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.
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.
In April 1996, Gish acquired infusion pump technology and related assets from
Creative Medical Development, Inc. ("CMD").
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.
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
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
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
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).
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.
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
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).
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
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
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
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
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
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
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
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
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.
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.
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.
Gish has no contracts with customers where cancellation or renegotiation would
have a material impact on the Company's sales or profit margins.
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.
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.
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.
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.
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.
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
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
Regulatory clearances or approvals, if granted, may include significant
limitations on the indicated uses for which the product may be marketed. In
addition, to obtain such clearances or approvals, the FDA and certain foreign
regulatory authorities impose numerous other requirements with which medical
device manufacturers must comply. FDA enforcement policy strictly prohibits the
marketing of cleared or approved medical devices for uncleared or unapproved
uses. In addition, product clearances or approvals could be withdrawn for
failure to comply with regulatory standards or the occurrence of unforeseen
problems following the initial marketing. The Company will be required to adhere
to applicable FDA regulations regarding good manufacturing practices ("GMP") and
similar regulations in other countries, which include testing, control, and
documentation requirements. Ongoing compliance with GMP and other applicable
regulatory requirements will be monitored through periodic inspections by
federal and state agencies, including FDA and CDHS, and by comparable agencies
in other countries. Failure to comply with applicable regulatory requirements,
including marketing products for unapproved uses, could result in, among other
things, warning letters, fines, injunctions, civil penalties, recall or seizure
of products, total or partial suspension of production, refusal of the
government to grant premarket clearance or premarket approval for devices,
withdrawal of clearances or approvals and criminal prosecution. Changes in
existing regulations or adoption of new governmental regulations or policies
could prevent or delay regulatory approval of the Company's products.
There can be no assurance that the Company will be able to obtain FDA 510(k)
clearance or PMA approval for its products under development or other necessary
regulatory approvals or clearances on a timely basis or at all. Delays in
receipt of or failure to receive U.S. or foreign clearances or approvals, the
loss of previously obtained clearances or approvals, or failure to comply with
existing or future regulatory requirements would have a material adverse effect
on the Company's business, financial condition and results of operations.
Product Liability Risk; Limited Insurance Coverage
The manufacture and sale of medical products entail significant risk of product
liability claims. The Company maintains insurance with respect to such claims,
but there can be no assurance that the Company's existing annual insurance
coverage limits of $5 million per occurrence and $5 million in the aggregate
will be adequate to protect the Company from any liabilities it might incur in
connection with the clinical trials or sales of its products. In addition, the
Company may require increased product liability coverage if and when products
under development are successfully commercialized. Such insurance is expensive
and in the future may not be available on acceptable terms, or at all. A
successful product liability claim or series of claims brought against the
Company in excess of its insurance coverage, could have a material adverse
effect on the Company's business, financial condition and results of operations.
Risks Relating to New Product Development
The Company's success is dependent in part on the design and development of new
products in the medical device industry. The product development process is
time-consuming and costly, and there can be no assurance that product
development will be successfully completed, that necessary regulatory clearances
or approvals will be granted by the FDA on a timely basis, or at all, or that
the potential products will achieve market acceptance. Failure by the Company to
develop, obtain necessary regulatory clearances or approvals for, or
successfully market potential new products could have a material adverse effect
on the Company's business, financial condition and results of operations.
Dependence Upon Key Personnel
The Company is dependent upon a number of key management and technical
personnel. The loss of the services of one or more key employees would have a
material adverse effect on the Company. The Company's success will also depend
on its ability to attract and retain additional highly qualified management and
technical personnel. The Company faces intense competition for qualified
personnel, many of whom are often subject to competing employment offers, and
there can be no assurance that the Company will be able to attract and retain
Risks Associated with Healthcare Reform Proposals
Political, economic and regulatory influences are subjecting the healthcare
industry in the United States to fundamental change. Potential reforms proposed
over the last several years have included mandated basic healthcare benefits,
controls on healthcare spending through limitations on the growth of private
health insurance premiums and Medicare and Medicaid spending, the creation of
large insurance purchasing groups and fundamental changes in the healthcare
delivery system. In addition, some states in which the Company operates are also
considering various healthcare reform proposals. The Company anticipates that
federal and state governments will continue to review and assess alternative
healthcare delivery systems and payment methodologies and public debate of these
issues will likely continue in the future. Due to uncertainties regarding the
ultimate features of reform initiatives and their enactment and implementation,
the Company cannot predict which, if any, of such reform proposals will be
adopted, when they may be adopted or what impact they may have on the Company,
and there can be no assurance that the adoption of reform proposals will not
have a material adverse effect on the Company's business, operating results or
financial condition. In addition, the actual announcement of reform proposals
and the investment community's reaction to such proposals, as well as
announcements by competitors and third-party payors of their strategies to
respond to such initiatives, could produce volatility in the trading and market
price of the Common Stock.
Risks Associated with Environmental Compliance
In the ordinary course of its manufacturing process, the Company uses solvents
and isopropyl alcohol which are stored on-site. The waste created by the use of
these products is transported off-site on a regular basis by a state-registered
waste hauler. Although the Company is not aware of any claim involving violation
of environmental or occupational safety and health laws and regulations, there
can be no assurance that such a claim may not arise in the future, which may
have a material adverse effect on the Company.
Adverse Effects of Preferred Stock on Rights of Common Stock
The Board of Directors of the Company is authorized to issue, from time to time,
without any action on the part of the Company's shareholders, up to 2,250,000
shares of Preferred Stock in one or more series, with such relative rights,
preferences, privileges and restrictions as are determined by the Board of
Directors at the time of issuance. Accordingly, the Board of Directors is
empowered to issue Preferred Stock with dividend, liquidation, conversion,
voting or other rights which could adversely affect the voting power or other
rights of the holders of Common Stock. In the event of such issuance, the
Preferred Stock could have the effect of discouraging, delaying or preventing a
change in control of the Company.
Volatility of Stock Price; No Dividends
The trading price of the Common Stock has been and is likely to continue to be
subject to significant fluctuations in response to variations in quarterly
operating results, the gain or loss of significant contracts, changes in
management, announcements of technological innovations or new products by the
Company or its competitors, legislative or regulatory changes, general trends in
the industry and other events and factors. In addition, the stock market has
frequently experienced extreme price and volume fluctuations which have affected
the market price for many companies for reasons unrelated to the operating
performance of these companies. These broad market fluctuations may adversely
affect the market price of the Company's Common Stock. The Company currently
intends to retain any future earnings for use in its business and does not
anticipate any cash dividends in the future.