UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: June 30, 1999
Commission File No.: 0-18900
EVEREST MEDICAL CORPORATION
(Exact name of small business issuer as specified in its charter)
13755 1st Avenue North, Suite 500, Minneapolis, MN
55441-5454 (Address of Principal executive offices) (Zip Code)
(612) 473-6262
(Issuer's Telephone number, including area code)
MINNESOTA 41-1454928
(State of incorporation) (IRS Employer I.D.#)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
As of August 6, 1999, 7,638,167 shares of Common Stock of the Registrant were
outstanding.
Transitional Small Business Disclosure Format (check one): YES___ NO X
<PAGE>
EVEREST MEDICAL CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
(Unaudited) (Note)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 211,208 $ 217,489
Accounts receivable, net 1,832,004 1,745,512
Inventories 1,920,609 1,751,946
Prepaid insurance and deposits 107,005 76,689
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 4,070,826 3,791,636
Equipment
Office and display equipment 447,148 414,315
Research and development equipment 188,224 188,224
Production equipment 1,370,771 1,335,164
------------------ -------------------
2,006,143 1,937,703
Less allowance for depreciation (1,710,396) (1,632,198)
- ---------------------------------------------------------------------------------------------------------------------
295,747 305,505
Patents, net of amortization - 250
- ---------------------------------------------------------------------------------------------------------------------
Total assets $ 4,366,573 $ 4,097,391
=====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Customer advances $ 70,724 $ 36,788
Accounts payable 436,975 582,110
Accrued compensation and related taxes 454,458 314,174
Other accrued liabilities 163,895 189,875
Bank borrowings, short-term 150,000 125,000
Capital lease obligations, current portion - -
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,276,052 1,247,947
Long-term debt and other liabilities - -
Shareholders' equity
Convertible preferred stock series A, ($.01 par value,
$2.50 liquidation value) 1,400,000 authorized; outstanding:
1999 - 472,937 shares; 1998 - 632,937 shares 1,151,717 1,551,717
Convertible preferred stock series B, ($.01 par value,
$2.75 liquidation value) 730,000 authorized; outstanding:
1999 - 637,273 shares; 1998 - 637,273 shares 1,545,313 1,545,313
Convertible preferred stock series C, ($.01 par value,
$2.75 liquidation value) authorized and outstanding:
1999 - 410,906 shares; 1998 - 410,906 shares 1,002,832 1,002,832
Convertible preferred stock series D, ($.01 par value,
$2.875 liquidation value) authorized and outstanding:
1999 - 471,500 shares; 1998 - 471,500 shares 1,205,808 1,205,808
Common stock, ($.01 par value) 12,461,821 authorized; outstanding:
1999 - 7,638,167 shares; 1998 - 7,465,875 shares 76,382 74,659
Additional paid-in capital 16,667,425 16,420,828
Retained deficit (18,558,955) (18,951,713)
- ---------------------------------------------------------------------------------------------------------------------
3,090,521 2,849,444
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 4,366,573 $ 4,097,391
=====================================================================================================================
</TABLE>
Note: The balance sheet at December 31, 1998 is derived from the audited
financial statements at that date.
<PAGE>
EVEREST MEDICAL CORPORATION
STATEMENT OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
3 Months Ended June 30 6 Months Ended June 30
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 3,049,340 $ 2,638,577 $ 6,089,512 $ 4,789,864
Cost of goods sold 1,602,871 1,257,547 3,224,190 2,397,523
- ---------------------------------------------------------------------------------------------------------------------------
Gross margin 1,446,469 1,381,030 2,865,322 2,392,341
Cost and expenses:
Sales and marketing 724,460 743,150 1,459,365 1,327,183
Research and development 206,636 196,370 476,021 350,271
General and administrative 249,378 236,224 513,631 472,774
- ---------------------------------------------------------------------------------------------------------------------------
Total operating expenses 1,180,474 1,175,744 2,449,017 2,150,228
Interest and other income (1,787) (2,017) (3,977) (4,102)
Interest expense 6,362 15,545 19,875 39,621
- ---------------------------------------------------------------------------------------------------------------------------
Net income before income taxes 261,420 191,758 400,407 206,594
Provision for income taxes 4,650 - 7,650 -
Net income 256,770 191,758 392,757 206,594
Less preferred stock dividends 85,891 85,891 171,782 171,783
- ---------------------------------------------------------------------------------------------------------------------------
Net income applicable to common stock $ 170,879 $ 105,867 $ 220,975 $ 34,811
===========================================================================================================================
Net income per common share $ 0.02 $ 0.01 $ 0.03 $ 0.00
===========================================================================================================================
Weighted average number of shares
outstanding during the period 7,628,167 7,457,274 7,562,125 7,279,731
===========================================================================================================================
</TABLE>
<PAGE>
EVEREST MEDICAL CORPORATION
STATEMENT OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30
1999 1998
- --------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 392,756 $ 206,594
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 78,448 90,922
Provision for losses on accounts receivable 15,000 6,000
Provision for inventory obsolescence 19,656 12,738
Changes in operating assets and liabilities
Accounts receivable (101,492) (178,821)
Inventories (188,318) (383,616)
Prepaid expenses (30,316) (8,878)
Customer advances 33,936 -
Accounts payable and accrued expenses (30,295) 296,254
- ----------------------------------------------------------------------------------------------
Net cash provided by in operating activities 189,375 41,193
INVESTING ACTIVITIES
Purchase of equipment (68,440) (117,061)
- --------------------------------------------------------------------------------------------------
Net cash used in investing activities (68,440) (117,061)
FINANCING ACTIVITIES
Dividends paid (171,783) (171,783)
Proceeds from debt 25,000 -
Principal payments on debt and capital leases (536) (400,000)
Net proceeds from sale of common stock 20,103 711,652
- --------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (127,216) 139,869
- --------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (6,281) 64,001
Cash and cash equivalents at beginning of period 217,489 80,362
- --------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 211,208 $ 144,363
==================================================================================================
</TABLE>
<PAGE>
EVEREST MEDICAL CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1999
Note A - Business Activity
Everest Medical Corporation is engaged in the development, manufacturing and
marketing of bipolar electrosurgical devices for the medical specialties of
gynecology, gastroenterology, cardiovascular and general surgery.
Note B - Basis of Presentation
The accompanying unaudited, condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for six months ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. For further information, refer to the financial statements
and footnotes thereto included in the Company's annual report on Form 10-KSB for
the year ended December 31, 1998.
Note C - Net Income (Loss) Per Share
In February 1998, the Financial Accounting Standards Board issued Statement No.
128, Earnings Per Share, which was adopted on December 31, 1998. All earnings
per share amounts for all periods have been presented, and where necessary,
restated to conform to the Statement 128 requirements. Basic earnings per share
are computed on the basis of the average number of common shares outstanding.
Diluted earnings per share do not include the effect of outstanding stock
options, as they are anti-dilutitive.
<PAGE>
Part I - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
RESULTS OF OPERATIONS
Net Revenues. Net revenues in the second quarter of 1999 were $3,049,342, an
increase of $410,765, or 16%, from the second quarter of 1998. This revenue
increase arose from increases in the Company's Growth Businesses, consisting of
cardiovascular and Everest laparoscopy, the product sales of which grew 24% in
the second quarter. These revenue increases were offset by 9% decline in the
Mature Businesses, comprised of OEM laparoscopy, gastrointestinal and other
products, compared to the same period in last year.
Net revenues for the six months ended June 30, 1999 were $6,089,518, an increase
of $1,299,654, or 27%, from the same period of 1998. The revenues for the period
reflect a 37% increase in revenues from the Growth Businesses and no change in
revenues from the Company's Mature Businesses.
The Company realized an increase of 24% in its Everest laparoscopy product sales
during the first six months of 1999 compared to the same period last year. This
growth reflected the ongoing record pace of the BiCOAG(R) Bipolar Cutting
Forceps, which is now the Company's largest product line. The balance of the
product line, except the EVERSHEARS(R) II Bipolar Metal-on Metal Scissors and
the recently introduced EVERSHEARS LP Bipolar Scissors, also grew at strong
levels compared to the second quarter of 1998. Sales of the EVERSHEARS Bipolar
Scissors grew 5% for the first six months of 1999. The Company expects revenues
from the Everest laparoscopy product line to continue to grow as a result of
improved sales management from the recently completed reorganization of the
sales management team and the growing acceptance of the Company's bipolar
product offering.
Shipments to Guidant Corporation of select Everest Medical propriety bipolar
instruments for use in their VasoView(TM) Balloon Dissection System for
minimally invasive saphenous vein harvesting procedures, exceeded $1,000,000 for
the first six months of 1999. Revenues from this product line in the same period
of 1998 were approximately $500,000. Revenues from Guidant have been level for
the past two quarters as a result of a patent infringement proceeding
surrounding a specific feature of the Guidant endoscopic vessel harvesting
system balloon dissection. Guidant has introduced a new version of this system,
the VasoView UNIPORT PLUS System, which does not incorporate the controversial
feature during the second quarter. While initial market response to this new
system has been positive, it is impossible to determine the success of Guidant
with respect to the new version of the their system. However, the Company does
not expect shipments to Guidant to increase from current levels for the balance
of 1999.
<PAGE>
The Company's sales within its Mature Businesses were flat for the first six
months of 1999 as compared to the same period of 1998. The makeup of the Mature
Business reflected a 20% decline in shipments of a private label version of the
Company's classic tip forceps to Ethicon Endo-Surgery, a division of Johnson &
Johnson, and Origin Medsystems. Offsetting this decline was a 20% increase of
the Company's gastrointestinal products pursuant to the Company's supply
agreements to C.R. Bard and the Company's Japanese distributor compared to the
same period of 1998. The Company expects revenues from the Mature Businesses to
decrease throughout 1999 due primarily to decreased shipments to C.R. Bard as
its demand returns to its historic levels, following a strong 1998 in which
shipments increased due to a short-term market opportunity.
Gross Margin. Gross margin in the second quarter of 1999 was 46.7% of sales
compared to 52.3% of sales for the second quarter of 1998. The decrease in gross
margin reflected the impact of both the Company's higher than anticipated
gastrointestinal sales to Japan and the growing impact of the cardiovascular
sales to Guidant, which carry a lower gross margin.
The gross margin for the first six months of 1999 was 47.0%, as compared with
49.9% for the same period of 1998. The decrease in gross margin reflects
primarily the changing sales mix to include a larger portion of revenue for the
cardiovascular product offering to Guidant.
Sales and Marketing Expense. Sales and marketing expenses for the second quarter
of 1999 were $829,298, an increase of $86,148, or 12%, from the same period in
1998. The increase was a result of transition to a new sales management
organization completed in the second quarter and increases in sales incentives
and commissions to create sales momentum. For the first six months, sales and
marketing expenses were $1,459,365, an increase of $132,182, or 10%, from the
same period of 1998 for the same reasons identified earlier.
Research and Development Expense. Research and development expenses for the
second quarter of 1999 were $206,636, an increase of $10,266, or 5%, from the
same period in 1998. For the first six months, research and development expenses
were $476,021, an increase of $125,750, or 36%, from the same period of 1998.
The significant increase in expenses was due primarily to staff increases,
on-going intellectual property initiatives and new technology initiatives for
the laparoscopy market, as well as new markets.
General and Administrative Expense. General and administrative expenses for the
second quarter of 1999 were $249,378, an increase of $13,154, or 6%, from the
same period of 1998. For the first six months, research and development expenses
were $513,631, an increase of $40,857, or 9%, from the same period of 1998.
Net Income. Net income for the second quarter was $256,770, compared to a net
income of $191,758 for the same quarter in 1998. The increase in the second
quarter income as compared to the prior year was primarily due to the revenue
<PAGE>
increase and the slight increase in operating expenses. Net income for the first
six months of 1999 was $392,757, compared to $206,594 for the same period of
1998. The increase was primarily due to the revenue increase coupled with
expense control, increasing net income by 90%.
Income Tax Expense. The Company has approximately $18 million of tax loss
carryforwards available to offset future taxable income. The Company can only
utilize these tax attributes to the extent of 90% of pre-tax income since the
alternative minimum tax system will result in tax liabilities at this point. The
Company recognized $4,650 of income tax expense for the second quarter of 1999
and has recognized $7,650 for the first six months of 1999.
LIQUIDITY and CAPITAL RESOURCES
Cash and short-term investments were $211,208 on June 30, 1999 compared to
$217,489 on December 31, 1998. The Company generated $189,375 of cash from its
operating activities in the first six months of 1999 compared to providing
$41,193 for the same period of 1998. Operating activities in the first six
months included a significant increase in net income as compared to the prior
year. Offsetting this increase was the growth in inventory and accounts
receivable, natural results of the sales growth.
The Company spent $68,440 on capital equipment in the first six months and
expects this level of investment to continue for the balance of 1999.The Company
also paid its $171,783 dividend obligation on preferred stock.
The Company entered into a credit facility with Norwest Bank of Minneapolis, in
February, consisting of a $1,000,000 revolving line of credit. The Company
intends to use this credit facility to meet and manage its working capital needs
for 1999. As of June 30, 1999 the amount available under the credit facility was
$850,000.
The Company believes that cash and short-term investments onhand, cash projected
to be generated from operations and funds available from its line of credit will
be sufficient to fund operations for at least the next twelve months, assuming
that its sales goals are met and there are no significant unexpected
expenditures.
EFFECT OF INFLATION
The Company does not believe that inflation will have a significant effect on
operations.
<PAGE>
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 putting a team together to further assess its Year
2000 compliance issues with other functions including computer hardware,
telephone systems, and other manufacturing equipment. The Company's goal is to
document potential risks to the Company and plan necessary actions to meet the
risks associated with the Year 2000.
The Company believes that given its reliance on outside software
vendors and its relatively non-sophiscated information systems, it will achieve
substantial compliance with respect to Year 2000 issues before the end of 1999.
Although the Company is still in the process of assessment, it currently
believes the costs to meet this objective will not be material. The Company has
not yet created a contingency plan should the Year 2000 issues prove to present
significant unanticipated problems or if the Company is not ready in time. As
the Company's assessment process continues, it intends to revisit the risks of
non-compliance and how to respond.
Forward-Looking Statements and Risks
As provided for under the Private Securities Litigation Reform Act of 1995, the
Company wishes to caution investors that the following important factors, among
those described above, in some cases have affected and in the future could
affect the Company's actual results of operations and cause such results to
differ materially from those anticipated in forward-looking statements made in
this document.
o The expectation that revenues from the Everest laparoscopy product line
will continue to grow in 1999 depends on market acceptance and demand,
effectiveness of sales and marketing personnel, as well as other
general market conditions and competitive conditions within this
market, including the introduction of products by competitors.
o The expectation of an unfavorable impact to revenues from the Company's
product supply agreement with Guidant Corporation relates to the
hurdles presented by the recent court rulings. While Guidant has
introduce an alternate design that do not utilize the contested
patented feature, there are no assurances that Guidant will be
successful in gaining market share in this emerging minimally invasive
saphenous vein harvesting market with its new design.
<PAGE>
o The expectation that shipments of bipolar forceps and gastrointestinal
products as part of its Mature Businesses will decrease in 1999 depends
primarily on the extent of the maturing of this product line for the
Company's OEM customers
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>
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting on Tuesday, April 27, 1999. Proxies for the
Annual Meeting were solicited pursuant to Regulation 14 under the Securities and
Exchange Act of 1934. There was no solicitation in opposition to management's
nominees as listed in the Company's proxy statement, and all nominees were
elected.
The following persons were elected to serve as directors of the Company, by
votes indicated, until the next annual meeting of shareholders:
Number of Number of
Nominee Votes For Votes Withheld
- ----------------- --------- --------------
John L. Shannon, Jr. 7,687,681 100,664
David D. Koentopf 7,695,748 92,597
Donald R. Brattain 7,694,448 93,897
Richard J. Migliori, M.D. 7,695,848 92,497
By a vote of 7,482,124 shares in favor, with 159,054 shares opposed, 60,158
shares abstaining and 87,009 shares deemed to be broker non-votes, the
shareholders approved the adoption of the 1999 Employee Stock Purchase Plan,
reserving 150,000 shares for this plan.
By a vote of 7,758,620 shares in favor, with 19,175 shares opposed and 10,550
shares abstaining, the shareholders also ratified the appointment of Ernst &
Young LLP as independent auditors for the fiscal year ending December 31, 1999.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule (filed in electronic format only)
(b) Reports on Form 8-K: None filed in the period.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
EVEREST MEDICAL CORPORATION
August 12, 1999 By: /s/ John L. Shannon, Jr.
John L. Shannon, Jr.,
President and Chief Executive Officer
August 12, 1999 By: /s/ Thomas F. Murphy
Thomas F. Murphy
Vice President of Finance and Administration
and Assistant Secretary
<TABLE> <S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
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<CASH> 211,208
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0
4,905,670
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