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, 1997 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. [ ]
The Issuer's revenues for fiscal year 1997 were $7,365,380.
As of March 16, 1998, there were 7,457,274 shares of Common Stock of the Issuer
outstanding.
The aggregate market value of the Common Stock of the Issuer (based upon the
closing sale price of the Common Stock on March 16, 1998, as reported by
NASDAQ), excluding shares owned beneficially by executive officers and
directors, was approximately $17,136,367.
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, 1997 (the
"1997 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 28, 1998 (the "1998 Proxy Statement").
Transitional Small Business Disclosure Format (check one) Yes No X
<PAGE>
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 are being utilized for a growing range of surgical
specialties such 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(R) Bipolar
Cutting/Coagulating 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 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 advanced 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
Gastrointestinal Coagulator for treating intestinal bleeding.
<PAGE>
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
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 may 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 and hernia repair 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 three years,
there have been additional products introduced to the market by competitors that
may address the need for cutting and coagulation during laparoscopic procedures.
<PAGE>
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
non-conductive 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 $1,200,000 for 1997.
BiCOAG Bipolar 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 and in 1997 they grew almost 15% from the prior year.
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 19% of the Company's revenue in 1996 and 10% in 1997.
BiLAP Bipolar Probes. The BiLAP Probe consists of a handle and a long
rigid tube. The probe contains cutting electrodes and an area to provide spot
coagulation on the distal end, and features suction and irrigation capabilities
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, due to product modifications
made in 1996, the device is now compatible with most common electrosurgical
generators, eliminating the need for an Everest Generator. Sales of the BiLAP
System to date have been minimal, and the Company does not believe sales will
increase significantly in the future.
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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 1997 exceeded $400,000, an increase of 26% from 1996.
BiLAP Bipolar Needle Electrode. The BiLAP Bipolar Needle Electrode is
similar in design to the BiLAP product line but 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 1997 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.
The Company realized a significant portion of its growth in 1996 and
1997 from the revenues generated from this product line. Revenues grew from
under $200,000 in 1995 to in excess of $1,000,000 and $2,000,000 in 1996 and
1997, respectively. The Company expects this product line to continue to be a
source of revenue growth in 1998.
<PAGE>
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 1997 were limited.
The Company also plans to introduce a 3mm Bipolar scissors in 1998 to complement
the 3mm Bipolar forceps, thereby providing additional functionality to the
clinician in the area of microlaparoscopy.
In mid-1997 the Company submitted a 510(k) submission to the United
States Food & Drug Administration for clearance to market the 3mm BiCOAG Bipolar
Forceps to be indicated for use in female tubal sterilization procedures. See
"Regulation." An estimated 700,000 tubal sterilization procedures are performed
yearly in the United States. The Company has observed a movement of these
procedures to alternate site venues, and the Company believes this may represent
a significant opportunity for this product. The Company received approval for
this procedure's labeling in March 1998.
Laparoscopic Surgical Products Under Development. The Company has
ongoing development projects to optimize the performance of its products, and
the reduction of its manufacturing costs through the benefits of value
engineering, and to offer a lower profile, 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.
<PAGE>
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. The BiSNARE experienced a
decline in 1996 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 $335,000 in 1996 as compared to
almost $411,000 in 1995. Sales of this product in Japan continued to fall by 25%
in 1997 to a level of $255,000. This decline in sales resulted from the
competitive products offered in Japan, which have eroded the Company's market
share. The Company, together with its distribution partner, KK Adachi, have
redesigned the handle and instituted other product improvements to meet the
marketplace needs. The Company is planning an introduction of the redesigned
product in the second quarter of 1998. The Company expects sales of this product
to decrease marginally in 1998 due to the market conditions and the uncertainty
of market acceptance of this redesigned BiSNARE. The BiSNARE is currently
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 1997 were unchanged from 1996 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. 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 "ligation and transection" of side
branches during minimally invasive saphenous vein harvesting. The Company
believes it can leverage its technology to these procedures without significant
obstacles. The applicable products include the BiCOAG Cutting Forceps, the
EVERSHEARS II Metal-on-Metal Bipolar Scissors and the new BiSECTOR(TM) Ligating
Forceps.
<PAGE>
In mid-1997, the Company entered into a product supply agreement with
Guidant Corporation for the cardiovascular market. Under the terms of this
agreement, Everest supplies Guidant with a version of its bipolar scissors and
bipolar cutting forceps to be packaged in the proprietary Guidant VasoView(TM)
Balloon Dissection System kit, offering clinicians a complete minimally invasive
solution for saphenous vein harvesting during cardiovascular and peripheral
vascular surgical procedures. Surgeons perform approximately 600,000 coronary
artery bypass procedures and 200,000 peripheral bypass procedures worldwide each
year. Guidant introduced the Everest Medical products to their customers during
the third quarter of 1997. Shipments to Guidant of these products represented
over 10% of the Company revenues in the fourth quarter of 1997.
In the first quarter of 1998, the Company introduced its BiSECTOR
Bipolar Ligating Forceps as a tool for minimally invasive sapheneous vein
harvesting to be included in kits being introduced on the market. The product
provides a one-step alternative to coagulate and transect vessels, compared to
the single function, more costly, scissors and clip appliers.
In addition, the Company will be exploring proprietary bipolar
technology as an application to improve the current internal mammary artery
(IMA) harvesting technique in minimally invasive, beating heart, bypass graft
procedures. With obvious vital structures such as the heart and aorta nearby,
the Company believes these relatively new and still evolving heart procedures
will be more effective due to the added safety and one-step methods that bipolar
technology brings.
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.
<PAGE>
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
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 may have established positions in certain markets.
Minimally Invasive Surgical Markets
A number of major medical products suppliers, including United States
Surgical Corporation, Ethicon, Inc. (a subsidiary of Johnson & Johnson, Inc.),
CONMED Corporation, Karl Storz Endoscopy-America Inc., Imagyn Medical
Technologies, Inc. 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.
<PAGE>
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 increased 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.
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.
Over the past 4 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 63% of its sales
volume in 1997 as compared to 58% and 54% of its volume in 1996 and 1995,
respectively. 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 1998.
<PAGE>
The Company is approaching the minimally invasive cardiac market with a
dual strategy. The first is through Guidant Corporation as a strategic marketer
and distributor of versions of the Company's bipolar products to be packaged
with the VasoView Balloon Dissection System for less invasive saphenous vein
harvesting. In addition, the Company will market a line of bipolar
instrumentation for use in non-Guidant saphenous vein harvesting systems through
a network of independent sales representatives.
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. 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 declined in 1997 due to these
customers continuing to balance their inventory levels. The Company expects
sales to these customers to increase marginally in 1998 as the ordering patterns
reflect the increased demand for these products.
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.
The Company's sales and marketing department consists of the Vice
President of Sales and Marketing, four regional sales managers, one marketing
manager for the laparoscopic product line, a product manager focused on the
minimally invasive cardiac market and two sales and marketing support
individuals. The Company expects to continue to invest in this growing
distribution strategy in 1998.
The Company intends to continue to utilize independent distributors for
foreign sales. During 1997, the Company concentrated its sales and marketing
efforts primarily in the United States market and experienced an increase in
sales internationally. The Company expects sales in 1998 to increase
domestically, as well as internationally.
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.
<PAGE>
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. For the years ended December 31, 1997 and 1996, the
Company's research and development expenditures were $633,898 and $606,970,
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 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.
<PAGE>
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.
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 a material 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.
<PAGE>
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
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 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.
In November 1997, the Company received official notice from the United
States Patent and Trademark Office ("PTO") that it intends to issue a
reexamination certificate for the Company's bipolar cutting forceps patent. The
Company had requested this reexamination in an effort to ensure the long-term
viability of the bipolar cutting forceps patent. This reexamination certificate
will state that the essential claims of the bipolar cutting forceps patent have
been upheld by the PTO. The bipolar cutting forceps design incorporates a
precision bipolar forceps for grasping and coagulation of tissue with a passive,
reciprocally-moveable surgical cutting blade positioned between the forceps jaws
to allow transection of the coagulated tissue. The Company was issued a U.S.
patent for this device on August 29, 1995. A reexamination is a PTO action to
review an issued patent in the context of newly discovered prior art.
The Company currently has one patent issue outstanding. 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 this action; however, an
unfavorable result could adversely affect to the Company's ability to use
certain of its technology in the manner expected.
<PAGE>
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 PTO. In addition, the Company has filed trademark applications
on some of its other products.
Employees
As of March 14, 1998, the Company had 79 employees, of which 78 are
full-time and one is part-time. The employees include three in research and
development, 42 in production, 18 in manufacturing support, 10 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.
Outlook and Risks
Certain statements made in this annual report on Form 10-KSB, which are
summarized here, are forward-looking statements that involve risk and
uncertainties, and actual results may be materially different. Factors that
could cause actual results to differ include, but are not limited to those
identified:
- - The expectation that as the Company continues to invest in sales and
marketing support programs, increased revenues will result from the
Everest-branded laparoscopy depends on surgeons increasing their use of
bipolar technology as an alternative to existing monopolar and ultrasonic
technologies, and upon general market conditions and competitive conditions
within this market, including the introduction of products by both U.S. and
European competitors.
- - The expectation that the Company will prevail in the patent interference
action involving its metal-on-metal bipolar scissors patent depends on the
strength of the other party's claims and on the PTO's judgment.
- - The expectation that the shipment of bipolar forceps will increase
marginally depends on the demand for such products continuing despite the
maturing of this product line for the Company's OEM customers.
- - The Company's expectation that it will experience sales growth domestically
and internationally depends on general market conditions and competitive
conditions that may be encountered in both such markets, and on Everest's
ability both (i) to increase its market share in its core business of
laparoscopy given that Everest competes with large, well-capitalized
companies who have the ability to enter into contact purchasing agreements
with large institutions, and (ii) to establish a market presence in the
minimally invasive cardiac surgery market.
- - The expectation that the MIS market in general will experience growth
depends on demand and on acceptance by physicians, hospitals and third
party payers of the believe that MIS procedures result in reduced costs.
<PAGE>
- - The expectation that the Company will increase its research and development
spending in order to achieve ultimate sales growth depends on the Company
having sufficient capital. The belief that the Company's current capital
resources will be sufficient to fund current and anticipated business
operations could be adversely impacted by changes in anticipated operating
results or the Company's inability to obtain financing on favorable terms
and to meet the Company's obligations on its preferred stock dividends.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently rents facilities consisting of approximately
23,485 square feet located at Carlson Technical Center, Suite 500, 13755 First
Avenue North, Minneapolis, Minnesota 55441. The Company pays monthly rent of
approximately $13,650, plus operating expenses and taxes, under the lease which
extends through December 2004. 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.
<PAGE>
Executive Officers of the Company
The Company's executive officers, along with their ages and positions
as of March 16, 1998, are as follows:
Name Age Position
John L. Shannon, Jr. 44 President, Chief Executive Officer and
Chairman of the Board
Michael E. Geraghty 50 Vice President, Sales and Marketing
Steven M. Blakemore 43 Vice President, Operations and Engineering
Thomas F. Murphy 38 Vice President, Finance and Administration
and Assistant Secretary
John L. Shannon, Jr. Mr. Shannon has served as Chairman of the Board
since May 1997 and as President and Chief Executive Officer since 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.
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 and
Engineering. From October 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.
<PAGE>
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 1997 Annual Report, portions of which are filed herewith in
Exhibit 13.1.
On March 6, 1998, the Company sold 411,765 shares of Common Stock to
Guidant Corporation for a total of $700,000. No commissions were paid as part of
the transaction. In issuing the shares, the Company relied upon Rule 506 of
Regulation D and Section 4(2) of the Securities Act of 1933. Guidant Corporation
was the only investor and is accredited.
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 1997 Annual Report, portions of which are filed herewith in
Exhibit 13.1.
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements of the Company for the year ended December 31,
1997 are incorporated by reference from the Company's 1997 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.
<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 1998 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 1998 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 1998 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 1998 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 1998 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.
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 16, 1998, 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, 1997; however, subsequently, the Company filed
a Form 8-K dated March 6, 1998 to report the sale of shares of the
Company's Common Stock to Guidant Corporation.
<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 26, 1998 EVEREST MEDICAL CORPORATION
By /s/ John L. Shannon, Jr.
John L. Shannon, Jr.
President, Chief Executive Officer and
Chairman of the Board
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 26, 1998
John L. Shannon, Jr. President (Principal Executive
Officer) and Chairman of the
Board
/s/ David D. Koentopf Director March 26, 1998
David D. Koentopf
(Signatures continued on following page)
<PAGE>
Signature Title Date
/s/ Thomas F. Murphy Chief Financial Officer March 26, 1998
Thomas F. Murphy (Principal Financial and
Accounting Officer)
/s/ Donald R. Brattain Director March 26, 1998
Donald R. Brattain
/s/ Richard J. Migliori, M.D. Director March 26, 1998
Richard J. Migliori, M.D.
<PAGE>
EVEREST MEDICAL CORPORATION
EXHIBIT INDEX TO ANNUAL REPORT
ON FORM 10-KSB
For the Fiscal Year Ended December 31, 1997
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))**
<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 (Incorporated by reference to Exhibit 10.18 to the
Company's Form 10-KSB for the fiscal year ended December 31, 1996)**
<PAGE>
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)
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 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)
10.22 Separation Agreement dated October 12, 1996 between the Company and R.
Keith Poppe (Incorporated by reference to Exhibit 10.25 to the
Company's Form 10-KSB for the fiscal year ended December 31, 1996)**
10.23 Terms of Employment for Michael Geraghty. (Incorporated by reference to
Exhibit 10.26 to the Company's Form 10-KSB for the fiscal year ended
December 31, 1996)**
10.24* Amendment #3 dated September 11, 1997 to Lease by and between the
Company and the Estate of James Campbell, as Landlord
11.1* Statement Re Computation of Per Share Loss
13.1* Portions of 1997 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)
27.1 Financial Data Schedule (in electronic format only)
- -------------------
* Filed herewith.
** Management contract or compensatory plan or arrangement.
AMENDMENT #3
TO LEASE BY AND BETWEEN
THE ESTATE OF JAMES CAMPBELL, AS LANDLORD
AND
EVEREST MEDICAL CORPORATION (A MINNESOTA CORPORATION),
AS TENANT
THIS AMENDMENT TO LEASE, is entered into and made as of the 11th day of
September, 1997, by and between The Trustees Under the Will and of the Estate of
James Campbell, Deceased, acting in their fiduciary and not their individual
capacities as "Landlord," and Everest Medical Corporation (a Minnesota
corporation) as "Tenant."
WITNESSETH:
WHEREAS, Landlord's predecessor in interest, Carlson Center III Limited
Partnership, and Everest Medical Corporation are the parties to that certain
lease agreement dated on or about November 20, 1989 ("Lease"), and subsequently
amended on December 7, 1992 ("Amendment #1"), and further amended on December 9,
1993 ("Amendment #2"), now collectively known as the Lease with regard to the
lease of approximately 17,985 square feet in the building owned by Landlord and
located at 13755 First Avenue North, Plymouth, Minnesota (the "Premises"); and
WHEREAS, Landlord and Tenant desire to set forth their agreement to
expand the Premises, extend the Term, and make other modifications to the Lease;
NOW THEREFORE, in consideration of the rents reserved and of the
covenants and agreements herein set forth, it is agreed that the Lease be hereby
amended from and after the date hereof as follows:
1. Term: The term of the Lease as extended in Amendment #2 shall be
further extended for a period of eighty-four (84) months (the "Second
Extension") commencing on the date of Landlord's delivery to Tenant of the
Expansion Premises, as defined below in paragraph 2 (the "Effective Date") which
date is expected to occur on December 1, 1997. Following the Effective Date,
Landlord and Tenant shall each confirm in writing the Effective Date and the new
expiration date of the Lease.
2. Premises. As of the Effective Date, the Premises shall be expanded
to incorporate that portion of the building that consists of 5,578 rentable
square feet (the "Expansion Premises") as shown on the attached Exhibit A2, and
thereafter, the Premises shall be deemed to contain a total of 23,563 rentable
square feet.
<PAGE>
3. Base Rent: Commencing on the Effective Date, the Base Rent due under
the Lease shall be as follows:
Effective Date through and including Month 36 $13,647.00 per month
Month 37 through and including Month 60 $14,137.80 per month
Month 61 through and including Month 84 $14,628.69 per month
4. Proportionate Share: As of the Effective Date, Tenant's
proportionate share as defined in Article 4 of the Lease will increase to
78.73%.
5. Termination of Lease Provisions: Upon execution of this Amendment
#3, Article 32 of the Rider to Lease Agreement dated September 20, 1989, and
Article 3 and Article 4 of Amendment #2 to the Lease dated December 9, 1993,
shall become null and void.
6. Improvements: Upon execution of this Amendment #3, Landlord shall
commence and pursue diligently to complete those improvements to the Premises
and Expansion Premises that are defined in the attached Exhibit B (the "Work").
Such Work shall be at Landlord's sole cost and expense not to exceed $129,777
(the "Tenant Improvement Allowance"). In the event the Work shall cost in excess
of the Tenant Improvement Allowance, Tenant shall reimburse Landlord for such
costs in excess of the Tenant Improvement Allowance upon presentation of an
invoice from Landlord.
Except as is hereinabove set forth, all terms, provisions and covenants
of the Lease shall remain unchanged and in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date and year first above written.
TENANT: LANDLORD:
Everest Medical Corporation The Trustees Under the Will and of The
(a Minnesota Corporation) Estate of James Campbell, Deceased,
Acting in Their Fiduciary and Not Their
Individual Capacities
By: /s/ John Shannon By: /s/ Roy S. Robins
John Shannon Roy S. Robins
Its: Chief Executive Officer Its: Director - Mainland Properties
By: /s/ Katherine A. Mattes
Katherine A. Mattes
Its: Senior Asset Manager
RESULTS OF OPERATIONS
Net Revenues
Net revenues in 1997 were $7,365,380, an increase of $1,363,608, or 23%, from
net revenues in 1996. The increase in revenues primarily reflects the Company's
emphasis on Everest-branded product sales, the shipments of cardiovascular
bipolar products to Guidant Corporation and licensing revenues of $182,940
recorded in the fourth quarter covering a period of 28 months. The Company does
not expect future licensing revenues to be material to the Company's revenues.
Revenues of the Company's branded laparoscopy product line, a growth
segment for the Company, increased to $4,612,169, a 43% increase from 1996. This
increase in revenues was primarily a result of ongoing sales and marketing
initiatives directed at increasing this segment. The 43% increase in revenues
related primarily to the BiCOAG Bipolar Cutting Forceps; revenues from this
product exceeded $2,400,000 in 1997. The Company also experienced revenue
increases of 25% and 12% in 1997 from the BiCOAG Dissecting Forceps and the
BiCOAG Classic Tip Forceps, respectively. 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. The Company believes bipolar products allow surgeons greater
safety versatility and cost savings compared to alternative technologies.
The second growth segment for the Company is the cardiovascular
business. This segment achieved revenues in excess of $400,000 from the
propriety bipolar products supplied to Guidant Corporation for use with their
VasoView Balloon Dissection System for minimally invasive saphenous vein
harvesting. The Company expects revenues from this product supply agreement to
increase in 1998 with the increased marketing and educational efforts of
Guidant.
Revenues from the Company's bipolar forceps sold to its OEM customers
in 1997 decreased 37% as these customers continue to manage their inventory
levels to meet end-user demand. The Company expects shipments of these bipolar
forceps to increase marginally in 1998.
Net revenues from gastrointestinal products decreased 6% for the year
due primarily to a 25% decline in shipments of the Company's bipolar polypectomy
snare to the Company's Japanese distributor. This decrease in revenues resulted
both from increased competitive products which eroded existing business and from
delays in obtaining regulatory approval in Japan for the Company's new version
of the bipolar snare. The Company expects revenues from this segment of the
business to decrease in 1998.
Net revenues in 1996 were $6,001,772, an increase of $1,723,231, or
40%, over net revenues in 1995. The increase in revenues was a result of a 64%
increase in sales of the Company's Everest-branded laparoscopic products and an
increase of 62% in shipments to its OEM laparoscopy customers. The revenues from
the Company's gastrointestinal products fell 12% for the year.
Gross Margin
Gross margin for 1997 was 44.3% of revenues, compared to 43.9% for 1996. This
improvement resulted from increased revenues from the Everest-branded product
offerings and the recognition of licensing revenue in the fourth quarter.
Offsetting this increase were production inefficiencies related to the BiCOAG
Bipolar Cutting Forceps caused by the rapid ramp up of production to meet the
sales demand. Two other items which impacted the production process and were
reflected in gross margin included the cardiovascular products sold to Guidant
Corporation, which carried a lower gross margin than the Everest-branded
products, and the steep decline in sales to Japan, which negatively impacted the
planned production output. Gross margin as a percent of revenues increased 2.5%
as a result of the royalties recorded in 1997. The Company expects gross margin
as a percent of revenues to increase in 1998 as the Company strives to leverage
its manufacturing overhead over a greater number of units produced.
Additionally, the Company expects to realize the benefit from the value
engineering projects aimed specifically at the BiCOAG Bipolar Cutting Forceps.
<PAGE>
Gross margin for 1996 was 43.9% of sales, compared to 38.7% for 1995.
This improvement was a result of increased sales from the Everest-branded
product offering, which allows for higher average selling prices. 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.
Sales and Marketing
Sales and marketing expenses for 1997 were $2,192,829, an increase of $661,553,
or 43%, from 1996. This increase in expenses resulted primarily from the
increased commissions related to the revenue increase, marketing initiatives to
commercialize products for the emerging minimally invasive cardiovascular
surgery market, a rebuilding of the sales and marketing staff in 1997 to meet
current and future needs, and ongoing promotional and marketing activities. The
Company expects that sales and marketing expenses will increase in 1998 as the
Company generates increased sales and continues to pursue marketing initiatives
aimed at the minimally invasive cardiovascular opportunity.
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,
continued use of product samples for clinical evaluations and increased staff to
support the network of independent manufacturers representatives.
Research and Development
Research and development expenses for 1997 were $633,898, an increase of
$26,928, or 4%, from 1996. This expense increase was, in part, a result of
increased staff and other associated costs related to the Company's efforts to
obtain ISO 9000 and CE Mark approval for its products, development costs
associated with the minimally invasive cardiovascular products and ongoing
patent-related costs. The Company expects research and development costs to
increase in 1998 as the Company increases its staff and development efforts to
evaluate certain opportunities in the minimally invasive cardiovascular market,
laparoscopy and other surgical specialties. There will be incremental expenses
as the Company continues the process of obtaining ISO 9000 and CE Mark
certifications in 1998. Additionally, the Company expects to continue to incur
expenses in relation to its patent portfolio and related issues.
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 efforts with the July 1996 introduction of the 5mm BiCOAG Bipolar
Cutting Forceps. The Company also incurred increased expenses related to its
patent portfolio, including responding to patent interference and re-examination
issues which arose in 1996.
General and Administrative
General and administrative expenses for 1997 were $784,203, an increase of
$44,250, or 6%, over 1996. This increase was attributable to expenses related to
obtaining the $1,000,000 revolving line of credit secured by a private investor,
increased insurance costs and expenses related to investor communications. The
Company expects that its general and administrative expenses will increase in
1998 due to ongoing investor relations activities and overall activity increases
resulting from the growth in the business.
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 increased insurance coverage and the increased cost associated with
investor communications.
<PAGE>
Net Loss
The net loss in 1997 was $384,841 compared to a net loss of $339,056 in 1996 and
$773,251 in 1995. The net losses for 1997 and 1996 were primarily a result of
continuing increased sales and marketing efforts to change the Company's revenue
mix to the more profitable Everest-branded business, the strategic initiatives
by the Company related to the minimally invasive cardiovascular opportunity, and
the ISO 9000 and CE Mark certifications. 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
manufacturing overhead. The Company believes, but cannot assume, that it will
achieve profitability in 1998 as it increases market share in its core business
of laparoscopy and continues to achieve a market presence in the minimally
invasive cardiovascular surgery market both through the Company's independent
sales channel and Guidant Corporation.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $80,362 on December 31, 1997, compared to
$712,810 on December 31, 1996. The Company expended $788,237 on operating
activities in 1997 compared to $631,027 in 1996. Operating activities in 1997
included a growth in accounts receivable due primarily to the increased sales
volume, and the growth in inventory as the Company expanded its product line
with the introduction of new products. Included in year-end accounts receivable
was $182,940 of licensing income, which was received in early January 1998. In
1997, the Company spent $187,629 on capital equipment. The Company received
$92,696 from the exercise of stock options and warrants in 1997. The Company
also borrowed $600,000 against its $1,000,000 revolving line of credit in 1997.
The Company met its obligations on its preferred stock dividends of $344,390.
The Company's obligation to pay quarterly dividend payments to three
outstanding series of preferred stock, necessary capital expenditures, growth in
inventory as the Company expands its product offering and increased operating
expenses will challenge the Company to meet its capital needs for 1998. Based on
its existing operating plan, the Company believes its credit facility will be
sufficient to meet its working capital needs in 1998, provided there are no
significant deviations from the plan in 1998. The Company completed a private
placement of 411,765 shares of common stock at $1.70 per share with Guidant
Corporation on March 6, 1998. The Company believes this $700,000 capital
infusion will allow the Company to meet the recent changes in the maintenance
requirements for continued listing on the Nasdaq Small Cap Market and other
working capital needs in 1998.
FORWARD-LOOKING STATEMENTS
Certain statements made in this Management Discussion and Analysis, which are
summarized here, are forward looking statements that involve risk and
uncertainties, and actual results may be materially different. Factors that
could cause actual results to differ include, but are not limited to those
identified:
o The expectation that the Company will introduce a next generation bipolar
scissors in 1998 and that revenues from the Everest-branded laparoscopic
product line will continue to grow in 1998 depends on the Company's ability
to meet its projected timeline for the new bipolar scissors, market
acceptance and demand, as well as other 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 successful marketing and
education efforts of Guidant to increase market share in this emerging
minimally invasive saphenous vein harvesting market.
o The expectation that shipments of bipolar forceps will increase marginally
in 1998 depends on the demand for such products continuing despite the
maturing of this product line for the Company's OEM customers.
o The expectation that revenues from the Company's gastrointestinal products
will decrease marginally results from the uncertainty of the market
acceptance of planned product improvements.
o The expectation that the Company's gross margin as a percent of revenues
will increase in 1998 depends on the actual production of a greater number
of units, so to allow the Company to leverage its manufacturing overhead,
and the actual benefits of value engineering projects aimed specifically at
the BiCOAG Bipolar Cutting Forceps.
o The Company's ability to achieve sales and profitability in 1998 depends on
general market conditions and competitive conditions that may be
encountered, including the Company's ability both (i) to increase its
market share in its core business of laparoscopy given that the Company
competes with larger, well capitalized companies who have the ability to
enter into contract purchasing agreements with large institutions, and (ii)
to establish a market presence in the minimally invasive cardiac surgery
market.
o The belief that the Company's current capital resources will be sufficient
to fund current and anticipated business operations could be adversely
impacted by material changes in anticipated operating results.
o The expectation that the Company will successfully complete ISO 9000 and CE
Mark certification in 1998 depends on the ability of the Company to provide
sufficient resources to prepare for the audit and meet the standards
required.
<PAGE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues $ 7,365,380 $ 6,001,772 $ 4,278,541
Cost of goods sold 4,103,920 3,364,885 2,622,993
----------- ----------- -----------
Gross margin 3,261,460 2,636,887 1,655,549
Cost and expenses
Sales and marketing 2,192,829 1,531,276 1,200,728
Research and development 633,898 606,970 555,804
General and administrative 784,203 739,953 659,756
----------- ----------- -----------
Total operating expenses 3,610,930 2,878,199 2,416,288
Interest income (16,775) (62,702) (109,078)
Interest expense 52,146 160,446 121,589
----------- ----------- -----------
Net loss (384,841) (339,056) (773,251)
Less preferred stock dividends 344,390 354,848 283,405
----------- ----------- -----------
Loss applicable to common stock $ (729,231) $ (693,904) $(1,056,656)
=========== =========== ===========
Net loss per common share-basic and dilutive $ (0.10) $ (0.11) $ (0.18)
=========== =========== ===========
Weighted average number of shares outstanding
during the period 7,017,635 6,349,775 5,789,275
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements
<PAGE>
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 80,362 $ 712,810
Accounts receivable, less allowances (1997 - $46,750;1996 - $46,000) 1,563,066 1,135,545
Inventories 1,055,811 780,129
Prepaid insurance and deposits 99,528 167,738
----------- -----------
Total current assets 2,798,767 2,796,222
Equipment
Office and display equipment 387,919 396,794
Research and development equipment 188,224 188,715
Production equipment 1,076,341 924,599
Equipment under capital lease 115,235 115,535
----------- -----------
1,767,719 1,625,643
Less allowance for depreciation (1,486,020) (1,376,389)
----------- -----------
281,699 249,254
Patents, net of amortization (1997 - $169,746; 1996 - $156,845) 2,591 15,492
----------- -----------
Total assets $ 3,083,057 $ 3,060,968
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities
Customer advances $ 38,000 $ 18,000
Accounts payable 340,378 241,766
Accrued compensation and related taxes 202,915 165,917
Other accrued liabilities 93,777 171,490
Capital lease obligations, current portion 2,496 5,409
----------- -----------
Total current liabilities 677,566 602,582
Capital lease obligations, net of current portion - 2,496
Long-term debt and other liabilities 600,000 16,250
Shareholders' equity
Convertible preferred stock series A, ($.01 par value, $2.50 liquidation value)
1,400,000 authorized; outstanding: 1997 - 632,937 shares; 1996 - 636,937 shares 1,551,717 1,561,717
Convertible preferred stock series B, ($01 par value, $2.75 liquidation value)
730,000 authorized; outstanding: 1997 - 637,273 shares; 1996 - 652,273 shares 1,545,313 1,586,563
Convertible preferred stock series C, ($.01 par value, $2.75 liquidation value)
authorized and outstanding: 1997-410,906 shares; 1996-410,906 shares 1,002,832 1,002,832
Convertible preferred stock series D, ($.01 par value, $2.875 liquidation value)
authorized and outstanding: 1997-471,500 shares; 1996-471,500 shares 1,205,808 1,205,808
Common stock, ($.01 par value) 12,461,821 authorized; outstanding:
1997-7,038,002; 1996-6,970,912 70,380 69,709
Additional paid in capital 16,041,470 16,240,199
Accumulated deficit (19,612,029) (19,227,188)
----------- -----------
1,805,491 2,439,640
----------- -----------
Total liabilities and shareholders' equity $ 3,083,057 $ 3,060,968
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Preferred Shares Common Shares Preferred Stock Common Stock-Par Paid-in Capital
<S> <C> <C> <C> <C> <C>
Balance January 1, 1995 $ 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
Common stock issued under stock
purchase plan and stock options
less related costs 40,818 408 72,290
Common stock issued upon exercise of
stock warrants 7,272 73 19,925
Conversion of Series A preferred stock (4,000) 4,000 (10,000) 40 9,960
Conversion of Series B preferred stock (15,000) 15,000 (41,250) 150 41,100
Issuance of warrants in connection with
guarantee of bank line of credit 2,386
Dividends on preferred stock (344,390)
Net loss for the year
--------- --------- --------- -------- ----------
Balance December 31, 1997 2,152,616 7,038,002 $ 5,305,670 $ 70,380 $ 16,041,470
========= ========= ========= ======== ==========
</TABLE>
<PAGE>
(continued)
<TABLE>
<CAPTION>
Accumulated
Deficit Total
<S> <C> <C>
Balance January 1, 1995 $(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
Common stock issued under stock
purchase plan and stock options
less related costs 72,698
Common stock issued upon exercise of
stock warrants - 19,998
Conversion of Series A preferred stock -
Conversion of Series B preferred stock -
Issuance of warrants in connection with
guarantee of bank line of credit 2,386
Dividends on preferred stock (344,390)
Net loss for the year (384,841) (384,841)
----------- ---------
Balance December 31, 1997 $(19,612,029) $ 1,805,491
=========== =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $ (384,841) $ (339,056) $ (773,251)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 168,086 171,910 217,483
Loss on sale and disposal of equipment -- -- 7,892
Provision for losses on accounts receivable 750 30,000 15,000
Value of warrants granted in connection with guarantee of bank line 2,386 -- --
Changes in operating assets and liabilities
Accounts receivable (428,271) (249,204) (284,979)
Inventories (275,682) (121,375) (77,480)
Prepaid expenses 68,210 (126,273) 22,549
Customer advances 20,000 (150,000) (14,810)
Accounts payable and accrued expenses 41,647 152,971 104,720
----------- ---------- -----------
Net cash used in operating activities (787,716) (631,027) (782,876)
INVESTING ACTIVITIES
Purchase of equipment (187,629) (121,641) (86,286)
Sale of equipment -- -- 3,000
----------- ---------- -----------
Net cash used in investing activities (187,629) (121,641) (83,286)
FINANCING ACTIVITIES
Dividends paid (344,390) (388,737) (330,398)
Principal payments on debt and capital leases (5,409) (645,228) (358,505)
Proceeds from issuance of debt 600,000 500,000 --
Net proceeds from sale of common stock 92,696 970,967 51,381
Net proceeds from sale of preferred stock -- -- 1,205,807
----------- ---------- -----------
Net cash provided by financing activities 342,897 437,002 568,285
----------- ---------- -----------
Decrease in cash and cash equivalents (632,448) (315,666) (297,877)
Cash and cash equivalents at beginning of period 712,810 1,028,476 1,326,353
----------- ---------- -----------
Cash and cash equivalents at end of period $ 80,362 $ 712,810 $ 1,028,476
=========== ========== ===========
Supplemental cash flow information:
Conversion of Series A and B preferred stock into common stock $ 51,250 $ 1,346,250 $ --
Conversion of convertible note into common stock $ -- $ 500,000 $ --
</TABLE>
See accompanying notes to financial statements
<PAGE>
Notes to Financial Statements
December 31, 1997
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 Company's 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 $123,513
and $613,156 at December 31, 1997 and 1996, respectively.
Inventories
Inventories are valued at the lower of cost or market determined by the
first-in, first-out (FIFO) method.
Equipment and Fixtures
Equipment and fixtures are 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 and development.
Income Taxes
The Company accounts for income taxes under the liability method.
Per Share Data
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share (Statement 128). Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similiar to fully diluted earnings per share under
the previous rules. All earnings per share amounts for all periods have been
presented, and where necessary, restated to conform to the Statement 128
requirements.
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.
<PAGE>
2. INVENTORIES Inventories consisted of:
December 31
1997 1996
---------- ----------
Raw materials $ 493,008 $ 447,952
Work in process 462,290 292,912
Finished goods 100,513 39,265
---------- ----------
$1,055,811 $ 780,129
========== ==========
3. DEBT Debt consisted of:
December 31
1997 1996
------ ----
Line of credit, due March 1999. Interest
is payable monthly at the bank's reference
rate, which is currently 8.5%. Principal
is due in one payment on March 31, 1999.
The note is secured by a standby letter of
credit expiring on April 30, 1999. $600,000 $ -
Capital leases, payable in monthly
installments at various interest rates
through 1999. 2,496 7,905
-------- -------
Less current portion 2,496 5,409
-------- -------
$600,000 $2,496
======== =======
In November 1996, the Company entered into a line of credit agreement with a
bank. Under this agreement, the Company was able to borrow up to $300,000. The
line of credit bore interest at the bank's reference rate plus 1%. The line of
credit expired in March 1997.
In June 1997, the Company entered into a line of credit arrangement with a bank.
Under this agreement, the Company is able to borrow up to $1,000,000. The line
of credit bears interest at the bank's reference rate. The line of credit
expires March 1999. The line of credit is secured by a standby letter of credit
from a shareholder of the Company. As consideration for securing the letter of
credit, the Company will pay the shareholder $50,000 per year and granted the
shareholder a warrant to purchase 25,000 shares of common stock at an exercise
price of $2.50 per share. In addition, the shareholder holds a security interest
in all of the Company's assets, subordinated only to senior debt. The warrant
expires in May 2000. The warrant was deemed to have value of approximately
$6,900. This amount is being expensed over the life of the line of credit. At
December 31, 1997 the balance outstanding on the line of credit was $600,000.
Minimum future payments on debt and capital leases are as follows:
1998 $ 2,496
1999 600,000
---------
$602,496
=========
Interest paid by the Company in 1997, 1996 and 1995, was $49,760, $160,446, and
$132,502, respectively.
<PAGE>
4. OPERATING LEASE
The Company leases its office and manufacturing facility under an operating
lease that expires in 2004. Maintenance, utilities, and real estate taxes are
paid by the Company. Total rent expense under this lease was $165,368, $173,067
and $173,841 for the years ended December 31, 1997, 1996 and 1995, respectively.
Minimum future obligations on the facility lease are as follows:
1998 $ 163,764
1999 163,764
2000 164,255
2001 169,654
2002 170,144
Thereafter 336,460
----------
$1,168,041
==========
5. INCOME TAXES
At December 31, 1997, the Company had net operating losses for federal income
tax purposes of approximately $18,809,000, plus credits for research and
development costs of approximately $298,000 that are available to offset future
taxable income through the year 2012. 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 Company's
deferred tax assets are as follows:
December 31
1997 1996
---------- ----------
Net operating losses $7,148,000 $7,016,000
Depreciation 96,000 90,000
Amortization 35,000 33,000
Reserve for bad debt 18,000 17,000
Reserve for obsolete inventory 28,000 24,000
Research and development 298,000 298,000
credit amount
Other 30,000 41,000
---------- ----------
Total deferred tax asset 7,653,000 7,519,000
Less valuation allowance 7,653,000 7,519,000
---------- ----------
Net deferred tax asset $0 $0
========== ==========
<PAGE>
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. The conversion price is $2.875 per share.
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.
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. The
Series A Preferred Stock has anti-dilution rights for any sales of Common Stock
by the Company at less than its current conversion price, and the conversion
price for each Series of Preferred Stock 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,
1997 for convertible notes and convertible preferred stock, future employee
stock purchase plan purchases and options and warrants were 5,473,698.
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 1997, the Company adopted the 1997 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 seven years from the date of grant.
Incentive and nonstatutory options are granted at prices not less than market on
the date of grant.
<PAGE>
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 1997 and 1996, respectively: risk free interest rates of 5% and
5%; dividend yields of 0% and 0%; volatility factors of the expected market
price of the Company's stock of .593 and .5164; and a weighted-average expected
life of the option of four years.
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 management's
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 Company's pro
forma information follows:
1997 1996 1995
---- ---- ----
Pro forma loss applicable to common stock $(996,570) $(780,840) $(1,129,276)
Pro forma loss per common share $(.14) $(.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.
<PAGE>
A summary of the Company's stock option activity and related information for the
years ended December 31 follows:
<TABLE>
<CAPTION>
1997 1996 1995
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding
beginning of year 989,600 $ 2.31 1,070,000 $ 2.31 910,250 $ 2.33
Granted 346,554 $ 2.23 44,500 $ 3.14 189,000 $ 2.09
Exercised (33,750) $ 1.70 (94,063) $ 2.42 -- --
Canceled (132,250) $ 2.28 (30,837) $ 3.08 (29,250) 1.66
--------- --------- ---------
Outstanding
end of year 1,170,154 $ 2.31 989,600 $ 2.31 1,070,000 2.31
========= ========= =========
Exercisable
at end of year 944,064 807,620 621,463
========= ========= =========
Weighted average
fair value of options
granted during the
year $ .93 $ 1.59 $ .87
=============================================================
</TABLE>
Exercise prices for options outstanding as of December 31,1997 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, 1997 for the option
plans were 236,159.
Warrants
At December 31, 1997, the Company had total exercisable warrants outstanding to
purchase shares of its Common Stock as follows: 13,500 shares at $2.25 per
share; 25,000 shares at $2.50 per share:1,105,440 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.
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
15% of their compensation to the plan. The Company may elect to match 100% of
employees contributions up to 2% of the employee's compensation and 50%
thereafter up to 6% of the employee's 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, 1997, 1996 and
1995.
<PAGE>
9. EXPORT SALES AND MAJOR CUSTOMERS
Total sales to foreign customers were $1,418,234, $1,310,700 and $894,334 in
1997, 1996 and 1995, respectively. Sales to the Company's Japanese distributors
amounted to $392,101, $584,045 and $323,638, in 1997, 1996 and 1995,
respectively. Accounts receivable at December 31, 1997 and 1996 carried a credit
balance of $35,275 and a receivable balance of $32,980, respectively, from these
customers.
The Company had total sales to OEM customers of $1,913,985, $1,855,149 and
$1,508,013, in 1997, 1996 and 1995, respectively. Sales to one OEM customer
amounted to $685,553 in 1997. Sales to another OEM customer was $975,094 in
1996. Accounts receivable at December 31, 1997 and 1996 included $196,456 and
$146,803, respectively 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 distributor's agreement is terminated for any cause.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
We have audited the accompanying balance sheets of Everest Medical Corporation
as of December 31, 1997 and 1996, and the related statements of operations,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's 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, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
January 16, 1998
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is quoted on the Nasdaq SmallCap Market, 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, 1997, there were approximately 283 holders of record of the
Company's Common Stock, with approximately 2,600 beneficial holders. In
addition, there were 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 dividends paid on this Series B Preferred Stock were
$141,025 in 1997. 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 were $67,799 in 1997. 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 were $135,566 in 1997.
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 shares of Preferred Stock and (b) the Company's convertible promissory notes
and the warrants issued in connection therewith.
HIGH LOW
1997
First Quarter $3 $1 7/8
Second Quarter 3 1/8 1 3/4
Third Quarter 3 1/8 1 7/8
Fourth Quarter 2 11/16 1 1/8
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
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 16, 1998, included in
the 1997 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 on 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 16, 1998, with respect to the financial statements
incorporated herein by reference.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 80,362
<SECURITIES> 0
<RECEIVABLES> 1,609,816
<ALLOWANCES> 46,750
<INVENTORY> 1,055,811
<CURRENT-ASSETS> 2,798,767
<PP&E> 1,767,719
<DEPRECIATION> 1,486,020
<TOTAL-ASSETS> 3,083,057
<CURRENT-LIABILITIES> 677,566
<BONDS> 600,000
0
5,305,670
<COMMON> 70,380
<OTHER-SE> (3,570,559)
<TOTAL-LIABILITY-AND-EQUITY> 3,083,057
<SALES> 7,182,440
<TOTAL-REVENUES> 7,365,380
<CGS> 4,103,920
<TOTAL-COSTS> 3,610,930
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52,146
<INCOME-PRETAX> (384,841)
<INCOME-TAX> 0
<INCOME-CONTINUING> (384,841)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (384,841)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
