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: June 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 July 31, 1998, 7,457,274 shares of Common Stock of the Registrant were
outstanding.
Transitional Small Business Disclosure Format (check one): YES NO X
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
EVEREST MEDICAL CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
(Unaudited) (Note)
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 144,364 $ 80,362
Accounts receivable, net 1,735,888 1,563,066
Inventories 1,426,691 1,055,811
Prepaid insurance and deposits 108,406 99,528
------------ ------------
Total current assets 3,415,349 2,798,767
Equipment
Office and display equipment 400,739 387,919
Research and development equipment 188,224 188,224
Production equipment 1,264,285 1,191,576
------------ ------------
1,853,248 1,767,719
Less allowance for depreciation (1,543,405) (1,486,020)
------------ ------------
309,843 281,699
Patents, net of amortization 584 2,591
------------ ------------
Total assets $ 3,725,776 $ 3,083,057
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Customer advances $ 38,000 $ 38,000
Accounts payable 489,178 340,378
Accrued compensation and related taxes 375,916 202,915
Other accrued liabilities 68,230 93,777
Bank borrowings, short-term 200,000 --
Capital lease obligations, current portion 1,550 2,496
------------ ------------
Total current liabilities 1,172,874 677,566
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 - 7,457,274 shares; 1997 - 7,038,002 shares 74,573 70,380
Additional paid-in capital 16,578,091 16,041,470
Retained deficit (19,405,432) (19,612,029)
------------ ------------
2,552,902 1,805,491
------------ ------------
Total liabilities and shareholders' equity $ 3,725,776 $ 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 June 30 6 Months Ended June 30
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 2,638,577 $ 1,785,315 $ 4,789,864 $ 3,290,119
Cost of goods sold 1,257,547 986,816 2,397,523 1,904,488
----------- ----------- ----------- -----------
Gross margin 1,381,030 798,499 2,392,341 1,385,631
Cost and expenses:
Sales and marketing 743,150 574,603 1,327,183 1,103,116
Research and development 196,370 155,727 350,271 330,914
General and administrative 236,224 248,693 472,774 448,802
----------- ----------- ----------- -----------
Total operating expenses 1,175,744 979,023 2,150,228 1,882,832
Interest and other income (2,017) (5,204) (4,102) (11,947)
Interest expense 15,545 5,945 39,621 6,151
----------- ----------- ----------- -----------
Net income (loss) 191,758 (181,265) 206,594 (491,405)
Less preferred stock dividends 85,891 86,716 171,783 173,433
----------- ----------- ----------- -----------
Loss applicable to common stock $ 105,867 $ (267,981) $ 34,811 $ (664,838)
=========== =========== =========== ===========
Net loss per common share $ 0.01 $ (0.04) $ 0.00 $ (0.09)
=========== =========== =========== ===========
Weighted average number of shares outstanding
during the period 7,457,274 7,018,986 7,279,731 7,003,386
=========== =========== =========== ===========
</TABLE>
<PAGE>
EVEREST MEDICAL CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income / (loss) $ 206,594 $(491,405)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation and amortization 90,922 108,618
Loss on sale and disposal of equipment -- --
Provision for losses on accounts receivable 6,000 (3,367)
Provision for inventory obsolescence 12,738 2,328
Changes in operating assets and liabilities
Accounts receivable (178,821) (122,482)
Inventories (383,616) (97,331)
Prepaid expenses (8,878) 39,528
Customer advances -- --
Accounts payable and accrued expenses 296,254 51,066
--------- ---------
Net cash provided by (used in) in operating activities 41,193 (513,045)
INVESTING ACTIVITIES
Purchase of equipment (117,061) (140,288)
--------- ---------
Net cash used in investing activities (117,061) (140,288)
FINANCING ACTIVITIES
Dividends paid (171,783) (173,433)
Proceeds from debt -- 200,000
Proceeds from warrants and options -- 67,928
Principal payments on debt and capital leases (400,000) (4,142)
Net proceeds from sale of common stock 711,652 15,408
--------- ---------
Net cash provided by (used in) by financing activities 139,869 105,761
--------- ---------
Decrease in cash and cash equivalents 64,001 (547,572)
Cash and cash equivalents at beginning of period 80,362 712,810
--------- ---------
Cash and cash equivalents at end of period $ 144,363 $ 165,238
========= =========
</TABLE>
<PAGE>
EVEREST MEDICAL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
June 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 six months ended June 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 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.
( 5 )
<PAGE>
Part I - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
RESULTS OF OPERATIONS
Net Revenues. Net revenues in the second quarter of 1998 were $2,638,577, an
increase of $853,262, or 48%, from the second quarter of 1997. This revenue
increase resulted primarily from the Company's Growth Businesses, consisting of
cardiovascular and Everest-branded laparoscopy, which grew 72% in the second
quarter as compared to the same period in 1997, and the Mature Businesses,
comprised of OEM laparoscopy, gastrointestinal and other products, which grew 5%
in the second quarter as compared to the same period in 1997.
Net revenues for the six months ended June 30,1998 were $4,789,864, an increase
of $1,499,745, or 46%, from the same period of 1997. The revenues for the period
reflect a 64% growth in revenues from the Growth Businesses and a 10% increase
in the Mature Businesses.
The Company realized an increase of 41% in its Everest-branded laparoscopy
product sales during the first six months of 1998. This growth reflected the
impact of the BiCOAG(R) Bipolar Cutting Forceps which now represents the largest
product for the Company. That product led the Everest-branded laparoscopy
segment to a record sales quarter. The balance of the Company's Everest-branded
laparoscopy products also reflected growth 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 10% of the Company's first
half revenues. There were no revenues from this product line in the first six
months of 1997. The Company expects revenues from this product supply agreement
to increase in 1998 with the increased marketing and educational efforts of
Guidant.
The Company experienced a 10% 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 declined 12% in the first six months with the demand
for products under the Company's supply agreements to C.R. Bard increasing 25%
but offset by the lack of demand from the Company's Japanese distributor whose
shipments fell significantly in the first six months as compared to the same
period of 1997. The Company expects revenues from the Mature Businesses to
increase marginally throughout the second half of 1998.
( 6 )
<PAGE>
Gross Margin. Gross margin in the second quarter of 1998 was 52.3% of revenues
compared with 44.7% of revenues for the second 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 six months of 1998 was 49.9%, as compared with
42.1% 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 second quarter of 1998
were $743,150, an increase of $168,547, or 29%, 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 six months, sales
and marketing expenses were $1,327,183, an increase of $224,067, or 20%, from
the same period of 1997 for the same reasons identified earlier.
Research and Development. Research and development expenses for the second
quarter of 1998 were $196,370, an increase of $40,643, or 26%, from the same
period in 1997. For the first six months of 1998, research and development
expenses were $350,271, an increase of $19,357, or 6%, from the same period of
1997. The Company experienced such increase primarily due to the Company's final
steps toward ISO 9000 and CE Mark certification.
General and Administrative. General and administrative expenses for the second
quarter of 1998 were $236,224 an decrease of $12,469, or 5%, from the same
period of 1997. For the first six months of 1998, general and administrative
expenses were $472,774, an increase of $23,972, or 5%, from the same period of
1997. The expense increase resulted primarily from executive salary increases
and costs associated with the sale of common stock to Guidant Corporation.
Net Income (Loss). Net income for the second quarter was $191,758 compared to a
net loss of $181,265 for the same quarter in 1997. The second quarter income as
compared to the same period of 1997 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 six months of 1998 was
$206,594, compared to a net loss of $491,405 in the same period of 1997. The
income for the six-month period reflects the revenue increases, the improvement
in gross margin resulting for the favorable sales mix and the increased
production output, as well as the continued management of operating expenses.
( 7 )
<PAGE>
LIQUIDITY and CAPITAL RESOURCES
Cash and short-term investments were $144,364 on June 30, 1998, compared to
$80,362 on December 31, 1997. Operating activities provided $41,193 of cash for
the Company in the first six months of 1998, compared to cash used of $513,045
for the same period of 1997. Operating activities in the first six months
included an increase in working capital due to the revenue growth.
The Company spent $117,061 on capital equipment in the first six months and
expects this level of investment to decline over the next two quarters. During
the first six months, the Company also met its obligation on preferred stock
dividends of $171,783 and raised $711,652 from the sale of common stock to
Guidant Corporation and in connection with the Employee Stock Purchase Plan.
The Company used these proceeds to retire the outstanding balance of $600,000 on
the Company's line of credit. Subsequent working capital needs have resulted in
borrowings of $200,000 against the $1,000,000 line of credit.
The Company believes that cash and short-term investments onhand, 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.
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 in 1998 depends on general market
conditions and competitive conditions within this market, including the
introduction of products by competitors.
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.
( 8 )
<PAGE>
o The expectation that revenues in the Mature Businesses will increase
marginally in 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 Company believes that with projected revenues increases, an
improvement in gross margin and responsible management of operating
expenses, the Company will achieve profitability in 1998. Because
profitability is dependent on the risks discussed in this Outlook and Risk
section in addition to general market conditions and competitive condition
that may arise, there can be no assurance of profitability.
PART II - OTHER INFORMATION
Item 2 - Changes in Securities and Use of Proceeds
On March 6, 1998, the Company issued 411,765 shares of Common Stock to Guidant
Corporation for an aggregate price of $700,000. Because this was a transaction
not involving a public offering and because the aggregate offering price was
less than $1,000,000, the Company relied upon Section 4 (2) and rule 504 of the
Securities Act of 1933.
Item 4 - Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting on Tuesday, April 28, 1998. Proxies for the
Annual Meeting were solicited pursuant to Regulation 14 under the Securities and
Exchange Act of 1934. There was no solicitation in opposition to management's
nominees as listed in the Company's proxy statement, and all nominees were
elected.
The following persons were elected to serve as directors of the Company, by
votes indicated, until the next annual meeting of shareholders:
Number of Number of
Nominee Votes For Votes Withheld
- ------- --------- --------------
John L. Shannon, Jr. 8,211,731 89,049
David D. Koentopf 8,212,006 90,149
Donald R. Brattain 8,213,106 90,424
Richard J. Migliori, M.D. 8,213,031 89,124
( 9 )
<PAGE>
By a vote of 8,239,646 shares in favor, with 49,659 shares opposed and 12,850
shares abstaining, the shareholders also ratified the appointment of Ernst &
Young LLP as independent auditors for the fiscal year ending December 31, 1998.
Item 5 - Other Information
The Company has been involved in an interference proceeding declared by the
United States Patent and Trademark office ("PTO") involving the Company's
metal-on-metal bipolar scissors technology which it is currently marketing. An
interference is a PTO action to determine who, as between two different
inventors, is entitled to a patent on the same invention, and will result in the
PTO rendering a decision on ownership of a patent. The Company has been declared
the senior party in this action. The Company has been advised by its outside
patent counsel that, based on experience and published statistics, the senior
party is more likely than not to prevail in such an action. The Company cannot,
however, predict the outcome of the interference action. At this time, no
determination has been made by the PTO regarding the outcome of this matter.
During the quarter, the Company was notified by the PTO of two additional
interference actions relating to bipolar scissors technology. The Company has
been declared the junior party in both of these actions. These actions involve
alternate bipolar scissors designs that the Company does not currently practice.
Therefore, if the Company were not to prevail in either or both actions, the
Company does not believe that it would be adversely affect the Company's ability
to provide its current metal-on-metal bipolar scissors to the market. At this
time, the Company cannot predict the results of the interference actions.
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
August 12, 1998 By: /s/ John L. Shannon, Jr.
John L. Shannon, Jr.,
President and Chief Executive Officer
August 12, 1998 By: /s/ Thomas F. Murphy
Thomas F. Murphy
Vice President and Assistant Secretary
( 11 )
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U. S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 144,364
<SECURITIES> 0
<RECEIVABLES> 1,735,888
<ALLOWANCES> 0
<INVENTORY> 1,426,691
<CURRENT-ASSETS> 3,415,349
<PP&E> 1,853,248
<DEPRECIATION> 1,543,405
<TOTAL-ASSETS> 3,725,776
<CURRENT-LIABILITIES> 1,172,874
<BONDS> 0
0
5,305,670
<COMMON> 74,573
<OTHER-SE> (2,827,341)
<TOTAL-LIABILITY-AND-EQUITY> 3,725,776
<SALES> 4,789,864
<TOTAL-REVENUES> 4,789,864
<CGS> 2,397,523
<TOTAL-COSTS> 2,150,228
<OTHER-EXPENSES> (4,102)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,621
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 206,594
<DISCONTINUED> 0
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<NET-INCOME> 206,594
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</TABLE>
