1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998 COMMISSION FILE NO. 0-10581
- --------------------------------------------
-----------------------------
TRIMEDYNE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 36-3094439
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
2801 BARRANCA ROAD, P.O. BOX 57001 92619-7001
IRVINE, CALIFORNIA (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
--- ---
The aggregate market value of voting stock held by non-affiliates of
registrant on December 1, 1998, based upon the closing price of the common stock
on such date was $8,519,000.
As of December 1, 1998, there were outstanding 10,905,956 shares of
registrant's Common Stock.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this From 10-K or any
amendment to this Form 10-K.________
2
TABLE OF CONTENTS
PART 1
ITEM I. BUSINESS
General ..................................................... 1
Orthopedics and Other Surgical Specialties.................... 1
Agreement with Bard, FDA Status and Pending Lawsuits.......... 2
Cardiodyne.................................................... 3
New Products.................................................. 4
License Agreements ........................................... 4
Sale of License Agreement..................................... 4
Plastic Optical Fibers ....................................... 4
Research and Development ..................................... 5
Manufacturing, Supply Agreements ............................. 5
Marketing .................................................... 5
Government Regulation ........................................ 5
Employees .................................................... 7
Patents and Patent Applications .............................. 7
Competition .................................................. 7
Insurance .................................................... 8
Foreign Operations ........................................... 8
ITEM 2. PROPERTIES ....................................................... 8
ITEM 3. LITIGATION ....................................................... 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .............. 9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS ...................................................... 10
ITEM 6. SELECTED FINANCIAL DATA .......................................... 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED RESULTS OF
OPERATIONS AND CONSOLIDATED FINANCIAL CONDITION .............. 11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 12
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE...................................... 13
PART III
ITEM 10. IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS ............... 14
ITEM 11. EXECUTIVE COMPENSATION ........................................... 14
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ... 14
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ................... 14
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.. 15
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ....................... F-1
ii
3
PART I
ITEM I. 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
Financial Condition and Results of Operations--Factors That May Affect Future
Results and Market Price of Stock." 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-Q to be filed by the
Company in fiscal year 1999.
GENERAL
Trimedyne, Inc.(the "Company") is engaged in the development,
manufacturing and marketing of Holmium "cold" pulsed Lasers, Nd:YAG "thermal"
continuous wave Lasers and proprietary, disposable fiber-optic laser delivery
devices for use in orthopedics, urology, ear, nose and throat ("ENT") surgery
and other medical specialties. An approximately 90% owned subsidiary of the
Company, Cardiodyne, Inc. ("Cardiodyne"), is engaged in the development and
testing of a new, automated system for performing Laser Transmyocardial
Revascularization ("Laser TMR") to treat severe angina, using the Company's 80
watt Holmium Laser as the energy source for its Laser TMR System.
The Company's principal efforts from its inception in 1980 until 1991
were devoted to the manufacturing and marketing of cardiovascular lasers and
related disposables for vaporizing plaque (fatty deposits) in blood vessels. As
a result of significant declines in sales of its cardiovascular laser products,
in 1991 the Company shifted its focus to laser and proprietary delivery system
technologies for use in selected "less invasive" surgical applications in
orthopedics, urology and ENT surgery. While sales of its Holmium lasers in
orthopedics have declined, the Company has experienced an increase in sales of
its Holmium Lasers in lithotripsy (fragmentation of urinary stones) and for the
resection of enlarged prostates in males. In 1996 the Company began the
development of the Laser TMR System for Cardiodyne and the development of a new,
proprietary laser for use in cosmetic surgery. The Company believes its
proprietary laser products may have advantages over lasers made by others and
conventional surgical devices in the aforementioned fields.
Net revenue from continuing operations of the Company in fiscal 1998
decreased 25% to $6,985,000 from $9,262,000 for the prior year, largely due to
lower sales of lasers as a result of hospitals experiencing a worldwide shortage
of funds for purchasing capital equipment., economic problems in many foreign
countries and the increased use of lower priced radio-frequency
electrovaporization devices. The Company incurred a net loss of $2,538,000 or
$0.23 per share in fiscal 1998, compared to a net loss of $5,778,000 or $0.53
per share in fiscal 1997. The reduction was primarily due to Trimedyne's sale of
a non-exclusive Patent License Agreement for $3,638,000 in June 1998 (see "Sale
of License Agreement").
The Company believes its future lies in expanding the sales of its laser
products in its existing business areas and introducing new laser products for
use in the cardiovascular field (through Cardiodyne) and in cosmetic surgery,
neurology and gynecology. (See "Cardiodyne" and "New Products" for a description
of the new products that Cardiodyne and the Company are developing).
The Company's working capital on September 30, 1998 was $7,366,000. (See
"Management's Discussion and Analysis of Results of Operations and Consolidated
Financial Condition" herein). Subsequent to the end of the current fiscal year,
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
"Agreement with Bard", "FDA Status and Pending Litigation" and "Litigation"
herein).
The Company was incorporated in Nevada on May 1, 1980, and adopted its
present name on December 31, 1980. In addition to its 90% owned subsidiary,
Cardiodyne, until January 1997, the Company had a 90% owned subsidiary,
Poly-Optical, which manufactured plastic optical fibers for use in automotive,
consumer, industrial and medical products. Poly-Optical was sold in January
1997. Unless the context otherwise requires, all references to the Company shall
be to Trimedyne, Inc. and its subsidiaries. The Company's principal executive
offices are located at 2801 Barranca Road, Irvine, California 92606, and its
telephone number is (949) 559-5300.
ORTHOPEDICS AND OTHER SURGICAL SPECIALTIES
Holmium "cold" lasers, which generate very short, extremely powerful
pulses of laser energy, are able to cut and vaporize tissue without significant
thermal damage to surrounding areas. Such lasers are expected to have advantages
over continuous wave "thermal" lasers in certain surgical applications,
particularly when used in tissues such as cartilage, which can be irreparably
damaged by heat, or heat sensitive blood vessels or nerves. Also, tiny optical
fibers permit laser energy to be delivered into spaces too small to accommodate
conventional surgical
1
4
tools. In March 1991, the Company received FDA clearance of its 510(k) Premarket
Notification (see "Government Regulation") to market its OmniPulse(TM) Holmium
Laser and a variety of disposable optical fiber delivery devices for use in
orthopedic surgery in soft tissues. While an estimated 1,200,000 arthroscopic
surgeries are performed annually in the United States, the proportion in which a
laser might be used cannot presently be predicted. The Company's sales of
Holmium lasers in orthopedics has declined, due to the introduction of lower
priced electrovaporization devices by competitors.
In 1991, the Company received FDA clearance of its 510(k) Premarket
Notification to market its OmniPulse(TM) Holmium Laser for use in general
surgery and 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 June, 1993, the Company received FDA clearance of its 510(k) Premarket
Notification to market its proprietary SideFire(TM) Laser Needle for use with
its Holmium Laser in herniated spinal disks. According to published studies,
Holmium Laser use in discectomy has been successful in relieving the pain in up
to 90% of the cases treated. While it is estimated that millions of people in
the United States suffer from lower back pain, the number of these whose back
pain is sufficiently serious to warrant a laser discectomy procedure cannot
presently be ascertained. The Company's sales of Holmium lasers for use in
diskectomy have not been significant.
In March 1994, the Company received FDA clearance under a 510(k)
Premarket Notification to market its Holmium Laser for use in urology and
endoscopic sinus surgery, an ear, nose and throat ("ENT") specialty. In July,
1995, the Company received FDA clearance to market this laser under a 510(k)
Premarket Notification for use in gynecology and lithotripsy (to fragment
urinary stones). Sales of the Company's Holmium lasers in lithotripsy are
growing. The Company plans to file similar applications with the FDA for the use
of its Holmium Lasers in other surgical applications.
In addition to its 80 watt Holmium laser, the Company has developed and
plans to commence marketing a new, smaller 30 watt Holmium laser in early 1999
for use in urology, disk decompression, ENT surgery and other applications to
meet customer demand for such lasers.
AGREEMENT WITH BARD, FDA STATUS AND PENDING LAWSUIT
In June 1991, the Company's side-firing laser device was cleared for
sale by the U.S. Food and Drug Administration ("FDA") under a 510(k) Premarket
Notification for use with Nd:YAG lasers for ablation and hemostasis
(coagulation) of urologic tissues. Nd:YAG lasers produce the deepest coagulation
zone of any wavelength of laser energy, up to 1.5 cm in depth.
In June 1991, the Company entered into a Development, Supply and License
Agreement with C.R. Bard, Inc. ("Bard"), under which Bard was granted exclusive,
worldwide rights to market the Company's side-firing laser devices (under Bard's
Urolase(R) Fiber trademark), certain other laser delivery devices and
improvements thereto in urology, gynecology and gastroenterology. Bard also
agreed, at its expense, to conduct a clinical study of the Urolase(R) Fiber at a
number of medical centers in the United States in the treatment of benign
prostatic hyperplasia ("BPH") or enlarged prostate, a condition affecting an
estimated 50% of all men over age 55.
Bard commenced the clinical study in 1991. In April 1992, Bard initiated
a limited marketing release of the Urolase(R) Fiber for urologic use in the
United States and commenced marketing these devices in Europe, the Far East and
a number of other countries in early 1993. Although cleared for sale by the FDA
for ablation and hemostasis (coagulation) of urologic tissues, in January 1993,
the FDA announced that side-firing laser devices were investigational and not
cleared for sale for the treatment of BPH. Although the FDA stated that
side-firing laser devices cleared for sale for ablation and coagulation of
urologic tissues could be used by a urologist for the treatment of BPH if the
physician felt it was in the best interest of the patient, Bard ceased promoting
the Urolase(R) Fiber in the United States.
In June 1993, the FDA announced that a Pre-Market Approval ("PMA")
Application (see "Government Regulation") and a controlled, prospective clinical
trial, with a one-year follow-up period, would be required for approval to
market a side-firing laser device for the treatment of BPH. The Company filed
its PMA Application for the treatment of BPH in July 1993. In October 1995, the
FDA changed its position and advised the Company and other laser manufacturers
that side-firing laser devices could be cleared for sale for the treatment of
BPH under the less stringent 510(k) Premarket Notification process, with
appropriate clinical study data. In October 1995, the Company withdrew its PMA
Application and filed its 510(k) Premarket Notification with the FDA. The
Company's 510(k) Premarket Notification Application to market its Nd:YAG Lasers
and side-firing laser devices for the treatment of BPH was cleared by the FDA in
March 1996. However, sales of these products have not been substantial, due to
Bard's ceasing to promote the sale of the Company's side-firing laser devices in
the U.S. for more than three years, enabling laser and electrosurgical device
competitors to fill the void created by Bard's withdrawal from the U.S.
market.
On October 6, 1995, the Company filed a lawsuit against Bard claiming
substantial damages for Bard's failure to perform its obligations as Trimedyne's
exclusive distributor under the Agreement. In November 1998, the Company settled
its lawsuit against Bard and received from Bard approximately $6.5 million,
after legal fees and other costs. While the Company has attempted to sell its
sidefiring laser devices for the treatment of BPH, for the reasons described
above, the Company has not been able to generate any significant sales of its
Nd:YAG lasers or side-firing laser devices for this purpose. (See Item 3
"Litigation")
2
5
CARDIODYNE
In October 1996, the Company organized Cardiodyne, presently an
approximately 90% owned subsidiary of the Company, which is developing a
proprietary 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 all of the Company's present and future 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 to an unrelated party at $2.00 per share, the then estimated fair value
of such common stock.
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 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 is adapting its Laser TMR System to also
inject angiogenic growth factors or their genes (which can be linked to a
partially deactivated virus such as adenovirus or adeno associated virus or the
like), to enable the combination to better penetrate the cells of the heart
wall.
Cardiodyne's proprietary Angiogenic Injection and Laser TMR System,
which is presently in development, consists of the SuperPulse(TM) 80 Watt
Holmium Laser, which is able to produce higher energy per pulse than any laser
of this type presently available, as well as Cardiodyne's proprietary
AutoFire(TM) Automated Interface, Accuject(TM) Injector and disposable
ChannelMaker(TM) Optical Fiber Devices.
The proprietary ChannelMaker(TM) Fiber consists of an optical fiber
whose tip is enclosed within a sharp, double-beveled needle. The AutoFire(TM)
Interface monitors the patient's electrocardiogram ("ECG") and, at the desired
time in the cardiac cycle, automatically inserts the needle/fiber a
pre-programmed distance into the heart wall without lasing, activates the laser,
--------------
advances the needle/fiber through the rest of the heart wall, into the heart
chamber and back, de-activates the laser and withdraws the needle/fiber from the
heart without lasing, all in one-half second or less. The Accuject(TM) Injector
--------------
can also be programmed to inject an angiogenic agent into the channel, just
before the needle/fiber is withdrawn from the heart wall. When it is withdrawn,
the needle/fiber leaves only a small needle puncture in the outer portion of the
heart wall, minimizing bleeding, a serious complication reported in the use of
other laser myocardial revascularization systems.
In 1995, the Company acquired sole ownership of a U.S. Patent covering
the therapeutic use of any device on a beating heart which is synchronized with
the movement of the heart (evidenced by the patient's ECG). The use of lasers in
TMR not properly synchronized with the patient's ECG has been shown to increase
the incidence of life threatening arrhythmias (irregular, sometimes
uncontrollable heartbeats). The Company believes this Patent, which was issued
in 1988, is the dominant Patent covering ECG synchronization in the Laser TMR
and angiogenic injection fields. This Patent was exclusively licensed to
Cardiodyne. In addition, Cardiodyne has a pending U.S. patent application on its
AutoFire(TM) Interface and ChannelMaker(TM) Fiber Optic Delivery Device, claims
of which have been allowed by the U.S. Patent Office. The SuperPulse(TM) 80 watt
Holmium Laser is protected by two U.S. Patents and foreign patents in a number
of countries.
In November 1997, Cardiodyne filed an Investigational Device Exemption
("IDE") application with the FDA for approval to commence a Phase I clinical
trial of its Intraoperative Laser TMR System in the treatment of so-called "no
option" angina patients, who are unresponsive to maximal drug therapy and have
already failed bypass surgery and/or balloon angioplasty or are not suitable
candidates for such procedures. In mid-1999, Cardiodyne plans to seek FDA
approval to conduct Phase II clinical trials of its Intraoperative Laser TMR
System in (a) 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, and (b)
in an intraoperative TMR procedure as an adjunct to coronary bypass surgery, to
provide an alternate source of blood to the heart muscle if a vessel cannot be
effectively bypassed.
Also in mid-1999, Cardiodyne plans to request FDA approval to commence a
Phase I clinical trial of its Percutaneous Laser TMR System. The Company's
Percutaneous ChannelMaker(TM) catheter employs an optical fiber with a metal cap
at its end, containing a lens to expand the laser beam, attached to its distal
end. In this procedure, the catheter is inserted into a puncture in the
patient's femoral artery in the groin and moved through the arterial system into
the left ventricle, the main pumping chamber of the heart. The AutoFire(TM)
Interface would, synchronized with the patient's ECG, fire the laser and advance
the fiber optic tip approximately two-thirds of the way through the heart wall.
By making the channels from the inside of the heart chamber, the risk of
bleeding from the heart's surface would be eliminated.
Later in 1999, 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 Intraoperative, Endoscopic and
Percutaneous Laser TMR Systems.
3
6
Extensive, controlled clinical trials, demonstrating the safety and
efficacy of Cardiodyne's Laser TMR and Angiogenic Injection Systems versus
conventional therapies, will be required before Cardiodyne can submit a
Pre-Market Approval ("PMA") application to the FDA to market its Systems. This
process could take two to three years, or longer, and will require Cardiodyne's
raising additional funds. Until U.S. marketing approval is obtained, Cardiodyne
plans to market its Laser TMR Systems overseas, particularly in countries whose
health care budgets cannot afford the high cost of coronary bypass surgery or
balloon angioplasty.
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.
The Company is developing new disposable and limited reusable devices
for use in urology, gynecology, neurosurgery and other medical specialities,
which the Company believes offer advantages over competing technologies.
The Company is developing a new, proprietary laser for use in cosmetic
surgery by plastic surgeons, dermatologists and other physicians. The Company
believes this new laser will have the capability to perform procedures that
cannot be done by other conventional lasers. Since cosmetic surgery lasers are
sold directly to plastic surgeons, dermatologists and other physicians, the
Company does not expect that sales of its new cosmetic laser will be inhibited
by limited capital equipment funds, as is the case in sales of conventional
lasers to hospitals.
An earlier version of the new laser was cleared for sale by the U.S.
Food and Drug Administration ("FDA") in 1997 for the treatment of vascular
lesions (port wine stains, rosacea, hemangioma and telangiectasia); removal of
tattoos and scars and the treatment of basal cell carcinoma (a skin cancer).
However, the Company decided to develop a more advanced version of the laser,
which would enable it to perform unique, new cosmetic surgery procedures, making
it more desirable to users. As a result, the Company decided to not introduce
the original version. The new laser is protected by two U.S. Patents,
counterparts of which have been filed in a number of foreign countries, one
pending U.S. (device) patent application and two pending U.S. (method) patent
applications.
The Company acquired an exclusive license to a U.S. Patent covering a
proprietary device for treating an aneurism in the brain. An aneurism occurs
when a portion of the wall of a blood vessel becomes weakened and balloons out,
like a bubble on an automobile tire. The Patent covers a laser device for
delivering and depositing in the aneurism a tiny platinum coil, which causes a
clot to form, filling the aneurism and taking the pressure off the weakened
vessel wall. An estimated 90,000 brain aneurisms are diagnosed annually in the
United States. In 1995 the Company filed a U.S. Patent application on an
improved device for delivering and releasing coils in brain aneurisms. The
Company has developed prototypes of a disposable laser device for delivering
such coils into aneurisms, but the Company has not begun clinical trials which
will be required for FDA marketing approval and acceptance by the medical
profession due to current priorities of the Company.
In 1996, the Company acquired an exclusive license to a U.S. Patent
(also issued in the U.K. and Germany) covering a unique laser device for use in
gynecology for the treatment of menhorragia (excessive uterine bleeding). This
device may enable this condition to be treated without general anesthesia on an
outpatient basis in a clinic or a physician's office. An estimated 300,000 of
the 600,000 hysterectomies are performed annually in the United States to treat
this condition, entailing a substantial hospital stay and costing much more than
an outpatient procedure. Prototypes of this device are being developed, and no
date for commencing clinical trials can presently be ascertained.
LICENSE AGREEMENTS
The Company has license agreements with a number of universities and
inventors, under which royalties on sales, if any, are payable, and one license
agreement with a competitor under which an annual maximum royalty is payable by
the Company. U.S. Patents covering certain of the Company's products have also
been issued to officers and employees of the Company and have been assigned to
the Company without royalty. In addition, patent applications by officers and
employees of the Company are on file with the U.S. Patent Office (and in a
number of foreign countries) and have been assigned to the Company without
royalty. These patent applications are currently being processed by the U.S.
Patent Office and, to the Company's knowledge, are proceeding in the normal
course of review.
SALE OF LICENSE AGREEMENT
In June 1998, the Company sold a non-exclusive license agreement to an
unaffiliated third party for net proceeds of approximately $3,600,000. The
patent covered by this license agreement was not being utilized in the Company's
business and no future need for such patent was contemplated.
PLASTIC OPTICAL FIBERS
Poly-Optical Products, Inc. ("Poly-Optical"), a 90% owned subsidiary of
the Company, is a manufacturer of fiber-optic lighting and viewing devices.
Poly-Optical's product line consists of both high and low loss polymeric
(plastic) optical fibers. These products sell for a wide
4
7
range of prices, depending upon the size, shape and manufacturing complexity
involved. Customers include the automotive and truck manufacturing industry,
scientific instrument manufacturers, the aircraft industry and medical device
firms. On January 31, 1997, the Company sold its 90% interest in Poly-Optical
for $1,290,000, recognizing a loss of $276,000.
RESEARCH AND DEVELOPMENT
From its inception to September 30, 1998, an aggregate of $35,252,000
has been expended by the Company for research and development ("R&D"), including
clinical and regulatory activities, of which $4,141,000 (including $2,955,000 of
R&D expenses of Cardiodyne) was expended during the fiscal year ended September
30, 1998. As it has in the past, the Company intends to continue to contract
with unaffiliated hospitals and research institutions for the clinical testing
of its developmental products.
MANUFACTURING, SUPPLY AGREEMENTS
Trimedyne and Cardiodyne believe that each has adequate engineering,
design and manufacturing facilities (see "Properties" herein).
The Company has supply agreements with several vendors for components
and materials used in the production of its products. The materials used in the
Company's products, consisting primarily of certain plastics, optical fibers,
lenses, various metal alloys, lasers and laser assemblies and components used in
the manufacture of its lasers are, in most cases, available from several
vendors. The Company has, on occasion, experienced temporary delays or increased
costs in obtaining these materials. An extended shortage of required materials
and supplies could have an adverse effect upon the revenue and earnings of the
Company. In addition, the Company must allow for significant lead time when
procuring certain materials and supplies. Where 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, 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 expects that its new cosmetic laser if
successfully developed, will be sold directly to plastic surgeons,
dermatologists, ENT surgeons and other physicians. The Company's other proposed
new products (See "New Products") will, if cleared for sale by the FDA and
marketed, be sold to hospitals for use in neurosurgery and gynecology, as well
as to gynecologists for use in their offices. The Company anticipates marketing
only those products which are customarily sold to the same customer groups that
are markets for its lasers and related devices. There is no assurance as to the
extent to which the Company will be able to penetrate these markets.
At September 30, 1998, the Company had marketing arrangements for the
sale of its lasers and certain of its disposable products on a straight
commission basis with 22 independent sales representatives and organizations
employing an estimated 53 sales persons specializing in the sale of medical
devices in the United States. Outside the United States, the Company sells its
products through 51 independent distributors who sell various medical products
in approximately 51 foreign countries. The Company presently employs two
Regional Sales Directors, a Vice President - Sales, a Marketing Vice President
and a Clinical Education Director.
The Company hopes in the future to increase the number of domestic sales
representatives and to appoint additional distributors in foreign countries for
the purpose of expanding sales of the Company's products. There is no assurance
that the Company will be able to enter into marketing arrangements with any or
all of the persons or organizations with which it is presently negotiating or
that the Company will be able to maintain its existing selling arrangements.
GOVERNMENT REGULATION
All of the Company's products are, and will in the future, likely be
subject to extensive governmental regulation and supervision, principally by the
FDA and comparable agencies in other countries. The FDA regulates the
introduction, advertising, manufacturing practices, labeling and record keeping
of all drugs and medical devices. The FDA has the power to seize adulterated or
misbranded devices, require removal of devices from the market, enjoin further
manufacture or sale of devices and publicize relevant facts regarding devices.
Prior to the sale of any of its products, the Company is required to
obtain marketing approval for each product from the FDA and comparable agencies
in foreign countries. Extensive clinical testing of each product, which is both
costly and time-consuming, may be required to obtain such approvals. The
Company's business would be adversely affected if it were unable to obtain such
approvals or to comply with continuing regulations of the FDA and other
governmental agencies. In addition, the Company cannot predict whether future
changes in government regulations might increase the cost of conducting its
business or affect the time required to develop and introduce new products.
Specific areas of regulation by the FDA and other related matters are
described in detail below:
5
8
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.
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
6
9
companies and state health care programs have standards for reimbursement
similar to those of HCFA. If an application for reimbursement of a product is
not approved by HCFA, private insurers and/or health care programs, marketing of
such product would be adversely affected.
Cost of Compliance with FDA and Other Applicable Regulations:
The Company is in the process of qualifying its products for the CE Mark
(required for the sale of its products in the European Union), and meeting ISO
9001 and EN 46001 requirements. The cost of doing so is significant.
The costs of complying with FDA and other governmental regulations prior
to the sale of approved products are reflected mainly in the Company's R&D
expenditures. The cost of first obtaining an IDE for a product and, after having
developed a product which in the Company's view is safe and effective, obtaining
a PMA approval therefor, as well as making the necessary application to HCFA in
order to establish insurance reimbursability for treatments utilizing such
product, adds significantly to the cost of developing and bringing a product to
market over what such cost would have been if such regulatory requirements did
not exist.
Such regulatory requirements also lengthen the time which is required to
develop and 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, 1998, the Company and Cardiodyne had 86 and 10
full-time employees, respectively, a total of 96, of whom 47 were engaged in
production, 22 in R&D, 9 in sales and marketing, and 18 in general and
administrative functions. The Company and Cardiodyne also employ a total of 14
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, 1998, the Company had been assigned or obtained
exclusive or non-exclusive , worldwide licenses to 20 issued U.S. Patents and 10
patent applications on file with the U.S. Patent Office. Several of such patents
have issued as foreign patents and certain corresponding patent applications
have been filed in up to 7 foreign countries. The validity of the U.S. Patents
covering the Company's OmniPulse(TM) and Cardiodyne's SuperPulse(TM) 80 watt
Holmium Laser was challenged by a competitor in the U.S. in an action before the
U.S. Patent and Trademark Office ("USPTO"). In December 1996, the USPTO upheld
the validity of all of the Company's claims of this patent in the U.S.
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.
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., U.S. Surgical Corporation, Johnson & Johnson,
Boston Scientific, Inc., Baxter
7
10
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., CardioGenesis, Inc., Eclipse Surgical Technologies, Inc., Xintec, Inc.,
New Star Lasers, Inc. and others, certain of which are publicly held.
INSURANCE
The Company has a commercial general liability insurance policy,
including an umbrella policy providing coverage in the aggregate amount of
$7,000,000 and a products liability insurance policy providing coverage in the
aggregate amount of $10,000,000. There is no assurance that such amounts of
insurance will be sufficient to protect the Company's assets against claims by
users of its products. Although there have been no successful claims against the
Company, there is no assurance the Company will be able to maintain such
liability insurance in force in the future at an acceptable cost, or at all, in
which case the Company's assets would be at risk in the event of successful
claims against it. Successful claims in excess of the amount of insurance then
in force could have a serious adverse effect upon the Company's financial
condition and its future viability.
The Company does not carry director and officer liability insurance, but
does have indemnification agreements with its officers and directors.
FOREIGN OPERATIONS
In fiscal 1998, sales of products in foreign countries accounted for
approximately 27% of the Company's total sales. See "Marketing" herein for
information on the marketing of the Company's products in foreign countries.
ITEM 2. PROPERTIES
The Company occupies approximately 40,000 square feet of office,
manufacturing and warehouse space in Irvine, California, which it leases at
approximately $17,830 per month through November 1998. The Company exercised an
option to renew this lease for one period of 30 months at approximately $25,870
per month, expiring June 2001. This facility serves as the Company's
headquarters, where research, regulatory, sales, marketing and administrative
activities, as well as manufacturing and warehousing, are conducted. In November
1998, Cardiodyne moved its operations to this facility (see below).
Cardiodyne leases a 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. Cardiodyne plans to sublease the 8,000 sq. ft. of this building
which it occupied until November 1998 and expects to be able to do so at its
cost, although such cannot be assured. Cardiodyne subleases on a month-to-month
basis approximately 6,000 sq. ft. of space at its cost to a privately owned
medical device company controlled by the Chairman of the Company. Cardiodyne
presently does not need the space subleased to said entity.
Management considers all of its facilities to be well maintained.
ITEM 3. LITIGATION
In connection with the June 9, 1994 settlement of litigation with the
co-inventor of the Urolase(R) fiber, the Company amended and restated its
licensing agreement with the co-inventor. The Company paid $90,000 of the
settlement amount for royalties owed on past Urolase(R) fiber sales and $585,000
of the settlement amount as a non-refundable prepayment of future royalties
which otherwise would be owed to the co-inventor on future sales of the
Urolase(R) type fibers. The Company wrote off the unused prepaid royalty of
$355,000 during fiscal 1997 and the corresponding reserve which was established
in fiscal 1996, due to the unlikelihood of significant future revenues from such
fibers. Royalties paid in 1997, 1996 and 1995 were not significant.
In early 1995, the Company filed a lawsuit against Surgical Laser
Technologies, Inc. (SLT) charging infringement of the Company's U.S. Patents No.
4,646,737 and 5,380,317, which are owned by the Company, and one U.S. Patent
which is owned jointly by the Company and a co-inventor. The trial court granted
SLT's motion for summary judgement that all three U.S. Patents are not infringed
by SLT's laser devices. On July 10, 1998, the Federal Circuit Court of Appeals
reversed the trial court's grant of summary judgement as to the 5,380,317
patent, and sent the matter back to the trial court for further proceedings. A
settlement conference has been scheduled by the Court in January 1999.
On October 6, 1995, the Company filed a lawsuit against Bard 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
8
11
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.
The Company has been named as a defendant in one product liability
lawsuit, which was being handled by the Company's insurance carrier. A trial was
held in March 1998 with a verdict in favor of the Company. Plaintiff's motion
for a new trial was denied and an appeal was not filed.
In July, 1998, the Company settled a lawsuit with a former employee.
The Company is subject to various claims and actions which arise in the
ordinary course of business. The litigation process is inherently uncertain, and
it is possible that the resolution of the Company's existing and future
litigation may adversely affect the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. Annual Stockholders meeting of Trimedyne, Inc. was held on
September 16, 1998.
b. The director elected at the meeting was:
Bruce N. Barron
c. The proposal presented to the stockholders and the voting results
were:
For Withheld
--- --------
Bruce N. Barron 9,458,915 217,275
9
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
A. MARKET INFORMATION
The Company's Common Stock has been traded on the NASDAQ system in the
over-the-counter market since April 13, 1982, and, since August 12, 1986, has
been quoted on the NASDAQ National Market System under the symbol "TMED". The
following table sets forth the high and low closing sales prices for the Common
Stock for each quarterly period within the Company's two most recent fiscal
years on the National Market System.
1998 HIGH LOW
- ---- ---- ---
Quarter ended:
December 31, 1997 2 7/8 1 25/32
March 31, 1998 2 3/4 1 5/8
June 30, 1998 2 25/32 1 1/2
September 30, 1998 1 21/32 23/32
1997 HIGH LOW
- ---- ---- ---
Quarter ended:
December 31, 1996 4 3/4 2 31/32
March 31, 1997 6 1/8 3
June 30, 1997 4 2 13/16
September 30, 1997 3 13/16 2 1/4
B. HOLDERS OF COMMON STOCK
As of December 1, 1998 there were approximately 1,470 holders of record
of the Company's Common Stock and an additional estimated 7,828 holders who
maintain the beneficial ownership of their shares in "Street Name".
C. DIVIDENDS
The Company has never paid cash dividends on its Common Stock, and does
not anticipate paying cash dividends in the foreseeable future. Any future
determination as to the payment of cash dividends will be dependent upon the
Company's financial condition and results of operations and other factors then
deemed relevant by the Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA
STATEMENT OF OPERATIONS DATA:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED SEPTEMBER 30,
-------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Net revenues $ 6,985 $ 9,262 $ 9,383 $ 9,639 $ 10,403
Loss from continuing operations (2,538) (5,535) (4,956) (5,622) (2,490)
Net income from discontinued operations -- 33 227 332 225
Loss on sale of subsidiary assets -- (276) -- -- --
Net loss (2,538) (5,778) (4,729) (5,290) (2,265)
Basic and dilutive earnings (loss) per share:
From continuing operations (0.23) (0.51) (0.49) (0.59) (0.28)
From discontinued operations -- (0.02) 0.02 0.03 0.03
Net loss (0.23) (0.53) (0.47) (0.56) (0.25)
10
13
BALANCE SHEET DATA:
(IN THOUSANDS)
AT SEPTEMBER 30,
----------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Total assets $9,249 $12,761 $17,739 $15,040 $20,498
Total liabilities 1,258 2,205 2,302 2,941 3,304
Working capital 7,366 9,651 13,919 10,082 14,829
Stockholders' equity 7,991 10,438 15,270 11,957 17,081
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED RESULTS OF
OPERATIONS AND CONSOLIDATED FINANCIAL CONDITION
CONSOLIDATED RESULTS OF OPERATIONS
FISCAL YEARS 1998, 1997 AND 1996
The following table sets forth certain items in the consolidated
statements of operations as a percentage of net revenues for the year ended
September 30, 1998 and the prior two fiscal years.
Year Ended September 30,
------------------------
1998 1997 1996
---- ---- ----
Net revenues 100.0% 100.0% 100.0%
Cost of goods sold 58.8 65.2 65.4
Selling, general and administrative 74.8 64.4 69.2
Research and development 59.3 36.6 22.4
Interest income 2.6 4.0 4.2
Other (income) expense, net .2 0.7 0.1
Net loss from continuing operations (36.3) (59.8) (52.8)
Net Income from discontinued operations -- 0.4 2.4
Loss on sale of subsidiary assets -- (3.0) --
Net loss (36.3) (62.4) (50.4)
NET REVENUES
Net revenues decreased 25% in fiscal 1998 to $6,985,000 from $9,262,000
in 1997, due primarily to the continued tightness in hospital budgets for
capital equipment in the United States, a substantial decline in sales overseas,
particularly in Asia, due to economic problems in these areas, and the
introduction of lower cost electrovaporization devices by competitors.
Net revenues decreased 2% on continuing operations to $9,262,000 in 1997
from $9,383,000 in 1996. International revenues were $1,885,000 for fiscal 1998
(27% of revenues), $3,342,000 for fiscal 1997 (36% of revenues) and $2,449,000
in fiscal 1996 (26% of revenues). The decline in fiscal 1998 was due to the
aforementioned factors.
COST OF GOODS SOLD
Cost of goods sold in fiscal 1998 was approximately 58.8% of net
revenue, compared to 65.2% in fiscal 1997 and 65.4% in fiscal 1996, due to
proportionately higher sales of disposables.
RESEARCH AND DEVELOPMENT EXPENSES (R&D)
R&D expenses were $4,141,000 in fiscal 1998, compared to $3,391,000 in
fiscal 1997 and $2,106,000 in fiscal 1996. R&D spending in fiscal 1999 is
expected to be approximately equal to the fiscal 1998 level, as the Company
intends to continue to fund development of several new products. R&D as a
percentage of net revenues increased to 59% of net revenues in fiscal 1998 vs.
37% and 22% in fiscal years 1997 and 1996, respectively. The increase in R&D
expenses in 1998 was largely due to the development of the automated system for
performing Laser TMR by the Company's 90% owned subsidiary, Cardiodyne.
11
14
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses decreased 12% to
$5,225,000 in fiscal 1998, compared to $5,963,000 in fiscal 1997, which was a 9%
decrease from the fiscal 1996 total of $6,494,000. The decrease in fiscal 1998
is attributed to lower legal expenses. Legal expenses are expected to decline in
fiscal 1999.
SG&A expenses increased as a percentage of net revenues in fiscal 1998
over fiscal 1997 and 1996 (75%, 64% and 69%, respectively), due to the reduction
of net revenues in fiscal 1998.
INTEREST INCOME, TAXES AND NET LOSS
Interest income in fiscal 1998 was $180,000 compared to $368,000 in
fiscal 1997 and $395,000 in fiscal 1996. The levels of cash and equivalents
available for investment in interest bearing securities were $2,983,000,
$5,341,000 and $8,100,000, as of September 30, 1998, 1997 and 1996,
respectively. In 1998, the Company generated lower income on its investments
than in 1997 and 1996 due to the lower overall level of cash available for
investment during the current fiscal year and lower prevailing interest rates.
As a result of all of the above, the fiscal 1998 net loss was
$2,538,000, compared to a net loss of $5,778,000 in fiscal 1997 and $4,729,000
in fiscal 1996.
Due to the net losses incurred, the Company was not obligated to pay
income taxes for fiscal 1998, 1997 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had working capital of $7,366,000,
compared to $9,651,000 at the end of fiscal 1997. Cash, cash equivalents and
marketable securities decreased by $2,358,000 in fiscal 1998 to $2,983,000 at
September 30, 1998 from $5,341,000 at September 30, 1997. The decrease in cash
and cash equivalents, and marketable securities was due to the following fiscal
1998 events: (i) cash used for operating activities totaling approximately $5.9
million and (ii) capital and expenditures of $99,000 which were offset by funds
received from the sale of a patent license of $3,638,000.
The Company has incurred significant net operating losses during each of
the last three years. At September 30, 1998, the Company had working capital of
approximately $7.4 million and had no long-term obligations. Management believes
its existing working capital and the $6.5 million received from the settlement
of its lawsuit against Bard will be sufficient to meet Trimedyne's operating
needs for at least the next 12 months. Management has implemented cost
reductions at Trimedyne and will seek additional financing to continue
development of Cardiodyne's products. If funds for the latter purpose are not
obtained, the Company will require cut-backs in Cardiodyne's operating expenses
or cease funding of Cardiodyne's operations. Sources of additional financing
include the sale of equity securities of the Company or its subsidiaries and the
sale or licensing of certain patent rights.
YEAR 2000 DISCLOSURE
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
2-digit year is commonly referred to as the "Year 2000 Compliance" issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
The Company uses computers principally for product design, product
prototyping and administrative functions such as communications, word
processing, accounting and management and financial reporting. The Company's
principal computer systems have been purchased since December 31, 1995. The
software utilized by the Company is generally standard "off the shelf" software,
typically available from a number of vendors. While the Company believes it is
taking all appropriate steps to assure year 2000 compliance, it is dependent
substantially on vendor compliance. The Company intends to modify or replace
those systems that are not year 2000 compliant. The Company is verifying with
its system and software vendors that the services and products provided are, or
will be, year 2000 compliant. The Company estimates that the cost to redevelop,
replace or repair its technology will not be material. There can be no
assurance, however, that such systems and/or programs are or will be year 2000
compliant and that the failure of such would not have a material adverse impact
on the Company's business and operations.
In addition to its own computer systems, in connection with its business
activities, the Company interacts with suppliers, customers, creditors and
financial service organizations domestically and globally who use computer
systems. It is impossible for the Company to monitor all such systems and there
can be no assurance that the failure of such systems would not have a material
adverse impact on the Company's business and operations. The Company is
currently evaluating what contingency plans, if any, to make in the event the
Company or parties with whom the Company does business experience year 2000
problems.
12
15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedule required by
this report are set forth in the index on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(a) Previous independent accountants (i) On September 15, 1998, the
Registrant elected to replace Pricewaterhouse Coopers LLP as its independent
accountants. (ii) The reports of PricewaterhouseCoopers LLP on the Registrant's
financial statements for the past two fiscal years contained no adverse opinion
or disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles. (iii) The Registrant's audit committee and
Board of Directors participated in and approved the decision to change
independent accountants. (iv) During the Registrant's two most recent fiscal
years and through September 15, 1998, there have been no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure,, which
disagreements if not resolved to the satisfaction of PricewaterhouseCoopers LLP
would have caused them to make reference thereto in their report on financial
statements for such years. (v) During the two most recent fiscal years and
through September 15, 1998, there have been no reportable events (as defined in
Regulation S-K Item 304(a)(1)(v)). (vi) The Registrant requested that
PricewaterhouseCoopers LLP furnish it with a letter addressed to the Securities
and Exchange Commission (the "SEC") stating whether or not it agrees with the
above statements. A copy of such letter, dated September 22, 1998, was
previously filed as Exhibit 16 to Form 8-K. (b) New independent accountants (i)
The Registrant engaged McKennon, Wilson & Morgan LLP as its new independent
accountants as of September 15, 1998. During the two most recent fiscal years
and through September 15, 1998, the Registrant has not consulted with McKennon,
Wilson & Morgan LLP on items which (1) are described in Regulation S-K item 304
(a) (2) (i) or (2) concerned the subject matter of a disagreement or reportable
event with the former accountants (as described in Regulation S-K Item 304 (a)
(2) (ii).
13
16
PART III
ITEM 10. IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
Information with respect to this item is incorporated by reference from
the Company's definitive Proxy Statement to be filed with the Commission within
120 days after the close of Registrant's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item is incorporated by reference from
the Company's definitive Proxy Statement to be filed with the Commission within
120 days after the close of Registrant's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item is incorporated by reference from
the Company's definitive Proxy Statement to be filed with the Commission within
120 days after the close of Registrant's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item is incorporated by reference from
the Company's definitive Proxy Statement to be filed with the Commission within
120 days after the close of Registrant's fiscal year.
14
17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. Financial Statements.
See "Index to Consolidated Financial Statements" included in
this report at Page F-1.
2. Financial Statement Schedules. See "Index to Consolidated
Financial Statements" included in this report at Page F-1.
3. Exhibits pursuant to No. 10 of Item 601 of S-K.
FILED PREVIOUSLY
10(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
23.1 Consent of Independent Accountants
23.2 Consent of Independent Accountants
27 Financial Data Schedule
* The Company requested and received confidential treatment
for portions of those exhibits marked with an asterisk (*).
(b) No reports on Form 8-K were filed during the fourth quarter of
the fiscal year ended September 30, 1998.
15
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Trimedyne, Inc.
Date: December 18, 1998 /s/ Marvin P. Loeb
-----------------------------
Marvin P. Loeb,
Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Marvin P. Loeb Chairman of the December 18, 1998
- ---------------------------------- Board of Directors
Marvin P. Loeb Chief Executive Officer
/s/ Donald Baker Director December 18, 1998
- ----------------------------------
Donald Baker
/s/ Bruce N. Barron Director December 18, 1998
- ----------------------------------
Bruce N. Barron
/s/ Richard F. Horowitz Director December 18, 1998
- ----------------------------------
Richard F. Horowitz
/s/ Shane H. Traveller Chief Financial Officer and December 18, 1998
- ---------------------------------- Treasurer
Shane H. Traveller
16
19
TRIMEDYNE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of Trimedyne, Inc. and
subsidiaries are included in Item 8:
PAGE
Consolidated Financial Statements:
Report of Independent Accountants F-2
Report of Independent Accountants F-3
Consolidated Balance Sheets at September 30, 1998 and 1997 F-4
Consolidated Statements of Operations for each of the three
years in the period ended September 30, 1998 F-5
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended September 30, 1998 F-6
Consolidated Statements of Cash Flows for each of the three
years in the period ended September 30, 1998 F-7
Notes to Consolidated Financial Statements F-8
The following consolidated financial statement schedule of
Trimedyne, Inc. and subsidiaries is included in Item 14(d):
PAGE
II. Valuation and qualifying accounts F-16
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
F-1
20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Trimedyne, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14 (a)(1) and (2) on page F-1 present fairly, in all
material aspects, the financial position of Trimedyne, Inc. and subsidiaries at
September 30, 1998, and the results of their operations and their cash flows for
the year then ended, in conformity with generally accepted accounting
principles. 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 audit. We conducted our audit of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement.
An audit requires examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
McKennon, Wilson & Morgan LLP
Irvine, California
December 9, 1998
F-2
21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Trimedyne, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14 (a)(1) and (2) on page F-1 present fairly, in all
material aspects, the financial position of Trimedyne, Inc. and subsidiaries at
September 30, 1997, and the results of their operations and their cash flows for
each of the two years in the period ended September 30, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit requires examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Costa Mesa, California
December 19, 1997
F-3
22
TRIMEDYNE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
-------------
1998 1997
---- ----
Current assets:
Cash and cash equivalents $ 1,974,000 $ 3,286,000
Marketable securities 1,009,000 2,055,000
Trade accounts receivable, net of allowance
for doubtful accounts of $358,000 and
$232,000 in 1998 and 1997, respectively 1,666,000 2,732,000
Inventories 3,492,000 3,285,000
Receivable from related party 151,000 49,000
Other 332,000 449,000
------------ ------------
Total current assets 8,624,000 11,856,000
Property and equipment, net 625,000 905,000
------------ ------------
$ 9,249,000 $ 12,761,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 212,000 $ 580,000
Accrued expenses 934,000 1,519,000
Other 112,000 106,000
------------ ------------
Total current liabilities 1,258,000 2,205,000
------------ ------------
Minority interest -- 118,000
------------ ------------
Stockholders' equity:
Common stock - $.01 par value; 15,000,000 shares
authorized, 11,007,565 shares issued
and 10,905,956 shares outstanding 110,000 110,000
Capital in excess of par value 43,110,000 43,017,000
Accumulated deficit (34,491,000) (31,953,000)
Unrealized (loss) on securities available for sale (25,000) (23,000)
------------ ------------
8,704,000 11,151,000
Less shares of common stock held in treasury (713,000) (713,000)
------------ ------------
Total stockholders' equity 7,991,000 10,438,000
------------ ------------
$ 9,249,000 $ 12,761,000
============ ============
See Notes to Consolidated Financial Statements
F-4
23
TRIMEDYNE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Year Ended September 30,
--------------------------------
1998 1997 1996
---- ---- ----
Net revenues $ 6,985,000 $ 9,262,000 $ 9,383,000
Costs of goods sold 4,104,000 6,036,000 6,141,000
----------- ----------- -----------
Gross Profit 2,881,000 3,226,000 3,242,000
Selling, general and administrative expenses 5,225,000 5,963,000 6,494,000
Research and development expenses 4,141,000 3,391,000 2,106,000
----------- ----------- -----------
Loss from operations (6,485,000) (6,128,000) (5,358,000)
Other income (expense):
Gain on sale of patent 3,638,000 -- --
Interest income 180,000 368,000 395,000
Minority interest in consolidated subsidiary 118,000 156,000 --
Other 11,000 69,000 7,000
----------- ----------- -----------
Net loss from continuing operations (2,538,000) (5,535,000) (4,956,000)
Discontinued operations:
Net income from discontinued operations -- 33,000 227,000
Loss on sale of subsidiary assets -- (276,000) --
----------- ----------- -----------
Net loss $(2,538,000) $(5,778,000) $(4,729,000)
=========== =========== ===========
Basic and diluted earnings (loss) per share:
From continuing operations $(0.23) $(0.51) $(0.49)
From discontinued operations -- (0.02) 0.02
------ ------ ------
Net loss per share (Notes 2 and 12) $(0.23) $(0.53) $(0.47)
====== ====== ======
See Notes to Consolidated Financial Statements
F-5
24
TRIMEDYNE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NOTE
COMMON STOCK CAPITAL IN RECEIVABLE
------------ EXCESS OF ACCUMULATED TREASURY UNDER STOCK
SHARES AMOUNT PAR VALUE DEFICIT STOCK OPTION PLANS
------ ------ --------- ------- ----- ------------
Balance at September 30, 1995 9,573,910 $ 96,000 $35,007,000 $(21,446,000) $(713,000) $(982,000)
Net proceeds from securities
offering 855,000 9,000 4,576,000
Exercise of stock warrants 30,000 -- 309,000 --
Exercise of stock options 513,046 5,000 2,129,000
Stock issued to Company's
401(K) plan 20,000 -- 60,000
Payment received from officer 982,000
Net loss for the year -- -- -- (4,729,000) -- --
---------- -------- ----------- ------------ --------- ----------
Balance at September 30, 1996 10,991,956 110,000 42,081,000 (26,175,000) (713,000)
Exercise of stock options 5,400 -- 1,000 -- --
Stock issued to Company's
401(k) Plan 10,209 -- 48,000 -- --
Minority interest investment
in Cardiodyne 846,000 -- --
Value of stock options issued -- --
below fair value -- -- 41,000 --
Net loss for the year (5,778,000)
---------- -------- ----------- ------------ --------- ----------
Balance at September 30, 1997 11,007,565 110,000 43,017,000 (31,953,000) (713,000) --
---------- -------- ----------- ------------ --------- ----------
Value of stock options issued
below fair value 93,000
Net loss for the year (2,538,000)
---------- -------- ----------- ------------ --------- ----------
Balance at September 30, 1998 11,007,565 $110,000 $43,110,000 $(34,491,000) $(713,000) $ --
========== ======== =========== ============ ========= ==========
See Notes to Consolidated Financial Statements
F-6
25
TRIMEDYNE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30,
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net loss $(2,538,000) $(5,778,000) $(4,729,000)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 305,000 404,000 497,000
Provision for excess and obsolete inventory -- 299,000 352,000
Write-off of prepaid royalties -- -- 355,000
Value of stock options issued below fair value 93,000 41,000 --
Minority interest in earnings (loss) of subsidiary (118,000) (323,000) 25,000
Loss on sale of subsidiary assets -- 276,000
Loss on disposition of property and equipment 74,000 -- --
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts
receivable, net 1,066,000 (504,000) (414,000)
Decrease (increase) in inventories (207,000) 1,081,000 232,000)
Decrease (increase) in receivable from related
party and other current assets 15,000 (159,000) 317,000
(Decrease) in accounts payable (368,000) (103,000) (338,000)
(Decrease) increase in accrued expenses (585,000) 86,000 (400,000)
(Decrease) increase in other current liabilities 6,000 (80,000) 100,000
----------- ----------- -----------
Net cash used for operating activities (2,257,000) (4,760,000) (4,003,000)
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (99,000) (455,000) (296,000)
Patent expenditures -- (13,000) (58,000)
Net proceeds from sale of subsidiary assets -- 1,290,000 --
Sale of marketable securities 1,044,000 480,000 495,000
----------- ----------- -----------
Net cash provided by investing activities 945,000 1,302,000 141,000
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from sale of subsidiary stock -- 1,120,000 --
Proceeds from exercise of stock options -- 1,000 2,134,000
Proceeds from stock issued under 401(k) program -- 48,000 60,000
Proceeds from exercise of warrants -- -- 309,000
Payments received on notes receivable under stock
options plan -- -- 982,000
Proceeds from issuance of common stock -- -- 4,585,000
----------- ----------- -----------
Net cash provided by financing activities -- 1,169,000 8,070,000
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (1,312,000) (2,289,000) 4,208,000
----------- ----------- -----------
Cash and cash equivalents at beginning of year 3,286,000 5,575,000 1,367,000
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,974,000 $ 3,286,000 $ 5,575,000
=========== =========== ===========
See Notes to Consolidated Financial Statements
F-7
26
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY:
Trimedyne, Inc. ("Trimedyne") and its subsidiaries (collectively "the
Company") is engaged primarily in the research and development, manufacture and
sale of lasers and disposable laser devices in the medical field. The Company
was also engaged in the development, manufacture and sale of plastic fiber-optic
illumination devices through its 90% owned subsidiary, Poly-Optical Products,
Inc. ("Poly-Optical") until January 31, 1997, when its interest in Poly-Optical
was sold. The Company is also engaged in the research and development of
cardiovascular laser devices through its 90% owned subsidiary, Cardiodyne, Inc.
("Cardiodyne"). The Company's operations are primarily located in Southern
California with distribution of its products worldwide.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company and its 90% owned subsidiary, Cardiodyne, and discontinued operations of
its 90% owned subsidiary, Poly-Optical (Note 12). All significant intercompany
accounts and transactions have been eliminated in consolidation.
The Company has incurred significant net operating losses during each of
the last three years. At September 30, 1998, the Company had working capital of
approximately $7.4 million and had no long-term obligations. In November 1998,
the Company settled its lawsuit with C.R. Bard ("Bard"), resulting in a gain of
approximately $6.5 million. Management believes existing working capital coupled
with the proceeds received in the Bard settlement are sufficient to meet
Trimedyne's operating needs for at least the next 12 months. Management has
implemented cost reductions at Trimedyne and will seek additional financing to
continue development of Cardiodyne's products as the capital needs arise.
RECLASSIFICATIONS
Certain prior year items have been reclassified to conform with the
current year presentation.
INVENTORIES
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.
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.
F-8
27
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Intangible assets, which
consist primarily of patents, are amortized on a straight-line basis over the
life of the patent.
DISCONTINUED OPERATIONS
The statements of operations have been restated for 1997 and 1996 to
reflect the discontinued operations of Poly-Optical, the Company's 90% owned
subsidiary, which sold its net assets in an all-cash transaction consummated on
January 31, 1997 (Note 12).
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 6).
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses the impairment of long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Long-lived assets are reported at the lower of carrying
amount or fair value, less cost to sell. No significant impact on its
consolidated financial position or results of operations has been realized as a
result of this policy.
PER SHARE INFORMATION
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"). SFAS 128 simplifies the standards for computing Earnings per Share
("EPS"), eliminating the presentation of primary EPS and requiring dual
presentation of basic and diluted EPS on the face of the income statement for
all public corporations with complex capital structures. SFAS 128 is effective
for financial statements for both interim and annual periods ending after
December 15, 1997. In fiscal 1998, the Company adopted SFAS 128 and had no
impact on per share data for the periods presented.
F-9
28
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH AND CASH EQUIVALENTS
Cash in excess of requirements is principally invested in short-term
corporate and government obligations, money market funds and certificates of
deposit with a remaining maturity of three months or less. Such investments are
deemed to be cash equivalents.
MARKETABLE SECURITIES
The amortized cost and fair market values of all marketable securities
at September 30, 1998 and 1997 are as follows:
AMORTIZED
SECURITIES AVAILABLE FOR SALE COST BASIS UNREALIZED
(MATURE WITHIN THREE YEARS) (PLUS INTEREST) FAIR VALUE LOSS
----------------------------- --------------- ---------- ----
SEPTEMBER 30, 1998
Commercial paper $1,034,000 $1,009,000 $(25,000)
SEPTEMBER 30, 1997
U.S. government and government agencies $2,078,000 $2,055,000 $(23,000)
The specific identification method has been used to determine cost for
each security. The net unrealized holding loss on securities available for sale
which is included in stockholders' equity for fiscal 1998 was $25,000. These
securities are interest-earning securities.
CONSOLIDATED STATEMENTS OF CASH FLOWS
During fiscal 1994, an officer-director exercised options to acquire
340,000 shares of common stock and borrowed $982,000 under the Employee Stock
Option Loan Program. In March 1996, the loan was repaid in full with accrued
interest of $112,643.
The Company made no cash payments for interest or income taxes in 1998,
1997 and 1996.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). This statement
establishes standards for the reporting and display of comprehensive income and
its components. 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. It includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners. This standard will require that an enterprise display an amount
representing total comprehensive income for the period. SFAS 130 will be
effective for the Company's year ending September 30, 1999. Adoption of SFAS 130
is for presentation only and will not affect the Company's financial position or
results of operations.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131") which supersedes Statement of Financial Accounting
Standards No. 14. This statement changes the way that publicly-held companies
report information about operating segments as well as disclosures about
products and services, geographic areas and major customers. Operating segments
are defined as revenue-producing components of the enterprise, which are
generally used internally for evaluating segment performance. SFAS 131 will be
effective for the Company's year ending September 30, 1999 and will not affect
the Company's financial position or results of operations.
F-10
29
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS:
Inventories consist of the following at September 30, 1998 and 1997:
1998 1997
---- ----
Raw materials $1,259,000 $1,170,000
Work-in-process 702,000 952,000
Finished goods 1,531,000 1,163,000
---------- ----------
$3,492,000 $3,285,000
========== ==========
Property and equipment, net consist of the following at September 30,
1998 and 1997:
1998 1997
---- ----
Furniture and equipment $ 3,125,000 $ 3,822,000
Leasehold improvements 331,000 331,000
Other -- 566,000
----------- -----------
3,456,000 4,719,000
Less accumulated depreciation
and amortization (2,831,000) (3,814,000)
----------- -----------
$ 625,000 $ 905,000
=========== ===========
Accrued expenses consist of the following at September 30, 1998 and
1997:
1998 1997
---- ----
Professional fees $ 46,000 $ 69,000
Commissions 175,000 215,000
Salaries, wages and benefits 423,000 435,000
Sales tax 24,000 189,000
Printing 8,000 112,000
Product warranty 144,000 241,000
Other 114,000 258,000
---------- ----------
$ 934,000 $1,519,000
========== ==========
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
Bard.
Pursuant to the terms of the Agreement, (i) the Company received a
royalty amount (subject to certain specified volume adjustments) from the unit
sales price for the Company's products charged by Bard to its customers, (ii) an
additional 4% of the unit sales price was appropriated to an escrow fund for
reimbursing the Company for the future development of other urological products
or improvements to existing urological products, (iii) the Company also received
a monthly research and development allowance of $33,333 for the first twelve
months of the agreement, and (iv) the cost of certain future patent preparation
and filing cost was borne by Bard. In addition, Bard agreed to pay a portion of
royalty and patent litigation costs relating to the Company's lateral lasing
device (see Note 10). During fiscal 1995, in management's opinion, Bard
discontinued fulfilling its obligations under the agreement. Accordingly, the
Company initiated litigation against Bard (see Note 10).
F-11
30
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the Agreement, no net revenues and no royalties were earned from
Bard in fiscal 1998, 1997 and 1996. In addition, no development costs related to
urological applications were incurred during the years ended September 30, 1998,
1997 and 1996. At September 30, 1998 and 1997, the Company had a receivable from
Bard of $183,000 and $382,000, respectively, in other current assets. Such
amounts represent monies receivable from Bard for royalties earned, reimbursable
legal costs incurred and reimbursable R&D expenses incurred.
On October 6, 1995, the Company filed a lawsuit against Bard 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 received from Bard approximately $6,500,000, after legal fees
and other costs (See Note 13).
NOTE 5. INCOME TAXES:
Due to the net operating losses incurred by the Company in prior years,
no provision for income taxes has been made. The deferred income tax balances
are comprised as follows:
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------ ------------------
Deferred tax assets:
Net operating loss carry forwards $ 11,300,000 $ 10,900,000
Research & development credits 2,300,000 2,000,000
Inventory obsolescence reserves 900,000 1,300,000
Accrued expenses 300,000 300,000
Account receivable reserves 100,000 100,000
Valuation allowance (14,500,000) (14,100,000)
------------ ------------
400,000 400,000
Deferred tax liabilities:
Excess depreciation of property and
equipment for tax reporting (400,000) (400,000)
------------ ------------
$ -- $ --
============ ============
The valuation allowance for deferred tax assets increased approximately
$400,000, $2,267,000 and $2,300,000 during the years ended September 30, 1998,
1997 and 1996, respectively. The changes primarily relate to additional net
operating loss carry forwards generated.
At September 30, 1998, the Company had net operating loss carryforwards
for Federal and California income tax purposes totaling approximately
$30,800,000 and $9,200,000, respectively, which for Federal reporting purposes,
begin to expire in 2004 and fully expire in 2013. The Tax Reform Act of 1986
includes provisions which may limit the net operating loss carry forwards
available for use in any given year if certain events occur, including
significant changes in stock ownership.
NOTE 6. STOCKHOLDERS' EQUITY:
SECURITIES OFFERING:
In March 1996, the Company completed an offering of 855,000 shares of
its common stock, which were sold with warrants to purchase 338,750 shares of
common stock at prices ranging from $6.53 to $8.13, resulting in net proceeds to
the Company totaling $4,585,000. This offering was completed pursuant to
Regulation S of the Securities Act of 1933. These warrants expired in June 1998.
F-12
31
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1998, 1997 and 1996 under
the plans was as follows:
STOCK OPTIONS OUTSTANDING
OPTION EXERCISE AGGREGATE
OPTIONS PRICE PER SHARE EXERCISE PRICE
------- --------------- --------------
September 30, 1995 1,379,330 1/100 - 5 1/2 $ 5,661,661
Granted 489,000 2 3/4 - 6 7/8 3,205,220
Exercised (493,046) 2 3/4 - 6 3/4 (2,090,580)
Canceled (139,150) 2 3/8 - 6 5/8 (520,209)
--------- -----------
September 30, 1996 1,236,134 1/100 - 6 7/8 6,256,092
Granted 105,000 2 7/8 - 4 1/4 358,762
Exercised (5,400) 1/100 - 3 1/2 (1,450)
Canceled (215,550) 2 3/8 - 6 5/8 (1,062,160)
--------- -----------
September 30, 1997 1,120,184 1/100 - 6 7/8 5,551,244
Granted 469,500 1 1/2 - 2 23/32 875,220
Exercised -- -- --
Canceled (179,040) 2 1/4 - 6 7/8 (1,033,564)
--------- ------------- -----------
September 30, 1998 1,410,644 1/100 - 6 7/8 $ 5,392,900
========= ===========
As of September 30, 1998, the Company had 214,910 shares available for
grant under the above option plans. Of the shares previously granted and
outstanding at September 30, 1998, 696,864 shares were vested and exercisable at
prices ranging from $0.01 to $6.88 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 August 18, 1994, the Board of Directors approved the exchange of all
outstanding Incentive Stock Options and Non-Qualified Stock Options held by
directors, consultants, officers and employees of the Company that were in
excess of $5.50 per share for new options exercisable at $5.50 per share with
the same vesting periods. The closing price of the common stock on such date was
$3.25 as reported by the NASDAQ National Market System. On September 11, 1995,
the Board of Directors approved the exchange of all outstanding Incentive Stock
Options and Non-Qualified Stock Options held by consultants, officers (excluding
the President and the Chairman of the Company) and employees of the Company that
were in excess of $3.50 per share for new options exercisable at $3.50 per share
with the same vesting periods. The closing price of the common stock on such
date was $3.375 as reported by the NASDAQ National Market System. Compensation
expense related to stock options issued to non-employees during the periods
presented was not significant.
F-13
32
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 years ended September 30, 1998, 1997
and 1996 to the pro forma amounts of $3,064,000, $6,138,000 and $4,888,000,
respectively with a pro forma net loss per share of $0.28, $0.56 and $0.48,
respectively. These pro forma amounts were determined based upon the fair value
of each option granted during fiscal 1998, 1997 and 1996 on its grant date,
using the Black-Scholes option-pricing model. Assumptions of no dividend yield,
a risk free interest rate which approximates the Federal Reserve Board's rate
for treasuries at the time granted, an expected life of five years, and a
volatility rate of approximately 98 percent were applied to all options granted.
The weighted average fair value at the grant date for the options granted during
fiscal years 1998, 1997 and 1996 was $1.13, $2.63 and $4.99 per option,
respectively.
WARRANTS:
During fiscal 1996, warrants to purchase common stock were exercised for
proceeds of $309,000. At September 30, 1998, no warrants to purchase common
stock were outstanding.
COMMON STOCK ISSUED - 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 as the Company's, the then
estimated fair value of such common stock. Prior to February 11, 1997,
Cardiodyne issued options to purchase 725,000 shares of its common stock at an
exercise price of $0.24 per share, the then estimated fair value of the common
stock. On February 11, 1997, Cardiodyne sold 500,000 shares to an unrelated
party at $2.00 per share, the then estimated fair value of such common stock.
Subsequent to February 11, 1997, Cardiodyne issued options to purchase 206,000
shares of its common stock to certain employees at an exercise price of $0.24
per share. In accordance with Accounting Principles Board Opinion No. 25, the
Company recorded compensation expense of $93,000 in fiscal 1998 and $41,000 in
fiscal 1997 for the difference between the fair value of the common stock at the
date of grant and the exercise price over the vesting period of five (5) years.
In addition, Cardiodyne issued options to purchase 63,000 shares of its common
stock at an exercise price of $2.00 during fiscal 1997. At September 30, 1998,
options to purchase 994,000 shares of common stock of Cardiodyne are
outstanding, of which options to purchase 41,200 shares of such common stock are
exercisable. These options vest over five (5) years and expire ten years from
the date of grant.
In connection with the 500,000 common shares issued by Cardiodyne to an
unrelated party at $2.00 per share, the holder has the right to receive
additional common shares on a pro-rata basis in the event additional shares are
sold to third parties prior to February 10, 1999, at a per share price lower
than $2 per share.
NOTE 7. EMPLOYEE BENEFIT PLAN:
Effective February 1, 1989, the Company adopted a 401(k) Retirement
Savings Plan (the "Retirement Plan"). Under the terms of the Retirement Plan,
employees may, subject to certain limitations, contribute up to 15% of their
total compensation. The Company contributes an additional $0.50 for each dollar
of employee contributions up to 4% of eligible employee compensation. Employees
become vested in the Company's contribution at 20% per year over five years. The
Company's contributions to the Retirement Plan totaled $64,000, $73,000 and
$72,000, for fiscal 1998, 1997, and 1996, respectively.
NOTE 8. RELATED PARTY TRANSACTIONS:
The Company has made payments of $55,000, $31,000 and $54,000 in the
fiscal years ending 1998, 1997 and 1996, 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.
F-14
33
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cardiodyne shares space with an affiliated company controlled by the
Company's Chairman and Chief Executive Officer. The Company allocates expenses
to said affiliate based on actual costs incurred. In fiscal 1997 and 1996, such
charges were not significant. In 1998, such charges aggregated $102,000. At
September 30, 1998, the Company has a receivable from this related party
amounting to $151,000. Also see Note 6 for discussion of additional related
party transactions.
NOTE 9. COMMITMENTS:
The Company is obligated under certain facility lease agreements to make
minimum rental payments, excluding taxes and common area maintenance costs, for
the years ending September 30 as follows:
1999 $ 422,000
2000 442,000
2001 365,000
2002 33,000
----------
Total $1,262,000
==========
The lease on the Company's headquarters facility was renewed in November
1998 and expires in June 2001. 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, 1998, 1997 and 1996 was
approximately $360,000, $307,000, and $294,000, respectively.
NOTE 10. LITIGATION:
In connection with the June 9, 1994 settlement of litigation with the
co-inventor of the Urolase(R) fiber, the Company amended and restated its
licensing agreement with the co-inventor. The Company paid $90,000 of the
settlement amount for royalties owed on past Urolase(R) fiber sales and $585,000
of the settlement amount as a non-refundable prepayment of future royalties
which otherwise would be owed to the co-inventor on future sales of Urolase(R)
type fibers. The Company wrote off the unused prepaid royalty of $355,000 during
fiscal 1997 and the corresponding reserve which was established in fiscal 1996,
due to the unlikelihood of significant future sales of such fibers. Royalties
paid in fiscal 1997 and 1996 were not significant. Management believes that
royalties on all future sales of Urolase(R) fibers over the term of the
agreement, which has no expiration date, will not be significant.
In early 1995, the Company filed a lawsuit against Surgical Laser
Technologies, Inc. ("SLT") charging infringement of the Company's U.S. Patents
No. 4,646,737 and 5,380,317, which are owned by the Company, and one U.S. Patent
which is owned jointly by the Company and a co-inventor. The trial court granted
SLT's motion for summary judgement that all three U.S. Patents are not infringed
by SLT's laser devices. On July 10, 1998, the Federal Circuit Court of Appeals
reversed the trial court's grant of summary judgement as to the 5,380,317
patent, and sent the matter back to the trial court for further proceedings. The
Court has scheduled a settlement conference in January 1999.
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.
The Company has been named as a defendant in one product liability
lawsuit, which was tendered by the Company's insurance carrier. A trial was held
in March 1998 with a verdict in favor of the Company. Plaintiff's motion for a
new trial was denied and an appeal was not filed.
F-15
34
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In July 1998, the Company settled a pending lawsuit with a former
employee subject to a final determination of certain stock options to be granted
to this former employee.
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 the Company's existing and
future litigation may adversely affect the Company. Management is unaware of any
matters which may have material impact on the Company's financial position,
results of operations or cash flows.
NOTE 11. 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. No single customer represented more
than 10% of sales in either fiscal 1998, 1997 or 1996.
Sales in foreign countries in fiscal 1998, 1997 and 1996 accounted for
approximately 27%, 36% and 26% of the Company's total sales, respectively. The
breakdown by geographic region is as follows:
1998 1997 1996
---- ---- ----
Asia $ 104,000 $ 509,000 $ 636,000
Latin America 243,000 164,000 353,000
Middle East 52,000 263,000 33,000
Europe 1,471,000 2,170,000 1,129,000
Other (Australia, New Zealand, South Africa) 15,000 236,000 298,000
---------- ---------- ----------
Total $1,885,000 $3,342,000 $2,449,000
========== ========== ==========
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company maintains reserves for
potential credit losses and such losses have been within management's
expectations.
NOTE 12. DISCONTINUED OPERATIONS
On January 31, 1997, the Board of Directors authorized the sale of the
net assets of its 90% owned subsidiary Poly-Optical. The Company received
proceeds of $1,566,000, less costs of disposition of $155,000, which includes a
two year indemnification provision, less a minority interest valued at $121,000,
resulting in net proceeds of $1,290,000 for the sale of the assets of
Poly-Optical. Accordingly, the Company recorded a loss of $276,000 on the sale
of Poly-Optical. This loss represents the difference between the net proceeds
received and the carrying value of the net assets sold of $1,566,000.
The results of operations for discontinued operations for the years
ended September 30, 1997 and 1996 are presented below:
F-16
35
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1997 1996
---- ----
Net sales $918,000 $3,105,000
-------- ----------
Cost and Expenses:
Cost of goods sold 457,000 1,638,000
Selling, general and administrative 333,000 943,000
Research and development 91,000 272,000
-------- ----------
Total Costs and Operating Expenses 881,000 2,853,000
-------- ----------
Income from discontinued operations 37,000 252,000
Less Minority Interest 4,000 25,000
Less Other -- --
-------- ----------
Net income from Discontinued Operations $ 33,000 $ 227,000
======== ==========
NOTE 13. SUBSEQUENT EVENTS
See Note 10 for discussion regarding the Company's favorable settlement
of the Bard litigation.
F-17
36
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULE VIII
TRIMEDYNE, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
BALANCE BALANCE
AT BEGINNING CHARGE TO WRITE OFF AT END
DESCRIPTION OF PERIOD EXPENSE TO RESERVE OF PERIOD
- ----------- --------- ------- ---------- ---------
FOR THE YEAR ENDED SEPTEMBER 30, 1998
Allowance for bad debt $ 232,000 $ -- $ 126,000 $ 358,000
Income tax valuation allowance 14,100,000 400,000 -- 14,500,000
FOR THE YEAR ENDED SEPTEMBER 30, 1997
Allowance for bad debt $ 337,000 $ -- $(105,000) $ 232,000
Income tax valuation allowance 11,833,000 2,267,000 -- 14,100,000
FOR THE YEAR ENDED SEPTEMBER 30, 1996
Allowance for bad debt $ 315,000 $ 48,000 $ 70,000 $ 337,000
Income tax valuation allowance 9,531,000 2,302,000 -- 11,833,000
F-18
37
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION
------- -----------
23.1 Consent of Independent Accountants
23.2 Consent of Independent Accountants
27 Financial Data Schedule