-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OAQaHZt72RGyn5Ja0nSWjGsZFhbomC52rlb/78ozoSGyfCyObew7hhdfwqwhq7HU jGeCYFhqwXIUbDPmr30fJg== 0000700945-99-000004.txt : 19990928 0000700945-99-000004.hdr.sgml : 19990928 ACCESSION NUMBER: 0000700945-99-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990927 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GISH BIOMEDICAL INC CENTRAL INDEX KEY: 0000700945 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 953046028 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-10728 FILM NUMBER: 99717874 BUSINESS ADDRESS: STREET 1: 2681 KELVIN AVE CITY: IRVINE STATE: CA ZIP: 92714 BUSINESS PHONE: 9497565485 MAIL ADDRESS: STREET 1: 2681 KELVIN AVE CITY: IRVINE STATE: CA ZIP: 92714 EX-27 1 FDS --
5 This Schedule contains summary financial information extracted from the Form 10-K of Gish Biomedical, Inc. for the year ended June 30, 1999 and is qualified in its entirety by reference to such financial statements. 0000700945 GISH BIOMEDICAL, INC. 1,000 12-MOS JUN-30-1999 JUL-01-1998 JUN-30-1999 2,792 1,490 3,403 0 7,180 14,983 9,851 6,997 17,987 1,998 0 0 0 10,148 (54) 17,987 18,709 18,709 13,669 13,669 6,928 0 0 (1,691) 0 (1,691) 0 0 0 (1,691) (.49) (.49)
10-K 2 FOR THE YEAR ENDED JUNE 30, 1999 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1999 ------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-10728 GISH BIOMEDICAL, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 95-3046028 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 2681 Kelvin Avenue Irvine, California 92614 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (949)756-5485 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of each class ------------------- No par value common stock Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No__ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] On September 14, 1999 the aggregate market value of the registrant's voting common stock held by non-affiliates of the registrant was approximately $9,553,121 (computed using the closing price of $2.750 per share of Common Stock on that date as reported by NASDAQ). There were 3,473,862 shares of the registrant's Common Stock, no par value, outstanding on September 14, 1999. DOCUMENTS INCORPORATED BY REFERENCE NONE GISH BIOMEDICAL, INC. INDEX
Part I: Page Item 1. Business 3 Item 2. Properties 14 Item 3. Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Part II: Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 14 Item 6. Selected Financial Data 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 20 Item 8. Financial Statements and Supplementary Data 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 34 Part III: Item 10. Directors and Executive Officers of the Registrant 35 Item 11. Executive Compensation 36 Item 12. Security Ownership of Certain Beneficial Owners and Management 39 Item 13. Certain Relationships and Related Transactions 40 Part IV: Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 41
PART I ITEM 1. BUSINESS FORWARD LOOKING STATEMENTS This Annual Report on Form 10-K contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of important factors. For a discussion of important factors that could affect the Company's results, please refer to "Risk Factors" below. GENERAL Gish Biomedical, Inc. ("Gish" or the "Company"), a California corporation, was founded in 1976 to design, produce and market innovative specialty surgical devices. The Company develops and markets its innovative and unique devices for various applications within the medical community. The Company operates in one industry segment, the manufacture of medical devices, which are marketed primarily through direct sales representatives domestically and through international distributors. All of Gish's products are single use disposable products or have a disposable component. The Company's primary markets include products for use in cardiac surgery, myocardial management, infusion therapy, and post operative blood salvage. ACQUISITIONS In April 1996, Gish acquired infusion pump technology and related assets from Creative Medical Development, Inc. ("CMD"). PRODUCTS Following is a brief description of Gish's present principal products. Custom Cardiovascular Tubing Systems - During open-heart surgery, the patient's blood is diverted from the heart through sterile plastic tubing and various other devices to an oxygenator device which oxygenates the blood before it is returned to the patient. Each hospital performing open-heart surgery specifies the components to be included in its custom tubing sets, based on the particular needs of its surgical team. The complexity of the sets varies from simple tubing systems to all-inclusive operating packs. The packs usually include blood filters, gas filters, reservoirs used to collect blood lost during surgery and other components. Gish produces custom tubing sets using clear Mediflex(TM) tubing. Such components are assembled in the Gish clean room, sterilized and then shipped either to the hospital or to one of Gish's specialty distributors which service such hospitals. The Company also assembles custom tubing sets for several competitive medical device manufacturers under private label agreements. Custom tubing set sales were approximately $6,360,000, $8,572,000, and $8,985,000, in fiscal 1999, 1998, and 1997 respectively (equal to 34%, 42% and 43% of net sales, respectively, in each of such years). Arterial Filters - The arterial filter is the last device the blood passes through in the cardiovascular bypass circuit as it is being returned to the patient. The purpose of the filter is to remove gaseous micro emboli and debris, which are generated by the oxygenation system, from the patient's blood. The Company introduced its first arterial filters in 1985. The Company's first design contained a safety bypass loop incorporated into the filter housing. The Company received FDA approval to market an improved design which became available for sale during the second quarter of fiscal 1994. Cardiotomy Reservoirs - Cardiac suction is a technique employed in open-heart surgery to recover shed blood in the chest cavity and return it to the patient. The use of this technique reduces the requirements for whole blood replacement from donor sources, thereby reducing the risk of blood compatibility problems and blood-borne viral diseases such as AIDS and hepatitis. Gish's cardiotomy reservoir systems consist of a polycarbonate reservoir, defoaming and filtration cartridge, and mounting bracket. This enables the perfusion team to recover high volumes of shed blood, then defoam and filter it prior to returning it to the patient's circulatory system. In addition to the cardiotomy reservoirs' use in the operating room, Gish has developed several systems which allow the cardiotomy reservoir to be used as a pleural drainage or autotransfusion system during recovery. Cardiotomy sales were approximately $1,291,000, $1,753,000, and $1,910,000 for fiscal years ended June 30, 1999, 1998 and 1997 respectively (equal to 7%, 9% and 9% of net sales, respectively, in such years). Vision(TM) Oxygenator - An oxygenator enables gas exchange of oxygen and carbon dioxide and also regulates the temperature of the patient's blood. As a life sustaining device used during open-heart surgery, the oxygenator is a key component of the bypass circuit. Vision is assembled in Gish's clean rooms using state of the art equipment and biocompatible materials, and then each unit is leak tested before shipment. Vision's gas transfer performance is excellent, dependable and capable of maintaining the oxygen demands of patients of all sizes for periods of up to six hours. Vision's unique air separation channel utilizes an arterial outlet pressure gradient and the natural buoyancy of air to minimize the passage of gaseous emboli towards the patient. Unwanted emboli are safely purged for safe venting back to the reservoir. Through studies at an independent testing facility, Vision's air handling abilities were proven superior to competitive devices. Vision also eliminates common difficulties associated with other oxygenators. The blood ports are oriented on one side, gas and water on the other to reduce contamination. Different sized gas inlet and outlet ports resolve any gas line confusion. Angled water ports allow Vision's heat exchanger to drain, minimizing the creation of water puddles on the floor. During long pump runs, a fluid dam and evacuation port divert condensation away from the gas scavenge port. Finally, a protective rib below the blood inlet port prevents any contact between the port and the floor. The Company's Vision oxygenator was sold in selected accounts both domestically and internationally for the first half of fiscal 1998. The Company made its full market release of this product for sale in January 1998. The Company believes that the Vision oxygenator's superior air handling capabilities should provide the Company with a competitive advantage in the oxygenator market place. Oxygenator sales were approximately $2,263,000 and $580,000 in fiscal 1999 and 1998, respectively (equal to 12% and 3% of net sales, respectively, in such years). Venous Reservoirs - A venous reservoir is a device used to pool, filter and defoam blood prior to its introduction to the oxygenator. Gish offers a variety of venous reservoirs, including some which incorporate the capacity for autologous transfusion post surgically. The Company also has several products which incorporate the functions of cardiotomy, venous reservoir, post surgical blood collection and blood reinfusion devices. This functional bundling is usually cost effective for the hospital. CAPVRF45 - The Company's CAPVRF45 hardshell venous reservoir combines a 360(degree) rotational, top-entry 1/2" inlet for unrestricted venous drainage and a high performance cardiotomy compartment with six sucker inlet ports to handle all of the blood coming from the surgical field. Gish has incorporated the advantages of the depth filter in its cardiotomies into the CAPVRF45 for reduced hold-up volumes, making more blood available to the patient. With an operating capacity of 4500 ml, the CAPVRF45 also has the capacity to handle high blood volume procedures such as valve replacements and second surgeries. The CAPVRF45 is a perioperative device, capable of operating in both the Operating Room and Recovery Room. Following surgery, through a simple conversion process, the CAPVRF45 collects blood shed from the chest cavity and removes unwanted debris before the filtered blood is reinfused back into the patient. Blood recovery and autotransfusion through the CAPVRF45's closed system limits hospital staff exposure to potential blood infections. Recovered blood may be reinfused continuously, intermittently, or not at all, in support of all patient's religious beliefs, including Jehovah's witnesses. The CAPVRF45's dual role means fewer homologous blood products are needed, further reducing surgical costs and improving patient safety. With an estimated 80% of the market using hardshell reservoirs, the combination of the Vision oxygenator and the hardshell CAPVRF45 reservoir provides the Company with the products to effectively meet the needs of the 400,000 open-heart procedures performed in the U.S. and the 600,000 procedures performed worldwide annually. Cardioplegia Delivery Systems - Cardioplegia encompasses several techniques employed in open-heart surgery to preserve, protect and manage the heart tissue. The technique typically involves the use of a chilled solution which is infused into the heart through the coronary arteries to cool the heart and reduce heart activity and metabolism. However, there are many different techniques utilized depending on the physician and patient needs. The use of these techniques significantly reduces damage to heart tissue during surgery, enhances restoration of heart function and helps return the patient to a normal heartbeat when the surgical procedure is complete. Gish has developed a complete line of cardioplegia delivery systems. Multiple systems are required for this technique due to varying physician preferences. Gish's original offerings for this procedure were a series of reservoirs with a recirculation valve (CPS) and a series of cooling coils (CCS series). The Company has since developed a line of cardioplegia systems and heat exchangers designed to utilize a blood and potassium mixture and allow the surgeon to quickly change the temperature delivered to the patient. Gish upgraded its CPS series of reservoirs with the CPS Plus(R) which was introduced in fiscal 1993. Cardioplegia system sales were approximately $3,147,000, $3,490,000 and $4,000,000 for fiscal years 1999, 1998, and 1997, respectively (equal to 17%, 17%, and 19% of net sales, respectively, in each of such years). Oxygen Saturation Monitor - In February 1992, the Company introduced a digital blood saturation monitor for open-heart surgery, the StatSat(TM). The StatSat is an electronic device which measures the oxygen content of the patient's blood during surgery. These readings are taken continuously and the StatSat(TM) plots the course of the blood oxygen saturation during the surgery. Although the StatSat is reusable, it uses a disposable sensor for each surgery which is only provided by Gish in its custom tubing systems. Critical Care Central Venous Access Catheters and Ports - Gish's Hemed(TM) central venous access catheter systems have applications in hyper-alimentation, chemotherapy, and long-term vascular access. These long-term indwelling catheters are surgically implanted to provide direct access to the central venous system for high protein intravenous solutions needed by patients having nonfunctional digestive systems and for rapid dilution and dispersion of highly concentrated drug administration in chemotherapy for cancer. The product line includes sterile single, dual and triple lumen catheters and accessories sold in kits. The triple lumen catheters which permits three substances to be administered through the same catheter was introduced during fiscal 1997. In 1993, the Company introduced an enhancement to its Hemed catheter line, the CathCap(TM). The CathCap reduces the risk of infection at the injection site by continually bathing the injection cap in an antimicrobial solution between injections. Gish has enhanced the Hemed line with the VasPort(R) Implantable Ports and the VasTack(R) Needle Support System. The VasPort consists of a silicone catheter with an implantable injection port, allowing vascular access through small needle sticks with the skin acting as a natural barrier to infection. This access method eliminates the need for a cumbersome external catheter. The Company introduced a detachable port/catheter system in fiscal 1994. The Company also introduced a dual VasPort in July 1996 to meet the needs of patients requiring multiple infusions. The VasTack consists of a specially designed needle and positioning system for use with the VasPort. The needle extends the life of the implanted injection port and the positioning system gives the nursing staff a sure, safe method for accessing the VasPort. The Hemed VasPort and VasTack are alternative vascular access products used for extended long-term infusion management and are designed to complement the Hemed catheter lines. The VasPort is a device implanted entirely under the skin and consists of a small reservoir with a diaphragm and catheter. The VasPort is accessed by the VasTack, a small patented non- coring needle system, which penetrates the skin and the diaphragm of the VasPort reservoir. Drugs are readily infused through the VasTack, into the reservoir and then into the catheter. When the infusion is complete the VasTack is removed and the skin acts as a natural barrier against infection. Single and double reservoir VasPorts are available in both titanium and lightweight engineering plastics. Catheter and port sales were approximately $980,000, $1,170,000 and $1,107,000 for fiscal year 1999, 1998, and 1997, respectively (equal to 5%, 6% and 5% of net sales, respectively, in each of such years). Infusion Pumps - The acquisition of the EZ Flow infusion pump technology from CMD in fiscal 1996 was intended to complement the Company's line of vascular access devices. In fiscal 1997 the Company evaluated the future revenue stream of the product and concluded that the goodwill had been impaired. In fiscal 1998 the pump was involved in an incident which precipitated a complete recall of the product and the cessation of all infusion pump sales. The Company has abandoned all technology acquired with the pump and written off all related inventory and fixed assets likewise associated with it. The Company decided to design and develop a pump not utilizing the technology acquired from CMD. Infusion pump sales, (returns), were approximately $(27,000), $(141,000) and $34,000 for fiscal years 1999, 1998 and 1997, respectively (equal to 0%, (1)% and 0% of net sales, respectively, in each of such years). Infusion pump disposable sales were $151,000, $198,000 and $219,000 for fiscal years 1999, 1998 and 1997, respectively (equal to 1% of net sales in each of such years). Orthofuser -The patented Orthofuser(TM)is designed for post-operative use in orthopedic surgeries such as hip and knee replacements and provides for the safe recovery and transfusion of the patient's own blood. This product is well suited for orthopedic procedures, as it is portable and incorporates its own internal vacuum source. Salvaging and reusing as little as 500 cc's of blood post surgically may be enough to avoid the use of donor blood in these types of surgeries. Orthofuser sales were approximately $1,405,000, $1,244,000 and $1,223,000 for fiscal years 1999, 1998, and 1997, respectively (equal to 8%, 6%, and 6% of net sales respectively, in each of such years). Government Regulations Gish's products are subject to the Federal Food, Drug and Cosmetic Act (the "Act") and regulations issued thereunder. The Act is administered by the Federal Food and Drug Administration ("FDA"), which has authority to regulate the marketing, manufacturing, labeling, packaging and distribution of products subject to the Act. In addition, there are requirements under other federal laws and under state, local and foreign statutes which apply to the manufacturing and marketing of Gish products. Gish operates a quality system certified to ISO9001, a standard for quality recognized worldwide. In addition, Gish has been found in compliance with the European Economic Community ("EEC") Medical Device Directive, which equivocates to portions of the United States FDA Current Good Manufacturing Practices ("CGMP") Quality System Regulations. This allows Gish to export and distribute its products with free movement within the European Community. Following the enactment of the Medical Device Amendments of 1976 to the Act, ("Amendments") the FDA classified medical devices in commercial distribution at the time of enactment into one of three classes --Class I, II, or III. This classification is based on the controls necessary to reasonably ensure the safety and effectiveness of medical devices. Class I devices are those whose safety and effectiveness can reasonably be ensured through general controls, such as labeling, the pre-market notification ("510(k)") process, and adherence to FDA-mandated good manufacturing practices ("GMP") and Quality System Regulations. Class II devices are those whose safety and effectiveness can reasonably be ensured through the use of general controls together with special controls, such as FDA performance standards, post-market surveillance, patient registries, and FDA guidelines. Generally, Class III devices are devices that must receive pre-market approval by the FDA to ensure their safety and effectiveness. They are typically life-sustaining, life-supporting, or implantable devices, and also include most devices that were not on the market before May 28, 1976 and for which the FDA has not made a finding of substantial equivalence based upon a 510(k). If a manufacturer or distributor of medical devices can establish to the FDA's satisfaction that a new device is substantially equivalent to a legally marketed Class I or Class II medical device or to a Class III device for which the FDA has not yet required pre-market approval, the manufacturer or distributor may market the device. In the 510(k), a manufacturer or distributor makes a claim of substantial equivalence, which the FDA may require to be supported by various types of information showing that the device is as safe and effective for its intended use as the legally marketed predicate device. Following submission of the 510(k), the manufacturer or distributor may not place the new device into commercial distribution until an order is issued by the FDA finding the new device to be substantially equivalent. Gish is registered as a medical device manufacturer with the FDA and state agencies, such as the California Department of Health Services ("CDHS") and files a listing of its products semi-annually. The Company is inspected periodically by both the FDA and the CDHS for compliance with the FDA's GMP and other requirements including the medical device reporting regulation and various requirements for labeling and promotion. The FDA Quality System Regulations ("QSR"), which became effective June 1, 1997, no longer limit control to manufacturing and post market controls, but specify requirements during design (Design Control), manufacturing, and servicing as well. Much of the new QSR is based on the ISO9001 Quality Standard, and is, as such in harmony with the thrust towards world harmonization of medical device requirements. The FDA's GMP regulation requires, among other things, that (i) the manufacturing process be regulated and controlled by the use of written procedures, and (ii) the ability to produce devices which meet the manufacturer's specifications be validated by extensive and detailed testing of every aspect of the process. The medical device reporting regulation requires that the device manufacturer provide information to the FDA on deaths or serious injuries alleged to have been associated with the use of its marketed devices, as well as product malfunctions that would likely cause or contribute to a death or serious injury if the malfunction were to recur. Changes in existing requirements or interpretations (on which regulations heavily depend) or adoption of new requirements or policies could adversely affect the ability of the Company to comply with regulatory requirements. Failure to comply with regulatory requirements could have a material adverse effect on Gish's business. Gish believes all of its present products are Class I, Class II, and Class III products and that it is in compliance in all material respects with all applicable performance standards as well as good manufacturing practices, record keeping and reporting requirements in the production and distribution of such products. Most of Gish's products have been determined by the FDA to be devices substantially similar to devices marketed by others prior to May 28, 1976, the effective date of the Amendments, and marketing of them has been authorized pending the classification by the FDA of such products. Gish does not anticipate any significant difficulty or material cost increases in complying with applicable performance standards if any such products were to be classified in Class II by the FDA. If the FDA were to classify use of Gish's cardiovascular or catheter products as Class III products, pre-marketing clinical testing and evaluation would be required in order to obtain FDA approval for the sale of such products. Regulations under the Act permit export of products which comply with the laws of the country to which they are exported. The Company relies upon its foreign distributors for the necessary certifications and compliances in their countries, except in the EEC where the Medical Device Directive prescriptively defines requirements. Research and Development Gish is actively engaged in many research and development programs. The objectives of these programs are to develop new products in the areas of the medical device industry in which it is already engaged, to enhance its competitive position and to develop new products for other medical device markets. Gish's research and development projects are principally focused on enhancements, line extensions and manufacturing cost improvements for both its cardiovascular and Hemed product lines. Additionally, the Company is designing a new infusion pump to replace the pump acquired from CMD. Gish's research and development expenditures for the years ended June 30, 1999, 1998, and 1997 were $1,276,000, $1,019,000, and $1,345,000, respectively. Marketing and Distribution The Company introduced the Vision Oxygenator to those domestic geographic regions which are represented by direct salespersons and distributors who did not market a competitive oxygenator in the third quarter of fiscal 1998. Internationally the Company is represented by specialty medical distributors in over fifty countries around the world. The Company's international sales represented 18% of total sales in fiscal 1999. International sales of the Company's new Vision Oxygenator commenced in September 1997. Gish has increased its marketing support of its distribution system over the past few years through increased sales management personnel, technical support, trade advertising, collateral materials and participation in medical conferences. The Company has not experienced, and does not expect, sales of the Company's products to be subject to seasonality in any material respects. Components and Parts Gish purchases components for its various products from vendors who sell such components generally to the medical device industry. Most components for the Company's proprietary products are manufactured from tooling owned by the Company. Other components are manufactured by outside suppliers to the Company's specifications. Certain components of the Company's custom tubing sets are purchased from competitors. Gish has not experienced difficulty in obtaining such components in the past and believes adequate sources of supply for such items are available on reasonable terms. Patents and License Agreements Gish has been issued or has patents pending on several of its products. There can be no assurance that any patents issued would afford the Company adequate protection against competitors which sell similar inventions or devices. There also can be no assurance that the Company's patents will not be infringed upon or designed around by others. However, the Company intends to vigorously enforce all patents it has been issued. Gish is obligated to pay a royalty equal to 3% of the net sales of its reservoir style cardioplegia delivery systems to Dr. Bradley Harlan. Gish is obligated under agreements entered into in 1988 to pay a royalty equal to 4% of the net sales of its thoracostomy kit, the Thoraguide, and to pay royalties equal to 5% of the net sales of its dual use uterine monitoring catheter, AmCath, to Dr. Neil Semrad and to Dr. Levy and Dr. Rosenwieg respectively. Gish is obligated to pay a royalty equal to 5% of the net sales of the Robiscek dual channel suction wand, RBS-2 to Dr. Francis Robiscek. Gish is obligated to pay a royalty equal to 5% of the net sales of its MyoManager(TM), myocardial management system to CardioPulmonary Services. The Company's aggregate royalty expenses were $41,000, $46,000, and $54,000 for the years ended June 30, 1999, 1998 and 1997, respectively. Working Capital and Financing of Operations Gish finances operations primarily through cash flow generated by sales of Gish's products. Gish seeks to increase its sales by developing new products, increasing market share for existing products and acquiring new products. Gish entered into a Loan and Security Agreement, (the "Agreement") with City National Bank in December, 1998, providing for loans up to $1,000,000 in the form of short term advances under a revolving credit arrangement. The Agreement is subject to renewal on December 2, 1999. Advances to Gish under the Agreement bear interest at the bank's prime rate. City National Bank has been granted a security interest in substantially all of Gish's assets to secure repayment of amounts borrowed by Gish under the Agreement. The Agreement prohibits the sale of secured assets other than in the ordinary course of business and requires Gish to maintain (i) tangible net worth (net worth excluding patents, goodwill and other intangible items) of not less than $16,000,000, (ii) a ratio of total senior liabilities to tangible net worth of not more than 0.50 to 1, and (iii) quick assets at least equal to 2.5 times current liabilities. The Company was not in compliance with all covenants at June 30, 1999. The bank has issued a waiver of default for the period ending June 30, 1999. At June 30, 1999 the Company had no funds borrowed under the revolving credit line, nor did the Company utilize the line during fiscal 1999. Customer information The Company performs ongoing credit evaluations and maintains allowances for potential credit losses. As of June 30, 1999 the Company believes it has no significant concentrations of credit risk. During fiscal 1997, the Company derived a total of 22% of net sales from two significant distributors, Specialized Medical Systems (15%) and CardioVascular Concepts (7%). No single customer comprised 10% or more of the Company's net sales in fiscal 1998 and 1999. In September 1997, the Company was informed by both Specialized Medical Systems and CardioVascular Concepts that they were electing to terminate their distributor relationships with the Company effective December 1997. The termination date was subsequently renegotiated to February 1, 1998. During the fiscal year ended June 30, 1998, the Company derived a total of 10% of net sales from these distributors. Backlog Almost all of Gish's products are repetitive purchase, single use disposable products, which are shipped shortly after receipt of a customer's purchase order. Therefore, Gish believes that the Company and its distributors generally maintain an adequate finished goods inventory to fulfill the customer's needs on demand. Accordingly, Gish believes that the backlog of orders at any given point in time is not indicative of the Company's future level of sales. Contracts Gish has no contracts with customers where cancellation or renegotiation would have a material impact on the Company's sales or profit margins. Competition The market for medical devices of the type sold by the Company is extremely competitive. The Company believes that product differentiation and performance, client service, reliability, cost and ease of use are important competitive considerations in the markets in which it competes. Most of Gish's competitors are United States concerns. Many of them are larger and possess greater financial and other resources than Gish. Gish has approximately five competitors within each of the hospital markets in which it competes. No one competitor is a dominant force in any of these markets. Gish believes it has achieved its position in the marketplace for its present principal products by means of superior design, quality, and service, and Gish intends to continue to utilize these means of competing. Environmental Compliance The Company's direct expenditures for environmental compliance were not material in the three most recent fiscal years. However, certain costs of manufacturing have increased due to environmental regulations placed upon suppliers of components and services. Employees As of June 30, 1999, Gish had 206 full-time employees, of whom 17 were engaged in field sales and sales management, 120 were engaged in manufacturing and the remainder in marketing, research and development, administrative and executive positions. The Company believes that its relationship with its employees is excellent. None of the Company's employees are represented by a labor union. International Operations Sales to foreign customers, primarily in Europe and Asia, were approximately $3,434,000, $3,863,000 and $3,865,000 in the years ended June 30, 1999, 1998, and 1997, respectively (equal to 18%, 19% and 18% of net sales, respectively, in each of such years). Operating profits as a percentage of sales on foreign sales approximate operating profits on domestic sales. All international transactions are conducted in U.S. dollars, thus reducing the risk of currency fluctuations. Gish does not have any facilities, property or other assets, excepting sales representative supplies, located in any geographic area other than California, where its offices, manufacturing and warehousing premises are located. RISK FACTORS The following factors should be considered carefully in evaluating the Company and its business. This Report on Form 10-K contains certain forward-looking statements that are based on current expectations. In light of the important factors that can materially affect results, including those set forth in this paragraph and below, the inclusion of forward-looking information herein should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. The Company may encounter competitive, technological, financial and business challenges making it more difficult than expected to continue to develop and market its products; the market may not accept the Company's existing and future products; the Company may be unable to retain existing key management personnel; and there may be other material adverse changes in the Company's operations or business. Certain important factors affecting the forward-looking statements made herein include, but are not limited to (i) failure of the Company's Vision(TM) oxygenator to meet sales expectations, (ii) failure of the Company to successfully redesign the MyoManager to meet customer expectations, (iii) continued downward pricing pressures in the Company's targeted markets, (iv) the continued acquisition of the Company's customers by certain of its competitors, (v) the uncertain success of the Company's direct sales force in certain geographic territories, and (vi) the failure of the Company to successfully develop and market a new infusion pump. Assumptions relating to budgeting, marketing, product development and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause the Company to alter its marketing, capital expenditure or other budgets, which may in turn affect the Company's financial position and results of operations. The reader is therefore cautioned not to place undue reliance on forward-looking statements contained herein, which speak solely as of the date of this Form 10K. Competition The medical device industry in general, and the market for products for use in cardiovascular surgery in particular, is intensely competitive and characterized by rapid innovation and technological advances. Product differentiation and performance, client service, reliability, cost and ease of use are important competitive considerations in the medical device industry. The Company expects that the current high levels of competition and technological change in the medical device industry in general, and the cardiovascular surgery products industry in particular, will continue to increase. Several companies offer devices which compete with devices manufactured by the Company, including Bentley Laboratories, a division of Baxter Health Care Corporation, Bard Cardiopulmonary, Inc., a division of C.R. Bard, Inc., COBE Laboratories, Inc. and Sorin Biomedical, Inc., both of which are units of Fiat Italy, Medtronic, Inc. and Stryker Surgical. Most of the Company's competitors have longer operating histories and significantly greater financial, technical, research, marketing, sales, distribution and other resources than the Company. In addition, the Company's competitors have greater name recognition than the Company and frequently offer discounts as a competitive tactic. There can be no assurance that the Company's current competitors or potential future competitors will not succeed in developing or marketing technologies and products that are more effective or commercially attractive than those that have been and are being developed by the Company or that would render the Company's technologies and products obsolete or noncompetitive, or that such companies will not succeed in obtaining regulatory approval for, introducing or commercializing any such products prior to the Company. Any of the above competitive developments could have a material adverse effect on the Company's business, financial condition and results of operations. Risk of Declining Average Selling Prices The Company is currently facing and may continue to face increasing pricing pressures from its current and future competitors, especially from competitors in the cardiovascular surgery products market. As a result of such pressures, the Company has been forced to lower the prices of certain of its products in order to maintain market share. There can be no assurance that the Company will be able to maintain its market share in the cardiovascular surgery products market in the face of continuing pricing pressures. Over time, the average selling prices for the Company's products may continue to decline as the markets for these products continues to become more competitive. Any material reduction in the prices for the Company's products would negatively affect the Company's gross margin and would require the Company to increase unit sales in order to maintain net sales. Dependence on International Sales International net revenues accounted for approximately 18%, 19% and 18% of the Company's total net sales in fiscal 1999, 1998 and 1997, respectively. International sales are subject to a number of inherent risks, including the impact of possible recessionary environments in economies outside the U.S., unexpected changes in regulatory requirements and fluctuations in exchange rates of local currencies in markets where the Company sells its products. While the Company denominates all of its international sales in U.S. dollars, a relative strengthening in the U.S. dollar would increase the effective cost of the Company's products to international customers. The foregoing factors could reduce international sales of the Company's products and could have a material adverse effect on the Company's business, financial condition and results of operations. Risk of Market Withdrawal or Product Recall Complex medical devices, such as the Company's products, can experience performance problems in the field that require review and possible corrective action by the manufacturer. Similar to many other medical device manufacturers, the Company periodically receives reports from users of its products relating to performance difficulties they have encountered. The Company expects that it will continue to receive customer reports regarding the performance and use of its products. Furthermore, there can be no assurance that component failures, manufacturing errors or design defects that could result in an unsafe condition or injury to the patient will not occur. If any such failures or defects were deemed serious, the Company could be required to withdraw or recall products, which could result in significant costs to the Company. The Company has in the recent past undertaken a voluntary recall of its ambulatory infusion pumps. There can be no assurance that market withdrawals or product recalls will not occur in the future. Any future product problems could result in market withdrawals or recalls of products, which could have a material adverse affect on the Company's business, financial condition or results of operations. There can be no assurance that the Company will be able to successfully take corrective actions if required, nor can there be any assurance that any such corrective actions will not force the Company to incur significant costs. In addition, there can be no assurance that the current recall or any future recalls will not cause the Company to face increasing scrutiny from its customers, which could cause the Company to lose market share or incur substantial costs in order to maintain existing market share. Risks Associated with Extensive Government Regulation The manufacture and sale of medical devices, including products currently sold by the Company and the Company's other potential products, are subject to extensive regulation by numerous governmental authorities in the United States, principally the FDA, and corresponding state agencies, such as the California Department of Health Services ("CDHS"). In order for the Company to market its products for clinical use in the United States, the Company must obtain clearance from the FDA of a 510(k) premarket notification or approval of a more extensive submission known as a premarket approval ("PMA") application. In addition, certain material changes to medical devices also are subject to FDA review and clearance or approval. The process of obtaining FDA and other required regulatory clearances and approvals is lengthy, expensive and uncertain, frequently requiring from one to several years from the date of FDA submission if premarket clearance or approval is obtained at all. Securing FDA clearances and approvals may require the submission of extensive clinical data and supporting information to the FDA. Sales of medical devices outside of the United States are subject to international regulatory requirements that vary from country to country. The time required to obtain approval for sales internationally may be longer or shorter than that required for FDA clearance or approval, and the requirements may differ. The Company has entered into distribution agreements for the foreign distribution of its products. These agreements generally require that the foreign distributor is responsible for obtaining all necessary regulatory approvals in order to allow sales of the Company's products in a particular country. There can be no assurance that the Company's foreign distributors will be able to obtain approval in a particular country for any future products of the Company. Regulatory clearances or approvals, if granted, may include significant limitations on the indicated uses for which the product may be marketed. In addition, to obtain such clearances or approvals, the FDA and certain foreign regulatory authorities impose numerous other requirements with which medical device manufacturers must comply. FDA enforcement policy strictly prohibits the marketing of cleared or approved medical devices for uncleared or unapproved uses. In addition, product clearances or approvals could be withdrawn for failure to comply with regulatory standards or the occurrence of unforeseen problems following the initial marketing. The Company will be required to adhere to applicable FDA regulations regarding good manufacturing practices ("GMP") and similar regulations in other countries, which include testing, control, and documentation requirements. Ongoing compliance with GMP and other applicable regulatory requirements will be monitored through periodic inspections by federal and state agencies, including FDA and CDHS, and by comparable agencies in other countries. Failure to comply with applicable regulatory requirements, including marketing products for unapproved uses, could result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal of the government to grant premarket clearance or premarket approval for devices, withdrawal of clearances or approvals and criminal prosecution. Changes in existing regulations or adoption of new governmental regulations or policies could prevent or delay regulatory approval of the Company's products. There can be no assurance that the Company will be able to obtain FDA 510(k) clearance or PMA approval for its products under development or other necessary regulatory approvals or clearances on a timely basis or at all. Delays in receipt of or failure to receive U.S. or foreign clearances or approvals, the loss of previously obtained clearances or approvals, or failure to comply with existing or future regulatory requirements would have a material adverse effect on the Company's business, financial condition and results of operations. Product Liability Risk; Limited Insurance Coverage The manufacture and sale of medical products entail significant risk of product liability claims. The Company maintains insurance with respect to such claims, but there can be no assurance that the Company's existing annual insurance coverage limits of $5 million per occurrence and $5 million in the aggregate will be adequate to protect the Company from any liabilities it might incur in connection with the clinical trials or sales of its products. In addition, the Company may require increased product liability coverage if and when products under development are successfully commercialized. Such insurance is expensive and in the future may not be available on acceptable terms, or at all. A successful product liability claim or series of claims brought against the Company in excess of its insurance coverage, could have a material adverse effect on the Company's business, financial condition and results of operations. Risks Relating to New Product Development The Company's success is dependent in part on the design and development of new products in the medical device industry. The product development process is time-consuming and costly, and there can be no assurance that product development will be successfully completed, that necessary regulatory clearances or approvals will be granted by the FDA on a timely basis, or at all, or that the potential products will achieve market acceptance. Failure by the Company to develop, obtain necessary regulatory clearances or approvals for, or successfully market potential new products could have a material adverse effect on the Company's business, financial condition and results of operations. Dependence Upon Key Personnel The Company is dependent upon a number of key management and technical personnel. The loss of the services of one or more key employees would have a material adverse effect on the Company. The Company's success will also depend on its ability to attract and retain additional highly qualified management and technical personnel. The Company faces intense competition for qualified personnel, many of whom are often subject to competing employment offers, and there can be no assurance that the Company will be able to attract and retain such personnel. Risks Associated with Healthcare Reform Proposals Political, economic and regulatory influences are subjecting the healthcare industry in the United States to fundamental change. Potential reforms proposed over the last several years have included mandated basic healthcare benefits, controls on healthcare spending through limitations on the growth of private health insurance premiums and Medicare and Medicaid spending, the creation of large insurance purchasing groups and fundamental changes in the healthcare delivery system. In addition, some states in which the Company operates are also considering various healthcare reform proposals. The Company anticipates that federal and state governments will continue to review and assess alternative healthcare delivery systems and payment methodologies and public debate of these issues will likely continue in the future. Due to uncertainties regarding the ultimate features of reform initiatives and their enactment and implementation, the Company cannot predict which, if any, of such reform proposals will be adopted, when they may be adopted or what impact they may have on the Company, and there can be no assurance that the adoption of reform proposals will not have a material adverse effect on the Company's business, operating results or financial condition. In addition, the actual announcement of reform proposals and the investment community's reaction to such proposals, as well as announcements by competitors and third-party payors of their strategies to respond to such initiatives, could produce volatility in the trading and market price of the Common Stock. Risks Associated with Environmental Compliance In the ordinary course of its manufacturing process, the Company uses solvents and isopropyl alcohol which are stored on-site. The waste created by the use of these products is transported off-site on a regular basis by a state-registered waste hauler. Although the Company is not aware of any claim involving violation of environmental or occupational safety and health laws and regulations, there can be no assurance that such a claim may not arise in the future, which may have a material adverse effect on the Company. Adverse Effects of Preferred Stock on Rights of Common Stock The Board of Directors of the Company is authorized to issue, from time to time, without any action on the part of the Company's shareholders, up to 2,250,000 shares of Preferred Stock in one or more series, with such relative rights, preferences, privileges and restrictions as are determined by the Board of Directors at the time of issuance. Accordingly, the Board of Directors is empowered to issue Preferred Stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of Common Stock. In the event of such issuance, the Preferred Stock could have the effect of discouraging, delaying or preventing a change in control of the Company. Volatility of Stock Price; No Dividends The trading price of the Common Stock has been and is likely to continue to be subject to significant fluctuations in response to variations in quarterly operating results, the gain or loss of significant contracts, changes in management, announcements of technological innovations or new products by the Company or its competitors, legislative or regulatory changes, general trends in the industry and other events and factors. In addition, the stock market has frequently experienced extreme price and volume fluctuations which have affected the market price for many companies for reasons unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. The Company currently intends to retain any future earnings for use in its business and does not anticipate any cash dividends in the future. ITEM 2. PROPERTIES Gish's office and manufacturing facilities are located in Irvine, California in a building containing approximately 150,000 square feet of space under a lease which expires in December, 2002. Within this facility Gish has constructed six clean rooms for the assembly of its products which meet all requirements under applicable federal and state good manufacturing practice regulations. The Company is subleasing approximately 40,000 square feet of the office and manufacturing facility until such time as the Company needs the space. The Company believes the Irvine facility will be adequate for its present and future needs. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any legal proceedings other than ordinary routine litigation incidental to its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to the security holders during the fourth quarter of the year ended June 30, 1999. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's Common Stock is traded on the NASDAQ National Market System under the symbol GISH. The table below sets forth the high and low per share closing prices during each quarter of the last two fiscal years as reported on the NASDAQ National Market System. Fiscal 1999 Fiscal 1998 Quarter ended High Low High Low - ------------------------ ----------- ----------- ------------ ------------ September 30 $3.06 $2.50 $5.00 $4.25 December 31 3.38 2.06 5.75 4.31 March 31 3.13 2.31 4.94 4.06 June 30 3.13 2.63 3.81 2.72 The Company has not previously paid any dividends on its Common Stock and does not anticipate that it will do so in the foreseeable future. As of September 14, 1999, there were approximately 270 holders of record of the Company's Common Stock. ITEM 6. SELECTED FINANCIAL DATA
Year ended June 30, In thousands, except per share data 1999 1998 1997 1996 1995 - -------------------------------------------------------- -------------- -------------- ------------ -------------- ------------- Income Statement Data: Net sales $18,709 $20,283 $21,127 $23,022 $21,588 Selling and marketing 4,031 4,618 3,954 3,688 2,575 Research and development 1,276 1,019 1,345 1,408 1,125 General and administrative 1,621 2,131 1,913 1,892 1,727 Distributor contract termination fee - - - 701 - Goodwill impairment - - 1,824 - - Net income (loss) $(1,691) $(2,022) $(1,927) $ 329 $ 1,682 Per Share Amounts: Basic net income (loss) per share $ (.49) $ (.59) $ (.57) $ .10 $ .55 Basic weighted average common shares 3,451 3,439 3,389 3,161 3,086 Diluted net income (loss) per share (.49) (.59) (.57) .10 .52 Diluted weighted average and common equivalent shares 3,451 3,439 3,389 3,395 3,235 Balance Sheet Data: Cash and cash equivalents $ 2,792 $ 3,497 $ 3,977 $ 3,314 $ 4,326 Total assets 17,987 19,445 21,028 22,909 21,044 Working capital 12,985 14,431 15,341 14,895 14,807 Current ratio 7.5:1 9.1:1 12.2:1 10.2:1 7.7:1 Shareholders' equity 15,686 17,343 19,348 21,010 18,605 Book value per share 4.52 5.03 5.64 6.25 6.00 Return (loss) on average equity (10%) (11%) (10%) 2% 9%
Selected Quarterly Financial Data In thousands, except per share data Fiscal 1999 June 30, 1999 Mar. 31, 1999 Dec. 31, 1998 Sept. 30, 1998 - ------------------------------------------------------- ----------------- ---------------- ----------------- ----------------- Net sales $ 4,833 $ 4,609 $ 4,515 $ 4,752 Gross profit 1,025 1,360 1,323 1,332 Loss before income taxes (826) (269) (326) (270) Net loss (826) (269) (326) (270) Basic net loss per share (.24) (.08) (.09) (.08) Basic average common shares 3,457 3,451 3,460 3,447 Diluted net loss per share (.24) (.08) (.09) (.08) Diluted average common and common equivalent shares 3,457 3,451 3,460 3,447 In thousands, except per share data Fiscal 1998 June 30,1998 Mar. 31, 1998 Dec. 31, 1997 Sept. 30, 1997 - ------------------------------------------------------- ----------------- ---------------- ----------------- ----------------- Net sales $ 5,247 $ 4,509 $ 5,209 $ 5,318 Gross profit 939 1,407 1,497 1,682 Income (loss) before income taxes (1,247) (510) (381) 148 Net income (loss) (1,569) (311) (233) 91 Net income (loss) per share (.46) (.09) (.07) .03 Basic average common shares 3,445 3,443 3,439 3,430 Diluted net income (loss) per share (.46) (.09) (.07) .03 Diluted average common and common equivalent shares 3,445 3,443 3,439 3,521
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS: Acquisition - ----------- On September 13, 1995, the Company entered into an agreement to acquire the assets and technology of Creative Medical Development, Inc. ("CMD"), a manufacturer of ambulatory infusion pumps, and began to operate the business under a management agreement whereby Gish assumed the risks and rewards of the operation of the acquired assets until the closing date of the acquisition. The agreement provided for a payment of $600,000 in cash and $2,000,000 of Gish Biomedical, Inc. common stock for these assets. The Company has included revenue and costs related to the product lines from September 13, 1995 in the Company's financial statements. The Company assumed ownership of the net assets and technology acquired from CMD on April 17, 1996 and entered into a one-year lease for the building CMD occupied. In February 1997, the Company was released from its lease obligation for the northern California facility and ceased operations in that facility. During the fourth quarter of fiscal 1997, due to the low level of infusion pump sales and negative cash flow projections, the Company determined that the unamortized goodwill of $1,824,000 associated with the purchase of the infusion pump from CMD had little, if any future value. Accordingly, the Company recorded a charge to earnings to write off the unamortized balance. During the fiscal year ended June 30, 1998 the infusion pump acquired from CMD was involved in an incident which precipitated the Company's decision to voluntarily cease sales of the infusion pump. The Company also decided to redesign the pump not utilizing the technology acquired from CMD. Consequently the Company wrote off all remaining assets, principally inventory, property and equipment, associated with the CMD infusion pump at June 30, 1998. The total pump inventory expensed to cost of sales during the fourth quarter of fiscal 1998 was $464,000. Also expensed in the fourth quarter were fixed assets acquired for the manufacture of the pump amounting to a $363,000 charge to general and administrative expense. Additionally, it was determined that the trade name EZ Flow had acquired such a poor reputation that it would not be used for a new infusion pump currently under development. Year Ended June 30, 1999 vs. Year Ended June 30, 1998 - ----------------------------------------------------- Net sales decreased to $18,709,000 for the year ended June 30, 1999 from $20,283,000 for the year ended June 30, 1998. The net decrease resulted primarily from decreased unit volume of custom tubing packs and other cardiovascular products, partially offset by an increase in volume of Vision(TM) oxygenators. Cost of sales for the year ended June 30, 1999 included accruals for inventory obsolescence of $192,000 plus an additional $100,000 charged directly to cost of sales during the fourth quarter to record the disposal of slow-moving and obsolete inventory items not previously reserved. Cost of sales for the year ended June 30, 1998 included inventory writeoffs of $705,000 consisting of $464,000 for the discontinued CMD infusion pump and $241,000 for increases in other reserves. Excluding these adjustments, cost of sales increased as a percentage of sales in fiscal 1999 relative to fiscal 1998. The increase is primarily due to unfavorable product mix changes and the increase in fixed overhead cost per unit resulting from the production volume decrease from fiscal 1998 to fiscal 1999. Selling and marketing expenses decreased to $4,031,000 for the year ended June 30, 1999 from $4,618,000 for the year ended June 30, 1998. The decrease reflects reduced salaries and commissions expense due to open sales positions, lower sales volume, and reduced selling expense in support of the discontinued CMD infusion pump. The reduction in compensation expense was partially offset by $67,000 charged to selling and marketing expense to provide a valuation reserve for field inventories consigned to sales representatives. Research and development expenses increased by 25 percent in fiscal 1999 over the prior year due to the hiring of additional professional engineering staff, and an increase in engineering project material expenditures. General and administrative expenses decreased to $1,621,000 for the year ended June 30, 1999 from $2,131,000 for the year ended June 30, 1998. The fiscal 1998 expense included $363,000 to write off fixed assets related to the infusion pump business acquired from CMD. The fiscal 1999 expense included $45,000 in legal expenses related to merger and acquisition activities which did not result in a consummated transaction. These activities are consistent with Gish's strategy of continuing to seek opportunities to broaden the Company's product offerings and more effectively address its target markets. The incremental legal expense in fiscal 1999 was offset by a favorable adjustment of $53,000 representing the reversal of excess reserve previously established for the write-off of plant and equipment related to the CMD infusion pump business. Excluding the adjustments for CMD-related assets and legal expenses, general and administrative expenses decreased by $139,000 or 8 percent from fiscal 1998 to fiscal 1999, primarily due to reduced incentive compensation and consulting expenses. Year Ended June 30, 1998 vs. Year Ended June 30, 1997 - ----------------------------------------------------- Sales for the year ended June 30, 1998 decreased by $844,000 or 4% as compared to fiscal 1997. Approximately $770,000 of the decrease was primarily due to a shift in distribution, as discussed below, and approximately $400,000 of such loss was attributable to lost sales in Louisiana due to Baxter Inc.'s acquisition of a perfusion service group customer of the Company. These decreases in sales were offset, in part, by sales of the Vision oxygenator and increases in the Company's sales of non- cardiovascular products. In February 1998, the Company ceased doing business with both Specialized Medical Systems (SMS) and CardioVascular Concepts (CVC). For the fiscal year ended June 30, 1997 SMS and CVC represented 15% and 7% of the Company's total sales, respectively. However, the two distributors only accounted for 12% and 5%, respectively, of the Company's gross profit for the same period. The Company engaged, during the second quarter of fiscal 1998, a direct sales force of seven persons to replace the two distributor sales organizations. The Company retained a substantial portion of the total existing distributor business in these regions at higher margins. The conversion of these territories to direct sales representation afforded the Company better marketing opportunities with respect to the new oxygenator. Gish had previously excluded these two territories from its initial marketing plan for the launch of its new Vision(TM) oxygenator, effected in January 1998, because these distributors represented a competing oxygenator product. The conversion of these territories to a direct sales force has allowed the Company to be able to sell the Vision(TM) in conjunction with custom tubing packs, cardioplegia systems, cardiotomy reservoirs and oxygen saturation monitors without limitations. Cost of sales for the year ended June 30, 1998 was 73% of sales as compared to 69% of sales for the year ended June 30, 1997. The increase in cost of sales is primarily due to the write off of the infusion pump inventory and increases in other inventory reserves. In the aggregate, these write-offs total $705,000, or 3% of sales. Additionally, the lower unit volume experienced in fiscal 1998 due to the conversion of the two distributor territories increased fixed overhead as a percentage of total product costs. Selling and marketing expenses for the year ended June 30, 1998 increased $663,000 or 17% over fiscal 1997 due to the addition of seven direct sales representatives to replace two former distributors and increased marketing efforts associated with the launch of the Company's Vision oxygenator. Research and development expenses for the year ended June 30, 1998 decreased 24% or $326,000 from fiscal 1997 due to the completion of the oxygenator development program and unfilled staff positions during the year. General and administrative expenses for fiscal 1998 increased $218,000 or 11% over fiscal 1997 primarily due to a $363,000 write off of fixed assets associated with the infusion pump business acquired from CMD. The provision (benefit) for taxes is based upon a combined federal and state effective tax rate of 39% for all years presented less valuation allowances of $680,000 in fiscal 1998 and $618,000 in fiscal 1997 against the Company's deferred tax assets. The valuation allowances reflect the uncertainty in utilizing the Company's net loss carryforwards in future periods. Inflation - --------- The effects of inflation have not been a significant factor in the results of operations. The cardiovascular surgery market has been experiencing pricing pressures which have precluded the Company from implementing significant price increases. Year 2000 - --------- The Year 2000 Problem in computers arises from the common computer industry practice of using two digits to represent a date in computer software code and databases to enhance both processing time and save storage space. Therefore, when dates in the year 2000 and beyond are indicated and computer programs read date "00", the computer may default to the year "1900" rather than the correct "2000". This could result in incorrect calculations, faulty data and computer shutdowns, potentially impairing the conduct of business. The Company has reviewed its significant or critical computerized financial, operations and facility management computer systems. These systems utilize licensed third party software most of which was converted in 1997 so as to be year 2000 compliant at no additional cost to the Company. The Company's third party vendors for the remaining systems provided upgrades enabling year 2000 compliance, which were installed during fiscal 1998 and fiscal 1999. The Company has also reviewed and analyzed all of its products which contain a software component and has determined that none of these electronic products are vulnerable to year 2000 issues. The Company instituted a year 2000 compliance program for its significant vendors and customers during fiscal 1999 to evaluate the risks and potential impact on the Company of any non-compliance. Year 2000 compliance issues are addressed during the Company's routinely scheduled vendor audits and should not represent a material expense. In the event that any significant vendor is unable to provide reasonable assurances to the Company of its year 2000 compliance the Company intends to evaluate and qualify alternate sources of supply on a case-by-case basis. Liquidity and Capital Resources - ------------------------------- Cash and cash equivalents decreased to $2,792,000 at June 30, 1999 from $3,497,000 at June 30, 1998. The net decrease in cash during fiscal 1999 resulted primarily from the substantial increase in cash used by investing activities. Net cash used by investing activities was $1,596,000 for the year ended June 30, 1999 compared to $22,000 net cash provided by investing activities in fiscal 1998. Investing activities during the year ended June 30, 1999 included purchases of short-term interest-bearing investments of $908,000, and purchases of fixed assets, primarily manufacturing molds and equipment, of $675,000. By comparison, during the year ended June 30, 1998 the company sold $501,000 in short-term investments, and purchases of property and equipment totaled $380,000. For the year ended June 30, 1999, net cash provided by operating activities was $857,000 compared to a net use of cash of $519,000 for the year ended June 30, 1998. The primary sources of cash provided by operating activities during fiscal 1999 were the collection of the $754,000 income tax refund receivable, the $430,000 decrease in inventories, and $920,000 depreciation and amortization, which offset the adverse effect on cash of the net loss for the year of $1,691,000. Net working capital decreased to $12,985,000 at June 30, 1999 from $14,431,000 at June 30, 1998. The decrease is primarily due to the net loss for the fiscal year, net of depreciation and amortization, and the Company's investment in property and equipment. Accounts receivable and inventories of components and finished goods at June 30, 1999 decreased from comparable amounts at June 30, 1998 in approximate proportion to the reduction in net sales in fiscal 1999 as compared to fiscal 1998. The Company believes that the cash flow from its operations together with available cash will be adequate to fund the company's existing operations in the near term. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The table below provides information about the Company's financial instruments that are subject to changes in interest rates. The Company's short-term investments are accounted for as available-for-sale securities and recorded in the Company's consolidated balance sheets at fair market value, which approximates cost. The short-term investments are all readily marketable and may be liquidated at any time to provide funds for use in the Company's business.
Fiscal years ended June 30, --------------------------- 2000 2001 2002 2003 2004 therafter ----------------------------------------------------------- Maturities of short-term investments (in thousands) $ 617 $ 431 $ 148 $ 99 $ 98 $ 97 Average interest rate 4.5% 5.1% 5.37% 5.75% 6.02% 6.08%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT AUDITORS Board of Directors Gish Biomedical, Inc. We have audited the accompanying consolidated balance sheets of Gish Biomedical, Inc. as of June 30, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gish Biomedical, Inc. at June 30, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ending June 30, 1999, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Orange County, California August 6, 1999
CONSOLIDATED BALANCE SHEETS As of June 30 (dollars in thousands) 1999 1998 - ---------------------------------------------------------------------------- ------------------ ----------------- ASSETS Current assets: Cash and cash equivalents $ 2,792 $ 3,497 Short-term investments 1,490 582 Accounts receivable, net of allowance for doubtful accounts of $94 in 1999 and $209 in 1998 3,403 3,589 Income tax refund receivable - 754 Inventories 7,180 7,610 Other assets 118 177 - ---------------------------------------------------------------------------- ------------------ ----------------- Total current assets 14,983 16,209 - ---------------------------------------------------------------------------- ------------------ ----------------- Property and Equipment, at cost: Leasehold improvements 2,685 2,685 Machinery and equipment 1,816 1,721 Molds, dies and tooling 3,623 3,364 Office furniture and equipment 1,727 1,406 - ---------------------------------------------------------------------------- ------------------ ----------------- Total property and equipment 9,851 9,176 Less accumulated depreciation (6,997) (6,089) - ---------------------------------------------------------------------------- ------------------ ----------------- Net property and equipment 2,854 3,087 Other assets, net of accumulated patent amortization of $297 in 1999 and $285 in 1998 150 149 - ----------------------------------------------------------------------------------------------------------------- $ 17,987 $ 19,445 - ---------------------------------------------------------------------------- ------------------ ----------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 1,366 $ 1,101 Accrued compensation and related items 595 666 Other accrued liabilities 37 11 - ---------------------------------------------------------------------------- ------------------ ----------------- Total current liabilities 1,998 1,778 - ---------------------------------------------------------------------------- ------------------ ----------------- Deferred rent 303 324 Commitments Shareholders' Equity: Preferred stock, 2,250,000 shares authorized; no shares outstanding - - common stock, no par value, 7,500,000 shares authorized; 3,470,362 shares issued and outstanding (3,444,632 shares in 1998) 10,148 10,114 Note receivable - officer stock purchases (54) (54) Retained earnings 5,592 7,283 - ---------------------------------------------------------------------------- ------------------ ----------------- Total shareholders' equity 15,686 17,343 - ---------------------------------------------------------------------------- ------------------ ----------------- $ 17,987 $ 19,445 - ---------------------------------------------------------------------------- ------------------ ----------------- See accompanying notes.
CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended June 30 (In thousands, except share and per share data) 1999 1998 1997 - ----------------------------------------------------- ----------------------- --------------------- --------------------- Net sales $ 18,709 $ 20,283 $ 21,127 Cost of sales 13,669 14,759 14,476 - ----------------------------------------------------- ----------------------- --------------------- --------------------- Gross profit 5,040 5,524 6,651 - ----------------------------------------------------- ----------------------- --------------------- --------------------- Operating Expenses: Selling and marketing 4,031 4,618 3,954 Research and development 1,276 1,019 1,345 General and administrative 1,621 2,131 1,913 Goodwill impairment - - 1,824 Interest income 197 254 233 - ----------------------------------------------------- ----------------------- --------------------- --------------------- Loss before provision for taxes (1,691) (1,990) (2,152) Provision ( benefit) for income taxes - 32 (225) Net loss $ (1,691) $ (2,022) $ (1,927) ======================= ===================== ===================== Basic net loss per share $ (0.49) $ (0.59) $ (0.57) ======================= ===================== ===================== Diluted net loss per share $ (0.49) $ (0.59) $ (0.57) ======================= ===================== ===================== Basic and diluted weighted average common shares 3,451,410 3,438,710 3,388,658 ======================= ===================== ===================== See accompanying notes.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Common Stock Number of Note Retained (In thousands, except per share data) Shares Amount Receivable Earnings Total - -------------------------------------------- -------------- --------------- ------------- ------------------ ---------------- Balance at June 30, 1996 3,363,444 $ 9,828 $ (50) $ 11,232 $ 21,010 Issuance of stock per employment agreement 13,876 84 - - 84 Exercise of options 52,825 128 - - 128 Tax benefit of options exercised - 38 - - 38 Payment on note receivable from officer - - 15 - 15 Net loss - - - (1,927) (1,927) - -------------------------------------------- -------------- --------------- ------------- ------------------ ---------------- Balance at June 30, 1997 3,430,145 $ 10,078 $ (35) $ 9,305 $ 19,348 Exercise of options 14,487 36 (19) - 17 Net loss - - - (2,022) (2,022) - -------------------------------------------- -------------- --------------- ------------- ------------------ ---------------- Balance at June 30, 1998 3,444,632 $ 10,114 $ (54) $ 7,283 $ 17,343 Exercise of options 113,152 307 - - 307 Stock received as payment for exercise of options (87,422) (273) - - (273) Net loss - - - (1,691) (1,691) - -------------------------------------------- -------------- --------------- ------------- ------------------ ---------------- Balance at June 30, 1999 3,470,362 $ 10,148 $ (54) $ 5,592 $ 15,686 =========================================== ============== =============== ============= ================== ================ See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended June 30 (in thousands) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Operating activities: Net loss $ (1,691) $ (2,022) $ (1, 927) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 908 935 911 Amortization 12 24 173 Loss on disposal of assets - 363 - Issuance of stock per employment contracts - - 84 Impairment of goodwill - - 1,824 Deferred rent (21) 7 35 Deferred income taxes - 840 (118) Changes in operating assets and liabilities 1,649 (666) 105 - --------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities 857 (519) 1,087 - --------------------------------------------------------------------------------------------------------------------- Investing activities: Purchase of short-term investments (908) (51) - Sale of short-term investments - 501 - Purchases of property and equipment (675) (380) (587) Purchase of other long-term assets (13) (56) (18) Proceeds from sale of assets - 8 - - --------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by investing activities (1,596) 22 ( 605) - --------------------------------------------------------------------------------------------------------------------- Financing activities: Proceeds from exercise of options 34 17 128 Tax benefit of options exercised - - 38 Payments on note receivable from officer - - 15 - --------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 34 17 181 - --------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (705) (480) 663 Cash and cash equivalents at beginning of year 3,497 3,977 3,314 - --------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 2,792 $ 3,497 $ 3,977 - --------------------------------------------------------------------------------------------------------------------- See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) 1. Summary of Significant Accounting Policies The accompanying consolidated financial statements include the accounts of Gish Biomedical, Inc. and its wholly owned subsidiary, Gish International, Inc., a foreign sales corporation. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The accounting policies that affect the more significant elements of the accompanying consolidated financial statements are summarized below: Short-term Investments Short-term investments reported in the balance sheet are accounted for as available-for-sale securities and are recorded at fair market value which approximates cost. Short-term investments consists of government backed securities and short-term certificates of deposit with maturity dates ranging from 1 to 7 years. Fair Values of Financial Instruments FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments", requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. The fair values of cash and equivalents, short term investments, accounts receivable and accounts payable at June 30, 1999 and 1998 approximated their carrying amounts, principally due to the relatively short maturity of these items. Inventories Inventories are stated at the lower of cost (first-in, first-out) or net realizable value. Year ended June 30, 1999 June 30, 1998 --------------------- ------------------ ------------------ Raw materials $ 3,737 $ 3,971 Work in progress 1,051 1,083 Finished goods 2,392 2,556 --------------------- ------------------ ------------------ Total inventories $ 7,180 $ 7,610 ===================== ================== ================== Property and Equipment Depreciation and amortization are provided on the straight-line method over the following estimated useful lives: Leasehold improvements Term of lease Machinery and equipment 5 years Molds, dies and tooling 5 years Office furniture and equipment 4 - 8 years In fiscal 1998 the Company decided to abandon all the property and equipment associated with the acquisition of the EZ Flow infusion pump from CMD (see Note 11). This resulted in a write-off in fiscal year 1998 of $363 on the disposal of those fixed assets. Goodwill and Other Intangibles Goodwill resulting from acquisitions represented the excess of the purchase price over the fair value of net assets acquired and was being amortized on a straight line basis over 10 years. In fiscal 1997 the Company wrote-off all remaining goodwill, which related solely to the acquisition of CMD, aggregating $1,824 since it was deemed to be impaired (see Note 11). Other intangible assets (patents) are being amortized on the straight-line method over 6 years. Revenue Recognition Revenue is recognized at the time of shipment to the customer. The customer's right of return is limited to damaged or defective products. Research and Development Costs Research and development costs related to the development of new products and improvements of existing products are expensed as incurred. Advertising Costs The Company expenses advertising costs as incurred. Advertising expense for fiscal 1999 was $119,000. Earnings Per Share In February 1997, The Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share". Statement 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share exclude any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the Statement 128 requirements. The adoption of this accounting standard did not have a material effect on previously reported earnings per share.
1999 1998 1997 Numerator: Numerator for basic and diluted income (loss) per share $ (1,691) $ (2,022) $ (1,927) Denominator: Denominator for basic income per share-weighted- average shares 3,451,410 3,438,710 3,388,658 Effect of dilutive securities - - - Denominator for diluted income (loss) per share- adjusted weighted-average shares 3,451,410 3,438,710 3,388,658 Basic income (loss) per share $ (.49) $ (.59) $ ( .57) Diluted income (loss) per share $ (.49) $ (.59) $ ( .57)
Statement of Cash Flows(In thousands) Changes in operating assets and liabilities 1999 1998 1997 ------------------------------------------------- ---------------- --------------- --------------- Accounts receivable $ 186 $ 381 $ 108 Income tax refund receivable 754 (537) (217) Inventories 430 (911) 385 Other current assets 59 (15) 83 Accounts payable 265 372 (255) Accrued compensation and related items (71) 132 (38) Other accrued liabilities 26 (88) 39 ---------------- --------------- --------------- Net change in operating assets and liabilities $1,649 $ (666) $105
The Company paid $13, $71, and $214 in federal and state income tax during the years ended June 30, 1999, 1998, and 1997, respectively. The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Stock Options The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB25) and related interpretation in accounting for its employee stock options because, as discussed in Note 7, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock- Based Compensation", requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. 2. Credit Facility On June 30, 1999, the Company had available a secured $1,000 revolving credit facility bearing interest at the bank's prime rate (7.75% at June 30, 1999). The loan is secured by substantially all of the Company's assets. The line is renewable annually in December. At June 30, 1999, the revolving credit facility had no outstanding balance, nor did the Company utilize the line during the fiscal 1999. The Company is restricted from the payment of dividends, mergers or acquisitions and other material transactions without the bank's consent during the term of the line of credit. The Company was not in compliance with all covenants at June 30, 1999, but the bank has issued a waiver of default for the period ending June 30, 1999.
3. Analysis of Reserve Accounts Balance at Additions Balance at Beginning of Charged to Deductions End of Year Year Expense - --------------------------------------------- ---------------- ---------------- -------------- --------------- Allowance for doubtful accounts: June 30, 1999 $ 209 $ 24 $ 139 $ 94 June 30, 1998 $ 187 $ 24 $ 2 $ 209 June 30, 1997 $ 181 $ 24 $ 18 $ 187 Reserve for inventory: June 30, 1999 $ 588 $ 562 $ 29 $ 1,121 June 30, 1998 $ 466 $ 240 $ 118 $ 588 June 30, 1997 $ 483 $ 92 $ 109 $ 466 Valuation reserve for deferred tax assets June 30, 1999 $ 1,298 $ 726 $ - $ 2,024 June 30, 1998 $ 618 $ 680 $ - $ 1,298 June 30, 1997 $ - $ 618 $ - $ 618
4. Benefit Plan The Company has a Salary Reduction Profit Sharing Plan, ("the Plan"), established under Section 401(k) of the Internal Revenue Code, in which all employees are eligible to participate. The Company matches up to $250.00 of annual contributions by each qualifying employee. Total Company contributions to the Plan were $46, $54, and $57 for fiscal years ended June 30, 1999, 1998 and 1997, respectively. 5. Taxes Based on Income The Company uses the liability method of accounting for income taxes as set forth in Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Under this method, deferred taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Deferred tax assets are recognized and measured based on the likelihood of realization of the related tax benefit in the future. A reconciliation of the income tax benefit using the federal statutory rate to the book provision for income taxes follows:
Year ended June 30 1999 1998 1997 --------------------------------- ---------------- ---------------- ---------------- Income tax at statutory rate $ (575) $ (676) $ (732) State tax, net of federal benefit - (8) (130) Other, net 28 36 19 Valuation allowance 547 680 618 --------------------------------- ---------------- ---------------- ---------------- $ - $ 32 $ (225) ================================= ================ ================ ================
Significant components of the income tax expense/(benefit) are as follows: Year ended June 30 1999 1998 1997 --------------------------------- ---------------- ----------------- --------------- Current: State $ - $ (12) $ 43 Federal - (636) (150) --------------------------------- ---------------- ----------------- --------------- - (648) (107) Deferred: State - 279 (65) Federal - 401 (53) --------------------------------- ---------------- ----------------- --------------- - 680 (118) --------------------------------- ---------------- ----------------- --------------- Total $ - $ 32 $ (225) ================================= ================ ================= ===============
At June 30, 1999, the Company has unused net operating loss carryforwards of approximately $1.9 million and $2.2 million for federal and California income tax purposes, respectively. The Company also has research and development tax credit and alternative minimum tax credit carryforwards of approximately $110,000 and $88,000 for federal and California tax purposes, respectively. As of June 30, 1999, the valuation allowance fully offsets the Company's net deferred tax assets because management cannot assess that it is more likely than not that they will be utilized. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of the net deferred tax asset at June 30, 1999 and 1998 consist of the following:
1999 1998 --------------------------------------------- ------------------ ------------------ Net operating loss carryforward $ 867 $ 402 Book over tax depreciation/amortization 18 52 Inventory capitalization 177 205 Reserves and accurals 894 624 State taxes (130) (145) Tax credit carryforward 198 160 --------------------------------------------- ------------------ ------------------ Total net deferred tax assets 2,024 1,298 Less valuation allowance $ (2,024) $ (1,298) --------------------------------------------- ------------------ ------------------ Net deferred tax assets - - ============================================= ================== ==================
6. Segment Information The Company operates in one industry segment, the manufacturer of medical devices which are marketed principally through domestic and international distributors. The Company performs ongoing credit evaluations and maintains allowances for potential credit losses. As of June 30, 1999 the Company believes it has no significant concentrations of credit risk. The Company derived the following percentages of its net sales from its significant distributors:
1999 1998 1997 ------------------ ----------------- ----------------- ---------------------------------------- - 8% 15% Specialized Medical Systems - 2% 7% CardioVascular Concepts, Inc.
In September 1997, the Company was informed by both Specialized Medical Systems and CardioVascular Concepts that they were electing to terminate their distributor relationships with the Company, which occurred in February 1998. No other customer comprised 10% or more of the Company's net sales in fiscal 1999, 1998 or 1997. Sales to foreign customers (primarily in Europe and Asia) aggregated approximately $3,434 in 1999, $3,863 in 1998, and $3,865 in 1997. All sales are transacted in United States dollars, accordingly the Company is not subject to foreign currency risks. 7. Stock Option Plan The Company has an Officers, Directors and Key Employee Incentive Plan (the "1981 Plan") authorizing stock options, stock bonuses and cash incentive awards, an Incentive Stock Option, Non-qualified Stock Option and Restricted Stock Purchase Plan - 1987 (the "1987 Plan") authorizing stock options and rights to purchase restricted stock and a Gish Biomedical, Inc. 1997 Stock Incentive Plan (the "1997 Plan"). Stock options granted under these Plans may be either incentive stock options as defined in the Internal Revenue Code ("incentive options"), or options that do not qualify as incentive options ("non-qualified options"). The number of shares of the Company's common stock approved for issuance under the 1981 Plan and the 1987 Plan is 487,500 and 1,025,000, respectively. During fiscal 1999, two employees exercised options for 100,485 shares at $2.72 per share using 87,422 shares at $3.13 per shares as consideration. During fiscal 1998 the Company canceled 739,000 options at exercise prices ranging from $7.13 to $3.58 and regranted such options at a replacement rate of .67 to 1 and at an exercise price of $2.72. All other terms of these options were unchanged. The Company realized tax benefits of $38 in 1997 from the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options. No charges have been made to income in accounting for the options. The following table summarizes information about stock options outstanding under the 1981, 1987 and 1997 plans combined:
Number of Weighted Average Shares Exercise Price Options outstanding at June 30, 1996 794,062 $4.94 Granted 34,000 5.27 Canceled (15,500) 6.09 Exercised (52,825) 2.45 - ------------------------------------------ ------------------ ---------------------- Options outstanding at June 30, 1997 759,737 $5.11 Granted 584,162 2.81 Canceled (766,250) 5.15 Exercised (14,487) 2.45 - ------------------------------------------ ------------------ ----------------------
Options outstanding at June 30, 1998 563,162 $2.74 Granted 78,125 2.80 Canceled (56,750) 2.77 Exercised (113,152) 2.72 ========================================== ================== ====================== Options outstanding at June 30, 1999 471,385 $2.75 ========================================== ================== ======================
As of June 30, 1999, 471,385 options are outstanding of which 423,552 are exercisable. Additionally, 366,375 options remain available for grant. As of June 30, 1998, 515,003 were exercisable and 430,500 options were available for grant. The weighted average fair values of options granted were $1.23, $.92 and $2.41 in fiscal 1999, 1998 and 1997, respectively. A summary of options outstanding and exercisable as of June 30, 1999 follows: Weighted-Average Options Exercise Price Weighted-Average Remaining Options Weighted-Average Outstanding Range Exercise Price Contractual Life Exercisable Exercise Price 20,000 $2.56 - 2.69 $2.63 4.18 - - 337,760 $2.72 - 2.72 $2.72 1.21 337,427 $2.72 113,625 $2.75 - 3.00 $2.85 4.35 86,125 $2.87
8. Accounting for Stock Based Compensation Adjusted pro forma information regarding net income (loss) and per share amounts, determined as if the Company had accounted for its employee stock options under the fair value method of Statement No. 123, is required when an enterprise elects the disclosure only provision of that Statement of Financial Accounting Standards. The fair value of options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1999, 1998 and 1997: risk free interest rate of 6.3%, a dividend yield of 0%, volatility factors of the expected market price of the Company's common stock of .478 and a weighted-average expected life of the option of 3.9 years for all periods. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Pro forma disclosures required by Statement No. 123 include the effects of all stock option awards granted by the Company from July 1, 1996 through June 30, 1999. During the phase-in period, the effects of applying this statement for generating pro forma disclosures are not likely to be representative of the effects on pro forma net income (loss) for future years. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
1999 1998 1997 Pro forma net loss $ (1,901) $ (2,055) $ (1,945) Pro forma diluted loss per share $ (.55) $ (.60) $ (.57)
9. Operating Leases The Company is committed to a ten year operating lease for its primary office and manufacturing facilities, which commenced December 15, 1992. The Company's operations do not fully occupy the facility and therefore, the Company is subleasing approximately a third of the space. The Company's sublease income was $168, $164 and $161 for the years ended June 30, 1999 and 1998 and 1997 respectively. Rent expense for financial statement purposes is computed on a straight-line basis over the term of the initial lease. The excess of straight-line expense over cash payments during the year is shown as a deferred rent liability. Aggregate future minimum rental payments on a cash basis required under operating leases for office and manufacturing space which have initial or remaining non-cancelable lease terms in excess of one year are as follows: $779; $810; $842; and $387 for the fiscal years ending June 30, 2000; 2001; 2002 and 2003, respectively, for a total of $2,818. Rent expense charged to operations was $727, $727, and $763 for the years ended June 30, 1999, 1998 and 1997, respectively. 10. Stock Purchase During the year ended June 30, 1991 the Company loaned $100 to the President and Chairman of the Board for the exercise of Gish common stock options. The note balance at June 30, 1999 is $54 which is secured by Company stock, bears interest at 5.5% and is due within one year. Interest is current on the note. 11. Infusion Pump Business On September 13, 1995, the Company entered into an agreement to acquire the assets and technology of Creative Medical Development, Inc. ("CMD") a manufacturer of ambulatory infusion pumps and began to operate the business under a management agreement whereby Gish assumed the risks and rewards of the operation of the acquired assets until the closing date of the acquisition. The agreement provided for a payment of $600 in cash and $2,000 of Gish Biomedical, Inc. common stock for these assets. The Company has included revenue and costs related to the product lines acquired in the Company's financial statements from September 13, 1995. The Company assumed ownership of the net assets and technology acquired from CMD on April 17, 1996 and entered into a one-year lease for the building CMD occupied. During the quarter ended December 31, 1996, the Company ceased to utilize the building for manufacturing and was released from the lease as of February 28, 1997. The Company had also executed one-year employment agreements with four key employees which included provisions for the issuance of up to 53,500 shares of the Company's common stock to those employees upon completion of certain performance criteria. As of December 31, 1996, 13,876 such shares were issued. During the quarter ended December 31, 1996 two of those key employees were terminated. Additionally, a third employee under contract resigned effective February 15, 1997. This acquisition was accounted for as a purchase and resulted in the recognition of $2,009 of goodwill. During the fourth quarter of fiscal 1997, the Company reviewed the goodwill resulting from acquisition of the assets and technology of the ambulatory infusion pumps because sales for the pump and related products in 1997 were only a quarter million dollars. In addition, the Company incurred additional marketing and selling expenses of $561 as well as $146 in engineering expenses related to the ambulatory infusion pumps. The foregoing factors resulted in a negative cash flow for the pump product line. Due to its poor performance, and negative margins, management believed it was unlikely that margins would improve in the near future nor would the product line generate positive cash flows. Accordingly, the Company recorded a $1,824 of goodwill impairment in fiscal 1997 to write-off goodwill associated with this product line. During the fiscal year ended June 30, 1998 the infusion pump acquired from CMD was involved in an incident which precipitated the Company's decision to voluntarily cease sales of the infusion pump. The Company also decided to redesign the pump not utilizing the technology acquired from CMD. Consequently the Company has written off all remaining assets, principally inventory, property and equipment associated with the infusion pump acquired from CMD at June 30, 1998. The table below sets forth the operating results of the discontinued infusion pump business for the past three fiscal years as if it were an operating segment.
Infusion pump operations June 30, 1999 June 30, 1998 June 30, 1997 - ------------------------------------------ --------------------- ---------------------- --------------------- Sales (returns) $ (27) $ (141) $ 34 Cost of sales - 7 9 ------- ----- ----- Gross profit (loss) (27) (148) 25 Research and development expenses - - 146 Selling and marketing expenses - 88 561 General and administrative expenses - 21 316 ------ -- ----- Total operating expenses - 109 1,023 ------ ----- ----- Operating loss (27) (257) (998) Goodwill impairment - - 1,824 Write off of plant and equipment (53) 363 - Write off of inventory - 464 - ------ ----- ----- Contribution to pretax loss $ 26 $ (1,084) $ (2,822) ==================== ====================== ====================
12. Fourth Quarter Adjustments During the fourth quarter of fiscal 1998 the Company made certain adjustments to its financial statements based upon events and decisions occurring either during the fourth quarter of fiscal 1998 or which occurred shortly thereafter. EZFlow Infusion Pump Adjustments During the fourth quarter of fiscal 1998 the Company wrote off infusion pump inventory of $464 and $363 of fixed assets (primarily tools and dies) associated with the EZFlow pump. The Company also recorded a provision of $88 for EZFlow pump returns from distributors. Inventory Reserve Increases During fiscal 1998, the Company provided an additional inventory reserve of $162 for inventory items on hand at June 30, 1998 related to the Company's myocardial management system, the MyoManager. Recognition of Valuation Allowance on Deferred Tax Asset Internal projections for the fiscal year ended June 30, 1998 anticipated a return to profitability. This coupled with the ability to carryback net operating losses allowed management to conclude that the Company's deferred tax assets were recoverable. However, during the fourth quarter it was determined that all conditions necessary to permit a tax deduction for the fiscal 1997 write off of $1.8 million of goodwill established from the CMD acquisition were present. This deduction together with tax losses arising from fiscal 1998 operations allowed the Company to realize the tax benefit of all available net operating losses, and a valuation allowance was recognized for the remaining net deferred tax asset. A summary of fourth quarter adjustments in fiscal 1998 follows: Infusion pump provision for sales returns $ 88 Infusion pump write off to cost of goods sold 464 MyoManager inventory reserve charged to cost of goods sold 162 --- Total charges against gross profit 714 Infusion pump fixed asset write off to general and administrative expense 363 Increase in valuation allowance for deferred tax assets 680 ------ Total non-recurring fourth quarter adjustments $1,757 ====== During the fourth quarter of fiscal 1999 the Company made certain adjustments to its financial statements based on events and decisions occurring either during the fourth quarter of fiscal 1999 or which occurred shortly thereafter. Obsolete Inventory Adjustments During the fourth quarter of fiscal 1999 the Company charged $118 to cost of sales for obsolete inventory not previously identified. The total charge consisted of a $100 direct charge representing inventory disposed of during the quarter, plus an additional $18 inventory reserve based on an analysis of inventory. Valuation of Field Inventories During fiscal 1999 the Company provided a valuation reserve of $67 for field inventories consigned to sales representatives primarily for demonstration purposes. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Inapplicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors of the Registrant The following persons are currently serving on the Board of Directors of the Company: Director Name Principal Occupation Age Since - ---- -------------------- --- ----- Howard F. Bovers President, Bradford Trading 59 1999 Company Jack W. Brown Managing Director, Product 59 1980 Development of the Company James J. Cotter Attorney, Whitman Breed 30 1999 Abbott & Morgan LLP Ray R. Coulter Co-Founder and Chief Financial 66 1979 Officer, Wintec Energy Ltd. Richard W. Dutrisac President and Chief Executive 61 1987 Officer of PFE, Inc. John W. Galuchie, Jr. President, T.R. Winston & 46 1999 Company, Inc. John S. Hagestad Managing Director, Sares/Regis 52 1979 Group Mr. Bovers has been the president of Bradford Trading Company, an investment management and venture capital firm, since 1994. In 1998 he also became vice-chairman of T.R. Winston & Company, Inc. an investment banking firm. He is founder and director of New England Municipal Telephone Association, LLC. Prior to the founding of Bradford Trading Company, Mr. Bovers was president of Newbay Corporation, a developer of independent power projects. Mr. Brown joined the company in 1980 as the Vice President of Marketing. Shortly thereafter in 1980 Mr. Brown was elected President and Chairman of the Board of Directors. In September of 1999 Mr. Brown resigned as President and Chairman and assumed the position of Managing Director of Product Development of the Company. The Company is in the process of negotiating the terms of a Employment Agreement with Mr. Brown. Mr. Cotter has been an attorney with Whitman Breed Abbott & Morgan LLP since 1997. Previously, he was with Cecelia Packing Corporation. Mr. Cotter received his L.L.M. and J.D. degrees in 1995 from New York University School of Law. Mr. Coulter is a co-founder and the Chief Financial Officer of Wintec Energy Ltd., a company engaged in the alternate energy business and has held that position since 1985. Mr. Dutrisac has been the President and Chief Executive Officer of PFE, Inc., a biological export company based in Newport Beach, California, since 1979. Mr. Dutrisac has been involved in the medical industry for 39 years. Mr. Galuchie, a Certified Public Accountant, is principally engaged in the following businesses: (i) T.R. Winston & Company, Inc., a securities broker/dealer, as President since January 1990 and director since September 1989; (ii) Kent Financial Services, Inc., in various executive positions since 1986; (iii) Pure World, Inc., a manufacturer and distributor of natural products, as Executive Vice President since April 1988; (iv) Golf Rounds.com, Inc., an Internet website publisher as Vice President, Treasurer and director since July 1992 and (v) Cortech, Inc., a biopharmaceutical company, as President and director since September 1998. Mr. Galuchie is also the Vice President and Secretary of Asset Value Management, Inc., the sole general partner of Asset Value Fund Limited Partnership. Mr. Galuchie served as a director of Crown NorthCorp, Inc. from June 1992 to August 1996 and as a director of HealthRite, Inc. from December 1998 to June 1999. Mr. Hagestad is a Managing Director of Sares/Regis Group, a firm specializing in real estate acquisition, development and management, located in Irvine, California. He has been associated with Sares/Regis Group for more than 20 years. Executive Officers of the Registrant First Year Elected Name Position with Company Age Office - ---- --------------------- --- ------ Jack W. Brown Former Chairman of the Board, 59 1980 President of the Company Jeanne M. Miller Former Chief Financial Officer 43 1986 James R. Talevich Chief Financial Officer 48 1999 For certain information concerning the business experience of Mr. Brown refer to previous section titled "Directors of the Registrant". Ms. Miller joined the company in 1982 as its Controller. She was promoted to Vice President, Chief Financial Officer and Corporate Secretary in 1986. She resigned from her position with the Company on June 14, 1999 for personal and family reasons. Mr. Talevich became Vice President and Chief Financial Officer in July, 1999. ITEM 11. EXECUTIVE COMPENSATION. Summary Compensation Table. The following table sets forth three years of compensation history for the Chief Executive Officer (the "Named Executive"). There was no other executive officer serving at the end of the last completed fiscal year, nor any additional individuals with salary and bonus for the last fiscal year exceeding $100,000.
SUMMARY COMPENSATION TABLE Long-Term Annual Compensation Compensation ------------------------------------------ ------------ Other Annual Securities All Other Name and Bonus Compensation Underlying Compensation Principal Position Year Salary($) ($) (1) ($) (1) Options (#) ($) (3) - ------------------ ---- --------- ------- ------- ----------- ------ Jack W. Brown 1999 191,000 28,650 4,926 -- 250 President and Chief 1998 175,500 47,750 5,269 225,000 250 Executive Officer of 1997 160,000 26,240 5,281 -- 250 the Company
(1) Other Annual Compensation consists of the personal use portion of company-provided automobiles and premiums paid on executive disability policies. (2) Bonuses paid to the Named Executive are pursuant to annual incentive compensation programs established each year for selected employees of the Company, including the Company's executive officers. Under this program, performance goals, relating to such matters as sales growth, gross profit margin and net income as a percentage of sales, and individual efforts are established each year. Incentive compensation, in the form of cash bonuses, was awarded based on the extent to which the Company and the individual achieved or exceeded the performance goals. (3) All Other Compensation consists of the Company's matching contributions to the Gish Salary Savings Plan under Section 401(k) of $250 in each fiscal year. Option Grants in Last Fiscal Year. The Named Executive Officer identified in the Summary Compensation Table did not receive a grant of stock options during the year ended June 30, 1999. The Company has never granted stock appreciation rights (SAR's). Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Values. The following table sets forth, for each of the executive officers named in the Summary Compensation Table above, each exercise of stock options during the year ended June 30, 1999 and the year-end value of unexercised options:
Number of Securities Value of Unexercised Underlying Unexercised Options In-the-Money Options at Fiscal Year End 1999 at Fiscal Year End 1999 ----------------------- ----------------------- Shares Acquired on Value Name Exercise (#) Realized ($)(1) Exercisable Unexercisable Exercisable (2) Unexercisable(2) ---- ------------ --------------- ----------- ------------- --------------- ---------------- J. Brown 56,000 $22,736 169,000 - $47,489 -
(1) Excess of market price over exercise price, on the date of exercise. (2) Excess of $3.00 (market price at year end) over exercise price. Compensation of Directors Directors who are not officers of the Company each receive a fee of $8,000 per fiscal year and an additional fee of $500 for attendance at each Board of Directors' and committee meeting. Officers of the Company do not receive additional compensation for attendance at Board of Directors' meetings or committee meetings. Effective February 1, 1999, the Board approved the waiver of Directors' compensation until such time as the Company returns to profitability. Information Regarding Compensation Committee Interlocks and Insider Participation The Compensation Committee is a standing committee of the Board of Directors of the Company. The Compensation Committee is responsible for establishing and evaluating the effectiveness of compensation policies and programs for the Company and for making determinations regarding the compensation of the Company's executive officers, subject to review by the full Board of Directors. During the fiscal year ended June 30, 1999, the members of the Committee were Richard W. Dutrisac, Ray R. Coulter and Howard F. Bovers, all of whom are non-employee directors of the Company. No member of the Compensation Committee is a former or current officer or employee of the Company or a subsidiary of the Company. Furthermore, there are no Compensation Committee interlocks between the Company and other entities involving the Company's executive officers and board members. Board Compensation Committee Report on Executive Compensation The following report is submitted by the Compensation Committee members with respect to the executive compensation policies established by the Compensation Committee and compensation paid or awarded to executive officers who consisted of Jack Brown (the Company's Chief Executive Officer) and Jeanne Miller (the Company's Vice President and Chief Financial Officer) (the "Executive Officers") for fiscal year 1999. Compensation Policies and Objectives In establishing and evaluating the effectiveness of compensation programs for Executive Officers, the Compensation Committee is guided by three basic principals: o The Company must offer competitive salaries to be able to attract and retain highly qualified and experienced executives and other management personnel. o Executive compensation in excess of base salaries should be tied to the Company's performance, measured in terms of sales growth, gross profit and profitability, as well as attainment of individual objectives. o The financial interests of the Company's executives should be aligned with the financial interests of the shareholders, primarily through stock option grants which reward executives for improvements in the market performance of the Company's Common Stock. Salaries and Employee Benefit Programs In order to retain executives and other key employees, and to be able to attract additional, well-qualified executives when the need arises, the Company strives to offer salaries, health care and other employee benefit programs, to its executives and other employees which are comparable to those offered by competing businesses. In establishing salaries for the Executive Officers, the Compensation Committee reviews (i) the historical performance of the Executive Officers; and (ii) available information regarding prevailing salaries and compensation programs offered by competing businesses. Performance-Based Compensation The Compensation Committee believes that annual compensation in excess of base salaries should be made dependent on both the Company's performance and the individual executive's performance. Accordingly, at the beginning of each fiscal year, the Compensation Committee establishes an incentive compensation program for Executive Officers and other key management personnel under which the Executive Officers and other key management personnel may earn bonuses, in amounts ranging from 15% to 40% of their annual salaries, provided the individuals meet their individual performance goals and the Company achieves or exceeds the corporate performance goals for the year. Bonuses under the incentive plan are awarded not only on the basis of the Company's performance, but also on the achievement by an executive of specific objectives within his or her area of responsibility. The maximum bonus that may be awarded for individual achievement of specific objectives is half of the total available under the program. In the fiscal year ended June 30, 1999, Mr. Brown earned $28,650 under the incentive plan for the first six months of the year, which resulted from a determination that Mr. Brown met 100% of his individual goals, and that 50% of the Company's performance goals were met. Effective February 1, 1999, the Company's Board of Directors voted to discontinue all payments to executive officers of the Company under the incentive plan until such time as the Company returns to profitability. Stock Performance Graph The following graph sets forth the cumulative shareholder return (assuming dividend reinvestment) to the Company's shareholders during the five year period ended June 30, 1999 as well as an overall stock market index (Media General Index) and the Company's peer group index (Media General Index of Medical Instruments and Supplies): GISH BIOMEDICAL, INC. MG GROUP INDEX MEDIA GENERAL INDEX 1994 $ 100.00 $ 100.00 $ 100.00 1995 $ 142.50 $ 139.54 $ 119.02 1996 $ 115.00 $ 189.86 $ 148.80 1997 $ 100.00 $ 217.52 $ 191.22 1998 $ 57.50 $ 254.55 $ 244.95 1999 $ 60.00 $ 292.64 $ 288.75 The stock performance graph assumes $100 was invested on July 1, 1994. Assumes dividend reinvested during fiscal year ended June 30, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information as of August 31, 1999, except as otherwise indicated, regarding the beneficial ownership of Common Stock of the Company by (i) each person who is known to the Company to be the beneficial owner of 5% or more of the Company's Common Stock, (ii) each director of the Company, (iii) certain executive officers of the Company and (iv) all directors and executive officers as a group. To the Company's knowledge, the beneficial owners named in the table have sole voting and investment power with respect to the shares. Shares Beneficially Percent of Name Owned Class (1) Asset Value Fund Limited Partnership 493,950 14% 376 Main Street Bedminster, NJ 07921 Craig Corporation 509,800 (2) 15% 550 South Hope Street, Suite 1825 Los Angeles, CA 90071 Dimensional Fund Advisors, Inc. 239,100 7% 1299 Ocean Avenue Santa Monica, CA 90401 Howard F. Bovers 25,000 1% Jack W. Brown 361,214 (3) 10% Ray R. Coulter 26,200 (5) 1% Richard W. Dutrisac 16,416 (5) * James B. Glavin (4) 18,916 (5) 1% John S. Hagestad 150,606 4% All directors and executive officers as a 598,352 16% group - ------------------ * Less than 1% (1) Percent of the outstanding shares of Common Stock, treating as outstanding all shares issuable upon exercise of options held by particular beneficial owners that are included in the first column. (2) Craig Corporation is beneficial owner of Common Stock of Gish Biomedical, Inc. through its controlling interest in Citadel Holding Corporation. (3) Includes 169,000 shares subject to options exercisable currently or within 60 days. (4) Mr. Glavin resigned as a director in September 1999. (5) Includes 16,416 shares subject to options exercisable currently or within 60 days. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) (1) Financial Statement Schedules The following consolidated financial statements of Gish Biomedical, Inc, are included in Item 8.: Consolidated balance sheet - June 30, 1999 and 1998. Consolidated statement of operations - Years ended June 30, 1999, 1998 and 1997. Consolidated statements of shareholders' equity - Years ended June 30, 1999, 1998 and 1997. Consolidated statements of cash flows - Years ended 1999, 1998 and 1997. Notes to consolidated financial statements - June 30, 1999. (2) Exhibits The following Exhibits are filed as part of this Report: Exhibit Number Description ------- ----------- 3.1 Restated Articles of Incorporation as filed with the California Secretary of State on November 9, 1981, incorporated herein by this reference to Exhibit 2(a) to the Company's Registration Statement on Form S-18, No. 2-73602LA (the "S-18 Registration Statement"). 3.2 Certificate of Amendment of Articles of Incorporation as filed with the California Secretary of State on May 19, 1982, incorporated herein by this reference to Exhibit 2(b) to the S-18 Registration Statement. 3.3 Certificate of Amendment of Articles of Incorporation as filed with the California Secretary of State on December 19, 1988, incorporated herein by this reference to Exhibit 3.3 to the Company's Report on Form 10-K for the year ended June 30, 1990. 3.4 Certificate of Amendment of Articles of Incorporation as filed with the California Secretary of State on June 13, 1990 incorporated herein by this reference to Exhibit 3.4 to the Company's Report on Form 10-K for the year ended June 30, 1990. 3.5 Bylaws, incorporated herein by this reference to Exhibit 2 to the S-18 Registration Statement. 10.1* 401-K Salary Reduction Profit Sharing Plan, incorporated herein by this reference to Exhibit 10(e) to the S-18 Registration Statement. 10.2* Officer, Director and Key Employee Incentive Plan, as amended, incorporated herein by this reference to Exhibit 10(x) to the Company's Report on Form 10-K for the year ended June 30, 1985. 10.3* Incentive Stock Option, Non-qualified Stock Option and Restricted Stock Purchase Plan- 1987, as amended (the "1987 Plan"), incorporated herein by this reference to Exhibit 4 to the Company's Registration Statement on Form S-8, No. 33-36432. Exhibit Number Description ------- ----------- 10.4* Form of Incentive Stock Option Agreement for use with the 1987 Plan, incorporated herein by this reference to Exhibit 4.3 to the Company's Registration Statement on Form S-8, No. 33-19714 (the "S-8 Registration Statement"). 10.5* Form of Non-qualified Stock Option Agreement for use with the 1987 Plan, incorporated herein by this reference to Exhibit 4.4 to the S-8 Registration Statement. 10.6* Form of Restricted Common Stock Purchase Agreement for use with the 1987 Plan, incorporated herein by this reference to Exhibit 4.5 to the S-8 Registration Statement. 10.7* Form of 1997 Stock Incentive Plan (the "1997 Plan"), incorporated herein by this reference to the Company's Report on Form 10-K for the year ended June 30, 1998. 10.8* Form of Option Agreement for the use with the 1997 Plan, incorporated herein by this reference to the Company's Report on Form 10-K for the year ended June 30, 1998. 10.9 Commercial Security Agreement dated December 2, 1998 between the Company and City National Bank. 10.10* Form of Indemnification Agreement entered into by the Company and its executive officers and directors, incorporated herein by this reference to Exhibit 3(iv) to the Company's report on Form 10-K for the year ended June 30, 1989. 10.11 Lease dated July 8, 1992 between the Company and ISCO - Irvine North, Ltd. incorporated herein by this reference to the Company's Report on Form 10-K for the year ended June 30, 1993. 10.12 Lease dated as of April 17, 1996, between the Company and LBI, a California General Partnership. Incorporated herein by this reference to the Company's Report on the form 10-K for the year ended June 30, 1996. 10.13 Registration rights agreement dated April 17, 1996, between the Company and Creative Medical Development, Inc., a Delaware Corporation. Incorporated herein by this reference to the Company's Report on the form 10-K for the year ended June 30, 1996 21.1 Subsidiaries of the Company. 23 Consent of Ernst & Young LLP. 25 Power of Attorney (included on signature page of this Annual Report on Form 10-K). 27.1 Financial Data Schedule (B) Reports on Form 8-K -------------------- The Company filed a Form 8-K dated June 25, 1999 reporting the resignation of Jeanne Miller as the Company's Chief Financial Officer. - ------------ *Management contract or compensatory plan or arrangement. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /S/JAMES R. TALEVICH Vice President, Chief September 27, 1999 -------------------- Financial Officer, and JAMES R. TALEVICH Corporate Secretary /S/ HOWARD F. BOVERS -------------------- Director September 27, 1999 HOWARD F. BOVERS /S/ JAMES J. COTTER ------------------- Director September 27, 1999 JAMES J. COTTER /S/ RICHARD W. DUTRISAC ----------------------- Director September 27, 1999 RICHARD W. DUTRISAC /S/ JOHN W. GALUCHIE, JR. ------------------------ Director September 27, 1999 JOHN W. GALUCHIE, JR. /S/ JOHN S. HAGESTAD -------------------- Director September 27, 1999 JOHN S. HAGESTAD /S/ JACK W. BROWN September 27, 1999 ----------------- Director JACK W. BROWN /S/ RAY R. COULTER September 27, 1999 ------------------ Director RAY R. 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