2
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: September 30, 1998
Commission File No.: 0-18900
EVEREST MEDICAL CORPORATION
(Exact name of small business issuer as specified in its charter)
13755 1st Avenue North, Suite 500, Minneapolis, MN
55441-5454 (Address of principal executive offices) (Zip Code)
(612) 473-6262
(Issuer's Telephone number, including area code)
MINNESOTA 41-1454928
(State of incorporation) (IRS Employer I.D.#)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
As of October 16, 1998, 7,465,875 shares of Common Stock of the Registrant were
outstanding.
Transitional Small Business Disclosure Format (check one): YES___ NO X
<PAGE>
EVEREST MEDICAL CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
(Unaudited) (Note)
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 107,623 $ 80,362
Accounts receivable, net 2,019,816 1,563,066
Inventories 1,616,101 1,055,811
Prepaid insurance and deposits 85,332 99,528
------------ ------------
Total current assets 3,828,872 2,798,767
Equipment
Office and display equipment 401,804 387,919
Research and development equipment 188,224 188,224
Production equipment 1,316,316 1,191,576
------------ ------------
1,906,344 1,767,719
Less allowance for depreciation (1,586,994) (1,486,020)
------------ ------------
319,350 281,699
Patents, net of amortization 417 2,591
------------ ------------
Total assets $ 4,148,639 $ 3,083,057
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Customer advances $ 38,000 $ 38,000
Accounts payable 498,210 340,378
Accrued compensation and related taxes 303,454 202,915
Other accrued liabilities 139,003 93,777
Bank borrowings, short-term 515,000 --
Capital lease obligations, current portion 1,052 2,496
------------ ------------
Total current liabilities 1,494,719 677,566
Capital lease obligations, net of current portion -- --
Long-term debt and other liabilities -- 600,000
Shareholders' equity
Convertible preferred stock series A, ($.01 par value,
$2.50 liquidation value) 1,400,000 authorized; outstanding:
1998 - 632,937 shares; 1997 - 632,937 shares 1,551,717 1,551,717
Convertible preferred stock series B, ($.01 par value,
$2.75 liquidation value) 730,000 authorized; outstanding:
1998 - 637,273 shares; 1997 - 637,273 shares 1,545,313 1,545,313
Convertible preferred stock series C, ($.01 par value,
$2.75 liquidation value) authorized and outstanding:
1998 - 410,906 shares; 1997 - 410,906 shares 1,002,832 1,002,832
Convertible preferred stock series D, ($.01 par value,
$2.875 liquidation value) authorized and outstanding:
1998 - 471,500 shares; 1997 - 471,500 shares 1,205,808 1,205,808
Common stock, ($.01 par value) 12,461,821 authorized; outstanding:
1998 - 7,465,875 shares; 1997 - 7,038,002 shares 74,658 70,380
Additional paid-in capital 16,505,825 16,041,470
Retained deficit (19,232,233) (19,612,029)
------------ ------------
2,653,920 1,805,491
------------ ------------
Total liabilities and shareholders' equity $ 4,148,639 $ 3,083,057
------------ ------------
</TABLE>
Note: The balance sheet at December 31, 1997 is derived from the audited
financial statements at that date.
<PAGE>
EVEREST MEDICAL CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
3 Months Ended September 30 9 Months Ended September 30
1998 1997 1998 1997
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Net sales $ 2,806,592 $ 1,762,395 $ 7,596,456 $ 5,052,515
Cost of goods sold 1,469,008 970,272 3,866,531 2,874,760
----------- ----------- ----------- -----------
Gross margin 1,337,584 792,123 3,729,925 2,177,755
Cost and expenses:
Sales and marketing 692,288 516,886 2,019,472 1,620,002
Research and development 220,128 162,170 570,399 493,084
General and administrative 232,701 174,136 705,474 622,939
----------- ----------- ----------- -----------
Total operating expenses 1,145,117 853,192 3,295,345 2,736,025
Interest and other income (1,873) (2,949) (5,975) (14,896)
Interest expense 21,136 21,115 60,757 27,266
----------- ----------- ----------- -----------
Net income (loss) 173,204 (79,235) 379,798 (570,640)
Less preferred stock dividends 85,891 85,065 257,675 258,498
----------- ----------- ----------- -----------
Loss applicable to common stock $ 87,313 $ (164,300) $ 122,123 $ (829,138)
----------- ----------- ----------- -----------
Net income (loss) per common share $ 0.01 $ (0.02) $ 0.02 $ (0.12)
----------- ----------- ----------- -----------
Weighted average number of shares
outstanding during the period 7,461,575 7,026,235 7,334,714 7,011,925
----------- ----------- ----------- -----------
</TABLE>
<PAGE>
EVEREST MEDICAL CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30
1998 1997
------------------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income / (loss) $ 379,794 $(570,639)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization 131,003 123,821
Loss on sale and disposal of equipment -- --
Provision for losses on accounts receivable 9,000 750
Provision for inventory obsolescence 21,782 10,899
Changes in operating assets and liabilities
Accounts receivable (465,749) (40,196)
Inventories (582,072) (299,701)
Prepaid expenses 14,196 78,984
Customer advances -- --
Accounts payable and accrued expenses 303,597 66,037
--------- ---------
Net cash provided by (used in) in operating activities (188,449) (630,045)
INVESTING ACTIVITIES
Purchase of equipment (166,480) (161,318)
--------- ---------
Net cash used in investing activities (166,480) (161,318)
FINANCING ACTIVITIES
Dividends paid (257,674) (258,499)
Proceeds from debt 515,000 400,000
Proceeds from warrants and options -- 67,928
Principal payments on debt and capital leases (601,444) (4,438)
Net proceeds from sale of common stock 726,308 15,408
--------- ---------
Net cash provided by financing activities 382,190 220,399
--------- ---------
Increase (decrease) in cash and cash equivalents 27,261 (570,964)
Cash and cash equivalents at beginning of period 80,362 712,810
--------- ---------
Cash and cash equivalents at end of period $ 107,623 $ 141,846
</TABLE>
<PAGE>
EVEREST MEDICAL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1998
Note A - Business Activity
Everest Medical Corporation is engaged in the development, manufacturing and
marketing of bipolar electrosurgical devices for the laparoscopy,
cardiovascular/vascular, gastrointestinal endoscopy and other minimally invasive
surgery markets.
Note B - Basis of Presentation
The accompanying unaudited, condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for nine months ended September 30, 1998 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. For further information, refer to the financial
statements and footnotes thereto included in the Company's annual report on Form
10-KSB for the year ended December 31, 1997.
Note C - Net Income (Loss) Per Share
In February 1998, the Financial Accounting Standards Board issued Statement No.
128, Earnings Per Share, which was adopted on December 31, 1997. All earnings
per share amounts for all periods have been presented, and where necessary,
restated to conform to the Statement 128 requirements. Basic earnings per share
is computed on the basis of the average number of common shares outstanding.
Diluted earnings per share does not include the effect of outstanding stock
options as they are anti-dilutive.
<PAGE>
Part I - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
RESULTS OF OPERATIONS
Net Revenues. Net revenues in the third quarter of 1998 were $2,806,592, an
increase of $1,044,197, or 59%, from the third quarter of 1997. This revenue
increase resulted primarily from the Company's Growth Businesses, consisting of
cardiovascular and Everest-branded laparoscopy, which grew 69% in the third
quarter as compared to the same period in 1997, and the Mature Businesses,
comprised of OEM laparoscopy, gastrointestinal and other products, which grew
39% in the third quarter as compared to the same period in 1997.
Net revenues for the nine months ended September 30,1998 were $7,596,456, an
increase of $2,543,941, or 50%, from the same period of 1997. The revenues for
the period reflect a 66% growth in revenues from the Growth Businesses and an
18% increase in the Mature Businesses.
The Company realized an increase of 43% in its Everest-branded laparoscopy
product sales during the first nine months of 1998. This growth reflected the
impact of the BiCOAG(R) Bipolar Cutting Forceps, currently the Company's the
largest selling product for the Company. Sales of the balance of the Company's
Everest-branded laparoscopy products also increased in this period due to the
ongoing impact of sales and marketing initiatives instituted in 1997, including
the recruitment of a more seasoned sales management team. The Company expects
revenues from the Everest-branded laparoscopic product line to continue to grow
as a result of improved sales management and growing acceptance of the Company's
bipolar product offering.
Revenues from the cardiovascular product line, consisting mainly of shipments to
Guidant Corporation of select Everest Medical propriety bipolar instruments for
use in their VasoView(TM) Balloon Dissection System for minimally invasive
saphenous vein harvesting procedures, approximated 12% of the Company's
nine-month revenues. Revenues from this product line in the first nine months of
1997 were approximately $100,000. The Company expects revenues from this product
supply agreement to increase for the fourth quarter of 1998 and in 1999 with the
increased marketing and educational efforts of Guidant.
During the nine-month period, the Company experienced an 18% increase in its
Mature Businesses primarily due to its OEM shipments of a private label version
of the Company's classic tip forceps to Ethicon Endo-Surgery, a division of
Johnson & Johnson, and Origin Medsystems, a division of Guidant Corporation.
Sales of the Company's gastrointestinal products increased 13% in the first nine
months with the demand for products under the Company's supply agreements to
C.R. Bard increasing 75% but offset by the lack of demand from the Company's
Japanese distributor whose shipments fell significantly compared to the same
period of 1997. The Company expects revenues from the Mature Businesses to
decrease marginally throughout the fourth quarter of 1998.
( 6 )
<PAGE>
Gross Margin. Gross margin in the third quarter of 1998 was 48% of revenues
compared with 45% of revenues for the third quarter of 1997. The increase in
gross margin reflected the increasing sales of Everest-branded products which
carry a higher margin, the increased production output associated with the sales
increase which allowed the Company to leverage its overhead expenses, and
certain cost reductions in the Company's raw materials.
The gross margin for the first nine months of 1998 was 49%, as compared with 43%
for the same period of 1997. The increase in gross margin reflects a more
favorable sales mix, increased production output and greater control of overhead
expenses.
Sales and Marketing. Sales and marketing expenses for the third quarter of 1998
were $692,288, an increase of $175,402, or 34%, from the same period in 1997.
The increase was a result of increased staffing to support the growing
Everest-branded product revenues, marketing initiatives aimed at the Company's
participation in the emerging minimally invasive cardiovascular market,
increases in commissions, and training costs. For the first nine months, sales
and marketing expenses were $2,019,472, an increase of $399,470, or 25%, from
the same period of 1997 for the same reasons identified for the third quarter
expense increases.
Research and Development. Research and development expenses for the third
quarter of 1998 were $220,128, an increase of $57,958, or 36%, from the same
period in 1997. For the first nine months of 1998, research and development
expenses were $570,399, an increase of $77,315, or 13%, from the same period of
1997. The increase in research and development expenses were primarily due to
costs incurred by the Company in completing ISO 9000 and CE Mark certification
and legal costs related to the defense of the Company's patent portfolio.
General and Administrative. General and administrative expenses for the third
quarter of 1998 were $232,701, an increase of $58,565, or 34%, from the same
period of 1997. For the first nine months of 1998, general and administrative
expenses were $705,474, an increase of $82,535, or 13%, from the same period of
1997. The expense increase resulted primarily from executive salary increases,
costs associated with the sale of common stock to Guidant Corporation in March
1998 and costs associated with the investor relations.
Net Income (Loss). Net income for the third quarter was $173,204, compared to a
net loss of $79,235 for the same quarter in 1997. The increase in income was
primarily due to the revenue increases, the increase in gross margin and the
leveraging of operations expenses over the growing sales base. The net income
for the first nine months of 1998 was $379,798, compared to a net loss of
$570,640 in the same period of 1997. The income for the nine-month period
reflects the revenue increases, improvement in gross margin resulting from the
favorable sales mix, increased production output, as well as continued
management of operating expenses.
( 7 )
<PAGE>
LIQUIDITY and CAPITAL RESOURCES
Cash and short-term investments were $107,623 on September 30, 1998, compared to
$80,362 on December 31, 1997. Operating activities used $188,449 of cash in the
first nine months of 1998, compared to $630,045 for the same period of 1997.
Operating activities in the first nine months required additional working
capital due to the revenue and inventory growth.
The Company spent $166,480 on capital equipment in the first nine months and
expects this level of investment to decline over the next quarter. During the
first nine months, the Company also paid preferred stock dividends of $257,674
and raised $726,308, primarily from the sale of common stock to Guidant
Corporation.
The Company used these proceeds to retire the outstanding balance of $600,000 on
the Company's line of credit. Subsequent working capital requirements in 1998
have resulted in borrowings of $515,000 against the $1,000,000 line of credit.
The Company believes that cash and short-term investments on hand, cash
generated from operations and funds available from its line of credit will be
sufficient to fund operations for at least the next twelve months, assuming that
its revenues goals are met and no significant unexpected expenditures arise.
EFFECT OF INFLATION
The Company does not believe that inflation will have a significant effect on
operations.
YEAR 2000
The Company has begun its detailed assessment of its compliance with the Year
2000 issues related to the Company's enterprise business applications. Although
continuing to seek written assurances, the Company has preliminarily concluded
that it is materially compliant with its accounting, resource planning and
network systems based on input from the third party software vendors. The
Company intends to fully test these systems over the next six months with the
goal that these applications are capable of handling transactions with Year 2000
dates, but no testing or remediation has been done to date.
( 8 )
<PAGE>
The Company also is putting a team together to further assess its Year 2000
compliance issues with other functions including computer hardware, telephone
systems, and other manufacturing equipment. The Company's goal is to document
potential risks to the Company and plan necessary actions to meet the risks
associated with the Year 2000.
The Company believes that given its reliance on outside software vendors and its
relatively simple information systems, it will achieve substantial compliance
with respect to Year 2000 issues before the end of 1999. Although the Company is
still in the process of assessment, it currently believes the costs to meet this
objective will not be material. The Company has not yet created a contingency
plan should the Year 2000 issues prove to present significant unanticipated
problems or if the Company is not ready in time. As the Company's assessment
process continues, it intends to revisit the risks of non-compliance and how to
respond.
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.
o The expectation that the revenues from the Everest-branded laparoscopic
product line will continue to grow over the next twelve months depends on
general market conditions and competitive conditions within this market,
including the introduction of products by competitors, as well as the
continued effectiveness of the Company's independent sales force.
o The expectation of increased revenues under the Company's product supply
agreement with Guidant Corporation depends upon the successful marketing
and educational efforts of Guidant to increase market share in this
emerging minimally invasive saphenous vein harvesting market.
o The expectation that revenues in the Mature Businesses will decrease
marginally in the last quarter of 1998 depends on the demand for such
products continuing despite the maturing of this product line for the
Company's customers, in addition to general competitive and market
conditions.
o The impact of Year 2000 issues on its business depends on the accuracy,
reliability and effectiveness of the Company's and its suppliers' and
customers' assessment and remediation of Year 2000 issues.
(9)
<PAGE>
PART II - OTHER INFORMATION
Item 5 - Other Information
In October 1998, the Company announced that a settlement had been reached with
Boston Scientific Corporation with respect to two separate interference actions
declared by the United States Patent and Trademark Office involving two bipolar
electrosurgical scissors designs.
The initial interference action involves a metal-on-metal bipolar scissors
technology which the Company is currently manufacturing and marketing, and in
which the Company has been declared the senior party in the interference
proceeding. The second interference involves an alternate bipolar scissors
design which is not commercialized by either party at this time, and in which
Boston Scientific has been declared the senior party.
Boston Scientific and the Company have come to terms regarding a settlement of
these two interference's. The terms of settlement include: 1) the Company will
remain the holder of United States Patent #5,352,222 relating to the
metal-on-metal bipolar scissors technology, and 2) Boston Scientific and the
Company will have access to both bipolar scissors technologies with appropriate
cross-licensing agreements executed between the two parties.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule (filed in electronic format only)
(b) Reports on Form 8-K:
None filed in the period.
(10)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
EVEREST MEDICAL CORPORATION
November 13, 1998 By: /s/ John L. Shannon, Jr.
John L. Shannon, Jr.,
President and Chief Executive Officer
November 13, 1998 By: /s/ Thomas F. Murphy
Thomas F. Murphy
Vice President of Finance and Administration
and Assistant Secretary
(11)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 107,623
<SECURITIES> 0
<RECEIVABLES> 2,019,816
<ALLOWANCES> 0
<INVENTORY> 1,616,101
<CURRENT-ASSETS> 3,828,872
<PP&E> 1,906,344
<DEPRECIATION> 1,586,994
<TOTAL-ASSETS> 4,148,639
<CURRENT-LIABILITIES> 1,494,719
<BONDS> 0
0
5,305,670
<COMMON> 74,658
<OTHER-SE> (2,726,408)
<TOTAL-LIABILITY-AND-EQUITY> 4,148,639
<SALES> 7,596,456
<TOTAL-REVENUES> 7,596,456
<CGS> 3,866,925
<TOTAL-COSTS> 3,295,345
<OTHER-EXPENSES> (5,976)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,757
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 379,798
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 379,798
<NET-INCOME> 122,123
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
