ITEM 2. PROPERTIES
The Company occupies approximately 40,000 square feet of office, manufacturing and warehouse space in Irvine, California, which it sub-leases at a monthly rent of approximately $17,830 per month. The sub-lease expires in December 1998. The Company also has an option to renew the sublease for one period of 30 months. This facility serves as the Company's headquarters, where research, regulatory, sales, marketing and administrative activities, as well as manufacturing and warehousing, are conducted.
Poly-Optical Products Inc. leases a 19,700 square foot one-story office and manufacturing building in Irvine, California, under a thirty month lease expiring in October, 1998 at a monthly rent of approximately $8,100, with one 30 month renewal option. As described under "Plastic Optical Fibers" herein, the Company has entered into an agreement, subject to financing, for the sale of Poly- Optical. The agreement for the sale of Poly-Optical includes a provision requiring the buyer to assume responsibility for Poly-Optical's facility lease.
Management considers all of its facilities to be well maintained and adequate for its present operations.
ITEM 3.
ITEM 3. LITIGATION
In connection with the June 9, 1994 settlement of litigation with the co-inventor of the Urolase(R) fiber, the Company amended and restated its licensing agreement with the co-inventor. The Company paid $90,000 of the settlement amount for royalties owed on past Urolase(R) fiber sales and $585,000 of the settlement amount as a non-refundable prepayment of future royalties which otherwise would be owed to the co-inventor on future sales of the Urolase(R) fiber. In addition, the Company is required to pay a royalty on sales of Urolase(R) fibers over the term of the agreement. At the end of fiscal 1996, the Company had a balance of $355,000 in prepaid royalties. On September 30, 1996, the Company established a reserve for the remaining prepaid royalty balance due to the uncertainty of future urology revenues..
In early 1995, the Company filed a lawsuit against Surgical Laser Technologies, Inc. (SLT) charging infringement of the Company's U.S. Patents No. 4,646,737 and 5,380,317, which are owned by the Company, and U.S. Patent No. 5,380,317, which is owned jointly by the Company and a co-inventor. The Court granted SLT's motion for summary judgment that all three U.S. Patents are not infringed by SLT's laser devices. The Company believes that the Court's granting SLT's motions for summary judgment is incorrect, and the Company has decided, upon advice of its counsel, to appeal the Court's decision on the latter two of the above patents.
As described above, on October 6, 1995, the Company filed a lawsuit against Bard claiming damages of at least $72 million for Bard's failure to perform its obligations as Trimedyne's exclusive distributor under the Agreement and pay certain amounts due under the agreement.
The Company has been named as a defendant in one product liability lawsuit which is being handled by the Company's insurance carrier. The Company believes this lawsuit will not have a material effect upon its finances and is expected to be either settled or dismissed in 1997. At the end of the fiscal year, the Company was not involved in any other lawsuits which are believed to have a material adverse effect on the Company's results of operations or financial position.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth quarter of the fiscal year ended September 30, 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
A. Market Information
The Company's Common Stock has been traded in the over-the-counter market since April 13, 1982, and has been quoted on the NASDAQ system since the commencement of trading under the symbol "TMED". On August 12, 1986, the Common Stock was approved for trading in the NASDAQ National Market System. The following table sets forth the high and low closing sales prices for the Common Stock for each quarterly period within the Company's two most recent fiscal years on the National Market System.
B. Holders of Common Stock
As of December 23, 1996, there were 1,692 holders of record of the Company's Common Stock and an additional estimated 7,000 holders who maintain the ownership of their shares in "Street Name".
C. Dividends
The Company has never paid cash dividends on its Common Stock. The Board of Directors currently intends to follow a policy of retaining earnings to finance the growth and development of the Company's business and does not anticipate paying cash dividends in the foreseeable future. Any future determination as to the payment of cash dividends will be dependent upon the Company's financial condition and results of operations and other factors then deemed relevant by the Board of Directors.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
STATEMENT OF OPERATIONS DATA: (In thousands, except per share data)
BALANCE SHEET DATA: (In thousands)
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED RESULTS OF OPERATIONS AND CONSOLIDATED FINANCIAL CONDITION
Consolidated Results of Operations Fiscal years 1996, 1995 and 1994
The following table sets forth certain items in the consolidated statements of operations as a percentage of net revenues for the year ended September 30, 1996 and the prior two fiscal years.
Year Ended September 30,
Net Revenues
1996 Compared to 1995
Net revenues decreased 4% in fiscal 1996 to $12,488,000 from $13,041,000. Sales in fiscal 1996 decreased from fiscal 1995 principally due to lower sales of plastic fiber optics which declined $298,000 or 9% and sales of urology products which declined $345,000 or 33%. This decline was partially offset by an increase of $177,000 or 2% in orthopedic sales. Total international revenues, which consists of medical device sales, for fiscal 1996 were $2,449,000 compared to $2,055,000 in fiscal 1995 representing 20% of revenues in fiscal 1996 compared to 16% in fiscal 1995. Laser and disposable device sales in orthopedics accounted for approximately 64% of revenues in fiscal 1996 compared to approximately 60% in fiscal 1995.
1995 Compared to 1994
Net revenues decreased 3% in fiscal 1995 to $13,041,000 from $13,393,000 in fiscal 1994. Sales in fiscal 1995 decreased from fiscal 1994 principally due to significantly lower sales of urology products to Bard, which declined $3,724,000 or approximately 78%. This decline was partially offset by a $3,059,000 or 65% increase in orthopedic sales and a 13% increase in Poly-Optical revenues. Total international revenues, which consists of medical device sales, for fiscal 1995 were $2,055,000 compared to $2,035,000 in fiscal 1995, representing 16% and 15% of revenues in fiscal year 1995 and 1994, respectively. Laser and fiber optic device sales in urology and orthopedics accounted for approximately 68% of revenues in fiscal 1995 compared to approximately 70% in fiscal 1994.
Cost of Goods Sold
Cost of goods sold in fiscal 1996 was approximately 62% of net revenue compared to 66% in fiscal 1995 and 54% in fiscal 1994
1996 Compared to 1995
The decrease in cost of goods sold as a percentage of sales was the result of lower material and warranty costs associated with the higher powered Holmium laser, which was first introduced in fiscal 1994, for use in orthopedics offset by additional inventory write-downs of approximately $352,000.
1995 Compared to 1994
The increase in cost of goods sold as percentage of sales was the result of the significant shift in the Company's product mix from urology to orthopedic products, which carry lower profit margins, a write-down of urology inventories, and greater warranty costs associated with the higher powered Holmium laser for use in orthopedics.
Research and Development Expenses (R&D)
R&D expenses were $2,378,000 in fiscal 1996, compared to $2,599,000 in fiscal 1995, and $2,578,000 in fiscal 1994 . R&D spending in fiscal 1997 is expected to be approximately equal to the fiscal 1996 level, as the Company intends to continue to fund development of several new products. R&D as a percentage of net revenues declined slightly to 19% of net revenues in fiscal 1996 vs. 20% and 19% in fiscal years 1995 and 1994, respectively. The decrease in R&D expenses in 1996 was attributed to prior year expenses associated with the development work on the Holmium and Nd:YAG lasers, which has been largely completed.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses increased 5 % to $7,437,000 in fiscal 1996, compared to $7,067,000 in fiscal 1995, which was an 11% increase from the fiscal 1994 total of $6,345,000. This increase was due primarily to the approximately $600,000 increase in legal expenses in fiscal 1996 compared to fiscal 1995 offset in part by lower marketing expenses and commissions paid on decreased sales. Legal expenses associated with current litigation the company is involved in are anticipated to decline in fiscal 1997.
SG&A expenses increased as a percentage of net revenues in fiscal 1996 over fiscal 1995 and 1994 (60%, 54%,and 47%, respectively), due to a higher level of legal expenses incurred as noted above, in connection with litigation.
Interest Income, Taxes and Net Loss
Interest income in fiscal 1996 was $395,000, compared to $309,000 in fiscal 1995 and $359,000 in fiscal 1994. The levels of cash and equivalents available for investment in interest bearing securities were $8,100,000, $4,415,000, and $8,661,000 as of September 30, 1996, 1995 and 1994, respectively. In 1996, the Company generated higher income on its investments than in 1995 due to the higher overall level of cash available for investment during the current fiscal year.
The fiscal 1996 net loss was $4,729,000 compared to a net loss of $5,290,000 in fiscal 1995 and $2,265,000 in fiscal 1994.
Due to the net losses incurred, the Company did not pay income taxes for fiscal 1996, 1995 and 1994.
Liquidity and Capital Resources
As of September 30, 1996, the Company had working capital of $13,919,000, compared to $10,082,000 at the end of fiscal 1995. Cash, cash equivalents and marketable securities increased by $3,685,000 in fiscal 1996 to $8,100,000 at September 30, 1996 from $4,415,000 at September 30, 1995. The increase in working capital and cash,
cash equivalents and marketable securities was due to the following fiscal 1996 events: (i) the Company completed an offering of equity securities, which included the sale of 855,000 shares of common stock along with warrants to purchase 338,750 shares of common stock, resulting in net proceeds of $4.5 million and (ii) the exercise of stock options by employees, repayment of option exercise loans and the exercise of outstanding warrants resulting in the receipt of approximately $3.5 million in cash proceeds. These factors were partially offset by cash used for operating activities totaling approximately $4 million and capital and patent expenditures of $354,000.
The Company believes its current cash and cash equivalents and other resources will be sufficient to meet its anticipated operating and capital requirements for at least the next two years.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedules required by Item 8 of this report are set forth in the index on page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None. PART III
ITEM 10.
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.
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.
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.
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.
PART IV
ITEM 14.
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.
2. Financial Statement Schedules. See "Index to Consolidated Financial Statements" included in this report at Page.
3. Exhibits pursuant to No. 10 of Item 601 of S-K.
FILED PREVIOUSLY
10(a) Agreement with James Capel Incorporated dated August 1, 1991.
10(b) Development, Supply and License Agreement with C.R. Bard, Inc., dated June 28, 1991.
10(c) Industrial Lease (for Barranca Parkway headquarters) with Griswold Controls dated June 19, 1991, and Addendum thereto dated July 1, 1991.
10(d) Patent Licensing Agreement with Royice B. Everett, M.D. (covering the Lateralase Catheter) dated April 1, 1988 as amended.
10(e) Poly-Optical lease with Elpal Electronics Inc. dated August 13, 1993.
10(f) Addendum to Industrial Lease with Griswold Controls dated September 14, 1993
10(g) Patent assignment agreement with Robert Ginsburg, M.D. dated July 1, 1993
10(h) License agreement with Christodoulos Stafanadis, M.D. and Pavlos Toutouzas, M.D. dated April 1, 1993
10(i)* Amendment to Development Supply and License Agreement with C.R. Bard dated June 14, 1994.
10(j)* Settlement Agreement and Mutual Release among Royice B. Everett, M.D., Trimedyne, Inc., and C.R. Bard dated June 9, 1994.
10(k)* Settlement Agreement and Mutual Release among Myriadlase, Inc., Trimedyne, Inc., and C.R. Bard dated June 9, 1994.
10(l)* Amended and Restated Licensing Agreement with Royice B. Everett M.D. dated June 9, 1994.
10(m)* License Agreement with Coherent dated December 9, 1994.
FILED HEREWITH
23.1 Consent of Independent Accountants
27 Financial Data Schedule
- -----------------
* The Company requested and received confidential treatment for portions of those exhibits marked with an asterisk (*).
(b) No reports on Form 8-K were filed during the fourth quarter of the fiscal year ended September 30, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Trimedyne, Inc.
Date: December 24, 1996 /s/ Marvin P. Loeb ------------------ Marvin P. Loeb, Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
TRIMEDYNE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of Trimedyne, Inc. and its subsidiary are included in Item 8:
Page
Consolidated Financial Statements:
Report of Independent Accountants
Consolidated Balance Sheets at September 30, 1996 and 1995
Consolidated Statements of Operations for the three years ended September 30, 1996
Consolidated Statements of Changes in Stockholders' Equity for the three years ended September 30, 1996
Consolidated Statements of Cash Flows for the three years ended September 30, 1996
Notes to Consolidated Financial Statements
The following consolidated financial statement schedule of Trimedyne, Inc. and its subsidiary are included in Item 14(d):
Page
II. Valuation and qualifying accounts
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.
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 present fairly, in all material aspects, the financial position of Trimedyne, Inc. and its subsidiary at September 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit requires examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP Costa Mesa, California December 24, 1996
TRIMEDYNE, INC. CONSOLIDATED BALANCE SHEETS ASSETS
See Notes to Consolidated Financial Statements
TRIMEDYNE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
See Notes to Consolidated Financial Statements
TRIMEDYNE, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
See Notes to Consolidated Financial Statements
TRIMEDYNE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
See Notes to Consolidated Financial Statements
TRIMEDYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY:
Trimedyne, Inc. ("the Company") is engaged primarily in the research and development, manufacture and sale of lasers and disposable laser devices in the medical field. The Company is also engaged in the development, manufacture and sale of plastic fiber-optic illumination devices through its subsidiary, Poly-Optical Products, Inc. ("Poly-Optical").
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its 90% owned subsidiary, Poly-Optical Products, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.
Inventories
Inventories are recorded at the lower of cost or market, cost being determined on a first-in, first-out (FIFO) basis.
Use of estimates by management
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates and assumptions include those made surrounding inventory valuation. The Company's inventory largely relates to technologies which have yet to gain wide spread market acceptance. Management believes no loss will be incurred on the disposition of its inventory. If wide spread market acceptance of the Company's products is not achieved, the carrying amount of inventory could be materially reduced.
Depreciation and amortization
Depreciation of furniture and equipment is calculated on a straight-line basis over the estimated useful lives of the assets ranging from three to seven years. Leasehold improvements are amortized on a straight-line basis over the lesser of the useful lives or the term of the lease. Intangible assets, which consist primarily of patents, are amortized on a straight-line basis over the life of the patent.
Research and development costs
All research and development costs, including licensing costs, are charged to expense as incurred. In accordance with this policy, all costs associated with the design, development and testing of the Company's products have been expensed as incurred.
Income taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes. SFAS 109 requires the liability method for accounting for income taxes.
The liability method requires the recognition of deferred tax liabilities and assets for expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities.
Accounting for stock-based compensation
The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), effective for years beginning after December 15, 1995, which establishes a fair value-based method of accounting for stock-based compensation plans. The statement allows companies to continue to use the intrinsic value-based approach, supplemented by footnote disclosure of the pro forma net income and earnings per share of the fair value-based approach. The Company intends to follow this method allowed by SFAS 123.
Loss per share
Loss per share is based on the weighted average number of common shares outstanding. Common stock equivalents are not included in the calculation because their inclusion would be antidilutive. Common stock equivalents include dilutive stock options and warrants, if any, using the treasury stock method. The weighted average number of shares used in the calculation of earnings per share for the three years ended September 30 are 10,082,844, 9,449,468, and 9,052,089 for 1996, 1995 and 1994, respectively.
Extended warranty/service contracts and deferred income
Deferred income consists of the unamortized portion of payments received from customers for extended warranty contracts. Revenue earned under these service contracts is recognized ratably over the life of the related contract (typically one year).
Cash and cash equivalents
Cash in excess of requirements is principally invested in short-term corporate and government obligations, money market funds and certificates of deposit with an average maturity of three months or less. Such investments are deemed to be cash equivalents for purposes of the Statements of Cash Flows.
Marketable Securities
The amortized cost and fair market values of all marketable securities at September 30, 1996 are as follows:
The specific identification method has been used to determine cost for each security. The net unrealized holding gain on securities available for sale which is included in stockholders' equity for fiscal 1996 was $33,000. These securities are interest-earning securities.
Consolidated Statements of Cash Flows
During fiscal 1994, an officer-director exercised a 340,000 share stock option and borrowed $982,000 under the Employee Stock Option Loan Program. In March 1996 the loan was repaid in full with accrued interest of $112,643.
The Company made no cash payments for interest or income taxes in 1996, 1995, or 1994.
NOTE 3. COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS:
Inventories consist of the following at September 30, 1996 and 1995:
Net properties consist of the following at September 30, 1996 and 1995:
Accrued expenses consist of the following at September 30, 1996 and 1995:
NOTE 4. DEVELOPMENT SUPPLY AND LICENSE AGREEMENT
In June 1991, the Company entered into an agreement (the "Agreement") granting worldwide rights to market the Company's side-firing laser devices in the medical specialty fields of urology, gynecology and gastroenterology to C.R. Bard, Inc. ("Bard").
Pursuant to the terms of the Agreement, (i) the Company received a royalty amount (subject to certain specified volume adjustments) from the unit sales price for the Company's products charged by Bard to its customers, (ii) an
additional 4% of the unit sales price was appropriated to an escrow fund for reimbursing the Company for the future development of other urological products or improvements to existing urological products, (iii) the Company also received a monthly research and development allowance of $33,333 for the first twelve months of the agreement, and (iv) the cost of certain future patent preparation and filing cost was borne by Bard. In addition, Bard agreed to pay a portion of royalty and patent litigation costs relating to the Company's lateral lasing device (see Note 10). During fiscal 1995, in management's opinion, Bard discontinued fulfilling its obligations under the agreement. Accordingly, the Company initiated litigation against Bard (see Note 10).
Under the Agreement, net revenues and royalties earned from Bard accounted for 0%, 3%, and 23% of the Company's net revenues for the fiscal years ended September 30, 1996, 1995 and 1994, respectively. In addition, during the year ended September 30, 1996, 1995 and 1994, the Company incurred $0, $0 and $184,500, respectively, of reimbursable development costs related to urological applications. At September 30, 1996, 1995 and 1994, the Company included $382,000, $382,000 and 403,000 respectively, in other assets. Such amounts represent monies receivable from Bard for royalties earned, reimbursable legal costs incurred and reimbursable R&D expenses incurred. The Company recorded a reserve equal to the amount included in other assets, $382,000, as of September 30, 1996
NOTE 5. INCOME TAXES:
Due to the net operating losses incurred by the Company in the fiscal years ended September 30, 1996, 1995 and 1994, no provision for income taxes has been made. The deferred tax balances are comprised as follows:
The net change in the valuation allowance for deferred tax assets was an increase of approximately $2,302,000 from the balance at September 30, 1995 The change primarily relates to additional net operating loss carryforwards generated in fiscal 1996, which were fully reserved for at September 30, 1996.
At September 30, 1996, the Company had net operating loss carryforwards for federal and state income tax purposes totaling approximately $22,863,000 and $13,664,000, respectively, which begin to expire in 2006. The Tax Reform Act of 1986 includes provisions which may limit the net operating loss carryforwards available for use in any given year if certain events occur, including significant changes in stock ownership.
NOTE 6 STOCKHOLDERS' EQUITY:
Securities Offering:
In March, 1996, the Company completed an offering of 855,000 shares of its common stock, which were sold with warrants to purchase 338,750 shares of common stock, resulting in net proceeds to the Company totaling $4,585,000. This offering was completed pursuant to Regulation S of the Securities and Exchange Commission.
Stock Options:
The Company has adopted stock option plans that authorize the granting of options to key employees, directors, and/or consultants to purchase unissued common stock subject to certain conditions, such as continued employment. Options are generally granted at the fair market value of the Company's common stock at the date of grant, become exercisable within five years from the date of grant, and expire in ten years.
Activity during the years ended September 30, 1996, 1995 and 1994 under the plans was as follows:
Stock Options Outstanding
As of September 30, 1996, the Company had granted all available options reserved for granting of options authorized under the above option plans. Of the shares previously granted and outstanding at September 30, 1996, 261,076 shares were vested and exercisable at prices ranging from $.01 to $5.50 per share.
As options are generally granted at an exercise price equal to the fair market value of the underlying stock at the date of grant, there are generally no charges to income in connection with the issuance of options. Upon exercise, proceeds from the sale of shares under the stock options plans are credited to common stock and additional paid-in capital.
On August 18, 1994 the Board of Directors approved the exchange of all outstanding Incentive Stock Options and Non-Qualified Stock Options held by directors, consultants, officers and employees of the Company that were in excess of $5.50 per share for new options exercisable at $5.50 per share with the same vesting periods. The closing price of the common stock on such date was $3.25 as reported by the NASDAQ National Market System. On
September 11, 1995 the Board of Directors approved the exchange of all outstanding Incentive Stock Options and NonQualified Stock Options held by consultants, officers (excluding the President and the Chairman of the Company) and employees of the Company that were in excess of $3.50 per share for new options exercisable at $3.50 per share with the same vesting periods. The closing price of the common stock on such date was $3.375 as reported by the NASDAQ National Market System.
Warrants:
During fiscal 1994, 44,000 warrants issued in connection with a prior securities offering were exercised and total proceeds of $460,000 were received. During fiscal 1996, 30,000 warrants were exercised, resulting in proceeds of $309,000. As of September 30, 1996, 326,000 warrants were outstanding at an exercise price of $10.31, and 130,000 warrants at a price of $11.86 were outstanding.
In addition to the above warrants, in connection with the Company's sale of equity securities, the Company issued warrants with an exercise price ranging from $6.53 to $8.125, to purchase 338,750 shares of common stock. These warrants expire in May and June, 1998 and contain certain redemption features that, if the warrants are unexercised and the Company's shares are trading in excess of certain per share prices, allow the Company to redeem the warrants for $.01 each.
NOTE 7. EMPLOYEE BENEFIT PLAN:
Effective February 1, 1989, the Company adopted a 401(k) Retirement Savings Plan (the "Retirement Plan"). Under the terms of the Retirement Plan, employees may, subject to certain limitations, contribute up to 15% of their total compensation. The Company contributes an additional $0.50 for each dollar of employee contributions up to 2% of eligible employee compensation. Employees become vested in the Company's contribution at 20% per year over five years. The Company's contributions to the Retirement Plan totaled $72,000, $76,000, and $69,000, for 1996, 1995, and 1994, respectively.
NOTE 8. RELATED PARTY TRANSACTIONS:
The Company has made payments of $54,000, $30,000 and $43,000, in the fiscal years ending 1996, 1995 and 1994, respectively, to two law firms. A director of the Company is a member of one of the law firms. Another director was a member of the other law firm until his retirement from that law firm in 1994.
On August 18, 1994, the Compensation Committee of the Board of Directors approved a loan to an officer director for the purchase of 340,000 shares of Common Stock of the Company for an aggregate of $982,000 as a result of the exercise of Options. The principal amount and interest due was loaned without recourse to the officer-director, and the sole collateral for the note was the 340,000 shares of common stock held in the officer-director's name. In March 1996, the loan was repaid in full with accrued interest of $112,643.
NOTE 9. COMMITMENTS:
The Company is obligated under certain facility lease agreements to make minimum rental payments, excluding taxes and common area maintenance costs, for the years ending September 30 as follows:
The lease on the Company's headquarters facility expires in December, 1998. The Company has an option to renew the lease for one period of thirty months. The Company's Poly-Optical Products, Inc. facility lease expires October 31, 1998 and contains renewal options totaling two and one-half years.
Rent expense for the years ended September 30, 1996, 1995 and 1994 was approximately $294,000, 315,000, and $280,000, respectively.
NOTE 10. LITIGATION:
In connection with the June 9, 1994 settlement of litigation with the co-inventor of the Urolase(R) fiber, the Company amended and restated its licensing agreement with the co-inventor. The Company paid $90,000 of the settlement amount for royalties owed on past Urolase(R) fiber sales and $585,000 of the settlement amount as a non-refundable prepayment of future royalties which otherwise would be owed to the co-inventor on future sales of the Urolase(R) fiber. In addition, the Company is required to pay a royalty on sales of Urolase(R) fibers over the term of the agreement. At the end of fiscal 1996, the Company had a balance of $355,000 in prepaid royalties. On September 30, 1996, the Company established a reserve for the remaining prepaid royalty balance due to the uncertainty of future urology revenues.
In early 1995, the Company filed a lawsuit against Surgical Laser Technologies, Inc. (SLT) charging infringement of the Company's U.S. Patents No. 4,646,737 and 5,380,317, which are owned by the Company, and U.S. Patent No. 5,380,317, which is owned jointly by the Company and a co-inventor. The Court granted SLT's motion for summary judgment that all three U.S. Patents are not infringed by SLT's laser devices. The Company believes that the Court's granting SLT's motions for summary judgment is incorrect, and the Company has decided, upon advice of its counsel, to appeal the Court's decision on the latter two of the above patents.
As described above, on October 6, 1995, the Company filed a lawsuit against Bard claiming damages of at least $72 million for Bard's failure to perform its obligations as Trimedyne's exclusive distributor under the Agreement and pay certain amounts due under the agreement.
The Company has been named as a defendant in one product liability lawsuit which is being handled by the Company's insurance carrier. The Company believes this lawsuit will not have a material effect upon its finances and is expected to be either settled or dismissed in 1997. The Company is currently involved in various disputes and other lawsuits and others may arise from time to time arising from its normal operations. The litigation process is inherently uncertain and it is possible that the resolution of the Company's existing litigation may adversely affect the Company. However, it is the opinion of management that the outcome of such matters will not have a material adverse impact on the Company's financial position, results of operations or cash flows.
NOTE 11. CONCENTRATION OF CREDIT RISK AND MAJOR CUSTOMER
The Company generates revenues principally from sales of products in the medical field. As a result, the Company's trade accounts receivable are concentrated primarily in this industry. No single customer represented more than 10% of sales in either fiscal 1996 or fiscal 1995. One customer accounted for approximately 23% of net revenues in fiscal 1994.
Sales in foreign countries accounted for approximately 20% of the Company's total sales. The breakdown by geographic region is as follows:
The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses and such losses have been within management's expectations.
NOTE 12. INDUSTRY SEGMENT FINANCIAL DATA:
During the three fiscal years ended 1996, 1995, and 1994, the Company operated in two industry segments: medical lasers and disposable devices and plastic optical fibers. Operations in the medical laser and disposable device industry consist primarily of the sale of Nd:YAG and Holmium medical laser systems and the manufacture and sale of related disposable devices. The Company's operations in the fiber optics industry relate principally to the manufacture and sale of plastic optical fibers and fiber-optic illumination products through its subsidiary, Poly-Optical.
Industry segment information for the years ended September 30, 1996, 1995 and 1994 is as follows:
NOTE 13. SUBSEQUENT EVENTS
The Company has entered into an agreement, subject to, among other significant conditions, the availability of financing, for the sale of Poly-Optical. In the event that the proposed sale of Poly-Optical is not consummated, the Company plans to continue operating Poly-Optical as a subsidiary. For the year ended September 30, 1996, Poly-Optical had sales of $3,105,000 and income from operations of $252,000 compared to sales of $3,403,000 and income from operations of $373,000 in the prior year.
In October, 1996, the Company created Cardiodyne, Inc., a wholly owned subsidiary that will specialize in developing laser and laser related products for use in the cardiovascular field.
SCHEDULE VIII
TRIMEDYNE, INC. AND SUBSIDIARY VALUATION AND QUALIFYING ACCOUNTS