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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 2000 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.)
15091 Bake Pkwy, P.O. Box 57001 92618-7001
Irvine, California (Zip Code)
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code:
(949) 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 _____
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The aggregate market value of voting stock held by non-affiliates of
registrant on December 15, 2000, based upon the closing price of the common
stock on such date was $17,490,000.
As of December 15, 2000, there were outstanding 12,437,978 shares of
registrant's Common Stock.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.________
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TABLE OF CONTENTS
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PART I
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ITEM 1. BUSINESS............................................................... 3
General .......................................................... 3
Orthopedics, Urology and Other Surgical Specialties................ 4
Subsequent Events.................................................. 4
Settlement of Litigation with Bard................................. 4
Cardiodyne......................................................... 5
New Products....................................................... 5
License Agreements ................................................ 5
Research and Development .......................................... 6
Manufacturing, Supply Agreements .................................. 6
Marketing ......................................................... 6
Government Regulation ............................................. 6
Employees ......................................................... 8
Patents and Patent Applications ................................... 8
Competition ....................................................... 9
Insurance ......................................................... 9
Foreign Operations ................................................ 9
ITEM 2. PROPERTIES ............................................................ 9
ITEM 3. LITIGATION ............................................................ 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ................... 10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS ........................................................... 10
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED RESULTS OF
OPERATIONS AND CONSOLIDATED FINANCIAL CONDITION.................... 10
ITEM 7. FINANCIAL STATEMENTS................................................... 12
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE............................................... 12
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS........... 13
ITEM 10. EXECUTIVE COMPENSATION ................................................ 13
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ........ 13
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................... 13
ITEM 13. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT...................... 13
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K....................................... 13
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................. F-1
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PART I
ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS
In addition to historical information, this Annual Report contains forward-
looking statements. These forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those reflected in these forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in the
section entitled "Management's Discussion and Analysis of Consolidated Results
of Operations and Consolidated Financial Condition". Readers are cautioned not
to place undue reliance on these forward-looking statements, which reflect
management's opinions only as of the date hereof. The Company undertakes no
obligation to revise or publicly release the results of any revision to these
forward-looking statements. Readers should carefully review the risk factors
described in other documents the Company files from time to time with the
Securities and Exchange Commission, including the Quarterly Reports on Form 10-
QSB to be filed by the Company in fiscal year 2001.
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,
gynecology, general surgery and other medical specialties. A 90% owned
subsidiary of the Company, Cardiodyne, Inc. ("Cardiodyne"), is engaged in the
development and testing of a new, automated system using the Company's 80 watt
Holmium laser to treat severe angina (chest pain due to blockages in one or more
of the coronary arteries).
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, gynecology, general surgery and ENT surgery. The Company's
Holmium laser was cleared for sale by the FDA in November 1999 for use in
gastrointestinal surgery, including excision of colorectal and other tumors and
fragmentation of gall bladder and other biliary stones, and in December 2000 for
treating herniated or ruptured lumbar disks in a minimally invasive procedure
called a foraminoplasty. The Company is also engaged in the development of new
laser products for other surgical applications. The Company believes its
proprietary laser products may have advantages over lasers made by others and
conventional surgical devices in the aforementioned fields.
In the fourth quarter of fiscal 2000, the Company replaced many of its
commission sales representatives and realigned a number of sales territories.
Training of its new sales representatives required their being out of the field,
which resulted in revenues in the fourth quarter being $560,000 less than in the
immediately preceding quarter. Also, in the fourth quarter, the Company
established a new marketing strategy, under which the Company provides lasers to
laser rental service companies and shares in the revenues generated from renting
the lasers to hospitals and surgery centers on a "fee per case" basis. To effect
this new strategy, in December 2000 the Company entered into a co-marketing
agreement with a subsidiary of Medical Resource Management, Inc. (MRMC.OB),
which provides lasers and other equipment to users in the Western U.S. on a "per
case" basis and restructured the co-marketing agreement it earlier entered into
with Surgical Innovations & Services, Inc., a subsidiary of Surgical Laser
Technologies, Inc. (SLTI), which provides lasers and other equipment to users on
a "per case" basis in the Southeast. The Company also entered into a Letter of
Intent to acquire Mobile Surgical Technologies, Inc. ("MST"), a Dallas, Texas-
based company that provides lasers and other equipment to users on "per
case" basis in the Southwest, and consummated the acquisition in November 2000.
Net revenue from continuing operations of the Company in fiscal 2000
decreased 16% to $6,095,000 from $7,276,000 for the prior year, principally
resulting from the above described restructuring of its sales organization and
refocusing of the Company's sales strategy on its "fee per case" revenue model
during the fourth quarter. The Company had a net loss of $4,700,000 or $0.41 per
share in fiscal 2000, compared to net income of $2,750,000 or $0.25 per share in
fiscal 1999, which included $6.5 million received in December 1998 from the
settlement of the Company's lawsuit against C.R. Bard, Inc. ("Bard").
The Company believes its future lies in expanding the sales of its laser
products in its existing business areas, expanding its "fee per case" laser
rental services and introducing new laser products for use in urology,
orthopedics, gynecology and gastrointestinal surgery. (See "New Products" for a
description of the new products that the Company is developing).
The Company's working capital on September 30, 2000 was $8,065,000. (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 subsidiary, Cardiodyne. The Company's principal
executive offices are located at 15091 Bake Pkwy., Irvine, CA 92619, and its
telephone number is (949) 559-5300.
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Orthopedics, Urology 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 instruments. During the past two years, the Company's
sales of Holmium lasers in some markets have declined, due to the introduction
of lower priced radiofrequency ("RF") devices by competitors. The Company
anticipates that the recent introduction of lower cost disposable devices, and
the new "fee-per-case" revenue model, will reverse the trend of declining
orthopedic-related sales by making laser-assisted orthopedic procedures more
affordable.
The Company's Holmium lasers are also used for decompression of herniated
lumbar spinal disks ("diskectomy") 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 addition to straight firing laser needles,
the Company also markets side firing laser needles. According to published
studies, Holmium Laser use in discectomy has been successful in relieving the
pain in up to 90% of the cases treated. In July 1999, the Company received
clearance from the FDA to market a new side firing laser needle with a channel
for fluid infusion or suction. In December 2000, the Company received clearance
from the FDA to market its devices for use in foraminoplasty, a corollary
procedure in minimally invasive endoscopic spine surgery in which a laser is
used to create an opening in certain non-load bearing bones in the spinal
column. These advances, coupled with a growing library of published data, has
generated increased interest by spinal surgeons.
Sales of the Company's Holmium lasers are increasing in lithotripsy for
fragmentation of urinary stones and for resection of enlarged prostates, a
condition affecting 50% of men over age 55. The recent introduction of the
Company's new line of fiber optic devices for Holmium lasers is expected to
contribute to this growth.
In addition to its 80 watt Holmium laser, the Company commenced marketing a
new, smaller 30 watt Holmium laser in December 2000 for use in urology, disk
decompression, ENT surgery, general surgery, gynecology and gastrointestinal
surgery.
Subsequent Events
In addition to the co-marketing agreements and Letter of Intent to acquire
MST, which are described above, the following events occurred subsequent to the
end of fiscal 2000:
(a) On October 4, 2000, the Company reported favorable results from
testing its angiogenic cocktail in animals. The study, conducted by
the Texas Heart Institute, showed that the Company's angiogenic agent,
developed by Cardiodyne and subject to a patent application, caused
the formation of new blood vessels and the normalization of heart wall
motion.
(b) On November 27, 2000, the Company announced that it had received FDA
clearance to market its proprietary fiber optic devices and Holmium
laser systems for use in foraminoplasty procedures to treat lower back
and leg pain caused by herniated or ruptured lumbar disks.
(c) On November 28, 2000, the Company announced the development and market
release of a new line of reusable, lower cost laser energy delivery
devices for minimally invasive, outpatient arthroscopy procedures.
These devices are intended to lower the cost per procedure to be more
price competitive with other surgical options.
(d) On December 4, 2000, the Company announced the consummation of the
acquisition of Mobile Surgical Technologies, Inc. ("MST"), described
above, and named MST founder and president as the Company's Vice
Chairman and Chief Executive Officer.
(e) On January 8, 2000, the Company announced the development and market
release of a new line of highly flexible and more visible fiber optic
devices, the FlexMax(TM) line of fibers, and commenced shipping its 30
watt OmniPulse Jr.(TM) Holmium laser.
Settlement of Litigation with Bard
On October 6, 1995, the Company filed a lawsuit against Bard claiming
substantial damages for Bard's failure to perform its obligations under an
Agreement the Company entered into with Bard in 1991, covering a device
developed by the Company to treat enlarged prostates in males. In November 1998,
the Company settled its lawsuit against Bard and received from Bard
approximately $6.5 million, after legal fees and other costs. (See Item 3
"Litigation")
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Cardiodyne
In October 1996, the Company organized Cardiodyne, a 90% owned subsidiary
of the Company, which is developing a proprietary Injection and Laser
Transmyocardial Revascularization ("Laser TMR") System for the treatment of
severe angina resulting from advanced coronary artery disease. The Company
invested $2,000,000 and transferred to Cardiodyne its Laser TMR technology,
several lasers, and testing and production equipment and supplies, and the
Company granted Cardiodyne an exclusive license to certain of the Company's
issued patents, patent applications and technology in the cardiovascular field
in exchange for 9,000,000 shares of Cardiodyne common stock. The Company's
chairman also purchased 500,000 shares of Cardiodyne common stock at the same
average cost per share as the Company. 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. On February 11, 1997, Cardiodyne sold
500,000 shares at a price of $2.00 per share, the then estimated fair value of
such common stock, to its distributor for Japan, Australia and New Zealand. As
of September 30, 2000, the Company had expended an additional $5,536,000 for R&D
on Cardiodyne's behalf and, in January 2001, Trimedyne ceased funding
Cardiodyne's operations. Cardiodyne is presently seeking independent funding to
continue development of its products and to commence human clinical trials.
Laser TMR 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 one or more of the
patient's coronary arteries. The laser energy has also been shown to stimulate
the growth of new blood vessels (angiogenesis) in the area of the laser
channels, possibly due to the release of naturally occurring angiogenic growth
factors. Since the body produces and stores only very small amounts of
angiogenic growth factors (VEGF, FGF and others), and since angiogenic growth
factors and the genes that cause cells to produce such growth factors can be
produced by today's genetic engineering techniques, Cardiodyne has adapted its
Laser TMR System to also inject such angiogenic agents. The Company recently
filed a U.S. patent application covering an angiogenic agent it is developing
and completed successful animal testing of the angiogenic agent in October 2000.
Cardiodyne's proprietary Injection and Laser TMR System, 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, Accuject(TM) Injector and
disposable ChannelMaker(TM) Optical Fiber Catheters.
In November 1997, Cardiodyne filed an Investigational Device Exemption
("IDE") application with the FDA for approval to commence a Phase I clinical
trial of its Epicardial Laser TMR System in the treatment of "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. Subject to Cardiodyne obtaining sufficient additional funding
to continue operations, Cardiodyne expects to receive FDA approval of this IDE
and begin human trials in early 2001. Later in 2001, the Company plans to expand
the clinical trial of this device to testing laser TMR as an adjunct (assist) to
bypass surgery and will seek FDA approval to conduct Phase I clinical trials of
its Endoscopic Laser TMR System in a minimally invasive, Endoscopic Laser TMR
procedure through a puncture between the ribs, with a second port for insertion
of a thoracoscope, enabling the surgeon to view the heart while conducting the
procedure. Also in 2001, Cardiodyne plans to request FDA approval to commence a
Phase I clinical trial of its Percutaneous Laser TMR System. The Company plans
to amend its IDEs (or file new IDEs) to include the use of its Accuject(TM)
Injector to inject an angiogenic agent during the aforementioned clinical trials
of its Epicardial, Endoscopic and Percutaneous Laser TMR Systems.
Extensive, controlled clinical trials, demonstrating the safety and
efficacy of Cardiodyne's Injection and Laser TMR Systems versus conventional
therapies, will be required before Cardiodyne can submit a Pre-Market Approval
("PMA") application to the FDA to market its Injection and Laser TMR Systems.
This process could take two to three years, or longer, and will require
Cardiodyne's raising additional funds.
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 resources being expended in such development efforts is limited.
In November 2000, the Company released the first products in a new line of
low-cost devices targeted to the orthopedics market. The Company will use the
platform of these devices to expand its product offering in other medical
specialties to help overcome cost barriers in certain markets. As the leader in
developing products for the laser-assisted spine surgery market, the Company
will continue to advance the technology in this market to help surgeons maximize
patient outcomes and expand the level of care to a greater number of patients.
The Company also plans to develop several new disposable devices for use in
urology, gynecology, gastrointestinal surgery and other medical specialties,
which the Company believes offer advantages over competing technologies. The
Company has been issued U.S. patents covering certain of its proposed new
products and plans to file patent applications covering others.
License Agreements
The Company has license agreements with a number of universities and
inventors, under which royalties on sales, if any, are payable, and two license
agreements with a competitor under which royalties are 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
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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.
Research And Development
From its inception to September 30, 2000, an aggregate of $42,547,000 has
been expended by the Company for research and development ("R&D"), including
clinical and regulatory activities, of which $3,486,000 (including $1,514,000 of
R&D expenses of Cardiodyne) was expended during the fiscal year ended September
30, 2000. 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. In January 2001, the Company ceased funding
Cardiodyne's development projects and significantly curtailed Trimedyne's
research and development efforts as part of the Company's overall cost reduction
program. Cardiodyne is seeking independent financing to continue operations;
however, there is no assurance that such financing will be available or that
Cardiodyne will be able to resume operations.
Manufacturing, Supply Agreements
The Company believes that it 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 the Company is currently using
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, gynecology, gastrointestinal, general surgery,
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 proposed new products (See "New Products") will, if
cleared for sale by the FDA and marketed, be sold to hospitals and outpatient
surgery centers, as well as to physicians 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, 2000, the Company had marketing arrangements for the sale
of its lasers and certain of its disposable products on a straight commission
basis with 56 independent sales representatives specializing in the sale of
medical devices in the United States. Outside the United States, the Company
sells its products through 83 independent distributors who sell various medical
products in approximately 72 foreign countries. The Company presently employs
three Regional Sales Directors, a Vice President - Sales, a Clinical Education
Director and an International Sales Director.
The Company hopes in the future to increase the number of domestic sales
representatives and to appoint additional distributors in foreign countries for
the purpose of expanding sales of the Company's products. There is no assurance
that the Company will be able to enter into marketing arrangements with any or
all of the persons or organizations with which it is presently negotiating or
that the Company will be able to maintain its existing selling arrangements.
Government Regulation
All of the Company's products are, and will in the future, likely be
subject to extensive governmental regulation and supervision, principally by the
FDA and comparable agencies in other countries. The FDA regulates the
introduction, advertising, manufacturing practices, labeling and record keeping
of all drugs and medical devices. The FDA has the power to seize adulterated or
misbranded devices, require removal of devices from the market, enjoin further
manufacture or sale of devices and publicize relevant facts regarding devices.
Prior to the sale of any of its products, the Company is required to obtain
marketing approval for each product from the FDA and comparable agencies in
foreign countries. Extensive clinical testing of each product, which is both
costly and time-consuming, may be required to obtain such approvals. The
Company's business would be adversely affected if it were unable to obtain such
approvals or to comply with continuing regulations of the FDA and other
governmental agencies. In addition, the Company cannot predict whether future
changes in government regulations might increase the cost of conducting its
business or affect the time required to develop and introduce new products.
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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.
Inspection of Plants:
The FDA also has authority to conduct detailed inspections of manufacturing
plants, to determine whether or not the manufacturer has followed its GMP
requirements, which are required for the manufacture of medical devices.
Additionally, the FDA requires reporting of certain product defects and
prohibits the domestic sale or exportation of devices that do not comply with
the law. The Company believes it is in compliance in all material respects with
these regulatory requirements, and expects that the processes and procedures in
place will satisfy the FDA, although such cannot be assured.
State Regulation:
Federal law preempts states or their political subdivisions from regulating
medical devices. Upon application, the FDA may permit state or local regulation
of medical devices which is either more stringent than federal regulations or is
required because of compelling local conditions. To date, and to the best of the
Company's knowledge, only California has filed such an application. On October
5, 1980, the FDA granted partial approval to such application, effective
December 9, 1980. The California requirements which have been exempted from
preemption have not had a materially adverse effect on the Company.
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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 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 commence marketing 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, 2000, Trimedyne and Cardiodyne had 93 and 5 full-time
employees, respectively, a total of 98, of whom 40 were engaged in production,
22 in R&D, 9 in sales and marketing, and 27 in general and administrative
functions. The Company also employs a total of 13 consultants on an hourly
basis.
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, 2000, the Company had been assigned or obtained
exclusive or non-exclusive, worldwide licenses to 26 issued U.S. patents and two
foreign patents, and has seven U.S. patent applications on file with the U.S.
Patent Office and 13 foreign patent applications on file in various countries.
Several of such patents have issued as foreign patents and certain corresponding
patent applications have been filed in up to 3 foreign countries. The validity
of one of the U.S. Patents covering the Company's 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 of the Company's claims of this patent.
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 future royalty and minimum
payment obligations.
8
<PAGE>
Competition
The Company and Cardiodyne face competition from a number of both young and
established companies in the medical field. The larger of such established
companies include Coherent, Inc., Johnson & Johnson, Boston Scientific, Inc.,
Baxter International, Inc., ESC Medical Systems 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 and Cardiodyne may
compete are Laserscope, Inc., Surgical Laser Technologies, Inc., PLC Systems,
Inc., Eclipse Surgical Technologies, Inc. and others, certain of which are
publicly held.
Insurance
The Company has a commercial general liability insurance policy, including
an umbrella policy providing coverage in the aggregate amount of $7,000,000 and
a products liability insurance policy providing coverage in the aggregate amount
of $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 covering its officers and
directors.
Foreign Operations
In fiscal 2000, sales of products in foreign countries accounted for
approximately 16% of the Company's total sales. See "Marketing" herein for
information on the marketing of the Company's products in foreign countries.
ITEM 2. PROPERTIES
The Company currently occupies approximately 40,000 square feet of office,
manufacturing and warehouse space in Irvine, California, which it leases at
approximately $25,870 per month through June 2001. The Company has obtained an
early termination of this lease, commencing February 2001 it will relocate its
offices to 48,000 square feet of office, warehouse and manufacturing space in
Irvine, California, which it has leased through December 2005 at approximately
$40,000 per month. This new facility will serve as the Company's headquarters,
where research, regulatory, sales, marketing and administrative activities, as
well as manufacturing and warehousing, will be conducted.
The Company leases 14,000 square feet of 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. The Company subleases 8,000 sq. ft. of this building, which it occupied
until November 1998, to a third party at its cost. The Company 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. The Company presently does not need the space subleased to either
entity.
Management considers all of its facilities to be well maintained and
adequate for its purposes.
ITEM 3. LITIGATION
On October 6, 1995, the Company filed a lawsuit against Bard claiming
damages for Bard's failure to perform its obligations under an Agreement the
Company entered into with Bard in 1991. On August 13, 1998, the United States
District Court for the District of New Jersey denied Bard's motion for partial
summary judgement. In November 1998, the Company settled its lawsuit against
Bard and received from Bard approximately $6,500,000, after legal fees and other
costs.
In September 1999, the co-inventor of the Company's Urolase(R) product
filed suit against the Company and Bard seeking damages and a share of the
proceeds of the lawsuit which Trimedyne brought against Bard. The Company
believes the suit is entirely without merit and intends to defend the lawsuit
vigorously. The case is still in a preliminary stage. No provision for loss has
been made in the accompanying financial statements as a result of this matter
since, in management's opinion, the an adverse outcome against the Company is
remote.
The Company is subject to various claims and actions that arise in the
ordinary course of business. The litigation process is inherently uncertain, and
it is possible that the resolution of any of the Company's existing and future
litigation may adversely affect the Company.
9
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the Company's fiscal year ended September 30,
2000, no matters were submitted to a vote of securities holders.
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.
2000 High Low
---- ---- ---
Quarter ended:
December 31, 1999 2 9/16 1 9/16
March 31, 2000 6 5/8 2 5/32
June 30, 2000 3 5/8 1 15/16
September 30, 2000 2 9/16 1 13/16
1999 High Low
---- ---- ---
Quarter ended:
December 31, 1998 1 9/16 11/16
March 31, 1999 1 17/32 29/32
June 30, 1999 1 13/32 1 1/16
September 30, 1999 3 5/16 1 7/32
B. Holders of Common Stock
As of December 15, 2000, there were approximately 1,200 holders of record
of the Company's Common Stock and an additional estimated 9,200 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. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED RESULTS OF
OPERATIONS AND CONSOLIDATED FINANCIAL CONDITION
Consolidated Results of Operations
Fiscal years 2000 and 1999
The following table sets forth certain items in the consolidated statements
of operations as a percentage of net revenues for the years ended September 30,
2000 and 1999.
Year Ended September 30,
2000 1999
---- ----
Net revenues 100.0% 100.0%
Cost of goods sold 56.7 53.9
Selling, general and administrative 67.9 51.9
Research and development 57.2 52.4
Interest income 4.1 4.3
Other income 0.5 91.6
Net (loss) income (77.0) 37.8
10
<PAGE>
Net Revenues
Total revenues decreased 16% in fiscal 2000 to $6,095,000 from $7,276,000
in 1999, due primarily to a restructuring of the Company's sales force and a
refocusing of the marketing efforts during the fourth quarter of fiscal 2000.
During the fourth quarter of fiscal 2000, the Company implemented a "fee-per-
case" revenue model that incorporated, among other aspects, revenue sharing
agreements with third party rental companies, and the development of lower-cost
disposable devices designed to reduce the overall cost per procedure.
International export revenues were $1,001,000 for fiscal 2000 and
$1,528,000 for fiscal 1999. The decline in fiscal 2000 resulted from increased
competition from lower-cost foreign manufacturers.
Cost of Goods Sold
Cost of goods sold in fiscal 2000 was approximately 56.7% of net revenue,
compared to 53.9% in fiscal 1999, attributed to the ratio of sales to fixed
manufacturing overhead. Where sales declined in the fourth quarter of fiscal
2000 and manufacturing overhead remained relatively fixed, cost of goods sold as
a percentage of sales increased. The Company did not experience significant
increases in component parts, labor or overhead in fiscal 2000 versus 1999.
Research and Development Expenses (R&D)
R&D expenses were $3,486,000 in fiscal 2000, compared to $3,809,000 in
fiscal 1999. R&D spending in fiscal 2001 is expected to be lower than the fiscal
2000 level, as the Company ceases funding of the development of Cardiodyne's
Injection and Laser TMR System. R&D as a percentage of net revenues increased to
57% of net revenues in fiscal 1999 vs. 52% in fiscal year 1999, attributed to
the lower overall level of sales in fiscal 2000. The decrease in R&D expenses in
2000 was largely due to a reduction in expenditures for the development of
Cardiodyne's products. In January 2001, the Company ceased funding further
development of Cardiodyne's products in order to improve its financial position.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses increased 9% to
$4,136,000 in fiscal 2000, compared to $3,776,000 in fiscal 1999. The increase
in fiscal 2000 is attributed to increased legal expenses and the addition of new
sales and marketing management.
SG&A expenses increased as a percentage of net revenues in fiscal 2000 over
fiscal 1999, (68% and 52%, respectively), due to the aforementioned factors, and
to the reduction in sales during fiscal 2000.
Interest and Other Income and Net Income
Interest income in fiscal 2000 was $249,000 compared to $315,000 in fiscal
1999. The levels of cash and equivalents available for investment in interest
bearing securities were $3,543,000 and $5,382,000 as of September 30, 2000 and
1999, respectively. In 2000, the Company generated less income on its
investments than in 1999 due to the decreased overall level of cash available
for investment during the current fiscal year.
Other income in fiscal 1999 consists primarily of $6.5 million in net
proceeds received in November 1998 from the settlement of the lawsuit against
Bard.
As a result of all of the above, fiscal 2000 net loss was $4,700,000
compared to net income of $2,750,000 in fiscal 1999.
Due to cumulative net losses incurred in prior years, the Company was not
obligated to pay federal or state income taxes for fiscal 1999.
Liquidity and Capital Resources
At September 30, 2000, the Company had working capital of $8,065,000
compared to $10,357,000 at the end of fiscal 1999. Cash, cash equivalents and
marketable securities decreased by $1,839,000 in fiscal 2000 to $3,543,000 at
September 30, 2000. The decrease in cash and cash equivalents, and marketable
securities was due to cash used for operating activities totaling approximately
$4,036,000 offset by cash received from a private placement and from the
exercise of stock options totaling $2,415,000.
Management believes its existing working capital will be sufficient to meet
Trimedyne's operating needs for at least the next 12 months. Management has
implemented cost reductions at Trimedyne that include discontinuing the
development of Cardiodyne's products and the postponement of several Trimedyne
development projects. The Company will further seek to reduce and control its
overhead by outsourcing significant portions of its manufacturing process and
eliminating some executive management positions. The Company will seek
additional financing to expand its sales and marketing efforts and to continue
development of new products. Sources of additional financing include the sale of
equity securities of the Company or Cardiodyne and the sale or licensing of
certain patent rights.
11
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by Item 7 of this report are set forth
in the index on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
12
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
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 10. 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 11. 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 12. 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.
ITEM 13. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Not applicable.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) Financial Statements.
See "Index to Consolidated Financial Statements" included in this
report at Page F-1.
(b) No reports on Form 8-K were filed during the fourth quarter of the
fiscal year ended September 30, 2000.
(c) Exhibits
Filed Previously
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(f) Addendum to Industrial Lease with Griswold Controls dated September
14, 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.
Filed Herewith
27 Financial Data Schedule
* The Company requested and received confidential treatment for
portions of those exhibits marked with an asterisk (*).
13
<PAGE>
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, 2001 /s/ William J. Schubert, Jr.
---------------- ____________________________
William J. Schubert, Jr.
Vice 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.
Signature Title Date
--------- ----- ----
/s/ Marvin P. Loeb Chairman of the January 12, 2001
------------------------------ Board of Directors ----------------
Marvin P. Loeb
/s/ William J. Schubert, Jr. Vice Chairman and January 12, 2001
------------------------------ Chief Executive Officer ----------------
William J. Schubert, Jr.
/s/ Shane H. Traveller President, January 12, 2001
------------------------------ Chief Operating Officer, ----------------
Shane H. Traveller Director
/s/ Donald Baker Director January 12, 2001
------------------------------ ----------------
Donald Baker
/s/ Bruce N. Barron Director January 12, 2001
------------------------------ ----------------
Bruce N. Barron
/s/ Richard F. Horowitz Director January 12, 2001
------------------------------ ----------------
Richard F. Horowitz
14
<PAGE>
TRIMEDYNE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of Trimedyne, Inc. and its
subsidiary are included in Item 7:
<TABLE>
<CAPTION>
Page
<S> <C>
Consolidated Financial Statements:
Report of Independent Accountants F-2
Consolidated Balance Sheet at September 30, 2000 F-3
Consolidated Statements of Operations and Comprehensive Income (Loss)
for each of the two years in the period ended September 30, 2000 F-4
Consolidated Statements of Stockholders' Equity for each of
the two years in the period ended September 30, 2000 F-5
Consolidated Statements of Cash Flows for each of the two years in the period
ended September 30, 2000 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Trimedyne, Inc.
We have audited the accompanying consolidated balance sheet of Trimedyne, Inc.
and its subsidiary (the "Company"), as of September 30, 2000, and the related
consolidated statements of operations and comprehensive income (loss),
stockholders' equity and cash flows for each of the two years in period ended
September 30, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Trimedyne, Inc., as
of September 30, 2000, and the results of their operations and their cash flows
for each of the two years in period ended September 30, 2000, in conformity with
accounting principles generally accepted in the United States.
/s/ McKennon, Wilson & Morgan LLP
-----------------------------
Irvine, California
January 3, 2001
F-2
<PAGE>
TRIMEDYNE, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
September 30,
------------
2000
----
Current assets:
Cash and cash equivalents $ 466,000
Marketable securities 3,077,000
Trade accounts receivable, net of allowance
for doubtful accounts of $443,000 812,000
Inventories 4,289,000
Other 361,000
------------
Total current assets 9,005,000
Property and equipment, net 407,000
------------
$ 9,412,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 397,000
Accrued expenses 475,000
Deferred income 68,000
------------
Total current liabilities 940,000
------------
Commitments and Contingencies (Note 6)
Stockholders' equity:
Common stock - $.01 par value; 30,000,000 shares
authorized, 11,931,978 shares issued
and 11,830,369 shares outstanding 120,000
Capital in excess of par value 45,661,000
Accumulated deficit (36,441,000)
Accumulated other comprehensive loss (155,000)
------------
9,185,000
Less treasury stock, at cost, 101,609 shares (713,000)
------------
Total stockholders' equity 8,472,000
------------
$ 9,412,000
============
See Notes to Consolidated Financial Statements
F-3
<PAGE>
TRIMEDYNE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
For The Year Ended September 30,
--------------------------------
2000 1999
---- ----
Net revenues $ 6,095,000 $ 7,276,000
Cost of goods sold 3,458,000 3,922,000
----------- -----------
Gross Profit 2,637,000 3,354,000
Selling, general and administrative expenses 4,136,000 3,776,000
Research and development expenses 3,486,000 3,809,000
----------- -----------
Loss from operations (4,985,000) (4,231,000)
Other income:
Interest income 249,000 315,000
Gain on settlement of claim 6,500,000
Other 36,000 166,000
----------- -----------
Net (loss) income (4,700,000) 2,750,000
Other comprehensive income (loss) -
Unrealized loss on marketable securities (94,000) (36,000)
------------ -----------
Comprehensive income (loss) $(4,794,000) $ 2,714,000
============ ===========
Basic and diluted net income (loss) per share $ (0.41) $ 0.25
============ ===========
Basic and dilutive weighted average
common shares outstanding 11,615,000 10,919,000
See Notes to Consolidated Financial Statements
F-4
<PAGE>
TRIMEDYNE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Capital In Other
------------ Excess of Accumulated Comprehensive Treasury
Shares Amount Par Value Deficit Loss Stock Total
------ ------ --------- ------- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
September 30, 1998 11,007,565 $110,000 $43,110,000 $(34,491,000) $(25,000) $(713,000) $ 7,991,000
Unrealized loss
on marketable
securities (36,000) (36,000)
Net income for
the year 2,750,000 2,750,000
Exercise of
stock options 76,100 1,000 117,000 118,000
Value of stock
options issued
below fair value 22,000 22,000
---------- -------- ----------- ------------ --------- --------- -----------
Balance at
September 30, 1999 11,083,665 $111,000 $43,249,000 $(31,741,000) $(61,000) $(713,000) $10,845,000
Unrealized loss
on marketable
securities (94,000) (94,000)
Net loss for
the year (4,700,000) (4,700,000)
Exercise of
stock options 187,494 3,000 288,000 291,000
Proceeds from
private
placement 660,819 6,000 2,118,000 2,124,000
Value of stock
options issued
below fair value 6,000 6,000
---------- -------- ----------- ------------ --------- --------- -----------
Balance at
September 30, 2000 11,931,978 $120,000 $45,661,000 $(36,441,000) $(155,000) $(713,000) $ 8,472,000
========== ======== =========== ============ ========= ========= ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
TRIMEDYNE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For The Year Ended September 30,
--------------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(4,700,000) $2,750,000
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 205,000 137,000
Value of stock options issued below fair value 6,000 22,000
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts receivable, net 1,402,000 (548,000)
(Increase) decrease in inventories (849,000) 52,000
Decrease in other current assets 48,000 74,000
Increase in accounts payable 72,000 113,000
Decrease in accrued expenses (159,000) (300,000)
(Decrease) increase in other current liabilities (61,000) 17,000
----------- ----------
Net cash provided by (used in) operating activities (4,036,000) 2,317,000
----------- ----------
Cash flows from investing activities:
Capital expenditures (124,000) --
Purchase of marketable securities (1,001,000) (1,197,000)
----------- ----------
Net cash used in investing activities (1,125,000) (1,197,000)
----------- ----------
Cash flows from financing activities -
Proceeds from exercise of stock options 291,000 118,000
Proceeds from private placement 2,124,000 -
----------- ----------
Net cash provided by financing activities 2,415,000 118,000
----------- ----------
Net (decrease) increase in cash and cash equivalents (2,746,000) 1,238,000
------------ ----------
Cash and cash equivalents at beginning of year 3,212,000 1,974,000
----------- ----------
Cash and cash equivalents at end of year $ 466,000 $3,212,000
=========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY:
Trimedyne, Inc. ("Trimedyne") and its subsidiary (collectively "the
Company") are engaged primarily in the research and development, manufacture and
sale of lasers and disposable laser devices in the medical field. The Company
has also been engaged in the research and development of cardiovascular laser
devices through its 90% owned subsidiary, Cardiodyne, Inc. ("Cardiodyne"). In
January 2001, the Company ceased funding Cardiodyne's operations due to
budgetary constraints. The Company's operations are primarily located in
Southern California with distribution of its products worldwide (Note 10).
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. All significant intercompany accounts
and transactions have been eliminated in consolidation.
At September 30, 2000, the Company had working capital of approximately
$8.1 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. Management has implemented cost reductions at Trimedyne that
include the curtailment of several R&D projects and has ceased funding the
development of Cardiodyne's products. The Company will further seek to reduce
and control its overhead by outsourcing significant portions of its
manufacturing process and eliminating some executive management positions. The
Company will seek additional financing to expand its sales and marketing efforts
and to continue development of new products. Sources of additional financing
include the sale of equity securities of the Company or Cardiodyne and the sale
or licensing of certain patent rights. There is no assurance that additional
financing will be available to the Company.
Reclassifications
Certain prior year items have been reclassified to conform with the current
year presentation.
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
Marketable securities are accounted for under the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Company's short-term investments
consisted of marketable debt and equity securities, which were classified as
"available-for-sale" in accordance with the provisions of SFAS No. 115.
Accordingly, such investments are presented as current assets and carried at
their estimated fair values in the accompanying consolidated financial
statements. Fair value was determined based on quoted market prices. The
specific identification method has been used to determine cost for each
security. Unrealized losses are excluded from net income (loss) and reported as
a separate component of shareholders' equity, net of the related tax effect and
as a component of comprehensive income (loss).
The amortized cost and fair market values of all marketable securities
at September 30, 2000 are as follows:
<TABLE>
<CAPTION>
Amortized Unrealized
Cost Basis Fair Value Loss
---------- ---------- ----
<S> <C> <C> <C>
Corporate bonds $1,000,000 $1,000,000 $ --
Equity funds 2,232,000 2,077,000 (155,000)
---------- ---------- ---------
Total $3,232,000 $3,077,000 $(155,000)
========== ========== =========
Inventories
</TABLE>
Inventories consist of raw materials and component parts, and work in
process and finished good lasers and dispensing systems. Inventories are
recorded at the lower of cost or market, cost being determined on a first-in,
first-out ("FIFO") basis.
F-7
<PAGE>
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, as
well as allowances for doubtful accounts and deferred income tax assets, losses
for contingencies and certain accrued liabilities.
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 property and equipment is calculated on a straight-line
basis over the estimated useful lives of the assets ranging from three to ten
years. Leasehold improvements are amortized on a straight-line basis over the
lesser of the useful lives or the term of the lease.
Revenue recognition
Revenues from sales of lasers and disposable laser devices are recognized
upon shipment of product. Shipments subject to customer acceptance criteria are
deferred until customer acceptance.
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).
Warranty
We warrant certain of our products and provide for estimated product
warranty costs at the time of sale.
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 liability method of accounting for income taxes 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 will not be recoverable based on future operations.
Accounting for stock-based compensation
The Company has not adopted a fair value-based method of accounting for
stock-based compensation plans for employees. The Company uses 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 (see
Note 7).
Impairment of long-lived assets
The Company accounts for impairment of long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of." This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. No significant impact on the Company's consolidated financial position,
results of operations or cash flows has been realized as a result of this
policy.
F-8
<PAGE>
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Per share information
Basic earnings (loss) per share is computed by dividing income (loss)
available to common shareholders by the weighted average common shares
outstanding plus the potential effect of dilutive securities which are
convertible to common shares such as options, warrants and preferred stock. Due
to the net loss incurred in fiscal 2000, all common stock equivalents
outstanding were considered anti-dilutive and were excluded from the
calculations of diluted net loss per share. Potential common shares, which
consist of the incremental common shares issuable upon the exercise of stock
options using the treasury stock method, approximated 527,000 and 45,000 shares
in fiscal 2000 and 1999, respectively. No adjustments were made to net income
(loss) attributable to common stock in the calculation of basic or diluted
income (loss) per share in fiscal 2000 or 1999.
Anti-dilutive securities and common stock equivalents at September 30,
2000, which could be dilutive in future periods, include common stock options to
purchase 1,136,000 shares of common stock.
Consolidated statements of cash flows
The Company made no cash payments for interest or income taxes in 2000 or
1999.
Comprehensive income
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. The Company's only element of comprehensive income
during fiscal 2000 and 1999 related to unrealized losses on marketable
securities.
Segment information
The Company reports information about operating segments as well as
disclosures about products and services, geographic areas and major customers
(See Note 11). Operating segments are defined as revenue-producing components of
the enterprise, which are generally used internally for evaluating segment
performance.
Recently issued accounting standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from changes in
the values of those derivatives would be accounted for depending on the use of
the derivative and whether it qualifies for hedge accounting. In May 1999, SFAS
133 was amended to defer its effective date. SFAS 133 will be effective our
first quarter filing of fiscal 2001. We do not expect the adoption of SFAS 133
to have a material impact on its consolidated financial statements.
The Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) 101, Revenue Recognition in Financial Statements, in December
1999. The SAB summarizes certain of the SEC staff's views in applying generally
accepted accounting principles (GAAP) to revenue recognition in financial
statements. We are required to adopt SAB 101 in the first quarter of fiscal
2001. We believe our revenue recognition policies are in accordance with GAAP
and, accordingly, we do not expect a significant impact on our financial
statements.
NOTE 3. COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS:
Inventories consist of the following at September 30, 2000:
Raw materials $1,439,000
Work-in-process 694,000
Finished goods 2,156,000
---------
$4,289,000
=========
F-9
<PAGE>
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and equipment, net consist of the following at September 30, 2000:
Furniture and equipment $ 2,542,000
Leasehold improvements 331,000
Other 698,000
-----------
3,571,000
Less accumulated depreciation and amortization (3,164,000)
-----------
$ 407,000
===========
Accrued expenses consist of the following at September 30, 2000:
Salaries, wages and benefits $ 352,000
Royalties 50,000
Product warranty 44,000
Other 29,000
-----------
$ 475,000
===========
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. Under the Agreement, no net revenues and no
royalties were earned from Bard during the periods presented. In addition, no
development costs related to urological applications were incurred during the
periods presented. During fiscal 1995, in management's opinion, Bard
discontinued fulfilling its obligations under the agreement. Accordingly, in
August 1997, the Company initiated litigation against Bard.
In August 1998, the United States District court for the District of New
Jersey denied Bard's motion for partial summary judgement. In November 1998, the
Company settled its lawsuit against Bard and received from Bard approximately
$6,500,000, after legal fees and other costs (See Note 6).
NOTE 5. INCOME TAXES:
The deferred income tax balances at September 30, 2000 are comprised as
follows:
September 30, 2000
------------------
Deferred income tax assets:
Net operating loss carry forwards $ 12,876,000
Research & development credits 3,340,000
Inventory obsolescence reserves 355,000
Accrued expenses 130,000
Account receivable reserves 190,000
Other 304,000
Valuation allowance (17,195,000)
-------------
-
=============
The valuation allowance for deferred tax assets increased approximately
$1,997,000 and decreased approximately $902,000 during the years ended September
30, 2000 and 1999, respectively. The 2000 increase primarily relates to
additional valuation allowance for net operating loss carryforwards and research
tax credits generated. The decrease in 1999 relates to the use of net operating
losses to offset taxable income. Due to the existence of net operating loss
carryforwards, such assets of which were fully reserved, the Company recorded no
provision for income taxes in fiscal 2000.
In fiscal 2000, the difference between the tax benefit derived by using
the 34% Federal tax rate and the zero benefit recorded by the Company is due to
the Company providing a 100% valuation allowance against any deferred tax
assets.
F-10
<PAGE>
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2000, the Company had net operating loss ("NOL")
carryforwards for Federal and California income tax purposes totaling
approximately $35 million and $12.5 million, respectively. Federal NOLs begin to
expire in 2008 and fully expire in 2020. California NOLs begin to expire in 2000
and fully expire in 2004. 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. COMMITMENTS AND CONTINGENCIES:
Commitments
The Company is obligated under certain facility and equipment lease
agreements to make minimum rental payments, excluding taxes and common area
maintenance costs, for the years ending September 30 as follows:
2001 $ 753,000
2002 540,000
2003 504,000
2004 531,000
2005 662,000
-----------
Total $ 2,990,000
===========
The lease on the Company's headquarters facility was renewed in November
1998 and expires in June 2001. The Company has elected an early termination of
this lease effective January 2001 and will commence occupying a new facility in
February 2001. The lease on the new facility expires in December 2005. The
Company's Cardiodyne facility lease expires January 2002 and contains one
thirty-six month renewal option.
Rent expense for the years ended September 30, 2000 and 1999 was
approximately $293,000 and $376,000, respectively.
Contingencies
On October 6, 1995, the Company filed a lawsuit against C.R. Bard Inc.
claiming substantial damages for among other things, Bard's failure to perform
its obligations as Trimedyne's exclusive distributor under the Agreement and
Bard's failure to pay certain amounts due under the Agreement. On August 13,
1998, the United States District court for the District of New Jersey denied
Bard's motion for partial summary judgement. In November 1998, the Company
settled its lawsuit against Bard and in December 1998 received from Bard net
proceeds of approximately $6,500,000, after legal fees and other costs. During
1999, the co-inventor sued the Company seeking damages and a share of the
proceeds received from the settlement of the Bard suit. The Company believes the
suit is entirely without merit and intends to defend the lawsuit vigorously. The
case is still in a preliminary stage. No provision for loss has been made in the
accompanying financial statements as a result of this matter since, in
management's opinion, an adverse outcome against the Company is remote.
The Company is subject to a limited number of 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 any of the Company's
existing and future litigation may adversely affect the Company. Management is
unaware of any matters that may have material impact on the Company's financial
position, results of operations or cash flows.
NOTE 7. STOCKHOLDERS' EQUITY:
Stock Options:
The Company has adopted stock option plans that authorize the granting of
options to key employees, directors, and/or consultants to purchase unissued
common stock subject to certain conditions, such as continued employment.
Options are generally granted at the fair market value of the Company's common
stock at the date of grant, become exercisable over a period of five years from
the date of grant, and expire in ten years. Forfeitures of stock options are
returned to the Company and become available for grant under the respective
plan.
Activity during the years ended September 30, 2000 and 1999 under the
plans was as follows:
F-11
<PAGE>
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Options Outstanding
<TABLE>
<CAPTION>
Option Exercise Aggregate
Options Price Per Share Exercise Price
------- --------------- --------------
<S> <C> <C> <C>
September 30, 1998 1,410,644 1/100 - 6 7/8 $ 5,392,900
Granted 942,550 1 1/16 - 2 5/8 1,347,110
Exercised (76,100) 1 1/16 - 1 1/2 (113,276)
Canceled (974,010) 1/100 - 6 7/8 (4,101,772)
--------- ------------- -----------
September 30, 1999 1,303,084 1 1/16 - 6 5/8 $ 2,524,962
Granted 849,000 2 1/8-3 27/32 $ 2,331,269
Exercised (187,494) 1 1/16-3 1/2 (291,000)
Canceled (62,240) 1 1/16-3 1/2 (103,412)
--------- -----------
September 2000 1,902,350 $ 4,461,819
========= ===========
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at September 30, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
Outstanding Weighted-Average Exercisable Weighted-
Range of as of Remaining Weighted-Average as of Average
Exercise Prices 9/30/2000 Contractual Life Exercise Price 9/30/2000 Exercise Price
--------------- --------- ---------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$1.06 - $1.65 1,134,270 5.5 $1.43 763,190 $1.49
$1.65 - $2.47 1,580 8.6 $2.12 0 $0.00
$2.47 - $3.30 625,000 8.5 $2.89 38,600 $3.00
$3.30 - $4.95 98,500 7.1 $3.72 34,100 $3.50
$4.95 - $7.42 43,000 2.3 $6.58 36,500 $6.58
</TABLE>
As of September 30, 2000, the Company had 697,650 shares available for
grant under the above option plans. Of the shares previously granted and
outstanding at September 30, 2000, 872,390 shares were vested and exercisable at
prices ranging from $1.48 to $6.63 per share.
As stock 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 stock 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 December 8, 1998, the Board of Directors approved the exchange of all
outstanding Incentive Stock Options and Non-Qualified Stock Options held by
directors, officers and employees of the Company that were in excess of $1.50
per share for new options exercisable at $1.50 per share with the same vesting
periods. The closing price of the common stock on such date was $1.06 as
reported by the NASDAQ National Market System.
As discussed in Note 2, the Company is required to disclose the effects on
operations and 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 year ended September 30, 2000 to the
pro-forma amount of $7,160,000 and decreasing the Company's net income for the
year ended September 30, 1999 to the pro forma amount of $1,958,000, with a pro
forma net (loss) income per share of $(0.62) and $0.18, respectively. These pro
forma amounts were determined based upon the fair value of each option granted
during fiscal 2000 and 1999 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 approximately
100 percent were applied to all options granted. The weighted average fair value
at the grant date for the options granted during fiscal years 2000 and 1999 was
$2.75 and $1.43 per option, respectively.
F-12
<PAGE>
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common stock issued and Expenditures on Behalf of Cardiodyne:
On October 30, 1996, the Company formed Cardiodyne, a development-stage
company. The Company invested $2,000,000 and transferred to Cardiodyne certain
equipment and supplies (valued at $117,000) and certain intellectual property
rights in exchange for 9,000,000 shares of Cardiodyne at a price of $0.24 per
share. The Company's chief executive officer purchased 500,000 shares of
Cardiodyne at the same average cost per share at the Company's 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 $6,000 in fiscal 2000 and $22,000 in fiscal 1999 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 564,500 shares of its common stock at an
exercise price of $2.00 subsequent to February 11, 1997. At September 30, 2000,
options to purchase 559,500 shares of common stock of Cardiodyne are
outstanding, of which options to purchase 249,566 shares of such common stock
are exercisable. These options vest over five (5) years and expire ten years
from the date of grant.
Private placement of common stock
On April 11, 2000, the Company completed a private placement of common
stock. In the transaction, the Company received approximately $2.1 million, net
of issuance costs in exchange for 660,819 shares of common stock. In addition,
the Company issued warrants to purchase 329,000 shares of the Company's common
stock at $4.88 per share. The warrants expire in March 2005.
NOTE 8. 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 annual contributions to the Retirement Plan totaled $67,000 for fiscal
2000 and $64,000 for fiscal 1999.
NOTE 9. RELATED PARTY TRANSACTIONS:
The Company has made payments of $37,000 and $56,000 in the fiscal years
ending 2000 and 1999, respectively, to the law firm of which a director of the
Company is a member. The Company has engaged in a consulting agreement for
annual payments of $33,000 with a director who is related to the Company's
Chairman and Chief Executive Officer.
The Company subleases space to a company controlled by the Company's
Chairman and Chief Executive Officer. The Company allocates expenses to that
company based on actual costs incurred. Such charges aggregated $54,000 and
$56,000 for the fiscal years 2000 and 1999, respectively. At September 30, 2000,
the Company has a receivable from this related party amounting to $191,000,
excluding accrued interest.
NOTE 10. CONCENTRATION OF CREDIT RISK
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. 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 11. SEGMENT INFORMATION:
Trimedyne's revenue base is derived from the sales of medical products
and services on a worldwide basis originating from the United States. Export
sales during the years ended September 30, 2000 and 1999 were $1,001,000 and
$1,528,000, respectively. Although discrete components that earn revenues and
incur expenses exist, significant expenses such as research and development and
corporate administration are not incurred by nor allocated to these operating
units but rather are employed by the entire enterprise. Additionally, the chief
operating decision maker evaluates resource allocation not on a product or
geographic basis, but rather on an enterprise-wide basis. Therefore, the Company
has concluded that it contains only one reportable segment, which is the medical
systems business.
F-13
<PAGE>
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All long-lived assets were located in the United States at September 30, 2000
and 1999.
Sales to customers by similar products and services for the years ended
September 30 2000 and 1999 were:
2000 1999
---- ----
By similar products and services:
--------------------------------
Laser equipment $1,799 $1,854
Delivery devices 3,100 4,138
Service and other 1,196 1,284
------ ------
Total $6,095 $7,276
====== ======
NOTE 12. QUARTERLY FINANCIAL INFORMATION AND FOURTH QUARTER ADJUSTMENTS
(unaudited)
The Company determined it was necessary to revise its unaudited results of
operations in fiscal 2000. The revisions to the financial statements reflect the
reversal of $139,000 of revenue previously recognized in the first quarter of
fiscal 2000. Additionally, costs of sales was increased to reflect physical
inventory adjustments and excess capitalized overhead.
The effect of such prior period adjustments on the Company's previously
reported quarters are as follows:
<TABLE>
<CAPTION>
Unaudited (in thousands, except per share information)
---------------------------------------------------------------------------------------------
Three months ended Three months ended Three months ended Three Months Ended
December 31, 1999 March 31, 2000 June 30, 2000 September 30, 2000
----------------- ------------------ ------------------ ------------------
As As As
Originally As Originally As Originally As
Reported Restated Reported Restated Reported Restated
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Revenues, net $ 1,985 $ 1,846 $ 1,515 $ 1,515 $ 1,647 $ 1,647 $ 1,087
Cost of sales 1,073 1,165 635 827 787 879 587
------- ------ ------- ------- ------- ------- -----------
Gross profit 912 681 880 688 860 798 500
Total operating expenses 1,470 1,470 1,711 1,711 1,942 1,942 2,499
------- ------ ------- ------- ------- ------- -----------
Income (loss) from (558) (789) (831) (1,023) (1,082) (1,174) (1,999)
operations
Total other income (expense) 74 74 66 66 85 85 60
------- ------ ------- ------- ------- ------- -----------
Net loss (484) (715) (765) (957) (997) (1,089) (1,939)
======= ====== ======= ======= ======= ======= ===========
Basic and diluted loss
per share (0.04) (0.06) (0.07) (0.09) (0.08) (0.09) (0.16)
===== ===== ===== ==== ===== ===== =====
</TABLE>
The fourth quarter of fiscal 2000 adjustments affecting previously reported
quarters are as follows:
Physical inventory and overhead adjustments $376,000
Reversal of prior period sales 139,000
-------
Total adjustments $515,000
=======
F-14
<PAGE>
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. SUBSEQUENT EVENTS
On November 30, 2000, the Company acquired all of the common stock of
Mobile Surgical Technologies, Inc. ("MST"), a Dallas, Texas-based privately held
company, in exchange for 500,000 shares of the Company's unregistered common
stock. MST is primarily engaged in providing the Company's lasers and other
surgical equipment to hospitals and surgery centers on a "fee-per-case" basis in
the southwestern United States.
On November 30, 2000, the Company appointed William J. Schubert, Jr. to be
Chief Executive Officer and Vice Chairman of the Board of Directors. Mr.
Schubert was previously the founder and President of MST.
F-15
