provided during the term of his employment.
4. The parties further agree that the "Severance Period" shall be
defined as the period of October 26, 1996 through April 25, 1997 provided that
Employer shall have no obligation to make any payment of salary or insurance
premiums on behalf of Employee in that event that Employee (a) ceases prior to
October 15, 1996, to provide services to Employer as provided in Paragraphs 1, 2
and 3 hereof or (b) violates the terms of Paragraph 5 hereof.
5. Restriction Against Competition. Employee acknowledges that Employee
has been employed in a position of trust and confidence and has had access to
- 3 -
<PAGE>
and become familiar with the unique methods, services and procedures used by
Employer and that as part of Employee's duties, Employee developed and
maintained close working relationships with Employer's customers. Employee
further acknowledges that disclosure of any of Employer's confidential or
proprietary information, trade secrets or other information relating to
operation of Employer's business or use of or access to such information by
Employer's competitors, would have a serious detrimental effect upon Employer,
the monetary loss from which would be difficult, if not impossible, to measure.
In consequence of the foregoing acknowledgements, Employee agrees:
A. Employee will not at any time during his employment by
Employer or thereafter, disclose the list of Employer's customers,
trade secrets, information about Employer's marketing, pricing,
merchandising, products in research and development, sales plans or
strategies or information about Employer's business operations deemed
to be confidential, to any person, firm, corporation, association, or
other entity for any reason or purpose whatsoever.
B. For the period of October 16, 1996 through October 15,
1997, Employee agrees that Employee will not, at any place within the
United States, directly or indirectly, own, manage, operate, control,
be employed by, participate in or be connected in any manner with the
ownership, management, operation or control of any business engaged in
the development, manufacture, marketing, sale and or distribution of
bipolar surgical instruments which compete directly with the current or
demonstrably anticipated products of Everest Medical Corporation. Such
restriction shall be limited to the following market segments; (i)
gastroenterological endoscopic procedures, (ii) general surgical
laparoscopic procedures, (iii) gynecological laparoscopic procedures,
and (iv) cardiovascular thoracoscopic procedures specifically including
saphenous vein harvesting for cardiac bypass surgery. Demonstrably
anticipated shall mean products which are currently in development and
are scheduled to be released to the market within twelve (12) months
from the date of this Agreement.
C. Employee agrees that Employee will not at any time from the
date of during his employment by Employer or during the period October
16, 1996 through October 15, 1997, directly or indirectly, either as an
individual for his own account, or on behalf of another person or
persons, corporation, partnership, or other entity, solicit any present
or future employee of Employer for any purpose of hiring or attempting
to hire such employee.
D. In the event that Employee shall violate any of the
foregoing provisions of this Paragraph 6, then Employer shall have the
right to seek injunctive relief or any other remedy allowed to it in
law or equity, and to collect from the Employee a reasonable attorney's
fee incurred in bringing such legal or equitable action or otherwise
enforcing the terms and conditions of this Agreement. Disputes arising
under this Paragraph 6 shall not be subject to the provisions of
- 4 -
<PAGE>
Section 10. In the event of a court of competent jurisdiction
determines that the provisions of this Paragraph 6 are unreasonable, it
may limit such provision to the extent it deems reasonable, without
declaring the provision invalid in its entirety.
6. The parties further agree that the terms of this Agreement shall
remain confidential provided that Employer may disclose such terms as is
necessary to effectuate the terms of the Agreement and/or for the operation of
its business and that Employee may disclose such terms to his spouse, tax and
financial advisers and attorney. Provided further, that the provisions of this
Paragraph 6 shall not apply to the terms contained in Paragraph 5 hereof.
7. The parties further agree that not to make any disparaging or
defamatory statements concerning one another. For the purposes of this Paragraph
7, Employer shall be defined as the officers, directors and managerial employees
of Employer.
8. Employee further agrees in consideration of and exchange for all the
mutual promises and covenants and promises contained herein to and hereby does
release, agree not to sue and forever discharge Employer, its past and present
officers, directors, shareholders, employees, consultants, agents and
representatives, from all claims and demands he has or might have against them
or any of them, whether in law or equity, contract or tort, arising out of or in
connection with his employment by Employer, or the termination of that
employment or otherwise. This release includes, without limiting the generality
of the foregoing, any claims he may have for wages, commissions, penalties,
vacation pay or other benefit, defamation or improper discharge (based on
contract, at common law or under any federal, state or local statute or
ordinance prohibiting discrimination in employment particularly discrimination
based on race, sex, national origin, age, color, religion, marital status,
disability or affectional preference, including the Age Discrimination in
Employment Act) or attorney's fees or other costs or expenses and any claims he
may have with respect to intellectual property including but not limited to
patents, copyrights, inventions, trademarks or the registration thereof;
provided that nothing herein shall release or waive any right or claim that
Employee has or may have arising under that Agreement attached hereto as Exhibit
D.
9. All disputes arising out of or in connection with this Agreement
and/or with Employee's employment or termination of employment, other than
disputes arising under Paragraph 5, shall be determined by arbitration in
accordance with the commercial arbitration rules of the American Arbitration
Association. The arbitration proceedings shall be held in Minneapolis,
Minnesota, or at such other place as may be mutually agreeable to the parties.
10. Employee acknowledges that he has been advised to consult with an
attorney prior to signing this Agreement. Employee further acknowledges that he
has had at least 21 days to consider whether to sign this Agreement.
- 5 -
<PAGE>
11. Employee acknowledges that he may rescind, that is, cancel, this
Agreement by delivering written notice of that rescission by certified mail,
return receipt requested, postmarked within fifteen days of his signing the
Agreement. The notice of rescission must be addressed to John Shannon, Everest
Medical Corporation, 13755 First Avenue North, Minneapolis, MN 55441-5454, or by
hand delivery to John Shannon at the same address within the 15-day period. The
sixteenth day following Employee's execution of this Agreement shall be the
Effective Date.
12. Employee acknowledges that Employer shall have no obligation
hereunder, except with respect to Paragraphs 1.A., 1.B., 1.C., and 1.H., prior
to the Effective Date of this Agreement, as defined in Paragraph 11 hereof.
13. No purported amendment, modification or waiver of any provision
hereof shall be binding unless set forth in a writing signed by both parties (in
the case of amendments or modifications) or by the party to be charged thereby
(in the case of waivers).
14. Any waiver shall be limited to the circumstances or event
specifically referenced in the written waiver document and shall not be deemed a
waiver of any other term of this Agreement or of the same circumstance or event
upon any recurrence thereof.
15. This Agreement, together with the Exhibits attached hereto,
constitutes the entire Agreement between the parties and supersedes any and all
prior and contemporaneous oral or written understandings between the parties
relating to the subject matter hereof.
EVEREST MEDICAL CORPORATION
Date: October 12, 1996 By: /s/ John L. Shannon, Jr.
Its President & Chief Executive Officer
"Employer"
R. KEITH POPPE
Date: October 12, 1996 /s/ R. Keith Poppe
R. Keith Poppe
"Employee"
- 6 -
Everest Medical Corporation
13755 First Avenue North
Minneapolis, MN 55441-5444
612-473-6262 - Facsimile 612-473-6465
VIA FACSIMILE (612) 451-2517
Page 1 of 2 pages
November 29, 1996
Michael E. Geraghty
1342 Cherry Hill Road
Mendota Heights, MN 55118
Dear Mike,
I am pleased to present the following revised offer of employment to you. This
offer is contingent upon approval of the Compensation Committee of the Board of
Directors of the Company. In addition, the grant of an option is contingent upon
the shareholder approval of a new stock option pool.
Please review and call me with any questions. Look forward to a positive
response. All the best.
With regards,
EVEREST MEDICAL CORPORATION
/s/ John L. Shannon, Jr.
President and Chief Executive Officer
Attachment
<PAGE>
Everest Medical Corporation
Employment Terms for Michael Geraghty -
Vice President of Sales & Marketing
Job Description
Primary responsibility for all worldwide sales and marketing functions of the
Company.
Duties
Responsibilities include:
o Overall management of the Company's marketing, sales and sales support
staff.
o Leadership and direction of the Company's worldwide independent
distribution network.
Qualifications
o Minimum of ten (10) years of increasingly responsible sales, sales
management, marketing and functional management experience. Prefer
experience in minimally invasive surgical market and sales experience
in management of independent representative network.
Reporting Relationship
o Reports to President & Chief Executive Officer.
Compensation
o $97,500 per annum. Management will recommend to the Stock Option
Committee of the Board of Directors at the grant of an option to
purchase 50,000 shares of common stock at the prevailing market price
as of the start date of employment. This option will vest equally over
four (4) years. The vesting will commence with the start date of
employment with the 25% vesting on the first year anniversary and each
anniversary for the three years thereafter. This option will vest
immediately upon the sale of the Company. Pricing for this grant will
be the effective market price as of the date of approval by the
shareholders of Everest Medical of an addition to the stock option
pool. In addition, if the employee is terminated prior to December 31,
1998 due to an acquisition of the Company for any reason other than
cause, the employee will be granted a severance payment of four (4)
months of base salary payable over the six-month period per the
standard payroll terms of the Company.
o Bonus potential of 15% of salary for period from January 1, 1997 to
December 31, 1997 based on attainment of specific corporate and
personal objectives. Bonus will be paid no later than February 15, 1998
and employee must be employed on date of payment.
<PAGE>
o Medical, Dental and Life Insurance Benefits (discuss with Human
Resources - Julie Seurer)
o Participation in the non-matching 401(k) program and Employee Stock
Purchase Plan.
Start Date
o January 20, 1997
EXHIBIT 11.1
EVEREST MEDICAL CORPORATION
Computation of Per Share Earnings
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994
------ ------- -------
(amounts in thousands except per share data)
<S> <C> <C> <C>
Primary
Average Common shares outstanding 6,350 5,789 5,680
Net effect of dilutive stock options based
on the treasury stock method using
average market price - - -
------ ------- -------
6,350 5,789 5,680
Net Loss (339) (773) (788)
Less preferred stock dividends 355 283 183
------ ------- -------
Loss applicable to Common Stock (694) (1,056) (971)
Per Share Amounts:
Net Loss per Common Share $ (0.11) $ (0.18) $ (0.17)
</TABLE>
Common stock equivalents relating to Convertible Preferred Stocks, Convertible
Notes and Outstanding options and warrants have been excluded because they are
anti-dilutive. Because the Company is currently in a loss position, the Fully
Diluted section of this computation is not applicable.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is traded in the SmallCap Stock Market, as quoted on
the National Association of Securities Dealers Automated Quotation (Nasdaq)
System under the symbol EVMD. The following table sets forth, for the periods
indicated, the high and low closing bid prices for the Common Stock as reported
by Nasdaq. Such quotations represent interdealer prices, without retail markup,
markdown or commission, and may not represent actual transactions.
As of December 31, 1996, there were approximately 310 holders of record
of the Company's Common Stock, 7 holders of record of Series A Preferred Stock,
29 holders of record of Series B Preferred Stock, 14 holders of Series C
Preferred Stock and 31 holders of record of Series D Preferred Stock.
The Company has not declared or paid any cash dividends on its Common
Stock or its Series A Preferred Stock since inception. The Company has paid its
Series B Preferred Stockholders its current dividend of $0.22 per share per
annum (8% of the purchase price per share) plus its dividends in arrears
commencing in September 1994. Cash dividend paid on this Series C Preferred
Stock was $133,435 in 1996. The Series C Preferred Stock is entitled to
dividends of $0.165 per share per annum (6% of the purchase price per share)
plus its dividends in arrears commencing August 1995. Cash dividends paid on
this Series C Preferred Stock was $67,800 in 1996. The Series D Preferred Stock
is entitled to dividends of $0.2875 per share per annum (10% of the purchase
price per share) plus its dividends in arrears commencing September 1995. Cash
dividends paid on this Series D Preferred Stock was $187,500 in 1996.
The Board of Directors presently intends to retain all other earnings
for use in the business for the foreseeable future. The Company is prohibited
from paying dividends on its common stock without consent of the holders of (a)
a majority of preferred shares of Preferred stock and (b) the Company's
convertible promissory notes and the warrants issued in connection therewith.
High Low
1996
First Quarter 3 1/8 2 5/8
Second Quarter 6 3
Third Quarter 4 3/4 2 7/8
Fourth Quarter 4 2 1/4
1995
First Quarter 1 13/16 1 3/8
Second Quarter 2 5/8 1 3/4
Third Quarter 3 1/16 2 1/4
Fourth Quarter 3 1/8 2 3/4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
Net Revenues
Net revenues in 1996 were $6,001,779, an increase of $1,723,238, or
40%, from net revenues in 1995. The increase in revenues primarily reflects new
product introductions and the benefits of the change in distribution strategy
the Company implemented in 1995. Revenues of the Company's branded laparoscopy
product line increased to $3,224,631, or 64%, from 1995. This increase in
revenues was a result of successful introduction of the BiCOAG Bipolar Cutting
Forceps in a 10mm version (October 1995) and 5mm version (June 1996). Revenues
from these products exceeded $1,000,000 in 1996. A significant increase in
revenue was also experienced in sales of the EVERSHEARS II Bipolar Scissors
which increased 14% from 1995, and sales of the BiCOAG Dissecting Forceps and
the BiCOAG Classic Tip Forceps, which increased 49% from 1995. The Company
expects revenues from the Everest-branded laparoscopic product line to increase
in 1997 as a result of ongoing investments in sales and marketing. Additionally,
the Company expects to benefit from the growing acceptance of the BiCOAG Bipolar
Cutting Forceps as surgeons continue to respond to the greater versatility
afforded them, and the cost savings associated with the product as compared to
alternative technologies. Revenues from the Company's laparoscopic products to
its OEM customers increased 62%. The Company experienced an increase in sales of
a version of its bipolar forceps to Ethicon Endo-Surgery, but expects shipment
of these bipolar forceps to decrease in 1997. Net revenues from endoscopy
products decreased 12% for the year. Revenue declines were experienced in
shipments of coagulating probes to C.R. Bard, in the amount of 9%, and in sales
of the Company's bipolar polypectomy snare to the Company's Japanese
distributor, which declined 18%. These decreases in revenues resulted from
increased competitive products which eroded existing business and delays in
obtaining regulatory approval in Japan for the Company's new distributor. Such
delays allowed competitive products to gain market share. The Company expects
revenues from this segment of the business for 1997 to increase marginally as
both products benefit from planned product improvements.
Net revenues in 1995 were $4,278,541, a decrease of $244,754, or 5%,
over net revenues in 1994. The decline in revenues was a result of a 51%
decrease in sales of the Company's laparoscopic products to its OEM customers as
these customers attempted to balance the inventory levels after over-purchasing
in 1994. The Company did experience a 42% increase in revenues for its Everest
branded laparoscopic product line resulting from the ongoing emphasis to focus
sales and marketing, and product development efforts to benefit the Company's
independent sales channel. The revenues from the Company's endoscopy products
grew 7% for the year, with strong growth in sales of coagulating probes to C.R.
Bard offsetting a decline in sales of endoscopy products in Japan.
Gross Margin. Gross margin for 1996 was 44% of sales compared to 39% for 1995.
This improvement was a result of increased sales from the Everest-branded
product offering which allows for increasing the average selling price. With the
sale of such products the Company is also able to develop and execute a
realistic inventory build schedule to better manage its production costs. The
average selling price increased by 7% and the number of units produced increased
by 23% in 1996 as compared to 1995. Start-up costs and production inefficiencies
related to the 5mm BiCOAG Bipolar Cutting Forceps (introduced in the second half
of 1996) offset the gross margin improvements resulting from the changing sales
mix.
Gross Margin for 1995 was 39% of sales compared to 26% for 1994. This
improvement resulted from the Company's changing distribution strategies which
produced a 27% increase in the average selling price for the Company's products
in 1995. The improved margins from such change in distribution were negatively
impacted by a decline in production volume for the year causing the overhead
burden to be absorbed over fewer units. The Company also experienced start-up
costs and production inefficiencies related to the new BiCOAG Cutting Forceps
which adversely affected its gross margin in 1995.
<PAGE>
Sales And Marketing. Sales and marketing expenses for 1996 were $1,531,276, an
increase of $330,548, or 28% from 1995. This increase in expense resulted
primarily from the ongoing change in distribution channels, which generated
higher commissions, increased promotional and advertising activities to create
brand awareness and continued use of product samples for clinical evaluations.
The Company expects that sales and marketing expenses will increase in 1997 due
to continued emphasis on the Everest-branded laparoscopy product line and an
anticipated increase in sales of this product line. Also, in 1997, the Company
expects to experience a cost increase with the initial marketing research
efforts associated with the minimally invasive cardiovascular opportunity.
Sales and marketing expenses in 1995 were $1,200,728, an increase of
$459,884, or 62%, from 1994. This expense increase reflects the additional costs
associated with the distribution changes implemented by the Company, including
increased commissions, increased staff to support the network of independent
distributors and manufacturing representatives, and increased promotion expense
(specifically the use of product samples for clinical evaluations).
Research And Development. Research and development expenses for 1996 were
$606,970, an increase of $51,166, or 9% from 1995. This expense increase was, in
part, a result of development issues with the July 1996 introduction of the
BiCOAG Bipolar Cutting Forceps in a 5mm version. The Company also incurred
increased expenses related to its patent portfolio, including responding to the
patent interference and re-examination issues which arose in 1996. The Company
expects research and development expenses to increase in 1997 as the Company
increases staff in an attempt to capitalize on certain opportunities in the
minimally invasive cardiovascular arena, microlaparoscopy and other surgical
specialties. The Company also expects expenses to increase as it pursues ISO
9000 and CE Mark certifications in 1997. Additionally, the Company expects to
continue to incur expenses in relation to its patent portfolio and related
issues.
Research and development expenses for 1995 were $555,804, an increase
of $108,479, or 24%, from 1994. This expense increase was primarily attributable
to the development efforts related to the September 1995 launch of the BiCOAG
Bipolar Cutting Forceps. The 1995 expense also reflects the Company's efforts to
capture that portion of manufacturing engineering expenses which represented
research and development expense on new products.
General And Administrative. General and administrative expenses for 1996 were
$739,953, an increase of $80,197, or 12% over 1995. This increase was
attributable to higher expenses relating to the purchase of directors and
officers insurance coverage and the increased cost associated with investor
communication. The Company expects that its general and administrative expenses
will increase in 1997 due the full year impact of additional insurance limits,
the planned retention of outside investor relations counsel, and overall
activity increases from the growth in the business and the expansion in new
market opportunities.
<PAGE>
General and administrative expenses for 1995 were $659,756, a decrease
of $39,522, or 6%, over 1994. This decrease were resulted from continued expense
and staffing control.
Net Loss. The net loss in 1996 was $339,056 compared to a net loss of $773,251
in 1995 and $788,335 in 1994. The net loss for 1996 was a result of increased
sales and marketing efforts to continue to change the Company's revenue mix to
the more profitable Everest-branded business and the increasing gross margin.
The loss for 1995 was a result of a decline in revenue, an increase in sales and
marketing efforts to facilitate the change in distribution strategy and the lack
of unit growth to leverage the Company's manufacturing overhead. The net loss
for 1994 was the result of strong cost control efforts, the impact of the
organizational restructuring in 1993, continued increases in revenues and
improving gross margins. The Company believes that it will achieve profitability
in 1997 as it increases market share in its core business of laparoscopy and
works towards the creation of a market presence in minimally invasive cardiac
surgery.
Liquidity and Capital Resources
Cash and cash equivalents were $712,810 on December 31, 1996, compared to
$1,028,476 on December 31, 1995. The Company expended $570,827, on operating
activities in 1996 compared to $782,876 in 1995. Operating activities in 1996
included growth in accounts receivable due primarily to the increased sales
volume in the fourth quarter of 1996, growth in inventory as the Company
expanded its product line with the introduction of new products, and repayment
of $150,000 in customer advances as the Company's Japanese distributor met
certain milestones. In 1996, the Company spent $121,641 on capital equipment.
The Company raised $1,470,967 from the sale of a convertible note of $500,000
and $970,967 from the exercise of stock options and warrants in 1996. The note
was later converted to 200,000 shares of the Company's common stock. The Company
met its obligations on its preferred stock dividends of $388,737 and retired
convertible notes, originally issued in 1992, in February 1996 in the amount of
$645,228. While the Company does not have excess working capital, the Company
believes it has sufficient capital to fund operations through 1997, assuming
that its sales goals are met and there are no significant unexpected
expenditures.
Outlook
The statements contained in this management's discussion and analysis are based
on current expectations. These statements are forward looking, and actual
results may differ materially.
The Company expects that as it continues to invest in sales and
marketing support programs increased revenues will result from the
Everest-branded laparoscopy as it gains market share. The Company also expects
that surgeons will increase their use of bipolar technology as an alternative to
existing monopolar and ultrasonic technologies because bipolar technology
provides a safe and effective way of cutting and coagulating tissue in minimally
invasive laparoscopy and gynecology procedures. 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 contact
purchasing agreements with large institutions due to their broad product
offerings which may exclude the Company's products.
<PAGE>
The Company also faces issues regarding the status of two key patents
that are currently undergoing patent office actions. Based on advice of counsel
and published statistics, the Company believes that it will prevail in the both
the patent re-examination of its Bipolar Cutting Forceps patent and the patent
interference action involving its metal-on-metal bipolar scissors patent. There
can be no assurances, however, that the Company's patents may not be limited
based on these actions or other unknown actions that may arise. Unfavorable
outcomes may limit gain in market share that the Company may be expects in the
future.
The Company also plans to expand its efforts relating to minimally
invasive cardiac surgery, an emerging market segment. Although, the Company
intends to investigate and commence market activities in 1997, there are no
assurances that it will be successful in demonstrating its bipolar products as
superior in this market. In addition, the Company cannot guarantee that this
market segment will evolve to a significant market size.
The Company also faces ongoing issues related to its working capital
needs. The capital structure under which the Company operates requires quarterly
dividend payments to three outstanding series of preferred convertible stock.
These requirements, necessary capital expenditures, growth in inventory as the
Company expands its product offering and increased operating expenses due to its
exploration of the minimally invasive cardiac market opportunity will challenge
the Company to meet its capital needs for 1997. The Company has a $300,000
revolving line of credit that matures on March 31, 1997. There are no assurances
that this credit facility will be renewed on terms favorable to the Company nor
that the Company would be able to receive other sources of capital it may need
should there be any significant deviations from the plan in 1997.
Effect of Inflation
The Company does not believe that inflation will have a significant effect on
operations.
<PAGE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 6,001,772 $ 4,278,541 $ 4,523,295
Cost of goods sold 3,364,885 2,622,993 3,344,351
----------- ----------- -----------
Gross margin 2,636,887 1,655,549 1,178,944
Cost and expenses:
Sales and marketing 1,531,276 1,200,728 740,844
Research and development 606,970 555,804 447,325
General and administrative 739,953 659,756 699,278
----------- ----------- -----------
Total operating expenses 2,878,199 2,416,288 1,887,447
----------- ----------- -----------
Operating loss (241,312) (760,739) (708,503)
Interest income (62,702) (109,078) (38,993)
Interest expense 160,446 121,589 118,825
----------- ----------- -----------
Net loss (339,056) (773,251) (788,335)
Less preferred stock dividends 354,848 283,405 182,600
----------- ----------- -----------
Loss applicable to common stock $ (693,904) $(1,056,656) $ (970,935)
Net loss per common share $ (0.11) $ (0.18) $ (0.17)
=========== =========== ===========
Weighted average number of shares outstanding
during the period 6,349,775 5,789,275 5,679,959
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31,
1996 1995
<S> <C> <C>
Current assets
Cash and cash equivalents $ 712,810 $ 1,028,476
Accounts receivable, less allowances
(1996--$46,000; 1995--$16,000) 1,135,545 916,341
Inventories 780,129 658,754
Prepaid insurance and deposits 167,739 51,506
------------ ------------
Total current assets 2,796,223 2,655,077
Equipment
Office and display equipment 396,794 374,278
Research and development equipment 188,715 188,715
Production equipment 924,599 825,775
Equipment under capital lease 115,535 115,235
------------ ------------
1,625,643 1,504,003
Less allowance for depreciation (1,376,389) (1,233,782)
------------ ------------
249,254 270,221
Patents, net of amortization
(1996--$156,845; 1995--$137,582) 15,492 34,754
------------ ------------
Total assets $ 3,060,968 $ 2,960,052
============ ============
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities
Customer advances $ 18,000 $ 168,000
Accounts payable 241,766 216,450
Accrued compensation and related taxes 165,917 140,889
Other accrued liabilities 171,490 85,113
Convertible notes, current portion -- 488,975
Capital lease obligations, current portion 5,409 28,320
------------ ------------
Total current liabilities 602,582 1,127,746
Capital lease obligations, net of current portion 2,496 9,138
Other long term liabilities 16,250 --
Convertible notes, net of current portion -- 126,700
Shareholder's equity
Convertible preferred stock series A,
($.01 par value, $2.50 liquidation value)
1,400,000 authorized; outstanding:
1996--636,937 shares; 1995--1,092,937 shares 1,561,717 2,701,717
Convertible preferred stock series B,
($.01 par value, $2.75 liquidation value)
authorized and outstanding:
1996--652,273 shares; 1995--727,273 shares 1,586,563 1,792,813
Convertible preferred stock series C,
($.01 par value, $2.75 liquidation value)
authorized and outstanding:
1996--410,906 shares; 1995--410,906 shares 1,002,832 1,002,832
Convertible preferred stock series D,
($.01 par value, $2.875 liquidation value)
authorized and outstanding:
1996--471,500 shares; 1995--471,500 shares 1,205,808 1,205,808
Common stock, ($.01 par value) 12,461,821
authorized; outstanding:
1996--6,970,912; 1995--5,806,699 69,709 58,067
Additional paid-in capital 16,240,199 13,659,504
Retained deficit (19,227,188) (18,724,274)
------------ ------------
2,439,641 1,696,467
------------ ------------
Total liabilities and shareholders equity $ 3,060,968 $ 2,960,052
============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
<TABLE>
<CAPTION>
Common Additional
Preferred Common Preferred Stock Paid-in
Shares Shares Stock Par Capital
--------- --------- ---------- ------- -----------
<S> <C> <C> <C> <C> <C>
Balance January 1, 1994 1,965,273 5,620,918 $4,857,187 $56,209 $13,646,937
========= ========= ========== ======= ===========
Common stock issued under
stock purchase plan, exercise
of warrants and stock options
less related costs 2,730 27 3,085
Issuance of warrants in
connection with extension
of convertible notes 22,148
Amortization of unearned
compensation under stock
option agreement 14,544
Conversion of Series A
preferred stock (141,063) 141,063 (352,657) 1,411 351,246
Sale of Series C preferred
stock less related costs 410,906 1,002,832
Dividends on preferred stock (131,325)
Net loss for the year
--------- --------- ---------- ------- -----------
Balance December 31, 1994 2,235,116 5,764,711 5,507,362 57,647 13,906,635
========= ========= ========== ======= ===========
Common stock issued under
stock purchase plan, exercise
of warrants and stock options
less related costs 37,989 380 50,999
Issuance of warrants in
connection with extension
of convertible notes 22,308
Conversion of Series A
preferred stock (4,000) 4,000 (10,000) 40 9,960
Sale of Series D preferred
stock less related costs 471,500 1,205,808
Dividends on preferred stock (330,398)
Net loss for the year
--------- --------- ---------- ------- -----------
Balance December 31, 1995 2,702,616 5,806,700 6,703,170 58,067 13,659,504
========= ========= ========== ======= ===========
Common stock issued under
stock purchase plan and stock
options less related costs 107,219 1,072 253,663
Common stock issued upon
exercise of stock warrants 325,993 3,260 876,829
Conversion of Series A
preferred stock (456,000) 456,000 (1,140,000) 4,560 1,135,440
Conversion of Series B
preferred stock (75,000) 75,000 (206,250) 750 205,500
Common stock issued upon
conversion of
convertible note 200,000 2,000 498,000
Dividends on preferred stock (388,737)
Net loss for the year
--------- --------- ---------- ------- -----------
Balance December 31, 1996 2,171,616 6,970,912 $5,356,920 $69,709 $16,240,199
========= ========= ========== ======= ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (continued)
<TABLE>
<CAPTION>
Accumulated
Deficit Total
------------ ----------
<S> <C> <C>
Balance January 1, 1994 $(17,162,688) $1,397,645
============ ==========
Common stock issued under
stock purchase plan, exercise
of warrants and stock options
less related costs 3,112
Issuance of warrants in
connection with extension
of convertible notes 22,148
Amortization of unearned
compensation under stock
option agreement 14,544
Conversion of Series A
preferred stock (0)
Sale of Series C preferred
stock less related costs 1,002,832
Dividends on preferred stock (131,325)
Net loss for the year (788,335) (788,335)
------------ ----------
Balance December 31, 1994 (17,951,023) 1,520,621
============ ==========
Common stock issued under
stock purchase plan, exercise
of warrants and stock options
less related costs 51,379
Issuance of warrants in
connection with extension
of convertible notes 22,308
Conversion of Series A
preferred stock --
Sale of Series D preferred
stock less related costs 1,205,808
Dividends on preferred stock (330,398)
Net loss for the year (773,251) (773,251)
------------ ----------
Balance December 31, 1995 (18,724,274) 1,696,467
============ ==========
Common stock issued under
stock purchase plan and stock
options less related costs 254,735
Common stock issued upon
exercise of stock warrants (163,858) 716,231
Conversion of Series A
preferred stock --
Conversion of Series B
preferred stock --
Common stock issued upon
conversion of
convertible note 500,000
Dividends on preferred stock (388,737)
Net loss for the year (339,056) (339,056)
------------ ----------
Balance December 31, 1996 $ (19,227,188) $ 2,439,640
============ ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
OPERATING ACTIVITIES
Year ended December 31,
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net loss $ (339,056) $ (773,251) $ (788,335)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 171,910 217,483 341,577
Loss on sale and disposal of equipment -- 7,892 28,813
Provision for losses on accounts receivable 30,000 15,000 10,400
Amortization of unearned compensation -- -- 14,544
Changes in operating assets and liabilities
Accounts receivable (249,204) (284,979) (12,573)
Inventories (121,375) (77,480) 23,417
Prepaid expenses (126,273) 22,549 67,690
Customer advances (150,000) (14,810) (174,050)
Accounts payable and accrued expenses 152,971 104,720 (195,163)
----------- ----------- -----------
Net cash used in operating activities (631,027) (782,876) (683,680)
INVESTING ACTIVITIES
Purchase of equipment (121,641) (86,286) (65,458)
Sale of equipment -- 3,000 614
Additions to patents and other assets -- -- (3,300)
----------- ----------- -----------
Net cash used in investing activities (121,641) (83,286) (68,144)
FINANCING ACTIVITIES
Dividends paid (388,737) (330,398) (131,325)
Principal payments on debt and capital leases (645,228) (358,505) (216,300)
Proceeds from issuance of debt 500,000
Net proceeds from sale of common stock 970,967 51,381 3,112
Net proceeds from sale of preferred stock -- 1,205,807 1,002,832
----------- ----------- -----------
Net cash provided by financing activities 437,002 568,285 658,319
----------- ----------- -----------
Decrease in cash and cash equivalents (315,666) (297,877) (93,505)
Cash and cash equivalents at beginning of period 1,028,476 1,326,353 1,419,858
----------- ----------- -----------
Cash and cash equivalents at end of period $ 712,810 $ 1,028,476 $ 1,326,353
=========== =========== ===========
Supplemental cash flow information:
Conversion of Series A and B preferred
stock into Common Stock $ 1,346,250 $ 10,000 $ 352,657
Conversion of Convertible note into Common Stocks 500,000 -- --
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity Everest Medical Corporation (the Company) is engaged in the
development, manufacturing, and marketing of bipolar electrosurgical
instrumentation for the minimally invasive surgery market.
Cash Equivalents The Company considers all highly liquid investments with a
maturity of less than three months when purchased to be cash equivalents. The
Companys cash equivalents consist of money market accounts and Treasury Bills
and are carried at cost which approximates market value. The cost of Treasury
Bills was $613,156 and $1,120,472 at December 31, 1996 and 1995, respectively.
Inventories Inventories are valued at the lower of cost or market determined by
the first-in, first-out (FIFO) method.
Equipment Equipment is stated at cost. The Company provides for depreciation on
a straight-line basis over estimated useful lives of from three to five years.
Maintenance, repairs, and minor renewals are expensed as incurred.
Patents Patents employed in current products are carried at cost (primarily
patent legal fees) and are amortized over 60 months. The Company reviews its
patents periodically to determine whether the patents have continuing value. The
expense of writing off patents is charged to research & development.
Income Taxes The Company accounts for income taxes under the liability method.
Per Share Data Net loss per share is computed by dividing the net loss
applicable to common shareholders by the weighted average number of common
shares outstanding during the period.
Impairment of Long-Lived Assets The Company will record impairment losses on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets carrying amount.
Use of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. INVENTORIES
Inventories consisted of:
December 31
1996 1995
-------- --------
Raw materials $447,952 $397,799
Work in process 292,912 169,167
Finished goods 39,265 91,788
-------- --------
$780,129 $658,754
======== ========
<PAGE>
3. DEBT
Debt consisted of:
December 31
1996 1995
-------- --------
Convertible notes, due
February 1997. Payable in
quarterly installments with
interest at 8% to
February 19, 1995 and
at 13% thereafter. Secured
by all assets of the
Company $ 0 $615,675
Capital leases, payable in monthly
installments at various interest
rates through 1998. 7,905 37,458
-------- --------
653,133
Less current portion 5,409 517,294
-------- --------
$2,496 $135,839
======== ========
The convertible notes were originally issued in 1992 and included
five-year detachable warrants to purchase 70,181 shares of Common Stock at $2.75
per share. The notes were convertible to Common Stock at a rate of one share for
each $2.75 of principal outstanding. In February 1994, the notes were extended
past the original maturity. As part of the agreement, interest accrued was added
to the principal balance and the Company issued warrants to purchase an
additional 61,016 shares of Common Stock at $2.75. In February 1995, the Company
issued warrants to purchase an additional 66,810 shares of Common Stock at
$2.75.
A director of the Company held one note with an outstanding principal
of $64,165 at December 31, 1995. The Company valued the warrants at fair market
value and amortizes the discount over the term of the notes as additional
interest expense.
The convertible notes were paid off during 1996.
During 1996, the Company entered into a $500,000 convertible note,
bearing interest at 13% per year. The note was due two years after its issue
date. The note was convertible to Common Stock at a rate of one share for each
$2.50 of principle outstanding. Also during 1996, the note was converted in
200,000 shares of Common Stock. Warrants to purchase 290,909 shares of Common
Stock originally issued to the noteholder in 1992 were repriced from $3.50 per
share to $2.75 per share in connection with the note. The warrants expire five
years after the date of closing.
In November 1996, the Company entered into a line of credit agreement
with a bank. Under this agreement, the Company is able to borrow up to $300,000.
The line of credit bears interest at the banks reference rate plus 1%. The line
expires in March 1997. The line is secured by the Company's accounts receivable.
At December 31, 1996, there was no balance outstanding on the line of credit.
Minimum future payments on debt and capital leases are as follows:
1997 5,409
1998 2,496
7,905
Interest paid by the Company in 1996, 1995 and 1994, was $86,873,
$132,502, and $105,068, respectively.
<PAGE>
4. OPERATING LEASE
The Company leases its office and manufacturing facility under an operating
lease that expires in 1998. Maintenance, utilities, and real estate taxes are
paid by the Company. Total rent expense under this lease was $173,067 and
$173,841 for the years ended December 31, 1996 and 1995, respectively.
Minimum future obligations on the facility lease are as follows:
1997 107,910
1998 107,910
--------
$215,820
5. INCOME TAXES
At December 31, 1996, the Company had net operating losses for federal income
tax purposes of approximately $18,462,000, plus credits for research and
development cost of approximately $298,000 that are available to offset future
taxable income through the year 2011. These carryforwards are subject to the
limitations of Internal Revenue Code section 382. This section provides that
limitations on the availability of net operating losses to offset current
taxable income result when an ownership change has occurred for federal tax
purposes. The annual limitation on net operating losses is calculated by
multiplying the value of the corporation immediately prior to the ownership
change by the long-term federal tax exempt rate.
As a result of the sale of Series A Preferred Stock in 1990, the
Company had a change of ownership under Section 382. The use of losses, incurred
through the change in ownership date, to offset future taxable income will be
limited to approximately $300,000 per year during the carryforward period. The
losses occurring after the change in ownership date are unaffected and can be
used to offset future taxable income without limit. The credits will also be
subject to limitations under these same rules.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts used for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Companys deferred tax assets are as follows:
December 31
1996 1995
---------- ----------
Net operating losses $7,016,000 $6,917,000
Depreciation 90,000 92,000
Amortization 33,000 31,000
Reserve for bad debt 17,000 6,000
Reserve for obsolete inventory 24,000 11,000
Research and development
credit amount 298,000 298,000
Other 41,000 41,000
---------- ----------
Total deferred tax asset 7,519,000 7,396,000
Less valuation allowance 7,519,000 7,396,000
---------- ----------
Net deferred tax asset $ 0 $ 0
========== ==========
6. CONVERTIBLE PREFERRED STOCK
During 1995, the Company sold 471,500 shares of Series D Convertible Preferred
Stock for $1,205,807. The Series D Preferred Stock carries a coupon rate of 10%
with dividends payable quarterly.
During 1994, the Company sold 410,906 units, each consisting of one
share of Series C Convertible Preferred Stock and a warrant to purchase one-half
share of Common Stock, for $1,129,992. The Series C Preferred Stock carries a
coupon rate of 6% with dividends payable quarterly. The conversion price is
$2.75 per share.
<PAGE>
The Company's Series B Convertible Preferred Stock carries a coupon
rate of 8% with dividends payable quarterly. The conversion price is $2.75 per
share. Each share of this Series was sold with a warrant attached to purchase
one share of Common Stock at $2.75. The warrants expire in 1998.
The Series A Convertible Preferred Stock is convertible at $2.50 per
share. This Series is subject to automatic conversion concurrently with the
closing of a public offering of the Company's Common Stock with aggregate
minimum proceeds of $7,500,000 at a minimum price per share of $5.00.
The Series A, B, C and D Preferred Stock are convertible into Common
Stock on a one-for-one basis at the option of the holders, and each holder has
voting rights on all matters submitted to shareholders on an as-if-converted
basis. Each Series of Preferred Stock provides anti-dilution provisions for any
sales of Common Stock by the Company at less than each Series conversion price,
and the conversion price is subject to adjustment for stock dividends, stock
splits and capital reorganizations. The Series B, C and D Preferred Stock
agreements provided that dividends would be held in arrears during the first
year of each issue.
7. STOCK PURCHASE AND OPTION PLANS AND WARRANTS
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, but
applies Accounting Principles Board Opinion No. 25 and related interpretations
in accounting for its plans.
The Company has a stock purchase plan, nonstatutory and incentive stock
option plans, and compensatory stock options. Total shares reserved at December
31, 1996 for convertible notes and convertible preferred stock, future employee
stock purchase plan purchases and options and warrants were 5,152,088.
Stock Purchase Plan. The Company has an employee stock purchase plan
under which the sale of 200,000 shares of its Common Stock has been authorized.
The purchase price of the shares under the plan is the lesser of 85% of the fair
market value on the first or last day of the offering period. Offering periods
are six months each. Employees may designate up to 10% of their compensation for
the purchase of stock.
Stock Option Plans. In 1992, the Company adopted the 1992 Stock Option
Plan under which 500,000 shares were reserved. Shares under this plan are
generally exercisable beginning one year from the date of grant in cumulative
amounts of one-fourth to one-third of the shares under option and expire ten
years from the date of grant. Incentive and nonstatutory options are granted at
prices not less than market on the date of grant.
In 1986, the Company adopted an Incentive Stock Option Plan under which
600,000 shares were reserved. Incentive options are generally exercisable
beginning one year from the date of grant in cumulative yearly amounts of
one-fourth to one-half of the shares under option and expire five to ten years
from the date of grant.
Also, in 1986, the Company adopted a Nonstatutory Stock Option Plan
under which 300,000 shares were reserved. Shares under this plan are exercisable
beginning eighteen months from the date of grant. Additionally, 55,000 shares
were reserved during the period from 1986 through 1989 for directors of the
Company through granting of individual non-qualified option agreements.
Non-qualified director options are exercisable beginning six months from the
date of grant. All non-qualified options expire after five years.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of the
Statement. The fair value for these options was estimated at the date of the
grant using a Black-Scholes option pricing model with the following weighted
average assumptions for 1996 and 1995, respectively: risk free interest rates of
5%; dividend yields of 0%; volatility factors of the expected market price of
the Companys stock of .5164; and a weighed-average expected life of the option
of four years.
<PAGE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different than those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. The Companys
pro forma information follows:
1996 1995
Pro forma loss applicable to
common stock $(780,840) $(1,129,276)
Pro forma loss per
common share $ (.12) $ (.20)
The pro forma results may not be representative of the future impact of
applying Statement 123 due to the phase in provisions of the Statement and
actual vesting experience.
A summary of the Company's stock option activity, and related
information for the years ended December 31 follows:
1996 1995
Weighted- Weighted-
Average Average
Options Exercise price Options Exercise Price
Outstanding beginning
of year 1,136,500 $2.31 977,450 $2.33
Granted 44,500 3.14 189,000 2.09
Exercised (94,063) 2.42 --
Canceled (30,837) 3.08 (29,950) 1.66
Outstanding
end of year 1,056,100 2.31 1,136,500 2.31
Exercisable
at end of year 807,620 621,463
Weighted average
fair value of options
granted during the
year $1.59 $ .87
Exercise prices for options outstanding as of December 31, 1996 ranged
from $1.56 to $5.00. The weighted average remaining contractual life of those
options is six years.
Shares reserved and available for grant at December 31, 1996 for the
option plans were 25,537.
Warrants At December 31, 1996, the Company had total exercisable
warrants outstanding to purchase shares of its Common Stock as follows: 13,500
shares at $2.25 per share; 1,176,074 shares at $2.75 per share; 247,150 shares
at $2.875 per share; and 109,091 shares at $3.50 per share. The warrants expire
at various dates from 1998 through 2005.
<PAGE>
8. EMPLOYEE BENEFIT PLAN
In January 1989, the Company adopted a defined contribution plan for
substantially all employees. Each employee may elect to contribute from 1% to
10% of their compensation to the plan. The Company may elect to match 100% of
employees contributions up to 2% of the employees compensation and 50%
thereafter up to 6% of the employees compensation. The Company may also make
additional contributions as determined by the Board of Directors. Employees
become 100% vested in Company contributions after four years of service. There
was no expense for this plan for the years ended December 31, 1996, 1995 and
1994.
9. EXPORT SALES AND MAJOR CUSTOMERS
Total sales to foreign customers were $1,310,700, $894,334 and $960,586, in
1996, 1995 and 1994, respectively. Sales to the Company's Japanese distributors
amounted to $584,045, $323,638 and $671,451, in 1996, 1995 and 1994,
respectively. Accounts receivable from these distributors at December 31, 1996
was $32,980 and at December 31, 1995 included no open balance.
The Company had total sales to OEM customers of $1,863,080, $1,508,013
and $2,151,634, in 1996, 1995 and 1994, respectively. Sales to one OEM customer
amounted to $975,094 in 1996. Sales to another OEM customer was $749,941 in
1995. Accounts receivable at December 31, 1996 and 1995 included $146,803 and
$137,000 from these customers.
10. CREDIT RISK
The Company is subject to credit risk on its accounts receivable which are
primarily with health care facilities, original equipment manufacturers, and
medical products distributors. The Company performs credit investigations to
minimize credit risk. Certain distributors have the right to return unsold
product in the event the distributors agreement is terminated for any cause.
<PAGE>
Report of Independent Auditors
Shareholders and Board of Directors
Everest Medical Corporation
We have audited the accompanying balance sheets of Everest Medical Corporation
as of December 31, 1996 and 1995, and the related statements of operations,
changes in shareholders equity and cash flows for the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Everest Medical Corporation at
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Minneapolis, Minnesota
January 17, 1997
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-KSB)
of Everest Medical Corporation of our report dated January 17, 1997, included in
the 1996 Annual Report to Shareholders of Everest Medical Corporation.
We also consent to the incorporation by reference in the Registration Statements
on Form S-8 (Nos. 33-40186, 33-64630 and 33-95030) pertaining to the 1989
Employee Stock Purchase Plan, Registration Statement on Form S-8 (No. 33-64594)
pertaining to the 1992 Stock Option Plan, Registration Statement Form S-8 (No.
333-21383) pertaining to the 1986 Incentive Stock Option Plan and in
Registration Statement Nos. 333-05729 and 333-10763 on Form S-3, dated June 17,
1996 and August 23, 1996, respectively, of Everest Medical Corporation of our
report dated January 17, 1997, with respect to the financial statements
incorporated herein by reference.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Minneapolis, Minnesota
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 712,810
<SECURITIES> 0
<RECEIVABLES> 1,181,545
<ALLOWANCES> 46,000
<INVENTORY> 780,129
<CURRENT-ASSETS> 2,796,223
<PP&E> 1,625,643
<DEPRECIATION> 1,376,389
<TOTAL-ASSETS> 3,060,968
<CURRENT-LIABILITIES> 602,582
<BONDS> 0
0
5,356,920
<COMMON> 69,709
<OTHER-SE> (2,986,989)
<TOTAL-LIABILITY-AND-EQUITY> 3,060,968
<SALES> 6,001,772
<TOTAL-REVENUES> 6,001,772
<CGS> 3,364,885
<TOTAL-COSTS> 2,878,199
<OTHER-EXPENSES> (62,702)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 160,446
<INCOME-PRETAX> (339,056)
<INCOME-TAX> 0
<INCOME-CONTINUING> (339,056)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (339,056)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
