SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended: Commission file number:
December 31, 1998 0-18900
EVEREST MEDICAL CORPORATION
(Name of small business issuer in its charter)
Minnesota 41-1454928
(State of Incorporation) (I.R.S. Employer Identification No.)
13755 First Avenue North
Minneapolis, Minnesota 55441
(Address of principal executive offices)
Issuer's telephone number: (612) 473-6262
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the Issuer was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The Issuer's revenues for fiscal year 1998 were $10,719,755.
As of March 12, 1999, there were 7,618,167 shares of Common Stock of the Issuer
outstanding.
The aggregate market value of the Common Stock of the Issuer (based upon the
closing sale price of the Common Stock on March 12, 1999, as reported by
NASDAQ), excluding shares owned beneficially by executive officers and
directors, was approximately $11,427,250.
Part II of this Annual Report on Form 10-KSB incorporates by reference
information (to the extent specific sections are referred to herein) from the
Issuer's Annual Report to Shareholders for the year ended December 31, 1998 (the
"1998 Annual Report"). Part III of this Annual Report on Form 10-KSB
incorporates by reference information (to the extent specific sections are
referred to herein) from the Issuer's Proxy Statement for its annual meeting to
be held April 27, 1999 (the "1999 Proxy Statement").
Transitional Small Business Disclosure Format (check one) Yes No X
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PART I
ITEM 1 DESCRIPTION OF BUSINESS
General Development of Business
Everest Medical Corporation (the "Company" or "Everest") is engaged
primarily in the development, manufacturing and marketing of bipolar
electrosurgical devices for use in minimally invasive surgical procedures.
Today, the Company serves the medical specialties of gynecology,
gastroenterology, cardiovascular and general surgery. Sales are worldwide with
primary emphasis on an independent network of over 150 sales professionals. In
addition, the Company supplies propriety bipolar instruments to leading medical
device companies, including Guidant Corporation, Johnson & Johnson and C.R.
Bard.
The Company commenced commercial sales of laparoscopic surgical
products in October 1991. The first product sold was the BiLAP(R) Bipolar
Cutting/Coagulating Probes. The Company added the BiCOAG(R) Bipolar Forceps in
September 1992, the EVERSHEARS(R) Straight Bipolar Scissors in November 1992 and
the EVERSHEARS Curved Bipolar Scissors in September 1993. The Company introduced
three additional products to the laparoscopic market in 1994, including the
EVERSHEARS II Bipolar Metal-on-Metal Curved Scissors, the BiCOAG Bipolar
Dissecting Forceps and the BiLAP Bipolar Needle Electrode. In 1995, the Company
commenced sales of the innovative, patented, multi-functional BiCOAG Cutting
Forceps, and in 1996 added additional versions, including a 5mm version of the
BiCOAG Cutting Forceps. In December 1996, the Company introduced the BiCOAG
Forceps in a 3mm version. This 3mm version of the bipolar forceps was introduced
to market in March 1998 as MOLly (Minimally Operative Laparoscopy) with FDA
clearance to expand the labeling to include the indication of female tubal
sterilization via contraceptive bipolar coagulation of the fallopian tube. The
Company is targeting these existing and new products to the laparoscopic general
surgery and gynecology markets.
As minimally invasive surgical techniques have evolved to increasingly
complex surgery in anatomically crowded areas of the human body, the need for
safer instrumentation has become more evident. The Company believes that bipolar
electrosurgery is gaining increasing scientific recognition and acceptance in
the growing minimally invasive surgery ("MIS") markets which predominately
utilize monopolar energy. Bipolar energy offers the surgeon more control, less
tissue damage, effective hemostasis and performance, eliminating the dangers
associated with monopolar energy. The Company believes that bipolar technology
will become the standard in electrosurgery in advanced MIS procedures and the
Company will be a beneficiary of this trend.
In late 1996, the Company identified the promising emerging minimally
invasive cardiovascular market as its first major market diversification. In
June 1997, the Company announced its first commercial venture in this market--a
product supply agreement with Guidant Corporation. Guidant, a technology leader
in minimally invasive surgery, bundles a version of the EVERSHEARS II Bipolar
Scissors and an innovative version of the bipolar cutting forceps, the
BiSECTOR(TM) Bipolar Ligating Forceps, in its minimally invasive saphenous vein
harvesting systems kits. These products were introduced to the market in the
third quarter of 1997. In 1998, the Company developed and commenced shipments to
Guidant of a 56cm flexible shaft version of these devices for exclusive use by
Guidant with its VASOVIEW(TM) and UNIPORT(TM) Endoscopic Vessel Harvesting
System.
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Together, these two businesses of cardiovascular and Everest
laparoscopy comprise the Company's Growth Businesses. The balance of the
Company's product offerings including the Company's gastrointestinal and OEM
Forceps comprise the Mature Businesses of the Company.
The Company markets a line of disposable products for use in selected
gastrointestinal endoscopic interventional procedures. These procedures are
performed by gastroenterologists using endoscopes through which Everest's
products are inserted into the body. These products are the BiSNARE(R)
Polypectomy Snare for removing colon polyps and the BiCOAG Probe Coagulator for
treating intestinal bleeding.
The electrosurgical products currently under development or being
marketed by Everest operate in a bipolar mode providing an improved margin of
patient safety in minimally invasive surgical procedures. Many of these
procedures are typically performed using monopolar electrosurgery which has
inherent characteristics that may pose certain risks for patients. In
electrosurgery, radio frequency (or RF energy) is used both to cut and coagulate
tissue. With monopolar devices, the RF energy must pass from the surgical
instrument through the patient's body to a separate return electrode attached to
a large surface area, generally the buttocks or thigh. With monopolar
electrosurgery, there is a greater potential for injury to body tissues as the
electrical current passes through to the surface or return electrode (grounding
pad) where skin burns may also occur. With bipolar devices, the RF energy is
contained at the surgical site because both the active and return electrodes are
located on the surgical instrument. In minimally invasive surgery, there is even
greater potential for complications when using monopolar instruments due to the
combined effects of the surgeon's limited field of vision, the proximity of
other organs and the inherent tendency of the surgical instruments to conduct
monopolar RF energy.
The Company has developed extensive expertise in the control and
containment of bipolar radio frequency energy to affect both surgical cutting
and coagulation of blood in a variety of surgical and interventional procedures.
The Company's strategy is to leverage its expertise to design, develop and
manufacture proprietary surgical instruments for use in selected minimally
invasive surgical procedures where the safety and other features of bipolar
electrosurgery have demonstrable advantages.
In 1998, the Company was awarded ISO 9001 certification for its quality
systems in design and manufacturing, and received authorization to place the CE
Mark on its products for distribution to members of the European Community.
These milestones provide an important recognition of the superior product
quality and safety standards of Everest Medical.
The Company was incorporated in Minnesota on April 19, 1983. The
Company's address is 13755 First Avenue North, Minneapolis, Minnesota 55441, and
its telephone number is (612) 473-6262.
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Business
Laparoscopic Surgical Products
The Company believes laparoscopy is a rapidly growing market in the
United States. Laparoscopic procedures, such as gall bladder removal,
hysterectomies, Nissen Fundiplation and hernia repair can now be routinely
performed through a trocar cannula. The cutting and coagulating instruments most
often utilized are either electrosurgical or lasers. Each of these methods
involves certain patient risks. With monopolar electrosurgical devices, there is
a risk that the passage of electrical current through the body will result in
unintended lateral tissue damage. Tissue damage can occur in laparoscopic
procedures performed with monopolar instruments due to RF current from the
monopolar instrument inducing current on one of the trocar cannulas or other
surgical instruments. This tissue damage, which can include severe burning, may
not be visible to the surgeon during surgery, but may result in post-operative
complications such as bowel perforation. Lasers are sometimes difficult to
control and have limited coagulation effect, particularly in the closed
conditions of a laparoscopic procedure. They are also expensive to acquire and
may be inconvenient for the clinician due to the problems of scheduling the
limited number available in a hospital and the high level of expertise required.
To the Company's knowledge, the EVERSHEARS Bipolar Scissors and the BiLAP Probe
were the first bipolar electrosurgical devices commercially available for the
purpose of providing cutting and coagulation in laparoscopic procedures. In the
past three years, there have been additional products introduced to the market
by competitors that may address the need for cutting and coagulation during
laparoscopic procedures.
Current Laparoscopic Surgical Products
EVERSHEARS Bipolar Scissors. The EVERSHEARS II Bipolar Scissors is used
to cut and coagulate tissue during laparoscopic surgery, combining mechanical
cutting with electrosurgical coagulation. The EVERSHEARS II Bipolar Scissors
consists of a handle and a long tube with blades at the distal end. The
EVERSHEARS II also contains a spindle which allows the physician to rotate the
device. The patented EVERSHEARS II design consists of metal cutting blades and
stainless steel support member which serves as the coagulation electrodes. The
conductive metal cutting blade is isolated from the support member by a
non-conductive adhesive. The EVERSHEARS II Bipolar Scissors is designed to
utilize the bipolar coagulating output of most standard electrosurgical
generators on the market. The EVERSHEARS II Bipolar Scissors is available in a
dual action curved design which allow the physician better visualization of the
surgical site.
In the fourth quarter of 1998, the Company commenced limited shipments
of the EVERSHEARS LP Bipolar Scissors. This next generation device features a
new lower profile scissors blade designed to improve the precision of cutting
and the surgical feel of the device. In this design, the blades are 30% thinner,
25% longer, open 30% wider and cut smoother than the EVERSHEARS II Bipolar
Scissors currently marketed. The Company continues to be the only company in the
world to market a laparoscopic bipolar scissors offering the clinician the
benefits of precision mechanical cutting and simultaneous coagulation.
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The Company currently distributes the EVERSHEARS Bipolar Scissors to
hospitals and physicians only through its network of independent marketing
representatives. Sales of EVERSHEARS Bipolar Scissors approached $1,400,000 for
1998.
BiCOAG Bipolar Cutting Forceps. The Company introduced this patented
new product in September 1995 in a 10mm version. This innovative product
incorporates a precision bipolar forceps for grasping and coagulation of tissue
with a surgical cutting blade positioned between the forceps jaws to allow
transection of coagulated tissue. The Company was issued a patent from the
United States Patent Office on August 29, 1995 for this design.
The BiCOAG Cutting Forceps allows the laparoscopic surgeon the ability
to grasp and coagulate safely with bipolar energy and transect tissue with one
instrument. This product minimizes the number of surgical instruments needed and
the need for instrument exchanges, resulting in a reduction of surgical time.
Additionally, the use of bipolar energy to safely and effectively seal vessels
may result in the elimination of costly stapling devices in many laparoscopic
procedures.
In the second quarter of 1996, the Company added a locking feature to
the device which enables the device to be used for retraction and increases
surgeon ease and comfort. The Company also commenced shipments of the new 5mm
version of the BiCOAG Cutting Forceps during the last half of 1996. The Company
believes this device is the first commercially available 5mm cutting forceps.
The 5mm version of the BiCOAG Cutting Forceps complements the 10mm device,
offering surgeons the advantage of using smaller trocars, reducing incision
size, cost and potential complications.
The Company realized a significant portion of its growth in 1996, 1997
and 1998 from the revenues generated from this product line. Revenues grew from
under $200,000 in 1995 to in excess of $3,800,000 in 1998.
BiCOAG Bipolar Forceps. The BiCOAG Forceps is used to coagulate tissue
and blood vessels during laparoscopic surgery. The BiCOAG Forceps consists of a
handle and a long tube containing two electrodes and a spindle which allows the
physician to rotate the device to more easily accomplish its function. The
forceps is available in two models, a macro version which has large paddles
attached to the end of the electrodes for coagulating large areas, and the micro
version which has a small electrode surface for more precise coagulation. The
BiCOAG Forceps is designed to operate on the bipolar coagulating output of most
standard electrosurgical generators on the market.
The BiCOAG Forceps were reintroduced to the Company's independent sales
channel in September 1995 after an 18-month hiatus. Sales of the BiCOAG Forceps
were previously restricted from the Company's independent sales channel due to a
now-terminated exclusivity provision in the product supply agreement with
Ethicon Endo-Surgery, a division of Johnson & Johnson. The sales impact of the
reintroduction of the BiCOAG Forceps for 1995 was nominal, but since then the
Company has continued to experience sales increases with revenues in 1998
exceeding $400,000.
<PAGE>
In addition to the Company's independent sales channel, the BiCOAG
Forceps are also marketed and distributed by Ethicon Endo-Surgery and Origin
MedSystems, a subsidiary of Guidant Corporation. Sales to these OEM customers
represented 10% of the Company's revenue in 1997 and 1998.
The Company has been notified that Origin Medsystems will discontinue
marketing this device in the second quarter of 1999 due to its strategic
realignment efforts. The Company is working closely with Origin to allow for a
smooth transition of customers to the Company's independent sales network.
BiCOAG Dissecting Forceps. The BiCOAG Dissecting Forceps is similar to
the bipolar forceps described above, but combines the ability to grasp and
dissect tissue in the surgical procedure with the benefits of bipolar
coagulation. This product provides the surgeon with a versatile and high-utility
instrument, and is compatible with most electrosurgical generators. Sales of
this product in 1998 exceeded $500,000.
MOLly 3mm Bipolar Forceps. In December 1996, the Company introduced
what it believes to be the world's first 3mm Bipolar laparoscopic forceps
targeted for the emerging microlaparoscopy market. This device allows for secure
grasping, effective coagulation, the use of smaller trocar ports and improved
outcomes. Procedures such as diagnostic laparoscopy are being moved out of
traditional hospital settings to alternate sites, including surgical-centers and
physicians' offices. The Company believes smaller instrumentation will improve
the success rate of these procedures by allowing the use of smaller ports,
reducing complications.
In March 1998, the Company received 510(k) clearance from the United
States Food & Drug Administration to expand the labeling for its 3mm bipolar
forceps to include the indication of female tubal sterilization via
contraceptive bipolar coagulation of the fallopian tube. See "Regulation." An
estimated 700,000 tubal sterilization procedures are performed yearly in the
United States. The Company believes this may represent a significant opportunity
for this product. To date, the Company has not experienced a significant revenue
contribution from this product.
BiLAP Bipolar Probes. The BiLAP Probe consists of a handle and a long
rigid tube. The probe contains cutting electrodes and an area to provide spot
coagulation on the distal end, and features suction and irrigation capabilities
to the operative site. The BiLAP Probe was released for general sale in the
United States in October 1991. Initially the BiLAP Probes were designed to work
only on an Everest-made Bipolar generator; however, due to product modifications
made in 1996, the device is now compatible with most common electrosurgical
generators, eliminating the need for an Everest Generator. Sales of the BiLAP
System to date have been minimal, and the Company does not believe sales will
increase significantly in the future.
BiLAP Bipolar Needle Electrode. The BiLAP Bipolar Needle Electrode is
similar in design to the BiLAP product line but features an adjustable needle
electrode that advances and retracts for precise cutting that preserves
surrounding tissues. The device utilizes the safety of bipolar energy and
provides the surgeon with precision cutting performance. This device is
compatible with most common electrosurgical generators. The sales of this
product are not expected to reach significant levels since this product has a
small niche of the market based on current surgical techniques.
<PAGE>
Laparoscopic Surgical Products Under Development. The Company has
ongoing development projects to optimize the performance of its products, and
the reduction of its manufacturing costs through the benefits of value
engineering, and to offer a lower profile, higher-quality blade design for its
bipolar scissors.
Gastrointestinal (GI) Endoscopic Products
Current GI Endoscopic Products
BiSNARE Polypectomy Snare. Lower gastrointestinal polyp removal
procedures are performed to reduce the risk of cancerous lesion formation. When
performed with a monopolar snare, this procedure may have the undesirable side
effects of colon wall perforation and delayed hemorrhage. The Company is
marketing a device designed to make the removal of polyps easier and safer. The
BiSNARE Polypectomy Snare consists of a bipolar wire loop on a long catheter
which is inserted through an endoscope. The wire loop is placed over the polyp
by the endoscopist, RF energy is activated, and, as the polyp is cut from the
intestinal wall, the exposed blood vessels are coagulated. The Company believes
that, compared to competing monopolar devices, the BiSNARE presents less
potential for burns and intestinal perforations because it requires less power
and the energy is localized to the lesion. In addition, it is easier to prepare
the patient for the procedure than with competing devices because the BiSNARE
does not require a grounding pad.
The BiSNARE is currently offered in several models to address physician
preferences. The Company is currently focusing on increasing its market share in
laparoscopy, therefore, the BiSNARE is sold to hospitals and physicians in the
United States through a limited network of independent marketing representatives
and distributors. Revenues from this product have fallen over the past three
years primarily due to a decline in revenues from the Company's distribution in
Japan of this product. This revenue decline resulted both from increased
competitive products which eroded existing business and from delays in obtaining
approval in Japan of new versions of the bipolar snare.
BiCOAG Probe Coagulator. In a common endoscopic procedure, a
coagulating tip on the distal end of a catheter is used to treat ulcers and
other intestinal bleeding. The BiCOAG Coagulator is a catheter with a spiral
electrode tip and a flushing port designed to facilitate the endoscopic
visualization and coagulation of gastrointestinal bleeding. The BiCOAG Probe has
a spiral bipolar electrode designed to permit the endoscopist to use any surface
of the tip for therapy while reducing the incidence of tissue adhesion. The
BiCOAG Probe was released for sale in the third quarter of 1990.
The Company has entered into an agreement with Bard Interventional, a
division of C.R. Bard, Inc., and is providing a private label version of the
coagulating probe for sale in the United States and Canada. Bard has no
obligation to purchase a minimum number of units under this agreement. In 1998,
the Company experienced a sharp increase in revenues under this product supply
agreement as Bard was able to gain additional market share for a period of time
due to competitive market opportunities. The Company believes the opportunity
was short-lived and does expect revenues to fall to normal levels in 1999.
<PAGE>
GI Endoscopic Products Under Development
Biopsy Forceps. The Company has developed a bipolar instrument that
will enable the endoscopist to obtain a tissue sample for pathology and
coagulate the site while maintaining the integrity of the sample. The market
potential for the product is under evaluation. The Company has entered into a
development agreement with a leading international distributor of surgical
instruments to refine the product design and explore the market potential.
Minimally Invasive Cardiovascular Surgery
The Company has identified the emerging minimally invasive
cardiovascular surgery market as an opportunity to export its bipolar
technology. The Company believes the inherent safety of bipolar technology
offers the cardiovascular surgeon the cost-effective electrosurgical solution to
meet the challenges of these new procedures. The Company also believes strongly
that bipolar electrosurgery has the potential to become the standard of care for
the new minimally invasive cardiovascular surgery marketplace.
The Company is exploring two applications for bipolar technology in
cardiac surgery--bipolar dissection of the internal mammary artery during
coronary artery bypass surgery, and bipolar "ligation and transection" of side
branches during minimally invasive saphenous vein harvesting. The Company
believes it can leverage its technology to these procedures without significant
obstacles. The applicable products include the EVERSHEARS II Metal-on-Metal
Bipolar Scissors and the new BiSECTOR(TM) Ligating Forceps.
In mid-1997, the Company entered into a product supply agreement with
Guidant Corporation for the cardiovascular market. Under the terms of this
agreement, Everest supplies Guidant with a version of its bipolar scissors and
bipolar cutting forceps to be packaged in the proprietary Guidant VasoView(TM)
Balloon Dissection System kit, offering clinicians a complete minimally invasive
solution for saphenous vein harvesting during cardiovascular and peripheral
vascular surgical procedures. Surgeons perform approximately 600,000 coronary
artery bypass procedures and 200,000 peripheral bypass procedures worldwide each
year. Guidant introduced the Everest Medical products to their customers during
the third quarter of 1997.
In the first quarter of 1998, the Company introduced its BiSECTOR
Bipolar Ligating Forceps as a tool for minimally invasive sapheneous vein
harvesting to be included in kits being introduced on the market. The product
provides a one-step alternative to coagulate and transect vessels, compared to
the single function, more costly, scissors and clip appliers. Guidant purchased
over $1,400,000 of the Company's products in 1998. Guidant continues to be the
market leader in this arena and introduced a second generation VASOVIEW(TM)
UNIPORT(TM) Endoscopic Vessal Harvesting System in 1998. To support this next
generation system, the Company developed and commenced shipments for Guidant of
an innovative 56cm flexible shaft scissors and its BiSECTOR ligating forceps for
use with this sytem.
In addition, the Company will be exploring proprietary bipolar
technology as an application to improve the current internal mammary artery
(IMA) harvesting technique in minimally invasive, beating heart, bypass graft
procedures. With obvious vital structures such as the heart and aorta nearby,
the Company believes these relatively new and still evolving heart procedures
will be more effective due to the added safety and one-step methods that bipolar
technology brings.
<PAGE>
General Market Trends
The MIS market continues to grow. Factors accounting for this growth
include: (a) increasing concern by employers and healthcare providers regarding
the total system costs associated with surgery; (b) higher degree of awareness
of patients regarding the benefits of MIS; and (c) improved technology for use
by clinicians in these procedures.
At present, many physicians, hospitals and third party payers do not
fully appreciate the favorable economics of MIS. There is a growing body of data
to support the conclusion that MIS procedures will significantly reduce the
total system healthcare-related costs of surgery. These potential cost savings
include reduced hospital stays and patient recovery time. From an employer's
perspective, savings are evident in lower costs of short-term disability and
workers' compensation. In addition, employers may realize savings in costs
associated with the hiring of replacement workers--training expense, reduced
productivity and additional compensation. The Company believes that large
employers will become more aggressive in managing their total system
healthcare-related costs and indicate a preference for MIS procedures. This may
include employers limiting reimbursement to laparoscopic procedures only, unless
clearly contraindicated.
Today, patients are better informed with respect to the benefits of
MIS--returning to an active lifestyle sooner, potentially reduced risks due to
anesthesia and infection, and obvious cosmetic advantages--and are requesting
less invasive procedures.
The Company continues to believe that MIS will grow and expand into
other medical markets. Today, the Company serves the medical specialties of
gynecology, general surgery, gastrointestinal endoscopy and cardiovascular.
As seen in its successful entrance to the cardiovascular market, the
Company believes it can be successful in leveraging its technological expertise
and operational capabilities into new an demerging MIS markets including
otolaryngology, orthopedics and urology as well as the expanding procedural
opportunity in gynecology, general surgery and cardiovascular markets.
The current health care debate by the federal government has the
potential to tremendously impact the system of delivery of health care in this
country. While the ultimate outcome is uncertain at this time, the Company feels
it will be well-positioned to take advantage of any change that may occur. In
order to reduce the overall rate of growth of spending on health care, any new
or revised system will need to encourage the ongoing trend to MIS due to the
overall efficiency of these procedures. The Company also expects that the trend
towards managed health care will bring into the procedural equation important
factors such as safety, efficacy, cost effectiveness and ease of use resulting
in a greater demand for bipolar energy.
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Competition
The medical device industry is intensely competitive in almost all
segments and tends to be dominated in large, more mature markets by a relatively
small group of large and well-financed companies. The Company also competes with
smaller, entrepreneurial companies, some of which are better financed than
Everest and may have established positions in certain markets.
Minimally Invasive Surgical Markets
A number of major medical products suppliers, including United States
Surgical Corporation (a subsidiary of Tyco Corporation), Ethicon, Inc. (a
subsidiary of Johnson & Johnson, Inc.), CONMED Corporation, Karl Storz
Endoscopy-America Inc., Imagyn Medical Technologies, Inc. and Circon Corporation
are currently selling devices for minimally invasive surgical procedures. For
the most part, the electrosurgical products sold by these companies are
monopolar devices. The Company also believes that a number of companies are
developing bipolar devices for laparoscopic applications. Competitors are
selling a bipolar coagulating forceps. The Company believes, however, that it is
the only manufacturer currently marketing a full line of bipolar devices
specifically designed for laparoscopy.
Due to the expected rapid growth in the market for minimally invasive
surgical products, the Company anticipates that additional competitors will
enter the market. It also expects that there will be a consolidation of existing
competitors, including acquisitions of small companies by large medical products
companies. This trend will mean increased competition for the Company.
Minimally Invasive Cardiovascular and Saphenous Vein Harvesting Markets
The principal competitors of the Company's products offered through
Guidant Corporation in the emerging minimally invasive cardiovascular market
include Ethicon EndoSurgery (a subsidiary of Johnson & Johnson), CardioThoracic
Systems, Inc., Heartport and General Surgical Innovations Inc.
Endoscopic Markets
The principal competitors of the BiSNARE polypectomy device are
Microvasive, Inc. (subsidiary of Boston Scientific Corp.), Wilson Cook Medical
Inc., Bard Interventional (a division of C.R. Bard, Inc.) and Olympus Corp. All
of these companies market monopolar systems. BEI, Inc. makes a bipolar snare
that is currently sold to customers at a significantly higher price than the
BiSNARE.
The principal competitors to the BiCOAG Probe are Microvasive, Circon
Corporation and Olympus. All of these companies market bipolar devices, with the
exception of Olympus, which offers a device using heat for coagulation.
The Company believes that the principal competitive factors in the MIS
market are product features, physician familiarity with the products and their
function, the ability of products to address cost containment issues, product
quality, distribution strength and price. Competitors to each of the Company's
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products market both disposable and reusable products. All of the Company's
current surgical instruments are intended for single use, a feature which the
Company believes provides the benefits of less risk of infection to patients and
reduced labor costs to hospitals.
Marketing and Distribution
The Company markets and promotes its products through advertising in
medical journals, publication of scientific papers, direct mail, attendance at
trade shows and participation by Everest's personnel in training sessions for
physicians. The Company also provides promotional information for its
independent sales representatives and international distributors. In addition,
the Company, its independent representatives and its distributors provide
physicians with assistance in learning the proper use of the Company's
laparoscopic products.
Over the past 4 years, the Company has focused on developing its
independent sales channel whereby the Company works with independent sales
organizations which have expertise in the Company's primary markets of general
surgery and gynecologic laparoscopy. The Company, in many cases, retains direct
billing to the hospital and pays a commission based on orders shipped. The
Company has seen this distribution channel grow to represent 60% of its sales
volume in 1998. The Company believes that continued management focus, ongoing
product development and increased sales and marketing efforts will continue to
grow this independent sales channel in 1999.
The Company is approaching the minimally invasive cardiovascular market
with a strategic partnership with Guidant Corporation, who became a shareholder
in the Company in 1998. Guidant is the strategic marketer and distributor of
versions of the Company's bipolar products to be packaged with the VasoView
Balloon Dissection System for less invasive saphenous vein harvesting.
The Company continues to maintain its non-exclusive product supply
agreement with Ethicon Endo-Surgery, a division of Johnson & Johnson, Inc.,
whereby Ethicon was granted a license to market the Company's laparoscopic
forceps. The Company also has a non-exclusive agreement with Origin MedSystems,
a subsidiary of Guidant Corporation, established in 1993 to market the Company's
laparoscopic forceps. This Origin agreement will, however, be discontinued in
the second quarter of 1999. See "Business--Laparoscopic Surgical Products."
Everest currently markets its GI endoscopic products in the United
States through a minimum number of independent distributors. These distributors
do not have written agreements with the Company and serve on a non-exclusive
basis. The Company also services a growing number of accounts directly. The
Company continues to provide Bard Interventional (a division of C.R. Bard, Inc.)
with its gastrointestinal coagulating probe.
The Company's sales and marketing department consists of the Vice
President of Sales and Marketing, four regional sales managers, one marketing
manager, one clinical support manager and two sales and marketing support
individuals. The Company expects to continue to invest in this growing
distribution strategy in 1999.
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The Company intends to continue to utilize independent distributors for
foreign sales. During 1998, the Company concentrated its sales and marketing
efforts primarily in the United States market and experienced an increase in
sales internationally. The Company expects sales in 1999 to increase
domestically, as well as internationally.
Manufacturing
The manufacturing process for the Company's current products consists
primarily of the assembly of parts and components purchased from outside
vendors, final testing and packaging. The Company currently produces the
majority of its injection molded plastic parts. It is probable that the Company
primarily will assemble its future products from parts bought from outside
suppliers. However, management may determine that certain parts should be
produced by the Company due, for instance, to a desire to control quality or to
reduce cost. The Company is currently subcontracting sterilization functions
with third parties. During 1993, the Company installed a class 10,000 clean room
in its facility which gives the Company the capability to package its products
in house at considerable savings compared to subcontracting that function.
Most of the parts and components used in the Company's current products
are purchased from multiple vendors or are available from additional vendors the
Company has qualified. However, in some instances the Company purchases, and may
in the future purchase, only from a single vendor. Although the Company believes
it would be able to obtain such parts from alternative vendors if required,
there could be some interruption in the Company's ability to supply products to
customers. If, as in the past, the Company finds itself with a single source of
supply for a critical component, it will, to the extent possible, take steps to
protect itself from a shortage of supply. Such steps include increased safety
stock, working to qualify additional vendors, and alternative designs which
utilize currently available components.
Research and Development
The Company's research and development activities are conducted at its
headquarters facility and at laboratory and clinical facilities at various
universities and hospitals. The Company attempts to coordinate its research and
development activities with those of its scientific advisors and other physician
contacts. The objective of the Company is to direct those coordinated efforts to
use its base of technology and expertise to develop products which meet
identified market needs. For the years ended December 31, 1998 and 1997, the
Company's research and development expenditures were $859,000 and $634,000,
respectively. The Company expects spending in the research and development area
to increase as the Company attempts to expand its laparoscopic product offering
and to capitalize on certain opportunities in the minimally invasive
cardiovascular arena, microlaparoscopy and other surgical specialties.
Regulation
The medical devices manufactured and marketed by the Company are
subject to regulation by the U.S. Food and Drug Administration (the "FDA") and,
in some instances, by state and foreign authorities. Pursuant to the Medical
Device Amendments of 1976 (the "1976 Amendments") to the Federal Food, Drug and
Cosmetic Act, and regulations promulgated thereunder, medical devices intended
<PAGE>
for human use are classified into three categories (Classes I, II, and III),
depending upon the degree of regulatory control to which they would be subject.
The Company's current GI surgical products have been classified as Class II
devices, and the Company believes that its planned electrosurgical devices will
also be in that class.
If a new device, irrespective of whether it is a Class II or III
device, is substantially equivalent to an existing device that has been
continuously marketed since the effective date of the 1976 Amendments (May 28,
1976) (a "Substantially Equivalent Device"), FDA requirements may be satisfied
through a Premarket Notification Submission (a "510(k) Submission"), under which
the applicant provides product information supporting its claim of substantial
equivalence. In a 510(k) Submission, the FDA may also require that it be
provided with clinical test results demonstrating the safety and efficacy of the
device. Under certain circumstances, that clinical data can be obtained only
after submitting to the FDA an application for an Investigational Device
Exemption ("IDE"). Marketing may commence when the FDA issues a letter finding
substantial equivalence. The Company has received 510(k) marketing clearances
finding substantial equivalence from the FDA, without submission of clinical
testing data, for all of its current products.
If a medical device does not qualify for the 510(k) Submission
procedure, the manufacturer must file a premarket approval application ("PMA").
This requires more extensive prefiling testing than the 510(k) Submission and
involves a significantly longer FDA review process. FDA approval of a PMA occurs
after the applicant has established the safety and efficacy of the device to the
satisfaction of the FDA under an IDE Procedure requiring preclinical laboratory
and animal tests and human clinical studies. The Company does not believe that
any of its products currently under development will be subject to this more
time-consuming FDA review process.
The United States Congress has enacted legislation which substantially
changes certain aspects of the regulation of the sale of medical devices and
which, depending on how it is interpreted and enforced, could make it
substantially more difficult and time-consuming to comply with premarketing
clearance and approval processes.
As a manufacturer of medical devices, the Company is also subject to
certain other FDA regulations, and its manufacturing processes and facilities
are subject to continuing review by the FDA to ensure compliance with Good
Manufacturing Practices regulations. The Company believes that its manufacturing
and quality control procedures substantially conform to the requirements of FDA
regulation.
The financial arrangements through which the Company markets, sells and
distributes its products may be subject to certain federal and state laws and
regulations with respect to the provision of services or products. These
so-called "fraud and abuse" laws and regulations prohibit certain direct or
indirect payment arrangements that are designed to induce or encourage the
purchase or recommendation of products reimbursable under Medicare or Medicaid.
Violations of these laws and regulations may result in civil and criminal
penalties, including substantial fines and imprisonment. The Company believes
that its operations and its marketing, sales and distribution practices
currently comply in all respects with the fraud and abuse laws and regulations,
to the extent they are applicable.
<PAGE>
The Company's devices are also subject to regulation in foreign
countries.
Third Party Reimbursement
In 1983, Congress amended the Social Security Act to establish a
prospective reimbursement system for Medicare which limits the reimbursement
that hospitals receive for treating certain medical conditions by setting
maximum fees that can be charged for Medicare patients. Under this system,
hospitals are paid a fixed amount for treating each patient with a particular
diagnosis. This differs from the previous system under which Medicare providers
were reimbursed for actual costs of providing services up to a stated maximum on
each procedure performed. In addition, certain private insurers have initiated
prospective reimbursement systems designed to slow the escalation of health care
costs. The Company does not believe that these reimbursement limitations will
have a material adverse effect on future sales of its existing or currently
proposed product lines, although the Company has become aware of pressure to
limit reimbursement for single-use devices.
Intellectual Property
Due to the rapid technology change that characterizes the medical
device industry, the Company believes that the improvement of existing products,
reliance upon trade secrets and unpatented proprietary know-how and the
development of new products are generally as important as patent protection in
establishing and maintaining a competitive advantage. Nevertheless, the Company
has made, and continues to make, efforts to obtain patents, when available, in
connection with its product development program. There can be no assurance,
however, that any patents obtained will provide substantial protection or be of
commercial benefit to the Company, or that their validity will not be
successfully challenged.
In 1994, the Company was awarded a patent for its second generation
bipolar scissors design, EVERSHEARS II. Although there were two opposing patents
issued to another company in 1994 involving ceramic bipolar scissors, the
Company believes that the patented EVERSHEARS II is a strong marketing
alternative in the bipolar scissors market. After review of the allowed claims
of the two opposing patents and the related files, the Company, based on the
advice of its patent counsel, believes that its metal-on-metal design
incorporated in the EVERSHEARS II does not infringe on either of the opposing
patents issued. The Company commenced shipment of the EVERSHEARS II on a limited
basis in the third quarter of 1994 and full market introduction in January 1995.
In 1995, the Company was awarded patents for its dissecting forceps
design and its bipolar cutting forceps design. The Company was awarded three
additional patents in 1996, two of which relate to the bipolar scissors
technology. The third patent, a methods patent, was granted to the Company which
allows for the interchangeability of monopolar and bipolar currents to an
instrument.
In November 1997, the Company received official notice from the United
States Patent and Trademark Office ("PTO") that it intended to issue a
reexamination certificate for the Company's bipolar cutting forceps patent. The
Company had requested this reexamination in an effort to ensure the long-term
<PAGE>
viability of the bipolar cutting forceps patent. A reexamination certificate
states that the essential claims of the bipolar cutting forceps patent have been
upheld by the PTO. The bipolar cutting forceps design incorporates a precision
bipolar forceps for grasping and coagulation of tissue with a passive,
reciprocally-moveable surgical cutting blade positioned between the forceps jaws
to allow transection of the coagulated tissue. The Company was issued a U.S.
patent for this device on August 29, 1995. A reexamination is a PTO action to
review an issued patent in the context of newly discovered prior art. As a
result of the successful outcome of the reexamination in favor of the Company,
it executed a cross-licensing agreement with an undisclosed party in the fourth
quarter of 1997. The Company received licensing revenue of $183,000 covering the
two-plus years since the patent issued in August 1995. Licensing revenues in
1998 approached $85,000 and the Company does not believe future licensing
revenues will be material to the Company.
In October 1998, the Company reached a settlement with Boston
Scientific Corporation with respect to separate patent interference actions
declared by the United States Patent and Trademark Office. A patent interference
action is a PTO action to determine who is entitled to the patent on the same
invention. The interference action involved two of the Company's bipolar
electrosurgical scissors designs. The resolution of the settlement resulted in
the Company maintaining ownership of the key "metal-on-metal" bipolar scissors
patent, which the Company is currently marketing, on terms favorable to the
Company, eliminating further legal costs and uncertainty.
The Company generally requires its consultants and each of its
employees to agree in writing to keep its proprietary information confidential
and, within certain limitations, to assign all inventions relating to the
Company's business to the Company.
The Company has registered its trademark logo, Everest Medical, and the
trademarks BiSNARE, BiTOME, BiCOAG, EVERSHEARS, BiLAP and BiBx on the principal
register in the PTO. In addition, the Company has filed trademark applications
on some of its other products.
Employees
As of March 12, 1999, the Company had 105 employees, all of which are
full-time. The employees include 4 in research and development, 63 in
production, 16 in manufacturing support, 6 in quality assurance, 9 in sales and
marketing and 7 in general and administrative functions. The Company's employees
are not represented by a union, and the Company considers its relationship with
its employees to be good.
Outlook and Risks
Certain statements made in this annual report on Form 10-KSB, which are
summarized here, are forward-looking statements that involve risk and
uncertainties, and actual results may be materially different. Factors that
could cause actual results to differ include, but are not limited to those
identified:
<PAGE>
o The expectation that as the Company continues to invest in sales and
marketing support programs, increased revenues will result through the
independent sales channel depends on surgeons increasing their use of
bipolar technology as an alternative to existing monopolar and ultrasonic
technologies, and upon general market conditions and competitive conditions
within this market, including the introduction of products by both U.S. and
European competitors.
o The Company's expectation that it will experience sales growth domestically
and internationally depends on general market conditions and competitive
conditions that may be encountered in both such markets, and on Everest's
ability both (i) to increase its market share in its core business of
laparoscopy given that Everest competes with large, well-capitalized
companies who have the ability to enter into contact purchasing agreements
with large institutions, and (ii) to establish a market presence in the
minimally invasive cardiac surgery market.
o The expectation that bipolar technology will become the standard in the MIS
market and that the Company will be a beneficiary of this trend depends on
demand and on acceptance by physicians, hospitals and third party payers of
the believe that MIS procedures result in reduced costs.
o The expectation that the Company will increase its research and development
spending in order to achieve ultimate sales growth depends on the Company
having sufficient capital. The belief that the Company's current capital
resources will be sufficient to fund current and anticipated business
operations could be adversely impacted by changes in anticipated operating
results or the Company's inability to obtain financing on favorable terms
and to meet the Company's obligations on its preferred stock dividends.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently rents facilities consisting of approximately
23,485 square feet located at Carlson Technical Center, Suite 500, 13755 First
Avenue North, Minneapolis, Minnesota 55441. The Company pays monthly rent of
approximately $13,650, plus operating expenses and taxes, under the lease which
extends through December 2004. The Company uses approximately 65% of the space
for production, 15% for research and development and 10% for each of sales and
marketing and administration. The Company believes this space will adequately
meet its needs for the foreseeable future, and, in management's opinion, the
property is adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to, nor is its property the subject of, any
material pending legal proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
<PAGE>
Executive Officers of the Company
The Company's executive officers, along with their ages and positions
as of March 12, 1999, are as follows:
Name Age Position
John L. Shannon, Jr. 45 President, Chief Executive Officer and
Chairman of the Board
Michael E. Geraghty 51 Vice President, Sales and Marketing
Steven M. Blakemore 44 Vice President, Operations and Engineering
David J. Parins 47 Vice President, Technology
Thomas F. Murphy 39 Vice President, Finance and Administration
and Assistant Secretary
John L. Shannon, Jr. Mr. Shannon has served as Chairman of the Board
since May 1997 and as President and Chief Executive Officer since August 1993.
From May 1989 to June 1993, Mr. Shannon was President and Chief Executive
Officer of EdenTec Corporation, a medical device manufacturer. From November
1985 to May 1989, Mr. Shannon was employed by Threshold Ventures, Inc., a
venture capital firm, most recently as President. From September 1984 to
November 1985, Mr. Shannon was Marketing Manager for SciMed Life Systems, Inc.,
a medical device manufacturer. From June 1979 to September 1984, Mr. Shannon was
employed by The Toro Company, a lawn and garden manufacturer, in a variety of
financial, planning and marketing positions, most recently as Marketing Manager.
Michael E. Geraghty. Mr. Geraghty joined the Company as Vice President
of Sales and Marketing in January 1997. From August 1995 to January 1997, Mr.
Geraghty was Director of Marketing - Advance Products at ArthroCare Corporation,
a start-up bipolar electrosurgical medical device manufacturer. From March 1994
to August 1995, Mr. Geraghty was the National Sales Manager of Laser
Peripherals, and from December 1990 to October 1993, he was the Sales Manager
for Intramed Labs, Inc., both of which are medical device manufacturers.
Steven M. Blakemore. Mr. Blakemore has been employed by the Company
since November 1992, most recently as Vice President of Operations and
Engineering. From October 1989 to February 1992, Mr. Blakemore was employed by
Clarus Medical Systems, a medical device manufacturer, as Vice President of
Operations and Research and Development. From March 1986 to October 1989, Mr.
Blakemore was employed by Medical Graphics Corporation, a medical device
manufacturer, most recently as Vice President of Operations. Mr. Blakemore is
the inventor on one patent in medical technology.
<PAGE>
David J. Parins. Mr. Parins rejoined the Company in April 1998 as Vice
President of Technology. Prior to rejoining the Company, Mr. Parins was employed
by Cardiac Instruments, a startup medical device company, as Vice President of
Research and Development from October 1997 to April 1998. Prior to this short
hiatus, Mr. Parins was employed by the Company as Vice President of Engineering,
Quality Assurance and Regulatory Affairs from November 1988 to October 1997. Mr.
Parins is the holder of many of the Company's patents and has over twenty years
of experience in the medical device industry.
Thomas F. Murphy. Mr. Murphy has served as Vice President of Finance
and Administration of the Company since January 1997, prior to which he served
as Chief Financial Officer since joining the Company in July 1994. Mr. Murphy
has also served as Assistant Secretary of the Company since February 1995. From
December 1992 to July 1994, he was Vice President of Finance for DaVinci
Medical, Inc., a manufacturer of laparoscopic surgical instruments. From October
1990 to May 1992, Mr. Murphy was employed by Tsumura International, a consumer
goods manufacturer of home fragrance and bath products, as Vice President of
Finance. From 1986 to October 1990, Mr. Murphy held various positions in sales
operations, administration and finance for Minnetonka Corporation, a consumer
goods manufacturer.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by Item 5 is incorporated by reference from
the Company's 1998 Annual Report, portions of which are filed herewith in
Exhibit 13.1.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The information required by Item 6 is incorporated by reference from
the Company's 1998 Annual Report, portions of which are filed herewith in
Exhibit 13.1.
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements of the Company for the year ended December 31,
1998 are incorporated by reference from the Company's 1998 Annual Report,
portions of which are filed herewith in Exhibit 13.1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by Item 9 regarding the Company's executive
officers is set forth in Part I of this report.
The information required by Item 9 regarding the Company's directors is
incorporated by reference from the Company's 1999 Proxy Statement under the
caption "Information About Nominees." The Company's proxy statement will be
filed pursuant to Rule 14a within 120 days after the close of the fiscal year
for which this report is filed.
The information relating to compliance with Section 16(a) of the
Exchange Act is incorporated by reference from the Company's 1999 Proxy
Statement under the caption "Compliance with Section 16(a) of the Exchange Act."
The Company's proxy statement will be filed pursuant to Rule 14a within 120 days
after the close of the fiscal year for which this report is filed.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is incorporated by reference from
the Company's 1999 Proxy Statement under the caption "Executive Compensation."
The Company's proxy statement will be filed pursuant to Rule 14a within 120 days
after the close of the fiscal year for which this report is filed.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 11 is incorporated by reference from
the Company's 1999 Proxy Statement under the caption "Security Ownership of
Management and Certain Beneficial Owners." The Company's proxy statement will be
filed pursuant to Rule 14a within 120 days after the close of the fiscal year
for which this report is filed.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 is incorporated by reference from
the Company's 1999 Proxy Statement under the caption "Certain Transactions." The
Company's proxy statement will be filed pursuant to Rule 14a within 120 days
after the close of the fiscal year for which this report is filed.
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The exhibits to this Report are listed in the Exhibit Index
immediately following the signature pages to this Report.
A copy of any of the exhibits listed or referred to above will be
furnished at a reasonable cost to any person who was a shareholder of
the Company as of March 11, 1999, upon receipt from any such person of
a written request for any such exhibit. Such request should be sent to
Everest Medical Corporation, 13755 First Avenue North, Minneapolis,
Minnesota 55441, Attention: Shareholder Information.
(b) Reports on Form 8-K: None filed during the fourth quarter of the fiscal
year ended December 31, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Issuer has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: March 30, 1999 EVEREST MEDICAL CORPORATION
By /s/ John L. Shannon, Jr.
John L. Shannon, Jr.
President, Chief Executive Officer
and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Issuer and in the capacities indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints John
L. Shannon, Jr. and Thomas F. Murphy as his true and lawful attorneys-in-fact
and agents, each acting alone, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments to this Annual Report on Form 10-KSB
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, each acting alone, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
Signature Title Date
/s/ John L. Shannon, Jr. Chief Executive Officer, March 30, 1999
John L. Shannon, Jr. President (Principal Executive
Officer) and Chairman of the
Board
/s/ David D. Koentopf Director March 30, 1999
David D. Koentopf
(Signatures continued on following page)
<PAGE>
Signature Title Date
/s/ Thomas F. Murphy Vice President of Finance March 30, 1999
Thomas F. Murphy and Administration
(Principal Financial and
Accounting Officer)
/s/ Donald R. Brattain Director March 30, 1999
Donald R. Brattain
Director
Richard J. Migliori, M.D.
<PAGE>
EVEREST MEDICAL CORPORATION
EXHIBIT INDEX TO ANNUAL REPORT
ON FORM 10-KSB
For the Fiscal Year Ended December 31, 1998
Item No. Item
3.1 Restated Articles of Incorporation of the Company, as amended
(Incorporated by reference to Exhibit 3.1 to the Company's Form 10-KSB
for the fiscal year ended December 31, 1995)
3.2 Restated Bylaws of the Company, as amended (Incorporated by reference
to Exhibit 3.2 to the Company's Registration Statement on Form S-18
(File No. 33-37352-C))
4.1 Specimen form of the Company's Common Stock Certificate (Incorporated
by reference to Exhibit 4.1 to the Company's Registration Statement on
Form S-18 (File No. 33-37352-C))
4.2 Restated Articles of Incorporation of the Company, as amended (See
Exhibit 3.1)
4.3 Restated Bylaws of the Company, as amended (See Exhibit 3.2)
10.1 1986 Incentive Stock Option Plan, as amended (Incorporated by reference
to Exhibit 10.6 to the Company's Registration Statement on Form S-18
(File No. 33-37352-C))**
10.2 1986 Non-Statutory Stock Option Plan, as amended (Incorporated by
reference to Exhibit 10.7 to the Company's Registration Statement on
Form S-18 (File No. 33-37352-C))**
10.3 Form of Incentive Stock Option Agreement (Incorporated by reference to
Exhibit 10.8 to the Company's Registration Statement on Form S-18 (File
No. 33-37352-C))**
10.4 Form of Non-Statutory Option Agreement (Incorporated by reference to
Exhibit 10.9 to the Company's Registration Statement on Form S-18 (File
No. 33-37352-C))**
10.5 Employee Stock Purchase Plan (Incorporated by reference to Exhibit
10.10 to the Company's Registration Statement on Form S-18 (File No.
33-37352-C))**
10.6 Employee Incentive Savings and Profit Sharing Plan (Incorporated by
reference to Exhibit 10.11 to the Company's Registration Statement on
Form S-18 (File No. 33-37352-C))**
10.7 Employee Incentive Savings and Profit Sharing Trust (Incorporated by
reference to Exhibit 10.12 to the Company's Registration Statement on
Form S-18 (File No. 33-37352-C))**
10.8 1992 Stock Option Plan (Incorporated by reference to Exhibit 10.37 to
the Company's Registration Statement on Form S-1 (File No. 33-45872))**
10.9 Lease Agreement dated September 20, 1989 between the Company and
Carlson Center Industrial II Limited Partnership (Incorporated by
reference to Exhibit 10.36 to the Company's Registration Statement on
Form S-18 (File No. 33-37352-C))
10.10 Amendment #1 dated December 7, 1992 to Lease Agreement dated September
20, 1989 between the Company and Carlson Center Industrial II Limited
Partnership (Incorporated by reference to Exhibit 10.13 to the
Company's Form 10-KSB for the fiscal year ended December 31, 1994)
10.11 Amendment #2 dated December 9, 1993 to Lease by and between the Company
and the Estate of James Campbell (Incorporated by reference to Exhibit
10.14 to the Company's Form 10-KSB for the fiscal year ended December
31, 1994)
10.12 Supply Agreement dated April 2, 1991 between the Company and C.R. Bard,
Inc. (Incorporated by reference to Exhibit 10.36 to the Company's
Registration Statement on Form S-1 (File No. 33-45872))
10.13 First Amendment to Supply Agreement dated April 2, 1991 between the
Company and C.R. Bard, Inc. (Incorporated by reference to Exhibit 10.36
to the Company's Registration Statement on Form S-1 (File No.
33-45872))
10.14 Stock Purchase Agreement dated July 15, 1993 between the Company and
Johnson & Johnson Development Corporation, including Distribution and
License Agreement between the Company and Ethicon Endo-Surgery
(Incorporated by reference to Exhibit 10.29 to the Company's Form
10-KSB for the fiscal year ended December 31, 1993)
10.15* Employment Agreement with John L. Shannon, Jr. dated January 1, 1999**
10.16 Form of Warrant dated February 18, 1994 issued pursuant to agreement to
certain purchasers (Incorporated by reference to Exhibit 10.38 to the
Company's Form 10-KSB for the fiscal year ended December 31, 1993)
10.17 Exclusive Distribution Agreement dated January 1, 1996 with KK Adachi
(Incorporated by reference to Exhibit 10.21 to the Company's Form
10-KSB for the fiscal year ended December 31, 1995)
10.18 Warrant to purchase 290,909 shares of Common Stock dated February 16,
1996 issued to Okabena Partnership K (Incorporated by reference to
Exhibit 10.25 to the Company's Form 10-KSB for the fiscal year ended
December 31, 1995)
10.19 Separation Agreement dated October 12, 1996 between the Company and R.
Keith Poppe (Incorporated by reference to Exhibit 10.25 to the
Company's Form 10-KSB for the fiscal year ended December 31, 1996)**
10.20 Terms of Employment for Michael Geraghty. (Incorporated by reference to
Exhibit 10.26 to the Company's Form 10-KSB for the fiscal year ended
December 31, 1996)**
10.21 Amendment #3 dated September 11, 1997 to Lease by and between the
Company and the Estate of James Campbell, as Landlord (Incorporated by
reference to Exhibit 10.24 to the Company's Form 10-KSB for the fiscal
year ended December 31, 1997)
10.22* Management Incentive Program for Fiscal Year 1999**
10.23* Credit Agreement between Norwest Bank Minnesota, N.A. and the Company
dated February 26, 1999.
10.24* Revolving Note dated February 26, 1999 from the Company to Norwest Bank
Minnesota, N.A.
13.1* Portions of 1998 Annual Report, including Management's Discussion and
Analysis, Financial Statements and Market for Common Equity
23.1* Consent of Independent Auditors
24.1* Power of Attorney of John L. Shannon, Jr., David D. Koentopf, Thomas F.
Murphy, Donald R. Brattain and Richard J. Migliori (included on the
signature pages of this Form 10-KSB)
27.1 Financial Data Schedule (in electronic format only)
- -------------------
* Filed herewith.
** Management contract or compensatory plan or arrangement.
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") made and entered into
effective as of the 1st day of January, 1999, by and between Everest Medical
Corporation, a Minnesota corporation (the "Company"), and John L.
Shannon ("Executive").
RECITALS
Executive has served as President and Chief Executive Officer of the
Company since August 3, 1993. Under the Executive's management and direction,
the Company has undergone a significant turnaround. The Company believes that
Executive continues to be a critical component of the future growth and
profitability of the Company. Accordingly, the Company and Executive mutually
agree to the foregoing terms and conditions.
AGREEMENT
1. Employment
a. The Company hereby agrees to continue to employ Executive as its
President and Chief Executive Officer upon the terms and conditions set forth in
this Agreement.
b. Executive currently serves as Chairman of the Board of Directors of
the Company. If still employed by the Company, the Company will include
Executive on the slate of directors that will be submitted by the Company to the
shareholders at the next annual meeting of shareholders scheduled to be held in
April 1999. His continuing service as Chairman of the Board of Directors will be
at the discretion of the directors elected at the 1999 Annual Meeting of
Shareholders.
c. Executive agrees that he will, at all times, faithfully,
industriously, and, to the best of his ability, experience and talents, perform
all the duties and responsibilities that may be required of him as President and
Chief Executive Officer of the Company.
2. Term of Employment
Subject to the terms and conditions hereof, Executive shall be employed
for an additional term commencing on January 1, 1999 and terminating on December
31, 2000. Unless the parties have entered into a new employment agreement to
cover a period beyond December 31, 2000 or one of the parties has given the
other party at least thirty (30) days written notice of his or its intent not to
extend the Agreement beyond December 31, 2000, this Agreement will continue in
effect on an at-will basis subject to the right of either party to terminate the
Agreement on thirty (30) days's written notice.
<PAGE>
3. Base Compensation
As compensation for his services to the Company, Executive shall be
paid annual salaries of $206,500 and $215,000 in 1999 and 2000, respectively,
payable in accordance with the Company's customary payment periods.
4. Incentive Arrangement
Executive will participate in a Management Incentive Program in each of
the two years of this Agreement. The Management Incentive Program will be
approved by the Compensation Committee of the Board of Directors of the Company
after review and approval by the Board of Directors of the Company's Annual
Operating Plan for that particular year.
5. Payment on Sale of Company Assets or Purchase of Company Capital Stock
If the Company enters into a definitive agreement with another entity
or person while Executive continues to be employed by the Company, either for a
purchase of substantially all of the Company's assets or the acquisition of 50%
or more of the Company's outstanding common or preferred stock, Executive will
be paid by the acquiror the sum of $250,000 within ten (10) days of the closing
of the purchase of Company assets or acquisition of Company capital stock.
6. Stock Options
The Company has previously granted to Executive certain incentive and
non-qualified stock options, all of which have become fully vested. In the event
of a "change in control," all options previously granted to Executive or which
are granted to him in the future which are outstanding at the time of a change
in control will become immediately vested and exercisable in full. A change in
control is hereby defined as follows:
A change in control shall be deemed to have occurred if (A)
any person or entity directly or indirectly becomes the owner of
securities representing more than 50% or more of the combined voting
power (with respect to the election of directors, or a merger,
consolidation or liquidation of the Company or a sale of all or
substantially all of business or assets of the Company); (B) the
consummation of a merger or consolidation of the Company with or into
any other corporation; or (C) the sale or disposition by the Company of
all or substantially all of the Company's business or assets.
<PAGE>
7. Other Benefits
During the term of his Agreement, Executive will be eligible to receive
or participate in all of the insurance, vacation, benefit plans and
miscellaneous benefits received by other salaried employees, subject to the
right of the Company to make such changes in the benefits as it may make for
salaried employees generally from time to time.
8. Termination
a. Notwithstanding Section 2 above, this Agreement shall terminate upon
the happening of any of the following events:
i. Mutual written agreement between the Company and
Executive to terminate his employment;
ii. Executive's death;
iii. Executive's disability defined as inability to
perform his duties hereunder for a period of ninety
(90) successive days; or
iv. For cause (as defined below) upon fourteen (14) days'
prior written notice from the Company specifying the
nature of the cause and, if such cause is of the type
described in b iii or b iv below, Executive's failure
to eliminate such cause during such fourteen (14) day
period.
b. For purposes of this Agreement, "cause" shall include:
i. Commission of any felony or commission of any act of
fraud or dishonesty in connection with the affairs of
the Company;
ii. Commission of any gross misdemeanor in connection
with the affairs of the Company;
iii. Intentional disobedience with regard to, or failure
to comply with, courses of action or policies
approved by the Company which have been communicated
to Executive; or
iv. Executive's willful breach of the terms of this
Agreement or habitual neglect of his duties
hereunder.
9. Payment upon Termination
a. In the event of the termination of Executive's employment for any
reason, Executive shall receive his base pay through the date that his
employment was terminated.
<PAGE>
b. If Executive's employment is terminated during the term of this
Agreement for any reason other than "cause" or his voluntary resignation, he
will receive the following in addition to the payment described in 9a above:
(i) the incentive compensation described in Section 4 of
this Agreement for the entire year in which the
termination occurs;
(ii) the payment provided in Section 5 of this Agreement
if a definitive agreement meeting the requirements of
Section 5 was signed prior to Executive's
termination, and the transaction contemplated by the
definitive agreement is closed;
(iii) severance equal to the greater of (a) Executive's
base salary for the remainder of the employment term;
and (b) Executive's base salary for a period of one
year. Under either (a) or (b), Executive will
receives his severance payments in twelve (12)
monthly installments.
c. If for any reason other than a prior termination for cause the
Company does not elect to extend Executive's employment for at least one year
beyond December 31, 2000 providing for annual base salary equal to at least
$215,000, Executive will receive monthly severance payments, equal to his
monthly base pay in effect on December 31, 2000, for a period of twelve (12)
months.
d. If Executive's employment is terminated for cause, Executive will
receive only the payment described in 9a and will not receive the incentive
compensation described in Section 4 or the payment provided in Section 5.
10. Nondisclosure
Except by written permission from the Company, Executive shall not
disclose or use any trade secrets, sales projections, formulations, customer
lists or information, product specifications or information, credit information,
production know-how, research and development plans or other information not
generally known to the public ("Confidential Information") acquired or learned
by Executive during the course, and on account, of his employment, whether or
not developed by Executive, except as such disclosure or use may be required by
his duties to the Company, and then only in strict accordance with his
obligations of service and loyalty thereto. Upon termination of employment,
Executive agrees to deliver to the Company all written materials embodying the
Company's Confidential Information.
11. Noncompetition.
a. Executive acknowledges that the Company markets products throughout
the United States and that the Company would be harmed if Executive conducted
any of the activities described in this Section 11 anywhere in the United
States. Therefore, Executive agrees that the covenants contained in this Section
11 shall apply to all portions of, and throughout, the entire United States;
<PAGE>
b. For a period of one (1) year from and after the end of the term of
this Agreement or any extension of such term, Executive will not, directly or
indirectly, alone or in any capacity with another legal entity, (i) engage in
any activity that competes in any respect with the Company, (ii) contact or in
any way interfere or attempt to interfere with the relationship of the Company
with any current or potential customers of the Company, or (iii) employ or
attempt to employ any employee of the Company (other than a former employee
thereof after such employee has terminated employment with the Company); and
c. To the extent any provision of this Section 11 shall be invalid or
unenforceable, it shall be considered deleted herefrom and the remainder of such
provision and this Section 11 shall be unaffected and shall continue in full
force and effect. In furtherance to and not in limitation of the foregoing,
should the duration or geographical extent of, or business activities covered
by, any provision of this Section 11 be in excess of that which is valid and
enforceable under applicable law, then such provision shall be construed to
cover only that duration, extent or activities which are validly and enforceably
covered. Executive acknowledges the uncertainty of the law in this respect and
expressly stipulates that this Section 11 be given the construction which
renders its provisions valid and enforceable to the maximum extent (not
exceeding its expressed terms) possible under applicable laws.
12. Specific Performance.
Executive acknowledges that a breach of this Agreement would cause the
Company irreparable injury and damage which could not be remedied or adequately
compensated by damages at law; therefore, Executive expressly agrees that the
Company shall be entitled, in addition to any other remedies legally available,
to injunctive and/or other equitable relief to prevent a breach of this
Agreement.
13. Miscellaneous.
a. Waiver by the Company of a breach of any provision of this Agreement
by Executive shall not operate or be construed as a waiver of any subsequent
breach by Executive.
b. This Agreement shall be binding upon and inure to the benefit of the
Company, its successors and assigns, and, as to Executive, his heirs, personal
representatives, estate, legatees, and assigns.
c. This Agreement constitutes the entire agreement between the parties
hereto with respect to the subject matter hereof and supersedes all prior
agreements whether written or oral relating hereto.
<PAGE>
d. This Agreement shall be governed by and construed under the laws of
the State of Minnesota.
IN WITNESS WHEREOF, the parties have hereto executed this Employment
Agreement as of the day and year first above written.
EVEREST MEDICAL CORPORATION
By /s/ David Koentopf
David Koentopf, on behalf of the Board of Directors
/s/ John L. Shannon
John L. Shannon
Everest Medical Corporation
Management Incentive Program for Fiscal Year 1999
The Compensation Committee of Everest Medical Corporation (the "Company"), as of
December 31, 1998, approved the following Management Incentive Program for
fiscal year 1999:
Level One
If the Company achieves a minimum net income of $1,250,000 on an audited basis,
a bonus pool will be available in the amount of 10% of salary for the top four
executive officers in addition to up to $25,000 total for the other employees of
the Company.
Level Two
If the Company achieves a minimum net income of $1,500,000 on an audited basis,
a bonus pool will be available in the amount of 15% of salary for the top four
executive officers, in addition to up to $40,000 total for the other employees
of the Company.
Definitions and Other Guidelines
Net income is defined as per the Company's traditional statement of operations,
i.e., net income after "other income/expense" before taxes and before
adjustments for preferred stock dividends.
The Payout Date will occur following Board approval of the 1999 audited
financial statements, with a targeted date of February 15, 2000.
Eligibility: The payout or bonus will only be paid to participants in the
Program who continue as employees of the Company on the payout date. Unless
otherwise provided in an employment or other written agreement, anyone who is
not an employee as of such date will forfeit the payout or bonus.
[LOGO] Norwest Bank Minnesota,
National Association Credit Agreement
===============================================================================
THIS CREDIT AGREEMENT (the "Agreement") dated as of February 26, 1999 (the
"Effective Date") is between Norwest Bank Minnesota, National Association (the
"Bank") and Everest Medical Corporation, a Minnesota corporation (the
"Borrower").
BACKGROUND
The Borrower has asked the Bank to provide a One Million and 00/100 Dollars
($1,000,000.00) line of credit to be used for financing accounts.
The Bank is agreeable to meeting the Borrower's request provided that the
Borrower agrees to the terms and conditions of this Agreement.
The Revolving Note (as defined below), this Agreement, and all "Security
Documents" described in Exhibit B, and any modifications, amendments or
replacements to such promissory notes or agreements shall be referred to
collectively as the "Documents."
In consideration of the above premises, the Bank and the Borrower agree as
follows:
1. LINE OF CREDIT
1.1 Line of Credit Amount. During the Line Availability Period defined
below, the Bank agrees to provide a conditional revolving line of
credit (the "Line") to the Borrower. Outstanding amounts under the Line
shall not, at any one time, exceed the lesser of the Borrowing Base or
One Million and 00/Dollars ($1,000,000.00). The Borrowing Base is
defined in Exhibit A-1 to this Agreement. This is a conditional
revolving line of credit and each advance under the Line, if made,
shall be at the sole discretion of the Bank.
1.2 Line Availability Period. The "Line Availability Period" shall mean the
period of time from the Effective Date or the date on which all
conditions precedent described in this Agreement have been met,
whichever is later, to the Line Expiration Date of December 31, 1999.
1.3 The Revolving Note. The Borrower's obligation to repay advances under
the Line shall be evidenced by a promissory note (the "Revolving Note")
dated as of the Effective Date, and in form and content acceptable to
the Bank. Reference is made to the Revolving Note for interest rate and
repayment terms.
1.4 Mandatory Prepayment. If at any time the principal outstanding under
the Revolving Note exceeds the lesser of the Borrowing Base or
$1,000,000.00, the Borrower must immediately prepay the Revolving Note
in an amount sufficient to eliminate the excess.
2. FEES AND EXPENSES
2.1 Audit Expense. The Borrower shall reimburse the Bank for the cost of
periodic audits of all collateral granted to the Bank by the Borrower,
which may be conducted at such intervals as the Bank may reasonable
require, but limited to a maximum reimbursement of $1,500.00 each
calendar year.
2.2 Documentation Expense. The Borrower agrees to reimburse the Bank for
its reasonable expenses relating to the preparation of the Documents
and any possible future amendments to the Documents, which
reimbursement may include, but shall not be limited to, reimbursement
<PAGE>
of reasonable attorneys' fees, including the allocated costs of the
Bank's in-house counsel, which shall not be in excess of $500.00.
Despite such reimbursement the Borrower acknowledges that the Bank's
counsel is engaged solely to represent the Bank and does not represent
the Borrower.
2.3 Collection Expense. In the event the Borrower fails to comply with any
covenant or condition of this Agreement or the Documents, or fails to
pay the Bank any amounts due under this Agreement or under the
Documents, the Borrower shall pay all costs of workout and collection,
including reasonable attorneys' fees and legal expenses incurred by the
Bank.
2.4 Miscellaneous Expense. The Borrower agrees to reimburse the Bank for
its expenses incurred in perfecting any security interest in property
granted by the Borrower to the Bank.
3. ADVANCES AND PAYMENTS
3.1 Requests for Advances. Any line advance requested under the terms of
this Agreement shall be requested by telephone or in a writing
delivered to the Bank (or transmitted via facsimile) by any person
reasonably believed by the Bank to be authorized by the Borrower to do
so. The Bank will not consider any such request following an event
which is, or with notice or the lapse of time would be, an event of
default under this Agreement. Proceeds shall be deposited into the
Borrower's account at the Bank or disbursed in such other manner as the
parties may agree.
3.2 Payments. All principal, interest and fees due under the Documents
shall be paid by the direct debit of available funds deposited in the
Borrower's account with the Bank. The Bank shall debit the account on
the dates the payments become due. If a due date does not fall on a day
on which the Bank is open for substantially all of its business (a
"Banking Day"), the Bank shall debit the account on the next Banking
Day and interest shall continue to accrue during the extended period.
If there are insufficient funds in the account on the day the Bank
enters any debit authorized by this Agreement, the debit will be
reversed and the payment shall be due immediately without necessity of
demand by direct payment of immediately available funds.
4. SECURITY
During the time period that credit is available under this Agreement,
and afterward until all amounts due under the Documents are paid in
full, unless the Bank shall otherwise agree in writing, all amounts due
under this Agreement and the Documents shall be secured at all times as
provided in Exhibit B. The Borrower also hereby grants the Bank a
security interest (independent of the Bank's right of set-off) in its
deposit accounts at the Bank and in any other debt obligations of the
Bank to the Borrower.
5. CONDITIONS PRECEDENT
The Borrower must deliver to the Bank the documents described in
Exhibit B, properly executed and in form and content acceptable to the
Bank, prior to the Bank's initial advance or disbursement under this
Agreement. The Borrower must also deliver to the Bank, prior to the
initial advance and any subsequent line advances under this Agreement,
a Borrowing Base Certificate in the form of Exhibit A-2, at the
intervals provided in Section 7.1(c).
6. REPRESENTATIONS AND WARRANTIES
To induce the Bank to enter into this Agreement, the Borrower, to the
best of its knowledge and upon due inquiry, makes the representations
and warranties contained in Exhibit C. Each request for an advance or a
disbursement under this Agreement following the Effective Date
constitutes a reaffirmation of these representations and warranties.
<PAGE>
7. COVENANTS
7.1 Financial Information and Reporting
Except as otherwise stated in this Agreement, all financial information
provided to the Bank shall be compiled using generally accepted
accounting principles consistently applied. During the time period that
credit is available under this Agreement, and afterward until all
amounts due under the Documents are paid in full, unless the Bank shall
otherwise agree in writing, the Borrower agrees to:
(a) Annual Financial Statements. Provide the Bank within 90 days of the
Borrower's fiscal year end, the Borrower's annual financial statements
for the fiscal year then ending, in form acceptable to the Bank.
The statements must be audited with an unqualified opinion by a
certified public accountant acceptable to the Bank.
(b) Interim Financial Statements. Provide the Bank within 30 days of each
quarter end, the Borrower's interim financial statements for the
interim period then ending. The statements must be current through the
end of that period and must be compiled by a certified public
accountant acceptable to the Bank.
(c) Borrowing Base Certificate. Provide the Bank within 30 days of each
month end when borrowings are outstanding under the Line, a Borrowing
Base Certificate in the form of Exhibit A-2, current through the end of
that period and certified as correct by an officer of the Borrower
acceptable to the Bank. At the time of each request for an advance
under this Agreement following the Effective Date, the Borrower shall
deliver to the Bank a new Borrowing Base Certificate, unless the Bank
is in possession of a Borrowing Base Certificate current within 30 days
of the requested advance.
(d) Accounts Receivable Aging. Provide the Bank within 30 days of each
month end when borrowings are outstanding under the Line, an accounts
receivable aging report in form acceptable to the Bank, current through
the end of that period and certified as correct by an officer of the
Borrower acceptable to the Bank.
(e) Notices. Provide the Bank prompt written notice of: 1) any event of
default or any event which would, after the lapse of time or the giving
of notice, or both, constitute an event of default under the Agreement
or any of the Documents; 2) any future event that would cause the
representations and warranties contained in this Agreement to be untrue
when applied to the Borrower's circumstances as of the date of such
event; 3) its discovery of any unpermitted release, emission, discharge
or disposal of any material of environmental concern; or 4) its receipt
of a claim from any governmental entity or third party alleging
noncompliance with environmental laws applicable to its operations or
properties.
(f) Additional Information. Provide the Bank with such other information as
it may reasonably request, and permit the Bank to visit and inspect its
properties and examine its books and records.
7.2 Financial Covenants
During the time period that credit is available under this Agreement,
and afterward until all amounts due under the Documents are paid in
full, unless the Bank shall otherwise agree in writing, the Borrower
agrees to comply with the financial covenants described below, which
shall be calculated using generally accepted accounting principles
consistently applied, except as they may be otherwise modified by the
following capitalized definitions:
<PAGE>
"Tangible Net Worth" means total assets less total liabilities and less
the following types of assets: (1) leasehold improvements; (2)
receivables and other investments in or amounts due from any
shareholder, director, officer, employee or other person or entity
related to or affiliated with the Borrower; and (3) goodwill, patents,
copyrights, mailing lists, trade names, trademarks, servicing rights,
organizational and franchise costs, bond underwriting costs and other
like assets properly classified as intangible.
(a) Tangible Net Worth. Maintain a minimum Tangible Net Worth of at least
(i) $2,738,000 as of March 31, 1999; (ii) $2,803,000 as of June 30,
1999; (iii) $2,917,000 as of September 30, 1999; and (iv) $3,131,000 as
of December 31, 1999.
(b) Total Liabilities to Tangible Net Worth Ratio. Maintain a ratio of
total liabilities to Tangible Net Worth of less than .80 to 1.0 as of
the end of each fiscal quarter.
(c) Net Profit. Achieve a minimum year to date after-tax net profit of (i)
($50,000) as of March 31, 1999; (ii) $100,000 as of June 30, 1999;
(iii) $300,000 as September 30, 1999; and (iv) $600,000 as of December
31, 1999.
7.3 Other Covenants
During the time period that credit is available under this Agreement,
and afterward until all amounts due under the Documents are paid in
full, unless the Bank shall otherwise agree in writing, the Borrower
agrees to:
(a) Insurance. Cause its properties to be adequately insured by a reputable
insurance company against loss or damage and to carry such other
insurance (including business interruption, flood, or environmental
risk insurance) as is required of or usually carried by persons engaged
in the same or similar business. Such insurance must with respect to
the Bank's collateral security, include a lender's loss payable
endorsement in favor of the Bank in form acceptable to the Bank.
(b) Collateral Audits. Permit the Bank to conduct audits of all collateral
pledged to the Bank by the Borrower at such intervals as the Bank may
reasonably require, but not in excess of 2 times each calendar year.
The audits may be performed by employees of the Bank or independent
contractors retained by the Bank.
(c) Nature of Business. Refrain from engaging in any line of business
materially different from that presently engaged in by the Borrower.
(d) Deposit Accounts. Maintain its principal deposit accounts with the
Bank.
(e) Form of Organization and Mergers. Refrain from filing as a limited
liability company or changing its legal form of organization, or
consolidating, merging, pooling, syndicating or otherwise combining
with any other entity.
(f) Maintenance of Properties. Make all repairs, renewals or replacements
necessary to keep its plant, properties and equipment in good working
condition.
(g) Books and Records. Maintain adequate books and records, refrain from
making any material changes in its accounting procedures for tax or
other purposes, and permit the Bank to inspect same upon reasonable
notice.
(h) Compliance with Laws. Comply in all material respects with all laws
applicable to its form of organization, business, and the ownership of
its property.
<PAGE>
(i) Preservation of Rights. Maintain and preserve all permits, licenses,
rights, privileges, charters and franchises that it now owns.
These covenants were negotiated by the Bank and Borrower based on
information provided to the Bank by the Borrower. A breach of a
covenant is an indication that the risk of the transaction has
increased. As consideration for any waiver or modification of these
covenants, the Bank may require: additional collateral, guaranties or
other credit support; higher fees or interest rates; and possible
modifications to the Documents and the monitoring of the Agreement. The
waiver or modification of any covenant that has been violated by the
Borrower shall be made at the sole discretion of the Bank. These
options do not limit the Bank's right to exercise its rights under
Section 8 of this Agreement.
8. EVENTS OF DEFAULT AND REMEDIES
8.1 Default
The Line is a conditional line of credit, which means that the Bank is
not obligated to make advances under the Line even if the Borrower is
in compliance with the terms of this Agreement, and the Revolving Note
evidencing borrowings under the Line shall be payable by the Borrower
upon Demand by the Bank. Despite this reservation of rights, upon the
occurrence of any one or more of the following events of default, or at
any time afterward unless the default has been timely cured (if
applicable), the Bank may declare the Line to be terminated and in its
discretion accelerate and declare the unpaid principal, accrued
interest and all other amounts payable under the Revolving Note and the
Documents to be immediately due and payable:
(a) Failure by the Borrower to make any payment of principal or interest
due under the Revolving Note which continues for 10 days after its due
date.
(b) Default by the Borrower in the observance or performance of any
covenant or agreement contained in this Agreement, and continuance for
more than 15 days.
(c) Default by the Borrower in the observance or performance of any
covenant or agreement contained in any of the Documents (excepting
defaults under this Agreement, which are addressed in the preceding
paragraph), after giving effect to applicable grace periods, if any.
(d) Default by the Borrower with respect to any indebtedness or obligation
owed to the Bank, which is unrelated to any loan or facility subject to
the terms of this Agreement, or to any other creditor, which would
allow the maturity of any such indebtedness or obligation to be
accelerated.
(e) Any representation or warranty made by the Borrower to the Bank in this
Agreement, or any financial statement or report submitted to the Bank
by or on behalf of the Borrower is materially false or misleading.
(f) Any litigation or governmental proceeding against the Borrower seeking
an amount in excess of $100,000.00 which is not insured or subject to
indemnity by a solvent third party either 1) results in a judgment
equal to or in excess of that amount against the Borrower or 2) remains
unresolved on the 270th day following the date of service on the
Borrower.
(g) A garnishment, levy or writ of attachment, or any local, state, or
federal notice of tax lien or levy is made or issues against the
Borrower, or any post judgment process or procedure is commenced or any
supplementary remedy for the enforcement of a judgment is employed
against the Borrower or the Borrower's property.
<PAGE>
(h) A material adverse change occurs in the Borrower's financial condition
or ability to repay its obligations to the Bank.
8.2 Immediate Default
If, with or without the Borrower's consent, a custodian, trustee or
receiver is appointed for any of the Borrower's properties, or the
Borrower makes an assignment for the benefit of its creditors, or if a
petition is filed by or against the Borrower under the United States
Bankruptcy Code, or the Borrower is dissolved, liquidated, or winds up
its business, then the Line shall immediately terminate without notice,
and the unpaid principal, accrued interest, and all other amounts
payable under the Revolving Note and the Documents shall become
immediately due and payable without notice or demand.
9. MISCELLANEOUS.
(a) No Waiver; Cumulative Remedies. No failure or delay by the Bank in
exercising any rights under this Agreement shall be deemed a waiver of
those rights. The remedies provided for in this Agreement and the
Documents are cumulative and not exclusive of any remedies provided by
law.
(b) Amendments or Modifications. Any amendment or modification of this
Agreement must be in writing and signed by the Bank and Borrower. Any
waiver of any provision in this Agreement must be in writing and signed
by the Bank.
(c) Binding Effect: Assignment. This Agreement and the Documents are
binding on the successors and assigns of the Borrower and Bank. The
Borrower may not assign its rights under this Agreement and the
Documents without the Bank's prior written consent. The Bank may sell
participations in or assign this Agreement and the Documents and
exchange financial information about the Borrower with actual or
potential participants or assignees.
(d) Minnesota Law. This Agreement and the Documents shall be governed by
the substantive laws (other than conflict of laws) of the State of
Minnesota, and the Bank and Borrower consent to the personal
jurisdiction of the state and federal courts located in the State of
Minnesota.
(e) Severability of Provisions. If any part of this Agreement or the
Documents are unenforceable, the rest of this Agreement or the
Documents may still be enforced.
(f) Integration. This Agreement and the Documents describe the entire
understanding and agreement of the parties and supersedes all prior
agreements between the Bank and the Borrower relating to each credit
facility subject to this Agreement, whether verbal or in writing, and
may be executed in counterparts, each of which shall be deemed an
original, and all of which together shall constitute one and the same
instrument. In the event of any inconsistency between the Agreement and
the Documents, inconsistent terms shall, where possible, be construed
as conferring cumulative rights and remedies upon the Bank, and, to the
extent that such construction is not possible, the terms of this
Agreement shall govern.
IMPORTANT: READ BEFORE SIGNING. THE TERMS OF THIS AGREEMENT SHOULD BE READ
CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. NO OTHER TERMS OR
ORAL PROMISES NOT CONTAINED IN THIS WRITTEN CONTRACT MAY BE LEGALLY ENFORCED.
YOU MAY CHANGE THE TERMS OF THIS AGREEMENT ONLY BY ANOTHER WRITTEN AGREEMENT.
THIS NOTICE ALSO APPLIES TO ANY OTHER CREDIT AGREEMENTS (EXCEPT CONSUMER LOANS
OR OTHER EXEMPT TRANSACTIONS) NOW IN EFFECT BETWEEN YOU AND THIS LENDER.
<PAGE>
Address for notices to Bank: Address for notices to Borrower:
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION EVEREST MEDICAL CORPORATION
7900 Xerxes Avenue South 13755 First Avenue North
Bloomington, Minnesota 55431-2208 Plymouth, Minnesota 55441-5454
Attention: Gary Veverka Attention: Thomas F. Murphy
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION EVEREST MEDICAL CORPORATION
By: By:
Its: Its:
<PAGE>
EXHIBIT A-1
BORROWING BASE DEFINITION
Borrowing Base means the sum of 80% of Eligible Accounts Receivable (as defined
below).
Eligible Accounts Receivable means all accounts receivable of the Borrower
except those which are:
1) Due from an account debtor located within the United States and
greater than 90 days past the invoice date.
2) Due from an account debtor located outside the United States
(specifically excluding Turkey and Italy), supported by insurance
acceptable to the Bank and greater than 120 days past the invoice
date.
3) Due from an account debtor located in Turkey or Italy, supported
by insurance acceptable to the Bank and greater than 150 days
past the invoice date.
4) Due from an account debtor located in the United States, 10% or
more of whose accounts owed to the Borrower are more than 90 days
past the invoice date.
5) Due from an account debtor located outside the United States
(specifically excluding Turkey and Italy), 10% or more of whose
accounts owed to the Borrower are more than 120 days past the
invoice date.
6) Due from an account debtor located in Turkey or Italy, 10% or
more of whose accounts owed to the Borrower are more than 150
days past the invoice date.
7) Subject to offset or dispute.
8) Due from an account debtor who is subject to any bankruptcy
proceeding.
9) Owed by a shareholder, subsidiary, affiliate, officer or employee
of the Borrower.
10) Not subject to a perfected first lien security interest in favor
of the Bank.
11) Due from an account debtor located outside the United States and
not supported by insurance acceptable to the Bank.
12) Due from a unit of government, whether foreign or domestic.
13) Otherwise deemed ineligible by the Bank in its reasonable
discretion.
<PAGE>
EXHIBIT A-2
EVEREST MEDICAL CORPORATION
BORROWING BASE CERTIFICATE
TO: Norwest Bank Minnesota,
National Association
7900 Xerxes Avenue South
Bloomington, Minnesota 55431-2208
(the "Bank")
Everest Medical Corporation (the "Borrower") certifies that the
following computation of the Borrowing Base was performed as of
__________________________ in accordance with the Borrowing Base definitions set
forth in Exhibit A-1 to the Credit Agreement entered into between the Bank and
the Borrower dated February _____, 1999.
Total A/R $
----------------
Less: 1) Greater than 90 days $
----------------
2) Other ineligibles $
----------------
Eligible A/R $
----------------
80% of Eligible Accts. Receivable $
---------------
Total Borrowing Base $
---------------
Total Line Outstandings ($ )
--------------
Excess (Deficit) $
---------------
EVEREST MEDICAL CORPORATION
By: ___________________________
Its:___________________________
Date:__________________________
<PAGE>
EXHIBIT B
CONDITIONS PRECEDENT AND SECURITY
Please Note: This Exhibit describes each Note, Security Document,
Authorizations, Organizational Documents, and all miscellaneous documents,
reports, certificates and other information required as a condition to each
advance or disbursement under the Agreement, whether or not they have previously
been delivered to the Bank.
Note
Revolving Note
Security Documents
Each Security Document described below must continue in full force and effect at
all times in accordance with its terms during the time period that credit is
available under this Agreement, and afterward until all amounts due under the
Documents are paid in full. The failure of any Security Document to meet these
requirements may result in an event of default under the Agreement and the
acceleration of all of the Borrower's obligations to the Bank evidenced by the
Documents.
Security Agreement of Borrower . A Security Agreement signed by the Borrower,
granting the Bank a first lien security interest in the Borrower's accounts,
inventory, equipment and general intangibles, described in that Agreement,
together with one or more UCC-1 Financing Statements sufficient to perfect the
security interest granted to the Bank in each jurisdiction where such property
is located.
Authorization
Certificate of Authority of Borrower. A Certificate of Authority executed by
such person or persons authorized by the Borrower's organizational documents
and/or agreements to do so, certifying the incumbency and signatures of the
officers or other persons authorized to execute the Documents, and authorizing
the execution of the Documents and performance in accordance with their terms.
Organization
Articles of Incorporation and By-Laws. A recently certified copy of the
Borrower's Articles of Incorporation and By-laws, and any amendments, if
applicable.
Certificate of Good Standing. A recently certified copy of the Borrower's
Certificate of Good Standing.
Other
Arbitration Agreement. The Bank's standard form of Arbitration Agreement signed
by the Bank and Borrower, subjecting potential controversies between them to
binding arbitration, including but not limited to those relating to the
Documents and this Agreement.
Evidence of Insurance. Evidence that the Borrower has obtained all insurance
coverage required by this Agreement, and that the Bank has been named as the
beneficiary of such policy or policies of insurance.
<PAGE>
EXHIBIT C
REPRESENTATIONS AND WARRANTIES
Organizational Status. The Borrower is a corporation duly formed and in good
standing under the laws of the State of Minnesota.
Authorization. The execution and delivery of the Documents is within the
Borrower's powers, has been duly authorized by the Borrower and does not
conflict with any of the Borrower's organizational documents or any other
agreement by which the Borrower is bound, and has been signed by all persons
authorized and required to do so under its organizational documents.
Financial Reports. The Borrower has provided the Bank with its annual audited
financial statement dated December 31, 1997 and its unaudited interim financial
statement dated September 30, 1998, and these statements fairly represent the
financial condition of the Borrower as of their respective dates and were
prepared in accordance with generally accepted accounting principles
consistently applied.
Litigation. There is no litigation or governmental proceeding pending or
threatened against the Borrower which could have a material adverse effect on
the Borrower's financial condition or business.
Taxes. The Borrower has paid when due all federal, state and local taxes.
No Default. There is no event which is, or with notice or the lapse of time
would be, an event of default under this Agreement.
ERISA. The Borrower is in compliance in all material respects with the Employee
Retirement Income Security Act of 1974, as amended, and has received no notice
to the contrary from the Internal Revenue Service, the Department of Labor, the
Pension Benefit Guaranty Corporation or any other governmental entity or notice
of any claims or pending claims under ERISA.
Environmental Matters. 1) The Borrower is in compliance in all material respects
with all health and environmental laws applicable to the Borrower and its
operations and knows of no conditions or circumstances that could interfere with
such compliance in the future; 2) the Borrower has obtained all environmental
permits and approvals required by law for the operation of its business; and 3)
the Borrower has not identified any "recognized environmental conditions", as
that term is defined by the American Society for Testing and Materials in its
standards for environmental due diligence, which could subject the Borrower to
enforcement action if brought to the attention of appropriate governmental
authorities.
[LOGO] Norwest Bank Minnesota,
National Association Revolving Note
================================================================================
$1,000,000.00 February 26, 1999
FOR VALUE RECEIVED, Everest Medical Corporation (the "Borrower") promises to pay
to the order of Norwest Bank Minnesota, National Association (the "Bank"), at
its principal office or such other address as the Bank or holder may designate
from time to time, the principal sum of One Million and 00/100 Dollars
($1,000,000.00), or the amount shown on the Bank's records to be outstanding,
plus interest (calculated on the basis of actual days elapsed in a 360-day year)
accruing each day on the unpaid principal balance at the annual interest rate
defined below. Absent manifest error, the Bank's records shall be conclusive
evidence of the principal and accrued interest owing hereunder.
INTEREST RATE. The principal balance outstanding under this Revolving Note shall
bear interest at an annual rate equal to the Base Rate, floating. Base Rate
means the rate of interest established by the Bank from time to time as its
"base" or "prime" rate of interest at its principal office in Minneapolis,
Minnesota.
REPAYMENT TERMS
Interest. Interest shall be payable on the last day of each month, beginning
February 28, 1999.
Principal. Principal, and any unpaid interest, shall be due on the earlier of
DEMAND or December 31, 1999.
ADDITIONAL TERMS AND CONDITIONS. This Revolving Note is issued pursuant to a
Credit Agreement of even date between the Bank and the Borrower (the
"Agreement"). The Agreement, and any amendments or substitutions, contains
additional terms and conditions, including default and acceleration provisions,
which are incorporated into this Revolving Note by reference. Capitalized terms
not expressly defined herein shall have the meanings given them in the
Agreement. The Borrower agrees to pay all costs of collection, including
reasonable attorneys' fees and legal expenses incurred by the Bank if this
Revolving Note is not paid as provided above. This Revolving Note shall be
governed by the substantive laws of the State of Minnesota.
WAIVER OF PRESENTMENT AND NOTICE OF DISHONOR. Borrower and any other person who
signs, guarantees or endorses this Revolving Note, to the extent allowed by law,
hereby waives presentment, demand for payment, notice of dishonor, protest, and
any notice relating to the acceleration of the maturity of this Revolving Note.
EVEREST MEDICAL CORPORATION
By: _________________________________
Its: __________________________________
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
Net Revenues
Net revenues in 1998 were $10,719,755, an increase of $3,354,375, or 46%, from
net revenues in 1997. The increase in revenues primarily reflects the Company's
emphasis on Everest laparoscopy product sales, the shipments of cardiovascular
bipolar products to Guidant Corporation and shipments to C.R. Bard of a version
of the Company's bipolar coagulating probe.
Revenues of the Everest laparoscopy product line, a growth business for the
Company, increased 39% to $6,430,798 from 1997. This increase in revenues
primarily resulted from ongoing sales and marketing initiatives directed at
increasing this business. The 39% increase in revenues related primarily to the
BiCOAG(R) Bipolar Cutting Forceps. Revenues from this product increased 56% as
compared to 1997. The Company also experienced revenue increases of 30% and 54%
in 1998 from the BiCOAG Dissecting Forceps and the BiCOAG Classic Tip Forceps,
respectively. The Company expects revenues from the Everest-branded laparoscopic
product line to continue to grow as a result of improved sales management and
growing acceptance of the Company's bipolar product offering. The Company
believes bipolar electrosurgical instruments allow surgeons greater versatility
and cost savings when compared to alternative technologies.
The other growth business for the Company is the cardiovascular business.
This segment achieved revenues in excess of $1,400,000 from the propriety
bipolar products supplied to Guidant Corporation. Guidant uses the Company's
products with their VasoView(R) Balloon Dissection System for minimally invasive
saphenous vein harvesting. The Company expects revenues from this product supply
agreement to increase in 1999 due to Guidant's increased marketing and
educational efforts.
Revenues in 1998 from the Company's bipolar forceps sold to its OEM customers
in 1998 increased 48% as these customers continue to meet end-user demand. The
Company expects shipments of these bipolar forceps to decrease in 1999 as these
product lines are maturing. In addition, the Company has been informed that
Origin Medsystems, which represented 14% of OEM bipolar forceps sales in 1998,
will be discontinuing its offering of such products.
Net revenues from gastrointestinal products increased 31% for the year due
primarily to C.R. Bard responding to a short-term market opportunity. The
Company does not expect this opportunity to continue in 1999. Offsetting this
revenue increase was a sharp decline in shipments of the Company's bipolar
polypectomy snare to the Company's Japanese distributor, due to an increased
presence of competitive products.
Net revenues in 1997 were $7,365,380, an increase of $1,363,608, or 23%, over
net revenues in 1996. The increase in revenues resulted from a 46% increase in
sales of the Everest laparoscopy products and the commencement of shipments of
select propriety bipolar products to Guidant Corporation for use with their
balloon dissection system for minimally invasive saphenous vein harvesting.
Offsetting these revenue increases were declines in shipments of bipolar forceps
to the Company's OEM customers as they managed their inventory levels and a
decline in sales to the Company's Japanese distributor of its bipolar
polypectomy snare due to increased competition.
Gross Margin
Gross margin for 1998 was 48.7% of revenues, compared to 44.3% for 1997. This
improvement resulted from increased revenues from the Everest laparoscopy
product offerings and the increased sales to C.R. Bard. Also impacting the
improvement in gross margin was the large unit volume increase the Company
experienced which allowed for greater leverage of its overhead capacity. In
addition, the Company benefited from the cost savings of certain value
engineering projects completed in 1998. Lower gross margins from the
cardiovascular products sold to Guidant Corporation, compared to the Everest
laparoscopy products, offset the increase. The ramp up of production output to
meet the increased demand for all product lines resulted in production
inefficiencies which negatively impacted the gross margin. The Company expects
gross margin as a percent of revenues to increase in 1999 as the Company strives
to leverage its manufacturing overhead over a greater number of produced units
and as it reduces costs with additional value engineering projects.
Gross margin for 1997 was 44.3% of sales, compared to 43.9% for 1996. This
improvement was a result of both increased sales from the Everest laparoscopy
product offerings and the recognition of licensing revenue in 1997 that
benefited gross margin by 2.5%.
Sales and Marketing
Sales and marketing expenses for 1998 were $2,680,409, an increase of $487,580,
or 22%, from 1997. This increase in expenses resulted primarily from payment of
increased commissions related to the revenue increase, marketing initiatives to
commercialize products for the emerging minimally invasive cardiovascular
surgery market, and expanding the sales and marketing staff in 1998 to meet
current and future needs and to support ongoing promotional and marketing
activities. The Company expects that sales and marketing expenses will increase
in 1999 in conjunction with the Company's anticipated increase in sales. The
Company continues to invest in its sales and marketing staff and other
initiatives aimed at the growing Everest laparoscopy product revenues.
Sales and marketing expenses for 1997 were $2,192,829, an increase of
$661,553, or 43%, from 1996. This increase in expense resulted primarily from
increased commissions related to the revenue increase, marketing initiatives to
commercialize products for the emerging minimally invasive cardiovascular
surgery market and the rebuilding of the sales and marketing staff in 1997 to
meet the Company's sales objectives.
Research and Development
Research and development expenses for 1998 were $858,816, an increase of
$224,918, or 35%, from 1997. This expense increase resulted primarily from the
Company's successful efforts to obtain ISO 9001 certification and CE Mark
approval for its products, development costs associated with the minimally
invasive cardiovascular products, increased staffing costs necessary for the
Company to broaden its product offering and patent-related costs. The Company
expects research and development costs to increase in 1999 as the Company
increases its development efforts in the minimally invasive cardiovascular
arena, laparoscopy and other surgical specialties.
Research and development expenses for 1997 were $633,898, an increase of
$26,928, or 4%, from 1996. This expense increase resulted, in part, from costs
related to the Company's efforts to obtain ISO 9001 certification and CE Mark
approval for its products, development costs associated with the minimally
invasive cardiovascular products and ongoing patent-related costs.
General and Administrative
General and administrative expenses for 1998 were $937,494, an increase of
$153,291, or 20%, over 1997. This increase was attributable to expenses related
to increases in executive compensation; higher insurance costs associated with
coverage enhancements and increased investor communication initiatives. The
Company expects that its general and administrative expenses will increase in
1999 due to the overall activity increases from the growth in the business.
General and administrative expenses for 1997 were $784,203, an increase of
$44,250, or 6%, over 1996. This increase was attributable to expenses related to
obtaining the revolving line of credit secured by a private investor, increased
insurance costs and expenses related to investor communications.
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 could also be limited
in the utilization of tax loss carryforwards by section 382 of the Internal
Revenue Code of 1986 as more fully discussed in the notes to the financial
statements. The Company recognized $10,000 of income tax expense for 1998.
Net Income (Loss)
The net income in 1998 was $660,316 compared to a net loss of $384,841 in 1997
and a net loss of $339,056 in 1996. The net income for 1998 was primarily a
result of sales increases, the increase in gross margin and effective control of
expenses. The net losses of 1997 and 1996 were primarily a result of continuing
efforts to shift the Company's revenue mix to the more profitable Everest
laparoscopy business, the strategic initiatives by the Company related to the
minimally invasive cardiovascular opportunity, and the ISO 9000 and CE Mark
certifications. Although there can be no assurance, the Company believes, that
it will maintain profitability in 1999 as it increases market share in its core
business of laparoscopy and as Guidant continues to increase its market share in
the minimally invasive cardiovascular surgery market.
Liquidity and Capital Resources
Cash and cash equivalents were $217,488 on December 31, 1998, compared to
$80,362 on December 31, 1997. The Company generated $400,433 of cash flow from
operating activities in 1998 compared to expending $788,237 on operating
activities in 1997. Operating activities in 1998 included income of $660,316, a
growth in accounts receivable due primarily to the increased sales volume, and
the growth in inventory as the Company expanded its product line with the
introduction of new products. In 1998, the Company expended $169,982 on capital
equipment. The Company received $727,202 from the sale of its common stock in
1998, including net proceeds of a stock sale to Guidant of $700,000. The Company
also reduced its borrowings $450,000 to $125,000 at December 31, 1998. The
Company met its obligations on its preferred stock dividends of $343,564.
The Company's obligation to pay quarterly dividend payments to three
outstanding series of preferred stock, necessary capital expenditures, growth in
inventory as the Company expands its product offering and increased operating
expenses will challenge the Company to meet its capital needs for 1999. Based on
its existing operating plan, however, the Company believes its current bank
credit facility of $1,000,000 obtained in 1999 will be sufficient to meet its
working capital needs in 1999, provided there are no significant deviations from
such plan in 1999.
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. 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 organizing a task force 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 best to respond.
Forward-Looking Statements and Risks
Certain statements made in this Annual Report, which are summarized here, are
forward looking statements that involve risk and uncertainties, and actual
results may be materially different than those projected. Factors that could
cause actual results to differ include, but are not limited to those identified:
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 increased revenues under the Company's product supply
agreement with Guidant Corporation depends upon successful marketing and
education efforts of Guidant to increase market share in this emerging
minimally invasive saphe-nous vein harvesting market.
o The expectation that shipments of bipolar forceps will decrease in 1999
depends primarily on the extent of the maturing of this product line for
the Company's OEM customers.
o The expectation that the Company's gross margin as a percent of revenues
will increase in 1999 depends on the actual production of a greater number
of units and the efficiency of the manufacturing process, so as to allow
the Company to leverage its manufacturing overhead, in addition to
receiving actual benefits from various value engineering projects completed
in 1998 or currently in process.
o The Company's ability to maintain profitability in 1999 depends on
effective expense management and general market conditions and competitive
conditions that may be encountered, including the Company's ability both
(i) to increase its market share in its core business of laparoscopy given
that the Company competes with larger, well capitalized companies who have
the ability to enter into contract purchasing agreements with large
institutions, and (ii) to establish a market presence in the minimally
invasive cardiac surgery market.
o The 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.
<PAGE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues $10,719,755 $ 7,365,380 $ 6,001,772
Cost of goods sold 5,501,001 4,103,920 3,364,885
----------- ----------- -----------
Gross margin 5,218,754 3,261,460 2,636,887
Operating expenses
Sales and marketing 2,680,409 2,192,829 1,531,276
Research and development 858,816 633,898 606,970
General and administrative 937,494 784,203 739,953
----------- ----------- -----------
Total operating expenses 4,476,719 3,610,930 2,878,199
Interest income (8,018) (16,775) (62,702)
Interest expense 79,737 52,146 160,446
----------- ----------- -----------
Net income (loss) before income taxes 670,316 (384,841) (339,056)
Provision for income taxes 10,000 - -
----------- ----------- -----------
Net income (loss) 660,316 (384,841) (339,056)
Less preferred stock dividends 343,564 344,390 354,848
----------- ----------- -----------
Net income (loss) applicable to common stock $ 316,752 $ (729,231) $ (693,904)
=========== =========== ===========
Net income (loss) per common share-basic and dilutive $ .04 $ (.10) $ (.11)
=========== =========== ===========
Weighted average number of shares
outstanding during the period 7,364,982 7,017,635 6,349,775
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements
<PAGE>
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1998 1997
------------ ------------
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 217,489 $ 80,362
Accounts receivable, less allowances (1998 - $61,750; 1997 - $46,750) 1,745,512 1,563,066
Inventories 1,751,946 1,055,811
Prepaid insurance and deposits 76,689 99,528
------------ ------------
Total current assets 3,791,636 2,798,767
Equipment
Office and display equipment 414,315 387,919
Research and development equipment 188,224 188,224
Production equipment 1,219,929 1,076,341
Equipment under capital lease 115,235 115,235
------------ ------------
1,937,703 1,767,719
Less allowance for depreciation (1,632,198) (1,486,020)
------------ ------------
305,505 281,699
Patents, net of amortization (1998 - $172,087; 1997 - $169,746) 250 2,591
------------ ------------
Total assets $ 4,097,391 $ 3,083,057
============ ============
Liabilities and Shareholders' Equity
Current liabilities
Customer advances $ 36,788 $ 38,000
Accounts payable 582,110 340,378
Accrued compensation and related taxes 314,174 202,915
Other accrued liabilities 189,875 93,777
Capital lease obligations, current portion - 2,496
Short-term debt 125,000 -
------------ ------------
Total current liabilities 1,247,947 677,566
Long-term debt and other liabilities - 600,000
Shareholders' equity
Convertible preferred stock series A, ($.01 par value, $2.50 liquidation value)
1,400,000 authorized; outstanding: 1998 and 1997-632,937 shares 1,551,717 1,551,717
Convertible preferred stock series B, ($.01 par value, $2.75 liquidation value)
730,000 authorized, outstanding: 1998 and 1997-637,273 shares 1,545,313 1,545,313
Convertible preferred stock series C, ($.01 par value, $2.75 liquidation value)
authorized and outstanding: 1998 and 1997-410,906 shares 1,002,832 1,002,832
Convertible preferred stock series D, ($.01 par value, $2.875 liquidation value)
authorized and outstanding: 1998 and 1997-471,500 shares 1,205,808 1,205,808
Common stock, ($.01 par value) 11,987,594 authorized; outstanding:
1998-7,465,875; 1997-7,038,002 74,659 70,380
Additional paid-in capital 16,420,828 16,041,470
Accumulated deficit (18,951,713) (19,612,029)
------------ ------------
2,849,444 1,805,491
------------ ------------
Total liabilities and shareholders' equity $ 4,097,391 $ 3,083,057
============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Additional
Preferred Common Preferred Stock- Paid-in Accumulated
Shares Shares Stock Par Capital Deficit Total
--------- --------- ---------- ------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1996 2,702,616 5,806,700 $6,703,170 $58,067 $13,659,504 $(18,724,274) $1,696,467
========= ========= ========== ======= =========== ============ ==========
Common stock issued under
stock purchase plan and stock
options less related costs 107,219 1,072 253,663 254,735
Common stock issued upon
exercise of stock warrants 325,993 3,260 876,829 (163,858) 716,231
Conversion of Series A
preferred stock (456,000) 456,000 (1,140,000) 4,560 1,135,440
Conversion of Series B
preferred stock (75,000) 75,000 (206,250) 750 205,500
Common stock issued upon
conversion of convertible note 200,000 2,000 498,000 500,000
Dividends on preferred stock (388,737) (388,737)
Net loss for the year (339,056) (339,056)
--------- --------- ---------- ------- ----------- ------------ ----------
Balance December 31, 1996 2,171,616 6,970,912 5,356,920 69,709 16,240,199 (19,277,188) 2,439,640
--------- --------- ---------- ------- ----------- ------------ ----------
Common stock issued under
stock purchase plan and
stock options less related
costs 40,818 408 72,290 72,698
Common stock issued upon
exercise of stock warrants 7,272 73 19,925 19,998
Conversion of Series A
preferred stock (4,000) 4,000 (10,000) 40 9,960
Conversion of Series B
preferred stock (15,000) 15,000 (41,250) 150 41,100
Issuance of warrants in
connection with guarantee
of bank line of credit 2,386 2,386
Dividends on preferred stock (344,390) (344,390)
Net loss for the year (384,841) (384,841)
--------- --------- ---------- ------- ----------- ------------ ----------
Balance December 31, 1997 2,152,616 7,038,002 5,305,670 70,380 16,041,470 (19,612,029) 1,805,491
--------- --------- ---------- ------- ----------- ------------ ----------
Common stock issued under
stock purchase plan 16,108 161 23,464 23,625
Common stock issued in
private transaction 411,765 4,118 695,882 700,000
Issuance of warrants in
connection with guarantee of
bank line of credit 3,576 3,576
Dividends on preferred stock (343,564) (343,564)
Net income for the year 660,316 660,316
--------- --------- ---------- ------- ----------- ------------ ----------
Balance December 31, 1998 2,152,616 7,465,875 $5,305,670 $74,659 $16,420,828 $(18,951,713) $2,849,444
========= ========= ========== ======= =========== ============ ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 660,316 $ (384,841) $ (339,056)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 148,516 168,086 171,910
Provision for losses on accounts receivable 15,000 750 30,000
Value of warrants granted in connection with guarantee of bank line 3,576 2,386 -
Changes in operating assets and liabilities:
Accounts receivable (197,446) (428,271) (249,204)
Inventories (696,135) (275,682) (121,375)
Prepaid expenses 22,839 68,210 (126,273)
Customer advances (1,212) 20,000 (150,000)
Accounts payable and accrued expenses 449,089 41,647 152,971
----------- ------------ -----------
Net cash provided by (used in) operating activities 404,543 (787,716) (631,027)
INVESTING ACTIVITIES
Purchase of equipment (169,981) (187,629) (121,640)
----------- ------------ -----------
Net cash used in investing activities (169,982) (187,629) (121,641)
FINANCING ACTIVITIES
Dividends paid (343,564) (344,390) (388,737)
Principal payments on debt and capital leases (477,496) (5,409) (645,228)
Proceeds from issuance of debt - 600,000 500,000
Net proceeds from sale of common stock 723,625 92,696 970,966
----------- ------------ -----------
Net cash (used in) provided by financing activities (97,434) 342,897 437,002
----------- ------------ -----------
Increase (decrease) in cash and cash equivalents 137,127 (632,448) (315,666)
Cash and cash equivalents at beginning of period 80,362 712,810 1,028,476
----------- ------------ -----------
Cash and cash equivalents at end of period $ 217,489 $ 80,362 $ 712,810
=========== ============ ===========
Supplemental cash flow information:
Conversion of Series A and B preferred stock into common stock $ - $ 51,250 $ 1,346,250
Conversion of convertible note into common stock $ - $ - $ 500,000
----------- ------------ -----------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Everest Medical Corporation
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
Everest Medical Corporation (the Company) is engaged in the development,
manufacturing and marketing of bipolar electrosurgical instrumentation for the
minimally invasive surgery market. The Company operates as one segment.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of less than
three months when purchased to be cash equivalents. The Company's cash
equivalents consist of money market accounts and Treasury Bills and are carried
at cost which approximates market value. The cost of Treasury Bills was $132,548
and $123,513 at December 31, 1998 and 1997, respectively.
Inventories
Inventories are valued at the lower of cost or market determined by the
first-in, first-out (FIFO) method.
Equipment and Fixtures
Equipment and fixtures are stated at cost. The Company provides for depreciation
on a straight-line basis over estimated useful lives from three to five years.
Maintenance, repairs and minor renewals are expensed as incurred.
Patents
Patents employed in current products are carried at cost (primarily patent legal
fees) and are amortized over 60 months. The Company reviews its patents
periodically to determine whether the patents have continuing value.
The expense of writing off patents is charged to research and development.
Income Taxes
The Company accounts for income taxes under the liability method.
Per Share Data
Basic earnings per share is computed using the weighted average number of common
shares outstanding. Diluted earnings per share is computed using the combination
of dilutive common share equivalents and the weighted average number of common
shares outstanding. The dilutive effect of options and warrants was not material
in 1998.
Impairment of Long-Lived Assets
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
2. INVENTORIES
Inventories consisted of:
December 31
1998 1997
---- ----
Raw materials $ 740,100 $ 493,008
Work in process 807,580 462,290
Finished goods 204,266 100,513
-------------- ---------------
$ 1,751,946 $ 1,055,811
============== ===============
3. DEBT
Debt consisted of:
<TABLE>
<CAPTION>
December 31
1998 1997
---- ----
<S> <C> <C>
Line of credit, due March 1999. Interest
is payable monthly at the bank's reference
rate, which is currently 8.5%. Principal
is due in one payment on March 31, 1999.
The note is secured by a standby letter of
credit expiring on April 30, 1999.
$ 125,000 $ 600,000
Capital leases, payable in monthly
installments at various interest rates through
1999. - 2,496
------------ ------------
125,000 602,496
Less current portion 125,000 2,496
------------ ------------
$ - $ 600,000
============ ============
</TABLE>
In June 1997, the Company entered into a line of credit arrangement
with a bank. Under this agreement, the Company is able to borrow up to
$1,000,000. The line of credit bears interest at the bank's reference rate. The
line of credit expires March 1999. The line of credit is secured by a standby
letter of credit from a shareholder of the Company. As consideration for
securing the letter of credit, the Company paid the shareholder $50,000 per year
and issued a warrant to purchase 25,000 shares of common stock at an exercise
price of $2.50 per share. In addition, the shareholder holds a security interest
in all of the Company's assets, subordinated only to senior debt. The warrant
expires in May 2000. The warrant was deemed to have value of approximately
$6,900.
This amount is being expensed over the life of the line of credit.
Interest paid by the Company in 1998, 1997 and 1996 was $76,161,
$49,760 and $160,446, respectively.
4. OPERATING LEASE
The Company leases its office and manufacturing facility under an operating
lease that expires in 2004. Maintenance, utilities and real estate taxes are
paid by the Company. Total rent expense under this lease was $261,964, $165,368
and $173,067 for the years ended December 31, 1998, 1997 and 1996, respectively.
Minimum future obligations on the facility lease are as follows:
1999 $ 163,764
2000 164,255
2001 169,654
2002 170,144
2003 175,536
Thereafter 160,908
--------------
$ 1,004,261
5. INCOME TAXES
At December 31, 1998, the Company had net operating losses for federal income
tax purposes of approximately $18,005,577, plus credits for research and
development costs of approximately $298,000 that are available to offset future
taxable income through the year 2013. These carryforwards are subject to the
limitations of Internal Revenue Code Section 382. This Section provides
limitations on the availability of net operating losses to offset current
taxable income when an ownership change has occurred for federal tax purposes.
The annual limitation on net operating losses is calculated by multiplying the
value of the corporation immediately prior to the ownership change by the
long-term federal tax exempt rate.
As a result of the sale of Series A preferred stock in 1990, the
Company had a change of ownership under Section 382. The use of losses, incurred
through the change in ownership date, to offset future taxable income will be
limited to approximately $300,000 per year during the carryforward period. The
losses occurring after the change in ownership date are unaffected and can be
used to offset future taxable income without limit. The credits will also be
subject to limitations under these same rules.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts used for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets are as follows:
December 31
1998 1997
---- ----
Net operating losses $ 6,842,000 $ 7,148,000
Depreciation 95,000 96,000
Amortization 36,000 35,000
Reserve for bad debt 23,000 18,000
Reserve for obsolete inventory 27,000 28,000
Research and development
credit amount 298,000 298,000
Other 56,000 30,000
----------- -----------
Total deferred tax asset 7,377,000 7,653,000
Less valuation allowance 7,377,000 7,653,000
----------- -----------
Net deferred tax asset $ 0 $ 0
=========== ===========
6. CONVERTIBLE PREFERRED STOCK
During 1995, the Company sold 471,500 shares of Series D Convertible Preferred
Stock for $1,205,808. The Series D Preferred Stock carries a coupon rate of 10%
with dividends payable quarterly. The conversion price is $2,875 per share.
During 1994, the Company sold 410,906 units, each consisting of one
share of Series C Convertible Preferred Stock and a warrant to purchase one-half
share of Common Stock, for $1,002,832. The Series C Preferred Stock carries a
coupon rate of 6% with dividends payable quarterly. The conversion price is
$2.75 per share.
The Company's Series B Convertible Preferred Stock carries a coupon
rate of 8% with dividends payable quarterly. The conversion price is $2.75 per
share. Each share of this Series was sold with a warrant attached to purchase
one share of Common Stock at $2.75. The warrants expired in 1998.
The Series A Convertible Preferred Stock is convertible at $2.50 per
share. This Series is subject to automatic conversion concurrently with the
closing of a public offering of the Company's Common Stock with aggregate
minimum proceeds of $7,500,000 at a minimum price per share of $5.00.
The Series A, B, C and D Preferred Stock are convertible into Common
Stock on a one-for-one basis at the option of the holders, and each holder has
voting rights on all matters submitted to shareholders on an as-if-converted
basis. The Series A Preferred Stock has anti-dilution rights for any sales of
Common Stock by the Company at less than its current conversion price, and the
conversion price for each Series of Preferred Stock is subject to adjustment for
stock dividends, stock splits and capital reorganizations.
7. STOCK PURCHASE AND OPTION PLANS AND WARRANTS
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, but
applies Accounting Principles Board Opinion No. 25 and related interpretations
in accounting for its plans.
The Company has a stock purchase plan, nonstatutory and incentive stock
option plans and compensatory stock options. Total shares reserved at December
31, 1998 for convertible preferred stock, future employee stock purchase plan
purchases and options and warrants were 4,360,639.
Stock Purchase Plan
The Company has an employee stock purchase plan under which the sale of 200,000
shares of its Common Stock has been authorized. The purchase price of the shares
under the plan is the lesser of 85% of the fair market value on the first or
last day of the offering period. Offering periods are six months each. Employees
may designate up to 10% of their compensation for the purchase of stock.
Stock Option Plans
In 1997, the Company adopted the 1997 Stock Option Plan under which 500,000
shares were reserved. Shares under this plan are generally exercisable beginning
one year from the date of grant in cumulative amounts of one-fourth to one-third
of the shares under option and expire seven years from the date of grant.
Incentive and nonstatutory options are granted at prices not less than market on
the date of grant.
In 1992, the Company adopted the 1992 Stock Option Plan under which
500,000 shares were reserved. Shares under this plan are generally exercisable
beginning one year from the date of grant in cumulative amounts of one-fourth to
one-third of the shares under option and expire ten years from the date of
grant. Incentive and nonstatutory options are granted at prices not less than
market on the date of grant.
In 1986, the Company adopted an Incentive Stock Option Plan under which
600,000 shares were reserved. Incentive options are generally exercisable
beginning one year from the date of grant in cumulative yearly amounts of
one-fourth and one-half of the shares under option and expire five to ten years
from the date of grant.
Also, in 1986, the Company adopted a Nonstatutory Stock Option Plan
under which 300,000 shares were reserved. Shares under this plan are exercisable
beginning 18 months from the date of grant. Additionally, 55,000 shares were
reserved during the period from 1986 through 1989 for directors of the Company
through granting of individual non-qualified option agreements. Non-qualified
director options are exercisable beginning six months from the date of grant.
All non-qualified options expire after five years.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of the
Statement. The fair value for these options was estimated at the date of the
grant using a Black-Scholes option pricing model with the following weighted
average assumptions for 1998, 1997 and 1996, respectively; risk free interest
rates of 5%, 5% and 5%; dividend yields of 0%, 0% and 0%; volatility factors of
the expected market price of the Company's stock of .582, .593 and .516; and a
weighted-average expected life of the option of seven, four and four years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different than those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Pro forma income (loss) applicable
to common stock $ 187,847 $(996,570) $(780,840)
Pro forma income (loss) per common share $ .03 $ (.14) $ (.12)
--------- ---------- ----------
</TABLE>
The pro forma results may not be representative of the future impact of applying
Statement 123 due to the phase-in provisions of the Statement and actual vesting
experience.
A summary of the Company's stock option activity and related information for the
years ended December 31 follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Weighted-Average Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price Options Exercise Price
--------- ---------------- ------- ---------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 1,170,154 $2.31 989,600 $2.31 1,070,000 $2.31
Granted 146,500 1.99 346,554 2.23 44,500 3.14
Exercised - - (33,750) 1.70 (94,063) 2.42
Canceled (22,500) 2.30 (132,250) 2.28 (30,837) 3.08
Outstanding at end of year 1,294,154 $1.99 1,170,154 $2.31 989,600 $2.31
--------- ----- --------- ----- ------- -----
Exercisable at end of year 1,048,579 944,064 807,620
========= ======= =======
Weighted average fair
value of options
granted during the
year $1.11 $ .93 $1.59
</TABLE>
Exercise prices for options outstanding as of December 31, 1998 ranged from
$1.53 to $5.00. The weighted average remaining contractual life of those options
is five years.
Shares reserved and available for grant at December 31, 1998 for the
option plans was 131,733.
Warrants
At December 31, 1998, the Company had outstanding total exercisable warrants to
purchase shares of its Common Stock as follows: 13,500 shares at $2.25 per
share; 25,000 shares at $2.50 per share; 360,440 shares at $2.75 per share;
247,150 shares at $2.875 per share. The warrants expire at various dates from
1999 through 2005.
8. EMPLOYEE BENEFIT PLAN
In January 1989, the Company adopted a defined contribution plan for
substantially all employees. Each employee may elect to contribute from 1% to
20% of their compensation to the plan. Employees become 100% vested in Company
contributions after four years of service. There was no expense for this plan
for the years ended December 31, 1998, 1997 and 1996.
9. EXPORT SALES AND MAJOR CUSTOMERS
Total sales to foreign customers were $1,267,653, $1,418,234 and $1,310,700 in
1998, 1997 and 1996, respectively.
The Company had total sales to OEM customers of $3,791,058, $1,913,985
and $1,855,149 in 1998, 1997 and 1996, respectively. Sales to one OEM customer
amounted to $1,594,493 in 1998. Sales to another OEM customer amounted to
$685,553 in 1997. Accounts receivable at December 31, 1998 and 1997 included
$296,820 and $196,456, respectively, from these customers.
10. CREDIT RISK
The Company is subject to credit risk on its accounts receivable which are
primarily with health care facilities, original equipment manufacturers and
medical products distributors. The Company performs credit investigations to
minimize credit risk. Certain distributors have the right to return unsold
product in the event the distributor's agreement is terminated for any cause.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Everest Medical Corporation
We have audited the accompanying balance sheets of Everest Medical Corporation
as of December 31, 1998 and 1997, and the related statements of operations,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Everest Medical Corporation at
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
January 13, 1999
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Everest Medical Corporation
The Company's Common Stock is quoted on the Nasdaq SmallCap Market, under the
symbol EVMD. The following table sets forth, for the periods indicated, the high
and low closing bid prices for the Common Stock as reported by Nasdaq. Such
quotations represent interdealer prices, without retail markup, markdown or
commission, and may not represent actual transactions.
As of December 31, 1998, there were approximately 283 holders of record
of the Company's Common Stock, with approximately 2,600 beneficial holders. In
addition there were 7 holders of record of Series A Preferred Stock, 29 holders
of record of Series B Preferred Stock, 14 holders of Series C Preferred Stock
and 31 holders of record of Series D Preferred Stock.
The Company has not declared or paid any cash dividends on its Common
Stock or its Series A Preferred Stock since inception. The Company has paid its
Series B Preferred Stockholders its current dividend of $0.22 per share per
annum (8% of the purchase price per share) plus its dividends in arrears
commencing in September 1994. Cash dividends paid on this Series B Preferred
Stock were $141,025 in 1998. The Series C Preferred Stock is entitled to
dividends of $0.165 per share per annum (6% of the purchase price per share)
plus its dividends in arrears commencing August 1995. Cash dividends paid on
this Series C Preferred Stock were $67,799 in 1998. The Series D Preferred Stock
is entitled to dividends of $0.2875 per share per annum (10% of the purchase
price per share) plus its dividends in arrears commencing September 1995. Cash
dividends paid on this Series D Preferred Stock were $135,566 in 1998.
The Board of Directors presently intends to retain all other earnings
for use in the business for the foreseeable future. The Company is prohibited
from paying dividends on its common stock without consent of the holders of (a)
a majority of shares of Preferred Stock and (b) the Company's convertible
promissory notes and the warrants issued in connection therewith.
HIGH LOW
1998
First Quarter $ 2 7/8 $ 1 5/16
Second Quarter 2 7/16 1 9/16
Third Quarter 2 3/8 1 1/4
Fourth Quarter 2 1/4 1 3/16
1997
First Quarter $ 3 $ 1 7/8
Second Quarter 3 1/8 1 3/4
Third Quarter 3 1/8 1 7/8
Fourth Quarter 2 11/16 1 1/8
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-KSB)
of Everest Medical Corporation of our report dated January 13, 1999, included in
the 1998 Annual Report to Shareholders of Everest Medical Corporation.
We also consent to the incorporation by reference in the Registration Statements
on Form S-8 (Nos. 33-40186, 33-64630 and 33-95030) pertaining to the 1989
Employee Stock Purchase Plan, Registration Statement on Form S-8 (No. 33-64594)
pertaining to the 1992 Stock Option Plan, Registration Statement on Form S-8
(No. 333-21383) pertaining to the 1986 Incentive Stock Option Plan and in
Registration Statement Nos. 333-05729 and 333-10763 on Form S-3, dated June 17,
1996 and August 23, 1996, respectively, of Everest Medical Corporation of our
report dated January 13, 1999, with respect to the financial statements
incorporated herein by reference.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
March 25, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 217,489
<SECURITIES> 0
<RECEIVABLES> 1,807,262
<ALLOWANCES> 61,750
<INVENTORY> 1,751,946
<CURRENT-ASSETS> 3,791,636
<PP&E> 1,937,703
<DEPRECIATION> 1,632,198
<TOTAL-ASSETS> 4,097,391
<CURRENT-LIABILITIES> 1,247,947
<BONDS> 0
0
5,305,670
<COMMON> 74,659
<OTHER-SE> (2,530,885)
<TOTAL-LIABILITY-AND-EQUITY> 4,097,391
<SALES> 10,719,755
<TOTAL-REVENUES> 10,719,755
<CGS> 5,501,001
<TOTAL-COSTS> 4,476,719
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71,719
<INCOME-PRETAX> 670,316
<INCOME-TAX> 10,000
<INCOME-CONTINUING> 660,316
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 316,752
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
