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, 1999 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. [ X ]
The Issuer's revenues for fiscal year 1999 were $12,608,863.
As of February 18, 2000, there were 7,669,127 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 February 18, 2000, as reported by
NASDAQ), excluding shares owned beneficially by executive officers and
directors, was approximately $29,986,287.
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 to be filed by April 29, 2000 (the "2000 Proxy
Statement").
Transitional Small Business Disclosure Format (check one) Yes No X
<PAGE>
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 innovative RF
surgical solutions 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 RF 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. In
late 1998, the Company commenced limited shipments of the EVERSHEARS LP Bipolar
Forceps. In late 1999, the Company introduced the QUADRIPOLAR(TM) Cutting
Forceps, which the Company believes represent the next generation of
electrosurgery for precise laparoscopic surgery. 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
RF electrosurgery is gaining increasing scientific recognition and acceptance in
the growing minimally invasive surgery ("MIS") markets which predominately
utilize monopolar energy. Bipolar RF energy offers the surgeon more control,
less tissue damage, effective hemostasis and performance, eliminating the
dangers associated with monopolar energy. Additionally, the Company's product
line offers the clinician multifunctional instruments that may lower cost and/or
reduce operating time. The Company believes that bipolar RF 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
<PAGE>
in minimally invasive surgery, bundles a version of the EVERSHEARS II Bipolar
Metal-on-Metal 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.
In 1999, the Company also identified the spinal surgical market as an
opportunity for the Company's innovative RF surgical products and commenced
limited shipments to Endius, Inc. These shipments were for a version of the
Company's 3mm bipolar forceps that Enduis will use for a new discectomy
procedure they have pioneered.
Together, these businesses of cardiovascular Everest laparoscopy and
spinal surgery comprise the Company's Growth Businesses. The balance of the
Company's product offerings including the Company's gastrointestinal, OEM
Forceps and accessories, as well as licensing income, 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, a greater potential exists 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.
<PAGE>
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. The
Company believes these milestones indicate recognition of Everest's superior
product quality and safety standards.
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.
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 Fundiplication 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, a risk
exists 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, competitors have introduced additional products to the market
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 that allows the physician better visualization of the
surgical site.
<PAGE>
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. The Company continues to be the only
company in the world to market an endoscopic bipolar scissors offering the
clinician the benefits of precision mechanical cutting and simultaneous
coagulation.
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 $1,500,000 for
1999.
BiCOAG Bipolar Cutting Forceps. The Company introduced this proprietary
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 United States Patent Office issued the
Company a patent 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 ratcheting 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
through 1999 from the revenues generated from this product line. Revenues grew
from under $200,000 in 1995 to more than $5,000,000 in 1999.
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 that allow 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 Company reintroduced the BiCOAG Forceps 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
<PAGE>
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 1999 exceeding $500,000.
In addition to the Company's independent sales channel, Ethicon
Endo-Surgery also markets and distributes the BiCOAG Forceps. Sales to these OEM
customers represented 10% of the Company's revenue in 1998 and 8% in 1999.
Origin MedSystems, a division of Guidant Corporation, notified the Company in
the second quarter of 1999 that it was discontinuing its marketing of this
product due to its new strategic direction. Subsequently, Guidant sold its
laparoscopy business to United States Surgical Corporation.
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 1999 approached $750,000.
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 annually 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. The Company intends to introduce a 5mm version
of the MOLly in the second quarter of 2000. The Company believes the 5mm version
will have greater market acceptance than the 3mm version.
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
<PAGE>
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.
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. In addition to these efforts the Company has the following products
in development.
Altimate(TM) Monopolar/Bipolar Scissors and Dissectors. These products
are similar in mechanical design to the bipolar products discussed above, but
electrically will be the only laparoscopic products commercially available that
can provide both monoploar and bipolar energy with one device. The Company
believes these products will be more versatile and provide a cost-effective
alternative to other instruments used in laparoscopic surgery. The Company
expects to begin limited shipments of these products in the third quarter of
2000.
QUADRIPOLAR Cutting Forceps. Again the mechanical design of this
product is similar to the Bipolar Cutting Forceps currently marketed by the
Company but this product introduces a new propriety electrosurgical technology
called QUADRIPOLARITY(TM). With Quadripolar technology, four electrosurgical
paths are created which more effectively controls and contains thermal spread
without compromising hemostatis. The QUADRIPOLAR Cutting Forceps allows five
separate surgical functions - dissect, grasp, coagulate, transect and retract -
which may significantly decrease operative time and reduce costs. Limited
shipments of this product occurred in 1999 and the Company expects a full market
release in the second quarter of 2000.
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 markets 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 been inconsistent over the
past three years primarily due to the Company's distribution in Japan of this
<PAGE>
product. This uneven revenue pattern 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. Revenues in 1999 approached
$300,000, up 32% from the prior year.
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 provides 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 1999,
the Company experienced a 32% decline in revenues from Bard as they worked off
large inventory levels purchased in 1998.
GI Endoscopic Products Under Development
Biopsy Forceps. The Company has developed a bipolar instrument that it
believes 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.
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
<PAGE>
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 Vessel Harvesting System in 1998. To support this next
generation system, the Company developed and commenced shipments to Guidant of
an innovative 56cm flexible shaft scissors and BiSECTOR ligating forceps for use
with this sytem.
Revenues from Guidant in 1999 approached $1,800,000. However these
strong revenue increases were dampened by patent issues surrounding a specific
feature of an earlier version of the Guidant system. Guidant introduced a new
version of its system in the third quarter of 1999 and the Company expects the
revenue growth of this product offering to accelerate in 2000.
In addition, the Company will be exploring proprietary RF technology 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 the efficacy
of these relatively new and still evolving heart procedures may be enhanced with
innovative, value added RF surgical instruments.
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.
<PAGE>
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 and emerging 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.
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. 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 Markets
The principal competitors of the Company's products offered through
Guidant Corporation in the emerging minimally invasive cardiovascular market
<PAGE>
include Ethicon EndoSurgery (a subsidiary of Johnson & Johnson), Heartport and
United States Surgical Corporation (a subsidiary of Tyco Corporation).
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
Corporation. 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
functions, the ability of products to address cost containment issues, product
quality, distribution strength and price. Competitors to each of the Company's
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 5 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 65% of its sales
volume in 1999. 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 2000.
The Company approaches 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
UNIPORT Endoscopic Vessel Harvesting System for less invasive saphenous vein
harvesting.
<PAGE>
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. See "Business--Laparoscopic Surgical Products."
Everest currently markets its GI endoscopic products in the United
States through a limited 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, Director of Marketing, five regional sales managers, one
clinical support director and two sales and marketing support individuals.
The Company intends to continue to utilize independent distributors for
foreign sales. During 1998 and 1999, 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.
<PAGE>
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 Company's objective 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, 1999 and 1998, the Company's
research and development expenditures were $915,000 and $859,000, 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 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
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
<PAGE>
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.
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.
<PAGE>
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
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 exceeded $95,000 in 1999. 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, MOLly, BiLAP and BiBx on the
<PAGE>
principal register in the PTO. In addition, the Company has filed trademark
applications on some of its other products.
Employees
As of February 18, 2000, the Company had 106 employees, of which 104
are full-time. The employees include 4 in research and development, 63 in
production, 16 in manufacturing support, 6 in quality assurance, 10 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.
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 February 18, 2000, are as follows:
Name Age Position
John L. Shannon, Jr. 46 President, Chief Executive Officer and
Chairman of the Board
Michael E. Geraghty 52 Vice President, Sales and Marketing
Steven M. Blakemore 45 Vice President, Operations and Engineering
David J. Parins 48 Vice President, Technology
Thomas F. Murphy 40 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.
Mr. Shannon received an MBA degree with a concentration in Finance from the
University of Minnesota in 1979.
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.
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,
<PAGE>
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. Mr. Murphy received an MBA with a management concentration
from the University of St. Thomas (MN).
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market, as
quoted on the National Association of Securities Dealers Automated Quotation
System 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, 1999, there were approximately 283 holders of record
of the Company's Common Stock, with approximately 2600 beneficial holders, 3
holders of record of Series A Preferred Stock, 27 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 Stock holders 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 dividend paid on this Series B Preferred
Stock was $140,208 in 1999. The Company has paid its Series C Preferred Stock
holders its current dividend 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 was $67,800 in 1999. 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 dividend in arrears commencing
September 1995. Cash dividends paid on this Series D Preferred Stock was
$135,556 in 1999.
<PAGE>
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
1999
First Quarter 1 13/16 1 7/16
Second Quarter 2 3/16 1 15/32
Third Quarter 1 15/16 1 9/16
Fourth Quarter 2 1/4 1 17/32
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
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
Net Revenues
Net revenues in 1999 were $12,608,863, an increase of $1,889,108, or
18%, from net revenues in 1998. The increase in revenues primarily reflects the
Company's emphasis on Everest laparoscopy product sales and the shipments of
cardiovascular bipolar products to Guidant Corporation. A decrease in shipments
to C.R. Bard of a version of the Company's bipolar coagulating probe offset the
Company's overall revenue increases.
Revenues of the Company's laparoscopy product line, a growth business
for the Company, increased 27% to $8,236,725 from 1998. This increase in
revenues primarily resulted from ongoing sales and marketing initiatives
directed at increasing this segment and from increased revenues related
primarily to the BiCOAG(R) Bipolar Cutting Forceps. Revenues from this product
increased 36% as compared to 1998. The Company also experienced revenue
increases of 34% and 28% in 1999 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, the growing acceptance of the Company's RF surgical
product offering and the addition of four new products. The Company believes its
innovative electrosurgical instruments allow surgeons greater versatility and
cost savings compared to alternative technologies.
The Company's cardiovascular business represents its second growth
business. This segment achieved revenues approaching $1,800,000 from the
propriety bipolar products supplied to Guidant Corporation. Guidant bundles the
Company's products with their VASOVIEW(TM) UNIPORT(TM) Endoscopic Vessel
<PAGE>
Harvesting System for minimally invasive saphenous vein harvesting. While
revenues increased 27% in 1999, the revenue growth was negatively impacted due
to the patent issues surrounding a specific feature of an earlier version of the
Guidant system. The Company expects revenues from this product supply agreement
to increase in 2000 due to Guidant's redesigned endoscopic vessel harvesting
system and Guidant's acquisition of CardioThoraic Systems, a leader in minimally
invasive cardiac surgery.
In addition, the Company commenced limited shipments of a version of
its 3mm bipolar forceps to Endius, Inc, a privately held emerging surgical spine
company for use in a discectomy procedure it is pioneering. The Company also
classifies this business as a growth business. The Company does not expect
shipments to Endius to be material in the near term.
Revenues in 1999 from the Company's bipolar forceps sold to its OEM
customers increased 2% as these customers continue to meet end-user demand. The
Company expects shipments of these bipolar forceps to remain unchanged in 2000
as these product lines are maturing. Net revenues from gastrointestinal products
decreased 21% for the year due primarily to decreased shipments to C.R. Bard of
a version of the Company's bipolar coagulating probe. Revenues from Bard in the
prior year reflected Bard responding to a short-term market opportunity to gain
share while a significant competitor was off the market. Additionally, the
Company experienced a 32% increase in shipments of the Company's bipolar
polypectomy snare. This increase was related to increased purchases by the
Company's Japanese distributor. The Company expects revenues to increase from
its gastrointestinal products in 2000 as C.R. Bard's purchases increase so its
inventory levels reflect the current market share gains it has acheived.
Net revenues in 1998 were $10,719,755, an increase of $3,354,375, or
46%, over net revenues in 1997. The increase in revenues primarily reflected the
Company's emphasis on Everest laparoscopy sales, the increase in shipments of
cardiovascular bipolar products to Guidant Corporation and shipments to C.R.
Bard of a version of the Company's bipolar coagulating probe.
Gross Margin
Gross margin for 1999 was 50.4% of revenues, compared to 48.7% for
1998. This improvement resulted from increased revenues from the Everest
laparoscopy product offerings and the increasing unit volume the Company
experienced that allowed for greater leverage of its overhead capacity. In
addition, the Company benefited from the cost savings of certain value
engineering projects completed in 1999. Lower gross margins from the
cardiovascular products sold to Guidant Corporation, compared to the Everest
laparoscopy products, offset this increase. The Company expects gross margin as
a percent of revenues to increase in 2000 as the Company strives to leverage its
manufacturing overhead over a greater number of units produced and the reduced
costs it expects due to additional value engineering projects.
Gross margin for 1998 was 48.7% of sales, compared to 44.3% for 1997.
This improvement resulted both from increased sales from the Everest laparoscopy
product offerings and a significant increase in unit volume that allowed the
Company to leverage its manufacturer overhead against the increasing production
output.
<PAGE>
Sales and Marketing
Sales and marketing expenses for 1999 were $2,986,171, an increase of
$305,762, or 11%, from 1998. This increase resulted primarily from payment of
increased commissions related to the revenue increase and upgrading the sales
and marketing staff in 1999 to meet current and future needs. The Company
expects that sales and marketing expenses will increase in 2000 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
continuing the growth of the Everest laparoscopy product revenues.
Sales and marketing expenses for 1998 were $2,680,409, an increase of
$487,580, or 22%, from 1997. This increase 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 expansion of the sales and marketing staff to meet the
Company's sales objectives.
Research and Development
Research and development expenses for 1999 were $915,047, an increase
of $56,231, or 6%, from 1998. This expense increase resulted primarily from the
Company's efforts to increase its product offering for the laparoscopy market,
the exploration of the Company's technology to benefit other medical market
opportunities and on-going intellectual property initiatives including
patent-related costs. The Company expects research and development costs to
increase in 2000 as the Company completes the introduction of four new products
for the laparoscopy market and increases its development efforts to evaluate
certain opportunities in the minimally invasive cardiovascular market,
laparoscopy and other surgical specialties. Additionally, the Company expects to
continue to incur expenses related to its patent portfolio and related issues.
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 9000 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.
General and Administrative
General and administrative expenses for 1999 were $1,071,081, an
increase of $133,587, or 14%, over 1998. This increase is in part due to the
Company finalizing a sales tax audit with California dating back to 1991, the
cost of the 1999 employee incentive program and increased staffing associated
with the increasing volumes. The Company expects that its general and
administrative expenses will increase in 2000 due to the overall activity
increases from the growth in the business.
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
<PAGE>
associated with coverage enhancements and increased investor communication
initiatives.
Income Tax Expense
The Company has approximately $16 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 $25,000 of income tax expense
for 1999. Additionally, the Company recorded an income tax benefit of $3,280,000
related to a reduction in the valuation allowance resulting from net operating
losses from prior years that had been recorded as an offset to the Company's
deferred tax assets.
Net Income (Loss)
The net income in 1999 was $4,628,482, compared to a net income of
$660,316 in 1998 and a net loss of $384,841 in 1997. The net income for 1999
resulted primarily from sales increases, the increase in gross margin, effective
control of expenses and the reduction in the valuation allowance of the
Company's deferred tax assets. The net income for 1998 was a result of sales
increases, the increase in gross margin and effective control of expenses. The
net losses of 1997 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 expenses related to the ISO 9000 and CE Mark
certifications. Although there can be no assurance, the Company believes that it
will maintain profitability in 2000 as it increases market share in its core
business of laparoscopy and as Guidant continues to improve its market share in
the cardiovascular surgery market.
Liquidity and Capital Resources
Cash and cash equivalents were $482,531 on December 31, 1999, compared
to $217,488 on December 31, 1998. The Company generated $859,293 of cash flow
from operating activities in 1999 compared to generating $404,543 on operating
activities in 1998. Operating activities in 1999 included income of $4,628,482,
a growth in accounts receivable due primarily to the increased sales volume, and
the growth in inventory as the Company expanded its product line. Additionally,
the Company recorded a deferred tax asset of $3,280,000 in 1999. The Company
expended $172,136 on capital equipment in 1999. The Company received $46,986
from the sale of its common stock in 1999 through its Employee Stock Purchase
Plan. The Company also reduced its entire outstanding borrowings throughout
1999. The Company met its obligations on its preferred stock dividends of
$343,564.
The Company's obligation to pay quarterly dividend payments to holders
of 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
2000. Based on its existing operating plan, however, the Company believes its
<PAGE>
current bank credit facility of $1,000,000 obtained in 1999, combined with
operating revenues, will be sufficient to meet its working capital needs in
2000, provided there are no significant deviations from such plan in 2000.
Year 2000
The Company has completed its detailed assessment, remediation and
testing of the Year 2000 issues related to the Company's enterprise business
applications. The Company has concluded that it is materially compliant with its
accounting, resource planning and network systems based on input from the third
party software vendors and actual testing completed.
The Company believes that, given its reliance on outside software
vendors and its relatively non-sophisticated information systems, it has
achieved substantial compliance with respect to Year 2000 issues.
To date, the Company has experienced no material problems related to
the Year 2000.
Forward-Looking Statements and Risks
Certain statements made in this Form 10-KSB, 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 laparoscopic product
line will continue to grow in 2000 and that sales and marketing
expenses related to such revenue increase depends on market acceptance
and demand of the current and new products, 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 from the Company's
gastrointestinal products in 2000 depends on C.R. Bard's actual market
share and resulting product need.
o The expectation of revenue growth in the cardiovascular market during
2000 depends on the success of and demand for Guidant's new version of
its system, as well as general market and competition conditions.
o The expectation that the Company's gross margin as a percent of
revenues will increase in 2000 depends on the actual production of a
greater number of units, the efficiency of the manufacturing process,
allowing the Company to leverage its manufacturing overhead, and the
actual effectiveness of value engineered projects.
o The Company's ability to maintain profitability in 2000 depends on
effective expense management and general market conditions and
competitive conditions that may be encountered, including the Company's
ability to increase its market share in its core business of
<PAGE>
laparoscopy given that the Company competes with larger, well
capitalized companies who have the ability to enter into contract
purchasing agreements with large institutions.
o The accuracy of the Company's belief that its current capital resources
will be sufficient to fund current and anticipated business operations
throughout 2000 depends, in part, on meeting anticipated revenue goals,
operating efficiencies and effective expense management, in addition to
general and competitive conditions.
o The Company's planned introduction of a 5mm version of the MOLly and
its full market release of the QUADRIPOLAR Cutting Forceps in the
second quarter of 2000 depend on the Company meeting its current
development schedule, as well as general market conditions.
o Growth in the Company's independent sales channel depends on market
demand as well as general market and competitive conditions.
ITEM 7. FINANCIAL STATEMENTS
The financial statements immediately follow the signature page of this Form
10-KSB at the pages set forth below:
Page
Report of Independent Auditors dated January 7, 2000........................F-1
Balance Sheets as of December 31, 1999 and 1998.............................F-2
Statements of Operations for Years Ended December 31, 1999, 1998 and 1997...F-3
Statements of Cash Flows for Years Ended December 31, 1999, 1998 and 1997...F-4
Statements of Changes in Shareholders' Equity for Years Ended
December 31, 1999, 1998 and 1997............................................F-5
Notes to Financial Statements...............................................F-6
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 2000 Proxy Statement under the
caption "Information About Nominees." The Company intends to file its proxy
statement 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 2000 Proxy
Statement under the caption "Compliance with Section 16(a) of the Exchange Act."
The Company intends to file its 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 2000 Proxy Statement under the caption "Executive Compensation."
The Company intends to file its proxy statement 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 2000 Proxy Statement under the caption "Security Ownership of
Management and Certain Beneficial Owners." The Company intends to file its proxy
statement 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 2000 Proxy Statement under the caption "Certain Transactions." The
Company intends to file its proxy statement pursuant to Rule 14a within 120 days
after the close of the fiscal year for which this report is filed.
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 financial statements following the signature
pages to this Report.
<PAGE>
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 February 18, 2000, 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, 1999.
<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: February 22, 2000 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, February 22, 2000
John L. Shannon, Jr. President (Principal Executive
Officer) and Chairman of the
Board
/s/ David D. Koentopf Director February 22, 2000
David D. Koentopf
(Signatures continued on following page)
<PAGE>
Signature Title Date
/s/ Thomas F. Murphy Vice President of Finance February 22, 2000
Thomas F. Murphy and Administration
(Principal Financial and
Accounting Officer)
/s/ Donald R. Brattain Director February 22, 2000
Donald R. Brattain
/s/ Richard J. Migliori Director February 22, 2000
Richard J. Migliori, M.D.
/s/ Anthony Badolato Director February 22, 2000
Anthony Badolato
<PAGE>
Report of Independent Auditors
To the Board of Directors
Everest Medical Corporation
We have audited the accompanying balance sheets of Everest Medical Corporation
as of December 31, 1999 and 1998, and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
January 7, 2000, except for Note 11 as
to which date is February 22, 2000
<PAGE>
EVEREST MEDICAL CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 482,531 $ 217,488
Accounts receivable, less allowances (1999 - $91,750; 1998 - $61,750) 2,034,342 1,745,512
Inventories 1,892,034 1,751,946
Prepaid insurance and deposits 125,098 76,689
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 4,534,005 3,791,636
Equipment
Office and display equipment 513,925 414,315
Research and development equipment 188,224 188,224
Production equipment 1,292,454 1,219,929
Equipment under capital lease 115,235 115,235
- ------------------------------------------------------------------------------------------------------------------------------------
2,109,839 1,937,703
Less allowance for depreciation (1,787,170) (1,632,198)
- ------------------------------------------------------------------------------------------------------------------------------------
322,669 305,505
Patents, net of amortization (1999 - $172,337; 1998 - $172,087) - 250
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred tax asset 3,280,000 -
Total assets $ 8,136,674 $ 4,097,391
====================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Customer advances $ 12,280 $ 36,788
Accounts payable 278,920 582,110
Accrued compensation and related taxes 473,151 314,174
Other accrued liabilities 190,081 189,875
Bank borrowings, short term - 125,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 954,432 1,247,947
Shareholders' equity
Convertible preferred stock series A, ($.01 par value,
$2.50 liquidation value) 1,400,000 authorized; outstanding:
1999 - 462,937 shares; 1998 - 632,937 shares 1,126,717 1,551,717
Convertible preferred stock series B, ($.01 par value,
$2.75 liquidation value) authorized and outstanding:
1999 - 637,273 shares; 1998 - 637,273 shares 1,545,313 1,545,313
Convertible preferred stock series C, ($.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 - 7,669,127; 1998 - 7,465,875 76,691 74,659
Additional paid-in capital 16,548,112 16,420,828
Accumulated deficit (14,323,231) (18,951,713)
- ------------------------------------------------------------------------------------------------------------------------------------
7,182,242 2,849,444
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 8,136,674 $ 4,097,391
====================================================================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
EVEREST MEDICAL CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues $12,608,863 $ 10,719,755 $ 7,365,380
Cost of goods sold 6,253,533 5,501,001 4,103,920
- ---------------------------------------------------------------------------------------------------------------------------
Gross margin 6,355,330 5,218,754 3,261,460
Cost and expenses:
Sales and marketing 2,986,171 2,680,409 2,192,829
Research and development 915,047 858,816 633,898
General and administrative 1,071,081 937,494 784,203
- ---------------------------------------------------------------------------------------------------------------------------
Total operating expenses 4,972,299 4,476,719 3,610,930
Interest income (10,878) (8,018) (16,775)
Interest expense 20,427 79,737 52,146
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (benefit) 1,373,482 670,316 (384,841)
Income tax (benefit) expense (3,255,000) 10,000 -
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) 4,628,482 660,316 (384,841)
Less preferred stock dividends 343,564 343,564 344,390
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common stock $4,284,918 $ 316,752 $ (729,231)
===========================================================================================================================
Basic and diluted net income (loss) per common share $ 0.56 $ 0.04 $ (0.10)
===========================================================================================================================
Weighted average number of common shares outstanding during the year 7,604,607 7,364,982 7,017,635
===========================================================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
EVEREST MEDICAL CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) $4,628,482 $ 660,316 $(384,841)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization 155,223 148,516 168,086
Provision for losses on accounts receivable 30,000 15,000 750
Recognition of deferred tax asset (3,280,000) - -
Changes in operating assets and liabilities
Accounts receivable (318,830) (197,446) (428,272)
Inventories (140,088) (696,135) (275,682)
Prepaid expenses (48,409) 22,839 68,210
Customer advances (24,508) (1,212) 20,000
Accounts payable and accrued expenses (143,471) 449,089 41,647
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 859,293 404,543 (787,716)
INVESTING ACTIVITIES
Purchases of equipment (172,136) (169,980) (187,629)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (172,136) (169,980) (187,629)
FINANCING ACTIVITIES
Dividends paid (343,564) (343,564) (344,390)
Principal payments on debt and capital leases (625,536) (477,496) (5,409)
Proceeds from issuance of debt 500,000 - 600,000
Net proceeds from sale of common stock 46,986 723,625 92,696
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (422,114) (97,435) 342,897
- ----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 265,043 137,128 (632,448)
Cash and cash equivalents at beginning of year 217,488 80,362 712,810
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 482,531 $ 217,488 $ 80,362
============================================================================================================================
Supplemental cash flow information:
Conversion of Series A and B preferred stock into common stock $ 425,000 $ - $ 51,250
</TABLE>
See accompanying notes to financial statements.
<PAGE>
EVEREST MEDICAL CORPORATION
STATEMENT 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, 1997 2,171,616 6,970,912 $ 5,356,920 $69,709 $ 16,240,199 $ (19,227,188) $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 16,108 162 23,463 23,625
Common stock issued upon
sale of common shares 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 74,660 16,420,827 (18,951,713) 2,849,444
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock issued under
stock purchase plan 33,252 332 46,654 46,986
Conversion of Series A
preferred stock (170,000) 170,000 (425,000) 1,700 423,300 - -
Issuance of warrants in
connection with guarantee
of bank line of credit 894 894
Dividends on preferred stock (343,564) (343,564)
Net income for the year 4,628,482 4,628,482
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1999 1,982,616 7,669,127 $ 4,880,670 $76,691 $ 16,548,112 $ (14,323,231) $7,182,242
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Everest Medical Corporation
Notes to Financial Statements
December 31, 1999
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 $170,633
and $132,548 at December 31, 1999 and 1998, 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.
Revenue Recognition
The Company recognizes revenue when the inventory has been shipped to the
customers.
<PAGE>
1. Summary of Significant Accounting Policies (continued)
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 1999 and 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
1999 1998
------------------------------------
Raw materials $ 718,567 $ 740,100
Work in process 914,573 807,580
Finished goods 258,894 204,266
====================================
$1,892,034 $1,751,946
====================================
3. Debt
Under a line of credit arrangement, due in December 2000, the Company had a
balance payable of $125,000 at December 31, 1998 with interest payable monthlyat
the banks reference rate which was 8.5%. The borrowings were paid in full in
1999.
In February 1999, the Company entered into a line of credit arrangement with
Norwest Bank, N.A. 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. This
line of credit arrangement was renewed by the bank in December 1999 and expires
in December 2000.
<PAGE>
This line of credit arrangement replaces a previous arrangement with another
bank with similar terms and conditions. The previous line of credit entered into
in June 1997 was 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. The warrant expires in
May 2000. The warrant was deemed to have a value of approximately $6,900 which
was expensed over the life of the line of credit. This arrangement ended in
March 1999.
Interest paid by the Company in 1999, 1998 and 1997 was $20,427, $76,161 and
$49,760, 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 $258,404, $261,964
and $165,368 for the years ended December 31, 1999, 1998 and 1997, respectively.
Minimum future obligations on the facility lease are as follows:
2000 $164,255
2001 169,654
2002 170,144
2003 175,536
2004 160,908
=============
$840,497
=============
5. Income Taxes
At December 31, 1999, the Company had net operating losses for federal income
tax purposes of approximately $16,441,000, 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 that
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.
<PAGE>
Until 1999 the Company had provided a full valuation allowance for the net
deferred tax assets. In the fourth quarter of 1999, based on the Company's
continued strong financial performance over the past two years and the
expectation that this performance will continue, the Company reduced its
valuation allowance for its deferred tax assets by $3,280,000.
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
1999 1998
---------------------------
Net operating losses $ 6,248,000 $ 6,842,000
Depreciation 75,000 95,000
Amortization 35,000 36,000
Reserve for bad debt 35,000 23,000
Reserve for obsolete inventory 39,000 27,000
Research and development credit amount 298,000 298,000
Vacation accrual 45,000 33,000
Other 59,000 56,000
---------------------------
Total deferred tax asset 6,834,000 7,377,000
Less valuation allowance 3,554,000 7,377,000
---------------------------
Net deferred tax asset $ 3,280,000 $ -
===========================
Income tax expense (benefit) consists of the following:
1999 1998 1997
----------- --------- --------
Current:
Federal $ -- $ -- $ --
State -- -- --
Alternative minimum tax 25,000 10,000 --
Deferred:
Federal 461,500 -- --
State 81,500 -- --
Change in valuation allowance
(3,823,000) -- --
----------- --------- --------
$(3,255,000) $ 10,000 $ --
=========== ========= ========
<PAGE>
5. Income Taxes (continued)
Reconciliation of the statutory federal income tax rate to the Company's
effective tax rate follows:
1999 1998 1997
------ ------ ------
Tax at statutory rate 34.0% 34.0% 34.0%
State income taxes 6.0 6.0 6.0
Alternative minimum tax 1.8 1.5 --
Impact of net operating loss (40.0) (40.0)
carryforwards (40.0)
Change in valuation allowance
(135.2) -- --
------ ------ ------
(137.0)% 1.5% -%
====== ====== ======
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.
<PAGE>
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, 1999
for convertible notes and convertible preferred stock, future employee stock
purchase plan purchases and options and warrants were 4,278,639.
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 the 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 non-statutory 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.
<PAGE>
7. Stock Purchase and Option Plans and Warrants (continued)
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 1999, 1998 and 1997, respectively; risk free interest rates of
6%, 5% and 5%; dividend yields of 0%, 0% and 0%; volatility factors of the
expected market price of the Company's stock of .533, .582 and .593; and a
weighted-average expected life of the option of seven, seven 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:
1999 1998 1997
------------------------------------
Pro forma income (loss) applicable
to common stock $4,132,147 $187,847 $(996,570)
Pro forma income (loss) per common
share $.54 $.03 $(.14)
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.
<PAGE>
7. Stock Purchase and Option Plans and Warrants (continued)
A summary of the Company's stock option activity and related information for the
years ended December 31 follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ----------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Exercise Exercise Exercise
Price Price Price
Options Options Options
------------------------- ----------------------------------------------------
Outstanding at beginning
<S> <C> <C> <C> <C> <C> <C>
of year 1,294,154 $1.99 1,170,154 $2.31 989,600 $2.31
Granted 142,000 1.69 146,500 1.99 346,554 2.23
Exercised - - - - (33,750) 1.70
Canceled (60,000) 1.87 (22,500) 2.30 (132,250) 2.28
============== ============== ==============
Outstanding end of year 1,376,154 $1.96 1,294,154 $1.99 1,170,154 $2.31
============== ============== ==============
Exercisable at end of 1,166,204 $2.29 1,048,579 $2.32 944,064
year
============== ============== ==============
Weighted average fair
value of options
granted during the year $1.01 $1.11 $ .93
</TABLE>
At December 31, 1999, the Company had exercise prices for options outstanding as
follows: 1,174,200 shares from $1.53 to $2.90 and 201,954 shares from $3.00 to
$5.00. The weighted average remaining contractual life of those options are six
and four years, respectively.
Shares reserved and available for grant at December 31, 1999 for the option
plans were 49,733.
Warrants
At December 31, 1999, the Company had total exercisable warrants outstanding to
purchase shares of its Common Stock as follows: 25,000 shares at $2.50 per
share; 305,747 shares at $2.75 per share; 247,150 shares at $2.875 per share.
The warrants expire at various dates from 2000 through 2005.
8. Employee Benefit Plan
The Company has 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. In April 1999, the Company authorized a matching contribution for
those participants who elect to make salary deferral contributions under the
Plan. The matching contribution equals 20% of each participant's salary deferral
contributions which do not exceed 5% of the participant's contributions. The
expense for this plan for the year ended December 31, 1999, was $16,578, with no
expense in 1998 or 1997.
<PAGE>
9. Export Sales and Major Customers
Total sales to foreign customers were $1,496,031, $1,267,653 and $1,418,234 in
1999, 1998 and 1997, respectively.
The Company had total sales to OEM customers of $3,698,014, $3,791,058 and
$1,913,985 in 1999, 1998 and 1997, respectively. Sales to one OEM customer
amounted to $1,889,653 in 1999. Sales to another OEM customer amounted to
$1,594,493 in 1998. Accounts receivable at December 31, 1999 and 1998 included
$170,920 and $296,820, 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.
11. Subsequent Events
On February 22, 2000, the Company entered into a definitive merger agreement
with Gyrus Group PLC through which the Company will be acquired for $51.6
million.
<PAGE>
EVEREST MEDICAL CORPORATION
EXHIBIT INDEX TO ANNUAL REPORT
ON FORM 10-KSB
For the Fiscal Year Ended December 31, 1999
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 1999 Employee Stock Purchase Plan**
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
(Incorporated by reference to Exhibit 10.15 to the Company's Form
10-KSB for the fiscal year ended December 31, 1998)**
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 (Incorporated by
reference to Exhibit 10.22 to the Company's Form 10-KSB for the fiscal
year ended December 31, 1998)**
10.23 Credit Agreement between Norwest Bank Minnesota, N.A. and the Company
dated February 26, 1999. (Incorporated by reference to Exhibit 10.23 to
the Company's Form 10-KSB for the fiscal year ended December 31, 1998)
10.24 Revolving Note dated February 26, 1999 from the Company to Norwest Bank
Minnesota, N.A. (Incorporated by reference to Exhibit 10.24 to the
Company's Form 10-KSB for the fiscal year ended December 31, 1998)
10.25* Restated Credit Agreement between Norwest Bank Minnesota N.A. and the
Company dated December 30, 1999.
10.26* Revolving Note dated December 30, 1999 from the Company to Norwest Bank
Minnesota, N.A.
10.27* Supply Agreement dated January 25, 2000 between the Company and Guidant
Corporation
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, Richard J. Migliori and Anthony Badolato
(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.
[Norwest Logo] Norwest Bank Minnesota, Restated
National Association Credit Agreement
================= ==============================================================
THIS RESTATED CREDIT AGREEMENT (the "Agreement") dated as of December 30,
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 and the Bank have entered into a Credit Agreement dated as of
February 26, 1999 whereby the Bank has extended to the Borrower a line of
credit in the amount of One Million and 00/100 Dollars ($1,000,000.00) (the
"Line") to be used for financing accounts.
The Borrower has asked the Bank to extend the Line for an additional period.
The Bank is agreeable to meeting the Borrower's request, provided that the
Borrower agrees to the terms and conditions of this Restated Credit Agreement,
which shall replace the prior Credit 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 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.
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, 2000.
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.
<PAGE>
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
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).
<PAGE>
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.
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) Insured Foreign Receivables. Provide the Bank within 90 days of the
Borrower's fiscal year end, evidence of insurance covering foreign
receivables identified as such in the Borrowing Base Certificate.
(c) 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.
(d) 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.
(e) 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.
(f) 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.
<PAGE>
(g) 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:
"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
$3,131,000 as of December 31, 1999 and at the end of each fiscal
quarter thereafter.
(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
$600,000 as of December 31, 1999 and December 31, 2000, and a positive
net profit for each interim fiscal quarter.
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 two 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.
<PAGE>
(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.
(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 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.
<PAGE>
(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.
(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.
<PAGE>
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.
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: /s/ Gary Veverka By: /s/ Thomas F. Murphy
Its: Its: Vice President of Finance
<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 December _____, 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:
tb1449i1
<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
The following items have been previously delivered to the Bank and the Borrower
acknowledges that they remain in effect with respect to this Restated Credit
Agreement:
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, 1998 and its unaudited interim financial
statement dated September 30, 1999, 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.
[Norwest Logo] Norwest Bank Minnesota,
National Association Revolving Note
================= ==============================================================
$1,000,000.00 December 30, 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
January 31, 2000.
Principal. Principal, and any unpaid interest, shall be due on the earlier of
DEMAND or December 31, 2000.
ADDITIONAL TERMS AND CONDITIONS. This Revolving Note is issued pursuant to a
Restated 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: __________________________________
SUPPLY AGREEMENT
THIS AGREEMENT is made and entered into effective as of January 25,
2000, by and between Guidant Corporation and its affiliates ("Guidant") having a
place of business at 1525 O'Brien Drive, Menlo Park, California 94025 and
Everest Medical Corporation ("Everest") having a principal place of business at
13755 First Avenue North, Minneapolis, Minnesota 55441-5454.
RECITALS
A. Guidant is engaged in the discovery, development, manufacture and
sale of medical devices and has interests in the field of advanced diagnostic
and therapeutic medical systems; and
B. Guidant desires to contract with Everest to develop, manufacture and
supply the Product (as defined below), and Everest is agreeable to doing so.
In consideration of the terms and provisions of this Agreement, Everest
and Guidant hereby agree as follows:
1. DEFINITIONS. Certain capitalized terms used in this Agreement are
defined below. Other capitalized terms are defined elsewhere in this Agreement.
(a) "Act" shall mean the United States Food, Drug and Cosmetic Act of
1938, as amended, as well as all regulations promulgated thereunder.
(b) "CE Mark" shall mean the CE Marking of conformity as prescribed by
Article 17 of Council Directive 93/42/EEC by the Council Of The European
Communities.
(c) "Confidential Information" shall mean any information of a
confidential and/or proprietary nature as to which Everest or Guidant has
acquired or, during the term of this Agreement, acquires, any interest,
including, but not limited to, all discoveries, inventions, improvements and
ideas related to any process, method, formula, machine, device, manufacture,
composition of matter, plan or design, whether patentable or not, or relating to
the conduct of business by either of them, which, prior to the date hereof or
during the term of this Agreement, was or is disclosed to the other.
Notwithstanding the foregoing, the term Confidential Information shall not
include any information which: (i) has been published or otherwise becomes a
matter of public knowledge by any means other than the recipient's default in
the observance or performance of any term or provision of this Agreement or any
other obligation on its part to be observed and performed; (ii) was known to the
recipient at the time of such disclosure without a requirement of
confidentiality as evidenced by its written business records; (iii) is at any
time disclosed to the recipient by any person or entity not a party hereto whom
it believes, after reasonable inquiry, has the right to so disclose the same;
(iv) is required to be disclosed in compliance with any law governmental
regulation, or court order, provided that the recipient shall notify the
<PAGE>
disclosing party in advance of any such disclosure, if feasible; (v) is
developed independently of the information provided by the disclosing party.
Notwithstanding anything contained in this Agreement to the contrary,
Confidential Information will include any and all specifications (design,
process or performance) for the Product as well as any changes in those
specifications, and any and all sales and marketing information related to the
Product. Shared information deemed "Confidential" shall be in writing and
documented as "Confidential", provided, however, that any and all specifications
(design, process or performance) for the Product, and any and all sales and
marketing information related to the Product, shall be deemed "Confidential
Information" regardless of whether they are so designated in writing.
(d) "Field" shall mean cardiac and vascular surgery.
(e) "FDA" shall mean the United States Food and Drug Administration.
(f) "Products" or "Product" shall mean the products which are listed
and more particularly described on Exhibit A hereto, which Exhibit is
incorporated into this Agreement by this reference.
(g) "Territory" shall mean the whole world.
2. MANUFACTURING OF PRODUCTS.
(a) Warranties. Everest represents and warrants that the Products
delivered and sold to Guidant (i) shall be manufactured, packaged, and labeled
in accordance with the Product specifications, (ii) shall be manufactured in
accordance with quality system regulations (QSRs) under the Act and consistent
with other International Regulatory Standards such as ISO and the requirements
necessary to obtain and maintain CE Marking, (iii) are free from defects in
material and workmanship, and (iv) based on the advice of outside patent
counsel, do not infringe any third party intellectual property rights.
(b) Specification Changes. If either party finds it necessary or
desirable to change any Product specifications including the materials used to
manufacture the Product, the manufacturing process thereof or protocols then in
effect for the Products, it shall request such change in writing, and the
parties shall thereafter discuss such change on a timely basis. No such change
shall be put into effect except upon the mutual consent of the parties. Neither
party shall withhold consent unreasonably. Everest shall provide test results to
Guidant within 10 days of making any such changes to assure that the Products
meet specifications and compliance with QSRs or other appropriate regulations.
None of the Products shall be discontinued during the term of this Agreement
without Guidant's written consent.
<PAGE>
(c) Regulatory Clearance. Everest represents, warrants and covenants
(i) that it has, and will continue to have and maintain throughout the term of
the Agreement all permits, approvals and authorizations, including, without
limitation, such approvals as may be required under the Act, to manufacture and
sell Products in accordance with the terms of this Agreement, and (ii) that the
submissions made by Everest to obtain the necessary and appropriate permits,
approvals and authorizations were made in good faith and contained accurate data
and information regarding the Product as required by applicable laws, rules and
regulations. Everest shall notify Guidant as soon as practicable after receiving
notice of any claim or action by the FDA or other regulating body with respect
to any violation of any applicable regulatory related laws, rules or
regulations.
(d) Continuing Compliance. Everest shall comply with all present and
future statutes, laws, ordinances and regulations relating to the manufacture,
assembly and supply of the Product, including, without limitation, those
enforced or promulgated by the FDA (including compliance with QSRs), and any
other registration requirements which may be imposed on the manufacture of
medical devices.
(e) Inspection Rights. Guidant shall have the right, upon ten (1 0)
business days notice and during business hours, to inspect Everest's production,
packaging and quality control facilities as well as Everest's records relating
to the Products to verify Everest's compliance with the manufacturing, quality
systems and procedures for the Products under this Agreement and the Act and any
other applicable rules or regulations. Everest agrees to undertake necessary
corrective action to mutually agreed upon audit items. Additionally, Everest
agrees to notify Guidant in writing of any regulatory inspection of Everest's
facility or subcontractor's facility that may impact Guidant's ability to sell
or distribute Products in accordance with this Agreement. Everest will inform
Guidant of any adverse findings from any regulatory inspection that may impact
Guidant's ability to sell or otherwise distribute Product within five (5) days
of such adverse findings.
(f) Product Liability Insurance. Everest shall obtain and maintain
product liability insurance in respect of the Products in amount of not less
than $1 million per occurrence and in the aggregate with a maximum deductible
per occurrence of not more than $10,000 single limit for bodily injury, death,
illness, and property damage arising from the use, sale or other distribution of
the Products. Everest will provide Guidant with thirty (30) days prior written
notice in the event of policy cancellation or a material change in its terms or
provisions. Everest will deliver a certificate evidencing such insurance to
Guidant upon written request by Guidant.
3. PURCHASE OF PRODUCTS.
(a) Orders and Acceptance. All orders for Products submitted by Guidant
shall be initiated by purchase orders to Everest. Everest shall acknowledge such
purchase orders within five (5) business days of receipt of order to confirm
Everest's ability to supply Products to Guidant in accordance with the terms of
the purchase order. An order may initially be placed orally if a confirming
purchase order is received by Everest within ten business (10) days after the
<PAGE>
oral order. The terms and conditions set forth in this Agreement and the
purchase order shall be the controlling terms for the purchase of Products by
Guidant (a copy of which is attached as Exhibit B) notwithstanding any terms and
conditions that may be contained on any statement, shipping, invoice,
acceptance, bill of lading or other document delivered by Everest to Guidant. In
the event of any conflict in the terms of a purchase order and the terms of this
Agreement, the terms of this Agreement shall control. Guidant may inspect
Products at its facility. Guidant may, within fifteen (15) days after receipt of
Products, return nonconforming Products to Everest for credit, refund of the
purchase price or replacement at Guidant's option. Everest shall bear all costs
and risk of loss for such returned Product provided that Everest has provided
Guidant authorization to return such Products, which authorization shall not be
unreasonably withheld. Products shall be deemed nonconforming if Guidant
determines in its inspection that they fail to materially comply with the
Product specifications. Guidant has up to six months after date of receipt of
Products to reject Products that are nonconforming in any material respect to
the certification provided by Everest for such Products, excluding shipping
damage. All nonconforming Products returned to Everest for replacement shall be
replaced in-kind by Everest at no cost to Guidant within thirty (30) business
days. If Everest can demonstrate to Guidant's satisfaction that Products
rejected as nonconforming conform to the Product specifications within thirty
(30) days of Everest's receipt of such Products, then Guidant shall issue a new
purchase order and accept the return of the Products.
(b) Price. The price for each Product shall be an amount equal to two
(2) times Everest's material, labor and sterilization costs (the "Product
Costs"). Guidant shall have the right, on five (5) business days written notice
to Everest and at Guidant's expense, to audit the Product Costs used in
determining the price. The Product pricing will be reviewed jointly by Everest
and Guidant for each of the first two quarters following the introduction of any
Product, and twice per year thereafter. Appropriate adjustments, if any, shall
be made to the price and price ceiling following such reviews. The initial
prices for the Products are set forth on Exhibit A. In addition, either party
may request a Product price adjustment at anytime in the event that any design
changes approved by Guidant result in an increase or a decrease of $.50 or more
in the Product Costs.
Everest agrees that in no event will the prices for the Products go
above the price ceilings for the Products identified on Exhibit A, unless design
specifications or volumes dictate such changes and are mutually agreed to.
Everest agrees that during the term of this Agreement that it will not offer the
co-exclusive Products to any third party at prices that are equal to or less
than the price offered to Guidant, unless that third party is purchasing a
higher volume of Products than Guidant, measured over the most recent two
calendar quarter period.
(c) Payment. Payment shall be on a net thirty (30) day basis from the
date of Guidant's receipt of Products and an invoice for those products.
<PAGE>
(d) Product Warranty Remedy. If any Products breach any of the Everest
representations or warranties contained in this Agreement, Everest shall, at
Guidant's election, replace the same or refund the purchase price, and reimburse
Guidant for its reasonable return freight incurred therefor.
(e) Forecast and Minimum Requirements. Upon commencement of this
Agreement Guidant shall provide Everest with a monthly forecast of its
requirements for products for a one-year period. Guidant shall provide Everest
with an updated twelve month rolling forecast during the first quarter of each
new calendar quarter. Guidant shall provide Everest with blanket purchase orders
that cover at least nine future months from the date of issuance and shall place
new additional purchase orders, or add to existing purchase orders, at least
three months before the prior purchase order expires. These purchase orders will
specify monthly delivery quantities Guidant shall purchase all Product scheduled
for delivery on a three month rolling basis. Guidant may increase or decrease
scheduled delivery quantities beyond three months by up to 25% of the amounts
previously forecast or covered in a blanket purchase order. Everest shall use
commercially reasonable efforts to satisfy Guidant orders for Products in excess
of the forecasts.
Guidant's minimum purchase requirements (the "Minimum Purchase
Requirements") for each of calendar years 2000-2003 are set forth on Exhibit A.
During the term of this Agreement (including any renewal term as provided in
Section 7), the parties agree to negotiate in good faith the Minimum Purchase
Requirement for the following year prior to the beginning of that year. The
parties agree that such negotiations shall be based upon the following and other
similar factors: (a) the previous years' Minimum Purchase Requirement; (b) the
competitive marketplace for the Products, including any recent changes, such as
the introduction of competitive products; and (c) any changes in the market
price(s) for the Products and competitive products. Further, unless the parties
otherwise agree, the Minimum Purchase Requirement for each such year shall be no
less than 50% nor more than 1.50% of the greater of the previous year's Minimum
Purchase Requirement or the number of units actually sold to Guidant for
distribution in the previous year.
(f) Shipping. Guidant shall provide Everest with a minimum lead-time of
ninety (90) days from Everest's receipt of a purchase order to ship the
Products. In the event that a shorter lead time is requested by Guidant, Everest
shall use commercially reasonable efforts to meet the requested lead-time. All
Products delivered pursuant to the terms of this Agreement shall be suitably
packaged for shipment in appropriate shipping cartons, which, (i) in the case of
the Products identified as "Rigid Shaft Instruments" on Exhibit A (the "Rigid
Shaft Instruments"), shall mean individualized, sterile units, five (5) per box,
and (ii) in the case of the Products identified as "Flexible Shaft Instruments"
on Exhibit A (the "Flexible Shaft Instruments") shall mean non-sterile bulk
packaged. The Products shall be marked for shipment to Guidant's address set
forth above, and delivered to Guidant or its carrier agent F.O.B. Everest's
dock, at which time title to such Products and risk of loss shall pass to
<PAGE>
Guidant. Unless otherwise instructed in writing by Guidant, Guidant shall select
the carrier. All freight, insurance, and other shipping expenses shall be
charged directly to Guidant's shipping account.
4. SALE OF THE PRODUCTS.
(a) Co-Exclusivity and Exclusivity. During the first two years of this
Agreement, Everest agrees to sell the Rigid Shaft Instruments co-exclusively to
Guidant within the Field and the Territory. "Co-exclusively" means that only
Guidant and not more than one other party (which includes Everest if it is
distributing those products to any end-users of the Products) shall be entitled
to distribute those Products. In addition, during the first two years of this
Agreement, Everest agrees that is will sell the Flexible Shaft Instruments
exclusively to Guidant within the Field and the Territory. Following the first
two years of this Agreement, if Guidant continues to purchase Products at a rate
of at least fifteen thousand (15,000) units of Products (measured over the most
recently completed four calendar quarter period), Everest will continue to sell
the Products either co-exclusively or exclusively to Guidant as described in
this Section.
(b) Trademarks, Labeling and Literature. Everest hereby grants to
Guidant a nonexclusive, royalty-free license to use the trademarks, trade names
and logos used by Everest to identify the Products (the "Trademarks") solely in
the course of Guidant's advertisement, promotion, distribution and sale of the
Products as provided in this Agreement. Use of the Trademarks on the Products
shall not give Guidant any proprietary rights in the Trademarks. Guidant shall
have the right to label the Flexible Shaft Instruments distributed under this
Agreement solely with Guidant's label, and to label the rigid Shaft Instruments
with both the Guidant and Everest Trademarks. Upon Guidant's request, Everest
shall furnish Guidant, without charge (except as otherwise agreed), with limited
samples of technical, advertising and selling information and literature
concerning the Products, provided that Everest has such materials available.
Guidant will remain primarily responsible for creating marketing materials for
the Products sold by Guidant under this Agreement.
5. CONFIDENTIALITY. During the term of this Agreement and for a period
of five (5) years thereafter, Everest and Guidant shall maintain the disclosing
party's Confidential Information in confidence and will not disclose the same to
any person or entity not a party hereto or use the same for its respective
benefit or the benefit of any such third party except as may be necessary to
carry out the transactions contemplated by this Agreement. Everest and Guidant
will keep and maintain complete and accurate written records of the disclosing
party's Confidential Information, mark same with such legends as the disclosing
party may reasonably direct, and promptly deliver same to the disclosing party
upon written request upon the expiration or termination hereof or at such other
times as the disclosing party may request, except that in any such event,
counsel for the receiving party may retain one copy thereof solely for use
should any dispute between the parties arise. In addition, both during the term
and after the expiration or termination of this Agreement, Everest and Guidant
shall take such other reasonable actions as the disclosing party may request, at
<PAGE>
the disclosing party's expense, to enable the disclosing party to publish,
protect by litigation or otherwise, or further its title to any of its
Confidential Information.
6. INDEMNIFICATION.
(a) By Everest. Everest shall defend, indemnify, and hold Guidant
harmless from and Everest shall defend or settle, any claim, proceeding or suit
("Claim") against Guidant or its customers, to the extent arising out of a
breach of any warranty set forth in paragraph 2(a), excluding misrepresentation
of the product's labeling by a Guidant employee or agent, provided that such
obligation shall not extend to Claims related to use of the Product to the
extent that the claim is due to the fact that the Product is incorporated into
another product. Everest shall have sole control of any action or settlement and
shall pay any final judgment entered against Guidant or its customers on such
issue in any Claim. At Everest's request, Guidant shall provide Everest with
assistance (subject to Everest's reimbursement of Guidant's reasonable expenses
in providing such assistance) to defend or settle such Claim.
(b) By Guidant. Guidant shall defend, indemnify, and hold Everest
harmless from and Guidant shall defend or settle, any Claim against Everest (i)
for infringement of any intellectual property right of any third party arising
from the sale or other distribution or use of any product that incorporates the
Product, or arising from any instructions, protocols or specifications provided
by Guidant to Everest, except to the extent such Claim is for infringement by
any Product, and (ii) arising from personal or bodily injury or death to the
extent arising out of the use of a product incorporating a Product, except to
the extent such Product failed to satisfy the warranty in Section 2(a) of this
Agreement. Guidant shall have sole control of any action or settlement and shall
pay any final judgment entered against Everest on such issue in any Claim.
Everest shall provide Guidant with assistance (subject to Guidant's
reimbursement of Everest's reasonable expenses in providing such assistance) to
defend or settle such Claim.
(c) Individual Responsibility. Each of the parties shall be responsible
for its own errors and omissions and indemnifies, and agrees to hold harmless,
the other and its officers, directors, professional staff, employees, and
agents, and any of their respective affiliates, respective successors, heirs and
assigns (the "Indemnitees"), against any Claim incurred by or imposed upon the
Indemnitees to the extent arising out of the indemnifying party's own activities
hereunder (including actions in tort, warranty or strict liability), to the
extent that it is held by a court of competent jurisdiction (in a proceeding in
which the indemnifying party is a party) to be due to the indemnifying party's
activities hereunder, except as to claims covered under Section 6(a) or (b)
above. Each of the parties shall notify the other promptly of any claim, demand,
suit or action arising out of any activity hereunder, whether or not the subject
of the indemnity herein.
<PAGE>
7. TERM. The initial term of this Agreement shall continue until
December 31, 2003, and shall continue thereafter for successive renewal terms of
one (1) year each unless and until terminated in writing in accordance with
Section 8(a).
8. TERMINATION.
(a) Termination at the End of a Term. Either party may terminate this
Agreement effective upon the end of the initial term or any extended term by
providing six (6) months advance notice in writing of its intent to terminate
this Agreement at the end of the applicable term.
(b) Termination for Cause. Upon Everest's or Guidant's default in the
observance or performance of any material term or provision of this Agreement,
the other party shall have the right to give that party written notice thereof,
and that party shall then have thirty (30) days to cure the same. If such breach
or default is so cured within the thirty (30) day period, then this Agreement
shall remain in full force and effect. If the breach or default is not cured
within such thirty (30) day period, then this Agreement shall terminate at the
end of such cure period.
(c) Termination by Everest. Everest may terminate this Agreement if
Guidant fails during any calendar year, to purchase the agreed upon Minimum
Purchase Requirements for that year. Prior to any such termination, Everest will
notify Guidant in writing of its failure to satisfy the Minimum Purchase
Requirements and the amount of additional Products that Guidant would need to
purchase to satisfy the Minimum Purchase Requirements (the "Shortfall"). Guidant
will have thirty (30) days from the date of Everest's notice in which to (i)
purchase an amount of Products equal to the Shortfall, (ii) pay Everest an
amount equal to one (1) times the Product Cost for the Shortfall, or (iii) any
combination of (i) and (ii). If Guidant cures the failure to satisfy the Minimum
Purchase Requirements as described in the preceding sentence, then the Agreement
will continue in full force and effect. Otherwise the Agreement will terminate
at the end of the thirty (30) day period following Everest's notice to Guidant.
Everest's sole remedy for Guidant's failure to purchase the minimum requirements
shall be termination of this Agreement as provided in this Section 8(c).
(d) Termination by Guidant Without Cause Following Significant
Corporate Event. Guidant may terminate this Agreement at anytime by providing
Everest thirty (30) days advance written notice of its intent to terminate this
Agreement if Everest (i) merges with a third party, sells all or substantially
all of its assets or stock, or a change in control of Everest occurs, or (ii)
announces that it has entered into an agreement to transact one of the events
described in Subsection 8(d)(i). If Guidant terminates this Agreement pursuant
to this Section 8(d), Guidant will have the right to make a final purchase of
Products in an amount equal to up to its current twelve month forecast for the
Products, and Everest will use commercially reasonable efforts to supply
Products for such final purchase as soon as practicable after such order is
placed.
<PAGE>
(d) Termination for Insolvency. This Agreement shall terminate, without
notice, (i) upon the institution by or against either party of insolvency,
receivership or bankruptcy proceedings or any other proceedings for the
settlement of the insolvent party's debts, (ii) upon the insolvent party making
an assignment for the benefit of creditors, or (iii) upon the insolvent party's
dissolution or ceasing to do business.
9. WAIVER. The failure of Everest or Guidant to exercise any right
under this Agreement shall not prevent such party from exercising such or any
other right at a later time.
10. EXCLUSIVENESS OF REMEDIES. Except as otherwise provided herein, all
rights accorded either of the parties hereunder shall be cumulative of all other
rights so granted as well as any rights and remedies either of them may have at
law or in equity.
11. SURVIVAL. All representations or warranties made hereunder, and all
terms and provisions intended to be observed and performed after the expiration
or termination hereof, shall survive such expiration or termination and continue
in full force and effect.
12. NOTICES. All notices or other communications required or permitted
to be given under this Agreement shall be in writing and will be deemed
effective and given when (i) delivered in person, (ii) sent by facsimile with
confirmation of receipt, or (iii) actually received if sent by certified or
registered mail, postage and certification prepaid. All notices shall be sent to
a party at its address first set forth above, attention President, or such other
address as the party shall provide to the other party.
13. ASSIGNMENT. This Agreement may not be assigned by either Everest or
Guidant without the prior written consent of the other, which consent will not
be unreasonably delayed or withheld, except that either party may assign this
Agreement, with written notice to the other party, but without its consent, to a
purchaser of all or substantially all of that portion of that party's business
to which this Agreement relates. In the event this Agreement is assigned, the
assignee shall be bound to all of the terms and conditions of this Agreement.
14. SUCCESSORS. This Agreement shall be binding upon and inure to the
benefit of Everest and Guidant and their respective successors and permitted
assigns.
15. PUBLICITY. Neither party shall originate any publicity, news
release or other announcement, written or oral, whether to the public or press,
to stockholders or otherwise, relating to this Agreement, to any amendment
hereto or to performance hereunder without the prior written consent of the
other, except as may be required, in the judgment of either parties legal
counsel, to comply with the requirements of any applicable law, including, but
not limited to, any disclosures required by state or federal securities laws.
<PAGE>
16. GOVERNING LAW, JURISDICTION AND VENUE. This Agreement shall be
governed by and construed in accordance with the laws of the State of California
as applied to agreements entered into and performed entirely within California
between California residents. The parties consent and submit to the exclusive
jurisdiction and venue of the courts located in and serving San Mateo,
California in any litigation arising out of this Agreement.
17. INVALIDITY. The invalidity or unenforceability of any term or
provision of this Agreement shall not affect the other terms and provisions, and
such invalid or unenforceable term or provision will, in all events, be
construed and enforced to the fullest extent permissible under applicable law.
18. ENTIRE AGREEMENT. This Agreement and any Guidant purchase order
contain the entire agreement between the parties hereto regarding the sale of
the Products, and no other promises, agreements, or warranties, written or
verbal, shall be of any force or effect. No modification of this Agreement shall
be of any force or effect unless such modification is in writing, refers
specifically to this Agreement, contains language indicating it is a
modification to this Agreement, and is signed by the party alleged to be bound
thereby.
19. SECTION HEADINGS. The section headings included in this Agreement
are for reference purpose only and shall not affect the meaning or
interpretation of this Agreement.
20. FORCE MAJEURE. Nonperformance of either party shall be excused to
the extent that performance is rendered impossible by strike, fire, flood,
governmental act or orders or restrictions or any other reason where failure to
perform is beyond the reasonable control of and is not caused by the negligence
of the nonperforming party. Whenever Everest's performance is delayed or
prevented for any reason in accordance with the foregoing, Everest shall
promptly notify Guidant of the existence thereof and of the expected duration
and the estimated effect thereof upon its ability to perform its obligations.
IN WITNESS WHEREOF, the parties have caused their duly authorized
representatives to execute this Agreement in duplicate on the date first above
written.
EVEREST MEDICAL CORPORATION GUIDANT CORPORATION
By: /s/ John L. Shannon, Jr. By: /s/ F. Thomas Watkins
Title: President & chief Executive Officer Title: Vice President
<PAGE>
EXHIBIT A
PRODUCTS, PRICES AND ANNUAL FORECAST
<PAGE>
EXHIBIT B
GUIDANT PURCHASER ORDER FORM
Exhibit 23.1
Consent of Independent Auditors
We 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, Registration
Statement on Form S-8 (No. 333-80025) pertaining to the 1997 Stock Option Plan,
Registration Statement on Form S-8 (No. 333-80019) pertaining to the 1999
Employee Stock Purchase 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
our report dated January 7, 2000, except for Note 11 as to which date is
February 22, 2000, with respect to the financial statements of Everest Medical
Corporation included in the Annual Report (Form 10-KSB) for the year ended
December 31, 1999.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 21, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 482,531
<SECURITIES> 0
<RECEIVABLES> 2,034,342
<ALLOWANCES> 0
<INVENTORY> 1,892,034
<CURRENT-ASSETS> 4,534,005
<PP&E> 2,109,839
<DEPRECIATION> 1,787,170
<TOTAL-ASSETS> 8,136,674
<CURRENT-LIABILITIES> 954,432
<BONDS> 0
0
4,880,670
<COMMON> 76,691
<OTHER-SE> 2,224,881
<TOTAL-LIABILITY-AND-EQUITY> 7,182,242
<SALES> 12,608,863
<TOTAL-REVENUES> 12,608,863
<CGS> 6,253,533
<TOTAL-COSTS> 4,972,299
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,549
<INCOME-PRETAX> 1,373,482
<INCOME-TAX> (3,255,000)
<INCOME-CONTINUING> 4,628,482
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,284,918
<EPS-BASIC> .56
<EPS-DILUTED> .56
</TABLE>
