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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995 COMMISSION FILE NO. 0-10581
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TRIMEDYNE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 36-3094439
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
2801 BARRANCA ROAD, P.O. BOX 57001 92619-7001
IRVINE, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(714) 559-5300
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE PER SHARE
(TITLE OF CLASS)
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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 THE
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
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THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES OF
REGISTRANT ON DECEMBER 13, 1995, BASED UPON THE CLOSING PRICE OF THE COMMON
STOCK ON SUCH DATE WAS $23,935,000.
AS OF DECEMBER 13, 1995, THERE WERE OUTSTANDING 9,573,910 SHARES OF
REGISTRANT'S COMMON STOCK.
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.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Cold Laser Use in Orthopedics and Other Surgical Applications. . . . . . . . . . 1
Lateral Firing Laser Devices . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Agreement with Bard, FDA Status and Pending Lawsuits . . . . . . . . . . . . . . 3
Thermal Laser Use in Blood Vessels and Surgery . . . . . . . . . . . . . . . . . 4
Cold Laser Use in the Cardiovascular Field . . . . . . . . . . . . . . . . . . . 4
License Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Plastic Optical Fibers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Research and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Manufacturing, Supply Agreements . . . . . . . . . . . . . . . . . . . . . . . . 6
Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Government Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Patents and Patent Applications . . . . . . . . . . . . . . . . . . . . . . . . 8
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Industry Segment Information . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Foreign Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ITEM 3. LITIGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . 12
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS . . . . . . 13
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED RESULTS OF
OPERATIONS AND CONSOLIDATED FINANCIAL CONDITION . . . . . . . . . . . . . . . . 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. . . . . . . . . . . . . . . . . . . 16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . 16
ITEM 10. IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS . . . . . . . . . . . . . . . 16
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . 16
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . 16
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K . . . . . . . . 17
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
Trimedyne, Inc. (the "Company") is engaged in the development,
manufacturing and marketing of Nd:YAG "thermal" lasers, Holmium "cold" lasers
and proprietary, disposable fiber-optic laser delivery devices for use in
urology, orthopedics and other medical specialties.
The Company's principal efforts from its inception in 1980 until 1991
were devoted to the manufacturing and marketing of lasers for vaporizing plaque
(fatty deposits) in blood vessels. As a result of significant declines in
sales of its cardiovascular laser products, in 1991 the Company expanded its
laser and proprietary delivery system technologies into selected "less
invasive" surgical applications in urology, orthopedics and other medical
specialties, where the Company believes its laser products have significant
advantages over conventional surgical devices.
As a result of lower sales in urology, net revenue of the Company in
fiscal 1995 decreased 3% to $13,041,000 from $13,393,000 for the prior year.
The Company incurred a net loss of $5,290,000 or $0.56 per share during fiscal
1995, compared to a net loss of $2,265,000 or $0.25 per share in fiscal 1994.
The increased loss in fiscal 1995 was principally a result of lower total
revenues and lower margins on revenues from sales of orthopedic products,
compared to those in urology. On September 30, 1995, the Company provided
reserves to write down inventories, receivables, and incurred legal fees
related to urology products aggregating to $1,200,000. (See "Agreement with
Bard", "FDA Status and Pending Litigation" and "Litigation" herein.) The
Company's working capital as of September 30, 1995 was $10,082,000. (See
"Management's Discussion and Analysis of Results of Operations and
Consolidated Financial Condition" herein).
The Company is a Nevada corporation incorporated on May 1, 1980, which
adopted its present name on December 31, 1980. The Company's majority owned
(90%) subsidiary, Poly-Optical Products, Inc. ("Poly-Optical"), manufactures
plastic optical fibers for use in automotive, consumer, industrial and medical
products. The Company also has several other wholly-owned subsidiaries, which
are inactive, including TriCardio, Inc. ("TriCardio"). Unless the context
otherwise requires, all references to the Company shall be to Trimedyne, Inc.
and its subsidiaries. The Company's principal executive offices are located at
2801 Barranca Road, Irvine, California 92714, and its telephone number is (714)
559-5300.
COLD LASER USE IN ORTHOPEDICS AND OTHER SURGICAL APPLICATIONS
Cold lasers, which generate short pulses of laser energy, are able to
cut and vaporize tissue without significant thermal damage to surrounding
areas. Such lasers are expected to have advantages over "thermal" lasers in
certain surgical applications, particularly when used in tissues which are
irreparably damaged by heat or near heat sensitive blood vessels, nerves or
structures. In March 1991, the Company received United States Food and Drug
Administration ("FDA") clearance of its 510(k) Premarket Notification (see
"Government Regulation") to market its OmniPulseTM Holmium "cold" Laser and a
variety of disposable optical fiber delivery devices for use in orthopedic
surgery in soft tissues. Orthopedic tissues, such as cartilage in the joints,
do not regenerate (re-grow) if damaged by heat. The Holmium Laser, which
produces short pulses of laser energy at a wavelength of 2100 nanometers, can
cut or ablate such tissues with little or no damage. Also, tiny fiber optic
devices permit laser energy to be delivered into spaces in joints too small to
accommodate conventional surgical tools. An estimated 1,200,000 arthroscopic
surgeries are performed annually in the United States.
In December 1991, the Company received FDA clearance of its 510(k)
Premarket Notification to market its OmniPulsTM Holmium Laser for use in
herniated lumbar spinal disks to treat lower back pain. In a laser discectomy
procedure, a needle containing an optical fiber is inserted into the spinal
disk, either under x-ray guidance or through an endoscope, and the laser is
used to vaporize a portion of the nucleus of the disk, relieving the pressure
of the disk on the nerves of the spinal column. In June, 1993, the Company
received FDA clearance of its 510(k) Premarket Notification to market its
proprietary Sidefire_ Laser Needle for use with its Holmium laser in herniated
spinal disks. According to published studies, Holmium Laser use in discectomy
was successful in relieving the pain in up to 90% of the cases treated. While
more than 20 million people in the United States suffer from lower back pain,
the number of these whose back pain is sufficiently serious to warrant a laser
discectomy procedure cannot presently be ascertained.
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Sales of the Company's Holmium Lasers and delivery devices in
orthopedics increased 65% in fiscal 1995, compared to the prior year. The
Company believes that sales of its Holmium Lasers and delivery devices in
orthopedics will continue to increase in fiscal 1996 and thereafter, although
such cannot be assured.
In September 1991, the Company received FDA clearance of its 510(k)
Premarket Notification to market its OmniPulse(TM) Holmium Laser in general
surgery, including laparoscopic cholecystectomy procedures. In March 1994,
the Company received FDA clearance under a 510(k) Premarket Notification to
market this laser for use in urology and endoscopic sinus surgery, an ear, nose
and throat ("ENT") specialty. In July, 1995, the Company received FDA
clearance to market this laser under a 510(k) Premarket Notification for use in
gynecology and lithotripsy (to fragment stones in the urethra). The Company
plans to file similar applications with the FDA for the use of its Holmium
Laser in a variety of other surgical applications, including dermatology and
plastic surgery, where its ability to cut and vaporize tissue without thermal
damage to adjoining areas is expected to offer substantial advantages over
other lasers and conventional surgical tools.
LATERAL FIRING LASER DEVICES
In certain surgical applications, deep coagulation of tissues is
desired. Laser light, which penetrates tissue to a predictable depth based
upon the wavelength being used, offers the unique ability to create coagulation
zones in tissue of almost any desired depth or shape. The coagulated tissues
die, due to lack of blood flow, and are partially absorbed by the body. The
remainder is sloughed off by the body in a mucous-like effusion, resulting in a
shrinkage of the mass.
The Company's Neodymium:YAG ("Nd:YAG") Lasers, which produce
continuous wave "thermal" light energy at a wavelength of 1064 nanometers,
produce a greater depth of coagulation in tissue (approximately 4,000 microns
or 4mm) than any other wavelength of laser light. Heat conduction can
increase the coagulation zone in tissue up to approximately 1.4cm (0.55
inches). Deep coagulation is believed to be useful in a variety of surgical
applications in urology, gynecology, gastroenterology, general surgery,
oncology (cancer), and other medical specialties. However, it is frequently
difficult to vaporize or coagulate all of the target tissue with conventional,
straight-ahead firing optical fibers, which produce a long, narrow coagulation
zone.
In 1988, the Company acquired an exclusive, worldwide license to a
fiber optic device for deflecting laser energy 90 degrees to the side
("Lateralase(TM) Fiber"), consisting of a specially designed, reflectively
coated metal tip which is mounted on the end of an optical fiber. Used with an
Nd:YAG thermal laser, the Lateralase(TM) Fiber produces a sphere of coagulation
of up to 2.8 cm (1.1 inches) in diameter, depending on the level of energy
employed and time of lasing. In March 1992, the license was determined to be
non-exclusive. Two co-licensed U.S. Patents covering such devices have issued.
(See "License Agreements" and "Litigation" herein for details on past
litigation with respect to the License Agreement covering this device).
In January, 1990, the Lateralase(TM) Fiber was cleared for sale by the
U.S. Food and Drug Administration ("FDA") under a 510(k) Premarket Notification
for use in gynecology, and in June, 1991, the Lateralase(TM) Fiber was cleared
for sale by the FDA under a 510(k) Premarket Notification for ablation and
hemostasis (coagulation) of urologic tissues. In addition to the above
described patent license, the Company has an exclusive license to a U.S. Patent
which was issued in August 1995 and covers the method of use of side-firing
laser devices in urology, orthopedics, gynecology, gastroenterology, oncology
and other medical specialties.
On November 28, 1994, the Company received clearance from the FDA
under a 510(k) Premarket Notification to market a new, improved version of the
Lateralase(TM) Fiber, which has greater durability, and a new, more versatile
version of the Lateralase(TM) Fiber which has the ability to both coagulate and
ablate tissue.
The Company has also developed proprietary side firing optical fibers
which are small enough to be inserted into a needle (Sidefire(TM) Needle), which
can be inserted directly into tissue or used through an endoscope. In January
and April 1992, the Company received clearance from the FDA under 510(k)
Premarket Notifications to market its Sidefire(TM) Needles with its Holmium and
Nd:YAG Lasers in a variety of medical specialties.
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The Company is devoting significant efforts to developing improved
side-firing laser devices and believes these devices may have a significant
beneficial effect upon the Company's revenues in fiscal 1996 and thereafter,
although such cannot be assured (See "Agreement with Bard").
AGREEMENT WITH BARD, FDA STATUS AND PENDING LAWSUITS
In June 1991, the Company entered into a Development, Supply and
License Agreement with C.R. Bard, Inc. ("Bard"), under which Bard was granted
exclusive, worldwide rights to market the Company's side-firing laser devices,
certain other laser delivery devices and improvements thereto in urology,
gynecology and gastroenterology. Bard markets the Company's Lateralase(TM)
side-firing Fiber under its Urolase(R) Fiber trademark. Bard is the world
market leader in the sale of products in the urology field.
Under the Agreement, the Company invoices Bard for Urolase(R) Fibers
when shipped to Bard at an agreed-upon transfer price and, when these devices
are sold by Bard to a customer, the Company receives a portion of the sales
price (subject to certain volume adjustments and R&D allocations). Bard also
agreed to pay certain future patent preparation, filing and maintenance costs
and to share certain royalty and patent litigation costs with the Company.
Bard also agreed, at its expense, to conduct a prospective, randomized,
controlled clinical study of the Urolase(R) Fiber at a number of medical centers
in the United States in the treatment of benign prostatic hyperplasia ("BPH")
or enlarged prostate, a condition affecting an estimated 50% of all men over
age 55.
Bard's study was begun in 1991. In April 1992, Bard commenced a
limited marketing release of the Urolase(R) Fiber for urologic use in the
United States and commenced marketing these devices in Europe, the Far East and
a number of other countries in early 1993. Although cleared for sale by the
FDA for ablation and hemostasis (coagulation) of urologic tissues, in January
1993, the FDA announced that side-firing laser devices were investigational and
not cleared for use in the treatment of BPH. Bard thereupon ceased promoting
the Urolase(R)Fiber in the United States. In June 1993, the FDA announced that
a Pre-Market Approval ("PMA") Application (see "Government Regulation") and a
controlled, prospective clinical trial, with a one-year follow-up period, would
be required for approval to market a side-firing laser device for the treatment
of BPH.
In July 1993, the Company and Bard jointly filed a PMA Application to
market the Urolase(R) Fiber for the treatment of BPH. The results of the Bard
clinical trial, including one year follow-up data, were supplied to the FDA to
support the PMA Application. In November 1993, the Company announced that the
PMA Application was accepted by the FDA after a preliminary review and had been
granted Expedited (priority) Review Status. The Company and Bard responded to
questions from the FDA in January 1994 and filed the Manufacturing Section of
the PMA Application with the FDA in October 1994. At the Company's request, in
late 1994 Bard withdrew its name from the PMA Application. The Company engaged
an experienced regulatory consultant and two respected urologists to assist it,
and the Company responded to the FDA's remaining questions in August 1995.
In October 1995, the FDA changed its position and advised the Company
and other laser manufacturers that side-firing laser devices could be cleared
for sale for the treatment of BPH under the less stringent 510(k) Premarket
Notification process, with clinical study data. Therefore, in October 1995,
the Company withdrew its previously filed PMA Application and filed its 510(k)
Premarket Notification with the FDA, and amendments were subsequently made in
response to additional FDA questions.
There is no assurance the Company's 510(k) Premarket Notification
Application will be cleared by the FDA. While the Urolase(R) Fiber can be sold
for ablation and hemostasis (coagulation) of urologic tissues, in the absence
of an FDA cleared 510(k) Premarket Notification for the treatment of BPH,
physician acceptance of the product and third party reimbursement therefor will
not be assured, which may limit the device's marketability. If the Company's
510(k) Notification is not cleared, the Company may be faced with the cost and
time required to conduct a new, randomized, controlled clinical study.
In June 1994, Bard advised the Company that it was contemplating the
purchase of laser devices from another laser manufacturer. The Company
objected and, in September 1994, Bard advised the Company that it was no longer
contemplating the purchase of laser devices from the other manufacturer and
intended to abide by the terms of the exclusive Development, Supply and License
Agreement with the Company. As of September 30, 1995, Bard has a substantial
inventory of Urolase(R) Fibers and has not advised the Company of any plan to
restart its marketing of this product in the United States, thus, no
substantial sales to Bard, if any, are expected for some time.
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On October 6, 1995, the Company filed a lawsuit against Bard claiming
damages of at least $72 million for Bard's failure to perform its obligations
as Trimedyne's exclusive distributor under the Agreement. The Company is
taking actions to mitigate its damages, produce revenues and attempt to regain
its market position in urology.
On January 25, 1995, the Company filed a lawsuit against Surgical
Laser Technologies, Inc. (SLT) charging infringement of the Company's U.S.
Patent No. 4,646,737, and of U.S. Patent No. 5,380,317 which is owned jointly
by the Company and by Dr. Everett. On November 8, 1995 the Court granted SLT's
motion for summary judgment that U.S. Patent No. 4,646,737 is not infringed by
SLT's contact lasing devices. The Company believes that the Court's
interlocutory order granting the motion for summary judgment is incorrect and
plans to appeal the Court's decision at the appropriate time. The Company is
currently investigating whether SLT is infringing yet another U.S. patent owned
by the Company.
THERMAL LASER USE IN BLOOD VESSELS AND SURGERY
In 1987 and 1990, respectively, the Company received clearance from
the FDA to market its Optilase(TM) Nd:YAG "thermal" lasers with a variety of
optical fibers and devices for use in peripheral (below the waist) blood
vessels and in a number of surgical specialties. In addition to their ability
to melt or vaporize plaque and cut, coagulate and vaporize tissue, the heat
created by such lasers simultaneously cauterizes adjoining tissues, stopping
bleeding. In addition, Nd:YAG laser energy can be transmitted through tiny
optical fibers inserted into blood vessels or body cavities through small
incisions. The Company does not plan to devote significant efforts to marketing
its Nd:YAG "thermal" lasers and optical fibers for use in blood vessels or
surgery.
COLD LASER USE IN THE CARDIOVASCULAR FIELD
Since the Company is focusing its efforts in the urology and
orthopedic fields, the Company has established a subsidiary, TriCardio, Inc.,
to which it intends to exclusively license all of its patents, patent
applications and assign all of its assets and business in the cardiovascular
field. At the present time, this wholly-owned subsidiary is inactive. The
Company plans to seek private financing for TriCardio in 1996 to develop
several new cardiovascular products based on its technology. The most
significant of these is a new procedure involving the use of a proprietary,
pulsed "cold" laser inserted through a puncture between the ribs to create
15-30 new channels through the heart wall in a beating heart. The channels
seal at the outer surface of the heart and enable blood from the heart's
chamber to enter the heart muscle.
This procedure, called trans-myocardial revascularization or "TMR", is
designed to provide blood flow to the heart muscle of persons who have failed
coronary bypass surgery and/or balloon angioplasty, or whose condition
precludes such surgery. If successful, this procedure could be used as an
alternative (or adjunct) to coronary bypass surgery. The Company also plans to
develop devices, like conventional heart catheters, that might enable these
channels to be made with optical fibers extended through such catheters from
inside the heart's chamber, as an alternative (or adjunct) to coronary balloon
angioplasty.
The development of the aforementioned TMR devices is in a very early,
conceptual stage, and there is no assurance the Company's efforts in this area
will be successful. The Company plans to obtain financing for TriCardio in
1996 are at an early stage and may not prove successful, in which case these
cardiovascular products will not be developed.
LICENSE AGREEMENTS
On April 1, 1988, the Company entered into an exclusive, worldwide
license agreement, for a royalty on sales in gynecology, with a co-inventor
("the Co-Inventor") of U.S. Patent Application No. 460,843 covering a
lateral-lasing device. As a result of litigation, in March 1992 the license
agreement was determined to be non-exclusive. In June 1994, the Company
settled other litigation with the Co-Inventor. (See "Litigation" herein for a
description of the litigation with the Co-Inventor.)
In January 1991, the Company entered into a non-exclusive license
agreement with International Business Machines Corporation ("IBM") to a U.S.
Patent owned by IBM covering Excimer Lasers, under which a royalty on sales of
such lasers is payable to IBM.
In March 1991, the Company entered into an agreement with Douglas E.
Johnson, M.D., under which Dr. Johnson agreed to assign to the Company, for a
royalty on sales, all U.S. and foreign patent rights to a patent application
covering a method of use of side-firing laser devices in a variety of medical
specialties. The U.S. Patent covering this method issued
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in August 1995. The Company believes this U.S. Patent will enable the Company
to obtain a significant advantage in the market for products for the treatment
of BPH, although such cannot be assured.
In fiscal 1993, the Company acquired rights to three issued U.S.
Patents and one patent application on file in the United States and a number of
foreign countries, as described below.
In July, 1993, the Company acquired sole ownership of a U.S. Patent
covering an expandable laser angioplasty catheter from Robert S. Ginsburg,
M.D., Director of the Unit for Cardiovascular Intervention of the University of
Colorado. In November, 1995, the Company was issued a U.S. Patent covering an
improved, expandable laser angioplasty catheter. Since coronary arteries are
almost always larger in diameter than conventional catheters, it is necessary
to follow the laser procedure with balloon angioplasty to widen the channel,
which can result in reclosure of the vessel. These U.S. Patents may enable the
Company to develop laser catheters able to create a channel significantly
larger than their diameter and restore normal blood flow, without the need to
follow the laser procedure with balloon angioplasty. A second U.S. Patent
acquired from Dr. Ginsburg covers the use of laser energy through a balloon.
The Company acquired, for a royalty on sales, from C. Stefanadis, M.D.
and P. Tovtousas, M.D. of the University of Athens in Greece, an exclusive,
worldwide license to a U.S. Patent (pending in several foreign countries)
covering a temporary, removable stent-like coronary infusion catheter for
relieving abrupt reclosure (generally due to spasm of the vessel) or dissection
(separation of the plaque from the vessel wall), a condition which occurs in
approximately 5% and 9%, respectively, of the estimated 400,000 coronary
balloon angioplasty procedures performed each year in the United States.
The Company acquired, for a royalty on sales, an exclusive license to
a U.S. Patent issued to Glen K. Geremia M.D. and Michael Haklin of the
Rush-Presbyterian-St. Luke's Medical Center in Chicago. The patent covers a
device and method for depositing a tiny coil of platinum wire, called the
Geremia Coil, in an aneurysm in a blood vessel in the brain. An aneurysm
occurs when a portion of the wall of a blood vessel becomes weakened and
balloons out, like a bubble on an automobile tire. Depositing several Coils in
the aneurysm causes a clot to form, filling the aneurysm and taking the
pressure off the weakened vessel wall. An estimated 90,000 brain aneurysms are
diagnosed annually in the United States. In 1995 the Company filed a U.S.
Patent application on an improved method for delivering and relasing Coils in
brain aneurysms.
The Company also has license agreements with a number of universities
and inventors. U.S. Patents covering certain of the Company's products have
also been issued to officers and employees of the Company and have been
assigned to the Company without royalty. In addition, patent applications by
officers and employees of the Company are on file with the U.S. Patent Office
(and in a number of foreign countries) and have been assigned to the Company
without royalty. These patent applications are currently being processed by
the U.S. Patent Office and, to the Company's knowledge, are proceeding in the
normal course of review.
PLASTIC OPTICAL FIBERS
In May 1983, the Company acquired Poly-Optical Products, Inc.
("Poly-Optical"), a manufacturer of fiber-optic lighting and viewing devices.
Poly-Optical owns four U.S. Patents and has six additional U.S. Patent
applications pending, certain of which cover products the Company believes have
potential for backlighting membrane switches and liquid crystal displays. In
December 1986, the Company sold 10% of the outstanding stock of Poly-Optical to
Mitsubishi-Rayon Limited, Inc. ("Mitsubishi") for $416,000.
Poly-Optical's product line consists of both high and low loss
polymeric (plastic) optical fibers. These products sell for a wide range of
prices, depending upon the size, shape and manufacturing complexity involved.
Current customers include the automotive and truck manufacturing industry,
scientific instrument manufacturers, the aircraft industry and medical device
firms. For the fiscal year ended September 30, 1995, Poly-Optical had sales
of $3,403,000, and income from operations of $325,000, compared to sales of
$2,990,000 and income from operations of $235,000 in the prior year.
The Company is engaged in discussions with several companies regarding
the potential sale of its 90% interest in Poly-Optical. The Company has
discussed the potential sales of Poly-Optical with one specific buyer. In the
event that a sales agreement is not reached with any of the potential buyers on
acceptable terms, the Company plans to continue operating Poly-Optical as a
subsidiary.
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RESEARCH AND DEVELOPMENT
From its inception to September 30, 1995, an aggregate of $25,342,000
has been expended by the Company and its subsidiary for research and
development ("R&D"), including clinical and regulatory activities, of which
$2,599,000 was expended during the fiscal year ended September 30, 1995. As it
has in the past, the Company intends to continue to contract with unaffiliated
research institutions for the clinical testing of its developmental products.
MANUFACTURING, SUPPLY AGREEMENTS
Trimedyne and Poly-Optical believe that each have adequate
engineering, design and manufacturing facilities (see "Properties" herein).
The Company has supply agreements with several vendors for lasers,
components and materials used in the production of its products. The materials
used in the Company's products, consisting primarily of certain plastics,
optical fibers, lenses, various metal alloys, lasers and laser assemblies and
components used in the manufacture of its lasers are, in most cases, available
from several vendors. The Company has, on occasion, experienced temporary
delays or increased costs in obtaining these materials. An extended shortage
of required materials and supplies could have an adverse effect upon the
revenue and earnings of the Company. In addition, the Company must allow for
significant lead times when procuring certain materials and supplies. Where
there is only one source of supply, the Company believes that a second source
could be obtained within a reasonable period of time. However, no assurance
can be given that the Company's results of operations would not be adversely
affected until a new source could be located.
MARKETING
The principal markets for the Company's products are hospitals with
orthopedic, urology, and other surgical operating room facilities, and
outpatient surgery facilities. In the United States, this market represents
approximately 5,500 hospitals, as well as a number of outpatient surgery
centers. There is no assurance as to the extent to which the Company will be
able to penetrate this market. The Company anticipates marketing only those
products which are customarily sold to the same customer groups that currently
use its lasers and related devices.
At September 30, 1995, the Company had marketing arrangements for the
sale of its lasers and certain of its disposable products on a straight
commission basis with 23 independent sales representatives and organizations
employing an estimated 45 sales persons specializing in the sale of medical
devices in the United States. Outside the United States, the Company sells its
products through 51 independent distributors who sell various medical products
in approximately 51 foreign countries. The Company presently employs a Vice
President, Sales and Marketing, two Regional Sales Directors, a Vice President
- - International Sales, an International Sales Manager, an Asia Marketing
Manager, a Marketing Director and a Clinical Education Director.
The Company hopes in the future to increase the number of domestic
sales representatives and to appoint additional distributors in foreign
countries for the purpose of expanding sales of the Company's products. There
is no assurance that the Company will be able to enter into marketing
arrangements with any or all of the persons or organizations with which it is
presently negotiating or that the Company will be able to maintain its existing
selling arrangements.
GOVERNMENT REGULATION
All of the Company's products are and will in the future likely be
subject to extensive governmental regulation and supervision, principally by
the FDA and comparable agencies in other countries. The FDA regulates the
introduction, advertising, manufacturing practices, labeling and record keeping
of all drugs and medical devices. The FDA has the power to seize adulterated
or misbranded devices, require removal of devices from the market, enjoin
further manufacture or sale of devices and publicize relevant facts regarding
devices.
Prior to the sale of any of its products, the Company is required to
obtain marketing approval for each product from the FDA and comparable agencies
in foreign countries. Extensive clinical testing of each product, which is
both costly and time-consuming, may be required to obtain such approvals. The
Company's business would be adversely affected if it were unable to obtain such
approvals or to comply with continuing regulations of the FDA and other
governmental agencies. In addition, the Company cannot predict whether future
changes in government regulations might increase the cost of conducting its
business or affect the time required to develop and introduce new products.
6
<PAGE> 9
Specific areas of regulation by the FDA and other related matters are
described in detail below:
Investigational Device Exemption:
Before a new medical device may be used for investigational research
in the United States, an Investigational Device Exemption ("IDE") application
must be approved by the FDA, unless an applicable exemption, such as a 510(k)
Premarket Notification (see "510(k) Premarket Notification") is available.
In order to obtain an IDE, the sponsor of the investigational research must
first obtain approval for the research from an Institutional Review Board or
Committee ("IRB") established for this purpose at the institution (e.g.
hospital, medical center, etc.) at which the research is to be conducted.
510(k) Notification:
The procedure for obtaining clearance from the FDA to market a new
medical device involves many steps, such as IDE's and PMA's (see "Pre-market
Approval" ). However, if a device is substantially equivalent to a product
marketed prior to May 28, 1976, or a comparable product subsequently cleared by
the FDA under a 510(k) Premarket Notification, a 510(k) pre-market Notification
may be filed to establish the device's equivalence. The FDA's review process
can take three months or longer. However, if additional testing or data are
requested by the FDA, it is common for the overall review process to be
extended.
Pre-Market Approval:
Under the Medical Device Amendments of 1976, all medical devices are
classified by the FDA into one of three classes. A "Class I" device is one
that is subject only to general controls, such as labeling requirements and
good manufacturing practices ("GMP"). A "Class II" device is one that is
subject to general controls and must comply with performance standards
established by the FDA. A "Class III" device is one for which general controls
and performance standards alone are insufficient to assure safety and
effectiveness, unless the device qualifies for sale under a 510(k) Premarket
Notification. Such devices require clinical testing to establish their safety
and efficacy in treating specific diseases or conditions, and a Premarket
Approval ("PMA") Application for the intended use must be approved by the FDA
before the device can be marketed in the United States. A device is generally
classified as a Class I, II, or III device based on recommendations of advisory
panels appointed by the FDA.
The filing of a PMA Application entails a rigorous review by the FDA,
which can take one year or longer, unless additional testing or data are
requested by the FDA, in which case the review process can be considerably
longer. The Company anticipates the majority of its cardiovascular products
will be classified as Class III devices and that a PMA approval from the FDA
will be required before the sale of each of such products commences. The
Company believes the majority of its urology, orthopedic and other surgical
products can be cleared for sale pursuant to 510(k) Premarket Notifications,
which in some cases may require limited clinical trials, although such cannot
be assured.
There is no assurance that required PMA approvals or 510(k) clearances
for new products can be obtained or that PMA approvals or 510(k) clearances for
the Company's present products can be maintained. The failure to maintain PMA
approvals and 510(k) clearances for existing products or to obtain needed PMA
approvals or 510(k) clearances for new products would have a material adverse
effect upon the Company's future operations.
Inspection of Plants:
The FDA also has authority to conduct detailed inspections of
manufacturing plants, to determine whether or not the manufacturer has followed
its GMP requirements, which are required for the manufacture of medical
devices. Additionally, the FDA requires reporting of certain product defects
and prohibits the domestic sale or exportation of devices that do not comply
with the law. The Company believes it is in compliance with these regulatory
requirements, and expects that the processes and procedures in place will
satisfy the FDA, although such cannot be assured.
State Regulation:
Federal law preempts states or their political subdivisions from
regulating medical devices. Upon application, the FDA may permit state or
local regulation of medical devices which is either more stringent than federal
regulations or is required because of compelling local conditions. To date,
and to the best of the Company's knowledge, only California has filed such an
application. On October 5, 1980, the FDA granted partial approval to such
application, effective December
7
<PAGE> 10
9, 1980. The California requirements which have been exempted from preemption
have not had a materially adverse effect on the Company.
Insurance Reimbursement:
To permit the users of the Company's products to obtain reimbursement
under Federal health care programs such as Medicare, the Company may be
required to demonstrate, in an application to the Health Care Financing
Administration ("HCFA"), at either the state or federal level or both, the
safety and efficacy of its products and the benefit to patients therefrom which
justify the cost of such treatment. Criteria for demonstrating such benefits
is in the process of definition by HCFA, and there does not yet exist a clear
method or requirement to receive approval for reimbursement. There is no
assurance that such an application, if made, will be approved by HCFA. Most
private health insurance companies and state health care programs have
standards for reimbursement similar to those of HCFA. If an application for
reimbursement of a product is not approved by HCFA, private insurers and/or
health care programs, marketing of such product would be adversely affected.
Cost of Compliance with FDA and Other Applicable Regulations:
The costs of complying with FDA and other governmental regulations
prior to the sale of approved products are reflected mainly in the Company's
R&D expenditures. The cost of first obtaining an IDE for a product and, after
having developed a product which in the Company's view is safe and effective,
obtaining a PMA approval therefor, as well as making the necessary application
to HCFA in order to establish insurance reimbursability for treatments
utilizing such product, adds significantly to the cost of developing and
bringing a product to market over what such cost would have been if such
regulatory requirements did not exist.
Such regulatory requirements also lengthen the time which is required
to develop and market a product. These delays increase the Company's R & D
costs by (a) lengthening the time during which the Company must maintain and
bear the carrying costs of a given research and development effort and (b)
delaying the time when the Company can commence realizing revenues from sales
of a product, during which time, however, the Company must nevertheless
continue to bear administrative and overhead costs. It is, however, not
possible for the Company to quantify or estimate in advance the direct and
indirect costs of complying with such regulatory requirements, particularly
since the expense and difficulty of such compliance can vary greatly, depending
upon the nature of the product, its intended use, the technological success of
the R&D effort and the results of clinical testing of its products.
To the extent applicable regulations require more rigorous testing
than might otherwise be deemed necessary by the Company, the costs entailed in
conducting testing of its products by such institutions (and fees or royalties,
if any, payable to them) may be deemed in part a cost to the Company of
compliance with such regulatory requirements.
EMPLOYEES
On September 30, 1995, the Company and Poly-Optical had 98 and 41
full-time employees, respectively, a total of 139, of whom 80 were engaged in
production, 28 in R&D, 15 in sales and marketing, and 16 in general and
administrative functions.
The Company may require additional employees in the areas of
administration, product development, research, production, regulatory affairs,
sales and marketing in the future. There is intense competition for capable,
experienced personnel in the medical device and laser fields, and there is no
assurance the Company will be able to obtain new qualified employees when
required.
The Company believes its relations with its employees are good.
PATENTS AND PATENT APPLICATIONS
As of September 30, 1995, the Company had been assigned or had
obtained exclusive or non-exclusive , worldwide licenses to 18 issued U.S.
Patents and had 6 patent applications on file with the U.S. Patent Office.
Several of such patents have issued as foreign patents and several
corresponding patent applications have been filed in up to 7 foreign countries.
8
<PAGE> 11
There is no assurance that (a) any patents will be issued from the
pending applications, (b) any issued patents will prove enforceable or (c) the
Company will derive any competitive advantage therefrom. To the extent that
new patents do not issue, the Company may be subject to more competition.
There can also be no assurance that the already patented products, methods and
processes will be medically useful or commercially viable.
The issuance of patents on some but not all aspects of a product may
be insufficient to prevent competitors from essentially duplicating the product
by designing around the patented aspects. In addition, there is no assurance
the Company's products will not infringe patents owned by others, licenses to
which may not be available to the Company.
The Company is obligated, under certain of its patent licenses, to
make royalty payments including, in some instances, minimum payments, even if
no sales are achieved. Part of the Company's R&D activities will be directed
towards obtaining additional patent rights, which may also entail royalty and
minimum payment obligations.
Following are the pending U.S. Patent applications and issued U.S.
Patents which the Company believes are important to its business:
U.S. PATENT APPLICATIONS
<TABLE>
<CAPTION>
United States Date
Title Inventor(s) Application No. Filed (U.S.)
- ----- ----------- --------------- ------------
<S> <C> <C> <C>
Therapeutic Appliance Saadatmanesh 494,382 6/26/95
Releasing Device
Surgical Laser Instrument Saadatmanesh 473,752 6/7/95
Enclosure for a Lasing Device Saadatmanesh 485,362 6/7/95
Lateral Reflecting Saadatmanesh 239,338 5/6/94
Laser Device Loeb
Crawford
</TABLE>
U.S. PATENTS
<TABLE>
<CAPTION>
United States Date
Title Inventor(s) Patent No. Granted
- ----- ----------- ------------- -------
<S> <C> <C> <C>
Expandable Loeb 5,466,234 11/14/95
Laser Catheter Shaolian
Saadatmanesh
Giba
Van Pham
Tissue Ablation Johnson 5,437,660 8/1/95
and a Lateral-Lasing Hussein
Fiber Optic Device Therefor Loeb
Coupling Device Saadatmanesh 5,396,571 3/7/95
and Method Loeb
Multihead Laser Saadatmanesh 5,387,211 2/7/95
Assembly Loeb
Medical Device Everett 5,380,317 1/10/95
applying localized Acosta
light and heat Hussein
</TABLE>
9
<PAGE> 12
U.S. PATENTS (cont'd)
<TABLE>
<CAPTION>
United States Date
Title Inventor(s) Patent No. Granted
- ----- ----------- ------------- -------
<S> <C> <C> <C>
Steerable Stent Catheter Stafanadis 5,342,300 8/30/94
Tovtouzas
Connector for Milburn 5,179,610 1/12/93
Coupling of Laser Saadatmanesh
Energy Dessoffy
Crawford
Hussein
Method and Apparatus Geremia 5,108,407 4/28/92
for Placement of an
Embolic Coil
Dispensing Milburn 4,974,789 12/4/90
Package for a
Fiber Optic Device
Laser Catheter Ginsburg 4,790,310 12/13/88
Having Wide Angle
Sweep
Fiber
Optic Hussein 4,773,413 9/27/88
Laser Device
Vascular Catheter Ginsburg 4,754,752 7/5/88
Localized Hussein 4,662,368 5/5/87
Heat Applying Loeb
Fiberoptic Medical Sulek
Device
Localized Hussein 4,646,737 3/3/87
Heat Applying Loeb
Fiberoptic Medical
Device(1)
</TABLE>
- -------------------------
(1) Filed in up to seven foreign countries as well as the United States.
COMPETITION
The Company faces competition from a number of both young and
established companies in the medical field. The larger of such established
companies include Coherent, Inc., Bristol Myers, Inc., Smith & Nephew, Inc.,
Boston Scientific, Inc. and others, all of which have greater financial
resources, engineering and manufacturing facilities, technical skills,
management staffs and/or marketing organizations than the Company's.
Among the younger companies with which the Company may compete are
Eclipse, Inc., Laserscope, Inc., Surgical Laser Technologies, Inc., Hereaus
Lasersonics, Inc., Sharplan Lasers, Inc., Myriadlase, Inc., Endocare, Inc. and
others, certain of which are publicly held.
10
<PAGE> 13
INSURANCE
The Company has a commercial general liability insurance policy,
including an umbrella policy providing coverage in the aggregate amount of
$6,000,000 and a products liability insurance policy providing coverage in the
aggregate amount of $5,000,000. There is no assurance that such amounts of
insurance will be sufficient to protect the Company's assets against claims by
users of its products. Although there have been no successful claims against
the Company, there is no assurance the Company will be able to maintain such
liability insurance in force in the future at an acceptable cost, or at all, in
which case the Company's assets would be at risk in the event of successful
claims against it. Successful claims in excess of the amount of insurance then
in force could have a serious adverse effect upon the Company's financial
condition and its future viability.
The Company does not carry director and officer liability insurance,
but does have indemnification agreements with its officers and directors.
INDUSTRY SEGMENT INFORMATION
Information about the industry segments in which the Company is
engaged is provided in Note 1 and Note 13 of the Notes to Consolidated
Financial Statements herein.
FOREIGN OPERATIONS
In fiscal 1995, sales of products in foreign countries accounted for
approximately 16% of the Company's total sales. See "Marketing" herein for
information on the marketing of the Company's products in foreign countries.
ITEM 2. PROPERTIES
The Company occupies approximately 40,000 square feet of office,
manufacturing and warehouse space in its headquarters building in Irvine,
California, which it sub-leases at a monthly rent of approximately $16,600 per
month. The sub-lease expires in June 1996. The Company also has an option to
renew the sublease for two periods of 30 months each. This facility serves as
the Company's headquarters, where research, regulatory, sales, marketing and
administrative activities, as well as manufacturing and warehousing, are
conducted.
Poly-Optical Products Inc. leases a 19,700 square foot one-story
office and manufacturing building in Irvine, California, under a thirty month
lease expiring in March 1996 at a monthly rent of approximately $7,500, with
two 30 month renewal options. As described under "Plastic Optical Fibers"
herein, the Company is considering the sale of its 90% remaining interest in
Poly-Optical. It is contemplated that any sale of Poly-Optical would include
a provision requiring the buyer to assume responsibility for Poly-Optical's
facility lease.
Management considers all of its facilities to be well maintained and
adequate for its present operations.
ITEM 3. LITIGATION
In connection with the June 9, 1994 settlement of litigation with the
co-inventor of the Urolase(R) fiber, the Company amended and restated its
licensing agreement with Dr. Everett. The Company paid $90,000 of the
settlement amount for royalties owed on past Urolase(R) fiber sales and $585,000
of the settlement amount as a non-refundable prepayment of future royalties
which otherwise would be owed to the co-inventor on future sales of the
Urolase(R) fiber. In addition, the Company is required to pay a royalty on
sales of Urolase(R) fibers over the term of the agreement. At September 30,
1995, the Company had a balance of $439,000 in prepaid royalties of which
$83,600 was included in other current assets.
In February 1994, a lawsuit was filed by Coherent, Inc., claiming the
Company was infringing three of its patents in the orthopedic field. The
Company filed a response and counter claim. This matter was settled by the
parties in December 1994. In connection with this settlement the Company
received a license in orthopedics at a reasonable royalty rate.
On October 6, 1995, the Company filed a lawsuit against Bard claiming
damages of at least $72 million for Bard's failure to perform its obligations
as Trimedyne's exclusive distributor under the Agreement. The Company is
taking actions to mitigate its damages, produce revenues and attempt to regain
its market position in urology.
11
<PAGE> 14
On January 25, 1995 the Company filed a lawsuit against Surgical Laser
Technologies, Inc. (SLT) charging infringement of the Company's U.S. Patent No.
4,646,737, and of U.S. Patent No. 5,380,317 which is owned jointly by the
Company and by Dr. Everett. On November 8, 1995 the Court granted SLT's motion
for summary judgment that U.S. Patent No. 4,646,737 is not infringed by SLT's
contact lasing devices. The Company believes that the Court's interlocutory
order granting the motion for summary judgment is incorrect and plans to appeal
the Court's decision at the appropriate time. The Company is currently
investigating whether SLT is infringing yet another U.S. patent owned by the
Company.
It is the Company's opinion that the settlements referred to above
will not have a material adverse effect on the Company's results of operations
or financial position.
Trimedyne was involved in several other minor actions which were
handled by the company's insurance carrier and either settled or dismissed
during the fiscal year ended September 1995. At the end of the fiscal year,
the Company was not involved in any other lawsuits which are believed to have a
material adverse effect on the Company's results of operations or financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth
quarter of the fiscal year ended September 30, 1995.
12
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
A. Market Information
The Company's Common Stock has been traded in the over-the-counter
market since April 13, 1982, and has been quoted on the NASDAQ system since the
commencement of trading under the symbol "TMED". On August 12, 1986, the
Common Stock was approved for trading in the NASDAQ National Market System.
The following table sets forth the high and low closing sales prices for the
Common Stock for each quarterly period within the Company's two most recent
fiscal years on the National Market System.
<TABLE>
<CAPTION>
1994 HIGH LOW
- ---- ------ -----
<S> <C> <C>
Quarter ended:
December 31, 1993 11 1/8 6 1/2
March 31, 1994 17 3/8 9 5/8
June 30, 1994 12 1/8 5
September 30, 1994 7 3
</TABLE>
<TABLE>
<CAPTION>
1995 HIGH LOW
- ---- ------ -----
<S> <C> <C>
Quarter ended:
December 31, 1994 4 5/8 2 3/4
March 31, 1995 3 5/8 2 1/4
June 30, 1995 3 3/8 1 11/16
September 30, 1995 5 1/8 2
</TABLE>
B. Holders of Common Stock
As of December 13, 1995, there were 1,692 holders of record of the
Company's Common Stock and an additional estimated 7,000 holders who maintain
the ownership of their shares in "Street Name".
C. Dividends
The Company has never paid cash dividends on its Common Stock. The
Board of Directors currently intends to follow a policy of retaining earnings
to finance the growth and development of the Company's business and does not
anticipate paying cash dividends in the foreseeable future. Any future
determination as to the payment of cash dividends will be dependent upon the
Company's financial condition and results of operations and other factors then
deemed relevant by the Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA
STATEMENT OF OPERATIONS DATA:
(In thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
-----------------------------------------------------------------
1995 1994 1993 1992 1991
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net revenues $13,041 $13,393 $15,724 $11,366 $ 8,483
Loss from operations (5,206) (2,774) (1,109) (3,035) (7,046)
Net loss (5,290) (2,265) (561) (1,961) (6,345)
Net loss per share (.56) (.25) (.06) (.24) (.93)
</TABLE>
13
<PAGE> 16
BALANCE SHEET DATA:
(In thousands)
At September 30,
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Total assets $15,040 $20,498 $21,554 $22,405 $11,580
Total liabilities 2,941 3,304 2,949 3,665 3,892
Working capital 10,082 14,829 16,673 16,779 5,488
Stockholders' equity 11,957 17,081 18,517 18,649 7,618
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED RESULTS OF
OPERATIONS AND CONSOLIDATED FINANCIAL CONDITION
Consolidated Results of Operations
- ----------------------------------
Fiscal years 1995, 1994 and 1993
The following table sets forth certain items in the consolidated
statements of operations as a percentage of net revenues for the year ended
September 30, 1995 and the prior two fiscal years.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Cost of goods sold 65.8 54.1 53.7
Research and development 19.9 19.2 13.7
Selling, general
and administrative 54.2 47.4 39.5
Interest income (2.4) (2.7) (2.5)
Other (income) expense, net 3.0 (1.1) (0.8)
Net loss 40.6 16.9 3.6
</TABLE>
Net Revenues
- ------------
1995 Compared to 1994
Net revenues decreased 3% in fiscal 1995 to $13,041,000 from
$13,393,000 in fiscal 1994. Sales in fiscal 1995 decreased from fiscal 1994
principally due to significantly lower sales of urology products to Bard, which
declined $3,724,000 or approximately 78%. This decline was partially offset
by a $3,059,000 or 65% increase in orthopedic sales and a 13% increase in
Poly-Optical revenues. Total international revenues for fiscal 1995 were
$2,055,000 compared to $2,035,000 in fiscal 1995, representing 15% of revenues
in each fiscal year. Laser and fiber optic device sales in urology and
orthopedics accounted for approximately 68% of revenues in fiscal 1995 compared
to approximately 70% in fiscal 1994.
1994 Compared to 1993
Revenues in fiscal 1994 decreased from fiscal 1993 principally due to
approximately 30% lower sales to Bard, the exclusive distributor of the
Company's Urolase(R)Fiber for urologic use, and a 65% reduction in sales of
orthopedic lasers in foreign markets. This decline was offset in part by a 25%
increase in orthopedic sales in the United States and a 13% increase in
revenues of Poly-Optical. Total international sales decreased by 24% to
$2,035,000 in fiscal 1994 representing 15% of total sales compared to 17% in
the previous year. Laser and fiber optic device sales in urology and
orthopedics accounted for approximately 70% of revenues in fiscal 1994 compared
to approximately 75% in fiscal 1993.
14
<PAGE> 17
Cost of Goods Sold
- ------------------
Cost of goods sold in fiscal 1995 was approximately 66% of net revenue
compared to 54% in both fiscal 1994 and 1993.
1995 Compared to 1994
The increase in cost of goods sold as percentage of sales was the
result of the significant shift in the Company's product mix from urology to
orthopedic products, which carry lower profit margins, a write-down of urology
inventories, and greater warranty costs associated with the higher powered
Holmium laser for use in orthopedics, which was first introduced in fiscal
1994.
1994 Compared to 1993
While the cost of goods sold remained constant from fiscal 1994 to
fiscal 1993, the Company's gross margins were positively affected by product
cost reductions, as the Company continued to increase the proportion of
products it directly produces, and by the increase in domestic sales in
relation to total sales. Domestic sales are made on a direct basis at a higher
margin than international sales, which are sold through distributors. These
affects were offset by the decline in sales of Urolase(R) fibers, which are
manufactured on automated milling machines and carry a higher than average
margin relative to other Trimedyne products.
Research and Development Expenses (R&D)
- ---------------------------------------
R&D expenses were $2,599,000 in fiscal 1995, compared to $2,578,000 in
fiscal 1994, and $2,162,000 in fiscal 1993. R&D spending in fiscal 1996 is
expected to be approximately equal to the fiscal 1995 level, as the Company
intends to continue to fund development of several new products. Expenditures
of $184,500 in fiscal 1994 and $413,000 in fiscal 1993 related to urological
applications were offset by payments expected to be made from the development
fund established under the agreement with Bard. The Company did not receive
the reimbursement for these expenditures which in part is the basis of the
litigation with Bard (see "Litigation" herein). R&D as a percentage of net
revenues increased to 20% of net revenues in fiscal 1995 vs. 19% and 14% in
fiscal years 1994 and 1993, respectively, due to a disproportionate (and
relatively fixed) amount of R&D spending relative to sales in these years. The
slight increase in R&D expenses in 1995 occurred as the result of the Company
continuing to expand its development efforts of Holmium and Neodymium:YAG
lasers and other products for use in urology and orthopedic applications.
Selling, General and Administrative Expenses
- --------------------------------------------
Selling, general and administrative ("SG&A") expenses increased 6% to
$7,067,000 in fiscal 1995, compared to $6,345,000 in fiscal 1994, which was a
2% increase from the fiscal 1993 total of $6,213,000.
SG&A expenses increased as a percentage of net revenues in fiscal 1995
over fiscal 1994 and 1993 (54%, 47% and 40%), due to a lower level of revenues,
higher sales expenses and increased marketing costs on increased sales of
orthopedic products, which are sold through manufacturer's reps. SG&A expenses
also increased due to a higher level of legal expenses incurred in connection
with patent costs and litigation.
Interest Income, Taxes and Net Loss
- -----------------------------------
Interest income in fiscal 1995 was $309,000, compared to $359,000 in
fiscal 1994 and $392,000 in fiscal 1993. The levels of cash and equivalents
available for investment in interest bearing securities were $4,415,000,
$8,758,000, and $10,809,000, as of September 30, 1995, 1994 and 1993,
respectively. In 1995, the Company was able to generate higher yields on its
investments which offset in part the lower overall level of cash available for
investment during the current fiscal year.
The fiscal 1995 loss before income taxes was $5,290,000 compared to a
loss of $2,265,000 in fiscal 1994 and $561,000 in fiscal 1993. The increase in
loss in fiscal 1995 from fiscal 1994 was primarily due to higher product costs,
a change in product mix to devices with lower profit margins, and legal
expenses incurred in connection with patent litigation.
15
<PAGE> 18
Due to the net losses incurred, the Company did not pay income taxes
for fiscal 1995, 1994 and 1993.
Liquidity and Capital Resources
- -------------------------------
As of September 30, 1995, the Company had working capital of
$10,082,000 compared to $14,829,000 at the end of fiscal 1994 and $16,673,000
at the end of fiscal 1993.
Cash and equivalents and marketable securities decreased by $4,246,000
in fiscal 1995. Cash was used primarily to fund operations and purchase
manufacturing equipment, as well as other changes as noted in the Company's
Consolidated Statements of Cash Flows.
The Company believes its current cash and cash equivalents and other
resources will be sufficient to meet its anticipated operating and capital
requirements for at least the next two years.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedules required by
Item 8 of this report are set forth in the index on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
Information with respect to this item is incorporated by reference
from the Company's definitive Proxy Statement to be filed with the Commission
within 120 days after the close of Registrant's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item is incorporated by reference
from the Company's definitive Proxy Statement to be filed with the Commission
within 120 days after the close of Registrant's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item is incorporated by reference
from the Company's definitive Proxy Statement to be filed with the Commission
within 120 days after the close of Registrant's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item is incorporated by reference
from the Company's definitive Proxy Statement to be filed with the Commission
within 120 days after the close of Registrant's fiscal year.
16
<PAGE> 19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. Financial Statements.
See "Index to Consolidated Financial Statements" included in this
report at Page F-1.
2. Financial Statement Schedules. See "Index to
Consolidated Financial Statements" included in this
report at Page F-1.
3. Exhibits pursuant to No. 10 of Item 601 of S-K.
FILED PREVIOUSLY
10(a) Agreement with James Capel Incorporated dated August 1, 1991.
10(b) Development, Supply and License Agreement with C.R. Bard,
Inc., dated June 28, 1991.
10(c) Industrial Lease (for Barranca Parkway headquarters) with
Griswold Controls dated June 19, 1991, and Addendum thereto
dated July 1, 1991.
10(d) Patent Licensing Agreement with Royice B. Everett,
M.D. (covering the Lateralase Catheter) dated April
1, 1988 as amended.
10(e) Poly-Optical lease with Elpal Electronics Inc. dated
August 13, 1993.
10(f) Addendum to Industrial Lease with Griswold Controls
dated September 14, 1993
10(g) Patent assignment agreement with Robert Ginsburg,
M.D. dated July 1, 1993
10(h) License agreement with Christodoulos Stafanadis, M.D.
and Pavlos Toutouzas, M.D. dated April 1, 1993
10(i)* Amendment to Development Supply and License Agreement
with C.R. Bard dated June 14, 1994.
10(j)* Settlement Agreement and Mutual Release among Royice
B. Everett, M.D., Trimedyne, Inc., and C.R. Bard
dated June 9, 1994.
10(k)* Settlement Agreement and Mutual Release among
Myriadlase, Inc., Trimedyne, Inc., and C.R. Bard dated
June 9, 1994.
10(l)* Amended and Restated Licensing Agreement with Royice
B. Everett M.D. dated June 9, 1994.
FILED HEREWITH
10(m)* License Agreement with Coherent dated December 9, 1994.
23 Consent of Independent Public Accountants
27 Financial Data Schedule
- -----------------
* The Company requested confidential treatment for
portions of those exhibits marked with an asterisk (*).
(b) No reports on Form 8-K were filed during the fourth quarter of the
fiscal year ended September 30, 1995.
17
<PAGE> 20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Trimedyne, Inc.
Date: December 22, 1995 /s/ MARVIN P. LOEB
-------------------------------
Marvin P. Loeb,
Chairman and Chief
Executive Officer
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>
/s/ MARVIN P. LOEB Chairman of the December 22, 1995
- ----------------------------- Board of Directors
Marvin P. Loeb Chief Executive Officer
/s/ PETER T. HYDE President and Chief December 22, 1995
- ----------------------------- Operating Officer
Peter T. Hyde
/s/ DONALD BAKER Director December 22, 1995
- -----------------------------
Donald Baker
/s/ BRUCE N. BARRON Director December 22, 1995
- -----------------------------
Bruce N. Barron
/s/ RICHARD F. HOROWITZ Director December 22, 1995
- -----------------------------
Richard F. Horowitz
/s/ JAMES L. KELLY Vice President-Finance December 22, 1995
- ----------------------------- and Chief Financial
James L. Kelly and Accounting Officer
</TABLE>
18
<PAGE> 21
TRIMEDYNE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of Trimedyne, Inc. and its
subsidiary are included in Item 8:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Financial Statements:
Report of Independent Accountants F-2
Consolidated Balance Sheets at
September 30, 1995 and 1994 F-3
Consolidated Statements of Operations
for the three years ended September 30, 1995 F-4
Consolidated Statements of Changes in
Stockholders' Equity for the three years
ended September 30, 1995 F-5
Consolidated Statements of Cash Flows
for the three years ended
September 30, 1995 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
The following consolidated financial statement schedules of Trimedyne, Inc. and
its subsidiary are included in Item 14(d):
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
I. Marketable Securities F-15
Other Security Investments
VIII. Valuation and qualifying accounts F-16
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
F-1
<PAGE> 22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Trimedyne, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14. (a)(1) and (2) on page F-1 present fairly, in all
material aspects, the financial position of Trimedyne, Inc. and its subsidiary
at September 30, 1995 and 1994, and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 1995,
in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit requires examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Costa Mesa, California
December 14, 1995
F-2
<PAGE> 23
TRIMEDYNE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------
1995 1994
------------ ------------
<S> <C>
Current assets:
Cash and cash equivalents $ 1,367,000 $ 3,183,000
Marketable securities (Note 2) 3,048,000 5,478,000
Trade accounts receivable, net of allowance for doubtful
accounts of $315,000 and $335,000 2,098,000 2,608,000
Inventories (Note 3) 5,798,000 5,730,000
Other 712,000 1,134,000
------------ ------------
Total current assets 13,023,000 18,133,000
Net properties (Note 3) 1,368,000 1,628,000
Prepaid royalties (Note 10) 355,000 439,000
Intangible assets, net of accumulated amortization of
$315,000 and $246,000 294,000 298,000
------------ ------------
$ 15,040,000 $ 20,498,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,021,000 $ 1,297,000
Accrued expenses (Note 3) 1,833,000 1,825,000
Deferred income (Note 2) 87,000 182,000
------------ ------------
Total current liabilities 2,941,000 3,304,000
------------ ------------
Commitments and contingencies (Notes 9 and 10)
Minority interest (Note 2) 142,000 113,000
------------ ------------
Stockholders' equity (Note 6):
Common stock - .01 par value; 15,000,000 shares authorized,
9,573,910 and 9,548,310 shares issued 96,000 96,000
Capital in excess of par value 35,007,000 34,932,000
Accumulated deficit (21,446,000) (16,156,000)
Notes receivable under stock option plans (Notes 1 and 8) (982,000) (982,000)
Unrealized loss on securities available for sale (5,000) (96,000)
------------ ------------
12,670,000 17,794,000
Less shares of common stock in treasury,
at cost, 101,609 and 101,609 shares (713,000) (713,000)
------------ ------------
Total stockholders' equity 11,957,000 17,081,000
------------- -------------
$ 15,040,000 $ 20,498,000
============= =============
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE> 24
TRIMEDYNE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Revenues from product sales $12,647,000 $12,944,000 $15,273,000
Revenues from service contracts 394,000 449,000 451,000
----------- ----------- -----------
Net revenues 13,041,000 13,393,000 15,724,000
Costs of goods sold:
Cost of products sold 7,718,000 6,689,000 8,659,000
Addition (reductions) to reserve for excess
and obsolete inventory 446,000 319,000 (561,000)
Costs of service contracts 417,000 236,000 360,000
----------- ----------- -----------
8,581,000 7,244,000 8,458,000
Selling, general and administrative expenses 7,067,000 6,345,000 6,213,000
Research and development expenses 2,599,000 2,578,000 2,162,000
----------- ----------- -----------
18,247,000 16,167,000 16,833,000
Loss from operations (5,206,000) (2,774,000) (1,109,000)
Other income (expense):
Interest income 309,000 359,000 392,000
Gain on sale of subsidiary 32,000
Minority interest in (earnings) loss
of consolidated subsidiary company (29,000) (25,000) 3,000
Other (364,000) 175,000 121,000
----------- ----------- -----------
Loss before income taxes (5,290,000) (2,265,000) (561,000)
Income tax provision
----------- ----------- -----------
Net loss $(5,290,000) $(2,265,000) $ (561,000)
=========== =========== ===========
Net loss per share (Note 2) $(0.56) $(0.25) $(0.06)
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE> 25
TRIMEDYNE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK NOTE
$.01 PAR VALUE CAPITAL IN RECEIVABLE
---------------------- EXCESS OF ACCUMULATED TREASURY UNDER STOCK
SHARES AMOUNT PAR VALUE DEFICIT STOCK OPTION PLANS
--------- -------- ----------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1992 8,971,340 $90,000 $32,626,000 $(13,330,000) $(687,000) $ (50,000)
Exercise of stock options 93,150 1,000 336,000
Conversion of loan to treasury stock (26,000) 26,000
Payment received from officer notes
receivable 24,000
Stock issued in lieu of cash payments
for patents 10,000 68,000
Net loss for the year (561,000)
---------- ------- ------------ ------------ -------- ---------
Balance at September 30, 1993 9,074,490 91,000 33,030,000 (13,891,000) (713,000)
Exercise of stock options 419,820 5,000 1,376,000
Exercise of stock warrants 44,000 460,000
Stock issued to Company's 401(k)
plan 10,000 66,000
Notes receivable from officer (982,000)
Net loss for the year (2,265,000)
---------- ------- ------------ ------------ --------- ---------
Balance at September 30, 1994 9,548,310 96,000 34,932,000 (16,156,000) (713,000) (982,000)
Exercise of stock options 25,600 75,000
Net loss for the year (5,290,000)
---------- ------- ----------- ------------ --------- ---------
Balance at September 30, 1995 9,573,910 $96,000 $35,007,000 $(21,446,000) $(713,000) $(982,000)
========== ======= =========== ============ ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE> 26
TRIMEDYNE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(5,290,000) $(2,265,000) $ (561,000)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 567,000 548,000 488,000
Provision (reversal of provision) for excess and
obsolete inventory 122,000 319,000 (561,000)
Loss on disposal of assets 21,000 45,000 39,000
Gain on sale of minority interest in subsidiary (32,000)
Minority interest in earnings (loss) of subsidiary 29,000 25,000 (3,000)
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts receivable, net 510,000 531,000 (67,000)
Increase in inventories (190,000) (1,517,000) (631,000)
Decrease in other current assets 422,000 8,000 11,000
Decrease (increase) in prepaid royalties 84,000 (439,000)
(Decrease) increase in accounts payable (276,000) 610,000 (327,000)
Increase (decrease) in accrued expenses 8,000 (275,000) (164,000)
(Decrease) increase in deferred income (95,000) 20,000 6,000
----------- ----------- -----------
Net cash used for operating activities (4,088,000) (2,390,000) (1,802,000)
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (259,000) (608,000) (426,000)
Patent expenditures (65,000) (42,000) (82,000)
Payments received on note receivable from sale
of subsidiary 63,000 79,000
Repurchase of minority interest of subsidiary (200,000)
Sale of (investment in) marketable securities 2,521,000 (1,915,000) (3,659,000)
----------- ----------- -----------
Net cash provided by (used for) investing activities 2,197,000 (2,502,000) (4,288,000)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options 75,000 399,000 337,000
Proceeds from stock issued under 401(k) program 66,000
Net proceeds from exercise of warrants 460,000
Payments received on notes receivable under
stock option plan 24,000
----------- ----------- -----------
Net cash provided by financing activities 75,000 925,000 361,000
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (1,816,000) (3,067,000) (5,729,000)
----------- ----------- -----------
Cash and cash equivalents at beginning of period 3,183,000 7,150,000 12,879,000
----------- ----------- -----------
Cash and cash equivalents at end of period $ 1,367,000 $ 3,183,000 $ 7,150,000
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE> 27
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY:
Trimedyne, Inc. ("the Company") is engaged primarily in the research
and development, manufacture and sale of lasers and disposable laser devices in
the medical field. The Company is also engaged in the development, manufacture
and sale of plastic fiber-optic illumination devices through its subsidiary,
Poly-Optical Products, Inc. ("Poly-Optical"). The Company has discussed the
potential sale of Poly-Optical with one specific buyer. In the event that a
sales agreement is not reached with the potential buyer on acceptable terms,
the Company plans to continue operating Poly-Optical as a subsidiary. For the
year ended September 30, 1995, Poly-Optical had sales of $3,403,000 and
income from operations of $373,000, compared to sales of $2,990,000 and income
from operations of $235,000 in the prior year.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
---------------------
The consolidated financial statements include the accounts of the
Company and its 90% owned subsidiary, Poly-Optical Products, Inc. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Inventories
-----------
Inventories are recorded at the lower of cost or market, cost being
determined on a first-in, first-out (FIFO) basis.
Depreciation and amortization
-----------------------------
Depreciation of furniture and equipment is calculated on a
straight-line basis over the estimated useful lives of the assets ranging from
three to seven years. Leasehold improvements are amortized on a straight-line
basis over the lesser of the useful lives or the term of the lease. Intangible
assets, which consist primarily of patents, are amortized on a straight-line
basis over the life of the patent.
Research and development costs
------------------------------
All research and development costs, including licensing costs, are
charged to expense as incurred. In accordance with this policy, all costs
associated with the design, development and testing of the Company's products
have been expensed as incurred.
Income taxes
------------
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes.
SFAS 109 requires the liability method for accounting for income taxes. The
liability method requires the recognition of deferred tax liabilities and
assets for expected future tax consequences of temporary differences between
the carrying amounts and tax bases of assets and liabilities.
Loss per share
--------------
Loss per share is based on the weighted average number of common
shares outstanding. Common stock equivalents are not included in the
calculation because their inclusion would be antidilutive. Common stock
equivalents include dilutive stock options and warrants, if any, using the
treasury stock method. The weighted average number of shares used in the
calculation of earnings per share for the three years ended September 30 are
9,449,468, 9,052,089, and 8,931,068 for 1995, 1994 and 1993, respectively.
Extended warranty/service contracts and deferred income
-------------------------------------------------------
Deferred income consists of the unamortized portion of payments
received from customers for extended warranty contracts. Revenue earned under
these service contracts is recognized ratably over the life of the related
contract (typically one year).
Cash and cash equivalents
-------------------------
Cash in excess of requirements is principally invested in short-term
corporate and government obligations, money market funds and certificates of
deposit with an average maturity of three months or less. Such investments
are deemed to be cash equivalents for purposes of the Statements of Cash Flows.
F-7
<PAGE> 28
Marketable Securities
---------------------
The amortized cost and fair market values of all marketable securities
at September 30, 1995 are as follows:
<TABLE>
<CAPTION>
Amortized Fair Value Gross
(Securities available for sale Cost Basis (plus accrued Unrealized
(mature within three years) (plus interest) interest) Loss
- ------------------------------ --------------- ------------- ----------
<S> <C> <C> <C>
U.S. government and government agencies $1,534,000 $1,534,000 $ 0
Commercial paper 1,519,000 1,514,000 (5,000)
---------- ---------- --------
$3,053,000 $3,048,000 $ (5,000)
========== ========== ========
</TABLE>
The specific identification method has been used to determine cost for
each security. During fiscal 1995, the Company realized losses of $55,000 from
the sale of securities available for sale during fiscal 1995. The net
unrealized holding loss on securities available for sale which is included in
stockholders' equity for fiscal 1995 was $5,000. These securities are
interest-earning securities.
Consolidated Statements of Cash Flows
-------------------------------------
During fiscal 1993, the Company entered into an agreement to acquire
title and interest in two U.S. Patents for medical devices. As consideration,
the Company granted a Non-Qualified Stock Option to purchase 25,000 shares of
the Company's common stock at a price of $.01 per share. Pursuant to the
agreement, options to purchase 10,000 common stock shares were exercisable
immediately and options to purchase 15,000 common stock shares become
exercisable, subject to certain covenants and restrictions, at a rate of 5,000
per year over the three years beginning on January 1, 1995. The underlying fair
market value of the options immediately exercisable on the date of the agreement
of $68,000 was recorded as the value of the acquired patents.
During fiscal 1994, an officer-director exercised a 340,000 share stock
option and borrowed $982,000 under the Employee Stock Option Loan Program. The
note receivable from this officer-director is secured by the 340,000 common
shares acquired.
The Company made no cash payments for interest or income taxes in 1995,
1994, or 1993.
F-8
<PAGE> 29
NOTE 3. COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS:
Inventories consist of the following at September 30, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Raw materials $ 3,362,000 $ 3,796,000
Work-in-process 633,000 1,010,000
Finished goods 4,546,000 3,545,000
----------- -----------
8,541,000 8,351,000
Inventory reserve (2,743,000) (2,621,000)
----------- -----------
Net inventory $ 5,798,000 $ 5,730,000
=========== ===========
</TABLE>
Net properties consist of the following at September 30, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Furniture and equipment $ 4,593,000 $ 4,457,000
Leasehold improvements 278,000 256,000
Other 72,000 43,000
----------- -----------
4,943,000 4,756,000
Accumulated depreciation and amortization (3,575,000) (3,128,000)
----------- -----------
Net properties $ 1,368,000 $ 1,628,000
=========== ===========
</TABLE>
Accrued expenses consist of the following at September 30, 1995 and
1994:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Professional fees $ 198,000 $ 200,000
Commissions 401,000 312,000
Salaries, wages and benefits 549,000 473,000
Sales tax 268,000 217,000
Printing 89,000 90,000
Retrofit accrual 20,000 100,000
Product warranty 186,000 126,000
Accrued royalties 42,000 140,000
Other 80,000 167,000
---------- ----------
$1,833,000 $1,825,000
========== ==========
</TABLE>
NOTE 4. DEVELOPMENT SUPPLY AND LICENSE AGREEMENT
In June 1991, the Company entered into an agreement (the "Agreement")
granting worldwide rights to market the Company's side-firing laser devices in
the medical specialty fields of urology, gynecology and gastroenterology to
C.R. Bard, Inc. ("Bard").
Pursuant to the terms of the Agreement, (i) the Company receives a
royalty amount (subject to certain specified volume adjustments) from the unit
sales price for the Company's products charged by Bard to its customers, (ii)
an additional 4% of the unit sales price is appropriated to an escrow fund for
reimbursing the Company for the future development of other urological products
or improvements to existing urological products, (iii) the Company also
received a monthly research and development allowance of $33,333 for the first
twelve months of the agreement, and (iv)
F-9
<PAGE> 30
Bard bears the cost of certain future patent preparation and filing costs. In
addition, Bard has agreed to pay a portion of royalty and patent litigation
costs surrounding the Company's lateral lasing device (see Note 10.)
Under the Agreement, net revenues and royalties earned from Bard
accounted for 3%, 23%, and 32% of the Company's net revenues for the fiscal
years ended September 30, 1995, 1994 and 1993, respectively. In addition,
during the year ended September 30, 1995, 1994 and 1993, the Company incurred
$0, $184,500 and $413,000, respectively, of reimbursable development costs
related to urological applications. At September 30, 1995, 1994 and 1993, the
Company included $382,000, 403,000 and $586,000 respectively, in other assets.
Such amounts represent monies receivable from Bard for royalties earned,
reimbursable legal costs incurred and reimbursable R&D expenses incurred. The
Company recorded a reserve equal to the amount included in other assets,
$382,000, as of September 30, 1995 due to the uncertainty of collectibility of
such amounts due to the Company's filing of litigation against Bard (See Note
10).
NOTE 5. INCOME TAXES:
Due to the net operating losses incurred by the Company in the fiscal
years ended September 30, 1995, 1994 and 1993, no provision for income taxes
has been made. The deferred tax balances are comprised as follows:
<TABLE>
<CAPTION>
September 30, 1995 September 30, 1994
------------------ ------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 6,574,000 $ 4,823,000
Research & development credits 1,546,000 1,221,000
Inventory obsolescence reserves 1,056,000 1,048,000
Accrued expenses 360,000 400,000
Account receivable reserves 103,000 134,000
Valuation allowance (9,531,000) (7,428,000)
----------- -----------
108,000 198,000
Deferred tax liabilities:
Fixed asset basis (108,000) (198,000)
----------- -----------
$ 0 $ 0
=========== ===========
</TABLE>
The net change in the valuation allowance for deferred tax assets was
an increase of approximately $2,103,000 from the balance at September 30, 1994.
The change primarily relates to additional net operating loss carryforwards
generated in fiscal 1995, which were fully reserved for at September 30, 1995.
At September 30, 1995, the Company had net operating loss
carryforwards for federal and state income tax purposes totaling approximately
$17,300,000 and $11,400,000, respectively, which begin to expire in 2006.
The Tax Reform Act of 1986 includes provisions which may limit the net
operating loss carryforwards available for use in any given year if certain
events occur, including significant changes in stock ownership.
NOTE 6. STOCKHOLDERS' EQUITY:
Stock Options:
The Company has adopted stock option plans that authorize the granting
of options to key employees, directors, and/or consultants to purchase unissued
common stock subject to certain conditions, such as continued employment.
Options are generally granted at the fair market value of the Company's common
stock at the date of grant, become exercisable within five years from the date
of grant, and expire in ten years.
F-10
<PAGE> 31
Activity during the years ended September 30, 1995, 1994 and 1993 under the
plans was as follows:
Stock Options Outstanding
<TABLE>
<CAPTION>
Option Exercise Aggregate
Options Price Per Share Exercise Price
--------- --------------- --------------
<S> <C> <C> <C>
September 30, 1992 1,143,000 2 3/8 - 9 3/4 $ 5,607,160
Granted 486,500 1/100 - 8 1/4 3,474,125
Exercised (103,150) 1/100 - 6 1/4 (336,769)
Canceled (200,300) 2 3/8 - 15 3/4 (1,060,775)
--------- -----------
September 30, 1993 1,326,050 1/100 - 9 3/4 7,683,741
Granted 287,000 3 5/8 - 14 5/8 2,515,750
Exercised (419,820) 2 3/8 - 8 1/4 (1,377,190)
Canceled (65,400) 2 3/8 - 11 1/4 (429,075)
Exchanged (956,080) 5 7/8 - 14 5/8 7,741,733)
Reissued 956,080 5 1/2 5,249,538
--------- -----------
September 30, 1994 1,127,830 1/100 - 5 1/2 5,901,031
Granted 302,500 2 3/4 - 3 3/8 1,034,562
Exercised (25,600) 1/100 - 5 1/2 (61,463)
Canceled (25,400) 3 3/8 - 5 1/2 (105,411)
Exchanged (697,080) 3 5/8 - 5 1/2 (3,766,838)
Reissued 697,080 3 1/2 2,439,780
--------- -----------
September 30, 1995 1,379,330 1/100 - 5 1/2 $ 5,441,661
========= ================ ===========
</TABLE>
Common shares reserved for future grants under the above option plans
totaled 0 and 260,959 at September 30, 1995 and 1994, respectively. Of the
shares previously granted and outstanding at September 30, 1995, 518,740 shares
were vested and exercisable at prices ranging from $2.375 to $5.500 per share.
As options are generally granted at an exercise price equal to the
fair market value of the underlying stock at the date of grant, there are
generally no charges to income in connection with the issuance of options.
Upon exercise, proceeds from the sale of shares under the stock options plans
are credited to common stock and additional paid-in capital.
See NOTE 8 for information on a loan to an officer in connection
with his exercise of stock options.
On August 18, 1994 the Board of Directors approved the exchange of all
outstanding Incentive Stock Options and Non-Qualified Stock Options held by
directors, consultants, officers and employees of the Company that were in
excess of $5.50 per share for new options exercisable at $5.50 per share with
the same vesting periods. The closing price of the common stock on such date
was $3.25 as reported by the NASDAQ National Market System. On September 11,
1995 the Board of Directors approved the exchange of all outstanding Incentive
Stock Options and Non-Qualified Stock Options held by consultants, officers
(excluding the President and the Chairman of the Company) and employees of the
Company that were in excess of $3.50 per share for new options exercisable at
$3.50 per share with the same vesting periods. The closing price of the common
stock on such date was $3.375 as reported by the NASDAQ National Market System.
Warrants:
During fiscal 1994, 44,000 warrants issued in connection with a prior
securities offering were exercised and total proceeds of $460,000 were
received. As of September 30, 1995, 356,000 warrants were outstanding at an
exercise price of $10.31, and 130,000 unregistered warrants at a price of
$11.86 were outstanding.
NOTE 7. EMPLOYEE BENEFIT PLANS:
Effective February 1, 1989, the Company and its subsidiary adopted a
401(k) Retirement Savings Plan (the "Retirement Plan"). Under the terms of the
Retirement Plan, employees may, subject to IRS limitations, contribute up to
15% of their total compensation. The Company contributes an additional $0.50
for each dollar of employee contributions up to 2% of eligible employee
compensation. Employees become vested
F-11
<PAGE> 32
in the Company's contribution at 20% per year over five years. The Company's
contributions to the Retirement Plan totaled $76,000, $69,000, and $60,000, for
1995, 1994, and 1993, respectively.
NOTE 8. RELATED PARTY TRANSACTIONS:
The Company has made payments of $30,000, $43,000, and $59,000, in
the fiscal years ending 1995, 1994 and 1993, respectively, to two law firms. A
director of the Company is a member of one of the law firms. Another director
was a member of the other law firm until his retirement from that law firm in
1994.
On August 18, 1994, the Compensation Committee of the Board of
Directors approved a loan to an officer-director for the purchase of 340,000
shares of Common Stock of the Company for an aggregate of $982,000 as a result
of the exercise of Options. The principal amount and interest due are loaned
without recourse to the officer-director, and the sole collateral for the note
is the 340,000 shares of common stock held in the officer-director's name. The
note is due and payable five (5) years from August 18, 1994, with interest
currently at 7.05%, said interest accruing and being payable at maturity.
NOTE 9. COMMITMENTS:
The Company is obligated under certain facility lease agreements to make
minimum rental payments, excluding taxes and common area maintenance costs, for
the years ending September 30 as follows:
<TABLE>
<S> <C>
1996 $194,000
--------
TOTAL $194,000
========
</TABLE>
The lease on the Company's headquarters facility (monthly rental
$16,600), expires in June 1996. The Company has an option to renew the lease
for two periods of thirty months each. The Company's Poly-Optical Products,
Inc. facility lease (monthly rental $7,500) expires in March 1996 and contains
renewal options totaling five years.
Rent expense for the years ended September 30, 1995, 1994 and 1993 was
approximately $315,000, $280,000, and $464,000, respectively.
NOTE 10. LITIGATION:
In connection with the June 9, 1994 settlement of litigation with
Royice B. Everett, M.D., a co-inventor of the Urolase(R) fiber, the Company
amended and restated its licensing agreement with Dr. Everett. The Company
paid $90,000 of the settlement amount for royalties owed on past Urolase(R)
fiber sales and $585,000 of the settlement amount as a non-refundable
prepayment of future royalties which otherwise would be owed to the co-inventor
on future sales of the Urolase(R) fiber. In addition, the Company is required
to pay a royalty on sales of Urolase(R) fibers over the term of the agreement.
At September 30, 1995, the Company had a balance of $439,000 in prepaid
royalties of which $83,600 was included in other current assets.
In February 1994, a lawsuit was filed by Coherent, Inc., claiming the
Company was infringing three of its patents in the orthopedic field. The
Company filed a response and counter claim. This matter was settled by the
parties in December 1994. In connection with this settlement the Company
received a license in orthopedics at an agreed-upon royalty rate.
On October 6, 1995, the Company filed a lawsuit against Bard claiming
damages of at least $72 million for Bard's failure to perform its obligations
as Trimedyne's exclusive distributor under the Agreement. The Company is
taking actions to mitigate its damages, produce revenues and attempt to regain
its market position in urology.
On January 25, 1995 the Company filed a lawsuit against Surgical Laser
Technologies, Inc. (SLT) charging infringement of the Company's U.S. Patent No.
4,646,737, and of U.S. Patent No. 5,380,317 which is owned jointly by the
Company and by Dr. Everett. On November 8, 1995 the Court granted SLT's motion
for summary judgment that U.S. Patent No. 4,646,737 is not infringed by SLT's
contact lasing devices. The Company believes that the Court's interlocutory
order granting the motion for summary judgment is incorrect and plans to appeal
the Court's decision at the appropriate time. The Company is currently
investigating whether SLT is infringing on another U.S. patent owned by the
Company.
It is the Company's opinion that the settlements referred to above
will not have a material adverse effect on the Company's results of operations
or financial position.
F-12
<PAGE> 33
Trimedyne was involved in several other minor actions which were
handled by the company's insurance carrier and either settled or dismissed
during the fiscal year ended September 1995. At the end of the fiscal year,
the Company was not involved in any other lawsuits which are believed to have a
material adverse effect on the Company's results of operations or financial
position.
NOTE 11. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMER
The Company generates revenues principally from sales of products in
the medical field. As a result, the Company's trade accounts receivable are
concentrated primarily in this industry. No single customer represented more
than 10% of sales in fiscal 1995. One customer accounted for approximately 23%
and 32% of net revenues in fiscal 1994 and 1993, respectively.
Sales in foreign countries accounted for approximately 16% of the
Company's total sales. The breakdown by geographic region is as follows:
<TABLE>
<S> <C>
Asia $ 754,000
Latin America 389,000
Middle East 54,000
Europe 804,000
Other (Australia, New Zealand, South Africa) 54,000
----------
Total $2,055,000
==========
</TABLE>
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company maintains reserves for
potential credit losses and such losses have been within management's
expectations.
NOTE 12. INDUSTRY SEGMENT FINANCIAL DATA:
During the three fiscal years ending 1995, 1994, and 1993, the Company
operated in two industry segments: medical lasers and disposable devices and
plastic optical fibers. Operations in the medical laser and disposable device
industry consist primarily of the sale of Nd:YAG and Holmium medical laser
systems and the manufacture and sale of related disposable devices. The
Company's operations in the fiber optics industry relate principally to the
manufacture and sale of plastic optical fibers and fiber-optic illumination
products through its subsidiary, Poly-Optical.
F-13
<PAGE> 34
Industry segment information for the years ended September 30, 1995, 1994 and
1993 is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------------------- ------------------ -------------------
Amount % Amount % Amount %
------------- ---- ----------- --- ----------- ----
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Fiber Optics Industry $ 3,403,000 26% $ 2,990,000 22% $ 2,635,000 17%
Medical Products 9,638,000 74% 10,403,000 78% 13,089,000 83%
----------- --- ----------- ---- ---------- ----
Total $13,041,000 100% $13,393,000 100% $15,724,000 100%
=========== === =========== ==== =========== ====
Income (loss) from
operations:
Fiber Optics Industry $ 373,000 (7%) $ 235,000 8% $( 62,000) (6%)
Medical Products (5,579,000) 107% (3,009,000) (108%) (1,047,000) (94%)
---------- --- ----------- ---- ----------- ----
Total $(5,206,000) 100% $(2,774,000) (100%) $(1,109,000) (100%)
=========== === ========== ==== =========== ====
Assets:
Fiber Optics Industry $ 1,945,000 13% $ 1,771,000 9% $ 1,565,000 7%
Medical Products 13,095,000 87% 18,727,000 91% 19,989,000 93%
----------- --- ----------- ---- ----------- ----
Total $15,040,000 100% $20,498,000 100% $21,554,000 100%
=========== === =========== ==== =========== ====
Depreciation and amortization:
Fiber Optics Industry $ 137,000 24% $ 126,000 23% $ 110,000 23%
Medical Products 430,000 76% 422,000 77% 378,000 77%
----------- --- ----------- ---- ----------- ----
Total $ 567,000 100% $ 548,000 100% $ 488,000 100%
=========== === =========== ==== =========== ====
Capital expenditures:
Fiber Optics Industry $ 169,000 52% $ 189,000 31% $ 121,000 28%
Medical Products 155,000 48% 419,000 69% 305,000 72%
----------- --- ----------- --- ----------- ----
Total $ 324,000 100% $ 608,000 100% $ 426,000 100%
=========== === =========== === =========== ===
</TABLE>
F-14
<PAGE> 35
SCHEDULE I
TRIMEDYNE, INC. AND SUBSIDIARY
SUMMARY OF MARKETABLE SECURITIES
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Amount at
which shown
Maturity Interest in the
Marketable Securities Date Rate Cost Market Value balance sheet
- --------------------- -------- -------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Commercial CR Group 01/01/96 6.375% $ 518,000 $ 512,000 $ 512,000
Norwest 09/18/96 5.163% 500,000 501,000 501,000
Fed MM LN Bks 12/23/97 4.650% 501,000 501,000 501,000
Federal Farm Cr 11/01/95 6.330% 500,000 514,000 514,000
Student Loan 02/02/96 499,000 500,000 500,000
U.S. Treasury Notes 03/31/96 7.750% 535,000 520,000 520,000
---------- ---------- ----------
Total Marketable Securities $3,053,000 $3,048,000 $3,048,000
========== ========== ==========
</TABLE>
F-15
<PAGE> 36
SCHEDULE VIII
TRIMEDYNE, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
BALANCE BALANCE
AT BEGINNING CHARGE TO AT END
DESCRIPTION OF PERIOD COST & EXP. DEDUCTION OF PERIOD
- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Allowance bad debt $ 335,000 $ 62,000 $ (82,000) $ 315,000
Inventory reserve $2,621,000 $ 685,000 $(563,000) $2,743,000
Tax reserve $7,428,000 $2,103,000 $ 0 $9,531,000
</TABLE>
F-16
<PAGE> 37
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
- ------- ----------- ------------
<S> <C> <C>
FILED PREVIOUSLY
10(a) Agreement with James Capel Incorporated dated August 1, 1991. . . .
10(b) Development, Supply and License Agreement with C.R. Bard,
Inc., dated June 28, 1991 . . . . . . . . . . . . . . . . . . . . .
10(c) Industrial Lease (for Barranca Parkway headquarters) with
Griswold Controls dated June 19, 1991, and Addendum thereto
dated July 1, 1991 . . . . . . . . . . . . . . . . . . . . . . . . .
10(d) Patent Licensing Agreement with Royice B. Everett,
M.D. (covering the Lateralase Catheter) dated April
1, 1988 as amended . . . . . . . . . . . . . . . . . . . . . . . . .
10(e) Poly-Optical lease with Elpal Electronics Inc. dated
August 13, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . .
10(f) Addendum to Industrial Lease with Griswold Controls
dated September 14, 1993 . . . . . . . . . . . . . . . . . . . . . .
10(g) Patent assignment agreement with Robert Ginsburg,
M.D. dated July 1, 1993 . . . . . . . . . . . . . . . . . . . . . .
10(h) License agreement with Christodoulos Stafanadis, M.D.
and Pavlos Toutouzas, M.D. dated April 1, 1993 . . . . . . . . . . .
10(i)* Amendment to Development Supply and License Agreement
with C.R. Bard dated June 14, 1994 . . . . . . . . . . . . . . . . .
10(j)* Settlement Agreement and Mutual Release among Royice
B. Everett, M.D., Trimedyne, Inc., and C.R. Bard
dated June 9, 1994 . . . . . . . . . . . . . . . . . . . . . . . . .
10(k)* Settlement Agreement and Mutual Release among
Myriadlase, Inc., Trimedyne, Inc., and C.R. Bard dated
June 9, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10(l)* Amended and Restated Licensing Agreement with Royice
B. Everett M.D. dated June 9, 1994 . . . . . . . . . . . . . . . . .
FILED HEREWITH
10(m)* License Agreement with Coherent dated December 9, 1994 . . . . . . .
23 Consent of Independent Public Accountants . . . . . . . . . . . . .
27 Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
- -----------------
* The Company requested confidential treatment for
portions of those exhibits marked with an asterisk (*).
<PAGE> 1
EXHIBIT 10(m)
ALL SECTIONS MARKED WITH TWO ASTERISKS ("**") REFLECT PORTIONS WHICH
HAVE BEEN REDACTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION BY TRIMEDYNE, INC. AS PART OF A REQUEST FOR CONFIDENTIAL TREATMENT.
LICENSE AGREEMENT
This Agreement is made and entered into by and between Coherent, Inc.,
a Delaware corporation, having its principal office located at 5100 Patrick
Henry Drive, Santa Clara, California 95054 (hereinafter "LICENSOR"), and
Trimedyne, Inc., a California corporation having its principal office at 2801
Barranca Road, Irvine, California 92714 (hereinafter referred to as
"LICENSEE").
RECITALS
Whereas, LICENSOR is the owner of U.S. Patent No. 5,037,421 and U.S.
Patent No. 5,147,354 both entitled "Mid Infrared Laser Arthroscopic Procedure"
(the "Licensed Patents");
Whereas, LICENSEE desires to obtain a non-exclusive license under the
Licensed Patents; and
WHEREAS, LICENSOR is willing to grant LICENSEE a non-exclusive license
under the Licensed Patents.
Now therefore, subject to the terms and conditions contained herein,
the parties agree as follows:
1.0 Definitions
-----------
1.1 LICENSED PATENTS shall mean the U.S. Patents referred to
above plus any renewals, divisions, reissues, reexaminations or
continuations-in-part with respect thereto and any corresponding foreign
patents.
1.2 LICENSED LASER shall mean any laser or laser systems which
infringes one or more of the valid claims of the Licensed Patents.
1.3 LICENSED DELIVERY DEVICE shall mean any device that
delivers the laser energy to a desired location which infringes one or more of
the valid claims of the Licensed Patents, including such Devices sold with
original equipment or subsequent thereto.
1.4 LICENSED DEVICE shall mean a Licensed Laser and/or a
Licensed Delivery Device. It shall be presumed that a Licensed Device sold by
LICENSEE infringes the Licensed Patents (in which case royalties would be due
hereunder) if it is used with an arthroscopic or endoscope in a liquid medium
in a method covered by any valid claim of the Licensed Patents, unless (i) the
Licensed Device will be used solely for cardiovascular applications and
appropriate labeling is placed on the Licensed Device or (ii) LICENSEE provides
LICENSOR with a written statement signed by the customer that the Licensed
Device shall not be used for applications that infringe one or more of the
valid claims of the Licensed Patents.
1.5 LICENSED APPLICATION shall mean only orthopedic
applications.
1.6 NET SELLING PRICE for the purpose of computing royalties
shall mean the price at which LICENSEE invoices the sale or lease of Licensed
Devices to its customers. It is further understood and agreed that in respect
of inter-company sales between the LICENSEE and its related
1
<PAGE> 2
companies, the Net Selling Price shall mean the price at which the LICENSEE
ordinarily sells to its independent distributors or customers under similar
circumstances. In such event, no royalty shall accrue or be payable in respect
of any subsequent resale of such equipment by such independent distributor or
consumer to a third party.
1.7 EFFECTIVE DATE shall be July 1, 1994.
1.8 SUBSIDIARY shall mean a corporation, company or other
entity more than 50% of whose outstanding shares or securities (representing
the right to vote for the election of directors or other managing authority)
are, now or hereafter, owned or controlled by LICENSEE. Whenever the term
LICENSEE is used through this Agreement, it is intended to include Licensees
and Subsidiaries.
2.0 License Grant
-------------
1.2 LICENSOR grants LICENSEE a non-exclusive, world-wide
license under the Licensed Patents to make, have made, use, lease and sell
Licensed Devices for Licensed Applications which would infringe any valid claim
of the Licensed Patents.
2.2 LICENSOR hereby covenants not to sue customers of LICENSEE
for using Licensed Devices for Licensed Applications sold or leased by LICENSEE
upon which the requisite royalties have been paid or accrued by LICENSEE under
this Agreement.
2.3 LICENSEE agrees to appropriately mark all Licensed Devices
with a notice stating that the products are licensed under U.S. Patent No.
5,037,421 and U.S. Patent No. 5,147,354.
2.4 LICENSOR undertakes that it will not assert against
LICENSEE, or any customer of LICENSEE, any United States patent, or any pending
United States patent application upon which claims may be granted, which would
have a scope broader than any of the independent claims in either U.S. Patent
No. 5,037,421 or U.S. Patent No. 5,147,354. For the purposes of this
paragraph, a claim having a scope broader than the independent claims referred
to above, would necessarily be infringed by performing the steps set forth in
those claims without regard to the specific design of the laser system
generating the 1.8 to 2.2 micron output beam.
3.0 Release of Past Infringement. Execution of this Agreement and
payment of the amount set forth in Section 4.1 hereof shall be in full
settlement of any claim of infringement liability arising under the Licensed
Patents for Licensed Applications prior to the Effective Date of this
Agreement.
4.0 Royalties
---------
4.1 LICENSEE agrees to pay LICENSOR the sum of $100,000 as a
license issue fee, plus $50,000 for past royalties, payable within fifteen (15)
days of execution of this Agreement. Failure to pay this amount when due shall
be considered a material breach of this Agreement and LICENSOR shall be
permitted, in addition to whatever other legal remedies it may be entitled to,
to terminate this Agreement without regard to the notice provisions of Section
6.2 hereof.
4.2 During the term of this Agreement LICENSEE agrees to pay
LICENSOR royalties
2
<PAGE> 3
for any Licensed Devices sold or leased by LICENSEE in an amount equal to 2% of
the Net Selling Price for the Licensed Devices.
4.3 For any agreement year during the term of this Agreement,
royalties paid under Section 4.2 hereof shall not be less than $ nor more
than $**. In the event that the Net Selling Price for Licensed Devices sold by
Licensee during any calendar year are insufficient to require payment of $**
of royalties, LICENSEE agrees to pay the difference to LICENSOR with its
royalty payment due August 15 of the next agreement year.
4.4 Royalties shall be paid quarterly and payments shall be
made not more than forty-five (45) days following the termination of each
calendar quarter. Royalties shall be payable hereunder when the sale of
Licensed Devices shall have been invoiced by LICENSEE or shipped, whichever is
sooner.
4.5 With respect to licensed Devices shipped to customers
under lease, LICENSEE shall pay royalties to LICENSOR as if such transaction
were a sale.
4.6 LICENSEE shall have the right to adjust royalties payable
hereunder for returns, bona fide price reductions and allowances of Licensed
Devices sold or leased by LICENSEE on which the requisite royalties shall
previously have been paid hereunder. Royalties will however accrue and be
payable on subsequent sales of Licensed Devices which have been acquired by way
of trade-ins, purchases from leasing companies, or other similar acquisitions.
4.7 If subsequent to the Effective Date, LICENSOR grants
another license to the Licensed Patents with royalty rates and/or up front
payments (exclusive of payments for past infringements) more favorable than
those provided herein, LICENSEE may, at its option, adopt all of the terms of
the new license agreement as of the effective date of such subsequent license.
LICENSOR shall notify LICENSEE of any such subsequent licenses and provide
LICENSEE with the opportunity to exercise its right under this Section 4.7.
Such rights shall be exercised by Licensee in writing within 30 days notice
from Licensor or be deemed waived.
5.0 Records and Reports
-------------------
5.1 LICENSEE will maintain records and keep accounts in
sufficient detail to enable a certified public accountant nominated by LICENSOR
and approved by LICENSEE to determine the amount of royalty actually due and
payable for each calendar quarter year. LICENSEE will permit such a certified
public accountant nominated by LICENSOR and approved by LICENSEE to make
inspection of such records and accounts nor more often than annually, at the
request of LICENSOR. Any such certified accountant shall maintain in
confidence any information learned by it by reason of any such inspection and
not use the same for any purpose whatsoever except to verify royalty payments
and reports made by LICENSEE and to report to LICENSOR any underpayment or
overpayment of royalties. If an audit shall reveal that the LICENSEE has made
an error of 10% or more in its favor in any payment due to LICENSOR, the
LICENSEE shall pay the costs of the audit.
5.2 Unless the maximum royalty pursuant to Paragraph 4.2
hereof has been paid, at the end of each calendar year in which this maximum
royalty has not bee paid, LICENSEE will
3
<PAGE> 4
deliver to LICENSOR within 60 days after the end of the calendar year a
statement setting forth the number and type (by model number) of Licensed
Devices sold by LICENSEE during the calendar year. LICENSOR shall retain in
confidence all information contained in such royalty statement.
6.0 Termination
-----------
6.1 LICENSEE may give LICENSOR notice of termination of this
Agreement at any time during the life of the Agreement and such termination
will be effective thirty days following written notice from LICENSEE of intent
to terminate.
6.2 If either party to this Agreement should default in the
performance of any of the terms of this Agreement (including a breach of this
Agreement which can be cured) the non-defaulting party may terminate this
Agreement by providing written notice of termination to the defaulting party
and the termination shall be effective 60 days from said notice unless the
defaulting party cures such default within said 60 day period or taken
reasonable steps to avoid recurrence of the default if the default is of a type
which cannot be cured.
6.3 Should LICENSEE terminate this Agreement (under either 6.1
or 6.2), said notice of termination shall be accompanied by a statement of all
royalty based activities performed by LICENSEE on which royalties are due
hereunder for such period as has elapsed since the last report. Said statement
shall be accompanied by all monies due, including the minimum royalty payment
for the year.
6.4 Unless terminated earlier, this Agreement shall continue
in force until the expiration of the Licensed Patents.
7.0 General
-------
7.1 This License shall not be assignable by LICENSEE without
the express written consent of LICENSOR. LICENSEE may, however, upon written
notice to LICENSOR, assign or extend its rights under this Agreement as a part
of the sale of all or a portion respectively of its business in which Licensed
Devices are manufactured, used or sold pursuant to this Agreement, but only
with respect to the business sold as a part of such sale; provided, however,
that if the acquiring company is selling infringing Devices other than those of
Licensee prior to the acquisition, the $** maximum royalty provision set forth
in Section 4.3 shall terminate and no longer apply after the acquisition. If
LICENSEE acquires a laser business of an unlicensed third party, neither the
acquisition nor this Agreement shall extinguish the third party's liability
for past infringement.
7.2 Any dispute or claim arising out of, in relation to, or in
connection with this Agreement, or the interpretation, making, performance,
breach or termination thereof, shall be finally settled by binding arbitration
in San Francisco, California under the Commercial Arbitration Rules of the
American Arbitration Association by three arbitrators appointed in accordance
with said Rules. Judgment on the aware rendered by the arbitrators may be
entered in any court having jurisdiction thereof. This Agreement shall be
governed by the laws of the state of California. The arbitrators shall apply
California law to the merits of any dispute or claim, without reference to
rules of conflict of law. The costs of the arbitration, including
administrative and arbitrators' fees, shall be shared equally by the parties.
Each party shall bear the cost of its own attorneys' fees and expert witness
fees. The
4
<PAGE> 5
arbitrators shall make preliminary findings of fact and conclusions of law
which they shall circulate to the parties for their comment during the next
fifteen days. Between fifteen and thirty days after such circulation, the
arbitrators shall issue their final ruling which shall include findings of fact
and conclusion of law.
7.3 This agreement contains the entire and only agreement
between the parties and supersedes all pre-existing agreements between them
respecting its subject matter. Any changes hereto are effective only if in
writing and signed by both parties.
7.4 Any payment, notice or other communication required by, or
permitted to be made by or given to, either party pursuant to this Agreement
shall be sent to such party by registered, certified or express mail, postage
prepaid, or prepaid courier service, addressed to such party at its address set
forth at the beginning of this Agreement, or to such other addresses as such
party shall designate by written notice given to the other party, and shall be
deemed to have been made, given or provided on the date of mailing.
7.5 The parties to this Agreement shall not disclose the terms
and conditions of this Agreement to any third party without the express written
consent of the other party, except:
(a) In response to bona fide requirements or advice of
counsel;
(b) In response to Government disclosure requirements
and inquiries;
(c) In furtherance of judicial action, but the parties
agree to use their best efforts to obtain a
protective order limiting disclosure to attorneys
only; and
(d) For the purpose of identifying LICENSEE as a
licensee of the Licensed Patents, but excluding any
dollar amounts to be paid under this Agreement.
(d) To prior licensees for the purpose of complying
with "most favored licensee" obligation set forth
in prior license agreements.
The parties may also disclose the terms and conditions of this Agreement on a
confidential basis to potential parties to commercial transactions, for example
to potential investors or potential customers, subject to a written
confidentiality agreement.
7.6 Upon execution of this Agreement, the parties shall
execute a consent decree in the form of Exhibit A attached hereto, and such
documents shall be filed jointly on behalf of the parties in the United States
District Court for the Northern District of California in litigation C94-0591
SBA. Each party is to bear its own cost and attorneys' fees.
7.7 LICENSOR grants LICENSEE a non-exclusive, world-wide
license under U.S. Patent No. 5,257,969 to make, have made, use, lease and
sell products that would infringe upon any valid claim of this patent. There
shall be no royalties due on account of such sales occurring within sixty days
of the date of this Agreement. After this 60 day period, royalties shall be
paid on the sale of products that infringe this patent (which shall be in
addition to other royalties required to be paid hereunder) in an amount equal
to 2% of Net Selling Price until six months past the Effective
5
<PAGE> 6
Date and 8% of Net Selling Price thereafter. These sales shall not be counted
towards the minimum or maximum royalties set forth in Section 4.3. For all
other purposes, this patent shall be considered one of the "Licensed Patents"
and the products that infringe upon this patent shall be considered a "Licensed
Device."
Now therefore the parties have caused this Agreement to be signed by
their authorized representatives as of the date first written above.
COHERENT, INC.
Date: December 8, 1994 By: /s/ Robert J. Quillinan
------------------------ -----------------------------
Title: VP & CFO
--------------------------
TRIMEDYNE, INC.
Date: December 9, 1994 By: /s/ Peter Hyde
------------------------ -----------------------------
Title: President and COO
-------------------------
6
<PAGE> 7
MICHAEL A. STALLMENT
JOHN K. UILKEMA
LIMBACH & LIMBACH
2001 Ferry Building
San Francisco, CA 94111
Telephone: (415) 433-4150
Attorneys for Plaintiff and Counterdefendant
COHERENT, INC.
TALIVIDIS CEPURITIS, ESQ.
OLSON & HIERL, LTD.
20 North Wacker Drive, Suite 3000
Chicago, IL 60606
Telephone: (312) 580-1180
Attorneys for Defendant and Counterclaimant
TRIMEDYNE, INC.
HOWARD F. FINE
BAKER & MCKENZIE
Two Embarcadero Center, 24th Floor
San Francisco, CA 94111-3909
Telephone: (415) 576-3000
Attorneys for Defendant
TRIMEDYNE, INC.
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
COHERENT, INC. ) Civil Action No.
Plaintiff, ) C94 0591 SBA
vs. )
)
TRIMEDYNE, INC. )
Defendant. )
) CONSENT DECREE
- ---------------------------------- --------------
TRIMEDYNE, INC., )
Counterclaimant, )
vs. )
)
COHERENT, INC., )
Counterdefendant.)
EXHIBIT A
---------
1
<PAGE> 8
The parties hereto, having resolved their differences in accordance
with a License Agreement executed by them, and having consented to the entry of
the following judgment:
IT IS HEREBY ORDERED:
1. The Court has jurisdiction over the parties and the subject
matter of this action.
2. United States Letters Patents, Nos. 5,037,421, and 5,147,354
are owned by plaintiff and are valid and enforceable in all respects as between
the parties when interpreted to cover orthopedic applications unless and until
there is some other final judicial or administrative (including patent office
reexamination) determination or invalidity and/or unenforceability from which
no appeal can be taken.
3. Defendant Trimedyne, Inc. has infringed or has induced the
infringement of United States Letters Patents, Nos. 5,037,421 and 5,147,354
with respect to certain of the lasers and laser energy delivery devices it
markets as of the date of this judgement for orthopedic applications, unless
and until there is some other final judicial or administrative (including
patent office reexamination) determination from which no appeal can be taken
which limits the scope of one or more of such patents in such a way as to avoid
infringement by such currently marketed products.
4. United States Letters Patent No. 5,257,989 is owned by
plaintiff and is valid and enforceable in all respects as between the parties,
unless and until there is some other final judicial or administrative
(including patent office reexamination) determination of invalidity and/or
unenforceability from which no appeal can be taken.
5. Defendant Trimedyne, Inc. has infringed United States Letters
Patent No. 5,257,989 with respect to certain laser energy delivery devices it
markets as of the date of this judgement, unless and until there is some other
judicial or administration (including patent office reexamination)
determination from which no appeal can be taken which limits the scope of one
or more of such patents in such a way as to avoid infringement by such
currently marketed products.
6. Judgement on the basis of such infringement of United States
Letters Patents, Nos. 5,037,421, 5,147,354, and 5,257,989 is entered in favor
of plaintiff.
7. The above-entitled civil action, including all claims of
plaintiff against defendant and all counterclaims of defendant against
plaintiff is hereby dismissed.
8. There shall be no accounting or award of damages and each
party is to bear its own costs and attorney's fees.
9. This consent judgement is binding upon and constitutes res
judicata between the parties except as otherwise provided above in paragraphs
2, 3, 4 and 5.
2
<PAGE> 9
10. The parties waive all right to appeal from this judgment.
Respectfully submitted,
LIMBACH & LIMBACH
2001 Ferry Building
San Francisco, CA 94111
(415) 433-4150
Dated: By:
----------------------- ----------------------------
Michael A. Stallment
Attorneys for Plaintiff and
Counterdefendant
OLSON & HIERL, LTD.
20 North Wacker Drive, Suite 3000
Chicago, IL 60606
(312) 580-1180
Dated: By:
----------------------- ----------------------------
Talividis Cepuritis, Esq.
Attorneys for Defendant and
Counterclaimant
Howard F. Fine
BAKER & MCKENZIE
IT IS SO ORDERED:
Dated:
--------------------- -------------------------------
U.S. Dist. Judge S.B. Armstrong
Atty. Docket No.: COHN-A0046
3
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-8 of Trimedyne, Inc.
of our report dated December 14, 1995 appearing on page F-2 of this Form 10-K.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
Price Waterhouse LLP
PRICE WATERHOUSE LLP
Costa Mesa, California
December 28, 1995
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