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This Schedule contains summary financial information extracted from the
Form 10-K of Gish Biomedical, Inc. for the year ended June 30, 1999 and is
qualified in its entirety by reference to such financial statements.
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<NAME> GISH BIOMEDICAL, INC.
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 1999
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 0-10728
GISH BIOMEDICAL, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3046028
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2681 Kelvin Avenue
Irvine, California 92614
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (949)756-5485
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
-------------------
No par value common stock
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 was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No__
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
On September 14, 1999 the aggregate market value of the registrant's voting
common stock held by non-affiliates of the registrant was approximately
$9,553,121 (computed using the closing price of $2.750 per share of Common Stock
on that date as reported by NASDAQ).
There were 3,473,862 shares of the registrant's Common Stock, no par value,
outstanding on September 14, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
<PAGE>
GISH BIOMEDICAL, INC.
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
Part I: Page
Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Part II:
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 17
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 20
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 34
Part III:
Item 10. Directors and Executive Officers of the Registrant 35
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain Beneficial Owners and Management 39
Item 13. Certain Relationships and Related Transactions 40
Part IV:
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 41
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of a number of
important factors. For a discussion of important factors that could affect the
Company's results, please refer to "Risk Factors" below.
GENERAL
Gish Biomedical, Inc. ("Gish" or the "Company"), a California corporation, was
founded in 1976 to design, produce and market innovative specialty surgical
devices. The Company develops and markets its innovative and unique devices for
various applications within the medical community. The Company operates in one
industry segment, the manufacture of medical devices, which are marketed
primarily through direct sales representatives domestically and through
international distributors. All of Gish's products are single use disposable
products or have a disposable component. The Company's primary markets include
products for use in cardiac surgery, myocardial management, infusion therapy,
and post operative blood salvage.
ACQUISITIONS
In April 1996, Gish acquired infusion pump technology and related assets from
Creative Medical Development, Inc. ("CMD").
PRODUCTS
Following is a brief description of Gish's present principal products.
Custom Cardiovascular Tubing Systems - During open-heart surgery, the patient's
blood is diverted from the heart through sterile plastic tubing and various
other devices to an oxygenator device which oxygenates the blood before it is
returned to the patient. Each hospital performing open-heart surgery specifies
the components to be included in its custom tubing sets, based on the particular
needs of its surgical team. The complexity of the sets varies from simple tubing
systems to all-inclusive operating packs. The packs usually include blood
filters, gas filters, reservoirs used to collect blood lost during surgery and
other components. Gish produces custom tubing sets using clear Mediflex(TM)
tubing. Such components are assembled in the Gish clean room, sterilized and
then shipped either to the hospital or to one of Gish's specialty distributors
which service such hospitals. The Company also assembles custom tubing sets for
several competitive medical device manufacturers under private label agreements.
Custom tubing set sales were approximately $6,360,000, $8,572,000, and
$8,985,000, in fiscal 1999, 1998, and 1997 respectively (equal to 34%, 42% and
43% of net sales, respectively, in each of such years).
Arterial Filters - The arterial filter is the last device the blood passes
through in the cardiovascular bypass circuit as it is being returned to the
patient. The purpose of the filter is to remove gaseous micro emboli and debris,
which are generated by the oxygenation system, from the patient's blood.
The Company introduced its first arterial filters in 1985. The Company's first
design contained a safety bypass loop incorporated into the filter housing. The
Company received FDA approval to market an improved design which became
available for sale during the second quarter of fiscal 1994.
Cardiotomy Reservoirs - Cardiac suction is a technique employed in open-heart
surgery to recover shed blood in the chest cavity and return it to the patient.
The use of this technique reduces the requirements for whole blood replacement
from donor sources, thereby reducing the risk of blood compatibility problems
and blood-borne viral diseases such as AIDS and hepatitis.
<PAGE>
Gish's cardiotomy reservoir systems consist of a polycarbonate reservoir,
defoaming and filtration cartridge, and mounting bracket. This enables the
perfusion team to recover high volumes of shed blood, then defoam and filter it
prior to returning it to the patient's circulatory system.
In addition to the cardiotomy reservoirs' use in the operating room, Gish has
developed several systems which allow the cardiotomy reservoir to be used as a
pleural drainage or autotransfusion system during recovery.
Cardiotomy sales were approximately $1,291,000, $1,753,000, and $1,910,000 for
fiscal years ended June 30, 1999, 1998 and 1997 respectively (equal to 7%, 9%
and 9% of net sales, respectively, in such years).
Vision(TM) Oxygenator - An oxygenator enables gas exchange of oxygen and carbon
dioxide and also regulates the temperature of the patient's blood.
As a life sustaining device used during open-heart surgery, the oxygenator is a
key component of the bypass circuit. Vision is assembled in Gish's clean rooms
using state of the art equipment and biocompatible materials, and then each unit
is leak tested before shipment.
Vision's gas transfer performance is excellent, dependable and capable of
maintaining the oxygen demands of patients of all sizes for periods of up to six
hours.
Vision's unique air separation channel utilizes an arterial outlet pressure
gradient and the natural buoyancy of air to minimize the passage of gaseous
emboli towards the patient. Unwanted emboli are safely purged for safe venting
back to the reservoir. Through studies at an independent testing facility,
Vision's air handling abilities were proven superior to competitive devices.
Vision also eliminates common difficulties associated with other oxygenators.
The blood ports are oriented on one side, gas and water on the other to reduce
contamination. Different sized gas inlet and outlet ports resolve any gas line
confusion. Angled water ports allow Vision's heat exchanger to drain, minimizing
the creation of water puddles on the floor. During long pump runs, a fluid dam
and evacuation port divert condensation away from the gas scavenge port.
Finally, a protective rib below the blood inlet port prevents any contact
between the port and the floor.
The Company's Vision oxygenator was sold in selected accounts both domestically
and internationally for the first half of fiscal 1998. The Company made its full
market release of this product for sale in January 1998. The Company believes
that the Vision oxygenator's superior air handling capabilities should provide
the Company with a competitive advantage in the oxygenator market place.
Oxygenator sales were approximately $2,263,000 and $580,000 in fiscal 1999 and
1998, respectively (equal to 12% and 3% of net sales, respectively, in such
years).
Venous Reservoirs - A venous reservoir is a device used to pool, filter and
defoam blood prior to its introduction to the oxygenator. Gish offers a variety
of venous reservoirs, including some which incorporate the capacity for
autologous transfusion post surgically. The Company also has several products
which incorporate the functions of cardiotomy, venous reservoir, post surgical
blood collection and blood reinfusion devices. This functional bundling is
usually cost effective for the hospital.
CAPVRF45 - The Company's CAPVRF45 hardshell venous reservoir combines a
360(degree) rotational, top-entry 1/2" inlet for unrestricted venous drainage
and a high performance cardiotomy compartment with six sucker inlet ports to
handle all of the blood coming from the surgical field. Gish has incorporated
the advantages of the depth filter in its cardiotomies into the CAPVRF45 for
reduced hold-up volumes, making more blood available to the patient. With an
operating capacity of 4500 ml, the CAPVRF45 also has the capacity to handle high
blood volume procedures such as valve replacements and second surgeries.
<PAGE>
The CAPVRF45 is a perioperative device, capable of operating in both the
Operating Room and Recovery Room. Following surgery, through a simple conversion
process, the CAPVRF45 collects blood shed from the chest cavity and removes
unwanted debris before the filtered blood is reinfused back into the patient.
Blood recovery and autotransfusion through the CAPVRF45's closed system limits
hospital staff exposure to potential blood infections. Recovered blood may be
reinfused continuously, intermittently, or not at all, in support of all
patient's religious beliefs, including Jehovah's witnesses. The CAPVRF45's dual
role means fewer homologous blood products are needed, further reducing surgical
costs and improving patient safety.
With an estimated 80% of the market using hardshell reservoirs, the combination
of the Vision oxygenator and the hardshell CAPVRF45 reservoir provides the
Company with the products to effectively meet the needs of the 400,000
open-heart procedures performed in the U.S. and the 600,000 procedures performed
worldwide annually.
Cardioplegia Delivery Systems - Cardioplegia encompasses several techniques
employed in open-heart surgery to preserve, protect and manage the heart tissue.
The technique typically involves the use of a chilled solution which is infused
into the heart through the coronary arteries to cool the heart and reduce heart
activity and metabolism. However, there are many different techniques utilized
depending on the physician and patient needs. The use of these techniques
significantly reduces damage to heart tissue during surgery, enhances
restoration of heart function and helps return the patient to a normal heartbeat
when the surgical procedure is complete.
Gish has developed a complete line of cardioplegia delivery systems. Multiple
systems are required for this technique due to varying physician preferences.
Gish's original offerings for this procedure were a series of reservoirs with a
recirculation valve (CPS) and a series of cooling coils (CCS series). The
Company has since developed a line of cardioplegia systems and heat exchangers
designed to utilize a blood and potassium mixture and allow the surgeon to
quickly change the temperature delivered to the patient.
Gish upgraded its CPS series of reservoirs with the CPS Plus(R) which was
introduced in fiscal 1993. Cardioplegia system sales were approximately
$3,147,000, $3,490,000 and $4,000,000 for fiscal years 1999, 1998, and 1997,
respectively (equal to 17%, 17%, and 19% of net sales, respectively, in each of
such years).
Oxygen Saturation Monitor - In February 1992, the Company introduced a digital
blood saturation monitor for open-heart surgery, the StatSat(TM). The StatSat is
an electronic device which measures the oxygen content of the patient's blood
during surgery. These readings are taken continuously and the StatSat(TM) plots
the course of the blood oxygen saturation during the surgery. Although the
StatSat is reusable, it uses a disposable sensor for each surgery which is only
provided by Gish in its custom tubing systems.
Critical Care Central Venous Access Catheters and Ports - Gish's Hemed(TM)
central venous access catheter systems have applications in hyper-alimentation,
chemotherapy, and long-term vascular access. These long-term indwelling
catheters are surgically implanted to provide direct access to the central
venous system for high protein intravenous solutions needed by patients having
nonfunctional digestive systems and for rapid dilution and dispersion of highly
concentrated drug administration in chemotherapy for cancer.
The product line includes sterile single, dual and triple lumen catheters and
accessories sold in kits. The triple lumen catheters which permits three
substances to be administered through the same catheter was introduced during
fiscal 1997. In 1993, the Company introduced an enhancement to its Hemed
catheter line, the CathCap(TM). The CathCap reduces the risk of infection at the
injection site by continually bathing the injection cap in an antimicrobial
solution between injections.
Gish has enhanced the Hemed line with the VasPort(R) Implantable Ports and the
VasTack(R) Needle Support System. The VasPort consists of a silicone catheter
with an implantable injection port, allowing vascular access through small
needle sticks with the skin acting as a natural barrier to infection. This
access method eliminates the need for a cumbersome external catheter. The
Company introduced a detachable port/catheter system in fiscal 1994. The Company
also introduced a dual VasPort in July 1996 to meet the needs of patients
requiring multiple infusions. The VasTack consists of a specially designed
<PAGE>
needle and positioning system for use with the VasPort. The needle extends the
life of the implanted injection port and the positioning system gives the
nursing staff a sure, safe method for accessing the VasPort.
The Hemed VasPort and VasTack are alternative vascular access products used for
extended long-term infusion management and are designed to complement the Hemed
catheter lines. The VasPort is a device implanted entirely under the skin and
consists of a small reservoir with a diaphragm and catheter. The VasPort is
accessed by the VasTack, a small patented non- coring needle system, which
penetrates the skin and the diaphragm of the VasPort reservoir. Drugs are
readily infused through the VasTack, into the reservoir and then into the
catheter. When the infusion is complete the VasTack is removed and the skin acts
as a natural barrier against infection. Single and double reservoir VasPorts are
available in both titanium and lightweight engineering plastics.
Catheter and port sales were approximately $980,000, $1,170,000 and $1,107,000
for fiscal year 1999, 1998, and 1997, respectively (equal to 5%, 6% and 5% of
net sales, respectively, in each of such years).
Infusion Pumps - The acquisition of the EZ Flow infusion pump technology from
CMD in fiscal 1996 was intended to complement the Company's line of vascular
access devices. In fiscal 1997 the Company evaluated the future revenue stream
of the product and concluded that the goodwill had been impaired. In fiscal 1998
the pump was involved in an incident which precipitated a complete recall of the
product and the cessation of all infusion pump sales. The Company has abandoned
all technology acquired with the pump and written off all related inventory and
fixed assets likewise associated with it. The Company decided to design and
develop a pump not utilizing the technology acquired from CMD.
Infusion pump sales, (returns), were approximately $(27,000), $(141,000) and
$34,000 for fiscal years 1999, 1998 and 1997, respectively (equal to 0%, (1)%
and 0% of net sales, respectively, in each of such years).
Infusion pump disposable sales were $151,000, $198,000 and $219,000 for fiscal
years 1999, 1998 and 1997, respectively (equal to 1% of net sales in each of
such years).
Orthofuser -The patented Orthofuser(TM)is designed for post-operative use in
orthopedic surgeries such as hip and knee replacements and provides for the safe
recovery and transfusion of the patient's own blood. This product is well suited
for orthopedic procedures, as it is portable and incorporates its own internal
vacuum source. Salvaging and reusing as little as 500 cc's of blood post
surgically may be enough to avoid the use of donor blood in these types of
surgeries.
Orthofuser sales were approximately $1,405,000, $1,244,000 and $1,223,000 for
fiscal years 1999, 1998, and 1997, respectively (equal to 8%, 6%, and 6% of net
sales respectively, in each of such years).
Government Regulations
Gish's products are subject to the Federal Food, Drug and Cosmetic Act (the
"Act") and regulations issued thereunder. The Act is administered by the Federal
Food and Drug Administration ("FDA"), which has authority to regulate the
marketing, manufacturing, labeling, packaging and distribution of products
subject to the Act. In addition, there are requirements under other federal laws
and under state, local and foreign statutes which apply to the manufacturing and
marketing of Gish products. Gish operates a quality system certified to ISO9001,
a standard for quality recognized worldwide. In addition, Gish has been found in
compliance with the European Economic Community ("EEC") Medical Device
Directive, which equivocates to portions of the United States FDA Current Good
Manufacturing Practices ("CGMP") Quality System Regulations. This allows Gish to
export and distribute its products with free movement within the European
Community.
Following the enactment of the Medical Device Amendments of 1976 to the Act,
("Amendments") the FDA classified medical devices in commercial distribution at
the time of enactment into one of three classes --Class I, II, or III. This
classification is based on the controls necessary to reasonably ensure the
safety and effectiveness of medical devices. Class I devices are those whose
safety and effectiveness can reasonably be ensured through general controls,
such as labeling, the pre-market notification ("510(k)") process, and adherence
to FDA-mandated good manufacturing practices ("GMP") and Quality System
Regulations. Class II devices are those whose safety and effectiveness can
<PAGE>
reasonably be ensured through the use of general controls together with special
controls, such as FDA performance standards, post-market surveillance, patient
registries, and FDA guidelines. Generally, Class III devices are devices that
must receive pre-market approval by the FDA to ensure their safety and
effectiveness. They are typically life-sustaining, life-supporting, or
implantable devices, and also include most devices that were not on the market
before May 28, 1976 and for which the FDA has not made a finding of substantial
equivalence based upon a 510(k).
If a manufacturer or distributor of medical devices can establish to the FDA's
satisfaction that a new device is substantially equivalent to a legally marketed
Class I or Class II medical device or to a Class III device for which the FDA
has not yet required pre-market approval, the manufacturer or distributor may
market the device. In the 510(k), a manufacturer or distributor makes a claim of
substantial equivalence, which the FDA may require to be supported by various
types of information showing that the device is as safe and effective for its
intended use as the legally marketed predicate device. Following submission of
the 510(k), the manufacturer or distributor may not place the new device into
commercial distribution until an order is issued by the FDA finding the new
device to be substantially equivalent.
Gish is registered as a medical device manufacturer with the FDA and state
agencies, such as the California Department of Health Services ("CDHS") and
files a listing of its products semi-annually. The Company is inspected
periodically by both the FDA and the CDHS for compliance with the FDA's GMP and
other requirements including the medical device reporting regulation and various
requirements for labeling and promotion. The FDA Quality System Regulations
("QSR"), which became effective June 1, 1997, no longer limit control to
manufacturing and post market controls, but specify requirements during design
(Design Control), manufacturing, and servicing as well. Much of the new QSR is
based on the ISO9001 Quality Standard, and is, as such in harmony with the
thrust towards world harmonization of medical device requirements. The FDA's GMP
regulation requires, among other things, that (i) the manufacturing process be
regulated and controlled by the use of written procedures, and (ii) the ability
to produce devices which meet the manufacturer's specifications be validated by
extensive and detailed testing of every aspect of the process. The medical
device reporting regulation requires that the device manufacturer provide
information to the FDA on deaths or serious injuries alleged to have been
associated with the use of its marketed devices, as well as product malfunctions
that would likely cause or contribute to a death or serious injury if the
malfunction were to recur. Changes in existing requirements or interpretations
(on which regulations heavily depend) or adoption of new requirements or
policies could adversely affect the ability of the Company to comply with
regulatory requirements. Failure to comply with regulatory requirements could
have a material adverse effect on Gish's business.
Gish believes all of its present products are Class I, Class II, and Class III
products and that it is in compliance in all material respects with all
applicable performance standards as well as good manufacturing practices, record
keeping and reporting requirements in the production and distribution of such
products. Most of Gish's products have been determined by the FDA to be devices
substantially similar to devices marketed by others prior to May 28, 1976, the
effective date of the Amendments, and marketing of them has been authorized
pending the classification by the FDA of such products. Gish does not anticipate
any significant difficulty or material cost increases in complying with
applicable performance standards if any such products were to be classified in
Class II by the FDA. If the FDA were to classify use of Gish's cardiovascular or
catheter products as Class III products, pre-marketing clinical testing and
evaluation would be required in order to obtain FDA approval for the sale of
such products.
Regulations under the Act permit export of products which comply with the laws
of the country to which they are exported. The Company relies upon its foreign
distributors for the necessary certifications and compliances in their
countries, except in the EEC where the Medical Device Directive prescriptively
defines requirements.
<PAGE>
Research and Development
Gish is actively engaged in many research and development programs. The
objectives of these programs are to develop new products in the areas of the
medical device industry in which it is already engaged, to enhance its
competitive position and to develop new products for other medical device
markets. Gish's research and development projects are principally focused on
enhancements, line extensions and manufacturing cost improvements for both its
cardiovascular and Hemed product lines. Additionally, the Company is designing a
new infusion pump to replace the pump acquired from CMD.
Gish's research and development expenditures for the years ended June 30, 1999,
1998, and 1997 were $1,276,000, $1,019,000, and $1,345,000, respectively.
Marketing and Distribution
The Company introduced the Vision Oxygenator to those domestic geographic
regions which are represented by direct salespersons and distributors who did
not market a competitive oxygenator in the third quarter of fiscal 1998.
Internationally the Company is represented by specialty medical distributors in
over fifty countries around the world. The Company's international sales
represented 18% of total sales in fiscal 1999. International sales of the
Company's new Vision Oxygenator commenced in September 1997.
Gish has increased its marketing support of its distribution system over the
past few years through increased sales management personnel, technical support,
trade advertising, collateral materials and participation in medical
conferences. The Company has not experienced, and does not expect, sales of the
Company's products to be subject to seasonality in any material respects.
Components and Parts
Gish purchases components for its various products from vendors who sell such
components generally to the medical device industry. Most components for the
Company's proprietary products are manufactured from tooling owned by the
Company. Other components are manufactured by outside suppliers to the Company's
specifications.
Certain components of the Company's custom tubing sets are purchased from
competitors. Gish has not experienced difficulty in obtaining such components in
the past and believes adequate sources of supply for such items are available on
reasonable terms.
Patents and License Agreements
Gish has been issued or has patents pending on several of its products. There
can be no assurance that any patents issued would afford the Company adequate
protection against competitors which sell similar inventions or devices. There
also can be no assurance that the Company's patents will not be infringed upon
or designed around by others. However, the Company intends to vigorously enforce
all patents it has been issued.
Gish is obligated to pay a royalty equal to 3% of the net sales of its reservoir
style cardioplegia delivery systems to Dr. Bradley Harlan.
Gish is obligated under agreements entered into in 1988 to pay a royalty equal
to 4% of the net sales of its thoracostomy kit, the Thoraguide, and to pay
royalties equal to 5% of the net sales of its dual use uterine monitoring
catheter, AmCath, to Dr. Neil Semrad and to Dr. Levy and Dr. Rosenwieg
respectively.
Gish is obligated to pay a royalty equal to 5% of the net sales of the Robiscek
dual channel suction wand, RBS-2 to Dr. Francis Robiscek.
Gish is obligated to pay a royalty equal to 5% of the net sales of its
MyoManager(TM), myocardial management system to CardioPulmonary Services.
The Company's aggregate royalty expenses were $41,000, $46,000, and $54,000 for
the years ended June 30, 1999, 1998 and 1997, respectively.
Working Capital and Financing of Operations
Gish finances operations primarily through cash flow generated by sales of
Gish's products. Gish seeks to increase its sales by developing new products,
increasing market share for existing products and acquiring new products.
<PAGE>
Gish entered into a Loan and Security Agreement, (the "Agreement") with City
National Bank in December, 1998, providing for loans up to $1,000,000 in the
form of short term advances under a revolving credit arrangement. The Agreement
is subject to renewal on December 2, 1999. Advances to Gish under the Agreement
bear interest at the bank's prime rate. City National Bank has been granted a
security interest in substantially all of Gish's assets to secure repayment of
amounts borrowed by Gish under the Agreement.
The Agreement prohibits the sale of secured assets other than in the ordinary
course of business and requires Gish to maintain (i) tangible net worth (net
worth excluding patents, goodwill and other intangible items) of not less than
$16,000,000, (ii) a ratio of total senior liabilities to tangible net worth of
not more than 0.50 to 1, and (iii) quick assets at least equal to 2.5 times
current liabilities. The Company was not in compliance with all covenants at
June 30, 1999. The bank has issued a waiver of default for the period ending
June 30, 1999.
At June 30, 1999 the Company had no funds borrowed under the revolving credit
line, nor did the Company utilize the line during fiscal 1999.
Customer information
The Company performs ongoing credit evaluations and maintains allowances for
potential credit losses. As of June 30, 1999 the Company believes it has no
significant concentrations of credit risk.
During fiscal 1997, the Company derived a total of 22% of net sales from two
significant distributors, Specialized Medical Systems (15%) and CardioVascular
Concepts (7%). No single customer comprised 10% or more of the Company's net
sales in fiscal 1998 and 1999.
In September 1997, the Company was informed by both Specialized Medical Systems
and CardioVascular Concepts that they were electing to terminate their
distributor relationships with the Company effective December 1997. The
termination date was subsequently renegotiated to February 1, 1998. During the
fiscal year ended June 30, 1998, the Company derived a total of 10% of net sales
from these distributors.
Backlog
Almost all of Gish's products are repetitive purchase, single use disposable
products, which are shipped shortly after receipt of a customer's purchase
order. Therefore, Gish believes that the Company and its distributors generally
maintain an adequate finished goods inventory to fulfill the customer's needs on
demand. Accordingly, Gish believes that the backlog of orders at any given point
in time is not indicative of the Company's future level of sales.
Contracts
Gish has no contracts with customers where cancellation or renegotiation would
have a material impact on the Company's sales or profit margins.
Competition
The market for medical devices of the type sold by the Company is extremely
competitive. The Company believes that product differentiation and performance,
client service, reliability, cost and ease of use are important competitive
considerations in the markets in which it competes. Most of Gish's competitors
are United States concerns. Many of them are larger and possess greater
financial and other resources than Gish. Gish has approximately five competitors
within each of the hospital markets in which it competes. No one competitor is a
dominant force in any of these markets. Gish believes it has achieved its
position in the marketplace for its present principal products by means of
superior design, quality, and service, and Gish intends to continue to utilize
these means of competing.
<PAGE>
Environmental Compliance
The Company's direct expenditures for environmental compliance were not material
in the three most recent fiscal years. However, certain costs of manufacturing
have increased due to environmental regulations placed upon suppliers of
components and services.
Employees
As of June 30, 1999, Gish had 206 full-time employees, of whom 17 were engaged
in field sales and sales management, 120 were engaged in manufacturing and the
remainder in marketing, research and development, administrative and executive
positions. The Company believes that its relationship with its employees is
excellent. None of the Company's employees are represented by a labor union.
International Operations
Sales to foreign customers, primarily in Europe and Asia, were approximately
$3,434,000, $3,863,000 and $3,865,000 in the years ended June 30, 1999, 1998,
and 1997, respectively (equal to 18%, 19% and 18% of net sales, respectively, in
each of such years). Operating profits as a percentage of sales on foreign sales
approximate operating profits on domestic sales. All international transactions
are conducted in U.S. dollars, thus reducing the risk of currency fluctuations.
Gish does not have any facilities, property or other assets, excepting sales
representative supplies, located in any geographic area other than California,
where its offices, manufacturing and warehousing premises are located.
RISK FACTORS
The following factors should be considered carefully in evaluating the Company
and its business.
This Report on Form 10-K 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 in this paragraph and
below, 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 existing key management personnel; and there may be
other material adverse changes in the Company's operations or business. Certain
important factors affecting the forward-looking statements made herein include,
but are not limited to (i) failure of the Company's Vision(TM) oxygenator to
meet sales expectations, (ii) failure of the Company to successfully redesign
the MyoManager to meet customer expectations, (iii) continued downward pricing
pressures in the Company's targeted markets, (iv) the continued acquisition of
the Company's customers by certain of its competitors, (v) the uncertain success
of the Company's direct sales force in certain geographic territories, and (vi)
the failure of the Company to successfully develop and market a new infusion
pump. 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 forward-looking statements contained
herein, which speak solely as of the date of this Form 10K.
Competition
The medical device industry in general, and the market for products for use in
cardiovascular surgery in particular, is intensely competitive and characterized
by rapid innovation and technological advances. Product differentiation and
performance, client service, reliability, cost and ease of use are important
competitive considerations in the medical device industry. The Company expects
that the current high levels of competition and technological change in the
medical device industry in general, and the cardiovascular surgery products
industry in particular, will continue to increase. Several companies offer
devices which compete with devices manufactured by the Company, including
Bentley Laboratories, a division of Baxter Health Care Corporation, Bard
Cardiopulmonary, Inc., a division of C.R. Bard, Inc., COBE Laboratories, Inc.
and Sorin Biomedical, Inc., both of which are units of Fiat Italy, Medtronic,
<PAGE>
Inc. and Stryker Surgical. Most of the Company's competitors have longer
operating histories and significantly greater financial, technical, research,
marketing, sales, distribution and other resources than the Company. In
addition, the Company's competitors have greater name recognition than the
Company and frequently offer discounts as a competitive tactic. There can be no
assurance that the Company's current competitors or potential future competitors
will not succeed in developing or marketing technologies and products that are
more effective or commercially attractive than those that have been and are
being developed by the Company or that would render the Company's technologies
and products obsolete or noncompetitive, or that such companies will not succeed
in obtaining regulatory approval for, introducing or commercializing any such
products prior to the Company. Any of the above competitive developments could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Risk of Declining Average Selling Prices
The Company is currently facing and may continue to face increasing pricing
pressures from its current and future competitors, especially from competitors
in the cardiovascular surgery products market. As a result of such pressures,
the Company has been forced to lower the prices of certain of its products in
order to maintain market share. There can be no assurance that the Company will
be able to maintain its market share in the cardiovascular surgery products
market in the face of continuing pricing pressures. Over time, the average
selling prices for the Company's products may continue to decline as the markets
for these products continues to become more competitive. Any material reduction
in the prices for the Company's products would negatively affect the Company's
gross margin and would require the Company to increase unit sales in order to
maintain net sales.
Dependence on International Sales
International net revenues accounted for approximately 18%, 19% and 18% of the
Company's total net sales in fiscal 1999, 1998 and 1997, respectively.
International sales are subject to a number of inherent risks, including the
impact of possible recessionary environments in economies outside the U.S.,
unexpected changes in regulatory requirements and fluctuations in exchange rates
of local currencies in markets where the Company sells its products. While the
Company denominates all of its international sales in U.S. dollars, a relative
strengthening in the U.S. dollar would increase the effective cost of the
Company's products to international customers. The foregoing factors could
reduce international sales of the Company's products and could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Risk of Market Withdrawal or Product Recall
Complex medical devices, such as the Company's products, can experience
performance problems in the field that require review and possible corrective
action by the manufacturer. Similar to many other medical device manufacturers,
the Company periodically receives reports from users of its products relating to
performance difficulties they have encountered. The Company expects that it will
continue to receive customer reports regarding the performance and use of its
products. Furthermore, there can be no assurance that component failures,
manufacturing errors or design defects that could result in an unsafe condition
or injury to the patient will not occur. If any such failures or defects were
deemed serious, the Company could be required to withdraw or recall products,
which could result in significant costs to the Company. The Company has in the
recent past undertaken a voluntary recall of its ambulatory infusion pumps.
There can be no assurance that market withdrawals or product recalls will not
occur in the future. Any future product problems could result in market
withdrawals or recalls of products, which could have a material adverse affect
on the Company's business, financial condition or results of operations.
There can be no assurance that the Company will be able to successfully take
corrective actions if required, nor can there be any assurance that any such
corrective actions will not force the Company to incur significant costs. In
<PAGE>
addition, there can be no assurance that the current recall or any future
recalls will not cause the Company to face increasing scrutiny from its
customers, which could cause the Company to lose market share or incur
substantial costs in order to maintain existing market share.
Risks Associated with Extensive Government Regulation
The manufacture and sale of medical devices, including products currently sold
by the Company and the Company's other potential products, are subject to
extensive regulation by numerous governmental authorities in the United States,
principally the FDA, and corresponding state agencies, such as the California
Department of Health Services ("CDHS"). In order for the Company to market its
products for clinical use in the United States, the Company must obtain
clearance from the FDA of a 510(k) premarket notification or approval of a more
extensive submission known as a premarket approval ("PMA") application. In
addition, certain material changes to medical devices also are subject to FDA
review and clearance or approval. The process of obtaining FDA and other
required regulatory clearances and approvals is lengthy, expensive and
uncertain, frequently requiring from one to several years from the date of FDA
submission if premarket clearance or approval is obtained at all. Securing FDA
clearances and approvals may require the submission of extensive clinical data
and supporting information to the FDA.
Sales of medical devices outside of the United States are subject to
international regulatory requirements that vary from country to country. The
time required to obtain approval for sales internationally may be longer or
shorter than that required for FDA clearance or approval, and the requirements
may differ. The Company has entered into distribution agreements for the foreign
distribution of its products. These agreements generally require that the
foreign distributor is responsible for obtaining all necessary regulatory
approvals in order to allow sales of the Company's products in a particular
country. There can be no assurance that the Company's foreign distributors will
be able to obtain approval in a particular country for any future products of
the Company.
Regulatory clearances or approvals, if granted, may include significant
limitations on the indicated uses for which the product may be marketed. In
addition, to obtain such clearances or approvals, the FDA and certain foreign
regulatory authorities impose numerous other requirements with which medical
device manufacturers must comply. FDA enforcement policy strictly prohibits the
marketing of cleared or approved medical devices for uncleared or unapproved
uses. In addition, product clearances or approvals could be withdrawn for
failure to comply with regulatory standards or the occurrence of unforeseen
problems following the initial marketing. The Company will be required to adhere
to applicable FDA regulations regarding good manufacturing practices ("GMP") and
similar regulations in other countries, which include testing, control, and
documentation requirements. Ongoing compliance with GMP and other applicable
regulatory requirements will be monitored through periodic inspections by
federal and state agencies, including FDA and CDHS, and by comparable agencies
in other countries. Failure to comply with applicable regulatory requirements,
including marketing products for unapproved uses, could result in, among other
things, warning letters, fines, injunctions, civil penalties, recall or seizure
of products, total or partial suspension of production, refusal of the
government to grant premarket clearance or premarket approval for devices,
withdrawal of clearances or approvals and criminal prosecution. Changes in
existing regulations or adoption of new governmental regulations or policies
could prevent or delay regulatory approval of the Company's products.
There can be no assurance that the Company will be able to obtain FDA 510(k)
clearance or PMA approval for its products under development or other necessary
regulatory approvals or clearances on a timely basis or at all. Delays in
receipt of or failure to receive U.S. or foreign clearances or approvals, the
loss of previously obtained clearances or approvals, or failure to comply with
existing or future regulatory requirements would have a material adverse effect
on the Company's business, financial condition and results of operations.
Product Liability Risk; Limited Insurance Coverage
The manufacture and sale of medical products entail significant risk of product
liability claims. The Company maintains insurance with respect to such claims,
but there can be no assurance that the Company's existing annual insurance
coverage limits of $5 million per occurrence and $5 million in the aggregate
will be adequate to protect the Company from any liabilities it might incur in
connection with the clinical trials or sales of its products. In addition, the
Company may require increased product liability coverage if and when products
under development are successfully commercialized. Such insurance is expensive
<PAGE>
and in the future may not be available on acceptable terms, or at all. A
successful product liability claim or series of claims brought against the
Company in excess of its insurance coverage, could have a material adverse
effect on the Company's business, financial condition and results of operations.
Risks Relating to New Product Development
The Company's success is dependent in part on the design and development of new
products in the medical device industry. The product development process is
time-consuming and costly, and there can be no assurance that product
development will be successfully completed, that necessary regulatory clearances
or approvals will be granted by the FDA on a timely basis, or at all, or that
the potential products will achieve market acceptance. Failure by the Company to
develop, obtain necessary regulatory clearances or approvals for, or
successfully market potential new products could have a material adverse effect
on the Company's business, financial condition and results of operations.
Dependence Upon Key Personnel
The Company is dependent upon a number of key management and technical
personnel. The loss of the services of one or more key employees would have a
material adverse effect on the Company. The Company's success will also depend
on its ability to attract and retain additional highly qualified management and
technical personnel. The Company faces intense competition for qualified
personnel, many of whom are often subject to competing employment offers, and
there can be no assurance that the Company will be able to attract and retain
such personnel.
Risks Associated with Healthcare Reform Proposals
Political, economic and regulatory influences are subjecting the healthcare
industry in the United States to fundamental change. Potential reforms proposed
over the last several years have included mandated basic healthcare benefits,
controls on healthcare spending through limitations on the growth of private
health insurance premiums and Medicare and Medicaid spending, the creation of
large insurance purchasing groups and fundamental changes in the healthcare
delivery system. In addition, some states in which the Company operates are also
considering various healthcare reform proposals. The Company anticipates that
federal and state governments will continue to review and assess alternative
healthcare delivery systems and payment methodologies and public debate of these
issues will likely continue in the future. Due to uncertainties regarding the
ultimate features of reform initiatives and their enactment and implementation,
the Company cannot predict which, if any, of such reform proposals will be
adopted, when they may be adopted or what impact they may have on the Company,
and there can be no assurance that the adoption of reform proposals will not
have a material adverse effect on the Company's business, operating results or
financial condition. In addition, the actual announcement of reform proposals
and the investment community's reaction to such proposals, as well as
announcements by competitors and third-party payors of their strategies to
respond to such initiatives, could produce volatility in the trading and market
price of the Common Stock.
Risks Associated with Environmental Compliance
In the ordinary course of its manufacturing process, the Company uses solvents
and isopropyl alcohol which are stored on-site. The waste created by the use of
these products is transported off-site on a regular basis by a state-registered
waste hauler. Although the Company is not aware of any claim involving violation
of environmental or occupational safety and health laws and regulations, there
can be no assurance that such a claim may not arise in the future, which may
have a material adverse effect on the Company.
Adverse Effects of Preferred Stock on Rights of Common Stock
The Board of Directors of the Company is authorized to issue, from time to time,
without any action on the part of the Company's shareholders, up to 2,250,000
shares of Preferred Stock in one or more series, with such relative rights,
preferences, privileges and restrictions as are determined by the Board of
Directors at the time of issuance. Accordingly, the Board of Directors is
empowered to issue Preferred Stock with dividend, liquidation, conversion,
voting or other rights which could adversely affect the voting power or other
rights of the holders of Common Stock. In the event of such issuance, the
Preferred Stock could have the effect of discouraging, delaying or preventing a
change in control of the Company.
Volatility of Stock Price; No Dividends
The trading price of the Common Stock has been and is likely to continue to be
subject to significant fluctuations in response to variations in quarterly
<PAGE>
operating results, the gain or loss of significant contracts, changes in
management, announcements of technological innovations or new products by the
Company or its competitors, legislative or regulatory changes, general trends in
the industry and other events and factors. In addition, the stock market has
frequently experienced extreme price and volume fluctuations which have affected
the market price for many companies for reasons unrelated to the operating
performance of these companies. These broad market fluctuations may adversely
affect the market price of the Company's Common Stock. The Company currently
intends to retain any future earnings for use in its business and does not
anticipate any cash dividends in the future.
ITEM 2. PROPERTIES
Gish's office and manufacturing facilities are located in Irvine, California in
a building containing approximately 150,000 square feet of space under a lease
which expires in December, 2002. Within this facility Gish has constructed six
clean rooms for the assembly of its products which meet all requirements under
applicable federal and state good manufacturing practice regulations.
The Company is subleasing approximately 40,000 square feet of the office and
manufacturing facility until such time as the Company needs the space. The
Company believes the Irvine facility will be adequate for its present and future
needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings other than ordinary routine
litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the security holders during the fourth quarter of
the year ended June 30, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ National Market System under
the symbol GISH. The table below sets forth the high and low per share closing
prices during each quarter of the last two fiscal years as reported on the
NASDAQ National Market System.
Fiscal 1999 Fiscal 1998
Quarter ended High Low High Low
- ------------------------ ----------- ----------- ------------ ------------
September 30 $3.06 $2.50 $5.00 $4.25
December 31 3.38 2.06 5.75 4.31
March 31 3.13 2.31 4.94 4.06
June 30 3.13 2.63 3.81 2.72
The Company has not previously paid any dividends on its Common Stock and does
not anticipate that it will do so in the foreseeable future. As of September 14,
1999, there were approximately 270 holders of record of the Company's Common
Stock.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Year ended June 30,
In thousands, except per share data 1999 1998 1997 1996 1995
- -------------------------------------------------------- -------------- -------------- ------------ -------------- -------------
Income Statement Data:
Net sales $18,709 $20,283 $21,127 $23,022 $21,588
Selling and marketing 4,031 4,618 3,954 3,688 2,575
Research and development 1,276 1,019 1,345 1,408 1,125
General and administrative 1,621 2,131 1,913 1,892 1,727
Distributor contract termination fee - - - 701 -
Goodwill impairment - - 1,824 - -
Net income (loss) $(1,691) $(2,022) $(1,927) $ 329 $ 1,682
Per Share Amounts:
Basic net income (loss) per share $ (.49) $ (.59) $ (.57) $ .10 $ .55
Basic weighted average common shares 3,451 3,439 3,389 3,161 3,086
Diluted net income (loss) per share (.49) (.59) (.57) .10 .52
Diluted weighted average and common equivalent
shares 3,451 3,439 3,389 3,395 3,235
Balance Sheet Data:
Cash and cash equivalents $ 2,792 $ 3,497 $ 3,977 $ 3,314 $ 4,326
Total assets 17,987 19,445 21,028 22,909 21,044
Working capital 12,985 14,431 15,341 14,895 14,807
Current ratio 7.5:1 9.1:1 12.2:1 10.2:1 7.7:1
Shareholders' equity 15,686 17,343 19,348 21,010 18,605
Book value per share 4.52 5.03 5.64 6.25 6.00
Return (loss) on average equity (10%) (11%) (10%) 2% 9%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Selected Quarterly Financial Data
In thousands, except per share data Fiscal 1999 June 30, 1999 Mar. 31, 1999 Dec. 31, 1998 Sept. 30, 1998
- ------------------------------------------------------- ----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net sales $ 4,833 $ 4,609 $ 4,515 $ 4,752
Gross profit 1,025 1,360 1,323 1,332
Loss before income taxes (826) (269) (326) (270)
Net loss (826) (269) (326) (270)
Basic net loss per share (.24) (.08) (.09) (.08)
Basic average common shares 3,457 3,451 3,460 3,447
Diluted net loss per share (.24) (.08) (.09) (.08)
Diluted average common and common equivalent
shares 3,457 3,451 3,460 3,447
In thousands, except per share data Fiscal 1998 June 30,1998 Mar. 31, 1998 Dec. 31, 1997 Sept. 30, 1997
- ------------------------------------------------------- ----------------- ---------------- ----------------- -----------------
Net sales $ 5,247 $ 4,509 $ 5,209 $ 5,318
Gross profit 939 1,407 1,497 1,682
Income (loss) before income taxes (1,247) (510) (381) 148
Net income (loss) (1,569) (311) (233) 91
Net income (loss) per share (.46) (.09) (.07) .03
Basic average common shares 3,445 3,443 3,439 3,430
Diluted net income (loss) per share (.46) (.09) (.07) .03
Diluted average common and common equivalent
shares 3,445 3,443 3,439 3,521
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS:
Acquisition
- -----------
On September 13, 1995, the Company entered into an agreement to acquire the
assets and technology of Creative Medical Development, Inc. ("CMD"), a
manufacturer of ambulatory infusion pumps, and began to operate the business
under a management agreement whereby Gish assumed the risks and rewards of the
operation of the acquired assets until the closing date of the acquisition. The
agreement provided for a payment of $600,000 in cash and $2,000,000 of Gish
Biomedical, Inc. common stock for these assets. The Company has included revenue
and costs related to the product lines from September 13, 1995 in the Company's
financial statements. The Company assumed ownership of the net assets and
technology acquired from CMD on April 17, 1996 and entered into a one-year lease
for the building CMD occupied.
In February 1997, the Company was released from its lease obligation for the
northern California facility and ceased operations in that facility. 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 $1,824,000 associated with the purchase of the infusion pump from
CMD had little, if any future value. Accordingly, the Company recorded a charge
to earnings to write off the unamortized balance.
During the fiscal year ended June 30, 1998 the infusion pump acquired from CMD
was involved in an incident which precipitated the Company's decision to
voluntarily cease sales of the infusion pump. The Company also decided to
redesign the pump not utilizing the technology acquired from CMD. Consequently
the Company wrote off all remaining assets, principally inventory, property and
equipment, associated with the CMD infusion pump at June 30, 1998.
The total pump inventory expensed to cost of sales during the fourth quarter of
fiscal 1998 was $464,000. Also expensed in the fourth quarter were fixed assets
acquired for the manufacture of the pump amounting to a $363,000 charge to
general and administrative expense. Additionally, it was determined that the
trade name EZ Flow had acquired such a poor reputation that it would not be used
for a new infusion pump currently under development.
Year Ended June 30, 1999 vs. Year Ended June 30, 1998
- -----------------------------------------------------
Net sales decreased to $18,709,000 for the year ended June 30, 1999 from
$20,283,000 for the year ended June 30, 1998. The net decrease resulted
primarily from decreased unit volume of custom tubing packs and other
cardiovascular products, partially offset by an increase in volume of Vision(TM)
oxygenators.
Cost of sales for the year ended June 30, 1999 included accruals for inventory
obsolescence of $192,000 plus an additional $100,000 charged directly to cost of
sales during the fourth quarter to record the disposal of slow-moving and
obsolete inventory items not previously reserved. Cost of sales for the year
ended June 30, 1998 included inventory writeoffs of $705,000 consisting of
$464,000 for the discontinued CMD infusion pump and $241,000 for increases in
other reserves. Excluding these adjustments, cost of sales increased as a
percentage of sales in fiscal 1999 relative to fiscal 1998. The increase is
primarily due to unfavorable product mix changes and the increase in fixed
overhead cost per unit resulting from the production volume decrease from fiscal
1998 to fiscal 1999.
Selling and marketing expenses decreased to $4,031,000 for the year ended June
30, 1999 from $4,618,000 for the year ended June 30, 1998. The decrease reflects
reduced salaries and commissions expense due to open sales positions, lower
sales volume, and reduced selling expense in support of the discontinued CMD
infusion pump. The reduction in compensation expense was partially offset by
$67,000 charged to selling and marketing expense to provide a valuation reserve
for field inventories consigned to sales representatives.
<PAGE>
Research and development expenses increased by 25 percent in fiscal 1999 over
the prior year due to the hiring of additional professional engineering staff,
and an increase in engineering project material expenditures.
General and administrative expenses decreased to $1,621,000 for the year ended
June 30, 1999 from $2,131,000 for the year ended June 30, 1998. The fiscal 1998
expense included $363,000 to write off fixed assets related to the infusion pump
business acquired from CMD. The fiscal 1999 expense included $45,000 in legal
expenses related to merger and acquisition activities which did not result in a
consummated transaction. These activities are consistent with Gish's strategy of
continuing to seek opportunities to broaden the Company's product offerings and
more effectively address its target markets. The incremental legal expense in
fiscal 1999 was offset by a favorable adjustment of $53,000 representing the
reversal of excess reserve previously established for the write-off of plant and
equipment related to the CMD infusion pump business. Excluding the adjustments
for CMD-related assets and legal expenses, general and administrative expenses
decreased by $139,000 or 8 percent from fiscal 1998 to fiscal 1999, primarily
due to reduced incentive compensation and consulting expenses.
Year Ended June 30, 1998 vs. Year Ended June 30, 1997
- -----------------------------------------------------
Sales for the year ended June 30, 1998 decreased by $844,000 or 4% as compared
to fiscal 1997. Approximately $770,000 of the decrease was primarily due to a
shift in distribution, as discussed below, and approximately $400,000 of such
loss was attributable to lost sales in Louisiana due to Baxter Inc.'s
acquisition of a perfusion service group customer of the Company. These
decreases in sales were offset, in part, by sales of the Vision oxygenator and
increases in the Company's sales of non- cardiovascular products.
In February 1998, the Company ceased doing business with both 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.
The Company engaged, during the second quarter of fiscal 1998, 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 to direct sales representation afforded the
Company better marketing opportunities with respect to the new oxygenator. Gish
had previously excluded these two territories from its initial marketing plan
for the launch of its new Vision(TM) oxygenator, effected 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(TM) in conjunction with custom tubing packs,
cardioplegia systems, cardiotomy reservoirs and oxygen saturation monitors
without limitations.
Cost of sales for the year ended June 30, 1998 was 73% of sales as compared to
69% of sales for the year ended June 30, 1997. The increase in cost of sales is
primarily due to the write off of the infusion pump inventory and increases in
other inventory reserves. In the aggregate, these write-offs total $705,000, or
3% of sales. Additionally, the lower unit volume experienced in fiscal 1998 due
to the conversion of the two distributor territories increased fixed overhead as
a percentage of total product costs.
Selling and marketing expenses for the year ended June 30, 1998 increased
$663,000 or 17% over fiscal 1997 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.
Research and development expenses for the year ended June 30, 1998 decreased 24%
or $326,000 from fiscal 1997 due to the completion of the oxygenator development
program and unfilled staff positions during the year.
<PAGE>
General and administrative expenses for fiscal 1998 increased $218,000 or 11%
over fiscal 1997 primarily due to a $363,000 write off of fixed assets
associated with the infusion pump business acquired from CMD.
The provision (benefit) for taxes is based upon a combined federal and state
effective tax rate of 39% for all years presented less valuation allowances of
$680,000 in fiscal 1998 and $618,000 in fiscal 1997 against the Company's
deferred tax assets. The valuation allowances reflect the uncertainty in
utilizing the Company's net loss carryforwards in future periods.
Inflation
- ---------
The effects of inflation have not been a significant factor in the results of
operations. The cardiovascular surgery market has been experiencing pricing
pressures which have precluded the Company from implementing significant price
increases.
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.
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 provided upgrades enabling year 2000
compliance, which were installed during fiscal 1998 and fiscal 1999.
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 instituted 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 any non-compliance. Year 2000 compliance issues are
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
- -------------------------------
Cash and cash equivalents decreased to $2,792,000 at June 30, 1999 from
$3,497,000 at June 30, 1998. The net decrease in cash during fiscal 1999
resulted primarily from the substantial increase in cash used by investing
activities.
Net cash used by investing activities was $1,596,000 for the year ended June 30,
1999 compared to $22,000 net cash provided by investing activities in fiscal
1998. Investing activities during the year ended June 30, 1999 included
purchases of short-term interest-bearing investments of $908,000, and purchases
of fixed assets, primarily manufacturing molds and equipment, of $675,000. By
comparison, during the year ended June 30, 1998 the company sold $501,000 in
short-term investments, and purchases of property and equipment totaled
$380,000.
For the year ended June 30, 1999, net cash provided by operating activities was
$857,000 compared to a net use of cash of $519,000 for the year ended June 30,
1998. The primary sources of cash provided by operating activities during fiscal
1999 were the collection of the $754,000 income tax refund receivable, the
$430,000 decrease in inventories, and $920,000 depreciation and amortization,
which offset the adverse effect on cash of the net loss for the year of
$1,691,000.
<PAGE>
Net working capital decreased to $12,985,000 at June 30, 1999 from $14,431,000
at June 30, 1998. The decrease is primarily due to the net loss for the fiscal
year, net of depreciation and amortization, and the Company's investment in
property and equipment. Accounts receivable and inventories of components and
finished goods at June 30, 1999 decreased from comparable amounts at June 30,
1998 in approximate proportion to the reduction in net sales in fiscal 1999 as
compared to fiscal 1998.
The Company believes that the cash flow from its operations together with
available cash will be adequate to fund the company's existing operations in the
near term.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about the Company's financial instruments
that are subject to changes in interest rates. The Company's short-term
investments are accounted for as available-for-sale securities and recorded in
the Company's consolidated balance sheets at fair market value, which
approximates cost. The short-term investments are all readily marketable and may
be liquidated at any time to provide funds for use in the Company's business.
<TABLE>
<CAPTION>
Fiscal years ended June 30,
---------------------------
2000 2001 2002 2003 2004 therafter
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Maturities of short-term
investments (in thousands) $ 617 $ 431 $ 148 $ 99 $ 98 $ 97
Average interest rate 4.5% 5.1% 5.37% 5.75% 6.02% 6.08%
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Gish Biomedical, Inc.
We have audited the accompanying consolidated balance sheets of Gish Biomedical,
Inc. as of June 30, 1999 and 1998, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended June 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 consolidated financial position of Gish Biomedical,
Inc. at June 30, 1999 and 1998, and the consolidated results of its operations
and its cash flows for each of the three years in the period ending June 30,
1999, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Orange County, California
August 6, 1999
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
As of June 30 (dollars in thousands) 1999 1998
- ---------------------------------------------------------------------------- ------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,792 $ 3,497
Short-term investments 1,490 582
Accounts receivable, net of allowance for doubtful
accounts of $94 in 1999 and $209 in 1998 3,403 3,589
Income tax refund receivable - 754
Inventories 7,180 7,610
Other assets 118 177
- ---------------------------------------------------------------------------- ------------------ -----------------
Total current assets 14,983 16,209
- ---------------------------------------------------------------------------- ------------------ -----------------
Property and Equipment, at cost:
Leasehold improvements 2,685 2,685
Machinery and equipment 1,816 1,721
Molds, dies and tooling 3,623 3,364
Office furniture and equipment 1,727 1,406
- ---------------------------------------------------------------------------- ------------------ -----------------
Total property and equipment 9,851 9,176
Less accumulated depreciation (6,997) (6,089)
- ---------------------------------------------------------------------------- ------------------ -----------------
Net property and equipment 2,854 3,087
Other assets, net of accumulated patent amortization of $297 in 1999
and $285 in 1998 150 149
- -----------------------------------------------------------------------------------------------------------------
$ 17,987 $ 19,445
- ---------------------------------------------------------------------------- ------------------ -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,366 $ 1,101
Accrued compensation and related items 595 666
Other accrued liabilities 37 11
- ---------------------------------------------------------------------------- ------------------ -----------------
Total current liabilities 1,998 1,778
- ---------------------------------------------------------------------------- ------------------ -----------------
Deferred rent 303 324
Commitments
Shareholders' Equity:
Preferred stock, 2,250,000 shares authorized; no shares outstanding - -
common stock, no par value, 7,500,000 shares authorized;
3,470,362 shares issued and outstanding (3,444,632 shares in 1998) 10,148 10,114
Note receivable - officer stock purchases (54) (54)
Retained earnings 5,592 7,283
- ---------------------------------------------------------------------------- ------------------ -----------------
Total shareholders' equity 15,686 17,343
- ---------------------------------------------------------------------------- ------------------ -----------------
$ 17,987 $ 19,445
- ---------------------------------------------------------------------------- ------------------ -----------------
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
<S> <C> <C> <C>
Years Ended June 30 (In thousands, except share
and per share data) 1999 1998 1997
- ----------------------------------------------------- ----------------------- --------------------- ---------------------
Net sales $ 18,709 $ 20,283 $ 21,127
Cost of sales 13,669 14,759 14,476
- ----------------------------------------------------- ----------------------- --------------------- ---------------------
Gross profit 5,040 5,524 6,651
- ----------------------------------------------------- ----------------------- --------------------- ---------------------
Operating Expenses:
Selling and marketing 4,031 4,618 3,954
Research and development 1,276 1,019 1,345
General and administrative 1,621 2,131 1,913
Goodwill impairment - - 1,824
Interest income 197 254 233
- ----------------------------------------------------- ----------------------- --------------------- ---------------------
Loss before provision for taxes (1,691) (1,990) (2,152)
Provision ( benefit) for income taxes - 32 (225)
Net loss $ (1,691) $ (2,022) $ (1,927)
======================= ===================== =====================
Basic net loss per share $ (0.49) $ (0.59) $ (0.57)
======================= ===================== =====================
Diluted net loss per share $ (0.49) $ (0.59) $ (0.57)
======================= ===================== =====================
Basic and diluted weighted average common shares 3,451,410 3,438,710 3,388,658
======================= ===================== =====================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock
Number of Note Retained
(In thousands, except per share data) Shares Amount Receivable Earnings Total
- -------------------------------------------- -------------- --------------- ------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 3,363,444 $ 9,828 $ (50) $ 11,232 $ 21,010
Issuance of stock per employment
agreement 13,876 84 - - 84
Exercise of options 52,825 128 - - 128
Tax benefit of options exercised - 38 - - 38
Payment on note receivable from officer - - 15 - 15
Net loss - - - (1,927) (1,927)
- -------------------------------------------- -------------- --------------- ------------- ------------------ ----------------
Balance at June 30, 1997 3,430,145 $ 10,078 $ (35) $ 9,305 $ 19,348
Exercise of options 14,487 36 (19) - 17
Net loss - - - (2,022) (2,022)
- -------------------------------------------- -------------- --------------- ------------- ------------------ ----------------
Balance at June 30, 1998 3,444,632 $ 10,114 $ (54) $ 7,283 $ 17,343
Exercise of options 113,152 307 - - 307
Stock received as payment for exercise of
options (87,422) (273) - - (273)
Net loss - - - (1,691) (1,691)
- -------------------------------------------- -------------- --------------- ------------- ------------------ ----------------
Balance at June 30, 1999 3,470,362 $ 10,148 $ (54) $ 5,592 $ 15,686
=========================================== ============== =============== ============= ================== ================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30 (in thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Operating activities:
<S> <C> <C> <C>
Net loss $ (1,691) $ (2,022) $ (1, 927)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 908 935 911
Amortization 12 24 173
Loss on disposal of assets - 363 -
Issuance of stock per employment contracts - - 84
Impairment of goodwill - - 1,824
Deferred rent (21) 7 35
Deferred income taxes - 840 (118)
Changes in operating assets and liabilities 1,649 (666) 105
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 857 (519) 1,087
- ---------------------------------------------------------------------------------------------------------------------
Investing activities:
Purchase of short-term investments (908) (51) -
Sale of short-term investments - 501 -
Purchases of property and equipment (675) (380) (587)
Purchase of other long-term assets (13) (56) (18)
Proceeds from sale of assets - 8 -
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (1,596) 22 ( 605)
- ---------------------------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from exercise of options 34 17 128
Tax benefit of options exercised - - 38
Payments on note receivable from officer - - 15
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 34 17 181
- ---------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (705) (480) 663
Cash and cash equivalents at beginning of year 3,497 3,977 3,314
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,792 $ 3,497 $ 3,977
- ---------------------------------------------------------------------------------------------------------------------
See accompanying notes.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per
share data)
1. Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the accounts
of Gish Biomedical, Inc. and its wholly owned subsidiary, Gish
International, Inc., a foreign sales corporation. All significant
intercompany accounts and transactions have been eliminated.
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.
The accounting policies that affect the more significant elements of
the accompanying consolidated financial statements are summarized
below:
Short-term Investments
Short-term investments reported in the balance sheet are accounted for
as available-for-sale securities and are recorded at fair market value
which approximates cost. Short-term investments consists of government
backed securities and short-term certificates of deposit with maturity
dates ranging from 1 to 7 years.
Fair Values of Financial Instruments
FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments", requires disclosure of fair value information about
financial instruments, whether or not recognized in the balance sheet,
for which it is practicable to estimate that value. The fair values of
cash and equivalents, short term investments, accounts receivable and
accounts payable at June 30, 1999 and 1998 approximated their carrying
amounts, principally due to the relatively short maturity of these
items.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
net realizable value.
Year ended June 30, 1999 June 30, 1998
--------------------- ------------------ ------------------
Raw materials $ 3,737 $ 3,971
Work in progress 1,051 1,083
Finished goods 2,392 2,556
--------------------- ------------------ ------------------
Total inventories $ 7,180 $ 7,610
===================== ================== ==================
Property and Equipment
Depreciation and amortization are provided on the straight-line method
over the following estimated useful lives:
Leasehold improvements Term of lease
Machinery and equipment 5 years
Molds, dies and tooling 5 years
Office furniture and equipment 4 - 8 years
In fiscal 1998 the Company decided to abandon all the property and
equipment associated with the acquisition of the EZ Flow infusion pump
from CMD (see Note 11). This resulted in a write-off in fiscal year
1998 of $363 on the disposal of those fixed assets.
<PAGE>
Goodwill and Other Intangibles
Goodwill resulting from acquisitions represented the excess of the
purchase price over the fair value of net assets acquired and was being
amortized on a straight line basis over 10 years. In fiscal 1997 the
Company wrote-off all remaining goodwill, which related solely to the
acquisition of CMD, aggregating $1,824 since it was deemed to be
impaired (see Note 11). Other intangible assets (patents) are being
amortized on the straight-line method over 6 years.
Revenue Recognition
Revenue is recognized at the time of shipment to the customer. The
customer's right of return is limited to damaged or defective products.
Research and Development Costs
Research and development costs related to the development of new
products and improvements of existing products are expensed as
incurred.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising
expense for fiscal 1999 was $119,000.
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 accounting standard did not have
a material effect on previously reported earnings per share.
<TABLE>
<CAPTION>
1999 1998 1997
Numerator:
<S> <C> <C> <C>
Numerator for basic and diluted income (loss) per share $ (1,691) $ (2,022) $ (1,927)
Denominator:
Denominator for basic income per share-weighted-
average shares 3,451,410 3,438,710 3,388,658
Effect of dilutive securities - - -
Denominator for diluted income (loss) per share-
adjusted weighted-average shares 3,451,410 3,438,710 3,388,658
Basic income (loss) per share $ (.49) $ (.59) $ ( .57)
Diluted income (loss) per share $ (.49) $ (.59) $ ( .57)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statement of Cash Flows(In thousands)
Changes in operating assets and liabilities 1999 1998 1997
------------------------------------------------- ---------------- --------------- ---------------
<S> <C> <C> <C>
Accounts receivable $ 186 $ 381 $ 108
Income tax refund receivable 754 (537) (217)
Inventories 430 (911) 385
Other current assets 59 (15) 83
Accounts payable 265 372 (255)
Accrued compensation and related items (71) 132 (38)
Other accrued liabilities 26 (88) 39
---------------- --------------- ---------------
Net change in operating assets and liabilities $1,649 $ (666) $105
</TABLE>
The Company paid $13, $71, and $214 in federal and state income tax
during the years ended June 30, 1999, 1998, and 1997, respectively.
The Company considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB25) and related
interpretation in accounting for its employee stock options because, as
discussed in Note 7, the alternative fair value accounting provided for
under FASB Statement No. 123, "Accounting for Stock- Based
Compensation", requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant,
no compensation expense is recognized.
2. Credit Facility
On June 30, 1999, the Company had available a secured $1,000 revolving
credit facility bearing interest at the bank's prime rate (7.75% at
June 30, 1999). The loan is secured by substantially all of the
Company's assets. The line is renewable annually in December. At June
30, 1999, the revolving credit facility had no outstanding balance,
nor did the Company utilize the line during the fiscal 1999.
The Company is restricted from the payment of dividends, mergers or
acquisitions and other material transactions without the bank's consent
during the term of the line of credit. The Company was not in
compliance with all covenants at June 30, 1999, but the bank has issued
a waiver of default for the period ending June 30, 1999.
<PAGE>
<TABLE>
<CAPTION>
3. Analysis of Reserve Accounts
Balance at Additions Balance at
Beginning of Charged to Deductions End of Year
Year Expense
- --------------------------------------------- ---------------- ---------------- -------------- ---------------
Allowance for doubtful accounts:
<S> <C> <C> <C> <C>
June 30, 1999 $ 209 $ 24 $ 139 $ 94
June 30, 1998 $ 187 $ 24 $ 2 $ 209
June 30, 1997 $ 181 $ 24 $ 18 $ 187
Reserve for inventory:
June 30, 1999 $ 588 $ 562 $ 29 $ 1,121
June 30, 1998 $ 466 $ 240 $ 118 $ 588
June 30, 1997 $ 483 $ 92 $ 109 $ 466
Valuation reserve for deferred tax assets
June 30, 1999 $ 1,298 $ 726 $ - $ 2,024
June 30, 1998 $ 618 $ 680 $ - $ 1,298
June 30, 1997 $ - $ 618 $ - $ 618
</TABLE>
4. Benefit Plan
The Company has a Salary Reduction Profit Sharing Plan, ("the Plan"),
established under Section 401(k) of the Internal Revenue Code, in which
all employees are eligible to participate. The Company matches up to
$250.00 of annual contributions by each qualifying employee. Total
Company contributions to the Plan were $46, $54, and $57 for fiscal
years ended June 30, 1999, 1998 and 1997, respectively.
5. Taxes Based on Income
The Company uses the liability method of accounting for income taxes as
set forth in Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes". Under this method, deferred taxes are
determined based on the difference between the financial statement and
tax bases of assets and liabilities using enacted tax rates in effect
in the years in which the differences are expected to reverse. Deferred
tax assets are recognized and measured based on the likelihood of
realization of the related tax benefit in the future.
A reconciliation of the income tax benefit using the federal statutory
rate to the book provision for income taxes follows:
<TABLE>
<CAPTION>
Year ended June 30 1999 1998 1997
--------------------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
Income tax at statutory rate $ (575) $ (676) $ (732)
State tax, net of federal benefit - (8) (130)
Other, net 28 36 19
Valuation allowance 547 680 618
--------------------------------- ---------------- ---------------- ----------------
$ - $ 32 $ (225)
================================= ================ ================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Significant components of the income tax expense/(benefit) are as
follows:
<S> <C> <C> <C>
Year ended June 30 1999 1998 1997
--------------------------------- ---------------- ----------------- ---------------
Current:
State $ - $ (12) $ 43
Federal - (636) (150)
--------------------------------- ---------------- ----------------- ---------------
- (648) (107)
Deferred:
State - 279 (65)
Federal - 401 (53)
--------------------------------- ---------------- ----------------- ---------------
- 680 (118)
--------------------------------- ---------------- ----------------- ---------------
Total $ - $ 32 $ (225)
================================= ================ ================= ===============
</TABLE>
At June 30, 1999, the Company has unused net operating loss
carryforwards of approximately $1.9 million and $2.2 million for
federal and California income tax purposes, respectively. The Company
also has research and development tax credit and alternative minimum
tax credit carryforwards of approximately $110,000 and $88,000 for
federal and California tax purposes, respectively. As of June 30, 1999,
the valuation allowance fully offsets the Company's net deferred tax
assets because management cannot assess that it is more likely than not
that they will be utilized.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. The components of the net deferred tax asset at June 30, 1999
and 1998 consist of the following:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------- ------------------ ------------------
<S> <C> <C>
Net operating loss carryforward $ 867 $ 402
Book over tax depreciation/amortization 18 52
Inventory capitalization 177 205
Reserves and accurals 894 624
State taxes (130) (145)
Tax credit carryforward 198 160
--------------------------------------------- ------------------ ------------------
Total net deferred tax assets 2,024 1,298
Less valuation allowance $ (2,024) $ (1,298)
--------------------------------------------- ------------------ ------------------
Net deferred tax assets - -
============================================= ================== ==================
</TABLE>
6. Segment Information
The Company operates in one industry segment, the manufacturer of
medical devices which are marketed principally through domestic and
international distributors. The Company performs ongoing credit
evaluations and maintains allowances for potential credit losses. As of
June 30, 1999 the Company believes it has no significant concentrations
of credit risk.
<PAGE>
The Company derived the following percentages of its net sales from its
significant distributors:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ----------------- ----------------- ----------------------------------------
<S> <C> <C> <C> <C>
- 8% 15% Specialized Medical Systems
- 2% 7% CardioVascular Concepts, Inc.
</TABLE>
In September 1997, the Company was informed by both Specialized
Medical Systems and CardioVascular Concepts that they were electing to
terminate their distributor relationships with the Company, which
occurred in February 1998. No other customer comprised 10% or more of
the Company's net sales in fiscal 1999, 1998 or 1997.
Sales to foreign customers (primarily in Europe and Asia) aggregated
approximately $3,434 in 1999, $3,863 in 1998, and $3,865 in 1997. All
sales are transacted in United States dollars, accordingly the Company
is not subject to foreign currency risks.
7. Stock Option Plan
The Company has an Officers, Directors and Key Employee Incentive Plan
(the "1981 Plan") authorizing stock options, stock bonuses and cash
incentive awards, an Incentive Stock Option, Non-qualified Stock Option
and Restricted Stock Purchase Plan - 1987 (the "1987 Plan") authorizing
stock options and rights to purchase restricted stock and a Gish
Biomedical, Inc. 1997 Stock Incentive Plan (the "1997 Plan"). Stock
options granted under these Plans may be either incentive stock options
as defined in the Internal Revenue Code ("incentive options"), or
options that do not qualify as incentive options ("non-qualified
options"). The number of shares of the Company's common stock approved
for issuance under the 1981 Plan and the 1987 Plan is 487,500 and
1,025,000, respectively.
During fiscal 1999, two employees exercised options for 100,485 shares
at $2.72 per share using 87,422 shares at $3.13 per shares as
consideration.
During fiscal 1998 the Company canceled 739,000 options at exercise
prices ranging from $7.13 to $3.58 and regranted such options at a
replacement rate of .67 to 1 and at an exercise price of $2.72. All
other terms of these options were unchanged.
The Company realized tax benefits of $38 in 1997 from the exercise of
non-qualified stock options and disqualifying dispositions of incentive
stock options. No charges have been made to income in accounting for
the options.
The following table summarizes information about stock options
outstanding under the 1981, 1987 and 1997 plans combined:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
<S> <C> <C>
Options outstanding at June 30, 1996 794,062 $4.94
Granted 34,000 5.27
Canceled (15,500) 6.09
Exercised (52,825) 2.45
- ------------------------------------------ ------------------ ----------------------
Options outstanding at June 30, 1997 759,737 $5.11
Granted 584,162 2.81
Canceled (766,250) 5.15
Exercised (14,487) 2.45
- ------------------------------------------ ------------------ ----------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Options outstanding at June 30, 1998 563,162 $2.74
Granted 78,125 2.80
Canceled (56,750) 2.77
Exercised (113,152) 2.72
========================================== ================== ======================
Options outstanding at June 30, 1999 471,385 $2.75
========================================== ================== ======================
</TABLE>
As of June 30, 1999, 471,385 options are outstanding of which 423,552
are exercisable. Additionally, 366,375 options remain available for
grant. As of June 30, 1998, 515,003 were exercisable and 430,500
options were available for grant.
The weighted average fair values of options granted were $1.23, $.92
and $2.41 in fiscal 1999, 1998 and 1997, respectively.
A summary of options outstanding and exercisable as of June 30, 1999
follows:
<TABLE>
Weighted-Average
Options Exercise Price Weighted-Average Remaining Options Weighted-Average
Outstanding Range Exercise Price Contractual Life Exercisable Exercise Price
<S> <C> <C> <C> <C> <C> <C>
20,000 $2.56 - 2.69 $2.63 4.18 - -
337,760 $2.72 - 2.72 $2.72 1.21 337,427 $2.72
113,625 $2.75 - 3.00 $2.85 4.35 86,125 $2.87
</TABLE>
8. Accounting for Stock Based Compensation
Adjusted pro forma information regarding net income (loss) and per
share amounts, determined as if the Company had accounted for its
employee stock options under the fair value method of Statement No.
123, is required when an enterprise elects the disclosure only
provision of that Statement of Financial Accounting Standards. The fair
value of options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1999, 1998 and 1997: risk free interest rate of 6.3%, a
dividend yield of 0%, volatility factors of the expected market price
of the Company's common stock of .478 and a weighted-average expected
life of the option of 3.9 years for all periods.
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 from 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.
Pro forma disclosures required by Statement No. 123 include the effects
of all stock option awards granted by the Company from July 1, 1996
through June 30, 1999. During the phase-in period, the effects of
applying this statement for generating pro forma disclosures are not
likely to be representative of the effects on pro forma net income
(loss) for future years. 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:
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Pro forma net loss $ (1,901) $ (2,055) $ (1,945)
Pro forma diluted loss per share $ (.55) $ (.60) $ (.57)
</TABLE>
9. Operating Leases
The Company is committed to a ten year operating lease for its primary
office and manufacturing facilities, which commenced December 15, 1992.
The Company's operations do not fully occupy the facility and
therefore, the Company is subleasing approximately a third of the
space. The Company's sublease income was $168, $164 and $161 for the
years ended June 30, 1999 and 1998 and 1997 respectively. Rent expense
for financial statement purposes is computed on a straight-line basis
over the term of the initial lease. The excess of straight-line expense
over cash payments during the year is shown as a deferred rent
liability.
Aggregate future minimum rental payments on a cash basis required under
operating leases for office and manufacturing space which have initial
or remaining non-cancelable lease terms in excess of one year are as
follows: $779; $810; $842; and $387 for the fiscal years ending June
30, 2000; 2001; 2002 and 2003, respectively, for a total of $2,818.
Rent expense charged to operations was $727, $727, and $763 for the
years ended June 30, 1999, 1998 and 1997, respectively.
10. Stock Purchase
During the year ended June 30, 1991 the Company loaned $100 to the
President and Chairman of the Board for the exercise of Gish common
stock options. The note balance at June 30, 1999 is $54 which is
secured by Company stock, bears interest at 5.5% and is due within one
year. Interest is current on the note.
11. Infusion Pump Business
On September 13, 1995, the Company entered into an agreement to acquire
the assets and technology of Creative Medical Development, Inc. ("CMD")
a manufacturer of ambulatory infusion pumps and began to operate the
business under a management agreement whereby Gish assumed the risks
and rewards of the operation of the acquired assets until the closing
date of the acquisition. The agreement provided for a payment of $600
in cash and $2,000 of Gish Biomedical, Inc. common stock for these
assets. The Company has included revenue and costs related to the
product lines acquired in the Company's financial statements from
September 13, 1995. The Company assumed ownership of the net assets and
technology acquired from CMD on April 17, 1996 and entered into a
one-year lease for the building CMD occupied. During the quarter ended
December 31, 1996, the Company ceased to utilize the building for
manufacturing and was released from the lease as of February 28, 1997.
The Company had also executed one-year employment agreements with four
key employees which included provisions for the issuance of up to
53,500 shares of the Company's common stock to those employees upon
completion of certain performance criteria. As of December 31, 1996,
13,876 such shares were issued. During the quarter ended December 31,
1996 two of those key employees were terminated. Additionally, a third
employee under contract resigned effective February 15, 1997.
This acquisition was accounted for as a purchase and resulted in the
recognition of $2,009 of goodwill.
<PAGE>
During the fourth quarter of fiscal 1997, the Company reviewed the
goodwill resulting from acquisition of the assets and technology of the
ambulatory infusion pumps because sales for the pump and related
products in 1997 were only a quarter million dollars. In addition, the
Company incurred additional marketing and selling expenses of $561 as
well as $146 in engineering expenses related to the ambulatory infusion
pumps. The foregoing factors resulted in a negative cash flow for the
pump product line. Due to its poor performance, and negative margins,
management believed it was unlikely that margins would improve in the
near future nor would the product line generate positive cash flows.
Accordingly, the Company recorded a $1,824 of goodwill impairment
in fiscal 1997 to write-off goodwill associated with this product
line.
During the fiscal year ended June 30, 1998 the infusion pump acquired
from CMD was involved in an incident which precipitated the Company's
decision to voluntarily cease sales of the infusion pump. The Company
also decided to redesign the pump not utilizing the technology acquired
from CMD. Consequently the Company has written off all remaining
assets, principally inventory, property and equipment associated with
the infusion pump acquired from CMD at June 30, 1998. The table below
sets forth the operating results of the discontinued infusion pump
business for the past three fiscal years as if it were an operating
segment.
<TABLE>
<CAPTION>
Infusion pump operations June 30, 1999 June 30, 1998 June 30, 1997
- ------------------------------------------ --------------------- ---------------------- ---------------------
<S> <C> <C> <C>
Sales (returns) $ (27) $ (141) $ 34
Cost of sales - 7 9
------- ----- -----
Gross profit (loss) (27) (148) 25
Research and development expenses - - 146
Selling and marketing expenses - 88 561
General and administrative expenses - 21 316
------ -- -----
Total operating expenses - 109 1,023
------ ----- -----
Operating loss (27) (257) (998)
Goodwill impairment - - 1,824
Write off of plant and equipment (53) 363 -
Write off of inventory - 464 -
------ ----- -----
Contribution to pretax loss $ 26 $ (1,084) $ (2,822)
==================== ====================== ====================
</TABLE>
12. Fourth Quarter Adjustments
During the fourth quarter of fiscal 1998 the Company made certain
adjustments to its financial statements based upon events and decisions
occurring either during the fourth quarter of fiscal 1998 or which
occurred shortly thereafter.
EZFlow Infusion Pump Adjustments
During the fourth quarter of fiscal 1998 the Company wrote off infusion
pump inventory of $464 and $363 of fixed assets (primarily tools and
dies) associated with the EZFlow pump. The Company also recorded a
provision of $88 for EZFlow pump returns from distributors.
Inventory Reserve Increases
During fiscal 1998, the Company provided an additional inventory
reserve of $162 for inventory items on hand at June 30, 1998 related to
the Company's myocardial management system, the MyoManager.
Recognition of Valuation Allowance on Deferred Tax Asset
Internal projections for the fiscal year ended June 30, 1998
anticipated a return to profitability. This coupled with the ability to
carryback net operating losses allowed management to conclude that the
Company's deferred tax assets were recoverable. However, during the
fourth quarter it was determined that all conditions necessary to
permit a tax deduction for the fiscal 1997 write off of $1.8 million of
goodwill established from the CMD acquisition were present. This
<PAGE>
deduction together with tax losses arising from fiscal 1998 operations
allowed the Company to realize the tax benefit of all available net
operating losses, and a valuation allowance was recognized for the
remaining net deferred tax asset.
A summary of fourth quarter adjustments in fiscal 1998 follows:
Infusion pump provision for sales returns $ 88
Infusion pump write off to cost of goods sold 464
MyoManager inventory reserve charged to cost of goods sold 162
---
Total charges against gross profit 714
Infusion pump fixed asset write off to general and
administrative expense 363
Increase in valuation allowance for deferred tax assets 680
------
Total non-recurring fourth quarter adjustments $1,757
======
During the fourth quarter of fiscal 1999 the Company made certain
adjustments to its financial statements based on events and decisions
occurring either during the fourth quarter of fiscal 1999 or which
occurred shortly thereafter.
Obsolete Inventory Adjustments
During the fourth quarter of fiscal 1999 the Company charged $118 to
cost of sales for obsolete inventory not previously identified. The
total charge consisted of a $100 direct charge representing inventory
disposed of during the quarter, plus an additional $18 inventory
reserve based on an analysis of inventory.
Valuation of Field Inventories
During fiscal 1999 the Company provided a valuation reserve of $67 for
field inventories consigned to sales representatives primarily for
demonstration purposes.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Inapplicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors of the Registrant
The following persons are currently serving on the Board of Directors of the
Company:
Director
Name Principal Occupation Age Since
- ---- -------------------- --- -----
Howard F. Bovers President, Bradford Trading 59 1999
Company
Jack W. Brown Managing Director, Product 59 1980
Development of the Company
James J. Cotter Attorney, Whitman Breed 30 1999
Abbott & Morgan LLP
Ray R. Coulter Co-Founder and Chief Financial 66 1979
Officer, Wintec Energy Ltd.
<PAGE>
Richard W. Dutrisac President and Chief Executive 61 1987
Officer of PFE, Inc.
John W. Galuchie, Jr. President, T.R. Winston & 46 1999
Company, Inc.
John S. Hagestad Managing Director, Sares/Regis 52 1979
Group
Mr. Bovers has been the president of Bradford Trading Company, an investment
management and venture capital firm, since 1994. In 1998 he also became
vice-chairman of T.R. Winston & Company, Inc. an investment banking firm. He
is founder and director of New England Municipal Telephone Association, LLC.
Prior to the founding of Bradford Trading Company, Mr. Bovers was president of
Newbay Corporation, a developer of independent power projects.
Mr. Brown joined the company in 1980 as the Vice President of Marketing. Shortly
thereafter in 1980 Mr. Brown was elected President and Chairman of the Board of
Directors. In September of 1999 Mr. Brown resigned as President and Chairman and
assumed the position of Managing Director of Product Development of the Company.
The Company is in the process of negotiating the terms of a Employment Agreement
with Mr. Brown.
Mr. Cotter has been an attorney with Whitman Breed Abbott & Morgan LLP since
1997. Previously, he was with Cecelia Packing Corporation. Mr. Cotter received
his L.L.M. and J.D. degrees in 1995 from New York University School of Law.
Mr. Coulter is a co-founder and the Chief Financial Officer of Wintec Energy
Ltd., a company engaged in the alternate energy business and has held that
position since 1985.
Mr. Dutrisac has been the President and Chief Executive Officer of PFE, Inc., a
biological export company based in Newport Beach, California, since 1979. Mr.
Dutrisac has been involved in the medical industry for 39 years.
Mr. Galuchie, a Certified Public Accountant, is principally engaged in the
following businesses: (i) T.R. Winston & Company, Inc., a securities
broker/dealer, as President since January 1990 and director since September
1989; (ii) Kent Financial Services, Inc., in various executive positions since
1986; (iii) Pure World, Inc., a manufacturer and distributor of natural
products, as Executive Vice President since April 1988; (iv) Golf Rounds.com,
Inc., an Internet website publisher as Vice President, Treasurer and director
since July 1992 and (v) Cortech, Inc., a biopharmaceutical company, as President
and director since September 1998. Mr. Galuchie is also the Vice President and
Secretary of Asset Value Management, Inc., the sole general partner of Asset
Value Fund Limited Partnership. Mr. Galuchie served as a director of Crown
NorthCorp, Inc. from June 1992 to August 1996 and as a director of HealthRite,
Inc. from December 1998 to June 1999.
Mr. Hagestad is a Managing Director of Sares/Regis Group, a firm specializing in
real estate acquisition, development and management, located in Irvine,
California. He has been associated with Sares/Regis Group for more than 20
years.
Executive Officers of the Registrant
First Year
Elected
Name Position with Company Age Office
- ---- --------------------- --- ------
Jack W. Brown Former Chairman of the Board, 59 1980
President of the Company
Jeanne M. Miller Former Chief Financial Officer 43 1986
James R. Talevich Chief Financial Officer 48 1999
For certain information concerning the business experience of Mr. Brown refer to
previous section titled "Directors of the Registrant".
<PAGE>
Ms. Miller joined the company in 1982 as its Controller. She was promoted to
Vice President, Chief Financial Officer and Corporate Secretary in 1986. She
resigned from her position with the Company on June 14, 1999 for personal and
family reasons.
Mr. Talevich became Vice President and Chief Financial Officer in July, 1999.
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table. The following table sets forth three years of
compensation history for the Chief Executive Officer (the "Named Executive").
There was no other executive officer serving at the end of the last completed
fiscal year, nor any additional individuals with salary and bonus for the last
fiscal year exceeding $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation
------------------------------------------ ------------
Other Annual Securities All Other
Name and Bonus Compensation Underlying Compensation
Principal Position Year Salary($) ($) (1) ($) (1) Options (#) ($) (3)
- ------------------ ---- --------- ------- ------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Jack W. Brown 1999 191,000 28,650 4,926 -- 250
President and Chief 1998 175,500 47,750 5,269 225,000 250
Executive Officer of 1997 160,000 26,240 5,281 -- 250
the Company
</TABLE>
(1) Other Annual Compensation consists of the personal use portion of
company-provided automobiles and premiums paid on executive disability
policies.
(2) Bonuses paid to the Named Executive are pursuant to annual incentive
compensation programs established each year for selected employees of
the Company, including the Company's executive officers. Under this
program, performance goals, relating to such matters as sales growth,
gross profit margin and net income as a percentage of sales, and
individual efforts are established each year. Incentive compensation,
in the form of cash bonuses, was awarded based on the extent to which
the Company and the individual achieved or exceeded the performance
goals.
(3) All Other Compensation consists of the Company's matching contributions
to the Gish Salary Savings Plan under Section 401(k) of $250 in each
fiscal year.
Option Grants in Last Fiscal Year. The Named Executive Officer identified in the
Summary Compensation Table did not receive a grant of stock options during the
year ended June 30, 1999. The Company has never granted stock appreciation
rights (SAR's).
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Values. The
following table sets forth, for each of the executive officers named in the
Summary Compensation Table above, each exercise of stock options during the year
ended June 30, 1999 and the year-end value of unexercised options:
<PAGE>
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options
at Fiscal Year End 1999 at Fiscal Year End 1999
----------------------- -----------------------
Shares
Acquired on Value
Name Exercise (#) Realized ($)(1) Exercisable Unexercisable Exercisable (2) Unexercisable(2)
---- ------------ --------------- ----------- ------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
J. Brown 56,000 $22,736 169,000 - $47,489 -
</TABLE>
(1) Excess of market price over exercise price, on the date of exercise.
(2) Excess of $3.00 (market price at year end) over exercise price.
Compensation of Directors
Directors who are not officers of the Company each receive a fee of $8,000 per
fiscal year and an additional fee of $500 for attendance at each Board of
Directors' and committee meeting. Officers of the Company do not receive
additional compensation for attendance at Board of Directors' meetings or
committee meetings. Effective February 1, 1999, the Board approved the waiver of
Directors' compensation until such time as the Company returns to profitability.
Information Regarding Compensation Committee Interlocks and Insider
Participation
The Compensation Committee is a standing committee of the Board of Directors of
the Company. The Compensation Committee is responsible for establishing and
evaluating the effectiveness of compensation policies and programs for the
Company and for making determinations regarding the compensation of the
Company's executive officers, subject to review by the full Board of Directors.
During the fiscal year ended June 30, 1999, the members of the Committee were
Richard W. Dutrisac, Ray R. Coulter and Howard F. Bovers, all of whom are
non-employee directors of the Company.
No member of the Compensation Committee is a former or current officer or
employee of the Company or a subsidiary of the Company. Furthermore, there are
no Compensation Committee interlocks between the Company and other entities
involving the Company's executive officers and board members.
Board Compensation Committee Report on Executive Compensation
The following report is submitted by the Compensation Committee members with
respect to the executive compensation policies established by the Compensation
Committee and compensation paid or awarded to executive officers who consisted
of Jack Brown (the Company's Chief Executive Officer) and Jeanne Miller (the
Company's Vice President and Chief Financial Officer) (the "Executive Officers")
for fiscal year 1999.
Compensation Policies and Objectives
In establishing and evaluating the effectiveness of compensation programs for
Executive Officers, the Compensation Committee is guided by three basic
principals:
o The Company must offer competitive salaries to be able to
attract and retain highly qualified and experienced executives
and other management personnel.
<PAGE>
o Executive compensation in excess of base salaries should be
tied to the Company's performance, measured in terms of sales
growth, gross profit and profitability, as well as attainment
of individual objectives.
o The financial interests of the Company's executives should be
aligned with the financial interests of the shareholders,
primarily through stock option grants which reward executives
for improvements in the market performance of the Company's
Common Stock.
Salaries and Employee Benefit Programs
In order to retain executives and other key employees, and to be able to attract
additional, well-qualified executives when the need arises, the Company strives
to offer salaries, health care and other employee benefit programs, to its
executives and other employees which are comparable to those offered by
competing businesses.
In establishing salaries for the Executive Officers, the Compensation Committee
reviews (i) the historical performance of the Executive Officers; and (ii)
available information regarding prevailing salaries and compensation programs
offered by competing businesses.
Performance-Based Compensation
The Compensation Committee believes that annual compensation in excess of base
salaries should be made dependent on both the Company's performance and the
individual executive's performance. Accordingly, at the beginning of each fiscal
year, the Compensation Committee establishes an incentive compensation program
for Executive Officers and other key management personnel under which the
Executive Officers and other key management personnel may earn bonuses, in
amounts ranging from 15% to 40% of their annual salaries, provided the
individuals meet their individual performance goals and the Company achieves or
exceeds the corporate performance goals for the year.
Bonuses under the incentive plan are awarded not only on the basis of the
Company's performance, but also on the achievement by an executive of specific
objectives within his or her area of responsibility. The maximum bonus that may
be awarded for individual achievement of specific objectives is half of the
total available under the program.
In the fiscal year ended June 30, 1999, Mr. Brown earned $28,650 under the
incentive plan for the first six months of the year, which resulted from a
determination that Mr. Brown met 100% of his individual goals, and that 50% of
the Company's performance goals were met.
Effective February 1, 1999, the Company's Board of Directors voted to
discontinue all payments to executive officers of the Company under the
incentive plan until such time as the Company returns to profitability.
Stock Performance Graph
The following graph sets forth the cumulative shareholder return (assuming
dividend reinvestment) to the Company's shareholders during the five year period
ended June 30, 1999 as well as an overall stock market index (Media General
Index) and the Company's peer group index (Media General Index of Medical
Instruments and Supplies):
GISH BIOMEDICAL, INC. MG GROUP INDEX MEDIA GENERAL INDEX
1994 $ 100.00 $ 100.00 $ 100.00
1995 $ 142.50 $ 139.54 $ 119.02
1996 $ 115.00 $ 189.86 $ 148.80
1997 $ 100.00 $ 217.52 $ 191.22
1998 $ 57.50 $ 254.55 $ 244.95
1999 $ 60.00 $ 292.64 $ 288.75
<PAGE>
The stock performance graph assumes $100 was invested on July 1, 1994. Assumes
dividend reinvested during fiscal year ended June 30, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of August 31, 1999, except
as otherwise indicated, regarding the beneficial ownership of Common Stock of
the Company by (i) each person who is known to the Company to be the beneficial
owner of 5% or more of the Company's Common Stock, (ii) each director of the
Company, (iii) certain executive officers of the Company and (iv) all directors
and executive officers as a group. To the Company's knowledge, the beneficial
owners named in the table have sole voting and investment power with respect to
the shares.
Shares
Beneficially Percent of
Name Owned Class (1)
Asset Value Fund Limited Partnership 493,950 14%
376 Main Street
Bedminster, NJ 07921
Craig Corporation 509,800 (2) 15%
550 South Hope Street, Suite 1825
Los Angeles, CA 90071
Dimensional Fund Advisors, Inc. 239,100 7%
1299 Ocean Avenue
Santa Monica, CA 90401
Howard F. Bovers 25,000 1%
Jack W. Brown 361,214 (3) 10%
Ray R. Coulter 26,200 (5) 1%
Richard W. Dutrisac 16,416 (5) *
James B. Glavin (4) 18,916 (5) 1%
John S. Hagestad 150,606 4%
All directors and executive officers as a 598,352 16%
group
- ------------------
* Less than 1%
(1) Percent of the outstanding shares of Common Stock, treating as
outstanding all shares issuable upon exercise of options held by
particular beneficial owners that are included in the first column.
(2) Craig Corporation is beneficial owner of Common Stock of Gish
Biomedical, Inc. through its controlling interest in Citadel Holding
Corporation.
(3) Includes 169,000 shares subject to options exercisable currently or
within 60 days.
(4) Mr. Glavin resigned as a director in September 1999.
(5) Includes 16,416 shares subject to options exercisable currently or
within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(A) (1) Financial Statement Schedules
The following consolidated financial statements of Gish
Biomedical, Inc, are included in Item 8.:
Consolidated balance sheet - June 30, 1999 and 1998.
Consolidated statement of operations - Years ended
June 30, 1999, 1998 and 1997.
Consolidated statements of shareholders' equity -
Years ended June 30, 1999, 1998 and 1997.
Consolidated statements of cash flows - Years ended
1999, 1998 and 1997.
Notes to consolidated financial statements - June 30,
1999.
(2) Exhibits
The following Exhibits are filed as part of this Report:
Exhibit
Number Description
------- -----------
3.1 Restated Articles of Incorporation as filed with the
California Secretary of State on November 9, 1981,
incorporated herein by this reference to Exhibit 2(a)
to the Company's Registration Statement on Form S-18,
No. 2-73602LA (the "S-18 Registration Statement").
3.2 Certificate of Amendment of Articles of Incorporation
as filed with the California Secretary of State on
May 19, 1982, incorporated herein by this reference
to Exhibit 2(b) to the S-18 Registration Statement.
3.3 Certificate of Amendment of Articles of Incorporation
as filed with the California Secretary of State on
December 19, 1988, incorporated herein by this
reference to Exhibit 3.3 to the Company's Report on
Form 10-K for the year ended June 30, 1990.
3.4 Certificate of Amendment of Articles of Incorporation
as filed with the California Secretary of State on
June 13, 1990 incorporated herein by this reference
to Exhibit 3.4 to the Company's Report on Form 10-K
for the year ended June 30, 1990.
3.5 Bylaws, incorporated herein by this reference to
Exhibit 2 to the S-18 Registration Statement.
10.1* 401-K Salary Reduction Profit Sharing Plan,
incorporated herein by this reference to Exhibit
10(e) to the S-18 Registration Statement.
10.2* Officer, Director and Key Employee Incentive Plan, as
amended, incorporated herein by this reference to
Exhibit 10(x) to the Company's Report on Form 10-K
for the year ended June 30, 1985.
10.3* Incentive Stock Option, Non-qualified Stock Option
and Restricted Stock Purchase Plan- 1987, as amended
(the "1987 Plan"), incorporated herein by this
reference to Exhibit 4 to the Company's Registration
Statement on Form S-8, No. 33-36432.
<PAGE>
Exhibit
Number Description
------- -----------
10.4* Form of Incentive Stock Option Agreement for use with
the 1987 Plan, incorporated herein by this reference
to Exhibit 4.3 to the Company's Registration
Statement on Form S-8, No. 33-19714 (the "S-8
Registration Statement").
10.5* Form of Non-qualified Stock Option Agreement for use
with the 1987 Plan, incorporated herein by this
reference to Exhibit 4.4 to the S-8 Registration
Statement.
10.6* Form of Restricted Common Stock Purchase Agreement
for use with the 1987 Plan, incorporated herein by
this reference to Exhibit 4.5 to the S-8 Registration
Statement.
10.7* Form of 1997 Stock Incentive Plan (the "1997 Plan"),
incorporated herein by this reference to the
Company's Report on Form 10-K for the year ended June
30, 1998.
10.8* Form of Option Agreement for the use with the 1997
Plan, incorporated herein by this reference to the
Company's Report on Form 10-K for the year ended June
30, 1998.
10.9 Commercial Security Agreement dated December 2, 1998
between the Company and City National Bank.
10.10* Form of Indemnification Agreement entered into by the
Company and its executive officers and directors,
incorporated herein by this reference to Exhibit
3(iv) to the Company's report on Form 10-K for the
year ended June 30, 1989.
10.11 Lease dated July 8, 1992 between the Company and ISCO
- Irvine North, Ltd. incorporated herein by this
reference to the Company's Report on Form 10-K for
the year ended June 30, 1993.
10.12 Lease dated as of April 17, 1996, between the Company
and LBI, a California General Partnership.
Incorporated herein by this reference to the
Company's Report on the form 10-K for the year ended
June 30, 1996.
10.13 Registration rights agreement dated April 17, 1996,
between the Company and Creative Medical Development,
Inc., a Delaware Corporation. Incorporated herein by
this reference to the Company's Report on the form
10-K for the year ended June 30, 1996
21.1 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP.
25 Power of Attorney (included on signature page of this
Annual Report on Form 10-K).
27.1 Financial Data Schedule
(B) Reports on Form 8-K
--------------------
The Company filed a Form 8-K dated June 25, 1999
reporting the resignation of Jeanne Miller as the
Company's Chief Financial Officer.
- ------------
*Management contract or compensatory plan or arrangement.
<PAGE>
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 registrant and in the capacities and on the dates indicated.
Signature Title Date
/S/JAMES R. TALEVICH Vice President, Chief September 27, 1999
-------------------- Financial Officer, and
JAMES R. TALEVICH Corporate Secretary
/S/ HOWARD F. BOVERS
-------------------- Director September 27, 1999
HOWARD F. BOVERS
/S/ JAMES J. COTTER
------------------- Director September 27, 1999
JAMES J. COTTER
/S/ RICHARD W. DUTRISAC
----------------------- Director September 27, 1999
RICHARD W. DUTRISAC
/S/ JOHN W. GALUCHIE, JR.
------------------------ Director September 27, 1999
JOHN W. GALUCHIE, JR.
/S/ JOHN S. HAGESTAD
-------------------- Director September 27, 1999
JOHN S. HAGESTAD
/S/ JACK W. BROWN September 27, 1999
----------------- Director
JACK W. BROWN
/S/ RAY R. COULTER September 27, 1999
------------------ Director
RAY R. COULTER
<PAGE>
