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WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-10728
GISH BIOMEDICAL, INC.
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(Exact name of registrant as specified in its charter)
California 95-3046028
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2681 Kelvin Avenue, Irvine California 92614
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (949)756-5485
N/A
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Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of January 31,
1999: 3,450,632
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GISH BIOMEDICAL, INC.
INDEX
PART I. Financial Information Page
Item 1: Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
as of December 31, 1998 and June 30, 1998 3
Condensed Consolidated Statements of
Operations for the three and six months
ended December 31, 1998 and 1997 4
Condensed Consolidated Statements of
Cash Flows for the six months ended
December 31, 1998 and 1997 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2: Management's Discussion and Analysis
of Financial Condition and Results
of Operations 8
PART II Other Information
Item 4: Submission of Matters to a Vote of
Security-Holders 11
Item 6: Exhibits and Reports on Form 8-K 11
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GISH BIOMEDICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1998 1998
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ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 3,225,600 $ 3,497,100
Short-term investments 581,700 581,700
Accounts receivable, net 3,425,400 3,588,800
Income tax refund receivable 803,400 754,300
Inventories 7,101,800 7,609,900
Prepaid expenses 248,300 177,300
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Total current assets 15,386,200 16,209,100
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Property and equipment, at cost 9,338,100 9,176,400
Less accumulated depreciation (6,544,300) (6,089,800)
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Net property and equipment 2,793,800 3,086,600
Other assets 164,600 149,400
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$ 18,344,600 $ 19,445,100
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 713,800 $ 1,100,700
Accrued compensation and related items 534,600 665,700
Other accrued liabilities 19,000 11,700
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Total current liabilities 1,267,400 1,778,100
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Deferred rent 314,200 324,400
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Shareholders' equity:
Preferred stock, 2,250,000 shares
authorized; no shares outstanding
Common stock, no par value, 7,500,000
shares authorized, 3,450,632 shares issued
and outstanding (3,444,632 shares at
June 30, 1998) 10,130,100 10,113,800
Note receivable - officer stock purchase (53,800) (53,800)
Retained earnings 6,686,700 7,282,600
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Total shareholders' equity 16,763,000 17,342,600
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$ 18,344,600 $ 19,445,100
============ ============
See accompanying notes
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GISH BIOMEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
Three months ended Six months ended
December 31, December 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Net sales $ 4,515,200 $ 5,209,200 $ 9,267,500 $ 10,526,900
Cost of sales 3,192,200 3,712,100 6,612,200 7,347,600
------------ ------------ ------------ ------------
Gross profit 1,323,000 1,497,100 2,655,300 3,179,300
------------ ------------ ------------ ------------
Operating expenses
Selling and marketing 969,500 1,192,700 1,989,700 2,142,700
Research and development 336,200 291,000 565,200 528,400
General and administrative 382,800 469,400 808,300 889,200
------------ ------------ ------------ ------------
Total operating expenses 1,688,500 1,953,100 3,363,200 3,560,300
------------ ------------ ------------ ------------
Operating loss (365,500) (456,000) (707,900) (381,000)
------------ ------------ ------------ ------------
Interest income 39,300 74,500 112,000 147,900
------------ ------------ ------------ ------------
Loss before provision for taxes (326,200) (381,500) (595,900) (233,100)
Benefit for taxes 127,200 (148,800) 232,400 (90,900)
Valuation allowance (127,200) -- (232,400) --
------------ ------------ ------------ ------------
Net loss $ (326,200) $ (232,700) $ (595,900) $ (142,200)
============ ============ ============ ============
Net loss per share-basic and
diluted $ (.09) $ (.07) $ (.17) $ (.04)
============ ============ ============ ============
Average common and common
equivalent shares used for basic
and diluted per share calculation 3,459,632 3,439,195 3,448,899 3,434,572
============ ============ ============ ============
See accompanying notes
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GISH BIOMEDICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
1998 1997
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Cash flows from operating activities:
Net loss $ (595,900) $ (142,200)
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 454,500 442,400
Amortization 12,100 12,100
Deferred rent (10,200) 4,100
Changes in operating assets and liabilities 40,700 (697,200)
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Net cash used in operating activities (98,800) (380,800)
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Cash flows for investing activities:
Purchases of property and equipment (161,700) (152,600)
Increase in other assets (27,300) (6,800)
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Net cash used in investing activities (189,000) (159,400)
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Cash flows from financing activities:
Proceeds from stock options exercised 16,300 18,800
Increase in note receivable from officer -- (18,800)
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Net cash provided by financing activities 16,300 --
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Net decrease in cash and cash equivalents (271,500) (540,200)
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Cash and cash equivalents at beginning of period 3,497,100 3,977,100
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Cash and cash equivalents at end of period $ 3,225,600 $ 3,436,900
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See accompanying notes
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GISH BIOMEDICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(UNAUDITED)
1. General
The condensed financial statements included herein have been prepared
by the Company, without audit, and include all adjustments which , in
the opinion of management, are necessary for a fair presentation of the
results of operations for the three and six month periods ended
December 31, 1998 and 1997, financial position at December 31, 1998,
and cash flows for the six month periods ended December 31, 1998 and
1997, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures
normally included in consolidated financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures in such condensed
consolidated financial statements are adequate to make the information
presented not misleading. These condensed financial statements should
be read in conjunction with the Company's consolidated financial
statements and the notes thereto included in the Company's Annual
Report filed with the Securities and Exchange Commission on Form 10-K
for the year ended June 30, 1998.
Effective July 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS
130") which establishes standards for reporting and displaying
comprehensive income and its components in the financial statements.
For the three and six month periods ended December 31, 1998 and 1997,
the Company did not have any components of other comprehensive income
as defined in SFAS 130.
Statement of Cash Flows
Changes in operating assets and liabilities as shown in the condensed
consolidated statements of cash flows comprise:
Six months ended December 31, 1998 1997
----------------------------- --------- ---------
(Increase) decrease in:
Accounts receivable $ 163,400 $ 308,200
Inventories 508,100 (681,800)
Prepaid expenses (71,000) (287,200)
Income tax refund receivable (49,100) --
Increase (decrease) in:
Accounts payable (386,900) 16,300
Accrued compensation and related items (131,100) (10,500)
Other accrued liabilities 7,300 (42,200)
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Changes in operating assets and liabilities $ 40,700 $(697,200)
========= =========
The Company did not pay any Federal and State income taxes during the
six month period ending December 31, 1998 nor in the six month period
ending December 31, 1997.
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GISH BIOMEDICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
2. Inventories
Inventories are stated at the lower of cost (first-in, first out) or
net realizable value and are summarized as follows:
December 31, 1998 June 30,1998
Raw materials $3,602,500 $3,971,500
Work in progress 973,700 1,082,600
Finished goods 2,525,600 2,555,800
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$7,101,800 $7,609,900
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3. Earnings per share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share". Statement 128 replaced the previously reported primary and
fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share
exclude any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented, and where necessary,
restated to conform to the Statement 128 requirements. The adoption of
this standard did not have a material effect on previously reported
earning per share.
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GISH BIOMEDICAL, INC.
DECEMBER 31, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations:
Sales for the three and six month periods ended December 31, 1998 decreased by
$694,000, or 13%, and $1,259,400 or 12%, respectively, over the corresponding
periods of fiscal 1998.
The decreases in sales was due primarily to the loss of two original equipment
manufacturing or (OEM) customers who together accounted for sales of
approximately $1,800,000 per year of private labeled custom tubing packs.
Additionally sales were adversely effected by a general industry-wide price
decline for cardiovascular products, lost business relating to the discontinued
distributors discussed below and new European Economic Community (EEC)
regulations which resulted in the defferal of shipments of some of the Company's
products to the EEC. These decreases in sales were offset, in part, by sales of
the Vision(TM) oxygenator. Sales of the Vision(TM) oxygenator for the three and
six months ended December 31, 1998 were $459,000 and $710,000, respectively.
In February 1998, the Company ceased doing business with two distributors of the
Company's products, Specialized Medical Systems (SMS) and CardioVascular
Concepts (CVC). For the six month period ended December 31, 1997 SMS and CVC
represented 17% and 4% of the Company's total sales, respectively. During the
second quarter of fiscal 1998, the Company engaged a direct sales force of seven
persons to replace the two distributor sales organizations discussed above. The
Company retained approximately 72% and 52% of the sales previously attributable
to SMS and CVC, respectively, while increasing margins on such sales.
The Company expects further declines in its OEM business to result from the
merger of several of its existing OEM customers. The OEM portion of the
company's business was 9% and 11% of total sales for the three and six month
periods ended December 31, 1998, respectively, as compared to 16% for the
corresponding periods of fiscal 1998.
Cost of sales for the three month period ended December 31, 1998 remained
constant at 71% of sales as compared to the corresponding period of fiscal 1998.
Cost of sales for the six month period ended December 31, 1998 was 71% of sales
as compared to 70% of sales for the corresponding period of fiscal 1998. The
increase in cost of sales of 1% for the three month period ended December 31,
1998 is primarily due to fixed costs associated with excess capacity offset by
cost reductions pursuant to the Company's cost reduction program.
Research and development expenses for the three and six month periods ended
December 31, 1998 increased $45,200 and $36,800 or 16% and 7% compared to the
corresponding periods of fiscal 1998. The Company anticipates increasing its
investment in research and development over the next few fiscal quarters as it
expands its development staff and project list. The Company is actively engaged
in several new product development projects which will require expenditures
approximating $325,000 per quarter for the foreseeable future.
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GISH BIOMEDICAL, INC.
DECEMBER 31, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Selling and marketing expenses for the three and six month periods ended
December 31, 1998 decreased $223,200 and $153,000 or 19% and 7% as compared to
the corresponding periods of fiscal 1998. The decreases were due to a reduction
of sales and marketing staff and lower commissions resulting from lower sales
volumes. The Company anticipates that its selling and marketing expenses will
increase to approximately $1,300,000 per quarter for the remainder of the fiscal
year.
General and administrative expenses decreased $86,600 and $80,900 or 18% and 9%
for the three and six month periods ended December 31, 1998, respectively. The
decreases were primarily due to lower insurance costs and expenditure reductions
with outside service providers. No significant increases in general and
administrative expenses are planned for the foreseeable future.
The provision (benefit) for taxes is based upon a combined federal and state
effective tax rate of 39% for all periods presented entirely offset by a
valuation allowance against the Company's deferred tax assets of $127,200 and
$232,400 established in the three and six month periods ended December 31, 1998.
The valuation allowance reflects the uncertain ability of the Company to utilize
its net loss carryforwards in future periods.
The effects of inflation have not been a significant factor in the results of
the Company's operations. The cardiovascular surgery market has been
experiencing downward competitive pricing pressures which are reflected in lower
sales dollars per unit sold.
Year 2000
The Year 2000 Problem in computers arises from the common computer industry
practice of using two digits to represent a date in computer software code and
databases to enhance both processing time and save storage space. Therefore,
when dates in the year 2000 and beyond are indicated and computer programs read
date "00," the computer may default to the year "1900" rather than the correct
"2000". This could result in incorrect calculations, faulty data and computer
shutdowns, potentially impairing the conduct of business.
The Company has reviewed its significant or critical computerized financial,
operations and facility management computer systems. These systems utilize
licensed third party software most of which was converted in 1997 so as to be
year 2000 compliant at no additional cost to the Company. The Company's
third-party vendors for the remaining systems have committed to be year 2000
compliant by the end of calendar 1998 at no additional charge to the Company.
The Company has also reviewed and analyzed all of its products which contain a
software component and has determined that none of these electronic products are
vulnerable to year 2000 issues.
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GISH BIOMEDICAL, INC.
DECEMBER 31, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The Company plans to institute a year 2000 compliance program for its
significant vendors and customers during fiscal 1999 to evaluate the risks and
potential impact on the Company of their non compliance. Year 2000 compliance
issues will be addressed during the Company's routinely scheduled vendor audits
and should not represent a material expense. In the event that any significant
vendor is unable to provide reasonable assurances to the Company of its year
2000 compliance the Company intends to evaluate and qualify alternate sources of
supply on a case-by-case basis.
Although the Company expects its internal systems to be Year 2000 compliant as
described above, the Company intends to prepare a contingency plan that will
specify what it plans to do if it or its significant vendors are not Year 2000
compliant in a timely manner. The Company expects to prepare its contingency
plan in calendar year 1999 following the anticipated completion of its internal
remediation and the assessment of the compliance of the Company's significant
vendors. Even if these plans are completed on time and put in place, there can
be no assurance that such plans will be sufficient to address any third party
failures or that unresolved or undetected internal and external Year 2000 issues
will not have a material effect on the Company's business, financial condition
and results of operations.
Liquidity and capital resources:
For the six month period ended December 31, 1998 cash used in operations of
$98,800 was primarily due to cash used to fund unprofitable operations offset in
part by net changes in operating assets and liabilities.
For the six month period ended December 31, 1997 cash used in operations of
$380,800 was primarily due to increases in inventory. This increase was
primarily due to stocking higher levels of inventory related to the expansion of
the Company's direct sales force.
For the six month period ended December 31, 1998 cash used in investing
activities of $189,000 was primarily due to purchases of property and equipment
for the manufacture of new products and to improve operating efficiencies.
For the six month period ended December 31, 1997 cash used in investing
activities of $159,400 was primarily due to purchases of property and equipment
for the manufacturer of new products.
For the six month period ended December 31, 1998 cash provided by financing
activities of $16,300 was primarily due to proceeds from the exercise of stock
options.
As a result of the above matters, in the six month period ended December 31,
1998 the Company's working capital decreased by $312,200.
The Company believes that cash generated from operations together with available
cash will be adequate to meet the Company's planned expenditures and liquidity
needs for fiscal 1999.
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This Quarterly Report on Form 10-Q contains certain forward-looking statements
that are based on current expectations. In light of the important factors that
can materially affect results, including those set forth below and elsewhere in
this Quarterly Report on Form 10-Q, the inclusion of forward-looking information
herein should not be regarded as a representation by the Company or any other
person that the objectives or plans of the Company will be achieved. The Company
may encounter competitive, technological, financial and business challenges
making it more difficult than expected to continue to develop and market its
products; the market may not accept the Company's existing and future products;
the Company may be unable to retain key management personnel; and there may be
other material adverse changes in the Company's operations or business. Certain
important factors affecting the forward-looking statements made herein include,
but are not limited to (i) continued downward pricing pressures in the Company's
targeted markets, (ii) the continued acquisition of the Company's customers by
certain of its competitors and (iii) the decision by the Company to replace its
distributor network with a direct sales force in certain geographic territories.
Assumptions relating to budgeting, marketing, product development and other
management decisions are subjective in many respects and thus susceptible to
interpretations and periodic revisions based on actual experience and business
developments, the impact of which may cause the Company to alter its marketing,
capital expenditure or other budgets, which may in turn affect the Company's
financial position and results of operations. The reader is therefore cautioned
not to place undue reliance on forwarding-looking statements contained herein,
which speak as of the date of this Report.
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security-Holders.
The Company held its annual meeting of Shareholders ("Annual Meeting") on
November 18, 1998. At the Annual Meeting the Shareholders voted upon the
following two proposals: (1) the election of six directors for the ensuing year
(proposal one) and (2) the ratification of the selection of Ernst & Young, LLP
as the Company's auditors for 1999 (proposal two). At the annual meeting a
shareholder exercised its right to cumulative voting. The number of votes cast
for each of the Directors were: Jack W. Brown 2,986,160; Howard F. Bovers
3,539,700; Richard A. Braun none; Ray R. Coulter 2,986,156; Richard W. Dutrisac
2,986,156; James B. Glavin 2,986,156; James S. Hagestad 2,986,156, respectively.
The number of votes cast for, against or withheld, as well as the number of
abstentions and broker non-votes for proposal two were: 2,641,367, 54,600 and
599,585 respectively with no broker non-votes.
ITEM 6. Exhibits and reports on Form 8-K.
27.1 Financial Data Schedule
A Form 8-K was filed by Gish on November 25, 1998.
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Pursuant to the requirements of the Securities Exchange Act of 1934 the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GISH BIOMEDICAL, INC.
Date: 2/11/99 JEANNE M. MILLER
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JEANNE M. MILLER
Chief Financial Officer
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EXHIBIT INDEX
Exhibit No. Description
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27.1 Financial Data Schedule