-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KfAkuGSXaH9+9sy4E4SYbxxQVqYA3GDd4llSWhm2g/xgfJJWoQivRVUWtBD4jwA/ Ki++2NHKD/1mwCQmjmbhtw== 0000892569-98-002661.txt : 19980929 0000892569-98-002661.hdr.sgml : 19980929 ACCESSION NUMBER: 0000892569-98-002661 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980928 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GISH BIOMEDICAL INC CENTRAL INDEX KEY: 0000700945 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 953046028 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-10728 FILM NUMBER: 98715577 BUSINESS ADDRESS: STREET 1: 2681 KELVIN AVE CITY: IRVINE STATE: CA ZIP: 92714 BUSINESS PHONE: 7147565485 MAIL ADDRESS: STREET 1: 2681 KELVIN AVE CITY: IRVINE STATE: CA ZIP: 92714 10-K405 1 FORM 10-K405 FOR THE PERIOD ENDED JUNE 30, 1998 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1998 ------------- 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 incorporation or organization) (IRS Employer Identification No.)
2681 Kelvin Avenue Irvine, California 92614 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (949)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 21, 1998 the aggregate market value of the registrant's voting common stock held by non-affiliates of the registrant was approximately $8,833,618 (computed using the closing price of $2.56 per share of Common Stock on that date as reported by NASDAQ). There were 3,450,632 shares of the registrant's common stock, no par value, outstanding on September 21, 1998. DOCUMENTS INCORPORATED BY REFERENCE DOCUMENT WHERE INCORPORATED Portions of Proxy Statement for the 1998 Annual Meeting of Shareholders Part III, Items 10, 11, 12 and 13 1 2 GISH BIOMEDICAL, INC. INDEX
Part I: Page ---- Item 1. Business 3 Item 2. Properties 13 Item 3. Legal Proceedings 13 Item 4. Submission of Matters to a Vote of Security Holders 13 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 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 34 Part III: Item 10. Directors and Executive Officers of the Registrant 35 Item 11. Executive Compensation 35 Item 12. Security Ownership of Certain Beneficial Owners and Management 35 Item 13. Certain Relationships and Related Transactions 35 Part IV: Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 35
2 3 PART I ITEM 1. BUSINESS FORWARD LOOKING STATEMENTS This Annual Report on Form 10-K contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of important factors. For a discussion of important factors that could affect the Company's results, please refer to "Risk Factors" below. 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 primarily through direct sales representatives domestically and through international distributors. All of Gish's products are single use disposable products or have a disposable component. The Company's primary markets include products for use in cardiac surgery, myocardial management, infusion therapy, and post operative blood salvage. ACQUISITIONS In April 1996, Gish acquired infusion pump technology and related assets 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 an oxygenator machine which oxygenates the blood and returns it to the patient. Each hospital performing open-heart surgery specifies the components to be included in its custom tubing sets, based on the particular needs of its surgical team. The complexity of the sets varies from simple tubing systems to all-inclusive operating packs. The packs usually include blood filters, gas filters, reservoirs used to collect blood lost during surgery and other components. Gish produces custom tubing sets using clear Mediflex(TM) tubing. Such components are assembled in the Gish clean room, sterilized and then shipped either to the hospital or to one of Gish's specialty distributors which service such hospitals. The Company also assembles custom tubing sets for several competitive medical device manufacturers under private label agreements. Custom tubing set sales were approximately $8,572,300, $8,985,400, and $9,643,200, in fiscal 1998, 1997, and 1996 respectively (equal to 42%, 43% and 42% of net sales, respectively, in each of such years). ARTERIAL FILTERS - The arterial filter is the last device the blood passes through in the cardiovascular bypass circuit as it is being returned to the patient. The purpose of the filter is to remove gaseous micro emboli and debris, which are generated by the oxygenation system, from the patient's blood. The Company introduced its first arterial filters in 1985. The Company's first design contained a safety bypass loop incorporated into the filter housing. The Company received FDA approval to market an improved design which became available for sale during the second quarter of fiscal 1994. CARDIOTOMIES - Cardiac suction is a technique employed in open-heart surgery to recover shed blood in the chest cavity and return it to the patient. The use of this technique reduces the requirements for whole blood replacement from donor sources, thereby reducing risk of blood compatibility problems and blood-borne viral diseases such as AIDS and hepatitis. Gish's cardiotomy reservoir systems consist of a polycarbonate reservoir, defoaming and filtration cartridge, and mounting bracket. This enables the perfusion team to recover high volumes of shed blood, then defoam and filter it prior to returning it to the patient's circulatory system. 3 4 In addition to the cardiotomy reservoirs' use in the operating room, Gish has developed several systems which allow the cardiotomy reservoir to be used as a pleural drainage or autotransfusion system during recovery. Cardiotomy sales were approximately $1,752,600, $1,910,200, and $1,971,100 for fiscal years ended June 30, 1998, 1997 and 1996 respectively (equal to 9% of net sales 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. 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 was sold in selected accounts both domestically and internationally for the first half of fiscal 1998. The Company made its full market release of this product for sale in January 1998. The Company believes that the Vision oxygenator's superior air handling capabilities should provide the Company with a competitive advantage in the oxygenator market place. Revenues from the Vision oxygenator for the year ended June 30, 1998 were $580,200. 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 role means fewer homologous blood products are needed, further reducing surgical costs and improving patient safety. 4 5 With an estimated 80% of the market using hardshell reservoirs, the combination of the Vision oxygenator and the hardshell CAPVRF45 reservoir provides the Company with the products to effectively meet the needs of the 400,000 open- heart procedures performed in the U.S. and the 600,000 procedures performed 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 $3,489,700, $3,999,600 and $4,611,200 for fiscal years 1998, 1997, and 1996, respectively (equal to 17%, 19%, and 20% 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(R) is a device implanted entirely under the skin and consists of a small reservoir with a diaphragm and catheter. The VasPort is accessed by the VasTack, a small patented non-coring needle system, which penetrates the skin and the diaphragm of the VasPort reservoir. Drugs are readily infused through the VasTack, into the reservoir and then into the catheter. When the infusion is complete the VasTack is removed and the skin acts as a natural barrier against infection. Single and double reservoir VasPorts are available in both titanium and lightweight engineering plastics. 5 6 Catheter and port sales were approximately $1,169,800, $1,106,500 and $960,500 for fiscal year 1998, 1997, and 1996, respectively (equal to 6%, 5% and 4% of net sales, respectively, in each of such years). INFUSION PUMPS - The acquisition of the EZ Flow infusion pump technology from CMD in fiscal 1996 was intended to complement the Company's line of vascular access devices. In fiscal 1997 the Company evaluated the future revenue stream of the product and concluded that the goodwill had been impaired. In fiscal 1998 the pump was involved in an incident which precipitated a complete recall of the product and the cessation of all infusion pump sales. The Company has abandoned all technology acquired with the pump and written off all related inventory and fixed assets likewise associated with it. Infusion pump sales, (returns), were approximately $(141,000), $34,400 and $545,600 for fiscal years 1998, 1997 and 1996, respectively (equal to ( 1)%, 0% and 2% of net sales, respectively, in each of such years). Infusion pump disposable sales were $198,000, $219,000 and $175,000 for fiscal years 1998, 1997 and 1996, respectively (equal to 1% of net sales in each 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 $1,243,900, $1,222,700 and $1,107,100 (equal to 6%, 6%, and 5% 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 apply to the manufacturing and marketing of Gish products. Gish operates a quality system certified to ISO9001, a standard for quality recognized worldwide as the best. In addition, Gish has been found in compliance with the EEC Medical Device Directive, which equivocates to portions of the USFDA CGMP Quality System Regulations. This allows Gish to export and distribute its products with free movement within the European Community. Following the enactment of the Medical Device Amendments of 1976 to the Act, ("Amendments") the FDA classified medical devices in commercial distribution at the time of enactment into one of three classes --Class I, II, or III. This classification is based on the controls necessary to reasonably ensure the safety and effectiveness of medical devices. Class I devices are those whose safety and effectiveness can reasonably be ensured through general controls, such as labeling, the pre-market notification ("510(k)") process, and adherence to FDA-mandated good manufacturing practices ("GMP") and Quality System Regulations. Class II devices are those whose safety and effectiveness can reasonably be ensured through the use of general controls together with special controls, such as performance standards, post-market surveillance, patient registries, and FDA guidelines. Generally, Class III devices are devices that must receive pre-market approval by the FDA to ensure their safety and effectiveness. They are typically life-sustaining, life-supporting, or implantable devices, and also include most devices that were not on the market before May 28, 1976 and for which the FDA has not made a finding of substantial equivalence based upon a 510(k). If a manufacturer or distributor of medical devices can establish to the FDA's satisfaction that a new device is substantially equivalent to a legally marketed Class I or Class II medical device or to a Class III device for which the FDA has not yet required pre-market approval, the manufacturer or distributor may market the device. In the 510(k), a manufacturer or distributor makes a claim of substantial equivalence, which the FDA may require to be supported by various types of information showing that the device is as safe and effective for its intended use as the legally marketed predicate device. Following submission of the 510(k), the manufacturer or distributor may not place the new device into commercial distribution until an order is issued by the FDA finding the new device to be substantially equivalent. 6 7 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 periodically by both the FDA and the CDHS for compliance with the FDA's GMP and other requirements including the medical device reporting regulation and various requirements for labeling and promotion. The FDA Quality System Regulations ("QSR"), which became effective June 1, 1997, no longer limit control to manufacturing and post market controls, but specify requirements during design (Design Control), manufacturing, and servicing as well. Much of the new QSR is based on the ISO9001 Quality Standard, and is, as such in harmony with the thrust towards world harmonization of medical device requirements. The FDA's GMP regulation requires, among other things, that (i) the manufacturing process be regulated and controlled by the use of written procedures, and (ii) the ability to produce devices which meet the manufacturer's specifications be validated by extensive and detailed testing of every aspect of the process. The medical device reporting regulation requires that the device manufacturer provide information to the FDA on deaths or serious injuries alleged to have been associated with the use of its marketed devices, as well as product malfunctions that would likely cause or contribute to a death or serious injury if the malfunction were to recur. Changes in existing requirements or interpretations (on which regulations heavily depend) or adoption of new requirements or policies could adversely affect the ability of the Company to comply with regulatory requirements. Failure to comply with regulatory requirements could have a material adverse effect on Gish's business. Gish believes all of its present products are Class I, Class II, and Class III products and that it is in compliance in all material respects with all applicable performance standards as well as good manufacturing practices, record keeping and reporting requirements in the production and distribution of such products. Most of Gish's product 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, except in the EEC where the Medical Device Directive prescriptively defines requirements. RESEARCH AND DEVELOPMENT Gish is actively engaged in many research and development programs. The objectives of these programs are to develop new products in the areas of the medical device industry in which it is already engaged, to enhance its competitive position and to develop new products for other medical device markets. Gish's research and development projects are principally focused on enhancements, line extensions and manufacturing cost improvements for both its cardiovascular and Hemed product lines. Additionally, the Company is designing a new infusion pump to replace the pump acquired from CMD. Gish's research and development expenditures for the years ended June 30, 1998, 1997, and 1996 were $1,019,400, $1,345,400, and $1,407,500, respectively. 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. The effective date of this transition was subsequently renegotiated to be effective February 1, 1998. Accordingly, the Company expanded its direct sales force during the second quarter of fiscal 1998. The Company introduced the Vision Oxygenator to those domestic geographic regions which are represented by direct salespersons and distributors who do not currently sell a competitive oxygenator in the third quarter of fiscal 1998. Internationally the Company is represented by specialty medical distributors in over fifty countries around the world. The Company's international sales represented 19% of total sales in fiscal 1998. International sales of the Company's new Vision Oxygenator commenced in September 1997. 7 8 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 $45,500, $54,100, and $55,800 for the years ended June 30, 1998, 1997 and 1996, respectively. WORKING CAPITAL AND FINANCING OF OPERATIONS Gish finances operations primarily through cash flow generated by sales of Gish's products. Gish seeks to increase its sales by developing new products, increasing market share for existing products and acquiring new products. Gish entered into a Loan and Security Agreement, (the "Agreement") with Sanwa Bank in 1995, providing for loans up to $1,000,000 in the form of short term advances under a revolving credit arrangement. The Agreement is subject to renewal on October 31, 1998. 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 $18,000,000 (ii) current assets at least equal to 2.5 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 more than .50 to 1. At June 30, 1998 the Company had no funds borrowed under the revolving credit line, nor did the Company utilize the line 8 9 during fiscal 1998. CUSTOMER INFORMATION The Company performs ongoing credit evaluations and maintains allowances for potential credit losses. As of June 30, 1998 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:
1998 1997 1996 - ---- ---- ---- 8% 15% 12% Specialized Medical Systems 2% 7% 7% CardioVascular Concepts
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. The termination date was subsequently renegotiated to February 1, 1998. 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 the Company and its distributors generally maintain an adequate finished goods inventory to fulfill the customer's needs on demand. Accordingly, Gish believes that the backlog of orders at any given point in time is not indicative of the Company's future level of sales. CONTRACTS Gish has no contracts with customers where cancellation or renegotiation would have a material impact on the Company's sales or profit margins. COMPETITION The market for medical devices of the type sold by the Company is extremely competitive. The Company believes that product differentiation and performance, client service, reliability, cost and ease of use are important competitive considerations in the markets in which it competes. Most of Gish's competitors are United States concerns. Many of them are larger and possess greater financial and other resources than Gish. Gish has approximately eight competitors within each of the hospital markets in which it competes. No one competitor is a dominant force in any of these markets. Gish believes it has achieved its position in the marketplace for its present principal products by means of superior design, quality, and service, and Gish intends to continue to utilize these means of competing. ENVIRONMENTAL COMPLIANCE The Company's direct expenditures for environmental compliance were not material in the three most recent fiscal years. However, certain costs of manufacturing have increased due to environmental regulations placed upon suppliers of components and services. EMPLOYEES As of June 30, 1998, Gish had 235 full-time employees, of whom 27 were engaged in field sales and sales management, 159 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 is represented by a labor union. INTERNATIONAL OPERATIONS Sales to foreign customers, primarily in Europe and Asia, were approximately $3,862,700, $3,864,700 and $3,758,600 in the years ended June 30, 1998, 1997, and 1996, respectively (equal to 19%, 18% 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 9 10 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 OF 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 UNCERTAIN SUCCESS OF THE COMPANY'S DIRECT SALES FORCE IN CERTAIN GEOGRAPHIC TERRITORIES, AND (VI) THE FAILURE OF THE COMPANY TO SUCCESSFULLY DEVELOP AND MARKET A NEW INFUSION PUMP. ASSUMPTIONS RELATING TO BUDGETING, MARKETING, PRODUCT DEVELOPMENT AND OTHER MANAGEMENT DECISIONS ARE SUBJECTIVE IN MANY RESPECTS AND THUS SUSCEPTIBLE TO INTERPRETATIONS AND PERIODIC REVISIONS BASED ON ACTUAL EXPERIENCE AND BUSINESS DEVELOPMENTS, THE IMPACT OF WHICH MAY CAUSE THE COMPANY TO ALTER ITS MARKETING, CAPITAL EXPENDITURE OR OTHER BUDGETS, WHICH MAY IN TURN AFFECT THE COMPANY'S FINANCIAL POSITION AND RESULTS OF OPERATIONS. THE READER IS THEREFORE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, WHICH SPEAK SOLELY AS OF THE DATE OF THIS FORM 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 rapid innovation and technological advances. Product differentiation and performance, client service, reliability, cost and ease of use are important competitive considerations in the medical device industry. The Company expects that the current high levels of competition and technological change in the medical device industry in general, and the cardiovascular surgery products industry in particular, will continue to increase. Several companies offer devices which compete with devices manufactured by the Company, including 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, 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. 10 11 DEPENDENCE ON INTERNATIONAL SALES International net revenues accounted for approximately 19%, 18% and 16% of the Company's total net sales in fiscal 1998, 1997 and 1996, respectively. International sales are subject to a number of inherent risks, including the impact of possible recessionary environments in economies outside the U.S., unexpected changes in regulatory requirements and fluctuations in exchange rates of local currencies in markets where the Company sells its products. While the Company denominates all of its international sales in U.S. dollar, a relative strengthening in the U.S. dollar would increase the effective cost of the Company's products to international customers. The foregoing factors could reduce international sales of the Company's products and could have a material adverse effect on the Company's business, financial condition and results of operations. RISK OF MARKET WITHDRAWAL OR PRODUCT RECALL Complex medical devices, such as the Company's products, can experience performance problems in the field that require review and possible corrective action by the manufacturer. Similar to many other medical device manufacturers, the Company periodically receives reports from users of its products relating to performance difficulties they have encountered. The Company expects that it will continue to receive customer reports regarding the performance and use of its products. Furthermore, there can be no assurance that component failures, manufacturing errors or design defects that could result in an unsafe condition or injury to the patient will not occur. If any such failures or defects were deemed serious, the Company could be required to withdraw or recall products, which could result in significant costs to the Company. The Company has in the recent past undertaken a voluntary recall of its ambulatory infusion pumps. There can be no assurance that market withdrawals or product recalls will not occur in the future. Any future product problems could result in market withdrawals or recalls of products, which could have a material adverse affect on the Company's business, financial condition or results of operations. There can be no assurance that the Company will be able to successfully take corrective actions if required, nor can there be any assurance that any such corrective actions will not force the Company to incur significant costs. In addition, there can be no assurance that the current recall or any future recalls will not cause the Company to face increasing scrutiny from its customers, which could cause the Company to lose market share or incur substantial costs in order to maintain existing market share. RISKS ASSOCIATED WITH EXTENSIVE GOVERNMENT REGULATION The manufacture and sale of medical devices, including products currently sold by the Company and the Company's other potential products, are subject to extensive regulation by numerous governmental authorities in the United States, principally the FDA, and corresponding state agencies, such as the California Department of Health Services ("CDHS"). In order for the Company to market its products for clinical use in the United States, the Company must obtain clearance from the FDA of a 510(k) premarket notification or approval of a more extensive submission known as a premarket approval ("PMA") application. In addition, certain material changes to medical devices also are subject to FDA review and clearance or approval. The process of obtaining FDA and other required regulatory clearances and approvals is lengthy, expensive and uncertain, frequently requiring from one to several years from the date of FDA submission if premarket clearance or approval is obtained at all. Securing FDA clearances and approvals may require the submission of extensive clinical data and supporting information to the FDA. Sales of medical devices outside of the United States are subject to international regulatory requirements that vary from country to country. The time required to obtain approval for sales internationally may be longer or shorter than that required for FDA clearance or approval, and the requirements may differ. The Company has entered into distribution agreements for the foreign distribution of its products. These agreements generally require that the foreign distributor is responsible for obtaining all necessary regulatory approvals in order to allow sales of the Company's products in a particular country. There can be no assurance that the Company's foreign distributors will be able to obtain approval in a particular country for any future products of 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 11 12 practices ("GMP") and similar regulations in other countries, which include testing, control, and documentation requirements. Ongoing compliance with GMP and other applicable regulatory requirements will be monitored through periodic inspections by federal and state agencies, including FDA and CDHS, and by comparable agencies in other countries. Failure to comply with applicable regulatory requirements, including marketing products for unapproved uses, could result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal of the government to grant premarket clearance or premarket approval for devices, withdrawal of clearances or approvals and criminal prosecution. Changes in existing regulations or adoption of new governmental regulations or policies could prevent or delay regulatory approval of the Company's products. There can be no assurance that the Company will be able to obtain FDA 510(k) clearance or PMA approval for its products under development or other necessary regulatory approvals or clearances on a timely basis or at all. Delays in receipt of or failure to receive U.S. or foreign clearances or approvals, the loss of previously obtained clearances or approvals, or failure to comply with existing or future regulatory requirements would have a material adverse effect on the Company's business, financial condition and results of operations. PRODUCT LIABILITY RISK; LIMITED INSURANCE COVERAGE The manufacture and sale of medical products entail significant risk of product liability claims. The Company maintains insurance with respect to such claims, but there can be no assurance that the Company's existing annual insurance coverage limits of $5 million per occurrence and $5 million in the aggregate will be adequate to protect the Company from any liabilities it might incur in connection with the clinical trials or sales of its products. In addition, the Company may require increased product liability coverage if and when products under development are successfully commercialized. Such insurance is expensive and in the future may not be available on acceptable terms, or at all. A successful product liability claim or series of claims brought against the Company in excess of its insurance coverage, could have a material adverse effect on the Company's business, financial condition and results of operations. RISKS RELATING TO NEW PRODUCT DEVELOPMENT The Company's success is dependent in part on the design and development of new products in the medical device industry. The product development process is time-consuming and costly, and there can be no assurance that product development will be successfully completed, that necessary regulatory clearances or approvals will be granted by the FDA on a timely basis, or at all, or that the potential products will achieve market acceptance. Failure by the Company to develop, obtain necessary regulatory clearances or approvals for, or successfully market potential new products could have a material adverse effect on the Company's business, financial 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 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 12 13 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, could 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 2,250,000 shares of Preferred Stock in one or more series, with such relative rights, preferences, privileges and restrictions as are determined by the Board of Directors at the time of issuance. Accordingly, the Board of Directors is empowered to issue Preferred Stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of Common Stock. In the event of such issuance, the Preferred Stock could have the effect of discouraging, delaying or preventing a change in control of the Company. VOLATILITY OF STOCK PRICE; NO DIVIDENDS The trading price of the Common Stock has been and is likely to continue to be subject to significant fluctuations in response to variations in quarterly operating results, the gain or loss of significant contracts, changes in management, announcements of technological innovations or new products by the Company or its competitors, legislative or regulatory changes, general trends in the industry and other events and factors. In addition, the stock market has frequently experienced extreme price and volume fluctuations which have affected the market price for any companies for reasons unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. The Company currently intends to retain any future earnings for use in its business and does not anticipate any cash dividends in the future. 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, 1998. 13 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's Common Stock is traded on the NASDAQ National Market System under the symbol GISH. The table below sets forth the high and low per share closing prices during each quarter of the last two fiscal years as reported on the NASDAQ National Market System.
FISCAL 1998 FISCAL 1997 ----------------------- ----------------------- QUARTER ENDED HIGH LOW HIGH LOW - --------------------------------------------------------------------------- September 30 $ 5.00 $ 4.25 $ 7.63 $ 5.25 December 31 5.75 4.31 7.75 6.00 March 31 4.94 4.06 7.25 5.38 June 30 3.81 2.72 5.63 4.38
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 21, 1998, there were approximately 500 holders of record of the Company's Common Stock. 14 15 ITEM 6. SELECTED FINANCIAL DATA
Year ended June 30, In thousands, except per share data 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA: Net sales $ 20,283 $ 21,127 $ 23,022 $ 21,588 $ 21,114 Selling and marketing 4,618 3,955 3,688 2,575 1,962 Research and development 1,019 1,345 1,408 1,125 1,326 General and administrative 2,131 1,913 1,892 1,727 1,633 Distributor contract termination fee -- -- 701 -- -- Goodwill impairment -- 1,824 -- -- -- Net income (loss) $ (2,022) $ (1,927) $ 329 $ 1,682 $ 1,267 - ---------------------------------------------------------------------------------------------------------------------- PER SHARE AMOUNTS: - ---------------------------------------------------------------------------------------------------------------------- Basic net income (loss) per share $ (.59) $ (.57) $ .10 $ .55 $ .42 Basic weighted average common shares 3,439 3,389 3,161 3,086 3,026 Diluted net income (loss) per share (.59) (.57) .10 .52 .41 Diluted weighted average and common equivalent shares 3,439 3,389 3,395 3,235 3,090 - ---------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA: - ---------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 3,497 $ 3,977 $ 3,314 $ 4,326 $ 6,125 Total assets 19,445 21,028 22,909 21,044 18,299 Working capital 14,431 15,341 14,895 14,807 13,206 Current ratio 9.1:1 12.2:1 10.2:1 7.7:1 9.5:1 Shareholders' equity 17,343 19,348 21,010 18,605 16,588 Book value per share 5.03 5.64 6.25 6.00 5.47 Return (loss) on average equity (11%) (10%) 2% 9% 8%
15 16 SELECTED QUARTERLY FINANCIAL DATA
- ------------------------------------------------------------------------------------------------------------------ In thousands, except per share data Fiscal 1998 JUNE 30, 1998 Mar. 31, 1998 Dec. 31, 1997 Sept. 30, 1997 - ------------------------------------------------------------------------------------------------------------------ Net sales $ 5,247 $ 4,509 $ 5,209 $ 5,318 Gross profit 939 1,407 1,497 1,682 Income (loss) before income taxes (1,247) (510) (381) 148 Net income (loss) (1,569) (311) (233) 91 - ------------------------------------------------------------------------------------------------------------------ Basic net income (loss) per share (.46) (.09) (.07) .03 Basic average common shares 3,445 3,443 3,439 3,430 - ------------------------------------------------------------------------------------------------------------------ Diluted net income (loss) per share (.46) (.09) (.07) .03 Diluted average common and common equivalent shares 3,445 3,443 3,439 3,521 - ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------ In thousands, except per share data Fiscal 1997 June 30,1997 Mar. 31, 1997 Dec. 31, 1996 Sept. 30, 1996 - ------------------------------------------------------------------------------------------------------------------ Net sales $ 5,341 $ 5,133 $ 5,341 $ 5,313 Gross profit 1,812 1,450 1,683 1,800 Goodwill impairment 1,824 -- -- -- Income (loss) before income taxes (1,984) (255) (14) 101 Net income (loss) (1,825) (156) (8) 62 - ------------------------------------------------------------------------------------------------------------------ Net income (loss) per share (.54) (.05) -- .02 Average common shares 3,390 3,384 3,381 3,370 - ------------------------------------------------------------------------------------------------------------------ Diluted net income (loss) per share (.54) (.05) -- .02 Diluted average common and common equivalent shares 3,390 3,384 3,381 3,589 - ------------------------------------------------------------------------------------------------------------------
16 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations: 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 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 acquired from CMD on April 17, 1996 and entered into a one-year lease for the building CMD occupied. In February 1997, the Company was released from its lease obligation for the northern California facility and ceased operations in that facility. During the fourth quarter of fiscal 1997, 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. During the fiscal year ended June 30, 1998 the infusion pump acquired from CMD was involved in an incident which precipitated the Company's decision to voluntarily cease sales of the infusion pump. The Company also decided to redesign the pump not utilizing the technology acquired from CMD. Consequently the Company has written off all remaining assets, principally inventory, property and equipment, associated with the infusion pump at June 30, 1998. The total pump inventory expensed to cost of sales during the fourth quarter of fiscal 1998 was $464,400. Also expensed in the fourth quarter were fixed assets acquired for the manufacture of the pump amounting to a $363,000 charge to general and administrative expense. Additionally, it was determined that the trade name EZ Flow had acquired such a poor reputation that it would not be used for the new infusion pump. The Company's new infusion pump is due to be submitted to the FDA for market approval during the third quarter of fiscal 1999. However, due to the issues involved with the EZ Flow infusion pumps market approval is not expected until fiscal 2000. Income statement data Sales for the year ended June 30, 1998 decreased by $843,500 or 4% as compared to fiscal 1997. Approximately $770,000 of the decrease was primarily due to a shift in distribution, as discussed below, and approximately $400,000 of such loss was attributable to lost sales in Louisiana due to Baxter Inc.'s acquisition of a perfusion service group customer of the company. These decreases in sales were offset, in part, by sales of the Vision oxygenator and increases in the Company's sales of non cardiovascular products. In February 1998, the Company ceased doing business with both Specialized Medical Systems (SMS) and CardioVascular Concepts (CVC). 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 engaged, during the second quarter of fiscal 1998, a direct sales force of seven persons to replace the two distributor sales organizations. The Company retained a substantial portion of the total existing distributor business in these regions at higher margins. 17 18 The conversion of these territories to direct sales representation afforded the Company better marketing opportunities with respect to the new oxygenator. Gish had previously excluded these two territories from its initial marketing plan for the launch of its new Vision(TM) oxygenator, effected in January 1998, because these distributors represented a competing oxygenator product. The conversion of these territories to a direct sales force, has allowed the Company to 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 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. Cost of sales for the year ended June 30, 1998 was 73% of sales as compared to 69% of sales for the year ended June 30, 1997. The increase in cost of sales is primarily due to the write off of the infusion pump inventory and increases in other inventory reserves. In the aggregate these write offs total $704,500, or 3% of sales. Additionally, the lower volumes experienced this fiscal year due to the conversion of the two distributor territories increased fixed overhead as a percentage of total product costs. Cost of sales for the year ended June 30, 1997 was 69% of sales as compared to 65% of sales for the year ended June 30, 1996. The increase in cost of sales is primarily due to decreases in average selling prices of cardiovascular products and an unfavorable product mix . Selling and marketing expenses for the year ended June 30, 1998 increased $663,200 or 17% over fiscal 1997 due to the addition of seven direct sales representatives to replace two former distributors and increased marketing efforts associated with the launch of the company's Vision oxygenator. 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. Research and development expenses for the year ended June 30, 1998 decreased 24% or $326,000 due to the completion of the oxygenator development program and unfilled staff positions. The Company is currently restaffing the research and development department and is reevaluating the focus of its research and development efforts. Research and development expenses for the year ended June 30,1997 remained constant at 6% of sales as compared to fiscal 1996. General and administrative expenses for fiscal 1998 increased $218,000 or 11% over fiscal 1997 primarily due to a $363,000 write off of fixed assets associated with the infusion pump business acquired from CMD. General and administrative expenses for fiscal 1997 remained relatively consistent with general and administrative expenses for fiscal 1996. 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 (benefit) for taxes is based upon a combined federal and state effective tax rate of 39% for all years presented less valuation allowances of $680,200 in fiscal 1998 and $617,500 in fiscal 1997 against the Company's deferred tax assets. The valuation allowances reflect the uncertainty in utilizing the Company's net loss carryforwards in future periods. The effects of inflation have not been a significant factor in the results of operations. The cardiovascular surgery market has been experiencing pricing pressures which have precluded the Company from considering price increases. 18 19 Year 2000 The Year 2000 Problem in computers arises from the common computer industry practice of using two digits to represent a date in computer software code and databases to enhance both processing time and save storage space. Therefore, when dates in the year 2000 and beyond are indicated and computer programs read date "00," the computer may default to the year "1900" rather than the correct "2000". This could result in incorrect calculations, faulty data and computer shutdowns, potentially impairing the conduct of business. The Company has reviewed its significant or critical computerized financial, operations and facility management computer systems. These systems utilize licensed third party software most of which was converted in 1997 so as to be year 2000 compliant at no additional cost to the Company. The Company's third party vendors for the remaining systems have committed to be year 2000 compliant by the end of calendar 1998 at no additional charge to the Company. The Company has also reviewed and analyzed all of its products which contain a software component and has determined that none of these electronic products are vulnerable to year 2000 issues. The Company plans to institute a year 2000 compliance program for its significant vendors and customers during fiscal 1999 to evaluate the risks and potential impact on the Company of their non compliance. Year 2000 compliance issues will be addressed during the Company's routinely scheduled vendor audits and should not represent a material expense. In the event that any significant vendor is unable to provide reasonable assurances to the Company of its year 2000 compliance the Company intends to evaluate and qualify alternate sources of supply on a case-by-case basis. Liquidity and capital resources: At June 30, 1998, the Company had $14,431,000 of working capital, a decrease of $909,700 from working capital at June 30, 1997. The decrease is primarily due to cash used in operations of $519,000, the largest component of which is $911,200 for increases in inventory levels to improve customer service levels in the new direct territories. At June 30, 1997, the Company had $15,340,700 of working capital, an increase of $445,400 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, 1998 cash provided by investing activities of $22,300 was primarily due to the sale of short-term investments offset by purchases of property and equipment for use in the manufacture of new and existing products as well as improvements to the Company's information systems. 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 periods ended June 30, 1998, 1997 and 1996 cash provided by financing activities of $16,700, $180,700 and $81,000, 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 1999. 19 20 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, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 1998. 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, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ending June 30, 1998, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Orange County, California September 14, 1998 20 21 CONSOLIDATED BALANCE SHEETS
As of June 30 1998 1997 - ------------- ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 3,497,100 $ 3,977,100 Short-term investments 581,700 1,031,600 Accounts receivable, net of allowance for doubtful accounts of $209,500 in 1998 and $187,300 in 1997 3,588,800 3,970,100 Income tax refund receivable 754,300 217,500 Inventories 7,609,900 6,698,700 Deferred tax assets -- 646,000 Other assets 177,300 162,500 ------------ ------------ TOTAL CURRENT ASSETS 16,209,100 16,703,500 ============ ============ PROPERTY AND EQUIPMENT, AT COST: Leasehold improvements 2,685,000 2,910,800 Machinery and equipment 1,721,200 1,877,600 Molds, dies and tooling 3,363,900 3,938,900 Office furniture and equipment 1,406,300 1,659,600 ------------ ------------ Total property and equipment 9,176,400 10,386,900 Less accumulated depreciation (6,089,800) (6,374,100) ------------ ------------ NET PROPERTY AND EQUIPMENT 3,086,600 4,012,800 Deferred tax assets -- 194,000 Other assets, net of accumulated patent amortization of $284,600 in 1998 and $260,400 in 1997 149,400 117,700 ------------ ------------ $ 19,445,100 $ 21,028,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,100,700 $ 729,400 Accrued compensation and related items 665,700 533,700 Other accrued liabilities 11,700 99,700 ------------ ------------ TOTAL CURRENT LIABILITIES 1,778,100 1,362,800 Deferred rent 324,400 317,300 Commitments SHAREHOLDERS' EQUITY: Preferred stock, 2,250,000 shares authorized; no shares outstanding Common stock, no par value, 7,500,000 shares authorized; 3,444,632 shares issued and outstanding (3,430,145 shares in 1997) 10,113,800 10,078,300 Note receivable - officer stock purchases (53,800) (35,000) Retained earnings 7,282,600 9,304,600 ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 17,342,600 19,347,900 ------------ ------------ $ 19,445,100 $ 21,028,000 ============ ============
See accompanying notes 21 22 CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended June 30 1998 1997 1996 - ------------------ ------------ ------------ ------------ Net sales $ 20,283,400 $ 21,126,900 $ 23,022,400 Cost of sales 14,758,700 14,475,500 15,062,400 ------------ ------------ ------------ Gross profit 5,524,700 6,651,400 7,960,000 ------------ ------------ ------------ OPERATING EXPENSES: Selling and marketing 4,617,700 3,954,500 3,687,500 Research and development 1,019,400 1,345,400 1,407,500 General and administrative 2,130,800 1,912,800 1,892,000 Goodwill impairment -- 1,824,200 -- Distributor contract termination fee -- -- 701,200 Interest income 253,600 233,300 267,400 ------------ ------------ ------------ Income (loss) before provision for taxes (1,989,600) (2,152,200) 539,200 Provision (benefit) for income taxes 32,400 (225,000) 210,300 Net income (loss) $ (2,022,000) $ (1,927,200) $ 328,900 Basic net income (loss) per share $ (0.59) $ (0.57) $ 0.10 Basic weighted average common shares 3,438,700 3,388,700 3,160,500 ------------ ------------ ------------ Diluted net income (loss) per share $ (0.59) $ (0.57) $ 0.10 Diluted weighted average and common equivalent shares 3,438,700 3,388,700 3,394,500
See accompanying notes 22 23 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Common Stock ---------------------------- Number of Note Retained Shares Amount Receivable Earnings Total ------------ ------------ ---------- ------------ ------------ Balance at June 30, 1995 3,101,129 $ 7,761,800 $(60,000) $10,902,900 $18,604,700 ------------ ----------- -------- ----------- ----------- Issuance of stock for purchase of assets, net of issuance cost 240,240 1,995,200 -- -- 1,995,200 Exercise of options 22,075 62,800 -- -- 62,800 Tax benefit of options exercised -- 8,200 -- -- 8,200 Payment on note receivable from officer -- -- 10,000 -- 10,000 Net income -- -- -- 328,900 328,900 ------------ ----------- -------- ----------- ----------- Balance at June 30, 1996 3,363,444 $ 9,828,000 $(50,000) $11,231,800 $21,009,800 ------------ ----------- -------- ----------- ----------- Issuance of stock per employment agreement 13,876 84,600 -- -- 84,600 Exercise of options 52,825 128,000 -- -- 128,000 Tax benefit of options exercised -- 37,700 -- -- 37,700 Payment on note receivable from officer -- -- 15,000 -- 15,000 Net loss -- -- -- (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 ------------ ----------- -------- ----------- ----------- EXERCISE OF OPTIONS 14,487 35,500 18,800 -- 16,700 ------------ ----------- -------- ----------- ----------- NET LOSS -- -- -- (2,022,000) (2,022,000) ============ =========== ======== =========== =========== BALANCE AT JUNE 30, 1998 3,444,632 $10,113,800 $(53,800) $ 7,282,600 $17,342,600 ============ =========== ======== =========== ===========
See accompanying notes 23 24 CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended June 30 1998 1997 1996 - ------------------ ----------- ----------- ----------- OPERATING ACTIVITIES: Net income (loss) $(2,022,000) $(1,927,200) $ 328,900 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 934,800 910,900 801,500 Amortization 24,200 172,600 71,800 Loss on disposal of assets 363,100 -- -- Issuance of stock per employment contracts -- 84,600 -- Impairment of goodwill -- 1,824,200 -- Deferred rent 7,100 34,700 54,700 Deferred income taxes 840,000 (118,000) (101,400) Changes in operating assets and liabilities (666,200) 104,800 (2,714,100) ----------- ----------- ----------- Net cash provided (used) by operating activities (519,000) 1,086,600 (1,558,600) =========== =========== =========== INVESTING ACTIVITIES: Purchase of short-term investments (50,700) -- (1,031,600) Sale of short-term investments 500,600 -- 2,987,700 Purchases of property and equipment (379,700) (587,000) (765,000) Purchase of other long-term assets (55,900) (17,400) (43,600) Proceeds from sale of assets 8,000 -- -- Payment for acquisition -- -- (681,700) ----------- ----------- ----------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 22,300 (604,400) 465,800 =========== =========== =========== FINANCING ACTIVITIES: Proceeds from exercise of options 16,700 128,000 62,800 Tax benefit of options exercised -- 37,700 8,200 Payments on note receivable from officer -- 15,000 10,000 ----------- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 16,700 180,700 81,000 =========== =========== =========== Net increase (decrease) in cash and cash equivalents (480,000) 662,900 (1,011,800) Cash and cash equivalents at beginning of year 3,977,100 3,314,200 4,326,000 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 3,497,100 $ 3,977,100 $ 3,314,200 ----------- ----------- ----------- SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES Fair value of assets acquired -- -- $ 668,200 Excess of purchase price over net assets acquired -- -- 2,008,700 ----------- ----------- ----------- -- -- $ 2,676,900 Common stock issued, net of issuance cost -- -- (1,995,200) ----------- ----------- ----------- Payment for acquisition -- -- $ 681,700 =========== =========== ===========
See accompanying notes 24 25 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 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, 1998 and 1997 approximated their carrying amounts due to the relatively short maturity of these items. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or net realizable value.
YEAR ENDED JUNE 30, 1998 JUNE 30, 1997 ---------- ------------- ------------- Raw materials $3,971,500 $3,529,800 Work in progress 1,082,600 1,225,800 Finished goods 2,555,800 1,943,100 ---------- ---------- Total inventories $7,609,900 $6,698,700 ========== ==========
PROPERTY AND EQUIPMENT Depreciation and amortization are provided on the straight-line method over the following estimated useful lives: Leasehold improvements Term of lease Machinery and equipment 5 years Molds, dies and tooling 5 years Office furniture and equipment 4 - 8 years In fiscal 1998 the Company decided to abandon all the property and equipment associated with the acquisition of the EZ Flow infusion pump from CMD (see Note 11). This has resulted in a write-off of $363,100 on the disposal of those fixed assets. GOODWILL AND OTHER INTANGIBLES Goodwill resulting from acquisitions represented the excess of the purchase price over the fair value of net assets acquired and was being amortized on a straight line basis over 10 years. In fiscal 1997 the Company wrote-off all remaining goodwill, which related solely to the acquisition of CMD, aggregating $1,824,200 since it was 25 26 deemed to be impaired (see Note 11). Other intangible assets (patents) are being amortized on the straight-line method over 6 years. 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. EARNINGS PER SHARE In February 1997, The Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share". Statement 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share exclude any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the Statement 128 requirements. The adoption of this new accounting standard did not have a material effect on previously reported earnings per share.
1998 1997 1996 ----------- ------------ ----------- Numerator: Numerator for basic and diluted income (loss) per share $(2,022,000) $(1,927,200) $ 328,900 ----------- ------------ ----------- Denominator: Denominator for basic income per share-weighted- average shares 3,438,700 3,388,700 3,160,500 Effect of dilutive securities: Employee stock options -- -- 234,000 Denominator for diluted income (loss) per share-adjusted weighted-average shares 3,438,700 3,388,700 3,394,500 Basic income (loss) per share $ (.59) $ (.57) $ .10 Diluted income (loss) per share $ (.59) $ (.57) $ .10 =========== ============ ===========
26 27 STATEMENT OF CASH FLOWS
Changes in operating assets and liabilities 1998 1997 1996 --------- ---------- ----------- Accounts receivable $ 381,300 $ 107,900 $ (735,800) Income tax refund receivable (536,800) (217,500) -- Inventories (911,200) 385,000 (1,313,600) Other current assets (14,800) 83,200 (74,100) Accounts payable 371,300 (255,100) 40,200 Accrued compensation and related items 132,000 (38,100) 8,400 Accrued income taxes -- -- (570,900) Other accrued liabilities (88,000) 39,400 (68,300) --------- --------- ----------- Net change in operating assets and liabilities $(666,200) $ 104,800 $(2,714,100) ========= ========= ===========
The Company paid $71,200, $214,500, and $985,500 in federal and state income tax during the years ended June 30, 1998, 1997, and 1996, 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, "Accounting 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 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. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income", which established standards for financial statements. Comprehensive income is comprised of net income plus or minus specified changes in stockholders' equity. Statement No. 130 is effective for fiscal years beginning after December 15, 1997 and requires restatement of earlier periods presented. Also in June 1997, the FASB issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information", which requires publicly-held companies to report financial descriptive information about its operating segments in financial statements issued. Statement No. 131 is effective for fiscal years beginning after December 31, 1997 with prior year information concerning segments conformed to the new standard. RECLASSIFICATIONS Certain amounts in the consolidated financial statements have been reclassified to conform to presentations adopted in 1998. 2. CREDIT FACILITY On June 30, 1998, the Company had available a secured $1,000,000 revolving credit facility bearing interest at the bank's prime rate (8.50% at June 30, 1998). The loan is secured by substantially all of the Company's assets. The line is renewable annually in October. At June 30, 1998, 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 not in compliance with all covenants at June 30, 1998. 27 28 3. ANALYSIS OF RESERVE ACCOUNTS
BALANCE AT ADDITIONS BEGINNING OF CHARGED TO BALANCE AT YEAR EXPENSE DEDUCTIONS END OF YEAR ---------- ---------- ---------- ---------- ALLOWANCE FOR DOUBTFUL ACCOUNTS: JUNE 30, 1998 $187,300 $ 24,000 $ 1,800 $ 209,500 JUNE 30, 1997 $180,800 $ 24,000 $ 17,500 $ 187,300 JUNE 30, 1996 $168,800 $ 12,000 -- $ 180,800 -------- -------- -------- ---------- RESERVE FOR INVENTORY: JUNE 30, 1998 $465,800 $240,200 $117,500 $ 588,500 JUNE 30, 1997 $482,500 $ 92,000 $108,700 $ 465,800 JUNE 30, 1996 $545,400 -- $ 62,900 $ 482,500 -------- -------- -------- ---------- VALUATION RESERVE FOR DEFERRED TAX ASSETS JUNE 30, 1998 $617,500 $680,200 $ -- $1,297,700 JUNE 30, 1997 $ -- $617,500 $ -- $ 617,500 JUNE 30, 1996 $ -- $ -- $ -- $ -- -------- -------- -------- ----------
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 $54,300, $57,000, and $48,900 for fiscal years ended June 30, 1998, 1997 and 1996, respectively. 5. TAXES BASED ON INCOME Deferred taxes are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years the differences are expected to reverse. A valuation allowance is provided, when necessary, to reduce the Company's value of deferred tax assets to an amount which management believes is more likely then not of realization. A summary of the provision for taxes based on income is shown below and includes adjustments for prior year tax return filing positions that varied from the tax provision amounts estimated during the financial statement audit.
YEAR ENDED JUNE 30 1998 1997 1996 --------- --------- --------- CURRENT: State $ (12,400) $ 43,000 $ 96,000 Federal (635,400) (150,000) 215,700 --------- --------- --------- (647,800) (107,000) 311,700 DEFERRED: State 279,200 (65,000) (41,100) Federal 401,000 (53,000) (60,300) --------- --------- --------- 680,200 (118,000) (101,400) --------- --------- --------- Total $ 32,400 $(225,000) $ 210,300 ========= ========= =========
The provision for taxes based on income differs from the amount computed by applying the statutory federal income tax rate as follows: 28 29
YEAR ENDED JUNE 30 1998 1997 1996 --------- --------- -------- Income tax at statutory rate $(676,000) $(732,000) $183,300 State tax, net of federal benefit (8,000) (130,000) 38,000 Other, net 36,200 19,500 (11,000) Valuation allowance 680,200 617,500 -- --------- --------- -------- $ 32,400 $(225,000) $210,300 ========= ========= ========
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, 1998 and 1997 are:
DEFERRED TAX ASSETS 1998 1997 ----------- --------- Accounts receivable and inventory reserves $ 342,000 $ 283,000 Inventory capitalization 205,000 167,000 Book over tax depreciation 52,000 -- Accrued expenses and others 281,700 323,000 Net operating loss carryforward 402,000 -- Tax credit carryforward 160,000 -- Goodwill -- 815,000 Valuation allowance (1,297,700) (617,500) ----------- --------- Total deferred tax assets $ 145,000 $ 970,500 =========== =========
DEFERRED TAX LIABILITIES 1998 1997 ----------- --------- Tax over book depreciation $ -- $ 76,600 State franchise/income tax 145,000 53,900 ----------- --------- Total deferred tax liabilities $ 145,000 $ 130,500 =========== ========= Net deferred taxes -- $ 840,000 =========== ========= Current deferred tax assets, net of current deferred tax liabilities -- $ 646,000 Non-current deferred tax assets, net of non- current deferred tax liabilities -- 194,000 ----------- --------- Net deferred taxes $ -- $ 840,000 =========== =========
The Company has net operating loss carryforwards of approximately $700,000 and $1,800,000 for federal and state tax purposes respectively. For financial reporting purposes the Company recognized valuation allowances against the net deferred asset of $680,200 and $617,500 in fiscal years 1998 and 1997, respectively. As of June 30, 1998 the valuation allowance fully offsets the Company's net deferred tax assets because management cannot assess that it is likely they will be utilized. This is due to the Company's reported losses in 1998 and 1997, a lack of net operating loss carryback potential, and a lack of other tax planning alternatives to permit realization of the deferred tax assets. 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, 1998 the Company believes it has no significant concentrations of credit risk. 29 30 The Company derived the following percentages of its net sales from its significant distributors:
1998 1997 1996 ---- ---- ---- 8% 15% 12% Specialized Medical Systems 2% 7% 7% CardioVascular Concepts, 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, which occurred in February 1998. Sales to foreign customers (primarily in Europe and Asia) aggregated approximately $3,862,700, in 1998, $3,864,700 in 1997, and $3,758,600 in 1996. 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 an Officers, Directors and Key Employee Incentive Plan (the "1981 Plan") authorizing stock options, stock bonuses and cash incentive awards, an Incentive Stock Option, Non-qualified Stock Option and Restricted Stock Purchase Plan - 1987 (the "1987 Plan") authorizing stock options and rights to purchase restricted stock and a Gish Biomedical, Inc. 1997 Stock Incentive Plan (the "1997 Plan"). 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. During fiscal 1998 the Company canceled 739,000 options at exercise prices ranging from $7.13 to $3.58 and regranted such options at a replacement rate of .67 to 1 and at an exercise price of $2.72. All other terms of these options were unchanged. The Company realized tax benefits of $37,700 and $8,200 in 1997, and 1996 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, 1987 and 1997 plans combined:
Number of Weighted Average Shares Exercise Price -------- -------------- 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 $ 4.94 Granted 34,000 5.27 Canceled (15,500) 6.09 Exercised (52,825) 2.45 -------- -------- Options outstanding at June 30, 1997 759,737 $ 5.11 -------- -------- Granted 584,162 2.81 Canceled (766,250) 5.15 Exercised (14,487) 2.45 ======== ======== Options outstanding at June 30, 1998 563,162 $ 2.74 ======== ========
30 31 As of June 30, 1998, 563,162 options are outstanding of which 515,003 are exercisable. Additionally, 430,500 options remain available for grant. As of June 30, 1997, 751,737 were exercisable and 16,535 options were available for grant. The weighted average fair values of options granted were $.92, $2.41 and $2.40 in fiscal 1998, 1997 and 1996, respectively. A summary of options outstanding and exercisable as of June 30, 1998 follows:
Weighted-Average Options Exercise Price Weighted-Average Remaining Options Weighted-Average Outstanding Range Exercise Price Contractual Life Exercisable Exercise Price ----------- ----- -------------- ---------------- ----------- -------------- 492,662 2.72 - 2.72 2.72 1.88 489,003 2.72 70,500 2.81 - 4.75 2.86 4.98 26,000 2.95
8. ACCOUNTING FOR STOCK BASED COMPENSATION 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. 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 1998, 1997 and 1996: 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 3.9 years for all periods. 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 options, 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, 1998. 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:
1998 1997 1996 ----------- ----------- --------- Pro forma net income (loss) $(2,476,900) $(1,988,500) $ 269,000 Pro forma diluted earnings (loss) per share $ (.72) $ (.59) $ .08
9. OPERATING LEASES 31 32 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 $163,900, $161,400 and $143,700 for the years ended June 30, 1998 and 1997 and 1996 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: $752,700; $778,600; $809,800; $842,200 and $386,600 for the fiscal years ending June 30, 1999; 2000; 2001; 2002 and 2003 respectively for a total of $3,569,900. Rent expense charged to operations was $727,100, $763,400, and $798,300 for the years ended June 30, 1998, 1997 and 1996, 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. During the year ended June 30, 1998, an additional loan of $18,800 was made and the note was renewed. The note balance at June 30, 1998 is $53,800 which is secured by Company stock, bears interest at 5.5% and is due within one year. 11. INFUSION PUMP BUSINESS 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. This acquisition was accounted for as a purchase and resulted in the recognition of $2,008,700 of goodwill. During the fourth quarter of fiscal 1997, the Company reviewed the goodwill resulting from acquisition of the assets and technology of the ambulatory infusion pumps 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. Due to its poor performance and negative margins, management believed it was unlikely that margins would improve in the near future nor would the product line generate positive cash flows. Accordingly, the Company recorded a $1.8 million of goodwill impairment in fiscal 1997 to write-off goodwill associated with this product line. During the fiscal year ended June 30, 1998 the infusion pump acquired from CMD was involved in an incident which precipitated the Company's decision to voluntarily cease sales of the infusion pump. The Company also decided to redesign the pump and not utilizing the technology acquired from CMD. Consequently the Company has written off all remaining assets, principally inventory, property and equipment, associated with the infusion pump at June 30, 1998. The table below sets forth the operating results of the infusion pump business for the past three fiscal years 32 33 as if were an operating segment.
Infusion pump operations June 30, 1998 June 30, 1997 June 30, 1996 - ----------------------------------------------------------------------------------------------------------------- Sales (returns) $ (141,000) $ 34,400 $ 545,600 Cost of sales 6,700 9,600 360,200 ----------- ----------- ----------- Gross profit (loss) (147,700) 24,800 185,400 Research and development expenses -- 145,500 323,400 Selling and marketing expenses 88,000 560,800 403,800 General and administrative expenses 21,200 316,200 221,700 ----------- ----------- ----------- Total operating expenses 109,200 1,022,500 948,900 ----------- ----------- ----------- Operating loss (256,900) (997,700) (763,500) Goodwill impairment -- 1,824,200 -- Write off of plant and equipment 363,100 -- -- Write off of inventory 464,400 -- -- ----------- ----------- ----------- Contribution to pretax loss $(1,084,400) $(2,821,900) $ (763,500) =========== =========== ===========
12. FOURTH QUARTER ADJUSTMENTS During the fourth quarter the Company made certain adjustments to its financial statements based upon events and decisions occurring either during the fourth quarter of fiscal 1998 or which occurred shortly thereafter. EZFlow infusion pump adjustments During the third quarter of fiscal 1998 the Company made a decision to rewrite the software utilized by the EZFlow infusion pump. As a corollary to the software rewrite, decisions were made to enhance other aspects of the pump. The resulting design no longer utilized much of the components and tooling of the original pump. In the fourth quarter of fiscal 1998, the Company determined that the new design prohibits the upgrading of the existing pump inventory. Accordingly, the Company has written off infusion pump inventory associated with the old design of $464,400 and $363,000 of fixed assets (primarily tools and dies) associated with the EZFlow pump. The Company also recorded a provision of $88,000 for EZFlow pump returns from distributors. Additionally, the Company has determined that the EZFlow name has been tarnished in the marketplace to such an extent that the new infusion pump will bear no resemblance to the EZFlow infusion pump. Inventory reserve increases During fiscal 1997, the Company's myocardial management system, the MyoManager, failed to work as well clinically as it had in a laboratory setting. The Company began a redesign of this product in that year. During fiscal 1998, due to rather limited research and development resources, the Company focused on more urgent projects. Subsequent to the 1998 fiscal year end senior management reviewed the Company's research and development projects and assigned a lower priority to the completion of the MyoManager redesign. Consequently, the Company has provided an additional inventory reserve of $162,000 for MyoManagers and MyoManager components in inventory at June 30, 1998. Recognition of valuation allowance on deferred tax asset Internal projections for the fiscal year ended June 30, 1998 anticipated a return to profitability. This coupled with the ability to carryback net operating losses allowed management to conclude that the Company's deferred tax assets were recoverable. However, during the fourth quarter it was determined that all conditions necessary to permit a tax deduction for the fiscal 1997 write off of $1.8 million of goodwill established from the CMD acquisition were present. This deduction together with tax losses arising from fiscal 1998 operations allowed the Company to realize the tax benefit of all available net operating losses, and a valuation allowance was recognized for the remaining net deferred tax asset. 33 34 A summary of fourth quarter adjustments follows: Infusion pump provision for sales returns $ 88,000 Infusion pump write off to cost of goods sold 464,400 MyoManager inventory reserve charged to cost of goods sold 162,000 ---------- Total charges against gross profit 714,400 Infusion pump fixed asset write off to general and administrative expense 363,000 Increase in valuation allowance for deferred tax assets 680,200 ---------- Total non-recurring fourth quarter adjustments $1,757,600 ==========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Inapplicable. 34 35 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 1998 Annual Meeting of Shareholders ("Proxy Statement") is incorporated herein by reference. The Proxy Statement will be filed with the Commission within the time period specified by General Instruction G to Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information under the caption "Executive Compensation" contained in the Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the caption "Principal Shareholders" contained in the Proxy Statement is incorporated herein by this reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the captions "Board of Directors' Affiliations" and "Management Indebtedness" contained in the Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) (1) Financial Statement Schedules All financial statement schedules have been omitted because they are inapplicable or the information required thereby is included in the financial statements. (2) Exhibits The following Exhibits are filed as part of this Report:
Exhibit Number Description ------ ----------- 3.1 Restated Articles of Incorporation as filed with the California Secretary of State on November 9, 1981, incorporated herein by this reference to Exhibit 2(a) to the Company's Registration Statement on Form S-18, No. 2-73602LA (the "S-18 Registration Statement"). 3.2 Certificate of Amendment of Articles of Incorporation as filed with the California Secretary of State on May 19, 1982, incorporated herein by this reference to Exhibit 2(b) to the S-18 Registration Statement. 3.3 Certificate of Amendment of Articles of Incorporation as filed with the California Secretary of State on December 19, 1988, incorporated herein by this reference to Exhibit 3.3 to the Company's Report on Form 10-K for the year ended June 30, 1990. 3.4 Certificate of Amendment of Articles of Incorporation as filed with the California Secretary of State on June 13, 1990 incorporated herein by this reference to Exhibit 3.4 to the Company's Report on Form 10-K for the year ended June 30, 1990.
35 36
Exhibit Number Description ------ ----------- 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. 10.3* Incentive Stock Option, Non-qualified Stock Option and Restricted Stock Purchase Plan- 1987, as amended (the "1987 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 1987 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 1987 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 1987 Plan, incorporated herein by this reference to Exhibit 4.5 to the S-8 Registration Statement. 10.7* Form of 1997 Stock Incentive Plan (the "1997 Plan"). 10.8* Form of Option Agreement for the use with the 1997 Plan. 10.9 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. 10.10* 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. 10.11 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 10-K for the year ended June 30, 1993. 10.12 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 10.13 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
36 37
Exhibit Number Description ------ ----------- 21.1 Subsidiaries of the Company. 23 Consent of Ernst & Young LLP. 25 Power of Attorney (included on signature page of this Annual Report on Form 10-K). 27.1 Financial Data Schedule
(B) Reports on Form 8-K None. - ------------- *Management contract or compensatory plan or arrangement. 37 38 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date JACK W. BROWN President, Chairman September 28, 1998 - --------------------------- Chief Executive Officer JACK W. BROWN JEANNE M. MILLER Vice President, Chief September 28, 1998 - --------------------------- Financial Officer, and JEANNE M. MILLER Corporate Secretary RICHARD A. BRAUN - --------------------------- Director September 28, 1998 RICHARD A. BRAUN RAY R. COULTER - --------------------------- Director September 28, 1998 RAY R. COULTER RICHARD W. DUTRISAC - --------------------------- Director September 28, 1998 RICHARD W. DUTRISAC JAMES B. GLAVIN - --------------------------- Director September 28, 1998 JAMES B. GLAVIN JOHN S. HAGESTAD - --------------------------- Director September 28, 1998 JOHN S. HAGESTAD
38 39 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 28th day of September 1998. 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. 39 40 EXHIBIT INDEX ------------- EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.7 Form of 1997 Stock Incentive Plan (the "1997 Plan"). 10.8 Form of Option Agreement for the use with the 1997 Plan. 21.1 Subsidiaries of the Company. 23 Consent of Ernst & Young LLP. 25 Power of Attorney (included on signature page of this Annual Report on Form 10-K). 27.1 Financial Data Schedule EX-10.7 2 FORM OF 1997 STOCK INCENTIVE PLAN 1 EXHIBIT 10.7 GISH BIOMEDICAL, INC. 1997 STOCK INCENTIVE PLAN This 1997 STOCK INCENTIVE PLAN (the "Plan") is hereby established by Gish Biomedical, Inc. (the "Company"), and adopted by its Board of Directors as of the 15 day of August, 1997 (the "Effective Date"). ARTICLE 1. PURPOSES OF THE PLAN -------------------- 1.1 PURPOSES. The purposes of the Plan are (a) to enhance the Company's ability to attract and retain the services of qualified employees, officers and directors (including non-employee officers and directors), and consultants and other service providers upon whose judgment, initiative and efforts the successful conduct and development of the Company's business largely depends, and (b) to provide additional incentives to such persons or entities to devote their utmost effort and skill to the advancement and betterment of the Company, by providing them an opportunity to participate in the ownership of the Company and thereby have an interest in the success and increased value of the Company. ARTICLE 2. DEFINITIONS ----------- For purposes of this Plan, the following terms shall have the meanings indicated: 2.1 ADMINISTRATOR. "Administrator" means the Board or, if the Board delegates responsibility for any matter to the Committee, the term Administrator shall mean the Committee. 2.2 AFFILIATED COMPANY. "Affiliated Company" means any "parent corporation" or "subsidiary corporation" of the Company, whether now existing or hereafter created or acquired, as those terms are defined in Sections 424(e) and 424(f) of the Code, respectively. 2.3 BOARD. "Board" means the Board of Directors of the Company. 2.4 CHANGE IN CONTROL. "Change in Control" shall mean (i) the acquisition, directly or indirectly, by any person or group (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) of the beneficial ownership of securities of the Company possessing more than fifty percent (50%) of the total combined voting power of all outstanding voting securities of the Company; (ii) a merger or consolidation in which the Company is not the surviving entity, except for a transaction in which the holders of the outstanding voting securities of the Company immediately prior to such merger or consolidation hold, in the aggregate, securities possessing more than fifty percent (50%) of the total combined voting power of all outstanding voting securities of the surviving entity immediately after such merger or consolidation; (iii) a reverse merger in which the Company is the surviving entity but in which securities possessing more than fifty percent (50%) of the total combined voting power of all outstanding voting securities of 2 the Company are transferred to or acquired by a person or persons different from the persons holding those securities immediately prior to such merger; (iv) the sale, transfer or other disposition (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company; or (v) the approval by the shareholders of a plan or proposal for the liquidation or dissolution of the Company. 2.5 CODE. "Code" means the Internal Revenue Code of 1986, as amended from time to time. 2.6 COMMITTEE. "Committee" means a committee of two or more members of the Board appointed to administer the Plan, as set forth in Section 7.1 hereof. 2.7 COMMON STOCK. "Common Stock" means the Common Stock, no par value, of the Company, subject to adjustment pursuant to Section 4.2 hereof. 2.8 DISABILITY. "Disability" means permanent and total disability as defined in Section 22(e)(3) of the Code. The Administrator's determination of a Disability or the absence thereof shall be conclusive and binding on all interested parties. 2.9 EFFECTIVE DATE. "Effective Date" means the date on which the Plan is adopted by the Board, as set forth on the first page hereof. 2.10 EXERCISE PRICE. "Exercise Price" means the purchase price per share of Common Stock payable upon exercise of an Option. 2.11 FAIR MARKET VALUE. "Fair Market Value" on any given date means the value of one share of Common Stock, determined as follows: (a) If the Common Stock is then listed or admitted to trading on a NASDAQ market system or a stock exchange which reports closing sale prices, the Fair Market Value shall be the closing sale price on the date of valuation on such NASDAQ market system or principal stock exchange on which the Common Stock is then listed or admitted to trading, or, if no closing sale price is quoted on such day, then the Fair Market Value shall be the closing sale price of the Common Stock on such NASDAQ market system or such exchange on the next preceding day for which a closing sale price is reported. (b) If the Common Stock is not then listed or admitted to trading on a NASDAQ market system or a stock exchange which reports closing sale prices, the Fair Market Value shall be the average of the closing bid and asked prices of the Common Stock in the over-the-counter market on the date of valuation. (c) If neither (a) nor (b) is applicable as of the date of valuation, then the Fair Market Value shall be determined by the Administrator in good faith using any reasonable method of evaluation, which determination shall be conclusive and binding on all interested parties. 2.12 INCENTIVE OPTION. "Incentive Option" means any Option designated and qualified as an "incentive stock option" as defined in Section 422 of the Code. D-2 3 2.13 INCENTIVE OPTION AGREEMENT. "Incentive Option Agreement" means an Option Agreement with respect to an Incentive Option. 2.14 NASD DEALER. "NASD Dealer" means a broker-dealer that is a member of the National Association of Securities Dealers, Inc. 2.15 NONQUALIFIED OPTION. "Nonqualified Option" means any Option that is not an Incentive Option. To the extent that any Option designated as an Incentive Option fails in whole or in part to qualify as an Incentive Option, including, without limitation, for failure to meet the limitations applicable to a 10% Shareholder or because it exceeds the annual limit provided for in Section 5.6 below, it shall to that extent constitute a Nonqualified Option. 2.16 NONQUALIFIED OPTION AGREEMENT. "Nonqualified Option Agreement" means an Option Agreement with respect to a Nonqualified Option. 2.17 OFFEREE. "Offeree" means a Participant to whom a Right to Purchase has been offered or who has acquired Restricted Stock under the Plan. 2.18 OPTION. "Option" means any option to purchase Common Stock granted pursuant to the Plan. 2.19 OPTION AGREEMENT. "Option Agreement" means the written agreement entered into between the Company and the Optionee with respect to an Option granted under the Plan. 2.20 OPTIONEE. "Optionee" means a Participant who holds an Option. 2.21 PARTICIPANT. "Participant" means an individual or entity who holds an Option, a Right to Purchase or Restricted Stock under the Plan. 2.22 PURCHASE PRICE. "Purchase Price" means the purchase price per share of Restricted Stock payable upon acceptance of a Right to Purchase. 2.23 RESTRICTED STOCK. "Restricted Stock" means shares of Common Stock issued pursuant to Article 6 hereof, subject to any restrictions and conditions as are established pursuant to such Article 6. 2.24 RIGHT TO PURCHASE. "Right to Purchase" means a right to purchase Restricted Stock granted to an Offeree pursuant to Article 6 hereof. 2.25 SERVICE PROVIDER. "Service Provider" means a consultant or other person or entity who provides services to the Company or an Affiliated Company and who the Administrator authorizes to become a Participant in the Plan. 2.26 STOCK PURCHASE AGREEMENT. "Stock Purchase Agreement" means the written agreement entered into between the Company and the Offeree with respect to a Right to Purchase offered under the Plan. D-3 4 2.27 10% SHAREHOLDER. "10% Shareholder" means a person who, as of a relevant date, owns or is deemed to own (by reason of the attribution rules applicable under Section 424(d) of the Code) stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of an Affiliated Company. ARTICLE 3. ELIGIBILITY ----------- 3.1 INCENTIVE OPTIONS. Officers and other key employees of the Company or of an Affiliated Company (including members of the Board if they are employees of the Company or of an Affiliated Company) are eligible to receive Incentive Options under the Plan. 3.2 NONQUALIFIED OPTIONS AND RIGHTS TO PURCHASE. Officers and other key employees of the Company or of an Affiliated Company, members of the Board (whether or not employed by the Company or an Affiliated Company), and Service Providers are eligible to receive Nonqualified Options or Rights to Purchase under the Plan. 3.3 LIMITATION ON SHARES. In no event shall any Participant be granted Options or Rights to Purchase in any one calendar year pursuant to which the aggregate number of shares of Common Stock that may be acquired thereunder exceeds 100,000 shares. ARTICLE 4. PLAN SHARES ----------- 4.1 SHARES SUBJECT TO THE PLAN. A total of 500,000 shares of Common Stock may be issued under the Plan, subject to adjustment as to the number and kind of shares pursuant to Section 4.2 hereof. For purposes of this limitation, in the event that (a) all or any portion of any Option or Right to Purchase granted or offered under the Plan can no longer under any circumstances be exercised, or (b) any shares of Common Stock are reacquired by the Company pursuant to an Incentive Option Agreement, Nonqualified Option Agreement or Stock Purchase Agreement, the shares of Common Stock allocable to the unexercised portion of such Option or such Right to Purchase, or the shares so reacquired, shall again be available for grant or issuance under the Plan. 4.2 CHANGES IN CAPITAL STRUCTURE. In the event that the outstanding shares of Common Stock are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of a recapitalization, stock split, combination of shares, reclassification, stock dividend, or other change in the capital structure of the Company, then appropriate adjustments shall be made by the Administrator to the aggregate number and kind of shares subject to this Plan, and the number and kind of shares and the price per share subject to outstanding Option Agreements, Rights to Purchase and Stock Purchase Agreements in order to preserve, as nearly as practical, but not to increase, the benefits to Participants. D-4 5 ARTICLE 5. OPTIONS ------- 5.1 OPTION AGREEMENT. Each Option granted pursuant to this Plan shall be evidenced by an Option Agreement which shall specify the number of shares subject thereto, the Exercise Price per share, and whether the Option is an Incentive Option or Nonqualified Option. As soon as is practical following the grant of an Option, an Option Agreement shall be duly executed and delivered by or on behalf of the Company to the Optionee to whom such Option was granted. Each Option Agreement shall be in such form and contain such additional terms and conditions, not inconsistent with the provisions of this Plan, as the Administrator shall, from time to time, deem desirable, including, without limitation, the imposition of any rights of first refusal and resale obligations upon any shares of Common Stock acquired pursuant to an Option Agreement. Each Option Agreement may be different from each other Option Agreement. 5.2 EXERCISE PRICE. The Exercise Price per share of Common Stock covered by each Option shall be determined by the Administrator, subject to the following: (a) the Exercise Price of an Incentive Option shall not be less than 100% of Fair Market Value on the date the Incentive Option is granted, (b) the Exercise Price of a Nonqualified Option shall not be less than 85% of Fair Market Value on the date the Nonqualified Option is granted, and (c) if the person to whom an Incentive Option is granted is a 10% Shareholder on the date of grant, the Exercise Price shall not be less than 110% of Fair Market Value on the date the Option is granted. 5.3 PAYMENT OF EXERCISE PRICE. Payment of the Exercise Price shall be made upon exercise of an Option and may be made, in the discretion of the Administrator, subject to any legal restrictions, by: (a) cash; (b) check; (c) the surrender of shares of Common Stock owned by the Optionee that have been held by the Optionee for at least six (6) months, which surrendered shares shall be valued at Fair Market Value as of the date of such exercise; (d) the Optionee's promissory note in a form and on terms acceptable to the Administrator; (e) the cancellation of indebtedness of the Company to the Optionee; (f) the waiver of compensation due or accrued to the Optionee for services rendered; (g) provided that a public market for the Common Stock exists, a "same day sale" commitment from the Optionee and an NASD Dealer whereby the Optionee irrevocably elects to exercise the Option and to sell a portion of the shares so purchased to pay for the Exercise Price and whereby the NASD Dealer irrevocably commits upon receipt of such shares to forward the Exercise Price directly to the Company; (h) provided that a public market for the Common Stock exists, a "margin" commitment from the Optionee and an NASD Dealer whereby the Optionee irrevocably elects to exercise the Option and to pledge the shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such shares to forward the Exercise Price directly to the Company; or (i) any combination of the foregoing methods of payment or any other consideration or method of payment as shall be permitted by applicable corporate law. 5.4 TERM AND TERMINATION OF OPTIONS. The term and provisions for termination of each Option shall be as fixed by the Administrator, but no Option may be exercisable more than five (5) years after the date it is granted. D-5 6 5.5 VESTING AND EXERCISE OF OPTIONS. Each Option shall vest and become exercisable in one or more installments at such time or times and subject to such conditions, including without limitation the achievement of specified performance goals or objectives, as shall be determined by the Administrator. 5.6 ANNUAL LIMIT ON INCENTIVE OPTIONS. To the extent required for "incentive stock option" treatment under Section 422 of the Code, the aggregate Fair Market Value (determined as of the time of grant) of the Common Stock shall not, with respect to which Incentive Options granted under this Plan and any other plan of the Company or any Affiliated Company become exercisable for the first time by an Optionee during any calendar year, exceed $100,000. 5.7 NONTRANSFERABILITY OF OPTIONS. No Option shall be assignable or transferable except by will or the laws of descent and distribution, and during the life of the Optionee shall be exercisable only by such Optionee; provided, however, that, in the discretion of the Administrator, any Option may be assigned or transferred in any manner which an "incentive stock option" is permitted to be assigned or transferred under the Code. 5.8 RIGHTS AS SHAREHOLDER. An Optionee or permitted transferee of an Option shall have no rights or privileges as a shareholder with respect to any shares covered by an Option until such Option has been duly exercised and certificates representing shares purchased upon such exercise have been issued to such person. ARTICLE 6. RIGHTS TO PURCHASE ------------------ 6.1 NATURE OF RIGHT TO PURCHASE. A Right to Purchase granted to an Offeree entitles the Offeree to purchase, for a Purchase Price determined by the Administrator, shares of Common Stock subject to such terms, restrictions and conditions as the Administrator may determine at the time of grant ("Restricted Stock"). Such conditions may include, but are not limited to, continued employment or the achievement of specified performance goals or objectives. 6.2 ACCEPTANCE OF RIGHT TO PURCHASE. An Offeree shall have no rights with respect to the Restricted Stock subject to a Right to Purchase unless the Offeree shall have accepted the Right to Purchase within ten (10) days (or such longer or shorter period as the Administrator may specify) following the grant of the Right to Purchase by making payment of the full Purchase Price to the Company in the manner set forth in Section 6.3 hereof and by executing and delivering to the Company a Stock Purchase Agreement. Each Stock Purchase Agreement shall be in such form, and shall set forth the Purchase Price and such other terms, conditions and restrictions of the Restricted Stock, not inconsistent with the provisions of this Plan, as the Administrator shall, from time to time, deem desirable. Each Stock Purchase Agreement may be different from each other Stock Purchase Agreement. 6.3 PAYMENT OF PURCHASE PRICE. Subject to any legal restrictions, payment of the Purchase Price upon acceptance of a Right to Purchase Restricted Stock may be made, in the discretion of the Administrator, by: (a) cash; (b) check; (c) the surrender of shares of Common D-6 7 Stock owned by the Offeree that have been held by the Offeree for at least six (6) months, which surrendered shares shall be valued at Fair Market Value as of the date of such exercise; (d) the Offeree's promissory note in a form and on terms acceptable to the Administrator; (e) the cancellation of indebtedness of the Company to the Offeree; (f) the waiver of compensation due or accrued to the Offeree for services rendered; or (g) any combination of the foregoing methods of payment or any other consideration or method of payment as shall be permitted by applicable corporate law. 6.4 RIGHTS AS A SHAREHOLDER. Upon complying with the provisions of Section 6.2 hereof, an Offeree shall have the rights of a shareholder with respect to the Restricted Stock purchased pursuant to the Right to Purchase, including voting and dividend rights, subject to the terms, restrictions and conditions as are set forth in the Stock Purchase Agreement. Unless the Administrator shall determine otherwise, certificates evidencing shares of Restricted Stock shall remain in the possession of the Company until such shares have vested in accordance with the terms of the Stock Purchase Agreement. 6.5 RESTRICTIONS. Shares of Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of except as specifically provided in the Stock Purchase Agreement. In the event of termination of a Participant's employment, service as a director of the Company or Service Provider status for any reason whatsoever (including death or disability), the Stock Purchase Agreement may provide, in the discretion of the Administrator, that the Company shall have the right, exercisable at the discretion of the Administrator, to repurchase (i) at the original Purchase Price, any shares of Restricted Stock which have not vested as of the date of termination, and (ii) at Fair Market Value, any shares of Restricted Stock which have vested as of such date, on such terms as may be provided in the Stock Purchase Agreement. 6.6 VESTING OF RESTRICTED STOCK. The Stock Purchase Agreement shall specify the date or dates, the performance goals or objectives which must be achieved, and any other conditions on which the Restricted Stock may vest. 6.7 DIVIDENDS. If payment for shares of Restricted Stock is made by promissory note, any cash dividends paid with respect to the Restricted Stock may be applied, in the discretion of the Administrator, to repayment of such note. 6.8 NONASSIGNABILITY OF RIGHTS. No Right to Purchase shall be assignable or transferable except by will or the laws of descent and distribution or as otherwise provided by the Administrator. ARTICLE 7. ADMINISTRATION OF THE PLAN -------------------------- 7.1 ADMINISTRATOR. Authority to control and manage the operation and administration of the Plan shall be vested in the Board, which may delegate such responsibilities in whole or in part to a committee consisting of two (2) or more members of the Board (the "Committee"). Members of the Committee may be appointed from time to time by, and shall serve at the pleasure of, the Board. As used herein, the term "Administrator" means the Board or, with respect to any matter as to which D-7 8 responsibility has been delegated to the Committee, the term Administrator shall mean the Committee. 7.2 POWERS OF THE ADMINISTRATOR. In addition to any other powers or authority conferred upon the Administrator elsewhere in the Plan or by law, the Administrator shall have full power and authority: (a) to determine the persons to whom, and the time or times at which, Incentive Options or Nonqualified Options shall be granted and Rights to Purchase shall be offered, the number of shares to be represented by each Option and Right to Purchase and the consideration to be received by the Company upon the exercise thereof; (b) to interpret the Plan; (c) to create, amend or rescind rules and regulations relating to the Plan; (d) to determine the terms, conditions and restrictions contained in, and the form of, Option Agreements and Stock Purchase Agreements; (e) to determine the identity or capacity of any persons who may be entitled to exercise a Participant's rights under any Option or Right to Purchase under the Plan; (f) to correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any Option Agreement or Stock Purchase Agreement; (g) to accelerate the vesting of any Option or release or waive any repurchase rights of the Company with respect to Restricted Stock; (h) to extend the exercise date of any Option or acceptance date of any Right to Purchase; (i) to provide for rights of first refusal and/or repurchase rights; (j) to amend outstanding Option Agreements and Stock Purchase Agreements to provide for, among other things, any change or modification which the Administrator could have provided for upon the grant of an Option or Right to Purchase or in furtherance of the powers provided for herein; and (k) to make all other determinations necessary or advisable for the administration of the Plan, but only to the extent not contrary to the express provisions of the Plan. Any action, decision, interpretation or determination made in good faith by the Administrator in the exercise of its authority conferred upon it under the Plan shall be final and binding on the Company and all Participants. 7.3 LIMITATION ON LIABILITY. No employee of the Company or member of the Board or Committee shall be subject to any liability with respect to duties under the Plan unless the person acts fraudulently or in bad faith. To the extent permitted by law, the Company shall indemnify each member of the Board or Committee, and any employee of the Company with duties under the Plan, who was or is a party, or is threatened to be made a party, to any threatened, pending or completed proceeding, whether civil, criminal, administrative or investigative, by reason of such person's conduct in the performance of duties under the Plan. ARTICLE 8. CHANGE IN CONTROL ----------------- 8.1 CHANGE IN CONTROL. In order to preserve a Participant's rights in the event of a Change in Control of the Company, (i) the time period relating to the exercise or realization of all outstanding Options, Rights to Purchase and Restricted Stock shall automatically accelerate immediately prior to the consummation of such Change in Control, and (ii) with respect to Options and Rights to Purchase, the Administrator in its discretion may, at any time an Option or Right to Purchase is granted, or at any time thereafter, take one or more of the following actions: (A) provide for the purchase or exchange of each Option or Right to Purchase for an amount of cash or other property having a value equal to the difference, or spread, between (x) the value of the cash or other D-8 9 property that the Participant would have received pursuant to such Change in Control transaction in exchange for the shares issuable upon exercise of the Option or Right to Purchase had the Option or Right to Purchase been exercised immediately prior to such Change in Control transaction and (y) the Exercise Price of such Option or the Purchase Price under such Right to Purchase, (B) adjust the terms of the Options and Rights to Purchase in a manner determined by the Administrator to reflect the Change in Control, (C) cause the Options and Rights to Purchase to be assumed, or new rights substituted therefor, by another entity, through the continuance of the Plan and the assumption of outstanding Options and Rights to Purchase, or the substitution for such Options and Rights to Purchase of new options and new rights to purchase of comparable value covering shares of a successor corporation, with appropriate adjustments as to the number and kind of shares and Exercise Prices, in which event the Plan and such Options and Rights to Purchase, or the new options and rights to purchase substituted therefor, shall continue in the manner and under the terms so provided, or (D) make such other provision as the Administrator may consider equitable. If the Administrator does not take any of the forgoing actions, all Options and Rights to Purchase shall terminate upon the consummation of the Change in Control and the Administrator shall cause written notice of the proposed transaction to be given to all Participants not less than fifteen (15) days prior to the anticipated effective date of the proposed transaction. ARTICLE 9. AMENDMENT AND TERMINATION OF THE PLAN ------------------------------------- 9.1 AMENDMENTS. The Board may from time to time alter, amend, suspend or terminate the Plan in such respects as the Board may deem advisable. No such alteration, amendment, suspension or termination shall be made which shall substantially affect or impair the rights of any Participant under an outstanding Option Agreement or Stock Purchase Agreement without such Participant's consent. The Board may alter or amend the Plan to comply with requirements under the Code relating to Incentive Options or other types of options which give Optionees more favorable tax treatment than that applicable to Options granted under this Plan as of the date of its adoption. Upon any such alteration or amendment, any outstanding Option granted hereunder may, if the Administrator so determines and if permitted by applicable law, be subject to the more favorable tax treatment afforded to an Optionee pursuant to such terms and conditions. 9.2 PLAN TERMINATION. Unless the Plan shall theretofore have been terminated, the Plan shall terminate on the tenth (10th) anniversary of the Effective Date and no Options or Rights to Purchase may be granted under the Plan thereafter, but Option Agreements, Stock Purchase Agreements and Rights to Purchase then outstanding shall continue in effect in accordance with their respective terms. ARTICLE 10. TAX WITHHOLDING --------------- 10.1 WITHHOLDING. The Company shall have the power to withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy any applicable Federal, state, and local tax withholding requirements with respect to any Options exercised or Restricted Stock issued under the Plan. To the extent permissible under applicable tax, securities and other laws, the D-9 10 Administrator may, in its sole discretion and upon such terms and conditions as it may deem appropriate, permit a Participant to satisfy his or her obligation to pay any such tax, in whole or in part, up to an amount determined on the basis of the highest marginal tax rate applicable to such Participant, by (a) directing the Company to apply shares of Common Stock to which the Participant is entitled as a result of the exercise of an Option or as a result of the purchase of or lapse of restrictions on Restricted Stock or (b) delivering to the Company shares of Common Stock owned by the Participant. The shares of Common Stock so applied or delivered in satisfaction of the Participant's tax withholding obligation shall be valued at their Fair Market Value as of the date of measurement of the amount of income subject to withholding. ARTICLE 11. MISCELLANEOUS ------------- 11.1 BENEFITS NOT ALIENABLE. Other than as provided above, benefits under the Plan may not be assigned or alienated, whether voluntarily or involuntarily. Any unauthorized attempt at assignment, transfer, pledge or other disposition shall be without effect. 11.2 NO ENLARGEMENT OF EMPLOYEE RIGHTS. This Plan is strictly a voluntary undertaking on the part of the Company and shall not be deemed to constitute a contract between the Company and any Participant to be consideration for, or an inducement to, or a condition of, the employment of any Participant. Nothing contained in the Plan shall be deemed to give the right to any Participant to be retained as an employee of the Company or any Affiliated Company or to limit the right of the Company or any Affiliated Company to discharge any Participant at any time. 11.3 APPLICATION OF FUNDS. The proceeds received by the Company from the sale of Common Stock pursuant to Option Agreements and Stock Purchase Agreements, except as otherwise provided herein, will be used for general corporate purposes. D-10 EX-10.8 3 FORM OF OPTION AGREEMENT 1 EXHIBIT 10.8 GISH BIOMEDICAL, INC. STOCK OPTION AGREEMENT ---------------------- TYPE OF OPTION (CHECK ONE): [ ] INCENTIVE [ ] NONQUALIFIED This Stock Option Agreement (the "Agreement") is entered into as of ___________ , 19__, by and between Gish Biomedical, Inc., a California corporation (the "Company"), and ______________________________________________ (the "Optionee") pursuant to the Company's 1997 Stock Incentive Plan (the "Plan"). 1. GRANT OF OPTION. The Company hereby grants to Optionee an option (the "Option") to purchase all or any portion of a total of ______________________ ( ) shares (the "Shares") of the Common Stock of the Company at a purchase price of _________________________________________ ($___________) per share (the "Exercise Price"), subject to the terms and conditions set forth herein and the provisions of the Plan. If the box marked "Incentive" above is checked, then this Option is intended to qualify as an "incentive stock option" as defined in Section 422 of the Internal Revenue Code of l986, as amended (the "Code"). If this Option fails in whole or in part to qualify as an incentive stock option, or if the box marked "Nonqualified" is checked, then this Option shall to that extent constitute a nonqualified stock option. 2. VESTING OF OPTION. The right to exercise this Option shall vest in installments, and this Option shall be exercisable from time to time in whole or in part as to any vested installment, as follows: This Option shall be On or After: Exercisable as to: ------------ -------------------- (i) ___________________, 19___: _______________ shares (ii) ___________________, 19___: an additional _______________ shares (iii) ___________________, 19___: an additional _______________ shares (iv) ___________________, 19___: an additional _______________ shares No additional shares shall vest after the date of termination of Optionee's "Continuous Service" (as defined in Section 3 below), but this Option shall continue to be exercisable in accordance with Section 3 hereof with respect to that number of shares that have vested as of the date of termination of Optionee's Continuous Service. 3. TERM OF OPTION. Optionee's right to exercise this Option shall terminate upon the first to occur of the following: (a) the expiration of ____ (___) years from the date of this Agreement; (b) the expiration of three (3) months from the date of termination of Optionee's 2 Continuous Service if such termination occurs for any reason other than permanent disability, death or voluntary resignation; provided, however, that if Optionee dies during such three-month period the provisions of Section 3(e) below shall apply; (c) the expiration of one (1) month from the date of termination of Optionee's Continuous Service if such termination occurs due to voluntary resignation; provided, however, that if Optionee dies during such one-month period the provisions of Section 3(e) below shall apply; (d) the expiration of one (1) year from the date of termination of Optionee's Continuous Service if such termination is due to permanent disability of the Optionee (as defined in Section 22(e)(3) of the Code); (e) the expiration of one (1) year from the date of termination of Optionee's Continuous Service if such termination is due to Optionee's death or if death occurs during either the three-month or one-month period following termination of Optionee's Continuous Service pursuant to Section 3(b) or 3(c) above, as the case may be; or (f) upon the consummation of a "Change in Control" (as defined in Section 2.4 of the Plan), unless otherwise provided pursuant to Section 9 below. As used herein, the term "Continuous Service" means (i) employment by either the Company or any parent or subsidiary corporation of the Company, or by a corporation or a parent or subsidiary of a corporation issuing or assuming a stock option in a transaction to which Section 424(a) of the Code applies, which is uninterrupted except for vacations, illness (except for permanent disability, as defined in Section 22(e)(3) of the Code), or leaves of absence which are approved in writing by the Company or any of such other employer corporations, if applicable, (ii) service as a member of the Board of Directors of the Company until Optionee resigns, is removed from office, or Optionee's term of office expires and he or she is not reelected, or (iii) so long as Optionee is engaged as a consultant or service provider to the Company or other corporation referred to in clause (i) above. 4. EXERCISE OF OPTION. On or after the vesting of any portion of this Option in accordance with Sections 2 or 9 hereof, and until termination of the right to exercise this Option in accordance with Section 3 above, the portion of this Option which has vested may be exercised in whole or in part by the Optionee (or, after his or her death, by the person designated in Section 5 below) upon delivery of the following to the Company at its principal executive offices: (a) a written notice of exercise which identifies this Agreement and states the number of Shares then being purchased (but no fractional Shares may be purchased); (b) a check or cash in the amount of the Exercise Price (or payment of the Exercise Price in such other form of lawful consideration as the Administrator may approve from time to time under the provisions of Section 5.3 of the Plan); (c) a check or cash in the amount reasonably requested by the Company to satisfy the Company's withholding obligations under federal, state or other applicable tax laws with respect to the taxable income, if any, recognized by the Optionee in connection with the exercise of this Option (unless the Company and Optionee shall have made other arrangements for deductions or withholding from Optionee's wages, bonus or other compensation payable to Optionee, or by the withholding of Shares issuable upon exercise of this Option or the delivery of Shares owned by the Optionee in 2 3 accordance with Section 10.1 of the Plan, provided such arrangements satisfy the requirements of applicable tax laws); and (d) a letter, if requested by the Company, in such form and substance as the Company may require, setting forth the investment intent of the Optionee, or person designated in Section 5 below, as the case may be. 5. DEATH OF OPTIONEE; NO ASSIGNMENT. The rights of the Optionee under this Agreement may not be assigned or transferred except by will or by the laws of descent and distribution, and may be exercised during the lifetime of the Optionee only by such Optionee. Any attempt to sell, pledge, assign, hypothecate, transfer or dispose of this Option in contravention of this Agreement or the Plan shall be void and shall have no effect. If the Optionee's Continuous Service terminates as a result of his or her death, and provided Optionee's rights hereunder shall have vested pursuant to Section 2 hereof, Optionee's legal representative, his or her legatee, or the person who acquired the right to exercise this Option by reason of the death of the Optionee (individually, a "Successor") shall succeed to the Optionee's rights and obligations under this Agreement. After the death of the Optionee, only a Successor may exercise this Option. 6. REPRESENTATIONS AND WARRANTIES OF OPTIONEE. (a) Optionee represents and warrants that this Option is being acquired by Optionee for Optionee's personal account, for investment purposes only, and not with a view to the distribution, resale or other disposition thereof. (b) Optionee acknowledges that the Company may issue Shares upon the exercise of the Option without registering such Shares under the Securities Act of l933, as amended (the "Securities Act"), on the basis of certain exemptions from such registration requirement. Accordingly, Optionee agrees that his or her exercise of the Option may be expressly conditioned upon his or her delivery to the Company of an investment certificate including such representations and undertakings as the Company may reasonably require in order to assure the availability of such exemptions, including a representation that Optionee is acquiring the Shares for investment and not with a present intention of selling or otherwise disposing thereof and an agreement by Optionee that the certificates evidencing the Shares may bear a legend indicating such non-registration under the Securities Act and the resulting restrictions on transfer. Optionee acknowledges that, because Shares received upon exercise of an Option may be unregistered, Optionee may be required to hold the Shares indefinitely unless they are subsequently registered for resale under the Securities Act or an exemption from such registration is available. (c) Optionee acknowledges receipt of a copy of the Plan and understands that all rights and obligations connected with this Option are set forth in this Agreement and in the Plan. 7. RESTRICTIVE LEGENDS. Optionee hereby acknowledges that federal securities laws and the securities laws of the state in which Optionee resides may require the placement of certain restrictive legends upon the Shares issued upon exercise of this Option, and Optionee hereby consents to the placing of any such legends upon certificates evidencing the Shares as the Company, or its counsel, may deem necessary or advisable. 8. ADJUSTMENTS UPON CHANGES IN CAPITAL STRUCTURE. In the event that the outstanding shares of Common Stock of the Company are hereafter increased or decreased or changed into or 3 4 exchanged for a different number or kind of shares or other securities of the Company by reason of a recapitalization, stock split, combination of shares, reclassification, stock dividend or other change in the capital structure of the Company, then appropriate adjustment shall be made by the Administrator to the number of Shares subject to the unexercised portion of this Option and to the Exercise Price per share, in order to preserve, as nearly as practical, but not to increase, the benefits of the Optionee under this Option, in accordance with the provisions of Section 4.2 of the Plan. 9. CHANGE IN CONTROL. In the event of a Change in Control (as defined in Section 2.4 of the Plan) of the Company, (i) the vesting of this Option pursuant to Section 2 above shall automatically accelerate immediately prior to the consummation of such Change in Control, and (ii) the Administrator in its discretion may take one or more of the following actions: (A) provide for the purchase or exchange of this Option for an amount of cash or other property having a value equal to the difference, or spread, between (x) the value of the cash or other property that the Optionee would have received pursuant to such Change in Control transaction in exchange for the shares issuable upon exercise of this Option had this Option been exercised immediately prior to such Change in Control transaction and (y) the Exercise Price, (B) adjust the terms of this Option in a manner determined by the Administrator to reflect the Change in Control, (C) cause this Option to be assumed, or new rights substituted therefor, by another entity, through the continuance of the Plan and the assumption of this Option, or the substitution for this Option of a new option of comparable value covering shares of a successor corporation, with appropriate adjustments as to the number and kind of shares and Exercise Price, in which event the Plan and this Option, or the new option substituted therefor, shall continue in the manner and under the terms so provided, or (D) make such other provision as the Administrator may consider equitable. If the Administrator does not take any of the forgoing actions, this Option shall terminate upon the consummation of the Change in Control and the Administrator shall cause written notice of the proposed transaction to be given to the Optionee not less than fifteen (15) days prior to the anticipated effective date of the proposed transaction. 10. NO EMPLOYMENT CONTRACT CREATED. Neither the granting of this Option nor the exercise hereof shall be construed as granting to the Optionee any right with respect to continuance of employment by the Company or any of its subsidiaries. The right of the Company or any of its subsidiaries to terminate at will the Optionee's employment at any time (whether by dismissal, discharge or otherwise), with or without cause, is specifically reserved. 11. RIGHTS AS SHAREHOLDER. The Optionee (or transferee of this option by will or by the laws of descent and distribution) shall have no rights as a shareholder with respect to any Shares covered by this Option until the date of the issuance of a stock certificate or certificates to him or her for such Shares, notwithstanding the exercise of this Option. 12. "MARKET STAND-OFF" AGREEMENT. Optionee agrees that, if requested by the Company or the managing underwriter of any proposed public offering of the Company's securities, Optionee will not sell or otherwise transfer or dispose of any Shares held by Optionee without the prior written consent of the Company or such underwriter, as the case may be, during such period of time, not to exceed 180 days following the effective date of the registration statement filed by the Company with respect to such offering, as the Company or the underwriter may specify. 13. INTERPRETATION. This Option is granted pursuant to the terms of the Plan, and shall in all respects be interpreted in accordance therewith. The Administrator shall interpret and construe this Option and the Plan, and any action, decision, interpretation or determination made in good faith by the Administrator shall be final and binding on the Company and the Optionee. As used in this Agreement, 4 5 the term "Administrator" shall refer to the committee of the Board of Directors of the Company appointed to administer the Plan, and if no such committee has been appointed, the term Administrator shall mean the Board of Directors. 14. NOTICES. Any notice, demand or request required or permitted to be given under this Agreement shall be in writing and shall be deemed given when delivered personally or three (3) days after being deposited in the United States mail, as certified or registered mail, with postage prepaid, and addressed, if to the Company, at its principal place of business, Attention: the Chief Financial Officer, and if to the Optionee, at his or her most recent address as shown in the employment or stock records of the Company. 15. ANNUAL AND OTHER PERIODIC REPORTS. During the term of this Agreement, the Company will furnish to the Optionee copies of all annual and other periodic financial and informational reports that the Company distributes generally to its shareholders. 16. GOVERNING LAW. The validity, construction, interpretation, and effect of this Option shall be governed by and determined in accordance with the laws of the State of California. 17. SEVERABILITY. Should any provision or portion of this Agreement be held to be unenforceable or invalid for any reason, the remaining provisions and portions of this Agreement shall be unaffected by such holding. 18. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall be deemed one instrument. 19. SECURITIES LAW COMPLIANCE. The sale of the Shares that are the subject of this Agreement has not been qualified with the administrator of the securities laws of any state and the issuance of such Shares or the payment or receipt of any part of the consideration therefor prior to such qualification may be unlawful, unless the sale of such Shares is exempt from such qualification. The rights of all parties to this Agreement are expressly conditioned upon such qualification being obtained, unless the sale is so exempt. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. GISH BIOMEDICAL, INC. "OPTIONEE" By: ---------------------------- -------------------------------- (Signature) Name: ---------------------------- Title: ---------------------------- -------------------------------- (Type or print name) 5 EX-21.1 4 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21.1 21.1 SUBSIDIARIES OF THE COMPANY Gish International, Inc., a wholly owned foreign sales corporation which is incorporated in Barbados. EX-23 5 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 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 September 15, 1998, 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, 1998. /s/ ERNST & YOUNG LLP Orange County, California September 24, 1998 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 YEAR JUN-30-1998 JUL-01-1997 JUN-30-1998 3,497,100 581,700 3,588,800 0 7,609,900 16,209,100 9,176,400 6,089,800 19,445,100 1,778,100 0 0 0 10,113,800 (53,800) 19,445,100 20,283,400 20,283,400 14,758,700 14,758,700 7,767,900 0 0 (1,989,600) 32,400 (2,022,000) 0 0 0 (2,022,000) (.059) (.059)
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