-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WgaRvtWRoSqkMCoFQ+a+Tu9KziWnzFv21zYqT4cMu5fPpyqGNDSBV6SAOKaswV0C N23rj3qanT62PMChNo+TPg== 0000914190-99-000125.txt : 19990331 0000914190-99-000125.hdr.sgml : 19990331 ACCESSION NUMBER: 0000914190-99-000125 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EVEREST MEDICAL CORPORATION CENTRAL INDEX KEY: 0000869426 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 411454928 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-18900 FILM NUMBER: 99579210 BUSINESS ADDRESS: STREET 1: 13755 1ST AVE N STE 500 CITY: MINNEAPOLIS STATE: MN ZIP: 55441 BUSINESS PHONE: 6124736262 MAIL ADDRESS: STREET 1: 13755 FIRST AVE N STREET 2: STE 500 CITY: MINNEAPOLIS STATE: MN ZIP: 55441-5454 10KSB 1 FORM 10-KSB FOR YEAR ENDED 12/31/98 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended: Commission file number: December 31, 1998 0-18900 EVEREST MEDICAL CORPORATION (Name of small business issuer in its charter) Minnesota 41-1454928 (State of Incorporation) (I.R.S. Employer Identification No.) 13755 First Avenue North Minneapolis, Minnesota 55441 (Address of principal executive offices) Issuer's telephone number: (612) 473-6262 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the Issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of Issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The Issuer's revenues for fiscal year 1998 were $10,719,755. As of March 12, 1999, there were 7,618,167 shares of Common Stock of the Issuer outstanding. The aggregate market value of the Common Stock of the Issuer (based upon the closing sale price of the Common Stock on March 12, 1999, as reported by NASDAQ), excluding shares owned beneficially by executive officers and directors, was approximately $11,427,250. Part II of this Annual Report on Form 10-KSB incorporates by reference information (to the extent specific sections are referred to herein) from the Issuer's Annual Report to Shareholders for the year ended December 31, 1998 (the "1998 Annual Report"). Part III of this Annual Report on Form 10-KSB incorporates by reference information (to the extent specific sections are referred to herein) from the Issuer's Proxy Statement for its annual meeting to be held April 27, 1999 (the "1999 Proxy Statement"). Transitional Small Business Disclosure Format (check one) Yes No X PART I ITEM 1 DESCRIPTION OF BUSINESS General Development of Business Everest Medical Corporation (the "Company" or "Everest") is engaged primarily in the development, manufacturing and marketing of bipolar electrosurgical devices for use in minimally invasive surgical procedures. Today, the Company serves the medical specialties of gynecology, gastroenterology, cardiovascular and general surgery. Sales are worldwide with primary emphasis on an independent network of over 150 sales professionals. In addition, the Company supplies propriety bipolar instruments to leading medical device companies, including Guidant Corporation, Johnson & Johnson and C.R. Bard. The Company commenced commercial sales of laparoscopic surgical products in October 1991. The first product sold was the BiLAP(R) Bipolar Cutting/Coagulating Probes. The Company added the BiCOAG(R) Bipolar Forceps in September 1992, the EVERSHEARS(R) Straight Bipolar Scissors in November 1992 and the EVERSHEARS Curved Bipolar Scissors in September 1993. The Company introduced three additional products to the laparoscopic market in 1994, including the EVERSHEARS II Bipolar Metal-on-Metal Curved Scissors, the BiCOAG Bipolar Dissecting Forceps and the BiLAP Bipolar Needle Electrode. In 1995, the Company commenced sales of the innovative, patented, multi-functional BiCOAG Cutting Forceps, and in 1996 added additional versions, including a 5mm version of the BiCOAG Cutting Forceps. In December 1996, the Company introduced the BiCOAG Forceps in a 3mm version. This 3mm version of the bipolar forceps was introduced to market in March 1998 as MOLly (Minimally Operative Laparoscopy) with FDA clearance to expand the labeling to include the indication of female tubal sterilization via contraceptive bipolar coagulation of the fallopian tube. The Company is targeting these existing and new products to the laparoscopic general surgery and gynecology markets. As minimally invasive surgical techniques have evolved to increasingly complex surgery in anatomically crowded areas of the human body, the need for safer instrumentation has become more evident. The Company believes that bipolar electrosurgery is gaining increasing scientific recognition and acceptance in the growing minimally invasive surgery ("MIS") markets which predominately utilize monopolar energy. Bipolar energy offers the surgeon more control, less tissue damage, effective hemostasis and performance, eliminating the dangers associated with monopolar energy. The Company believes that bipolar technology will become the standard in electrosurgery in advanced MIS procedures and the Company will be a beneficiary of this trend. In late 1996, the Company identified the promising emerging minimally invasive cardiovascular market as its first major market diversification. In June 1997, the Company announced its first commercial venture in this market--a product supply agreement with Guidant Corporation. Guidant, a technology leader in minimally invasive surgery, bundles a version of the EVERSHEARS II Bipolar Scissors and an innovative version of the bipolar cutting forceps, the BiSECTOR(TM) Bipolar Ligating Forceps, in its minimally invasive saphenous vein harvesting systems kits. These products were introduced to the market in the third quarter of 1997. In 1998, the Company developed and commenced shipments to Guidant of a 56cm flexible shaft version of these devices for exclusive use by Guidant with its VASOVIEW(TM) and UNIPORT(TM) Endoscopic Vessel Harvesting System. Together, these two businesses of cardiovascular and Everest laparoscopy comprise the Company's Growth Businesses. The balance of the Company's product offerings including the Company's gastrointestinal and OEM Forceps comprise the Mature Businesses of the Company. The Company markets a line of disposable products for use in selected gastrointestinal endoscopic interventional procedures. These procedures are performed by gastroenterologists using endoscopes through which Everest's products are inserted into the body. These products are the BiSNARE(R) Polypectomy Snare for removing colon polyps and the BiCOAG Probe Coagulator for treating intestinal bleeding. The electrosurgical products currently under development or being marketed by Everest operate in a bipolar mode providing an improved margin of patient safety in minimally invasive surgical procedures. Many of these procedures are typically performed using monopolar electrosurgery which has inherent characteristics that may pose certain risks for patients. In electrosurgery, radio frequency (or RF energy) is used both to cut and coagulate tissue. With monopolar devices, the RF energy must pass from the surgical instrument through the patient's body to a separate return electrode attached to a large surface area, generally the buttocks or thigh. With monopolar electrosurgery, there is a greater potential for injury to body tissues as the electrical current passes through to the surface or return electrode (grounding pad) where skin burns may also occur. With bipolar devices, the RF energy is contained at the surgical site because both the active and return electrodes are located on the surgical instrument. In minimally invasive surgery, there is even greater potential for complications when using monopolar instruments due to the combined effects of the surgeon's limited field of vision, the proximity of other organs and the inherent tendency of the surgical instruments to conduct monopolar RF energy. The Company has developed extensive expertise in the control and containment of bipolar radio frequency energy to affect both surgical cutting and coagulation of blood in a variety of surgical and interventional procedures. The Company's strategy is to leverage its expertise to design, develop and manufacture proprietary surgical instruments for use in selected minimally invasive surgical procedures where the safety and other features of bipolar electrosurgery have demonstrable advantages. In 1998, the Company was awarded ISO 9001 certification for its quality systems in design and manufacturing, and received authorization to place the CE Mark on its products for distribution to members of the European Community. These milestones provide an important recognition of the superior product quality and safety standards of Everest Medical. The Company was incorporated in Minnesota on April 19, 1983. The Company's address is 13755 First Avenue North, Minneapolis, Minnesota 55441, and its telephone number is (612) 473-6262. Business Laparoscopic Surgical Products The Company believes laparoscopy is a rapidly growing market in the United States. Laparoscopic procedures, such as gall bladder removal, hysterectomies, Nissen Fundiplation and hernia repair can now be routinely performed through a trocar cannula. The cutting and coagulating instruments most often utilized are either electrosurgical or lasers. Each of these methods involves certain patient risks. With monopolar electrosurgical devices, there is a risk that the passage of electrical current through the body will result in unintended lateral tissue damage. Tissue damage can occur in laparoscopic procedures performed with monopolar instruments due to RF current from the monopolar instrument inducing current on one of the trocar cannulas or other surgical instruments. This tissue damage, which can include severe burning, may not be visible to the surgeon during surgery, but may result in post-operative complications such as bowel perforation. Lasers are sometimes difficult to control and have limited coagulation effect, particularly in the closed conditions of a laparoscopic procedure. They are also expensive to acquire and may be inconvenient for the clinician due to the problems of scheduling the limited number available in a hospital and the high level of expertise required. To the Company's knowledge, the EVERSHEARS Bipolar Scissors and the BiLAP Probe were the first bipolar electrosurgical devices commercially available for the purpose of providing cutting and coagulation in laparoscopic procedures. In the past three years, there have been additional products introduced to the market by competitors that may address the need for cutting and coagulation during laparoscopic procedures. Current Laparoscopic Surgical Products EVERSHEARS Bipolar Scissors. The EVERSHEARS II Bipolar Scissors is used to cut and coagulate tissue during laparoscopic surgery, combining mechanical cutting with electrosurgical coagulation. The EVERSHEARS II Bipolar Scissors consists of a handle and a long tube with blades at the distal end. The EVERSHEARS II also contains a spindle which allows the physician to rotate the device. The patented EVERSHEARS II design consists of metal cutting blades and stainless steel support member which serves as the coagulation electrodes. The conductive metal cutting blade is isolated from the support member by a non-conductive adhesive. The EVERSHEARS II Bipolar Scissors is designed to utilize the bipolar coagulating output of most standard electrosurgical generators on the market. The EVERSHEARS II Bipolar Scissors is available in a dual action curved design which allow the physician better visualization of the surgical site. In the fourth quarter of 1998, the Company commenced limited shipments of the EVERSHEARS LP Bipolar Scissors. This next generation device features a new lower profile scissors blade designed to improve the precision of cutting and the surgical feel of the device. In this design, the blades are 30% thinner, 25% longer, open 30% wider and cut smoother than the EVERSHEARS II Bipolar Scissors currently marketed. The Company continues to be the only company in the world to market a laparoscopic bipolar scissors offering the clinician the benefits of precision mechanical cutting and simultaneous coagulation. The Company currently distributes the EVERSHEARS Bipolar Scissors to hospitals and physicians only through its network of independent marketing representatives. Sales of EVERSHEARS Bipolar Scissors approached $1,400,000 for 1998. BiCOAG Bipolar Cutting Forceps. The Company introduced this patented new product in September 1995 in a 10mm version. This innovative product incorporates a precision bipolar forceps for grasping and coagulation of tissue with a surgical cutting blade positioned between the forceps jaws to allow transection of coagulated tissue. The Company was issued a patent from the United States Patent Office on August 29, 1995 for this design. The BiCOAG Cutting Forceps allows the laparoscopic surgeon the ability to grasp and coagulate safely with bipolar energy and transect tissue with one instrument. This product minimizes the number of surgical instruments needed and the need for instrument exchanges, resulting in a reduction of surgical time. Additionally, the use of bipolar energy to safely and effectively seal vessels may result in the elimination of costly stapling devices in many laparoscopic procedures. In the second quarter of 1996, the Company added a locking feature to the device which enables the device to be used for retraction and increases surgeon ease and comfort. The Company also commenced shipments of the new 5mm version of the BiCOAG Cutting Forceps during the last half of 1996. The Company believes this device is the first commercially available 5mm cutting forceps. The 5mm version of the BiCOAG Cutting Forceps complements the 10mm device, offering surgeons the advantage of using smaller trocars, reducing incision size, cost and potential complications. The Company realized a significant portion of its growth in 1996, 1997 and 1998 from the revenues generated from this product line. Revenues grew from under $200,000 in 1995 to in excess of $3,800,000 in 1998. BiCOAG Bipolar Forceps. The BiCOAG Forceps is used to coagulate tissue and blood vessels during laparoscopic surgery. The BiCOAG Forceps consists of a handle and a long tube containing two electrodes and a spindle which allows the physician to rotate the device to more easily accomplish its function. The forceps is available in two models, a macro version which has large paddles attached to the end of the electrodes for coagulating large areas, and the micro version which has a small electrode surface for more precise coagulation. The BiCOAG Forceps is designed to operate on the bipolar coagulating output of most standard electrosurgical generators on the market. The BiCOAG Forceps were reintroduced to the Company's independent sales channel in September 1995 after an 18-month hiatus. Sales of the BiCOAG Forceps were previously restricted from the Company's independent sales channel due to a now-terminated exclusivity provision in the product supply agreement with Ethicon Endo-Surgery, a division of Johnson & Johnson. The sales impact of the reintroduction of the BiCOAG Forceps for 1995 was nominal, but since then the Company has continued to experience sales increases with revenues in 1998 exceeding $400,000. In addition to the Company's independent sales channel, the BiCOAG Forceps are also marketed and distributed by Ethicon Endo-Surgery and Origin MedSystems, a subsidiary of Guidant Corporation. Sales to these OEM customers represented 10% of the Company's revenue in 1997 and 1998. The Company has been notified that Origin Medsystems will discontinue marketing this device in the second quarter of 1999 due to its strategic realignment efforts. The Company is working closely with Origin to allow for a smooth transition of customers to the Company's independent sales network. BiCOAG Dissecting Forceps. The BiCOAG Dissecting Forceps is similar to the bipolar forceps described above, but combines the ability to grasp and dissect tissue in the surgical procedure with the benefits of bipolar coagulation. This product provides the surgeon with a versatile and high-utility instrument, and is compatible with most electrosurgical generators. Sales of this product in 1998 exceeded $500,000. MOLly 3mm Bipolar Forceps. In December 1996, the Company introduced what it believes to be the world's first 3mm Bipolar laparoscopic forceps targeted for the emerging microlaparoscopy market. This device allows for secure grasping, effective coagulation, the use of smaller trocar ports and improved outcomes. Procedures such as diagnostic laparoscopy are being moved out of traditional hospital settings to alternate sites, including surgical-centers and physicians' offices. The Company believes smaller instrumentation will improve the success rate of these procedures by allowing the use of smaller ports, reducing complications. In March 1998, the Company received 510(k) clearance from the United States Food & Drug Administration to expand the labeling for its 3mm bipolar forceps to include the indication of female tubal sterilization via contraceptive bipolar coagulation of the fallopian tube. See "Regulation." An estimated 700,000 tubal sterilization procedures are performed yearly in the United States. The Company believes this may represent a significant opportunity for this product. To date, the Company has not experienced a significant revenue contribution from this product. BiLAP Bipolar Probes. The BiLAP Probe consists of a handle and a long rigid tube. The probe contains cutting electrodes and an area to provide spot coagulation on the distal end, and features suction and irrigation capabilities to the operative site. The BiLAP Probe was released for general sale in the United States in October 1991. Initially the BiLAP Probes were designed to work only on an Everest-made Bipolar generator; however, due to product modifications made in 1996, the device is now compatible with most common electrosurgical generators, eliminating the need for an Everest Generator. Sales of the BiLAP System to date have been minimal, and the Company does not believe sales will increase significantly in the future. BiLAP Bipolar Needle Electrode. The BiLAP Bipolar Needle Electrode is similar in design to the BiLAP product line but features an adjustable needle electrode that advances and retracts for precise cutting that preserves surrounding tissues. The device utilizes the safety of bipolar energy and provides the surgeon with precision cutting performance. This device is compatible with most common electrosurgical generators. The sales of this product are not expected to reach significant levels since this product has a small niche of the market based on current surgical techniques. Laparoscopic Surgical Products Under Development. The Company has ongoing development projects to optimize the performance of its products, and the reduction of its manufacturing costs through the benefits of value engineering, and to offer a lower profile, higher-quality blade design for its bipolar scissors. Gastrointestinal (GI) Endoscopic Products Current GI Endoscopic Products BiSNARE Polypectomy Snare. Lower gastrointestinal polyp removal procedures are performed to reduce the risk of cancerous lesion formation. When performed with a monopolar snare, this procedure may have the undesirable side effects of colon wall perforation and delayed hemorrhage. The Company is marketing a device designed to make the removal of polyps easier and safer. The BiSNARE Polypectomy Snare consists of a bipolar wire loop on a long catheter which is inserted through an endoscope. The wire loop is placed over the polyp by the endoscopist, RF energy is activated, and, as the polyp is cut from the intestinal wall, the exposed blood vessels are coagulated. The Company believes that, compared to competing monopolar devices, the BiSNARE presents less potential for burns and intestinal perforations because it requires less power and the energy is localized to the lesion. In addition, it is easier to prepare the patient for the procedure than with competing devices because the BiSNARE does not require a grounding pad. The BiSNARE is currently offered in several models to address physician preferences. The Company is currently focusing on increasing its market share in laparoscopy, therefore, the BiSNARE is sold to hospitals and physicians in the United States through a limited network of independent marketing representatives and distributors. Revenues from this product have fallen over the past three years primarily due to a decline in revenues from the Company's distribution in Japan of this product. This revenue decline resulted both from increased competitive products which eroded existing business and from delays in obtaining approval in Japan of new versions of the bipolar snare. BiCOAG Probe Coagulator. In a common endoscopic procedure, a coagulating tip on the distal end of a catheter is used to treat ulcers and other intestinal bleeding. The BiCOAG Coagulator is a catheter with a spiral electrode tip and a flushing port designed to facilitate the endoscopic visualization and coagulation of gastrointestinal bleeding. The BiCOAG Probe has a spiral bipolar electrode designed to permit the endoscopist to use any surface of the tip for therapy while reducing the incidence of tissue adhesion. The BiCOAG Probe was released for sale in the third quarter of 1990. The Company has entered into an agreement with Bard Interventional, a division of C.R. Bard, Inc., and is providing a private label version of the coagulating probe for sale in the United States and Canada. Bard has no obligation to purchase a minimum number of units under this agreement. In 1998, the Company experienced a sharp increase in revenues under this product supply agreement as Bard was able to gain additional market share for a period of time due to competitive market opportunities. The Company believes the opportunity was short-lived and does expect revenues to fall to normal levels in 1999. GI Endoscopic Products Under Development Biopsy Forceps. The Company has developed a bipolar instrument that will enable the endoscopist to obtain a tissue sample for pathology and coagulate the site while maintaining the integrity of the sample. The market potential for the product is under evaluation. The Company has entered into a development agreement with a leading international distributor of surgical instruments to refine the product design and explore the market potential. Minimally Invasive Cardiovascular Surgery The Company has identified the emerging minimally invasive cardiovascular surgery market as an opportunity to export its bipolar technology. The Company believes the inherent safety of bipolar technology offers the cardiovascular surgeon the cost-effective electrosurgical solution to meet the challenges of these new procedures. The Company also believes strongly that bipolar electrosurgery has the potential to become the standard of care for the new minimally invasive cardiovascular surgery marketplace. The Company is exploring two applications for bipolar technology in cardiac surgery--bipolar dissection of the internal mammary artery during coronary artery bypass surgery, and bipolar "ligation and transection" of side branches during minimally invasive saphenous vein harvesting. The Company believes it can leverage its technology to these procedures without significant obstacles. The applicable products include the EVERSHEARS II Metal-on-Metal Bipolar Scissors and the new BiSECTOR(TM) Ligating Forceps. In mid-1997, the Company entered into a product supply agreement with Guidant Corporation for the cardiovascular market. Under the terms of this agreement, Everest supplies Guidant with a version of its bipolar scissors and bipolar cutting forceps to be packaged in the proprietary Guidant VasoView(TM) Balloon Dissection System kit, offering clinicians a complete minimally invasive solution for saphenous vein harvesting during cardiovascular and peripheral vascular surgical procedures. Surgeons perform approximately 600,000 coronary artery bypass procedures and 200,000 peripheral bypass procedures worldwide each year. Guidant introduced the Everest Medical products to their customers during the third quarter of 1997. In the first quarter of 1998, the Company introduced its BiSECTOR Bipolar Ligating Forceps as a tool for minimally invasive sapheneous vein harvesting to be included in kits being introduced on the market. The product provides a one-step alternative to coagulate and transect vessels, compared to the single function, more costly, scissors and clip appliers. Guidant purchased over $1,400,000 of the Company's products in 1998. Guidant continues to be the market leader in this arena and introduced a second generation VASOVIEW(TM) UNIPORT(TM) Endoscopic Vessal Harvesting System in 1998. To support this next generation system, the Company developed and commenced shipments for Guidant of an innovative 56cm flexible shaft scissors and its BiSECTOR ligating forceps for use with this sytem. In addition, the Company will be exploring proprietary bipolar technology as an application to improve the current internal mammary artery (IMA) harvesting technique in minimally invasive, beating heart, bypass graft procedures. With obvious vital structures such as the heart and aorta nearby, the Company believes these relatively new and still evolving heart procedures will be more effective due to the added safety and one-step methods that bipolar technology brings. General Market Trends The MIS market continues to grow. Factors accounting for this growth include: (a) increasing concern by employers and healthcare providers regarding the total system costs associated with surgery; (b) higher degree of awareness of patients regarding the benefits of MIS; and (c) improved technology for use by clinicians in these procedures. At present, many physicians, hospitals and third party payers do not fully appreciate the favorable economics of MIS. There is a growing body of data to support the conclusion that MIS procedures will significantly reduce the total system healthcare-related costs of surgery. These potential cost savings include reduced hospital stays and patient recovery time. From an employer's perspective, savings are evident in lower costs of short-term disability and workers' compensation. In addition, employers may realize savings in costs associated with the hiring of replacement workers--training expense, reduced productivity and additional compensation. The Company believes that large employers will become more aggressive in managing their total system healthcare-related costs and indicate a preference for MIS procedures. This may include employers limiting reimbursement to laparoscopic procedures only, unless clearly contraindicated. Today, patients are better informed with respect to the benefits of MIS--returning to an active lifestyle sooner, potentially reduced risks due to anesthesia and infection, and obvious cosmetic advantages--and are requesting less invasive procedures. The Company continues to believe that MIS will grow and expand into other medical markets. Today, the Company serves the medical specialties of gynecology, general surgery, gastrointestinal endoscopy and cardiovascular. As seen in its successful entrance to the cardiovascular market, the Company believes it can be successful in leveraging its technological expertise and operational capabilities into new an demerging MIS markets including otolaryngology, orthopedics and urology as well as the expanding procedural opportunity in gynecology, general surgery and cardiovascular markets. The current health care debate by the federal government has the potential to tremendously impact the system of delivery of health care in this country. While the ultimate outcome is uncertain at this time, the Company feels it will be well-positioned to take advantage of any change that may occur. In order to reduce the overall rate of growth of spending on health care, any new or revised system will need to encourage the ongoing trend to MIS due to the overall efficiency of these procedures. The Company also expects that the trend towards managed health care will bring into the procedural equation important factors such as safety, efficacy, cost effectiveness and ease of use resulting in a greater demand for bipolar energy. Competition The medical device industry is intensely competitive in almost all segments and tends to be dominated in large, more mature markets by a relatively small group of large and well-financed companies. The Company also competes with smaller, entrepreneurial companies, some of which are better financed than Everest and may have established positions in certain markets. Minimally Invasive Surgical Markets A number of major medical products suppliers, including United States Surgical Corporation (a subsidiary of Tyco Corporation), Ethicon, Inc. (a subsidiary of Johnson & Johnson, Inc.), CONMED Corporation, Karl Storz Endoscopy-America Inc., Imagyn Medical Technologies, Inc. and Circon Corporation are currently selling devices for minimally invasive surgical procedures. For the most part, the electrosurgical products sold by these companies are monopolar devices. The Company also believes that a number of companies are developing bipolar devices for laparoscopic applications. Competitors are selling a bipolar coagulating forceps. The Company believes, however, that it is the only manufacturer currently marketing a full line of bipolar devices specifically designed for laparoscopy. Due to the expected rapid growth in the market for minimally invasive surgical products, the Company anticipates that additional competitors will enter the market. It also expects that there will be a consolidation of existing competitors, including acquisitions of small companies by large medical products companies. This trend will mean increased competition for the Company. Minimally Invasive Cardiovascular and Saphenous Vein Harvesting Markets The principal competitors of the Company's products offered through Guidant Corporation in the emerging minimally invasive cardiovascular market include Ethicon EndoSurgery (a subsidiary of Johnson & Johnson), CardioThoracic Systems, Inc., Heartport and General Surgical Innovations Inc. Endoscopic Markets The principal competitors of the BiSNARE polypectomy device are Microvasive, Inc. (subsidiary of Boston Scientific Corp.), Wilson Cook Medical Inc., Bard Interventional (a division of C.R. Bard, Inc.) and Olympus Corp. All of these companies market monopolar systems. BEI, Inc. makes a bipolar snare that is currently sold to customers at a significantly higher price than the BiSNARE. The principal competitors to the BiCOAG Probe are Microvasive, Circon Corporation and Olympus. All of these companies market bipolar devices, with the exception of Olympus, which offers a device using heat for coagulation. The Company believes that the principal competitive factors in the MIS market are product features, physician familiarity with the products and their function, the ability of products to address cost containment issues, product quality, distribution strength and price. Competitors to each of the Company's products market both disposable and reusable products. All of the Company's current surgical instruments are intended for single use, a feature which the Company believes provides the benefits of less risk of infection to patients and reduced labor costs to hospitals. Marketing and Distribution The Company markets and promotes its products through advertising in medical journals, publication of scientific papers, direct mail, attendance at trade shows and participation by Everest's personnel in training sessions for physicians. The Company also provides promotional information for its independent sales representatives and international distributors. In addition, the Company, its independent representatives and its distributors provide physicians with assistance in learning the proper use of the Company's laparoscopic products. Over the past 4 years, the Company has focused on developing its independent sales channel whereby the Company works with independent sales organizations which have expertise in the Company's primary markets of general surgery and gynecologic laparoscopy. The Company, in many cases, retains direct billing to the hospital and pays a commission based on orders shipped. The Company has seen this distribution channel grow to represent 60% of its sales volume in 1998. The Company believes that continued management focus, ongoing product development and increased sales and marketing efforts will continue to grow this independent sales channel in 1999. The Company is approaching the minimally invasive cardiovascular market with a strategic partnership with Guidant Corporation, who became a shareholder in the Company in 1998. Guidant is the strategic marketer and distributor of versions of the Company's bipolar products to be packaged with the VasoView Balloon Dissection System for less invasive saphenous vein harvesting. The Company continues to maintain its non-exclusive product supply agreement with Ethicon Endo-Surgery, a division of Johnson & Johnson, Inc., whereby Ethicon was granted a license to market the Company's laparoscopic forceps. The Company also has a non-exclusive agreement with Origin MedSystems, a subsidiary of Guidant Corporation, established in 1993 to market the Company's laparoscopic forceps. This Origin agreement will, however, be discontinued in the second quarter of 1999. See "Business--Laparoscopic Surgical Products." Everest currently markets its GI endoscopic products in the United States through a minimum number of independent distributors. These distributors do not have written agreements with the Company and serve on a non-exclusive basis. The Company also services a growing number of accounts directly. The Company continues to provide Bard Interventional (a division of C.R. Bard, Inc.) with its gastrointestinal coagulating probe. The Company's sales and marketing department consists of the Vice President of Sales and Marketing, four regional sales managers, one marketing manager, one clinical support manager and two sales and marketing support individuals. The Company expects to continue to invest in this growing distribution strategy in 1999. The Company intends to continue to utilize independent distributors for foreign sales. During 1998, the Company concentrated its sales and marketing efforts primarily in the United States market and experienced an increase in sales internationally. The Company expects sales in 1999 to increase domestically, as well as internationally. Manufacturing The manufacturing process for the Company's current products consists primarily of the assembly of parts and components purchased from outside vendors, final testing and packaging. The Company currently produces the majority of its injection molded plastic parts. It is probable that the Company primarily will assemble its future products from parts bought from outside suppliers. However, management may determine that certain parts should be produced by the Company due, for instance, to a desire to control quality or to reduce cost. The Company is currently subcontracting sterilization functions with third parties. During 1993, the Company installed a class 10,000 clean room in its facility which gives the Company the capability to package its products in house at considerable savings compared to subcontracting that function. Most of the parts and components used in the Company's current products are purchased from multiple vendors or are available from additional vendors the Company has qualified. However, in some instances the Company purchases, and may in the future purchase, only from a single vendor. Although the Company believes it would be able to obtain such parts from alternative vendors if required, there could be some interruption in the Company's ability to supply products to customers. If, as in the past, the Company finds itself with a single source of supply for a critical component, it will, to the extent possible, take steps to protect itself from a shortage of supply. Such steps include increased safety stock, working to qualify additional vendors, and alternative designs which utilize currently available components. Research and Development The Company's research and development activities are conducted at its headquarters facility and at laboratory and clinical facilities at various universities and hospitals. The Company attempts to coordinate its research and development activities with those of its scientific advisors and other physician contacts. The objective of the Company is to direct those coordinated efforts to use its base of technology and expertise to develop products which meet identified market needs. For the years ended December 31, 1998 and 1997, the Company's research and development expenditures were $859,000 and $634,000, respectively. The Company expects spending in the research and development area to increase as the Company attempts to expand its laparoscopic product offering and to capitalize on certain opportunities in the minimally invasive cardiovascular arena, microlaparoscopy and other surgical specialties. Regulation The medical devices manufactured and marketed by the Company are subject to regulation by the U.S. Food and Drug Administration (the "FDA") and, in some instances, by state and foreign authorities. Pursuant to the Medical Device Amendments of 1976 (the "1976 Amendments") to the Federal Food, Drug and Cosmetic Act, and regulations promulgated thereunder, medical devices intended for human use are classified into three categories (Classes I, II, and III), depending upon the degree of regulatory control to which they would be subject. The Company's current GI surgical products have been classified as Class II devices, and the Company believes that its planned electrosurgical devices will also be in that class. If a new device, irrespective of whether it is a Class II or III device, is substantially equivalent to an existing device that has been continuously marketed since the effective date of the 1976 Amendments (May 28, 1976) (a "Substantially Equivalent Device"), FDA requirements may be satisfied through a Premarket Notification Submission (a "510(k) Submission"), under which the applicant provides product information supporting its claim of substantial equivalence. In a 510(k) Submission, the FDA may also require that it be provided with clinical test results demonstrating the safety and efficacy of the device. Under certain circumstances, that clinical data can be obtained only after submitting to the FDA an application for an Investigational Device Exemption ("IDE"). Marketing may commence when the FDA issues a letter finding substantial equivalence. The Company has received 510(k) marketing clearances finding substantial equivalence from the FDA, without submission of clinical testing data, for all of its current products. If a medical device does not qualify for the 510(k) Submission procedure, the manufacturer must file a premarket approval application ("PMA"). This requires more extensive prefiling testing than the 510(k) Submission and involves a significantly longer FDA review process. FDA approval of a PMA occurs after the applicant has established the safety and efficacy of the device to the satisfaction of the FDA under an IDE Procedure requiring preclinical laboratory and animal tests and human clinical studies. The Company does not believe that any of its products currently under development will be subject to this more time-consuming FDA review process. The United States Congress has enacted legislation which substantially changes certain aspects of the regulation of the sale of medical devices and which, depending on how it is interpreted and enforced, could make it substantially more difficult and time-consuming to comply with premarketing clearance and approval processes. As a manufacturer of medical devices, the Company is also subject to certain other FDA regulations, and its manufacturing processes and facilities are subject to continuing review by the FDA to ensure compliance with Good Manufacturing Practices regulations. The Company believes that its manufacturing and quality control procedures substantially conform to the requirements of FDA regulation. The financial arrangements through which the Company markets, sells and distributes its products may be subject to certain federal and state laws and regulations with respect to the provision of services or products. These so-called "fraud and abuse" laws and regulations prohibit certain direct or indirect payment arrangements that are designed to induce or encourage the purchase or recommendation of products reimbursable under Medicare or Medicaid. Violations of these laws and regulations may result in civil and criminal penalties, including substantial fines and imprisonment. The Company believes that its operations and its marketing, sales and distribution practices currently comply in all respects with the fraud and abuse laws and regulations, to the extent they are applicable. The Company's devices are also subject to regulation in foreign countries. Third Party Reimbursement In 1983, Congress amended the Social Security Act to establish a prospective reimbursement system for Medicare which limits the reimbursement that hospitals receive for treating certain medical conditions by setting maximum fees that can be charged for Medicare patients. Under this system, hospitals are paid a fixed amount for treating each patient with a particular diagnosis. This differs from the previous system under which Medicare providers were reimbursed for actual costs of providing services up to a stated maximum on each procedure performed. In addition, certain private insurers have initiated prospective reimbursement systems designed to slow the escalation of health care costs. The Company does not believe that these reimbursement limitations will have a material adverse effect on future sales of its existing or currently proposed product lines, although the Company has become aware of pressure to limit reimbursement for single-use devices. Intellectual Property Due to the rapid technology change that characterizes the medical device industry, the Company believes that the improvement of existing products, reliance upon trade secrets and unpatented proprietary know-how and the development of new products are generally as important as patent protection in establishing and maintaining a competitive advantage. Nevertheless, the Company has made, and continues to make, efforts to obtain patents, when available, in connection with its product development program. There can be no assurance, however, that any patents obtained will provide substantial protection or be of commercial benefit to the Company, or that their validity will not be successfully challenged. In 1994, the Company was awarded a patent for its second generation bipolar scissors design, EVERSHEARS II. Although there were two opposing patents issued to another company in 1994 involving ceramic bipolar scissors, the Company believes that the patented EVERSHEARS II is a strong marketing alternative in the bipolar scissors market. After review of the allowed claims of the two opposing patents and the related files, the Company, based on the advice of its patent counsel, believes that its metal-on-metal design incorporated in the EVERSHEARS II does not infringe on either of the opposing patents issued. The Company commenced shipment of the EVERSHEARS II on a limited basis in the third quarter of 1994 and full market introduction in January 1995. In 1995, the Company was awarded patents for its dissecting forceps design and its bipolar cutting forceps design. The Company was awarded three additional patents in 1996, two of which relate to the bipolar scissors technology. The third patent, a methods patent, was granted to the Company which allows for the interchangeability of monopolar and bipolar currents to an instrument. In November 1997, the Company received official notice from the United States Patent and Trademark Office ("PTO") that it intended to issue a reexamination certificate for the Company's bipolar cutting forceps patent. The Company had requested this reexamination in an effort to ensure the long-term viability of the bipolar cutting forceps patent. A reexamination certificate states that the essential claims of the bipolar cutting forceps patent have been upheld by the PTO. The bipolar cutting forceps design incorporates a precision bipolar forceps for grasping and coagulation of tissue with a passive, reciprocally-moveable surgical cutting blade positioned between the forceps jaws to allow transection of the coagulated tissue. The Company was issued a U.S. patent for this device on August 29, 1995. A reexamination is a PTO action to review an issued patent in the context of newly discovered prior art. As a result of the successful outcome of the reexamination in favor of the Company, it executed a cross-licensing agreement with an undisclosed party in the fourth quarter of 1997. The Company received licensing revenue of $183,000 covering the two-plus years since the patent issued in August 1995. Licensing revenues in 1998 approached $85,000 and the Company does not believe future licensing revenues will be material to the Company. In October 1998, the Company reached a settlement with Boston Scientific Corporation with respect to separate patent interference actions declared by the United States Patent and Trademark Office. A patent interference action is a PTO action to determine who is entitled to the patent on the same invention. The interference action involved two of the Company's bipolar electrosurgical scissors designs. The resolution of the settlement resulted in the Company maintaining ownership of the key "metal-on-metal" bipolar scissors patent, which the Company is currently marketing, on terms favorable to the Company, eliminating further legal costs and uncertainty. The Company generally requires its consultants and each of its employees to agree in writing to keep its proprietary information confidential and, within certain limitations, to assign all inventions relating to the Company's business to the Company. The Company has registered its trademark logo, Everest Medical, and the trademarks BiSNARE, BiTOME, BiCOAG, EVERSHEARS, BiLAP and BiBx on the principal register in the PTO. In addition, the Company has filed trademark applications on some of its other products. Employees As of March 12, 1999, the Company had 105 employees, all of which are full-time. The employees include 4 in research and development, 63 in production, 16 in manufacturing support, 6 in quality assurance, 9 in sales and marketing and 7 in general and administrative functions. The Company's employees are not represented by a union, and the Company considers its relationship with its employees to be good. Outlook and Risks Certain statements made in this annual report on Form 10-KSB, which are summarized here, are forward-looking statements that involve risk and uncertainties, and actual results may be materially different. Factors that could cause actual results to differ include, but are not limited to those identified: o The expectation that as the Company continues to invest in sales and marketing support programs, increased revenues will result through the independent sales channel depends on surgeons increasing their use of bipolar technology as an alternative to existing monopolar and ultrasonic technologies, and upon general market conditions and competitive conditions within this market, including the introduction of products by both U.S. and European competitors. o The Company's expectation that it will experience sales growth domestically and internationally depends on general market conditions and competitive conditions that may be encountered in both such markets, and on Everest's ability both (i) to increase its market share in its core business of laparoscopy given that Everest competes with large, well-capitalized companies who have the ability to enter into contact purchasing agreements with large institutions, and (ii) to establish a market presence in the minimally invasive cardiac surgery market. o The expectation that bipolar technology will become the standard in the MIS market and that the Company will be a beneficiary of this trend depends on demand and on acceptance by physicians, hospitals and third party payers of the believe that MIS procedures result in reduced costs. o The expectation that the Company will increase its research and development spending in order to achieve ultimate sales growth depends on the Company having sufficient capital. The belief that the Company's current capital resources will be sufficient to fund current and anticipated business operations could be adversely impacted by changes in anticipated operating results or the Company's inability to obtain financing on favorable terms and to meet the Company's obligations on its preferred stock dividends. ITEM 2. DESCRIPTION OF PROPERTY The Company currently rents facilities consisting of approximately 23,485 square feet located at Carlson Technical Center, Suite 500, 13755 First Avenue North, Minneapolis, Minnesota 55441. The Company pays monthly rent of approximately $13,650, plus operating expenses and taxes, under the lease which extends through December 2004. The Company uses approximately 65% of the space for production, 15% for research and development and 10% for each of sales and marketing and administration. The Company believes this space will adequately meet its needs for the foreseeable future, and, in management's opinion, the property is adequately covered by insurance. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to, nor is its property the subject of, any material pending legal proceeding. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. Executive Officers of the Company The Company's executive officers, along with their ages and positions as of March 12, 1999, are as follows: Name Age Position John L. Shannon, Jr. 45 President, Chief Executive Officer and Chairman of the Board Michael E. Geraghty 51 Vice President, Sales and Marketing Steven M. Blakemore 44 Vice President, Operations and Engineering David J. Parins 47 Vice President, Technology Thomas F. Murphy 39 Vice President, Finance and Administration and Assistant Secretary John L. Shannon, Jr. Mr. Shannon has served as Chairman of the Board since May 1997 and as President and Chief Executive Officer since August 1993. From May 1989 to June 1993, Mr. Shannon was President and Chief Executive Officer of EdenTec Corporation, a medical device manufacturer. From November 1985 to May 1989, Mr. Shannon was employed by Threshold Ventures, Inc., a venture capital firm, most recently as President. From September 1984 to November 1985, Mr. Shannon was Marketing Manager for SciMed Life Systems, Inc., a medical device manufacturer. From June 1979 to September 1984, Mr. Shannon was employed by The Toro Company, a lawn and garden manufacturer, in a variety of financial, planning and marketing positions, most recently as Marketing Manager. Michael E. Geraghty. Mr. Geraghty joined the Company as Vice President of Sales and Marketing in January 1997. From August 1995 to January 1997, Mr. Geraghty was Director of Marketing - Advance Products at ArthroCare Corporation, a start-up bipolar electrosurgical medical device manufacturer. From March 1994 to August 1995, Mr. Geraghty was the National Sales Manager of Laser Peripherals, and from December 1990 to October 1993, he was the Sales Manager for Intramed Labs, Inc., both of which are medical device manufacturers. Steven M. Blakemore. Mr. Blakemore has been employed by the Company since November 1992, most recently as Vice President of Operations and Engineering. From October 1989 to February 1992, Mr. Blakemore was employed by Clarus Medical Systems, a medical device manufacturer, as Vice President of Operations and Research and Development. From March 1986 to October 1989, Mr. Blakemore was employed by Medical Graphics Corporation, a medical device manufacturer, most recently as Vice President of Operations. Mr. Blakemore is the inventor on one patent in medical technology. David J. Parins. Mr. Parins rejoined the Company in April 1998 as Vice President of Technology. Prior to rejoining the Company, Mr. Parins was employed by Cardiac Instruments, a startup medical device company, as Vice President of Research and Development from October 1997 to April 1998. Prior to this short hiatus, Mr. Parins was employed by the Company as Vice President of Engineering, Quality Assurance and Regulatory Affairs from November 1988 to October 1997. Mr. Parins is the holder of many of the Company's patents and has over twenty years of experience in the medical device industry. Thomas F. Murphy. Mr. Murphy has served as Vice President of Finance and Administration of the Company since January 1997, prior to which he served as Chief Financial Officer since joining the Company in July 1994. Mr. Murphy has also served as Assistant Secretary of the Company since February 1995. From December 1992 to July 1994, he was Vice President of Finance for DaVinci Medical, Inc., a manufacturer of laparoscopic surgical instruments. From October 1990 to May 1992, Mr. Murphy was employed by Tsumura International, a consumer goods manufacturer of home fragrance and bath products, as Vice President of Finance. From 1986 to October 1990, Mr. Murphy held various positions in sales operations, administration and finance for Minnetonka Corporation, a consumer goods manufacturer. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by Item 5 is incorporated by reference from the Company's 1998 Annual Report, portions of which are filed herewith in Exhibit 13.1. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The information required by Item 6 is incorporated by reference from the Company's 1998 Annual Report, portions of which are filed herewith in Exhibit 13.1. ITEM 7. FINANCIAL STATEMENTS The Financial Statements of the Company for the year ended December 31, 1998 are incorporated by reference from the Company's 1998 Annual Report, portions of which are filed herewith in Exhibit 13.1. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The information required by Item 9 regarding the Company's executive officers is set forth in Part I of this report. The information required by Item 9 regarding the Company's directors is incorporated by reference from the Company's 1999 Proxy Statement under the caption "Information About Nominees." The Company's proxy statement will be filed pursuant to Rule 14a within 120 days after the close of the fiscal year for which this report is filed. The information relating to compliance with Section 16(a) of the Exchange Act is incorporated by reference from the Company's 1999 Proxy Statement under the caption "Compliance with Section 16(a) of the Exchange Act." The Company's proxy statement will be filed pursuant to Rule 14a within 120 days after the close of the fiscal year for which this report is filed. ITEM 10. EXECUTIVE COMPENSATION The information required by Item 10 is incorporated by reference from the Company's 1999 Proxy Statement under the caption "Executive Compensation." The Company's proxy statement will be filed pursuant to Rule 14a within 120 days after the close of the fiscal year for which this report is filed. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 11 is incorporated by reference from the Company's 1999 Proxy Statement under the caption "Security Ownership of Management and Certain Beneficial Owners." The Company's proxy statement will be filed pursuant to Rule 14a within 120 days after the close of the fiscal year for which this report is filed. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 12 is incorporated by reference from the Company's 1999 Proxy Statement under the caption "Certain Transactions." The Company's proxy statement will be filed pursuant to Rule 14a within 120 days after the close of the fiscal year for which this report is filed. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: The exhibits to this Report are listed in the Exhibit Index immediately following the signature pages to this Report. A copy of any of the exhibits listed or referred to above will be furnished at a reasonable cost to any person who was a shareholder of the Company as of March 11, 1999, upon receipt from any such person of a written request for any such exhibit. Such request should be sent to Everest Medical Corporation, 13755 First Avenue North, Minneapolis, Minnesota 55441, Attention: Shareholder Information. (b) Reports on Form 8-K: None filed during the fourth quarter of the fiscal year ended December 31, 1998. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Issuer has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 30, 1999 EVEREST MEDICAL CORPORATION By /s/ John L. Shannon, Jr. John L. Shannon, Jr. President, Chief Executive Officer and Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Issuer and in the capacities indicated. (Power of Attorney) Each person whose signature appears below constitutes and appoints John L. Shannon, Jr. and Thomas F. Murphy as his true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-KSB and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. Signature Title Date /s/ John L. Shannon, Jr. Chief Executive Officer, March 30, 1999 John L. Shannon, Jr. President (Principal Executive Officer) and Chairman of the Board /s/ David D. Koentopf Director March 30, 1999 David D. Koentopf (Signatures continued on following page) Signature Title Date /s/ Thomas F. Murphy Vice President of Finance March 30, 1999 Thomas F. Murphy and Administration (Principal Financial and Accounting Officer) /s/ Donald R. Brattain Director March 30, 1999 Donald R. Brattain Director Richard J. Migliori, M.D. EVEREST MEDICAL CORPORATION EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-KSB For the Fiscal Year Ended December 31, 1998 Item No. Item 3.1 Restated Articles of Incorporation of the Company, as amended (Incorporated by reference to Exhibit 3.1 to the Company's Form 10-KSB for the fiscal year ended December 31, 1995) 3.2 Restated Bylaws of the Company, as amended (Incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-18 (File No. 33-37352-C)) 4.1 Specimen form of the Company's Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-18 (File No. 33-37352-C)) 4.2 Restated Articles of Incorporation of the Company, as amended (See Exhibit 3.1) 4.3 Restated Bylaws of the Company, as amended (See Exhibit 3.2) 10.1 1986 Incentive Stock Option Plan, as amended (Incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-18 (File No. 33-37352-C))** 10.2 1986 Non-Statutory Stock Option Plan, as amended (Incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-18 (File No. 33-37352-C))** 10.3 Form of Incentive Stock Option Agreement (Incorporated by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-18 (File No. 33-37352-C))** 10.4 Form of Non-Statutory Option Agreement (Incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-18 (File No. 33-37352-C))** 10.5 Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-18 (File No. 33-37352-C))** 10.6 Employee Incentive Savings and Profit Sharing Plan (Incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-18 (File No. 33-37352-C))** 10.7 Employee Incentive Savings and Profit Sharing Trust (Incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-18 (File No. 33-37352-C))** 10.8 1992 Stock Option Plan (Incorporated by reference to Exhibit 10.37 to the Company's Registration Statement on Form S-1 (File No. 33-45872))** 10.9 Lease Agreement dated September 20, 1989 between the Company and Carlson Center Industrial II Limited Partnership (Incorporated by reference to Exhibit 10.36 to the Company's Registration Statement on Form S-18 (File No. 33-37352-C)) 10.10 Amendment #1 dated December 7, 1992 to Lease Agreement dated September 20, 1989 between the Company and Carlson Center Industrial II Limited Partnership (Incorporated by reference to Exhibit 10.13 to the Company's Form 10-KSB for the fiscal year ended December 31, 1994) 10.11 Amendment #2 dated December 9, 1993 to Lease by and between the Company and the Estate of James Campbell (Incorporated by reference to Exhibit 10.14 to the Company's Form 10-KSB for the fiscal year ended December 31, 1994) 10.12 Supply Agreement dated April 2, 1991 between the Company and C.R. Bard, Inc. (Incorporated by reference to Exhibit 10.36 to the Company's Registration Statement on Form S-1 (File No. 33-45872)) 10.13 First Amendment to Supply Agreement dated April 2, 1991 between the Company and C.R. Bard, Inc. (Incorporated by reference to Exhibit 10.36 to the Company's Registration Statement on Form S-1 (File No. 33-45872)) 10.14 Stock Purchase Agreement dated July 15, 1993 between the Company and Johnson & Johnson Development Corporation, including Distribution and License Agreement between the Company and Ethicon Endo-Surgery (Incorporated by reference to Exhibit 10.29 to the Company's Form 10-KSB for the fiscal year ended December 31, 1993) 10.15* Employment Agreement with John L. Shannon, Jr. dated January 1, 1999** 10.16 Form of Warrant dated February 18, 1994 issued pursuant to agreement to certain purchasers (Incorporated by reference to Exhibit 10.38 to the Company's Form 10-KSB for the fiscal year ended December 31, 1993) 10.17 Exclusive Distribution Agreement dated January 1, 1996 with KK Adachi (Incorporated by reference to Exhibit 10.21 to the Company's Form 10-KSB for the fiscal year ended December 31, 1995) 10.18 Warrant to purchase 290,909 shares of Common Stock dated February 16, 1996 issued to Okabena Partnership K (Incorporated by reference to Exhibit 10.25 to the Company's Form 10-KSB for the fiscal year ended December 31, 1995) 10.19 Separation Agreement dated October 12, 1996 between the Company and R. Keith Poppe (Incorporated by reference to Exhibit 10.25 to the Company's Form 10-KSB for the fiscal year ended December 31, 1996)** 10.20 Terms of Employment for Michael Geraghty. (Incorporated by reference to Exhibit 10.26 to the Company's Form 10-KSB for the fiscal year ended December 31, 1996)** 10.21 Amendment #3 dated September 11, 1997 to Lease by and between the Company and the Estate of James Campbell, as Landlord (Incorporated by reference to Exhibit 10.24 to the Company's Form 10-KSB for the fiscal year ended December 31, 1997) 10.22* Management Incentive Program for Fiscal Year 1999** 10.23* Credit Agreement between Norwest Bank Minnesota, N.A. and the Company dated February 26, 1999. 10.24* Revolving Note dated February 26, 1999 from the Company to Norwest Bank Minnesota, N.A. 13.1* Portions of 1998 Annual Report, including Management's Discussion and Analysis, Financial Statements and Market for Common Equity 23.1* Consent of Independent Auditors 24.1* Power of Attorney of John L. Shannon, Jr., David D. Koentopf, Thomas F. Murphy, Donald R. Brattain and Richard J. Migliori (included on the signature pages of this Form 10-KSB) 27.1 Financial Data Schedule (in electronic format only) - ------------------- * Filed herewith. ** Management contract or compensatory plan or arrangement. EX-10.15 2 SHANNON EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") made and entered into effective as of the 1st day of January, 1999, by and between Everest Medical Corporation, a Minnesota corporation (the "Company"), and John L. Shannon ("Executive"). RECITALS Executive has served as President and Chief Executive Officer of the Company since August 3, 1993. Under the Executive's management and direction, the Company has undergone a significant turnaround. The Company believes that Executive continues to be a critical component of the future growth and profitability of the Company. Accordingly, the Company and Executive mutually agree to the foregoing terms and conditions. AGREEMENT 1. Employment a. The Company hereby agrees to continue to employ Executive as its President and Chief Executive Officer upon the terms and conditions set forth in this Agreement. b. Executive currently serves as Chairman of the Board of Directors of the Company. If still employed by the Company, the Company will include Executive on the slate of directors that will be submitted by the Company to the shareholders at the next annual meeting of shareholders scheduled to be held in April 1999. His continuing service as Chairman of the Board of Directors will be at the discretion of the directors elected at the 1999 Annual Meeting of Shareholders. c. Executive agrees that he will, at all times, faithfully, industriously, and, to the best of his ability, experience and talents, perform all the duties and responsibilities that may be required of him as President and Chief Executive Officer of the Company. 2. Term of Employment Subject to the terms and conditions hereof, Executive shall be employed for an additional term commencing on January 1, 1999 and terminating on December 31, 2000. Unless the parties have entered into a new employment agreement to cover a period beyond December 31, 2000 or one of the parties has given the other party at least thirty (30) days written notice of his or its intent not to extend the Agreement beyond December 31, 2000, this Agreement will continue in effect on an at-will basis subject to the right of either party to terminate the Agreement on thirty (30) days's written notice. 3. Base Compensation As compensation for his services to the Company, Executive shall be paid annual salaries of $206,500 and $215,000 in 1999 and 2000, respectively, payable in accordance with the Company's customary payment periods. 4. Incentive Arrangement Executive will participate in a Management Incentive Program in each of the two years of this Agreement. The Management Incentive Program will be approved by the Compensation Committee of the Board of Directors of the Company after review and approval by the Board of Directors of the Company's Annual Operating Plan for that particular year. 5. Payment on Sale of Company Assets or Purchase of Company Capital Stock If the Company enters into a definitive agreement with another entity or person while Executive continues to be employed by the Company, either for a purchase of substantially all of the Company's assets or the acquisition of 50% or more of the Company's outstanding common or preferred stock, Executive will be paid by the acquiror the sum of $250,000 within ten (10) days of the closing of the purchase of Company assets or acquisition of Company capital stock. 6. Stock Options The Company has previously granted to Executive certain incentive and non-qualified stock options, all of which have become fully vested. In the event of a "change in control," all options previously granted to Executive or which are granted to him in the future which are outstanding at the time of a change in control will become immediately vested and exercisable in full. A change in control is hereby defined as follows: A change in control shall be deemed to have occurred if (A) any person or entity directly or indirectly becomes the owner of securities representing more than 50% or more of the combined voting power (with respect to the election of directors, or a merger, consolidation or liquidation of the Company or a sale of all or substantially all of business or assets of the Company); (B) the consummation of a merger or consolidation of the Company with or into any other corporation; or (C) the sale or disposition by the Company of all or substantially all of the Company's business or assets. 7. Other Benefits During the term of his Agreement, Executive will be eligible to receive or participate in all of the insurance, vacation, benefit plans and miscellaneous benefits received by other salaried employees, subject to the right of the Company to make such changes in the benefits as it may make for salaried employees generally from time to time. 8. Termination a. Notwithstanding Section 2 above, this Agreement shall terminate upon the happening of any of the following events: i. Mutual written agreement between the Company and Executive to terminate his employment; ii. Executive's death; iii. Executive's disability defined as inability to perform his duties hereunder for a period of ninety (90) successive days; or iv. For cause (as defined below) upon fourteen (14) days' prior written notice from the Company specifying the nature of the cause and, if such cause is of the type described in b iii or b iv below, Executive's failure to eliminate such cause during such fourteen (14) day period. b. For purposes of this Agreement, "cause" shall include: i. Commission of any felony or commission of any act of fraud or dishonesty in connection with the affairs of the Company; ii. Commission of any gross misdemeanor in connection with the affairs of the Company; iii. Intentional disobedience with regard to, or failure to comply with, courses of action or policies approved by the Company which have been communicated to Executive; or iv. Executive's willful breach of the terms of this Agreement or habitual neglect of his duties hereunder. 9. Payment upon Termination a. In the event of the termination of Executive's employment for any reason, Executive shall receive his base pay through the date that his employment was terminated. b. If Executive's employment is terminated during the term of this Agreement for any reason other than "cause" or his voluntary resignation, he will receive the following in addition to the payment described in 9a above: (i) the incentive compensation described in Section 4 of this Agreement for the entire year in which the termination occurs; (ii) the payment provided in Section 5 of this Agreement if a definitive agreement meeting the requirements of Section 5 was signed prior to Executive's termination, and the transaction contemplated by the definitive agreement is closed; (iii) severance equal to the greater of (a) Executive's base salary for the remainder of the employment term; and (b) Executive's base salary for a period of one year. Under either (a) or (b), Executive will receives his severance payments in twelve (12) monthly installments. c. If for any reason other than a prior termination for cause the Company does not elect to extend Executive's employment for at least one year beyond December 31, 2000 providing for annual base salary equal to at least $215,000, Executive will receive monthly severance payments, equal to his monthly base pay in effect on December 31, 2000, for a period of twelve (12) months. d. If Executive's employment is terminated for cause, Executive will receive only the payment described in 9a and will not receive the incentive compensation described in Section 4 or the payment provided in Section 5. 10. Nondisclosure Except by written permission from the Company, Executive shall not disclose or use any trade secrets, sales projections, formulations, customer lists or information, product specifications or information, credit information, production know-how, research and development plans or other information not generally known to the public ("Confidential Information") acquired or learned by Executive during the course, and on account, of his employment, whether or not developed by Executive, except as such disclosure or use may be required by his duties to the Company, and then only in strict accordance with his obligations of service and loyalty thereto. Upon termination of employment, Executive agrees to deliver to the Company all written materials embodying the Company's Confidential Information. 11. Noncompetition. a. Executive acknowledges that the Company markets products throughout the United States and that the Company would be harmed if Executive conducted any of the activities described in this Section 11 anywhere in the United States. Therefore, Executive agrees that the covenants contained in this Section 11 shall apply to all portions of, and throughout, the entire United States; b. For a period of one (1) year from and after the end of the term of this Agreement or any extension of such term, Executive will not, directly or indirectly, alone or in any capacity with another legal entity, (i) engage in any activity that competes in any respect with the Company, (ii) contact or in any way interfere or attempt to interfere with the relationship of the Company with any current or potential customers of the Company, or (iii) employ or attempt to employ any employee of the Company (other than a former employee thereof after such employee has terminated employment with the Company); and c. To the extent any provision of this Section 11 shall be invalid or unenforceable, it shall be considered deleted herefrom and the remainder of such provision and this Section 11 shall be unaffected and shall continue in full force and effect. In furtherance to and not in limitation of the foregoing, should the duration or geographical extent of, or business activities covered by, any provision of this Section 11 be in excess of that which is valid and enforceable under applicable law, then such provision shall be construed to cover only that duration, extent or activities which are validly and enforceably covered. Executive acknowledges the uncertainty of the law in this respect and expressly stipulates that this Section 11 be given the construction which renders its provisions valid and enforceable to the maximum extent (not exceeding its expressed terms) possible under applicable laws. 12. Specific Performance. Executive acknowledges that a breach of this Agreement would cause the Company irreparable injury and damage which could not be remedied or adequately compensated by damages at law; therefore, Executive expressly agrees that the Company shall be entitled, in addition to any other remedies legally available, to injunctive and/or other equitable relief to prevent a breach of this Agreement. 13. Miscellaneous. a. Waiver by the Company of a breach of any provision of this Agreement by Executive shall not operate or be construed as a waiver of any subsequent breach by Executive. b. This Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns, and, as to Executive, his heirs, personal representatives, estate, legatees, and assigns. c. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements whether written or oral relating hereto. d. This Agreement shall be governed by and construed under the laws of the State of Minnesota. IN WITNESS WHEREOF, the parties have hereto executed this Employment Agreement as of the day and year first above written. EVEREST MEDICAL CORPORATION By /s/ David Koentopf David Koentopf, on behalf of the Board of Directors /s/ John L. Shannon John L. Shannon EX-10.22 3 MANAGEMENT INCENTIVE PROGRAM FOR 1999 Everest Medical Corporation Management Incentive Program for Fiscal Year 1999 The Compensation Committee of Everest Medical Corporation (the "Company"), as of December 31, 1998, approved the following Management Incentive Program for fiscal year 1999: Level One If the Company achieves a minimum net income of $1,250,000 on an audited basis, a bonus pool will be available in the amount of 10% of salary for the top four executive officers in addition to up to $25,000 total for the other employees of the Company. Level Two If the Company achieves a minimum net income of $1,500,000 on an audited basis, a bonus pool will be available in the amount of 15% of salary for the top four executive officers, in addition to up to $40,000 total for the other employees of the Company. Definitions and Other Guidelines Net income is defined as per the Company's traditional statement of operations, i.e., net income after "other income/expense" before taxes and before adjustments for preferred stock dividends. The Payout Date will occur following Board approval of the 1999 audited financial statements, with a targeted date of February 15, 2000. Eligibility: The payout or bonus will only be paid to participants in the Program who continue as employees of the Company on the payout date. Unless otherwise provided in an employment or other written agreement, anyone who is not an employee as of such date will forfeit the payout or bonus. EX-10.23 4 CREDIT AGREEMENT [LOGO] Norwest Bank Minnesota, National Association Credit Agreement =============================================================================== THIS CREDIT AGREEMENT (the "Agreement") dated as of February 26, 1999 (the "Effective Date") is between Norwest Bank Minnesota, National Association (the "Bank") and Everest Medical Corporation, a Minnesota corporation (the "Borrower"). BACKGROUND The Borrower has asked the Bank to provide a One Million and 00/100 Dollars ($1,000,000.00) line of credit to be used for financing accounts. The Bank is agreeable to meeting the Borrower's request provided that the Borrower agrees to the terms and conditions of this Agreement. The Revolving Note (as defined below), this Agreement, and all "Security Documents" described in Exhibit B, and any modifications, amendments or replacements to such promissory notes or agreements shall be referred to collectively as the "Documents." In consideration of the above premises, the Bank and the Borrower agree as follows: 1. LINE OF CREDIT 1.1 Line of Credit Amount. During the Line Availability Period defined below, the Bank agrees to provide a conditional revolving line of credit (the "Line") to the Borrower. Outstanding amounts under the Line shall not, at any one time, exceed the lesser of the Borrowing Base or One Million and 00/Dollars ($1,000,000.00). The Borrowing Base is defined in Exhibit A-1 to this Agreement. This is a conditional revolving line of credit and each advance under the Line, if made, shall be at the sole discretion of the Bank. 1.2 Line Availability Period. The "Line Availability Period" shall mean the period of time from the Effective Date or the date on which all conditions precedent described in this Agreement have been met, whichever is later, to the Line Expiration Date of December 31, 1999. 1.3 The Revolving Note. The Borrower's obligation to repay advances under the Line shall be evidenced by a promissory note (the "Revolving Note") dated as of the Effective Date, and in form and content acceptable to the Bank. Reference is made to the Revolving Note for interest rate and repayment terms. 1.4 Mandatory Prepayment. If at any time the principal outstanding under the Revolving Note exceeds the lesser of the Borrowing Base or $1,000,000.00, the Borrower must immediately prepay the Revolving Note in an amount sufficient to eliminate the excess. 2. FEES AND EXPENSES 2.1 Audit Expense. The Borrower shall reimburse the Bank for the cost of periodic audits of all collateral granted to the Bank by the Borrower, which may be conducted at such intervals as the Bank may reasonable require, but limited to a maximum reimbursement of $1,500.00 each calendar year. 2.2 Documentation Expense. The Borrower agrees to reimburse the Bank for its reasonable expenses relating to the preparation of the Documents and any possible future amendments to the Documents, which reimbursement may include, but shall not be limited to, reimbursement of reasonable attorneys' fees, including the allocated costs of the Bank's in-house counsel, which shall not be in excess of $500.00. Despite such reimbursement the Borrower acknowledges that the Bank's counsel is engaged solely to represent the Bank and does not represent the Borrower. 2.3 Collection Expense. In the event the Borrower fails to comply with any covenant or condition of this Agreement or the Documents, or fails to pay the Bank any amounts due under this Agreement or under the Documents, the Borrower shall pay all costs of workout and collection, including reasonable attorneys' fees and legal expenses incurred by the Bank. 2.4 Miscellaneous Expense. The Borrower agrees to reimburse the Bank for its expenses incurred in perfecting any security interest in property granted by the Borrower to the Bank. 3. ADVANCES AND PAYMENTS 3.1 Requests for Advances. Any line advance requested under the terms of this Agreement shall be requested by telephone or in a writing delivered to the Bank (or transmitted via facsimile) by any person reasonably believed by the Bank to be authorized by the Borrower to do so. The Bank will not consider any such request following an event which is, or with notice or the lapse of time would be, an event of default under this Agreement. Proceeds shall be deposited into the Borrower's account at the Bank or disbursed in such other manner as the parties may agree. 3.2 Payments. All principal, interest and fees due under the Documents shall be paid by the direct debit of available funds deposited in the Borrower's account with the Bank. The Bank shall debit the account on the dates the payments become due. If a due date does not fall on a day on which the Bank is open for substantially all of its business (a "Banking Day"), the Bank shall debit the account on the next Banking Day and interest shall continue to accrue during the extended period. If there are insufficient funds in the account on the day the Bank enters any debit authorized by this Agreement, the debit will be reversed and the payment shall be due immediately without necessity of demand by direct payment of immediately available funds. 4. SECURITY During the time period that credit is available under this Agreement, and afterward until all amounts due under the Documents are paid in full, unless the Bank shall otherwise agree in writing, all amounts due under this Agreement and the Documents shall be secured at all times as provided in Exhibit B. The Borrower also hereby grants the Bank a security interest (independent of the Bank's right of set-off) in its deposit accounts at the Bank and in any other debt obligations of the Bank to the Borrower. 5. CONDITIONS PRECEDENT The Borrower must deliver to the Bank the documents described in Exhibit B, properly executed and in form and content acceptable to the Bank, prior to the Bank's initial advance or disbursement under this Agreement. The Borrower must also deliver to the Bank, prior to the initial advance and any subsequent line advances under this Agreement, a Borrowing Base Certificate in the form of Exhibit A-2, at the intervals provided in Section 7.1(c). 6. REPRESENTATIONS AND WARRANTIES To induce the Bank to enter into this Agreement, the Borrower, to the best of its knowledge and upon due inquiry, makes the representations and warranties contained in Exhibit C. Each request for an advance or a disbursement under this Agreement following the Effective Date constitutes a reaffirmation of these representations and warranties. 7. COVENANTS 7.1 Financial Information and Reporting Except as otherwise stated in this Agreement, all financial information provided to the Bank shall be compiled using generally accepted accounting principles consistently applied. During the time period that credit is available under this Agreement, and afterward until all amounts due under the Documents are paid in full, unless the Bank shall otherwise agree in writing, the Borrower agrees to: (a) Annual Financial Statements. Provide the Bank within 90 days of the Borrower's fiscal year end, the Borrower's annual financial statements for the fiscal year then ending, in form acceptable to the Bank. The statements must be audited with an unqualified opinion by a certified public accountant acceptable to the Bank. (b) Interim Financial Statements. Provide the Bank within 30 days of each quarter end, the Borrower's interim financial statements for the interim period then ending. The statements must be current through the end of that period and must be compiled by a certified public accountant acceptable to the Bank. (c) Borrowing Base Certificate. Provide the Bank within 30 days of each month end when borrowings are outstanding under the Line, a Borrowing Base Certificate in the form of Exhibit A-2, current through the end of that period and certified as correct by an officer of the Borrower acceptable to the Bank. At the time of each request for an advance under this Agreement following the Effective Date, the Borrower shall deliver to the Bank a new Borrowing Base Certificate, unless the Bank is in possession of a Borrowing Base Certificate current within 30 days of the requested advance. (d) Accounts Receivable Aging. Provide the Bank within 30 days of each month end when borrowings are outstanding under the Line, an accounts receivable aging report in form acceptable to the Bank, current through the end of that period and certified as correct by an officer of the Borrower acceptable to the Bank. (e) Notices. Provide the Bank prompt written notice of: 1) any event of default or any event which would, after the lapse of time or the giving of notice, or both, constitute an event of default under the Agreement or any of the Documents; 2) any future event that would cause the representations and warranties contained in this Agreement to be untrue when applied to the Borrower's circumstances as of the date of such event; 3) its discovery of any unpermitted release, emission, discharge or disposal of any material of environmental concern; or 4) its receipt of a claim from any governmental entity or third party alleging noncompliance with environmental laws applicable to its operations or properties. (f) Additional Information. Provide the Bank with such other information as it may reasonably request, and permit the Bank to visit and inspect its properties and examine its books and records. 7.2 Financial Covenants During the time period that credit is available under this Agreement, and afterward until all amounts due under the Documents are paid in full, unless the Bank shall otherwise agree in writing, the Borrower agrees to comply with the financial covenants described below, which shall be calculated using generally accepted accounting principles consistently applied, except as they may be otherwise modified by the following capitalized definitions: "Tangible Net Worth" means total assets less total liabilities and less the following types of assets: (1) leasehold improvements; (2) receivables and other investments in or amounts due from any shareholder, director, officer, employee or other person or entity related to or affiliated with the Borrower; and (3) goodwill, patents, copyrights, mailing lists, trade names, trademarks, servicing rights, organizational and franchise costs, bond underwriting costs and other like assets properly classified as intangible. (a) Tangible Net Worth. Maintain a minimum Tangible Net Worth of at least (i) $2,738,000 as of March 31, 1999; (ii) $2,803,000 as of June 30, 1999; (iii) $2,917,000 as of September 30, 1999; and (iv) $3,131,000 as of December 31, 1999. (b) Total Liabilities to Tangible Net Worth Ratio. Maintain a ratio of total liabilities to Tangible Net Worth of less than .80 to 1.0 as of the end of each fiscal quarter. (c) Net Profit. Achieve a minimum year to date after-tax net profit of (i) ($50,000) as of March 31, 1999; (ii) $100,000 as of June 30, 1999; (iii) $300,000 as September 30, 1999; and (iv) $600,000 as of December 31, 1999. 7.3 Other Covenants During the time period that credit is available under this Agreement, and afterward until all amounts due under the Documents are paid in full, unless the Bank shall otherwise agree in writing, the Borrower agrees to: (a) Insurance. Cause its properties to be adequately insured by a reputable insurance company against loss or damage and to carry such other insurance (including business interruption, flood, or environmental risk insurance) as is required of or usually carried by persons engaged in the same or similar business. Such insurance must with respect to the Bank's collateral security, include a lender's loss payable endorsement in favor of the Bank in form acceptable to the Bank. (b) Collateral Audits. Permit the Bank to conduct audits of all collateral pledged to the Bank by the Borrower at such intervals as the Bank may reasonably require, but not in excess of 2 times each calendar year. The audits may be performed by employees of the Bank or independent contractors retained by the Bank. (c) Nature of Business. Refrain from engaging in any line of business materially different from that presently engaged in by the Borrower. (d) Deposit Accounts. Maintain its principal deposit accounts with the Bank. (e) Form of Organization and Mergers. Refrain from filing as a limited liability company or changing its legal form of organization, or consolidating, merging, pooling, syndicating or otherwise combining with any other entity. (f) Maintenance of Properties. Make all repairs, renewals or replacements necessary to keep its plant, properties and equipment in good working condition. (g) Books and Records. Maintain adequate books and records, refrain from making any material changes in its accounting procedures for tax or other purposes, and permit the Bank to inspect same upon reasonable notice. (h) Compliance with Laws. Comply in all material respects with all laws applicable to its form of organization, business, and the ownership of its property. (i) Preservation of Rights. Maintain and preserve all permits, licenses, rights, privileges, charters and franchises that it now owns. These covenants were negotiated by the Bank and Borrower based on information provided to the Bank by the Borrower. A breach of a covenant is an indication that the risk of the transaction has increased. As consideration for any waiver or modification of these covenants, the Bank may require: additional collateral, guaranties or other credit support; higher fees or interest rates; and possible modifications to the Documents and the monitoring of the Agreement. The waiver or modification of any covenant that has been violated by the Borrower shall be made at the sole discretion of the Bank. These options do not limit the Bank's right to exercise its rights under Section 8 of this Agreement. 8. EVENTS OF DEFAULT AND REMEDIES 8.1 Default The Line is a conditional line of credit, which means that the Bank is not obligated to make advances under the Line even if the Borrower is in compliance with the terms of this Agreement, and the Revolving Note evidencing borrowings under the Line shall be payable by the Borrower upon Demand by the Bank. Despite this reservation of rights, upon the occurrence of any one or more of the following events of default, or at any time afterward unless the default has been timely cured (if applicable), the Bank may declare the Line to be terminated and in its discretion accelerate and declare the unpaid principal, accrued interest and all other amounts payable under the Revolving Note and the Documents to be immediately due and payable: (a) Failure by the Borrower to make any payment of principal or interest due under the Revolving Note which continues for 10 days after its due date. (b) Default by the Borrower in the observance or performance of any covenant or agreement contained in this Agreement, and continuance for more than 15 days. (c) Default by the Borrower in the observance or performance of any covenant or agreement contained in any of the Documents (excepting defaults under this Agreement, which are addressed in the preceding paragraph), after giving effect to applicable grace periods, if any. (d) Default by the Borrower with respect to any indebtedness or obligation owed to the Bank, which is unrelated to any loan or facility subject to the terms of this Agreement, or to any other creditor, which would allow the maturity of any such indebtedness or obligation to be accelerated. (e) Any representation or warranty made by the Borrower to the Bank in this Agreement, or any financial statement or report submitted to the Bank by or on behalf of the Borrower is materially false or misleading. (f) Any litigation or governmental proceeding against the Borrower seeking an amount in excess of $100,000.00 which is not insured or subject to indemnity by a solvent third party either 1) results in a judgment equal to or in excess of that amount against the Borrower or 2) remains unresolved on the 270th day following the date of service on the Borrower. (g) A garnishment, levy or writ of attachment, or any local, state, or federal notice of tax lien or levy is made or issues against the Borrower, or any post judgment process or procedure is commenced or any supplementary remedy for the enforcement of a judgment is employed against the Borrower or the Borrower's property. (h) A material adverse change occurs in the Borrower's financial condition or ability to repay its obligations to the Bank. 8.2 Immediate Default If, with or without the Borrower's consent, a custodian, trustee or receiver is appointed for any of the Borrower's properties, or the Borrower makes an assignment for the benefit of its creditors, or if a petition is filed by or against the Borrower under the United States Bankruptcy Code, or the Borrower is dissolved, liquidated, or winds up its business, then the Line shall immediately terminate without notice, and the unpaid principal, accrued interest, and all other amounts payable under the Revolving Note and the Documents shall become immediately due and payable without notice or demand. 9. MISCELLANEOUS. (a) No Waiver; Cumulative Remedies. No failure or delay by the Bank in exercising any rights under this Agreement shall be deemed a waiver of those rights. The remedies provided for in this Agreement and the Documents are cumulative and not exclusive of any remedies provided by law. (b) Amendments or Modifications. Any amendment or modification of this Agreement must be in writing and signed by the Bank and Borrower. Any waiver of any provision in this Agreement must be in writing and signed by the Bank. (c) Binding Effect: Assignment. This Agreement and the Documents are binding on the successors and assigns of the Borrower and Bank. The Borrower may not assign its rights under this Agreement and the Documents without the Bank's prior written consent. The Bank may sell participations in or assign this Agreement and the Documents and exchange financial information about the Borrower with actual or potential participants or assignees. (d) Minnesota Law. This Agreement and the Documents shall be governed by the substantive laws (other than conflict of laws) of the State of Minnesota, and the Bank and Borrower consent to the personal jurisdiction of the state and federal courts located in the State of Minnesota. (e) Severability of Provisions. If any part of this Agreement or the Documents are unenforceable, the rest of this Agreement or the Documents may still be enforced. (f) Integration. This Agreement and the Documents describe the entire understanding and agreement of the parties and supersedes all prior agreements between the Bank and the Borrower relating to each credit facility subject to this Agreement, whether verbal or in writing, and may be executed in counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. In the event of any inconsistency between the Agreement and the Documents, inconsistent terms shall, where possible, be construed as conferring cumulative rights and remedies upon the Bank, and, to the extent that such construction is not possible, the terms of this Agreement shall govern. IMPORTANT: READ BEFORE SIGNING. THE TERMS OF THIS AGREEMENT SHOULD BE READ CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. NO OTHER TERMS OR ORAL PROMISES NOT CONTAINED IN THIS WRITTEN CONTRACT MAY BE LEGALLY ENFORCED. YOU MAY CHANGE THE TERMS OF THIS AGREEMENT ONLY BY ANOTHER WRITTEN AGREEMENT. THIS NOTICE ALSO APPLIES TO ANY OTHER CREDIT AGREEMENTS (EXCEPT CONSUMER LOANS OR OTHER EXEMPT TRANSACTIONS) NOW IN EFFECT BETWEEN YOU AND THIS LENDER. Address for notices to Bank: Address for notices to Borrower: NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION EVEREST MEDICAL CORPORATION 7900 Xerxes Avenue South 13755 First Avenue North Bloomington, Minnesota 55431-2208 Plymouth, Minnesota 55441-5454 Attention: Gary Veverka Attention: Thomas F. Murphy NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION EVEREST MEDICAL CORPORATION By: By: Its: Its: 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. EXHIBIT A-2 EVEREST MEDICAL CORPORATION BORROWING BASE CERTIFICATE TO: Norwest Bank Minnesota, National Association 7900 Xerxes Avenue South Bloomington, Minnesota 55431-2208 (the "Bank") Everest Medical Corporation (the "Borrower") certifies that the following computation of the Borrowing Base was performed as of __________________________ in accordance with the Borrowing Base definitions set forth in Exhibit A-1 to the Credit Agreement entered into between the Bank and the Borrower dated February _____, 1999. Total A/R $ ---------------- Less: 1) Greater than 90 days $ ---------------- 2) Other ineligibles $ ---------------- Eligible A/R $ ---------------- 80% of Eligible Accts. Receivable $ --------------- Total Borrowing Base $ --------------- Total Line Outstandings ($ ) -------------- Excess (Deficit) $ --------------- EVEREST MEDICAL CORPORATION By: ___________________________ Its:___________________________ Date:__________________________ EXHIBIT B CONDITIONS PRECEDENT AND SECURITY Please Note: This Exhibit describes each Note, Security Document, Authorizations, Organizational Documents, and all miscellaneous documents, reports, certificates and other information required as a condition to each advance or disbursement under the Agreement, whether or not they have previously been delivered to the Bank. Note Revolving Note Security Documents Each Security Document described below must continue in full force and effect at all times in accordance with its terms during the time period that credit is available under this Agreement, and afterward until all amounts due under the Documents are paid in full. The failure of any Security Document to meet these requirements may result in an event of default under the Agreement and the acceleration of all of the Borrower's obligations to the Bank evidenced by the Documents. Security Agreement of Borrower . A Security Agreement signed by the Borrower, granting the Bank a first lien security interest in the Borrower's accounts, inventory, equipment and general intangibles, described in that Agreement, together with one or more UCC-1 Financing Statements sufficient to perfect the security interest granted to the Bank in each jurisdiction where such property is located. Authorization Certificate of Authority of Borrower. A Certificate of Authority executed by such person or persons authorized by the Borrower's organizational documents and/or agreements to do so, certifying the incumbency and signatures of the officers or other persons authorized to execute the Documents, and authorizing the execution of the Documents and performance in accordance with their terms. Organization Articles of Incorporation and By-Laws. A recently certified copy of the Borrower's Articles of Incorporation and By-laws, and any amendments, if applicable. Certificate of Good Standing. A recently certified copy of the Borrower's Certificate of Good Standing. Other Arbitration Agreement. The Bank's standard form of Arbitration Agreement signed by the Bank and Borrower, subjecting potential controversies between them to binding arbitration, including but not limited to those relating to the Documents and this Agreement. Evidence of Insurance. Evidence that the Borrower has obtained all insurance coverage required by this Agreement, and that the Bank has been named as the beneficiary of such policy or policies of insurance. EXHIBIT C REPRESENTATIONS AND WARRANTIES Organizational Status. The Borrower is a corporation duly formed and in good standing under the laws of the State of Minnesota. Authorization. The execution and delivery of the Documents is within the Borrower's powers, has been duly authorized by the Borrower and does not conflict with any of the Borrower's organizational documents or any other agreement by which the Borrower is bound, and has been signed by all persons authorized and required to do so under its organizational documents. Financial Reports. The Borrower has provided the Bank with its annual audited financial statement dated December 31, 1997 and its unaudited interim financial statement dated September 30, 1998, and these statements fairly represent the financial condition of the Borrower as of their respective dates and were prepared in accordance with generally accepted accounting principles consistently applied. Litigation. There is no litigation or governmental proceeding pending or threatened against the Borrower which could have a material adverse effect on the Borrower's financial condition or business. Taxes. The Borrower has paid when due all federal, state and local taxes. No Default. There is no event which is, or with notice or the lapse of time would be, an event of default under this Agreement. ERISA. The Borrower is in compliance in all material respects with the Employee Retirement Income Security Act of 1974, as amended, and has received no notice to the contrary from the Internal Revenue Service, the Department of Labor, the Pension Benefit Guaranty Corporation or any other governmental entity or notice of any claims or pending claims under ERISA. Environmental Matters. 1) The Borrower is in compliance in all material respects with all health and environmental laws applicable to the Borrower and its operations and knows of no conditions or circumstances that could interfere with such compliance in the future; 2) the Borrower has obtained all environmental permits and approvals required by law for the operation of its business; and 3) the Borrower has not identified any "recognized environmental conditions", as that term is defined by the American Society for Testing and Materials in its standards for environmental due diligence, which could subject the Borrower to enforcement action if brought to the attention of appropriate governmental authorities. EX-10.24 5 REVOLVING NOTE [LOGO] Norwest Bank Minnesota, National Association Revolving Note ================================================================================ $1,000,000.00 February 26, 1999 FOR VALUE RECEIVED, Everest Medical Corporation (the "Borrower") promises to pay to the order of Norwest Bank Minnesota, National Association (the "Bank"), at its principal office or such other address as the Bank or holder may designate from time to time, the principal sum of One Million and 00/100 Dollars ($1,000,000.00), or the amount shown on the Bank's records to be outstanding, plus interest (calculated on the basis of actual days elapsed in a 360-day year) accruing each day on the unpaid principal balance at the annual interest rate defined below. Absent manifest error, the Bank's records shall be conclusive evidence of the principal and accrued interest owing hereunder. INTEREST RATE. The principal balance outstanding under this Revolving Note shall bear interest at an annual rate equal to the Base Rate, floating. Base Rate means the rate of interest established by the Bank from time to time as its "base" or "prime" rate of interest at its principal office in Minneapolis, Minnesota. REPAYMENT TERMS Interest. Interest shall be payable on the last day of each month, beginning February 28, 1999. Principal. Principal, and any unpaid interest, shall be due on the earlier of DEMAND or December 31, 1999. ADDITIONAL TERMS AND CONDITIONS. This Revolving Note is issued pursuant to a Credit Agreement of even date between the Bank and the Borrower (the "Agreement"). The Agreement, and any amendments or substitutions, contains additional terms and conditions, including default and acceleration provisions, which are incorporated into this Revolving Note by reference. Capitalized terms not expressly defined herein shall have the meanings given them in the Agreement. The Borrower agrees to pay all costs of collection, including reasonable attorneys' fees and legal expenses incurred by the Bank if this Revolving Note is not paid as provided above. This Revolving Note shall be governed by the substantive laws of the State of Minnesota. WAIVER OF PRESENTMENT AND NOTICE OF DISHONOR. Borrower and any other person who signs, guarantees or endorses this Revolving Note, to the extent allowed by law, hereby waives presentment, demand for payment, notice of dishonor, protest, and any notice relating to the acceleration of the maturity of this Revolving Note. EVEREST MEDICAL CORPORATION By: _________________________________ Its: __________________________________ EX-13.1 6 PORTIONS OF 1998 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS Results of Operations Net Revenues Net revenues in 1998 were $10,719,755, an increase of $3,354,375, or 46%, from net revenues in 1997. The increase in revenues primarily reflects the Company's emphasis on Everest laparoscopy product sales, the shipments of cardiovascular bipolar products to Guidant Corporation and shipments to C.R. Bard of a version of the Company's bipolar coagulating probe. Revenues of the Everest laparoscopy product line, a growth business for the Company, increased 39% to $6,430,798 from 1997. This increase in revenues primarily resulted from ongoing sales and marketing initiatives directed at increasing this business. The 39% increase in revenues related primarily to the BiCOAG(R) Bipolar Cutting Forceps. Revenues from this product increased 56% as compared to 1997. The Company also experienced revenue increases of 30% and 54% in 1998 from the BiCOAG Dissecting Forceps and the BiCOAG Classic Tip Forceps, respectively. The Company expects revenues from the Everest-branded laparoscopic product line to continue to grow as a result of improved sales management and growing acceptance of the Company's bipolar product offering. The Company believes bipolar electrosurgical instruments allow surgeons greater versatility and cost savings when compared to alternative technologies. The other growth business for the Company is the cardiovascular business. This segment achieved revenues in excess of $1,400,000 from the propriety bipolar products supplied to Guidant Corporation. Guidant uses the Company's products with their VasoView(R) Balloon Dissection System for minimally invasive saphenous vein harvesting. The Company expects revenues from this product supply agreement to increase in 1999 due to Guidant's increased marketing and educational efforts. Revenues in 1998 from the Company's bipolar forceps sold to its OEM customers in 1998 increased 48% as these customers continue to meet end-user demand. The Company expects shipments of these bipolar forceps to decrease in 1999 as these product lines are maturing. In addition, the Company has been informed that Origin Medsystems, which represented 14% of OEM bipolar forceps sales in 1998, will be discontinuing its offering of such products. Net revenues from gastrointestinal products increased 31% for the year due primarily to C.R. Bard responding to a short-term market opportunity. The Company does not expect this opportunity to continue in 1999. Offsetting this revenue increase was a sharp decline in shipments of the Company's bipolar polypectomy snare to the Company's Japanese distributor, due to an increased presence of competitive products. Net revenues in 1997 were $7,365,380, an increase of $1,363,608, or 23%, over net revenues in 1996. The increase in revenues resulted from a 46% increase in sales of the Everest laparoscopy products and the commencement of shipments of select propriety bipolar products to Guidant Corporation for use with their balloon dissection system for minimally invasive saphenous vein harvesting. Offsetting these revenue increases were declines in shipments of bipolar forceps to the Company's OEM customers as they managed their inventory levels and a decline in sales to the Company's Japanese distributor of its bipolar polypectomy snare due to increased competition. Gross Margin Gross margin for 1998 was 48.7% of revenues, compared to 44.3% for 1997. This improvement resulted from increased revenues from the Everest laparoscopy product offerings and the increased sales to C.R. Bard. Also impacting the improvement in gross margin was the large unit volume increase the Company experienced which allowed for greater leverage of its overhead capacity. In addition, the Company benefited from the cost savings of certain value engineering projects completed in 1998. Lower gross margins from the cardiovascular products sold to Guidant Corporation, compared to the Everest laparoscopy products, offset the increase. The ramp up of production output to meet the increased demand for all product lines resulted in production inefficiencies which negatively impacted the gross margin. The Company expects gross margin as a percent of revenues to increase in 1999 as the Company strives to leverage its manufacturing overhead over a greater number of produced units and as it reduces costs with additional value engineering projects. Gross margin for 1997 was 44.3% of sales, compared to 43.9% for 1996. This improvement was a result of both increased sales from the Everest laparoscopy product offerings and the recognition of licensing revenue in 1997 that benefited gross margin by 2.5%. Sales and Marketing Sales and marketing expenses for 1998 were $2,680,409, an increase of $487,580, or 22%, from 1997. This increase in expenses resulted primarily from payment of increased commissions related to the revenue increase, marketing initiatives to commercialize products for the emerging minimally invasive cardiovascular surgery market, and expanding the sales and marketing staff in 1998 to meet current and future needs and to support ongoing promotional and marketing activities. The Company expects that sales and marketing expenses will increase in 1999 in conjunction with the Company's anticipated increase in sales. The Company continues to invest in its sales and marketing staff and other initiatives aimed at the growing Everest laparoscopy product revenues. Sales and marketing expenses for 1997 were $2,192,829, an increase of $661,553, or 43%, from 1996. This increase in expense resulted primarily from increased commissions related to the revenue increase, marketing initiatives to commercialize products for the emerging minimally invasive cardiovascular surgery market and the rebuilding of the sales and marketing staff in 1997 to meet the Company's sales objectives. Research and Development Research and development expenses for 1998 were $858,816, an increase of $224,918, or 35%, from 1997. This expense increase resulted primarily from the Company's successful efforts to obtain ISO 9001 certification and CE Mark approval for its products, development costs associated with the minimally invasive cardiovascular products, increased staffing costs necessary for the Company to broaden its product offering and patent-related costs. The Company expects research and development costs to increase in 1999 as the Company increases its development efforts in the minimally invasive cardiovascular arena, laparoscopy and other surgical specialties. Research and development expenses for 1997 were $633,898, an increase of $26,928, or 4%, from 1996. This expense increase resulted, in part, from costs related to the Company's efforts to obtain ISO 9001 certification and CE Mark approval for its products, development costs associated with the minimally invasive cardiovascular products and ongoing patent-related costs. General and Administrative General and administrative expenses for 1998 were $937,494, an increase of $153,291, or 20%, over 1997. This increase was attributable to expenses related to increases in executive compensation; higher insurance costs associated with coverage enhancements and increased investor communication initiatives. The Company expects that its general and administrative expenses will increase in 1999 due to the overall activity increases from the growth in the business. General and administrative expenses for 1997 were $784,203, an increase of $44,250, or 6%, over 1996. This increase was attributable to expenses related to obtaining the revolving line of credit secured by a private investor, increased insurance costs and expenses related to investor communications. Income Tax Expense The Company has approximately $18 million of tax loss carryforwards available to offset future taxable income. The Company can only utilize these tax attributes to the extent of 90% of pre-tax income since the alternative minimum tax system will result in tax liabilities at this point. The Company could also be limited in the utilization of tax loss carryforwards by section 382 of the Internal Revenue Code of 1986 as more fully discussed in the notes to the financial statements. The Company recognized $10,000 of income tax expense for 1998. Net Income (Loss) The net income in 1998 was $660,316 compared to a net loss of $384,841 in 1997 and a net loss of $339,056 in 1996. The net income for 1998 was primarily a result of sales increases, the increase in gross margin and effective control of expenses. The net losses of 1997 and 1996 were primarily a result of continuing efforts to shift the Company's revenue mix to the more profitable Everest laparoscopy business, the strategic initiatives by the Company related to the minimally invasive cardiovascular opportunity, and the ISO 9000 and CE Mark certifications. Although there can be no assurance, the Company believes, that it will maintain profitability in 1999 as it increases market share in its core business of laparoscopy and as Guidant continues to increase its market share in the minimally invasive cardiovascular surgery market. Liquidity and Capital Resources Cash and cash equivalents were $217,488 on December 31, 1998, compared to $80,362 on December 31, 1997. The Company generated $400,433 of cash flow from operating activities in 1998 compared to expending $788,237 on operating activities in 1997. Operating activities in 1998 included income of $660,316, a growth in accounts receivable due primarily to the increased sales volume, and the growth in inventory as the Company expanded its product line with the introduction of new products. In 1998, the Company expended $169,982 on capital equipment. The Company received $727,202 from the sale of its common stock in 1998, including net proceeds of a stock sale to Guidant of $700,000. The Company also reduced its borrowings $450,000 to $125,000 at December 31, 1998. The Company met its obligations on its preferred stock dividends of $343,564. The Company's obligation to pay quarterly dividend payments to three outstanding series of preferred stock, necessary capital expenditures, growth in inventory as the Company expands its product offering and increased operating expenses will challenge the Company to meet its capital needs for 1999. Based on its existing operating plan, however, the Company believes its current bank credit facility of $1,000,000 obtained in 1999 will be sufficient to meet its working capital needs in 1999, provided there are no significant deviations from such plan in 1999. Year 2000 The Company has continued its detailed assessment of the Year 2000 issues related to the Company's enterprise business applications. Although continuing to seek written assurances, the Company has preliminarily concluded that it is materially compliant with its accounting, resource planning and network systems based on input from the third party software vendors. The Company intends to fully test these systems over the next six months with the goal that these applications will be capable of handling transactions with Year 2000 dates, but no testing or remediation has been done to date. The Company also is organizing a task force to further assess its Year 2000 compliance issues with other functions including computer hardware, telephone systems, and other manufacturing equipment. The Company's goal is to document potential risks to the Company and plan necessary actions to meet the risks associated with the Year 2000. The Company believes that given its reliance on outside software vendors and its relatively simple information systems, it will achieve substantial compliance with respect to Year 2000 issues before the end of 1999. Although the Company is still in the process of assessment, it currently believes the costs to meet this objective will not be material. The Company has not yet created a contingency plan should the Year 2000 issues prove to present significant unanticipated problems or if the Company is not ready in time. As the Company's assessment process continues, it intends to revisit the risks of non-compliance and how best to respond. Forward-Looking Statements and Risks Certain statements made in this Annual Report, which are summarized here, are forward looking statements that involve risk and uncertainties, and actual results may be materially different than those projected. Factors that could cause actual results to differ include, but are not limited to those identified: o The expectation that revenues from the Everest laparoscopy product line will continue to grow in 1999 depends on market acceptance and demand, effectiveness of sales and marketing personnel, as well as other general market conditions and competitive conditions within this market, including the introduction of products by competitors. o The expectation of increased revenues under the Company's product supply agreement with Guidant Corporation depends upon successful marketing and education efforts of Guidant to increase market share in this emerging minimally invasive saphe-nous vein harvesting market. o The expectation that shipments of bipolar forceps will decrease in 1999 depends primarily on the extent of the maturing of this product line for the Company's OEM customers. o The expectation that the Company's gross margin as a percent of revenues will increase in 1999 depends on the actual production of a greater number of units and the efficiency of the manufacturing process, so as to allow the Company to leverage its manufacturing overhead, in addition to receiving actual benefits from various value engineering projects completed in 1998 or currently in process. o The Company's ability to maintain profitability in 1999 depends on effective expense management and general market conditions and competitive conditions that may be encountered, including the Company's ability both (i) to increase its market share in its core business of laparoscopy given that the Company competes with larger, well capitalized companies who have the ability to enter into contract purchasing agreements with large institutions, and (ii) to establish a market presence in the minimally invasive cardiac surgery market. o The accuracy of the Company's belief that its current capital resources will be sufficient to fund current and anticipated business operations throughout 1999 depends, in part, on meeting anticipated revenue goals, operating efficiencies and effective expense management, in addition to general and competitive conditions. o The impact of Year 2000 issues on the Company's business depends on the accuracy, reliability and effectiveness of the Company's and its suppliers' and customers' assessment and remediation of Year 2000 issues. STATEMENTS OF OPERATIONS
Year ended December 31, 1998 1997 1996 ----------- ----------- ----------- Net revenues $10,719,755 $ 7,365,380 $ 6,001,772 Cost of goods sold 5,501,001 4,103,920 3,364,885 ----------- ----------- ----------- Gross margin 5,218,754 3,261,460 2,636,887 Operating expenses Sales and marketing 2,680,409 2,192,829 1,531,276 Research and development 858,816 633,898 606,970 General and administrative 937,494 784,203 739,953 ----------- ----------- ----------- Total operating expenses 4,476,719 3,610,930 2,878,199 Interest income (8,018) (16,775) (62,702) Interest expense 79,737 52,146 160,446 ----------- ----------- ----------- Net income (loss) before income taxes 670,316 (384,841) (339,056) Provision for income taxes 10,000 - - ----------- ----------- ----------- Net income (loss) 660,316 (384,841) (339,056) Less preferred stock dividends 343,564 344,390 354,848 ----------- ----------- ----------- Net income (loss) applicable to common stock $ 316,752 $ (729,231) $ (693,904) =========== =========== =========== Net income (loss) per common share-basic and dilutive $ .04 $ (.10) $ (.11) =========== =========== =========== Weighted average number of shares outstanding during the period 7,364,982 7,017,635 6,349,775 =========== =========== ===========
See accompanying notes to financial statements BALANCE SHEETS
December 31, 1998 1997 ------------ ------------ Assets Current assets Cash and cash equivalents $ 217,489 $ 80,362 Accounts receivable, less allowances (1998 - $61,750; 1997 - $46,750) 1,745,512 1,563,066 Inventories 1,751,946 1,055,811 Prepaid insurance and deposits 76,689 99,528 ------------ ------------ Total current assets 3,791,636 2,798,767 Equipment Office and display equipment 414,315 387,919 Research and development equipment 188,224 188,224 Production equipment 1,219,929 1,076,341 Equipment under capital lease 115,235 115,235 ------------ ------------ 1,937,703 1,767,719 Less allowance for depreciation (1,632,198) (1,486,020) ------------ ------------ 305,505 281,699 Patents, net of amortization (1998 - $172,087; 1997 - $169,746) 250 2,591 ------------ ------------ Total assets $ 4,097,391 $ 3,083,057 ============ ============ Liabilities and Shareholders' Equity Current liabilities Customer advances $ 36,788 $ 38,000 Accounts payable 582,110 340,378 Accrued compensation and related taxes 314,174 202,915 Other accrued liabilities 189,875 93,777 Capital lease obligations, current portion - 2,496 Short-term debt 125,000 - ------------ ------------ Total current liabilities 1,247,947 677,566 Long-term debt and other liabilities - 600,000 Shareholders' equity Convertible preferred stock series A, ($.01 par value, $2.50 liquidation value) 1,400,000 authorized; outstanding: 1998 and 1997-632,937 shares 1,551,717 1,551,717 Convertible preferred stock series B, ($.01 par value, $2.75 liquidation value) 730,000 authorized, outstanding: 1998 and 1997-637,273 shares 1,545,313 1,545,313 Convertible preferred stock series C, ($.01 par value, $2.75 liquidation value) authorized and outstanding: 1998 and 1997-410,906 shares 1,002,832 1,002,832 Convertible preferred stock series D, ($.01 par value, $2.875 liquidation value) authorized and outstanding: 1998 and 1997-471,500 shares 1,205,808 1,205,808 Common stock, ($.01 par value) 11,987,594 authorized; outstanding: 1998-7,465,875; 1997-7,038,002 74,659 70,380 Additional paid-in capital 16,420,828 16,041,470 Accumulated deficit (18,951,713) (19,612,029) ------------ ------------ 2,849,444 1,805,491 ------------ ------------ Total liabilities and shareholders' equity $ 4,097,391 $ 3,083,057 ============ ============
See accompanying notes to financial statements. STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Common Additional Preferred Common Preferred Stock- Paid-in Accumulated Shares Shares Stock Par Capital Deficit Total --------- --------- ---------- ------- ----------- ------------ ---------- Balance January 1, 1996 2,702,616 5,806,700 $6,703,170 $58,067 $13,659,504 $(18,724,274) $1,696,467 ========= ========= ========== ======= =========== ============ ========== Common stock issued under stock purchase plan and stock options less related costs 107,219 1,072 253,663 254,735 Common stock issued upon exercise of stock warrants 325,993 3,260 876,829 (163,858) 716,231 Conversion of Series A preferred stock (456,000) 456,000 (1,140,000) 4,560 1,135,440 Conversion of Series B preferred stock (75,000) 75,000 (206,250) 750 205,500 Common stock issued upon conversion of convertible note 200,000 2,000 498,000 500,000 Dividends on preferred stock (388,737) (388,737) Net loss for the year (339,056) (339,056) --------- --------- ---------- ------- ----------- ------------ ---------- Balance December 31, 1996 2,171,616 6,970,912 5,356,920 69,709 16,240,199 (19,277,188) 2,439,640 --------- --------- ---------- ------- ----------- ------------ ---------- Common stock issued under stock purchase plan and stock options less related costs 40,818 408 72,290 72,698 Common stock issued upon exercise of stock warrants 7,272 73 19,925 19,998 Conversion of Series A preferred stock (4,000) 4,000 (10,000) 40 9,960 Conversion of Series B preferred stock (15,000) 15,000 (41,250) 150 41,100 Issuance of warrants in connection with guarantee of bank line of credit 2,386 2,386 Dividends on preferred stock (344,390) (344,390) Net loss for the year (384,841) (384,841) --------- --------- ---------- ------- ----------- ------------ ---------- Balance December 31, 1997 2,152,616 7,038,002 5,305,670 70,380 16,041,470 (19,612,029) 1,805,491 --------- --------- ---------- ------- ----------- ------------ ---------- Common stock issued under stock purchase plan 16,108 161 23,464 23,625 Common stock issued in private transaction 411,765 4,118 695,882 700,000 Issuance of warrants in connection with guarantee of bank line of credit 3,576 3,576 Dividends on preferred stock (343,564) (343,564) Net income for the year 660,316 660,316 --------- --------- ---------- ------- ----------- ------------ ---------- Balance December 31, 1998 2,152,616 7,465,875 $5,305,670 $74,659 $16,420,828 $(18,951,713) $2,849,444 ========= ========= ========== ======= =========== ============ ==========
See accompanying notes to financial statements. STATEMENTS OF CASH FLOWS
Year ended December 31, 1998 1997 1996 ----------- ------------ ----------- OPERATING ACTIVITIES Net income (loss) $ 660,316 $ (384,841) $ (339,056) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 148,516 168,086 171,910 Provision for losses on accounts receivable 15,000 750 30,000 Value of warrants granted in connection with guarantee of bank line 3,576 2,386 - Changes in operating assets and liabilities: Accounts receivable (197,446) (428,271) (249,204) Inventories (696,135) (275,682) (121,375) Prepaid expenses 22,839 68,210 (126,273) Customer advances (1,212) 20,000 (150,000) Accounts payable and accrued expenses 449,089 41,647 152,971 ----------- ------------ ----------- Net cash provided by (used in) operating activities 404,543 (787,716) (631,027) INVESTING ACTIVITIES Purchase of equipment (169,981) (187,629) (121,640) ----------- ------------ ----------- Net cash used in investing activities (169,982) (187,629) (121,641) FINANCING ACTIVITIES Dividends paid (343,564) (344,390) (388,737) Principal payments on debt and capital leases (477,496) (5,409) (645,228) Proceeds from issuance of debt - 600,000 500,000 Net proceeds from sale of common stock 723,625 92,696 970,966 ----------- ------------ ----------- Net cash (used in) provided by financing activities (97,434) 342,897 437,002 ----------- ------------ ----------- Increase (decrease) in cash and cash equivalents 137,127 (632,448) (315,666) Cash and cash equivalents at beginning of period 80,362 712,810 1,028,476 ----------- ------------ ----------- Cash and cash equivalents at end of period $ 217,489 $ 80,362 $ 712,810 =========== ============ =========== Supplemental cash flow information: Conversion of Series A and B preferred stock into common stock $ - $ 51,250 $ 1,346,250 Conversion of convertible note into common stock $ - $ - $ 500,000 ----------- ------------ -----------
See accompanying notes to financial statements. NOTES TO FINANCIAL STATEMENTS Everest Medical Corporation 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Activity Everest Medical Corporation (the Company) is engaged in the development, manufacturing and marketing of bipolar electrosurgical instrumentation for the minimally invasive surgery market. The Company operates as one segment. Cash Equivalents The Company considers all highly liquid investments with a maturity of less than three months when purchased to be cash equivalents. The Company's cash equivalents consist of money market accounts and Treasury Bills and are carried at cost which approximates market value. The cost of Treasury Bills was $132,548 and $123,513 at December 31, 1998 and 1997, respectively. Inventories Inventories are valued at the lower of cost or market determined by the first-in, first-out (FIFO) method. Equipment and Fixtures Equipment and fixtures are stated at cost. The Company provides for depreciation on a straight-line basis over estimated useful lives from three to five years. Maintenance, repairs and minor renewals are expensed as incurred. Patents Patents employed in current products are carried at cost (primarily patent legal fees) and are amortized over 60 months. The Company reviews its patents periodically to determine whether the patents have continuing value. The expense of writing off patents is charged to research and development. Income Taxes The Company accounts for income taxes under the liability method. Per Share Data Basic earnings per share is computed using the weighted average number of common shares outstanding. Diluted earnings per share is computed using the combination of dilutive common share equivalents and the weighted average number of common shares outstanding. The dilutive effect of options and warrants was not material in 1998. Impairment of Long-Lived Assets The Company will record impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 2. INVENTORIES Inventories consisted of: December 31 1998 1997 ---- ---- Raw materials $ 740,100 $ 493,008 Work in process 807,580 462,290 Finished goods 204,266 100,513 -------------- --------------- $ 1,751,946 $ 1,055,811 ============== =============== 3. DEBT Debt consisted of:
December 31 1998 1997 ---- ---- Line of credit, due March 1999. Interest is payable monthly at the bank's reference rate, which is currently 8.5%. Principal is due in one payment on March 31, 1999. The note is secured by a standby letter of credit expiring on April 30, 1999. $ 125,000 $ 600,000 Capital leases, payable in monthly installments at various interest rates through 1999. - 2,496 ------------ ------------ 125,000 602,496 Less current portion 125,000 2,496 ------------ ------------ $ - $ 600,000 ============ ============
In June 1997, the Company entered into a line of credit arrangement with a bank. Under this agreement, the Company is able to borrow up to $1,000,000. The line of credit bears interest at the bank's reference rate. The line of credit expires March 1999. The line of credit is secured by a standby letter of credit from a shareholder of the Company. As consideration for securing the letter of credit, the Company paid the shareholder $50,000 per year and issued a warrant to purchase 25,000 shares of common stock at an exercise price of $2.50 per share. In addition, the shareholder holds a security interest in all of the Company's assets, subordinated only to senior debt. The warrant expires in May 2000. The warrant was deemed to have value of approximately $6,900. This amount is being expensed over the life of the line of credit. Interest paid by the Company in 1998, 1997 and 1996 was $76,161, $49,760 and $160,446, respectively. 4. OPERATING LEASE The Company leases its office and manufacturing facility under an operating lease that expires in 2004. Maintenance, utilities and real estate taxes are paid by the Company. Total rent expense under this lease was $261,964, $165,368 and $173,067 for the years ended December 31, 1998, 1997 and 1996, respectively. Minimum future obligations on the facility lease are as follows: 1999 $ 163,764 2000 164,255 2001 169,654 2002 170,144 2003 175,536 Thereafter 160,908 -------------- $ 1,004,261 5. INCOME TAXES At December 31, 1998, the Company had net operating losses for federal income tax purposes of approximately $18,005,577, plus credits for research and development costs of approximately $298,000 that are available to offset future taxable income through the year 2013. These carryforwards are subject to the limitations of Internal Revenue Code Section 382. This Section provides limitations on the availability of net operating losses to offset current taxable income when an ownership change has occurred for federal tax purposes. The annual limitation on net operating losses is calculated by multiplying the value of the corporation immediately prior to the ownership change by the long-term federal tax exempt rate. As a result of the sale of Series A preferred stock in 1990, the Company had a change of ownership under Section 382. The use of losses, incurred through the change in ownership date, to offset future taxable income will be limited to approximately $300,000 per year during the carryforward period. The losses occurring after the change in ownership date are unaffected and can be used to offset future taxable income without limit. The credits will also be subject to limitations under these same rules. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts used for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows: December 31 1998 1997 ---- ---- Net operating losses $ 6,842,000 $ 7,148,000 Depreciation 95,000 96,000 Amortization 36,000 35,000 Reserve for bad debt 23,000 18,000 Reserve for obsolete inventory 27,000 28,000 Research and development credit amount 298,000 298,000 Other 56,000 30,000 ----------- ----------- Total deferred tax asset 7,377,000 7,653,000 Less valuation allowance 7,377,000 7,653,000 ----------- ----------- Net deferred tax asset $ 0 $ 0 =========== =========== 6. CONVERTIBLE PREFERRED STOCK During 1995, the Company sold 471,500 shares of Series D Convertible Preferred Stock for $1,205,808. The Series D Preferred Stock carries a coupon rate of 10% with dividends payable quarterly. The conversion price is $2,875 per share. During 1994, the Company sold 410,906 units, each consisting of one share of Series C Convertible Preferred Stock and a warrant to purchase one-half share of Common Stock, for $1,002,832. The Series C Preferred Stock carries a coupon rate of 6% with dividends payable quarterly. The conversion price is $2.75 per share. The Company's Series B Convertible Preferred Stock carries a coupon rate of 8% with dividends payable quarterly. The conversion price is $2.75 per share. Each share of this Series was sold with a warrant attached to purchase one share of Common Stock at $2.75. The warrants expired in 1998. The Series A Convertible Preferred Stock is convertible at $2.50 per share. This Series is subject to automatic conversion concurrently with the closing of a public offering of the Company's Common Stock with aggregate minimum proceeds of $7,500,000 at a minimum price per share of $5.00. The Series A, B, C and D Preferred Stock are convertible into Common Stock on a one-for-one basis at the option of the holders, and each holder has voting rights on all matters submitted to shareholders on an as-if-converted basis. The Series A Preferred Stock has anti-dilution rights for any sales of Common Stock by the Company at less than its current conversion price, and the conversion price for each Series of Preferred Stock is subject to adjustment for stock dividends, stock splits and capital reorganizations. 7. STOCK PURCHASE AND OPTION PLANS AND WARRANTS The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, but applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its plans. The Company has a stock purchase plan, nonstatutory and incentive stock option plans and compensatory stock options. Total shares reserved at December 31, 1998 for convertible preferred stock, future employee stock purchase plan purchases and options and warrants were 4,360,639. Stock Purchase Plan The Company has an employee stock purchase plan under which the sale of 200,000 shares of its Common Stock has been authorized. The purchase price of the shares under the plan is the lesser of 85% of the fair market value on the first or last day of the offering period. Offering periods are six months each. Employees may designate up to 10% of their compensation for the purchase of stock. Stock Option Plans In 1997, the Company adopted the 1997 Stock Option Plan under which 500,000 shares were reserved. Shares under this plan are generally exercisable beginning one year from the date of grant in cumulative amounts of one-fourth to one-third of the shares under option and expire seven years from the date of grant. Incentive and nonstatutory options are granted at prices not less than market on the date of grant. In 1992, the Company adopted the 1992 Stock Option Plan under which 500,000 shares were reserved. Shares under this plan are generally exercisable beginning one year from the date of grant in cumulative amounts of one-fourth to one-third of the shares under option and expire ten years from the date of grant. Incentive and nonstatutory options are granted at prices not less than market on the date of grant. In 1986, the Company adopted an Incentive Stock Option Plan under which 600,000 shares were reserved. Incentive options are generally exercisable beginning one year from the date of grant in cumulative yearly amounts of one-fourth and one-half of the shares under option and expire five to ten years from the date of grant. Also, in 1986, the Company adopted a Nonstatutory Stock Option Plan under which 300,000 shares were reserved. Shares under this plan are exercisable beginning 18 months from the date of grant. Additionally, 55,000 shares were reserved during the period from 1986 through 1989 for directors of the Company through granting of individual non-qualified option agreements. Non-qualified director options are exercisable beginning six months from the date of grant. All non-qualified options expire after five years. Pro forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of the Statement. The fair value for these options was estimated at the date of the grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1998, 1997 and 1996, respectively; risk free interest rates of 5%, 5% and 5%; dividend yields of 0%, 0% and 0%; volatility factors of the expected market price of the Company's stock of .582, .593 and .516; and a weighted-average expected life of the option of seven, four and four years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different than those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
1998 1997 1996 ---- ---- ---- Pro forma income (loss) applicable to common stock $ 187,847 $(996,570) $(780,840) Pro forma income (loss) per common share $ .03 $ (.14) $ (.12) --------- ---------- ----------
The pro forma results may not be representative of the future impact of applying Statement 123 due to the phase-in provisions of the Statement and actual vesting experience. A summary of the Company's stock option activity and related information for the years ended December 31 follows:
1998 1997 1996 ---- ---- ---- Weighted-Average Weighted-Average Weighted-Average Options Exercise Price Options Exercise Price Options Exercise Price --------- ---------------- ------- ---------------- ------- -------------- Outstanding at beginning of year 1,170,154 $2.31 989,600 $2.31 1,070,000 $2.31 Granted 146,500 1.99 346,554 2.23 44,500 3.14 Exercised - - (33,750) 1.70 (94,063) 2.42 Canceled (22,500) 2.30 (132,250) 2.28 (30,837) 3.08 Outstanding at end of year 1,294,154 $1.99 1,170,154 $2.31 989,600 $2.31 --------- ----- --------- ----- ------- ----- Exercisable at end of year 1,048,579 944,064 807,620 ========= ======= ======= Weighted average fair value of options granted during the year $1.11 $ .93 $1.59
Exercise prices for options outstanding as of December 31, 1998 ranged from $1.53 to $5.00. The weighted average remaining contractual life of those options is five years. Shares reserved and available for grant at December 31, 1998 for the option plans was 131,733. Warrants At December 31, 1998, the Company had outstanding total exercisable warrants to purchase shares of its Common Stock as follows: 13,500 shares at $2.25 per share; 25,000 shares at $2.50 per share; 360,440 shares at $2.75 per share; 247,150 shares at $2.875 per share. The warrants expire at various dates from 1999 through 2005. 8. EMPLOYEE BENEFIT PLAN In January 1989, the Company adopted a defined contribution plan for substantially all employees. Each employee may elect to contribute from 1% to 20% of their compensation to the plan. Employees become 100% vested in Company contributions after four years of service. There was no expense for this plan for the years ended December 31, 1998, 1997 and 1996. 9. EXPORT SALES AND MAJOR CUSTOMERS Total sales to foreign customers were $1,267,653, $1,418,234 and $1,310,700 in 1998, 1997 and 1996, respectively. The Company had total sales to OEM customers of $3,791,058, $1,913,985 and $1,855,149 in 1998, 1997 and 1996, respectively. Sales to one OEM customer amounted to $1,594,493 in 1998. Sales to another OEM customer amounted to $685,553 in 1997. Accounts receivable at December 31, 1998 and 1997 included $296,820 and $196,456, respectively, from these customers. 10. CREDIT RISK The Company is subject to credit risk on its accounts receivable which are primarily with health care facilities, original equipment manufacturers and medical products distributors. The Company performs credit investigations to minimize credit risk. Certain distributors have the right to return unsold product in the event the distributor's agreement is terminated for any cause. REPORT OF INDEPENDENT AUDITORS Everest Medical Corporation We have audited the accompanying balance sheets of Everest Medical Corporation as of December 31, 1998 and 1997, and the related statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Everest Medical Corporation at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Minneapolis, Minnesota January 13, 1999 PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY Everest Medical Corporation The Company's Common Stock is quoted on the Nasdaq SmallCap Market, under the symbol EVMD. The following table sets forth, for the periods indicated, the high and low closing bid prices for the Common Stock as reported by Nasdaq. Such quotations represent interdealer prices, without retail markup, markdown or commission, and may not represent actual transactions. As of December 31, 1998, there were approximately 283 holders of record of the Company's Common Stock, with approximately 2,600 beneficial holders. In addition there were 7 holders of record of Series A Preferred Stock, 29 holders of record of Series B Preferred Stock, 14 holders of Series C Preferred Stock and 31 holders of record of Series D Preferred Stock. The Company has not declared or paid any cash dividends on its Common Stock or its Series A Preferred Stock since inception. The Company has paid its Series B Preferred Stockholders its current dividend of $0.22 per share per annum (8% of the purchase price per share) plus its dividends in arrears commencing in September 1994. Cash dividends paid on this Series B Preferred Stock were $141,025 in 1998. The Series C Preferred Stock is entitled to dividends of $0.165 per share per annum (6% of the purchase price per share) plus its dividends in arrears commencing August 1995. Cash dividends paid on this Series C Preferred Stock were $67,799 in 1998. The Series D Preferred Stock is entitled to dividends of $0.2875 per share per annum (10% of the purchase price per share) plus its dividends in arrears commencing September 1995. Cash dividends paid on this Series D Preferred Stock were $135,566 in 1998. The Board of Directors presently intends to retain all other earnings for use in the business for the foreseeable future. The Company is prohibited from paying dividends on its common stock without consent of the holders of (a) a majority of shares of Preferred Stock and (b) the Company's convertible promissory notes and the warrants issued in connection therewith. HIGH LOW 1998 First Quarter $ 2 7/8 $ 1 5/16 Second Quarter 2 7/16 1 9/16 Third Quarter 2 3/8 1 1/4 Fourth Quarter 2 1/4 1 3/16 1997 First Quarter $ 3 $ 1 7/8 Second Quarter 3 1/8 1 3/4 Third Quarter 3 1/8 1 7/8 Fourth Quarter 2 11/16 1 1/8 EX-23.1 7 CONSENT OF INDEPENDENT AUDITORS Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-KSB) of Everest Medical Corporation of our report dated January 13, 1999, included in the 1998 Annual Report to Shareholders of Everest Medical Corporation. We also consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-40186, 33-64630 and 33-95030) pertaining to the 1989 Employee Stock Purchase Plan, Registration Statement on Form S-8 (No. 33-64594) pertaining to the 1992 Stock Option Plan, Registration Statement on Form S-8 (No. 333-21383) pertaining to the 1986 Incentive Stock Option Plan and in Registration Statement Nos. 333-05729 and 333-10763 on Form S-3, dated June 17, 1996 and August 23, 1996, respectively, of Everest Medical Corporation of our report dated January 13, 1999, with respect to the financial statements incorporated herein by reference. /s/ Ernst & Young LLP Minneapolis, Minnesota March 25, 1999 EX-27 8 ART 5 FDS FOR YEAR ENDED 12/31/98
5 1 U.S. Dollars YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1 217,489 0 1,807,262 61,750 1,751,946 3,791,636 1,937,703 1,632,198 4,097,391 1,247,947 0 0 5,305,670 74,659 (2,530,885) 4,097,391 10,719,755 10,719,755 5,501,001 4,476,719 0 0 71,719 670,316 10,000 660,316 0 0 0 316,752 .04 .04
-----END PRIVACY-ENHANCED MESSAGE-----