SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2008
COMMISSION FILE NO. 0-10581
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TRIMEDYNE, INC.
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(Exact Name of Registrant as Specified in its Charter)
NEVADA 36-3094439
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION) IDENTIFICATION NO.)
25901 COMMERCENTRE DRIVE 92630
LAKE FOREST, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's Telephone Number, Including Area Code:
(949) 951-3800
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value per Share
(Title of Class)
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Indicate by check mark if the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [_] No [X]
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. Yes [_] No [X]
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |_| Smaller reporting company |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act of 1934). Yes [X] No [_]
Issuer's revenues for the most recent fiscal year were: $5,871,000.
The aggregate market value of voting stock held by non-affiliates of registrant
on January 12, 2009 based upon the closing price of the common stock on such
date was approximately $1,169,955
As of January 12, 2009, there were outstanding 18,365,960 shares of registrant's
Common Stock.
TABLE OF CONTENTS
PART I
ITEM 1. DESCRIPTION OF BUSINESS................................................ 3
Forward Looking Statements......................................... 3
General............................................................ 3
The Urology Market................................................. 3
The Orthopedic Market.............................................. 5
Other Markets...................................................... 6
Laser Rental Services ............................................. 6
Litigation ........................................................ 6
License Agreements ................................................ 7
Research and Development .......................................... 7
Manufacturing, Supply Agreements .................................. 7
Marketing ......................................................... 7
Government Regulation ............................................. 8
Investigational Device Exemptions.................................. 8
510(k) Premarket Notification ..................................... 8
Premarket Approval ................................................ 8
Inspection of Plants .............................................. 9
State Regulation .................................................. 9
Insurance Reimbursement ........................................... 9
Cost of Compliance with FDA and Other Applicable Regulations ...... 9
Employees ......................................................... 10
Patents and Patent Applications ................................... 10
Competition ....................................................... 10
Insurance ......................................................... 10
Foreign Operations ................................................ 10
ITEM 2. DESCRIPTION OF PROPERTIES ............................................. 11
ITEM 3. LEGAL PROCEEDINGS...................................................... 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ................... 11
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS .............. 12
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.............. 13
ITEM 7. FINANCIAL STATEMENTS................................................... 16
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES.............................................. 16
ITEM 8A. CONTROLS AND PROCEDURES................................................ 17
ITEM 8B. OTHER INFORMATION...................................................... 17
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................... 18
ITEM 10. EXECUTIVE COMPENSATION ................................................ 19
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......... 21
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................... 21
ITEM 13. EXHIBITS............................................................... 22
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES................................. 22
2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
FORWARD LOOKING STATEMENTS
In addition to historical information, this Annual Report contains
forward-looking statements. These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in these forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in the section entitled "Management's Discussion and Analysis or Plan
of Operation". Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's opinions only as of the
date hereof. The Company undertakes no obligation to revise or publicly release
the results of any revision to these forward-looking statements. Readers should
carefully review the risk factors described in other documents the Company files
from time to time with the Securities and Exchange Commission, including the
Quarterly Reports on Form 10-QSB filed by the Company in fiscal year 2008.
GENERAL
Trimedyne, Inc. (the "Company", "we", "our" or "us") is engaged in the
development, manufacturing and marketing of 80 and 30 watt Holmium "cold" pulsed
lasers ("Lasers") and a variety of disposable and reusable, fiber optic laser
energy delivery devices ("Fibers", "Needles" and "Tips") for use in a broad
array of medical applications.
Our Lasers, Fibers, Needles and Tips have been cleared for sale by the U.S. Food
and Drug Administration ("FDA") for use in orthopedics, urology, ear, nose and
throat ("ENT") surgery, gynecology, gastrointestinal surgery, general surgery
and other medical specialties. Most of the medical procedures in which our
Lasers, Fibers, Needles and Tips are used are being reimbursed by Medicare and
most insurance companies and health plans.
Our 100% owned subsidiary, Mobile Surgical Technologies, Inc. ("MST"), is
engaged in the rental of lasers, along with the services of a trained operator
and, if requested, the provision of applicable Fibers, Needles or Tips, on a
"fee per case" basis to hospitals, surgery centers, group practices and
individual physicians in Texas. MST's revenues and those of our field service
department represented about 35% of our revenues in the fiscal year ended
September 30, 2008.
The principal market for our Lasers and Side Firing Needles is presently in
orthopedics to treat herniated (bulging) and ruptured lumbar, thoracic and
cervical discs in the spine, two of the four major causes of lower back, neck
and leg pain. Our Lasers and Tips are also used in orthopedics to treat damage
in joints, such as the knee, shoulder, elbow, hip, ankle and wrist, in
outpatient, arthroscopic procedures.
THE UROLOGY MARKET
While our Lasers and Fibers are presently used in urology to fragment stones in
the kidney, ureter and bladder, we have developed two, new, proprietary, Side
Firing Laser Fibers for use with our Holmium Lasers and others to vaporize a
portion of the prostate to treat benign prostatic hyperplasia or "BPH", commonly
called an enlarged prostate.
One of these new Fibers is for use with our 80 watt Holmium Lasers and the other
is designed for use with 80 and 100 watt Holmium Lasers manufactured by Lumenis,
Ltd. of Yokneam, Isreal ("Lumenis"). Lumenis is one of the world's largest
manufacturers of medical lasers, has revenues exceeding 250 million per year and
has a large worldwide sales force.
The Side Firing Fibers we will be manufacturing for Lumenis will be marketed in
the U.S. and Japan under Lumenis' DuraMAX trademark by Boston Scientific
Corporation (NYSE:BSX) and by Lumenis' sales organization elsewhere throughout
the world, when BSX has completed its quality review and testing of the new
Fiber.
We will market the other Side Firing Fiber under our VaporMAX registered
trademark through a limited number of commission sales representatives in the
United States and by distributors in certain foreign countries.
Both of these Side Firing Fibers are designed to be used with our and Lumenis'
Holmium Lasers to vaporize a portion of the prostate gland to treat BPH. This
condition, in which excessive growth of the prostate causes difficulty in
urination, affects about 50% of men over age 55, and a higher percentage of men
at advanced ages. While drugs are used to treat BPH, when they are no longer
able to adequately treat this condition, removal of a portion of the prostate is
needed to open a channel to permit proper urine flow.
3
About 200,000 men in the United States and an estimated one million men in
foreign countries are treated with a procedure each year to remove a portion of
the prostate to open a channel for urine flow. While radio frequency ("RF")
energy is also used to do this, laser vaporization or resection of the prostate
is becoming increasingly popular, as the laser procedure typically reduces
procedural bleeding and can be performed on an outpatient basis, whereas the RF
procedure usually entails a hospital stay, potentially significant bleeding, a
variety of adverse effects and a recuperation period of days to weeks.
As a result, when Boston Scientific and Lumenis begin marketing the new Fiber
for use with Lumenis' Holmium Lasers, we believe the treatment of BPH will
become the largest segment of our business.
The development of our new Side Firing Fiber for use with our 80 watt Holmium
Lasers and Lumenis' 80 and 100 watt Holmium Lasers has been delayed due to
obstacles imposed by the high peak powers and other characteristics of Holmium
Lasers, which make them excellent at vaporizing tissue, but also make them very
hard on the glass components of the Fibers. The new Side Firing Fibers we are
developing have been shown in our bench testing on animal tissue to vaporize
tissue faster and to be significantly more durable than the side firing fibers
presently being manufactured by Lumenis and marketed by Boston Scientific and
Lumenis.
Our new Side Firing Fibers have been cleared for sale by the FDA.
In mid December 2008, we delivered a number of DuraMax Side Firing Fibers to
Lumenis for bench testing on animal tissue, and we plan to deliver a number of
these devices to an independent laboratory for bench testing on animal tissue in
early 2009 and expect to receive the results of this testing in February 2009.
If the results of this testing confirms our results, we anticipate Boston
Scientific may commence its quality audit of Trimedyne in the first calendar
quarter of February or March of 2009, which could take four or more months to
complete.
The problems we faced in developing our new Side Firing Fibers are detailed in
the following description of the lasers and impact of their laser energy on the
Fibers.
Holmium Lasers emit very short pulses of laser energy. At 80 watts, our Holmium
Lasers emit pulses of energy with a duration or pulse width of about 700
microseconds, with a peak pulse power level of up to 9,000 watts. The laser
energy is transmitted from the laser through optical fibers to a tip designed to
emit the energy to the side at an angle of about 80 to 90 degrees.
Holmium Laser energy is highly absorbed by water. When tissue is struck by the
laser beam, water in the cells is almost instantly turned to steam, vaporizing
the tissue. As a result, Holmium Lasers vaporize tissue more efficiently than
most other lasers whose energy can be transmitted through conventional optical
fibers, such as KTP Lasers, whose energy is highly absorbed by hemoglobin in
blood, and Diode lasers, whose energy is moderately absorbed in both hemoglobin
and water.
KTP and Diode lasers, at very high power, can vaporize tissue, but can also
cause significant charring and thermal damage to the remaining tissue. Charred
tissue is removed from the body by macrophages and other mechanisms. Macrophages
emit harsh chemicals to dissolve char and other foreign matter, which causes the
patient to experience irritation at the vaporization site in the prostate for a
week or two.
Holmium lasers are able to vaporize tissue better than the above mentioned
lasers, with little or no charring or damage to the remaining tissue. However,
the very high power energy pulses of Holmium Lasers cause a steam bubble to
almost instantly be formed in a sort of explosion. These explosions of steam
typically occur at a rate of about 25 times per second with our Holmium Lasers
and at a rate of about 50 times per second with Lumenis' Holmium Lasers.
Also, when the steam bubble collapses between pulses, it causes an acoustic
shock, which can damage the glass components in the tip of the Fibers. And, the
water and steam heated by the laser energy can act as a catalyst for erosion of
the glass surface at the tip of the optical fiber, which can cause damage to the
Fiber's tip. Further, when the laser energy strikes the tissue, some of the
laser energy is reflected back into the tip of the optical fiber, which can
cause thermal damage that can affect the integrity of the Fiber's tip.
The combination of the above described steam explosions and the shock waves from
the collapse of the steam bubbles can fracture the glass enclosure of the
Fiber's tip and, with the degradation of the fiber tip by laser energy reflected
from the target tissue, reduce the Side Firing Fiber's useful lifetime.
As a result of the above described problems, it took us much longer than
anticipated to develop a durable, fast vaporizing, Side Firing Fiber for use
with our 80 watt Holmium Lasers. We expect, barring any unforeseen problems in
manufacturing, to begin marketing our VaporMAX(R) Side Firing Fiber for use with
our Holmium Lasers by late March 2009.
4
We encountered a more difficult problem in developing the Side Firing Fiber for
use with Lumenis' 100 watt Holmium Lasers. At 100 watts of power, Lumenis'
Holmium Laser produces 25% more laser energy than our 80 watt Holmium Laser, and
its pulse width or duration is about 250 microseconds at this power level, with
a peak pulse power of up to 11,000 watts.
In addition to the optical fiber's tip having to emit 25% more energy per pulse,
since the pulse width is about one-half that of our 80 watt Holmium Laser, 25%
more power must be transmitted through the tip of the optical fiber at about
twice the number of pulses per second as with our 80 watt Holmium Laser. The
steam explosions at the surface of the tip of the Fiber are more powerful, the
acoustic shocks caused by the collapse of the steam bubble are more intense and
the amount of laser energy reflected from the tissue, which can damage the tip
of the Fiber, is more powerful.
As a result, developing a fast vaporizing, durable, Side Firing Fiber for use
with Lumenis' Holmium Lasers proved to be a formidable challenge. A very
significant portion of our management and R & D efforts over the past year were
devoted to the development of the new Side Firing Laser Fiber for use with
Lumenis' Holmium Lasers and our Holmium Lasers.
Before Boston Scientific and Lumenis will commence marketing our new Side Firing
Fiber, Boston Scientific must conduct a quality review of the new Fiber and our
manufacturing and quality systems, as well as conducting limited physician
feedback testing in humans to assure that it functions within customer
expectations. No clinical studies of the new Fiber are expected to be required,
as we have already received FDA clearance to market the new Fiber.
While we plan to commence marketing our new VaporMAX(R) Side Firing Fiber to the
owners of our Holmium Lasers by late March 2009, the quality review and testing
of our DuraMax Side Firing Fiber for use with Lumenis' 80 and 100 watt Holmium
Lasers by Boston Scientific and Lumenis is expected to take four months or
longer from the time we provide supplies of the new fiber to Boston Scientific
and Lumenis, which is presently anticipated to commence, barring unforeseen
delays, in late March 2009. As a result, we expect to commence shipments of the
new Fibers to Boston Scientific and Lumenis early in the third calendar quarter
of 2009, assuming Boston Scientific begins its quality audit in February or
March of 2009 and physician feedback testing of the new fiber in April 2009.
We settled our patent litigation against Lumenis, Ltd., and in September 2005
entered into an OEM Agreement, under which Lumenis agreed to purchase 100% of
its side firing (75 to 90 degree emitting) laser fibers and 75% of its angled
firing (60 to 75 degree emitting) laser fibers from us. Lumenis presently
markets its laser fibers through Boston Scientific in the U.S. and Japan and
markets them elsewhere throughout the world through its own sales organization.
Our Side Firing Laser Fiber will replace Lumenis' side firing laser fibers in
these markets when Boston Scientific completes its quality audit and testing of
the new Fiber and validates us as a supplier (vendor).
Side firing laser fibers to treat an enlarged prostate typically sell for about
$750 or more and, due to their exposure to blood, are labeled "single use" and
should be discarded after one use, although some illicit re-use of these fibers
occurs in the United States and Europe and is common throughout the rest of the
world, where government reimbursement, insurance plans and self-pay patients
cannot afford such expensive devices.
Our Lasers and plain, straight-ahead firing Fibers are used in urology to
fragment stones in the kidney, ureter or bladder in "lithotripsy" procedures.
However, our plain, straight-ahead firing Fibers are reusable and are used an
average of about 20-30 times. As a result, revenues from the sale of $500 plain
Fibers to fragment stones do not result in as significant sales as those
expected from single use, disposable Side Firing Fibers to treat enlarged
prostates.
THE ORTHOPEDIC MARKET
Our Side Firing Laser Needles are used with our Lasers to treat herniated or
ruptured lumbar, thoracic or cervical discs in the spine in minimally invasive
procedures, most of which are performed on an outpatient basis in about 30-40
minute procedures, typically with only local anesthesia. The lower back, leg and
neck pain usually disappears on the operating table, and the patient usually
walks out with only a Band Aid(R) on the puncture (stitches are usually not
required). Most patients can return to light activities in a few days. Clinical
Studies on our disc procedures, published in medical journals, show success
rates (good or excellent results, based on pain scores) of 85% to 94%.
Approximately 400,000 conventional surgical laminectomy or discectomy procedures
are performed each year in the United States to treat herniated or ruptured
discs. These surgeries typically require general anesthesia and entail a two to
three day or longer hospital stay, some bleeding, post-operative pain and a
recovery period of a month or longer. Conventional surgery to treat herniated or
ruptured discs in the spine, published in medical journals, show the success
rates of disc surgery to be only 40% to 77%.
5
While our laser procedures to treat herniated or ruptured spinal discs compare
very favorably to the conventional surgical procedures to treat these conditions
and are less costly to third party payors, before surgeons can perform our laser
procedures, they must attend a one or more training courses in which they
practice the procedure on cadavers. In addition to difficulty in convincing busy
surgeons to take two to three days away from their practice to attend a training
course, we incur substantial costs in conducting the training courses. In
addition, surgeons are generally paid more by Medicare and insurance companies
for performing 2-3 hour conventional disc surgery than for our 30-40 minute,
outpatient laser procedures, reducing their desire to take time away from their
practice to attend a training course.
Since we can afford to conduct (or participate with makers of endoscopes used in
these procedures) in only a few training courses each year in the U.S. and only
occasionally in Europe, Latin America and Asia, our spinal disc market is
expected to grow only if we are able to conduct or participate in a larger
number of training courses.
OTHER MARKETS
Our Lasers, Fibers, Needles and Tips are also used in a variety of other
procedures in gynecology, ear, nose and throat surgery, gastrointestinal surgery
and general surgery.
In August 2008, we entered into a non-binding Letter of Interest with FemSuite
LLC of San Francisco, California to explore the use in the field of gynecology
of fiber-optic devices, including side firing laser fibers, covered by seven of
our issued U.S. Patents and two pending U.S. Patent Applications. There is no
assurance this arrangement will result in a License Agreement or an OEM Supply
Agreement with FemSuite.
Developing new medical devices for untested applications entails considerable
risk. While we have more than ten years of experience in designing, developing,
manufacturing and marketing lasers, conventional optical fibers and side firing
laser devices, we cannot assure that any new devices we attempt to develop for
FemSuite or other new Side Firing Fibers for use with our Holmium lasers and
Holmium lasers can be completed at a reasonable cost or in a timely manner, will
be clinically successful, can compete successfully in the marketplace or be
profitable to us.
THE LASER RENTAL MARKET
Many hospitals, surgery centers and physicians are reluctant to purchase "big
ticket" medical equipment, such as our Lasers, which sell for $55,000 to
$127,000, particularly for new medical procedures. Hospitals also traditionally
suffer from a lack of funds to buy expensive medical equipment, and they prefer
to avoid having to train their staff to operate new, complex equipment. As a
result, laser rental companies have been formed in the United States and
elsewhere to fill this void. These companies provide lasers, endoscopes and
other types of medical equipment, along with a trained operator, to hospitals,
surgery centers and physicians on a "fee per case" basis.
Mobile Surgical Technologies, Inc. ("MST") was organized in 1997 to rent lasers
with a trained operator to hospitals, surgery centers and physicians in Texas on
a "fee per case" basis. We acquired MST in late 2000 and expanded its "fee per
case" rental Business. MST is particularly well suited to our introduction and
testing of new laser products. If requested, MST also supplies, Side Firing or
plain Fibers or Tips and includes their price in the "per case" fee.
We also plan to rent lasers, without an operator, to hospitals and surgery
centers in other states on a month-to-month basis. When a surgeon is trained to
perform a new procedure, such as our Laser procedures for treating an enlarged
prostate or a herniated or ruptured disc in the spine, instead of waiting for
his hospital or surgery center to purchase the Laser, the hospital or surgery
center can rent it on a "per case" basis or for a fixed monthly rental.
When the hospital's or surgery center's staff has been trained 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. Since the
six to twelve month average delay in purchasing "big ticket" medical equipment
is eliminated, the hospital or surgery center can immediately start buying
Fibers, Needles and Tips from us, which typically carry higher profit margins
than our Lasers.
LITIGATION
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.
6
In November 2003, the Company settled its patent litigation against Lumenis,
Inc. ("Lumenis"). Under the settlement agreement, Lumenis agreed to pay a 7.5%
royalty to us on their sales of certain side-firing and angled-firing devices
manufactured by Lumenis or purchased by Lumenis from third-party suppliers. In
addition, Lumenis agreed to purchase 75% of its Angled-Firing (60 degree to 75
degree firing) and 100% of its Side-Firing (75 degree to 90 degree) Devices from
the Company under an OEM Supply Agreement. The OEM Agreement was executed on
September 8, 2005, and the Company is developing a special version of its
VaporMAX(TM) Side-Firing Device exclusively for Lumenis, under Lumenis' DuraMAX
trademark, for use with Lumenis' Holmium lasers for their cleared indications
for use, which include the treatment of benign prostatic hyperplasia or "BPH",
commonly referred to as an enlarged prostate.
In February, 2008, we and six other laser manufacturers were sued in the
district court of Massachusetts by CardioFocus, Inc., alleging infringement of
three of their new expired U.S. Patents, which limits their claim for royalties
to six years from their date of expiration. We and two other laser companies
joined in a petition to the U.S. Patent & Trademark Office ("USPTO") to
re-examine these patents and declare them invalid. The other four defendants
likewise individually requested a re-examination of these patents and a
declaration of invalidity by the USPTO. The USPTO agreed to re-examine these
patents and the lawsuit has been stayed by the court for one year and may be
stayed for an additional year. We have not established a reserve for any damages
under this lawsuit.
LICENSE AGREEMENTS
The Company has license agreements with a number of universities and inventors,
under which royalties on sales, if any, are payable. Sales of products covered
by these licenses are presently not material. Patent applications have been
filed with the U.S. Patent Office and U.S. Patents covering certain of the
Company's products have been issued to officers and employees of the Company,
all of which have been assigned to the Company without royalty. The Company's
patent applications are currently being processed by the U.S. Patent Office and,
to the Company's knowledge, are proceeding in the normal course of review.
RESEARCH AND DEVELOPMENT
From its inception to September 30, 2008, an aggregate of $51,811,000 has been
expended by the Company for research and development ("R&D"), including clinical
and regulatory activities, of which $1,311,000 and $1,220,000 was expended
during the fiscal years ended September 30, 2008 and 2007, respectively. As it
has in the past, the Company expects to contract with unaffiliated hospitals and
research institutions for the clinical testing of its developmental products.
MANUFACTURING AND SUPPLY AGREEMENTS
The Company believes that it has adequate engineering, design and manufacturing
facilities (see "DESCRIPTION OF PROPERTIES" herein).
The Company has supply agreements with several suppliers for components and
materials used in the production of its products. However, the Company has no
long-term volume commitments. The materials used in the Company's products,
consisting primarily of certain plastics, optical fibers, lenses, various metal
alloys, lasers and laser assemblies and components used in the manufacture of
its lasers are, in most cases, available from several vendors. The Company has,
on occasion, experienced temporary delays or increased costs in obtaining these
materials. An extended shortage of required materials and supplies could have an
adverse effect upon the revenue and earnings of the Company. In addition, the
Company must allow for significant lead time when procuring certain materials
and supplies. Where the Company is currently using only one source of supply,
the Company believes that a second source could be obtained within a reasonable
period of time. However, no assurance can be given that the Company's results of
operations would not be adversely affected until a new source could be located.
MARKETING
The principal markets for the Company's current products are hospitals with
orthopedic, urology, ENT, gynecology, gastrointestinal, general surgery and
other surgical operating room facilities, as well as outpatient surgery centers.
In the United States, this market represents approximately 5,500 hospitals, as
well as 1,000 or more outpatient surgery centers. Any new products the Company
develops will, if cleared for sale by the FDA and marketed, be sold to hospitals
and outpatient surgery centers, as well as to physicians for use in their
offices. The Company anticipates marketing only those products which are
customarily sold to the same customer groups to whom its Lasers and Fibers,
Needles and Tips are presently marketed. There is no assurance as to the extent
to which the Company will be able to penetrate these markets.
At September 30, 2008, the Company had marketing arrangements for the sale of
its Lasers, Fibers, Needles and Tips with 4 salesmen on a straight commission
basis, who devote only a part of their time to the Company's products, in the
United States. Outside the United States, the Company sells its products through
23 independent distributors who sell various medical products in approximately
25 foreign countries. The Company presently employs a Vice President of Sales
who directs the Company's sales activities in the United States and elsewhere.
7
The Company intends in the future to increase the number of domestic sales
representatives and appoint additional distributors in foreign countries for the
purpose of expanding sales of the Company's VaporMAX Fiber, its Side Firing
Needles for treating spinal discs and other products. There is no assurance that
the Company will be able to enter into marketing arrangements with any sales
persons or distributors, as the Company is devoting limited resources to these
activities, or that the Company will be able to maintain its existing selling
arrangements.
GOVERNMENT REGULATION
All of the Company's products are, and will in the future, be subject to
extensive governmental regulation and supervision, principally by the FDA and
comparable agencies in other countries. The FDA regulates the introduction,
advertising, manufacturing practices, labeling and record keeping of all drugs
and medical devices. The FDA has the power to seize adulterated or misbranded
devices, require removal of devices from the market, enjoin further manufacture
or sale of devices, and publicize relevant facts regarding devices.
Prior to the sale of any of its products, the Company is required to obtain
marketing clearance or approval for each product from the FDA and comparable
agencies in foreign countries. Extensive clinical testing of each product, which
is both costly and time-consuming, may be required to obtain such approvals. The
Company's business would be adversely affected if it were unable to obtain such
approvals or to comply with continuing regulations of the FDA and other
governmental agencies. In addition, the Company cannot predict whether future
changes in government regulations might increase the cost of conducting its
business or affect the time required to develop and introduce new products. The
Company's facilities were inspected by the FDA in September 2008 and no
deficiencies in the Company's compliance with the FDA's 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 ("IRB") established for this purpose at
the institution (e.g. hospital, medical center, etc.) at which the research is
to be conducted.
510(k) PREMARKET NOTIFICATION
The procedure for obtaining clearance from the FDA to market a new medical
device involves many steps, such as IDE's and PMA's (see "Premarket Approval").
However, if a device is substantially equivalent to a product marketed prior to
May 28, 1976, or a comparable product subsequently cleared by the FDA under a
510(k) Premarket Notification, a 510(k) Premarket Notification may be filed to
establish the device's equivalence. The FDA's review process can take three
months or longer. However, if additional testing or data are requested by the
FDA, it is common for the overall review process to be extended.
All of the Company's currently marketed lasers and fiber-optic laser energy
delivery devices were cleared for sale under 510(k) Notifications. However, some
or all of the new products the Company plans to develop may require extensive
clinical trials and the filing of a PMA, which will entail substantially more
cost over a significantly longer period of time.
PREMARKET APPROVAL
Under the Medical Device Amendments of 1976, all medical devices are classified
by the FDA into one of three classes. A "Class I" device is one that is subject
only to general controls, such as labeling requirements and good manufacturing
practices ("GMP"). A "Class II" device is one that is subject to general
controls and must comply with performance standards established by the FDA. A
"Class III" device is one for which general controls and performance standards
alone are insufficient to assure safety and effectiveness, unless the device
qualifies for sale under a 510(k) Premarket Notification. Such devices require
clinical testing to establish their safety and efficacy in treating specific
diseases or conditions, and a Premarket Approval ("PMA"). Application for the
intended use must be approved by the FDA before the device can be marketed in
the United States. A device is generally classified as a Class I, II, or III
device based on recommendations of advisory panels appointed by the FDA.
The filing of a PMA Application entails a rigorous review by the FDA, which can
take one year or longer, unless additional testing or data are requested by the
FDA, in which case the review process can be considerably longer. The Company
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.
8
There is no assurance that required PMA approvals or 510(k) clearances for any
new products the Company may develop can be obtained or that 510(k) clearances
for the Company's present products can be maintained. The failure to maintain
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 on the
Company's future operations.
INSPECTION OF PLANTS
The FDA also has authority to conduct detailed inspections of manufacturing
plants, to determine whether or not the manufacturer has followed its GMP
requirements, which are required for the manufacture of medical devices.
Additionally, the FDA requires reporting of certain product defects and
prohibits the domestic sale or exportation of devices that do not comply with
the law. The Company's manufacturing facility was inspected by the FDA in
September 2008 and no deficiencies in the Company's compliance with the FDA's
requirements were cited by the FDA. The Company believes it is currently in
compliance in all material respects with these regulatory requirements, and
expects that the processes and procedures in place will satisfy the FDA,
although such cannot be assured.
STATE REGULATION
Federal law preempts states or their political subdivisions from regulating
medical devices. Upon application, the FDA may permit state or local regulation
of medical devices which is either more stringent than federal regulations or is
required because of compelling local conditions. To date, and to the best of the
Company's knowledge, only California has filed such an application. On October
5, 1980, the FDA granted partial approval to such application, effective
December 9, 1980. The California requirements which have been exempted from
preemption have not had a materially adverse effect on the Company.
INSURANCE REIMBURSEMENT
To permit the users of the Company's products to obtain reimbursement under
Federal health care programs such as Medicare, the Company may be required to
demonstrate, in an application to the Centers for Medicare and Medicaid Services
("CMS"), at either the local or federal level or both, the safety and efficacy
of its products and the benefit to patients therefrom which justify the cost of
such treatment. Criteria for demonstrating such benefits are in the process of
being defined by CMS, 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 CMS. Most private health insurance
companies and state health care programs have standards for reimbursement
similar to those of CMS. If an application for reimbursement of a product is not
approved by CMS, private insurers and/or health care programs, marketing of such
product would be adversely affected.
COST OF COMPLIANCE WITH FDA AND OTHER APPLICABLE REGULATIONS
The costs of complying with FDA and other governmental regulations prior to the
sale of approved products are reflected mainly in the Company's R&D
expenditures. The cost of first obtaining an IDE for a product and, after having
developed a product which in the Company's view is safe and effective, obtaining
a PMA approval therefore, as well as making the necessary application to CMS in
order to establish insurance reimbursability for treatments utilizing such
product, adds significantly to the cost of developing and bringing a product to
market over what such cost would have been if such regulatory requirements did
not exist.
Such regulatory requirements also lengthen the time which is required to develop
and commence marketing a product. These delays increase the Company's R & D
costs by (a) lengthening the time during which the Company must maintain and
bear the carrying costs of a given research and development effort and (b)
delaying the time when the Company can commence realizing revenues from sales of
a product, during which time, however, the Company must nevertheless continue to
bear administrative and overhead costs. It is, however, not possible for the
Company to quantify or estimate in advance the direct and indirect costs of
complying with such regulatory requirements, particularly since the expense and
difficulty of such compliance can vary greatly, depending upon the nature of the
product, its intended use, the technological success of the R&D effort and the
results of clinical testing of its products.
To the extent applicable regulations require more rigorous testing than might
otherwise be deemed necessary by the Company, the costs entailed in conducting
testing of its products by such institutions (and fees or royalties, if any,
payable to them) may be deemed in part a cost to the Company of compliance with
such regulatory requirements.
9
EMPLOYEES
On September 30, 2008, the Company had 61 full-time employees, of whom 11 were
employed by MST. Of the remainder, 39 were engaged in production and
engineering, one in sales and marketing, and 10 in general and administrative
functions. On September 30, 2008, the Company had five part-time employees of
whom four were engaged in production and engineering, and one in general and
administrative functions.
The Company may require additional employees in the areas of administration,
product development, research, production, regulatory affairs, quality control,
sales and marketing in the future. There is intense competition for capable,
experienced personnel in the medical device and laser fields, and there is no
assurance the Company will be able to obtain new qualified employees when
required.
Management believes its relations with its employees are good.
PATENTS AND PATENT APPLICATIONS
As of September 30, 2008, the Company owned or had licenses to 19 U.S. Patents 2
foreign and 4 U.S. patent applications. The validity of one of the U.S. Patents
covering the Company's 80 watt Holmium Laser was challenged by a competitor in
the U.S. in an action before the U.S. Patent and Trademark Office ("USPTO"). In
December 1996, the USPTO upheld the validity of all of the claims of this
Patent.
There is no assurance that (a) any patents will be issued from the pending
applications, (b) any issued patents will prove enforceable, (c) the Company
will derive any competitive advantage therefrom or (d) that the Company's
products may not infringe patents owned by others, licenses to which may not be
available to the Company. To the extent that pending patent applications do not
issue, the Company may be subject to more competition. There can also be no
assurance that the already patented products, methods and processes will be
medically useful or commercially viable. The issuance of patents on some but not
all aspects of a product may be insufficient to prevent competitors from
essentially duplicating the product by designing around the patented aspects.
The Company is obligated, under certain of its patent licenses, to make royalty
payments. Part of the Company's R&D activities will be directed towards
obtaining additional patent rights, which may entail future royalty and minimum
payment obligations.
COMPETITION
The Company faces competition from a number of both small and large companies in
the medical field. The larger companies include Medtronic, Inc., Johnson &
Johnson, Boston Scientific, Inc., Lumenis, Inc., American Medical Systems
Holdings, Inc., Olympus, 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 the Company's.
Among the smaller companies with which the Company competes are: Dornier, Inc.,
PhotoMedex, Inc., Lisa Lasers, Convergent, Inc. and others, certain of which are
publicly held.
INSURANCE
The Company has a commercial general liability insurance policy, including an
umbrella policy, providing coverage in the aggregate amount of $5,000,000 and a
products liability insurance policy providing coverage in the amount per
occurrence of $5,000,000. There is no assurance that such amounts of insurance
will be sufficient to protect the Company's assets against claims by users of
its products. Although there have been no successful claims against the Company,
there is no assurance the Company will be able to maintain such liability
insurance in force in the future at an acceptable cost, or at all, in which case
the Company's assets would be at risk in the event of successful claims against
it. Successful claims in excess of the amount of insurance then in force could
have a serious adverse effect upon the Company's financial condition and its
future viability. The Company does not carry director and officer liability
insurance, but does have indemnification agreements covering its officers and
directors.
FOREIGN OPERATIONS
In fiscal 2008 and 2007, sales of products in foreign countries accounted for
approximately 24.6% and 22.9%, respectively, of the Company's total sales. See
"Marketing" herein for information on the marketing of the Company's products in
foreign countries.
10
ITEM 2. DESCRIPTION OF PROPERTIES
The Company currently occupies approximately 28,700 sq. ft, office, R&D,
manufacturing and warehouse facility at 25901 Commercentre Drive, Lake Forest,
CA 92630. The lease became effective April 1, 2006, and has a five-year term
with two five-year renewal options. The lease agreement provides for rent of
$29,251 per month through July 2009, and then for a 4% rental increase effective
on August 2009.
The Company's subsidiary, MST, currently occupies approximately 1,500 square
feet of office space in Dallas, Texas, which it leases at a rental of $1,688 per
month through August 2010.
Management considers all of its facilities to be well maintained and adequate
for its purposes.
ITEM 3. LEGAL PROCEEDINGS
The Company no liability lawsuits during the prior or current year. The Company
has insurance to cover product liability claims. This insurance provides the
Company with $5,000,000 of coverage for each occurrence with a general aggregate
coverage of $5,000,000. Trimedyne's liability is limited to a maximum of $50,000
per occurrence unless the judgment against the Company exceeds the $5,000,000
insurance coverage. In such case, Trimedyne would be liable for any liability in
excess of $5,000,000.
The Company is subject to various claims and actions that arise in the ordinary
course of business. The litigation process is inherently uncertain, and it is
possible that the resolution of any of the Company's existing and future
litigation may adversely affect the Company.
In February 2008, the Company and other manufacturers of lasers were named as
defendants in a lawsuit in the State Court of Massachusetts by CardioFocus, Inc.
as allegedly infringing three of their now expired patents in 2002 -2006. The
Company and two of the other defendants submitted a petition to the U.S. Patent
and Trademark Office ("USPTO") to re-examine the patents to determine if they
are valid, as did several of the other defendants. The Company and the other
defendants were successful in petitioning the Court to stay the action, which is
commonly done in patent cases, to save the court time in conducting a case on
patents which may be later invalidated by the USPTO. The USPTO usually takes two
to three years to reach a decision on the validity of patents. If the USPTO
should find any of the patents to be valid, the Company has other defenses that
we believe will enable it to successfully defend against any claims by
CardioFocus, Inc.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the Company's fiscal year ended September 30, 2008, no matters were
submitted to a vote of securities holders.
11
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A. MARKET INFORMATION
Since November 18, 2003, the Company's Common Stock has been quoted on the
NASDAQ Over-The-Counter Bulletin Board under the symbol "TMED." The following
table sets forth the high and low closing sales prices for the Common Stock
for each quarterly period within the Company's two most recent fiscal years:
2007 High Low
---- ---- ----
Quarter ended:
December 31, 2006 $ 1.69 $ 1.31
March 31, 2007 1.65 1.35
June 30, 2007 1.47 0.93
September 30, 2007 1.04 0.64
2008 High Low
---- ---- ----
Quarter ended:
December 31, 2007 $ 0.89 $ 0.60
March 31, 2008 0.62 0.33
June 30, 2008 0.48 0.33
September 30, 2008 0.33 0.21
B. HOLDERS OF COMMON STOCK
As of September 30, 2008, there were approximately 1,000 holders of record of
the Company's Common Stock and an estimated 9,000 additional holders who
maintain the beneficial ownership of their shares in "Street Name".
C. DIVIDENDS
The Company has never paid cash dividends on its Common Stock, and does not
anticipate paying cash dividends in the foreseeable future. Any future
determination as to the payment of cash dividends will be dependent upon the
Company's financial condition and results of operations and other factors then
deemed relevant by the Board of Directors.
D. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information as of September 30, 2008 with respect
to shares of the Company's common stock that may be issued through its employee
compensation plans:
NUMBER OF
SECURITIES REMAINING
NUMBER OF AVAILABLE FOR FUTURE
SECURITIES TO BE ISSUANCE UNDER
ISSUED UPON WEIGHTED-AVERAGE EQUITY
EXERCISE OF EXERCISE PRICE OF COMPENSATION PLANS
OUTSTANDING OUTSTANDING (EXCLUDING SECURITIES
OPTIONS, WARRANTS OPTIONS, WARRANTS REFLECTED IN COLUMN
AND RIGHTS AND RIGHTS (a))
----------------- ----------------- ---------------------
PLAN CATEGORY (a) (b) (c)
--------------------- ----------------- ----------------- ---------------------
Equity compensation
plans approved by
security holders 199,029 $ 1.37 --
Equity compensation
plans not approved by
security holders 1,439,450 $ 1.08 772,550
---------------- ---------------- ---------------------
Total 1,638,479 $ 1.12 772,550
================ ================ =====================
12
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements, as defined by Regulation S-B Section
303.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company's revenues include revenues from the sale of delivery and disposable
devices, the sale and rental of laser equipment and accessories, and service
contracts for lasers manufactured by the Company.
In accordance with Staff Accounting Bulletin 104, "Revenue Recognition," the
Company recognizes revenue from products sold once all of the following criteria
for revenue recognition have been met: (i) persuasive evidence that an
arrangement exists, (ii) the products have been shipped, (iii) the prices are
fixed and determinable and not subject to refund or adjustment, and (iv)
collection of the amounts due is reasonably assured.
Revenues from the sale of Lasers, Fibers, Needles and Tips are recognized upon
shipment and passage of title of the products, provided that all other revenue
recognition criteria have been met. Generally, customers are required to insure
the goods from the Company's place of business. Accordingly, the risk of loss
transfers to the customer once the goods have been shipped from the Company's
warehouse. The Company sells its products primarily through commission sales
representatives in the United States and distributors in foreign countries. In
cases where the Company utilizes distributors, it recognizes revenue upon
shipment, provided that all other revenue recognition criteria have been met,
and ownership risk has transferred. In general, the Company does not have any
post shipment obligations such as installation or acceptance provisions. All
domestic Lasers are sold with a one year warranty which includes parts and
labor. All international Lasers are sold with a one year parts only warranty. As
each Laser sale is recognized, a liability is accrued for estimated future
warranty costs.
The Company utilizes distributors for international sales only. All Lasers sales
are non-returnable. Our international distributors typically locate customers
for Lasers before ordering and in general do not maintain inventories. The
Company's return policy for Laser accessories, delivery and disposable devices
sold to distributors is as follows: 1) The Company will accept returns of any
unopened, undamaged, standard catalogue items (except laser systems) within
sixty (60) days of invoice date. Acceptable returned products will be subject to
a 20% restocking fee, 2) A return authorization number is required for all
returns. The number can be obtained by contacting the Customer Service
Department, and 3) Should a product be found defective at the time of initial
use, the Company will replace it free of charge.
The Company offers service contracts on its Lasers. These service contracts are
offered at different pricing levels based on the level of coverage, which
include periodic maintenance and different levels of parts and labor to be
provided. Since the service contracts have a twelve-month term, the revenue of
each service contract is deferred and recognized ratably over the term of each
service contract.
Trimedyne rents its Lasers for a flat monthly charge for a period of years or on
a month-to-month basis, or on a fee per case basis, sometimes with a minimum
monthly rental fee. During the fiscal years ended September 30, 2008 and 2007,
two Lasers, respectively, were being rented by Trimedyne, each on a
month-to-month basis. For these lasers, rental revenue is recorded ratably over
the rental period. MST generally enters into rental service contracts with
customers for a two year period, which unless cancelled, are renewed on an
annual basis after the initial period. During the rental service contract period
customers do not maintain possession of any rental equipment unless it is for
the Company's convenience. Customers are billed on a fee per case basis for
rentals, which includes the services of the laser operator and, in some cases,
the use of a reusable or single use laser delivery device. Revenue from these
rental service contracts is recognized as the cases are performed.
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 judgment 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. Our credit
losses in 2008 and 2007, were less than one percent of revenues.
INVENTORIES
Inventories consist of raw materials and component parts, work in process and
finished Lasers. Inventories are recorded at the lower of cost or market, cost
being determined principally by use of the average-cost method, which
approximates the first-in, first-out method. 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.
13
Laser units located at medical facilities for sales evaluation and demonstration
purposes or those units used for development and medical training are included
in inventory since the lasers will ultimately be sold. These units are written
down to reflect their net realizable values.
We write-down our inventory for estimated obsolescence equal to the net
realizable 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. We maintain a reserve on
inventories that we consider to be slow moving or obsolete, to reduce the
inventory to their net estimated realizable value. Once specific inventory is
written-down, the write-down is permanent until the inventory is physically
disposed of.
GOODWILL
Goodwill represents the excess of the cost over the acquired assets of MST. On
October 1, 2002, the Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets."
As a result of adoption SFAS No. 142, the Company's goodwill is no longer
amortized, but is subject to an annual impairment test, or whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. There was no impairment loss recognized on goodwill during the
fiscal years ended September 30, 2008 and 2007.
IMPAIRMENT OF LONG-LIVED ASSETS
SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets",
requires that long-lived assets, such as property and equipment and purchased
intangibles subject to amortization, be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of the asset is measured by comparison of its
carrying amount to undiscounted future cash flows the asset is expected to
generate. If such assets are considered to be impaired, the impairment to be
recognized is measured as the amount by which the carrying amount of the asset
exceeds its fair market value. Estimates of expected future cash flows represent
management's best estimate based on currently available information and
reasonable and supportable assumptions. Any impairment recognized in accordance
with SFAS No. 144 is permanent and may not be restored. To date, the Company has
not recognized any impairment of long-lived assets in connection with SFAS No.
144.
DEFERRED TAXES
The Company records a valuation allowance to reduce the deferred tax assets to
the amount that is more likely than not to be realized. The Company has
considered estimated future taxable income and ongoing tax planning strategies
in assessing the amount needed for the valuation allowance. Based on these
estimates, all of the Company's deferred tax assets have been reserved. If
actual results differ favorably from those estimates used, the Company may be
able to realize all or part of the Company's net deferred tax assets. Such
realization could positively impact our operating results and cash flows from
operating activities.
STOCK-BASED COMPENSATION
Effective October 1, 2006, the Company adopted SFAS No. 123(R), "Share Based
Payment," which establishes standards for the accounting of all transactions in
which an entity exchanges its equity instruments for goods or services,
including transactions with non-employees and employees. SFAS No. 123(R)
requires a public entity to measure the cost of non-employee and employee
services received in exchange for an award of equity instruments, including
stock options, based on the grant date fair value of the award, and to recognize
it as compensation expense over the period service is provided in exchange for
the award, usually the vesting period. The value of the portion of the award
that is ultimately expected to vest is recognized as expense over the requisite
service periods in the Company's consolidated statement of income. SFAS No.
123(R) supersedes the Company's previous accounting under APB No. 25. In March
2005, the SEC issued SAB No. 107, "Share-Based Payment," relating to SFAS No.
123(R). The Company has applied the provisions of SAB No. 107 in its adoption of
SFAS No. 123(R).
The Company adopted SFAS No. 123(R) using the modified prospective transition
method. Accordingly, the Company's consolidated financial statements as of and
for the fiscal year ended September 30, 2007 reflect the impact of adopting SFAS
No. 123(R). The Company's consolidated financial statements for the fiscal year
prior to the adoption of SFAS No. 123(R) have not been restated to reflect, and
do not include, the impact of SFAS No. 123(R).
RESULTS OF OPERATIONS
The statements contained in this Annual Report on Form 10-K that are not
historical facts may contain forward-looking statements that involve a number of
known and unknown risks and uncertainties that could cause actual results to
differ materially from those discussed or anticipated by management.
14
RISKS AND UNCERTAINTIES
Potential risks and uncertainties include, among other factors, general business
conditions, government regulations governing medical device approvals and
manufacturing practices, competitive market conditions, success of the Company's
business strategy, delay of orders, changes in the mix of products sold,
availability of suppliers, concentration of sales in markets and to certain
customers, changes in manufacturing efficiencies, development and introduction
of new products, fluctuations in margins, timing of significant orders, and
other risks and uncertainties currently unknown to management.
CONSOLIDATED RESULTS OF OPERATIONS FOR FISCAL YEARS 2008 AND 2007
The following table sets forth certain items in the consolidated statements of
income as a percentage of net revenues for the years ended September 30, 2008
and 2007:
Year Ended September 30,
2008 2007
------ ------
Net revenues 100.0% 100.0%
Cost of sales 70.9 57.8
Selling, general and administrative expenses 40.4 37.4
Research and development expenses 22.3 22.3
Interest expense 0.6 0.2
Other income, net 7.4 11.9
Income taxes 0.2 0.1
Net income (27.0) (5.9)
NET REVENUES
Net revenues increased $401,000 or 7.3% in fiscal 2008 to $5,871,000 from
$5,470,000 in fiscal 2007. Net sales from Lasers and accessories increased by
$438,000 or 65.1% to $1,111,000 during the fiscal year ended September 30, 2008
from $673,000 during the prior fiscal year, primarily due to international
customers taking advantage of existing lower pricing for lasers before a
scheduled price increase. Net sales from Fibers, Needles and Tips decreased by
$383,000 or 12.3% to $2,721,000 during the current fiscal year ended September
30, 2008 from $3,104,000 during the prior fiscal year. The decreases in sales
was primarily due to domestic customers and international distributors awaiting
the introduction of the Company's new VaporMax(R) Fiber, which will be used with
the Company's Holmium Laser for the treatment of benign prostatic hyperplasia
("BPH"). International export revenues increased $191,000 or 15.2% to $1,444,000
for fiscal 2008 from $1,253,000 for fiscal 2007 primarily due to international
customers taking advantage of existing lower pricing for lasers before a
scheduled price increase. Net revenues from service and rental increased by
$346,000 or 20.4% in fiscal 2008 to $2,039,000 from $1,693,000 in fiscal 2007,
primarily due to an increase in revenue from MST as a result of its expansion of
services.
COST OF GOODS SOLD
Cost of sales in fiscal 2008 was approximately 71% of net revenues, compared to
58% in fiscal 2007. Gross profit from the sale of lasers and accessories was 6%
in the fiscal year ended September 30, 2008 as compared to 20% for the prior
year fiscal period. Gross profit from the sale of Fibers, Needles and Tips
during the fiscal year ended September 30, 2008 was 41% as compared to 52% for
the prior fiscal year period. The lower gross profit during the current fiscal
year as compared to the previous fiscal year was due to increases in cost of raw
materials for Fibers, Needles and Tips, increases in expense incurred for
quality control, and a non-recurring year end adjustment of $127,000 to reserve
obsolete and slow moving inventory. Gross profit from revenue received from
service and rentals was 26% in the current fiscal year ended September 30, 2008
as compared to 34% for the prior fiscal year period. The decrease in gross
profit was due to a decrease in billable services for the service department
while maintaining necessary overhead and staff and higher costs of maintaining
new equipment purchased for the expansion of services by MST.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses increased 16% to
$2,373,000 in fiscal 2008, compared to $2,046,000 in fiscal 2007. The $327,000
increase in fiscal 2008 was primarily the result of $72,000 in commission
expense, $105,000 in administrative payroll expense, $55,000 in legal expense,
which was primarily related to an accused patent infringement, $43,000 in
insurance expense, $33,000 in temporary administrative staff, $26,000 in audit
related expense, $17,000 in travel expense, and $12,000 in repairs and
maintenance expense. The above expenses were offset by decreases in marketing
and recruiting expense of $24,000 and $12,000, respectively.
15
RESEARCH AND DEVELOPMENT (R&D) EXPENSES
R&D expenses increased $91,000 or 7.5% to $1,311,000 in fiscal 2008, compared to
$1,220,000 in fiscal 2007. R&D as a percentage of net revenues decreased to
21.8% of net revenues in fiscal 2008 as compared to 22.3% in fiscal year 2007.
R&D spending in fiscal 2008 was higher as the Company is nearing the completion
of its product development efforts and staff in readying its new Side-Firing
Fibers for use with its Lasers and Lumenis' Holmium Lasers.
OTHER INCOME AND EXPENSE
Total other income, net decreased $242,000 or 38% to $399,000 in fiscal 2008
from $641,000 in fiscal 2007. Interest income decreased by $81,000 or 60% to
$53,000 in fiscal 2008 compared to $134,000 in fiscal 2007. The levels of cash
available for investment in interest bearing securities were $2,007,000 and
$3,179,000 as of September 30,2008 and 2007, respectively. The decrease in
interest income was due to the Company's decrease in the levels of cash
available for investment in interest bearing securities due to negative cash
flows along with lower interest rates paid by institutions during fiscal 2008.
Income from royalties decreased $113,000 or 23% to $374,000 in fiscal 2008 from
$487,000 in fiscal 2007. This decrease was due to royalties received from
Lumenis based on a percentage of Lumenis' sales of side-firing and angled-firing
devices manufactured by Lumenis, as stipulated in the settlement agreement
entered into on November 17, 2003 between the Company and Lumenis, Inc. During
the year ended September 30, 2008, the Company incurred a loss form the sales of
assets of $17,000. During the fiscal year ended September 30, 2007, the Company
received refunds from the state of California and the state of Texas for and
$21,000, respectively, for the overpayment of use tax, and $2,000 in insurance
settlements, offset by interest expense due on Senior Secured Notes due to an
officer.
NET LOSS
As a result of the above, the net loss in fiscal 2008 was $1,590,000, compared
to a net loss of $324,000 in fiscal 2007.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows
In fiscal 2008, net cash used in operating activities was $895,000, as compared
to net cash used of $368,000 in fiscal 2007. Net cash used in investing
activities was $126,000 in fiscal 2008, compared to net cash used of $229,000 in
fiscal 2007. The decrease in cash used in investing activities in fiscal 2008 as
compared to fiscal 2007 was primarily due to the prior fiscal year's purchasing
of upgraded equipment. The net cash used in financing activities during fiscal
2008 of $151,000 for payments on debt as compared to net cash provided of
$2,974,000 during the prior fiscal year, which was the result of proceeds from
the Company's sale of 2,915,000 shares of common stock along with the exercise
of stock options, net of payments on debt.
Liquidity
At September 30, 2008, the Company had working capital of $4,625,000 compared to
$6,285,000 at the end of the previous fiscal year ended September 30, 2007. Cash
decreased by $1,172,000 to $2,007,000 at September 30, 2008 from $3,179,000 at
the fiscal year ended September 30, 2007.
Managements' Plans
The Company has incurred losses from operations for the past two years. However,
the Company believes that existing cash flows are sufficient enough to fund
operations through September 30, 2009. There can be no assurance that we will be
able to maintain or achieve sales growth in the next 12 months, or that the
Company will be profitable. Thus, it is possible that additional working capital
in the next 12 months may be required. If necessary, the Company will raise
additional debt and/or equity capital, reduce its costs by eliminating certain
personnel positions and reducing certain overhead costs in order to fund
operations. There is no assurance that management's plans will be successful.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by Item 7 of this Annual Report are set forth
in the index on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
16
ITEM 8A. CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures. Regulations under the
Securities Exchange Act of 1934 require public companies to maintain
"disclosure controls and procedures," which are defined to mean a
company's controls and other procedures that are designed to ensure
that information required to be disclosed in the reports that it files
or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified
in the Commission's rules and forms. Our Chief Executive Officer
("CEO"), President and our Chief Accounting Officer ("CAO") carried out
an evaluation of the effectiveness of our disclosure controls and
procedures as of September 30, 2008. Based on those evaluations, as of
the evaluation date, our CEO, President and CAO believe:
i) That our controls and procedures are designed to ensure that
information required to be disclosed by us in the reports we
file under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported in the time periods
specified in the SEC's rules and forms and that such
information is accumulated and communicated to our management,
including the CEO, President and CAO, as appropriate to allow
timely decisions regarding required disclosures; and
ii) That our disclosure controls and procedures are effective.
b) Changes in Internal Controls. There were no significant changes in our
internal controls or, to our knowledge, in other factors that could
significantly affect our internal controls subsequent to the evaluation
date.
LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROL
Our management, including the CEO, does not expect that our disclosure controls
and procedures or our internal control over financial reporting will necessarily
prevent all fraud and material errors. An internal control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of the controls must be considered relative to their costs.
Because of the inherent limitations on all internal control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple errors or mistakes.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, and/or by management override of
control. The design of any system of internal control is also based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Over time, controls may become inadequate because
of changes in circumstances, and/or the degree of compliance with the policies
and procedures may deteriorate. Because of the inherent limitations in a
cost-effective internal control system, financial reporting misstatements due to
error or fraud may occur and not be detected on a timely basis.
ITEM 8B. OTHER INFORMATION
Not applicable.
17
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
MANAGEMENT
The following persons served as our officers and directors in fiscal 2008.
Name Age Position
- ---- --- --------
Marvin P. Loeb 82 Chairman and CEO
Glenn D. Yeik 41 President, COO, and Director
Brian T. Kenney 52 V.P. - Global Sales and Marketing
Donald Baker 79 Director
Richard Horowitz, Secretary and Director of the Company, died in September,
2008, and has not been replaced as a Director. Don Baker now serves as Secretary
of the Company.
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 has been the Chairman of the Board of Cardiodyne, Inc.
(formerly Trioptic Laser, Inc., a 90% owned, inactive 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. 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 President, Chief Operating Officer, and Director
since September 2003. Since October 2004, he has been a Director of Cadiomedics,
Inc., a privately held company which developed and is marketing a circulatory
assist device. Before September 2003, he was our Executive Vice President from
April 2002 to September 2003 and Vice President Product Development from March
2000 to April 2002 to September 2003. Mr. Yeik was Manager and Director of
Electronic Systems at AngioTrax, Inc. from May 1998 to March 2000. He was our
Manager, Laser Engineering from May 1994 to May 1998 and our Senior Electrical
Engineer from July 1992 to May 1994. Before joining Trimedyne, 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.
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 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.
RICHARD F. HOROWITZ was a director of our Company from April 1983 to his death
in September, 2008, and Secretary from July 2001 to his death. He was also 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 was a director of Cardiomedics, Inc. since 1992. Mr. Horowitz was
a practicing attorney in New York City for the past 41 years. He was a member of
the firm of Heller, Horowitz & Feit, P.C. (formerly Heller, Horowitz & Feit)
since January 1979. Mr. Horowitz was a graduate of Columbia College and held a
J.D. degree from Columbia Law School. He was a member of the Association of the
Bar of the City of New York and the New York State Bar Association.
DONALD BAKER has been a director of our Company since May 1983. He also has been
a director of Cardiodyne, Inc. since August 1996. Mr. Baker retired after 39
years as a partner of the law firm of Baker & McKenzie. He holds a J.D.S. degree
from the University of Chicago Law School. Mr. Baker was a Director of the
management committee of the Mid-America Committee of Chicago for many years, a
director of various medical technology companies and is currently on the board
of Cardiomedics, Inc., of Irvine, CA. He is a member of the Chicago and American
Bar Associations.
18
Compliance With Section 16(A) of the Exchange Act
Not applicable.
ITEM 10. EXECUTIVE COMPENSATION
All executives enter into employment as salaried employees on an "at-will"
basis. The issuance of all bonuses, stock and option awards are discretionary
and are approved by the Board of Directors. No bonuses, stock, or option awards
were granted to executive officers during the fiscal year ended September 30,
2008.
Our company does not provide its executives with perquisites and does not have
any deferred compensation programs or retirement programs other than our 401(k)
plan, which is generally available to all employees. All of our full-time
employees are eligible to enroll in our health, dental and life and disability
insurance programs.
The following table sets forth the information required by Securities and
Exchange Commission Regulation S-B Item 402 as to the compensation paid or
accrued by us for the years ended September 30, 2008 and September 30, 2007 for
services rendered in all capacities, by all persons who served as our executive
officers who earned more than $100,000 in combined salary, stock option awards
and other compensation in fiscal 2008:
Option All Other
Salary Awards Compensation Total
Name and Principal Position Year ($) ($)(2) ($)(3) ($)
- ------------------------------- ---- ---------- -------- ------------ ---------
Marvin P. Loeb................. 2008 $ 121,257 0 $ 6,996 $ 128,253
CEO and Chairman 2007 $ 120,373 0 $ 17,344 $ 137,717
Glenn D. Yeik.................. 2008 $ 159,135 14,110 $ 18,240 $ 195,035
COO, President, and Director 2007 $ 157,976 16,579 $ 21,334 $ 195,889
Brian T. Kenney, V.P........... 2008 $ 120,000 0 $ 86,234 $ 206,234
2007 $ 99,696 1,256 $ 55,516 $ 156,468
- -----------------------------------------------------------------------------------------
(1) Amounts shown include cash and non-cash compensation earned and received by
our executive officers.
(2) This column represents the dollar amount recognized for financial statement
reporting purposes with respect to the 2008 and 2007 fiscal year for the fair
value of stock options granted to the named executive officers in accordance
with SFAS 123R. We did not grant awards to named executive officers in fiscal
2008 or 2007. For additional information on the valuation assumptions used by
the Company in calculating these amounts refer to Note 2 to Consolidated
Financial Statements incorporated by reference in this Form 10-K. The amounts
reported in the Summary Compensation Table for these awards may not represent
the amounts the named executive officers will actually realize from the awards.
Whether and to what extent, a named executive officer realizes value will depend
on stock price fluctuations and the named executive officer's continued
employment. Additional information on all outstanding awards is reflected in the
Outstanding Equity Awards at 2008 Fiscal Year-End table.
(3) 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 (iii) accrued vacation and (iv)commissions.
19
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
Option Awards
-------------------------------------------------------------------
Equity
Incentive
Number of Number of Plan Awards:
Securities Securities Number of
Underlying Underlying Securities
Unexercised Unexercised Underlying Option
Options Options Unexercised Exercise Option
(#) (#) Unearned Price Expiration
Name Exercisable Unexercisable Options (#) ($) Date
- ------------------- ------------- ------------- ----------- -------- ----------
Marvin P. Loeb 72,000 0.50 8/13/2009
30,000 1.25 4/04/2011
48,000 2.75 4/18/2010
Glenn D. Yeik 50,000 0.14 1/14/2013
22,000 0.50 8/13/2013
30,000 0.50 4/15/2012
75,000 0.60 4/15/2015
80,000 0.92 3/31/2016
25,000 1.25 4/04/2011
48,000 3.84 3/20/2010
Brian T. Kenney 20,000 0.50 4/15/2012
15,000 1.06 3/08/2009
50,000 1.25 4/04/2011
15,000 2.75 4/18/2010
- -------------------------------------------------------------------------------------------
None of Messrs. Loeb, Yeik, or Kenney exercised any options during fiscal year
2008.
DIRECTOR COMPENSATION IN FISCAL YEAR 2008
Each non-employee director who is appointed to the committee to administer our
2003 Non-Qualified Stock Option Plan (the "Committee") is entitled to a grant of
30,000 options to purchase shares every three years, beginning the day the
director is so appointed, for so long as he or she serves on the Committee. The
options vest in equal amounts over three years. No such grants were given during
the fiscal year ended September 30, 2008.
DIRECTOR COMPENSATION
Change in
Pension
Value and
Nonqualified
Fees Earned Non-Equity Deferred All
or Stock Option Incentive Plan Compensation Other
Paid in Cash Awards Awards Compensation Earnings Compensation Total
Name ($) ($) ($) (1) ($) ($) ($) ($)
- ------------------- ------------ ------ -------- ------------- ------------- ------------ -------
Donald Baker 10,172 10,172
Richard F. Horowitz (2) -- --
- ------------------------------------------------------------------------------------------------------------
None of Messrs. Baker or Horowitz exercised any options during fiscal year 2007
1) This column represents the dollar amount recognized for financial statement
reporting purposes with respect to the 2008 fiscal year for the fair value of
stock options granted to directors, in 2008 as well as prior years, in
accordance with SFAS 123R. Portions of awards granted over several years are
included. For additional information on the valuation assumptions used by the
Company in calculating these amounts refer to Note 2 to Consolidated Financial
Statements incorporated by reference in this Form 10-KSB. The amounts reported
in the Summary Compensation Table for these awards may not represent the amounts
the directors will actually realize from the awards. Whether and to what extent,
a director realizes value will depend on stock price fluctuations and the
director's continued service on the Board.
2) Deceased September 2008; all unvested options cancelled.
20
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The following table sets forth the name of and address of each beneficial owner
of more than five percent of the Company's Common Stock known to the Company,
each director of the Company, each named executive officer, and all directors
and executive officers as a group, the number of shares beneficially owned by
such persons as of September 30, 2008 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 SHAREHOLDERS
------------------
Common Stock Marvin P. Loeb, Chairman & CEO (1) 2,486,028 13.5%
$.01 Par Value 25901 Commercentre Drive
Lake Forest, CA 92630
Corsair Capital, LLC. (6) 1,140,000 6.2%
717 Fifth Avenue, 24 Floor
New York, NY 10022
Seth Hamot and his associates 1,013,536 5.5%
c/o Costa Brava Partnership III L.P.
420 Boylston Street
Boston, MA 02116
Bruce J. Haber and his associates 931,653 5.1%
145 Huguenot Street, Suite 405
New Rochelle, NY 10801
OTHER DIRECTORS AND EXECUTIVE OFFICERS
--------------------------------------
Donald Baker, Director (2) 110,000 *
544 Earlston Road
Kenilworth, IL 60043
Richard F. Horowitz, Secy. & Dir. (2)(7) 90,000 *
Heller, Horowitz & Feit, P.C.
292 Madison Avenue
New York, New York 10017
Glenn D. Yeik, Pres. COO (3)(5) 580,351 3.1%
Brian T. Kenney, V.P. (4)(5) 135,000 *
All Directors and Executive 3,421,375 18.6%
Officers as a Group (5 persons)
- -------------------
* Indicates less than 1%
(1) Consists of 2,486,028 Shares owned by Mr. Loeb and his wife, adult
children, grandchildren and trusts for their benefit, of which Mr. Loeb is
not a beneficiary, and Options to purchase 150,000 Shares.
(2) Consists of 50,000 Shares and Options to purchase 40,000 Shares.
(3) Consists of 230,351 Shares, and Options to purchase 350,000 Shares.
(4) Consists of 35,000 Shares and Options to purchase 100,000 Shares.
(5) Address is 25901 Commercentre Drive Lake Forest, CA 92630
(6) Consists of Shares owned by funds managed by Corsair Capital, LLC.
(7) Deceased September 2008
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended September 30, 2008, the Company incurred $7,600 of legal
services with a Director, of which $3,800 was paid during the fiscal year.
During the prior fiscal year ended September 30, 2007, the Company incurred
$14,800 of legal services with a Director, of which $12,600 was paid during the
prior fiscal year.
21
ITEM 13. EXHIBITS
(a) Financial Statements.
See "Index to Consolidated Financial Statements" included in
this report at Page F-1.
(b) Exhibits
Filed Previously:
10(b) Development, Supply and License Agreement with C.R. Bard,
Inc., dated June 28, 1991.
10(c) Industrial Lease (for Barranca Parkway headquarters) with
Griswold Controls dated June 19, 1991, and Addendum thereto
dated July 1, 1991.
10(d) Patent Licensing Agreement with Royice B. Everett, M.D.
(covering the Lateralase Catheter) dated April 1, 1988 as
amended.
10(f) Addendum to Industrial Lease with Griswold Controls dated
September 14, 1993
10(i)* Amendment to Development Supply and License Agreement with
C.R. Bard dated June 14, 1994.
10(j) Industrial Lease (for Bake Parkway headquarters) with Buckhead
Industrial Properties, Inc, dated October 25, 2000.
10(k) Industrial Lease effective July 26, 2005
* The Company requested and received confidential treatment for
portions of those exhibits marked with an asterisk (*).
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Principal Accountant Fees And Services
The following table sets forth fees billed to us by our Independent Registered
Public Accounting Firm during the fiscal years ended September 30, 2008 and
September 30, 2007 for: (i) services rendered for the audit of our annual
financial statements and the review of our quarterly financial statements, (ii)
services by our auditors that are reasonably related to the performance of the
audit or review of our financial statements and that are not reported as Audit
Fees, (iii) services rendered in connection with tax compliance, tax advice and
tax planning, and (iv) all other fees for services rendered. "Audit Related
Fees" consisted of consulting regarding accounting issues. "All Other Fees"
consisted of fees related to the issuance of consents for our Registration
Statements and this Annual Report.
September 30,
2008 2007
--------- ---------
(i) Audit Fees 42,900 60,500
(ii) Audit Related Fees 30,750 8,650
(iii) Tax Fees 7,250 8,665
(iv) All Other Fees 37,622 3,460
POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT
SERVICES OF INDEPENDENT AUDITOR
The audit committee is responsible for pre-approving all audit and permitted
non-audit services to be performed for us by our independent registered public
accounting firm.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Trimedyne, Inc.
Date: January 12, 2009 /s/ Marvin P. Loeb
-------------------------------
Marvin P. Loeb,
Chairman, and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Marvin P. Loeb Chairman of the Board January 12, 2009
- ------------------------------ of Directors & CEO
Marvin P. Loeb
/s/ Glenn D. Yeik President, COO January 12, 2009
- ------------------------------ Director
Glenn D. Yeik
/s/ Donald Baker Director January 12, 2009
- ------------------------------
Donald Baker
/s/ Richard F. Horowitz Secretary & Director January 12, 2009
- ------------------------------
Richard F. Horowitz
/s/ Jeffrey S. Rudner Treasurer & January 12, 2009
- ------------------------------ Chief Accounting Officer
Jeffrey S. Rudner
23
TRIMEDYNE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm F-2
Report of Independent Registered Public Accounting Firm F-3
Consolidated Balance Sheets at September 30, 2008 and 2007 F-4
Consolidated Statements of Operations for the years ended
September 30, 2008 and 2007 F-5
Consolidated Statements of Stockholders' Equity for the
years ended September 30, 2008 and 2007 F-6
Consolidated Statements of Cash Flows for the years
ended September 30, 2008 and 2007 F-7
Notes to Consolidated Financial Statements F-8
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2008, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit on its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Trimedyne, Inc. and its subsidiaries as of September 30, 2008, and the
consolidated results of its operations and its cash flow the year then ended, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ McKennon Wilson & Morgan LLP
Irvine, California
January 13,2009
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2007, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit on its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as e valuating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Trimedyne, Inc. and its subsidiaries as of September 30, 2007, and the
consolidated results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America.
/s/ KMJ Corbin & Company LLP
Irvine, California
January 15, 2008
F-3
TRIMEDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
For The Years Ended September 30,
----------------------------------
2008 2007
------------ -----------
Current assets:
Cash and cash equivalents $ 2,007,000 $ 3,179,000
Trade accounts receivable, net of allowance
for doubtful accounts of $12,000 and
$12,000, respectively 954,000 574,000
Inventories 2,584,000 2,991,000
Note due from related party -- 9,000
Other current assets 171,000 245,000
------------ ------------
Total current assets 5,716,000 6,998,000
Property and equipment, net 1,382,000 920,000
Other 83,000 41,000
Goodwill 544,000 544,000
------------ ------------
7,725,000 $ 8,503,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 256,000 $ 212,000
Accrued expenses 469,000 427,000
Deferred revenue 75,000 45,000
Accrued warranty 54,000 27,000
Current portion of note payable and capital leases 237,000 2,000
------------ ------------
Total current liabilities 1,091,000 713,000
Note payable and capital leases, net of current portion 400,000 --
Deferred rent 73,000 91,000
------------ ------------
Total liabilities 1,564,000 804,000
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $0.01 par value, 1,000,000 shares
authorized, none issued and outstanding --
Common stock - $0.01 par value; 30,000,000 shares authorized,
18,467,569 shares issued, 18,365,960 shares outstanding at
September 30, 2008 and 2007 186,000 186,000
Additional paid-in capital 51,425,000 51,373,000
Accumulated deficit (44,737,000) (43,147,000)
------------ ------------
6,874,000 8,412,000
Treasury stock, at cost (101,609 shares) (713,000) (713,000)
------------ ------------
Total stockholders' equity 6,161,000 7,699,000
------------ ------------
$ 7,725,000 $ 8,503,000
============ ============
See accompanying notes to consolidated financial statements
F-4
TRIMEDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended
September 30,
----------------------------
2008 2007
------------ ------------
Net revenues:
Products $ 3,832,000 $ 3,777,000
Service and rental 2,039,000 1,693,000
------------ ------------
5,871,000 5,470,000
------------ ------------
Cost of sales:
Products 2,657,000 2,039,000
Service and rental 1,506,000 1,122,000
------------ ------------
4,163,000 3,161,000
------------ ------------
Gross profit 1,708,000 2,309,000
Selling, general and administrative expenses 2,373,000 2,046,000
Research and development expenses 1,311,000 1,220,000
------------ ------------
Loss from operations (1,976,000) (957,000)
------------ ------------
Other income (expense):
Interest income 53,000 134,000
Royalty income 374,000 487,000
Interest expense (38,000) (10,000)
Creditor settlements and recoveries 27,000 30,000
Loss on disposal of equipment (17,000) --
------------ ------------
Total other income, net 399,000 641,000
------------ ------------
(Loss) before provision for income taxes (1,577,000) (316,000)
Provision for income taxes 13,000 8,000
------------ ------------
Net (loss) $ (1,590,000) $ (324,000)
============ ============
Basic net (loss) per share $ (0.09) $ (0.02)
============ ============
Basic weighted average
common shares outstanding: 18,365,960 17,594,668
============ ============
Diluted net (loss) per share $ (0.08) $ (0.02)
============ ============
Diluted weighted average
common shares outstanding: 18,365,960 17,594,668
============ ============
See accompanying notes to consolidated financial statements
F-5
TRIMEDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional
------------ Paid-In Accumulated Treasury
Shares Amount Capital Deficit Stock Total
------------ ------------ ------------ ------------ ------------ ------------
Balances at
October 1, 2006 14,770,511 149,000 47,979,000 (42,823,000) (713,000) 4,592,000
Issuance of common
stock 2,915,000 29,000 3,005,000 -- -- 3,034,000
Conversion of convertible
related-party notes and
accrued interest into
common stock 763,958 8,000 314,000 -- -- 322,000
Exercise of
stock options 18,100 -- 11,000 -- -- 11,000
Share-based compensation
expense -- -- 64,000 -- -- 64,000
Net loss -- -- -- (324,000) -- (324,000)
------------ ------------ ------------ ------------ ------------ ------------
Balances at
September 30, 2007 18,467,569 $ 186,000 $ 51,373,000 $(43,147,000) $ (713,000) $ 7,699,000
Share-based compensation
expense -- -- 52,000 -- -- 52,000
Net loss -- -- -- (1,590,000) -- (1,590,000)
------------ ------------ ------------ ------------ ------------ ------------
Balances at
September 30, 2008 18,467,569 $ 186,000 $ 51,425,000 $(44,737,000) $ (713,000) $ 6,161,000
============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements
F-6
TRIMEDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended September 30,
---------------------------------
2008 2007
----------- -----------
Cash flows from operating activities:
Net (loss) $(1,590,000) $ (324,000)
Adjustments to reconcile net (loss) to net cash
(used in) provided by operating activities:
Stock-based compensation 52,000 64,000
Accrued interest on senior secured notes -- 11,000
Depreciation and amortization 315,000 234,000
Loss on disposal of equipment -- --
Changes in operating assets and liabilities:
Trade accounts receivable (380,000) 168,000
Inventories 407,000 (395,000)
Other assets 167,000 (63,000)
Accounts payable 44,000 (111,000)
Note from related party 9,000 29,000
Accrued expenses 42,000 28,000
Deferred revenue 30,000 (3,000)
Accrued warranty 27,000 4,000
Income tax payable -- (4,000)
Deferred rent (18,000) (6,000)
----------- -----------
Net cash (used in)operating activities (895,000) (368,000)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (143,000) (229,000)
Loss on disposal of fixed assets 17,000 --
----------- -----------
Net cash used in investing activities (126,000) (229,000)
----------- -----------
Cash flows from financing activities:
Proceeds from the exercise of stock options -- 11,000
Proceeds from the sale of common stock -- 3,034,000
Principal payments on debt (151,000) (71,000)
----------- -----------
Net cash (used in) provided by financing activities (151,000) 2,974,000
----------- -----------
Net (decrease) increase in cash and cash equivalents (1,172,000) 2,377,000
Cash and cash equivalents at beginning of year 3,179,000 802,000
----------- -----------
Cash and cash equivalents at end of year $ 2,007,000 $ 3,179,000
=========== ===========
During the fiscal year ended September 30, 2007, the Company issued 763,958
shares of common stock to its Chief Executive Officer in connection with the
conversion of senior convertible notes of $200,000 and accrued interest of
$122,000 thereon owed to the officer. There were no such issuances in during the
fiscal year ended September 30, 2008.
Cash paid for income taxes in the years ended September 30, 2008 and 2007 was
$13,000 and $7,000, respectively. Cash paid for interest in the years ended
September 30, 2008 and 2007 was $38,000 and $10,000, respectively.
Supplemental disclosure of non-cash investing activity:
During the fiscal year ended September 30, 2008, the Company financed the
purchase of equipment with $651,000 in note and lease agreements.
During the fiscal year ended September 30, 2008, the Company financed the
purchase of certain insurance policies with a $134,000 note.
See accompanying notes to consolidated financial statements
F-7
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND BUSINESS
Trimedyne, Inc. ("Trimedyne") and its subsidiaries (collectively "the Company")
are engaged primarily in the manufacture and sale of lasers, and disposable and
reuseable fiber-optic laser devices in the medical field. The Company's
operations include the provision of services and rental of lasers and other
medical equipment to hospitals and surgery centers on a "fee-per-case" basis in
the Southwestern United States, through its wholly owned subsidiary Mobile
Surgical Technologies, Inc. ("MST"), located in Dallas, Texas. The Company's
operations are primarily located in Southern California with distribution of its
products worldwide (see Note 9).
Managements' Plans
The Company has incurred losses from operations for the past two years. However,
the Company believes that existing cash flows are sufficient enough to fund
operations through September 30, 2009. There can be no assurance that we will be
able to maintain or achieve sales growth in the next 12 months, or that the
Company will be profitable. Thus, it is possible that additional working capital
in the next 12 months may be required. If necessary, the Company will raise
additional debt and/or equity capital, reduce its costs by eliminating certain
personnel positions and reducing certain overhead costs in order to fund
operations. There is no assurance that management's plans will be successful.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Trimedyne, Inc., its wholly owned subsidiary, MST, Inc., and its 90% owned and
inactive subsidiary, Cardiodyne, Inc. ("Cardiodyne") (collectively, the
"Company"). All intercompany accounts and transactions have been eliminated in
consolidation.
Concentration of Credit Risk and Customer Concentration
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. As of September 30, 2008 two customers accounted for
24% and 12% of the Company's receivables. During the year ended September 30,
2007, one customer accounted for 13% of the Company's receivables. The Company
performs limited credit evaluations of its customers and generally does not
require collateral. The Company maintains reserves for potential credit losses.
The Company considers the following factors when determining if collection of a
fee is reasonably assured: customer credit-worthiness, past transaction history
with the customer, current economic industry trends and changes in customer
payment terms. In some cases in regards to new customers, management requires
payment in full or letters of credit before goods are shipped or services are
performed. If these factors do not indicate collection is reasonably assured,
revenue is deferred until collection becomes reasonably assured, which is
generally upon receipt of cash. During fiscal 2008 and 2007, credit losses were
not significant.
At September 30, 2008, the Company had cash balances in excess of federally
insured limits of $100,000 in the amount of $1,861,648.
Inventories
Inventories consist of raw materials and component parts, work-in-process and
finished good lasers and dispensing systems. Inventories are recorded at the
lower of cost or market, cost being determined principally by use of the
average-cost method, which approximates the first-in, first-out method. 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.
F-8
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Laser units located at medical facilities for sales evaluation and demonstration
purposes or those units used for development and medical training are included
in inventory since the lasers will ultimately be sold. These units are written
down to reflect their net realizable values. Writedowns are considered permanent
reductions at cost basis of the related inventories.
Goodwill
Goodwill represents the excess of the cost over the acquired assets of MST. On
October 1, 2002, the Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets."
As a result of adoption SFAS No. 142, the Company's goodwill is no longer
amortized, but is subject to an annual impairment test, or whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. There was no impairment loss recognized on goodwill during the
fiscal years ended September 30, 2008 and 2007.
Impairment of Long-Lived Assets
SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets",
requires that long-lived assets, such as property and equipment and purchased
intangibles subject to amortization, be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of the asset is measured by comparison of its
carrying amount to undiscounted future net cash flows the asset is expected to
generate. If such assets are considered to be impaired, the impairment to be
recognized is measured as the amount by which the carrying amount of the asset
exceeds its fair market value. Estimates of expected future cash flows represent
management's best estimate based on currently available information and
reasonable and supportable assumptions. Any impairment recognized in accordance
with SFAS No. 144 is permanent and may not be restored. To date, the Company has
not recognized any impairment of long-lived assets in connection with SFAS No.
144.
Stock-Based Compensation
Effective October 1, 2006, the Company adopted SFAS No. 123(R), "Share Based
Payment," which establishes standards for the accounting of all transactions in
which an entity exchanges its equity instruments for goods or services,
including transactions with non-employees and employees. SFAS No. 123(R)
requires a public entity to measure the cost of non-employee and employee
services received in exchange for an award of equity instruments, including
stock options, based on the grant date fair value of the award, and to recognize
it as compensation expense over the period service is provided in exchange for
the award, usually the vesting period. The value of the portion of the award
that is ultimately expected to vest is recognized as expense over the requisite
service periods in the Company's consolidated statement of income. SFAS No.
123(R) supersedes the Company's previous accounting under APB No. 25. In March
2005, the SEC issued SAB No. 107, "Share-Based Payment," relating to SFAS No.
123(R). The Company has applied the provisions of SAB No. 107 in its adoption of
SFAS No. 123(R).
The Company adopted SFAS No. 123(R) using the modified prospective transition
method. Accordingly, the Company's consolidated financial statements as of and
for the fiscal year ended September 30, 2008 and 2007 reflect the impact of
adopting SFAS No. 123(R).
Stock-based compensation expense recognized in the Company's consolidated
statements of operations for the fiscal year ended September 30, 2008 and 2007
includes compensation expense for share-based payment awards granted prior to,
but not yet vested as of September 30, 2006 based on the grant date fair value
estimated in accordance with the pro forma provisions of SFAS No. 123 and
compensation expense for the share-based payment awards granted subsequent to
September 30, 2006 based on the grant date fair value estimated in accordance
with the provisions of SFAS No. 123(R). As stock-based compensation expense
recognized in the consolidated statements of operations for the fiscal year
ended September 30, 2008 and 2007 is based on awards ultimately expected to
vest, it has been reduced for estimated forfeitures. SFAS No. 123(R) requires
forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates. The
estimated average forfeiture rate for fiscal years ended September 30, 2008 and
2007 of approximately 5% is based on historical forfeiture experience and
estimated future employee forfeitures. The estimated term of option grants for
the fiscal year ended September 30, 2008 was five years.
F-9
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of stock-based awards is calculated using the Black-Scholes
option pricing model. The Black-Scholes model requires subjective assumptions
regarding future stock price volatility and expected time to exercise, which
greatly affect the calculated values. The expected term of options granted is
derived from historical data on employee exercises and post-vesting employment
termination behavior. The risk-free rate selected to value any particular grant
is based on the U.S. Treasury rate that corresponds to the pricing term of the
grant effective as of the date of the grant. The expected volatility for the
fiscal year ended September 30, 2008 is primarily based on the Company's
historical volatilities of its common stock. These factors could change in the
future, affecting the determination of stock-based compensation expense in
future periods. The assumptions used for options granted during the fiscal years
ended September 30, 2008 and 2007, are as follows:
Fiscal Years Ended September 30,
---------------------------------
2008 2007
----------- -----------
Expected term 5 years 5 years
Expected stock volatility 94% 93%
Risk free rate 3.07% 4.71%
Dividend yield --% --%
The weighted-average grant date fair value of options granted during the fiscal
years ended September 30, 2008 and 2007 was $0.29 and $0.94 per option,
respectively. There were no options exercised during the fiscal year ended
September 30, 2008. The total intrinsic value of options exercised during the
fiscal year ended September 30, 2007 was $13,370.
As of September 30, 2008, there was approximately $135,604 of total unrecognized
compensation cost, net of estimated expected forfeitures, related to employee
and director stock option compensation arrangements. This unrecognized cost is
expected to be recognized on a straight-line basis over the next four years,
which is consistent with the vesting period.
The following table summarizes stock-based compensation expense related to
employee and director stock options under SFAS No. 123(R) for the fiscal years
ended September 30, 2008 and 2007, which was allocated as follows:
Fiscal Years Ended September 30,
-------------------------------
2008 2007
---------- ---------
Stock-based compensation included in:
Cost of revenues $ 10,000 $ 9,000
Research and development expenses 5,000 7,000
Selling, general, and administrative expenses 37,000 48,000
-------- --------
$52,000 $ 64,000
======== =========
Use of Estimates
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 inventory valuation, allowances
for doubtful accounts and deferred income tax assets, recoverability of goodwill
and long-lived assets, losses for contingencies and certain accrued liabilities.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, note due from related party, accounts payable,
accrued expenses and long-term debt. The carrying amounts of the Company's
financial instruments generally approximate their fair values as of September
30, 2008 and 2007.
Per Share Information
Basic per share information is computed based upon the weighted average number
of common shares outstanding during the period. Diluted per share information
consists of the weighted average number of common shares outstanding, plus the
dilutive effects of options and warrants calculated using the treasury stock
method. In loss periods, dilutive common equivalent shares are excluded as the
effect would be anti-dilutive. During the year ended September 30, 2008 and
2007, outstanding options of 60,842 and 368,418, respectively, were excluded
from the diluted net loss per share as the effects would have been
anti-dilutive.
F-10
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition
The Company's revenues include revenues from the sale of reusable and disposable
Fibers, Needles, and Tips, the sale and rental of Lasers and accessories, and
service contracts for Lasers manufactured by the Company.
In accordance with Staff Accounting Bulletin 104, "Revenue Recognition," the
Company recognizes revenue from products sold once all of the following criteria
for revenue recognition have been met: (i) persuasive evidence that an
arrangement exists, (ii) the products have been shipped, (iii) the prices are
fixed and determinable and not subject to refund or adjustment, and (iv)
collection of the amounts due is reasonably assured.
Revenues from the sale of fibers, needles, and tips and lasers are recognized
upon shipment and passage of title of the products, provided that all other
revenue recognition criteria have been met. Generally, customers are required to
insure the goods from the Company's place of business. Accordingly, the risk of
loss transfers to the customer once the goods have been shipped from the
Company's warehouse. The Company sells its products primarily through commission
sales representatives in the United States and distributors in foreign
countries. In cases where the Company utilizes distributors, it recognizes
revenue upon shipment, provided that all other revenue recognition criteria have
been met, and ownership risk has transferred. In general, the Company does not
have any post shipment obligations such as installation or acceptance
provisions. All domestic laser systems are sold with a one year warranty which
includes parts and labor. All international lasers systems are sold with a one
year parts only warranty. As each laser sale is recognized, a liability is
accrued for estimated future warranty costs.
The Company utilizes distributors for international sales only. All laser system
sales are non-returnable. Our international distributors typically locate
customers for lasers before ordering and in general do not maintain inventories.
The Company's return policy for laser accessories, fibers, needles, and tips
sold to distributors is as follows: (1) the Company will accept returns of any
unopened, undamaged, standard catalogue items (except laser systems) within
sixty (60) days of invoice date. Acceptable returned products will be subject to
a 20% restocking fee, (2) a return authorization number is required for all
returns, which can be obtained by contacting the Customer Service Department,
and (3) should a product be found defective at the time of initial use, the
Company will replace it free of charge.
The Company offers service contracts on its lasers. These service contracts are
offered at different pricing levels based on the level of coverage, which
include periodic maintenance and different levels of parts and labor to be
provided. Since the service contracts have a twelve-month term, the revenue of
each service contract is deferred and recognized ratably over the term of the
service contract.
Trimedyne rents its lasers for a flat monthly charge for a period of years or on
a month-to-month basis, or on a fee-per-case basis, which sometimes includes a
minimum monthly rental fee. During both fiscal years ended September 30, 2008
and 2007, two lasers were rented by Trimedyne, each on a month-to-month basis.
For these lasers, rental revenue is recorded ratably over the rental period. MST
generally enters into rental service contracts with customers for a two year
period, which unless cancelled, are renewed on an annual basis after the initial
period. During the rental service contract period customers do not maintain
possession of any rental equipment unless it is for the Company's convenience.
Customers are billed on a fee-per-case basis for rentals, which includes the
services of the laser operator and, in some cases, the use of a reusable or
single use Fiber, Needle, and Tip. Revenue from these rental service contracts
is recognized as the cases are performed.
Shipping and Handling Costs
Costs incurred for shipping and handling are included in cost of equipment and
services revenues at the time the related revenue is recognized. Amounts billed
to a customer for shipping and handling are reported as an offset to cost of
goods sold.
Product Warranty Costs
The Company provides warranties for certain products and maintains warranty
reserves for estimated product warranty costs at the time of sale. In estimating
its future warranty obligations, the Company considers various relevant factors,
including the Company's stated warranty policies and practices, the historical
frequency of claims and the cost to replace or repair its products under
warranty. The following table provides a summary of the activity related to the
Company's accrued warranty expense:
F-11
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For The Years Ended
September 30,
----------------------------
2008 2007
------------ ------------
Balance at beginning of period $ 27,000 $ 23,000
Charges to costs and expenses 74,000 46,000
Costs incurred (47,000) (42,000)
------------ ------------
Balance at end of period $ 54,000 $ 27,000
============ ============
Research and Development Costs
All research and development costs, including licensing costs, are charged to
expense as incurred. In accordance with this policy, all costs associated with
the design, development and testing of the Company's products have been expensed
as incurred.
Income Taxes
The Company uses the asset and liability method of SFAS No. 109 "Accounting for
Income Taxes," which 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.
In July 2006, the Financial Accounting and Standards Board (FASB) issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-- an
interpretation of FASB Statement No. 109 ("FIN 48")". FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with SFAS No. 109, Accounting for Income
Taxes. FIN 48 describes a recognition threshold and measurement attribute for
the recognition and measurement of tax positions taken or expected to be taken
in a tax return and also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The cumulative effect of adopting FIN 48 was required to be reported as an
adjustment to the opening balance of retained earnings (or other appropriate
components of equity) for that fiscal year, presented separately. The adoption
of FIN 48 did not have a material impact to the Company's financial statements.
Property and Equipment
Property and equipment is recorded at cost. 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. Depreciation expense for the years ended September 30, 2008
and 2007, was $315,000 and $234,000, respectively.
Segment Information
The Company reports information about operating segments, as well as disclosures
about products and services, geographic areas and major customers (see Note 9).
Operating segments are defined as revenue-producing components of the
enterprise, which are generally used internally for evaluating segment
performance.
Recently Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 provides accounting guidance on the definition of fair
value and establishes a framework for measuring fair value and requires expanded
disclosures about fair value measurements. SFAS 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007. We plan to
adopt the provisions of SFAS 157 on October 1, 2008 with limited impact on our
financial statements and on our results of operations and financial condition.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities--Including an amendment of FASB
Statement No. 115" ("SFAS 159"). SFAS 159 permits entities to choose to measure
financial instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS 159 is effective for financial statements issued for fiscal
year beginning after November 15, 2007. We plan to adopt the provisions of SFAS
159 on October 1, 2008 with limited impact on our financial statements and on
our results of operations and financial condition.
F-12
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations"
("SFAS 141(R)"), which replaces FAS 141. SFAS 141(R) establishes principles and
requirements for how an acquirer in a business combination recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any controlling interest; recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase;
and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. SFAS 141(R) is to be applied prospectively to business
combinations.
In May 2008, the FASB issued FAS 162, "The Hierarchy of Generally Accepted
Accounting Principles". FAS 162 is intended to improve financial reporting by
identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with GAAP for nongovernmental entities. FAS 162 is effective 60 days
following the SEC's approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles." We do not expect the adoption of this
statement to have a material impact on our results of operations, financial
position or cash flows.
In April 2008, the FASB issued FSP No. 142-3, "Determination of the Useful Life
of Intangible Assets". FSP 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets". FSP 142-3 is effective for fiscal years
beginning after December 15, 2008. Therefore, we will be required to adopt FSP
142-3 for the fiscal year beginning October 1, 2009. We are currently evaluating
the impact of FSP No. 142-3 on our consolidated financial position and results
of operations.
NOTE 3. COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS
Inventories consist of the following:
For The Years Ended September 30,
---------------------------------
2008 2007
------------ -----------
Raw materials $ 1,036,000 $ 1,129,000
Work-in-process 722,000 940,000
Finished goods 826,000 922,000
------------ -----------
$ 2,584,000 $ 2,991,000
============ ===========
For the fiscal years ended September 30, 2008 and 2007, the aggregate net
realizable value of demonstration and evaluation lasers did not comprise a
material amount in inventories.
Other current assets consist of the following:
For The Years Ended September 30,
---------------------------------
2008 2007
------------ -----------
Royalty receivable $ 58,000 $ 132,000
Prepaid insurance 86,000 86,000
Deposits 9,000 6,000
Prepaid income tax 5,000 4,000
Other 13,000 17,000
----------- -----------
Total other current assets $ 171,000 $ 245,000
============ ===========
Property and equipment, net consists of the following:
For The Years Ended September 30,
---------------------------------
2008 2007
------------ -----------
Furniture and equipment $ 3,216,000 $ 2,513,000
Leasehold improvements 619,000 619,000
Other 282,000 216,000
----------- -----------
$ 4,117,000 $ 3,348,000
Less accumulated depreciation and amortization (2,735,000) (2,428,000)
----------- -----------
$ 1,382,000 $ 920,000
=========== ===========
F-13
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2008, equipment purchased under capital leases had a cost of
$692,000 and an accumulated depreciation of $66,000.
Accrued expenses consist of the following:
For The Years Ended September 30,
---------------------------------
2008 2007
------------ -----------
Accrued vacation 187,000 $ 149,000
Accrued salaries and wages 130,000 103,000
Sales and use tax 67,000 66,000
Accrued professional fees 4,000 43,000
Customer deposits 13,000 10,000
Commissions 51,000 34,000
Accrued payroll tax 8,000 8,000
Other 9,000 14,000
------------ -----------
Total accrued expenses $ 469,000 $ 427,000
============ ===========
NOTE 4. ACQUISITION OF CPT
On August 6, 2008, the Company, through its subsidiary MST, acquired certain
assets and assumed certain liabilities of CPT Services, Inc. ("CPT") for an
aggregate cash purchase price of $21,000. CPT provided laser service and repair
services similar to the MST. The acquisition is expected to assist the MST
in the expansion of its services.
Since the assets acquired constituted a business, the acquisition has been
accounted for using the purchase method of accounting in accordance with SFAS
No. 141, whereby the estimated purchase price has been allocated to tangible and
intangible net assets acquired based upon their fair values at the date of
acquisition.
The purchase price of CPT has been allocated to assets acquired and liabilities
assumed based on their estimated fair values determined by management as
follows:
Property and equipment $ 129,000
Intangible asset - customer list 30,000
Notes and leases payable (138,000)
-------------
Cash paid $ 21,000
=============
The customer relationships are considered an intangible asset and are being
amortized over the estimated useful live of five years from the date of the
acquisition. The estimated useful life was determined based upon the historical
lives of the customer base. The pro-forma financial statements have not been
provided as they are insignificant to the Company's financial statements.
NOTE 5. NOTES PAYABLE AND CAPITAL LEASES
SENIOR CONVERTIBLE SECURED NOTES DUE TO OFFICER
During the fiscal year ended September 30, 2007, the Company had two senior
convertible secured notes (the "Convertible Notes") in the amounts of $150,000
and $50,000 to its Chief Executive Officer. The Convertible Notes accrued
interest at 12%, per annum, with maturity dates of February 27, and April 15,
2007, respectively, and were convertible, including accrued interest thereon,
into common stock, based on $0.40 per share and $0.50 per share (the "Conversion
Price"), respectively. The Notes and the accrued interest thereon of $122,000,
were converted into 763,958 shares of common stock on their respective maturity
dates. Their were no such Notes during issued during the fiscal year ended
September 30,2008.
F-14
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES PAYABLE AND CAPITAL LEASES
Notes payable and capital leases consists of the following at September 30,
2008:
Capital lease agreement in connection with the purchasing of equipment bearing
an effective interest rate of 8.69% per annum. The lease requires monthly
payments of $3,147 through September 2012. 99,000
Capital lease agreement in connection with the purchasing of equipment bearing
an effective interest rate of 9.25% per annum. The lease requires monthly
payments of $4,979 through January 2013. 213,000
Capital lease agreement in connection with the purchasing of ERP software
bearing an effective interest rate of 9.23% per annum. The lease requires
monthly payments of $526 through February 2013. 23,000
Capital lease agreement in connection with the purchasing of equipment bearing
an effective interest rate of 8.82% per annum. The lease requires monthly
payments of $2,403 through March 2012. 87,000
Capital lease agreement in connection with the purchasing of equipment bearing
an effective interest rate of 8.66% per annum. The lease requires monthly
payments of $2,386 through October 2010. 52,000
Capital lease agreement in connection with the purchasing of ERP software
bearing an effective interest rate of 8.51% per annum. The lease requires
monthly payments of $3,195 through April 2011. 89,000
Finance agreement issued in connection with the purchasing of certain insurance
policies. The note bears interest at 6.8% per annum and require monthly
principal and interest payments of $12,631 through March 2009. 74,000
-----------
637,000
Less: current portion (237,000)
-----------
$ 400,000
===========
The Company leases certain equipment under capital leases with terms ranging
from three to five years. Future annual minimum lease payments are as follows as
of September 30:
2009 $ 200,000
2010 200,000
2011 157,000
2012 80,000
2013 17,000
-----------
Total minimum lease payments 654,000
Less amount representing interest (91,000)
-----------
Present value of future minimum lease payments 563,000
Less current portion of capital lease payments 163,000
-----------
Capital lease obligations, net of current portion $ 400,000
===========
NOTE 6. INCOME TAXES
The deferred income tax balances at September 30, 2008, are comprised of the
following:
Deferred income tax assets (liabilities):
Net operating loss carry forwards $ 12,422,000
Inventories 139,000
Reserves and accruals 252,000
Research and development credits 2,591,000
Depreciation and amortization (72,000)
Other 4,000
Valuation allowance (15,336,000)
-------------
$ --
=============
F-15
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The valuation allowance for deferred tax assets decreased approximately $504,000
during the year ended September 30, 2008 and approximately $475,000 during the
year ended September 30. 2007, primarily due to a portion of the Company's net
operating loss carryforwards ("NOLS") for federal and state income tax
reporting, as well as research and development tax credits that expired. For the
years ended September 30, 2008 and 2007, the Company recorded a current
provision for state income taxes of $13,000 and $8,000, respectively. There was
not a provision for federal income taxes.
The Company's effective income tax rate differs from the statutory federal
income tax rate as follows for the years ended September 30, 2008 and 2007:
September 30,
2008 2007
---------- ----------
Statutory federal income tax rate (34.00) % (34.00) %
Increase (decrease) in tax rate resulting from:
State tax benefit, net of federal benefit (5.80) % (5.80) %
Other (0.03) % 0.50 %
Valuation Allowance 40.63 % 41.80 %
---------- ----------
Effective income tax rate 0.80 % 2.50 %
========== ==========
At September 30, 2008, the Company had NOL carry forwards for Federal and
California income tax purposes totaling approximately $35.6 million and $5.0
million, respectively. Federal and California NOL's have begun to expire and
fully expire in 2020 and 2011, respectively. 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. In addition, the Company has R & D credits that have begun to
expire and fully expire in 2028 for federal tax purposes.
NOTE 7. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company has two non-cancelable operating leases, which include a lease for
MST's facility in Dallas, Texas, which expires in August 2010, and a lease for
the Company's corporate office and manufacturing facility in Lake Forest,
California, which expires in March 2011.
Future annual minimum lease payments under the above lease agreements, at
September 30, 2008 are as follows:
Years ending
September 30,
-------------
2009 $ 374,000
2010 385,000
2011 183,000
-----------
Total $ 942,000
===========
Rent expense for the years ended September 30, 2008 and 2007 was approximately
$358,000 and $356,000, respectively.
In accordance with SFAS No. 13 "Accounting for Leases" and Financial Accounting
Standards Board Technical Bulletin 85-3, "Accounting for Operating Leases with
Scheduled Rent Increases", rent expense on the leases are recognized on a
straight-line basis over the term of the lease. Therefore, rent expense on the
leases does not correspond with the actual rent payments due. Additionally, as
part of the Company's lease agreement of its facility in Lake Forest,
California, the Company received $100,000 from the lessor as an allowance for
leasehold improvements contributed by the Company. In accordance with Financial
Accounting Standards Board Technical Bulletin No. 88-1, the unamortized portion
of the $100,000 payment received is being recognized on a straight-line basis
over the term of the lease as reduction to rent expense and the unamortized
portion is included in deferred rent. The difference between the cumulative rent
payments, net of the $100,000 allowance on leasehold improvements versus the
cumulative rent expense on a straight-line basis is recorded as a deferred rent
liability. As of September 30, 2008, this liability was $75,000.
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 condensed consolidated statements of
operations that may have material impact on the Company's financial position,
results of operations or cash flows.
See Note 5 regarding capital leases.
F-16
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Settlement and OEM Agreement
Under the terms of a settlement agreement with Lumenis, Inc. ("Lumenis"),
Lumenis has agreed to pay a 7.5% royalty on their sales of certain side-firing
and angled-firing devices manufactured by Lumenis. In addition, Lumenis agreed
to purchase 75% of its Angled-Firing (60 to 75 degree firing) and 100% of its
Side-Firing (75 to 90 degree) Fibers from the Company under an OEM agreement
("OEM Agreement"). The OEM Agreement was executed on September 8, 2005, under
which the Company agreed to manufacture a special version of its VaporMAX(TM)
Side-Firing Device exclusively for Lumenis, for use with Lumenis' Holmium lasers
for their cleared indications for use, which include the treatment of benign
prostatic hyperplasia or "BPH", commonly referred to as an enlarged prostate.
For the years ended September 30, 2008 and 2007 the Company recognized as income
$374,000 and $487,000, respectively, in royalties from Lumenis. These amounts
are all included as other income in the accompanying statements of operations.
Product Liability
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.
Guarantees and Indemnities
The Company has made certain indemnities and guarantees, under which it may be
required to make payments to a guaranteed or indemnified party. The Company
indemnifies its directors, officers, employees and agents to the maximum extent
permitted under the laws of the State of California. In connection with its
facility leases, the Company has indemnified its lessors for certain claims
arising from the use of the facilities. The duration of the guarantees and
indemnities varies, and in many cases is indefinite. These guarantees and
indemnities do not provide for any limitation of the maximum potential future
payments the Company could be obligated to make. Historically, the Company has
not been obligated to make any payments for these obligations and no liabilities
have been recorded for these indemnities and guarantees in the accompanying
consolidated balance sheet.
Risks and Uncertainties
The Centers for Medicare and Medicaid Services (CMS), the agency of the U.S.
Government that administers the Medicare Program, recently announced a proposed
decision to deny reimbursement for thermal intradiscal procedures (TIPs).
Thermal procedures to treat spinal discs typically entail the use of
electrothermal (ET) or radiofrequency (RF) energy to heat or coagulate the
nucleus of the disc, a spongy, gelatinous material that absorbs shocks when
people run, jump or are injured, to prevent damage to the vertebra.
CMS, however, included the use of laser energy in its proposed denial of
reimbursement, as the early lasers used in spinal disc treatment, Nd:YAG and KTP
lasers, emit continuous wave (CW) energy at a constant level, which is thermal,
like ET or RF energy.
The Company's pulsed Holmium Lasers emit pulsed energy, which is highly absorbed
by water. Each pulse of Holmium laser energy is absorbed by the water in the
cells, which is rapidly turned to steam, vaporizing the tissue. The tissue cools
between the pulses, which last a few hundred microseconds (millionths of a
second), and only a small amount of heating or coagulation occurs. That is why
our Holmium lasers are commonly referred to as "cold" vaporizing lasers.
The Company filed an objection to CMS' lumping our pulsed Holmium Lasers with
ET, RF and older, thermal Nd:YAG and KTP lasers, few of which lasers are still
in use in the treatment of spinal discs. We explained the different mechanisms
of action, tissue effects and improved patient outcomes of pulsed Holmium laser
energy, compared to those of ET, RF, Nd:YAG and KTP laser energy, and we
attached ten (10) published papers on clinical studies of Holmium laser energy
that support our position.
The Company believes its objection makes a convincing argument to avoid
including our pulsed Holmium Lasers with other thermal devices in CMS' proposed
decision. The Company expects it will take until October or later before CMS
makes a final decision to either deny or approve reimbursement for TIPS or take
no action, leaving the decision on what to reimburse or not to its 30 or so
local reimbursement bodies. If CMS makes a final decision to deny reimbursement
for the use of our pulsed Holmium Lasers in TIPS, our spinal business would be
adversely affected.
F-17
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. STOCKHOLDERS' EQUITY
During the first quarter of 2007, the Company sold 2,650,000 shares of its
common stock through J. H. Darbie & Co., Inc. ("Darbie") and First Island
Capital, Inc. ("FIC"). The Company sold 2,600,000 shares and 212,000 warrants
through Darbie to four institutional investors and a related accredited
individual at a price of $1.25 per share for an aggregate of $3,250,000, and
50,000 shares through FIC at a price of $1.25 per share for $62,500 to an
accredited individual. In addition, as part of the sale of the common stock, the
Company also issued warrants, exercisable to purchase 208,000 and 4,000 shares
of common stock to Darbie and FIC, respectively, at a price of $1.25 per share,
with a customary anti-dilution provision. The Company paid a commission of
$260,000 to Darbie and incurred $18,500 in legal expenses and other costs.
In January 2007, the Company and the investors renegotiated the terms of the
offering above, and the Company issued 265,000 additional shares of common stock
to the investors without cost, bringing the total number of shares issued to
2,915,000 at an average cost of $1.136 per share.
In fiscal 2007, the Chief Executive Officer converted two Senior Convertible
Secured Notes in the amounts of $150,000 and $50,000, and their respective
accrued interest, totaling $122,000, into 763,958 shares of common stock based
on their conversion price of $0.40 and $0.50 per share, respectively, upon their
respective maturity dates.
During the first quarter of fiscal 2007, the Company issued 212,000 warrants in
connection with a stock sale.
Shares of Weighted
Common Stock Average Range of
Issuable Upon Exercise Price Exercise
Exercise of Warrants Per Share Prices
---------------------- ----------------- ---------------
Outstanding, at September 30, 2006 -- $ -- $ --
----------------------
Issued 212,000 $ 1.25 $ 1.25
----------------------
Outstanding, at September 30, 2007 212,000 $ 1.25 $ 1.25
Issued -- -- --
----------------------
Outstanding, at September 30, 2008 212,000 $ 1.25 $ 1.25
======================
Stock Options
The Company has adopted stock option plans that authorize the granting of
options to key employees, directors, and 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 generally expire in six or ten years specific to their respective
plan. Forfeitures of stock options are returned to the Company and become
available for grant under the respective plan.
During fiscal 2007, the board of directors authorized the grant of non-qualified
stock options to purchase 172,000 shares as follows:
Number of Option Exercise
Options(1) Price Per Share(2)
--------- -----------------
36,000 $0.64
35,000 $1.20
16,000 $1.40
25,000 $1.52
60,000 $1.53
(1) These options vest over five years and expire ten (10) years from the date
of grant.
(2) Exercise price per share is based on the closing price of the Company's
common stock on the date of grant.
F-18
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During fiscal 2008, the Board of Directors authorized the grant of non-qualified
stock options to purchase 96,500 shares as follows:
Number of Option Exercise
Options(1) Price Per Share(2)
--------- -----------------
41,500 $0.38
30,000 $0.35
25,000 $0.77
(1) These options vest over five years and expire ten (10) years from the date
of grant.
(2) Exercise price per share is based on the closing price of the Company's
common stock on the date of grant.
Stock Options Outstanding:
Weighted-
Average
Weighted- Remaining
Average Contractual Aggregate
Exercise Term Intrinsic
Shares Price (Years) Value
---------- --------- ----------- -----------
Options outstanding at October 1, 2006 1,425,979 $ 1.16
Options granted 172,000 $ 1.26
Options exercised (18,100) $ 0.49
Options forfeited (152,900) $ 1.53
---------- ---------
Options outstanding at September 30, 2007 1,426,979 $ 1.14
Options granted 96,500 $ 0.47
Options exercised -- --
Options forfeited (97,000) $ 1.04
---------- ---------
Options outstanding at September 30, 2008 1,426,479 $ 1.10 4.0 $ 4,550
========== ========= =========== ===========
Options exercisable at September 30, 2008 1,244,229 $ 1.13 3.4 $ 4,550
========== ========= =========== ===========
The following table summarizes information concerning outstanding and
exercisable options at September 30, 2008:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------ -------------------
Outstanding Weighted-Average Exercisable Weighted-
Range of as of Remaining Weighted-Average as of Average
Exercise Prices 9/30/2008 Contractual Life (years) Exercise Price 9/30/2008 Exercise Price
- ----------------- --------- ------------------------ -------------- --------- --------------
$0.14 - $0.38 151,500 4.3 $0.27 121,500 $0.25
$0.39 - $0.94 586,679 5.0 $0.61 509,029 $0.59
$0.95 - $1.88 523,400 3.5 $1.30 448,800 $1.28
$1.89 - $2.61 16,000 1.7 $2.29 16,000 $2.29
$2.62 - $3.38 100,900 1.5 $2.75 100,900 $2.75
$3.39 - $4.25 48,000 1.5 $3.84 48,000 $3.84
---------- ---------- -------- ---------- --------
1,426,479 4.0 $1.10 1,244,229 $1.13
========== ========== ======== ========== ========
The weighted-average grant date fair value of options granted during the fiscal
years ended September 30, 2008 and 2007 was $0.29 and $0.94 per option,
respectively. There were no options exercised during the fiscal year ended
September 30, 2008. The total intrinsic value of options exercised during the
fiscal year ended September 30, 2007 was $13,370.
NOTE 9. EMPLOYEE BENEFIT PLAN
The Company has 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 for the fiscal years ended September 30, 2008 and 2007 totaled
$32,000 and $31,000, respectively.
F-19
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. SEGMENT INFORMATION:
The Company's revenue base is derived from the sales of medical products and
services on a worldwide basis originating from the United States. 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.
For the year ended September 30, 2008: For the year ended September 30, 2007:
Service and Service and
Product Rental Total Product Rental Total
------------------------------------------ ------------------------------------------
Revenues $ 3,832,000 $2,039,000 $ 5,871,000 $ 3,777,000 $1,693,000 $5,470,000
Cost of sales 2,657,000 1,506,000 4,163,000 2,039,000 1,122,000 3,161,000
------------------------------------------ ------------------------------------------
Gross profit 1,175,000 533,000 1,708,000 1,738,000 571,000 2,039,000
Expenses:
Selling, general and
administrative 1,877,000 496,000 2,373,000 1,676,000 370,000 2,046,000
Research and development 1,311,000 -- 1,311,000 1,220,000 -- 1,220,000
------------------------------------------ ------------------------------------------
(Loss) income from operations $(2,013,000) $ 37,000 (1,976,000) $(1,158,000) $201,000 (957,000)
=========== ========= =========== =========
Other income (expense):
Interest income 53,000 134,000
Royalty income 374,000 487,000
Interest expense (38,000) (10,000)
Creditor settlements and recoveries 27,000 31,000
Loss on disposal of equipment (17,000) (1,000)
---------- ----------
(Loss) before provision for income taxes (1,577,000) (316,000)
Provision for income taxes 13,000 8,000
---------- ----------
Net (loss) $(1,590,000) $ (324,000)
=========== ==========
Sales in foreign countries in fiscal 2008 and 2007 accounted for approximately
24.6% and 22.9%, respectively, of the Company's total sales. The breakdown by
geographic region is as follows:
2008 2007
---------- ----------
Asia $ 802,000 $ 675,000
Europe 224,000 224,000
Latin America 118,000 138,000
Middle East 80,000 1,000
Australia 121,000 6,000
Africa -- --
Other 99,000 209,000
---------- ----------
$1,444,000 $1,253,000
========== ==========
F-20
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sales and gross profit to customers by similar products and services for the
fiscal year ended September 30, 2008 and September 30, 2007 were as follows:
For the year ended September 30,
2008 2007
----------- -----------
By similar products and services:
Sales
Products:
Lasers and accessories $ 1,111,000 $ 673,000
Fibers, Needles and Tips 2,721,000 3,104,000
Service and rental 2,039,000 1,693,000
----------- -----------
Total $ 5,871,000 $ 5,470,000
=========== ===========
Gross profit
Products:
Lasers and accessories $ 66,000 $ 137,000
Fibers, Needles and Tips 1,109,000 1,601,000
Service and rental 533,000 571,000
----------- -----------
Total $ 1,708,000 $ 2,309,000
=========== ===========
All the Company's long-lived assets were located in the United States at
September 30, 2008.
NOTE 11. RELATED PARTY TRANSACTIONS
During the fiscal years ended September 30, 2008 and 2007, the Company incurred
$6,900 and $14,800 of legal services rendered by a Director, respectively, of
which $1,000 was still outstanding and included in accounts payable as of
September 30, 2008.
The Company entered into a service agreement with Cardiomedics, Inc.
("Cardiomedics"), a privately held corporation in which the Chairman/CEO of
Trimedyne, Inc. holds a majority interest and is a member of the Board of
Directors. The COO/President of the Company is also a board member of
Cardiomedics. Under the agreement, Trimedyne agreed to provide warranty service,
periodic maintenance, and repair on Cardiomedics' heart assist devices for which
Trimedyne billed Cardiomedics $40,000 on account and recorded as service income,
including $29,000 during the year ended September 30, 2006. During the quarter
ended March 31, 2006 Cardiomedics' account with Trimedyne, Inc. became
delinquent and the Company ceased providing services to Cardiomedics.
Cardiomedics also entered into a reimbursement agreement with the Company for
business expenses incurred by the CEO/Chairman of the Company on behalf of
Cardiomedics in the amount of $11,000.
The above balances due were consolidated and converted into a $51,000 promissory
note (the "Note"). The Note bears interest at 8.0% per annum, and matured on
March 31, 2008. During the fiscal year ended September 30, 2008 the Note was
paid in full. During the fiscal year ended September 30, 2007, the Company
received $29,000 in principal reduction payments from Cardiomedics, reducing the
principal balance of the Note to $9,000 and recorded $2,000 in interest income
in connection with the above agreement.
In connection with the above service agreement with Cardiomedics, the Company
received $33,000 in service income during the fiscal year ended September 30,
2008.
On April 7, 2006, the Company entered into an agreement to employ Cardiomedics
as a consultant to provide graphics arts services, since the Company had no
employee with experience in the design and production of brochures and other
marketing materials. Under this agreement, Cardiomedics provides the services of
a graphics art specialist at a rate comparable to those presently prevailing in
the market in the design and production of marketing materials. During the years
ended September 30, 2008 and 2007, the Company incurred $36,000 and $38,000,
respectively, in expense for the services provided under the agreement, which
was recorded to marketing expense, of which $4,000 was included in the balance
of accounts payable at September 30, 2008.
F-21