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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, 1997
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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
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GISH BIOMEDICAL, INC.
INDEX
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Part I: Page
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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
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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.
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.
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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
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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
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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
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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.
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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.
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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:
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<CAPTION>
1997 1996 1995
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1% 2% 18% Kol Bio Medical, Inc.
15% 12% 13% Specialized Medical Systems
7% 7% 10% CardioVascular Concepts, Inc.
</TABLE>
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.
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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,
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<PAGE> 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.
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<PAGE> 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
<PAGE> 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.
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<PAGE> 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.
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1996
QUARTER ENDED HIGH LOW HIGH LOW
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
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.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year ended June 30,
In thousands, except per share data 1997 1996 1995 1994 1993
- ------------------------------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
SELECTED QUARTERLY FINANCIAL DATA
June 30 Mar. 31 Dec. 31 Sept. 30
In thousands, except per share data Fiscal 1997 1997 1997 1996 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
June 30 Mar. 31 Dec. 31 Sept. 30
In thousands, except per share data Fiscal 1996 1996 1996* 1995 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
*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.
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<PAGE> 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.
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<PAGE> 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.
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<PAGE> 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
<PAGE> 20
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of June 30 1997 1996
==========================================================================================
<S> <C> <C>
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
- ------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
20
<PAGE> 21
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 1997 1996 1995
====================================================================================================
<S> <C> <C> <C>
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
====================================================================================================
</TABLE>
See accompanying notes
21
<PAGE> 22
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
Number
of Note Retained
Shares Amount Receivable Earnings Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
22
<PAGE> 23
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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 --
- ------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
23
<PAGE> 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.
<TABLE>
<CAPTION>
Year ended June 30, 1997 June 30, 1996
------------------------------------------------------------
<S> <C> <C>
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
============================================================
</TABLE>
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
<PAGE> 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
<TABLE>
<CAPTION>
Changes in operating assets
and liabilities 1997 1996 1995
<S> <C> <C> <C>
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)
</TABLE>
25
<PAGE> 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
<TABLE>
<CAPTION>
Balance at Additions Charged Balance at
Beginning of Year to Expense Deductions End of Year
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
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
<PAGE> 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.
<TABLE>
<CAPTION>
Year ended June 30 1997 1996 1995
-----------------------------------------------------------------
<S> <C> <C> <C>
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
=================================================================
</TABLE>
The provision for taxes based on income differs from the amount
computed by applying the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
Year ended June 30 1997 1996 1995
----------------------------------------------------------------------
<S> <C> <C> <C>
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
======================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
DEFERRED TAX ASSETS 1997 1996
-------------------------------------------------------------------
<S> <C> <C>
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
===================================================================
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
DEFERRED TAX LIABILITIES 1997 1996
------------------------------------------------------------------
<S> <C> <C>
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
==================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------------------------------
<S> <C> <C> <C>
1% 2% 18% Kol Bio Medical, Inc.
15% 12% 13% Specialized Medical Systems
7% 7% 10% CardioVascular Concepts, Inc.
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
<S> <C> <C>
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
=======================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
Weighted-Average
Options Exercise Price Weighted-Average Remaining Options Weighted-Average
Outstanding Range Exercise Price Contractual Life Exercisable Exercise Price
<S> <C> <C> <C> <C> <C>
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
</TABLE>
29
<PAGE> 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:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Pro forma net income (loss) (1,991,700) 285,300
Pro forma earnings(loss)
per share $ (.59) $ .08
</TABLE>
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
<PAGE> 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.
<TABLE>
<CAPTION>
Years ended June 30
1996 1995
<S> <C> <C>
Net sales $23,293,000 $23,394,000
Net income 42,000 319,000
Earnings per share .01 .09
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
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.
</TABLE>
32
<PAGE> 33
2) Exhibits (continued)
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
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.
</TABLE>
- -----------------------
* Management contract or compensatory plan or arrangement.
33
<PAGE> 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
<PAGE> 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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
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
</TABLE>
35
<PAGE> 36
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
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.
</TABLE>
<PAGE> 37
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
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.
</TABLE>
- -----------------------
* Management contract or compensatory plan or arrangement.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
Gish International, Inc., a wholly-owned foreign sales corporation
which is incorporated in Barbados.
<PAGE> 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
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 3,977,100
<SECURITIES> 1,031,600
<RECEIVABLES> 3,970,100
<ALLOWANCES> 0
<INVENTORY> 6,698,700
<CURRENT-ASSETS> 16,703,500
<PP&E> 10,386,900
<DEPRECIATION> 6,374,100
<TOTAL-ASSETS> 21,028,000
<CURRENT-LIABILITIES> 1,362,800
<BONDS> 0
0
0
<COMMON> 10,078,300
<OTHER-SE> (35,000)
<TOTAL-LIABILITY-AND-EQUITY> 21,028,000
<SALES> 21,126,900
<TOTAL-REVENUES> 21,126,900
<CGS> 14,383,500
<TOTAL-COSTS> 14,383,500
<OTHER-EXPENSES> 9,128,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,152,200)
<INCOME-TAX> (225,000)
<INCOME-CONTINUING> (1,927,200)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,927,200)
<EPS-PRIMARY> (.57)
<EPS-DILUTED> 0
</TABLE>
