10KSB 2 0002.txt FOR THE YEAR ENDED JUNE 30, 2000 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2000 ------------- [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-10728 GISH BIOMEDICAL, INC. (Name of small business issuer in its charter) CALIFORNIA 95-3046028 (State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.) 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 under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: No par value common stock Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Check if there is no disclosure of delinquent filers in response to item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-K. [ ] Issuer's revenues for the fiscal year ended June 30, 2000 were approximately $17,741,000. As of September 11, 2000 there were 3,592,145 shares of common stock outstanding. The aggregate market value of the common stock held by non-affiliates of the issuer, based upon the closing price on the NASDAQ National Market was approximately $5.6 million. Transitional Small Business Disclosure Format Yes No X --- --- DOCUMENTS INCORPORATED BY REFERENCE Document Where Incorporated -------- ------------------ None. GISH BIOMEDICAL, INC. INDEX Part I: Page Item 1. Description of Business 3 Item 2. Description of Properties 16 Item 3. Legal Proceedings 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Part II: Item 5. Market for Common Equity and Related Stockholder Matters 17 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 7. Financial Statements 21 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 37 Part III: Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section16(a) of the Exchange Act 38 Item 10. Executive Compensation 40 Item 11. Security Ownership of Certain Beneficial Owners and Management 44 Item 12. Certain Relationships and Related Transactions 45 Part IV: Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K 46
2 PART I ITEM 1. DESCRIPTION OF BUSINESS FORWARD LOOKING STATEMENTS This Annual Report on Form 10-KSB contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of important factors. For a discussion of important factors that could affect the Company's results, please refer to "Risk Factors" below. GENERAL Gish Biomedical, Inc. ("Gish" or the "Company"), a California corporation, was founded in 1976 to design, produce and market innovative specialty surgical devices. The Company develops and markets its innovative and unique devices for various applications within the medical community. The Company operates in one industry segment, the manufacture of medical devices, which are marketed 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 MediflexTM tubing. Such components are assembled in the Gish clean room, sterilized and then shipped either to the hospital or to one of Gish's specialty distributors which service such hospitals. The Company also assembles custom tubing sets for several competitive medical device manufacturers under private label agreements. Custom tubing set sales were approximately $4,985,000 and $6,360,000 in fiscal 2000 and 1999, respectively (equal to 28% and 34% 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. 3 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 $825,000 and $1,291,000 for fiscal years ended June 30, 2000 and 1999 respectively (equal to 5% and 7% 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 $3,642,000 and $2,263,000 in fiscal 2000 and 1999, respectively (equal to 21% and 12% of net sales, respectively, in such years). 4 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(0) rotational, top-entry 1/2" inlet for unrestricted venous drainage and a high performance cardiotomy compartment with six sucker inlet ports to handle all of the blood coming from the surgical field. Gish has incorporated the advantages of the depth filter in its cardiotomies into the 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. Cardioplegia system sales were approximately $2,615,000 and $3,147,000 for fiscal years 2000 and 1999, respectively (equal to 15% and 17% of net sales, respectively, in each of such years). 5 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 $1,050,000 and $980,000 for fiscal year 2000 and 1999, respectively (equal to 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. 6 During the fiscal year ended June 30, 1998 the Company decided to redesign the infusion pump without utilizing the technology acquired from CMD. Consequently, in the fourth quarter of fiscal 1998, the Company wrote off all remaining assets, principally inventory, property and equipment associated with the CMD infusion pump. In September, 1999 the Company discontinued development of the new infusion pump for strategic and economic reasons. Infusion pump disposable sales were $67,000 and $151,000 for fiscal years 2000 and 1999, respectively (equal to less than 1% of net sales in each year). There were no infusion pump hardware sales in other fiscal year. 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 $1,414,000 and $1,405,000 for fiscal years 2000 and 1999, respectively (equal to 8% and 8% of net sales respectively, in each of such years). Government Regulations Gish's products are subject to the Federal Food, Drug and Cosmetic Act (the "Act") and regulations issued thereunder. The Act is administered by the Federal Food and Drug Administration ("FDA"), which has authority to regulate the marketing, manufacturing, labeling, packaging and distribution of products subject to the Act. In addition, there are requirements under other federal laws and under state, local and foreign statutes which apply to the manufacturing and marketing of Gish products. Gish operates a quality system certified to ISO9001, a standard for quality recognized worldwide. In addition, Gish has been found in compliance with the European Economic Community ("EEC") Medical Device Directive, which equivocates to portions of the United States FDA Current Good Manufacturing Practices ("CGMP") Quality System Regulations. This allows Gish to export and distribute its products with free movement within the European Community. Following the enactment of the Medical Device Amendments of 1976 to the Act, ("Amendments") the FDA classified medical devices in commercial distribution at the time of enactment into one of three classes --Class I, II, or III. This classification is based on the controls necessary to reasonably ensure the safety and effectiveness of medical devices. Class I devices are those whose safety and effectiveness can reasonably be ensured through general controls, such as labeling, the pre-market notification ("510(k)") process, and adherence to FDA-mandated good manufacturing practices ("GMP") and Quality System Regulations. Class II devices are those whose safety and effectiveness can reasonably be ensured through the use of general controls together with special controls, such as performance standards, post-market surveillance, patient registries, and FDA guidelines. Generally, Class III devices are devices that must receive pre-market approval by the FDA to ensure their safety and effectiveness. They are typically life-sustaining, life-supporting, or implantable devices, and also include most devices that were not on the market 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 7 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. 8 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. Gish's research and development expenditures for the years ended June 30, 2000 and 1999 were $1,180,000 and $1,276,000, 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 20% of total sales in fiscal 2000 (18% 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. 9 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. The Company's aggregate royalty expenses were $31,000 and $41,000 for the years ended June 30, 2000 and 1999, 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 Commercial Pledge Agreement, (the "Agreement") with City National Bank in June, 2000, 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 expiration on September 30, 2001. Advances to Gish under the Agreement bear interest at the bank's prime rate. City National Bank has been granted a security interest in Gish's fixed income investment portfolio to secure repayment of amounts borrowed by Gish under the Agreement. Under the Agreement, amounts will not be advanced to Gish if, as a result of such disbursement, the total outstanding principal amount secured would exceed the total advance value of the collateral. At June 30, 2000 the Company had no funds borrowed under the revolving credit line, nor did the Company utilize the line during fiscal 2000. Customer Information The Company performs ongoing credit evaluations and maintains allowances for potential credit losses. As of June 30, 2000 the Company believes it has no significant concentrations of credit risk. No single customer comprised 10% or more of the Company's net sales in fiscal 2000 or fiscal 1999. BACKLOG almost all of Gish's products are repetitive purchase, single use disposable products, which are shipped shortly after receipt of a customer's purchase order. Therefore, Gish believes that the Company and its distributors generally maintain an adequate finished goods inventory to fulfill the customer's needs on demand. Accordingly, Gish believes that the backlog of orders at any given point in time is not indicative of the Company's future level of sales. Contracts Gish has no contracts with customers where cancellation or renegotiation would have a material impact on the Company's sales or profit margins. Competition The market for medical devices of the type sold by the Company is extremely competitive. The Company believes that product differentiation and performance, client service, reliability, cost and ease of use are important competitive considerations in the markets in which it competes. Most of Gish's competitors are larger and possess greater financial and other resources than Gish. Gish has approximately five competitors within each of the hospital markets in which it competes. No one competitor is a dominant force in this market. Gish believes it has achieved its position in the marketplace for its present principal products by means of superior design, quality, and service, and Gish intends to continue to utilize these means of competing. 10 Environmental Compliance The Company's direct expenditures for environmental compliance were not material in the two most recent fiscal years. However, certain costs of manufacturing have increased due to environmental regulations placed upon suppliers of components and services. Employees As of June 30, 2000, Gish had 179 full-time employees, of whom 14 were engaged in field sales and sales management, 132 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 $3,518,000 and $3,434,000 in the years ended June 30, 2000 and 1999, respectively (equal to 20% 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-KSB contains certain forward-looking statements that are based on current expectations. In light of the important factors that can materially affect results, including those set forth in this paragraph and below, the inclusion of forward-looking information herein should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. The Company may encounter competitive, technological, financial and business challenges making it more difficult than expected to continue to develop and market its products; the market may not accept the Company's existing and future products; the Company may be unable to retain existing key management personnel; and there may be other material adverse changes in the Company's operations or business. Certain important factors affecting the forward-looking statements made herein include, but are not limited to (i) failure of the Company's Vision oxygenator to meet sales expectations, (ii) continued downward pricing pressures in the Company's targeted markets, (iii) the continued acquisition of the Company's customers by certain of its competitors, and (iv) the uncertain success of the Company's direct sales force in certain geographic territories. Assumptions relating to budgeting, marketing, product development and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause the Company to alter its marketing, capital expenditure or other budgets, which may in turn affect the Company's financial position and results of operations. The reader is therefore cautioned not to place undue reliance on forward-looking statements contained herein, which speak solely as of the date of this Form 10KSB. 11 Competition The medical device industry in general, and the market for products for use in cardiovascular surgery in particular, is intensely competitive and characterized by rapid innovation and technological advances. Product differentiation and performance, client service, reliability, cost and ease of use are important competitive considerations in the medical device industry. The Company expects that the current high levels of competition and technological change in the medical device industry in general, and the cardiovascular surgery products industry in particular, will continue to increase. Several companies offer devices which compete with devices manufactured by the Company, including Jostra-Bentley, COBE Cardiovascular, a division of Sorin Biomedica, Terumo, Medtronic, Inc., Lifestream International, 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 20% and 18% of the Company's total net sales in fiscal 2000 and 1999, 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. 12 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 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. 13 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. 14 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. 15 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. DESCRIPTION OF PROPERTY 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 believes the Irvine facility is more than adequate for the next two years, but is currently in negotiation with the lessor of the facility to terminate its lease and relocate to a smaller facility. The Lessor of the Irvine facility is offering financial incentives to the Company in exchange for the Company's early termination of its lease. The Company's intent is to obtain sufficient financial incentives from its current Lessor to cover the costs associated with relocation. If the Company relocates to a new facility, it will be required to write-off abandoned unamortized leasehold improvements related to the Company's present facility. The unamortized book value of such leasehold improvements is approximately $720,000 at June 30, 2000. Additionally, if the Company relocates to a new facility, it will recognize a benefit for unamortized deferred rent expense, as disclosed in Note 10 to the financial statements. Deferred rent expense at June 30, 2000 is $251,000. 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, 2000. 16 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER 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 2000 Fiscal 1999 Quarter ended High Low High Low ------------------------------------------------------------------------------- September 30 $ 3.50 $ 2.63 $ 3.06 $ 2.50 December 31 3.75 2.13 3.38 2.06 March 31 5.69 2.75 3.13 2.31 June 30 3.00 2.00 3.13 2.63 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 11, 2000, there were approximately 240 holders of record of the Company's Common Stock. ITEM 6. 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. 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. 17 In September 1999 the Company concluded that its ambulatory pump business was not viable due to the large number of competitive models available and the downward trend in market pricing of both hardware and disposable pump products. Consequently, the Company discontinued development of a new infusion pump then under development, and recognized a $429,000 charge related to the discontinuance of the infusion pump business. For the convenience of the existing customer base using EZ Flow products, the Company continued to sell pump disposables on a limited basis through March 2000. Year Ended June 30, 2000 vs. Year Ended June 30, 1999 The Company incurred a net loss of $2,847,000, or $.81 basic and diluted net loss per share, for the fiscal year ended June 30, 2000, compared to a net loss of $1,691,000, or $.49 basic and diluted net loss per share, for the fiscal year ended June 30, 1999. The increased loss relative to the prior year is partly due to non-recurring charges of $1,034,000 which were reported in the quarter ended September 30, 1999. The charges included $429,000 related to the discontinuance of the Company's infusion pump business, $294,000 in severance and costs related to the resignation of the Company's chief executive officer, obsolete inventory write-offs of $83,000 for custom tubing packs, $133,000 write-down of field inventories, and $95,000 in severance from the Company's reduction in workforce in September 1999. The $95,000 severance included $24,000 charged to selling and marketing expense, $15,000 charged to research and development, and $56,000 charged to general and administrative costs. The $429,000 charge related to the discontinuance of the infusion pump business included $140,000 in obsolete inventories charged to cost of sales, $7,000 charged to selling and marketing for obsolete field inventories, and $282,000 charged to general and administrative expenses which included the write-off of capitalized software development costs for the infusion pump product previously under development. Net sales decreased to $17,741,000 for the year ended June 30, 2000 from $18,709,000 for the year ended June 30, 1999. The $968,000 net decrease included a $466,000 decrease in sales of cardiotomy reservoirs, a $532,000 decrease in sales of cardioplegia products, and a $1,375,000 decrease in sales of custom tubing sets, partly offset by a $1,379,000 increase in sales of oxygenators. The reduction in sales of cardiotomy reservoirs, cardioplegia products, and custom tubing sets resulted from factors which include a loss of market share in these products to other competitors, a shift in customer purchasing patterns from separate components to integrated oxygenator systems which include those components, and the increasing percentage of open heart surgeries which are performed without stopping the heart. A majority of the Company's sales are derived from products used in the open heart bypass circuit which is employed when a patient's heart is stopped during cardiac surgery. Oxygenator sales were $3,642,000 in the fiscal year ended June 30, 2000 compared to $2,263,000 for the fiscal year ended June 30, 1999. The sales increase resulted from additional market penetration by the Vision oxygenator which was introduced in August 1997. The Vision oxygenator has been favorably received by the market due to product features and operating performance. 18 Gross profit decreased to $4,489,000 for the fiscal year ended June 30, 2000 compared to $5,040,000 for the fiscal year ended June 30, 1999. The primary cause of the gross profit decrease was the decrease in sales compared to the prior year quarter. The decrease also included the effect of obsolete inventory write-offs totaling $223,000 which were recorded in the first quarter of fiscal 2000. The inventory writeoffs consisted of $83,000 for custom tubing packs and $140,000 related to the discontinuance of the Company's infusion pump business. An additional factor in the gross profit decrease was the shift in product mix to oxygenators from other products with higher margin such as cardiotomy reservoirs, cardioplegia products, and custom tubing packs. Selling and marketing expenses increased to $4,089,000 for the fiscal year ended June 30, 2000 compared to $4,031,000 for the fiscal year ended June 30, 1999. The increase is attributable to $164,000 in nonrecurring charges incurred in the quarter ended September 30, 1999. The nonrecurring charges consisted of $24,000 in severance from the Company's reduction in force in September 1999, $133,000 write-down of field inventories, and $7,000 write-down of discontinued infusion pumps in field inventory. Research and development expenses decreased to $1,180,000 for the fiscal year ended June 30, 2000 compared to $1,276,000 for the fiscal year ended June 30, 1999. The decrease in expense compared to the prior year resulted from the staff reduction in September 1999 and the termination of projects related to the Company's discontinued infusion pump business. General and administrative expenses increased to $2,250,000 for the fiscal year ended June 30, 2000 compared to $1,621,000 for the prior year. The $629,000 increase over the prior year included $294,000 in severance and other costs related to the resignation of the Company's chief executive officer, Jack W. Brown, in September 1999. An employment agreement between the Company and Mr. Brown provides for Mr. Brown's continued compensation by the Company until September 15, 2001 at an annual salary of $100,000, for which the Company recorded a $225,000 charge including fringe benefits. As part of the agreement, Mr. Brown also received forgiveness of debt of $54,000 and title to a former company automobile valued at $15,000. General and administrative expenses for the year ended June 30, 2000 also included a charge of $282,000 relating to the Company's ambulatory infusion pump. The charge included the write-off of capitalized software development costs for the new pump. Product development activities for the pump ceased in September 1999. In addition, the current year included $56,000 in severance related to the September 1999 reduction in force and $50,000 in additional accrued legal costs related to the discontinuation of the infusion pump business. Liquidity and Capital Resources At June 30, 2000, the Company had cash and cash equivalents of $1,477,000 and short-term investments of $868,000. Short-term investments consisted primarily of government-backed securities. For the fiscal year ended June 30, 2000 net cash used in operating activities was $1,665,000 compared to net cash provided by operating activities of $857,000 for the fiscal year ended June 30, 1999. Cash flows from operating activities for the year ended June 30, 2000 decreased compared to the prior year due to the increased net loss, and also due to the receipt during the prior year of an $800,000 income tax refund in January, 1999. The cash flow effect of the increased loss in the year ended June 30, 2000 was partially offset by the $313,000 loss on disposal of fixed assets which was included in the loss from operations but did not consume cash. The $313,000 loss on disposal of fixed assets consisted primarily of a $266,000 charge in September 1999 for software development costs associated with the Company's discontinued ambulatory infusion pump and MyoManager product lines. 19 Net cash used by investing activities for the fiscal year ended June 30, 2000 was $34,000 compared to net cash used by investing activities of $1,596,000 for the year ended June 30, 1999. The decrease in cash used by investing activities compared to the prior year resulted primarily from a $1,513,000 change in investments due to sales in fiscal 2000 versus purchases in fiscal 1999. For the year ended June 30, 2000 net cash provided by financing activities was $384,000 compared to net cash provided by financing activities of $34,000 for the year ended June 30, 1999. The increase in net cash provided by financing activities over the prior year resulted from increased proceeds from stock options exercised, and a $49,000 disgorgement of profits by a former officer and director pursuant to section 16(6) of the Exchange Act. The Company believes its Irvine facility is more than adequate for the next two years, but is currently in negotiation with the lessor of the facility to terminate its lease and relocate to a smaller facility. The lessor of the Irvine facility is offering financial incentives to the Company in exchange for the Company's early termination of its lease. The Company's intent is to obtain sufficient financial incentives from its current lessor to cover the costs associated with relocation. However, the final outcome of the negotiations can not be determined at this time and the relocation could result in cash generated from operations together with available cash not being adequate to meet the Company's planned expenditures and liquidity needs for fiscal 2001. The Company believes there are financing sources available to the Company sufficient to cover the potential additional cash requirement related to the relocation but there is no assurance that the Company will be successful in securing such financing. The Company believes that cash generated from operations together with available cash will be adequate to meet the Company's planned expenditures and liquidity needs for fiscal 2001. 20 ITEM 7. FINANCIAL STATEMENTS REPORT OF INDEPENDENT AUDITORS Board of Directors Gish Biomedical, Inc. We have audited the accompanying consolidated balance sheet of Gish Biomedical, Inc. as of June 30, 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the two years in the period ended June 30, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gish Biomedical, Inc. at June 30, 2000 and the consolidated results of its operations and its cash flows for each of the two years in the period ending June 30, 2000, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP Orange County, California August 16, 2000 21 GISH BIOMEDICAL, INC. CONSOLIDATED BALANCE SHEET As of June 30, 2000 ($000 in thousands) ASSETS Current assets: Cash and cash equivalents $ 1,477 Short-term investments 868 Accounts receivable, net of allowance for doubtful accounts of $156 3,490 Inventories 7,475 Other assets 129 --------- Total current assets 13,439 --------- Property and Equipment, at cost: Leasehold improvements 2,685 Machinery and equipment 1,897 Molds, dies and tooling 3,604 Vehicles 42 Office furniture and equipment 1,414 --------- Total property and equipment 9,642 Less accumulated depreciation ( 7,338) --------- Net property and equipment 2,304 Other assets, net of accumulated patent amortization of $303 151 --------- Total assets $ 15,894 ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable $ 1,605 Accrued compensation and related items 570 Other accrued liabilities 208 --------- Total current liabilities 2,383 --------- Deferred rent 251 Commitments Shareholders' Equity: Preferred stock, 2,250,000 shares authorized; no shares outstanding - Common stock, no par value, 7,500,000 shares authorized; 3,592,145 shares issued and outstanding 10,532 Retained earnings 2,745 Accumulated other comprehensive loss ( 17) --------- Total shareholders' equity 13,260 --------- Total liabilities and shareholders' equity $ 15,894 ========= See accompanying notes. 22 GISH BIOMEDICAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended June 30, 2000 and 1999 (In thousands, except share and per share data) 2000 1999 --------------------------- Net sales $ 17,741 $ 18,709 Cost of sales 13,252 13,669 --------------------------- Gross profit 4,489 5,040 Operating Expenses: Selling and marketing 4,089 4,031 Research and development 1,180 1,276 General and administrative 2,250 1,621 --------------------------- Total operating expenses 7,519 6,928 --------------------------- Operating loss ( 3,030) ( 1,888) Interest income 183 197 --------------------------- Loss before provision for taxes ( 2,847) ( 1,691) Provision (benefit) for income taxes - - --------------------------- Net loss ($ 2,847) ($ 1,691) =========================== Net loss per share - basic and diluted ($ 0.81) ($ 0.49) =========================== Basic and diluted weighted average common shares 3,515,661 3,451,410 =========================== See accompanying notes. 23 GISH BIOMEDICAL, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years Ended June 30, 2000 and 1999 (In thousands, except share and per share data) Accumulated Common Stock Other -------------------------------- Number of Note Retained Comprehensive Shares Amount Receivable Earnings Loss Total ---------------------------------------------------------------------------------------------------- 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 Exercise of options 121,783 335 - - - 335 Write off of note receivable from officer - - 54 - - 54 Disgorgement of profits under Section 16(b) of the Exchange Act - 49 - - - 49 Comprehensive loss: Unrealized gains/loss securities - - - - ( 17) ( 17) Net loss - - - ( 2,847) - ( 2,847) -------- Total comprehensive loss ( 2,864) ---------------------------------------------------------------------------------------------------- Balance at June 30, 2000 3,592,145 $ 10,532 $ - $ 2,745 ($ 17) $ 13,260 ===================================================================================================
See accompanying notes. 24 GISH BIOMEDICAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended June 30, 2000 and 1999 (in thousands) 2000 1999 ---------------------------------- OPERATING ACTIVITIES Net loss ($ 2,847) ($ 1,691) Adjustments to reconcile net income to net cash provided by Depreciation 869 908 Amortization 6 12 Noncash forgiveness of note receivable from officer 54 - Loss on disposal of assets 313 - Deferred rent ( 52) ( 21) Changes in operating assets and liabilities ( 8) 1,649 ---------------------------------- Net cash provided (used) by operating activities ( 1,665) 857 ---------------------------------- INVESTING ACTIVITIES Purchase of investments - ( 908) Maturity of investments 605 - Purchases of property and equipment ( 632) ( 675) Purchase of other long-term assets ( 7) ( 13) ---------------------------------- Net cash provided (used) by investing activities ( 34) ( 1,596) ---------------------------------- FINANCING ACTIVITIES Proceeds from exercise of options 335 34 Disgorgement of profits under Section 16(b) of the Exchange Act 49 - ---------------------------------- Net cash provided by financing activities 384 34 ---------------------------------- Net increase (decrease) in cash and cash equivalents ( 1,315) ( 705) Cash and cash equivalents at beginning of year 2,792 3,497 ---------------------------------- Cash and cash equivalents at end of year $ 1,477 $ 2,792 ==================================
See accompanying notes. 25 GISH BIOMEDICAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended June 30, 2000 and 1999 (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: Fair Value of Financial Instruments The fair value of cash and cash equivalents, accounts receivable and account payable at June 30, 2000 approximate their carrying amount due to the short maturities of these items. The fair values of the Company's investments a June 30, 2000 are set forth in Note 3. Investments Marketable debt securities are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in a separate component of shareholders' equity. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in investment income. Inventories Inventories are stated at the lower of cost (first-in, first-out) or net realizable value and consists of the following at June 30, 2000: Raw materials $ 4,307 Work in progress 1,231 Finished goods 1,937 ----------- Total inventories $ 7,475 =========== 26 GISH BIOMEDICAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. Summary of Significant Accounting Policies (continued) Property and Equipment Property and equipment are carried at cost. Depreciation and amortization are provided on the straight-line method over the following estimated useful lives: Leasehold improvements Term of lease Machinery and equipment 5 years Molds, dies and tooling 5 years Office furniture and equipment 4 - 8 years Revenue Recognition Revenue is recognized at the time of shipment to the customer. The customer's right of return is limited to damaged or defective products. 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 year 2000 and 1999 were $178 and $119, respectively. Net Loss per Share The Company computes net loss per share in accordance with SFAS No. 128, Earnings per Share. Under the provisions of SFAS No. 128, basic and diluted net loss per share in loss periods is computed by dividing the net loss available to holders of common stock for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net loss per share excludes potential shares of common stock if their effect is anti-dilutive. Potential shares of common stock consists of shares of common stock issuable upon the exercise of stock options. 2000 1999 ----------------------------------- Numerator: Numerator for basic and diluted loss per share ($ 2,847) ($ 1,691) ========================================= Denominator: Denominator for basic net loss per share-weighted-average shares 3,515,661 3,451,410 Effect of dilutive securities - - ----------------------------------------- Denominator for diluted net loss per share-adjusted weighted-average shares 3,515,661 3,451,410 ========================================= Net loss per share - basic and diluted ($ .81) ($ .49)
27 1. Summary of Significant Accounting Policies (continued) Statement of Cash Flows Changes in operating assets and liabilities (in thousands) 2000 1999 --------------------- Accounts receivable ($ 61) $ 186 Interest receivable ( 26) - Income tax refund receivable - 754 Inventories ( 295) 430 Other current assets ( 11) 59 Accounts payable 239 265 Accrued compensation and related items ( 25) ( 71) Other accrued liabilities 171 26 --------------------- Net change in operating assets and liabilities ($ 8) $1,649 ===================== The Company paid $4, and $13 in federal and state income tax during the years ended June 30, 2000 and 1999, respectively. During the year ended June 30, 2000, the Company recognized a $17 unrealized loss in its short-term investments that are classified as available for-sale. 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 9, 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. Recent Accounting Pronouncements In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101). SAB 101 summarizes certain areas of the Staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company believes that its current revenue recognition policies comply with SAB 101. 28 GISH BIOMEDICAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. Summary of Significant Accounting Policies (continued) Recent Accounting Pronouncements (continued) In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation - an interpretation of APB Opinion No. 25 (FIN 44). This Interpretation clarifies the definition of employee for purposes of applying Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and the accounting for an exchange of stock compensation awards in a business combination. This Interpretation is effective July 1, 2000, but certain conclusions in this Interpretation cover specific events that occur after either December 15, 1998, or January 12, 2000. The Company believes that the impact of FIN 44 will not have a material effect on its consolidated financial position or results of operations. 2. Credit Facility Gish entered into a Commercial Pledge Agreement, (the "Agreement") with City National Bank in June, 2000, providing for loans up to one million dollars in the form of short term advances under a revolving credit arrangement. The Agreement is subject to expiration on September 30, 2001. Advances to Gish under the Agreement bear interest at the bank's prime rate (9.5% at June 30, 2000). City National Bank has been granted a security interest in Gish's fixed income investment portfolio to secure repayment of amounts borrowed by Gish under the Agreement. Under the Agreement, amounts will not be advanced to Gish if, as a result of such disbursement, the total outstanding principal amount secured would exceed the total advance value of the collateral. At June 30, 2000 the Company had no funds borrowed under the revolving credit line, nor did the Company utilize the line during the fiscal year ended June 30, 2000. 3. Investments At June 30, 2000 all of the Company's investments were in commercial paper and government backed securities, and were classified as available-for-sale. A summary of available-for-sale securities follows (in thousands): Available-for-Sale ------------------------------------------------------------ Gross Gross Unrealized Unrealized Estimated Cost Gains Losses Fair Value ------------------------------------------------------------ Investment in debt instruments $ 885 $ - $ 17 $ 868
There was no realized gain or loss during the fiscal year ended June 30, 2000. 29 3. Investments (continued) The amortized cost and estimated fair value of debt securities at June 30, 2000, by contractual maturity, are shown below. Estimated Fair Cost Value ----------------------------- Available-for-Sale Due in one year or less $ 435 $ 432 Due after one year through three years 350 341 Due after three years 100 95 ----------------------------- Total Available-for-Sales Securities $ 885 $ 868 ============================= 4. Analysis of Reserve Accounts Balance at Additions Beginning of Year Charged to Balance at Expense Deductions End of Year ----------------------------------------------------------------------- Allowance for doubtful accounts: June 30, 2000 $ 94 $ 93 $ 31 $ 156 June 30, 1999 $ 209 $ 24 $ 139 $ 94 Reserve for inventory: June 30, 2000 $ 1,121 $ 495 $ 293 $ 1,323 June 30, 1999 $ 588 $ 562 $ 29 $ 1,121 Valuation reserve for deferred tax June 30, 2000 $ 2,024 $ 899 $ - $ 2,923 June 30, 1999 $ 1,298 $ 726 $ - $ 2,024
5. Benefit Plan The Company has a Salary Reduction Profit Sharing Plan, ("the Plan"), established under Section 401(k) of the Internal Revenue Code, in which all employees are eligible to participate. Total Company contributions to the Plan were $41 and $46 for fiscal years ended June 30, 2000 and 1999, respectively. 30 6. Taxes Based on Income The Company uses the liability method of accounting for income taxes as set forth in Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Under this method, deferred taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Deferred tax assets are recognized and measured based on the likelihood of realization of the related tax benefit in the future. A reconciliation of the income tax benefit using the federal statutory rate to the book provision for income taxes follows as of years ended June 30: 2000 1999 -------------------------- Income tax at statutory rate ($ 968) ($ 575) State tax, net of federal benefit - - Other, net ( 69) 28 Valuation allowance 899 547 -------------------------- $ - $ - ========================== At June 30, 2000, the Company has unused net operating loss carryforwards of approximately $3.9 million and $3.2 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 $65 and $104 for federal and California tax purposes, respectively. As of June 30, 2000, 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, 2000 and 1999 consist of the following: 2000 1999 ------------------------ Net operating loss carryforward $ 1,645 $ 867 Book over tax depreciation/amortization 251 18 Inventory capitalization 753 177 Reserves and accruals 331 894 State taxes ( 227) ( 130) Tax credit carryforward 170 198 ------------------------ Total net deferred tax assets 2,923 2,024 ------------------------ Less valuation allowance ( 2,923) ( 2,024) ------------------------ Net deferred tax assets $ - $ - ======================== 31 GISH BIOMEDICAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 7. 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, 2000 the Company believes it has no significant concentrations of credit risk. No one customer comprised 10% or more of the Company's net sales in fiscal 2000 or 1999. Sales to foreign customers (primarily in Europe and Asia) aggregated approximately $3,518 in 2000 and $3,434 in 1999. All sales are transacted in United States dollars, accordingly the Company is not subject to foreign currency risks. 8. 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, a 1997 Stock Incentive Plan (the "1997 Plan") and a Non Qualified Stock Option Agreement (the "2000 Agreement"). Stock options granted under these Plans may be either incentive stock options as defined in the Internal Revenue Code ("incentive options"), or options that do not qualify as incentive options ("non-qualified options"). The number of shares of the Company's common stock approved for issuance under the 1981 Plan, the 1987 Plan, the 1997 Plan and the 2000 Agreement is 487,500, 1,025,000, 500,000 and 190,000, 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. The following table summarizes information about stock options outstanding under the 1981, 1987 and 1997 plans and the 2000 Agreement combined: Weighted Average Number of Exercise Price Shares Price ----------------------------------- 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 Granted 525,000 3.14 Canceled ( 465,184) 3.08 Exercised ( 121,783) 2.75 ----------------------------------- Options outstanding at June 30, 2000 409,418 $2.87 =================================== 32 8. Stock Option Plan (continued) As of June 30, 2000, 409,418 options are outstanding of which 234,749 are exercisable. Additionally, 378,500 options remain available for grant. During the fiscal year ended June 30, 2000 118,059 shares available for grant under the 1987 Plan were expired. As of June 30, 1999, 423,552 were exercisable and 366,375 options were available for grant. The weighted average fair values of options granted were $1.16 and $1.23 in fiscal 2000 and 1999, respectively. A summary of options outstanding and exercisable as of June 30, 2000 follows: Weighted- Average Weighted-Average Weighted- Options Exercise Price Exercise Remaining Options Average Outstanding Range Price Contractual Life Exercisable Exercise Price --------------------------------------------------------------------------------------------------------------- 15,000 $2.56 - 2.69 $2.61 3.21 5,000 $2.56 133,001 $2.72 - 2.72 $2.72 0.60 132,999 $2.72 42,250 $2.75 - 2.87 $2.81 3.15 36,750 $2.81 219,167 $3.00 - 3.00 $3.00 9.10 60,000 $3.00
9. 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 2000 and 1999: 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. 33 GISH BIOMEDICAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 9. Accounting for Stock Based Compensation (continued) Pro forma disclosures required by Statement No. 123 include the effects of all stock option awards granted by the Company from July 1, 1995 through June 30, 2000. 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: 2000 1999 --------------------------- Pro forma net loss $ (3,164) $ (1,901) Pro forma diluted loss per share ($ .90) ($ .55) 10. Commitments and Contingencies Operating Leases The Company is committed to a ten year operating lease for its primary office and manufacturing facilities in Irvine, California, 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 $183 and $168 for the years ended June 30, 2000 and 1999, 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: $810; $842; and $387 for the fiscal years ending June 30, 2001; 2002 and 2003, respectively, for a total of $2,039. Rent expense charged to operations was $731 and $727 for the years ended June 30, 2000 and 1999, respectively. The Company believes the Irvine facility is more than adequate for the next two years, but is currently in negotiation with the lessor of the facility to terminate its lease and relocate to a smaller facility. The Lessor of the Irvine facility is offering financial incentives to the Company in exchange for the Company's early termination of its lease. The Company's intent is to obtain sufficient financial incentives from its current Lessor to cover the costs associated with relocation. If the Company relocates to a new facility, it will be required to write-off abandoned unamortized leasehold improvements related to the Company's present facility. The unamortized book value of such leasehold improvements is approximately $720 at June 30, 2000. Additionally, if the Company relocates to a new facility, it will recognize a benefit for unamortized deferred rent expense. Deferred rent expense at June 30, 2000 is $251. 34 GISH BIOMEDICAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 10. Commitments and Contingencies (continued) Litigation The Company is party to various legal actions arising in the ordinary course of its business. The Company believes that the resolution of these legal actions will not have a material adverse effect on the Company's financial position, results of operations or cash flows. 11. Stock Purchase During the year ended June 30, 1991 the Company loaned $100 to its than President and Chairman of the Board for the exercise of Gish common stock options. The note balance at June 30, 1999 was $54 which was secured by Company stock, bore interest at 5.5% and was due within one year. During fiscal 2000, the Company forgave this debt as part of this employee's severance agreement. 12. 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 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. 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. 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 wrote off all remaining assets (principally inventory and property and equipment) associated with the infusion pump acquired from CMD at June 30, 1998. In September 1999 the Company discontinued development of the new infusion pump for strategic and economic reasons and recognized a charge of $429 related to the discontinuance of the infusion pump line. The total charges related to the discontinuance of the infusion pump operations consisted of $140 charged to cost of sales for inventory obsolescence, $7 charged to selling and marketing expense for the write-down of field inventories, and $282 charged to general and administrative expense consisting primarily of software development cost. 35 GISH BIOMEDICAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 12. Infusion Pump Business (continued) The table below sets forth the operating results of the discontinued infusion pump business for the past two fiscal years as if it were an operating segment: Infusion pump operations June 30, June 30, 2000 1999 --------------------------- Sales (returns) $ - ($ 27) Cost of sales 140 - --------------------------- Gross profit (loss) ( 140) ( 27) --------------------------- Selling and marketing expenses 7 - General and administrative expenses 282 - --------------------------- Total operating expenses 289 - --------------------------- Operating loss ( 429) ( 27) Adjustment to write-off of plant and equipment in 1998 - ( 53) --------------------------- Contribution to pretax loss ($ 429) $ 26 ===========================
13. Fourth Quarter Adjustments Fiscal 1999 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 on 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. Fiscal 2000 During the fourth quarter of fiscal 2000, the Company made certain adjustments to its financial statements based on events and decisions occurring either during the fourth quarter of fiscal 2000 or which occurred shortly thereafter. 36 GISH BIOMEDICAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 13. Fourth Quarter Adjustments (continued) Fiscal 2000 (continued) Obsolete Inventory Adjustments ------------------------------ During the fourth quarter of fiscal 2000 the Company increased obsolete inventory reserve by $101 for slow-moving inventory. 14. Disgorgement of Profits Section 16(b) of the Securities Exchange Act of 1934, as amended, generally provides that any profit realized by a director or officer in connection with the purchase and sale of the Company's common stock within any period of less than six months shall be recoverable by the Company. During fiscal 2000 the Company recovered $49 in profits from a former officer and a former director. This amount was credited directly to shareholder equity. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Inapplicable. 37 PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Directors of the Registrant The following persons are currently serving on the Board of Directors of the Company: Name Principal Occupation Age Director Since ------------------------------------------------------------------------------------------------ James J. Cotter Attorney, Winston & Strawn 31 1999 Ray R. Coulter Practicing Attorney in Rancho Mirage, California 67 1979 John W. Galuchie, Jr. President, T.R. Winston & Company, Inc. 47 1999 John S. Hagestad Managing Director, Sares/Regis Group 53 1979 Kelly D. Scott President and Chief Executive 44 2000 Officer of the Company
Mr. Cotter has been an attorney with Winston & Strawn 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 practicing attorney in Rancho Mirage, California, specializing in corporate, Food and Drug Administration and health care law. For more than the previous 5 years, he was the co-founder and chief financial officer of Wintec Energy, Ltd., an alternate energy company. Mr. Galuchie, a Certified Public Accountant and Chairman of the Company, is principally engaged in the following businesses: (i) T.R. Winston & Company, Inc., a securities broker/dealer, as President since January 1990 and director since September 1989; (ii) Kent Financial Services, Inc., in various executive positions since 1986 including Treasurer and Secretary of Asset Value Management Inc, the sole general partner of Asset Value Fund Limited Partnership; (iii) Pure World, Inc., a manufacturer and distributor of natural products, as Executive Vice President since April 1988; (iv) Cortech, Inc., a biopharmaceutical company, as President and director since September 1998. Mr. Galuchie served as a director of Crown NorthCorp, Inc. from June 1992 to August 1996, a director of HealthRite, Inc. from December 1998 to June 1999 and a director of Golfrounds.com, Inc. from July 1992 to January 2000. Mr. Hagestad is a Managing Director of Sares/Regis Group, a firm specializing in real estate acquisition, development and management, located in Irvine, California. He has been associated with Sares/Regis Group for more than 20 years. Mr. Scott joined the Company in May 2000 as President and Chief Executive Officer. Prior to joining Gish, Mr. Scott was employed for more than twenty years by Sorin Biomedica and its predecessor, Shiley, Inc. a subsidiary of Pfizer, Inc. He was most recently Managing Director of Sorin Biomedica Asia, a position held since 1998. From 1996 to 1997 he was Managing Director of Sorin Biomedica U.K. Ltd. and from 1994 to 1996 Director of National Accounts for Sorin Biomedical, Inc. 38 Executive Officers of the Registrant First Year Name Position with Company Age Elected Office ------------------------------------------------------------------------------------------------ Kelly D. Scott President and Chief Executive 44 2000 Officer of the Company James R. Talevich Former Chief Financial Officer 49 1999
For certain information concerning the business experience of Mr. Scott refer to previous section titled "Directors of the Registrant". Mr. Talevich became Vice President, Chief Financial Officer in July, 1999. He resigned from the Company in August, 2000. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires the Company's Directors and executive officers, and persons who beneficially own more than ten percent of the Company's Common Stock, to file reports of holdings and transactions in the Company's shares with the SEC. Based on Gish's records and other information, Gish believes that in fiscal 2000 Gish's Directors and executive officers met all applicable SEC filing requirements, except that the following individuals inadvertently filed late Form 4s relating to the transactions described below: In June 1999, John Hagestad, a Director, exercised options to purchase 6,667 shares. The purchase was reported on a Form 4 in November, 1999. James R. Yarter, who was Chief Executive Officer of the Company during a portion of fiscal 2000, purchased 16,000 shares in December 1999. The purchase was reported on a Form 4 in February, 2000. Mr. Yarter sold 52,000 shares in March, 2000 which was reported 10 days late during April, 2000. 39 ITEM 10. EXECUTIVE COMPENSATION. Summary Compensation Table. The following table sets forth the aggregate ----------------------------- compensation for services rendered in all capacities during the fiscal years ended June 30, 2000, 1999 and 1998 of all persons serving as Chief Executive Officer and all other executive officers whose salary and bonus exceeded $100,000 (the "Named Executive Officers"). SUMMARY COMPENSATION TABLE Long-Term Compensa- Annual Compensation tion ------------------------------------------------------------------------ Other Annual Securities All Other Name and Bonus Compensation Underlying Compensation Principal Position Year Salary ($) ($) (1) ($) (2) Options (#) ($) (3) -------------------------------------------------------------------------------------------------------------- Kelly D. Scott, 2000 22,500 - - 190,000 - President and CEO 2000 118,958 - 3,332 - 15,629 Jack W. Brown, Former 1999 191,000 28,650 4,926 - 250 President and CEO 1998 175,500 47,750 5,269 225,000 250 James R. Talevich, 2000 126,583 - - 35,000 250 Former Chief Financial Officer --------------------------------------------------------------------------------------------------------------
(1) Bonuses paid to the Named Executive Officers are pursuant to annual incentive compensation programs established each year for selected employees of the Company, including the Company's executive officers. Under this program, performance goals, relating to such matters as sales growth, gross profit margin and net income as a percentage of sales, and individual efforts are established each year. Incentive compensation, in the form of cash bonuses, was awarded based on the extent to which the Company and the individual achieved or exceeded the performance goals. (2) Other Annual Compensation consists of the personal use portion of company-provided automobiles and premiums paid on executive disability policies. (3) All Other Compensation consists of the Company's matching contributions to the Gish Salary Savings Plan under Section 401(k) of $250 in each fiscal year, plus the value of a company-owned vehicle which was given to Mr. Brown under the terms of his employment agreement. 40 (4) Mr. Scott joined the Company in May 2000 as President and Chief Executive Officer. Mr. Scott entered into a written employment agreement with the Company whereby he is entitled to an annual base salary of $180,000, a signing bonus of $20,000 upon the commencement of his employment, and a bonus to be determined by the Board of Directors based on the achievement of specified corporate profitability targets. In the event that his employment is involuntarily terminated on or before May 18, 2001, he will be entitled to severance equivalent to two times the annual salary then in effect on the date of such termination. In the event that involuntary termination occurs after May 18, 2001 but before May 18, 2002, he will receive a payment equal to two times the annual salary then in effect, less the amount of base salary received from May 18, 2001 until the date of termination. Mr. Scott was granted options to purchase 190,000 shares of the Company's Common Stock at an exercise price of $3.00 per share. Options will vest and become exercisable at the rate of 60,000 shares on May 18, 2000, 40,000 shares on May 18, 2001, 40,000 shares on May 18, 2002, and 50,000 shares on May 18, 2003. Stock Options Granted During Fiscal 2000. The following table shows information ----------------------------------------- regarding stock options granted to the Named Executive Officers during fiscal year 2000. OPTION GRANTS IN LAST FISCAL YEAR (Individual Grants) Number of Securities % of total Options Underlying Granted to Options Granted Employees in Exercise or Base (#) (1) Fiscal Year Price ($/Share) Expiration Date ------------------------------------------------------------------------------------------------------------- Kelly D. Scott 190,000 36.2% $3.00 05-18-10 James R. Yarter 300,000 57.1% $3.25 12-01-04 Jack W. Brown - - $ - - James R. Talevich 35,000 6.7% $3.00 07-12-04
(1) The options granted to Mr. Scott become exercisable at the rate of 60,000 shares on May 18, 2000, 40,000 shares on May 18, 2001, 40,000 shares on May 18, 2002, and 50,000 shares on May 18, 2003. The options granted to Mr. Yarter were cancelled on March 15, 2000 following his resignation. The options granted to Mr. Talevich vest one-sixth every six months, beginning six months from the date of grant. 41 Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Values. The --------------------------------------------------------------------------- following table sets forth, for each of the executive officers named in the Summary Compensation Table above, each exercise of stock options during the year ended June 30, 2000 and the year-end value of unexercised options: Number of Securities Underlying Unexercised Shares Options Value of Unexercised Acquired at Fiscal End 2000 In-the-Money Options on Value Exercisable at Fiscal Year End 2000 Exercise Realized Unexercisable Exercisable Unexercisable Name (#) ($)(1) (#) (#) ($)(2) ($)(2) -------------------------------------------------------------------------------------------------------------- Kelly D. Scott - - 60,000 130,000 - - James Yarter - - - - - - Jack W. Brown 20,913 $62,091 100,000 - - - James R. Talevich 5,833 $15,312 - 29,167 - -
(1) Excess of market price over exercise price, on the date of exercise. (2) Value of unexercised in-the-money options is based on the Nasdaq last sale price on June 30, 2000 ($2.50 per share). 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, 2000, the members of the Committee were John S. Hagestad and Ray R. Coulter, both of whom are non-employee directors of the Company. No member of the Compensation Committee is a former or current officer or employee of the Company or a subsidiary of the Company. Furthermore, there are no Compensation Committee interlocks between the Company and other entities involving the Company's executive officers and board members. 42 Board Compensation Committee Report on Executive Compensation The following report was submitted by the Compensation Committee members as of June 30, 1999 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 former Chief Executive Officer) and Jeanne Miller (the Company's former Vice President and Chief Financial Officer) (the "Executive Officers") for fiscal year 1999. During fiscal year 2000 the Company employed new Chief Executive Officers and a new Chief Financial Officer. The compensation of these officers were based on negotiated employment contracts which were subsequently approved by the Board of Directors. Accordingly no report was issued from the Compensation Committee for the fiscal year ended June 30, 2000. 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. 43 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. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information as of September 11, 2000 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 549,800 15% 376 Main Street Bedminster, NJ 07921 Craig Corporation 548,800(2) 15% 550 South Hope Street, Suite 1825 Los Angeles, CA 90071 Dimensional Fund Advisors, Inc. 233,500 7% 1299 Ocean Avenue Santa Monica, CA 90401 Jack W. Brown 234,360(3) 6% James J. Cotter 2,383 * Ray R. Coulter 21,450(4) 1% John W. Galuchie, Jr. 549,800(5) 15% John S. Hagestad 145,856(4) 4% Kelly D. Scott 125,000(6) 3% All directors and executive officers as a group 844,489 (7) 23% ---------------- * Less than 1%
44 (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 33,333 shares subject to options exercisable currently or within 60 days. (4) Includes 11,666 shares subject to options exercisable currently or within 60 days. (5) Mr. Galuchie is deemed to be the beneficial owner of Common Stock of Gish Biomedical, Inc. through his position as Treasurer and Secretary of Asset Value Management, Inc. the sole general partner of Asset Value Fund Limited Partnership. (6) Includes 60,000 shares subject to options exercisable currently or within 60 days. (7) Includes 83,332 shares subject to options exercisable currently or within 60 days. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 45 PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits The following Exhibits are filed as part of this Report: Exhibit Number Description ------- ----------- 3.1 Restated Articles of Incorporation as filed with the California Secretary of State on November 9, 1981, incorporated herein by this reference to Exhibit 2(a) to the Company's Registration Statement on Form S-18, No. 2-73602LA (the "S-18 Registration Statement"). 3.2 Certificate of Amendment of Articles of Incorporation as filed with the California Secretary of State on May 19, 1982, incorporated herein by this reference to Exhibit 2(b) to the S-18 Registration Statement. 3.3 Certificate of Amendment of Articles of Incorporation as filed with the California Secretary of State on December 19, 1988, incorporated herein by this reference to Exhibit 3.3 to the Company's Report on Form 10-K for the year ended June 30, 1990. 3.4 Certificate of Amendment of Articles of Incorporation as filed with the California Secretary of State on June 13, 1990 incorporated herein by this reference to Exhibit 3.4 to the Company's Report on Form 10-K for the year ended June 30, 1990. 3.5 Bylaws, incorporated herein by this reference to Exhibit 2 to the S-18 Registration Statement. 10.1* 401-K Salary Reduction Profit Sharing Plan, incorporated herein by this reference to Exhibit 10(e) to the S-18 Registration Statement. 46 (A) Exhibits The following Exhibits are filed as part of this Report: Exhibit Number Description ------- ----------- 10.2* Officer, Director and Key Employee Incentive Plan, as amended, incorporated herein by this reference to Exhibit 10(x) to the Company's Report on Form 10-K for the year ended June 30, 1985. 10.3* Incentive Stock Option, Non-qualified Stock Option and Restricted Stock Purchase Plan-1987, as amended (the "1987 Plan"), incorporated herein by this reference to Exhibit 4 to the Company's Registration Statement on Form S-8, No. 33-36432. 10.4* Form of Incentive Stock Option Agreement for use with the 1987 Plan, incorporated herein by this reference to Exhibit 4.3 to the Company's Registration Statement on Form S-8, No. 33-19714 (the "S-8 Registration Statement"). 10.5* Form of Non-qualified Stock Option Agreement for use with the 1987 Plan, incorporated herein by this reference to Exhibit 4.4 to the S-8 Registration Statement. 10.6* Form of Restricted Common Stock Purchase Agreement for use with the 1987 Plan, incorporated herein by this reference to Exhibit 4.5 to the S-8 Registration Statement. 10.7* Form of 1997 Stock Incentive Plan (the "1997 Plan"), incorporated herein by this reference to the Company's Report on Form 10-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. 47 (A) Exhibits The following Exhibits are filed as part of this Report: Exhibit Number Description ------- ----------- 10.12 Lease dated as of April 17, 1996, between the Company and LBI, a California General Partnership. Incorporated herein by this reference to the Company's Report on 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 10.14* Employment agreement dated as of May 15, 2000 between the Company and Kelly D. Scott. 21.1 Subsidiaries of the Company. Incorporated herein by this reference to the Company's Report on the form 10-K for the year ended June 30, 1996. 27.1 Financial Data Schedule (B) Reports on Form 8-K ------------------- No reports were filed by the Company on Form 8-K during the quarterly period ended June 30, 2000. ------------------ *Management contract or compensatory plan or arrangement. 48 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 September 28, 2000 JAMES J. COTTER Director --------------------------- JAMES J. COTTER JOHN W. GALUCHIE, JR. Director, Chairman of the September 28, 2000 --------------------------- JOHN W. GALUCHIE, JR. Board and Acting Chief Financial Officer NOMA S. BATES Controller and Acting September 28, 2000 --------------------------- NOMA S. BATES Corporate Secretary JOHN S. HAGESTAD Director September 28, 2000 --------------------------- JOHN S. HAGESTAD RAY R. COULTER Director September 28, 2000 --------------------------- RAY R. COULTER KELLY D. SCOTT Director, President and Chief September 28, 2000 --------------------------- KELLY D. SCOTT Executive Officer
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