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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
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, 1996 COMMISSION FILE NO. 0-10581
--------------------------
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 92619-7001 (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(714) 559-5300
--------------------------
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)
--------------------------
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 _____
THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES OF
REGISTRANT ON DECEMBER 23, 1996, BASED UPON THE CLOSING PRICE OF THE COMMON
STOCK ON SUCH DATE WAS $32,997,000.
AS OF DECEMBER 23, 1996, THERE WERE OUTSTANDING 10,890,347 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>
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ITEM I. BUSINESS.................................................................. 1
General ................................................................. 1
Cold Laser Use in Orthopedics and Other Surgical Applications............. 1
Thermal Lasers and Side-Firing Laser Devices in Urology................... 2
Agreement with Bard, FDA Status and Pending Lawsuits...................... 2
New Products.............................................................. 3
Cardiodyne................................................................ 3
License Agreements........................................................ 4
Plastic Optical Fibers.................................................... 5
Research and Development.................................................. 5
Manufacturing, Supply Agreements.......................................... 5
Marketing................................................................. 6
Government Regulation..................................................... 6
Employees................................................................. 8
Patents and Patent Applications........................................... 8
Competition............................................................... 9
Insurance................................................................. 9
Industry Segment Information.............................................. 9
Foreign Operations........................................................ 9
ITEM 2. PROPERTIES....................................................... 9
ITEM 3. LITIGATION ...................................................... 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 10
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.......................................................... 11
ITEM 6. SELECTED FINANCIAL DATA.......................................... 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED RESULTS OF
OPERATIONS AND CONSOLIDATED FINANCIAL CONDITION.................. 12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE................................................................ 14
ITEM 10. IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS........................ 14
ITEM 11. EXECUTIVE COMPENSATION.................................................... 14
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............ 14
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ........................... 14
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.......... 15
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS......................................... F-1
</TABLE>
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PART I
ITEM I. BUSINESS
GENERAL
Trimedyne, Inc. (the "Company") is engaged in the development,
manufacturing and marketing of Holmium "cold" pulsed lasers, Nd:YAG "thermal"
lasers and proprietary, disposable fiber-optic laser delivery devices for use in
orthopedics, urology and other medical specialties.
The Company's principal efforts from its inception in 1980 until 1991
were devoted to the manufacturing and marketing of cardiovascular 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
shifted its focus to laser and proprietary delivery system technologies for use
in selected "less invasive" surgical applications in orthopedics, urology and
other medical specialties. In the year ended September 30, 1996, the Company
derived approximately 64% of its sales from the orthopedic field, where the
Company believes its laser products may have advantages over conventional
surgical devices.
Net revenue of the Company in fiscal 1996 decreased 4% to $12,488,000
from $13,041,000 for the prior year. The Company incurred a net loss of
$4,729,000 or $0.47 per share during fiscal 1996, compared to a net loss of
$5,290,000 or $0.56 per share in fiscal 1995. The loss in fiscal 1996 was lower
than in 1995 due to the Company's cost reduction efforts and lower warranty and
service costs. The decline in sales in the year ended September 30, 1996 was due
to lower sales of plastic fiber optics which declined $298,000 or 9% and sales
of urology products which declined $345,000 or 33%.
Despite United States Food and Drug Administration ("FDA") clearance to
market the Company's lasers and side-firing laser devices for the treatment of
BPH in March 1996, sales of these products have been less than anticipated, due
to the introduction of new, lower priced electrovaporization devices and the
incursion of a variety of side-firing laser devices made by competitors into the
U.S. market when C.R. Bard Inc. ("Bard") ceased marketing the Company's
sidefiring laser device. As of September 30, 1996, the Company increased it's
reserves totalling $1,000,000 for the write down of inventories and write-off of
prepaid royalties related to its urology products. (See "Agreement with Bard",
"FDA Status and Pending Litigation" and "Litigation" herein.)
The Company believes its future lies in expanding its orthopedic
business, the development of the new products in neurology, gynecology, urology,
dermatology and cosmetic surgery described herein and the Company's investment
in a newly established cardiovascular laser subsidiary, Cardiodyne, Inc. (See
"New Products", "Cardiodyne" and "License Agreements" for a description of the
new devices the Company and Cardiodyne are developing).
The Company's working capital on September 30, 1996 was $13,919,000.
(See "Management's Discussion and Analysis of Results of Operations and
Consolidated Financial Condition" herein).
The Company was incorporated in Nevada on May 1, 1980, and adopted its
present name on December 31, 1980. The Company has a 90% owned subsidiary,
Poly-Optical Products, Inc. ("Poly-Optical"), which manufactures plastic optical
fibers for use in automotive, consumer, industrial and medical products. In
November 1996, the Company entered into a letter of intent to sell its 90%
interest in Poly-Optical, subject to the buyer obtaining financing therefor.
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 92606, and its telephone
number is (714) 559-5300.
COLD LASER USE IN ORTHOPEDICS AND OTHER SURGICAL APPLICATIONS
Cold lasers, which generate very short, extremely powerful 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
continuous wave "thermal" lasers in certain surgical applications, particularly
when used in tissues such as cartilage, which can be irreparably damaged by
heat, or heat sensitive blood vessels or nerves. In March 1991, the Company
received FDA clearance of its 510(k) Premarket Notification (see "Government
Regulation") to market its OmniPulse(TM)
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Holmium "cold" pulsed 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.
Also, tiny optical fibers permit laser energy to be delivered into spaces in
joints too small to accommodate conventional surgical tools. While an estimated
1,200,000 arthroscopic surgeries are performed annually in the United States,
the proportion in which a laser might be used cannot presently be predicted.
In December 1991, the Company received FDA clearance of its 510(k)
Premarket Notification to market its OmniPulse(TM) 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(TM) 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.
In September 1991, the Company received FDA clearance of its 510(k)
Premarket Notification to market its OmniPulse(TM) Holmium Laser in general
surgery. In March 1994, the Company received FDA clearance under a 510(k)
Premarket Notification to market its Holmium 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
urinary stones). The Company plans to file similar applications with the FDA for
the use of its Holmium Laser in a variety of other surgical applications.
THERMAL LASERS AND SIDE-FIRING LASER DEVICES IN UROLOGY
In certain surgical applications, such as the treatment of benign
prostatic hyperplasia (enlarged prostate or "BPH"), 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, can create 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). In 1988, the
Company acquired an exclusive, worldwide license to a side-firing fiber optic
device consisting of a specially designed, reflectively coated metal tip which
is mounted on the end of an optical fiber. In March 1992, the license was
determined to be non-exclusive. Two U.S. Patents covering such devices have
since issued. The Company also holds an exclusive license to a U.S. Patent which
issued in August 1995 and covers the method of use of side-firing laser devices
in urology, gynecology, gastroenterology and other medical specialties.
In June 1991, the Company's side-firing laser device was cleared for
sale by the U.S. Food and Drug Administration ("FDA") under a 510(k) Premarket
Notification for ablation and hemostasis (coagulation) of urologic tissues. In
November 1994, the Company received clearance from the FDA under a 510(k)
Premarket Notification to market a new, improved version of its side-firing
laser device, which has greater durability, and a new, more versatile version
which has the ability to both coagulate and ablate tissue. However, sales of
these products have not been substantial (See "Agreement with Bard, FDA Status
and Pending Lawsuit").
AGREEMENT WITH BARD, FDA STATUS AND PENDING LAWSUIT
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
(under Bard's Urolase(R) trademark), certain other laser delivery devices and
improvements thereto in urology, gynecology and gastroenterology. 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.
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Bard's clinical 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 sale for the treatment of BPH. Although the FDA stated that
side-firing laser devices cleared for sale for ablation and coagulation of
urologic tissues could be used by a urologist for the treatment of BPH if he
felt it was in the best interest of the patient, Bard 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. The Company filed
its PMA Application for the treatment of BPH in July 1993. 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
appropriate clinical study data. In October 1995, the Company withdrew its PMA
Application and filed its 510(k) Premarket Notification with the FDA. The
Company's 510(k) Premarket Notification Application to market its side-firing
laser devices for the treatment of BPH was cleared by the FDA in March 1996.
The Company believes that Bard's ceasing to promote the sale of the
Company's side-firing laser devices in the U.S. for more than two years enabled
competitors to fill the void created by Bard's withdrawal from the U.S. market.
Since Bard had not advised the Company of any plan for it to re-enter the
market, 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 has taken
actions to mitigate its damages, produce revenues and attempt to regain sales in
urology. However, for the reasons described above, and other market factors, the
Company has not been able to generate any significant sales of its side-firing
laser devices in the urology field.
NEW PRODUCTS
The Company is developing a new type of laser for use in plastic
surgery, cosmetic surgery and dermatology. This new laser will have the
capability to perform procedures that cannot be done with conventional lasers.
The Company plans to commence testing its new laser in March 1997 and expects to
commence commercial sales, subject to FDA clearance, in 1997. Since cosmetic
surgery lasers are sold directly to plastic and cosmetic surgeons,
dermatologists and other physicians, the Company does not expect that sales of
its new laser will be inhibited by limited capital equipment funds, as is the
case in sales of conventional lasers to hospitals.
As discussed under "License Agreements" below, the Company has acquired
U.S. Patents covering proprietary devices for delivering and releasing coils in
brain aneurisms and treating menhorragia (excessive uterine bleeding). The
Company is developing products covered by these patents for use in neurology,
gynecology and urology. In order to market these products, the Company is
attempting to negotiate distribution agreements with established companies with
large sales forces in these medical specialties. There is no assurance the
Company's efforts to do so will be successful.
CARDIODYNE
In October 1996, the Company agreed to invest $2,000,000 in
Cardiodyne, Inc. ("Cardiodyne"), a wholly-owned subsidiary of Trimedyne, which
plans to develop a proprietary laser system for use in transmyocardial
revascularization or "TMR". Trimedyne also agreed to transfer to Cardiodyne, its
design for a TMR Laser System, several lasers, testing and production equipment
and supplies. Trimedyne agreed to grant Cardiodyne an exclusive license to all
of Trimedyne's present and future patents, patent applications and technology in
the cardiovascular field. Trimedyne also agreed to supply all of Cardiodyne's
requirements for lasers on a cost-plus basis.
TMR is a new procedure for treating severe coronary artery disease.
Cardiodyne's proprietary TMR Laser System, which is presently in development,
consists of its SuperPulse(TM) Holmium laser, the most powerful laser of this
type presently available, as well as Cardiodyne's proprietary AutoFire(TM)
automated firing system and its proprietary, disposable Channel Maker(TM)
optical fiber devices. Cardiodyne's TMR System will be used to create 15 to 50
channels through the heart wall between heartbeats, triggered by the patient's
electrocardiogram (ECG), in less than one-half
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second. The channels enable blood from the heart chamber to reach and nourish
areas of the myocardium (heart muscle) that have been deprived of blood by
blockages in the patient's coronary arteries.
In early 1997, Cardiodyne plans to apply to the FDA for approval to
commence clinical trials of its TMR System in the treatment of so-called "no
option" angina patients, who have already failed bypass surgery and/or balloon
angioplasty or are not suitable candidates for such procedures. In a second
clinical trial, Cardiodyne plans to perform TMR as an adjunct or "back-up" to
coronary bypass surgery, to provide an alternate source of blood to the heart
muscle if one or more of the grafted vessels or an unbypassed artery fails. At
about the same time, Cardiodyne also plans to request FDA approval to commence
clinical trials of its TMR System in humans in a minimally invasive TMR
procedure, through a needle puncture between the ribs. In this procedure, the
placement of the Channel Maker(TM) optical fiber will be observed by the surgeon
through an endoscope, which is inserted into the chest cavity through a separate
puncture beneath the rib cage.
In late 1997, Cardiodyne plans to request FDA approval to commence a
clinical trial of its patented Spectraprobe(TM) optical fiber percutaneously
through a catheter, which would be inserted into a puncture in the patient's
femoral artery in the groin and moved through the arterial system into the left
ventricle, the main pumping chamber of the heart. In this procedure, the TMR
channels will be made part way through the heart wall "from the inside",
eliminating the risk of bleeding from the heart's surface.
Extensive, controlled clinical trials, demonstrating the safety and
efficacy of Cardiodyne's TMR System versus conventional therapies, will be
required before Cardiodyne can submit a Pre-Market Approval ("PMA") application
to the FDA to market its TMR System for use in TMR. This process could take two
to three years, or longer, and will require Cardiodyne's raising additional
funds. Until U.S. marketing approval is obtained, Cardiodyne plans to market its
TMR Systems overseas, particularly in countries whose health care budgets cannot
afford the high cost of coronary bypass surgery or balloon angioplasty.
E. Phillip Palmer recently joined Cardiodyne as its President and Chief
Operating Officer. Mr. Palmer was formerly Vice President-Corporate Development
of St. Jude Medical, Inc. Prior thereto, he was Vice President-Global Sales and
Marketing of Pacesetter, Inc., a $400 million manufacturer of cardiac pacemakers
and cardiac rhythm devices. Earlier, he was Director of Operations in Europe,
Africa and the Middle East for Medtronic, Inc.
LICENSE AND PATENT AGREEMENTS
The Company acquired an exclusive license to a U.S. Patent covering a
device and method for depositing a tiny coil of platinum wire 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 platinum 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 device for delivering and
releasing coils in brain aneurysms. (See "New Products" above).
In 1996, the Company acquired an exclusive license to a U.S. Patent
covering a unique laser device for use in gynecology for the treatment of
menhorragia (excessive uterine bleeding). An estimated 200,000 surgeries are
performed annually in the United States to treat this condition. This device may
also be useful in urology for the treatment of BPH. The Company believes this
patent, which has also issued in the United Kingdom and Germany, may enable the
Company to enter the gynecology field and , possibly in the urology field,
although such cannot be assured.
(See "New Products" above.)
In 1995, the Company acquired sole ownership of a U.S. Patent covering
the therapeutic use in the heart of a laser or any other source of energy
synchronized with the movement of the heart, triggered from the patient's ECG.
The use of lasers not properly synchronized with the patient's ECG has been
shown to increase the incidence of life threatening arrhythmia (irregular,
sometimes uncontrollable heartbeats). The Company believes this patent, which
was issued in 1988, is the basic patent covering ECG synchronization in the TMR
field. This patent was exclusively licensed to Cardiodyne. (See "Cardiodyne"
above.)
In 1993, the Company acquired sole ownership of a U.S. Patent covering
an expandable laser angioplasty catheter. In November, 1995, the Company was
issued a U.S. Patent covering an improved, expandable laser
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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 an
expandable laser catheter able to create a channel significantly larger than the
catheter's original diameter and restore normal blood flow, without the need to
follow the laser procedure with balloon angioplasty. These patents have been
exclusively licensed to Cardiodyne. (See "Cardiodyne" above.)
In 1994, the Company acquired an exclusive, worldwide license to a U.S.
Patent (pending in several foreign countries) covering a temporary, removable
stent and 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. This patent has been exclusively licensed to
Cardiodyne. (See "Cardiodyne" above.)
The Company also has license agreements with a number of universities
and inventors, under which royalties on sales, if any, are payable, and one
license agreement with a competitor under which an annual maximum royalty is
payable. 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 1983, the Company acquired Poly-Optical Products, Inc.
("Poly-Optical"), a manufacturer of fiber-optic lighting and viewing devices.
Poly-Optical owns several U.S. Patents and pending U.S. Patent applications,
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").
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, 1996, Poly-Optical had sales of
$3,105,000 and income from operations of $252,000, compared to sales of
$3,403,000 and income from operations of $373,000 in the prior year.
The Company has entered into an agreement, subject to, among other
significant matters, the availability of financing, for the sale of
Poly-Optical. In the event that the proposed sale of Poly-Optical is not
consummated, the Company plans to continue operating Poly-Optical as a
subsidiary.
RESEARCH AND DEVELOPMENT
From its inception to September 30, 1996, an aggregate of $27,720,000
has been expended by the Company for research and development ("R&D"), including
clinical and regulatory activities, of which $2,378,000 was expended during the
fiscal year ended September 30, 1996. As it has in the past, the Company intends
to continue to contract with unaffiliated hospitals and research institutions
for the clinical testing of its developmental products.
MANUFACTURING, SUPPLY AGREEMENTS
Trimedyne and Poly-Optical believe that each has adequate engineering,
design and manufacturing facilities (see "Properties" herein).
The Company has supply agreements with several vendors for 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
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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 time 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, as well as
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, 1996, 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 44 sales persons specializing in the sale of medical
devices in the United States. Outside the United States, the Company sells its
products through 60 independent distributors who sell various medical products
in approximately 60 foreign countries. The Company presently employs two
Regional Sales Directors, a Vice President - International Sales, an
International Sales 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.
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. 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) Premarket 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 "Premarket
Approval"). However, if a device is substantially equivalent to a product
marketed
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prior to May 28, 1976, or a comparable product subsequently cleared by the FDA
under a 510(k) Premarket Notification, a 510(k) Premarket 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 might have a material adverse
effect upon the Company's future operations.
GMP Requirements
In October 1996, the FDA published a revision to its Good Manufacturing
Practice ("GMP") regulations. Compliance with the new GMP regulations is
required by June 1, 1997.
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 in all material respects 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 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
7
<PAGE> 10
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 are
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, 1996, the Company and Poly-Optical had 101 and 38
full-time employees, respectively, a total of 139, of whom 76 were engaged in
production, 32 in R&D, 14 in sales and marketing, and 17 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, 1996, the Company had been assigned or obtained
exclusive or non-exclusive , worldwide licenses to 15 issued U.S. Patents and 4
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.
There is no assurance that (a) any patents will be issued from the
pending applications, (b) any issued patents will prove enforceable, (c) the
Company will derive any competitive advantage therefrom or (d) that the
Company's products may not infringe patents owned by others, licenses to which
may not be available to the Company. To the extent that pending patent
applications 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. The Company is obligated, under certain
8
<PAGE> 11
of its patent licenses, to make royalty payments. Part of the Company's R&D
activities will be directed towards obtaining additional patent rights, which
may entail royalty and minimum payment obligations.
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
Laserscope, Inc., Surgical Laser Technologies, Inc., Sharplan Lasers, Inc., PLC
Systems, Inc., CardioGenesis, Inc., Eclipse Surgical Technologies, Inc.
and others, certain of which are publicly held.
INSURANCE
The Company has a commercial general liability insurance policy,
including an umbrella policy providing coverage in the aggregate amount of
$7,000,000 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 1996, sales of products in foreign countries accounted for
approximately 20% 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 Irvine, California, which it sub-leases at
a monthly rent of approximately $17,830 per month. The sub-lease expires in
December 1998. The Company also has an option to renew the sublease for one
period of 30 months. 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 October, 1998 at a monthly rent of approximately $8,100, with one 30
month renewal option. As described under "Plastic Optical Fibers" herein, the
Company has entered into an agreement, subject to financing, for the sale of
Poly- Optical. The agreement for the sale of Poly-Optical includes 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.
9
<PAGE> 12
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 the co-inventor. 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 the end of fiscal 1996,
the Company had a balance of $355,000 in prepaid royalties. On September 30,
1996, the Company established a reserve for the remaining prepaid royalty
balance due to the uncertainty of future urology revenues..
In early 1995, the Company filed a lawsuit against Surgical Laser
Technologies, Inc. (SLT) charging infringement of the Company's U.S. Patents No.
4,646,737 and 5,380,317, which are owned by the Company, and U.S. Patent No.
5,380,317, which is owned jointly by the Company and a co-inventor. The Court
granted SLT's motion for summary judgment that all three U.S. Patents are not
infringed by SLT's laser devices. The Company believes that the Court's granting
SLT's motions for summary judgment is incorrect, and the Company has decided,
upon advice of its counsel, to appeal the Court's decision on the latter two of
the above patents.
As described above, 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
and pay certain amounts due under the agreement.
The Company has been named as a defendant in one product liability
lawsuit which is being handled by the Company's insurance carrier. The Company
believes this lawsuit will not have a material effect upon its finances and is
expected to be either settled or dismissed in 1997. 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, 1996.
10
<PAGE> 13
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>
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 5/8 1 11/16
September 30, 1995 5 1/8 2
<CAPTION>
1996 HIGH LOW
- ---- ---- ---
<S> <C> <C>
Quarter ended:
December 31, 1995 4 1 15/16
March 31, 1996 16 1/4 2 9/32
June 30, 1996 9 1/4 5
September 30, 1996 7 3 1/16
</TABLE>
B. Holders of Common Stock
As of December 23, 1996, 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,
-------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues $12,488 $13,041 $13,393 $15,724 $11,366
Loss from operations (5,106) (5,206) (2,774) (1,109) (3,035)
Net loss (4,729) (5,290) (2,265) (561) (1,961)
Net loss per share (.47) (.56) (.25) (.06) (.24)
</TABLE>
11
<PAGE> 14
BALANCE SHEET DATA:
(In thousands)
<TABLE>
<CAPTION>
At September 30,
----------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total assets $17,739 $15,040 $20,498 $21,554 $22,405
Total liabilities 2,302 2,941 3,304 2,949 3,665
Working capital 13,919 10,082 14,829 16,673 16,779
Stockholders' equity 15,270 11,957 17,081 18,517 18,649
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED RESULTS OF
OPERATIONS AND CONSOLIDATED FINANCIAL CONDITION
Consolidated Results of Operations
Fiscal years 1996, 1995 and 1994
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, 1996 and the prior two fiscal years.
Year Ended September 30,
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Cost of goods sold 62.3 65.8 54.1
Research and development 19.0 19.9 19.2
Selling, general
and administrative 59.6 54.2 47.4
Interest income (3.2) (2.4) (2.7)
Other (income) expense, net 0 3.0 (1.1)
Net loss 37.9 40.6 16.9
</TABLE>
Net Revenues
1996 Compared to 1995
Net revenues decreased 4% in fiscal 1996 to $12,488,000 from
$13,041,000. Sales in fiscal 1996 decreased from fiscal 1995 principally due to
lower sales of plastic fiber optics which declined $298,000 or 9% and sales of
urology products which declined $345,000 or 33%. This decline was partially
offset by an increase of $177,000 or 2% in orthopedic sales. Total international
revenues, which consists of medical device sales, for fiscal 1996 were
$2,449,000 compared to $2,055,000 in fiscal 1995 representing 20% of revenues in
fiscal 1996 compared to 16% in fiscal 1995. Laser and disposable device sales in
orthopedics accounted for approximately 64% of revenues in fiscal 1996 compared
to approximately 60% in fiscal 1995.
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, which consists of medical
device sales, for fiscal 1995 were $2,055,000 compared to $2,035,000 in fiscal
1995, representing 16% and 15% of revenues in fiscal year 1995 and 1994,
respectively. 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.
12
<PAGE> 15
Cost of Goods Sold
Cost of goods sold in fiscal 1996 was approximately 62% of net
revenue compared to 66% in fiscal 1995 and 54% in fiscal 1994
1996 Compared to 1995
The decrease in cost of goods sold as a percentage of sales was the
result of lower material and warranty costs associated with the higher powered
Holmium laser, which was first introduced in fiscal 1994, for use in orthopedics
offset by additional inventory write-downs of approximately $352,000.
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.
Research and Development Expenses (R&D)
R&D expenses were $2,378,000 in fiscal 1996, compared to $2,599,000 in
fiscal 1995, and $2,578,000 in fiscal 1994 . R&D spending in fiscal 1997 is
expected to be approximately equal to the fiscal 1996 level, as the Company
intends to continue to fund development of several new products. R&D as a
percentage of net revenues declined slightly to 19% of net revenues in fiscal
1996 vs. 20% and 19% in fiscal years 1995 and 1994, respectively. The decrease
in R&D expenses in 1996 was attributed to prior year expenses associated with
the development work on the Holmium and Nd:YAG lasers, which has been largely
completed.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses increased 5 % to
$7,437,000 in fiscal 1996, compared to $7,067,000 in fiscal 1995, which was an
11% increase from the fiscal 1994 total of $6,345,000. This increase was due
primarily to the approximately $600,000 increase in legal expenses in fiscal
1996 compared to fiscal 1995 offset in part by lower marketing expenses and
commissions paid on decreased sales. Legal expenses associated with current
litigation the company is involved in are anticipated to decline in fiscal 1997.
SG&A expenses increased as a percentage of net revenues in fiscal 1996
over fiscal 1995 and 1994 (60%, 54%,and 47%, respectively), due to a higher
level of legal expenses incurred as noted above, in connection with litigation.
Interest Income, Taxes and Net Loss
Interest income in fiscal 1996 was $395,000, compared to $309,000 in
fiscal 1995 and $359,000 in fiscal 1994. The levels of cash and equivalents
available for investment in interest bearing securities were $8,100,000,
$4,415,000, and $8,661,000 as of September 30, 1996, 1995 and 1994,
respectively. In 1996, the Company generated higher income on its investments
than in 1995 due to the higher overall level of cash available for investment
during the current fiscal year.
The fiscal 1996 net loss was $4,729,000 compared to a net loss of
$5,290,000 in fiscal 1995 and $2,265,000 in fiscal 1994.
Due to the net losses incurred, the Company did not pay income taxes
for fiscal 1996, 1995 and 1994.
Liquidity and Capital Resources
As of September 30, 1996, the Company had working capital of
$13,919,000, compared to $10,082,000 at the end of fiscal 1995. Cash, cash
equivalents and marketable securities increased by $3,685,000 in fiscal 1996 to
$8,100,000 at September 30, 1996 from $4,415,000 at September 30, 1995. The
increase in working capital and cash,
13
<PAGE> 16
cash equivalents and marketable securities was due to the following fiscal 1996
events: (i) the Company completed an offering of equity securities, which
included the sale of 855,000 shares of common stock along with warrants to
purchase 338,750 shares of common stock, resulting in net proceeds of $4.5
million and (ii) the exercise of stock options by employees, repayment of option
exercise loans and the exercise of outstanding warrants resulting in the receipt
of approximately $3.5 million in cash proceeds. These factors were partially
offset by cash used for operating activities totaling approximately $4 million
and capital and patent expenditures of $354,000.
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.
14
<PAGE> 17
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.
10(m)* License Agreement with Coherent dated December 9, 1994.
FILED HEREWITH
23.1 Consent of Independent Accountants
27 Financial Data Schedule
- -----------------
* The Company requested and received confidential treatment for portions
of those exhibits marked with an asterisk (*).
15
<PAGE> 18
(b) No reports on Form 8-K were filed during the fourth quarter of the
fiscal year ended September 30, 1996.
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 24, 1996 /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 Dec. 24, 1996
- ----------------------- Board of Directors
Marvin P. Loeb Chief Executive Officer
/s/ Peter T. Hyde President and Dec. 24, 1996
- ----------------------- Chief Operating
Peter T. Hyde Officer
/s/ Donald Baker Director Dec. 24, 1996
- -----------------------
Donald Baker
/s/ Bruce N. Barron Director Dec. 24, 1996
- -----------------------
Bruce N. Barron
/s/ Richard F. Horowitz Director Dec. 24, 1996
- -----------------------
Richard F. Horowitz
/s/ James L. Kelly Vice President- Dec. 24, 1996
- ----------------------- Finance and
James L. Kelly Chief Financial
and Accounting Officer
</TABLE>
16
<PAGE> 19
TRIMEDYNE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of Trimedyne, Inc. and its
subsidiary are included in Item 8:
Page
Consolidated Financial Statements:
Report of Independent Accountants F-2
Consolidated Balance Sheets at
September 30, 1996 and 1995 F-3
Consolidated Statements of Operations
for the three years ended September 30, 1996 F-4
Consolidated Statements of Changes in
Stockholders' Equity for the three years
ended September 30, 1996 F-5
Consolidated Statements of Cash Flows
for the three years ended
September 30, 1996 F-6
Notes to Consolidated Financial Statements F-7
The following consolidated financial statement schedule of Trimedyne, Inc. and
its subsidiary are included in Item 14(d):
Page
II. Valuation and qualifying accounts F-15
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> 20
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, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 1996,
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 24, 1996
F-2
<PAGE> 21
TRIMEDYNE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------ ------------
1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,575,000 $ 1,367,000
Marketable securities (Note 2) 2,525,000 3,048,000
Trade accounts receivable, net of allowance for doubtful
accounts of $337,000 and $315,000 2,512,000 2,098,000
Inventories (Note 3) 5,214,000 5,798,000
Other 395,000 712,000
------------ ------------
Total current assets 16,221,000 13,023,000
Net properties (Note 3) 1,224,000 1,368,000
Prepaid royalties (Note 10) 355,000
Intangible assets, net of accumulated amortization of
$373,000 and $315,000 294,000 294,000
------------ ------------
$ 17,739,000 $ 15,040,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 683,000 $ 1,021,000
Accrued expenses (Note 3) 1,433,000 1,833,000
Deferred income (Note 2) 186,000 87,000
------------ ------------
Total current liabilities 2,302,000 2,941,000
------------ ------------
Commitments and contingencies (Notes 9 and 10)
Minority interest (Note 2) 167,000 142,000
------------ ------------
Stockholders' equity (Note 6):
Common stock - .01 par value; 15,000,000 shares authorized,
10,991,956 and 9,573,910 shares issued 110,000 96,000
Capital in excess of par value 42,081,000 35,007,000
Accumulated deficit (26,175,000) (21,446,000)
Notes receivable under stock option plans (Notes 2 and 8) (982,000)
Unrealized gain on securities available for sale (33,000) (5,000)
------------ ------------
15,983,000 12,670,000
Less shares of common stock in treasury,
101,609 and 101,609 shares (713,000) (713,000)
------------ ------------
Total stockholders' equity 15,270,000 11,957,000
------------ ------------
$ 17,739,000 $ 15,040,000
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE> 22
TRIMEDYNE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
----------- ----------- -----------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues $12,488,000 $13,041,000 $13,393,000
Costs of goods sold 7,779,000 8,581,000 7,244,000
----------- ----------- ----------
Gross Profit 4,709,000 4,460,000 6,149,000
Selling, general and administrative expenses 7,437,000 7,067,000 6,345,000
Research and development expenses 2,378,000 2,599,000 2,578,000
----------- ----------- -----------
Loss from operations (5,106,000) (5,206,000) (2,774,000)
Other income (expense):
Interest income 395,000 309,000 359,000
Minority interest in earnings
of consolidated subsidiary company (25,000) (29,000) (25,000)
Other 7,000 (364,000) 175,000
----------- ----------- -----------
Loss before income taxes (4,729,000) (5,290,000) (2,265,000)
Income tax provision (Note 5)
----------- ----------- -----------
Net loss $(4,729,000) $(5,290,000) $(2,265,000)
=========== =========== ===========
Net loss per share (Note 2) $ (.047) $ (0.56) $ (0.25)
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE> 23
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, 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)
Net proceeds from securities offering 855,000 9,000 4,576,000
Exercise of stock warrants 30,000 309,000
Exercise of stock options 513,046 5,000 2,129,000
Stock issued to Company's 401K plan 20,000 60,000
Payments received from officer 982,000
Net loss for the year (4,729,000)
---------- -------- ----------- ------------ --------- ---------
Balance at September 30, 1996 10,991,956 $110,000 $42,081,000 $(26,175,000) $(713,000) $ 0
========== ======== =========== ============ ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE> 24
TRIMEDYNE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------------
1996 1995 1994
=============== ============== ===============
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(4,729,000) $(5,290,000) $(2,265,000)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 499,000 567,000 548,000
Provision for excess and
obsolete inventory 352,000 122,000 319,000
Write-off of prepaid royalties 355,000
Loss on disposal of assets (2,000) 21,000 45,000
Minority interest in earnings of subsidiary 25,000 29,000 25,000
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable, net (414,000) 510,000 531,000
Decrease (increase) in inventories 232,000 (190,000) (1,517,000)
Decrease in other current assets 317,000 422,000 8,000
Decrease (increase) in prepaid royalties 84,000 (439,000)
(Decrease) increase in accounts payable (338,000) (276,000) 610,000
(Decrease) increase in accrued expenses (400,000) 8,000 (275,000)
Increase (decrease) in deferred income 100,000 (95,000) 20,000
----------- ----------- ------------
Net cash used for operating activities (4,003,000) (4,088,000) (2,390,000)
----------- ----------- ------------
Cash flows from investing activities:
Capital expenditures (296,000) (259,000) (608,000)
Patent expenditures (58,000) (65,000) (42,000)
Payments received on note receivable from sale of subsidiary 63,000
Sale of (investment in) marketable securities 495,000 2,521,000 (1,915,000)
----------- ----------- ------------
Net cash provided by (used for) investing activities 141,000 2,197,000 (2,502,000)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from exercise of stock options 2,134,000 75,000 399,000
Proceeds from stock issued under 401(k) program 60,000 66,000
Net proceeds from exercise of warrants 309,000 460,000
Net proceeds from securities offering 4,585,000
Payments received on notes receivable under stock option plan 982,000
----------- ----------- -----------
Net cash provided by financing activities 8,070,000 75,000 925,000
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 4,208,000 (1,816,000) (3,967,000)
----------- ----------- -----------
Cash and cash equivalents at beginning of period 1,367,000 3,183,000 7,150,000
----------- ----------- -----------
Cash and cash equivalents at end of period $ 5,575,000 $ 1,367,000 $ 3,183,000
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE> 25
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").
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.
Use of estimates by management
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant estimates and assumptions include those made surrounding
inventory valuation. The Company's inventory largely relates to technologies
which have yet to gain wide spread market acceptance. Management believes no
loss will be incurred on the disposition of its inventory. If wide spread market
acceptance of the Company's products is not achieved, the carrying amount of
inventory could be materially reduced.
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.
F-7
<PAGE> 26
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.
Accounting for stock-based compensation
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), effective for years beginning after December 15,
1995, which establishes a fair value-based method of accounting for stock-based
compensation plans. The statement allows companies to continue to use the
intrinsic value-based approach, supplemented by footnote disclosure of the pro
forma net income and earnings per share of the fair value-based approach. The
Company intends to follow this method allowed by SFAS 123.
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 10,082,844, 9,449,468, and
9,052,089 for 1996, 1995 and 1994, 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.
Marketable Securities
The amortized cost and fair market values of all marketable securities
at September 30, 1996 are as follows:
<TABLE>
<CAPTION>
Amortized Fair Value Gross
Cost Basis (plus accrued Unrealized
Securities available for sale (mature within three years) (plus interest) interest) Gain
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. government and government agencies $2,492,000 $2,525,000 $33,000
</TABLE>
The specific identification method has been used to determine cost for
each security. The net unrealized holding gain on securities available for sale
which is included in stockholders' equity for fiscal 1996 was $33,000. These
securities are interest-earning securities.
Consolidated Statements of Cash Flows
During fiscal 1994, an officer-director exercised a 340,000 share stock
option and borrowed $982,000 under the Employee Stock Option Loan Program. In
March 1996 the loan was repaid in full with accrued interest of $112,643.
The Company made no cash payments for interest or income taxes in 1996,
1995, or 1994.
F-8
<PAGE> 27
NOTE 3. COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS:
Inventories consist of the following at September 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
========== ==========
<S> <C> <C>
Raw materials $3,280,000 $3,362,000
Work-in-process 1,584,000 633,000
Finished goods 3,445,000 4,546,000
---------- ----------
8,309,000 8,541,000
Reserve for excess and
obsolete inventory (3,095,000) (2,743,000)
---------- ----------
Net inventory $5,214,000 $5,798,000
========== ==========
</TABLE>
Net properties consist of the following at September 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
========== ===========
<S> <C> <C>
Furniture and equipment $4,321,000 $ 4,593,000
Leasehold improvements 278,000 278,000
Other 637,000 72,000
---------- -----------
5,236,000 4,943,000
Accumulated depreciation
and amortization (4,012,000) (3,575,000)
---------- -----------
Net properties $1,224,000 $ 1,368,000
========== ===========
</TABLE>
Accrued expenses consist of the following at September 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
========== ==========
<S> <C> <C>
Professional fees $ 72,000 $ 198,000
Commissions 292,000 401,000
Salaries, wages and benefits 459,000 549,000
Sales tax 201,000 268,000
Printing 84,000 89,000
Product warranty 177,000 186,000
Other 148,000 142,000
---------- ----------
$1,433,000 $1,833,000
========== ==========
</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 received 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
F-9
<PAGE> 28
additional 4% of the unit sales price was 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) the cost of certain future patent preparation
and filing cost was borne by Bard. In addition, Bard agreed to pay a portion of
royalty and patent litigation costs relating to the Company's lateral lasing
device (see Note 10). During fiscal 1995, in management's opinion, Bard
discontinued fulfilling its obligations under the agreement. Accordingly, the
Company initiated litigation against Bard (see Note 10).
Under the Agreement, net revenues and royalties earned from Bard
accounted for 0%, 3%, and 23% of the Company's net revenues for the fiscal years
ended September 30, 1996, 1995 and 1994, respectively. In addition, during the
year ended September 30, 1996, 1995 and 1994, the Company incurred $0, $0 and
$184,500, respectively, of reimbursable development costs related to urological
applications. At September 30, 1996, 1995 and 1994, the Company included
$382,000, $382,000 and 403,000 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, 1996
NOTE 5. INCOME TAXES:
Due to the net operating losses incurred by the Company in the fiscal
years ended September 30, 1996, 1995 and 1994, no provision for income taxes has
been made. The deferred tax balances are comprised as follows:
<TABLE>
<CAPTION>
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 8,593,000 $ 6,574,000
Research & development credits 1,739,000 1,546,000
Inventory obsolescence reserves 1,238,000 1,056,000
Accrued expenses 332,000 360,000
Account receivable reserves 135,000 103,000
Valuation allowance (11,833,000) (9,531,000)
---------- -----------
204,000 108,000
Deferred tax liabilities:
Fixed asset basis (204,000) (108,000)
---------- -----------
$ 0 $ 0
========== ===========
</TABLE>
The net change in the valuation allowance for deferred tax assets was
an increase of approximately $2,302,000 from the balance at September 30, 1995
The change primarily relates to additional net operating loss carryforwards
generated in fiscal 1996, which were fully reserved for at September 30, 1996.
At September 30, 1996, the Company had net operating loss carryforwards
for federal and state income tax purposes totaling approximately $22,863,000 and
$13,664,000, 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.
F-10
<PAGE> 29
NOTE 6 STOCKHOLDERS' EQUITY:
Securities Offering:
In March, 1996, the Company completed an offering of 855,000 shares of
its common stock, which were sold with warrants to purchase 338,750 shares of
common stock, resulting in net proceeds to the Company totaling $4,585,000. This
offering was completed pursuant to Regulation S of the Securities and Exchange
Commission.
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.
Activity during the years ended September 30, 1996, 1995 and 1994 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, 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
Granted 489,000 2 3/4 - 6 7/8 3,205,220
Exercised (493,046) 2 3/4 - 6 3/4 (2,090,580)
Canceled (139,150) 2 3/8 - 6 5/8 (520,209)
--------- ----------
September 30, 1996 1,236,134 1/100 - 6 7/8 6,036,092
========= ==========
</TABLE>
As of September 30, 1996, the Company had granted all available options
reserved for granting of options authorized under the above option plans. Of
the shares previously granted and outstanding at September 30, 1996, 261,076
shares were vested and exercisable at prices ranging from $.01 to $5.50 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.
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
F-11
<PAGE> 30
September 11, 1995 the Board of Directors approved the exchange of all
outstanding Incentive Stock Options and NonQualified 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.
During fiscal 1996, 30,000 warrants were exercised, resulting in proceeds of
$309,000. As of September 30, 1996, 326,000 warrants were outstanding at an
exercise price of $10.31, and 130,000 warrants at a price of $11.86 were
outstanding.
In addition to the above warrants, in connection with the Company's
sale of equity securities, the Company issued warrants with an exercise price
ranging from $6.53 to $8.125, to purchase 338,750 shares of common stock. These
warrants expire in May and June, 1998 and contain certain redemption features
that, if the warrants are unexercised and the Company's shares are trading in
excess of certain per share prices, allow the Company to redeem the warrants
for $.01 each.
NOTE 7. EMPLOYEE BENEFIT PLAN:
Effective February 1, 1989, the Company adopted a 401(k) Retirement
Savings Plan (the "Retirement Plan"). Under the terms of the Retirement Plan,
employees may, subject to certain 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 in the Company's contribution at 20% per year over five years. The
Company's contributions to the Retirement Plan totaled $72,000, $76,000, and
$69,000, for 1996, 1995, and 1994, respectively.
NOTE 8. RELATED PARTY TRANSACTIONS:
The Company has made payments of $54,000, $30,000 and $43,000, in the
fiscal years ending 1996, 1995 and 1994, 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 was loaned
without recourse to the officer-director, and the sole collateral for the note
was the 340,000 shares of common stock held in the officer-director's name. In
March 1996, the loan was repaid in full with accrued interest of $112,643.
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>
1997 $310,889
1998 324,929
1999 65,077
--------
TOTAL $700,895
========
</TABLE>
The lease on the Company's headquarters facility expires in December,
1998. The Company has an option to renew the lease for one period of thirty
months. The Company's Poly-Optical Products, Inc. facility lease expires October
31, 1998 and contains renewal options totaling two and one-half years.
F-12
<PAGE> 31
Rent expense for the years ended September 30, 1996, 1995 and 1994 was
approximately $294,000, 315,000, and $280,000, respectively.
NOTE 10. 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 the co-inventor. 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 the end of fiscal 1996,
the Company had a balance of $355,000 in prepaid royalties. On September 30,
1996, the Company established a reserve for the remaining prepaid royalty
balance due to the uncertainty of future urology revenues.
In early 1995, the Company filed a lawsuit against Surgical Laser
Technologies, Inc. (SLT) charging infringement of the Company's U.S. Patents No.
4,646,737 and 5,380,317, which are owned by the Company, and U.S. Patent No.
5,380,317, which is owned jointly by the Company and a co-inventor. The Court
granted SLT's motion for summary judgment that all three U.S. Patents are not
infringed by SLT's laser devices. The Company believes that the Court's granting
SLT's motions for summary judgment is incorrect, and the Company has decided,
upon advice of its counsel, to appeal the Court's decision on the latter two of
the above patents.
As described above, 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
and pay certain amounts due under the agreement.
The Company has been named as a defendant in one product liability
lawsuit which is being handled by the Company's insurance carrier. The Company
believes this lawsuit will not have a material effect upon its finances and is
expected to be either settled or dismissed in 1997. The Company is currently
involved in various disputes and other lawsuits and others may arise from time
to time arising from its normal operations. The litigation process is inherently
uncertain and it is possible that the resolution of the Company's existing
litigation may adversely affect the Company. However, it is the opinion of
management that the outcome of such matters will not have a material adverse
impact on the Company's financial position, results of operations or cash flows.
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 either fiscal 1996 or fiscal 1995. One customer accounted
for approximately 23% of net revenues in fiscal 1994.
Sales in foreign countries accounted for approximately 20% of the
Company's total sales. The breakdown by geographic region is as follows:
<TABLE>
<S> <C>
Asia $ 636,000
Latin America 353,000
Middle East 33,000
Europe 1,129,000
Other (Australia, New Zealand, South Africa) 298,000
----------
Total $2,449,000
==========
</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.
F-13
<PAGE> 32
NOTE 12. INDUSTRY SEGMENT FINANCIAL DATA:
During the three fiscal years ended 1996, 1995, and 1994, 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.
Industry segment information for the years ended September 30, 1996, 1995 and
1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------- ----------------------- -----------------------
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Fiber Optics Industry $ 3,105,000 25 % $ 3,403,000 26 % $ 2,990,000 22 %
Medical Products 9,383,000 75 % 9,638,000 74 % 10,403,000 78 %
----------- ---- ----------- ---- ----------- ----
Total $12,488,000 100 % $13,041,000 100 % $13,393,000 100 %
=========== ==== =========== ==== =========== ====
Income (loss) from
operations:
Fiber Optics Industry $ 252,000 5 % $ 373,000 7 % $ 235,000 8 %
Medical Products (5,358,000) (105)% (5,579,000) (107)% (3,009,000) (108)%
----------- ---- ----------- ---- ----------- ----
Total $(5,106,000) (100)% $(5,206,000) (100)% $(2,774,000) (100)%
=========== ==== =========== ==== =========== ====
Assets:
Fiber Optics Industry $ 1,771,000 10 % $ 1,945,000 13 % $ 1,771,000 9 %
Medical Products 15,968,000 90 % 13,095,000 87 % 18,727,000 91 %
----------- ---- ----------- ---- ----------- ----
Total $17,739,000 100 % $15,040,000 100 % $20,498,000 100 %
=========== ==== =========== ==== =========== ====
Depreciation and amortization:
Fiber Optics Industry $ 134,000 27 % $ 137,000 24 % $ 126,000 23 %
Medical Products 365,000 73 % 430,000 76 % 422,000 77 %
----------- ---- ----------- ---- ----------- ----
Total $ 499,000 100 % $ 567,000 100 % $ 548,000 100 %
=========== ==== =========== ==== =========== ====
Capital expenditures:
Fiber Optics Industry $ 68,000 23 % $ 104,000 40 % $ 189,000 31 %
Medical Products 228,000 77 % 155,000 60 % 419,000 69 %
----------- ---- ----------- ---- ----------- ----
Total $ 296,000 100 % $ 259,000 100 % $ 608,000 100 %
=========== ==== =========== ==== =========== ====
</TABLE>
NOTE 13. SUBSEQUENT EVENTS
The Company has entered into an agreement, subject to, among other
significant conditions, the availability of financing, for the sale of
Poly-Optical. In the event that the proposed sale of Poly-Optical is not
consummated, the Company plans to continue operating Poly-Optical as a
subsidiary. For the year ended September 30, 1996, Poly-Optical had sales of
$3,105,000 and income from operations of $252,000 compared to sales of
$3,403,000 and income from operations of $373,000 in the prior year.
In October, 1996, the Company created Cardiodyne, Inc., a wholly owned
subsidiary that will specialize in developing laser and laser related products
for use in the cardiovascular field.
F-14
<PAGE> 33
SCHEDULE VIII
TRIMEDYNE, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE BALANCE
AT BEGINNING CHARGE TO WRITE OFF AT END
DESCRIPTION OF PERIOD EXPENSE TO RESERVE OF PERIOD
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FOR THE YEAR ENDED SEPTEMBER 30, 1996
Allowance for bad debt $ 315,000 $48,000 $ 70,000 $ 337,000
Inventory reserve 2,743,000 352,000 3,095,000
Tax reserve 9,531,000 2,302,000 11,833,000
</TABLE>
<TABLE>
<CAPTION>
BALANCE BALANCE
AT BEGINNING CHARGE TO WRITE OFF AT END
DESCRIPTION OF PERIOD EXPENSE TO RESERVE OF PERIOD
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FOR THE YEAR ENDED SEPTEMBER 30, 1995
Allowance for 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 9,531,000
</TABLE>
<TABLE>
<CAPTION>
BALANCE BALANCE
AT BEGINNING CHARGE TO WRITE OFF AT END
DESCRIPTION OF PERIOD EXPENSE TO RESERVE OF PERIOD
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FOR THE YEAR ENDED SEPTEMBER 30, 1994
Allowance for bad debt $ 302,000 $ 53,000 $ (20,000) $ 335,000
Inventory reserve 2,302,000 319,000 2,621,000
Tax reserve 6,231,000 1,197,000 7,428,000
</TABLE>
F-15
<PAGE> 1
EXHIBIT 23.1
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 24, 1996 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
Costa Mesa, California
December 27, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 5,575
<SECURITIES> 2,525
<RECEIVABLES> 2,849
<ALLOWANCES> 337
<INVENTORY> 5,214
<CURRENT-ASSETS> 16,221
<PP&E> 5,236
<DEPRECIATION> 4,012
<TOTAL-ASSETS> 17,739
<CURRENT-LIABILITIES> 2,302
<BONDS> 0
110
0
<COMMON> 0
<OTHER-SE> 15,160
<TOTAL-LIABILITY-AND-EQUITY> 17,739
<SALES> 12,488
<TOTAL-REVENUES> 12,883
<CGS> 7,779
<TOTAL-COSTS> 17,594
<OTHER-EXPENSES> (18)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,729)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,729)
<EPS-PRIMARY> (.47)
<EPS-DILUTED> (.47)
</TABLE>
