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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, 1996 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
incorporation or organization) Identification No.)
2681 Kelvin Avenue
Irvine, California 92714
(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 20, 1996 the aggregate market value of the registrant's voting
common stock held by non-affiliates of the registrant was approximately
$22,356,937 (computed using the closing price of $6.625 per share of Common
Stock as of September 20, 1996 as reported by NASDAQ).
There were 3,374,632 shares of the registrant's common stock, no par value,
outstanding on September 20, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT WHERE INCORPORATED
Portions of Proxy Statement for the Part III, Items 10, 11, 12 and 13
1996 Annual Meeting of Shareholders
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GISH BIOMEDICAL, INC.
INDEX
Part I: Page
Item 1. Business 3 -9
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Part II:
Item 5. Market for Registrant's Common Equity and Related 10
Shareholder Matters
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial 12
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data 15
Item 9. Changes in and Disagreements with Accountants on 25
Accounting and Financial Disclosure
Part III:
Item 10. Directors and Executive Officers of the Registrant 25
Item 11. Executive Compensation 25
Item 12. Security Ownership of Certain Beneficial Owners and 25
Management
Item 13. Certain Relationships and Related Transactions 25
Part IV:
Item 14. Exhibits, Financial Statement Schedules and Reports on 26 - 28
Form 8-K
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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.
In May 1992, Gish entered the orthopedic blood salvage market. The device, known
as the Orthofuser(TM), is used post surgically for high blood loss procedures
such as hip and knee replacements. The Company is currently exploring other
blood salvage applications for its technology.
ACQUISITIONS
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 aquisition. 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 currently occupies.
In May 1992, Gish acquired a line of transducer protectors and pressure
isolators from McGaw, Inc. This acquisition has enhanced the Company's profit
margin on custom blood handling systems and the Company's sales to other device
manufacturers.
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 Mediflex(TM)
tubing. Such components are assembled in the Gish clean room, sterilized and
then shipped either to the hospital or to one of Gish's specialty distributors
which service such hospitals. The Company also assembles custom tubing sets for
several competitive medical device manufacturers under private label agreements.
Custom tubing set sales were approximately $9,643,200, $8,254,500 and $8,369,400
in fiscal 1996, 1995, and 1994 respectively (equal to 42%, 38% and 40% 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.
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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. The Company expects
that use of the new arterial filters in the custom tubing sets will improve
profitability of these systems.
CARDIOTOMY AND VENOUS RESERVOIRS - Cardiac suction is a technique employed in
open-heart surgery to recover shed blood in the chest cavity and return it to
the patient. The use of this technique reduces the requirements for whole blood
replacement from donor sources, thereby reducing risk of blood compatibility
problems and blood-borne viral diseases such as AIDS and hepatitis.
Gish's cardiotomy reservoir systems consist of a polycarbonate reservoir,
defoaming and filtration cartridge, and mounting bracket. This enables the
perfusion team to recover high volumes of shed blood, then defoam and filter it
prior to returning it to the patient's circulatory system.
In addition to the cardiotomy reservoirs' use in the operating room, Gish has
developed several systems which allow the cardiotomy reservoir to be used as a
pleural drainage or autotransfusion system during recovery.
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 a cardiotomy, venous reservoir, post surgical blood collection and
blood reinfusion devices. This functional bundling is usually cost effective for
the hospital.
Cardiotomies and venous reservoir sales were approximately $1,971,100,
$2,439,100 and $2,566,900 for fiscal years ended June 30, 1996, 1995 and 1994
respectively (equal to 9%, 11% and 12% of net sales respectively in each such
years).
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 physician preference. 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
$4,611,200, $4,979,500 and $4,687,000 for fiscal year 1996, 1995, and 1994
respectively (equal to 20%, 23% and 22% 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.
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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 catheters and accessories sold in kits. A dual
lumen catheter which permits two substances to be administered through the same
catheter, and a dry method repair kit were introduced during fiscal 1985. In
1993, the Company introduced an enhancement to its Hemed 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 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.
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.
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.
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.
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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 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.
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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 research and development programs. The objectives of
this program 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), an oxygenator, and a unique vascular access port, the
Trans-Q-Port. Additionally, the Company is working on the next generation
infusion pump and enhancements to 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 a modest redesign of certain portions of the system. The
Company expects this redesign and the related clinical trials to be completed
before calendar 1997.
An oxygenator enables gas exchange of oxygen and carbon dioxide and also
regulates the temperature of the patient's blood. Gish has invested significant
resources in the development of its first oxygenator, which is due to be
released upon receipt of FDA market approval. The development process of this
project was delayed when the Company increased the acceptable performance
standards for its design in October 1995.
The Trans-Q-Port is a vascular access port which eliminates the need for needles
during infusion. The Company has submitted an application to the FDA for market
approval of this device. After market approval, the Company expects to conduct
extensive clinical trials and studies before general market release of this
product.
Gish's research and development expenditures for the years ended June 30, 1996,
1995, and 1994 were $1,407,500, $1,124,700 and $1,325,600 respectively.
MARKETING AND DISTRIBUTION
Gish distributes its products primarily through a network of domestic and
international distributors. In fiscal 1993 the Company undertook a review of
each of its distributor's territory and product mix. Based upon this analysis,
the Company is in the process of renegotiating territories and performance goals
with each distributor. Where appropriate, the Company has elected to hire direct
sales personnel. In July 1995, Gish terminated its relationship with its
distributor along the Eastern seaboard and hired an additional six direct
salespersons, in order to provide the Company with greater control of sales and
participation in the selling process.
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.
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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, and the Robiscek dual channel suction wand, RBS-2 to Dr. Neil
Semrad and to Dr's Levy and Rosenwieg respectively.
Gish is obligated to pay a royalty equal to 5% of the net sales of its
MyoManager(TM), myocardial management system to Cardio-Pulmonary Services.
The Company's aggregate royalty expenses were $55,800, $49,900, and $49,400 for
the years ended June 30, 1996, 1995 and 1994 respectively.
WORKING CAPITAL AND FINANCING OF OPERATIONS
Gish finances operations primarily through cash flow generated by sales of
Gish's products. Gish seeks to increase its sales by developing new products,
increasing market share for existing products and acquiring new products.
Gish entered into a Loan and Security Agreement, (the "Agreement") with Sanwa
Bank in 1995, providing for loans up to $2,000,000 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, 1996 the Company had no funds borrowed under the revolving credit
line, nor did the Company utilize the line during fiscal 1996.
CUSTOMER INFORMATION
The Company performs ongoing credit evaluations and maintains allowances for
potential credit losses. As of June 30, 1996 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:
1996 1995 1994
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2% 18% 18% Kol Bio Medical, Inc.
12% 13% 13% Specialized Medical Systems
7% 10% 10% CardioVascular Concepts, Inc.
As of June 30, 1995 the company terminated its relationship with Kol Bio Medical
Inc..
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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 it 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.
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, 1996, Gish had 264 full-time employees, of whom 20 were engaged
in field sales and sales management, 175 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
$3,758,600, $3,481,100 and $3,166,000 in the years ended June 30, 1996, 1995,
and 1994, respectively (equal to 16%, 16% and 15% 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.
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.
Additionally, in conjunction with its acquisition of the assets of Creative
Medical Development, Inc., the Company leases 8,450 square feet of space under a
lease which expires in April 1997 in Nevada City, California. The Nevada City
facility houses the manufacturing, marketing, and research and development for
the Company's recently acquired infusion pump.
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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, 1996.
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 1996 FISCAL 1995
QUARTER ENDED HIGH LOW HIGH LOW
September 30 $9.25 $7.13 $5.62 $4.75
December 31 9.25 7.38 7.13 5.00
March 31 8.38 6.25 7.50 5.88
June 30 7.38 5.75 7.50 6.13
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,
1996, there were approximately 500 holders of record of the Company's common
stock.
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ITEM 6. SELECTED FINANCIAL DATA
Year ended June 30,
In thousands, except per share data 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA:
Net sales $23,022 $21,588 $21,114 $21,065 $21,070
Selling and marketing 3,688 2,575 1,962 1,739 1,479
Research and development 1,408 1,125 1,326 850 789
General and administrative 1,892 1,727 1,633 1,727 1,552
Distributor contract termination fee 701 -- -- -- --
Net income $ 329 $ 1,682 $ 1,267 $ 1,783 $ 1,709
PER SHARE AMOUNTS:
Primary net income per share $ .10 $ .52 $ .41 $ .54 $ .54
Primary weighted average shares 3,395 3,218 3,090 3,311 3,192
Fully dilutednet income per share .09 .51 .41 .54 .52
Fully diluted weighted average 3,597 3,290 3,094 3,318 3,277
BALANCE SHEET DATA:
Cash and cash equivalents $ 3,314 $ 4,326 $ 6,125 $ 3,308 $ 4,466
Total assets 22,936 21,044 18,299 16,477 15,757
Working capital 14,886 14,807 13,206 11,376 12,091
Current ratio 10.2:1 7.7:1 9.5:1 10.3:1 6.6:1
Shareholders' equity 21,010 18,605 16,588 15,195 13,341
Book value per share 6.25 6.00 5.47 5.06 4.47
Return on average equity 2% 9% 8% 13% 14%
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SELECTED QUARTERLY FINANCIAL DATA
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:
Primary .02 .05 .03 (.03)
Fully diluted .02 .05 .03 (.03)
AVERAGE COMMON AND COMMON EQUIVALENT
SHARES:
Primary 3,484 3,330 3,364 3,373
Fully dilluted 3,530 3,331 3,371 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.
June 30 Mar. 31 Dec. 31 Sept. 30
In thousands, except per share data Fiscal 1995 1995 1995 1994 1994
- ----------------------------------------------------------------------------------------------------
Net sales $5,242 $5,592 $5,406 $5,348
Gross profit 2,065 2,015 1,991 1,857
Income before income taxes 653 776 677 651
Net income 398 474 413 397
NET INCOME PER SHARE:
Primary .12 .14 .12 .12
Fully diluted .12 .14 .12 .12
AVERAGE COMMON AND COMMON EQUIVALENT
SHARES:
Primary 3,287 3,269 3,231 3,100
Fully diluted 3,308 3,271 3,288 3,138
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
12
13
entered into a one-year lease for the building CMD currently occupies. The
Company has also executed one-year employment agreements with four key employees
which include 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.
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 $719,600 for the
period ended June 30, 1996.
Sales for the year ended June 30, 1995 increased by $474,100 or 2% over fiscal
1994. The largest percentage sales gains were in the Company's
non-cardiovascular surgery product areas which offset declines in cardiotomy
sales.
Cost of sales for the year ended June 30, 1996 was 65% of sales as compared to
63% and 68% of sales for the years ended June 30, 1995 and 1994 respectively.
Current year 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. Cost of sales for the
year ended June 30, 1995 improved over fiscal 1994 due to increased productivity
and a reduction in certain components of overhead such as employee benefits.
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 recent direct sales force expansion
in the southeastern United States. The Company anticipates that its selling and
marketing expenses will continue to be approximately $1,000,000 per quarter for
the upcoming the fiscal year.
Selling and marketing expenses for the year ended June 30, 1995 increased
$613,700 or 31% over fiscal 1994. The increase was due to the Company's
commitment to increasing its direct sales force presence and preparation for the
direct sales force expansion in the southeastern United States which took effect
July 1, 1995.
Research and development expenses for the year ended June 30, 1996 was $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.
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 in 1995 decreased $200,900 or 15% from fiscal 1994 due to
the completion of the outside development contract for the Company's Oxygenator.
General and administrative expenses were 8% of sales in 1996, 1995 and 1994. The
Company expects general and administrative expenses to remain relatively
constant at this level for the next fiscal year.
The Company also incurred a one-time expense of $701,200 during the first
quarter of fiscal 1996, which represents 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 and 37% for fiscal 1994.
Quarterly earnings per share is 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
13
14
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.
Liquidity and capital resources: At June 30, 1996, the Company had $14,885,500
of working capital, an increase of $78,300 from working capital at June 30,
1995. The increase is primarily due to profitable operations offset by the use
of cash in operating activities.
For the period ended June 30, 1996 cash used in operations of $1,550,400 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 $1,755,100 was primarily due to profitable operations. For the
period ended June 30, 1994 cash provided by operating activities of $3,142,100
was primarily due to profitable operations and decreases in accounts receivable
and inventory.
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 periods ended
June 30, 1995 and June 30, 1994 cash used by investing activities of $3,876,200
and $438,000, respectively was primarily due to the purchase of property and
equipment and short-term investments.
For the periods ended June 30, 1996, 1995 and 1994 cash provided by financing
activities of $72,800, $322,200 and $113,100 was primarily due to proceeds from
the exercise of stock options.
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.
14
15
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, 1996 and 1995, and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the three years in the
period ended June 30, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule 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, 1996 and 1995, and the consolidated results of its operations
and cash flows for each of the three years in the period ending June 30, 1996,
in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
-----------------------------
Ernst & Young LLP
Orange County, California
August 23, 1996
15
16
CONSOLIDATED BALANCE SHEETS
As of June 30 1996 1995
- -----------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,314,200 $ 4,326,000
Short-term investments 1,031,600 2,987,700
Accounts receivable, net of allowance for doubtful
accounts of $180,800 in 1996 and $168,800 in 1995 4,078,000 3,342,200
Inventories: 7,083,700 5,561,900
Deferred tax assets 748,900 625,000
Other assets 245,700 171,600
- -----------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 16,502,100 17,014,400
- -----------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, AT COST:
Leasehold improvements 2,903,500 2,860,100
Machinery and equipment 1,662,400 1,417,300
Molds, dies and tooling 3,761,800 3,106,000
Office furniture and equipment 1,472,200 1,191,500
- -----------------------------------------------------------------------------------------------------------
Total property and equipment 9,799,900 8,574,900
Less accumulated depreciation (5,463,200) (4,661,700)
- -----------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 4,336,700 3,913,200
Other assets, net of accumulated patent amortization of $230,400 in 1996
and $200,400 in 1995 130,400 116,700
Goodwill, net of accumulated amortization of $41,800 in 1996 1,966,800 --
- -----------------------------------------------------------------------------------------------------------
$ 22,936,000 $ 21,044,300
===========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Account payable $ 984,500 $ 944,300
Accrued compensation and related items 571,800 563,400
Accrued income taxes -- 570,900
Other accured liabilities 60,300 128,600
- -----------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,616,600 2,207,200
Deferred rent 282,600 227,900
Deferred tax liabilities 27,000 4,500
Commitments
SHAREHOLDERS' EQUITY:
Preferred stock, 2,250,000 shares authorized; no shares outstanding
Common stock, no par value, 7,500,000 shares authorized;
3,363,444 shares issued and outstanding (3,101,129 shares in 1995) 9,828,000 7,761,800
Note receivable - officer stock purchase (50,000) (60,000)
Retained earnings 11,231,800 10,902,900
- -----------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 21,009,800 18,604,700
- -----------------------------------------------------------------------------------------------------------
$ 22,936,000 $ 21,044,300
===========================================================================================================
See accompanying notes.
16
17
CONSOLIDATED STATEMENTS OF INCOME
Year Ended June 30 1996 1995 1994
- --------------------------------------------------------------------------------------------
Net sales $23,022,400 $21,587,600 $21,113,500
Cost of sales 15,062,400 13,659,300 14,287,300
- --------------------------------------------------------------------------------------------
GROSS PROFIT 7,960,000 7,928,300 6,826,200
- --------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Selling and marketing 3,687,500 2,575,200 1,961,500
Research and development 1,407,500 1,124,700 1,325,600
General and administrative 1,892,000 1,727,300 1,633,400
Distributor contract termination fee 701,200 -- --
- --------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 7,688,200 5,427,200 4,920,500
- --------------------------------------------------------------------------------------------
OPERATING INCOME 271,800 2,501,100 1,905,700
OTHER INCOME:
Interest income 267,400 256,300 105,200
- --------------------------------------------------------------------------------------------
Income before provision for taxes 539,200 2,757,400 2,010,900
Provision for taxes based on income 210,300 1,075,000 744,000
- --------------------------------------------------------------------------------------------
Net income $ 328,900 $ 1,682,400 $ 1,266,900
============================================================================================
NET INCOME PER SHARE:
Primary $ 0.10 $ 0.52 $ 0.41
Fully diluted $ 0.09 $ 0.51 $ 0.41
- --------------------------------------------------------------------------------------------
AVERAGE COMMON AND COMMON EQUIVALENT SHARES:
Primary 3,394,600 3,217,800 3,089,600
Fully diluted 3,597,400 3,290,300 3,094,000
============================================================================================
See accompanying notes.
17
18
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Common Stock
------------
Number of Note Retained
Shares Amount Receivable Earnings TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1993 3,001,629 $ 7,341,400 $ (100,000) $ 7,953,600 $15,195,000
Exercise of options 28,500 93,100 -- -- 93,100
Tax benefit of options exercised -- 12,800 -- -- 12,800
Payment on note receivable from officer -- -- 20,000 -- 20,000
Net income -- -- -- 1,266,900 1,266,900
- ---------------------------------------------------------------------------------------------------------------------------------
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 -- -- 302,200
Tax benefit of options exercised -- 12,300 -- -- 12,300
Payment on note receivable from officer -- -- 20,000 -- 20,000
Net income -- -- -- 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 -- -- 1,995,200
EXERCISE OF OPTIONS 22,075 62,800 -- -- 62,800
TAX BENEFIT OF OPTIONS EXERCISED -- 8,200 -- -- 8,200
PAYMENT ON NOTE RECEIVABLE FROM OFFICER -- -- 10,000 -- 10,000
NET INCOME -- -- -- 328,900 328,900
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1996 3,363,444 $ 9,828,000 $ (50,000) $11,231,800 $21,009,800
=================================================================================================================================
See accompanying notes.
18
19
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 328,900 $ 1,682,400 $ 1,266,900
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 873,300 877,700 780,100
Deferred rent 54,700 74,400 93,300
Deferred income taxes assets (123,900) (79,000) (37,000)
Tax benefit of options exercised 8,200 12,300 12,800
Changes in operating assets and liabilities:
Accounts receivable (735,800) 355,500 418,800
Inventories (1,313,600) (1,833,400) 261,700
Other current assets (74,100) 10,900 12,000
Accounts payable 40,200 56,400 177,700
Deferred income taxes 22,500 -- --
Accrued compensation and related items 8,400 112,500 14,800
Accrued income taxes (570,900) 374,600 196,300
Other accrued liabilities (68,300) 110,800 (55,300)
- ---------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (1,550,400) 1,755,100 3,142,100
- ---------------------------------------------------------------------------------------------------------
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 (765,000) (855,000) (417,600)
Proceeds from sales of equipment -- -- 2,400
Purchase of other long term assets (43,600) (33,500) (22,800)
Payment for acquisition (681,700) -- --
- ---------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 465,800 (3,876,200) (438,000)
- ---------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from exercise of options 62,800 302,200 93,100
Payments on note receivable from officer 10,000 20,000 20,000
- ---------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 72,800 322,200 113,100
=========================================================================================================
Net increase (decrease) in cash and cash equivalents (1,011,800) (1,798,900) 2,817,200
Cash and cash equivalents at beginning of year 4,326,000 6,124,900 3,307,700
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 3,314,200 $ 4,326,000 $ 6,124,900
=========================================================================================================
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.
19
20
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.
Certain reclassifications have been made to amounts previously reported in order
to conform with the 1996 presentation on equipment, cash equivalents and other
income.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect 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 consists of government backed securities and short term
certificates of deposit with a maturity date of less than one year.
FAIR VALUES OF FINANCIAL STATEMENTS
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.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or net
realizable value.
Year ended June 30, 1996 June 30, 1995
- -----------------------------------------------------------------------------
Raw materials $4,166,000 $2,936,700
Work in progress 1,123,200 1,317,900
Finished goods 1,794,500 1,307,300
- ----------------------------------------------------------------------------
Total inventories $7,083,700 $5,561,900
============================================================================
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 is being amortized on a straight-line basis
over 10 years. The carrying value of goodwill is reviewed periodically if the
facts and circumstances suggest that it may be impaired. 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. Other
intangible assets (patents) are being amortized on the straight-line method over
6 years.
20
21
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.
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. Fully diluted earnings per
share assumes common shares issued for the exercise of the stock options during
the period were outstanding at the beginning of the period.
STATEMENT OF CASH FLOWS
The Company paid $985,500, $781,800, and $488,000 in federal and state income
tax during the years ended June 30, 1996, 1995, and 1994, respectively.
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" ("FAS 121"), which becomes effective for fiscal years
beginning after December 15, 1995. FAS 121 requires impairment losses to be
recorded on long-lived assets used in operations, or to be disposed of, when
such impairment has been determined. The Company is in the process of evaluating
the statement. The potential impact on the Company of adopting the new standard
has not been quantified at this time.
In October 1995, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 123 "Accounting for Stock Based Compensation" which
must be implemented no later than fiscal 1997. The Company will elect not to
adopt the new valuation method of accounting for stock based compensation, but
will implement the new disclosure requirements.
2. NOTE PAYABLE
On June 30, 1996, the Company had available a secured $2,000,000 revolving
credit facility bearing interest at the bank's prime rate (8.25% at June 30,
1996). The loan is secured by substantially all of the Company's assets. The
line is renewable annually in October. At June 30, 1996, 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,
1996.
21
22
3. TAXES BASED ON INCOME
The Company utilizes the liability method of accounting for income taxes as set
forth in Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes. Under the liability method, 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 summary of the provision for taxes based on income is shown below:
Year ended June 30 1996 1995 1994
- -------------------------------------------------------------------------------
CURRENT:
State $ 96,000 $ 270,000 $ 190,000
Federal 215,700 884,000 591,000
- -------------------------------------------------------------------------------
311,700 1,154,000 781,000
DEFERRED:
State (41,100) (11,000) (2,000)
Federal (60,300) (68,000) (35,000)
- -------------------------------------------------------------------------------
(101,400) (79,000) (37,000)
$ 210,300 $ 1,075,000 $ 744,000
===============================================================================
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 1996 1995 1994
- -----------------------------------------------------------------------------------
Income tax at statutory rate $ 183,300 $ 938,000 $ 684,000
State tax, net of federal benefit 38,000 171,000 123,000
Other, net (11,000) (34,000) (63,000)
- -----------------------------------------------------------------------------------
$ 210,300 $ 1,075,000 $ 744,000
===================================================================================
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, 1996 and 1995 are:
DEFERRED TAX ASSETS 1996 1995
- --------------------------------------------------------------------------------
Accounts receivable and inventory $287,000 $309,000
reserves 196,000 177,000
Inventory capitalization -- 43,000
California franchise taxes 12,000 --
Book over tax depreciation 254,000 96,000
Accrued expenses and others
- --------------------------------------------------------------------------------
Total deferred tax assets $749,000 $625,000
================================================================================
DEFERRED TAX LIABILITIES
Tax over book depreciation $ -- $ 4,500
California franchise tax 27,000 --
- --------------------------------------------------------------------------------
Total deferred tax liabilities $ 27,000 $ 4,500
================================================================================
22
23
4. 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 $143,700,
$168,300 and $101,400 for the years ended June 30, 1996 and 1995 and 1994
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:
Year ending June 30,
- --------------------------------------------------------------------------------
1997 $ 754,700
1998 729,900
1999 752,700
2000 778,600
2001 809,800
Thereafter 1,228,800
- --------------------------------------------------------------------------------
$5,048,500
================================================================================
Rent expense charged to operations was $798,300, $609,000, and $608,900 for the
years ended June 30, 1996, 1995 and 1994, respectively.
5. ANALYSIS OF RESERVE ACCOUNTS
Balance at Beginning Additions Charged to Balance at
of Year Expense Deductions End of Year
- ---------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts:
June 30, 1996 $168,800 $ 12,000 -- $180,800
June 30, 1995 $144,300 $ 24,500 -- $168,800
June 30, 1994 $120,000 $ 24,800 $ 500 $144,300
Reserve for inventory:
June 30, 1996 $545,400 -- $ 62,900 $482,500
June 30, 1995 $554,400 -- $ 9,000 $545,400
June 30, 1994 $513,800 $ 47,100 $ 6,500 $554,400
6. BENEFIT PLANS
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 1,000,000,
respectively.
The Company realized a tax benefit of $8,200 and $12,300 in 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.
23
24
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 $10,000 was made and the note was renewed during the year
ended June 30, 1996. The note is secured by Company stock, bears interest at
5.5% and is due within one year.
The following table sets forth the status of stock options granted at fair
market value at the date of grant under the 1981 and 1987 plans combined:
Number of Shares Average Price Per Share
Options outstanding at June 30, 1994 689,012 $5.78
- -----------------------------------------------------------------------------------------------
Granted 398,625 5.68
Canceled (224,000) 9.34
Exercised (71,000) 4.25
- -----------------------------------------------------------------------------------------------
Options outstanding at June 30, 1995 792,637 4.85
Granted 25,000 5.75
Canceled (1,500) 6.38
Exercised (22,075) 2.85
- -----------------------------------------------------------------------------------------------
Options outstanding at June 30, 1996 794,062 $4.94
===============================================================================================
As of June 30, 1996, 2,612,787 options had been granted of which 727,877 are
exercisable. Additionally, 10,035 options remain available for grant. As of June
30, 1995, 688,767 were exercisable and 33,535 were available for grant.
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
contribution by each qualifying employee. Total Company contributions to the
Plan were $48,900, $48,800, and $45,400 for fiscal years ended June 30, 1996,
1995 and 1994, respectively.
7. SEGMENT INFORMATION
The Company operates in one industry segment, the manufacture 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, 1996 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:
1996 1995 1994
- ---------------------------------------------------
2% 18% 18%
12% 13% 13%
7% 10% 10%
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.
Sales to foreign customers (primarily in Europe and Asia) aggregated
approximately $3,758,600 in 1996, $3,481,100 in 1995, and $3,166,000 in 1994.
All sales are transacted in United States dollars, accordingly the Company is
not subject to foreign currency risks.
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8. 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 aquired assets until the closing date of the aquisition. 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 currently occupies.
The Company has also executed one-year employment agreements with four key
employees which include 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.
This acquisition has been accounted for as a purchase and resulted in the
recognition of $2,008,700 of goodwill.
The following table presents the unaudited consolidated results of operations on
a pro forma basis as though the acquisitions made 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 1996
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.
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.
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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
------ -----------
2.1 Asset Purchase Agreement dated September 12, 1995 between
Gish Biomedical, Inc. and Creative Medical Development,
Inc. Incorporated herein by reference to Exhibit 2.1 to
the Company's Report on Form 8-K dated May 2, 1996 (the
"Form 8-K").
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.
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2) Exhibits (continued)
Exhibit
Number Description
------ -----------
10.1* 401-K Salary Reduction Profit Sharing Plan, incorporated
herein by this reference to Exhibit 10(e) to the S-18
Registration Statement.
10.2* Officer, Director and Key Employee Incentive Plan, as
amended, incorporated herein by this reference to Exhibit
10(x) to the Company's Report on Form 10-K for the year
ended June 30, 1985.
10.3* Incentive Stock Option, Non-qualified Stock Option and
Restricted Stock Purchase Plan-1987, as amended (the
"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.
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.
10.11 Registration rights agreement dated April 17, 1996,
between the Company and Creative Medical Development,
Inc., a Delaware Corporation.
21.1 Subsidiaries of the Company.
- ----------------------
*Management contract or compensatory plan or arrangement.
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(2) Exhibits (continued)
Exhibit
Number Description
------ -----------
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
A Form 8-K was filed by Gish on May 2, 1996.
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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 1996.
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.
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30
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 27, 1996
- ------------------- Chief Executive Officer
JACK W. BROWN
JEANNE M. MILLER Vice President, Chief September 27, 1996
- ------------------- Financial Officer, and
JEANNE M. MILLER Corporate Secretary
RICHARD A. BRAUN
- ------------------- Director September 27, 1996
RICHARD A. BRAUN
RAY R. COULTER
- ------------------- Director September 27, 1996
RAY R. COULTER
RICHARD W. DUTRISAC
- ------------------- Director September 27, 1996
RICHARD W. DUTRISAC
JAMES B. GLAVIN
- ------------------- Director September 27, 1996
JAMES B. GLAVIN
JOHN S. HAGESTAD
- ------------------- Director September 27, 1996
JOHN S. HAGESTAD
30