UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: March 31, 1998
Commission File No.: 0-18900
EVEREST MEDICAL CORPORATION
(Exact name of small business issuer as specified in its charter)
13755 1st Avenue North, Suite 500, Minneapolis, MN
55441-5454 (Address of Principal executive offices) (Zip Code)
(612) 473-6262
(Issuer's Telephone number, including area code)
MINNESOTA 41-1454928
(State of incorporation) (IRS Employer I.D.#)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
As of May 10, 1998, 7,457,274 shares of Common Stock of the Registrant were
outstanding.
Transitional Small Business Disclosure Format (check one): YES___ NO X
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
EVEREST MEDICAL CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
(Unaudited) (Note)
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 68,391 $ 80,362
Accounts receivable, net 1,618,771 1,563,066
Inventories 1,119,176 1,055,811
Prepaid insurance and deposits 126,638 99,528
------------ ------------
Total current assets 2,932,976 2,798,767
Equipment
Office and display equipment 408,092 387,919
Research and development equipment 188,224 188,224
Production equipment 1,241,634 1,191,576
------------ ------------
1,837,950 1,767,719
Less allowance for depreciation (1,529,364) (1,486,020)
------------ ------------
308,586 281,699
Patents, net of amortization 1,177 2,591
------------ ------------
Total assets $ 3,242,739 $ 3,083,057
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Customer advances $ 38,000 $ 38,000
Accounts payable 476,816 340,378
Accrued compensation and related taxes 212,270 202,915
Other accrued liabilities 67,482 93,777
Bank borrowings, short-term -- --
Capital lease obligations, current portion 2,031 2,496
------------ ------------
Total current liabilities 796,599 677,566
Capital lease obligations, net of current portion -- --
Long-term debt and other liabilities -- 600,000
Shareholders' equity
Convertible preferred stock series A, ($.01 par value,
$2.50 liquidation value) 1,400,000 authorized; outstanding:
1998 - 632,937 shares; 1997 - 632,937 shares 1,551,717 1,551,717
Convertible preferred stock series B, ($.01 par value,
$2.75 liquidation value) 730,000 authorized; outstanding:
1998 - 637,273 shares; 1997 - 637,273 shares 1,545,313 1,545,313
Convertible preferred stock series C, ($.01 par value, $2.75
liquidation value) authorized and outstanding:
1998 - 410,906 shares; 1997 - 410,906 shares 1,002,832 1,002,832
Convertible preferred stock series D, ($.01 par value, $2.875
liquidation value) authorized and outstanding:
1998 - 471,500 shares; 1997 - 471,500 shares 1,205,808 1,205,808
Common stock, ($.01 par value) 12,461,821 authorized; outstanding:
1998 - 7,457,274 shares; 1997 - 7,038,002 shares 74,573 70,380
Additional paid-in capital 16,663,089 16,041,470
Retained deficit (19,597,192) (19,612,029)
------------ ------------
2,446,140 1,805,491
------------ ------------
Total liabilities and shareholders' equity $ 3,242,739 $ 3,083,057
============ ============
</TABLE>
Note: The balance sheet at December 31, 1997 is derived from the audited
financial statements at that date.
(2)
<PAGE>
EVEREST MEDICAL CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
3 Months Ended March 31
1998 1997
----------- -----------
Net sales $ 2,151,287 $ 1,504,805
Cost of goods sold 1,139,976 917,672
----------- -----------
Gross margin 1,011,311 587,133
Cost and expenses:
Sales and marketing 584,033 528,513
Research and development 153,901 175,186
General and administrative 236,551 200,110
----------- -----------
Total operating expenses 974,485 903,809
Interest and other income (2,085) (6,743)
Interest expense 24,076 206
----------- -----------
Net income (loss) 14,835 (310,139)
Less preferred stock dividends 85,891 86,716
----------- -----------
Loss applicable to common stock $ (71,056) $ (396,855)
=========== ===========
Net loss per common share $ (0.01) $ (0.06)
=========== ===========
Weighted average number of shares
outstanding during the period 7,146,574 6,993,111
=========== ===========
(3)
<PAGE>
EVEREST MEDICAL CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31
1998 1997
--------- ---------
OPERATING ACTIVITIES
<S> <C> <C>
Net income / (loss) $ 14,835 $(310,139)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation and amortization 44,758 43,035
Loss on sale and disposal of equipment -- --
Provision for losses on accounts receivable 3,000 227
Provision for inventory obsolescence 7,858 --
Changes in operating assets and liabilities
Accounts receivable (58,704) (13,788)
Inventories (71,223) (78,505)
Prepaid expenses (27,110) 38,925
Customer advances -- --
Accounts payable and accrued expenses 119,498 132,002
--------- ---------
Net cash provided by (used in) operating activities 32,912 (188,243)
INVESTING ACTIVITIES
Purchase of equipment (70,230) (122,359)
--------- ---------
Net cash used in investing activities (70,230) (122,359)
FINANCING ACTIVITIES
Dividends paid (85,892) (86,716)
Proceeds from debt -- --
Proceeds from warrants and options -- 67,928
Principal payments on debt and capital leases (600,465) (3,723)
Net proceeds from sale of common stock 711,704 --
--------- ---------
Net cash provided by (used in) by financing activities 25,347 (22,511)
--------- ---------
Decrease in cash and cash equivalents (11,971) (333,113)
Cash and cash equivalents at beginning of period 80,362 712,810
--------- ---------
Cash and cash equivalents at end of period $ 68,391 $ 379,697
========= =========
</TABLE>
(4)
<PAGE>
EVEREST MEDICAL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1998
Note A - Business Activity
Everest Medical Corporation is engaged in the development, manufacturing and
marketing of bipolar electrosurgical devices for the gastrointestinal endoscopy,
laparoscopy and other minimally invasive surgery markets.
Note B - Basis of Presentation
The accompanying unaudited, condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for three months ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1998. For further information, refer to the financial statements
and footnotes thereto included in the Company's annual report on Form 10-KSB for
the year ended December 31, 1997.
Note C - Net Loss Per Share
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings Per Share, which was adopted on December 31, 1997. All earnings
per share amounts for all periods have been presented, and where necessary,
restated to conform to the Statement 128 requirements. Basic earnings per share
is computed on the basis of the average number of common shares outstanding.
Diluted earnings per share does not include the effect of outstanding stock
options as they are anti-dilutitive.
( 5 )
<PAGE>
Part I - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
RESULTS OF OPERATIONS
Net Revenues. Net revenues in the first quarter of 1998 were $2,151,287, an
increase of $646,482, or 43%, from the first quarter of 1997. This revenue
increase was a result of the Company's Growth Businesses, consisting of
cardiovascular and Everest-branded laparoscopy, which grew 55% in the first
quarter, and the Mature Businesses, comprised of OEM laparoscopy,
gastrointestinal and other products, which grew 16% in the first quarter.
The Company realized an increase of 35% in its Everest-branded laparoscopy
product sales during the first quarter. This growth reflected the continuing
market acceptance of the BiCOAG(R) Bipolar Cutting Forceps which is now the
largest product line for the Company. The balance of the product line, including
the EVERSHEARS(R) II Bipolar Metal-on Metal Scissors, grew at modest levels
compared to the first quarter of 1997. The Company expects revenues from the
Everest-branded laparoscopic product line to continue to grow a result of
improved sales management and growing acceptance of the Company's bipolar
product offering.
Revenues from the cardiovascular product line, consisting mainly of shipments to
Guidant Corporation of select Everest Medical propriety bipolar instruments for
use in their VasoView(TM) Balloon Dissection System for minimally invasive
saphenous vein harvesting procedures, approached 10% of the Company's first
quarter revenues. There were no revenues from this product line in the first
quarter of 1997. The Company expects revenues from this product supply agreement
to increase in 1998 with the increased marketing and educational efforts of
Guidant.
The Company experienced a 16% increase in its Mature Businesses primarily due to
its OEM shipments of a private label version of the Company's classic tip
forceps to Ethicon Endo-Surgery, a division of Johnson & Johnson, and Origin
Medsystems, a division of Guidant Corporation. Sales of the Company's
gastrointestinal products declined 22% in the first quarter as the demand for
products under the Company's supply agreements to C.R. Bard and the Company's
Japanese distributor fell. The Company expects revenues from the Mature
Businesses to increase marginally throughout 1998.
Gross Margin. Gross margin in the first quarter of 1998 was 47.0% of sales
compared to 39.0% of sales for the first quarter of 1997. The increase in gross
margin reflected the increasing sales of Everest-branded products which carry a
higher margin, the increased production output associated with the sales
increase which allowed the Company to leverage its overhead expenses and certain
cost reductions in the Company's raw materials.
( 6 )
<PAGE>
Sales and Marketing Expense. Sales and marketing expenses for the first quarter
of 1998 were $584,033, an increase of $55,520, or 11%, from the same period in
1997. The increase was a result of increased staffing to support the growing
Everest-branded product sales, marketing initiatives aimed at the Company's
participation in the emerging minimally invasive cardiovascular market, and
increases in commissions and training costs.
Research and Development Expense. Research and development expenses for the
first quarter of 1998 were $153,901, an decrease of $21,285, or 12%, from the
same period in 1997. The Company experienced a decrease in expenses due
primarily to an open staff position, Vice President of Technology, which was
filled at the end of April 1998.
General and Administrative Expense. General and administrative expenses for the
first quarter of 1998 were $236,551, an increase of $36,441, or 18%, from the
same period of 1997. The Company experienced an increase in expenses as compared
to the same period of 1997, primarily due to executive salary increases and
costs associated with the sale of common stock to Guidant Corporation.
Net Income/Loss. Net income for the first quarter was $14,835, compared to a net
loss of $310,139 for the same quarter in 1997. The first quarter income as
compared to the first quarter loss of 1997 was primarily due to the revenue
increases, the increase in gross margin caused by the improving sales mix and
leveraging of operating expenses over the growing sales base.
LIQUIDITY and CAPITAL RESOURCES
Cash and short-term investments were $68,391 on March 31, 1998 compared to
$80,362 on December 31, 1997. The Company generated $32,912 of cash in operating
activities in the first three months of 1998 compared to using $188,243 for the
same period of 1997. Operating activities in the first three months included an
increase in accounts receivable due to the Company's sales growth. The Company
also experienced an increase in inventories, accounts payable and other accrued
expenses.
The Company spent $70,230 on capital equipment in the first three months and
expects this level of investment to decline over the rest of 1998. During the
quarter, the Company also paid its $85,892 dividend obligation on preferred
stock and raised $700,000 through the sale of 411,765 shares of common stock to
Guidant Corporation. The Company used these proceeds to retire the outstanding
balance of $600,000 on the Company's line of credit. As of March 31, 1998, the
Company has full access to its $1,000,000 line of credit.
The Company believes that cash and short-term investments onhand, cash projected
to be generated from operations and funds available from its line of credit will
be sufficient to fund operations for at least the next twelve months assuming
that its sales goals are met and there are no significant unexpected
expenditures.
( 7 )
<PAGE>
EFFECT OF INFLATION
The Company does not believe that inflation will have a significant effect on
operations.
OUTLOOK AND RISKS
As provided for under the Private Securities Litigation Reform Act of 1995, the
Company wishes to caution investors that the following important factors, among
others, in some cases have affected and in the future could affect the Company's
actual results of operations and cause such results to differ materially from
those anticipated in forward-looking statements made in this document.
- -- The expectation that the revenues from the Everest-branded laparoscopic
product line will continue to grow in 1998 depends on general market
conditions and competitive conditions within this market, including the
introduction of products by competitors.
- -- The expectation of increased revenues under the Company's product
supply agreement with Guidant Corporation depends upon the successful
marketing and educational efforts of Guidant to increase market share
in this emerging minimally invasive saphenous vein harvesting market.
- -- The expectation that revenues in the Mature Businesses will increase
marginally in 1998 depends on the demand for such products continuing
despite the maturing of this product line for the Company's customers.
- -- The Company believes that with projected sales increases, an
improvement in gross margin and responsible management of operating
expenses, the Company will achieve profitability in 1998. Because
profitability is dependent on the risks discussed in this Outlook and
Risk section in addition to general market conditions and competitive
condition that may arise, there can be no assurance of profitability.
( 8 )
<PAGE>
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Stock Purchase Agreement by and between Guidant Corporation
and Everest Medical Corporation dated March 6, 1998.
27 Financial Data Schedule (filed in electronic format only)
(b) Reports on Form 8-K:
The Company filed a Form 8-K on March 10, 1998 pursuant to which the
Company reported (under Item 5: Other Events) the sale on March 6, 1998
of 411,765 shares of Common Stock to Guidant Corporation for $700,000.
As part of such Form 8-K, the Company filed its February 28, 1998
balance sheets as adjusted to reflect the sale of such shares, under
Item 7(b).
( 9 )
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
EVEREST MEDICAL CORPORATION
May 12, 1998 By: /s/ John L. Shannon, Jr.
John L. Shannon, Jr.,
President and Chief Executive Officer
May 12, 1998 By: /s/ Thomas F. Murphy
Thomas F. Murphy
Vice President and Assistant Secretary
( 10 )
STOCK PURCHASE AGREEMENT
BY AND BETWEEN
GUIDANT CORPORATION
AND
EVEREST MEDICAL CORPORATION
DATED AS OF MARCH 6, 1998
<PAGE>
TABLE OF CONTENTS
Page
1. Purchase and Sale of Common Stock.....................................1
1.1 Purchase and Sale............................................1
1.2 Closing......................................................1
2. Representations and Warranties of the Company.........................1
2.1 Corporate Organization and Authority.........................1
2.2 Capitalization...............................................2
2.3 Equity Investments...........................................2
2.4 Authority; No Conflict.......................................3
2.5 Securities and Exchange Commission Documents.................3
2.6 Business Changes.............................................4
2.7 Litigation...................................................5
2.8 Compliance with Law..........................................6
2.9 Title to Properties..........................................6
2.10 Licenses, etc................................................6
2.11 No Default...................................................6
2.12 Proprietary Rights...........................................6
2.13 Environmental Matters........................................7
2.14 Taxes........................................................7
2.15 Private Offering.............................................8
2.16 Employee Plans and Relations.................................8
2.17 Brokers or Finders...........................................8
2.18 Full Disclosure..............................................8
3. Representations and Warranties of Guidant.............................9
3.1 Corporate Organization.......................................9
3.2 Authority; No Conflict.......................................9
3.3 Restricted Shares............................................9
3.4 Brokers or Finders..........................................10
4. Covenants of the Company.............................................10
4.1 Corporate Existence.........................................10
4.2 Conduct of Business in Normal Course........................10
4.3 Maintenance.................................................10
4.4 Use of Proceeds.............................................10
4.5 Preservation of Business and Relationships..................10
4.6 Reports and Access to Information...........................10
<PAGE>
5. Registration Rights; Right of Participation; Right of Consideration..11
5.1 Demand Registration Rights..................................11
5.2 Piggy-Back Registration.....................................12
5.3 Expenses of Registration....................................13
5.4 Registration Procedures.....................................14
5.5 Information by Guidant......................................15
5.6 Limitations on Registration of Issues of Securities.........15
5.7 Rule 144 Reporting..........................................15
5.8 Transfer or Assignment of Registration Rights...............15
5.9 Termination of Registration Rights..........................16
5.10 Right of Participation......................................16
5.11 Right of Consideration......................................17
6. Conditions Precedent.................................................18
6.1 Conditions to Obligations of Guidant........................18
6.2 Conditions to Obligations of the Company....................19
7. Indemnification......................................................19
7.1 Indemnification by the Company..............................19
7.2 Indemnification Procedure...................................19
8. Additional Agreements................................................20
8.1 Confidentiality.............................................20
9. Miscellaneous........................................................20
9.1 Powers and Rights Not Waived; Remedies Cumulative...........20
9.2 Notice......................................................20
9.3 Successors and Assigns......................................21
9.4 Survival of Covenants and Representations...................21
9.5 Severability................................................21
9.6 Waiver of Conditions........................................21
9.7 Counterparts................................................22
9.8 Governing Law...............................................22
9.9 Captions....................................................22
EXHIBITS
Exhibit A Disclosure Schedule
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement"), is entered into as of
March 6, 1998, by and between GUIDANT CORPORATION, an Indiana corporation
("Guidant"), and EVEREST MEDICAL CORPORATION, a Minnesota corporation (the
"Company"),
W I T N E S S E T H:
WHEREAS, Guidant desires to purchase from the Company, and the Company
desires to sell to Guidant, 411,765 shares (each, individually, a "Share,"
collectively, the "Shares") of the Company's Common Stock, par value $0.01 (the
"Common Stock"), all as more fully described below, on the terms and conditions
set forth herein; and
NOW, THEREFORE, in consideration of the promises and of the mutual
provisions, agreements and covenants contained herein, the Company and Guidant
hereby agree as follows:
1. Purchase and Sale of Common Stock.
1.1 Purchase and Sale. Subject to the terms and conditions of this
Agreement, Guidant agrees to purchase at the Closing and the Company agrees to
issue and sell to Guidant at the Closing 411,765 Shares at a purchase price of
$700,000 ($1.70 per Share).
1.2 Closing. (a) The purchase and sale of the Shares shall take place
via telecopy on March 6, 1998 at 11:00 a.m., Central Standard Time, or at such
other time as the Company and Guidant mutually agree upon, orally or in writing
(which time and place are designated as the "Closing"). At the Closing, the
Company shall deliver to Guidant certificates representing the shares being
purchased hereby against delivery by Guidant to the Company of the purchase
price therefor by wire transfer payable in same-day funds to an account
specified by the Company.
2. Representations and Warranties of the Company. Except as otherwise
set forth in the Disclosure Schedule attached hereto as Exhibit A (the
"Disclosure Schedule") or in any document expressly referenced in the Disclosure
Schedule, the Company represents and warrants to Guidant as of the date hereof
as follows:
2.1 Corporate Organization and Authority. The Company: (a) is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation; (b) has all requisite power and authority
and all necessary licenses and permits to own and operate its properties and to
carry on its business as now conducted and as presently proposed to be
conducted; and (c) is qualified to do business and is in good standing as a
foreign corporation in all states in which qualification is required by the
nature of its business except where the failure to be so qualified would not
have a material adverse effect on the Company.
The Company does not have any subsidiaries.
<PAGE>
2.2 Capitalization. The authorized capital of the Company is, or will
be immediately prior to the Closing, as follows:
(a) Common Stock. Eleven million nine hundred eighty-seven thousand
five hundred ninety-four (11,987,594) shares of Common Stock, par value $0.01,
of which seven million forty-five thousand five hundred nine (7,045,509) shares
are issued and outstanding;
(b) Preferred Stock. Three million twelve thousand four hundred six
(3,012,406) shares of Preferred Stock: One million four hundred thousand
(1,400,000) shares have been designated Series A Preferred Stock, par value
$0.01, of which six hundred thirty-two thousand nine hundred thirty-seven
(632,937) shares are issued and outstanding; seven hundred thirty thousand
(730,000) shares are designated Series B Preferred Stock, par value $0.01, of
which six hundred thirty-seven thousand two hundred seventy-three (637,273) are
issued and outstanding; four hundred ten thousand nine hundred six (410,906)
shares are designated Series C Preferred Stock, par value $0.01, all of which
are issued and outstanding; and four hundred seventy-one thousand five hundred
(471,500) shares are designated Series D Preferred Stock, par value $0.01, all
of which are issued and outstanding.
(c) Options and Warrants. Except for (i) fifty-two thousand fifty-eight
(52,058) shares of Common Stock reserved for issuance pursuant to the Employee
Stock Purchase Plan, (ii) options issued or issuable for up to an aggregate of
three hundred four thousand seven hundred (304,700) shares of Common Stock
pursuant to the 1986 Incentive Stock Option Plan, (iii) options issued or
issuable for up to an aggregate of one hundred ninety-one thousand (191,000)
shares of Common Stock pursuant to the 1986 Non-Statutory Stock Option Plan,
(iv) options issued or issuable for up to an aggregate of four hundred ninety
thousand two hundred thirteen (490,213) shares of Common Stock pursuant to the
1992 Stock option Plan, (v) options issued or issuable for up to an aggregate of
five hundred thousand (500,000) shares of Common Stock pursuant to the 1997
Stock Option Plan, (vi) and warrants to purchase an aggregate of one million
five hundred thousand one hundred eighty-one (1,500,181) shares of Common Stock
(as set forth on the Disclosure Schedule), there are no outstanding options,
warrants, rights (including preemptive rights, but excluding rights to convert
Preferred Stock into Common Stock pursuant to the provisions of the Articles of
Incorporation or any Certificate of Designation filed with the Secretary of
State of Minnesota) orally or in writing, for the purchase or acquisition from
the Company of any shares of its capital stock. There exist no rights of first
refusal or similar rights with respect to shares of the Company's capital stock
issued or sold by the Company, other than rights created by this Agreement.
All of the outstanding Common Stock and Preferred Stock was issued in
compliance with applicable federal and state securities laws and regulations.
All of the outstanding shares of the Common and Preferred Stock are, and the
Shares will be, duly authorized, validly issued, fully paid and nonassessable.
2.3 Equity Investments. The Company does not own any equity stock or
interest, directly or indirectly, in any corporation, partnership, joint
venture, firm or other entity.
<PAGE>
2.4 Authority; No Conflict. The Company has all requisite corporate
power and authority to enter into this Agreement and to issue the Shares and,
subject to satisfaction of the conditions set forth herein and therein, to
consummate the transactions contemplated hereby and thereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of the Company. This Agreement has been duly executed and delivered by the
Company, and constitutes the valid and binding obligation of the Company,
enforceable in accordance with its terms, subject to the effect of applicable
bankruptcy, insolvency, reorganization or other similar laws affecting the
rights of creditors and the effect or availability of rules of law governing
specific performance, injunctive relief or other equitable remedies. Provided
the conditions set forth in Section 0 hereof are satisfied, the execution and
delivery of this Agreement does not or will not, and the consummation of the
transactions contemplated hereby will not, conflict with, or result in any
violation of or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of
any obligation under (a) any provision of the Articles of Incorporation or
Bylaws of the Company, or (b) any material agreement or instrument, permit,
franchise, license, judgment or order, applicable to the Company or its
respective properties or assets, other than any such conflicts, violations,
defaults, terminations, cancelations or accelerations which, individually or in
the aggregate would not have a material adverse effect on the Company.
No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority (a "Governmental Entity"), is required by, or with
respect to, the Company in connection with the execution and delivery of this
Agreement or the consummation by the Company of the transactions contemplated
hereby except for such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
federal and state securities laws and the laws of any foreign country.
2.5 Securities and Exchange Commission Documents. Since it registered
itself under the Securities Exchange Act of 1934 (the "Exchange Act") on
December 6, 1990, the Company has filed all reports, schedules, forms,
statements, exhibits and other documents required to be filed by it with the
Securities and Exchange Commission (the "Commission") pursuant to the reporting
requirements of the Exchange Act (all of the foregoing, together with
Registration Statements Nos. 33-37352 and 33-45872, as amended, being referred
to herein as the "SEC Documents"). As of their respective dates, the SEC
Documents complied in all material respects with the applicable requirements of
the Securities Act of 1933 (the "Securities Act") and the Exchange Act and the
rules and regulations of the Commission promulgated thereunder applicable to
such SEC Documents, and, as of their respective dates, none of the SEC Documents
taken as a whole (when read together with all exhibits included therein and
financial statement schedules thereto and documents incorporated by reference
therein) contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. As of their respective dates, the financial statements of the
Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published results and
regulations of the commission with respect thereto. Such financial statements
have been prepared in accordance with generally accepted accounting principles
applied on a consistent basis during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto or (ii) in
the case of unaudited interim statements, to the extent they may not include
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustment).
<PAGE>
2.6 Business Changes. Since December 31, 1997, except as otherwise
contemplated by this Agreement or as disclosed in writing to Guidant or in the
SEC Documents, the Company has conducted its business only in the ordinary and
usual course and, without limiting the generality of the foregoing:
(a) There have been no changes in the condition (financial or
otherwise), business, net worth, assets, properties, employees, operations,
obligations or liabilities of the Company which, in the aggregate, have had or
may be reasonably expected to have a materially adverse effect on the condition,
business, net worth, assets, prospects, properties or operations of the Company.
(b) The Company has not issued, or authorized for issuance, or entered
into any commitment to issue, any equity security, bond, note or other security
of the Company.
(c) The Company has not incurred debt for borrowed money, nor incurred
any obligation or liability except in the ordinary and usual course of business
and in any event not in excess of One Hundred Thousand Dollars ($100,000) for
any single occurrence.
(d) The Company has not paid any obligation or liability, or
discharged, settled or satisfied any claim, lien or encumbrance, except for
current liabilities in the ordinary and usual course of business and in any
event not in excess of One Hundred Thousand Dollars ($100,000) for any single
occurrence.
(e) The Company has not declared or made any dividend, payment or other
distribution on or with respect to any share of capital stock of the Company.
(f) The Company has not purchased, redeemed or otherwise acquired or
committed itself to acquire, directly or indirectly, any share or shares of
capital stock of the Company.
(g) The Company has not mortgaged, pledged, or otherwise encumbered any
of its assets or properties, other than inventory sold in the normal course of
business or accounts receivable.
(h) The Company has not disposed of, or agreed to dispose of, by sale,
lease, license or otherwise, any asset or property, tangible or intangible,
except, in the case of such other assets and property, in the ordinary and usual
course of business, and in each case for a consideration believed to be at least
equal to the fair value of such asset or property and in any event not in excess
of One Hundred Thousand Dollars ($100,000) for any single item or Two Hundred
Fifty Thousand Dollars ($250,000) in the aggregate other than inventory sold or
returned in the normal course of business.
<PAGE>
(i) The Company has not purchased or agreed to purchase or otherwise
acquire any securities of any corporation, partnership, joint venture, firm or
other entity; the Company has not made any expenditure or commitment for the
purchase, acquisition, construction or improvement of a capital asset, except in
the ordinary and usual course of business and in any event not in excess of One
Hundred Thousand Dollars ($100,000) for any single item or Two Hundred Fifty
Thousand Dollars ($250,000) in the aggregate.
(j) The Company has not entered into any transaction or contract, or
made any commitment to do the same, except in the ordinary and usual course of
business.
(k) The Company has not sold, assigned, transferred or conveyed, or
committed itself to sell, assign, transfer or convey, any Proprietary Rights (as
defined in Section 0)
(l) The Company has not adopted or amended any bonus, incentive,
profit-sharing, stock option, stock purchase, pension, retirement,
deferred-compensation, severance, life insurance, medical or other benefit plan,
agreement, trust, fund or arrangement for the benefit of employees of any kind
whatsoever, nor entered into or amended any agreement relating to employment,
services as an independent contractor or consultant, or severance or termination
pay, nor agreed to do any of the foregoing.
(m) The Company has not effected or agreed to effect any change in its
directors, officers or key employees.
(n) The Company has not effected or committed itself to effect any
amendment or modification in its Articles of Incorporation or Bylaws, except as
contemplated by this Agreement.
2.7 Litigation. Except as disclosed in the SEC Documents, there is no
material claim, dispute, action, proceeding, notice, order, suit, appeal or
investigation, at law or in equity, pending against the Company, or involving
any of its assets or properties, before any court, agency, authority,
arbitration panel or other tribunal (other than those, if any, with respect to
which service of process or similar notice has not yet been made on the
Company), and to its knowledge, none have been threatened. The Company is aware
of no facts which, if known to shareholders, customers, governmental authorities
or other persons, would result in any such claim, dispute, action, proceeding,
suit or appeal or investigation which would have a material adverse effect on
the condition (financial or otherwise), business, net worth, assets, prospects,
properties or operations of the Company. The Company is not subject to any
order, writ, injunction or decree of any court, agency, authority, arbitration
panel or other tribunal, nor is it in default with respect to any notice, order,
writ, injunction or decree.
<PAGE>
2.8 Compliance with Law. All material licenses, franchises, permits,
clearances, consents, certificates and other evidences of authority of the
Company which are necessary to the conduct of the Company's business ("Permits")
are in full force and effect and the Company is not in violation of any Permit
in any material respect. Except for possible exceptions, the curing or
non-curing of which would not have a material adverse effect on the condition
(financial or otherwise), business, net worth, assets, prospects, properties or
operations of the Company, the business of the Company has been conducted in
accordance with all applicable laws, regulations, orders and other requirements
of governmental authorities.
2.9 Title to Properties. The Company has good and marketable title in
fee simple (or its equivalent under applicable law) to all material parcels of
real property and has good title to all the other material items of property it
purports to own, except as sold or otherwise disposed of in the ordinary course
of business.
2.10 Licenses, etc. To its knowledge, the Company owns or possesses all
the material trade names, service marks, licenses and rights with respect to the
foregoing necessary for the present conduct of its business, without any known
conflict with the rights of others.
2.11 No Default.
(a) Each of the Company's material agreements or contracts is a legal,
binding and enforceable obligation by or against the Company, subject to the
effect of applicable bankruptcy, insolvency, reorganization, moratorium or other
similar federal or state laws affecting the rights of creditors and the effect
or availability of rules of law governing specific performance, injunctive
relief or other equitable remedies (regardless of whether any such remedy is
considered in a proceeding at law or in equity). To the Company's knowledge, no
party with whom the Company has an agreement or contract is in default
thereunder or has breached any term or provision thereof which is material to
the conduct of the Company's business.
(b) The Company has performed, or is now performing, the obligations
of, and the Company is not in material default (or would by the lapse of time
and/or the giving of notice be in material default) in respect of, any contract,
agreement or commitment binding upon it or its assets or properties and material
to the conduct of its business. No third party has raised any claim, dispute or
controversy with respect to any of the contracts of the Company, whether fully
performed or currently being performed, nor has the Company received written
notice or warning of alleged nonperformance, delay in delivery or other
noncompliance by the Company with respect to its obligations under any of those
contracts, nor are there any facts which exist indicating that any of those
contracts may be totally or partially terminated or suspended by the other
parties thereto.
<PAGE>
2.12 Proprietary Rights.
(a) The Company owns or possesses licenses or other rights to use all
patents, patent applications, trademarks, trademark applications, trade secrets,
service marks, trade names, copyrights, inventions, drawings, designs, customer
lists, proprietary know-how or information, or other rights with respect thereto
(collectively referred to as "Proprietary Rights"), used in the business of the
Company, and the same are sufficient to conduct the Company's business as it has
been and is now being conducted.
(b) The operations of the Company do not conflict with or infringe, and
no one has asserted to the Company that such operations conflict with or
infringe, on any Proprietary Rights, owned, possessed or used by any third
party. There are no claims, disputes, actions, proceedings, suits or appeals
pending against the Company with respect to any Proprietary Rights (other than
those, if any, with respect to which service of process or similar notice may
not yet have been made on the Company), and, none has been threatened against
the Company. To the knowledge of the Company, there are no facts or alleged
facts which would reasonably serve as a basis for any claim that the Company
does not have the right to use, free of any rights or claims of others, all
Proprietary Rights in the development, manufacture, use, sale or other
disposition of any or all products or services presently being used, furnished
or sold in the conduct of the business of the Company as it has been and is now
being conducted.
(c) To the Company's knowledge, no employee of the Company is in
violation of any term of any employment contract, proprietary information and
inventions agreement, non-competition agreement, or any other contract or
agreement relating to the relationship of any such employee with the Company or
any previous employer.
2.13 Environmental Matters. The Company is, and at all times during the
period prior to the date hereof the Company has been, in compliance with all
applicable local, state and federal statutes, orders, rules, ordinances and
regulations relating to pollution or protection of the environment, including,
without limitation, laws relating to zoning and land use and to emissions,
discharges, releases or threatened releases of pollutants, contaminants,
hazardous or toxic materials or wastes into or on land, ambient air, surface
water, ground water, personal property or structures (including the protection,
cleanup, removal, remediation or damage thereof), or otherwise related to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport, discharge or handling of pollutants, contaminants or hazardous or
toxic substances, materials or wastes.
2.14 Taxes. All tax returns required to be filed by the Company in any
jurisdiction have, in fact, been filed, and all taxes, assessments, fees and
other governmental charges upon the Company or its Subsidiaries or upon any of
their respective properties, income or franchises, which are shown to be due and
payable in such returns have been paid. For all taxable years ending on or
before December 31, 1996, the federal income tax liability of the Company has
been satisfied. The Company does not know of any proposed additional tax
assessment against it for which adequate provision has not been made on its
accounts, and no material controversy in respect of additional federal or state
income taxes due since said date is pending or, to the knowledge of the Company,
threatened. The provisions for taxes on the books of the Company are adequate in
all material respects for all open years, and for its current fiscal period.
<PAGE>
2.15 Private Offering. Neither the Company, directly or indirectly, nor
any agent on its behalf has offered or will offer the Shares or any similar
security or has solicited or will solicit an offer to acquire the Shares or any
similar security from or has otherwise approached or negotiated or will approach
or negotiate in respect of the Shares or any similar security with any person
other than Guidant. Neither the Company, directly or indirectly, nor any agent
on its behalf has offered or will offer the Shares or any similar security or
has solicited or will solicit an offer to acquire the Shares or any similar
security from any Person so as to bring the issuance of the Shares within the
provisions of section 5 of the Securities Act.
2.16 Employee Plans and Relations.
(a) Except as provided in the SEC Documents, the Company does not have
any: (i) employee benefit plans, multi-employer plans and employee benefit plans
(as defined in section 3(2) or section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended); (ii) bonus, deferred compensation, incentive,
restricted stock, stock purchase, stock option, stock appreciation right,
phantom stock, debenture, supplemental pension, profit-sharing, royalty pool,
commission or similar plan or arrangement; (iii) employment, consulting or
termination agreement; or (iv) other plan, program, agreement, procedure,
policy, commitment, understanding or other arrangement relating to employee
benefits, executive compensation, fringe benefits, severance pay, terms of
employment or services as a director, officer, employee or independent
contractor.
(b) The Company has not been and is not a party to, or subject to, or
affected by, any collective bargaining agreement or other labor contract. The
Company has complied in all respects with all laws, rules and regulations
relating to employment, equal employment opportunity, nondiscrimination,
immigration, wages, hours, benefits, collective bargaining, the payment of
social security and similar taxes, occupational safety and health and plant
closing.
2.17 Brokers or Finders. The Company has not dealt with any broker or
finder in connection with the transactions contemplated by this Agreement. The
Company has not incurred, and shall not incur, directly or indirectly, any
liability for any brokerage or finders' fees or agents' commissions or any
similar charges in connection with this Agreement or any transaction
contemplated hereby.
2.18 Full Disclosure. Neither this Agreement, nor the SEC Documents,
nor any other written statement furnished by the Company to Guidant in
connection with the negotiation of the sale of the Shares, contains any untrue
statement of a material fact or omits a material fact necessary to make the
statements contained herein or therein not misleading. There is no fact peculiar
to the Company which the Company has not disclosed to Guidant in writing which
materially affects adversely nor, so far as the Company can now foresee, will
materially affect adversely, the properties, business, profits or condition
(financial or otherwise) of the Company taken as a whole.
<PAGE>
3. Representations and Warranties of Guidant. Except as contemplated by
this Agreement, Guidant represents and warrants to the Company as of the date
hereof as follows:
3.1 Corporate Organization. Guidant is a corporation duly incorporated,
validly existing and in good standing under the laws of Indiana.
3.2 Authority; No Conflict. Guidant has all requisite corporate power
and authority to enter into this Agreement and the related agreements
contemplated herein, and, subject to satisfaction of the conditions set forth
herein, to consummate the transactions contemplated hereby. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of Guidant. This Agreement has been duly executed and delivered by Guidant and
constitutes the valid and binding obligation of Guidant enforceable in
accordance with its terms, subject to the effect of applicable bankruptcy,
insolvency, reorganization or other similar federal or state laws affecting the
rights of creditors and the effect or availability of rules of law governing
specific performance, injunctive relief or other equitable remedies. Provided
the conditions set forth in Section 0 are satisfied, the execution and delivery
of this Agreement do not, and the consummation of the transactions contemplated
hereby will not, conflict with, or result in any violation of or default (with
or without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation under (a) any
provision of the Articles of Incorporation or Bylaws of Guidant, or (b) any
material agreement or instrument, permit, license, judgment, order, statute,
law, ordinance, rule or regulation applicable to Guidant or its properties or
assets, other than any such conflicts, violations, defaults, terminations,
cancelations or accelerations which individually or in the aggregate would not
have a material adverse effect on Guidant.
No consent, approval, order or authorization of, or registration,
declaration or filing with, any governmental authority is required by or with
respect to Guidant in connection with the execution and delivery of this
Agreement by Guidant or the consummation by Guidant of the transactions
contemplated hereby or thereby.
3.3 Restricted Shares. Guidant represents and agrees, and in entering
into this Agreement, the Company understands, and is relying upon Guidant's
representations and agreement, that (a) Guidant is acquiring the Shares for
Guidant's own account, and for the purpose of investment and not with a view to
the distribution thereof, and that Guidant has no present intention of selling,
negotiating or otherwise disposing of the Shares; it being understood, however,
that the disposition of Guidant's property shall at all times be and remain
within its control, and (b) the Shares have not been registered under section 5
of the Securities Act and that Guidant will only re-offer or resell the Shares
purchased by Guidant under this Agreement pursuant to an effective registration
statement under the Securities Act or in accordance with an available exemption
from the requirements of section 5 of the Securities Act.
<PAGE>
3.4 Brokers or Finders. Guidant has not dealt with any broker or finder
in connection with the transactions contemplated by this Agreement. Guidant has
not incurred, and shall not incur, directly or indirectly, any liability for any
brokerage or finders' fees or agents commissions or any similar charges in
connection with this Agreement or any transaction contemplated hereby.
4. Covenants of the Company. From and after the Closing until the
earlier to occur of (a) the Five (5) year anniversary of the Closing, (b) the
date on which Guidant owns fewer than 50,000 Shares, or (c) at such earlier time
as may be specified herein, the Company covenants and agrees with Guidant that:
4.1 Corporate Existence. The Company shall do or cause to be done all
things necessary to preserve and keep in full force and effect the existence,
rights and franchises of the Company.
4.2 Conduct of Business in Normal Course. The Company will not
incorporate nor cause to be incorporated any subsidiaries ("Subsidiaries")
without the prior written consent of Guidant. The Company and its Subsidiaries
shall carry on the business and their activities diligently and in the ordinary
course.
4.3 Maintenance. The Company will maintain, preserve and keep, and will
cause each of its Subsidiaries, if any, to maintain, preserve and keep, its
material properties which are used or useful in the conduct of its business
(whether owned in fee or a leasehold interest) in good repair and working order
and from time to time will make all necessary repairs, replacements, renewals
and additions so that at all times the efficiency thereof shall be maintained in
all material respects.
4.4 Use of Proceeds. The Company will use the net proceeds from the
sale of the Shares for general working capital and for other corporate purposes.
4.5 Preservation of Business and Relationships. Neither the Company nor
any of its Subsidiaries will engage in any business if, as a result, the general
nature of the business, taken on a consolidated basis, which would then be
engaged in by the Company and its Subsidiaries would be substantially changed
from the general nature of the business engaged in by the Company and its
Subsidiaries on the date of this Agreement.
4.6 Reports and Access to Information. The Company shall use reasonable
efforts to furnish promptly to Guidant (a) a copy of each report, schedule and
other document filed or received by the Company during such period pursuant to
the requirements of federal and state securities laws and (b) all other material
information concerning the business, properties and personnel of the Company and
any other materials as Guidant may reasonably request. Guidant will not use such
information for purposes other than as contemplated by this Agreement and will
otherwise hold such information in confidence (and Guidant will cause its
consultants and advisors to also hold such information in confidence).
<PAGE>
5. Registration Rights; Right of Participation; Right of Consideration.
5.1 Demand Registration Rights. If the Company shall receive at any
time after the Closing a written request from Guidant (including, for the
purposes of this Article 5, persons to whom Guidant may have sold or transferred
all or some of the Shares together with an assignment of the rights contained in
this Article 5) that the Company effect any registration with respect to some or
all of the Shares, the Company will, as soon as practicable, use its best
efforts to effect such registration (including, without limitation, filing
post-effective amendments, appropriate qualifications under applicable blue sky
or other state securities laws, and appropriate compliance with the Securities
Act) as would permit or facilitate the sale and distribution of all of the
Shares that are specified in such request.
The Company shall not be obligated to effect, any such registration
pursuant to this Section 5.1:
(i) In any particular jurisdiction in which the Company would
be required to execute a general consent to service of process in
effecting such registration, qualification, or compliance, unless the
Company is already subject to service in such jurisdiction and except
as may be required by the Securities Act; or
(ii) After the Company has initiated one such registration
pursuant to this Section 5.1 (counting for these purposes only
registrations which have been declared or ordered effective and
registrations which have been withdrawn by Guidant as to which Guidant
has not elected to bear, pursuant to Section 5.3, the expenses of such
registration and would, absent such election, have been required to
bear such expenses).
(a) Filing of Registration Statement. Subject to the foregoing clauses
(i) and (ii), the Company shall file a registration statement covering the
Shares so requested to be registered as soon as practicable after receipt of
Guidant's request; provided, however, that if, in the good faith judgment of the
Board of Directors of the Company (the "Board"), such registration would be
seriously detrimental to the Company and the Board concludes, as a result, that
it is essential to defer the filing of such registration statement at such time,
and if the Company shall furnish to Guidant a certificate signed by the
President of the Company stating that in the good faith judgment of the Board,
it would be seriously detrimental to the Company for such registration statement
to be filed in the near future and that it is, therefore, essential to defer the
filing of such registration statement, then the Company shall have the right to
defer such filing for the period during which such disclosure would be seriously
detrimental, provided that the Company may not defer the filing for a period of
more than ninety (90) days after receipt of the request of Guidant, and,
provided further, that the Company shall not defer its obligation in this manner
more than once in any twelve (12) month period.
<PAGE>
The registration statement filed pursuant to the request of Guidant
may, subject to the provisions of this Article 5, include other securities of
the Company, with respect to which registration rights have been granted, and
may include securities of the Company being sold for the account of the Company.
(b) Procedures. If the Company shall request inclusion in any
registration pursuant to Section 5.1 of securities being sold for its own
account, or if other shareholders shall request inclusion in any registration
pursuant to Section 5.1, Guidant shall offer to include such securities in the
registration and the underwriting, if any, and may condition such offer on their
acceptance of the further applicable provisions of this Article 5. The Company
shall (together with Guidant and all other shareholders) enter into an
underwriting agreement in customary form with the representative of the
underwriter or underwriters, if any, selected for such underwriting by Guidant
in its discretion. Notwithstanding any other provision of this Section 5.1, if
the representative of the underwriters, if any, advises Guidant in writing that
marketing factors require a limitation on the number of shares to be
underwritten, the number of shares to be included in the underwriting or
registration shall be allocated first, to Guidant and those other shareholders
with pari passu registration rights (collectively, "Other Rights Holders"), with
such allocation to be made among Guidant and the Other Rights Holders on a pro
rata basis, second, to the Company, and third, to other shareholders
(collectively, the "Junior Rights Holders") with registration rights junior to
the rights of Guidant and the Other Rights Holders, with the number of shares to
be included allocated among the Junior Rights Holders on a pro rata basis. If a
person who has requested inclusion in such registration as provided above does
not agree to the terms of any such underwriting, such person shall be excluded
therefrom by written notice from the Company, the underwriter or Guidant. Any
securities excluded shall also be withdrawn from such registration.
5.2 Piggy-Back Registration.
(a) If the Company shall determine to register any of its securities
either for its own account or the account of a security holder or holders
exercising their respective demand registration rights (other than pursuant to
Section 5.1), other than a registration relating solely to employee benefit
plans, or a registration relating solely to a Rule 145 transaction, or a
registration on any registration form that does not permit secondary sales, the
Company will promptly give to Guidant written notice thereof and use its best
efforts to include in such registration (and any related qualification under
blue sky laws or other compliance), except as set forth in Section 5.2(b) below,
and in any underwriting involved therein, all the Shares specified in a written
request or requests, made by any Guidant and received by the Company within
twenty (20) days after such written notice from the Company. Such written
request may specify all or a part of the Shares.
(b) Underwriting. If the registration of which the Company gives notice
is for a registered public offering involving an underwriting, the Company shall
so advise Guidant as a part of its written notice to Guidant. In such event, the
right of Guidant to registration pursuant to this Section 5.2 shall be
conditioned upon Guidant's participation in such underwriting and the inclusion
of the Shares in the underwriting to the extent provided herein. Guidant shall
enter into an underwriting agreement in customary form with the representative
of the underwriter or underwriters selected by the Company.
<PAGE>
Notwithstanding any other provision of this Section 5.2, if the
representative of the underwriters advises the Company in writing that marketing
factors require a limitation on the number of shares to be underwritten, the
representative may (subject to the limitations set forth below) exclude all
Shares from, or limit the number of Shares to be included in, the registration
and underwriting. The Company may limit, to the extent so advised by the
underwriters, the amount of securities (including Shares) to be included in the
registration by the Company's shareholders (including Guidant), or may exclude,
on a pro rata basis based on the number of shares of Common Stock held
(including shares of Common Stock issued or issuable upon conversion of other
securities of the Company, but excluding shares which have previously been
registered or sold to the public) to the extent so advised by the underwriters,
such underwritten securities entirely from such registration; provided, however,
that any such limitation or cut back shall first be applied to all shares
proposed to be sold in such offering other than for the account of the Company
which are not Shares; and provided, further, that the aggregate value of
securities (including Shares) to be included in such registration by Guidant may
not be so reduced to less than twenty-five percent (25%) of the total value of
all securities included in such registration. The Company shall so advise all
holders of securities requesting registration, and the number of shares of
securities that are entitled to be included in the registration and underwriting
shall be allocated first to the Company for securities being sold for its own
account and thereafter as set forth herein. If any person does not agree to the
terms of any such underwriting, he shall be excluded therefrom by written notice
from the Company or the underwriter. Any Shares or other securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration.
5.3 Expenses of Registration. All expenses incurred in connection with
any registration, qualification or compliance pursuant to Sections 5.1 and 5.2
hereof shall be borne by the Company; provided, however, that if Guidant bears
the expenses for any registration proceeding begun pursuant to Section 5.1 and
subsequently withdrawn by Guidant registering shares therein, such registration
proceeding shall not be counted as a requested registration pursuant to Section
5.1 hereof, except in the event that such withdrawal is based upon material
adverse information relating to the Company that is different from the
information known or available (upon request from the Company or otherwise) to
Guidant at the time of Guidant's request for registration under Section 5.1, in
which event such registration shall not be treated as a counted registration for
purposes of Section 5.1 hereof, even though Guidant did not bear the expenses
for such registration. For the purposes of this Section 5.3, the expenses of a
registration shall include, without limitation, all registration, qualification
and filing fees, printing expenses, escrow fees, fees and disbursements of
counsel for the Company and one special counsel for Guidant, blue sky fees and
expenses, and the expenses of any audits required by such registration, but
excluding all underwriting discounts and selling commissions, which shall be
borne by the holders of securities so registered pro rata on the basis of the
number of shares of securities registered on their behalf.
<PAGE>
5.4 Registration Procedures. In the case of each registration effected
by the Company pursuant to Section 5.2, the Company will keep Guidant advised in
writing as to the initiation of each registration and as to the completion
thereof. At its expense, the Company will use its best efforts to:
(a) Keep such registration effective for a period of one hundred twenty
(120) days or until Guidant has completed the distribution described in the
registration statement relating thereto, whichever first occurs; provided,
however, that _. such one hundred twenty (120) day period shall be extended for
a period of time equal to the period Guidant refrains from selling any
securities included in such registration at the request of an underwriter of
Common Stock (or other securities) of the Company or the Company;
(b) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement;
(c) Furnish such number of prospectuses and other documents incident
thereto, including any amendment of or supplement to the prospectus, as Guidant
from time to time may reasonably request;
(d) Notify Guidant at any time when a prospectus relating thereto is
required to be delivered under the Securities Act or of the happening of any
event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or incomplete in the light of the
circumstances then existing, and at the request of Guidant, prepare and furnish
to Guidant a reasonable number of copies of a supplement to or an amendment of
such prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such shares, such prospectus shall not include an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or incomplete
in the light of the circumstances then existing;
(e) Cause all such Shares registered pursuant hereunder to be listed on
each securities quotation system or exchange on which similar securities issued
by the Company are then listed;
(f) Provide a transfer agent and registrar for all Shares registered
pursuant to such registration statement and a CUSIP number for all such Shares,
in each case not later than the effective date of such registration;
(g) In connection with any underwritten offering pursuant to a
registration statement filed pursuant to Section 5.1 hereof, enter into an
underwriting agreement reasonably necessary to effect the offer and sale of
Common Stock, provided such underwriting agreement contains customary
underwriting provisions and provided further that if the underwriter so requests
the underwriting agreement will contain customary contribution provisions; and
<PAGE>
(h) Use its best efforts to comply with all applicable rules and
regulations of the Commission.
5.5 Information by Guidant. Guidant shall furnish to the Company such
information regarding Guidant and the distribution proposed by Guidant as the
Company may reasonably request in writing and as shall be reasonably required in
connection with any registration, qualification, or compliance referred to in
this Article 5.
5.6 Limitations on Registration of Issues of Securities. Without the
prior written consent of Guidant, the Company shall not grant any holders or
prospective holders of securities of the Company registration rights which are
senior to the rights of Guidant hereunder. The Company may grant registration
rights to other holders or prospective holders of securities of the Company
provided such rights are pari passu or junior to the rights of Guidant
hereunder.
5.7 Rule 144 Reporting. With a view to making available the benefits of
certain rules and regulations of the Commission that may permit the sale of the
Restricted Securities to the public without registration, the Company agrees to
use its best efforts to:
(a) Make and keep public information regarding the Company available as
those terms are understood and defined in Rule 144 under the Securities Act;
(b) File with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act
so long as (i) the Company remains subject to such reporting requirements
pursuant to the provisions of the Exchange Act and the rules promulgated
thereunder, or (ii) the Company is required to file such reports and documents
in order to comply with the provisions of Section 5.7(a) hereof;
(c) So long as Guidant owns any Shares, furnish to Guidant forthwith
upon written request a written statement by the Company as to its compliance
with the reporting requirements of Rule 144, a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents so filed
as Guidant may reasonably request in availing itself of any rule or regulation
of the Commission allowing Guidant to sell any such securities without
registration.
5.8 Transfer or Assignment of Registration Rights. The rights to cause
the Company to register securities granted to Guidant by the Company under this
Section 5 may be transferred or assigned by Guidant only to a transferee or
assignee of not less than 50,000 of the Shares (as presently constituted and
subject to subsequent adjustments for stock splits, stock dividends, reverse
stock splits, and the like) or to an affiliate of Guidant, provided that the
Company is given written notice at the time of or within a reasonable time after
such transfer or assignment, stating the name and address of the transferee or
assignee and identifying the securities with respect to which such registration
rights are being transferred or assigned, and, provided further, that the
transferee or assignee of such rights assumes the obligations of Guidant under
this Agreement in a writing delivered to the Company.
<PAGE>
5.9 Termination of Registration Rights. The right of Guidant to request
registration or inclusion in any registration pursuant to Section 5.1 of 5.2
shall terminate on the earlier to occur of (a) the date that all Shares held by
Guidant may immediately be sold under Rule 144 during any ninety (90) day period
or (b) the Closing of an acquisition of the Shares in exchange for shares of
publicly traded stock of another entity registered on a registration statement
under the Securities Act.
5.10 Right of Participation. Subject to the terms and conditions
specified in this Section 5.10, the Company hereby grants to Guidant a right of
participation with respect to future sales by the Company of its New Securities
(as hereinafter defined). If Guidant chooses to exercise the right of
participation, Guidant may designate as purchasers under such right itself or
its partners or affiliates in such proportions as it deems appropriate.
Each time the Company proposes to offer any shares of, or securities
convertible into or exercisable for any shares of, any class of its capital
stock ("New Securities"), the Company shall first make an offering of such New
Securities to Guidant in accordance with the following provisions:
(a) The Company shall deliver a notice by certified mail (the "Notice")
to Guidant stating _. its bona fide intention to offer such New Securities, _.
the number of shares of such New Securities to be offered, and _. the price and
terms, if any, upon which it proposes to offer such New Securities.
(b) Within thirty (30) calendar days after delivery of the Notice,
Guidant may elect to purchase or obtain, at the price and on the terms specified
in the Notice, up to that number of shares of such New Securities obtained by
multiplying the number of shares of New Securities being offered by the ratio of
the number of Shares held by Guidant to the total number of shares of Common
Stock outstanding.
(c) The Company may, during the ninety (90) day period following the
expiration of the period provided in subsection 5.10(b) hereof, offer the
remaining unsubscribed portion of the New Securities to any person or persons at
a price not less than, and upon terms no more favorable to the offeree than
those specified in the Notice. If the Company does not enter into an agreement
for the sale of the New Securities within such period, or if such agreement is
not consummated within forty-five (45) days of the execution thereof, the right
provided hereunder shall be deemed to be revived and such New Securities shall
not be offered unless first reoffered to Guidant in accordance herewith.
(d) The right of participation in this Section 5.10 shall not be
applicable (i) to the issuance or sale of shares of Common Stock (or options
therefor) to employees, consultants and directors, pursuant to plans or
agreements approved by the Board for the primary purpose of soliciting or
retaining their services, or (ii) to the offer and sale of shares of Common
Stock of the Company to the public pursuant to a firmly underwritten public
offering, registered under the Securities Act pursuant to a registration
statement, or (iii) to the issuance of securities pursuant to the conversion or
exercise of convertible or exercisable securities, or to the issuance of
securities in connection with a bona fide business acquisition of or by the
Company, whether by merger, consolidation, sale of assets, sale or exchange of
stock or otherwise, or (iv) to any securities issued upon exercise of currently
outstanding options or warrants.
<PAGE>
5.11 Right of Consideration.
(a) In the event that the Company receives from a third party any
indication that such third party is interested in acquiring all or substantially
all of the Company, either through an asset purchase, stock purchase, merger or
other reorganization (an "Acquisition"), the Company shall immediately notify
Guidant, in writing, of the interest of such third party. In the event that the
Company enters into negotiations with such third party with regard to an
Acquisition by such third party, it shall also negotiate in good faith with
Guidant on an equal and arms-length basis with regard to an Acquisition by
Guidant, and Guidant will be provided an equal and fair opportunity to submit a
proposal for an acquisition; provided, however, that the Company retains the
right to
(i) determine that it is not for sale;
(ii) enter into an agreement in principle or a definitive agreement
with any party making an offer with respect to an Acquisition that the
Board determines in its sole discretion to be in the best interests of
the shareholders of the Company, provided that the Company satisfies
its obligations to Guidant, as set forth in this Section 5.11;
(iii) retain the ability to terminate any such definitive agreement in
the event that the Board determines, in good faith and after
consultation with counsel, that the consummation of an Acquisition
contemplated by such definitive agreement would be inconsistent with
the fiduciary duties of the Board toward the shareholders of the
Company;
(iv) conduct a sale auction of the Company if the Board determines, in
good faith and after consultation with counsel, that such an auction
would be required by the fiduciary duties of the Board toward the
shareholders of the Company, provided that the Company satisfies its
obligations to Guidant, as set forth in this Section 5.11.
(b) If the Board determines that it will seek to pursue an Acquisition,
the Company will provide Guidant with a right of first offer (the "Right of
First Offer") to acquire the Company as follows:
(i) The Company shall, promptly upon determination by the Board to seek
to pursue such an Acquisition, notify Guidant of its determination to
that effect.
<PAGE>
(ii) Guidant shall, within thirty (30) days of such notice, provide to
the Company a written proposal detailing the terms and conditions under
which Guidant would be willing to complete an Acquisition.
(iii) The Company shall consider Guidant's offer in good faith and will
make an initial response to such offer within fifteen (15) days of the
receipt of any proposal from Guidant.
(iv) In the event that Guidant fails to respond to such notice within
the thirty (30) day period specified in 5.11(b)(ii) above, Guidant
shall be deemed to have waived its Right of First Offer.
(v) The Company shall not be obligated to accept such a proposal from
Guidant, and, in the event that it does not, it may pursue and
consummate an Acquisition by any other party on terms that it deems to
be in the best interests of its shareholders.
(vi) If the Company does not consummate such an Acquisition by such a
third party within one year of the Company's initial notice to Guidant,
Guidant shall retain its Right of First Offer upon the occurrence of
any subsequent determination with respect to an Acquisition.
6. Conditions Precedent.
6.1 Conditions to Obligations of Guidant. The obligations of Guidant to
consummate this Agreement are subject to the satisfaction on or prior to the
Closing of the following conditions, unless waived by Guidant:
(a) Representations and Warranties. The representations and warranties
of the Company set forth in this Agreement shall be true and correct in all
material respects as of the date of this Agreement and as if made at and as of
the Closing, except as otherwise contemplated by this Agreement, and Guidant
shall have received a certificate or certificates signed by the Chief Executive
Officer of the Company to such effect.
(b) Performance of Obligations. The Company shall have performed all
obligations required to be performed by it under this Agreement prior to the
Closing, and Guidant shall have received a certificate signed by the Chief
Executive Officer of the Company to such effect.
(c) No Material Adverse Change. There shall have been no changes in the
condition (financial or otherwise), business, prospects, employees, operations,
obligations or liabilities of the Company which, in the aggregate, have had or
may be reasonably expected to have a materially adverse effect on the financial
condition, business, or operations of the Company on a consolidated basis. For
the purposes of this section, a decline in the Company's average closing price
per share on the Nasdaq Small Cap market listing (measured over a period of ten
trading days prior to the date two days prior to the Closing) to a price less
than $1.25 shall be deemed to be a material adverse change.
<PAGE>
6.2 Conditions to Obligations of the Company. The obligations of the
Company to consummate the transactions contemplated hereby are subject to the
satisfaction on or prior to the Closing of the following conditions, unless
waived by the Company:
(a) Representations and Warranties. The representations and warranties
of Guidant set forth in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and as if made at and as of the
Closing, except as otherwise contemplated by this Agreement, and the Company
shall have received a certificate signed by a Vice President of Guidant to such
effect.
(b) Payment. Guidant shall have tendered to the Company Seven Hundred
Thousand Dollars ($700,000) in exchange for the Shares.
7. Indemnification.
7.1 Indemnification by the Company.
(a) The Company agrees to defend and indemnify Guidant and its
affiliates, directors, officers and shareholders, and their respective
successors and assigns (collectively, the "Guidant Indemnitees"), against, and
hold each of them harmless from, any and all losses, liabilities, taxes, claims,
suits, proceedings, demands, judgments, damages, expenses and costs, including,
without limitation, reasonable counsel fees, costs and expenses incurred in the
investigation, defense or settlement of any claims covered by this indemnity (in
this Section 0 collectively, the "Indemnifiable Damages") which any such
indemnified person may suffer or incur by reason of (i) the inaccuracy or breach
of any of the representations, warranties and covenants of the Company contained
in this Agreement or any documents, certificate or agreement delivered pursuant
hereto; or (ii) any claim by any person under any provision of any federal or
state securities law relating to any transaction, event, act or omission of or
by the Company occurring before or after the Closing.
(b) Without limiting the generality of the foregoing, with respect to
the measurement of Indemnifiable Damages, the Guidant Indemnitees shall have the
right to be put in the same financial position as they would have been in if
each of the representations, warranties and covenants of the Company had been
true and accurate, or if the Company had not breached any such covenants, or if
none of the events, claims or liabilities referred to in Section 0(a) had
occurred, been made or incurred.
7.2 Indemnification Procedure. A party seeking indemnification (the
"Indemnitee") shall give written notice to the Company of the assertion of a
claim for indemnification. If any action or proceeding shall be brought in
connection with any liability or claim to be indemnified hereunder, the
Indemnitee shall provide the Company twenty (20) calendar days to decide whether
to defend such liability or claim. During such period, the Indemnitee shall take
all reasonable steps to protect the interests of itself and the Company,
including the filing of any necessary responsive pleadings, the seeking of
emergency relief or other action necessary to maintain the status quo, subject
to reimbursement from the Company of its expenses in doing so. The Company shall
(with, if necessary, reservation of rights) defend such action or proceeding at
its expense, using counsel selected by the insurance company insuring against
any such claim and undertaking to defend such claim, or by other counsel
selected by it and approved by the Indemnitee. The Company shall keep the
Indemnitee fully apprised at all times of the status of the defense and shall
consult with the Indemnitee prior to the settlement of any indemnified matter.
Indemnitee agrees to use reasonable efforts to cooperate with Company in
connection with its defense of indemnifiable claims.
<PAGE>
8. Additional Agreements.
8.1 Confidentiality. Until such time as the parties agree, mutually and
in writing, to disclose such information, both parties agree that they will take
all necessary steps to keep the existence and terms of this Agreement
confidential and will refrain from disclosing the existence and/or terms of this
Agreement to any third parties, except as such disclosure may be required by
federal securities laws or by other government laws, regulations, or orders of
administrative or regulatory agencies. Neither party shall file any press
release with regard to the subject matter of this Agreement without first
obtaining the prior written consent of the other party as to the form, content
and timing of such press release.
9. Miscellaneous.
9.1 Powers and Rights Not Waived; Remedies Cumulative. No delay or
failure on the part of Guidant in the exercise of any power or right shall
operate as a waiver thereof; nor shall any single or partial exercise of the
same preclude any other or further exercise thereof, or the exercise of any
other power or right, and the rights and remedies of Guidant are cumulative to,
and are not exclusive of, any rights or remedies Guidant would otherwise have.
9.2 Notice. Except as otherwise expressly provided herein, any notice,
consent or document required or permitted hereunder shall be given in writing
and it or any certificates or other documents delivered hereunder shall be
deemed effectively given or delivered (as the case may be) upon personal
delivery (professional courier permissible) or when mailed by receipted United
States certified mail delivery, or five (5) business days after deposit in the
United States mail. Such certificates, documents or notice may be personally
delivered to an authorized representative of the Company or Guidant (as the case
may be) at any address where such authorized representative is present and
otherwise shall be sent to the following address:
If to the Company: Everest Medical Corporation
13755 First Avenue North
Minneapolis, MN 55441
Attention: John L. Shannon, Jr.
Fax: (612) 473-8140
With a copy to: Fredrikson & Byron, P.A.
1100 International Centre
900 Second Avenue South
Minneapolis, MN 55402
Attention: Thomas R. King
Fax: (612) 347-7077
If to Guidant: Guidant Corporation
3200 Lakeside Drive
Santa Clara, CA 95054
Attention: Greg S. Garfield
Fax: (408) 235-3987
With a copy to: Pillsbury Madison & Sutro LLP
2550 Hanover Street
Palo Alto, CA 94304
Attention: Katharine A. Martin
Fax: (650) 233-4545
9.3 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the Company and its successors and assigns and shall be
binding upon and inure to the benefit of Guidant and its successors and assigns;
provided, however, that the Company shall not assign this Agreement or any of
its rights, duties or obligations hereunder without the prior written consent of
Guidant.
9.4 Survival of Covenants and Representations. All covenants,
representations and warranties made by the Company herein and in any
certificates delivered pursuant hereto, whether or not made or delivered at the
Closing, shall survive the closing and the delivery of this Agreement by the
Company.
<PAGE>
9.5 Severability. Should any part of this Agreement for any reason be
declared invalid or unenforceable, such decision shall not affect the validity
or enforceability of any remaining portion, which remaining portion shall remain
in force and effect as if this Agreement had been executed with the invalid or
unenforceable portion thereof eliminated and it is hereby declared the intention
of the parties hereto that they would have executed the remaining portion of
this Agreement without including therein any such part, parts or portion which
may, for any reason, be hereafter declared invalid or unenforceable.
9.6 Waiver of Conditions. If at the Closing, either party hereto fails
to fulfill each of the conditions specified in Section 0 hereof, the other party
may thereupon elect to be relieved of all further obligations under this
Agreement. Without limiting the foregoing, if the conditions specified in
Section 0 have not been fulfilled, the other party may waive compliance by such
party with any such condition to such extent as such party may in its sole
discretion determine. Nothing in this Section 0 shall operate to relieve either
party of any obligations hereunder or to waive any of the other party's rights
against such party.
9.7 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
9.8 Governing Law. This Agreement and the Shares issued and sold
hereunder shall be governed by and construed in accordance with Minnesota law,
without regard to the conflict of laws provisions thereof. The parties agree
that the state or federal courts located in Minnesota shall have jurisdiction to
hear and determine any claims or disputes pertaining to this Agreement or to any
matter arising out of or related to this Agreement.
9.9 Captions. The descriptive headings of the various sections or parts
of this Agreement are for convenience only and shall not affect the meaning or
construction of any of the provisions hereof.
IN WITNESS WHEREOF, the Company and Guidant by their duly authorized
officers, have each caused this Agreement to be executed as of the date first
written above.
GUIDANT
GUIDANT CORPORATION
By /s/ Jay Watkins
Jay Watkins, Vice President
COMPANY
EVEREST MEDICAL CORPORATION
By /s/ John Shannon
John Shannon, President
<PAGE>
EXHIBIT A
DISCLOSURE SCHEDULE OF THE COMPANY
<PAGE>
AMENDED DISCLOSURE SCHEDULE OF THE COMPANY
2.2(c) The following warrants to purchase an aggregate of 1,500,181 shares of
Common Stock are outstanding:
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
109,091 shares at $3.50 per share
These warrants expire at various dates in 1998 through 2005.
2.6(l) On December 31, 1997, the Company increased the base salary of the chief
executive officer to $198,000, effective January 1, 1998.
2.7 Pending product liability claims.
The Company is currently aware of the following product liability
claims:
CASE LOCATION DATE OF LOSS INSURER PRODUCT
B. Lang Philadelphia, PA December 1994 Medmarc Scissors
T. Eckel Montclair, NJ August 1994 St. Paul Scissors
P. Marchart Neterland, TX September 1994 St. Paul Scissors
The Company believes the product liability limits of $3,000,000 under St. Paul
and $4,000,000 under Medmarc are sufficient to meet the potential liability
based on the information the Company is aware of.
2.9 A shareholder of the Company has provided a standby letter of credit to
secure the Company's bank line. For this accommodation, he holds a security
interest in all of the Company's assets, subordinated only to senior debt.
2.12 On July 24, 1997, the U.S. Patent Trademark Office ("PT") informed the
Company's outside patent counsel that all claims of its divisional patent
application designated as Bipolar Electrosurgical Scissors with Metal Cutting
Edges and Shearing Surfaces are all allowable. This design embodies an
"inner-to-outer" electrical configuration on each blade compared to the
"metal-on-metal" configuration the Company currently commercialized Everest
Medical bipolar scissors. On this date, the PTO also informed the Company of a
potential interference and, therefore, suspended the ex parte prosecution of the
patent for a period of three months. On February 9, 1998, the Company filed an
amendment in response to the Official Action dated January 23, 1998 in the
above-identified patent application. As of this date, the PTO has not responded
to the Company's proposed amendment.
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