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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMMISSION FILE NO. 0-10581
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TRIMEDYNE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 36-3094439
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
2801 BARRANCA ROAD, P.O. BOX 57001 92619-7001
IRVINE, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(714) 559-5300
-----------------------------
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 January 12, 1998, based upon the closing price of the common stock
on such date was $19,085,000.
As of January 12, 1998, there were outstanding 10,905,956 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 From 10-K or any
amendment to this Form 10-K.________
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TABLE OF CONTENTS
<TABLE>
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PART 1
ITEM I. BUSINESS .............................................................................1
General ..........................................................................1
Cold Laser Use in Orthopedics and Other Surgical Specialties.......................1
Thermal Lasers and Side-Firing Laser Devices in Urology............................2
Agreement with Bard, FDA Status and Pending Lawsuits.............................. 2
Cardiodyne.........................................................................3
New Products.......................................................................4
License Agreements ................................................................4
Plastic Optical Fibers ............................................................5
Research and Development ..........................................................5
Manufacturing, Supply Agreements ..................................................5
Marketing .........................................................................5
Government Regulation .............................................................5
Employees .........................................................................7
Patents and Patent Applications ...................................................7
Competition .......................................................................8
Insurance .........................................................................8
Foreign Operations ................................................................8
ITEM 2. PROPERTIES ............................................................................8
ITEM 3. LITIGATION ............................................................................8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...................................9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS ..........................................................................10
ITEM 6. SELECTED FINANCIAL DATA ..............................................................10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED RESULTS OF
OPERATIONS AND CONSOLIDATED FINANCIAL CONDITION ..................................11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........................................12
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE .........................................................12
PART III
ITEM 10. IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS ...................................13
ITEM 11. EXECUTIVE COMPENSATION ...............................................................13
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .......................13
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .......................................13
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K .....................14
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ..........................................F-1
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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"
continuous wave Lasers and proprietary, disposable fiber-optic laser delivery
devices for use in orthopedics, urology, ear, nose and throat ("ENT") surgery
and other medical specialties. A 90% owned subsidiary of the Company,
Cardiodyne, Inc. ("Cardiodyne"), is engaged in the development, testing and
marketing of a new, automated system for performing Myocardial (heart muscle)
Laser Revascularization ("MLR") to treat severe angina, using the Company's 80
watt Holmium Laser as the energy source for its MLR System.
The Company's principal efforts from its inception in 1980 until 1991
were devoted to the manufacturing and marketing of cardiovascular lasers and
related disposables 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 ENT surgery. The Company has experienced an increase in
interest in the use of its Holmium "cold" Laser in lithotripsy (fragmentation of
urinary stones) and, outside the United States, for the treatment of enlarged
prostates in males (benign prostatic hyperplasia or "BPH"). In 1996 the Company
began the development of the MLR System for Cardiodyne and the development of a
new, proprietary laser for use in cosmetic surgery. The Company believes its
proprietary laser products may have advantages over lasers made by others and
conventional surgical devices in the aforementioned fields.
Net revenue of the Company in fiscal 1997 for continuing operations
decreased 2% to $9,262,000 from $9,383,000 for the prior year, largely due to
lower sales of lasers as a result of hospitals experiencing a worldwide shortage
of funds for purchasing capital equipment. The Company incurred a net loss of
$5,778,000 or $0.53 per share during fiscal 1997, compared to a net loss of
$4,729,000 or $0.47 per share in fiscal 1996. The loss in fiscal 1997 was higher
than in 1996 due to $1,475,000 of start-up and R&D expenses entailed in the
development of Cardiodyne's MLR System and a $276,000 loss on the sale of a 90%
owned subsidiary, Poly-Optical Products, Inc. ("Poly-Optical"). (See "Financial
Statement and Supplemental Data" and "Management's Discussion and Analysis of
Results of Operations and Consolidated Financial Condition" herein.)
In March 1996, the Company received U.S. Food and Drug Administration
("FDA") clearance to market the Company's Nd:YAG "thermal" Lasers and
side-firing laser devices for the treatment of BPH. However, sales of these
products have been very small, 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. (See "Agreement with
Bard", "FDA Status and Pending Litigation" and "Litigation" herein.)
The Company believes its future lies in expanding the sales of its laser
products in its existing business areas and introducing new laser products for
use in the cardiovascular field (through Cardiodyne) and in cosmetic surgery,
neurology and gynecology. (See "Cardiodyne" and "New Products" for a description
of the new products the Company and Cardiodyne are developing).
The Company's working capital on September 30, 1997 was $9,651,000. (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. In addition to its 90% owned subsidiary,
Cardiodyne, until January 1997, the Company had a 90% owned subsidiary,
Poly-Optical, which manufactured plastic optical fibers for use in automotive,
consumer, industrial and medical products. Poly-Optical was sold in January
1997. 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 SPECIALTIES
Holmium "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. Also, tiny optical
fibers permit laser energy to be delivered into spaces too small to accommodate
conventional surgical tools. In March 1991, the Company received FDA clearance
of its 510(k) Premarket Notification (see "Government Regulation") to market its
OmniPulse(TM) Holmium Laser and a variety of disposable optical fiber delivery
devices for use in orthopedic surgery in soft tissues. 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.
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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 and leg 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 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 has been
successful in relieving the pain in up to 90% of the cases treated. While it is
estimated that millions of 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 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). In September 1991, the Company also received FDA clearance to
market said laser for use in general surgery. The Company plans to file similar
applications with the FDA for the use of its Holmium Laser in 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 4 mm)
than any other wavelength of laser light. Heat conduction can increase the
coagulation zone in tissue up to approximately 1.4 cm (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 been issued. The Company also holds an exclusive license to a U.S. Patent
which was issued in August 1995 and covers the method of use of side-firing
laser devices in urology, 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) Fiber trademark), certain other laser delivery devices and
improvements thereto in urology, gynecology and gastroenterology. Bard also
agreed, at its expense, to conduct a clinical study of the Urolase(R) Fiber at a
number of medical centers in the United States in the treatment of benign
prostatic hyperplasia ("BPH") or enlarged prostate, a condition affecting an
estimated 50% of all men over age 55.
Bard commenced the clinical study in 1991. In April 1992, Bard initiated
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 the
physician 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 Nd:YAG Lasers
and side-firing laser devices for the treatment of BPH was cleared by the FDA in
March 1996.
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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 three years
enabled laser and electrosurgical competitors to fill the void created by Bard's
withdrawal from the U.S. market. On October 6, 1995, the Company filed a lawsuit
against Bard claiming substantial damages 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, the
Company has not been able to generate any significant sales of its lasers or
side-firing laser devices in the urology field. (See Item 3 "Litigation")
CARDIODYNE
In October 1996, the Company agreed to organize Cardiodyne, presently a
90% owned subsidiary of the Company, which is developing a proprietary MLR
System for the treatment of severe angina resulting from advanced coronary
artery disease. The Company invested $2,000,000 and transferred to Cardiodyne
its MLR technology, several lasers, testing and production equipment and
supplies, and the Company granted Cardiodyne an exclusive license to all of the
Company's present and future patents, patent applications and technology in the
cardiovascular field in exchange for 9,000,000 shares. The Company also agreed
to supply all of Cardiodyne's requirements for lasers, continuing R&D services
and field service in the United States on a cost-plus basis. The Company's
chairman, at the same average cost per share as the Company's, 500,000 shares
at $0.24 each, the then estimated fair value of such common stock. On February
11, 1997, Cardiodyne sold 500,000 shares to an unrelated party at $2.00 per
share, the then estimated fair value of such common stock. In addition,
Cardiodyne issued options to purchase 994,000 shares at exercise prices of $0.24
and $2.00 per share.
MLR is a new procedure for treating angina, in which a laser is used to
create 15 to 60 channels through the heart wall. 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. Cardiodyne's proprietary MLR System, which is presently in
development, consists of the SuperPulse(TM) 80 Watt Holmium Laser, which is able
to produce higher energy per pulse than any laser of this type presently
available, as well as Cardiodyne's proprietary AutoFire(TM) Automated Interface
and its proprietary, disposable ChannelMaker(TM) Optical Fiber Devices.
The proprietary ChannelMaker(TM) Fiber consists of an optical fiber
whose tip is enclosed within a sharp, double-beveled needle. the AutoFire(TM)
Interface monitors the patient's electrocardiogram ("ECG") and, at the desired
time in the cardiac cycle, automatically inserts the needle/fiber a
pre-programmed distance into the heart wall without lasing, activates the laser,
advances the needle/fiber through the rest of the heart wall, into the heart
chamber and back, de-activates the laser and withdraws the needle/fiber from the
heart without lasing, all in one-half second or less. The needle/fiber leaves
only a small needle puncture in the outer portion of the heart wall, minimizing
bleeding, a serious complication reported in the use of other laser
revascularization systems.
In 1995, the Company acquired sole ownership of a U.S. Patent covering
the therapeutic use in the heart of a laser 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
a life threatening arrhythmia (irregular, sometimes uncontrollable heartbeat).
The Company believes this Patent, which was issued in 1988, is the dominant
Patent covering ECG synchronization in the MLR field. This Patent was
exclusively licensed to Cardiodyne. In addition, Cardiodyne has two pending
patent applications in the U.S. and internationally on its AutoFire(TM)
Interface and ChannelMaker(TM) Fiber Optic Delivery Device. The SuperPulse 80
watt Holmium Laser is protected by two U.S. Patents and foreign patents in a
number of countries.
In November 1997, Cardiodyne filed an Investigational Device Exemption
("IDE") application with the FDA for approval to commence a clinical trial of
its MLR System in the treatment of so-called "no option" angina patients, who
are unresponsive to maximal drug therapy and have already failed bypass surgery
and/or balloon angioplasty or are not suitable candidates for such procedures.
In early 1998, Cardiodyne plans to seek FDA approval to conduct clinical trials
of its MLR System in (a) a minimally invasive, endoscopic MLR procedure through
a puncture between the ribs, with a second port for insertion of a thoracoscope,
enabling the surgeon to view the heart and conduct the procedure and (b) as an
adjunct or "back-up" to coronary bypass surgery, to provide an alternate source
of blood to the heart muscle if a vessel cannot be bypassed or if one or more of
the grafted vessels or an unbypassed artery fails.
Also in early 1998, Cardiodyne plans to request FDA approval to commence
a clinical trial of its patented ChannelMax(TM) optical fiber in a percutaneous
MLR procedure. The ChannelMax(TM) optical fiber has a metal cap, containing a
lens to expand the laser beam, attached to its distal end. In this procedure,
the ChannelMax(TM) Fiber, contained in a steerable catheter, 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. The AutoFire(TM) Interface would, synchronized with the patient's ECG,
fire the laser and advance the ChannelMax(TM) Fiber approximately two-thirds of
the way through the heart wall. By making the channels from the inside of the
heart chamber, the risk of bleeding from the heart's surface may be eliminated.
Extensive, controlled clinical trials, demonstrating the safety and
efficacy of Cardiodyne's MLR System versus conventional therapies, will be
required before Cardiodyne can submit a Pre-Market Approval ("PMA") application
to the FDA to market its MLR Systems. This process could take two to three
years, or longer, and will require Cardiodyne's raising additional funds. Until
U.S. marketing approval is
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obtained, Cardiodyne plans to market its MLR Systems overseas, particularly in
countries whose health care budgets cannot afford the high cost of coronary
bypass surgery or balloon angioplasty.
In December 1996, E. Phillip Palmer 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.
NEW PRODUCTS
The Company believes the development of new products is essential to its
future success. While the Company is engaged in the development of the new
products described below, since the Company is attempting to control its costs,
the amounts being expended in such development efforts is limited.
The Company is developing a new, proprietary laser for use in cosmetic
surgery by plastic surgeons, dermatologists and other physicians. This new laser
will have the capability to perform procedures that can be done by most
conventional lasers. In addition, the Company believes its new laser will have
the capability to perform cosmetic procedures that cannot be done with
conventional lasers and ordinarily require scalpel surgery, entailing the risk
of infection and permanent scars. Since cosmetic surgery lasers are sold
directly to plastic 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.
An earlier version of the new laser was cleared for sale by the U.S.
Food and Drug Administration ("FDA") in January, 1997 for the treatment of
vascular lesions (port wine stains, rosacea, hemangioma and telangiectasia);
removal of tattoos and scars and the treatment of basal cell carcinoma (a skin
cancer). However, the Company decided to develop a much more advanced version of
the laser, which should be able to perform a substantially greater number of
cosmetic surgery procedures, making it more desirable to users. As a result, the
Company decided to not introduce the original version. An application to market
the improved version has been filed with the FDA.
The Company's new cosmetic laser is presently being tested by the
Departments of Plastic Surgery of the UCLA Medical School (Los Angeles) and the
Baylor College of Medicine (Houston). In addition to using the new laser for the
aforementioned FDA cleared indications, data will be collected on its use in
removing wrinkles, skin resurfacing, hair removal and a number of other unique
cosmetic surgery procedures. If its use in some or all of these indications is
successful, an application to market the new laser for such uses will be
submitted to the FDA. The new laser is protected by two U.S. Patents,
counterparts of which have been filed in a number of foreign countries, one
pending U.S. (device) patent application and two pending U.S. (method) patent
applications.
The Company acquired an exclusive license to a U.S. Patent covering a
proprietary device for treating an aneurism in the brain. An aneurism occurs
when a portion of the wall of a blood vessel becomes weakened and balloons out,
like a bubble on an automobile tire. The Patent covers a laser device for
delivering and depositing in the aneurism a tiny platinum coil, which causes a
clot to form, filling the aneurism and taking the pressure off the weakened
vessel wall. An estimated 90,000 brain aneurisms 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 aneurisms.
Procedures to treat brain aneurisms in this manner are presently performed by
neurosurgeons and interventional neuroradiologists.
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). This device may enable this condition
to be treated without general anesthesia on an outpatient basis in a clinic or a
physician's office. An estimated 300,000 of the 600,000 hysterectomies performed
annually in the United States are due to this condition, entailing a substantial
hospital stay and costing much more than an outpatient procedure. The Company
believes 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,
develop a new way to treat BPH, although such cannot be assured.
LICENSE AGREEMENTS
The Company 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 by
the Company. 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.
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PLASTIC OPTICAL FIBERS
Poly-Optical Products, Inc. ("Poly-Optical"), a 90% owned subsidiary of
the Company, is a manufacturer of fiber-optic lighting and viewing devices.
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. Customers
include the automotive and truck manufacturing industry, scientific instrument
manufacturers, the aircraft industry and medical device firms. On January 31,
1997, the Company sold its 90% interest in Poly-Optical for $1,290,000,
recognizing a loss of $276,000.
RESEARCH AND DEVELOPMENT
From its inception to September 30, 1997, an aggregate of $31,111,000
has been expended by the Company for research and development ("R&D"), including
clinical and regulatory activities, of which $3,391,000 was expended during the
fiscal year ended September 30, 1997. 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 Cardiodyne 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
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 current products are hospitals
with orthopedic, urology, ENT, cardiovascular 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 several hundred
outpatient surgery centers. The Company's new cosmetic laser will, if
successful, be sold directly to plastic surgeons, dermatologists, ENT surgeons
and other physicians. The Company's other proposed new products (See "New
Products") will, if cleared for sale by the FDA and marketed, be sold to
hospitals for use in neurosurgery and gynecology, as well as to gynecologists
for use in their offices. The Company anticipates marketing only those products
which are customarily sold to the same customer groups that are markets for its
lasers and related devices. There is no assurance as to the extent to which the
Company will be able to penetrate these markets.
At September 30, 1997, the Company had marketing arrangements for the
sale of its lasers and certain of its disposable products on a straight
commission basis with 22 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 Vice President 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.
5
<PAGE> 8
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 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.
Premarket 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.
6
<PAGE> 9
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 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 Company is in the process of qualifying its products for the CE Mark
(for the sale of its products in the European Union), and meeting ISO 9001 and
EN 46001 requirements. The cost of doing so is significant.
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, 1997, the Company and Cardiodyne had 86 and 14
full-time employees, respectively, a total of 100, of whom 46 were engaged in
production, 27 in R&D, 11 in sales and marketing, and 16 in general and
administrative functions.
The Company may require additional employees in the areas of
administration, product development, research, production, regulatory affairs,
sales and marketing in the future. There is intense competition for capable,
experienced personnel in the medical device and laser fields, and there is no
assurance the Company will be able to obtain new qualified employees when
required.
The Company believes its relations with its employees are good.
PATENTS AND PATENT APPLICATIONS
As of September 30, 1997, the Company had been assigned or obtained
exclusive or non-exclusive , worldwide licenses to 18 issued U.S. Patents and 6
patent applications on file with the U.S. Patent Office. Several of such patents
have issued as foreign patents and several corresponding patent applications
have been filed in up to 7 foreign countries. The validity of the U.S. Patent
covering the Company's OmniPulse(TM) and Cardiodyne's SuperPulse(TM) 80 watt
Holmium Laser was challenged by a competitor in the U.S. in an action before the
U.S. Patent and Trademark Office ("USPTO"). In December 1996, the USPTO upheld
the validity of all claims of the patent in the U.S.
7
<PAGE> 10
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 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., U.S. Surgical Corporation, Johnson & Johnson,
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., Laser Industries, Inc., PLC
Systems, Inc., CardioGenesis, Inc., Eclipse Surgical Technologies, Inc., Xintec,
Inc., New Star Lasers, 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 $10,000,000. 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.
FOREIGN OPERATIONS
In fiscal 1997, sales of products in foreign countries accounted for
approximately 36% 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, which it intends to exercise. This facility serves as the
Company's headquarters, where research, regulatory, sales, marketing and
administrative activities, as well as manufacturing and warehousing, are
conducted.
Cardiodyne leases a 14,000 square foot one-story office and
manufacturing building in Irvine, California, under a sixty month lease expiring
in January, 2002 at a monthly rental of approximately $11,462, with one
thirty-six month renewal option. Cardiodyne subleases on a month-to-month basis
approximately 6,000 sq. ft. of space at its cost to a privately owned medical
device company controlled by the Chairman of the Company, with which it also
shares some office expenses. Cardiodyne presently does not need the space
subleased to said entity.
Management considers all of its facilities to be well maintained and
adequate for its present operations.
ITEM 3. LITIGATION
In connection with the June 9, 1994 settlement of litigation with the
co-inventor of the Urolase(R) fiber, the Company amended and restated its
licensing agreement with 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. The Company wrote off the unused prepaid royalty of
$355,000 during fiscal 1997 and the corresponding reserve which was established
in fiscal 1996, due to the uncertainty of future urology revenues. Royalties
8
<PAGE> 11
paid in 1997, 1996 and 1995 were not significant. Management believes that all
royalties on future sales of Urolase(R) fibers over the term of the agreement,
which has no expiration date, will not be significant.
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 one U.S. Patent
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 on two of the patents, and the Company
has, upon advice of its counsel, appealed the Court's decision in the SLT suit.
As described above, on October 6, 1995, the Company filed a lawsuit
against Bard claiming substantial damages for Bard's failure to perform its
obligations as Trimedyne's exclusive distributor under the Agreement and pay
certain amounts due under the Agreement. (See Agreement with Bard). The trial
date is tentatively set for April 1998.
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, if any, upon its finances
and is expected either to be settled or dismissed in 1998. The trial date is
tentatively set for March 1998.
The Company has been named as a defendant in an employment dispute with
a prior employee, which the Company believes is without merit and is not
expected to have a material financial effect, if any, on the Company's financial
condition.
The Company is subject to various claims and actions which arise in the
ordinary course of business. The litigation process is inherently uncertain, and
it is possible that the resolution of the Company's existing and future
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 condition, operations or cash flows.
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, 1997.
9
<PAGE> 12
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 on the NASDAQ system in the
over-the-counter market since April 13, 1982, and, since August 12, 1986, has
been quoted on the NASDAQ National Market System under the symbol "TMED". 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>
1996 HIGH LOW
- ---- ---- ---
<S> <C> <C>
Quarter ended:
December 31, 1995 4 1 5/16
March 31, 1996 16 1/4 2 9/32
June 30, 1996 9 1/4 5
September 30, 1996 7 3 1/16
</TABLE>
<TABLE>
<CAPTION>
1997 HIGH LOW
- ---- ---- ---
<S> <C> <C>
Quarter ended:
December 31, 1996 4 3/4 2 31/32
March 31, 1997 6 1/8 3
June 30, 1997 4 2 13/16
September 30, 1997 3 13/16 2 1/4
</TABLE>
B. HOLDERS OF COMMON STOCK
As of December 31, 1997, there were 1,547 holders of record of the
Company's Common Stock and an additional estimated 10,100 holders who maintain
the beneficial ownership of their shares in "Street Name".
C. DIVIDENDS
The Company has never paid cash dividends on its Common Stock, 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,
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenues $ 9,262 $ 9,383 $ 9,639 $ 10,403 $ 13,089
Loss from continuing operations (5,535) (4,956) (5,622) (2,490) (496)
Net income from discontinued operations 33 227 332 225 (65)
Loss on sale of subsidiary assets (276) -- -- -- --
Net loss (5,778) (4,729) (5,290) (2,265) (561)
Earnings(loss)per share:
From continuing operations (0.51) (0.49) (0.59) (0.28) (0.06)
From discontinued operations (0.02) 0.02 0.03 0.03 --
Net loss (0.53) (0.47) (0.56) (0.25) (0.06)
</TABLE>
10
<PAGE> 13
BALANCE SHEET DATA:
(IN THOUSANDS)
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Total assets $12,761 $17,739 $15,040 $20,498 $21,554
Total liabilities 2,205 2,302 2,941 3,304 2,949
Working capital 9,651 13,919 10,082 14,829 16,673
Stockholders' equity 10,438 15,270 11,957 17,081 18,517
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED RESULTS OF
OPERATIONS AND CONSOLIDATED FINANCIAL CONDITION
CONSOLIDATED RESULTS OF OPERATIONS
FISCAL YEARS 1997, 1996 AND 1995
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, 1997 and the prior two fiscal years.
<TABLE>
<CAPTION>
Year Ended September 30,
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Cost of goods sold 65.2 65.4 70.1
Selling, general and administrative 64.4 69.2 64.0
Research and development 36.6 22.4 23.7
Interest income 4.0 4.2 3.2
Other (income) expense, net 0.7 0.1 (3.7)
Net income (loss) from continuing operations (59.8) (52.8) (58.3)
Net Income from discontinued operations 0.4 2.4 3.4
Loss on sale of subsidiary assets (3.0) -- --
Net loss (62.4) (50.4) (54.9)
</TABLE>
NET REVENUES
1997 Compared to 1996
Net revenues decreased 2% on continuing operations to $9,262,000 from
$9,383,000, due to the continued tightness in hospital budgets for capital
equipment in the United States and the introduction of lower cost arthroscopic
devices by competitors. However, international revenues were $3,342,000 for
fiscal 1997, compared to $2,449,000 in fiscal 1996, representing 36% of revenues
in fiscal 1997, compared to 26% of revenues in fiscal 1996.
1996 Compared to 1995
Net revenues decreased 4% in fiscal 1996 to $9,383,000 from $9,639,000.
Sales in fiscal 1996 decreased from fiscal 1995 principally due to lower 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 26% of revenues in
fiscal 1996 compared to 21% in fiscal 1995.
COST OF GOODS SOLD
Cost of goods sold in fiscal 1997 was approximately 65% of net revenue,
compared to 65% in fiscal 1996 and 70% in fiscal 1995. The decrease in cost of
goods sold as a percentage of sales from 1995 to 1996 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.
11
<PAGE> 14
RESEARCH AND DEVELOPMENT EXPENSES (R&D)
R&D expenses were $3,391,000 in fiscal 1997, compared to $2,106,000 in
fiscal 1996 and $2,285,000 in fiscal 1995. R&D spending in fiscal 1998 is
expected to be approximately equal to the fiscal 1997 level, as the Company
intends to continue to fund development of several new products. R&D as a
percentage of net revenues increased to 37% of net revenues in fiscal 1997 vs.
22% and 24% in fiscal years 1996 and 1995, respectively. The increase in R&D
expenses in 1997 was largely due to the development of the automated system for
performing MLR by the 90% owned subsidiary, Cardiodyne.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses decreased 9% to
$5,963,000 in fiscal 1997, compared to $6,494,000 in fiscal 1996, which was a 5%
increase from the fiscal 1995 total of $6,173,000. The decrease in fiscal 1997
is attributed to lower legal expenses. The increase in fiscal 1996 was due
primarily to the approximately $600,000 increase in legal expenses in fiscal
1996 compared to fiscal 1996 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 1998.
SG&A expenses decreased as a percentage of net revenues in fiscal 1997
over fiscal 1996 and 1995 (64%, 69% and 64%, 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 1997 was $368,000 compared to $395,000 in
fiscal 1996 and $309,000 in fiscal 1995. The levels of cash and equivalents
available for investment in interest bearing securities were $5,341,000,
$8,100,000, and $4,415,000, as of September 30, 1997, 1996 and 1995,
respectively. In 1997, the Company generated lower income on its investments
than in 1996 due to the lower overall level of cash available for investment
during the current fiscal year.
The fiscal 1997 net loss was $5,778,000 compared to a net loss of
$4,729,000 in fiscal 1996 and $5,290,000 in fiscal 1995.
Due to the net losses incurred, the Company did not pay income taxes for
fiscal 1997, 1996, and 1995.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had working capital of $9,651,000,
compared to $13,919,000 at the end of fiscal 1996. Cash, cash equivalents and
marketable securities decreased by $2,759,000 in fiscal 1997 to $5,341,000 at
September 30, 1997 from $8,100,000 at September 30, 1996. The decrease in cash
and cash equivalents, and marketable securities was due to the following fiscal
1997 events: (i) cash used for operating activities totaling approximately $4.8
million and (ii) capital and patent expenditures of $468,000, which were offset
by funds received from the sale of net assets of Poly-Optical of $1.3 million
and the sale of 1,000,000 shares of Cardiodyne's common stock for $1.1 million.
The Company has incurred significant net operating losses during each of
the last three years. At September 30, 1997, the Company had working capital of
approximately $9.6 million and had no long-term obligations. Management believes
existing working capital is sufficient to meet Trimedyne's operating needs for
at least the next 12 months excluding additional investment in Cardiodyne.
Management has implemented cost reductions at Trimedyne and will seek additional
financing to continue development of Cardiodyne's products. If funds for the
latter purpose are not obtained, the Company will require cut-backs in
Cardiodyne's operating expenses or cease funding of Cardiodyne's operations.
Sources of additional financing include the sale of equity securities of the
Company or its subsidiaries and the sale or licensing of certain patent rights.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedule 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.
12
<PAGE> 15
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.
13
<PAGE> 16
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 Christopoulos 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 (*).
(b) No reports on Form 8-K were filed during the fourth quarter of the
fiscal year ended September 30, 1997.
14
<PAGE> 17
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: January 12, 1998 /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 Jan. 12, 1998
- --------------------------- Board of Directors
Marvin P. Loeb Chief Executive Officer
- --------------------------- President and Jan. 12, 1998
Peter T. Hyde Chief Operating
Officer
/s/ Donald Baker Director Jan. 12, 1998
- ---------------------------
Donald Baker
/s/ Bruce N. Barron Director Jan. 12, 1998
- ---------------------------
Bruce N. Barron
/s/ Richard F. Horowitz Director Jan. 12, 1998
- ---------------------------
Richard F. Horowitz
/s/ Charisse E. Chel Corporate Controller, Jan. 12, 1998
- --------------------------- Treasurer and
Charisse E. Chel Chief Financial and Accounting Officer
</TABLE>
15
<PAGE> 18
TRIMEDYNE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of Trimedyne, Inc. and
its subsidiary are included in Item 8:
<TABLE>
<CAPTION>
PAGE
<S> <C>
Consolidated Financial Statements:
Report of Independent Accountants F-2
Consolidated Balance Sheets at September 30, 1997 and 1996 F-3
Consolidated Statements of Operations for each of the three years in the period
ended September 30, 1997 F-4
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended September 30, 1997 F-5
Consolidated Statements of Cash Flows for each of the three years in the period
ended September 30, 1997 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-16
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
F-1
<PAGE> 19
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 subsidiaries at
September 30, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended September 30, 1997, 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 19, 1997
F-2
<PAGE> 20
TRIMEDYNE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30,
1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,286,000 $ 5,575,000
Marketable securities (Note 2) 2,055,000 2,525,000
Trade accounts receivable, net of allowance
for doubtful accounts of $232,000 and $337,000 2,732,000 2,512,000
Inventories (Note 3) 3,285,000 5,214,000
Other 498,000 395,000
------------ ------------
Total current assets 11,856,000 16,221,000
Net properties (Note 3) 905,000 1,224,000
Intangible assets, net of accumulated amortization of
$315,000 at September 30, 1996 -- 294,000
------------ ------------
$ 12,761,000 $ 17,739,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 580,000 $ 683,000
Accrued expenses (Note 3) 1,519,000 1,433,000
Deferred income (Note 2) 106,000 186,000
------------ ------------
Total current liabilities 2,205,000 2,302,000
------------ ------------
Minority interest (Note 2) 118,000 167,000
Stockholders' equity (Note 6):
Common stock - $.01 par value; 15,000,000 shares
authorized, 11,007,565 and 10,991,956 shares
issued 110,000 110,000
Capital in excess of par value 43,017,000 42,081,000
Accumulated deficit (31,953,000) (26,175,000)
Unrealized gain on securities available for sale (23,000) (33,000)
------------ ------------
11,151,000 15,983,000
Less shares of common stock in treasury,
101,609 and 101,609 shares (713,000) (713,000)
------------ ------------
Total stockholders' equity 10,438,000 15,270,000
------------ ------------
$ 12,761,000 $ 17,739,000
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE> 21
TRIMEDYNE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net revenues $ 9,262,000 $ 9,383,000 $ 9,639,000
Costs of goods sold 6,036,000 6,141,000 6,760,000
----------- ----------- -----------
Gross Profit 3,226,000 3,242,000 2,879,000
Selling, general and administrative 5,963,000 6,494,000 6,173,000
Research and development expenses 3,391,000 2,106,000 2,285,000
----------- ----------- -----------
Loss from operations (6,128,000) (5,358,000) (5,579,000)
Other income (expense):
Interest income 368,000 395,000 309,000
Minority interest in consolidated subsidiary 156,000 -- --
Other 69,000 7,000 (352,000)
----------- ----------- -----------
Net loss from continuing operations (5,535,000) (4,956,000) (5,622,000)
----------- ----------- -----------
Net income from discontinued operations 33,000 227,000 332,000
Loss on sale of subsidiary assets (276,000) -- --
----------- -----------
Net loss $(5,778,000) $(4,729,000) $(5,290,000)
=========== =========== ===========
Earnings (loss) per share:
From continuing operations $ (0.51) $ (0.49) $ (0.59)
From discontinued operations (0.02) 0.02 0.03
----------- ----------- -----------
Net loss per share (Notes 2 and 12) $ (0.53) $ (0.47) $ (0.56)
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE> 22
TRIMEDYNE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTE
COMMON STOCK 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, 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, 19959, 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
401(k) plan 20,000 -- 60,000
Payments received from officer 982,000
Net loss for the year (4,729,000)
--------- ------------ ------------ ------------ ------------ ------------
Balance at September 30, 199 10,991,956 110,000 42,081,000 (26,175,000) (713,000)
Exercise of stock options 5,400 -- 1,000
Stock issued to Company's
401(k) Plan 10,209 -- 48,000
Minority interest investment in Cardiodyne 846,000
Value of stock options issued
below fair value 41,000
Net loss for the year (5,778,000)
------------ ------------ ------------ ------------ ------------ ------------
Balance at September 30, 1997 11,007,565 $ 110,000 $ 43,017,000 $(31,953,000) $ (713,000) $
============ ============ ============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE> 23
TRIMEDYNE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(5,778,000) $(4,729,000) $(5,290,000)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 404,000 497,000 588,000
Provision for excess and obsolete inventory 299,000 352,000 122,000
Write-off of prepaid royalties -- 355,000
Value of stock options issued below fair value 41,000 -- --
Minority interest in earnings of subsidiary (323,000) 25,000 29,000
Loss (gain) on sale of subsidiary assets 276,000
Changes in operating assets
and liabilities:
Decrease (increase) in trade accounts receivable, net (504,000) (414,000) 510,000
Decrease (increase) in inventories 1,081,000 232,000 (190,000)
(Increase) decrease in other current assets (159,000) 317,000 422,000
Decrease (increase) in prepaid royalties -- -- 84,000
(Decrease) increase in accounts payable (103,000) (338,000) (276,000)
Increase (decrease) in accrued expenses 86,000 (400,000) 8,000
(Decrease) increase in deferred income (80,000) 100,000 (95,000)
----------- ----------- -----------
Net cash used for operating activities (4,760,000) (4,003,000) (4,088,000)
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (455,000) (296,000) (259,000)
Patent expenditures (13,000) (58,000) (65,000)
Net proceeds from sale of subsidiary assets 1,290,000 -- --
Sale of marketable securities 480,000 495,000 2,521,000
----------- ----------- -----------
Net cash provided by investing activities 1,302,000 141,000 2,197,000
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from sale of subsidiary stock 1,120,000 -- --
Proceeds from exercise of stock options 1,000 2,134,000 75,000
Proceeds from stock issued under 401(k) program 48,000 60,000 --
Net proceeds from exercise of warrants -- 309,000 --
Payments received on notes receivable under stock options plan-- -- 982,000 --
Sale of stock -- 4,585,000 --
----------- ----------- -----------
Net cash provided by financing activities 1,169,000 8,070,000 75,000
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (2,289,000) 4,208,000 (1,816,000)
----------- ----------- -----------
Cash and cash equivalents at beginning of period 5,575,000 1,367,000 3,183,000
----------- ----------- -----------
Cash and cash equivalents at end of period $ 3,286,000 $ 5,575,000 $ 1,367,000
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE> 24
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY:
Trimedyne, Inc. ("Trimedyne") and its subsidiaries (collectively "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
was also engaged in the development, manufacture and sale of plastic fiber-optic
illumination devices through its 90% owned subsidiary, Poly-Optical Products,
Inc. ("Poly-Optical") until January 31, 1997, when its interest in Poly-Optical
was sold. The Company is also engaged in the development of cardiovascular laser
devices through its subsidiary, Cardiodyne, Inc. ("Cardiodyne").
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, Cardiodyne, and discontinued operations of its 90%
owned subsidiary, Poly-Optical. (Note 12). All significant intercompany accounts
and transactions have been eliminated in consolidation.
The Company has incurred significant net operating losses during each of
the last three years. At September 30, 1997, the Company had working capital of
approximately $9.6 million and had no long-term obligations. Management believes
existing working capital is sufficient to meet Trimedyne's operating needs for
at least the next 12 months, excluding any additional investment in Cardiodyne.
Management has implemented cost reductions at Trimedyne and will seek additional
financing to continue development of Cardiodyne's products or cease funding of
Cardiodyne's operations. Sources of additional financing include the sale of
equity securities of the Company or its subsidiaries and the sale or licensing
of certain patent rights.
RECLASSIFICATIONS
Certain prior year items have been reclassified to conform with the current
year presentation.
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 currently
believes no material 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 impacted.
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.
F-7
<PAGE> 25
DISCONTINUED OPERATIONS
The statements of operations have been restated for all periods presented
to reflect the discontinued operations of Poly- Optical, the Company's 90% owned
subsidiary, which was sold in an all cash transaction consummated on January 31,
1997.
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 of accounting for income taxes.
The liability method requires the recognition of deferred tax liabilities
and assets for expected future tax consequences of temporary differences between
the carrying amounts and tax bases of assets and liabilities. Management
provides a valuation allowance for deferred tax assets when it is more likely
than not that all or a portion of such assets are not recoverable based on
future operations.
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. SFAS
123 allows companies to continue to use the intrinsic value-based approach,
supplemented by disclosure of the pro forma impact on operations and per share
information using the fair value-based approach. The Company intends to follow
the intrinsic value-based method allowed by SFAS 123.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting For the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"),
which establishes accounting standards for the impairment of long-lived assets
to be reviewed whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In addition, SFAS 121
requires that certain long-lived assets be reported at the lower of carrying
amount or fair value less cost to sell. The Company adopted SFAS 121 in fiscal
1997. The adoption of SFAS 121 had no significant impact on its consolidated
financial position or results of operations.
PER SHARE INFORMATION
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 10,895,728, 10,082,844, and
9,449,468 for 1997, 1996, and 1995 respectively.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
SFAS 128 simplifies the standards for computing Earnings per Share ("EPS"),
eliminating the presentation of primary EPS (currently required by Accounting
Principles Board Opinion No. 15, "Earnings per Share") and requiring dual
presentation of basic and diluted EPS on the face of the income statement for
all public corporations with complex capital structures. SFAS 128 is effective
for financial statements for both interim and annual periods ending after
December 15, 1997. Early adoption is not permitted, although pro forma
disclosure is optional. SFAS 128 is not expected to have a significant impact on
per share data.
F-8
<PAGE> 26
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 a remaining maturity of three months or less. Such investments are
deemed to be cash equivalents.
MARKETABLE SECURITIES
The amortized cost and fair market values of all marketable securities at
September 30, 1997 and September 30, 1996 are as follows:
<TABLE>
<CAPTION>
AMORTIZED
SECURITIES AVAILABLE FOR SALE COST BASIS UNREALIZED
(MATURE WITHIN THREE YEARS) (PLUS INTEREST) FAIR VALUE GAIN
<S> <C> <C> <C>
SEPTEMBER 30, 1997
U.S. government and government agencies $2,032,000 $2,055,000 $23,000
SEPTEMBER 30, 1996
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 1997 was $23,000. 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 1997,
1996 or 1995.
NOTE 3. COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS:
Inventories consist of the following at September 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Raw materials $ 2,720,000 $ 3,280,000
Work-in-process 1,304,000 1,584,000
Finished goods 2,408,000 3,445,000
----------- -----------
6,432,000 8,309,000
Reserve for excess and
obsolete inventory (3,147,000) (3,095,000)
----------- -----------
Net inventory $ 3,285,000 $ 5,214,000
=========== ===========
</TABLE>
F-9
<PAGE> 27
Net properties consist of the following at September 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Furniture and equipment $ 3,822,000 $ 4,321,000
Leasehold improvements 331,000 278,000
Other 566,000 637,000
----------- -----------
4,719,000 5,236,000
Accumulated depreciation
and amortization (3,814,000) (4,012,000)
----------- -----------
Net properties $ 905,000 $ 1,224,000
=========== ===========
</TABLE>
Accrued expenses consist of the following at September 30, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Professional fees $ 69,000 $ 72,000
Commissions 215,000 292,000
Salaries, wages and benefits 435,000 459,000
Sales tax 189,000 201,000
Printing 112,000 89,000
Product warranty 241,000 177,000
Other 258,000 148,000
---------- ----------
$1,519,000 $1,433,000
========== ==========
</TABLE>
NOTE 4. DEVELOPMENT SUPPLY AND LICENSE AGREEMENT WITH BARD
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
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 zero percent of the Company's net revenues for the fiscal years
ended September 30, 1997 and 1996 and 3% in 1995. In addition, the Company
incurred reimbursable development costs related to urological applications of
zero percent during the years ended September 30, 1997 and 1996 and $184,500 in
1995. At September 30, 1997, 1996 and 1995, the Company included $382,000,
$382,000, and $382,000 respectively, in other assets. Such amounts represent
monies receivable from Bard for royalties earned, reimbursable legal costs
incurred and reimbursable R&D expenses incurred.
F-10
<PAGE> 28
NOTE 5. INCOME TAXES:
Due to the net operating losses incurred by the Company in prior years,
no provision for income taxes has been made. The deferred tax balances are
comprised as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carry forwards $ 10,869,000 $ 8,593,000
Research & development credits 1,984,000 1,739,000
Inventory obsolescence reserves 1,259,000 1,238,000
Accrued expenses 298,000 332,000
Account receivable reserves 93,000 135,000
Valuation allowance (14,107,000) (11,833,000)
------------ ------------
396,000 204,000
Deferred tax liabilities:
Fixed asset basis (396,000) (204,000)
------------ ------------
$ 0 $ 0
============ ============
</TABLE>
The valuation allowance for deferred tax assets increased approximately
$2,274,000 and $2,302,000 during the years ended September 30, 1997 and
September 30, 1996, respectively. The changes primarily relate to additional net
operating loss carry forwards generated in fiscal 1997 and 1996, which were
fully reserved for at year end.
At September 30, 1997, the Company had net operating loss carry forwards for
federal and state income tax purposes totaling approximately $29,511,000 and
$13,919,000, respectively, which for Federal reporting purposes begin to expire
in 2006. The Tax Reform Act of 1986 includes provisions which may limit the net
operating loss carry forwards available for use in any given year if certain
events occur, including significant changes in stock ownership.
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, 1997, 1996 and 1995 under the
plans was as follows:
F-11
<PAGE> 29
STOCK OPTIONS OUTSTANDING
<TABLE>
<CAPTION>
OPTION EXERCISE AGGREGATE
OPTIONS PRICE PER SHARE EXERCISE PRICE
<S> <C> <C> <C>
September 30, 1994 1,127,830 1/100 - 5 1/2 $ 6,121,031
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 5,661,661
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 6,256,092
Granted 105,000 2 7/8 - 4 1/4 358,762
Exercised (5,400) 1/100 - 3 1/2 (1,450)
Canceled (215,550) 2 3/8 - 6 5/8 (1,062,160)
--------- ------------- -----------
September 30, 1997 1,120,184 1/100 - 6 7/8 $ 5,551,244
========= ============= ===========
</TABLE>
As of September 30, 1997, the Company had 110,550 available options and
authorized under the above option plans. Of the shares previously granted and
outstanding at September 30, 1997, 472,370 shares were vested and exercisable at
prices ranging from $0.01 to $6.88 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 September 11, 1995,
the Board of Directors approved the exchange of all outstanding Incentive Stock
Options and Non-Qualified Stock Options held by consultants, officers (excluding
the President and the Chairman of the Company) and employees of the Company that
were in excess of $3.50 per share for new options exercisable at $3.50 per share
with the same vesting periods. The closing price of the common stock on such
date was $3.375 as reported by the NASDAQ National Market System. Compensation
expense related to stock options issued to non-employees during the periods
presented was not significant.
Pursuant to SFAS No. 123 "Accounting for Stock Based Compensation," the
Company is required to disclose the effects on the net loss per share data as if
the Company had elected to use the fair value approach to account for all of its
employee stock-based compensation plans. Had the compensation cost for the
Company's plans been determined using the fair value method, the compensation
expense would have had the effects of increasing the Company's net loss for the
years ended September 30, 1997 and 1996 to the pro forma amounts of $6,138,000
and $4,888,000, respectively with a pro forma net loss per share of $0.56 and
$0.48, respectively. These pro forma amounts were determined based upon the fair
value of each option granted during fiscal 1997 and fiscal 1996 on its grant
date, using the Black-Scholes option-pricing model. Assumptions of no dividend
yield, a risk free interest rate which approximates the Federal Reserve Board's
rate for treasuries at the time granted, an expected life of five years, and a
volatility rate of 98.5 percent were applied to all options granted during
fiscal year 1997 and fiscal year 1996. The weighted average fair value at the
grant date for the options granted during fiscal years 1997 and 1996 was $2.63
and $4.99 per option, respectively.
F-12
<PAGE> 30
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 of such warrants were exercised, resulting
in proceeds of $309,000. As of September 30, 1997, 326,000 warrants were
outstanding at an exercise price of $10.31, and 130,000 warrants were
outstanding at a price of $11.86.
In addition to the above warrants, in connection with the Company's sale
of equity securities in fiscal 1996, 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.
COMMON STOCK ISSUED - CARDIODYNE:
On October 30, 1996, the Company formed Cardiodyne, a development-stage
company, which does not anticipate generating revenues until mid-1998. The
Company invested $2,000,000 and transferred to Cardiodyne certain equipment and
supplies and certain intellectual property rights in exchange for 9,000,000
shares. The Company's chief executive officer purchased, at the same average
cost per share as the Company's, 500,000 shares at $0.24 each, the then
estimated fair value of such common stock. Prior to February 11, 1997,
Cardiodyne issued options to purchase 725,000 shares of its common stock at an
exercise price of $0.24 per share, the then estimated fair value of the common
stock. On February 11, 1997, Cardiodyne sold 500,000 shares to an unrelated
party at $2.00 per share, the then estimated fair value of such common stock.
Subsequent to February 11, 1997, Cardiodyne issued options to purchase 206,000
shares of its common stock to certain employees at an exercise price of $0.24
per share. In accordance with Accounting Principles Board Opinion No. 25, the
Company recorded compensation expense of $41,000 for the difference between the
fair value of the common stock at the date of grant and the exercise price over
the vesting period of five (5) years. In addition, Cardiodyne issued options to
purchase 63,000 shares of its common stock at an exercise price of $2.00 per
share.
In connection with the 500,000 common shares issued by Cardiodyne to an
unrelated party at $2.00 per share, the holder has the right to receive
additional common shares on a pro-rata basis in the event additional shares are
sold to third parties at a per share price lower than $2 per share.
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 4% 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 $73,000, $72,000, and
$76,000 for 1997, 1996, and 1995, respectively.
NOTE 8. RELATED PARTY TRANSACTIONS:
The Company has made payments of $31,000, $54,000, and $30,000 in the
fiscal years ending 1997, 1996, and 1995, 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. Cardiodyne shares space with an affiliated company controlled by the
Company's CEO. The company allocates expenses to said affiliate based on actual
cost incurred. For each of the three years presented, such costs were not
significant. Also see Note 6 for discussion of additional related party
transactions.
F-13
<PAGE> 31
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>
1998 $366,000
1999 195,000
2000 139,000
---------
Total $700,000
=========
</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 Cardiodyne facility lease expires January 31, 2002 and
contains one thirty-six month renewal option.
Rent expense for the years ended September 30, 1997, 1996 and 1995 was
approximately $307,000, $294,000, and $315,000, 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. The Company wrote off the unused prepaid royalty of
$355,000 during fiscal 1997 and the corresponding reserve which was established
in fiscal 1996, due to the uncertainty of future urology revenues. Royalties
paid in 1997, 1996 and 1995 were not significant. Management believes that all
royalties on future sales of Urolase(R) fibers over the term of the agreement,
which has no expiration date, will not be significant.
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 one U.S. Patent
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 on two of the patents, and the Company
has, upon advice of its counsel, appealed the Court's decision in the SLT suit.
On October 6, 1995, the Company filed a lawsuit against Bard claiming
substantial damages for Bard's failure to perform its obligations as Trimedyne's
exclusive distributor under the Agreement and pay certain amounts due under the
Agreement (see Note 4). The trial date is tentatively set for April 1998.
The Company is subject to various claims and actions which arise in the
ordinary course of business. The litigation process is inherently uncertain, and
it is possible that the resolution of the Company's existing and future
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 condition, operations or cash flows.
F-14
<PAGE> 32
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 1997 or fiscal 1996.
Sales in foreign countries in fiscal 1997 and 1996 accounted for
approximately 36% and 20% of the Company's total sales, respectively. The
breakdown by geographic region is as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Asia $ 509,000 $ 636,000
Latin America 164,000 353,000
Middle East 263,000 33,000
Europe 2,170,000 1,129,000
Other (Australia, New Zealand, South Africa) 236,000 298,000
---------- ----------
Total $3,342,000 $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.
NOTE 12. DISCONTINUED OPERATIONS
On January 31, 1997, the Board of Directors authorized the sale of the
net assets of its 90% owned subsidiary Poly-Optical. The Company received
proceeds of $1,566,000, less costs of disposition of $155,000, which includes a
two year indemnification provision, less a minority interest valued at $121,000,
resulting in net proceeds of $1,290,000 for the sale of the assets of
Poly-Optical. Accordingly, the Company recorded a loss of $276,000 on the sale
of Poly-Optical. This loss represents the difference between the net proceeds
received and the carrying value of the net assets sold of $1,566,000.
The results of operations for discontinued operations for the years
ended September 30, 1997, 1996, and 1995 are presented below (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net sales .................................. $ 918 $3,105 $3,402
Cost and Expenses
Cost of goods sold ....................... 457 1,638 1,821
Selling, general and administrative ...... 333 943 894
Research and development ................. 91 272 314
------ ------ ------
Total Costs and Operating Expenses ....... 881 2,853 3,029
------ ------ ------
Income from discontinued operations ........ 37 252 373
Less Minority Interest ................... 4 25 29
Less Other ............................. -- -- 12
------ ------ ------
Net income from Discontinued Operations .... $ 33 $ 227 $ 332
====== ====== ======
</TABLE>
NOTE 13. SUBSEQUENT EVENTS
In November 1997, Cardiodyne filed an application with the FDA to
conduct a clinical trial in the United States of its MLR System in the treatment
of severe angina.
F-15
<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, 1997
Allowance for bad debt $ 337,000 $ -- $ (105,000) $ 232,000
Inventory reserve 3,095,000 52,000 -- 3,147,00
Income tax valuation allowance 11,833,000 2,274,000 -- 14,107,000
</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, 1996
Allowance for bad debt $ 315,000 $ 48,000 $ 70,000 $ 337,000
Inventory reserve 2,743,000 -- 352,000 3,095,000
Income tax valuation allowance 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
Income tax valuation allowance 7,428,000 2,103,000 -- 9,531,000
</TABLE>
F-16
<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 19, 1997 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
January 12, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 3,286
<SECURITIES> 2,055
<RECEIVABLES> 2,964
<ALLOWANCES> 232
<INVENTORY> 3,285
<CURRENT-ASSETS> 11,856
<PP&E> 4,719
<DEPRECIATION> 3,814
<TOTAL-ASSETS> 12,761
<CURRENT-LIABILITIES> 2,205
<BONDS> 0
0
0
<COMMON> 110
<OTHER-SE> 10,328
<TOTAL-LIABILITY-AND-EQUITY> 12,761
<SALES> 9,262
<TOTAL-REVENUES> 9,630
<CGS> 6,036
<TOTAL-COSTS> 15,391
<OTHER-EXPENSES> 18
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,535)
<DISCONTINUED> 33
<EXTRAORDINARY> (276)
<CHANGES> 0
<NET-INCOME> (5,778)
<EPS-PRIMARY> (0.53)
<EPS-DILUTED> (0.53)
</TABLE>
