10KSB 1 gishk602.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2002 ------------- [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-10728 GISH BIOMEDICAL, INC. (Name of Small Business Issuer in Its Charter) CALIFORNIA 95-3046028 ------------------------------- --------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 22942 Arroyo Vista Rancho Santa Margarita, CA 92688 ------------------------------------------------------------ (Address of Principal Executive Offices, Including Zip Code) Issuer's Telephone Number, Including Area Code: (949)635-6200 ------------------------------------------------------------- Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: No par value common stock Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 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 --- --- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ X] Issuer's revenues for the fiscal year ended June 30, 2002 were approximately $16,410,000. As of September 6, 2002 there were 3,592,145 shares of common stock outstanding. The aggregate market value of the common stock held by non-affiliates of the issuer, based upon the closing price on the NASDAQ SmallCap Market of $.25 on September 6, 2002 was approximately $544,000. Transitional Small Business Disclosure Format Yes No X --- --- DOCUMENTS INCORPORATED BY REFERENCE Document Where Incorporated -------- ------------------ None. GISH BIOMEDICAL, INC. INDEX Part I: Page Item 1. Description of Business 3 Item 2. Description of Property 15 Item 3. Legal Proceedings 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Part II: Item 5. Market for Common Equity and Related Stockholder Matters 16 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Item 7. Financial Statements 20 Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 35 Part III: Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act 36 Item 10. Executive Compensation 37 Item 11. Security Ownership of Certain Beneficial Owners and Management 40 Item 12. Certain Relationships and Related Transactions 41 Part IV: Item 13. Exhibits and Reports on Form 8-K 42 2 PART I ITEM 1. DESCRIPTION OF BUSINESS FORWARD LOOKING STATEMENTS This Annual Report on Form 10-KSB 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 through direct sales representatives and distributors 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. 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 MediflexTM 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 $3,528,000 and $4,294,000 in fiscal 2002 and 2001, respectively (equal to 21% and 24% 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. 3 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 $767,000 and $795,000 for fiscal years ended June 30, 2002 and 2001 respectively (equal to 5% and 4% of net sales, respectively, in each of 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 room 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 provides the Company with a competitive advantage in the oxygenator market place. Oxygenator sales were approximately $5,507,000 and $5,516,000 in fiscal 2002 and 2001, respectively (equal to 34% and 31% of net sales, respectively, in each of 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. CAPVRF44 - The Company's CAPVRF44 hardshell venous reservoir combines a 360(0) 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 CAPVRF44 for reduced hold-up volumes, making more blood available to the patient. With an operating capacity 4 of 4400 ml, the CAPVRF44 also has the capacity to handle high blood volume procedures such as valve replacements and second surgeries. The CAPVRF44 is a perioperative device, capable of operating in both the Operating Room and Recovery Room. Following surgery, through a simple conversion process, the CAPVRF44 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 CAPVRF44'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 patients' religious beliefs, including Jehovah's Witnesses. The CAPVRF44'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 CAPVRF44 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, including a new cardioplegia device, which the Company, on April 10, 2002, was granted clearance by the FDA to sell in the United States of America. Additionally, the new cardioplegia device is CE marked, allowing sale in Europe. 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. Cardioplegia system sales were approximately $1,715,000 and $2,313,000 for fiscal years 2002 and 2001, respectively (equal to 10% and 13% 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 StatSatTM. 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 StatSatTM plots the course of the blood oxygen saturation during the surgery. Although the StatSat is reusable, it uses a disposable sensor for each surgery. Critical Care Central Venous Access Catheters and Ports - Gish's HemedTM 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 catheter which permit 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 CathCapTM. The CathCap reduces the risk of infection at the injection site by continually bathing the injection cap in an antimicrobial solution between injections. 5 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 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 engineered plastics. Catheter and port sales were approximately $871,000 and $930,000 for fiscal year 2002 and 2001, respectively (equal to 5% of net sales, in each of such years). Orthofuser -The patented OrthofuserTM 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 $1,039,000 and $1,304,000 for fiscal years 2002 and 2001, respectively (equal to 6% and 7% 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 reasonably be ensured through the use of general controls together with special controls, such as 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 6 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 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. 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. 7 The Company is currently engaged in the development of a biocompatible coating for the Company's cardiovascular products. If the Company is unable to develop a biocompatible coating and obtain clearance by the FDA of its use in the United States of America, Gish's business could be materially adversely affected. Gish's research and development expenditures for the years ended June 30, 2002 and 2001 were $1,024,000 and $1,107,000, 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 19% of total sales in fiscal 2002 and fiscal 2001. International sales of the Company's new Vision Oxygenator commenced in September 1997. The Company has not experienced, and does not expect to experience sales of the Company's products to be subject to seasonality in any material respect. 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 in accordance with 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. Membrana GmbH is a principle supplier of the Company and provides polyester wrap thread for use in the Vision(TM) Oxygenator. 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. The Company is obligated to pay royalties on several of its products. The Company's aggregate royalty expenses were $28,000 and $29,000 for the years ended June 30, 2002 and 2001, 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. In December 2000, the Company entered into a $2,000,000 three-year revolving line of credit agreement. In February 2002, the revolving line of credit agreement was amended to extend the agreement for an additional year and increase the line to $4,000,000. Advances, based on eligible receivables, are secured by the operating assets of the Company and bear interest at prime (4.75% 8 at June 30, 2002) plus 2%. The agreement also includes various restrictive loan covenants, including a requirement for the Company to maintain a minimum net worth of $7,000,000, and to obtain an operating profit on a rolling three-month basis, effective March 2003. At June 30, 2002 the Company had borrowed $1,455,000 under the revolving line of credit and, would have been entitled to borrow an additional $601,000. Customer Information The Company performs ongoing credit evaluations and maintains allowances for potential credit losses. As of June 30, 2002, the Company believes it has no significant concentrations of credit risk. One sales representative organization comprised 14.5% of the Company's net sales in fiscal 2002 and 11% in fiscal 2001. The Company believes that the loss of this sales representative organization would not have a material effect on its business. 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 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 this market. 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. Environmental Compliance The Company's direct expenditures for environmental compliance were not material in the two 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, 2002, Gish had 116 full-time employees, of whom 8 were engaged in sales and sales management, 96 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. 9 International Operations Sales to foreign customers, primarily in Europe and Asia, were approximately $3,138,000 and $3,491,000 in the years ended June 30, 2002 and 2001, respectively (equal to 19% of net sales, 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 from 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-KSB 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) continued downward pricing pressures in the Company's targeted markets, (ii) the continued acquisition of the Company's customers by certain of its competitors, and (iii) continued periods of net losses, which could require the Company to find additional sources of financing to fund operations, implement its financial and business strategies, meet anticipated capital expenditures and fund research and development costs. 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 10-KSB. The Company assumes no responsibility to update any forward-looking statements as a result of new information, future events, or otherwise. Liquidity We have reported net losses in the last six fiscal years and may continue to report net losses through at least the fiscal year ending June 30, 2003. We cannot assure you that our revenue will be maintained at the current level or increase in the future, and we may never achieve sustained profitability. The Company completed its relocation to a new operating facility in the April 2001. At June 30, 2002 unpaid relocation costs of $322,000 are included in accrued relocation liabilities. Additionally, the Company has excluded from the costs recorded for the construction improvements at June 30, 2002 approximately $300,000 billed to the Company by the improvement construction contractor. The accuracy and validity of these billings are currently being disputed by the Company and the issue is scheduled for arbitration in October 2002. Upon resolution of this issue the current Landlord will reimburse the Company $156,000 for leasehold improvements, which is included in relocation receivable at June 30, 2002. 10 Under its current operating plan, the Company believes its existing cash, together with cash forecasted to be generated by operations, including proceeds from the sale of non-core assets, and from borrowings under the existing revolving line of credit may be sufficient to meet the Company's cash requirements through June 30, 2003. However, if the Company is unable to achieve the financial performance embodied in the Company's current operating plan, including a substantial reduction in its current level of operating losses, a cash shortage would occur earlier and it would require either additional sources of funding or raising additional cash through the sale of assets. There can be no assurances that additional sources of funding will be available when needed or will be available at rates and terms favorable to the Company or that any potential asset sale will occur. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The Company's balance sheet at June 30, 2002 presented elsewhere in this Form 10-KSB does not include any adjustments to reflect the possible future effects on recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. The report of our independent auditors contains an explanatory paragraph that highlights this uncertainty. 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 Jostra-Bentley, COBE Cardiovascular, a division of Sorin Biomedica, Terumo, Medtronic, 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 continue 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 19% of the Company's total net sales in fiscal 2002 and 2001. 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 11 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. 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 effect 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 addition, there can be no assurance 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 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) pre-market notification or approval of a more extensive submission known as a pre-market 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 pre-market 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 12 problems following the initial marketing. The Company will be required to adhere to applicable FDA GMP regulations 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 pre-market clearance or pre-market 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 $3 million per occurrence and $3 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 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 on Vendors The Company has various "sole source" vendors who supply key components for the Company's products. While the Company believes alternate supply sources could be developed, the Company could incur significant costs to obtain alternate components. The alternate components could also require regulatory approval, the denial or delay of which, could adversely affect the Company's ability to provide products to its customers. 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 could 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 13 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 Gish's 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 1,500,000 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 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. 14 Adverse effects of Delisting On February 14, 2002 the Company received notification from NASDAQ that the bid price for the Company's shares of common stock had closed at less than $1.00 per share for over 30 consecutive days of trading and, as a result, did not comply with Marketplace Rule 4310(c)(4). The Company was allowed 180 days to regain compliance. On August 14, 2002 the Company received notification from NASDAQ that it had not regained compliance but pursuant to Rule 4310(c)(8)(D) the Company would be provided an additional 180 days, February 10, 2003, to regain compliance. To regain compliance the bid price of the Company's shares of common stock must close at $1.00 per share or greater for a minimum of 10 consecutive trading days before February 10, 2003. Additionally, on July 26, 2002 the Company received notification from NASDAQ that the Company's common stock had not maintained a minimum market value of publicly held shares (MVPHS) of $1,000,000 as required by Marketplace Rule 4310(c) (8)(B). The Company has until October 24, 2002, to regain compliance. To regain compliance, the MVPHS must be $1,000,000 for a minimum of 10 consecutive trading days. Based upon the publicly traded shares at September 6, 2002, a minimum share price of $.46 is required. If compliance is not achieved during either or these periods, NASDAQ will notify the Company that the Company's securities will be delisted. If the Company's securities are delisted, the market price and liquidity of the Company's shares of common stock could be adversely affected. ITEM 2. DESCRIPTION OF PROPERTY Gish's office and manufacturing facilities are located in Rancho Santa Margarita, California in a building containing approximately 52,000 square feet of space under a lease which expires in February 2011. Within this facility, Gish has constructed a clean room for the assembly of its products which meet all requirements under applicable federal and state GMP regulations. Gish's finished goods storage facility is located in Irvine, California in a building containing approximately 23,000 square feet of space under a lease which expires in January 2006. In managements' opinion, the above properties are adequately covered by insurance. ITEM 3. LEGAL PROCEEDINGS The Company completed its relocation to a new operating facility in the April 2001. At June 30, 2002 unpaid relocation costs of $322,000 are included in accrued relocation liabilities. Additionally, the Company has excluded from the costs recorded for the construction improvements at June 30, 2002 approximately $300,000 billed to the Company by the improvement construction contractor. The accuracy and validity of these billings are currently being disputed by the Company and the issue is scheduled for arbitration in October 2002. Upon resolution of this issue the current Landlord will reimburse the Company $156,000 for leasehold improvements, which is included in relocation receivable at June 30, 2002. The Company is not a party to any other 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 fiscal year ended June 30, 2002. 15 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the NASDAQ SmallCap 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 by NASDAQ. Fiscal 2002 Fiscal 2001 Quarter ended High Low High Low -------------------------------------------------------------------------------- September 30 $ 1.13 $ .78 $ 2.55 $ 2.13 December 31 1.00 .76 2.25 .81 March 31 .93 .51 1.94 .84 June 30 .63 .37 1.57 1.00 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 6, 2002, there were approximately 217 holders of record of the Company's common stock. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of certain significant factors which have affected the earnings and financial position of the Company during the period included in the accompanying financial statements. This discussion compares the year ended June 30, 2002 with the year ended June 30, 2001. This discussion should be read in conjunction with the financial statements and associated notes. RESULTS OF OPERATIONS: Year Ended June 30, 2002 vs. Year Ended June 30, 2001 The Company incurred a net loss of $2,730,000, or $.76 basic and diluted net loss per share, for the fiscal year ended June 30, 2002, compared to a net loss of $2,892,000, or $.81 basic and diluted net loss per share, for the fiscal year ended June 30, 2001. In June 2002 the Company reached a settlement with a vendor related to substandard parts furnished by the vendor which required the Company to incur additional inspection, testing and rework costs. The vendor agreed to make a cash payment to the Company of $100,000, which was received during August 2002, and forgive an outstanding accounts payable balance of $32,000. The effect of the settlement has been included as a reduction of cost of goods sold for the year ended June 30, 2002. In March 2001, the Company identified slow moving and obsolete inventory of $300,000 that consisted of custom tubing packs and other items that the Company wrote off in conjunction with the relocation to its new facilities. This charge is included in cost of sales during the current period. Also in fiscal 2001, the Company recorded a net gain on relocation of $125,000. This gain is comprised of cash incentives of $1,850,000 to vacate the Irvine facility before the expiration of the lease and the recognition of a gain of $236,000 related to the unamortized portion of deferred rent expense, offset by the costs associated with the relocation. These costs included the write-off of assets of $662,000 consisting principally of leasehold improvements, costs associated with the 16 physical move of $297,000, unabsorbed overhead incurred during the period of reduced production of $400,000, costs related to temporary production facilities of $390,000 and other costs associated with the relocation of $214,000. The Company completed its use of the temporary facilities in April 2001. After adjustment for the 2001 non-recurring items, the net losses for 2002 and 2001 are comparable. However, to reduce the current level of operating losses being incurred by the Company and the cash requirement to fund those losses, effective April 2002 the Company restructured its sales organization to return to greater representation by distributors and manufacturer's representatives instead of by a direct sales force. This change resulted in the elimination of eight direct sales positions. During the same period, the Company also restructured its non-production work force, resulting in the elimination of 17 positions. For the quarter ended June 30, 2002 the Company had sales of $4,483,000 and reduced its quarterly net loss, excluding the effect of the vendor settlement, to $427,000. The reader is cautioned that the results for the quarter ended June 30, 2002 may not be indicative of future results. Net sales decreased to $16,410,000 for the year ended June 30, 2002 from $18,017,000 for the year ended June 30, 2001. The $1,607,000 net decrease included a $766,000 decrease in sales of Custom Cardiovascular Tubing Systems and, a $598,000 decrease in sales of Cardioplegia Delivery Systems. The decrease in Custom Cardiovascular Tubing Systems resulted primarily from the acquisition of our customers by our competitors. The decline in Cardioplegia Delivery Systems resulted primarily for the declining market appeal of our Straight Shot cardioplegia device. The Company has developed a new cardioplegia device, which, on April 10, 2002, was granted clearance by the FDA for sale in the United States of America. Additionally, the new cardioplegia device is CE marked, allowing sale in Europe. A majority of the Company's sales are derived from products used in the open-heart bypass circuit which is employed when a patient's heart is stopped during cardiac surgery. In response to the events which occurred on September 11, 2001, most healthcare facilities immediately ceased non-emergency surgeries in an effort to conserve the nations blood supply and reserve their care capacity for potential future emergency needs. The Company experienced a significant reduction in orders in September 2001, which in turn had the effect of September revenue being approximately $500,000 lower than the prior months revenue and budgeted revenue. In 2002 the Company was negatively affected by the economic downturn which followed the events which occurred on September 11, 2001. The Company believes that sales have also been negatively affected by the growing trend to perform cardiac surgery without stopping the heart ("Beating Heart"), the growing demand for products to have a biocompatible coating ("Coated Products") and by doubt of its ability to continue as a going concern. Beating Heart cardiac surgery may be involved in 10% to 20% of the cardiac surgeries currently performed in the United States of America. The Company has a biocompatible coating under development, but does not currently offer Coated Products. The Company believes its lack of Coated Products may have contributed to its inability to retain certain customers and prevented the opportunity to acquire certain new customers. While the current effect on the Company's sales of the demand for Coated Products cannot be determined, if the Company is unable to develop Coated Products and the demand for Coated Products continues to increase, the lack of Coated Products could have a significant negative impact on future Company sales. Gross profit decreased to $3,603,000 for the fiscal year ended June 30, 2002, compared to $4,300,000 (after adjustment for previously discussed non-recurring items) for the fiscal year ended June 30, 2001. The primary factors in the gross profit decrease was the decline in sales and shift in product mix to oxygenators from other products with higher margins. 17 Selling and marketing expenses for the fiscal year ended June 30, 2002 were $3,587,000 compared to $4,132,000 for the fiscal year ended June 30, 2001. The decline in selling and marketing expenses results primarily from decreased commissions on sales resulting from the decline in revenue, and the effect of the restructure of its sales organization in April 2002. Research and development expenses for the fiscal year ended June 30, 2002 were $1,024,000 compared to $1,107,000 for the comparable period in the prior year. The decrease in expense from 2001 to 2002 resulted from the April 2002 staff reduction. For the fiscal year ended June 30, 2002, general and administrative expenses were $1,627,000 compared to $1,765,000 for the fiscal year ended June 30, 2001. Liquidity and Capital Resources At June 30, 2002, the Company had cash of $158,000. For the year ended June 30, 2002 net cash used in operating activities was $192,000 compared to $632,000 for the year ended June 30, 2001. The decrease in cash used by operating activities, results primarily from the Company's ability to reduce its operating losses and increased use of trade credit. Liquidity and cash flow of the Company were materially affected by its ability to reduce its inventory level, $1,761,000 in the year ended June 30, 2002 and $1,844,000 in the year ended June 30, 2001. The reductions were the result of management efforts, a movement to a more "just in time" purchasing and production plan and, in the year ended June 30, 2002, the decline in revenue from the prior year. The Company believes it will continue to reduce inventory levels in the year ended June 30, 2003, but achieve a substantially smaller inventory level reduction than achieved in the years ended June 30, 2002 and 2001. Net cash used by investing activities for the year ended June 30, 2002 was $421,000 compared to net cash used by investing activities of $1,530,000 for the year ended June 30, 2001. The decrease in cash used by investing activities compared to the prior year resulted primarily from capital improvements made to the Company's new operating facility which was completed in fiscal 2001, and increased lease security deposits required by the Company's new facility leases. For the year ended June 30, 2002 net cash provided by financing activities was $661,000 compared to net cash provided by financing activities of $795,000 for the year ended June 30, 2001 and is due to the net borrowings on its revolving line of credit. In December 2000 the Company entered into a $2,000,000 three-year revolving line of credit agreement. In February 2002, the revolving line of credit agreement was amended to extend the agreement for an additional year and increase the line to $4,000,000. Advances, based on eligible receivables, are secured by the operating assets of the Company and bear interest at prime (4.75% at June 30, 2002) plus 2%. The agreement also includes various restrictive loan covenants, including a requirement for the Company to maintain a minimum net worth of $7,000,000, and to obtain an operating profit on a rolling three-month basis, effective March 2003. At June 30, 2002 the Company had borrowed $1,455,000 under the revolving line of credit and, would have been entitled to borrow an additional $601,000. The Company completed its relocation to a new operating facility in the April 2001. At June 30, 2002 unpaid relocation costs of $322,000 are included in accrued relocation liabilities. Additionally, the Company has excluded from the costs recorded for the construction improvements at June 30, 2002 approximately $300,000 billed to the Company by the improvement construction contractor. The accuracy and validity of these billings are currently being disputed by the Company and the issue is scheduled for arbitration in October 2002. Upon 18 resolution of this issue the current Landlord will reimburse the Company $156,000 for leasehold improvements, which is included in relocation receivable at June 30, 2002. Under its current operating plan, the Company believes its existing cash, together with cash forecasted to be generated by operations, including proceeds from the sale of non-core assets, and from borrowings under the existing revolving line of credit may be sufficient to meet the Company's cash requirements through June 30, 2003. However, if the Company is unable to achieve the financial performance embodied in the Company's current operating plan, including a substantial reduction in its current level of operating losses, a cash shortage would occur earlier and would require either additional sources of funding or raising additional cash through the sale of assets. There can be no assurances that additional sources of funding will be available when needed or will be available at rates and terms favorable to the Company or that any potential assets sale will occur. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The Company's balance sheet at June 30, 2002 presented elsewhere in this Form 10-KSB does not include any adjustments to reflect the possible future effects on recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. Critical accounting policies We have identified the policy below as critical to our business operations and the understanding of our results of operations. See also the notes to the Financial Statements. Note that our preparation of this Annual Report on Form 10-KSB requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. Inventory Valuation Excess and obsolete inventory is primarily the result of changing market or customer demands. We make provisions for excess and obsolete inventory based on regular reviews of quantities on hand and the latest forecast of product demand and production requirements from our customers. If actual market conditions or our customers' product demands are less favorable than those projected, additional write-downs may be required. 19 ITEM 7. FINANCIAL STATEMENTS REPORT OF INDEPENDENT AUDITORS Board of Directors Gish Biomedical, Inc. We have audited the accompanying balance sheet of Gish Biomedical, Inc. as of June 30, 2002, and the related statements of operations, shareholders' equity, and cash flows for each of the two years in the period ended June 30, 2002. 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gish Biomedical, Inc. at June 30, 2002 and the results of its operations and its cash flows for each of the two years in the period ending June 30, 2002, in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that Gish Biomedical, Inc. will continue as a going concern. As discussed in Note 1 to the financial statements the Company has incurred recurring losses and has limited available cash resources at June 30, 2002. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. /s/ ERNST & YOUNG LLP Orange County, California August 30, 2002 20 GISH BIOMEDICAL, INC. BALANCE SHEET As of June 30, 2002 (dollars in thousands) ASSETS Current assets: Cash $ 158 Accounts receivable, net of allowance for doubtful accounts of $177 2,674 Relocation receivable 156 Inventories 4,313 Other current assets 106 -------- Total current assets 7,407 -------- Property and equipment: Leasehold improvements 2,182 Machinery and equipment 2,069 Molds, dies and tooling 3,895 Vehicles 65 Office furniture and equipment 1,372 -------- Total property and equipment 9,583 Less accumulated depreciation ( 6,727) -------- Net property and equipment 2,856 Other assets, net of accumulated patent amortization of $315 474 -------- Total assets $ 10,737 ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Revolving line of credit $ 1,455 Accounts payable 875 Accrued compensation and related items 292 Accrued relocation liabilities 322 Other accrued liabilities 45 -------- Total current liabilities 2,989 -------- Deferred rent 93 Commitments Shareholders' equity: Preferred stock, 1,500,000 shares authorized; no shares outstanding - Common stock, no par value, 7,500,000 shares authorized; 3,592,145 shares issued and outstanding 10,532 Retained earnings (deficit) ( 2,877) -------- Total shareholders' equity 7,655 -------- Total liabilities and shareholders' equity $ 10,737 ======== See accompanying notes. 21 GISH BIOMEDICAL, INC. STATEMENTS OF OPERATIONS Years Ended June 30, 2002 and 2001 (In thousands, except share and per share data) 2002 2001 --------- --------- Net sales $ 16,410 $ 18,017 Cost of sales 12,807 14,017 --------- --------- Gross profit 3,603 4,000 Operating expenses: Selling and marketing 3,587 4,132 Research and development 1,024 1,107 General and administrative 1,627 1,765 --------- --------- Total operating expenses 6,238 7,004 --------- --------- Operating loss ( 2,635) ( 3,044) Gain on relocation, net - 125 Interest expense, net ( 95) ( 13) --------- --------- Net loss ($ 2,730) ($ 2,892) ========= ========= Net loss per share - basic and diluted ($ .76) ($ .81) ========= ========= Basic and diluted weighted average common shares 3,592,145 3,592,145 ========= ========= See accompanying notes. 22 GISH BIOMEDICAL, INC. STATEMENTS OF SHAREHOLDERS' EQUITY Years Ended June 30, 2002 and 2001 (In thousands, except share data) Accumulated Common Stock Retained Other ------------------------- Number of Earnings Comprehensive Shares Amount (Deficit) Loss Total Balance at June 30, 2000 3,592,145 $ 10,532 $ 2,745 ($ 17) $ 13,260 Comprehensive loss: Unrealized gains/loss securities - - - 17 17 Net loss - - ( 2,892) - ( 2,892) Total comprehensive loss - - - - ( 2,875) --------- --------- ------- --------- -------- Balance at June 30, 2001 3,592,145 10,532 ( 147) - 10,385 Comprehensive loss: Net loss - - ( 2,730) - ( 2,730) Total comprehensive loss - - - - ( 2,730) --------- --------- ------- --------- -------- Balance at June 30, 2002 3,592,145 $ 10,532 ($ 2,877) $ - $ 7,655 ========= ========= ======= ========= ========
See accompanying notes. 23 GISH BIOMEDICAL, INC. STATEMENTS OF CASH FLOWS Years Ended June 30, 2002 and 2001 (in thousands) 2002 2001 -------- -------- OPERATING ACTIVITIES Net loss ($ 2,730) ($ 2,892) Adjustments to reconcile net income to net cash used in operating activities: Depreciation 685 713 Amortization 6 6 Gain on disposal of assets ( 3) - Deferred rent 50 27 Gain on relocation, net - ( 125) Changes in operating assets and liabilities 1,800 1,639 -------- -------- Net cash used in operating activities ( 192) ( 632) -------- -------- INVESTING ACTIVITIES Maturity of investments - 885 Purchase of property and equipment, net ( 434) ( 1,996) Increase of other long-term assets ( 13) ( 419) -------- -------- Net cash used in investing activities ( 421) ( 1,530) -------- -------- FINANCING ACTIVITIES Net borrowings on line of credit 661 795 -------- -------- Net cash provided by financing activities 661 795 -------- -------- Net increase (decrease) in cash and cash equivalents 48 ( 1,367) Cash and cash equivalents at beginning of year 110 1,477 -------- -------- Cash and cash equivalents at end of year $ 158 $ 110 ======== ========
See accompanying notes. 24 GISH BIOMEDICAL, INC. NOTES TO FINANCIAL STATEMENTS Years Ended June 30, 2002 and 2001 (In thousands, except share, per share and square footage data) 1. Business and Summary of Significant Accounting Policies 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 through direct sales representatives and distributors 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. The accompanying financial statements have been prepared assuming the Company will remain a going concern. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 Company incurred net losses of $2,730 and $2,892, and used $1,992 and $2,271 of cash in financing such losses during the years ended June 30, 2002 and 2001, respectively. As a result, the Company has cash of $158 and a deficit in retained earnings of $2,877 at June 30, 2002. Under its current operating plan, the Company believes its existing cash, together with cash forecasted to be generated by operations, including proceeds from the sale of non-core assets, and from borrowings under the existing revolving line of credit may be sufficient to meet the Company's cash requirements through June 30, 2003. However, if the Company is unable to achieve the financial performance embodied in the Company's current operating plan, including a substantial reduction in its current level of operating losses, a cash shortage would occur earlier and it would require either additional sources of funding or raising additional cash through the sale of assets. There can be no assurances that additional sources of funding will be available when needed or will be available at rates and terms favorable to the Company or that any potential assets sale will occur. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The accompanying balance sheet does not include any adjustments to reflect the possible future effects on recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. The accounting policies that affect the more significant elements of the accompanying financial statements are summarized below: Fair Value of Financial Instruments The fair value of cash, receivables and payables at June 30, 2002 approximate their carrying amount due to the short maturities of these items. Based upon borrowing rates currently available to the Company for loans with similar terms, the carrying value of its debt obligation approximates fair value. 25 GISH BIOMEDICAL, INC. NOTES TO FINANCIAL STATEMENTS (continued) 1. Summary of Significant Accounting Policies (continued) Inventories Inventories are stated at the lower of cost (first-in, first-out) or net realizable value and consists of the following at June 30, 2002: Raw materials $ 2,056 Work in progress 921 Finished goods 1,336 -------- Total inventories $ 4,313 ======== Property and Equipment Property and equipment are carried at cost. 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 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. Upon sale, the Company's products are primarily delivered by common carriers to the Company's customers. Generally, the customer specifies the delivery method and is responsible for delivery costs. Very often the customer specifies the delivery method and requests the Company pay the delivery costs and then invoice the delivery costs to the customer. Delivery costs billed to customers for the year ended June 30, 2002 of $475 and for the year ended June 30, 2001 of $569 have been recorded as a reduction of cost of sales in the respective years. The difference between the actual cost to the Company and the amounts billed to customers is not material. 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 2002 and fiscal 2001 were $25 and $144, respectively. 26 GISH BIOMEDICAL, INC. NOTES TO FINANCIAL STATEMENTS (continued) 1. Summary of Significant Accounting Policies (continued) Net Loss per Share The Company computes net loss per share in accordance with SFAS No. 128, "Earnings per Share". Under the provisions of SFAS No. 128, basic and diluted net loss per share in loss periods is computed by dividing the net loss available to holders of common stock for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net loss per share excludes potential shares of common stock if their effect is anti-dilutive. Potential shares of common stock consists of shares of common stock (440,834 shares at June 30, 2002) issuable upon the exercise of stock options. 2002 2001 ---- ---- Numerator for basic and diluted loss per share ($ 2,730) ($ 2,892) ========= ========= Denominator for basic net loss per share-weighted- average shares 3,592,145 3,592,145 Effect of dilutive securities - - --------- --------- Denominator for diluted net loss per share-adjusted weighted-average shares 3,592,145 3,592,145 ========= ========= Net loss per share-basic and diluted ($ .76) ($ .81) Statement of Cash Flows Changes in operating assets and liabilities: 2002 2001 ---- ---- Accounts receivable $ 244 $ 572 Relocation receivable - ( 156) Inventories 1,761 1,844 Other current assets ( 22) 44 Accounts payable 151 ( 881) Accrued compensation and related items ( 261) ( 17) Accrued relocation liabilities ( 102) 424 Other accrued liabilities 29 ( 191) -------- -------- Net change in operating assets and liabilities $ 1,800 $ 1,639 ======== ======== 27 GISH BIOMEDICAL, INC. NOTES TO FINANCIAL STATEMENTS (continued) 1. Summary of Significant Accounting Policies (continued) The Company paid $3 and $5 in federal and state income tax during the years ended June 30, 2002 and 2001, respectively. The Company paid interest costs of $106 and $47 during the years ended June 30, 2002 and 2001. During the year ended June 30, 2000, the Company recognized a $17 unrealized loss in its short-term investments that were classified as available-for-sale. The loss was realized during the year ended June 30, 2001. Stock Options The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and its related interpretation in accounting for its employee stock options because, as discussed in Note 8, 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. Revolving Line of Credit In December 2000, the Company entered into a $2,000 three-year revolving line of credit agreement. In February 2002, the revolving line of credit agreement was amended to extend the agreement for an additional year and increase the line to $4,000. Advances, based on eligible receivables, are secured by the operating assets of the Company and bear interest at prime (4.75% at June 30, 2002) plus 2%. The agreement also includes various restrictive loan covenants, including a requirement for the Company to maintain a minimum net worth of $7,000, and to obtain an operating profit on a rolling three-month basis, effective March 2003. At June 30, 2002 the Company had borrowed $1,455 under the revolving line of credit and, would have been entitled to borrow an additional $601. 3. Analysis of Reserve Accounts Balance at Additions Beginning of Charged to Balance at Year Expense Deductions End of Year ------------------------------------------------------- Allowance for doubtful accounts: June 30, 2002 $ 198 $ 15 $ 36 $ 177 June 30, 2001 $ 156 $ 60 $ 18 $ 198 Reserve for inventory: June 30, 2002 $ 850 $ 96 $ 210 $ 736 June 30, 2001 $1,323 $ 404 $ 877 $ 850 Valuation reserve for deferred tax assets: June 30, 2002 $3,954 $ 945 $ --- $4,899 June 30, 2001 $2,923 $1,031 $ --- $3,954
28 GISH BIOMEDICAL, INC. NOTES TO FINANCIAL STATEMENTS (continued) 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. Total Company contributions to the Plan were $39 and $36 for fiscal years ended June 30, 2002 and 2001, respectively. 5. Taxes Based on Income The Company uses the liability method of accounting for income taxes as set forth in Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Under this method, deferred taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Deferred tax assets are recognized and measured based on the likelihood of realization of the related tax benefit in the future. A reconciliation of the income tax benefit using the federal statutory rate to the book provision for income taxes follows as of years ended June 30: 2002 2001 ---- ---- Income tax at statutory rate ($ 928) ($ 983) State tax, net of federal benefit - - Other, net ( 17) ( 48) Valuation allowance 945 1,031 ------- ------- $ - $ - ======= ======= At June 30, 2002, the Company has unused net operating loss carryforwards of approximately $10,936 and $6,350 for federal and California income tax purposes, respectively. The Company also has alternative minimum tax credit carryforwards of approximately $100 and $108 for federal and California tax purposes, respectively. As of June 30, 2002, 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. 29 GISH BIOMEDICAL, INC. NOTES TO FINANCIAL STATEMENTS (continued) 5. Taxes Based on Income (continued) 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, 2002 and 2001 consist of the following: 2002 2001 ---- ---- Net operating loss carryforward $ 4,280 $ 3,209 Book over tax depreciation/amortization ( 118) ( 114) Inventory capitalization 400 433 Reserves and accruals 405 467 State taxes ( 276) ( 251) Tax credit carryforward 208 210 ------- -------- Total net deferred tax assets 4,899 3,954 ------- -------- Less valuation allowance ( 4,899) ( 3,954) ------- -------- Net deferred tax assets $ - $ - ======= ======== 6. Segment Information The Company operates in one industry segment, the manufacture 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, 2002, the Company believes it has no significant concentrations of credit risk. One sales representative organization comprised 14.5% of the Company's net sales in fiscal 2002 and 11% in fiscal 2001. Sales to foreign customers (primarily in Europe and Asia) aggregated approximately $3,138 in 2002 and $3,491 in 2001. 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, an Amended 1997 Stock Incentive Plan (the "Amended 1997 Plan"), a Non Qualified Stock Option Agreement (the "2000 Agreement"), and a Non-Qualified Stock Option Agreement (the "2001" Agreement). 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, the 1987 Plan, the Amended 1997 Plan, the 2000 Agreement, and the 2001 Agreement is 487,500, 1,025,000, 500,000, 190,000, and 100,000 respectively. 30 GISH BIOMEDICAL, INC. NOTES TO FINANCIAL STATEMENTS (continued) 7. Stock Option Plan (continued) The following table summarizes information about stock options outstanding under the 1981, 1987 and 1997 plans and the 2000 and 2001 Agreements combined: Weighted Number of Average Exercise Shares Price ---------- ---------------- Options outstanding at June 30, 2000 406,750 $ 2.87 Granted 256,000 2.28 Canceled (161,324) 2.68 Exercised - - ------- ------- Options outstanding at June 30, 2001 501,416 2.63 Granted 25,000 .98 Canceled (185,582) 2.26 Exercised - - ------- ------- Options outstanding at June 30, 2002 440,834 $ 2.27 ======= ======= As of June 30, 2002, 440,834 options are outstanding of which 305,459 are exercisable. Additionally, 315,417 options remain available for grant. At June 30, 2002 the 1987 Plan has no options available for grant and options for 1,334 shares are outstanding and exercisable. As of June 30, 2001, 216,916 options were exercisable and 200,167 options were available for grant. The weighted average fair values of options granted were $.72 and $1.59 in fiscal 2002 and 2001, respectively. A summary of options outstanding and exercisable as of June 30, 2002 follows: Weighted- Average Weighted-Average Weighted- Options Exercise Price Exercise Remaining Options Average Outstanding Range Price Contractual Life Exercisable Exercise Price ---------------------------------------------------------------------------------------------------- 100,000 $ .96 - .96 $ .96 9.11 100,000 $ .96 25,000 $1.05 - 1.05 $1.05 9.15 0 - 100,250 $2.38 - 2.38 $2.38 8.00 39,875 $2.38 1,334 $2.72 - 2.72 $2.72 .13 1,334 $2.72 5,000 $2.75 - 2.75 $2.75 1.53 5,000 $2.75 9,250 $2.81 - 2.81 $2.81 .99 9,250 $2.81 10,000 $2.87 - 2.87 $2.87 1.00 10,000 $2.87 190,000 $3.00 - 3.00 $3.00 7.88 140,000 $3.00
31 GISH BIOMEDICAL, INC. NOTES TO FINANCIAL STATEMENTS (continued) 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 2002: risk free interest rate of 4.0% a dividend yield of 0%, volatility factors of the expected market price of the Company's common stock of 1.08 and a weighted-average expected life of the option of 3.8 years, and 2001: risk free interest rate of 5.0%, a dividend yield of 0%, volatility factors of the expected market price of the Company's common stock of .95 and a weighted-average expected life of the option of 3.8 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different 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, 1995 through June 30, 2002. 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: 2002 2001 -------- -------- Pro forma net loss ($ 2,935) ($ 3,069) Pro forma diluted loss per share ($ .82) ($ .85) 9. Early Lease Termination In October 2000, the Company completed negotiations with its then current landlord to terminate the lease on its Irvine facility that was due to expire in December 2002. Pursuant to the Agreement, the Company vacated the Irvine facility in stages commencing in October 2000 and ending in January 2001. As the Company vacated the Irvine facility its rental payments were reduced accordingly. As part of the Agreement, the Irvine facility landlord paid the Company incentive fees for this early termination in the aggregate amount of $1,550. In addition to the early lease termination incentives received from its Irvine facility landlord, a third party paid the Company $300 to accelerate the vacating of a portion of the lease space. The cash incentive fees received were used to pay for the cost of moving and constructing leasehold improvements at the Company's new facilities. 32 GISH BIOMEDICAL, INC. NOTES TO FINANCIAL STATEMENTS (continued) 9. Early Lease Termination (continued) The net gain on relocation of $125 recorded in the current period is comprised of cash incentives of $1,850 to vacate the Irvine facility before the expiration of the lease and the recognition of a gain of $236 related to the unamortized portion of deferred rent expense, offset by the costs associated with the relocation. These costs included the write-off of assets of $662, consisting principally of leasehold improvements, costs associated with the physical move of $297, unabsorbed overhead incurred during the period of reduced production of $400, costs related to temporary production facilities of $390 and other costs associated with the relocation of $214. Unpaid costs of $322 at June 30, 2002 are included in accrued relocation liabilities. 10. Commitments and Contingencies Operating Leases In conjunction with the early lease termination the Company entered into a lease during October 2000 for a 52,000 square foot facility in Rancho Santa Margarita, California. This new lease expires in February 2011 and contains a five-year renewal option. The lease provides for initial monthly payments, commencing February 2001, of approximately $34 with annual increases, based on the Consumer Price Index, but in no event less than 3% or more than 5% per annum ($35 at June 30, 2002). A letter of credit in the amount of $300 was posted as a security deposit for this lease with the Company pledging as collateral a certificate of deposit in a like amount. The security deposit was reduced to $195 in February 2002 and is to be reduced to $90 during February 2003, based on provisions contained in the lease. The new landlord agreed to reimburse the Company $156 for leasehold improvements, which is included in the relocation receivable at June 30, 2002. Costs for the construction of improvements totaled approximately $1,800 of which $164 is included in accrued relocation liabilities at June 30, 2002. The Company has excluded from the costs for the construction improvements at June 30, 2002, approximately $300 billed to the Company by the improvement construction contractor. The accuracy and validity of these billings are currently being disputed by the Company. In November 2000, the Company entered into a lease for an additional 23,000 square foot facility in Irvine, California for storage of finished goods inventory. This lease expires in January 2006 and contains a five-year renewal option. The lease provides initial monthly payments commencing January 2001, of approximately $12, increased 3% annually ($13 at June 30, 2002). The lease required a security deposit of $30 and prepayment of approximately $37 ($13 remaining at June 30, 2002) representing the first, thirteenth and twenty-fifth months' rent. 33 GISH BIOMEDICAL, INC. NOTES TO FINANCIAL STATEMENTS (continued) 10. Commitments and Contingencies (continued) Aggregate future minimum rental payments on a cash basis required under operating leases for the Rancho Santa Margarita and Irvine facilities are as follows: Fiscal year Rancho Santa ended June 30, Margarita Irvine ------------------------------------------------------ 2003 $ 422 $ 140 2004 435 158 2005 448 163 2006 461 82 2007 475 - Thereafter 1,822 - ------- ------- $ 4,063 $ 543 ======= ======= Rent expense charged to operations was $609 and $650 for the years ended June 30, 2002 and 2001. Litigation The Company completed its relocation to a new operating facility in the April 2001. At June 30, 2002 unpaid relocation costs of $322 are included in accrued relocation liabilities. Additionally, the Company has excluded from the costs recorded for the construction improvements at June 30, 2002 approximately $300 billed to the Company by the improvement construction contractor. The accuracy and validity of these billings are currently being disputed by the Company and the issue is scheduled for arbitration in October 2002. Upon resolution of this issue the current Landlord will reimburse the Company $156 for leasehold improvements, which is included in relocation receivable at June 30, 2002. The Company is party to various other legal actions arising in the ordinary course of its business. The Company believes that the resolution of these legal actions will not have a material adverse effect on the Company's financial position, results of operations or cash flows. 11. Foreign Sales Corporation Subsidiary The Company dissolved its wholly-owned foreign sales corporation subsidiary, Gish International Inc., effective January 12, 2001. 34 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Inapplicable. 35 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Directors of the Registrant The following persons are currently serving on the Board of Directors of the Company until the Company's next Annual Meeting of Shareholders: Name Principal Occupation Age Director Since ------------------------------------------------------------------------------- Ray R. Coulter Practicing Attorney in Rancho 69 1979 Mirage, California John W. Galuchie, Jr. President, T.R. Winston & 49 1999 Company, Inc. John S. Hagestad Managing Director, Sares/Regis 55 1979 Group Kelly D. Scott President and Chief Executive 46 2000 Officer of the Company Mr. Coulter is a practicing attorney in Rancho Mirage, California, specializing in corporate, Food and Drug Administration and health care law. For more than the previous 5 years, he was the co-founder and chief financial officer of Wintec Energy, Ltd., an alternate energy company. Mr. Galuchie, a Certified Public Accountant and Chairman of the Company, 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 including Treasurer and Secretary of Asset Value Management, Inc., the sole general partner of Asset Value Fund Limited Partnership; (iii) Pure World, Inc., a manufacturer and distributor of natural products, as Executive Vice President since April 1988; (iv) Cortech, Inc., a biopharmaceutical company, as President and director since September 1998. Mr. Galuchie served as a director of Crown NorthCorp, Inc. from June 1992 to August 1996, a director of HealthRite, Inc. from December 1998 to June 1999 and a director of Golfrounds.com, Inc. from July 1992 to January 2000. 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. Mr. Scott joined the Company in May 2000 as President and Chief Executive Officer. Prior to joining Gish, Mr. Scott was employed for more than twenty years by Sorin Biomedica and its predecessor, Shiley, Inc. a subsidiary of Pfizer, Inc. He was most recently Managing Director of Sorin Biomedica Asia, a position held since 1998. From 1996 to 1997 he was Managing Director of Sorin Biomedica U.K. Ltd. and from 1994 to 1996 Director of National Accounts for Sorin Biomedical, Inc. 36 Executive Officers of the Registrant First Year Name Position with Company Age Elected Office ------------------------------------------------------------------------------- Kelly D. Scott President and Chief Executive 46 2000 Officer of the Company Leslie M. Taeger Chief Financial Officer 52 2000 For certain information concerning the business experience of Mr. Scott refer to previous section titled "Directors of the Registrant". Mr. Taeger became Vice President, Chief Financial Officer in September 2000. Prior to joining Gish, Mr. Taeger was employed for more than five years as Chief Financial Officer by Cartwright Electronics, Inc., a division of Meggitt, PLC. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who beneficially own more than ten percent of the Company's common stock, to file reports of holdings and transactions in the Company's shares with the SEC. Based on Gish's records and other information, Gish believes that in fiscal 2002 Gish's directors and executive officers met all applicable SEC filing requirements. ITEM 10. EXECUTIVE COMPENSATION Summary Compensation Table. The following table sets forth the aggregate compensation for services rendered in all capacities during the fiscal years ended June 30, 2002, 2001 and 2000 of all persons serving as Chief Executive Officer and all other executive officers whose salary and bonus exceeded $100,000 (the "Named Executive Officers"). SUMMARY COMPENSATION TABLE Long-Term Compensa- Annual Compensation tion ----------------------------------------------------------------- Other Annual Securities All Other Name and Bonus Compensation Underlying Compensation Principal Position Year Salary ($) ($) (1) (4) ($) (2) Option (#) ($) (3) ----------------------------------------------------------------------------------------------- Kelly D. Scott, 2002 180,000 - 6,332 100,000 - President and 2001 180,000 - 4,512 190,000 - CEO 2000 22,500 20,000 752 - - Jack W. Brown, 2001 100,000 - - - - Former President 2000 118,958 - 3,332 - 15,629 and CEO Leslie M. Taeger, 2002 150,000 - 3,812 - 250 Chief Financial 2001 118,750 10,900 3,120 25,000 250 Officer James R. Talevich, 2000 126,583 - - 35,000 250 Former Chief Financial Officer
37 (1) Bonuses paid to the Named Executive Officers 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. (2) Other Annual Compensation consists of the personal use portion of Company-provided automobiles and premiums paid on executive insurance. (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, plus the value of a company-owned vehicle which was given to Mr. Brown under the terms of his employment agreement. (4) Mr. Scott joined the Company in May 2000 as President and Chief Executive Officer. Mr. Scott entered into a written employment agreement with the Company whereby he is entitled to an annual base salary of $180,000, a signing bonus of $20,000 upon the commencement of his employment, and a bonus to be determined by the Board of Directors based on the achievement of specified corporate profitability targets. The employment agreement was amended in August 2001 to provide an initial two-year term commencing August 9, 2001 ("Commencement Date"). The term is to be automatically extended one day for each day elapsed after the Commencement Date. In the event that his employment is involuntarily terminated, he will be entitled to severance payments equivalent to two times the annual salary then in effect on the date of such termination. Mr. Scott was granted options to purchase 190,000 shares of the Company's common stock at an exercise price of $3.00 per share. Options will vest and become exercisable at the rate of 60,000 shares on May 18, 2000, 40,000 shares on May 18, 2001, 40,000 shares on Mary 18, 2002, and 50,000 shares on May 18, 2003. Mr. Scott was granted an additional fully vested option to purchase 100,000 shares at an exercise price of $.96 per share effective August 8, 2001. Stock Options Granted During Fiscal 2002. The following table shows information regarding stock options granted to the Named Executive Officers during fiscal 2001. OPTION GRANTS IN LAST FISCAL YEAR (Individual Grants) Number of Securities % of total Options Underlying Granted to Options Granted Employees in Exercise or Base Name (#) (1) Fiscal Year Price ($/Share) Expiration Date ---------------------------------------------------------------------------------------- Kelly D. Scott 100,000 80% $.96 8/7/2011
38 Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Values. The following table sets forth, for each of the Named Executive Officers named in the Summary Compensation Table above, each exercise of stock options during the year ended June 30, 2002 and the year-end value of unexercised options: Number of Securities Shares Underlying Unexercised Value of Unexercised Acquired Options In-the-Money Options on Value at Fiscal Year End 2001 at Fiscal Year End 2001 Exercise Realized Exercisable Unexercisable Exercisable Unexercisable Name (#) ($)(1) (#) (#) ($)(2) ($)(2) ---------------------------------------------------------------------------------------------------- Kelly D. Scott - - 240,000 50,000 - - Jack W. Brown - - - - - - Leslie M. Taeger - - 15,000 10,000 - -
(1) Excess of market price over exercise price, on the date of exercise. (2) Value of unexercised in-the-money options is based on Nasdaq's closing price on June 28, 2002 ($.37 per share). Compensation of Directors Effective February 1, 1999, the Board approved the waiver of Directors' compensation until such time as the Company returns to profitability. Subsequent to this date, because of the continued operating losses and management turnover experienced by the Company, the Board requested that John W. Galuchie, Jr., become actively involved in the operations of the Company. In return for the ongoing services provided by Mr. Galuchie, the Board authorized the Company to pay Mr. Galuchie a monthly fee of $8,000 and to reimburse Mr. Galuchie's Company related travel expenses. Fees earned by Mr. Galuchie totaled $96,000 in both 2002 and 2001. 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, 2002, the members of the Committee were John S. Hagestad and Ray R. Coulter, both 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 During fiscal years 2000 and 2001 the Company employed a new Chief Executive Officer and a new Chief Financial Officer. The compensation of these officers were based on negotiated employment contracts which were subsequently approved by the Board of Directors. Accordingly, no report was issued by the Compensation Committee for the fiscal years ended June 30, 2002 or June 30, 2001. 39 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information as of September 6, 2002 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 590,400 16% 376 Main Street Bedminster, NJ 07921 Craig Corporation 583,900 (2) 16% 550 South Hope Street, Suite 1825 Los Angeles, CA 90071 Dimensional Fund Advisors, Inc. 229,600 6% 1299 Ocean Avenue Santa Monica, CA 90401 Ray R. Coulter 9,178 (3) * John W. Galuchie, Jr. 590,400 (4) 16% John S. Hagestad 139,190 (5) 4% Kelly D. Scott 343,300 (6) 9% Leslie M. Taeger 45,000 (7) 1% All directors and executive officers as a group 1,127,068 (8) 29% ---------------- * 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 5,000 shares subject to options exercisable currently. (4) Mr. Galuchie is deemed to be the beneficial owner of Common Stock of Gish Biomedical, Inc. through his position as Treasurer and Secretary of Asset Value Management, Inc. the sole general partner of Asset Value Fund Limited Partnership. (5) Includes 5,000 shares subject to options exercisable currently. (6) Includes 240,000 shares subject to options exercisable currently. 40 (7) Includes 45,000 shares subject to options exercisable currently or within 60 days. (8) Includes 295,000 shares subject to options exercisable currently or within 60 days. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In connection with the Company's relocation to its new facility in Rancho Santa Margarita, California the Sares-Regis Group acted as the real estate broker for the Company's new landlord. In this capacity they received usual and customary real estate commissions from the landlord in the transaction. A director of the Company is a principal with Sares-Regis Group. 41 PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (A) 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. 42 (A) Exhibits The following Exhibits are filed as part of this Report: Exhibit Number Description ------- ----------- 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. 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-KSB 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, incorporated herein by this reference to the Company's Report on Form 10-KSB for the year ended June 30, 1999. 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. 43 Exhibit Number Description ------- ----------- 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 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 Form 10-K for the year ended June 30, 1996. 10.14* Kelly D. Scott, President and Chief Executive Officer Employment Agreement dated May 15, 2000, incorporated herein by this reference to the Company's Report on Form 10-KSB for the year ended June 30, 2000. 10.15 Lease Amendment, Settlement Agreement and Mutual Release dated October 26, 2000, between ISCO-Irvine North Ltd. and the Company, incorporated herein by this reference to the Company's Report on Form 10-QSB for the quarter ended December 31, 2000. 10.16 Lease, dated October 26, 2000, between the Company and Eric and Shirley Pepys, incorporated herein by this reference to the Company's Report on Form 10-KSB for the year ended June 30, 2000. 10.17 Contract, dated November 3, 2000, between the Company and Image Builders Consortium, Inc, incorporated herein by this reference to the Company's Report on Form 10-KSB for the year ended June 30, 2000. 10.18 Lease, dated November 28, 2000, between the Company and Buckhead Industrial Properties, Inc., incorporated herein by this reference to the Company's Report on Form 10-KSB for the year ended June 30, 2000. 10.19 Loan and Security Agreement, dated December 26, 2000, between the Company and Heller Healthcare Finance, Inc., incorporated herein by this reference to the Company's Report on Form 10-KSB for the year ended June 30, 2000. 10.20* Kelly D. Scott, President and Chief Executive Officer Amended Employment Agreement dated August 9, 2001. 10.21* Form of Amended 1997 Stock Incentive Plan (the "Amended 1997 Plan"). 21.1 Subsidiaries of the Company - None 44 (A) Exhibits -------- The following Exhibits are filed as part of this Report: 99.1 Certifications pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002** (B) Reports on Form 8-K ------------------- No reports on Form 8-K were filed by the Company during the quarterly period ended June 30, 2002. -------------------- *Management contract or compensatory plan or arrangement. ** Filed herewith. 45 Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Commission Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. GISH BIOMEDICAL, INC. REGISTRANT Date: September 26, 2002 By: /s/ LESLIE M. TAEGER -------------------------- LESLIE M. TAEGER Chief Financial Officer 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/ JOHN W. GALUCHIE, JR. Director, Chairman of the September 26, 2002 -------------------------- Board JOHN W. GALUCHIE, JR. /s/ JOHN S. HAGESTAD Director September 26, 2002 -------------------------- JOHN S. HAGESTAD /s/ RAY R. COULTER Director September 26, 2002 -------------------------- RAY R. COULTER /s/ KELLY D. SCOTT Director, President and Chief September 26, 2002 -------------------------- Executive Officer KELLY D. SCOTT (Principal Executive Officer) /s/ LESLIE M. TAEGER Chief Financial Officer September 26, 2002 -------------------------- (Principal Financial Officer LESLIE M. TAEGER and Principal Accounting Officer) 46 CERTIFICATIONS I, Kelly D. Scott, certify that: 1. I have reviewed this annual report on Form 10-KSB of Gish Biomedical, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly represent in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; September 26, 2002 /s/ KELLY D. SCOTT -------------------------- Kelly D. Scott President/Chief Executive Officer CERTIFICATIONS I, Leslie M. Taeger, certify that: 1. I have reviewed this annual report on Form 10-KSB of Gish Biomedical, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly represent in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; September 26, 2002 /s/ LESLIE M. TAEGER -------------------------- Leslie M. Taeger Chief Financial Officer Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 906 of the Public Company Accounting Reform and Investor Protection Act of 2002 (18 U.S.C. 1350, as adopted), Kelly D. Scott, the President and Chief Executive Officer of Gish Biomedical, Inc., (the "Company"), and Leslie M. Taeger, the Chief Financial Officer of the Company each hereby certifies that, to the best of their knowledge: 1. The Company's Annual Report on Form 10-KSB for the period ended June 30, 2002, to which this Certification is attached as Exhibit 99.1 (the "Periodic Report"), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Periodic Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by the Periodic Report and results of operations of the Company for the period covered by the Periodic Report. Dated: September 26, 2002 /s/ Kelly D. Scott --------------------------- Kelly D. Scott President and Chief Executive Officer /s/ Leslie M. Taeger --------------------------- Leslie M. Taeger Chief Financial Officer