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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended June 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-10728
GISH BIOMEDICAL, INC.
(Exact name of registrant as specified in its charter)
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CALIFORNIA 95-3046028
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(State or other jurisdiction of incorporation or organization) (IRS Employer
Identification No.)
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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
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GISH BIOMEDICAL, INC.
INDEX
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Part I: Page
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Item 1. Business 3
Item 2. Properties 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
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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.
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In addition to the cardiotomy reservoirs' use in the operating room, Gish has
developed several systems which allow the cardiotomy reservoir to be used as a
pleural drainage or autotransfusion system during recovery.
Cardiotomy sales were approximately $1,752,600, $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.
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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.
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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.
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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.
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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
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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:
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8% 15% 12% Specialized Medical Systems
2% 7% 7% CardioVascular Concepts
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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
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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
<PAGE> 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
<PAGE> 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
<PAGE> 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.
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<PAGE> 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.
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997
----------------------- -----------------------
QUARTER ENDED HIGH LOW HIGH LOW
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
The Company has not previously paid any dividends on its Common Stock and does
not anticipate that it will do so in the foreseeable future. As of September 21,
1998, there were approximately 500 holders of record of the Company's Common
Stock.
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<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year ended June 30,
In thousands, except per share data 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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%
</TABLE>
15
<PAGE> 16
SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
In thousands, except per share data Fiscal 1998 JUNE 30, 1998 Mar. 31, 1998 Dec. 31, 1997 Sept. 30, 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
In thousands, except per share data Fiscal 1997 June 30,1997 Mar. 31, 1997 Dec. 31, 1996 Sept. 30, 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 5,341 $ 5,133 $ 5,341 $ 5,313
Gross profit 1,812 1,450 1,683 1,800
Goodwill impairment 1,824 -- -- --
Income (loss) before income taxes (1,984) (255) (14) 101
Net income (loss) (1,825) (156) (8) 62
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) per share (.54) (.05) -- .02
Average common 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
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 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.
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<PAGE> 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.
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<PAGE> 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
<PAGE> 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
<PAGE> 21
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of June 30 1998 1997
- ------------- ------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
See accompanying notes
21
<PAGE> 22
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended June 30 1998 1997 1996
- ------------------ ------------ ------------ ------------
<S> <C> <C> <C>
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
</TABLE>
See accompanying notes
22
<PAGE> 23
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
----------------------------
Number of Note Retained
Shares Amount Receivable Earnings Total
------------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 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
============ =========== ======== =========== ===========
</TABLE>
See accompanying notes
23
<PAGE> 24
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30 1998 1997 1996
- ------------------ ----------- ----------- -----------
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
See accompanying notes
24
<PAGE> 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.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1998 JUNE 30, 1997
---------- ------------- -------------
<S> <C> <C>
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
========== ==========
</TABLE>
PROPERTY AND EQUIPMENT
Depreciation and amortization are provided on the straight-line
method over the following estimated useful lives:
Leasehold improvements Term of lease
Machinery and equipment 5 years
Molds, dies and tooling 5 years
Office furniture and equipment 4 - 8 years
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
<PAGE> 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.
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
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
=========== ============ ===========
</TABLE>
26
<PAGE> 27
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Changes in operating assets and liabilities 1998 1997 1996
--------- ---------- -----------
<S> <C> <C> <C>
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)
========= ========= ===========
</TABLE>
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
<PAGE> 28
3. ANALYSIS OF RESERVE ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS
BEGINNING OF CHARGED TO BALANCE AT
YEAR EXPENSE DEDUCTIONS END OF YEAR
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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 $ -- $ -- $ -- $ --
-------- -------- -------- ----------
</TABLE>
4. BENEFIT PLAN
The Company has a Salary Reduction Profit Sharing Plan, ("the Plan"),
established under Section 401(k) of the Internal Revenue Code, in
which all employees are eligible to participate. The Company matches
up to $250 of annual contributions by each qualifying employee. Total
Company contributions to the Plan were $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.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
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
========= ========= =========
</TABLE>
The provision for taxes based on income differs from the amount
computed by applying the statutory federal income tax rate as
follows:
28
<PAGE> 29
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30 1998 1997 1996
--------- --------- --------
<S> <C> <C> <C>
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
========= ========= ========
</TABLE>
Deferred income taxes reflect the tax effects of temporary
differences between the value of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's net deferred tax assets and
liabilities as of June 30, 1998 and 1997 are:
<TABLE>
<CAPTION>
DEFERRED TAX ASSETS 1998 1997
----------- ---------
<S> <C> <C>
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
=========== =========
</TABLE>
<TABLE>
<CAPTION>
DEFERRED TAX LIABILITIES 1998 1997
----------- ---------
<S> <C> <C>
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
=========== =========
</TABLE>
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
<PAGE> 30
The Company derived the following percentages of its net sales from
its significant distributors:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
8% 15% 12% Specialized Medical Systems
2% 7% 7% CardioVascular Concepts, Inc.
</TABLE>
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:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
-------- --------------
<S> <C> <C>
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
======== ========
</TABLE>
30
<PAGE> 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:
<TABLE>
<CAPTION>
Weighted-Average
Options Exercise Price Weighted-Average Remaining Options Weighted-Average
Outstanding Range Exercise Price Contractual Life Exercisable Exercise Price
----------- ----- -------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
Pro forma net income (loss) $(2,476,900) $(1,988,500) $ 269,000
Pro forma diluted earnings
(loss) per share $ (.72) $ (.59) $ .08
</TABLE>
9. OPERATING LEASES
31
<PAGE> 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
<PAGE> 33
as if were an operating segment.
<TABLE>
<CAPTION>
Infusion pump operations June 30, 1998 June 30, 1997 June 30, 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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)
=========== =========== ===========
</TABLE>
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
<PAGE> 34
A summary of fourth quarter adjustments follows:
<TABLE>
<S> <C>
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
==========
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Inapplicable.
34
<PAGE> 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:
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1 Restated Articles of Incorporation as filed with
the California Secretary of State on November 9,
1981, incorporated herein by this reference to
Exhibit 2(a) to the Company's Registration
Statement on Form S-18, No. 2-73602LA (the "S-18
Registration Statement").
3.2 Certificate of Amendment of Articles of
Incorporation as filed with the California
Secretary of State on May 19, 1982, incorporated
herein by this reference to Exhibit 2(b) to the
S-18 Registration Statement.
3.3 Certificate of Amendment of Articles of
Incorporation as filed with the California
Secretary of State on December 19, 1988,
incorporated herein by this reference to Exhibit
3.3 to the Company's Report on Form 10-K for the
year ended June 30, 1990.
3.4 Certificate of Amendment of Articles of
Incorporation as filed with the California
Secretary of State on June 13, 1990 incorporated
herein by this reference to Exhibit 3.4 to the
Company's Report on Form 10-K for the year ended
June 30, 1990.
</TABLE>
35
<PAGE> 36
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
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
</TABLE>
36
<PAGE> 37
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
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
</TABLE>
(B) Reports on Form 8-K
None.
- -------------
*Management contract or compensatory plan or arrangement.
37
<PAGE> 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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
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
</TABLE>
38
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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.
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<PAGE> 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
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<PAGE> 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
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<PAGE> 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
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<PAGE> 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
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<PAGE> 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.
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<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 1
EXHIBIT 21.1
21.1 SUBSIDIARIES OF THE COMPANY
Gish International, Inc., a wholly owned foreign sales corporation
which is incorporated in Barbados.
<PAGE> 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
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 3,497,100
<SECURITIES> 581,700
<RECEIVABLES> 3,588,800
<ALLOWANCES> 0
<INVENTORY> 7,609,900
<CURRENT-ASSETS> 16,209,100
<PP&E> 9,176,400
<DEPRECIATION> 6,089,800
<TOTAL-ASSETS> 19,445,100
<CURRENT-LIABILITIES> 1,778,100
<BONDS> 0
0
0
<COMMON> 10,113,800
<OTHER-SE> (53,800)
<TOTAL-LIABILITY-AND-EQUITY> 19,445,100
<SALES> 20,283,400
<TOTAL-REVENUES> 20,283,400
<CGS> 14,758,700
<TOTAL-COSTS> 14,758,700
<OTHER-EXPENSES> 7,767,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,989,600)
<INCOME-TAX> 32,400
<INCOME-CONTINUING> (2,022,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,022,000)
<EPS-PRIMARY> (.059)
<EPS-DILUTED> (.059)
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