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, 1999
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 6, 1999, 7,618,167 shares of Common Stock of the Registrant were
outstanding.
Transitional Small Business Disclosure Format (check one): YES___ NO X
<PAGE>
EVEREST MEDICAL CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
(Unaudited) (Note)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 33,326 $ 217,489
Accounts receivable, net 2,055,731 1,745,512
Inventories 1,867,637 1,751,946
Prepaid insurance and deposits 103,618 76,689
------------ ------------
Total current assets 4,060,312 3,791,636
Equipment
Office and display equipment 444,553 414,315
Research and development equipment 188,224 188,224
Production equipment 1,360,429 1,335,164
------------ ------------
1,993,206 1,937,703
Less allowance for depreciation (1,672,600) (1,632,198)
------------ ------------
320,606 305,505
Patents, net of amortization 83 250
------------ ------------
Total assets $ 4,381,001 $ 4,097,391
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Customer advances $ 71,932 $ 36,788
Accounts payable 546,399 582,110
Accrued compensation and related taxes 352,300 314,174
Other accrued liabilities 216,622 189,875
Bank borrowings, short-term 275,000 125,000
Capital lease obligations, current portion -- --
------------ ------------
Total current liabilities 1,462,253 1,247,947
Long-term debt and other liabilities -- --
Shareholders' equity
Convertible preferred stock series A, ($.01 par value,
$2.50 liquidation value) 1,400,000 authorized; outstanding:
1999 - 492,937 shares; 1998 - 632,937 shares 1,201,717 1,551,717
Convertible preferred stock series B, ($.01 par value,
$2.75 liquidation value) 730,000 authorized; outstanding:
1999 - 637,273 shares; 1998 - 637,273 shares 1,545,313 1,545,313
Convertible preferred stock series C, ($.01 par value,
$2.75 liquidation value) authorized and outstanding:
1999 - 410,906 shares; 1998 - 410,906 shares 1,002,832 1,002,832
Convertible preferred stock series D, ($.01 par value,
$2.875 liquidation value) authorized and outstanding:
1999 - 471,500 shares; 1998 - 471,500 shares 1,205,808 1,205,808
Common stock, ($.01 par value) 12,461,821 authorized; outstanding:
1999 - 7,618,167 shares; 1998 - 7,465,875 shares 76,182 74,659
Additional paid-in capital 16,702,621 16,420,828
Retained deficit (18,815,725) (18,951,713)
------------ ------------
2,918,748 2,849,444
------------ ------------
Total liabilities and shareholders' equity $ 4,381,001 $ 4,097,391
============ ============
</TABLE>
Note: The balance sheet at December 31, 1998 is derived from the audited
financial statements at that date.
<PAGE>
EVEREST MEDICAL CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
3 Months Ended March 31
1999 1998
- --------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 3,040,172 $ 2,151,287
Cost of goods sold 1,621,319 1,139,976
----------- -----------
Gross margin 1,418,853 1,011,311
Cost and expenses:
Sales and marketing 734,905 584,033
Research and development 269,386 153,901
General and administrative 264,254 236,551
----------- -----------
Total operating expenses 1,268,545 974,485
Interest and other income (2,191) (2,085)
Interest expense 13,513 24,076
----------- -----------
Net income (loss) before income taxes 138,986 14,835
Provision for income taxes 3,000 --
Net income (loss) 135,986 14,835
Less preferred stock dividends 85,891 85,891
----------- -----------
Income (Loss) applicable to common stock $ 50,095 $ (71,056)
=========== ===========
Net income (loss) per common share $ 0.01 $ (0.01)
=========== ===========
Weighted average number of shares
outstanding during the period 7,510,094 7,146,574
=========== ===========
</TABLE>
<PAGE>
EVEREST MEDICAL CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31
1999 1998
- ----------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income / (loss) $ 135,986 $ 14,835
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities
Depreciation and amortization 40,569 44,758
Provision for losses on accounts receivable 7,500 3,000
Provision for inventory obsolescence 11,164 7,858
Changes in operating assets and liabilities
Accounts receivable (317,719) (58,704)
Inventories (126,855) (71,223)
Prepaid expenses (26,929) (27,110)
Customer advances 35,144 --
Accounts payable and accrued expenses 29,699 119,498
--------- ---------
Net cash provided by (used in) operating activities (211,441) 32,912
INVESTING ACTIVITIES
Purchase of equipment (55,503) (70,230)
--------- ---------
Net cash used in investing activities (55,503) (70,230)
FINANCING ACTIVITIES
Dividends paid (85,891) (85,892)
Proceeds from debt 150,000 --
Principal payments on debt and capital leases (536) (600,465)
Net proceeds from sale of common stock 19,209 711,704
--------- ---------
Net cash provided by financing activities 82,782 25,347
--------- ---------
Increase (decrease) in cash and cash equivalents (184,162) (11,971)
Cash and cash equivalents at beginning of period 217,489 80,362
--------- ---------
Cash and cash equivalents at end of period $ 33,327 $ 68,391
========= =========
</TABLE>
<PAGE>
EVEREST MEDICAL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1999
Note A - Business Activity
Everest Medical Corporation is engaged in the development, manufacturing and
marketing of bipolar electrosurgical devices for the medical specialties of
gynecology, gastroenterology, cardiovascular and general surgery.
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, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. 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, 1998.
Note C - Net Income (Loss) Per Share
In February 1998, the Financial Accounting Standards Board issued Statement No.
128, Earnings Per Share, which was adopted on December 31, 1998. 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
are computed on the basis of the average number of common shares outstanding.
Diluted earnings per share do not include the effect of outstanding stock
options, as they are anti-dilutitive.
<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 1999 were $3,040,172, an
increase of $888,882, or 41%, from the first quarter of 1998. This revenue
increase arose from the Company's Growth Businesses, consisting of
cardiovascular and Everest laparoscopy, the product sales of which grew 53% in
the first quarter, and the Mature Businesses, comprised of OEM laparoscopy,
gastrointestinal and other products, which grew 10% in the first quarter
compared to the same period in last year.
The Company realized an increase of 38% in its Everest laparoscopy product sales
during the first quarter compared to the same period last year. This growth
reflected the continuing acceptance of the BiCOAG(R) Bipolar Cutting Forceps,
which is now the Company's largest product line. The balance of the product
line, including the EVERSHEARS(R) II Bipolar Metal-on Metal Scissors and the
recently introduced EVERSHEARS LP Bipolar Scissors, also grew at significant
levels compared to the first quarter of 1998 aided by revenues from the
Company's distributor in Turkey. The Company expects revenues from the Everest
laparoscopy product line to continue to grow as a result of improved sales
management and growing acceptance of the Company's bipolar product offering.
Revenues from the cardiovascular product line, consisting 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, exceeded 15% of the Company's first
quarter revenues. Revenues from this product line in the first quarter of 1998
were approximately $200,000. The Company expects revenues from this product
supply agreement to be adversely impacted by a recent injunction issued by a
California federal court in which Guidant was ruled to have infringed on a
patent held by a third party. The injunction precludes Guidant from selling its
existing VasoView Balloon Dissection Cannula to any new domestic customer who
was not a user prior to February 8, 1999 and will be permanently enjoined from
selling this product to any domestic customer after November 15, 1999. Guidant
will appeal this decision. In addition, Guidant has new products in development
that do not utilize the balloon dissection feature, and intends to introduce
these alternate designs in the near term. While it is impossible to quantify the
impact of the injunction on the Company's sales, the Company believes the sales
impact to be short-term. The extent of the impact on revenues will depend on
Guidant's successful introduction and market acceptance of the new product
designs.
( 6 )
<PAGE>
The Company experienced a 10% increase in sales within its Mature Businesses
primarily due to shipments of the Company's gastrointestinal products pursuant
to the Company's supply agreements to C.R. Bard and the Company's Japanese
distributor compared to the same period of 1998. Offsetting this revenue
increase was a decline in 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 such forceps
fell 23% as compared to the first quarter of 1998 as these customers worked off
existing inventory levels. The Company expects revenues from the Mature
Businesses to decrease throughout 1999 due primarily to decreased shipments to
C.R. Bard as its demand returns to its historic levels, following a strong 1998
in which shipments increased due to a short-term market opportunity.
Gross Margin. Gross margin in the first quarter of 1999 was 46.7% of sales
compared to 47.0% of sales for the first quarter of 1998. The slight decrease in
gross margin reflected the impact of both the Company's higher than anticipated
international sales and the growing impact of the cardiovascular sales to
Guidant which resulted in a lower gross margin for the Company. However, the
increased production output associated with the sales increase allowed the
Company to leverage its overhead expenses.
Sales and Marketing Expense. Sales and marketing expenses for the first quarter
of 1999 were $734,905, an increase of $150,872, or 26%, from the same period in
1998. The increase was a result of increased staffing to support the growing
Everest laparoscopy product sales, increases in commissions and costs associated
with re-organizing the sales management of the Company's independent
distribution in the quarter.
Research and Development Expense. Research and development expenses for the
first quarter of 1999 were $269,386, an increase of $115,482, or 75%, from the
same period in 1998. The significant increase in expenses was due primarily to
staff increases, on-going intellectual property initiatives and aggressive new
technology initiatives for the laparoscopy market, as well as new market
opportunities.
General and Administrative Expense. General and administrative expenses for the
first quarter of 1999 were $264,254, an increase of $27,706, or 12%, from the
same period of 1998. The Company experienced this increase in expenses as
compared to the same period of 1998, primarily due to costs associated with the
corporate reporting required as a public company.
Net Income. Net income for the first quarter was $138,986, compared to a net
income of $14,835 for the same quarter in 1998. The increase in the first
quarter income as compared to the prior year was primarily due to the revenue
increase. Offsetting the gain associated with the revenue increase was a 30%
increase in operating expenses resulting from the increased commissions, sales
management re-organization and technology initiatives aimed at increasing the
future opportunities for the Company.
( 7 )
<PAGE>
Income Tax Expense. The Company has approximately $18 million of tax loss
carryforwards available to offset future taxable income. The Company can only
utilize these tax attributes to the extent of 90% of pre-tax income since the
alternative minimum tax system will result in tax liabilities at this point. The
Company recognized $3,000 of income tax expense for the first quarter of 1999.
LIQUIDITY and CAPITAL RESOURCES
Cash and short-term investments were $33,326 on March 31, 1999 compared to
$217,489 on December 31, 1998. The Company used $211,441 of cash in operating
activities in the first three months of 1999 compared to providing $32,912 for
the same period of 1998. Operating activities in the first three months included
a significant 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 $55,503 on capital equipment in the first three months and
expects this level of investment to continue for the balance of 1999. During the
quarter, the Company also paid its $85,891 dividend obligation on preferred
stock and raised $19,209 through the sale of shares of common stock under the
Company's Employee Stock Purchase Plan.
The Company increased its bank borrowings by $150,000 in the quarter to meet
working capital needs. The Company entered into a credit facility with Norwest
Bank of Minneapolis, in the quarter, consisting of a $1,000,000 revolving line
of credit. The Company intends to use this credit facility to meet and manage
its working capital needs for 1999. As of March 31, 1999 the amount available
under the credit facility was $725,000.
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.
EFFECT OF INFLATION
The Company does not believe that inflation will have a significant effect on
operations.
Year 2000
The Company has continued its detailed assessment of the Year 2000
issues related to the Company's enterprise business applications. Although
continuing to seek written assurances, the Company has preliminarily concluded
that it is materially compliant with its accounting, resource planning and
network systems based on input from the third party software vendors.
( 8 )
<PAGE>
The Company intends to fully test these systems over the next six months with
the goal that these applications will be capable of handling transactions with
Year 2000 dates, but no testing or remediation has been done to date.
The Company also is putting a team together to further assess its Year
2000 compliance issues with other functions including computer hardware,
telephone systems, and other manufacturing equipment. The Company's goal is to
document potential risks to the Company and plan necessary actions to meet the
risks associated with the Year 2000.
The Company believes that given its reliance on outside software
vendors and its relatively simple information systems, it will achieve
substantial compliance with respect to Year 2000 issues before the end of 1999.
Although the Company is still in the process of assessment, it currently
believes the costs to meet this objective will not be material. The Company has
not yet created a contingency plan should the Year 2000 issues prove to present
significant unanticipated problems or if the Company is not ready in time. As
the Company's assessment process continues, it intends to revisit the risks of
non-compliance and how to respond.
Forward-Looking Statements 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
those described above, in some cases have affected and in the future could
affect the Company's actual results of operations and cause such results to
differ materially from those anticipated in forward-looking statements made in
this document.
o The expectation that revenues from the Everest laparoscopy product line
will continue to grow in 1999 depends on market acceptance and demand,
effectiveness of sales and marketing personnel, as well as other
general market conditions and competitive conditions within this
market, including the introduction of products by competitors.
o The expectation of an unfavorable impact to revenues from the Company's
product supply agreement with Guidant Corporation relates to the
hurdles presented by the recent court rulings. While the Company
expects Guidant to introduce alternate designs that do not utilize the
contested patented feature, there are no assurances that Guidant will
be successful in gaining market share in this emerging minimally
invasive saphenous vein harvesting market with its new designs.
o The expectation that shipments of bipolar forceps and gastrointestinal
products as part of its Mature Businesses will decrease in 1999 depends
primarily on the extent of the maturing of this product line for the
Company's OEM customers.
( 9 )
<PAGE>
o The accuracy of the Company's belief that its current capital resources
will be sufficient to fund current and anticipated business operations
throughout 1999 depends, in part, on meeting anticipated revenue goals,
operating efficiencies and effective expense management, in addition to
general and competitive conditions.
o The impact of Year 2000 issues on the Company's business depends on the
accuracy, reliability and effectiveness of the Company's and its
suppliers' and customers' assessment and remediation of Year 2000
issues.
( 10 )
<PAGE>
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule (filed in electronic format only)
(b) Reports on Form 8-K: None filed in the period.
( 11 )
<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, 1999 By: /s/ John L. Shannon, Jr.
John L. Shannon, Jr.,
President and Chief Executive Officer
May 12, 1999 By: /s/ Thomas F. Murphy
Thomas F. Murphy
Vice President of Finance and Administration
and Assistant Secretary
( 12 )
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 33,326
<SECURITIES> 0
<RECEIVABLES> 2,055,731
<ALLOWANCES> 0
<INVENTORY> 1,867,637
<CURRENT-ASSETS> 4,060,312
<PP&E> 1,993,206
<DEPRECIATION> 1,672,600
<TOTAL-ASSETS> 4,381,001
<CURRENT-LIABILITIES> 1,462,253
<BONDS> 0
0
4,955,670
<COMMON> 76,182
<OTHER-SE> (2,113,104)
<TOTAL-LIABILITY-AND-EQUITY> 4,381,001
<SALES> 3,040,172
<TOTAL-REVENUES> 3,040,172
<CGS> 1,621,319
<TOTAL-COSTS> 1,268,545
<OTHER-EXPENSES> (2,191)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,513
<INCOME-PRETAX> 138,986
<INCOME-TAX> 3,000
<INCOME-CONTINUING> 135,986
<DISCONTINUED> 0
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<NET-INCOME> 135,986
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
