-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K416QaLP5bT0h6+qAjikVv2aizBINSjvz0vxgQ3iu0xBQCmqW53ta3wSXDsx9uXa RVJwWTkshNWI5H5k0qwXhA== 0000892569-97-002662.txt : 19970930 0000892569-97-002662.hdr.sgml : 19970930 ACCESSION NUMBER: 0000892569-97-002662 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970929 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GISH BIOMEDICAL INC CENTRAL INDEX KEY: 0000700945 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 953046028 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-10728 FILM NUMBER: 97686876 BUSINESS ADDRESS: STREET 1: 2681 KELVIN AVE CITY: IRVINE STATE: CA ZIP: 92714 BUSINESS PHONE: 7147565485 MAIL ADDRESS: STREET 1: 2681 KELVIN AVE CITY: IRVINE STATE: CA ZIP: 92714 10-K405 1 FORM 10-K FOR PERIOD ENDED JUNE 30, 1997 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1997 ------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-10728 GISH BIOMEDICAL, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 95-3046028 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 2681 Kelvin Avenue Irvine, California 92614 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (714) 756-5485 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of each class No par value common stock Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X] On September 15, 1997 the aggregate market value of the registrant's voting common stock held by non-affiliates of the registrant was approximately $16,293,189 (computed using the closing price of $4.75 per share of Common Stock as of September 15, 1997 as reported by NASDAQ). There were 3,430,145 shares of the registrant's common stock, no par value, outstanding on September 15, 1997. DOCUMENTS INCORPORATED BY REFERENCE DOCUMENT WHERE INCORPORATED - -------- ------------------ Portions of Proxy Statement for the 1997 Annual Meeting of Shareholders Part III, Items 10, 11, 12 and 13 2 GISH BIOMEDICAL, INC. INDEX
Part I: Page Item 1. Business 3 Item 2. Properties 14 Item 3. Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Part II: Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 14 Item 6. Selected Financial Data 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 8. Financial Statements and Supplementary Data 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 31 Part III: Item 10. Directors and Executive Officers of the Registrant 31 Item 11. Executive Compensation 31 Item 12. Security Ownership of Certain Beneficial Owners and Management 32 Item 13. Certain Relationships and Related Transactions 32 Part IV: Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 32
2 3 PART I ITEM 1. BUSINESS 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 principally through domestic and 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 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 a heart-lung machine which oxygenates the blood and returns it 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 $8,985,400, $9,643,200, and $8,254,500 in fiscal 1997, 1996, and 1995 respectively (equal to 43%, 42% and 38% 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. CARDIOTOMIES - 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 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. 3 4 In addition to the cardiotomy reservoirs' use in the operating room, Gish has developed several systems which allow the cardiotomy reservoir to be used as a pleural drainage or autotransfusion system during recovery. Cardiotomy sales were approximately $1,910,200, $1,971,100 and $2,439,100 for fiscal years ended June 30, 1997, 1996 and 1995 respectively (equal to 9%, 9% and 11% of net sales, respectively, in each 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. The development process of this project was delayed when the Company increased the acceptable performance standards for its design in October 1995. The Company expects it's Vision(TM) oxygenator to be available for market in the second quarter of fiscal 1998. As a life sustaining device used during open heart surgery, Vision's design allows consistent performance, day after day. Vision is assembled in Gish's clean rooms using state of the art equipment and biocompatible materials, and then each unit is 100% 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 is currently being sold in selected accounts both domestically and internationally. The Company anticipates full market release of this product during the second quarter of fiscal 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. 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 new CAPVRF45 hardshell venous reservoir combines a 360(degree) rotational, top-entry 1/2" inlet for unrestricted venous drainage and a high performance cardiotomy compartment with six sucker inlet ports to handle all of the blood coming from the surgical field. Gish has incorporated the advantages of the depth filter in its cardiotomies into the CAPVRF45 for reduced hold-up volumes, making more blood available to the patient. With an operating capacity of 4500 ml, the CAPVRF45 also has the capacity to handle high blood volume procedures such as valve replacements and second surgeries. The CAPVRF45 is a perioperative device, capable of operating in both the Operating Room and Recovery Room. Following surgery, through a simple conversion process, the CAPVRF45 collects blood shed from the chest cavity and removes unwanted debris before the filtered blood is reinfused back into the patient. Blood recovery and autotransfusion through the CAPVRF45's closed system limits hospital staff exposure to potential blood infections. Recovered blood may be reinfused continuously, intermittently, or not at all, in support of all patient's religious beliefs, including Jehovah's witnesses. The CAPVRF45's dual 4 5 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 CAPVRF45 reservoir provides the Company with the products to effectively meet the needs of the 320,000 open heart procedures performed in the U.S. and the 600,000 procedures performed worldwide annually. CARDIOPLEGIA DELIVERY SYSTEMS - Cardioplegia encompasses several techniques employed in open-heart surgery to preserve, protect and manage the heart tissue. The technique typically involves the use of a chilled solution which is infused into the heart through the coronary arteries to cool the heart and reduce heart activity and metabolism. However, there are many different techniques utilized depending on the physician and patient needs. The use of these techniques significantly reduces damage to heart tissue during surgery, enhances restoration of heart function and helps return the patient to a normal heartbeat when the surgical procedure is complete. Gish has developed a complete line of cardioplegia delivery systems. Multiple systems are required for this technique due to varying physician preferences. Gish's original offerings for this procedure were a series of reservoirs with a recirculation valve (CPS) and a series of cooling coils (CCS series). The Company has since developed a line of cardioplegia systems and heat exchangers designed to utilize a blood and potassium mixture and allow the surgeon to quickly change the temperature delivered to the patient. Gish upgraded its CPS series of reservoirs with the CPS Plus(R) which was introduced in fiscal 1993. Cardioplegia system sales were approximately $3,999,600, $4,611,200, and $4,979,500 for fiscal year 1997, 1996, and 1995 respectively (equal to 19%, 20%, and 23% 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(TM) 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(TM) 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(TM) catheter line, the CathCap(TM). The CathCap(TM) 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(TM) line with the VasPort(R) Implantable Ports and the Vastack(R) Needle Support System. The VasPort(R) 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(R) in July 1996 to meet the needs of patients requiring multiple infusions. The Vastack(R) consists of a specially designed needle and positioning system for use with the VasPort(R) . 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(R). The Hemed VasPort(R) and VasTack(R) 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 5 6 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 $1,106,500, $960,500, and $1,005,600 for fiscal year 1997, 1996, and 1995 respectively (equal to 5%,4%, 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 complements the Company's line of vascular access devices. The EZ Flow 480's unique microprocessor-based design accommodates continuous, intermittent, total parenteral nutrition ("TPN") and patient controlled analgesia therapies ("PCA"). The EZ Flow 480's menu-driven software features multi-view programming screens, lending itself to simple operation. The pump's automatic calculation software automatically verifies and corrects infusion rate and dosage intervals. The EZ Flow 480 performs complex dosage requirements such as tapered TPN administration, time delayed antibiotic therapy, and PCA with continuous basal infusion. EZ Flow sales were approximately $253,400, and $720,700 for fiscal years 1997 and 1996, respectively (equal to 1%, and 3% of net sales respectively, in each of such years). ORTHOFUSER - The patented Orthofuser(TM) is designed for post-operative use in orthopedic surgeries such as hip and knee replacements and provides for the safe recovery and transfusion of the patient's own blood. This product is well suited for orthopedic procedures, as it is portable and incorporates its own internal vacuum source. Salvaging and reusing as little as 500 cc's of blood post surgically may be enough to avoid the use of donor blood in these types of surgeries. Orthofuser sales were approximately $1,222,700, $1,107,100 and $1,269,900 for fiscal year 1997, 1996, and 1995 respectively (equal to 6%, 5%, and 6% of net sales respectively, in each of such years). GOVERNMENT REGULATIONS Gish's products are subject to the Federal Food, Drug and Cosmetic Act (the "Act") and regulations issued thereunder. The Act is administered by the Federal Food and Drug Administration ("FDA"), which has authority to regulate the marketing, manufacturing, labeling, packaging and distribution of products subject to the Act. In addition, there are requirements under other federal laws and under state, local and foreign statutes which may apply to the manufacturing and marketing of Gish products. 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"). 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 6 7 510(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 also 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 on a routine basis 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'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 regulation also requires investigation of any deficiencies in the manufacturing process or in the products produced and detailed record keeping. The FDA has proposed changes to the GMP regulation that would, if finalized, likely increase the cost of complying with GMP requirements. 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 the Gish's business. Gish believes all of its present products are Class I or Class II 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. Several products of Gish 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. 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 major projects currently under development include a myocardial management system, the MyoManager(TM), a pediatric oxygenator and related pediatric cardiovascular accessories, a hemoconcentrator, and cardiovascular coated circuit technology. Additionally, the Company has a project in process to enhance and add functionality to its existing StatSat, oxygen saturation monitor, and develop a unique vascular access port, the Trans-Q-Port. Concurrently, the Company is working on the next generation infusion pump and enhancements to other existing products. The Company received FDA market approval for the MyoManager(TM) myocardial management system in June 1995, then released the MyoManager(TM) for clinical trials during the third quarter of fiscal 1996. The initial trials of the device indicated a need for the redesign of certain portions of the system, which is still in process. Gish's research and development expenditures for the years ended June 30, 1997, 1996, and 1995 were $1,345,400, $1,407,500, and $1,124,700 respectively. 7 8 MARKETING AND DISTRIBUTION Domestically the Company distributes its products through a combination of direct sales representatives and specialty medical distributors. In September 1997, two of these dealers announced plans to represent a competing product line effective December 1997. Accordingly, the Company will be expanding its direct sales force during the second quarter of fiscal 1998. The Company will introduce the Vision Oxygenator to those domestic geographic regions which are represented by direct salespersons and distributors who do not currently sell a competitive oxygenator. Both of the distributors who will terminate their relationship with the Company represented competing oxygenators; consequently the Company will be able to introduce its oxygenator in a larger geographic region than was originally planned. Internationally the Company is represented by specialty medical distributors in over fifty countries around the world. The Company's international sales represented 18% of total sales. International sales of the Company's new Vision Oxygenator commenced in September 1997. Gish has increased its marketing support of its distribution system over the past few years through increased sales management personnel, technical support, trade advertising, collateral materials and participation in medical conferences. The Company has not experienced, and does not expect, sales of the Company's products to be subject to seasonality in any material respects. COMPONENTS AND PARTS Gish purchases components for its various products from vendors who sell such components generally to the medical device industry. Most components for the Company's proprietary products are manufactured from tooling owned by the Company. Other components are manufactured by outside suppliers to the Company's specifications. Certain components of the Company's custom tubing sets are purchased from competitors. Gish has not experienced difficulty in obtaining such components in the past and believes adequate sources of supply for such items are available on reasonable terms. PATENTS AND LICENSE AGREEMENTS Gish has been issued or has patents pending on several of its products. There can be no assurance that any patents issued would afford the Company adequate protection against competitors which sell similar inventions or devices. There also can be no assurance that the Company's patents will not be infringed upon or designed around by others. However, the Company intends to vigorously enforce all patents it has been issued. Gish is obligated to pay a royalty equal to 3% of the net sales of its reservoir style cardioplegia delivery systems to Dr. Bradley Harlan. Gish is obligated under agreements entered into in 1988 to pay a royalty equal to 4% of the net sales of its thoracostomy kit, the Thoraguide, and to pay royalties equal to 5% of the net sales of its dual use uterine monitoring catheter, AmCath, to Dr. Neil Semrad and to Dr. Levy and Dr. Rosenwieg respectively. Gish is obligated to pay a royalty equal to 5% of the net sales of the Robiscek dual channel suction wand, RBS-2 to Dr. Francis Robiscek. Gish is obligated to pay a royalty equal to 5% of the net sales of its MyoManager(TM), myocardial management system to CardioPulmonary Services. The Company's aggregate royalty expenses were $54,100, $55,800, and $49,900 for the years ended June 30, 1997, 1996 and 1995, respectively. 8 9 WORKING CAPITAL AND FINANCING OF OPERATIONS Gish finances operations primarily through cash flow generated by sales of Gish's products. Gish seeks to increase its sales by developing new products, increasing market share for existing products and acquiring new products. Gish entered into a Loan and Security Agreement, (the "Agreement") with Sanwa Bank in 1995, providing for loans up to $4,000,000 in the form of short term advances under a revolving credit arrangement. The Agreement is renewable on October 31, 1997. Advances to Gish under the Agreement bear interest at the bank's prime rate. Sanwa Bank has been granted a security interest in substantially all of Gish's assets to secure repayment of amounts borrowed by Gish under the Agreement. The Agreement prohibits payment of dividends on Gish's common stock, mergers or acquisitions and other material transactions without the Sanwa Bank's consent and requires Gish to maintain (i) tangible net worth (net worth excluding patents, goodwill and other intangible items) of not less than $15,000,000 (ii) current assets at least equal to two times current liabilities other than amounts due Sanwa Bank, (iii) working capital of not less than $10,000,000 and (iv) debt to equity ratio of not less than 1 to 1. At June 30, 1997 the Company had no funds borrowed under the revolving credit line, nor did the Company utilize the line during fiscal 1997. CUSTOMER INFORMATION The Company performs ongoing credit evaluations and maintains allowances for potential credit losses. As of June 30, 1997 the Company believes it has no significant concentrations of credit risk. The Company derived the following percentages of its net sales from its significant distributors:
1997 1996 1995 - ---- ---- ---- ----------------------------- 1% 2% 18% Kol Bio Medical, Inc. 15% 12% 13% Specialized Medical Systems 7% 7% 10% CardioVascular Concepts, Inc.
As of June 30, 1995 the Company terminated its relationship with Kol Bio Medical Inc. In September 1997, the Company was informed by both Specialized Medical Systems and CardioVascular Concepts that they were electing to terminate their distributor relationships with the Company effective December 1997. 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 both the Company and it's distributors generally maintain an adequate finished goods inventory to fulfill the customer's needs on demand. Therefore, Gish believes that the backlog of orders at any given point in time is not indicative of the Company's future level of sales. CONTRACTS Gish has no contracts with customers where cancellation or renegotiation would have a material impact on the Company's sales or profit margins. COMPETITION The market for medical devices of the type sold by the Company is extremely competitive. The Company believes that product differentiation and performance, client service, reliability, cost and ease of use are important competitive considerations in the markets in which it competes. Most of Gish's competitors are United States concerns. Many of them are larger and possess greater financial and other resources than Gish. Gish has approximately eight competitors within each of the hospital markets in which it competes. No one competitor is a dominant force in any of these markets. Gish believes it has achieved its position in the marketplace for its present principal products by means of superior design, quality, and service, and Gish intends to continue to utilize these means of competing. 9 10 ENVIRONMENTAL COMPLIANCE The Company's direct expenditures for environmental compliance were not material in the three most recent fiscal years. However, certain costs of manufacturing have increased due to environmental regulations placed upon suppliers of components and services. EMPLOYEES As of June 30, 1997, Gish had 240 full-time employees, of whom 27 were engaged in field sales and sales management, 186 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 $3,864,700, $3,758,600 and $3,481,100 in the years ended June 30, 1997, 1996, and 1995, respectively (equal to 18%, 16% and 16% of net sales, respectively, in each of such years). Operating profits as a percentage of sales on foreign sales approximate operating profits on domestic sales. All international transactions are conducted in U.S. dollars, thus reducing the risk of currency fluctuations. Gish does not have any facilities, property or other assets, excepting sales representative supplies, located in any geographic area other than California, where its offices, manufacturing and warehousing premises are located. RISK FACTORS THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS BUSINESS. THIS REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT ARE BASED ON CURRENT EXPECTATIONS. IN LIGHT OF THE IMPORTANT FACTORS THAT CAN MATERIALLY AFFECT RESULTS, INCLUDING THOSE SET FORTH IN THIS PARAGRAPH AND BELOW, THE INCLUSION OF FORWARD-LOOKING INFORMATION HEREIN SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY OTHER PERSON THAT THE OBJECTIVES OR PLANS OF THE COMPANY WILL BE ACHIEVED. THE COMPANY MAY ENCOUNTER COMPETITIVE, TECHNOLOGICAL, FINANCIAL AND BUSINESS CHALLENGES MAKING IT MORE DIFFICULT THAN EXPECTED TO CONTINUE TO DEVELOP AND MARKET ITS PRODUCTS; THE MARKET MAY NOT ACCEPT THE COMPANY'S EXISTING AND FUTURE PRODUCTS; THE COMPANY MAY BE UNABLE TO RETAIN EXISTING KEY MANAGEMENT PERSONNEL; AND THERE MAY BE OTHER MATERIAL ADVERSE CHANGES IN THE COMPANY'S OPERATIONS OR BUSINESS. CERTAIN IMPORTANT FACTORS AFFECTING THE FORWARD-LOOKING STATEMENTS MADE HEREIN INCLUDE, BUT ARE NOT LIMITED TO (I) FAILURE TO THE COMPANY'S VISION(TM) OXYGENATOR IN ONGOING FIELD TRIALS, (II) FAILURE OF THE COMPANY TO SUCCESSFULLY REDESIGN THE MYOMANAGER TO MEET CUSTOMER EXPECTATIONS, (III) CONTINUED DOWNWARD PRICING PRESSURES IN THE COMPANY'S TARGETED MARKETS, (IV) THE CONTINUED ACQUISITION OF THE COMPANY'S CUSTOMERS BY CERTAIN OF ITS COMPETITORS, (V) THE SUCCESS OF THE COMPANY'S DIRECT SALES FORCE IN CERTAIN GEOGRAPHIC TERRITORIES, AND (VI) THE FAILURE OF THE COMPANY TO SUCCESSFULLY REESTABLISH THE EZ FLOW PUMPS IN THE MARKETPLACE. 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 AS OF THE DATE OF THIS FORM 10K. COMPETITION The medical device industry in general, and the market for products for use in cardiovascular surgery in particular, is intensely competitive and characterized by innovation and technological advances. Product differentiation and performance, client service, reliability, cost and ease of use are important competitive considerations in the medical device industry. The Company expects that the current high levels of competition and technological change in the medical device industry in general, and the cardiovascular surgery products industry in particular, will continue to increase. Several companies offer devices which compete with devices manufactured by the Company, including Bentley Laboratories, a division of Baxter Health Care Corporation, Bard Cardiopulmonary, Inc., a division of C.A. Bard, Inc., COBE Laboratories, Inc., Sorin Biomedical, Inc., a unit of Fiat Italy, 10 11 Medtronic, Inc. and Stryker Surgical. Most of the Company's competitors have longer operating histories and significantly greater financial, technical, research, marketing, sales, distribution and other resources than the Company. In addition, the Company's competitors have greater name recognition than the Company and frequently offer discounts as a competitive tactic. There can be no assurance that the Company's current competitors or potential future competitors will not succeed in developing or marketing technologies and products that are more effective or commercially attractive than those that have been and are being developed by the Company or that would render the Company's technologies and products obsolete or noncompetitive, or that such companies will not succeed in obtaining regulatory approval for, introducing or commercializing any such products prior to the Company. Any of the above competitive developments could have a material adverse effect on the Company's business, financial condition and results of operations. RISK OF DECLINING AVERAGE SELLING PRICES The Company is currently facing and may continue to face increasing pricing pressures from its current and future competitors, especially from competitors in the cardiovascular surgery products market. As a result of such pressures, the Company has been forced to lower the prices of certain of its products in order to maintain market share. There can be no assurance that the Company will be able to maintain its market share in the cardiovascular surgery products market in the face of continuing pricing pressures. Over time, the average selling prices for the Company's products may continue to decline as the markets for these products continues to become more competitive. Any material reduction in the prices for the Company's products would negatively affect the Company's gross margin and would require the Company to increase unit sales in order to maintain net sales. 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. 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. However, 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. The Company has in the recent past undertaken a voluntary recall of its ambulatory infusion pumps. There can be no assurance that the Company will be able to successfully take corrective actions with respect to these pumps, 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. 11 12 Sales of medical devices outside of the United States are subject to international regulatory requirements that vary from country to country. The time required to obtain approval for sales internationally may be longer or shorter than that required for FDA clearance or approval, and the requirements may differ. The Company has entered into distribution agreements for the foreign distribution of its products. These agreements generally require that the foreign distributor is responsible for obtaining all necessary regulatory approvals in order to allow sales of the Company's products in a particular country. There can be no assurance that the Company's foreign distributors will be able to obtain approval in a particular country for any future products of the Company. Regulatory clearances or approvals, if granted, may include significant limitations on the indicated uses for which the product may be marketed. In addition, to obtain such clearances or approvals, the FDA and certain foreign regulatory authorities impose numerous other requirements with which medical device manufacturers must comply. FDA enforcement policy strictly prohibits the marketing of cleared or approved medical devices for uncleared or unapproved uses. In addition, product clearances or approvals could be withdrawn for failure to comply with regulatory standards or the occurrence of unforeseen problems following the initial marketing. The Company will be required to adhere to applicable FDA regulations regarding good manufacturing practices ("GMP") and similar regulations in other countries, which include testing, control, and documentation requirements. Ongoing compliance with GMP and other applicable regulatory requirements will be monitored through periodic inspections by federal and state agencies, including FDA and CDHS, and by comparable agencies in other countries. Failure to comply with applicable regulatory requirements, including marketing products for unapproved uses, could result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal of the government to grant premarket clearance or premarket approval for devices, withdrawal of clearances or approvals and criminal prosecution. Changes in existing regulations or adoption of new governmental regulations or policies could prevent or delay regulatory approval of the Company's products. There can be no assurance that the Company will be able to obtain FDA 510(k) clearance or PMA approval for its potential products 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. 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 as 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 growth 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 conditions 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 12 13 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. The Clinton administration has expressed a continuing commitment to increasing access to healthcare for the uninsured, and both the President and the Congress have expressed interest in controlling the escalation of healthcare expenditures and using healthcare reimbursement policies to help control the federal deficit. 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. CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS The Company's directors and executive officers, in the aggregate, beneficially own approximately 24% of the Company's outstanding Common Stock. These shareholders, if acting together, would be able to control substantially all matters requiring approval by the shareholders of the Company, including the election of directors and the approval of mergers or other business combination transactions. Such concentration of ownership could discourage or prevent a change in control of the Company. ADVERSE EFFECTS OF PREFERRED STOCK ON RIGHTS OF COMMON STOCK The Board of Directors of the Company is authorized to issue, from time to time, without any action on the part of the Company's shareholders, up to 1,500,000 shares of Preferred Stock in one or more series, with such relative rights, preferences, privileges and restrictions as are determined by the Board of Directors at the time of issuance. Accordingly, the Board of Directors is empowered to issue Preferred Stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of Common Stock. In the event of such issuance, the Preferred Stock could be utilized as a method 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 experienced extreme price and volume fluctuations which have affected the market price for any companies for reasons frequently 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. 13 14 ITEM 2. PROPERTIES Gish's office and manufacturing facilities are located in Irvine, California in a building containing approximately 150,000 square feet of space under a lease which expires in December, 2002. Within this facility Gish has constructed four clean rooms for the assembly of its products which meet all requirements under applicable federal and state good manufacturing practice regulations. The Company is subleasing approximately 40,000 square feet of the office and manufacturing facility until such time as the Company needs the space. The Company believes the Irvine facility will be adequate for its present and future needs. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any legal proceedings other than ordinary routine litigation incidental to its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to the security holders during the fourth quarter of the year ended June 30, 1997. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's common stock is traded on the NASDAQ National Market System under the symbol GISH. The table below sets forth the high and low per share closing prices during each quarter of the last two fiscal years as reported on the NASDAQ National Market System.
FISCAL 1997 FISCAL 1996 QUARTER ENDED HIGH LOW HIGH LOW - ------------------------------------------------------------------------------ September 30 $7.63 $5.25 $9.25 $7.13 December 31 7.75 6.00 9.25 7.38 March 31 7.25 5.38 8.38 6.25 June 30 5.63 4.38 7.38 5.75
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 20, 1997, there were approximately 500 holders of record of the Company's common stock. 14 15 ITEM 6. SELECTED FINANCIAL DATA
Year ended June 30, In thousands, except per share data 1997 1996 1995 1994 1993 - ------------------------------------ -------- -------- -------- -------- -------- INCOME STATEMENT DATA: Net sales $ 21,127 $ 23,022 $ 21,588 $ 21,114 $ 21,065 Selling and marketing 3,955 3,688 2,575 1,962 1,739 Research and development 1,345 1,408 1,125 1,326 850 General and administrative 2,005 1,892 1,727 1,633 1,727 Distributor contract termination fee -- 701 -- -- -- Goodwill impairment 1,824 -- -- -- -- Net income (loss) ($ 1,927) $ 329 $ 1,682 $ 1,267 $ 1,783 PER SHARE AMOUNTS: Primary net income (loss) per share $ (.57) $ .10 $ .52 $ .41 $ .54 Primary weighted average shares 3,390 3,395 3,218 3,090 3,311 BALANCE SHEET DATA: Cash and cash equivalents $ 3,977 $ 3,314 $ 4,326 $ 6,125 $ 3,308 Total assets 21,159 22,936 21,044 18,299 16,477 Working capital 15,665 14,886 14,807 13,206 11,376 Current ratio 12.5:1 10.2:1 7.7:1 9.5:1 10.3:1 Shareholders' equity 19,348 21,010 18,605 16,588 15,195 Book value per share 5.64 6.25 6.00 5.47 5.06 Return (loss) on average equity (10%) 2% 9% 8% 13%
15 16
SELECTED QUARTERLY FINANCIAL DATA June 30 Mar. 31 Dec. 31 Sept. 30 In thousands, except per share data Fiscal 1997 1997 1997 1996 1996 - ---------------------------------------------------------------------------------------------------- Net sales $ 5,341 $ 5,133 $ 5,341 $ 5,313 Gross profit 1,812 1,450 1,683 1,800 Goodwill impairment 1,824 -- -- -- Income (loss) before income taxes (1,984) (255) (14) 101 Net income (loss) (1,825) (156) (8) 62 Net income (loss) per share: (.54) (.05) -- .02 Average common and common equivalent shares: 3,420 3,384 3,383 3,520
June 30 Mar. 31 Dec. 31 Sept. 30 In thousands, except per share data Fiscal 1996 1996 1996* 1995 1995 - ----------------------------------------------------------------------------------------------------- Net sales $ 5,970 $ 6,000 $ 5,781 $ 5,271 Gross profit 2,089 2,018 2,015 1,838 Distributor contract termination fee -- -- -- 701 Income (loss) before income taxes 270 247 160 (138) Net income (loss) 165 151 98 (84) Net income (loss) per share: .02 .05 .03 (.03) Average common and common equivalent shares: 3,484 3,330 3,364 3,373
*Management discovered an error in the March 31, 1996 accrued liability for employee benefits, vacation and sick pay in the course of preparing the Company's consolidated financial statements for the year ended June 30, 1996. To properly state the accrued liability, the March 31, 1996 financial statements were restated from those originally issued by increasing employee related expenses by $180,000. After income tax, the recalculation of employee costs resulted in a decrease of $109,800 in net income for the three month period ended March 31, 1996. 16 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations: 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 aquired 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 acquired for the period September 13, 1995 through April 16, 1996 in the Company's financial statements. The Company assumed ownership of the net assets and technology aquired from CMD on April 17, 1996 and entered into a one-year lease for the building CMD occupied. The Company also executed one-year employment agreements with four key employees which included provisions for the issuance of up to 53,500 shares of the Company's common stock to those employees upon completion of certain performance criteria. In November 1996, two of the former CMD employees were terminated for cause. In February 1997, the Company was released from its lease obligation for the northern California facility and ceased operations in that facility. Total shares issued to former CMD employees under the employment contracts were 13,876. During the fourth quarter, due to the low level of infusion pump sales and negative cash flow projections, the Company determined that the unamortized goodwill of $1,824,200 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. Sales for the year ended June 30, 1997 decreased by $1,895,500 or 8% as compared to fiscal 1996. The decrease was primarily due to the acquisition by Baxter, Inc. of several perfusion service groups which were previously customers of the Company, average selling price declines for cardiac surgery products and low level of infusion pump sales due to software problems that have recently been corrected. Sales attributable to the EZ Flow infusion products were $253,400 for the period ended June 30, 1997. In September 1997, the Company was informed by both Specialized Medical Systems (SMS) and CardioVascular Concepts (CVC) that they were electing to terminate their distributor relationships with the Company effective December 1997. For the fiscal year ended, June 30, 1997 SMS and CVC represented 15% and 7% of the Company's total sales, respectively. However, the two distributors only accounted for 12% and 5%, respectively, of the Company's gross profit for the same period. The Company intends to engage, during the second quarter of fiscal 1998, a direct sales force of approximately seven persons to replace the two distributor sales organizations. The Company expects to retain a substantial portion of the existing business at higher margins and expects improved market penetration for its non-cardiovascular products. However, the conversion of these territories to direct sales representation should afford the Company better marketing opportunities with respect to its new oxygenator. Gish had previously excluded these two territories from its initial marketing plan for the launch of its new Vision(TM) oxygenator, scheduled for October 1997, because these distributors represented a competing oxygenator product. With the conversion of these territories to a direct sales force, the Company will be able to sell the Vision(TM) in conjunction with custom tubing packs, cardioplegia systems, cardiotomy reservoirs and oxygen saturation monitors without limitations. Sales for year ended June 30, 1996 increased by $1,434,800 or 7% over fiscal 1995. The increase was due primarily to increases in cardiovascular surgery sales. Sales attributable to the EZ Flow infusion products were $720,700 for the period ended June 30, 1996. Cost of sales for the year ended June 30, 1997 was 68% of sales as compared to 65% of sales for the year ended June 30, 1996. The increse in cost of sales is primarily due to decreases in cardiovascular average selling prices and an unfavorable product mix. 17 18 Cost of sales for the year ended June 30, 1996 was 65% of sales as compared to 63% of sales for the year ended June 30, 1995. Fiscal 1996 costs increased due to increases in overhead related to the maintenance of a separate manufacturing facility for the EZ Flow infusion pumps and rework associated with that product line of $279,600. Selling and marketing expenses for the year ended June 30, 1997 increased $267,000 or 7% over fiscal 1996 due to increased salaries and commission expenses related to the Company's direct sales force. The Company currently has plans to expand its direct sales force within the United States commencing the second quarter of fiscal 1998. The Company anticipates that its selling and marketing expenses will increase during the second and third quarters of fiscal 1998 as the Company adds several new sales positions for the new direct territories and incurs additional marketing expenses associated with the launch of its new Vision oxygenator. Selling and marketing expenses for the year ended June 30, 1996 increased $1,112,300 or 43% over fiscal 1995. Selling expenses related to the EZ Flow infusion pumps accounted for approximately a third of the increase. The remaining increase was due to the Company's direct sales force expansion in the southeastern United States. Research and development expenses for the year ended June 30,1997 remained constant at 6% of sales as compared to fiscal 1996. The Company is actively engaged in several new product development projects, including the oxygenator, finalizing the MyoManager(TM) and the next generation infusion pump all of which will continue to require expenditures of approximating $400,000 per quarter for the foreseeable future. Research and development expenses for the year ended June 30, 1996 increased $282,800 over fiscal 1995. Costs associated with upgrading CMD's ambulatory infusion pump product line represent the majority of the increase in expense over fiscal 1995. General and adminsitratve expenses increased $112,800 over the year ended June 30, 1996. The increase was due to amortization of goodwill of $150,700 for fiscal 1997 as compared to $41,800 in fiscal 1996. General and administrative expenses were 8% of sales in 1996 and 1995. The Company expects general and administrative expenses to be no more than $500,000 per quarter for the next fiscal year. During the fourth quarter, due to the lack of infusion pump sales and cash flow projections, the Company determined that the unamortized goodwill of $1,824,200 associated with the purchase of the infusion pump from CMD had little if any future value. Accordingly, the Company recorded a charge to earnings for the unamortized balance. The Company also incurred a one-time expense of $701,200 during the first quarter of fiscal 1996, which represented payments due to a former distributor as compensation for the termination of its contract with the Company. The provision for taxes is based upon a combined federal and state effective tax rate of 39% for fiscal years 1996 and 1995. The Company recognized a tax benefit equal to 10.5% of pre-tax loss in fiscal 1997; this benefit is less than the combined federal and state statuatory rate due to the establishment of a valuation allowance against a substantial portion of the deferred tax asset resulting from the write-off of goodwill. Quarterly per share amounts in 1996 are not directly additive for the periods presented due to fluctuations in weighted average shares outstanding. These fluctuations are attributable to the issuance of shares for the purchase of the EZ Flow infusion pump, the exercise of stock options and the use of the treasury stock method for determining the number of outstanding options to be included as common stock equivalents. These fluctuations are more significant when there are substantial variations in the market price of the Company's common stock. The effects of inflation have not been a significant factor in the results of operations. The cardiovascular surgery market has been experiencing pricing pressures which have precluded the Company from considering price increases. 18 19 Liquidity and capital resources: At June 30, 1997, the Company had $15,665,200 of working capital, an increase of $779,700 from working capital at June 30, 1996. The increase is primarily due to cash generated by operations, net of property and equipment purchases. For the period ended June 30, 1996 cash used by operations of $1,558,600 was primarily due to increased inventories, increased accounts receivable and payment of accrued taxes. Increases in inventories were primarily due to a commitment to stocking higher levels of finished goods, related to our direct sales efforts and acquisition of component inventory for new products such as MyoManager(TM), the oxygenator, and the ambulatory infusion pumps. Increases in accounts receivable were due to increases in sales and the timing of those sales during the quarter. For the period ended June 30, 1995, cash provided by operations of $1,742,800 was primarily due to profitable operations. For the period ended June 30, 1997 cash used by investing activities of $604,400 was primarily due to the purchase of property and equipment, specifically production equipment and tooling for new products. For the period ended June 30, 1996 cash provided by investing activities of $465,800 was primarily due to the sale of short-term investments offset by purchases of property and equipment and the cash used for the acquisition of the EZ Flow technology of $681,700. Purchases of property and equipment were primarily tooling purchases to manufacture inventory associated with new products such as the MyoManager(TM) and the oxygenator. For the period ended June 30, 1995 cash used by investing activities of $3,876,200 was primarily due to the purchase of property and equipment and short-term investments. For the periods ended June 30, 1997, 1996 and 1995 cash provided by financing activities of $180,700, $81,000, and $334,500 was primarily due to proceeds from the exercise of stock options and the tax benefit thereof. 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 1997. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT AUDITORS Board of Directors Gish Biomedical, Inc. We have audited the accompanying consolidated balance sheets of Gish Biomedical, Inc. as of June 30, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gish Biomedical, Inc. at June 30, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ending June 30, 1997, in conformity with generally accepted accounting principles. Orange County, California August 15, 1997 /s/ ERNST & YOUNG LLP 19 20 CONSOLIDATED BALANCE SHEETS
As of June 30 1997 1996 ========================================================================================== ASSETS CURRENT ASSETS: Cash and cash equivalents $ 3,977,100 $ 3,314,200 Short-term investments 1,031,600 1,031,600 Accounts receivable, net of allowance for doubtful accounts of $187,300 in 1997 and $180,800 in 1996 3,970,100 4,078,000 Inventories 6,698,700 7,083,700 Deferred tax assets 646,000 721,900 Other assets 380,000 245,700 - ------------------------------------------------------------------------------------------ TOTAL CURRENT ASSETS 16,703,500 16,475,100 - ------------------------------------------------------------------------------------------ PROPERTY AND EQUIPMENT, AT COST: Leasehold improvements 2,910,800 2,903,500 Machinery and equipment 1,877,600 1,662,400 Molds, dies and tooling 3,938,900 3,761,800 Office furniture and equipment 1,659,600 1,472,200 - ------------------------------------------------------------------------------------------ Total property and equipment 10,386,900 9,799,900 Less accumulated depreciation (6,374,100) (5,463,200) - ------------------------------------------------------------------------------------------ NET PROPERTY AND EQUIPMENT 4,012,800 4,336,700 Deferred tax assets 194,000 -- Other assets, net of accumulated patent amortization of $260,400 in 1997 and $230,400 in 1996 117,700 130,400 Goodwill, net of accumulated amortization of $41,800 in 1996 0 1,966,800 - ------------------------------------------------------------------------------------------ $ 21,028,000 $ 22,909,000 - ------------------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Account payable $ 729,400 $ 984,500 Accrued compensation and related items 533,700 571,800 Other accrued liabilities 99,700 60,300 - ------------------------------------------------------------------------------------------ TOTAL CURRENT LIABILITIES 1,362,800 1,616,600 Deferred rent 317,300 282,600 Commitments SHAREHOLDERS' EQUITY: Preferred stock, 2,250,000 shares authorized; no shares outstanding Common stock, no par value, 7,500,000 shares authorized; 3,430,145 shares issued and outstanding (3,363,444 shares in 1996) 10,078,300 9,828,000 Note receivable - officer stock purchase (35,000) (50,000) Retained earnings 9,304,600 11,231,800 - ------------------------------------------------------------------------------------------ TOTAL SHAREHOLDERS' EQUITY 19,347,900 21,009,800 - ------------------------------------------------------------------------------------------ $ 21,028,000 $ 22,909,000 - ------------------------------------------------------------------------------------------
See accompanying notes 20 21 CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30 1997 1996 1995 ==================================================================================================== Net sales $21,126,900 $23,022,400 $21,587,600 Cost of sales 14,383,500 15,062,400 13,659,300 - ---------------------------------------------------------------------------------------------------- Gross profit 6,743,400 7,960,000 7,928,300 - ---------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Selling and marketing 3,954,500 3,687,500 2,575,200 Research and development 1,345,400 1,407,500 1,124,700 General and administrative 2,004,800 1,892,000 1,727,300 Goodwill impairment 1,824,200 0 0 Distributor contract termination fee 0 701,200 0 Interest income 233,300 267,400 256,300 - ---------------------------------------------------------------------------------------------------- Income (loss) before provision for taxes (2,152,200) 539,200 2,757,400 Provision (benefit) for income taxes (225,000) 210,300 1,075,000 Net income (loss) $(1,927,200) $ 328,900 $ 1,682,400 Net Income (loss) per share $ (0.57) $ 0.10 $ 0.52 Average common and common equivalent shares 3,389,600 3,394,600 3,217,800 ====================================================================================================
See accompanying notes 21 22 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Common Stock Number of Note Retained Shares Amount Receivable Earnings Total - ---------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1994 3,030,129 $ 7,447,300 $ (80,000) $ 9,220,500 $ 16,587,800 Exercise of options 71,000 302,200 0 0 302,200 Tax benefit of options exercised 0 12,300 0 0 12,300 Payment on note receivable from officer 0 0 20,000 0 20,000 Net income 0 0 0 1,682,400 1,682,400 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1995 3,101,129 $ 7,761,800 $ (60,000) $ 10,902,900 $ 18,604,700 - ---------------------------------------------------------------------------------------------------------------------------------- Issuance of stock for purchase of assets, net of issuance cost 240,240 1,995,200 0 0 1,995,200 Exercise of options 22,075 62,800 0 0 62,800 Tax benefit of options exercised 0 8,200 0 0 8,200 Payment on note receivable from officer 0 0 10,000 0 10,000 Net income 0 0 0 328,900 328,900 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at June 30, 1996 3,363,444 $ 9,828,000 $ (50,000) $ 11,231,800 $ 21,009,800 - ---------------------------------------------------------------------------------------------------------------------------------- ISSUANCE OF STOCK PER EMPLOYMENT AGREEMENT 13,876 84,600 0 0 84,600 EXERCISE OF OPTIONS 52,825 128,000 0 0 128,000 TAX BENEFIT OF OPTIONS EXERCISED 0 37,700 0 0 37,700 PAYMENT ON NOTE RECEIVABLE FROM OFFICER 0 0 15,000 0 15,000 NET LOSS 0 0 0 (1,927,200) (1,927,200) - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE AT JUNE 30, 1997 3,430,145 $ 10,078,300 $ (35,000) $ 9,304,600 $ 19,347,900 - ----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes 22 23 CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended June 30 1997 1996 1995 - ------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES: Net income (loss) $(1,927,200) $ 328,900 $ 1,682,400 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 910,900 801,500 847,700 Amortization 172,600 71,800 30,000 Issuance of stock per employment contracts 84,600 -- -- Impairment of goodwill 1,824,200 -- -- Deferred rent 34,700 54,700 74,400 Deferred income taxes (118,000) (101,400) (79,000) Changes in operating assets and liabilities 104,800 (2,714,100) (812,700 - ------------------------------------------------------------------------------------------------------ NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 1,086,600 (1,558,600) 1,742,800 - ------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES: Purchase of short-term investments -- (1,031,600) (2,987,700) Sale of short-term investments -- 2,987,700 -- Purchases of property and equipment (587,000) (765,000) (855,000) Purchase of other long term assets (17,400) (43,600) (33,500) Payment for acquisition -- (681,700) -- - ------------------------------------------------------------------------------------------------------ NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (604,400) 465,800 (3,876,200) - ------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES: Proceeds from exercise of options 128,000 62,800 302,200 Tax benefit of options exercised 37,700 8,200 12,300 Payments on note receivable from officer 15,000 10,000 20,000 - ------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 180,700 81,000 334,500 - ------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 662,900 (1,011,800) (1,798,900) Cash and cash equivalents at beginning of year 3,314,200 4,326,000 6,124,900 - ------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 3,977,100 $ 3,314,200 $ 4,326,000 - ------------------------------------------------------------------------------------------------------ SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES - ------------------------------------------------------------------------------------------------------ Fair value of assets acquired $ -- $ 668,200 -- Excess of purchase price over net assets acquired -- 2,008,700 -- - ------------------------------------------------------------------------------------------------------ $ 2,676,900 Common stock issued, net of issuance cost -- (1,995,200) -- - ------------------------------------------------------------------------------------------------------ Payment for acquisition -- $ 681,700 -- - ------------------------------------------------------------------------------------------------------
See accompanying notes 23 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements include the accounts of Gish Biomedical, Inc. and its wholly owned subsidiary, Gish International, Inc., a foreign sales corporation. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The accounting policies that affect the more significant elements of the accompanying consolidated financial statements are summarized below: SHORT-TERM INVESTMENTS Short-term investments of $1,031,600 reported in the balance sheet are held to maturity and are recorded at cost which approximates fair market value. Short-term investments consists of government backed securities and short-term certificates of deposit with a maturity date of less than one year. FAIR VALUES OF FINANCIAL INSTRUMENTS FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments", requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. The fair values of cash and equivalents, accounts receivable and accounts payable at June 30, 1997 and 1996 approximated their carrying amounts due to the relatively short maturity of these items. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or net realizable value.
Year ended June 30, 1997 June 30, 1996 ------------------------------------------------------------ Raw materials $3,529,800 $4,166,000 Work in progress 1,225,800 1,123,200 Finished goods 1,943,100 1,794,500 ------------------------------------------------------------ Total inventories $6,698,700 $7,083,700 ============================================================
PROPERTY AND EQUIPMENT Depreciation and amortization are provided on the straight-line method over the following estimated useful lives: Leasehold improvements Term of lease Machinery and equipment 5 years Molds, dies and tooling 5 years Office furniture and equipment 4 - 8 years GOODWILL AND OTHER INTANGIBLES Goodwill resulting from acquisitions represents the excess of the purchase price over the fair value of net assets acquired and is being amortized on a straight line basis over 10 years. Other intangible assets (patents) are being amortized on the straight-line method over 6 years. 24 25 The carrying value of goodwill is reviewed periodically to determine if any impairment indicators are present. If such review indicates that goodwill will not be recoverable based on undiscounted estimated cash flow over the remaining amortization period, the carrying value of goodwill will be reduced by the estimated shortfalls of discounted cash flow. During the fourth quarter, the Company reviewed the goodwill resulting from acquisition of the assets and technology of the ambulatory infusion pumps (see Note 11) because sales for the pump and related products in 1997 were only a quarter million dollars. In addition, the Company incurred additional marketing and selling expenses of $560,000 as well as $145,000 in engineering expenses related to the ambulatory infusion pumps. The foregoing factors resulted in a negative cash flow for the pump product line. The Company is in process of improving the product, but due to its prior poor performance, the Company is uncertain as to the possible effect of these actions. Given current negative margins, management believes it is unlikely that margins will improve in the near future nor will the product line generate positive cash flows. Accordingly, the Company recorded an impairment of goodwill of $1.8 million in fiscal 1997 to write-off goodwill associated with this product line. 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. EARNING PER SHARE Earnings per share is based on the weighted average number of common and common equivalent shares outstanding during the year. Common equivalent shares include the potential dilution from the exercise of stock options reduced by the number of common shares which are assumed to have been purchased with the proceeds from such exercise and the related income tax benefit. In February 1997, The Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share", which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earning per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The Company has not yet determined the impact of Statement 128 will be on the calculation of earnings per share, but it is not expected to be material. STATEMENT OF CASH FLOWS
Changes in operating assets and liabilities 1997 1996 1995 Accounts Receivable 107,900 (735,800) 355,500 Inventories 385,000 (1,313,600) (1,833,400) Other current assets (134,300) (74,100) 10,900 Accounts Payable (255,100) 40,200 56,400 Accrued compensation and related items (38,100) 8,400 112,500 Accrued income taxes - (570,900) 374,600 Other accrued liabilities 39,400 (68,300) 110,800 ----------------------------------------- Net change in operating assets and liabilities 104,800 (2,714,100) (812,700)
25 26 The Company paid $214,500, $985,500, and $781,800 in federal and state income tax during the years ended June 30, 1997, 1996, and 1995, respectively. The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. STOCK OPTIONS The Company has elected to follow Accounting Principles Board Opinion No. 25, "Account for Stock Issued to Employees" (APB25) and related Interpretation in accounting for its employee stock options because, as discussed in Note 7, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation", requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. RECLASSIFICATIONS Certain amounts in the consolidated financial statements have been reclassified to conform to presentations adopted in 1997. 2. CREDIT FACILITY On June 30, 1997, the Company had available a secured $4,000,000 revolving credit facility bearing interest at the bank's prime rate (8.50% at June 30, 1997). The loan is secured by substantially all of the Company's assets. The line is renewable annually in October. At June 30, 1997, the revolving credit facility had no outstanding balance. The Company is restricted from the payment of dividends, mergers or acquisitions and other material transactions without the bank's consent during the term of the line of credit. The Company was in compliance with all covenants at June 30, 1997. 3. ANALYSIS OF RESERVE ACCOUNTS
Balance at Additions Charged Balance at Beginning of Year to Expense Deductions End of Year -------------------------------------------------------------------------------------------------------- Allowance for doubtful accounts: June 30, 1997 $180,800 $ 24,000 $ 17,500 $187,300 June 30, 1996 $168,800 $ 12,000 -- $180,800 June 30, 1995 $144,300 $ 24,500 -- $168,800 Reserve for inventory: June 30, 1997 $482,500 $ 92,000 $108,700 $465,800 June 30, 1996 $545,400 -- $ 62,900 $482,500 June 30, 1995 $554,400 -- $ 9,000 $545,400
4. BENEFIT PLAN The Company has a Salary Reduction Profit Sharing Plan, ("the Plan"), established under Section 401(k) of the Internal Revenue Code, in which all employees are eligible to participate. The Company matches up to $250 of annual contributions by each qualifying employee. Total Company contributions to the Plan were $57,000, $48,900, and $48,800 for fiscal years ended June 30, 1997, 1996 and 1995, respectively. 26 27 5. TAXES BASED ON INCOME Deferred taxes are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years the differences are expected to reverse. A valuation allowance is provided, when necessary, to reduce the Company's value of deferred tax assets to an amount which management believes is more likely then not of realization. A summary of the provision for taxes based on income is shown below and includes adjustments for prior year tax return filing positions that varied from the tax provision amounts estimated during the financial statement audit.
Year ended June 30 1997 1996 1995 ----------------------------------------------------------------- CURRENT: State $ 43,000 $ 96,000 $ 270,000 Federal (150,000) 215,700 884,000 ----------------------------------------------------------------- (107,000) 311,700 1,154,000 DEFERRED: State (65,000) (41,100) (11,000) Federal (53,000) (60,300) (68,000) ----------------------------------------------------------------- (118,000) (101,400) (79,000) ----------------------------------------------------------------- Total $ (225,000) $ 210,300 $ 1,075,000 =================================================================
The provision for taxes based on income differs from the amount computed by applying the statutory federal income tax rate as follows:
Year ended June 30 1997 1996 1995 ---------------------------------------------------------------------- Income tax at statutory rate $ (732,000) $ 183,300 $ 938,000 State tax, net of federal benefit (130,000) 38,000 171,000 Other, net 19,500 (11,000) (34,000) Valuation allowance 617,500 --- --- ---------------------------------------------------------------------- $ (225,000) $ 210,300 $1,075,000 ======================================================================
Deferred income taxes reflect the tax effects of temporary differences between the value of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's net deferred tax assets and liabilities as of June 30, 1997 and 1996 are:
DEFERRED TAX ASSETS 1997 1996 ------------------------------------------------------------------- Accounts receivable and inventory reserves $ 283,000 $ 287,000 Inventory capitalization 167,000 196,000 Book over tax depreciation --- 11,900 Accrued expenses and others 323,000 254,000 Goodwill 815,000 --- Valuation allowance (617,500) --- ------------------------------------------------------------------- Total deferred tax assets $ 970,500 $ 748,900 ===================================================================
27 28
DEFERRED TAX LIABILITIES 1997 1996 ------------------------------------------------------------------ Tax over book depreciation $ 76,600 $ --- State franchise/income tax 53,900 27,000 . ------------------------------------------------------------------ Total deferred tax liabilities $ 130,500 $ 27,000 ================================================================== Net deferred taxes $ 840,000 $ 721,900 ================================================================== Current deferred tax assets, net of current deferred tax liabilities $ 646,000 $ 721,900 Non-current deferred tax assets, net of non-current deferred tax liabilities 194,000 --- ------------------------------------------------------------------ Net deferred taxes $ 840,000 $ 721,900 ==================================================================
During fiscal 1997, the Company established a valuation allowance of $617,500 against its deferred tax asset established as a result of the write-off of goodwill. 6. SEGMENT INFORMATION The Company operates in one industry segment, the manufacturer of medical devices which are marketed principally through domestic and international distributors. The Company performs ongoing credit evaluations and maintains allowances for potential credit losses. As of June 30, 1997 the Company believes it has no significant concentrations of credit risk. The Company derived the following percentages of its net sales from its significant distributors:
1997 1996 1995 -------------------------------------------------------------------------- 1% 2% 18% Kol Bio Medical, Inc. 15% 12% 13% Specialized Medical Systems 7% 7% 10% CardioVascular Concepts, Inc.
As of July 1, 1995 the company terminated its relationship with the distributorship to which sales were 18% in 1995 and paid a contract termination fee of $701,200 during the first quarter of fiscal 1996. In September 1997, the Company was informed by both Specialized Medical Systems and CardioVascular Concepts that they were electing to terminate their distributor relationships with the Company effective December 1997. Sales to foreign customers (primarily in Europe and Asia) aggregated approximately $3,864,700 in 1997, $3,758,600 in 1996, and $3,481,100 in 1995. All sales are transacted in United States dollars, accordingly the Company is not subject to foreign currency risks. 7. STOCK OPTION PLAN The Company has elected to follow Accounting Principles Board Opinion No.25 "Accounting for Stock Issued to Employees" (APB25) and related Interpretations in accounting for its employee stock options, because as discussed below, 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 APB25, 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. 28 29 The Company has an Officers, Directors and Key Employee Incentive Plan (the "1981 Plan") authorizing stock options, stock bonuses and cash incentive awards, and an Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase Plan - 1987 (the "1987 Plan") authorizing stock options and rights to purchase restricted stock. Stock options granted under these Plans may be either incentive stock options as defined in the Internal Revenue Code ("incentive options"), or options that do not qualify as incentive options ("non-qualified options"). The number of shares of the Company's common stock approved for issuance under the 1981 Plan and the 1987 Plan is 487,500 and 1,025,000, respectively. The Company realized a tax benefit of $37,700 and $8,200 and $12,300 in 1997, 1996, and 1995 respectively, from the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options. No charges have been made to income in accounting for the options. The following table summarizes information about stock options outstanding under the 1981 and 1987 plans combined:
Number of Weighted Average Shares Exercise Price Options outstanding at June 30, 1994 689,012 $4.47 Granted 398,625 5.22 Canceled (224,000) 9.36 Exercised (71,000) 4.20 ----------------------------------------------------------------------- Options outstanding at June 30, 1995 792,637 $4.63 Granted 25,000 5.75 Canceled (1,500) 6.38 Exercised (22,075) 3.26 ----------------------------------------------------------------------- Options outstanding at June 30, 1996 794,062 $4.88 Granted 34,000 5.98 Canceled (15,500) 6.20 Exercised (52,825) 2.75 ----------------------------------------------------------------------- Options outstanding at June 30, 1997 759,737 $4.97 =======================================================================
As of June 30, 1997, 759,737 options are outstanding of which 751,737 are exercisable. Additionally, 16,535 options remain available for grant. As of June 30, 1996, 727,877 were exercisable and 10,035 were available for grant. The weighted average fair values of options granted were $2.49 and $2.86 in fiscal 1997 and 1996, respectively. A summary of options outstanding and exercisable as of June 30, 1997 follows:
Weighted-Average Options Exercise Price Weighted-Average Remaining Options Weighted-Average Outstanding Range Exercise Price Contractual Life Exercisable Exercise Price 217,362 2.083 - 4.417 $ 3.99 2.54 yrs. 217,362 $ 3.99 542,375 5.00 - 7.125 $ 5.55 2.94 yrs. 534,375 $ 5.55
29 30 8. ACCOUNTING FOR STOCK BASED COMPENSATION Adjusted pro forma information regarding net income (loss) and per share amounts, determined as if the Company had accounted for its employee stock options under the fair value method of SFAS 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 1997: risk free interest rate of 6.3%, a dividend yield of 0%, volatility factors of the expected market price of the Company's common stock of .478 and a weighted-average expected life of the option of 5 years for officers and 3.5 years for incentive stock options with a 2 year vesting period. 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 option, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Pro forma disclosures required by SFAS No. 123 include the effects of all stock option awards granted by the Company from July 1, 1995 through June 30, 1997. During the phase-in period, the effects of applying this statement for generating pro forma disclosures are not likely to be representative of the effects on pro forma net income (loss) for future years. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
1997 1996 Pro forma net income (loss) (1,991,700) 285,300 Pro forma earnings(loss) per share $ (.59) $ .08
9. OPERATING LEASES The Company is committed to a ten year operating lease for its primary office and manufacturing facilities, which commenced December 15, 1992. The Company will not fully occupy the new facility for some time and is subleasing approximately a third of the space. The Company's sublease income was $161,400, $143,700 and $168,300 for the years ended June 30, 1997 and 1996 and 1995 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: $723,900; $752,700; $788,600; $809,800 and $842,200 for the fiscal years ending June 30, 1998; 1999; 2000; 2001 and 2002 respectively, and $386,600 thereafter for a total of $4,293,800. Rent expense charged to operations was $763,400, $798,300, and $609,000 for the years ended June 30, 1997, 1996 and 1995, respectively. 10. STOCK PURCHASE During the year ended June 30, 1991 the Company loaned $100,000 to the President and Chairman of the Board for the exercise of Gish common stock options. A principal payment of $15,000 was made and the note was renewed during the year ended June 30, 1997. The note is secured by Company stock, bears interest at 5.5% and is due within one year. 30 31 11. 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 acquired in the Company's financial statements from September 13, 1995. The Company assumed ownership of the net assets and technology acquired from CMD on April 17, 1996 and entered into a one-year lease for the building CMD occupied. During the quarter ended December 31, 1996, the Company ceased to utilize the building for manufacturing and was released from the lease as of February 28, 1997. The Company had also executed one-year employment agreements with four key employees which included provisions for the issuance of up to 53,500 shares of the Company's common stock to those employees upon completion of certain performance criteria. As of December 31, 1996, 13,876 such shares were issued. During the quarter ended December 31, 1996 two of those key employees were terminated. Additionally, a third employee under contract resigned effective February 15, 1997. The Company has no reason to believe that the loss of those employees will negatively affect the performance of the assets acquired. This acquisition had been accounted for as a purchase and resulted in the recognition of $2,008,700 of goodwill. During the fourth quarter, it was determined that this goodwill was impaired. The impairment loss is recorded as a separate line item in operating expenses. (See Note 1). The following table presents the unaudited consolidated results of operations on a pro forma basis as though the acquisitions make in 1996 had occurred on July 1, 1994.
Years ended June 30 1996 1995 Net sales $23,293,000 $23,394,000 Net income 42,000 319,000 Earnings per share .01 .09
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Inapplicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information under the captions "Election of Directors" and "Principal Shareholders" contained in the Company's definitive proxy statement for its 1997 Annual Meeting of Shareholders ("Proxy Statement") is incorporated herein by reference. The Proxy Statement will be filed with the Commission within the time period specified by General Instruction G to Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information under the caption "Executive Compensation" contained in the Proxy Statement is incorporated herein by reference. 31 32 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the caption "Principal Shareholders" contained in the Proxy Statement is incorporated herein by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the captions "Board of Directors' Affiliations" and "Management Indebtedness" contained in the Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) (1) Financial Statement Schedules All financial statement schedules have been omitted because they are inapplicable or the information required thereby is included in the financial statements. (2) Exhibits The following Exhibits are filed as part of this Report:
Exhibit Number Description ------ ----------- 3.1 Restated Articles of Incorporation as filed with the California Secretary of State on November 9, 1981, incorporated herein by this reference to Exhibit 2(a) to the Company's Registration Statement on Form S-18, No. 2-73602LA (the "S-18 Registration Statement"). 3.2 Certificate of Amendment of Articles of Incorporation as filed with the California Secretary of State on May 19, 1982, incorporated herein by this reference to Exhibit 2(b) to the S-18 Registration Statement. 3.3 Certificate of Amendment of Articles of Incorporation as filed with the California Secretary of State on December 19, 1988, incorporated herein by this reference to Exhibit 3.3 to the Company's Report on Form 10-K for the year ended June 30, 1990. 3.4 Certificate of Amendment of Articles of Incorporation as filed with the California Secretary of State on June 13, 1990 incorporated herein by this reference to Exhibit 3.4 to the Company's Report on Form 10-K for the year ended June 30, 1990. 3.5 Bylaws, incorporated herein by this reference to Exhibit 2 to the S-18 Registration Statement. 10.1* 401-K Salary Reduction Profit Sharing Plan, incorporated herein by this reference to Exhibit 10(e) to the S-18 Registration Statement. 10.2* Officer, Director and Key Employee Incentive Plan, as amended, incorporated herein by this reference to Exhibit 10(x) to the Company's Report on Form 10-K for the year ended June 30, 1985.
32 33 2) Exhibits (continued)
Exhibit Number Description ------ ----------- 10.3* Incentive Stock Option, Non-qualified Stock Option and Restricted Stock Purchase Plan-1987, as amended (the "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 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 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 Plan, incorporated herein by this reference to Exhibit 4.5 to the S-8 Registration Statement. 10.7 Loan and Security Agreement dated November 30, 1995 between the Company and Sanwa Bank. Incorporated herein by this reference to the Company's Report on the Form 10-K for the year ended June 30, 1996. 10.8* 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. 10.9 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 10K for the year ended June 30, 1993. 10.10 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. 10.11 Registration rights agreement dated April 17, 1996, between the Company and Creative Medical Development, Inc., a Delaware Corporation. Incorporated herein by this reference to the Company's Report on the Form 10-K for the year ended June 30, 1996. 21.1 Subsidiaries of the Company. 23 Consent of Ernst & Young LLP. 25 Power of Attorney (included on signature page of the Annual Report on Form 10-K). 27 Financial Data Schedule (B) Reports on Form 8-K None.
- ----------------------- * Management contract or compensatory plan or arrangement. 33 34 SIGNATURES Pursuant to the Requirements of Section 13 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, at Irvine, California this 27nd day of September 1997. GISH BIOMEDICAL, INC. By: Jeanne M. Miller ----------------- Jeanne M. Miller Executive Vice President POWER OF ATTORNEY We, the undersigned directors and officers of Gish Biomedical, Inc., do hereby constitute and appoint Jack W. Brown and Jeanne M. Miller, or both of them, our true and lawful attorneys and agents, each with power of substitution, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorneys and agents or any one of them, may deem necessary or advisable to enable said corporation to comply with the Securities Exchange Act of 1934, as amended and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments hereto and we do hereby ratify and confirm all that said attorneys and agents, or their substitute or substitutes, or any one of them, shall do or cause to be done by virtue hereof. 34 35 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 JACK W. BROWN President, Chairman September 26, 1997 ---------------- Chief Executive Officer JACK W. BROWN JEANNE M. MILLER Vice President, Chief September 26, 1997 ----------------- Financial Officer, and JEANNE M. MILLER Corporate Secretary RICHARD A. BRAUN ----------------- Director September 26, 1997 RICHARD A. BRAUN RAY R. COULTER ----------------- Director September 26, 1997 RAY R. COULTER RICHARD W. DUTRISAC ------------------- Director September 26, 1997 RICHARD W. DUTRISAC JAMES B. GLAVIN ------------------- Director September 26, 1997 JAMES B. GLAVIN JOHN S. HAGESTAD ------------------- Director September 26, 1997 JOHN S. HAGESTAD
35 36 EXHIBIT INDEX
Exhibit Number Description - ------- ----------- 3.1 Restated Articles of Incorporation as filed with the California Secretary of State on November 9, 1981, incorporated herein by this reference to Exhibit 2(a) to the Company's Registration Statement on Form S-18, No. 2-73602LA (the "S-18 Registration Statement"). 3.2 Certificate of Amendment of Articles of Incorporation as filed with the California Secretary of State on May 19, 1982, incorporated herein by this reference to Exhibit 2(b) to the S-18 Registration Statement. 3.3 Certificate of Amendment of Articles of Incorporation as filed with the California Secretary of State on December 19, 1988, incorporated herein by this reference to Exhibit 3.3 to the Company's Report on Form 10-K for the year ended June 30, 1990. 3.4 Certificate of Amendment of Articles of Incorporation as filed with the California Secretary of State on June 13, 1990 incorporated herein by this reference to Exhibit 3.4 to the Company's Report on Form 10-K for the year ended June 30, 1990. 3.5 Bylaws, incorporated herein by this reference to Exhibit 2 to the S-18 Registration Statement. 10.1* 401-K Salary Reduction Profit Sharing Plan, incorporated herein by this reference to Exhibit 10(e) to the S-18 Registration Statement. 10.2* Officer, Director and Key Employee Incentive Plan, as amended, incorporated herein by this reference to Exhibit 10(x) to the Company's Report on Form 10-K for the year ended June 30, 1985.
37
Exhibit Number Description - ------ ----------- 10.3* Incentive Stock Option, Non-qualified Stock Option and Restricted Stock Purchase Plan-1987, as amended (the "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 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 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 Plan, incorporated herein by this reference to Exhibit 4.5 to the S-8 Registration Statement. 10.7 Loan and Security Agreement dated November 30, 1995 between the Company and Sanwa Bank. Incorporated herein by this reference to the Company's Report on the Form 10-K for the year ended June 30, 1996. 10.8* 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. 10.9 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 10K for the year ended June 30, 1993. 10.10 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. 10.11 Registration rights agreement dated April 17, 1996, between the Company and Creative Medical Development, Inc., a Delaware Corporation. Incorporated herein by this reference to the Company's Report on the Form 10-K for the year ended June 30, 1996. 21.1 Subsidiaries of the Company. 23 Consent of Ernst & Young LLP. 25 Power of Attorney (included on signature page of the Annual Report on Form 10-K). 27 Financial Data Schedule (B) Reports on Form 8-K None.
- ----------------------- * Management contract or compensatory plan or arrangement. EX-21.1 2 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21.1 SUBSIDIARIES OF THE COMPANY Gish International, Inc., a wholly-owned foreign sales corporation which is incorporated in Barbados. EX-23 3 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-36432) pertaining to the Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase Plan - 1987 and (Form S-8 No. 33-1706) pertaining to the Officers, Directors and Key Employee Incentive Plan and in the related Prospectuses, of our report dated August 15, 1997, with respect to the consolidated financial statements of Gish Biomedical, Inc. included in the Annual Report (Form 10-K) for the year ended June 30, 1997. /s/ ERNST & YOUNG LLP Orange County, California September 25, 1997 EX-27 4 FINANCIAL DATA SCHEDULE
5 YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 3,977,100 1,031,600 3,970,100 0 6,698,700 16,703,500 10,386,900 6,374,100 21,028,000 1,362,800 0 0 0 10,078,300 (35,000) 21,028,000 21,126,900 21,126,900 14,383,500 14,383,500 9,128,900 0 0 (2,152,200) (225,000) (1,927,200) 0 0 0 (1,927,200) (.57) 0
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