AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 3, 2002
REGISTRATION NO. ___________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933, AS AMENDED
NEVADA 36-3094439
------ ----------
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
INCORPORATION OR ORGANIZATION IDENTIFICATION NO.)
15091 BAKE PARKWAY
IRVINE, CA 92618
---------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
TRIMEDYNE, INC.
---------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-------------------------------
MARVIN P. LOEB, CHAIRMAN
AND CHIEF EXECUTIVE OFFICER
TRIMEDYNE, INC.
15091 BAKE PARKWAY
IRVINE, CALIFORNIA 92618
(NAME AND ADDRESS OF AGENT FOR SERVICE)
(949) 559-5300
(TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT OF SERVICE)
COPIES TO:
RICHARD F. HOROWITZ, ESQ.
HELLER, HOROWITZ & FEIT, P.C.
292 MADISON AVENUE
NEW YORK, NEW YORK 10017
Approximate date of commencement of proposed sale to the public: At the
discretion of the selling stockholders.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. |X|
If the registrant elects to deliver its annual report to security
holders, or a complete and legal facsimile thereof pursuant to Item 11(a) (1) of
this Form, check the following box. |_|
CALCULATION OF REGISTRATION FEE
-------------------------------
PROPOSED PROPOSED
Title of Maximum Maximum
Securities Amount Offering Aggregate Amount of
To Be To Be Price Offering Registration
Registered Registered Per Share (1) Price (1) Fee (2)
Common Stock 851,232 (2) $ 0.23 $ 195,783 $ 18.01
Common Stock 760,000 (3) $ 0.50 $ 380,000 $ 34.96
Common Stock 365,000 (4) $ 2.50 $ 912,500 $ 83.95
--------- ---------- --------
1,976,232 $1,488,283 $ 136.92
========= ========== ========
(1) Estimated solely for the purpose of calculating the registratoion fee.
(2) Consists of 425,823 shares presently outstanding and 425,400 shares
issuable in lieu of compensation. The per share price is based upon the
closing price within the last five days.
(3) Consists of shares subject to issuance upon conversion of currently
outstanding Notes. The per share price is based upon the conversion
price.
(4) Consists of shares underlying currently outstanding Options with a
maximum exercise price of $2.50 per share.
This registration statement shall also include an indeterminable number
of additional shares to be issued resulting from the anti-dilution provisions of
the Notes and Options from recapitalizations.
The Registrant hereby amends this registration statement on such date
or dates as may be necessary to delay the effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
ii
SUBJECT TO COMPLETION, DATED OCTOBER 2, 2002
---------------------------------
TRIMEDYNE, INC.
--------------------------------
4,540,832 SHARES OF COMMON STOCK
This Prospectus covers the proposed offer and sale of up to 4,536,232
shares of Common Stock ($ .01 par value) (the "Shares") of Trimedyne, Inc.
("we", "us", "our" or the "Company") by certain of our present and future
shareholders. Of these, 425,832 Shares are presently outstanding; we have agreed
to issue 425,400 Shares to certain of our officers, employees and a consultant
in lieu of other compensation through June 30, 2002; 760,000 Shares may be
issued in the event of conversion of the 12% Senior Convertible Secured Notes
("Notes") presently outstanding in the aggregate face amount of $200,000,
assuming conversion of $50,000 and $150,000 of these Notes and accrued interest
to the date of maturity at prices of $0.40 and $0.50 per Share, respectively;
and 365,000 Shares which may be issued in the event of the exercise of stock
options ("Options") which have been granted to consultants, which are
exercisable at prices from $.50 to $2.50 per Share.
We will receive the proceeds of the additional Notes, if any are sold.
We will not receive any of the proceeds of the sale of the 425,832 Shares
presently outstanding or the 425,400 Shares we have agreed to issue to certain
of our officers, employees and a consultant. To the extent the Notes and accrued
interest are converted, we will not have to pay the principal or interest due on
the Notes to the holders. To the extent the Options are exercised, we will
receive only the exercise price.
Our Shares are traded on the NASDAQ Small Cap Market under the Symbol
"TMED." The closing price of our Shares on October 1, 2002, was $0.25 per share.
The securities offered hereby involve a high degree of risk. Please
Read the "risk factors" section beginning on page 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
THE DATE OF THIS PROSPECTUS IS _______________________, 2002
TABLE OF CONTENTS PAGE
Prospectus Summary 3
Use of Proceeds 3
Risk Factors 4
Special Note Regarding 6
Forward-Looking Statements
The Company 7
Management's Discussion & Analysis 8
Use of Proceeds 12
Business 13
Management 18
Executive Compensation 19
Security Ownership of Certain 21
Beneficial Owners and Management
Transactions with Management 23
Description of Securities 23
Commission's Policy 25
On Indemnification for Securities
Act Liabilities 25
Share Available for Future Sale 25
Plan of Distribution 25
Selling Stockholders 26
Legal Matters 28
Experts 28
Available Information 28
Index to Financial Statements 28
2
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by more detailed
information and the financial statements appearing elsewhere in this Prospectus
and our Annual Report on Form 10-KSB for the fiscal year ended September 30,
2001.
The Company Trimedyne, Inc. (the "Company", "we", "our" or "us") is
engaged in the development, manufacturing and marketing of
Holmium "cold" pulsed lasers and Nd:YAG "thermal" continuous
wave lasers. We also plan to commence the marketing of Diode
"thermal" continuous wave lasers in late 2002. We manufacture
a variety of proprietary, disposable and reusable fiber-optic
laser delivery devices for use with our lasers in orthopedics,
urology, ear, nose and throat ("ENT") surgery, gynecology,
gastrointestinal surgery, general surgery and other medical
applications. Our 100% owned subsidiary, Mobile Surgical
Technologies, Inc. ("MST"), rents lasers, along with the
services of a trained operator, on a "fee per case" basis to
hospitals, surgery centers and physicians in the Southwestern
United States.
The Offering This Prospectus covers the offer and sale of up to 4,536,232
of our Shares to the public by the holders of (I) 425,832
presently outstanding shares, (II) 425,400 Shares which we
have agreed to issue to certain of our officers, employees and
a consultant in lieu of other compensation, (III) 365,000
Shares which may be issued in the event of exercise of Options
we have granted to consultants, which are exercisable at
prices from $.50 to $2.50 per Share, (IV) 760,000 Shares which
may be issued in the event of conversion of the $200,000 of
outstanding Notes and accrued interest to maturity at prices
of $0.40 or $0.50 per Share, and (V) up to 2,560,000 Shares
may be issued in the event of the potential sale of an
additional $800,000 of Notes, if all of such Notes are sold,
assuming conversion of these Notes and accrued interest to
maturity at a price of $0.50 per Share.
Offering Price The offering price of the Shares which may be issued upon
exercise of the options will be between $.50 and $2.50 per
share. The offering price of the Shares which may be issued
upon conversion of the Notes and accrued interest will be
$0.40 to $0.50 or more per share.
Number of Shares 13,489,760 Shares
Outstanding on
June 30, 2002
Number of Shares 17,600,160 Shares*
To Be Outstanding
Following This
Offering
--------------------------
*Assuming all of the Shares being registered are issued.
Use of Proceeds We will not receive any proceeds from the sale of the
presently outstanding Shares. To the extent the Options are
exercised, we will receive only the exercise price. To the
extent the Notes and accrued interest are converted, we will
not have to pay the principal and accrued interest to the
holders of the Notes. The cash proceeds we receive from this
offering, after expenses of the offering, will be used for
operations and for general corporate purposes.
3
RISK FACTORS
An investment in our shares involves a high degree of risk. You should
carefully consider the risks and uncertainties described below, which may not be
the only ones we face. If any of the following risks actually occur, our
business, financial condition or results of operations could be materially
adversely affected. In this event, the trading price of our shares could decline
and you may lose all or part of your investment.
LIMITED CASH RESOURCES
On June 30, 2002, we had only $174,000 of cash and marketable
securities, receivables of $1,050,000 (after allowances for bad debts),
inventories of $2,090,000 and other current assets of $184,000. However, on that
date, we had accounts payable of $1,504,000, accrued expenses of $649,000 and
other current liabilities of $79,000. If we are unable to collect a significant
portion of our accounts receivable, sell much of our goods in inventory and
raise additional capital to reduce our accounts payable, pay our accrued
expenses and finance our operations, we may be unable to continue to operate as
a going concern.
WE HAVE INCURRED SUBSTANTIAL LOSSES AND ANTICIPATE CONTINUING LOSSES
We had a net loss of $877,000 in the nine months ended June 30, 2002,
and a net loss of $7,484,000 in the fiscal year ended September 30, 2001, of
which $2,833,000 consisted of write-downs and adjustments (See "Financial
Statements" and "Management's Discussion and Analysis"). We had an accumulated
deficit of $44,802,000 at June 30, 2002 and $43,925,000 at September 30, 2001.
We anticipate continuing to incur losses until we generate sufficient revenues
to offset the costs associated with manufacturing and marketing our current
products, overhead, and the development of new products. There can be no
assurance that we will ever operate profitably. You should be aware of the
risks, problems, delays, expenses, and difficulties encountered by companies
developing new medical technologies, especially in view of the significant
competition that we have and will continue to encounter.
WE WILL NEED SUBSTANTIAL ADDITIONAL FINANCING
We have substantial amounts of trade payables which are currently past
due. Although our working capital (current assets over our current liabilities)
is $1,063,000 at June 30, 2002, if you exclude our inventories, our liquid
working capital is a deficit in the amount of $1,027,000. We are decreasing our
inventories to preserve cash, however, in the near future we will have to fund
new inventory purchases. In addition, the development, testing, approval, and
4
marketing of medical devices require a substantial amount of funds. We believe
our existing working capital and the proceeds of this offering, if all of the
Notes are converted and all of the Options are exercised, which cannot be
assured, may only be sufficient to meet our operating needs and the operating
needs of MST, our 100% owned laser rental subsidiary, for the next six to
twelve months.
As a result, we will need to obtain additional financing to support our
operations, pay the Note holders the principal and interest due on the Notes, if
they are not converted, continue the development of our new products and expand
MST's "fee per case" rental service. Sources of such financing may include the
sale of additional equity securities or the sale or licensing of patent rights.
The issuance of additional Shares or shares of Preferred Stock will dilute your
holdings. Any inability to obtain additional financing, if needed, will have a
material adverse effect on us, including requiring us to reduce or curtail our
operations.
Our independent auditors have issued an explanatory in their report on
our fiscal 2001 consolidated financial statements raising substantial doubt
Trimedyne's ability to continue as a going concern. Management's plans with
respect to these matters include efforts to reduce certain of its expenses
(personnel and overhead) and raising additional capital. Sources of additional
financing include the sale of equity securities of the Company, the sale of
Cardiodyne and/or the sale or licensing of certain patent rights. There are no
assurances that additional capital will be raised or obtained by the Company.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
THERE IS NO ASSURANCE THAT ANY OR ALL OF THE NOTES WILL BE CONVERTED OR THE
OPTIONS WILL BE EXERCISED
There is no assurance any or all of the Notes will be converted or any
or all of the Options will be exercised prior to the expiration of their
conversion or exercise rights, which expire in approximately 5 years, as such is
largely dependent on the market price of our Shares significantly exceeding the
conversion or exercise prices of the Notes and Options.
WE MAY NOT BE ABLE TO ADJUST TO RAPID TECHNOLOGICAL CHANGES
We are engaged in an intensely competitive industry. In recent years,
the medical laser industry has been characterized by rapid technological change.
There is no assurance that our present products may not face technological
obsolescence, or that we will be able to develop, acquire licenses for, or
obtain regulatory approvals to market new products and keep pace with
technological advances by our competitors.
WE MAY ACQUIRE OTHER ENTITIES
We recently entered into a letter of intent to acquire Surgical
Alliance, Inc., which rents lasers, along with a trained operator, on a "fee per
case" basis to hospitals, surgery centers, group practices and individual
physicians in Alabama, Georgia and Tennessee, and we are evaluating whether to
proceed with this acquisition. We may engage in acquisitions of other companies
and businesses and may use our cash reserves or shares of our Preferred Stock or
Common Stock to pay for these companies. If we use shares of our Preferred or
Common Stock for acquisitions, this will result in a dilution of the percentage
of the equity you own. In addition, acquisitions may involve speculative and
risky undertakings. Under Nevada law, acquisitions do not require shareholder
approval, except when accomplished by merger or consolidation.
THERE ARE STOCK OPTIONS AND WARRANTS THAT MAY DILUTE YOUR OWNERSHIP
In addition to the Shares underlying the aforementioned Notes and
Options, at May 31, 2002 we had granted stock options under our Incentive and
Non-Qualified option plans to our officers, directors, employees and consultants
to purchase an aggregate of 1,646,354 Shares at prices of $0.40 to $4.25 per
Share, and we may grant additional stock options to them in the future.
5
OUR STOCK PRICE IS VOLATILE
The market prices for securities of medical device companies, including
our Shares, have been volatile. It is likely that the price of our Shares will
fluctuate in the future. Many factors can impact the market price of our Shares,
such as announcements of technological innovations or new commercial products,
FDA clearances or approvals, distribution agreements, the results of
pre-clinical testing and clinical trials, the issuance or acquisition of patents
or proprietary rights, changes in sales or earnings, recommendations by
securities analysts, and market conditions in general. The market price of our
Shares could also be adversely affected by future conversions of the Notes or
exercises of outstanding stock options.
WE DO NOT ANTICIPATE PAYING ANY DIVIDENDS
We have not paid any dividends in the past and do not anticipate paying
any dividends in the foreseeable future. This may depress the price of our
securities, as a non-dividend paying stock may not appeal to certain investors.
WE MAY ISSUE PREFERRED STOCK THAT COULD EFFECT THE RIGHTS OF HOLDERS OF OUR
SHARES
We are authorized to issue 1,000,000 shares of Preferred Stock. Our
Board of Directors has broad powers to fix the rights and terms of any Preferred
Stock we may issue, without requiring shareholder approval. The issuance of any
of our authorized but unissued Preferred Stock could have an adverse effect on
the rights of the holders of our Shares.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION
Our business is subject to extensive regulation by the FDA and
comparable regulatory authorities of foreign countries. Compliance with
regulatory requirements and obtaining approvals to test or market new medical
devices is expensive and time consuming. There is no assurance we will be able
to continue to meet all regulatory requirements of the FDA and other
governmental authorities necessary to market our present products or obtain and
maintain approvals to test and market new products. Failing to meet necessary
government requirements will have a negative impact on our ability to continue
as a going concern.
WE CARRY LIMITED LIABILITY INSURANCE
We carry an aggregate of $10,000,000 of general liability insurance.
There is no assurance that we can maintain such insurance in force at an
acceptable cost or that the amount of such insurance will be sufficient to
protect our assets in the event of claims by users of our products, patients or
other parties. If court awards exceeding the amount of such insurance were made,
our assets could be depleted.
WE ARE DEPENDENT UPON MAINTAINING VALID PATENTS AND LICENSES
There is no assurance our patents will be upheld if challenged in
courts or that we will be able to obtain additional valid patents. We cannot
assure that our patents can be enforced against infringers. We also cannot
assure that our products do not infringe patents owned by others, licenses to
which may not be available to us. Our inability to maintain our patents, avoid
infringement of our patents by others or, to obtain licenses to any necessary
patents could have an adverse impact on our financial condition, results of
operations or our ability to successfully remain in business. (See "Litigation"
for information on a patent infringement lawsuit filed against us by a
competitor, which involves products we no longer market).
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Risk Factors," "Plan of Operations,"
"Business" and elsewhere in this prospectus are forward-looking statements that
involve risks and uncertainties. These forward-looking statements include
statements about our plans, objectives, expectations, intentions and assumptions
and other statements contained in this prospectus that are not statements of
historical fact. You can identify these statements by words such as "may,"
"will," "should," "estimates," "plans," "expects," "believes," "intends" and
similar expressions. We cannot guarantee future results, levels of activity,
performance or achievements. Our actual results and the timing of certain events
6
may differ significantly from those discussed in the forward-looking statements.
Factors that might cause such a discrepancy include those discussed in "Risk
factors" and elsewhere in this prospectus. You are cautioned not to place undue
reliance on any forward-looking statements.
THE COMPANY
Trimedyne, Inc. (the "Company", "we", "our" or "us") is engaged in the
development, manufacturing and marketing of Holmium "cold" pulsed laser, and
Nd:YAG "thermal" continuous wave lasers. We also plan to commence the marketing
of Diode "thermal" continuous wave lasers in late 2002. We manufacture a variety
of proprietary, disposable and reusable fiber-optic laser delivery devices which
have been cleared for sale by the U.S. Food and Drug Administration ("FDA") for
use with these lasers and lasers made by others in orthopedics, urology, ear,
nose and throat ("ENT") surgery, gynecology, gastrointestinal surgery, general
surgery and other medical applications.
Our 100% owned subsidiary, Mobile Surgical Technologies, Inc. ("MST"),
is engaged in the rental of lasers, along with the services of a trained
operator, on a "fee per case" basis to hospitals, surgery centers, group
practices and individual physicians in Texas, Oklahoma and Louisiana. In 2001,
we entered into a letter of intent to acquire Surgical Alliance, Inc., which is
engaged in a similar "fee per case" laser rental business in Alabama, Georgia
and Tennessee, and we are presently evaluating whether or not to proceed with
this acquisition. We have a Revenue Sharing Agreement with another "fee per
case" laser rental company, under which we provide one laser to them and share
in the revenues from its rental. While we expect revenues from rentals of lasers
to grow, such revenues represented only about 9% of our current revenues in the
fiscal year ended September 30, 2001 and 14% of our revenues in the six months
ended March 31, 2002.
The principal uses of our Holmium lasers are in orthopedics to treat
herniated (bulging) and ruptured lumbar discs, two of the three major causes of
lower back pain, and to treat damage in joints, and in urology to fragment
stones in the kidney, ureter and bladder.
In addition to the use of our Holmium lasers and patented Side-Firing
Laser Needles for percutaneous (x-ray guided) laser discectomy to treat
herniated lumbar (lower back) spinal discs on an outpatient basis, in late 2000
we received clearance from the FDA to market our Holmium laser and Side-Firing
Laser Needles in minimally invasive, endoscopic laser foraminoplasty ("ELF")
procedures, which orthopedic surgeons can employ to treat both herniated and
ruptured lumbar discs on an outpatient basis.
Our laser discectomy and ELF procedures are performed in 30-45 minutes
with only local anesthesia. The lower back and leg pain usually disappears on
the operating table, and the patient walks out with a Band Aid(TM) on the needle
puncture (stitches are usually not required). Most patients can return to light
activities in a few days. Published studies show success rates (good or
excellent results, based on pain scores) of 88% to 92%.
Approximately 540,000 surgical laminectomy or discectomy procedures are
performed each year in the United States to treat herniated or ruptured discs at
a cost of about $30,000 each or $16.2 billion annually. Our outpatient laser
discectomy and ELF procedures to treat herniated or ruptured discs cost less
than one-half the cost of the surgical procedure, which requires general
anesthesia and entails a 2-3 day hospital stay, significant post-operative pain
and a recovery period of 2-3 months or longer. Published studies show the
success rates of conventional disc surgery to be 40% to 77%.
The third major cause of lower back pain is a degenerated lumbar disc,
due to injury, disease or dehydration (loss of water content) of the disc as we
age. Approximately 400,000 conventional surgical procedures to treat degenerated
discs are performed each year in the United States at a cost of about $60,000
each or $24 billion annually and require general anesthesia, a hospital stay of
3-5 days, significant post-operative pain and a recovery period of 3-4 months or
longer.
Our Holmium laser and fiber-optic devices are presently being used by
an orthopedic surgeon with a specially designed implant he developed in a new,
experimental, endoscopic Spinal Stabilization procedure to treat degenerated
lumbar discs on an outpatient basis. The surgeon has assigned the patent rights
to this implant to us for a royalty on future sales, if any. The expected cost
of our outpatient Spinal Stabilization procedure, if and when the implant and
procedure are approved for sale by the FDA is expected to be about one-third the
cost of the surgical procedure.
7
We have an application pending with the FDA for clearance to market our
Holmium laser and Laser Needles for laser discectomy and ELF procedures in
thoracic (upper back) and cervical (neck) discs. Diseased lumbar discs represent
approximately 52% of the disc market, thoracic approximately 10% and cervical
approximately 38%. Although we submitted data showing greater than 90% success
rates (good or excellent results based on pain scores) in treating thoracic and
cervical discs, there is no assurance we will receive clearance from the FDA to
market our laser products for use in thoracic and cervical discs.
We have also designed and obtained U.S. patents or filed patent
applications covering several new fiber-optic devices for use with Holmium,
Nd:YAG and Diode lasers in other minimally invasive surgical applications. These
include disposable devices to treat, on a minimally invasive, outpatient basis,
such widespread conditions as menorrhagia (excessive uterine bleeding in women),
benign prostatic hyperplasia (enlarged prostates in men), gastroesophogeal
reflux disease (severe heartburn), female stress urinary incontinence, fecal
incontinence and ear infections in children. Clinical studies of our laser
products will be required before we can submit an application to the FDA to
market any of these devices, and there is no assurance FDA marketing clearance
for any of these applications can be obtained.
Our factory and corporate office is located at 15091 Bake Parkway,
Irvine, California, 92618, and our telephone number is (949) 559-5300.
Our Shares are traded on the NASDAQ Small Cap Market System under the
symbol "TMED". The closing price of our Common Stock on October 1, 2002 was
$0.25 per share.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED RESULTS OF
OPERATIONS AND CONSOLIDATED FINANCIAL CONDITION
CRITICAL ACCOUNTING POLICIES
----------------------------
REVENUE RECOGNITION AND ALLOWANCES FOR DOUBTFUL ACCOUNTS
We recognize revenue when the title and risk of ownership have passed
to the buyer. In making that assessment, pervasive evidence that an agreement
must exist, the products have been shipped, the prices are fixed and
determinable and not subject to refund or adjustment, and collection of the
amount are reasonably assured. We use purchase orders for the sale of lasers and
related disposable systems which is customary in our business. Allowances for
doubtful accounts are estimated based on estimates of losses related to customer
receivable balances. Estimates are developed based on historical losses,
adjusting for current economic conditions and, in some cases, evaluating
specific customer accounts for risk of loss. The establishment of reserves
requires the use of judgement and assumptions regarding the potential for losses
on receivable balances. Though we consider these balances adequate and proper,
changes in economic conditions in specific markets in which we operate could
have a material effect on reserved balances required.
INVENTORIES
We value our inventories at the lower of cost or market. Cost is
determined by the first-in, first-out (Fifo) method including material, labor
and factory overhead. We write down our inventory for estimated obsolescence
equal to the salvage value of the obsolete inventory. Product obsolescence may
be caused by changes in technology discontinuance of a product line, replacement
products in the marketplace or other competitive situations. See below for
discussions of restatements of our financial statements encountered in the
recent past related to inventories.
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS
We assess the fair value and recoverability of our long-lived assets,
including goodwill, whenever events and circumstances indicate the carrying
value of an asset may not be recoverable from estimated future cash flows
expected to result from its use and eventual disposition. In doing so, we make
assumptions and estimates regarding future cash flows and other factors to make
our determination. The fair value of our long-lived assets and goodwill is
dependent upon the forecasted performance of our business and the overall
economic environment. When we determine that the carrying value of our
long-lived assets and goodwill may not be recoverable, we measure any impairment
based upon a forecasted discounted cash flow method or fair value. If these
forecasts are not met, we may have to record impairment charges not previously
recognized.
8
SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS 142 requires that we identify reporting units for the purposes
of assessing potential future impairments of goodwill, reassess the useful lives
of other existing recognized intangible assets, and cease amortization of
intagible assets with an indefinite useful life. An intangible asset with an
indefinite useful life should be testedfor impairment in accordance with the
guidelines in SFAS 121, until SFAS 144 is adopted, which uses a single
accounting approach for measuring impairment. SFAS 142 is required to be applied
in fiscal years beginning after December 15, 2001, to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires us to complete a transitional goodwill
impairment test six months from the date of adoption. We are also required to
reassess the useful lives of other intangible assets within the first interim
quarter after adoption of SFAS 142. We are assessing, but have not yet
determined, how the adoption of SFAS 141 and SFAS 142 will impact the Company's
financial statements and results of operations.
RESTATEMENT OF JUNE 30, 2001 FINANCIAL STATEMENTS
We restated our consolidated financial statements for the nine months
ended June 30, 2001 because of material fiscal fourth quarter of 2001
adjustments. During our annual count of our inventories, we noted certain
inventory discrepancies between the general ledger and the perpetual inventory
at year end. Management believes these discrepancies are due to over-absorption
of overhead costs, resulting in inconsistencies in the standard costing of
products sold. Management has allocated these additional inventory costs
totaling $1,005,000 to cost of sales during the 9 months ended June 30, 2001. We
also provide write-downs of inventory costs due to obsolete products and parts.
We charge the financial statements aggregating $596,000 during the 9 months
ended June 30, 2001, respectively. We have reevaluated our standard costs due to
changes in product sales mixes, changes in manufacturing costs and the
anticipated level of production. We also anticipate cycle counting our inventory
as a supplement to our year end count. We believe that our procedures
implemented will reduce the risk of restatement of our financial statements in
the future.
9
RESTATEMENT OF SEPTEMBER 30, 2001 FINANCIAL STATEMENTS
We recorded a charge to operations totaling $263,000 for purchase
commitments which were in excess of normal operating requirements. Upon further
evaluation, we determine that such provision was not based on the most relevant
information. We believe the basis used for reporting this charge to operations
constitutes and error requiring restatement of effects of such charge on
operations during the year ended September 30, 2001. We plan to monitor our
purchase and production requirements and assess provisions for losses on our
inventories.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
2001
The following table sets forth certain items in the consolidated
statements of operations as a percentage of net revenues for the years ended
September 30, 2000 and 2001.
Year Ended September 30,
------------------------
2000 2001
---- ----
Net revenues 100.0% 100.0%
Cost of goods sold 56.7 83.3
Gross Profit 43.3 16.7
Selling, general and administrative 67.9 64.8
Research and development 57.2 31.2
Interest income 4.1 2.9
Loss on investments ---- (15.3)
Fair value of make-up shares ---- (8.8)
Other 0.6 0.3
Net loss (77.1) (100.2)
NET REVENUES
Net revenues increased $1,369,000 or 22.5% in fiscal 2001 to $7,464,000
from $6,095,000 in fiscal 2000. Net revenues from service and rentals, due to
the acquisition of MST in late 2000, contributed $556,000 or 7.5% of revenues in
fiscal year 2001. Net revenues from laser sales increased $486,000 or 27.3% in
fiscal 2001 to $2,267,000 from $1,781,000 in fiscal 2000. Net revenues from
delivery systems increased $234,000 or 7.5% in fiscal 2001 to $3,334,000 in
fiscal 2001 from $3,100,000 in fiscal 2000. Net revenues from lasers comprised
30.4% of total net product sales in fiscal 2001 as compared to 29.2% in fiscal
2000. Net revenues from delivery systems comprised 44.7% of total net product
sales in fiscal 2001 as compared to 50.9% in fiscal 2000.
International export revenues were $1,265,000 for fiscal 2001 as
compared to $1,001,000 for fiscal 2000. The increase in fiscal 2001 resulted
largely from obtaining new distributors in the Asian market, primarily in China
and Korea. Net international export revenues from laser sales decreased $125,000
or 15.9% from $786,000 in fiscal 2000 to $661,000 in fiscal 2001. Net
international export revenues from delivery system sales increased $392,000 or
183.3% from $213,000 in fiscal 2000 to $605,000 in fiscal 2001.
COST OF GOODS SOLD
Cost of goods sold in fiscal 2001 was approximately 83% of net
revenues, compared to 57% in fiscal 2000. Part of the $2,757,000 or 45% increase
in cost of goods during fiscal 2001 was a provision for excess and obsolete
inventories totaling $868,000 and a provision for the annual book to physical
inventory count and over-absorption of labor and overhead costs totaling
$1,463,000. The Company did not experience significant cost increases in
component parts, labor or overhead in fiscal 2001 versus 2000.
GROSS PROFIT
Gross profit for the year ended September 30, 2001 decreased $1,388,000
or 53% from fiscal 2000. The decrease resulted from a provision for excess and
obsolete inventories of custom components which have no resale market.
Additionally, the decreased gross profit during the year, was due to management
lowering selling prices on lasers to meet competition and stimulate sales.
10
RESEARCH AND DEVELOPMENT EXPENSES (R&D)
R&D expenses were $2,330,000 in fiscal 2001, compared to $3,486,000 in
fiscal 2000. R&D spending in fiscal 2001 was lower, as the Company reduced its
product development efforts and ceased funding of the development of
Cardiodyne's proposed products in January 2001. R&D as a percentage of net
revenues decreased to 31% of net revenues in fiscal 2001 vs. 57% in fiscal year
2000, attributed to the lower R&D costs and increased revenues from sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses increased 17% to
$4,839,000 in fiscal 2001, compared to $4,136,000 in fiscal 2000. The $703,000
increase in fiscal 2001 is primarily attributed to an increase in SG&A related
to MST and compensation expense of $162,000 recorded for the modification of
fixed stock option awards in fiscal 2001.
OTHER INCOME AND EXPENSE
Interest income in fiscal 2001 was $220,000 compared to $249,000 in
fiscal 2000. The levels of cash and equivalents available for investment in
interest bearing securities were $84,000 and $3,543,000 as of September 30, 2001
and 2000, respectively. In 2001, the Company generated less income on its
investments than in 2000 due to the decline in value of the investments and the
decreased overall level of cash available for investment. As a result of the
decline in the value of the investments, the Company incurred a loss on sale of
investments of $1,143,000 during fiscal 2001. The Company incurred a $660,000
non-recurring expense due to the issuance of 425,832 shares of common stock
pursuant to an anti-dilution or "make-up" share provision related to the private
placement of its common stock in fiscal 2000. The anti-dilution provision
expired in December 2001.
NET LOSS
As a result of the above, fiscal 2001 net loss was $7,484,000
($4,651,000 net of the aforementioned $2,833,000 of charges), compared to a net
loss of $4,700,000 in fiscal 2000. Management intends to further reduce its
staff and expenses, while continuing its efforts to raise new capital and sell
or license some of its patent portfolio.
NINE MONTHS ENDED JUNE 30, 2002 COMPARED TO NINE MONTHS ENDED JUNE 30, 2001, AS
RESTATED:
The following table sets forth certain items in the consolidated
statements of operations as a percentage of net revenues for the nine month
periods ending June 30, 2001 and 2002.
Nine Months Ended June 30,
--------------------------
2001 2002
---- ----
(as restated)
Net revenues 100.0% 100.0%
Cost of goods sold 78.4 54.9
Gross Profit 21.6 45.1
Selling, general and administrative 75.6 45.8
Research and development 33.5 21.0
Interest income 3.5 0.0
Loss on investments (21.0) 0.0
Fair value of make-up shares (12.1) 0.0
Other 0.3 2.4
Net loss (116.8) (19.3)
11
NET REVENUES
During the nine months ended June 30, 2002, Trimedyne's net revenues
decreased $37,000 or 1% from the same period of the previous year, $5,445,000
vs. $5,408,000. Net sales from lasers increased by $248,000 or 15% from
$1,656,000 in the prior year to $1,904,000 in the current nine-month period. Net
sales from delivery and disposable devices decreased by $30,000 or 1% from
$2,479,000 to $2,449,000 for the nine-month periods ending 2001 and 2002,
respectively. Net sales from service and rental decreased by 255,000 or 19% from
$1,310,000 to $1,055,000 for the nine-month periods ending 2001 and 2002,
respectively. The decrease is due to the Company's canceling a revenue sharing
agreement with a rental company, due to its failure to timely pay amounts due to
the Company. Additionally, the acquisition of MST contributed approximately
$526,000 in the current nine-month period compared to $385,000 in the prior year
nine-monh period.
Export sales during the nine months ended June 30, 2001 and June 30,
2002, were $721,000 and $915,000, respectively. This increase resulted largely
from new distributors in the Asian market, primarily in China and Korea.
COST OF GOODS SOLD
Cost of goods sold was 55% of net sales in the nine months ended June
30, 2002 compared to 78% for the nine months ended June 30, 2001. The decrease
in cost of goods sold as a percentage of revenues was primarily the result of
the Company's cost reduction efforts, which began upon the relocation of its
manufacturing facilities in March 2001. Furthermore, costs of sales in the nine
months ended June 30, 2001 contained provisions for excess and obsolete
inventories totaling $596,000 and a charge for excess physical inventories and
capitalized overhead costs totaling $1,005,000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased from $4,118,000
to $2,479,000, a decrease of $1,639,000 or 66%. The decrease in selling, general
and administrative expenses is primarily attributed to cost containment measures
including employee layoffs representing reductions of approximately $595,000,
reductions in advertising and marketing of approximately $320,000, and reduction
of legal fees of $237,000 resulting from the settlement of the Company's lawsuit
against C. R. Bard.
STOCK-BASED COMPENSATION
Stock-based compensation, which was charged to selling, general and
administrative expenses, totaled $173,000 during the nine months ended June 30,
2002, with no corresponding charge in the comparable period in the prior year.
We used our common stock and common stock purchase options to compensate our
chief Executive in the amount of $115,000, as well as employees and certain
consultants. Because of our lack of liquidity, we may be required to provide
compensation through common stock in the future.
REASEARCH AND DEVELOPMENT (R&D)
Research and development expenditures for the nine months ended June
30, 2002, decreased $689,000 or 61% from $1,825,000 to $1,136,000. The decrease
is primarily attributed to the Company reducing the product development efforts
of Cardiodyne and other projects, as well as employee attrition.
OTHER INCOME AND EXPENSE
Other expense decreased by $1,722,000 to income of $128,000 in the
current nine-month period from expense of $1,594,000 in the nine-month period of
fiscal 2001, which was primarily attributed to a $660,000 charge for the value
of "make-up" shares of common stock issued pursuant to an anti-dilution clause
related to the private placement in fiscal 2000, triggered by the acquisition of
MST along with a loss on the sale of investments of $953,000. Income in the
current nine-month period includes approximately $51,000 in proceeds from the
successful settlement of a lawsuit filed by the co-inventor of the Company's
Urolase(R) product, who was seeking a share of the settlement of the lawsuit
which the Company brought against C.R. Bard, $37,000 from the sale of fixed
assets and the reversal of approximately $30,000 in accruals which did not
materialize in payments by the Company.
12
NET LOSS
The net loss for the nine months ended June 30, 2002, was $1,050,000 or
$0.08 per share, a reduction of 506% from the net loss for the same period of
the prior year of $6,362,000 or $0.51 per share, which included charges and
adjustments of $2,484,000 or $0.18 per share.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
In 2001, net cash used in operating activities was $2,252,000, which
resulted principally from losses incurred of $7,484,000, offset by non-cash
adjustments from a loss on investments of $1,143,000, inventory impairment of
$868,000, a charge of $660,000 related to make-up stock issued to purhasers of a
prior private placement, a charge of $162,000 from the modification of certain
stock option grants and increases in current liabilities of $1,785,000. During
the nine-month period ended June 30, 2002, net cash used in operating
activities was $112,000 which resulted principally from losses incurred of
$1,136,000, offset by non-cash adjustments for depreciation and amortization of
$202,000 and stock-based compensation of $173,000 and a charge of $25,000 from
the modification of certain stock option grants.
Net cash provided by investing activities was $1,812,000 in fiscal 2001
compared to net cash used of $1,125,000 in fiscal 2000. The increase in cash
from investing activities in fiscal 2001 was primarily due to the sale of
marketable securities of $2,089,000. In fiscal 2000, net purchases of marketable
securities totaled $1,001,000.
Net cash provided by financing activities in fiscal 2001 was $58,000
from the exercise of stock options of $198,000, offset by payments on long-term
obligations of $140,000. Net cash provided from financing activities during the
nine-month period ending June 30, 2002, was $165,000, which included a $200,000
from the issuance of Senior Convertible Secured Notes to our chief executive
officer offset by payments on long-term obligations totaling approximately
$35,000.
LIQUIDITY
We have incurred losses from operations throughout its recent past.
Because of the Company's losses during 2001 amounting to $7.4 million, the
Company's liquid assets declined dramatically and trade payables have become
significantly past due. Our current assets exceed current liabilities by
$1,063,000; however, if you exclude our inventories, our current liabilities
exceed our current assets in the amount of $1,027,000. Our independent auditors
have included an explanatory paragraph in their report raising substantial doubt
about the Company's ability to continue as a going concern. Management's plans
with respect to these matters include efforts to reduce certain of its expenses
(personnel and overhead) and raising additional capital. Sources of additional
financing include the sale of senior convertible secured notes or equity
securities of the Company, the sale of Cardiodyne and/or the sale or licensing
of certain patent rights. There are no assurances that additional capital will
be raised or obtained by the Company. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
INCOME TAXES
Because of our historical net operating losses, we do not believe that
income taxes will be significant in the near future.
USE OF PROCEEDS
The cash proceeds that we will receive from this offering, if any,
after expenses of the offering, will be applied to our general operating account
and used for reducing our accounts payable, increasing our marketing and sales
efforts, expanding MST's "fee per case" rental service, and ongoing new product
development.
13
BUSINESS OF THE COMPANY
GENERAL
We were incorporated under the laws of the State of Nevada on May 1,
1980. We have a 100% owned "fee per case" laser rental subsidiary, MST, and a
90% owned subsidiary, Cardiodyne, Inc. which was developing a cardiovascular
laser system and related disposable devices, but is now inactive. See "THE
COMPANY" on Page 4, "MANAGEMENT" on Page 19 and elsewhere in this Prospectus for
other information on our business.
LASER RENTAL SERVICES
Hospitals, surgery centers and physicians are reluctant to purchase
"big ticket" medical equipment, such as our Holmium lasers, which sell for
$50,000 to $120,000, particularly for new medical procedures. Also, hospitals
traditionally suffer from the lack of funds to buy expensive medical equipment,
and they prefer to avoid having to train their staff to operate new equipment.
As a result, laser rental companies have sprung up throughout the United States
to fill this void. These companies provide lasers and other types of medical
equipment, along with a trained operator, to hospitals, surgery centers and
physicians on a "fee per case" basis.
We acquired MST in late 2000 and plan to expand its "fee per case"
rental business, which is particularly well suited to the introduction of new
laser products. When a surgeon is trained to perform a new procedure, such as
our laser discectomy or ELF procedure, instead of waiting for his hospital or
surgery center to purchase the laser, they can rent it on a "per case" basis.
When the hospital's or surgery center's staff has been trained by our laser
operator and is comfortable with the patient results, the volume of patients and
the amount third-party payors are reimbursing for the procedure, they can buy
the laser, lease it under a conventional, long term lease or continue to rent it
on a "per case" basis. Since the 6 to 12 month average delay in purchasing the
laser is eliminated, the hospital or surgery center can immediately start
purchasing our disposable and reusable devices, which typically carry higher
profit margins than lasers.
We have a revenue sharing agreement with one independent laser rental
company that operates in the southeastern United States and plan to enter into
similar agreements with others, as well as to increase our direct laser rental
business by expanding MST's territory and acquiring laser rental companies
serving other areas of the U.S.
MARKETING
We market our laser products in the United States through 29 "straight
commission" independent sales organizations who employ approximately 40 sales
persons, all of whom represent other manufacturers of medical products and
devote only a small part of their time to selling our products. Outside the
United States, we sell our laser products through 33 independent distributors in
34 foreign countries, all of whom sell other medical products. Virtually all of
our sales of lasers and most of our sales of disposable and reusable devices to
foreign distributors are made pursuant to letters of credit or wire transfers of
funds payable in U.S. dollars. As a result, we are largely not subject to
foreign currency risks.
In fiscal 2001 and the nine month period ended June 30, 2002, our sales
of products in foreign countries accounted for approximately 17% and 15%,
respectively, of our total revenues.
We presently employ a Vice President - Sales and Marketing and one
Regional Sales Director who appoint, train and supervise our U.S. sales
representatives and foreign distributors.
FIELD SERVICE
We presently employ a Director of Field Service and three field service
technicians who repair and provide preventative maintenance services to owners
of our lasers during the first year warranty period and, thereafter, under
annual service contracts. We also sell parts and charge for the time and travel
cost of our field service technicians when they repair lasers (after the initial
one year warranty period) which are not covered by annual service contracts.
14
GOVERNMENT REGULATION
All of our 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 our products, we are 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. Our
business would be adversely affected if we were unable to obtain such approvals
or to comply with continuing regulations of the FDA and other governmental
agencies. In addition, we cannot predict whether future changes in government
regulations might increase the cost of conducting our business or affect the
time required to develop and introduce new products. Our facilities were
inspected by the FDA in mid-2001 and no deficiencies in our compliance with the
FDA's Good Manufacturing Practice ("GMP") requirements were cited by the FDA.
Specific areas of regulation by the FDA and other related matters are
described in detail below.
INVESTIGATIONAL DEVICE EXEMPTION
Before a new medical device may be used for investigational research in
the United States, an Investigational Device Exemption ("IDE") application must
be approved by the FDA. In order to obtain an IDE, the sponsor of the
investigational research must first obtain approval for the research from an
Institutional Review Board or Committee ("RB" 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 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.
15
There is no assurance that required PMA approvals or 510(k) clearances
for our new products can be obtained or that PMA approvals or 510(k) clearances
for our 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 our 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. We believe we are 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 our 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 us.
INSURANCE REIMBURSEMENT:
To permit the users of our products to obtain reimbursement under
Federal health care programs such as Medicare, we 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 our products and the benefit to patients therefrom which justify the cost of
such treatment. Criteria for demonstrating such benefits are in the process of
definition by HCFA, and there does not yet exist a clear method or requirement
to receive approval for reimbursement. There is no assurance that such an
application, if made, will be approved by HCFA. Most private health insurance
companies and state health care programs have standards for reimbursement
similar to those of HCFA, private insurers and/or health care programs,
marketing of such product would be adversely affected.
COST OF COMPLIANCE WITH FDA AND OTHER APPLICABLE REGULATIONS:
The costs of complying with FDA and other governmental regulations
prior to the sale of approved products are reflected mainly in our R & D
expenditures. The cost of first obtaining an IDE for a product and, after having
developed a product which in our 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 we must maintain and bear
the carrying costs of a given research and development effort and (b) delaying
the time when we can commence realizing revenues from sales of a product, during
which time, however, we must nevertheless continue to bear administrative and
overhead costs. It is, however, not possible for us 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, the costs entailed in conducting testing of
our products by unaffiliated institutions (and fees or royalties, if any,
payable to them) may be deemed in part a cost to us of compliance with such
regulatory requirements.
16
EMPLOYEES
On June 30, 2002, we had 52 full-time employees, of whom 17 were
engaged in production and shipping, 9 in R & D, 2 in sales and marketing, 2 in
regulatory, 4 in quality control, 4 in field services, 14 in general and
administrative functions and 8 were employed by our subsidiary, MST, of which 1
was in sales, 5 in field operations and 2 in bookkeeping and office functions.
In July 2001, our Vice Chairman and CEO and our President and CFO
resigned as officers and directors. Our founder and Chairman assumed the
positions of President and CEO.
We 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 we
will be able to obtain new qualified employees when required.
Management believes its relations with its employees are good.
PATENTS AND PATENT APPLICATIONS
As of March 31, 2002, we owned or held licenses to 28 U.S. patents, 4
foreign patents, 7 U.S. patent applications and 8 foreign patent applications.
The validity of one of our important U.S. Patents covering our 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 our claims of this Patent.
There is no assurance that (a) any patents will be issued from the
pending applications, (b) any issued will prove enforceable, (c) we will derive
any competitive advantage therefrom or (d) that our products may not infringe
patents owned by others, licenses to which may not be available to us. To the
extent that pending patent applications do not issue, we 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. We are obligated, under certain of its patent
licenses, to make royalty payments. Part of our R & D activities will be
directed towards obtaining additional patent rights, which may entail future
royalty and minimum payment obligations.
COMPETITION
We face competition from a number of both young and established
companies in the medical field. The larger of such established companies include
Lumenis, Inc. (resulting from the acquisition of the medical devision of
Coherent, Inc. by ESC Medical Systems, Inc.), Johnson & Johnson, Boston
Scientific, Inc., Circon, Inc. and others, all of which have greater financial
resources. R & D and manufacturing facilities, technical skills, management
staffs and/or sales and marketing organizations than us.
Among the younger companies with which we compete are Laserscope, Inc.,
Surgical Laser Technologies, Inc., Convergent, Inc. and others, certain of which
are publicly held.
INSURANCE
We have 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 our assets against claims by users of our products.
Although there have been no successful claims against us, there is no assurance
we will be able to maintain such liability insurance in force in the future at
an acceptable cost, or at all, in which case our assets would be at risk in the
event of successful claims against us. Successful claims in excess of the amount
of insurance then in force could have a serious adverse effect upon our
Company's financial condition and future viability. We do not carry director and
officer liability insurance, but we do have indemnification agreements covering
our officers and directors.
17
PROPERTIES
We currently occupy approximately 47,000 square feet of office,
manufacturing and warehouse space in Irvine, California, which we lease at a
rental of approximately $40,000 per month through December 2005. We leased
approximately 7,000 square feet of this facility to a third party health
management company under a two year lease expiring in April 2004 at a monthly
rental of $14,553.
Our wholly-owned subsidiary, MST, leases approximately 1,500 sq. ft. of
office space on a 36-month lease basis in Dallas, TX at a cost of $1,563 per
month.
Management considers all of its facilities to be well maintained and
adequate for its purposes.
LITIGATION
In September 1999, the co-inventor of our Urolase(R)product filed suit
against us and C. R. Bard, Inc., seeking damages and a share of the proceeds of
the 1998 settlement of our lawsuit against Bard. The lawsuit was settled in mid
2001. All claims against us were dismissed and the co-inventor reimbursed us for
a portion of our legal costs and expenses.
In September 2000, we allowed our license to two U.S. Patents owned by
a competitor, Lumenis, Inc., to lapse, as sales of the urology products covered
by the license were insignificant, and we ceased marketing these products. On
January 18, 2002, Lumenis, Inc. filed a lawsuit against us alleging infringement
of these patents. We intend to vigorously defend this lawsuit and have filed
counterclaims against Lumenis alleging unfair competition, anti-competitive
activities, trade libel and infringement of two of our U.S. Patents.
We are subject to various claims and actions that arise in the ordinary
course of business. The litigation process is inherently uncertain, and it is
possible that the resolution of any future litigation may adversely affect us.
MARKET INFORMATION
Our Shares have been traded on the NASDAQ system in the
over-the-counter market since April 13, 1982 under the symbol "TMED". The
following table sets forth the high and low closing sales prices for our shares
for each quarterly period within our two most recent fiscal years.
2002 High Low
---- ---- ---
Quarter ended:
December 31, 2001 $0.63 $0.35
March 31, 2002 0.96 0.40
June 30, 2002 0.43 0.38
2001 High Low
---- ---- ---
Quarter ended:
December 31, 2000 $2.44 $1.56
March 31, 2001 2.30 1.25
June 30, 2001 2.00 1.21
September 30, 2001 1.58 0.24
18
MANAGEMENT
The following persons serve as our officers and directors.
Name Age Position
---- --- --------
Marvin P. Loeb 75 Chairman, President and CEO
Glenn D. Yeik 34 Executive V.P.
L. Dean Crawford 59 Senior V.P. - R & D
Brian T. Kenney 46 V.P. - Sales and Marketing
Stephen J. Byrne 55 V.P. - Operations
Richard F. Horowitz 61 Secretary and Director
Donald Baker 72 Director
MARVIN P. LOEB, has been a director of our Company since 1980, Chairman
of the Board since March 1981, Chief Executive Officer from April 1991 to
November 2000 and since July 2001. He served as our President from April 1991
until November 1992 and from July 1991 to November 2000. He has been the
Chairman of the Board of Cardiodyne, Inc. (formerly Trioptic Laser, Inc., a 90%
owned subsidiary of the Company) since May 1992. Since May 1986, he has been
Chairman and a director of Cardiomedics, Inc., a privately held company which
developed and is marketing a circulatory assist device. Since November 1988, he
has been Chairman of Ultramedics, Inc., a privately held company whose principal
interest is its investment in Cardiomedics, Inc. From April 1986 to June 1994,
he was Chairman and a Director of Xtramedics, Inc. (now Athena Medical
Corporation), a publicly held company engaged in the development of a feminine
hygiene product. From December 1979 he was a director of Automedix Sciences,
Inc., (now COMC, Inc., a publicly held company in the voice and data
telecommunications business). From 1980 to June 1999, Mr. Loeb was a director of
Contracap, Inc. (now eTravel Serve, Inc., an inactive publicly-held, internet
travel service. Mr. Loeb has been President of Master Health Services, Inc., a
family held medical consulting firm, since 1973, and Marvin P. Loeb and Company,
a family held patent licensing firm, since 1983. Mr. Loeb holds an honorary
Doctor of Science Degree from Pacific States University and a Bachelor of
Science Degree from the University of Illinois.
GLENN D. YEIK, has been our Executive Vice President since April 2002.
Prior thereto, he was our Vice President - Product Development from March 2000
to April 2002. Mr. Yeik was Manager and Director of Electronic Systems at
AngioTrax, Inc. from May 1998 to March 2000. He was our Manager, Laser Engineer
from May 1994 to May 1998 and our Senior Electrical Engineer from July 1992 to
May 1994. Prior thereto, Mr. Yeik was a Software Engineer at Cardiac Science,
Inc. from June 1991 to July 1992. Mr. Yeik received a Bachelor of Science of
Engineering Degree in Electrical Engineering from LeTourneau University. Mr.
Yeik is Mr. Loeb's son-in-law.
L. DEAN CRAWFORD, has been our Senior Vice President-Research and
Development since April 1997. Mr. Crawford had been Vice
President-Operations/Research and Development from July 1995 to April 1997 and
Vice President-Delivery Systems from May 1992 to July 1995. Mr. Crawford has
been a Senior engineer from February 1989 to May 1992. Before joining the
Company, he was a manufacturing engineer and R & D Section Manager for Baxter
Edwards Critical Care Division. Mr. Crawford has a Bachelors and Masters of
Engineering Degree in Mechanical Engineering from Brigham Young University.
BRIAN T. KENNEY, has been our Vice President of Sales and Marketing
since January 2000. Mr. Kenney had been our Director of International Sales from
January, 1999 to January 2000. Before joining Trimedyne, Mr. Kenney held sales
and sales management positions with Exogen, a division of Smith & Nephew from
April 1996 to November 1999, U.S. Surgical
19
Corporation from January 1982 to December 1984, Stryker Corporation/Endoscopy
Division from May 1988 to December 1992, and Surgical Laser Technologies from
January 1993 to February 1996. Mr. Kenney is a graduate of the University of
Oklahoma with a Bachelors Degree in Business Administration in Marketing and
Finance.
STEPHEN J. BYRNE, has been our Vice President of Operations since July,
2001, having previously been our V.P. Manufacturing from February, 2001 to July
2001 and our Director of Purchasing since May 1999. He has over 20 years of
diversified experience in medical device manufacturing, having held management
positions at mature, world class, manufacturing companies: Bristol-Meyers from
October 1975 to July 1981, American Hospital Supply from July 1981 to August
1982, and 3M from June 1988 to May 1996, as well as a successful start up
company, Cardiovascular Devices, Inc. from August 1982 to June 1988. He received
a Bachelor's of Science degree in Marketing from California State University at
Long Beach.
DONALD BAKER, has been a director of our Company since May 1983. He
also has been a director of Cardiodyne, Inc. (formerly Trioptic Laser, Inc.)
since August 1996. Mr. Baker retired after 39 years as a managing partner of the
law firm of Baker & McKenzie. He holds a J.D.S. degree from the University of
Chicago Law School. Mr. Baker is a Director of the Mid-America Committee on
International Business and Government Cooperation, Chicago, Automedix Sciences
(now COMC, Inc.), Santa Ana, CA and Cardiomedics, Inc., Santa Ana, CA. He is a
member of the Chicago and American Bar Associations.
RICHARD F. HOROWITZ, has been a director of our Company since April
1983, and Secretary since July 2001. He also has been a director of Cardiodyne,
Inc. (formerly Trioptic Laser, Inc.) since May 1992. He was a director of
Automedix Sciences, Inc. (now COMC, Inc.) from November 1988 until 1999 and he
has been a director of Cardiomedics, Inc. since 1992. Mr. Horowitz has been a
practicing attorney in New York City for the past 37 years. He has been a member
of the firm of Heller, Horowitz & Feit, P.C. (formerly Heller, Horowitz & Feit)
since January 1979. Mr. Horowitz is a graduate of Columbia College and Columbia
Law School. He is a member of the Association of the Bar of the City of New York
and the New York State Bar Association.
EXECUTIVE COMPENSATION
The following table sets forth the executive compensation paid during
the fiscal years ended September 30, 2001 and 2000 to our Executive officers who
earned more than $100,000 in combined salary, stock option awards and other
compensation in fiscal 2001:
Compensation
Annual ------------
Compensation (1) Securities
---------------- Underlying All Other
Salary Bonus Options Compensation
Name of Individual and Principal Position Year ($) ($) (#) ($) (2)
----------------------------------------- ---- -----------------------------------------------------
Marvin P. Loeb............................ 2001(3) $ 99,132 0 78,000 $12,124
Chairman of the Board, President and 2000 211,842 0 380,000 20,531
Chief Executive Officer
Glenn D. Yeik, V.P........................ 2001 122,836 0 95,300 8,471
2000 64,399 73,000 5,761
L. Dean Crawford, V.P..................... 2001 133,344 0 83,724 7,458
2000 131,659 0 79,020 7,459
Brian T. Kenney, V.P...................... 2001 113,591 0 30,000 7,886
2000 90,157 0 80,000 7,748
20
Steven J. Byrne, V.P...................... 2001 93,448 0 30,000 1,873
2000 66,999 0 71,000 1,054
William T. Schubert, Jr.(4)............... 2001 118,864 0 150,000 7,215
Former Vice Chairman & CEO 2000 58,676 0 50,000 8,000
Shane H. Traveller(4)..................... 2001 128,262 0 250,000 12,210
Former President & COO 2000 113,009 0 150,000 7,417
---------------
Amounts shown include cash and non-cash compensation earned and received by our
executive officers.
Amounts of Other Compensation shown for the above listed officers include the
cost of (i) car allowances and expenses and (ii) costs to us of 401(k) matching
contributions.
On January 18, 2001, Mr. Loeb voluntarily reduced his cash compensation by 50%
to $107,858 annually ($8,988 per month). On May 7, 2001, he agreed to accept
Shares in lieu of the reduced amount of cash compensation, the number of Shares
being determined by dividing $8,988 through March 31, 2002, and $9,231
thereafter, by the closing price of our Shares on the last day of each month.
Through June 30, 2002, he was entitled to be issued a total of 225,400 Shares.
21
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth the name of each beneficial owner of
more than five percent of the Company's Common Stock known to the Company, by
each director of the Company, by each named executive officer, and by all
directors and executive officers as a group, the number of shares beneficially
owned by such persons as of June 30, 2002 and the percent of the class so owned.
Each person named in the table has sole investment and sole voting power with
respect to the shares of Common Stock set forth opposite his name, except as
otherwise indicated. All shares are directly owned or are held for the
stockholder in street name, except as otherwise indicated.
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF CLASS
TITLE OF CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OUTSTANDING*
-------------- ------------------- -------------------- ------------
MAJOR SHAREHOLDER
-----------------
Common Stock Marvin P. Loeb, Chairman (1) 1,298,400 9.7%
$.01 Par Value 15091 Bake Parkway
Irvine, CA 92618
DIRECTORS AND EXECUTIVE OFFICERS
--------------------------------
Donald Baker, Director (2) 70,000 *
544 Earlston Road
Kenilworth, IL 60043
Richard Horowitz, Secy. & Dir. (2) 60,000 *
Heller, Horowitz & Feit, P.C.
292 Madison Avenue
New York, New York 10017
Glenn D. Yeik, Exec. V.P. (3) (4) 174,300 1.3%
L. Dean Crawford, Sr. V.P. (4) (5) 70,010 *
Brian T. Kenney, V.P. (4) (6) 26,000 *
Steven J. Byrne, V.P. (4) (7) 22,000 *
All Directors and Executive 1,720,710 12.4%
Officers as a Group (7 persons) (8)
-------------------
* Indicates less than 1%.
(1) Includes 521,000 Shares held by Mr. Loeb and his wife, 225,400 Shares
to be issued to Mr. Loeb in lieu of compensation, 760,000 shares
issuable upon conversion of the Notes held by Mr. Loeb and his wife
plus accrued interest to maturity, and currently exercisable Options to
purchase 22,000 Shares. Does not include 797,900 shares held by Mr.
Loeb's adult children and members of their families and trusts for
their benefit. (See "EXECUTIVE COMPENSATION").
(2) Includes 20,000 currently exercisable Options.
(3) Includes currently exercisable Options to purchase 17,000 Shares and
110,000 Shares owned by a trust for the benefit of his wife. Mr. Yeik
is Mr. Loeb's son-in-law.
(4) Address is 15091 Bake Parkway, Irvine, CA 92618.
(5) Includes currently exercisable options to purchase 55,724 Shares.
(6) Consists solely of currently exercisable options.
(7) Includes currently exercisable options to purchase 13,000 Shares.
(8) Includes currently exercisable options to purchase 173,724 Shares and
760,000 Shares issuable on conversion of the Notes and accrued interest
described in Note 1.
22
STOCK OPTION GRANTS IN LAST FISCAL YEAR
Options to purchase a total of 170,000 Shares of our Common Stock were
granted to our above named executive officers during the fiscal year ended
September 30, 2001.
STOCK OPTIONS EXERCISED AND HELD AT END OF FISCAL YEAR
The following table provides information related to options exercised
during the fiscal year ended September 30, 2001, and unexercised options held by
the above named executive officers as of the end of such fiscal year.
FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FY END (#) (1) AT FY END ($) (2)
SHARES ACQUIRED VALUE ----------------------------- -----------------------------------
ON EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE ($) UNEXERCISABLE ($)
--------------- ----------- ----------- ------------- --------------- -----------------
Marvin P. Loeb 332,000 $49,800 22,000 56,000 0 0
Brian T. Kenney 0 0 26,000 79,0000 0 0
Glenn D. Yeik 47,300 $ 7,095 17,000 86,000 0 0
Steven J. Byrne 9,000 $ 1,350 13,000 68,0000 0 0
L. Dean Crawford 14,286 $ 2,143 55,724 28,0000 0 0
---------------
(1) Our Non-Qualified Stock Options have a term of six years, and our
Incentive Stock Options have a term of ten years. All Options are
subject to earlier termination, with options becoming exercisable from
the date of grant equally over the following three years for our
Non-Qualified Stock options and five years for our Incentive Stock
Options.
(2) The exercise prices of all of our exercisable and non-exercisable stock
options on September 30, 2001 were higher than the market price of
$0.43 per share, as reported by NASDAQ on that date. If the exercise
price of any of these stock options had been less than the market price
on that date, the value would have been calculated by multiplying the
closing market price of our Shares at September 30, 2001 by the
respective number of Shares and subtracting the option price. No dollar
value indicates that the market price on September 30, 2001 was lower
than the exercise price.
23
TRANSACTIONS WITH MANAGEMENT
The following transactions occurred during fiscal 2001 in which the
present directors, officers and key employees of the Company had a direct or
indirect material interest. The Company believes that the terms of the
transactions described below are as favorable as could have been obtained with
unaffiliated third parties.
Mr. Loeb loaned us $62,500 in February and $87,500 in March 2002,
totaling $150,000, for which we have agreed to issue a Note, which is
convertible into Shares at a price of $0.40 per Share, the closing price on the
date of receipt of the loan. Mr. Loeb loaned us an additional $50,000 in April
2002, for which we have agreed to issue a Note, which is convertible into Shares
at a price of $0.50 per share, the closing price on the date of receipt of this
loan. We have agreed to issue 225,400 Shares to Mr. Loeb in lieu of cash
compensation from May 7, 2001 through June 30, 2002.
Mr. Horowitz, a director of the Company, is a member of the firm of
Heller, Horowitz & Feit, P.C., securities counsel to the Company. Heller,
Horowitz & Feit, P.C. also represents other companies of which Mr. Loeb is a
director, officer and/or controlling stockholder. During the fiscal year ended
September 30, 2001 and the nine month period ended June 30, 2002 we incurred
$86,933 and $13,161, respectively, of legal fees and costs for the above law
firm acting as our securities counsel.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 30,000,000 shares of Common
Stock, par value $.01, and 1,000,000 shares of Preferred Stock.
PREFERRED STOCK
---------------
No shares of our Preferred Stock are presently outstanding. Our Board
of Directors has the right to fix the rights and preferences of any of our
Preferred Stock which might be issued in the future, without obtaining approval
of our Shareholders.
COMMON STOCK
------------
The shares of our Common Stock presently outstanding, and any shares of
our Common Stock issues upon conversion of the Notes or exercise of stock
options, will be fully paid and non-assessable. Each holder of Common Stock is
entitled to one vote for each share owned on all matters voted upon by
stockholders, and a majority vote is required for all actions to be taken by
stockholders. In the event we liquidate, dissolve or wind-up our operations, the
holders of the Common Stock are entitled to share equally and ratably in our
assets, if any, remaining after the payment of all our debts and liabilities and
the liquidation preference of any shares of Preferred Stock that may then be
outstanding. The Common Stock has no preemptive rights, no cumulative voting
rights, and no redemption, sinking fund, or conversion provisions. Since the
holders of Common Stock do not have cumulative voting rights, holders of more
than 50% of the outstanding shares can elect all of our Directors, and the
holders of the remaining shares by themselves cannot elect any Directors.
Holders of Common Stock are entitled to receive dividends, if and when
declared by the Board of Directors, out of funds legally available for such
purpose, subject to the dividend and liquidation rights of any Preferred Stock
that may then be outstanding.
Our Articles of Incorporation provide for a staggered Board of
Directors, pursuant to which the Board is divided into three classes (as nearly
equal in number as possible) with the term of one class expiring each year. The
Articles also provide that the staggered Board provisions cannot be amended,
altered or repealed except by the vote of not less than two-thirds of our issued
and outstanding Common Stock and any Preferred Stock which may then be entitled
to vote.
24
REGISTRATION OF SHARES
----------------------
Included in the Registration Statement of which this prospectus is a
part are 425,832 Shares which are presently outstanding, 425,400 shares we have
agreed to issue to certain of our officers and employees and a consultant,
760,000 Shares issuable in the event of conversion of the outstanding $200,000
of Notes and accrued interest thereon, 2,560,000 Shares issuable in the event of
the possible sale and conversion of up to $800,000 of additional Notes and
accrued interest, and 365,000 Shares issuable in the event of exercise of
Options we have granted to consultants.
STOCKHOLDERS
As of June 30, 2002, there were approximately 1,000 holders of record
of the Company's Common Stock and an additional estimated 9,000 holders who
maintain the beneficial ownership of their shares in "Street Name".
DIVIDEND POLICY
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.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 141, "Business Combinations" ("SFAS 141"), which requires all
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting. As a result, use of the pooling-of-interests
method is prohibited for business combinations initiated thereafter. SFAS 141
also establishes criteria for the separate recognition of intangible assets
acquired in a business combination. The adoption of SFAS 141 is not expected to
have a material impact on our consolidated results of operations, financial
position or cash flows.
In July 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), which requires that goodwill and certain other
intangible assets having indefinite lives no longer be amortized to earnings,
but instead be subject to periodic testing for impairment. Intangible assets
determined to have definitive lives will continue to be amortized over their
useful lives. This Statement is effective for the Company's 2003 fiscal year.
However, goodwill and intangible assets acquired after June 30, 2001 are subject
immediately to the non-amortization and amortization provisions of this
Statement. The adoption of SFAS 142 is not expected to have a material impact on
our consolidated results of operations, financial position or cash flows.
In August 2001, the FASB issued Statement No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS 143"), which provides the accounting
requirements for retirement obligations associated with tangible long-lived
assets. This Statement requires entities to record the fair value of a liability
for an asset retirement obligation in the period in which it is incurred. This
Statement is effective for the Company's 2003 fiscal year, and early adoption is
permitted. The adoption of SFAS 143 is not expected to have a material impact on
our consolidated results of operations, financial position or cash flows.
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which excludes from
the definition of long-lived assets goodwill and other intangibles that are not
amortized in accordance with SFAS 142. SFAS 144 requires that long-lived assets
to be disposed of by sale be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or in
discontinued operations. SFAS 144 also expands the reporting of discontinued
operations to include components of an entity that have been or will be disposed
of rather than limiting such discontinuance to a segment of a business. This
Statement will be effective for our 2003 fiscal year and is not expected to have
a material effect on our consolidated results of operations, financial position
or cash flows, and early adoption is permitted.
25
TRANSFER AGENT
The transfer agent and registrar for our Shares is American Stock
Transfer and Trust Company, 40 Wall Street, New York, New York.
COMMISSION'S POLICY ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
Article 12 of our Certificate of Incorporation contains provisions
relating to the indemnification of our directors and officers to the fullest
extent permitted by Nevada law. Section 78.751 of the Nevada Revised Statutes,
as amended, authorizes us to indemnify any director or officer under certain
prescribed circumstances and, subject to certain limitations, against certain
costs and expenses, including attorneys' fees actually and reasonably incurred
in connection with any action, suit, or proceeding, whether civil, criminal,
administrative or investigative, to which the director is a party by reason of
being our director or a director of our subsidiary, if it is determined that the
director acted in accordance with the applicable standard of conduct set forth
in those statutory provisions.
We may also purchase and maintain insurance for the benefit of any
director or officer that may cover claims for which we could not otherwise
indemnify such person.
Insofar as indemnification for liabilities arising under the Act may be
permitted to our directors, officers, and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
SHARES AVAILABLE FOR FUTURE SALE
The 13,489,760 Shares outstanding on April 30, 2002, the 425,400 Shares
we have agreed to issue to certain of our officers, employees and a consultant,
which are included in this Prospectus, and the remaining 1,125,000 Shares
included in this Prospectus, if and when issued, will be freely tradable without
restriction imposed by, or further registration under, the Securities Act. The
above notwithstanding, Shares held by Mr. Loeb and our other executive officers
and directors may be sold only pursuant to Rule 144 of the Securities and
Exchange Commission, which imposes limitations on the number of our Shares which
may be sold during certain periods.
PLAN OF DISTRIBUTION
Sales of the Shares by the Selling Stockholders may be effected by them
from time to time on the NASDAQ Small Cap Market System or in such other public
forum where our shares are publicly traded or listed for quotation. Sales may
also be made in negotiated transactions through the timing of exercises of
Options or the conversion of Notes or, at fixed prices, which may be charged at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. The Selling Stockholders may
effect such transactions by selling the Shares through broker-dealers, and such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the Selling Stockholders and/or the purchasers of the Shares
for which such broker-dealer may act as agent or to whom they sell as principal,
or both. The compensation as to a particular broker-dealer may be in excess of
customary compensation.
The Selling Stockholders and any broker-dealers who act in connection
with the sale of the Shares hereunder may be deemed to be Underwriters within
the meaning of Section 2(11) of the Securities Act, and any commissions received
by them and any profit on any sale of the Shares as principal might be deemed to
be underwriting discounts and commissions under the Securities Act.
26
SELLING SECURITY HOLDERS
WE ARE REGISTERING CERTAIN SHARES WHICH ARE PRESENTLY OUTSTANDING,
SHARES WE HAVE AGREED TO ISSUE TO CERTAIN OF OUR OFFICERS, EMPLOYEES AND A
CONSULTANT, SHARES ISSUABLE IN THE EVENT OF CONVERSION OF OUTSTANDING NOTES AND
ACCRUED INTEREST, AND SHARES ISSUABLE IN THE EVENT OF EXERCISE OF OUTSTANDING
OPTIONS GRANTED TO CERTAIN OF OUR CONSULTANTS (COLLECTIVELY "SELLING SECURITY
HOLDERS").
Other than the costs of preparing this Prospectus and a registration
fee to the SEC, we are not paying any costs relating to the sales of Shares by
the Selling Security Holders. Each of the Selling Security Holders, or their
transferees, and intermediaries to whom such securities may be sold may be
deemed to be an "underwriter" of the common stock offered in this prospectus, as
that term is defined under the Securities Act. Each of the Selling Security
Holders, or their transferees, may sell Shares from time to time for their own
account in the open market at the prevailing prices, or in individually
negotiated transactions at such prices as may be agreed upon. The net proceeds
from the sale of Shares by the Selling Security Holders will inure entirely to
their benefit and not to ours.
The Shares may be offered for sale from time to time in regular
brokerage transactions in the over-the-counter market, or through brokers or
dealers, or in private sales or negotiated transactions, or otherwise, at prices
related to the then prevailing market prices. Thus, they may be required to
deliver a current prospectus in connection with the offer or sale of their
Shares. In the absence of a current prospectus, if required, these Shares may
not be sold publicly without restriction unless held by a non-affiliate for two
years, or after one year subject to volume limitations and satisfaction of other
conditions. The Selling Security Holders are hereby advised that Regulation M of
the General Rules and Regulations promulgated under the Securities Exchange Act
of 1934 will be applicable to their sales of these Shares. These rules contain
various prohibitions against trading by persons interested in a distribution and
against so-called "stabilization" activities.
The Selling Security Holders, or their transferees, might be deemed to
be "underwriters" within the meaning of Section 2(11) of the Act and any profit
on the resale of these Shares as principal might be deemed to be underwriting
discounts and commissions under the Act. Any sale of these Shares by Selling
Security Holders, or their transferees, through broker-dealers may cause the
broker-dealers to be considered as participating in a distribution and subject
to Regulation M promulgated under the Securities Exchange Act of 1934, as
amended. If any such transaction were a "distribution" for purposes of
Regulation M, then such broker-dealers might be required to cease making a
market in our equity securities for either two or nine trading days prior to,
and until the completion of, such activity. Two of the Selling Security Holders,
Roan/Meyers Associates, Inc. and Donner Corporation International, are
broker-dealers.
NO. OF SHARES NO. OF SHARES NO. OF SHARES
SHAREHOLDER NAME PRIOR TO OFFERING (1) BEING OFFERED AFTER OFFERING
---------------- ------------------ ------------- --------------
Marvin P. Loeb 1,276,400 (2) 985,400 291,000
Glenn D. Yeik 182,300 25,000 157,300
Brian T. Kenney 25,000 25,000 0
Steven J. Byrne 19,000 10,000 9,000
LibertyView Funds, L.P. 198,808 198,808 0
LibertyView Funds, L.L.C. 21,867 21,867 0
Quattro Fund, Ltd. 168,500 139,157 29,343
Thomas R. Ulie 116,000 66,000 50,000
Roan/Meyers Associates, L.P. 200,000 200,000 0
I. W. Miller Group 125,000 125,000 0
Richard C. Richley, M.D. 25,000 25,000 0
Donner Corporation International 25,000 25,000 0
Todd Black 2,000 2,000 0
Charles Mansfield 1,000 1,000 0
Russell Lindsey 3,000 3,000 0
Marcus Simmons 2,000 2,000 0
Bryan Wilson 1,000 1,000 0
Amy Kiminski 1,000 1,000 0
27
Gail Novelli 2,000 2,000 0
Carol Knight 2,000 2,000 0
James W. Pergl 10,000 5,000 5,000
Richard M. Fields 3,000 2,000 1,000
Dipu Ghosh 18,000 10,000 8,000
Mauricio Guerrero 6,000 3,000 3,000
Betty Moran 3,000 3,000 0
Craig Smith 14,000 10,000 4,000
Jeffrey Dannenberg 13,000 5,000 8,000
Bunnak Chuch 3,600 2,000 1,600
Naomi F. Gong 8,120 5,000 3,120
Bozena Lojewska 2,500 2,000 500
Ana Orellana 2,000 2,000 0
Randy Strader 3,000 3,000 0
Jose G. Aguirre 3,900 2,000 1,900
Simon Ramirez 4,000 4,000 0
Sandy DeAntonio 2,000 2,000 0
Helen Cao 2,200 2,000 200
Daly Chor 2,200 2,000 200
Rubicelia Silva 2,200 2,000 200
Haysan Eap 16,200 5,000 11,200
Hung Le 4,600 2,000 2,600
Timothy A. Maddox 4,360 2,000 2,360
Derick Nguyen 3,800 2,000 1,800
Joseph Chavit 5,500 5,000 500
Ingrid Corning 5,500 5,000 500
Cherylan Hils 2,000 2,000 0
Jeffery Jones 5,500 5,000 500
Jeff Rudner 10,000 10,000 0
Sudele Seron 7,000 5,000 2,000
Dennis J. Shade 8,000 7,000 1,000
------------
(1) Includes Shares outstanding, Shares we have agreed to issue, Shares issuable
upon conversion of Notes and accrued interest and Shares issuable upon exercise
of outstanding Options.
(2) Does not include 797,900 shares owned by adult children of Mr. Loeb, members
of their families and trusts for their benefit, of which 25,000 Shares are being
registered herein.
28
LEGAL MATTERS
In connection with this offering, the law firm of Heller, Horowitz &
Feit, P.C., New York, New York, is opining that we are in good standing in the
State of Nevada with due authority to conduct our business and that the Shares
offered herein have been duly and validly authorized and issued and are fully
paid, non-assessable. A copy of the opinion has been filed as Exhibit 5 to the
registration statement of which this prospectus forms a part.
EXPERTS
Our audited financial statements for the fiscal years ended September
30, 2001 and 2000 are included in this prospectus in reliance upon the report of
McKennon, Wilson & Morgan, LLP, located at 2 Venture Plaza, Suite 220, Irvine,
CA 92618-7394, an independent certified public accounting firm, and upon the
authority of said accounting firm as expert in accounting and auditing.
AVAILABLE INFORMATION
We are subject to the information requirements of the Securities
Exchange Act of 1934, as amended. This Act requires us to file reports, proxy
statements and other information with the Securities and Exchange Commission.
Copies of the reports, proxy statements and other information we file can be
inspected at the Headquarters Office of the Securities and Exchange Commission
located at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549.
Copies of the material we file may be obtained from the Public
Reference Section of the Commission, at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. at prescribed rates. The Public Reference Room can be reached
at (202) 942-8090. The Commission also maintains a web site that contains
reports, proxy and information statements and other information regarding us.
This material can be found at http://www.sec.gov.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants F-2
Consolidated Balance Sheets at September 30, 2001, as restated and June 30, 2002 F-3
(unaudited)
Consolidated Statements of Operations and Comprehensive Loss for years ended F-4
September 30, 2000 and 2001 as restated, and the nine months ended June 30, 2001
as restated and 2002
Consolidated Statements of Stockholders' Equity for each of the two years in the F-5
period ended September 30, 2001 and the nine months ended June 30, 2002
(unaudited)
Consolidated Statements of Cash Flows for years ended September 30, 2000 and 2001 F-6
as restated, and the nine months ended June 30, 2001 as restated and 2002
Notes to Consolidated Financial Statements F-7
29
TRIMEDYNE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of Trimedyne, Inc. and its
subsidiary are included in Item 7:
Consolidated Financial Statements:
Report of Independent Accountants F-2
Consolidated Balance Sheets at September 30, 2001, as restated,
and June 30, 2002 (unaudited) F-3
Consolidated Statements of Operations and Comprehensive Loss for years
ended September 30, 2000 and 2001 as restated, and the nine months
ended June 30, 2001 as restated,
and 2002 (unaudited) F-4
Consolidated Statements of Stockholders' Equity for two years ended
September 30,2000 and 2001 and the nine months ended
June 30, 2002 (unaudited) F-5
Consolidated Statements of Cash Flows for years ended September 30, 2000
and 2001, as restated, and the nine
months ended June 30, 2001, as restated, and 2002 (unaudited) F-6
Notes to Consolidated Financial Statements F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Trimedyne, Inc.
We have audited the accompanying consolidated balance sheet of Trimedyne, Inc.
and its subsidiaries (the "Company"), as of September 30, 2001, and the related
consolidated statements of operations and comprehensive loss, stockholders'
equity and cash flows for each of the two years in the period ended September
30, 2001. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Trimedyne, Inc. and
subsidiaries, as of September 30, 2001, and the results of their operations and
their cash flows for each of the two years in the period ended September 30,
2001, in conformity with accounting principles generally accepted in the United
States.
As discussed in Note 2, the Company restated its consolidated financial
statements for the year ended September 30, 2001 for the correction of an error.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred operating losses,
has a deficit in its liquid net assets and is unable to pay its current
obligations in a timely manner. These conditions raise substantial doubt about
its ability to continue as a going concern. Management's plans regarding those
matters are also described in Note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ McKennon, Wilson & Morgan LLP
-----------------------------
Irvine, California
January 10, 2002
F-2
TRIMEDYNE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, June 30,
2001 2002
------------- -------------
(as restated) (unaudited)
Current assets:
Cash and cash equivalents $ 84,000 $ 174,000
Trade accounts receivable, net of allowance
for doubtful accounts of $435,000 and
$68,000, respectively 1,241,000 1,050,000
Inventories (Note 5) 2,864,000 2,090,000
Other 271,000 184,000
------------- -------------
Total current assets 4,460,000 3,498,000
Goodwill, net (Note 3) 616,000 561,000
Property and equipment, net (Note 5) 770,000 623,000
Other assets -- 58,000
------------- -------------
$ 5,846,000 $ 4,740,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,776,000 $ 1,504,000
Accrued expenses (Note 5) 705,000 649,000
Deferred income 217,000 157,000
Current portion of long-term debt (Note 6) 73,000 46,000
Other current liabilities 67,000 79,000
------------- -------------
Total current liabilities 2,838,000 2,435,000
Long-term debt, net of current portion (Note 6) 26,000 --
Senior Convertible Secured Notes due to
related party (Note 6) -- 200,000
------------- -------------
Total liabilities 2,864,000 2,635,000
Commitments and Contingencies (Note 8)
Stockholders' equity: (Note 9)
Common stock - $.01 par value; 30,000,000
shares authorized, 13,591,369 shares issued
and 13,489,760 shares outstanding 137,000 137,000
Capital in excess of par value 47,483,000 47,656,000
Accumulated deficit (43,925,000) (44,975,000)
------------- -------------
3,695,000 2,818,000
Less treasury stock, at cost, 101,609 shares (713,000) (713,000)
------------- -------------
Total stockholders' equity 2,982,000 2,105,000
------------- -------------
$ 5,846,000 $ 4,740,000
============= =============
See Notes to Consolidated Financial Statements
F-3
TRIMEDYNE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
For The Years Ended For The Nine Months Ended
September 30, June 30,
----------------------------- -----------------------------
2000 2001 2001 2002
---- ---- ---- ----
(as restated) (unaudited) (unaudited)
Net revenues:
Products $ 5,185,000 5,857,000 $ 4,135,000 4,353,000
Service and rental 910,000 1,607,000 1,310,000 1,055,000
------------ ------------ ------------ ------------
6,095,000 7,464,000 5,445,000 5,408,000
------------ ------------ ------------ ------------
Cost of sales:
Products 2,761,000 5,187,000 3,391,000 2,325,000
Service and rental 697,000 1,028,000 879,000 646,000
------------ ------------ ------------ ------------
3,458,000 6,215,000 4,270,000 2,971,000
------------ ------------ ------------ ------------
Gross Profit 2,637,000 1,249,000 1,175,000 2,437,000
Selling, general and administrative expenses 4,136,000 4,839,000 4,118,000 2,479,000
Research and development expenses 3,486,000 2,330,000 1,825,000 1,136,000
------------ ------------ ------------ ------------
Loss from operations (4,985,000) (5,920,000) (4,768,000) (1,178,000)
Other income (expense):
Interest income 249,000 220,000 -- --
Loss on investments -- (1,143,000) (953,000) --
Fair value of make-up shares -- (660,000) (660,000) --
Other 36,000 19,000 19,000 128,000
------------ ------------ ------------ ------------
Net loss (4,700,000) (7,484,000) (6,362,000) (1,050,000)
Other comprehensive loss -
Unrealized loss on marketable securities (94,000) -- -- --
------------ ------------ ------------ ------------
Comprehensive loss $(4,794,000) $(7,484,000) $(6,362,000) $(1,050,000)
============ ============ ============ ============
Basic and diluted net loss per share $ (0.41) $ (0.59) $ (0.52) $ (0.08)
============ ============ ============ ============
Basic and diluted weighted average
common shares outstanding: 11,615,000 12,615,000 12,274,228 13,531,510
============ ============ ============ ============
See Notes to Consolidated Financial Statements
F-4
TRIMEDYNE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Common Stock Capital In Other
------------ Excess of Accumulated Comprehensive Treasury
Shares Amount Par Value Deficit Loss Stock Total
----------- --------- ------------ ------------- ---------- ---------- ------------
Balances at
September 30, 1999 11,083,665 $111,000 $43,249,000 $(31,741,000) $(61,000) $(713,000) $10,845,000
Unrealized loss
on marketable
securities (94,000) (94,000)
Exercise of
stock options 187,494 3,000 288,000 291,000
Proceeds from
private
placement 660,819 6,000 2,118,000 2,124,000
Value of stock
options issued
below fair value 6,000 6,000
Net loss for
the year (4,700,000) (4,700,000)
----------- --------- ------------ ------------- ---------- ---------- ------------
Balances at
September 30, 2000 11,931,978 $120,000 $45,661,000 $(36,441,000) $(155,000) $(713,000) $ 8,472,000
Change in unrealized
loss on marketable
securities 155,000 155,000
Exercise of
stock options 713,359 7,000 202,000 209,000
Stock issued
to consultants 20,200 1,000 32,000 33,000
Make-up shares issued
pursuant to
private placement 425,832 4,000 656,000 660,000
Additional compensation
for modification
of stock options 162,000 162,000
Purchase of
Mobile Surgical
Technologies, Inc. 500,000 5,000 770,000 775,000
Net loss for
the year (as restated) (7,484,000) (7,484,000)
----------- --------- ------------ ------------- ---------- ---------- ------------
Balances at
September 30, 2001
(as restated) 13,591,369 $137,000 $47,483,000 $(43,925,000) $ -- $(713,000) $ 2,982,000
Issuance of common
stock for compensation 120,000 120,000
Value of stock
Options granted 53,000 53,000
Net loss for the
period (1,050,000) (1,050,000)
----------- --------- ------------ ------------- ---------- ---------- ------------
Balances at
June 30, 2002
(unaudited) 13,591,369 $137,000 $47,656,000 $(44,975,000) $ -- $(713,000) $ 2,105,000
=========== ========= ============ ============= ========== ========== ============
See Notes to Consolidated Financial Statements
F-5
TRIMEDYNE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended For The Nine Months Ended
September 30, June 30,
------------------------------ ------------------------------
2000 2001 2001 2002
---- ---- ---- ----
(as restated) (unaudited) (unaudited)
Cash flows from operating activities:
Net loss $(4,700,000) ($7,484,000) $(6,362,000) $(1,050,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 205,000 241,000 149,000 202,000
Stock based compensation -- 173,000
Provision for impairment of inventories -- 868,000 596,000 --
Provision for bad debts -- 164,000 -- --
Loss on investments -- 1,143,000 953,000 --
Fair value of options granted 6,000 162,000 -- --
Fair value of stock issued to consultants -- 33,000 -- --
Fair value of make-up shares issued pursuant to
private placement -- 660,000 660,000 --
Gain on sale of fixed assets -- -- -- (37,000)
Changes in operating assets and liabilities:
Decrease (increase) in trade accounts receivable, net 1,402,000 (523,000) (359,000) 191,000
(Increase) decrease in inventories (849,000) 609,000 221,000 774,000
Decrease in other current assets 48,000 90,000 38,000 29,000
Increase in accounts payable 72,000 1,348,000 1,636,000 (272,000)
(Decrease) increase in accrued expenses (159,000) 221,000 222,000 (75,000)
(Decrease) increase in other current liabilities (61,000) 216,000 -- (85,000)
Increase (decrease in deferred income -- -- 4,000 38,000
------------ ------------- ------------- ------------
Net cash used in operating activities (4,036,000) (2,252,000) (2,242,000) (112,000)
Cash flows from investing activities:
Capital expenditures (124,000) (276,000) (258,000) 37,000
(Purchase) sale of marketable securities (1,001,000) 2,089,000 2,232,000 --
Acquisition of MST, net of cash received -- (1,000) (1,000) --
------------ ------------- ------------- ------------
Net cash provided by (used in) investing activities (1,125,000) 1,812,000 1,973,000 37,000
Cash flows from financing activities:
Payments on long-term obligations -- -- (123,000) (35,000)
Proceeds from private placement 2,124,000 -- -- --
Proceeds from senior convertible secured
note due to officer -- -- -- 200,000
Proceeds from exercise of stock options 291,000 198,000 25,000 --
Net payments on long-term liabilities -- (140,000) -- --
------------ ------------- ------------- ------------
Net cash provided by financing activities 2,415,000 58,000 (98,000) 165,000
Net decrease in cash and cash equivalents (2,746,000) (382,000) (367,000) 90,000
Cash and cash equivalents at beginning of year 3,212,000 466,000 466,000 84,000
------------ ------------- ------------- ------------
Cash and cash equivalents at end of year $ 466,000 $ 84,000 $ 99,000 $ 174,000
============ ============= ============= ============
Non-cash investing and financing activities:
Common stock issued for acquisition of MST $ -- $ 775,000 $ 775,000 $ --
============ ============= ============= ============
Stock options exercised for relief of debt $ -- $ 11,000 $ -- $ --
============ ============= ============= ============
See Notes to Consolidated Financial Statements
F-6
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY:
Trimedyne, Inc. ("Trimedyne") and its subsidiary (collectively "the Company")
are engaged primarily in the research and development, manufacture and sale of
lasers and disposable laser devices in the medical field. The Company has also
been engaged in the research and development of cardiovascular laser devices
through its 90% owned subsidiary, Cardiodyne, Inc. ("Cardiodyne"). In January
2001, the Company ceased funding Cardiodyne's operations due to budgetary
constraints. The Company's operations are primarily located in Southern
California with distribution of its products worldwide (Note 12).
On November 30, 2000, the Company acquired all of the common stock of Mobile
Surgical Technologies, Inc. ("MST"), a Dallas, Texas-based privately held
company, in exchange for 500,000 shares of the Company's unregistered common
stock. MST is primarily engaged in providing the Company's lasers and other
surgical equipment to hospitals and surgery centers on a "fee-per-case" basis in
the southwestern United States.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Restatement of Consolidated Financial Statements
The Company restated its consolidated financial statements for the year ended
September 30, 2001, for the correction of an error. The effects of the Company's
restatement on their results of operations for fiscal 2001 are as follows:
Year Ended
September 30, 2001
-------------------------------
Net Loss
Net Loss Per Share
------------ ----------
Net loss, as previously presented $(7,747,000) $ (0.61)
Loss on purchase commitments 263,000 0.02
------------ ----------
Net loss, as adjusted $(7,484,000) $ (0.59)
============ ==========
The Company recorded a charge to operations totaling $263,000 for purchase
commitments, which were in excess of normal operating requirements. Upon further
evaluation, management determined that such provision was not based on the most
relevant information. Management believes the basis used for reporting this
charge to operations constitutes an error requiring restatement of effects of
such charge on operations during the year ended September 30, 2001.
F-7
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company restated its consolidated financial statements for the nine months
ended June 30, 2001, to recorded a charge to operations totaling $660,000 for
the value of "make-up" shares of common stock issued pursuant to an
anti-dilution clause related to its private placement in fiscal 2000, which was
triggered by the acquisition of MST in the quarter ended December 31, 2000. In
addition the Company recorded charge to cost of sales of $596,000 representing
provisions for excess and obsolete inventories for the nine months ended June
30, 2001. The Company also recorded $1,005,000 to adjust its records related to
its annual reconciliation of its physical inventories and excess capitalized
overhead costs for the nine months ended June 30, 2001. Management believes the
bases used for reporting these charges to operations constitute errors requiring
restatement of effects of such charges on operations during the nine months
ended June 30, 2001. The effects of the Company's restatement on their results
of operations for the and nine months ended June 30, 2001, are as follows:
Nine Months Ended
June 30, 2001
------------------------
Net Loss
Net Loss Per Share
----------- ---------
Net loss, as previously presented $(4,101,000) $ (0.33)
Provision for obsolete and
slow moving (596,000) (0.05)
Physical inventory and excess
overhead adjustments (1,005,000) (0.08)
Fair value of "make-up" shares
issued (660,000) (0.05)
------------ --------
Net loss, as adjusted $(6,362,000) $ (0.51)
============ ========
F-8
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidation
The consolidated financial statements include the accounts of the Company, its
90% owned subsidiary, Cardiodyne and MST. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Going Concern
The Company has incurred losses from operations throughout its recent past. At
June 30, 2002, the Company had working capital of approximately $1.2 million,
and excluding inventories, the Company's current liabilities exceed the current
liquid assets by $1.1 million, primarily because of the Company's losses during
2002. In addition, the Company's trade payables have become significantly past
due. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans with respect to these matters
include efforts to reduce certain of its expenses by reducing personnel
positions, reducing inventories, reducing certain overhead costs, and raising
additional capital. Sources of additional financing include the sale of
convertible debt and/or equity securities of the Company. Management is also
attempting to sale Cardiodyne and/or certain patent rights. There are no
assurances that additional capital will be raised or obtained by the Company.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Cash and cash equivalents
Cash in excess of requirements is principally invested in short-term corporate
and government obligations, money market funds and certificates of deposit with
a remaining maturity of three months or less. Such investments are deemed to be
cash equivalents.
Marketable securities
Marketable securities are accounted for under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The Company's short-term investments
consisted of marketable debt and equity securities, which were classified as
"available-for-sale" in accordance with the provisions of SFAS No. 115.
Accordingly, such investments are presented as current assets and carried at
their estimated fair values in the accompanying consolidated financial
statements. Fair value was determined based on quoted market prices. The
specific identification method has been used to determine cost for each
security. Unrealized losses, which are considered temporary, are excluded from
net income (loss) and reported as a separate component of shareholders' equity,
net of the related tax effect and as a component of comprehensive income (loss).
When a decline in market value is considered permanent by management, the
Company reports such impairment in operations.
F-9
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 basis.
Cost is determined at the actual cost for raw materials, and at production cost
(materials, labor and indirect manufacturing overhead) for work-in-process and
finished goods.
Use of estimates by management
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 in the normal course of
business. If wide-spread market acceptance of the Company's products is not
achieved, the carrying amount of inventory could be materially impacted.
Concentration of credit risk
The Company generates revenues principally from sales of products in the medical
field. As a result, the Company's trade accounts receivable are concentrated
primarily in this industry. The Company performs limited credit evaluations of
its customers and generally does not require collateral. The Company maintains
reserves for potential credit losses.
Fair value of financial instruments
The Company has financial instruments whereby the fair value of the financial
instruments could be different than that recorded on a historical basis on the
accompanying balance sheet. The Company's financial instruments consist
primarily of accounts receivable and accounts payable. The carrying amounts of
the Company's financial instruments generally approximate their fair values as
of September 30, 2001 and June 30, 2002 because of the short maturity of these
instruments. Receivables from related parties cannot be objectively and fairly
valued due to the related party nature of the instrument.
F-10
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.
Revenue recognition
The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
(SAB) 101, Revenue Recognition in Financial Statements, in December 1999. The
SAB summarizes certain of the SEC staff's views in applying GAAP to revenue
recognition in financial statements. The Company recognizes revenue from
products once all of the following criteria for revenue recognition have been
met:
1) Pervasive evidence that an agreement exists; 2) the products have been
shipped; 3) the prices are fixed and determinable and not subject to refund
or adjustment; and 4) collection of the amounts due is reasonably assured.
The Company adopted SAB 101 in the first quarter of fiscal 2001 with no
material impact on its consolidated financial statements.
During fiscal 2000, the Company commenced a revenue share program (the
"program") with certain laser rental companies, the terms of which include
placements of lasers and the sale of reusable and disposable devices discounted
at 20% to 50%. The Company shares 35% of the customers' revenues generated from
surgical procedures in which the Company's lasers and reusable and disposable
devices are used. Generally, the laser rental companies are required to remit a
monthly minimum ranging from $3,000 to $3,800 per laser placed. Revenues from
the sale of delivery and disposable devices are recognized upon shipment of
product, provided that all revenue recognition criteria have been met. Shared
revenues are recognized at the end of each month pursuant to the terms of each
agreement. Revenue in excess of the minimum requirements is recognized when
received. As of September 30, 2001, the Company had agreements with three
customers under the program. Management has and will continue to analyze the
profitability of the program. During fiscal 2001, approximately $263,000 in
revenues was recorded under the revenue share program. As of the period ended
June 30, 2002, approximately $62,000 in revenues was recorded under the revenue
share program.
The Company sells its products primarily through commission sales
representatives in the United States and in foreign countries. In limited cases
where the Company utilizes distributors, it recognizes revenue upon shipment if
passes ownetship, provided that all revenue recognition criteria have been met.
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 to two years).
F-11
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warranty costs
We warrant certain of our products and provide for estimated product warranty
costs at the time of sale.
Research and development costs
All research and development costs, including licensing costs, are charged to
expense as incurred. In accordance with this policy, all costs associated with
the design, development and testing of the Company's products have been expensed
as incurred.
Income taxes
The liability method of accounting for income taxes requires the recognition of
deferred tax liabilities and assets for expected future tax consequences of
temporary differences between the carrying amounts and tax bases of assets and
liabilities. Management provides a valuation allowance for deferred tax assets
when it is more likely than not that all or a portion of such assets will not be
recoverable based on future operations.
Accounting for stock-based compensation
The Company has not adopted a fair value-based method of accounting for
stock-based compensation plans for employees and non-employee directors. 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 9). Stock-based compensation issued to
non-employees and consultants are measured at fair value. Common stock purchase
options and warrants issued to non-employees and consultants are measured at
fair value using the Black-Scholes valuation model. The Company has considered
the effects of Interpretation No. 44 of APB No. 25 issued by the FASB when
accounting for stock options issued to employees and to non-employee directors
voted to office by shareholders.
Impairment of long-lived assets
The Company accounts for impairment of long-lived assets under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of."
This statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. No significant impact on the Company's consolidated financial position,
results of operations or cash flows has been realized as a result of this
policy.
F-12
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Per share information
Basic earnings (loss) per share is computed by dividing income (loss) available
to common shareholders by the weighted average common shares outstanding plus
the potential effect of dilutive securities which are convertible to common
shares such as options, warrants and preferred stock. Due to the net loss
incurred in fiscal 2000 and 2001, all common stock equivalents outstanding were
considered anti-dilutive and were excluded from the calculations of diluted net
loss per share. Potential common shares which would have been included in
diluted per share information consist of the incremental common shares issuable
upon the exercise of stock options, using the treasury stock method,
approximated 527,000 and 101,000 shares in fiscal 2000 and 2001, respectively.
As of June 30, 2002, the Company did not have any incremental common shares,
using the treasury stock method.
Consolidated statements of cash flows
Cash paid for interest and income taxes during the periods presented was not
significant.
Comprehensive income
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. The Company's only element of comprehensive income during the
periods presented related to unrealized losses on marketable securities.
Segment information
The Company reports information about operating segments, as well as disclosures
about products and services, geographic areas and major customers (See Note 12).
Operating segments are defined as revenue-producing components of the
enterprise, which are generally used internally for evaluating segment
performance.
Recently issued accounting standards
In June 2001, the Financial Accounting Standards Board finalized Statements of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and
No. 142, "Goodwill and Other Intangible Assets." SFAS 141 requires the use of
the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001. SFAS 141 also requires that the Company recognize acquired
intangible assets apart from goodwill if the acquired intangible assets meet
certain criteria. SFAS 141 applies to all business combinations initiated after
June 30, 2001, and for purchase business combinations completed on or after July
1, 2001. It also requires, upon adoption of SFAS 142 that the Company reclassify
the carrying amounts of intangible assets and goodwill based on the criteria in
SFAS 141.
F-13
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 121. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001, to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142. The Company is assessing, but
has not yet determined, how the adoption of SFAS 141 and SFAS 142 will impact
its financial statements and results of operations.
The FASB issued Statement No. 143 "Accounting for Asset Retirement Obligations"
which establishes standards for the initial measurement and subsequent
accounting for obligations associated with the sale, abandonment, or other type
of disposal of long-lived tangible assets arising from the acquisition,
construction, or development and/or normal operation of such assets. SFAS No.
143 is effective for years beginning after June 15, 2002, with earlier
application encouraged. The Company is assessing, but has not yet determined,
how the adoption of SFAS 143 will impact its financial position and results of
operations.
The FASB also recently issued Statement No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." Statement No. 144 supersedes Statement No.
121 to supply a single accounting approach for measuring impairment of
long-lived assets, including segment of a business accounted for as a
discontinued operation or those to be sold or disposed of other than by sale.
The Company must adopt Statement No. 144 in 2002. The Company is assessing, but
has not yet determined, how the adoption of SFAS 144 will impact its financial
position and results of operations.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" (SFAS 145). SFAS
145 updates, clarifies and simplifies certain existing accounting
pronouncements. Currently, SFAS 145 impacts the Compnay only with respect to the
rescission of SFAS 4. Prior to the issuance of SFAS 145, SFAS 4 required all
gains and losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. As a
result of the rescission of SFAS 4, the criteria in APB No. 30 will now be used
to classify those gains and losses. SFAS 145 is required to be adopted for
fiscal years beginning after May 2002. The adoption of SFAS No. 145 is not
expected to have a significant impact on The Company's statements of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Costs covered by
the standard include lease termination costs and certain employee severance
costs that are associated with a restructuring, discontinued operation, plant
closing, or other exit or disposal activity. This statement is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
Management believes the adoption of the provisions of this statement will not
have a material effect on the Company's consolidated financial statements
F-14
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. ACQUISITION
On November 30, 2000, the Company acquired all of the common stock of Mobile
Surgical Technologies, Inc. ("MST"), a Dallas, Texas-based privately held
company, in exchange for 500,000 shares of the Company's common stock valued at
$775,000 with direct financing costs totaling $17,000. The assets and
liabilities of MST were recorded at fair value, with the excess of cost over the
fair value of the net assets acquired of $666,000 allocated to goodwill.
Goodwill is amortized on a straight-line basis over ten years. As discussed in
Note 2, the Company will evaluate the impact of SFAS 142 on its goodwill. In
connection with the acquisition of MST, the Company acquired the following net
assets:
Current assets $138,000
Non-current assets,
excluding Goodwill 278,000
Goodwill 666,000
Current liabilities (51,000)
Long-term liabilities (239,000)
---------
$792,000
=========
Amortization of goodwill amounted to $50,000 in fiscal 2001; no goodwill existed
in fiscal 2000. Amortization of goodwill amounted to $38,000 for the nine months
ended June 30, 2001, while amortization of goodwill amounted to $49,000 for the
nine months ended June 30, 2002. The unaudited pro forma statements of
operations data for the years ended September 30, 2000 and 2001, and the nine
months ended June 30, 2001, assuming the acquisition of MST occurred on October
1, 1999, are as follows:
For The Years Ended For The Nine Months
September 30, Ended June 30,
------------------------- -------------------
2000 2001 2001
---------- ----------- ----------
(unaudited) (unaudited) (unaudited)
(as restated) (as restated)
Revenues $6,095,000 $7,464,000 $5,445,000
=========== =========== ===========
Net loss $4,794,000 $7,484,000 $6,362,000
=========== =========== ===========
Basic and diluted net loss per share $(0.41) $(0.59) $(0.52)
======= ======= =======
F-15
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. MARKETABLE SECURITIES
Marketable securities during 2001 included an investment in an equity hedge fund
which suffered a significant loss during the second quarter of 2001. At that
time, management was unable to determine whether the investment was permanently
impaired since the value of the investment was volatile. Management determined a
permanent impairment to the asset value should be recognized during the third
quarter based on the proceeds received from the liquidation of its marketable
securities in July 2001 for approximately $47,000. Accordingly, management
recorded a charge of $1,143,000 to operations during fiscal 2001. The Company
has no marketable securities at September 30, 2001 and June 30, 2002.
NOTE 5. COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS:
Inventories consist of the following at September 30, 2001 and June 30, 2002
(unaudited):
September 30, June 30,
2001 2002
----------- ------------
(unaudited)
Raw materials $1,128,000 $ 1,002,000
Work-in-process 449,000 485,000
Finished goods 1,287,000 603,000
----------- ------------
$2,864,000 $ 2,090,000
=========== ============
The Company has approximately $1.1 million in purchase commitments for
inventory, which have been customized for the Company's production
specifications and for which suppliers, due to the Company's account not being
current, have not released the related inventory. The purchase commitment will
not be reflected in inventory until such time it is shipped by the vendor.
F-16
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and equipment, net consist of the following at September 30, 2001 and
June 30, 2002 (unaudited):
September 30, June 30,
2001 2002
----------- -----------
(unaudited)
Furniture and equipment $ 3,484,000 $ 3,270,000
Leasehold improvements 272,000 272,000
Other 98,000 116,000
------------ ------------
3,854,000 3,658,000
Less accumulated depreciation
and amortization (3,084,000) (3,035,000)
------------ ------------
$ 770,000 $ 623,000
============ ============
During the nine months ended June 30, 2002, fully depreciated equipment with an
original cost basis of $214,000 was sold to a vendor and a private party for a
$30,000 reduction to accounts payable and $7,000 cash, respectively.
As discussed in Note 7, the Company entered into a new facility lease beginning
February 2001. All remaining leasehold improvements related to the previously
leased facility have been expensed. In connection with the newly leased
facility, the Company incurred $218,000 in leasehold improvement costs in fiscal
2001. These leasehold improvements will be amortized over the initial lease term
on a straight-line basis through December 2005. Depreciation expense totaled
$205,000 and $191,000 for fiscal 2000 and 2001 respectively. Depreciation
expense totaled $111,000 and $80,000 for the nine months ended June 30, 2001 and
2002, respectively.
Accrued expenses consist of the following at September 30, 2001 and June 30,
2002 (unaudited):
September 30, June 30,
2001 2002
----------- -----------
(unaudited)
Salaries, wages and benefits $232,000 $ 295,000
Accrued royalties 150,000 --
Other 323,000 354,000
--------- ----------
$705,000 $ 649,000
========= ==========
F-17
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As discussed in Note 8, the Company terminated a licensing agreement and paid
the balance of royalties subsequent to September 30, 2001. Amounts relating to
the accrued royalties at June 30, 2002 are included in accounts payable.
NOTE 6. LONG-TERM DEBT:
Long-term debt consists of the following at September 30, 2001 and June 30, 2002
(unaudited):
September 30, June 30,
2001 2002
--------------- ---------------
(unaudited)
Loan payable to bank, bearing interest at
9.5% per annum; principal and interest
due monthly in equal installments of $2,306
through November 2002. The loan is secured
by the related laser. $ 28,000 $ 14,000
Loan payable to bank, bearing interest at
10% per annum; principal and interest
due monthly in equal installments of $1,611
through April 2003. The loan is secured by
the related laser. 27,000 13,000
Loan payable to bank, bearing interest at
10% per annum; principal and interest
due monthly in equal installments of $1,537
through April 2003. The loan is secured by
the related laser. 26,000 10,000
Loan payable to bank, bearing interest at
10% per annum; principal and interest
due monthly in equal installments of $1,098
through April 2003. The loan is secured by
the related automobiles 18,000 9,000
--------------- ---------------
99,000 46,000
Less: current portion (73,000) (46,000)
--------------- ---------------
Long-term debt $ 26,000 $ -
=============== ===============
F-18
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the nine months ended June 30, 2002, the Company sold two 12% Senior
Convertible Secured Notes (the "Convertible Notes") to its chief executive
totaling $200,000. The Convertible Notes
sold in the amount of $150,000 and $50,000 bear interest at 12%, per annum,
payable annually on December 31 through December 31, 2006, with a maturity date
of February 27 and April 15, 2007, respectively, and are convertible into common
stock, based on $0.40 per share and $0.50 per share (the "Conversion Price"),
respectively. The Convertible Notes are secured by substantially all the
Company's assets. The Convertible Notes are subject to reduction if the Company
issues or sells any shares of its common stock for a consideration per share
less than the Conversion Price at which the Conversion Price will be reduced to
the price at which the shares of common stock were sold. However, no later sale
of common stock at a price higher than the Conversion Price shall cause the
Conversion Price to be increased.
At September 30, 2001, maturities of all long-term debt was as follows:
Year ending
September 30,
------------
2002 $ 73,000
2003 26,000
---------------
$ 99,000
===============
NOTE 7. INCOME TAXES:
The deferred income tax balances at September 30, 2001 are comprised as follows:
September 30, 2001
------------------
Deferred income tax assets:
Net operating loss carry forwards $ 15,600,000
Research and development credits 3,680,000
Inventory obsolescence reserves 355,000
Accrued expenses 133,000
Account receivable reserves 186,000
Other 356,000
Valuation allowance (20,310,000)
--------------
-
==============
F-19
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The valuation allowance for deferred tax assets increased approximately
$3,065,000 and approximately $1,997,000 during the years ended September 30,
2001 and 2000, respectively. The increases primarily relate to additional
valuation allowance for net operating loss carryforwards and research tax
credits generated. Due to the existence of net operating loss carryforwards,
such assets of which were fully reserved, the Company recorded no provision for
income taxes during the periods presented.
In fiscal 2000 and 2001, the difference between the tax benefit derived by using
the 34% Federal tax rate and the zero benefit recorded by the Company is due to
the Company providing a 100% valuation allowance against any deferred tax
assets.
At September 30, 2001, the Company had net operating loss ("NOL") carry forwards
for Federal and California income tax purposes totaling approximately$42.5
million and $12.8 million, respectively. Federal NOL's begin to expire in 2005
and fully expire in 2020. California NOL's have begun to expire and fully expire
in 2011. The Tax Reform Act of 1986 includes provisions which may limit the new
operating loss carry forwards available for use in any given year if certain
events occur, including significant changes in stock ownership.
NOTE 8. COMMITMENTS AND CONTINGENCIES:
Lease Commitments
The Company elected an early termination of the then existing facility lease
effective January 2001. In February 2001, the Company entered into a
non-cancelable facility lease, which expires in December 2005, with an option to
renew the lease at market rates. The Company subleases approximately 8,800
square feet of this facility to a third party at a monthly rental of $14,553.
The sublease expires in April 2004 and reverts to a month-to-month basis.
The Company leased 14,000 square feet of office and manufacturing building in
Irvine, California, under a sixty month lease which expired in January 2002 at a
monthly rental of approximately $14,068, which was primarily used by Cardiodyne,
until their operations were ceased. The Company subleased 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 from February
1997 to January 2002.
Rent expense for the years ended September 30, 2000 and 2001 was approximately
$376,000 and $452,000, respectively. Sublease income during the years ended
September 30, 2000 and 2001, was $144,000 and $209,000, respectively. Rent
expense for the nine months ended June 30, 2001 and June 30, 2002 was
approximately $419,000 and approximately $510,000 respectively (unaudited).
Sub-lease income during the nine months ended June 30, 2001 and June 30, 2002
totaled approximately $106,000 and $86,000 respectivley (unaudited).
F-20
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In September 2002, the Company entered into a lease for office equipment for 60
months at $16,260 per year.
The Company is obligated under lease agreements to make minimum rental payments,
net of sublease income, excluding taxes and common area maintenance costs, for
the years ending September 30 as follows:
2002 $434,000
2003 506,000
2004 544,000
2005 544,000
2006 148,000
------------
Total $ 2,176,000
============
Contingencies
Litigation
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 any of the Company's existing and future
litigation may adversely affect the Company. Management is unaware of any
matters, which are not reflected, in the consolidated financial statements that
may have material impact on the Company's financial position, results of
operations or cash flows.
In September 1999, the co-inventor of the Company's Urolase(R) product filed
suit against the Company and C.R. Bard, Inc., seeking damages and a share of the
proceeds of the 1998 settlement of the Company's lawsuit against Bard. The
lawsuit was settled in mid 2001; all claims against the Company were dismissed
and the co-inventor reimbursed the Company for a portion of its legal costs and
expenses.
Licensing
The Company licenses certain applications related to its medical laser and laser
delivery systems under two license agreements from a competitor. The Company
elected to not pay the royalty due for the quarter ended September 30, 2000,
under one of the licenses, as sales of products pursuant to this license prior
to the date of termination were not material and did not warrant the payment of
the minimum quarterly royalty. This license agreement automatically terminated
on September 30, 2000, and the Company ceased marketing the affected products.
Subsequent to September 30, 2001, the Company paid the royalties due under the
other license.
F-21
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. STOCKHOLDERS' EQUITY:
Stock Options:
The Company has adopted stock option plans that authorize the granting of
options to key employees, directors, and/or consultants to purchase unissued
common stock subject to certain conditions, such as continued employment.
Options are generally granted at the fair market value of the Company's common
stock at the date of grant, become exercisable over a period of five years from
the date of grant, and expire in ten years. Forfeitures of stock options are
returned to the Company and become available for grant under the respective
plan. No options were granted to consultants during fiscal 2001. During fiscal
2000, options to purchase 60,000 shares of common stock were issued to
consultants of the Company for services rendered. No compensation expense was
recorded for the fair value of these options in fiscal 2000. Management has
determined that the $81,000 in expense was not significant for restatement of
fiscal 2000 consolidated financial statements.
On April 17, 2002, the board of directors authorized the grant of incentive
stock options to purchase 286,000 shares at an exercise price of $0.50 per share
to employees.
On April 17, 2002, the board of directors authorized the grant of non-qualified
stock options to purchase 365,000 shares at various exercise prices ranging from
$0.50 per share to $2.50 per share. Options to purchase 350,000 shares of common
stock are fully vested. The Company used the Black-Scholes valuation model to
value the options. Average assumptions used are: i. a volatility of 60%, ii. a
risk-free interest rate of 4.75%, iii. no dividend yield, and iv. an expected
life of 3 years. The total value ascribed to options issued to consultants
amounted to $53,000 and charged to operations during the three and nine months
ended June 30, 2002. These options generally expire in 5 years from the date of
grant. Options to purchase 340,000 shares are exercisable as of June 30, 2002.
On August 24, 2001, the Company modified all option contracts issued to
employees and certain non-employee board members. The modification consisted of
a reduction in the exercise prices ranging from $1.06 to $3.84 per share to
$0.28 per share, the closing market price on that date. This modification causes
the option contracts to be variable in nature, which requires management to
re-measure the value of the options on the date of modification and subsequent
periodic reporting dates. The effect in fiscal 2001 amounted to $25,013, and
such amount was charged to operations as compensation expense.
On February 23, 2001, the Board of Directors authorized a modification to
increase the life of option awards outstanding upon the separation from
employment for two employees. Additionally, upon the resignation of a
non-employee director, the Board authorized an increase in the life of all
options outstanding. The extension, which was not beyond the original maximum
contractual life, was for two years from the date of separation for the
employees and one year for the director. Accordingly, the Company charged
$60,625 in compensation expense for the intrinsic value at the date of
separation in excess of the intrinsic value at the date of the original grant.
F-22
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On October 6, 2000, the Board of Directors authorized the extension of the life
of stock options granted to certain members of the Board. The result is a new
measurement of compensation cost as if the awards were newly granted. The awards
were fully vested at the time of the modification. The Company recorded
compensation expense in fiscal 2001 pursuant to the modification totaling
$76,290.
Activity during the years ended September 30, 2000 and 2001 under the plans was
as follows:
Stock Options Outstanding
Option Exercise Aggregate
Options Price Per Share Exercise Price
------- --------------- --------------
September 30, 1999 1,553,834 $1.06 - 6.63 $ 3,010,916
Granted 849,000 2.13 - 3.84 $ 2,331,269
Exercised (187,494) 1.06 - 3.50 (291,000)
Canceled (36,320) 1.06 - 3.50 (68,002)
---------- ------------
September 30, 2000 2,179,020 1.06 - 6.63 $ 4,497,229
Granted 798,300 1.25 - 2.75 1,029,730
Exercised (713,359) 1.06 - 3.84 (1,120,657)
Canceled (338,580) 1.06 - 6.63 (764,458)
---------- ------------
September 30, 2001 1,925,381 1.06 - 6.63 $ 3,641,844
Granted 358,000 0.46 - 0.65 179,850
Exercised -- -- --
Canceled (486,827) 0.46 - 0.65 (833,963)
---------- ------------
June 30, 2002 (unaudited) 1,796,554 $1.06 - 6.63 $ 2,987,731
========== ============
The following table summarizes information concerning outstanding and
exercisable options at June 30, 2002, after taking into consideration of the
modification of option contract terms:
F-23
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
Outstanding Weighted-Average Exercisable Weighted-
Range of as of Remaining Weighted-Average as of Average
Exercise Prices June 30, 2002 Contractual Life Exercise Price June 30, 2002 Exercise Price
--------------- ------------- ---------------- -------------- ------------- --------------
$0.00 - $0.83 358,000 9.8 $0.50 -- $0.00
$0.83 - $1.65 883,794 6.3 $1.31 423,694 $1.37
$1.65 - $2.48 136,000 7.0 $2.04 21,336 $2.02
$2.48 - $3.30 324,760 5.4 $2.83 164,194 $2.94
$3.30 - $4.13 54,000 6.9 $3.79 18,000 $3.68
$4.13 - $4.95 5,000 0.3 $4.25 5,000 $4.25
$4.96 - $6.60 10,000 0.5 $6.44 10,000 $6.44
$6.61 - $7.43 25,000 0.6 $6.63 25,000 $6.63
---------- --- ----- -------- -----
1,796,554 6.7 $1.66 667,224 $2.14
========== === ===== ======== =====
F-24
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
As discussed in Note 2, the Company is required to disclose the effects on
operations and per share data as if the Company had elected to use the fair
value approach to account for all of its employee stock-based compensation
plans. Had the compensation cost for the Company's plans been determined using
the fair value method, the compensation expense would have had the effects of
increasing the Company's net loss for the year ended September 30, 2000 to the
pro-forma amount of $7,160,000 and increasing the Company's net loss for the
year ended September 30, 2001 to the pro forma amount of $7,675,000, with a pro
forma net loss per share of $(0.62) and $(0.61), respectively. These pro forma
amounts were determined based upon the fair value of each option granted during
fiscal 2000 and 2001 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
167% and 101%, respectively, were applied to all options granted. The weighted
average fair value at the grant date for the options granted during fiscal years
2000 and 2001 was $2.75 and $1.20 per option, respectively.
Private placement of common stock
On April 11, 2000, the Company completed a private placement of common stock. In
the transaction, the Company received approximately $2.1 million, net of
issuance costs, in exchange for 660,819 shares of common stock. In addition, the
Company issued warrants to purchase 329,000 shares of the Company's common stock
at $4.88 per share. The warrants expire in March 2005. In connection with the
private placement, the Company is required to issue "make-up" shares of common
stock to the extent the Company enters into a transaction whereby the value of
the common stock is less than the amount paid by the investors. The acquisition
of MST triggered the make-up share provision since 500,000 shares were issued,
based on the $2.00 per share market price on the date of the Letter of Intent to
acquire MST. On the date the registration of such shares became effective and
the shares were issued, the market price of the shares was approximately $1.55
per share. During the year ended September 30, 2001, the Company issued 425,832
shares in connection with the make-up provision, which were valued at the market
price on the date of issuance at $660,040, and included in other expense in the
accompanying statement of operations.
During fiscal 2001, the Company issued 20,200 shares of common stock to former
employees and consultants for services rendered. The stock was issued at prices
ranging from $1.34 to $2.06 for a total of $33,000 in compensation expense.
F-25
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. EMPLOYEE BENEFIT PLAN:
Effective February 1, 1989, the Company adopted a 401(k) Retirement Savings Plan
(the "Retirement Plan"). Under the terms of the Retirement Plan, employees may,
subject to certain limitations, contribute up to 15% of their total
compensation. The Company contributes an additional $0.50 for each dollar of
employee contributions up to 4% of eligible employee compensation. Employees
become vested in the Company's contribution at 20% per year over five years. The
Company's annual contributions to the Retirement Plan totaled $67,000 for fiscal
2000 and $65,000 for fiscal 2001. The Company's annual contributions to the
Retirement Plan totaled approximately $54,000 and $33,000, during the nine
months ended June 30, 2001 and 2002, respectively.
NOTE 11. RELATED PARTY TRANSACTIONS:
The Company has made payments of $37,000 and $30,000 in the fiscal years ending
2000 and 2001, respectively, to the law firm of which a director of the Company
is a member. The Company had a consulting agreement for annual payments of
$33,000 with a director who is related to the Company's Chairman and Chief
Executive Officer. This agreement terminated in February 2001.
Until January 2002, the Company subleased space to a company controlled by the
Company's Chairman and Chief Executive Officer. The Company allocated expenses
to that company based on actual costs incurred. Such charges aggregated $54,000
and $57,000 for the fiscal years 2000 and 2001, respectively. During fiscal
2001, the Company received collections totaling $331,500 from this related
party. As of January 2002 the sublease agreement was terminated and no expenses
were allocated nor collections received as of June 30, 2002.
NOTE 12. SEGMENT INFORMATION:
The Company's revenue base is derived from the sales of medical products and
services. Products consist of lasers, and related products such as disposable
systems and component parts. Services consist of rentals, fee on a per-case
basis, as well as service and warranty repairs and maintenance. Data with
respect to these operating activities are as follows:
F-26
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended September 30, 2000 For the year ended September 30, 2001
Service and Service and
Product Rental Total Product Rental Total
------------------------------------------ ----------------------------------------
Revenue $5,185,000 $910,000 $6,095,000 $5,857,000 $1,607,000 $7,464,000
Cost of sales 2,761,000 697,000 3,458,000 5,187,000 1,028,000 6,215,000
------------------------------------------ ----------------------------------------
Gross profit 2,424,000 213,000 2,637,000 670,000 579,000 1,249,000
Expenses:
Selling, general and
administrative 3,518,000 618,000 4,136,000 3,871,000 968,000 4,839,000
Research and development 3,486,000 3,486,000 2,330,000 2,330,000
------------------------------------------ ----------------------------------------
Loss from operations $(4,580,000) $(405,000) (4,985,000) $5,531,000 $(389,000) (5,920,000)
============ ========== ========== ==========
Other 191,000 (1,564,000)
------------ ------------
Net loss $(4,794,000) $(7,484,000)
============ ============
F-27
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period ended June 30, 2001 For the period ended June 30, 2002
Service and Service and
Product Rental Total Product Rental Total
------------------------------------------ ----------------------------------------
Revenue $4,153,000 $1,310,000 $5,445,000 $4,353,000 $1,055,000 $5,408,000
Cost of sales 3,391,000 879,000 4,270,000 2,325,000 646,000 2,971,000
------------------------------------------ ----------------------------------------
Gross profit 744,000 431,000 1,175,000 2,028,000 409,000 2,437,000
Expenses:
Selling, general and
administrative 3,294,000 824,000 4,118,000 1,983,000 496,000 2,479,000
Research and development 1,825,000 1,825,000 1,136,000 1,136,000
------------------------------------------ ----------------------------------------
Loss from operations $(4,375,000) $ 393,000 (4,768,000) $(1,091,000) $ (87,000) (1,178,000)
============ ========== ============ ==========
Other (1,594,000) 128,000
------------ ------------
Net loss $(6,362,000) $(1,050,000)
============ ============
F-28
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sales to customers by similar products and services for the years ended
September 30, 2000 and 2001, and nine months ended June 30, 2001 and 2002
(unaudited) were:
September 30, June 30,
--------------------- ---------------------
2000 2001 2001 2002
---- ---- ---- ----
By similar products and services:
Laser equipment and accessories $2,049 $2,477 $1,904 $1,656
Delivery and disposable devices 3,136 3,380 2,449 2,479
Service and rental 910 1,607 1,055 1,310
------- ------- ------- -------
Total $6,095 $7,464 $5,408 $5,545
======= ======= ======= =======
The Company's revenue base is derived from the sales of medical products and
services on a worldwide basis originating from the United States. Export sales
during the years ended September 30, 2000 and 2001 were $1,001,000 and
$1,265,000, respectively. Export sales during the nine months ended June 30,
2001 and 2002 were $721,000 and $915,000, respectively. Although discrete
components that earn revenues and incur expenses exist, significant expenses
such as research and development and corporate administration are not incurred
by nor allocated to these operating units but rather are employed by the entire
enterprise. Additionally, the chief operating decision maker evaluates resource
allocation not on a product or geographic basis, but rather on an
enterprise-wide basis. Therefore, the Company has concluded that it contains
only one reportable segment, which is the medical systems business.
F-29
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sales in foreign countries in fiscal 2000 and 2001 accounted for approximately
16% and 17% of the company's total sales, respectively. Sales in foreign
countries in for the nine months ended June 30, 2001 and 2002 accounted for
approximately 13% and 19% of the company's total sales, respectively. The
breakdown by geographic region is as follows:
September 30, June 30,
--------------------------- ---------------------------
2000 2001 2001 2002
----------- ----------- ----------- -----------
Asia $ 12,000 $ 369,000 $ 199,000 $ 519,000
Europe 815,000 672,000 434,000 176,000
Latin America 9,000 59,000 33,000 194,000
Middle East 71,000 165,000 55,000 26,000
Other 94,000 - - -
----------- ----------- ----------- -----------
$1,001,000 $1,265,000 $ 721,000 $ 915,000
=========== =========== =========== ===========
All long-lived assets were located in the United States at September 30, 2000
and 2001 and the nine months ended June 30, 2002.
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 expectation.
F-30
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
-----------------------------------------
Section 78.751 of the Nevada Revised Statutes, as amended, authorizes
us to indemnify any of our directors or officers under certain prescribed
circumstances and, subject to certain limitations, against certain costs and
expenses, including attorneys' fees actually and reasonably incurred in
connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which the director is a party by reason of
being one of our directors or officers, if it is determined that the director
acted in accordance with the applicable standard of conduct set forth in those
statutory provisions. Article 12 of our Certificate of Incorporation contains
provisions relating to the indemnification of our directors and officers to the
fullest extent permitted by Nevada law.
We may also purchase and maintain insurance for the benefit of any
director or officer that may cover claims for which we could not indemnify such
person.
Item 25. Other Expenses of Issuance and Distribution
-------------------------------------------
The following statement sets forth the estimated expenses in connection
with the offering described in the Registration Statement.
Securities and Exchange Commission Fee....................... $ 137.00
Accountants' Fees and Expenses............................... 15,000
Legal Fees and Expenses...................................... 20,000
Blue Sky Fees and Expenses...................................
Printing and Mailing Costs................................... 2,000
Miscellaneous................................................ 1,000
--------
TOTAL $83,137
========
Item 26. Recent Sales of Unregistered Securities
---------------------------------------
(a) $200,000 of 12% Senior, Secured Convertible Notes were sold to our
Chairman and CEO in private transactions in February and April 2002.
(b) We have agreed to issue 225,400 Shares to our Chairman and CEO in lieu
of cash compensation from May 7, 2001 through June 30, 2002.
(c) In 2001, we issued 425,832 Shares to the investors in a private
placement in 2000 pursuant to an anti-dilution provision, which was
triggered by our acquisition of MST.
(d) In May 2002, we agreed to issue 200,000 Shares to certain of our
officers and employees and a consultant in lieu of other compensation.
Item 27. Exhibits
--------
The following exhibits are filed with this Registration Statement:
5 Opinion of Counsel
23(a) Consent of Independent Auditors
II-1
Item 28. Undertakings
------------
The undersigned Registrant hereby undertakes;
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement to include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(4) The undersigned registrant hereby undertakes that, for the
purpose of determining any liability under the Securities Act
of 1933, each filing of the registrant's annual report
pursuant to section 13(a) or section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section
15(d) of the Securities Act of 1934) that is incorporated by
reference in the registration statement shall be deemed to be
a new registration statement relating to the securities being
offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering
thereof.
(5) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore unenforceable. In the
event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer, or
controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it
is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing a Registration Statement on Form SB-2 and has
duly caused this Registration Statement or Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Irvine, State of California, on the 2 day of
October, 2002.
TRIMEDYNE, INC.
By: /s/ Marvin P. Loeb
--------------------------------
Marvin P. Loeb
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or Amendment to the Registration Statement has been
signed below by the following persons in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ Marvin P. Loeb Chairman, Chief Executive October 2, 2002
---------------------- Officer and Director
Marvin P. Loeb
/s/ Jeffrey S. Rudner Controller October 2, 2002
----------------------
Jeffrey S. Rudner
/s/ Donald Baker Director October 2, 2002
----------------------
Donald Baker
/s/ Richard F. Horowitz Secretary and Director October 2, 2002
----------------------
Richard F. Horowitz
II-3