UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: September 30, 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 October 26, 1999, 7,651,174 shares of Common Stock of the Registrant were
outstanding.
Transitional Small Business Disclosure Format (check one): YES___ NO X
<PAGE>
EVEREST MEDICAL CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
(Unaudited) (Note)
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 238,555 $ 217,489
Accounts receivable, net 1,796,896 1,745,512
Inventories 1,977,361 1,751,946
Prepaid insurance and deposits 103,772 76,689
------------ ------------
Total current assets 4,116,584 3,791,636
Equipment
Office and display equipment 481,659 414,315
Research and development equipment 188,224 188,224
Production equipment 1,406,248 1,335,164
------------ ------------
2,076,131 1,937,703
Less allowance for depreciation (1,752,218) (1,632,198)
------------ ------------
323,914 305,505
Patents, net of amortization -- 250
------------ ------------
Total assets $ 4,440,498 $ 4,097,391
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Customer advances $ 68,580 $ 36,788
Accounts payable 347,221 582,110
Accrued compensation and related taxes 455,695 314,174
Other accrued liabilities 206,733 189,875
Bank borrowings, short-term -- 125,000
Capital lease obligations, current portion -- --
------------ ------------
Total current liabilities 1,078,229 1,247,947
Long-term debt and other liabilities -- --
Shareholders' equity
Convertible preferred stock series A, ($.01 par value,
$2.50 liquidation value) 1,400,000 authorized; outstanding:
1999 - 472,937 shares; 1998 - 632,937 shares 1,151,717 1,551,717
Convertible preferred stock series B, ($.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 - 7,638,167 shares; 1998 - 7,465,875 shares 76,512 74,659
Additional paid-in capital 16,597,808 16,420,828
Retained deficit (18,217,721) (18,951,713)
------------ ------------
3,362,269 2,849,444
------------ ------------
Total liabilities and shareholders' equity $ 4,440,498 $ 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 September 30 9 Months Ended September 30
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 3,050,333 $ 2,806,592 $ 9,141,845 $ 7,596,456
Cost of goods sold 1,497,249 1,469,008 4,721,439 3,866,531
----------- ----------- ----------- -----------
Gross margin 1,553,084 1,337,584 4,420,406 3,729,925
Cost and expenses:
Sales and marketing 699,859 692,288 2,159,223 2,019,472
Research and development 207,724 220,128 683,745 570,399
General and administrative 299,191 232,701 812,823 705,474
----------- ----------- ----------- -----------
Total operating expenses 1,206,774 1,145,117 3,655,791 3,295,345
Interest and other income (2,825) (1,873) (6,802) (5,975)
Interest expense 551 21,136 20,427 60,757
----------- ----------- ----------- -----------
Net income before income taxes 348,584 173,204 750,990 379,798
Provision for income taxes 7,350 -- 15,000 --
Net income 341,234 173,204 735,990 379,798
Less preferred stock dividends 85,891 85,891 257,675 257,675
----------- ----------- ----------- -----------
Net income applicable to common stock $ 255,343 $ 87,313 $ 478,315 $ 122,123
=========== =========== =========== ===========
Net income per common share $ 0.03 $ 0.01 $ 0.06 $ 0.02
=========== =========== =========== ===========
Weighted average number of shares
outstanding during the period 7,562,125 7,461,575 7,588,840 7,334,714
=========== =========== =========== ===========
</TABLE>
<PAGE>
EVEREST MEDICAL CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30
1999 1998
--------- ---------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 733,990 $ 379,794
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 120,269 131,003
Provision for losses on accounts receivable 22,500 9,000
Provision for inventory obsolescence 27,558 21,782
Changes in operating assets and liabilities
Accounts receivable (73,883) (465,749)
Inventories (252,974) (582,072)
Prepaid expenses (27,083) 14,196
Customer advances 31,792 --
Accounts payable and accrued expenses (75,973) 303,597
--------- ---------
Net cash provided by in operating activities 506,196 (188,449)
INVESTING ACTIVITIES
Purchase of equipment (138,428) (166,480)
--------- ---------
Net cash used in investing activities (138,428) (166,480)
FINANCING ACTIVITIES
Dividends paid (257,674) (257,674)
Proceeds from debt -- 515,000
Principal payments on debt and capital leases (125,536) (601,444)
Net proceeds from sale of common stock 36,508 726,308
--------- ---------
Net cash provided by (used in) financing activities (346,702) 382,190
--------- ---------
Increase (decrease) in cash and cash equivalents 21,066 27,261
Cash and cash equivalents at beginning of period 217,489 80,362
--------- ---------
Cash and cash equivalents at end of period $ 238,555 $ 107,623
========= =========
</TABLE>
<PAGE>
EVEREST MEDICAL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1999
Note A - Business Activity
Everest Medical Corporation is engaged in the development, manufacturing and
marketing of innovative RF surgical 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 nine months ended September 30, 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 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 third quarter of 1999 were $3,050,333, an
increase of $243,741, or 9%, from the third quarter of 1998. This revenue
improvement is due to gains in the Company's Growth Businesses, consisting of
cardiovascular and Everest laparoscopy, which grew 22% in the third quarter.
These revenue increases were offset by 26% decline in the Mature Businesses,
comprised of OEM laparoscopy, gastrointestinal and other products, compared to
the same period in last year.
Net revenues for the nine months ended September 30, 1999 were $9,141,845, an
increase of $1,545,389, or 20%, from the same period of 1998. The revenues for
the period reflect a 31% increase in revenues from the Growth Businesses and a
10% decline in revenues from the Company's Mature Businesses as compared to the
same period in 1998.
The Company realized an increase of 25% in its Everest laparoscopy product sales
during the first nine months of 1999 compared to the same period last year. This
growth reflected the ongoing record pace of the BiCOAG(R) Bipolar Cutting
Forceps, the Company's largest product line. The balance of the product line
also grew at strong levels compared to the same period of 1998. Sales of the
EVERSHEARS Bipolar Scissors grew 5% for the first nine months of 1999. The
Company expects revenues from the Everest laparoscopy product line to continue
to grow as a result of improvements made within the Company's sales management
function and the growing acceptance of the Company's bipolar product offering.
Shipments to Guidant Corporation of select Everest Medical propriety bipolar
instruments for use in their VasoView(TM) Endoscopic Saphenous Vessel Harvesting
System exceeded $1,400,000 for the first nine months of 1999. While this revenue
growth of 60% is strong on year to year comparison, revenues from the third
quarter of 1999 were off 7% from the third quarter of 1998. This decline
resulted from a patent action, brought by a Guidant competitor surrounding a
specific feature of an earlier version of the Guidant system. Revenues from
Guidant have been level for the past three quarters as a result of this patent
action. During the second quarter, Guidant has introduced a new version of this
system, the VasoView UNIPORT PLUS System, which does not incorporate the
controversial feature. While initial market response to this new system has been
positive, it is too early to determine the success of Guidant with respect to
the new version. However, the Company does not expect shipments to Guidant to
increase in the fourth quarter of 1999.
<PAGE>
In addition, the Company commenced limited shipments in the third quarter of a
version of the Company's 3mm bipolar forceps to Endius Inc., a privately held
emerging surgical spine company. Endius has decided to include the product in a
surgical procedure kit for new discectomy procedure it is pioneering. The
Company does not expect shipments to Endius to be material to the Company's
revenues in the near term.
The Company's sales within its Mature Businesses declined 10% during the first
nine months of 1999 as compared to the same period of 1998. Revenues of the
Mature Businesses in the period reflected a 34% decline in shipments of the
Company's gastrointestinal probe to C.R. Bard. Bard purchases of the Company's
product were significant in 1998, as they responded to a short-term market
opportunity. Revenues of a private label version of the Company's classic tip
forceps to Ethicon Endo-Surgery, a division of Johnson & Johnson, and Origin
Medsystems were flat as compared to the same period of 1998. The Company expects
revenues from the Mature Businesses to continue to decrease during the fourth
quarter of 1999 due primarily to decreased shipments to C.R. Bard as its demand
returns to its historic levels.
Gross Margin. Gross margin in the third quarter of 1999 was 50.9% of sales
compared to 47.7% of sales for the third quarter of 1998. The increase in gross
margin reflected a favorable sales mix whereby revenues from the Everest
laparoscopy products accounted for 68% of the Company's revenues. Gross margins
from these products carry a stronger margin than the revenues of the other
components of the Company's business. Additionally, for two months the Company
reduced its production output by 10% to maintain reasonable inventory levels.
The Company resumed full production capacity in September.
The gross margin for the first nine months of 1999 was 48.4%, as compared with
49.1% for the same period of 1998. The decrease in gross margin reflects
primarily the changing sales mix to include a larger portion of revenue for the
cardiovascular product offering to Guidant.
Sales and Marketing Expense. Sales and marketing expenses for the third quarter
of 1999 were $699,859, an increase of $7,571, or 1%, from the same period in
1998. The increase was a result of transition to a new sales management
organization completed in the third quarter and increases in sales incentives
and commissions. For the first nine months, sales and marketing expenses were
$2,159,223, an increase of $139,751, or 7%, from the same period of 1998 for the
same reasons identified for the third quarter.
Research and Development Expense. Research and development expenses for the
third quarter of 1999 were $207,724, a decrease of $12,404, or 6%, from the same
period in 1998. The decrease was due primarily to lower expenses related to ISO
9001 Certification as compared to the same quarter of 1999. For the first nine
months, research and development expenses were $683,745, an increase of
$113,346, or 20%, from the same period of 1998. The significant increase in
expenses during the nine month period was due primarily to staff increases,
on-going intellectual property initiatives and new technology initiatives for
the laparoscopy market, and certain new markets.
<PAGE>
General and Administrative Expense. General and administrative expenses for the
third quarter of 1999 were $299,191, an increase of $66,490, or 29%, from the
same period of 1998. For the first nine months, general and administrative
expenses were $812,823, an increase of $107,349, or 15%, from the same period of
1998. This expense increase during both the three and nine month periods was a
result of a sales tax audit by the state of California whereby the Company was
assessed tax and interest for unpaid sales tax dating back to 1991. The Company
has commenced collection activities to recoup these taxes from its customers in
the fourth quarter.
Net Income. Net income for the third quarter was $341,234, compared to a net
income of $173,204 for the same quarter in 1998. The increase in the third
quarter income as compared to the prior year was primarily due to the revenue
increase and the increase in gross margin. Net income for the first nine months
of 1999 was $735,990, compared to $379,798 for the same period of 1998. The
increase was primarily due to the revenue increase coupled with expense control,
increasing net income by 94%.
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 $7,350 of income tax expense for the third quarter of 1999
and has recognized $15,000 for the first nine months of 1999.
LIQUIDITY and CAPITAL RESOURCES
Cash and short-term investments were $238,555 on September 30, 1999 compared to
$217,489 on December 31, 1998. The Company generated $506,196 of cash from its
operating activities in the first nine months of 1999 compared to using $188,449
for the same period of 1998. Operating activities in the first nine months
included a significant increase in net income as compared to the prior year.
Offsetting this increase was the growth in inventory and accounts receivable,
due to the sales growth.
The Company spent $138,428 on capital equipment in the first nine months and
expects this level of investment to continue for the balance of 1999. The
Company also paid its $257,674 dividend obligation on preferred stock.
In February 1999, the Company entered into a credit facility with Norwest Bank
of Minneapolis, consisting of a $1,000,000 revolving line of credit. The Company
intends to use this credit facility when necessary to meet and manage its
working capital needs for 1999. As of September 30, 1999 the full amount was
available under the credit facility.
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.
<PAGE>
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, remediation and
testing 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.
The Company intends to fully test these systems over the next six weeks
with the goal that these applications will be capable of handling transactions
with Year 2000 dates, but only minimal testing has been done to date.
The Company has also had a team working to further assess its Year 2000
compliance issues with other functions including computer hardware, telephone
systems, and other manufacturing equipment. The Company believes that these
systems are compliant with the Year 2000.
The Company believes that given its reliance on outside software
vendors and its relatively non-sophiscated information systems, it has achieved
substantial compliance with respect to Year 2000 issues. Although the Company is
still in the process of remediation and testing, 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.
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 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.
<PAGE>
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 pending patent action. While Guidant has
introduced an alternate design that does 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 design.
o The expectation that shipments of bipolar forceps and gastrointestinal
products as part of its Mature Businesses will continue to decrease in
1999 depends primarily on the extent of the maturing of this product
line for the Company's OEM customers.
o The accuracy of the Company's belief that its current capital resources
will be sufficient to fund current and anticipated business operations
for at least the next 12 months 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.
<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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
EVEREST MEDICAL CORPORATION
November 11, 1999 By: /s/ John L. Shannon, Jr.
John L. Shannon, Jr.,
President and Chief Executive Officer
November 11, 1999 By: /s/ Thomas F. Murphy
Thomas F. Murphy
Vice President of Finance and Administration
and Assistant Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 238,555
<SECURITIES> 0
<RECEIVABLES> 1,796,896
<ALLOWANCES> 0
<INVENTORY> 1,977,361
<CURRENT-ASSETS> 4,116,584
<PP&E> 2,076,131
<DEPRECIATION> 1,752,218
<TOTAL-ASSETS> 4,440,498
<CURRENT-LIABILITIES> 1,078,229
<BONDS> 0
0
4,905,670
<COMMON> 76,512
<OTHER-SE> (1,619,913)
<TOTAL-LIABILITY-AND-EQUITY> 4,440,498
<SALES> 9,141,845
<TOTAL-REVENUES> 9,141,845
<CGS> 4,721,439
<TOTAL-COSTS> 3,655,791
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,625
<INCOME-PRETAX> 750,990
<INCOME-TAX> 15,000
<INCOME-CONTINUING> 735,990
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 735,990
<EPS-BASIC> .06
<EPS-DILUTED> .06
</TABLE>
