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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
--------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________to___________________
Commission file number 0-10728
GISH BIOMEDICAL, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-3046028
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2681 Kelvin Avenue Irvine, California 92614
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (949)756-5485
------------------------------
N/A
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant is required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
--- ---
The number of shares outstanding of each of the issuer's classes of
common stock, as of November 10, 1998: 3,450,632.
1
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GISH BIOMEDICAL, INC.
INDEX
<TABLE>
<CAPTION>
PART I. Financial Information Page
--------------------- ----
<S> <C> <C>
Item 1: Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 1998 3
and June 30, 1998
Condensed Consolidated Statements of Operations 4
for the three months ended September 30, 1998 and 1997
Condensed Consolidated Statements of Cash Flows 5
for the three months ended September 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements 6 - 7
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 11
PART II. Other Information
-----------------
Item 6: Exhibits and Reports on Form 8-K 11
</TABLE>
2
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GISH BIOMEDICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1998
------------------ -------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,744,500 $ 3,497,100
Short-term investments 581,700 581,700
Accounts receivable, net 3,128,500 3,588,800
Income tax refund receivable 754,300 754,300
Inventories 7,408,900 7,609,900
Prepaid expenses 142,500 177,300
------------ ------------
Total current assets 15,760,400 16,209,100
Property and equipment, at cost 9,232,600 9,176,400
Less accumulated depreciation (6,319,600) (6,089,800)
------------ ------------
Net property and equipment 2,913,000 3,086,600
Other assets 166,400 149,400
------------ ------------
$ 18,839,800 $ 19,445,100
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 793,800 $ 1,100,700
Accrued compensation and related items 624,900 665,700
Other accrued liabilities 12,000 11,700
------------ ------------
Total current liabilities 1,430,700 1,778,100
Deferred rent 319,900 324,400
Shareholders' equity:
Preferred stock, 2,250,000 shares authorized;
no shares outstanding
Common stock, no par value, 7,500,000 shares
authorized, 3,450,632 shares issued and
outstanding (3,444,632 shares at June 30, 1998) 10,130,100 10,113,800
Note receivable - officer stock purchase (53,800) (53,800)
Retained earnings 7,012,900 7,282,600
------------ ------------
Total shareholders' equity 17,089,200 17,342,600
------------ ------------
$ 18,839,800 $ 19,445,100
============ ============
</TABLE>
See accompanying notes
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GISH BIOMEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Net sales $ 4,752,300 $ 5,317,700
Cost of sales 3,420,000 3,635,500
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Gross profit 1,332,300 1,682,200
Research and development 229,000 237,400
Selling and marketing 1,020,200 950,000
General and administrative 425,500 419,800
----------- -----------
Total operating expenses 1,674,700 1,607,200
----------- -----------
Operating income (loss) (342,400) 75,000
Interest income 72,700 73,400
----------- -----------
Income (loss) before provision for taxes (269,700) 148,400
Provision for taxes -- 57,900
----------- -----------
Net income (loss) $ (269,700) $ 90,500
Basic net income (loss) per share $ (.08) $ .03
Basic weighted average common shares 3,447,145 3,430,342
Diluted net income (loss) per share $ (.08) $ .03
Diluted weighted average and common
equivalent shares 3,447,145 3,520,853
</TABLE>
See accompanying notes
4
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GISH BIOMEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (269,700) $ 90,500
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 229,800 233,900
Amortization 6,100 6,100
Deferred rent (4,500) 2,600
Changes in operating assets and liabilities 348,700 263,300
----------- -----------
Net cash provided by operating activities 310,400 596,400
Cash flows from investing activities:
Purchases of property and equipment (56,200) (106,900)
Increase in other assets (23,100) (2,500)
----------- -----------
Net cash used in investing activities (79,300) (109,400)
Cash flows from financing activities:
Payment (increase) in note receivable from officer -- (18,800)
Proceeds from stock options exercised 16,300 18,800
----------- -----------
Net cash provided by financing activities 16,300 --
Net increase in cash and cash equivalents 247,400 487,000
Cash and cash equivalents at beginning of period 3,497,100 3,977,100
----------- -----------
Cash and cash equivalents at end of period $ 3,744,500 $ 4,464,100
=========== ===========
</TABLE>
See accompanying notes
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GISH BIOMEDICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. General
The condensed consolidated financial statements included herein have
been prepared by the Company, without audit, and include all adjustments
which, in the opinion of management, are necessary for a fair
presentation of the results of operations and cash flows for the three
month periods ended September 30, 1998 and 1997, and financial position
at September 30, 1998, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in consolidated financial statements
prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations,
although the Company believes that the disclosures in such condensed
consolidated financial statements are adequate to make the information
presented not misleading, these condensed consolidated financial
statements should be read in conjunction with the Company's consolidated
financial statements and the notes thereto included in the Company's
Annual Report filed with the Securities and Exchange Commission on Form
10- K for the year ended June 30, 1998.
Effective July 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS
130") which establishes standards for reporting and displaying
comprehensive income and its components in the financial statements. For
the three months ended September 30, 1998 and 1997, the Company did not
have any components of other comprehensive income as defined in SFAS
130.
Statement of Cash Flows
-----------------------
Changes in operating assets and liabilities as shown in the condensed
consolidated statements of cash flows comprise:
Three months ended September 30, 1998 1997
-------------------------------- ---- ----
Decrease (increase) in:
Accounts receivable $ 460,300 $ 493,500
Inventories 201,000 (328,800)
Prepaid expenses 34,800 (5,700)
Increase (decrease) in:
Accounts payable (306,900) 25,400
Accrued compensation and related
items (40,800) 67,700
Other accrued liabilities 300 11,200
--------- ---------
Change in operating assets and
liabilities $ 348,700 $ 263,300
========= =========
The Company did not pay any interest or Federal and State income taxes during
the three month period ended September 30, 1998.
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GISH BIOMEDICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
2. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or net
realizable value and are summarized as follows:
September 30, 1998 June 30, 1998
------------------ -------------
Raw materials $3,837,100 $3,971,500
Work in progress 965,600 1,082,600
Finished goods 2,606,200 2,555,800
---------- ----------
$7,408,900 $7,609,900
========== ==========
3. Earnings per share
In February 1997, The Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share". Statement 128 replaced the
previously reported primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share exclude any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and
where necessary, restated to conform to the Statement 128 requirements.
The adoption of this new accounting standard did not have a material
effect on previously reported earnings per share.
4. Acquisition
On April 17, 1996, the Company assumed ownership of the net assets and
technology of Creative Medical Development in exchange for a payment of
$600,000 in cash and $2,000,000 of Gish Biomedical, Inc. common stock.
During the fourth quarter of fiscal 1997, due to the low level of
infusion pump sales and negative cash flow projections, the Company
determined that the unamortized goodwill of $1,824,200 associated with
the purchase of the infusion pump from CMD had little, if any future
value. Accordingly, the Company recorded an impairment of goodwill of
$1.8 million in fiscal 1997 to write-off the goodwill associated with
this product line.
During the fiscal year end June 30, 1998 the Company decided to redesign
the pump not utilizing the technology acquired from CMD. Consequently,
in the fourth quarter of fiscal 1998, the Company had written off all
remaining assets, principally inventory, property and equipment
associated with the infusion pump at June 30, 1998 and recognized
charges aggregating $827,400.
7
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GISH BIOMEDICAL, INC.
SEPTEMBER 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations:
- ----------------------
On April 17, 1996, the Company assumed ownership of the net assets and
technology of Creative Medical Development (CMD) in exchange for a payment of
$600,000 in cash and $2,000,000 of Gish Biomedical, Inc. common stock.
During the fourth quarter of fiscal 1997, due to the low level of infusion pump
sales and negative cash flow projections, the Company determined that the
unamortized goodwill of $1,824,200 associated with the purchase of the infusion
pump from CMD had little, if any future value. Accordingly, the Company recorded
an impairment of goodwill of $1.8 million in fiscal 1997 to write-off the
goodwill associated with this product line.
During the fiscal year end June 30, 1998 the Company decided to redesign the
pump not utilizing the technology acquired from CMD. Consequently, in the fourth
quarter of fiscal 1998, the Company had written off all remaining assets,
principally inventory, property and equipment associated with the infusion pump
at June 30, 1998 and recognized charges aggregating $827,400.
Sales for the three month period ended September 30, 1998 were $4,752,000, a
decrease of $566,000 or 11%, as compared to sales of $5,318,000 for the
corresponding period of fiscal 1998. The decrease in sales was due primarily to
the loss of two customers which purchased approximately $1,500,000 per year of
private labeled custom tubing packs and a general industry wide price decline
for cardiovascular products. These decreases in sales were offset, in part, by
sales of the Vision(TM) oxygenator and increases in the Company's sales of non
cardiovascular products.
In February 1998, the Company ceased doing business with two distributors of the
Company's products, Specialized Medical Systems (SMS) and CardioVascular
Concepts (CVC) . For the fiscal year ended, June 30, 1997 SMS and CVC
represented 15% and 7% of the Company's total sales, respectively. However, the
two distributors only accounted for 12% and 5%, respectively, of the Company's
gross profit for the same period.
During the second quarter of fiscal 1998, the Company engaged a direct sales
force of seven persons to replace the two distributor sales organizations. The
Company retained a substantial portion of the total existing distributor
business in these regions at higher margins.
The conversion of these territories from distributors to direct sales
representation has afforded the Company better marketing opportunities with
respect to its new Vision(TM) oxygenator. Gish had previously excluded these two
territories from its initial marketing plan for the launch of the Vision,
introduced in January 1998, because these distributors represented a competing
oxygenator product. The conversion of these territories to a direct sales force
has allowed the Company to be able to sell the Vision in conjunction with custom
tubing packs, cardioplegia systems, cardiotomy reservoirs and oxygen saturation
monitors in a broader geographic market.
8
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GISH BIOMEDICAL, INC.
SEPTEMBER 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Cost of sales for the period ended September 30, 1998 was 72% of sales as
compared to 68% of sales for the corresponding period of fiscal 1998. The
increase in cost of sales of 4% for the period ended September 30, 1998 is
primarily due to fixed costs associated with excess capacity of approximately
$250,000 combined with general price increases on materials, labor and other
cost of sales components.
Research and development expenses for the period ended September 30, 1998 were
comparable to the corresponding period of fiscal 1998. The Company anticipates
increasing its investment in research and development over the next few fiscal
quarters as it expands its development staff and project list. The Company is
actively engaged in several new product development projects which will require
expenditures approximating $325,000 per quarter for the foreseeable future.
Selling and marketing expenses for the period ended September 30, 1998 increased
$70,000 or 7% over the corresponding period of fiscal 1998, such increase is due
to the addition of seven direct sales representatives to replace two former
distributors and increased marketing efforts associated with the launch of the
Company's Vision oxygenator.
General and administrative expenses for the period ended September 30, 1998
remained relatively consistent with general and administrative expenses for the
corresponding period of fiscal 1998. No signicant increases in general and
administrative expenses are planned for the foreseeable future.
The provision (benefit) for taxes is based upon a combined federal and state
effective tax rate of 39% for all periods presented entirely offset by a
valuation allowance of $105,200 for the quarter ended September 30, 1998 against
the Company's deferred tax assets. The valuation allowance reflects the
uncertain ability of the Company to utilize its net loss carryforwards in future
periods.
The effects of inflation have not been a significant factor in the results of
the Company's operations. The cardiovascular surgery market has been
experiencing downward competitive pricing pressures which are reflected in lower
sales dollars per unit sold.
Year 2000
- ---------
The Year 2000 Problem in computers arises from the common computer industry
practice of using two digits to represent a date in computer software code and
databases to enhance both processing time and save storage space. Therefore,
when dates in the year 2000 and beyond are indicated and computer programs read
date "00," the computer may default to the year "1900" rather than the correct
"2000". This could result in incorrect calculations, faulty data and computer
shutdowns, potentially impairing the conduct of business.
9
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GISH BIOMEDICAL, INC.
SEPTEMBER 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Company has reviewed its significant or critical computerized financial,
operations and facility management computer systems. These systems utilize
licensed third party software most of which was converted in 1997 so as to be
year 2000 compliant at no additional cost to the Company. The Company's third
party vendors for the remaining systems have committed to be year 2000 compliant
by the end of calendar 1998 at no additional charge to the Company.
The Company has also reviewed and analyzed all of its products which contain a
software component and has determined that none of these electronic products are
vulnerable to year 2000 issues.
The Company plans to institute a year 2000 compliance program for its
significant vendors and customers during fiscal 1999 to evaluate the risks and
potential impact on the Company of their non compliance. Year 2000 compliance
issues will be addressed during the Company's routinely scheduled vendor audits
and should not represent a material expense. In the event that any significant
vendor is unable to provide reasonable assurances to the Company of its year
2000 compliance the Company intends to evaluate and qualify alternate sources of
supply on a case-by-case basis.
Liquidity and capital resources:
- --------------------------------
For the period ended September 30, 1998 cash provided by operations of $310,300
was primarily due to decreases in inventory and accounts receivable offset by a
decrease in accounts payable and by cash used to fund unprofitable operations.
As a result, in the quarter ended September 30, 1998 the Company's working
capital decreased by $101,300.
For the period ended September 30, 1998 cash used in investing activities of
$79,300 was primarily due to purchases of property and equipment for the
manufacture of new products and to improve operating efficiencies.
For the period ended September 30, 1998 cash provided by financing activities of
$16,300 was primarily due to proceeds from the exercise of stock options.
The Company believes that cash generated from operations together with available
cash will be adequate to meet the Company's planned expenditures and liquidity
needs for fiscal 1999.
This Quarterly Report on Form 10-Q contains certain forward-looking statements
that are based on current expectations. In light of the important factors that
can materially affect results, including those set forth below and elsewhere in
this Quarterly Report on Form 10-Q, the inclusion of forward-looking information
herein should not be regarded as a representation by the Company or any other
person that the objectives or plans of the Company will be achieved. The Company
may encounter competitive, technological, financial and business challenges
making it more difficult than expected to continue to develop and market its
products; the market may not accept the Company's existing and future products;
the Company may be unable to retain key management personnel; and there may be
other material adverse changes in the
10
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Company's operations or business. Certain important factors affecting the
forward-looking statements made herein include, but are not limited to (i)
continued downward pricing pressures in the Company's targeted markets, (ii) the
continued acquisition of the Company's customers by certain of its competitors
and (iii) the decision by the Company to replace its distributor network with a
direct sales force in certain geographic territories. Assumptions relating to
budgeting, marketing, product development and other management decisions are
subjective in many respects and thus susceptible to interpretations and periodic
revisions based on actual experience and business developments, the impact of
which may cause the Company to alter its marketing, capital expenditure or other
budgets, which may in turn affect the Company's financial position and results
of operations. The reader is therefore cautioned not to place undue reliance on
forwarding-looking statements contained herein, which speak as of the date of
this Report.
PART II. OTHER INFORMATION
ITEM 6. Exhibits and reports on Form 8K.
27.1 Financial Data Schedule
None.
11
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GISH BIOMEDICAL, INC.
SEPTEMBER 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934 the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GISH BIOMEDICAL, INC.
Date: 11/13/98 JEANNE M. MILLER
-------- ---------------------------------------
JEANNE M. MILLER
Chief Financial Officer
12
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EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,744,500
<SECURITIES> 581,700
<RECEIVABLES> 3,128,500
<ALLOWANCES> 0
<INVENTORY> 7,408,900
<CURRENT-ASSETS> 15,760,400
<PP&E> 9,232,600
<DEPRECIATION> 6,319,600
<TOTAL-ASSETS> 18,839,800
<CURRENT-LIABILITIES> 1,430,700
<BONDS> 0
0
0
<COMMON> 10,130,100
<OTHER-SE> (53,800)
<TOTAL-LIABILITY-AND-EQUITY> 18,839,800
<SALES> 4,752,300
<TOTAL-REVENUES> 4,752,300
<CGS> 3,420,000
<TOTAL-COSTS> 3,420,000
<OTHER-EXPENSES> 1,674,700
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (269,700)
<INCOME-TAX> 0
<INCOME-CONTINUING> (269,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (269,700)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
