AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 21, 2006
Washington, DC 20549
REGISTRATION NO. ___________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933, AS AMENDED
NEVADA 36-3094439
----------------------------- -------------
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
INCORPORATION OR ORGANIZATION IDENTIFICATION NO.)
25901 COMMERCENTRE DRIVE
LAKE FOREST, CA 92630
---------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
TRIMEDYNE, INC.
--------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-------------------------------
MARVIN P. LOEB, CHAIRMAN
AND CHIEF EXECUTIVE OFFICER
TRIMEDYNE, INC.
25901 COMMERCENTRE DRIVE
LAKE FOREST, CALIFORNIA 92360
(NAME AND ADDRESS OF AGENT FOR SERVICE)
(949) 951-3800
-----------------------------------------------------------------
(TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT OF SERVICE)
COPY TO:
RICHARD F. HOROWITZ, ESQ.
HELLER, HOROWITZ & FEIT, P.C.
292 MADISON AVENUE
NEW YORK, NEW YORK 10017
i
Approximate date of commencement of proposed sale to the public: At the
discretion of the selling stockholders.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
If the registrant elects to deliver its annual report to security holders, or a
complete and legal facsimile thereof pursuant to Item 11(a) (1) of this Form,
check the following box. |_|
CALCULATION OF REGISTRATION FEE
-------------------------------
PROPOSED PROPOSED
Title of
Securities Amount Offering Aggregate Amount of
To Be To Be Price Offering Registration
Registered Registered Per Share (1)(2) Price (1) Fee
---------- ---------- ---------------- ----------- ------------
Common Stock 3,462,000 $ 1.41 $4,881,420 $ 522.31
(1) Estimated solely for the purpose of calculating the registration fee.
(2) The per share price is based upon the average closing market price of
our Common Stock on December 19, 2006.
This registration statement includes 2,650,000 presently outstanding shares of
our Common Stock (the "Shares"), 212,000 Shares issuable upon the exercise of
Warrants issued in connection with the sale of those 2,650,000 Shares; 600,000
Shares reserved for granting of stock options under our 2007 Non-Qualified Stock
Option Plan (the "Option Plan") and the resale of the Shares that are issued
under the 2007 Option Plan; and an indeterminable number of Shares which we may
be required to issue pursuant to the anti-dilution provisions of the Warrants
and Common Stock Subscription Agreements under which the 2,650,000 Shares were
sold to the selling shareholders.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay the effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
ii
SUBJECT TO COMPLETION, DATED __________, 2007
---------------------------------
TRIMEDYNE, INC.
--------------------------------
3,462,000 SHARES OF COMMON STOCK
This Prospectus covers the proposed offer and sale of up to 3,462,000 shares of
Common Stock ($0.01 par value) (the "Shares") of Trimedyne, Inc. ("we", "us",
"our" or the "Company") by certain of our present shareholders. Of these,
2,650,000 Shares are presently outstanding; 212,000 Shares are issuable in the
event of the exercise of warrants expiring in December 2011 (the "Warrants"),
which are exercisable at a price of $1.25 per Share and were issued in
connection with the sale of the aforesaid 2,650,000 Shares; and up to 600,000
Shares which may be granted in the future pursuant to our 2007 Non-Qualified
Stock Option Plan (the "2007 Option Plan") and the resale of the shares that may
be issued under the 2007 Option Plan. In addition, this Prospectus covers an
indeterminable number of Shares, which may be issued pursuant to the
anti-dilution provisions of the Warrants and Subscription Agreements under which
the aforementioned 2,650,000 Shares were purchased by the selling shareholders.
This offering is not being underwritten. The prices at which the selling
stockholders may sell the shares of common stock that are part of this offering
will be determined by the prevailing market price for the shares at the time the
shares are sold, a price related to the prevailing market price, at negotiated
prices or prices determined, from time to time by the selling shareholders.
We will not receive any of the proceeds from the sale of the presently
outstanding 2,650,000 Shares being registered hereunder. To the extent the
Warrants issued in connection with the sale of the 2,650,000 Shares and Options
issued pursuant to our 2007 Option Plan are exercised, we will receive only the
exercise price.
Our Shares are traded on the Over-The-Counter Bulletin Board under the Symbol
"TMED.OB". The closing price of our Shares on December 19, 2006, was $1.41 per
share.
The securities offered hereby involve a high degree of risk. Please read the
"RISK FACTORS" section beginning on page 3.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
THE DATE OF THIS PROSPECTUS DECEMBER 21, 2006
1
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY 3
The Company 3
The Offering 3
Determination of the Offering Price 3
USE OF PROCEEDS 4
RISK FACTORS 4
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 6
THE COMPANY 6
The Orthopedics Market 7
The Urology Market 7
New Products 8
Market Information 8
Holders of Common Stock 9
Dividends 9
Shares Authorized For Issuance
Under Equity Compensation Plans 9
MANAGEMENT'S DISCUSSION & ANALYSIS OR PLAN OF OPERATION 10
CRITICAL ACCOUNTING POLICIES 10
Revenue Recognition 10
Inventories 10
Goodwill 11
Deferred Taxes 11
Stock-Based Compensation 11
Results of Operation 11
Risks and Uncertainties 11
Consolidated Results of Operations for Fiscal Years 2006 and 2005 12
Net Revenues 12
Cost of Goods Sold 12
Selling and General Administrative Expense 12
Research and Development (R & D) Expenses 12
Other Income and Expense 12
Net Income 12
Cash Flows 13
Liquidity 13
BUSINESS 13
General 13
Laser Rental Services 13
Marketing 14
Field Service 14
Government Regulation 14
Employees 16
Patients and Patient Applications 16
Competition 16
Insurance 16
Properties 16
Litigation 17
MANAGEMENT 17
Officers and Directors 17
Executive Compensation 18
Security Ownership of Management and Others 18
Stock Option Grants to Executive Offciers and Directors 19
TRANSACTIONS WITH MANAGEMENT 20
DESCRIPTION OF SECURITIES 20
Preferred Stock 20
Common Stock 20
Warrants 20
Anti-Dilution Rights of Certain Shareholders and Warrant Holders 20
Registration of Shares 21
Transfer Agent 21
THE COMMISSION'S POLICY ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES 21
SHARES AVAILABLE FOR FUTURE SALE 21
PLAN OF DISTRIBUTION 21
SELLING SECURITY HOLDERS 22
LEGAL MATTERS 23
EXPERTS 23
AVAILABLE INFORMATION 23
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR FISCAL YEARS 2006 AND 2005 F-1
FINANCIAL STATEMENTS FOR FISCAL YEARS 2006 AND 2005 F-3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR FISCAL YEARS 2006 AND 2005 F-7
2
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements appearing elsewhere in
this Prospectus, our Annual Report on Form 10-KSB for the fiscal year ended
September 30, 2006 and our subsequent 10Q-SB Reports.
The Company
Trimedyne, Inc. (the "Company", "we", "our" or "us") is engaged in the
development, manufacturing and marketing of 80 watt and 20 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, including applications in orthopedics,
urology, ear, nose and throat ("ENT") surgery, gynecology, gastrointestinal
surgery, and general surgery.
Our 100% owned subsidiary, Mobile Surgical Technologies, Inc. ("MST"), is
engaged in the rental of lasers, on a "fee per case" basis to hospitals, surgery
centers, group practices and individual physicians in Texas and Oklahoma. MST's
revenues and those of our field service department represented about 28% of our
revenues in the fiscal year ended September 30, 2006.
The principal market for our Lasers and Needles is presently in orthopedics to
treat herniated (bulging) and ruptured lumbar, thoracic and cervical discs in
the spine. Currently, the second most important market for our Lasers and Fibers
is in urology to fragment stones in the kidney, ureter and bladder.
We are developing a new, proprietary, Side Firing Laser Fiber for use with our
80 watt Lasers and Holmium lasers manufactured by others to vaporize a portion
of the prostate gland to treat Benign Prostatic Hyperplasia or "BPH", commonly
referred to as an enlarged prostate.
This new Fiber will be marketed by Boston Scientific Corporation (NYSE:BSX) in
the U.S. and Japan and by Lumenis, Ltd. (LUME.PK) elsewhere throughout the
world. As a result of Boston Scientific and Lumenis marketing our new Side
Firing Fiber, we believe urology will become our principal market.
In October through December 2006, we sold 2,650,000 Shares to four institutions
and two accredited individuals at a price of $1.25 per Share for an aggregate of
$3,312,500. After deducting $300,000 of estimated costs of the offering, the net
proceeds to us were about $3,012,500. The principal use of these funds will be
to finance the increased level of business expected to arise from sales of our
new Fiber by Boston Scientific and Lumenis.
See "THE COMPANY" and "BUSINESS" for more information on our products and
business.
The Offering
This Prospectus covers the offer and sale of up to 3,462,000 of our Shares to
the public by (a) the holders of 2,650,000 presently outstanding Shares, (b) up
to 212,000 Shares which are issuable upon the exercise of presently outstanding
Warrants, which are exercisable at a price of $1.25 per Share, expire in
December 2011 and were issued in connection with the sale of the aforesaid
2,650,000 presently outstanding Shares, (c) up to 600,000 Shares which may be
granted in the future pursuant to our 2007 Option Plan and the resale of the
shares that may be issued under the 2007 Option Plan and (d) an indeterminate
number of Shares issuable pursuant to the anti-dilution provisions of the
Warrants and Subscription Agreements for the 2,650,000 Shares.
Number of Shares Outstanding on December 19, 2006: 17,318,902
Number of Shares To Be Outstanding Following This Offering: 18,130,902 (assuming
the exercise of all of the Warrants and Options)
Determination of the Offering Price
The offering prices at which the Shares may be sold in the future by the Selling
Security Holders will be at their discretion and based upon the then market
price of our Shares and market conditions at the time of their sale. (See
"SELLING SECURITY HOLDERS")
3
USE OF PROCEEDS
We will not receive any proceeds from the sale of the 2,650,000 presently
outstanding Shares. If any of the Warrants and Options under our 2007 Option
Plan are exercised, we will receive only the exercise price, which will be used
for general corporate purposes.
RISK FACTORS
An investment in our Shares involves a high degree of risk. You should carefully
consider the risks and uncertainties described below, which may not be the only
ones we face. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially adversely
affected. In this event, the trading price of our Shares could decline and you
may lose all or part of your investment.
Limited Cash Resources
On September 30, 2006, we had $802,000 of cash and cash equivalents, receivables
of $742,000 (after allowances for bad debts), inventories of $2,596,000 and
other current assets of $184,000. However, on that date, we had accounts payable
of $323,000, accrued expenses of $399,000 and other current liabilities of
$146,000. In October-December 2006, we sold 2,650,000 Shares for an aggregate
cash consideration of $3,312,500 which, after an estimated $300,000 of offering
expenses, provides us with net proceeds of $3,012,500, which will be used for
working capital and general corporate purposes. However, unless our revenues
increase, we are able to collect a significant portion of our accounts
receivable and sell much of our goods in inventory to pay our accounts payable,
our accrued expenses and finance our operations, we may need additional
financing, the availability of which we cannot assure. (See "FINANCIAL
STATEMENTS")
We Have Had Only Modest Profits Over The Last Three Years
While we had a net profit of about $1,000,000 in our fiscal year ended September
30, 2004, we had a net profit of only $186,000 in the fiscal year ended
September 30, 2005 and a net profit of only $97,000 in the fiscal year ended
September 30, 2006. In addition, we had an accumulated deficit of $42,823,000 at
September 30, 2006. We cannot assure that we will be able to continue to operate
profitably. (See "FINANCIAL STATEMENTS" and "MANAGEMENT'S DISCUSSION AND
ANALYSIS").
Risks of Small Businesses in the Medical Technology Field
We do not anticipate generating substantial profits unless we are able to
produce sufficient revenues to offset the costs associated with developing,
manufacturing and marketing our current products, overhead, and the development
of new products. You should be aware of the risks, problems, delays, expenses,
and difficulties encountered by small companies developing new medical
technologies, especially in view of the significant competition that we have and
will continue to encounter. (See "BUSINESS" and "FINANCIAL STATEMENTS" herein.)
We May Need Substantial Additional Financing
Although our working capital (current assets over our current liabilities) was
$3,456,000 at September 30, 2006, and we received an aggregate of approximately
$3,012,500 of net proceeds from the sale of 2,650,000 Shares in October-December
2006, if our revenues increase in the near future, we may need to raise
additional capital to fund new inventory purchases and carry additional
receivables. If our revenues decrease, we may need to raise additional capital
to finance our overhead, operating, sales and marketing expenses.
In addition, the development, testing, obtaining regulatory approval for and
marketing of medical devices requires a substantial amount of funds. Our
existing working capital and the approximately $3,012,500 of net proceeds from
the recent sale of 2,650,000 Shares may not be sufficient to meet our operating
needs and the operating needs of MST, our 100% owned laser rental subsidiary, in
the future.
Sources of financing may include the sale of additional equity securities or the
sale or licensing of patent rights. The issuance of additional Shares or Shares
of Preferred Stock will dilute your holdings. Any inability to obtain additional
financing, if needed, will have a material adverse effect on us, and may require
us to reduce or curtail our operations. (See "THE COMPANY" and "BUSINESS"
herein.)
There Is No Assurance That Any Or All Of The Warrants Or Options Under Our 2007
Option Plan Will Be Exercised
There is no assurance any or all of the Warrants or any stock options issued
under our 2007 Option Plan will be exercised prior to their expiration. The
Warrants are exercisable at a price of $1.25 per Share and expire in October and
November 2011. The weighted average exercise price of Options we granted to
officers, directors, consultants and employees at September 30, 2006 was $1.28
per Share. The exercise of the Warrants and Options under our 2007 Option Plan
is dependent on the market price of our Shares significantly exceeding their
respective exercise prices. (See "Market Information" under "THE COMPANY" and
"Shares Authorized For Issuance Under Equity Compensation Plans" under "THE
COMPANY").
4
We May Not Be Able To Adjust To Rapid Technological Changes
We are engaged in an intensely competitive industry. In recent years, the
medical laser industry has been characterized by rapid technological change.
There is no assurance that our present products may not face technological
obsolescence, or that we will be able to develop, acquire licenses for, or
obtain regulatory approvals to market new products and keep pace with
technological advances by our competitors. (See "THE COMPANY" and "BUSINESS")
Risks of Developing New Products
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 side firing laser devices, we cannot assure that our
new side firing laser device for use with our Holmium laser and Holmium lasers
made by others for the treatment of BPH (enlarged prostates) or the new side
firing laser devices we are developing for the treatment of female urinary
incontinence and other conditions can be completed at a reasonable cost or in a
timely manner or will be clinically successful, able to complete successfully in
the marketplace or profitable to us. (SEE "New Products" under "THE COMPANY".)
We May Acquire Other Entities
We may engage in acquisitions of other companies and businesses and may use our
cash reserves, authorized but unissued Shares or shares of our Preferred Stock
or to acquire these entities. If we use shares of our Preferred or Common Stock
for acquisitions, this will result in a dilution of the percentage of your
ownership of Company. In addition, acquisitions may involve speculative and
risky undertakings. Under Nevada law, acquisitions do not require shareholder
approval, except when accomplished by merger or consolidation.
(See "DESCRIPTION OF SECURITIES" herein.)
There Are Warrants, Stock Options And Convertible Notes Outstanding That Will
Dilute Your Ownership
At September 30, 2006, we had granted stock options under our various Incentive
and Non-Qualified Stock Option Plans ("Option Plans") to our officers,
directors, employees and consultants to purchase an aggregate of 1,425,979
Shares at exercise prices of $0.14 to $3.84 per Share, with a weighted average
exercise price of $1.28 per Share, of which options to purchase an aggregate of
1,132,129 Shares were exercisable on that date. We are able to grant additional
options under our Option Plans in the future. We have received notice of
conversion of the $200,000 of the presently outstanding Convertible Notes and
accrued interest on the maturity dates of the Notes, February 27 and April 18,
2007, which will require us to issue an aggregate of 760,000 shares. If all of
the presently outstanding Warrants are exercised, we will be required to issue
212,000 shares. We may also be required to issue an undeterminable number of
shares pursuant to anti-dilution provisions of the Warrants and the Subscription
Agreements under which the 2,650,000 shares referred to above were sold. The
issuance of any of these Shares will dilute your percentage of ownership in the
Company. (See "SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION
PLANS," "FINANCIAL STATEMENTS" and "NOTES TO FINANCIAL STATEMENTS").
Our Stock Price Is Volatile
The market prices for securities of medical device companies, including our
Shares, have been volatile. It is likely that the price of our Shares will
continue to fluctuate in the future. Many factors can impact the market price of
our Shares, such as announcements of technological innovations or new commercial
products, FDA clearances or approvals, distribution agreements, the results of
pre-clinical testing and clinical trials, the issuance or acquisition of patents
or proprietary rights, changes in sales or earnings, lawsuits, recommendations
by securities analysts, and market conditions in general. The market price of
our Shares could also be adversely affected by future issuances of Common Stock
or Preferred Stock. (See "Market Information" under "THE COMPANY")
We Do Not Anticipate Paying Any Dividends
We have not paid any dividends in the past and do not anticipate paying any
dividends in the foreseeable future. This may depress the price of our Shares,
as a non-dividend paying stock may not appeal to certain investors. (See
"Dividends" under "THE COMPANY")
We May Issue Preferred Stock That Could Effect The Rights Of Holders Of Our
Common Stock
We are authorized to issue 1,000,000 shares of Preferred Stock. Our Board of
Directors has broad powers to fix the rights and terms of any Preferred Stock we
may issue, without requiring shareholder approval. The issuance of any of our
authorized but unissued Preferred Stock could have an adverse effect on the
rights of the holders of our Shares and on the market price of our Shares. (See
"DESCRIPTION OF SECURITIES")
5
We Are Subject To Extensive Government Regulation
Our business is subject to extensive regulation by the FDA and comparable
regulatory authorities of foreign countries. Compliance with regulatory
requirements and obtaining approvals to test or market new medical devices is
expensive and time consuming. We cannot assure that we will be able to continue
to meet all regulatory requirements of the FDA and other governmental
authorities necessary to market our present products or obtain and maintain
approvals to test and market new products. Failing to meet necessary FDA and
other governmental requirements will have a negative impact on the market price
of our Shares and our ability to continue as a going concern. (See "Government
Regulation" under "BUSINESS")
We Carry Limited Liability Insurance
We carry an aggregate of $5,000,000 of general liability insurance. We cannot
assure that we will be able to maintain this insurance in force at an acceptable
cost or that the amount of this insurance will be sufficient to protect our
assets in the event of claims by users of our products, patients or other
parties. If court awards exceeding the amount of the insurance were made, our
assets could be depleted. (See "Insurance" under "BUSINESS" herein.)
We Are Dependent Upon Maintaining Valid Patents And Licenses
There is no assurance our patents will be upheld if challenged in courts or that
we will be able to obtain additional valid patents. We cannot assure that our
patents can be enforced against infringers. We also cannot assure that our
products do not infringe patents owned by others, licenses to which may not be
available to us. Our inability to maintain our patents, avoid infringement of
our patents by others or to obtain licenses to any necessary patents could have
an adverse impact on our financial condition, results of operations and/or our
ability to remain in business. (See "Patents And Patent Applications" under
"BUSINESS")
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Risk Factors" and elsewhere in this prospectus are
forward-looking statements that involve risks and uncertainties. These
forward-looking statements include statements about our plans, objectives,
expectations, intentions and assumptions and other statements contained in this
prospectus that are not statements of historical fact. You can identify these
statements by words such as "may," "will," "should," "could", "estimates,"
"plans," "expects," "believes," "intends" and similar expressions. We cannot
guarantee future results, levels of activity, performance or achievements. Our
actual results and the timing of certain events may differ significantly from
those discussed in the forward-looking statements. Factors that might cause such
a discrepancy include those discussed in "RISK FACTORS" and elsewhere in this
prospectus. You are cautioned not to place undue reliance on any forward-looking
statements.
THE COMPANY
Trimedyne, Inc. (the "Company", "we", "our" or "us") is engaged in the
development, manufacturing and marketing of 80 watt and 20 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, and general
surgery. 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 and Oklahoma. MST's revenues and those of our
field service department represented only about 28% of our revenues in the
fiscal year ended September 30, 2006.
The principal market for our Lasers and 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, ankle and wrist, in outpatient, arthroscopic
procedures.
While the second most important market for our Lasers and Fibers is presently in
urology to fragment stones in the kidney, ureter and bladder, we are developing
a new, proprietary, Side Firing Laser Fiber for use with our 80 watt Lasers and
Holmium lasers manufactured by others to vaporize a portion of the prostate
gland to treat Benign Prostatic Hyperplasia or "BPH", commonly referred to as an
enlarged prostate. 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.
6
This new Fiber will be marketed by Boston Scientific Corporation (NYSE:BSX) in
the U.S. and Japan and by Lumenis, Ltd. (LUME.PK) elsewhere throughout the
world. Boston Scientific is a major factor in the urology field with a large
sales organization in the U.S. and Japan. Lumenis, which is based in Israel, is
the world's largest manufacturer of medical lasers, employs a worldwide sales
organization and has sales exceeding $200 million. As a result of Boston
Scientific and Lumenis marketing our new Side Firing Fiber, we believe urology
will become our principal market.
In October through December 2006, we sold 2,650,000 Shares to four institutions
and two accredited individuals at a price of $1.25 per Share for an aggregate of
$3,312,500. After deducting $300,000 of estimated expenses of the offering, the
net proceeds to us were about $3,012,500. The principal use of these funds will
be to finance the increased level of business expected to arise from sales of
our new Fiber by Boston Scientific and Lumenis.
See "BUSINESS" for more information on our products and business.
The Orthopedic Market
Our Side Firing Laser Needles are used with our Lasers to treat herniated or
ruptured discs in the spine in minimally invasive procedures, most of which are
performed on an outpatient basis in about 20-30 minute procedures, typically
with only local anesthesia. The lower back, leg and neck pain usually disappears
on the operating table, and the patient walks out with a Band Aid(R) on the
puncture (stitches are usually not required). Most patients can return to light
activities in a few days. Papers on our disc procedures published in medical
journals show success rates (good or excellent results, based on pain scores) of
85% to 94%.
Approximately 500,000 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 typically entail a two
to three day hospital stay, bleeding, post-operative pain and a recovery period
of two months or longer. Papers on 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%.
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 training course in which they practice the
procedure on cadavers. In addition to difficulty in convincing busy surgeons
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 to
airfare, food and lodging costs for the surgeons. In addition, surgeons are paid
for conventional disc surgery generally more by Medicare and other third-party
payers than for our 20-30 minute 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 in only a few training courses
organized by others each year in the U.S. and only occasionally in Europe, the
Middle East, 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.
THE UROLOGY MARKET
As the prostate grows, it obstructs the flow of urine through the penis. While
millions of men take drugs to treat an enlarged prostate, the drugs lose their
effect over time, and it is estimated that about 200,000 surgical procedures to
treat enlarged prostates are performed to treat this condition each year in the
United States and about one million are performed each year outside the U.S. The
conventional surgical procedure to treat an enlarged prostate utilizes a wire
loop, inserted through an endoscope in the penis, which is heated with
radiofrequency ("RF") energy and moved back and forth to carve out the interior
of the prostate to enable urine to flow normally.
While the surgical procedure restores urine flow to normal levels, based on
clinical studies, it entails general anesthesia, a three day average hospital
stay, bleeding (about 3% of the patients lose more than a pint of blood and
require a blood transfusion), an infection rate, 3% of the men potent before the
procedure become impotent, and 3% become permanently incontinent.
We are developing a new Side Firing Laser Fiber to treat enlarged prostates.
While our Side Firing Laser Fiber has been cleared for sale by the FDA for use
with our Lasers and Holmium lasers manufactured by others, it is not yet being
marketed. In Lumenis' laser procedure to treat an enlarged prostate, using
Lumenis' Holmium laser and a side firing laser fiber made by Lumenis, the laser
fiber is inserted through an endoscope and laser energy is emitted laterally to
simultaneously vaporize and cauterize the interior of the prostate, with urine
flow returning to normal levels. There is virtually no bleeding and the laser
procedure is typically performed on an outpatient basis, avoiding
hospitalization and the risk of general anesthesia and reducing or eliminating
the other adverse effects of the surgical procedure. Even hemophiliacs and
patients on blood thinners, who cannot have the surgical procedure, can usually
be treated with laser procedure.
7
We settled our patent litigation against Lumenis, Ltd., and in August 2005
entered into an OEM Agreement, under which Lumenis agreed to purchase 100% of
its side firing (75(degree) to 90(degree) emitting) laser fibers and 75% of its
angled firing (60(degree) 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' laser fibers in
these markets when Boston Scientific validates us as a supplier (vendor).
Boston Scientific and Lumenis are in the process of conducting a review of our
manufacturing facility and our manufacturing and quality processes and will
conduct animal and human testing of our new Fiber before they can validate us as
a supplier. The outcome of their review and testing cannot be assured. Their
review and testing is presently expected to be completed late in the second
calendar quarter of 2007 (the third quarter of our 2007 fiscal year), after
which we expect to commence shipments to Boston Scientific and Lumenis. In the
meantime, Lumenis is paying us a royalty of 7.5% on their sales of laser fibers
to Boston Scientific and on their sales of laser fibers to their customers
outside of the U.S. and Japan.
Side firing laser fibers to treat an enlarged prostate typically sell for about
$750 or more and, due to their exposure to blood, are discarded after one use.
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 $400-$500
Fibers to treat stones do not result in as significant sales as those expected
from single use, disposable Side Firing Fibers to treat enlarged prostates.
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.
New Products
In addition to the new Side Firing Laser Fiber described above in "The Urology
Market", we have designed, obtained U.S. patents and filed a patent application
covering a new disposable, side firing,fiber-optic device for use with a new
type of laser for the treatment of female stress urinary incontinence and other
conditions. This condition, which affects an estimated 14 million women in the
United States, is not often treated, as surgical procedures or the injection or
polymers or granules, which can migrate, are not very desirable to women.
However, before we can submit an application to the FDA to market this new laser
and fiber, we must successfully test them in animal and human clinical studies,
whose outcome cannot presently be predicted. There is no assurance FDA marketing
approval to market this new laser or fiber can be obtained.
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 side firing laser devices, we cannot assure that our
new side firing laser device for use with our Holmium laser and Holmium lasers
made by others for the treatment of BPH (enlarged prostates) or the new side
firing laser device we are developing for the treatment of female urinary
incontinence and other conditions can be completed at a reasonable cost or in a
timely manner, or will be clinically successful, able to complete successfully
in the marketplace or profitable to us.
Market Information
Our Common Stock was traded in the Over-The-Counter market from April 13, 1982
to August 11, 1986. From August 12, 1986 to November 18, 2003, the Company's
stock was quoted on the National Market or Small Cap Market System under the
symbol "TMED". Since November 18, 2003, the Company's Common Stock has been
quoted on the Over-The-Counter Bulletin Board under the symbol "TMED.OB". The
following table sets forth the high and low closing sales prices for our Common
Stock for each quarterly period within the Company's two most recent fiscal
years, 2005 and 2006:
2005 High Low
---- ---- ----
Quarter ended:
December 31, 2004 $ 0.75 $ 0.55
March 31, 2005 0.76 0.55
June 30, 2005 0.75 0.55
September 30, 2005 0.75 0.53
2006 High Low
---- ---- ----
Quarter ended:
December 31, 2005 $ 0.72 $ 0.52
March 31, 2006 1.02 0.56
June 30, 2006 1.19 0.80
September 30, 2006 2.00 1.15
8
Holders Of Common Stock
As of September 30, 2006, we had approximately 1,000 holders of record of our
Common Stock and an estimated 9,000 additional holders who maintain the
beneficial ownership of their Shares in "Street Name".
Dividends
We have never paid cash dividends on our Common Stock and do not anticipate
paying cash dividends in the foreseeable future. Any future determination as to
the payment of cash dividends will be dependent upon our financial condition and
results of operations and other factors then deemed relevant by our Board of
Directors.
Shares Authorized For Issuance Under Equity Compensation Plans
The following table provides information as of September 30, 2006 with respect
to shares that may be issued through its employee compensation plans (stock
option plans):
NUMBER OF
SECURITIES REMANING
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 237,229 $ 1.38 --
Equity compensation
plans not approved by
security holders 1,188,750 $ 1.12 811,250
---------------- ---------------- ---------------------
Total 1,425,979 $ 1.16 811,250
================ ================ =====================
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
Our 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," we
recognize 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 delivery and disposable devices 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. We sell our products primarily through commission sales
representatives in the United States and distributors in foreign countries. In
cases where the we utilize distributors, we recognize revenue upon shipment,
provided that all other revenue recognition criteria have been met, and
ownership risk has transferred. In general, we do 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.
We utilize distributors for international sales only. All laser system sales are
non-returnable. Our international distributors typically locate customers for
laser systems before ordering and in general do not maintain inventories. Our
return policy for laser accessories, delivery and disposable devices sold to
distributors is as follows: 1) We 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 our Customer Service Department, and 3)
Should a product be found defective at the time of initial use, the will replace
it free of charge.
We offer 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.
We rent our 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, 2006 and 2005,
four lasers were being rented, 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 2006 and 2005, were less than one percent of revenues.
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.
10
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, 2006 and 2005.
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
The Company accounts for its employee stock-based compensation plans under the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
The Company has adopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" - an amendment of FASB
Statement No. 123.
Results Of Operations
The statements contained herein 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.
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.
11
Consolidated Results Of Operations Fiscal Years 2006 And 2005
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, 2006
and 2005
Year Ended September 30,
2006 2005
------ ------
Net revenues 100.0% 100.0%
Cost of sales 60.1 53.9
Selling, general and administrative expenses 36.5 37.4
Research and development expenses 10.1 9.6
Interest expense 0.5 0.5
Other income, net 8.9 4.4
Income taxes 0.1 0.1
Net income 1.6 2.9
Net Revenues
Net revenues decreased $245,000 or 3.8% in fiscal 2006 to $6,237,000 from
$6,482,000 in fiscal 2005, largely due to decreased unit sales of lasers. Net
revenues from service and rental increased by $84,000 or 5.0% in fiscal 2006 to
$1,753,000 from $1,669,000 in fiscal 2005, primarily due to increased sales
generated by MST. International export revenues increased to $1,853,000 for
fiscal 2006 from $1,822,000 for fiscal 2005 or 1.7%.
Cost Of Goods Sold
Cost of sales in fiscal 2006 was approximately 60.1% of net revenues, compared
to 53.9% in fiscal 2005. Gross profit from the sale of lasers and accessories
was 17% in the fiscal year ended September 30, 2006 as compared to 34% for the
prior year fiscal period. Gross profit from the sale of delivery and disposable
devices during the fiscal year ended September 30, 2006 was 54% as compared to
65% for the prior fiscal year period. This decrease in gross profit was due to
an increase in the cost of raw materials combined with the payment of overtime
wages to production personnel and the hiring of temporary personnel to increase
inventory during the preparation for the relocation of the Company's facility.
Gross profit from revenue received from service and rentals was 28% in the
fiscal year ended September 30, 2006 as compared to 32% for the prior fiscal
year period. This decrease in gross profit was due to an increase in service
personnel to support periodic maintenance and warranty repairs for the Company's
i nstalled laser base and rental lasers along with an increase maintaining the
lasers utilized at MST.
Selling, General And Administrative Expenses
Selling, general and administrative ("SG&A") expenses decreased 6.3% to
$2,279,000 in fiscal 2006, compared to $2,423,000 in fiscal 2005. The $144,000
decrease in fiscal 2006 is primarily attributed to reductions in marketing
expense of $97,000, legal expense of $50,000, commission expense of $41,000,
travel expense of $22,000 and audit expense of $21,000 offset by $108,000 in
expense incurred in relocating to a new facility in May of 2006.
Research And Development (R&D) Expenses
R&D expenses were $633,000 in fiscal 2006, compared to $623,000 in fiscal 2005.
R&D as a percentage of net revenues increased to 10.1% of net revenues in fiscal
2006 as compared to 9.6% in fiscal year 2005. R&D spending in fiscal 2006 was
higher as the Company increased its product development efforts and staff in
readying its new VaporMAX(TM) Side-Firing Device for the market.
Other Income And Expense
Total other income, net increased $273,000 or 110% to $522,000 in fiscal 2006
from $249,000 in fiscal 2005. Interest income was $21,000 in fiscal 2006
compared to $16,000 in fiscal 2005. The levels of cash available for investment
in interest bearing securities were $802,000 and $1,523,000 as of September 30,
2006 and 2005, respectively. The increase in interest income was due to the
Company maintaining an increased amount of funds in interest bearing investments
along with higher interest rates in fiscal 2006. Income from royalties increased
$216,000 or 82% to $478,000 in fiscal 2006 from $262,000 in fiscal 2005. This
increase was due to royalties received from Lumenis based on a percentage of
Lumenis' sales of side-firing and angled-firing devices manufactured by Lumenis
or purchased by Lumenis from third-party suppliers, as stipulated in the
settlement agreement entered into on November 17, 2003 between the Company and
Lumenis, Inc. During the fiscal year ended September 30, 2006, the Company
reversed $49 ,000 of previous accruals for which the Company no longer had
obligations and received $3,000 in insurance settlements which was offset by
interest accrued on notes due to an officer.
Net Income
As a result of the above, net income in fiscal 2006 was $97,000, compared to a
net income of $186,000 in fiscal 2005.
12
Liquidity And Capital Resources
Cash flows
In fiscal 2006, net cash provided by operating activities was $128,000. Net cash
used in investing activities was $738,000 in fiscal 2006, compared to net cash
used of $100,000 in fiscal 2005. The increase in cash used in investing
activities in fiscal 2006 was primarily due to cash paid for leasehold
improvements for a new facility the Company occupied in May, 2006. Net cash used
in financing activities was $111,000 in fiscal 2006, which was the result of
$146,000 of payments on debt offset by $35,000 received from the exercise of
employee stock options.
Liquidity
At September 30, 2006, the Company had working capital of $3,456,000 compared to
$3,773,000 at the end of the previous fiscal year ended September 30, 2005. Cash
decreased by $721,000 to $802,000 at September 30, 2006 from $1,523,000 at the
fiscal year ended September 30, 2005.
During the period of October through December 2006, the Company sold an
aggregate of 2,650,000 shares of common stock to four investors and two
accredited individuals at a price of $1.25 per share, which resulted in
aggregate gross proceeds of $3,312,500. After $300,000 of estimated offering
expenses, the net proceeds to the Company will be approximately $3,012,500.
We believe our existing working capital will be sufficient to meet our operating
needs for at least the next twelve months. While we expect to continue to
operate at a profit, we could incur losses in the future if we fail to generate
revenues sufficient to offset the costs associated with manufacturing and
marketing our current products, our overhead, and the development of new
products. There can be no assurance that we will be able to operate profitably
in the future.
We have two outstanding senior, secured convertible notes due to our chief
executive officer. These notes have a face value of $150,000 and $50,000, bear
interest at 12% per annum, mature on February 28 and April 14, 2007,
respectively, and are convertible at prices of $0.40 and $0.50 per share,
respectively. The holder of these notes has the right at any time or times,
prior to the payment of these notes in full, including any unpaid interest, to
convert either or both of these notes for common stock at their respective
convertible price. On November 3, 2006 the Chief Executive officer elected to
convert the above notes and their respective accrued interest into 760,000
shares of common stock upon their maturity. The issuance of this common stock
will dilute the equity interests of our shareholders.
BUSINESS
General
We were incorporated in Nevada on May 1, 1980 and commenced operations in
December 1980, at which time our present name was adopted. We have a 100% owned
"fee per case" Laser rental subsidiary, MST, and an inactive, 90% owned
subsidiary, Cardiodyne, Inc., which ceased its development of a cardiovascular
laser system and related disposable devices in 2002.
Our factory and corporate office is located at 25901 Commercentre Drive, Lake
Forest, CA 92630, and our telephone number is (949) 951-3800.
SEE "THE COMPANY" FOR INFORMATION ON OUR PRODUCTS AND THEIR MARKETS IN THE
UROLOGY AND ORTHOPEDICS FIELDS AND THE NEW PRODUCTS WE ARE DEVELOPING.
Laser Rental Services
Many hospitals, surgery centers and physicians are reluctant to purchase "big
ticket" medical equipment, such as our Lasers, which sell for $50,000 to
$120,000, 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 sprung up throughout the United States to
fill this void. These companies provide lasers and other types of medical
equipment, along with a trained operator to hospitals, surgery centers and
physicians on a "fee per case" basis.
We acquired MST in late 2000 and plan to expand its "fee per case" rental
business, which is particularly well suited to the introduction of new laser
products. If requested, MST also supplies, disposable or reusable fiber optic
laser delivery devices and includes their price in the "per case" fee.
When a surgeon is trained to perform a new procedure, such as our Laser
procedures for testing 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 can rent it on a "per case" basis.
13
When the hospital's or surgery center's staff has been trained by our Laser
operator and is comfortable with the patient results, the volume of patients and
the amount third-party payors are reimbursing for the procedure, they can buy
the Laser, lease it under a conventional, long term lease or continue to rent it
on a "per case" basis. Since the six to twelve month average delay in purchasing
"big ticket" medical equipment is eliminated, the hospital or surgery center can
immediately start purchasing our disposable Fibers and Needles, which typically
carry higher profit margins than our Lasers.
Marketing
We market our lasers, Fibers, Needles and Tips in the United States through a
small group of "straight commission" independent sales representatives, all of
whom represent other manufacturers of medical products and devote only a small
part of their time to selling our products. Outside the United States, we sell
our Lasers, Fibers and Needles through independent distributors in about 30
foreign countries, all of whom sell other medical products. Virtually all of our
sales of Lasers and most of our sales of Fibers and Needles to foreign
distributors are made pursuant to letters of credit or wire transfers of funds
payable in U.S. dollars. As a result, we are largely not subject to foreign
currency risks.
In the fiscal year ended September 30, 2006, our sales of products in foreign
countries accounted for approximately 29.7% of our total revenues.
Field Service
We presently employ a Manager of Field Service and four field service
technicians who repair and provide preventative maintenance services to owners
of our Lasers during the first year warranty period and, thereafter, under
annual service contracts. We also sell parts and charge for the time and travel
cost of our field service technicians when they repair Lasers after the initial
one year warranty period or which are not covered by an annual service contract.
Government Regulation
All of our 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 our products, we are required to obtain marketing
approval for each product from the FDA and comparable agencies in foreign
countries. Extensive clinical testing of each product, which is both costly and
time-consuming, may be required to obtain such approvals. Our business would be
adversely affected if we were unable to obtain such approvals or to comply with
continuing regulations of the FDA and other governmental agencies. In addition,
we cannot predict whether future changes in government regulations might
increase the cost of conducting our business or affect the time required to
develop and introduce new products. Our facilities were inspected by the FDA in
October 2003 and no deficiencies in our compliance with the FDA's Good
Manufacturing Practice ("GMP") requirements were cited by the FDA.
Specific areas of regulation by the FDA and other related matters are described
in detail below.
Investigational Device Exemption
Before a new medical device may be used for investigational research in the
United States, an Investigational Device Exemption ("IDE") application must be
approved by the FDA. In order to obtain an IDE, the sponsor of the
investigational research must first obtain approval for the research from the
Institutional Review Board ("IRB" of 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, the overall review process may be extended.
We believe the majority of our urology, orthopedic and other surgical products
can be cleared for sales pursuant to 510(k) Premarket Notifications, which in
some cases may require limited clinical trials, although such cannot be assured.
14
Premarket Approval
Under the Medical Device Amendments of 1976, all medical devices are classified
by the FDA into one of three classes. A "Class I" device is one that is subject
only to general controls, such as labeling requirements and good manufacturing
practices ("GMP"). A "Class III" device is one for which general controls and
performance standards alone are insufficient to assure safety and effectiveness,
unless the device qualifies for sale under a 510(k) Premarket Notification. Such
devices require clinical testing to establish their safety and efficacy in
treating specific diseases or conditions, and a Premarket Approval ("PMA").
Application for the intended use must be approved by the FDA before the device
can be marketed in the United States. A device is generally classified as a
Class I, II, or III device based on recommendations of advisory panels appointed
by the FDA.
The filing of a PMA Application entails a rigorous review by the FDA which can
take one year or longer, unless additional testing or data are requested by the
FDA, in which case the review process can be considerably longer.
We are in an early stage of development of three new Side Firing Fibers for use
with a new type of laser that are expected to require a PMA filing with the FDA
before they can be marketed in the United States.
Continued Regulatory Risks
We cannot assure that required PMA approvals for any new products can be
obtained or if obtained, that they can be maintained. The failure to maintain
PMA approvals for new products may have a material adverse effect upon our
future operations.
Inspection Of Plants
The FDA also has authority to conduct detailed inspections of manufacturing
plants, to determine whether or not the manufacturer has followed its GMP
requirements, which are required for the manufacture of medical devices.
Additionally, the FDA requires reporting of certain product defects and
prohibits the domestic sale or exportation of devices that do not comply with
the law. We believe we are in compliance in all material respects with these
regulatory requirements, and we expect that our processes and procedures in
place will satisfy the FDA, although we cannot assure that will be the case.
State Regulation
Federal law preempts states or their political subdivisions from regulating
medical devices. Upon application, the FDA may permit state or local regulation
of medical devices which is either more stringent than federal regulations or is
required because of compelling local conditions. To date, and to the best of our
knowledge, only California has filed such an application. On October 5, 1980,
the FDA granted partial approval to such application, effective December 9,
1980. The California requirements, which have been exempted from preemption,
have not had a materially adverse effect on us.
Insurance Reimbursement
To permit the users of our products to obtain reimbursement under Federal health
care programs such as Medicare, we may be required to demonstrate, in an
application to the Centers for Medicare and Medicaid Services ("CMS"), the
operator of the Medicare and Medicaid Programs, at either the state or federal
level or both, the safety and efficacy of our products and the benefit to
patients therefrom which justify the cost of such treatment. Criteria for
demonstrating such benefits are in the process of definition by CMS, and there
does not yet exist a clear method or requirement to receive approval for
reimbursement. There is no assurance that any application for reimbursement,
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 any of our products is refused reimbursement by Medicare, private insurers
and/or health care programs, the marketing of such product would be adversely
affected.
Cost Of Compliance With FDA And Other Applicable Regulations
The costs of complying with FDA and other governmental regulations prior to the
sale of approved products are reflected mainly in our R & D expenditures. The
cost of first obtaining an IDE for a product, if required and, after having
developed a product which in our view is safe and effective, obtaining a PMA
approval or 510(k) clearance therefor, as well as making an application to CMS
in order to establish Medicare reimbursability for treatments utilizing such
product, adds significantly to the cost of developing and bringing a medical
device to the market over what such cost would have been if such regulatory
requirements did not exist.
15
Compliance with regulatory requirements also lengthens the time which is
required to develop and commence marketing a product. These delays increase our
R & D costs by (a) lengthening the time during which we must maintain and bear
the carrying costs of a given research and development effort and (b) delaying
the time when we can commence realizing revenues from sales of a product, during
which time, we must continue to bear administrative and overhead costs. It is,
however, not possible for us to quantify or estimate in advance the direct and
indirect costs of complying with such regulatory requirements, particularly
since the expense and difficulty of such compliance can vary greatly, depending
upon the nature of the product, its intended use, the technological success of
the R & D effort and the results of animal and/or animal and human clinical
(human) testing of the product.
To the extent applicable regulations require more rigorous testing than might
otherwise be deemed necessary, the costs of testing the product by unaffiliated
institutions (and fees or royalties, if any, payable to them) may be deemed in
part a cost to us of compliance with such regulatory requirements.
Employees
On September 30, 2006, we had 58 full-time employees, of whom 10 were employed
by MST. Of the remaining 48, 31 were engaged in production and engineering, one
in sales and marketing, and 10 were in general and administrative functions.
We may require additional employees in the areas of administration, product
development, research, production, regulatory affairs, sales and marketing in
the future. There is intense competition for capable, experienced personnel in
the medical device and laser fields, and we cannot assure that we will be able
to obtain new qualified employees when required.
Management believes its relations with its employees are good.
Patents And Patent Applications
As of September 30, 2006, we owned or held licenses to 22 U.S. patents, and
9 pending U.S. patent applications.
We cannot assure that (a) any patents will be issued from the pending
applications, (b) any issued will prove enforceable, (c) we will derive any
competitive advantage from them or (d) that our products may not infringe
patents owned by others, licenses to which may not be available to us or
available at an acceptable cost, in which event, we may be faced with patent
litigation, which is extremely costly, damages, judgments and settlements, which
may also require us to abandon the sale of the infringing or allegedly
infringing products. To the extent that pending patent applications do not
issue, we may be subject to more competition. We cannot assure that our already
patented products, methods and processes will be medically useful or
commercially viable. The issuance of patents on some but not all aspects of a
product may be insufficient to prevent competitors from essentially duplicating
the product by designing around the patented aspects. We are obligated, under
certain of our patent licenses, to make royalty payments. Part of our R & D
activities will be directed towards obtaining additional patent rights, which
may entail future royalty and minimum payment obligations.
Competition
We face competition from a number of both young and established companies in the
medical field. The larger of such established companies include Lumenis, Ltd.
(resulting from the acquisition of the medical division of Coherent, Inc. by ESC
Medical Systems, Inc.), American Medical Systems, Inc. (as a result of the
acquisition of Laserscope, Inc.), Johnson & Johnson, Boston Scientific, Inc.,
ACMI, Inc. and others, all of which have greater financial resources. R & D and
manufacturing facilities, technical skills, management staffs and/or sales and
marketing organizations than us.
Among the younger companies with which we compete are PhotoMedix, Inc.
Convergent, Inc. and others, certain of which are publicly held.
Insurance
We have a commercial general liability insurance policy and a products liability
insurance policy, each providing coverage in the aggregate amount of $5,000,000.
We cannot assure this amount of insurance will be sufficient to protect our
assets against claims by patients, users of our products or others. Although
there have been no successful claims against us, there is no assurance we will
be able to maintain such liability insurance in force in the future at an
acceptable cost, or at all, in which case our assets would be at risk in the
event of successful claims against us. Successful claims in excess of the amount
of insurance then in force could have a serious adverse effect upon our
financial condition and future viability. We do not carry director and officer
liability insurance, but we do have indemnification agreements covering our
officers and directors.
Properties
We currently occupy approximately 28,700 square feet of office, manufacturing
and warehouse space in Lake Forest, California, which we lease at a rental of
approximately $28,000 per month with 4% rental increases in December 2007 and
August 2009. The lease expires in April 2011, and we have two, 5-year renewal
options.
16
Our wholly-owned subsidiary, MST, occupies approximately 1,500 sq. ft. of office
space in Dallas, TX at a cost of $1,600 per month.
Management considers all of its facilities to be well maintained and adequate
for its purposes.
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. In
November 2003, the Company settled its 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 has offered 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.
MANAGEMENT
Officers And Directors
Name Age Position
---- --- --------
Marvin P. Loeb 80 Chairman and CEO
Glenn D. Yeik 39 President, COO, and Director
Brian T. Kenney 50 V.P. - Sales and Marketing
Richard F. Horowitz 65 Secretary and Director
Donald Baker 77 Director
Marvin P. Loeb has been a director of our Company since 1980, Chairman of the
Board since March 1981, Chief Executive Officer from April 1991 to November 2000
and since July 2001. He has been the Chairman of the Board of Cardiodyne, Inc.,
(formerly Trioptic Laser, Inc.,a 90% owned subsidiary of the Company) since May
1992. Since May 1986, he has been Chairman and a director of Cardiomedics, Inc.,
a privately held company which developed and is marketing a circulatory assist
device. Since November 1988, he has been Chairman of Ultramedics, Inc., a
privately held company whose principal interest is its investment in
Cardiomedics, Inc. Dr. 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. He has been a Director of Cardiomedics, Inc. since
October 2004. Mr. Yeik is Dr. 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 has been a director of our Company since April 1983, and
Secretary since July 2001. He also has been a director of Cardiodyne, Inc.
(formerly Trioptic Laser, Inc.) since May 1992. He was a director of Automedix
Sciences, Inc. (now COMC, Inc.) from November 1988 until 1999 and he has been a
director of Cardiomedics, Inc. since 1992. Mr. Horowitz has been a practicing
attorney in New York City for the past 42 years. He has been a member of the
firm of Heller, Horowitz & Feit, P.C. (formerly Heller, Horowitz & Feit) since
January 1979. Mr. Horowitz is a graduate of Columbia College and holds a J.D.
degree from Columbia Law School. He is a member of the Association of the Bar of
the City of New York and the New York State Bar Association.
17
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.
Executive Compensation
The following table sets forth the executive compensation paid during the fiscal
years ended September 30, 2004 through September 30, 2006 to our Executive
officers who earned more than $100,000 in combined salary, stock option awards
and other compensation in fiscal 2005:
Compensation
Annual ------------
Compensation (1) Securities
-------------------- Underlying All Other
Name of Individual Salary Bonus Options Compensation
and Principal Position Year $ $ $ Shares) ($)(2)
------------------------------- ---- ---------- ------- ----------- ------------
Marvin P. Loeb................. 2006 $ 119,393 $ 0 0 $ 10,500
Chairman of the Board, and 2005 $ 114,515 $ 0 0 $ 15,926
Chief Executive Officer 2004 115,000 0 0 2,939
Glenn D. Yeik.................. 2006 160,527 0 100,000 9,086
President, and 2005 151,784 0 75,000 8,765
Chief Operations Officer 2004 150,000 0 0 8,795
Brian T. Kenney, V.P........... 2006 152,945 0 0 7,957
2005 157,525 0 0 7,940
2004 133,425 0 0 7,878
---------------
(1) Amounts shown include cash and non-cash compensation earned and received by
our executive officers.
(2) 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.
Security Ownership Of Management And Others
The following table sets forth the name and address of each beneficial owner of
more than five percent of the Company's Common Stock known to the Company, by
each director of the Company, by each named executive officer, and by all
directors and executive officers as a group, the number of shares beneficially
owned by such persons as of December 19, 2006 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) 2,672,114 15.4%
$.01 Par Value 25901 Commercentre Drive
Lake Forest, CA 92630
Lewis Asset Management, Inc. (6) 1,000,000 5.8%
45 Rockefeller Plaza, Suite 2570
New York, N.Y. 10111
Bruce J. Haber and his associates 931,653 5.4%
145 Huguenot Street, Suite 405
New Rochelle, NY 10801
18
Other Directors and Executive Officers
--------------------------------------
Donald Baker, Director (2) 80,000 *
544 Earlston Road
Kenilworth, IL 60043
Richard F. Horowitz, Secy. & Dir. (2) 80,000 *
Heller, Horowitz & Feit, P.C.
292 Madison Avenue
New York, New York 10017
Glenn D. Yeik, Pres. COO (3)(5) 397,257 2.3%
Brian T. Kenney, V.P. (4)(5) 135,000 *
All Directors and Executive 3,364,371 19.4%
Officers as a Group (5 persons)
-------------------
* Indicates less than 1%
(1) Consists of 1,762,114 Shares owned by Dr. Loeb and his wife, adult
children, grandchildren and trusts for their benefit, of which Mr. Loeb
is not a trustee or beneficiary, 760,000 Shares issuable to Mr. Loeb
and his family members upon the conversion of $200,000 of Notes and
accrued interest, which Dr. Loeb has elected to convert upon their
maturity, and Options to purchase 150,000 Shares.
(2) Consists of 50,000 Shares and Options to purchase 30,000 Shares.
(3) Consists of 47,257 Shares, and Options to purchase 350,000 Shares.
(4) Consists of 35,000 Shares and Options to purchase 100,000 Shares.
(5) Address is 25901 Commercentre Drive, Lake Forest, CA 92630
(6) Consists of 850,000 Shares owned by Lewis Opportunity Fund, LP and
150,000 Shares owned by LAM Opportunity, Ltd. Managed by Lewis
Asset Management, Inc.
Stock Option Grants To Executive Officers and Directors
During the fiscal year ended September 30, 2006, the Company granted 100,000
options to an executive officer and 30,000 options to a Director. The following
table provides information concerning grants of options to purchase the
Company's common stock during the fiscal year ended September 30, 2006 to the
Named Executive Officer and Director:
INDIVIDUAL GRANTS
------------------------------------------------------
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS GRANTED
OPTIONS TO EMPLOYEES IN EXERCISE OR BASE
NAME GRANTED FISCAL YEAR PRICE ($/SH) EXPIRATION DATE
-------------- ----------- --------------- ---------------- ---------------
Glenn Yeik 100,000 56.9% $0.92 03/31/2016
Robert Crutchfield 30,000 17.1% $1.75 08/16/2006
The following table provides information related to options exercised
during the fiscal year ended September 30, 2006, and unexercised options held by
the above named executive officers as of the end of such fiscal year:
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FY END (#) (1) AT FY END ($) (2)
SHARES ACQUIRED VALUE --------------------------- -----------------------------------
ON EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE ($) UNEXERCISABLE ($)
--------------- ----------- ----------- ------------- --------------- -----------------
Marvin P. Loeb 0 0 150,000 0 82,560 0
Glenn D. Yeik 0 0 264,000 86,000 190,230 70,580
Brian T. Kenney 0 0 96,000 4,000 37,485 4,120
---------------
(1) Our Non-Qualified Stock Options have a term of six years, and our
Incentive Stock Options have a term of ten years. All Options are subject
to earlier termination, with options becoming exercisable from the date of
grant equally over the following three years for our Non-Qualified Stock
options and five years for our Incentive Stock Options.
(2) The dollar value of the in-the-money options shown above was calculated by
multiplying the closing market price of our Shares at September 30, 2006,
$1.53 per share, by the respective number of Shares and subtracting the
option price.
19
TRANSACTIONS WITH MANAGEMENT
The following are transactions in which certain of our officers and directors
had a direct or indirect material interest. The Company believes that the terms
of the transactions described below are as favorable as could have been obtained
with unaffiliated third parties.
On November 3, 2006, Dr. Loeb, the Chief Executive Officer elected to convert
two Senior Convertible Secured Notes in the amounts of $150,000 and $50,000, and
their respective accrued interest, into 760,000 shares of common stock based on
their conversion price of $0.40 and $0.50 per share, respectively, upon their
maturity.
Mr. Horowitz, a director of the Company, is a member of the firm of Heller,
Horowitz & Feit, P.C., securities counsel to the Company. During the fiscal year
ended September 30, 2006, we incurred $3,800 of legal fees and costs as a result
of the above law firm acting as our securities counsel.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 30,000,000 shares of Common Stock, par
value $.01, and 1,000,000 shares of Preferred Stock.
Preferred Stock
No shares of our Preferred Stock are presently outstanding. Our Board of
Directors has the right to fix the rights and preferences of any of our
Preferred Stock which might be issued in the future, without obtaining approval
of our Shareholders.
Common Stock
The shares of our Common Stock presently outstanding, and any shares of our
Common Stock issued upon conversion of the Notes or the exercise of stock
options, will be fully paid and non-assessable. Each holder of Common Stock is
entitled to one vote for each share owned on all matters voted upon by
stockholders, and a majority vote is required for all actions to be taken by
stockholders. In the event we liquidate, dissolve or wind-up our operations, the
holders of the Common Stock are entitled to share equally and ratably in our
assets, if any, remaining after the payment of all our debts and liabilities and
the liquidation preference of any shares of Preferred Stock that may then be
outstanding. The Common Stock has no preemptive rights, no cumulative voting
rights, and no redemption, sinking fund, or conversion provisions. Since the
holders of Common Stock do not have cumulative voting rights, holders of more
than 50% of the outstanding shares can elect all of our Directors, and the
holders of the remaining shares by themselves cannot elect any Directors.
Holders of Common Stock are entitled to receive dividends, if and when declared
by the Board of Directors, out of funds legally available for such purpose,
subject to the dividend and liquidation rights of any Preferred Stock that may
then be outstanding.
Our Articles of Incorporation provide for a staggered Board of Directors,
pursuant to which the Board is divided into three classes (as nearly equal in
number as possible) with the term of one class expiring each year. The articles
also provide that the staggered Board provisions cannot be amended, altered or
repealed except by the vote of not less than two-thirds of our issued and
outstanding Common Stock and any Preferred Stock which may then be entitled to
vote.
Warrants
The Warrants to purchase 212,000 Shares, which we issued in connection with our
recent sale of 2,650,000 Shares, are exercisable at any time at the option of
the holder at an exercise price of $1.25 per Share during a period of five (5)
years from their date of issue in December 2006.
Anti-Dilution Rights Of Certain Shareholders And Warrant Holders
The Subscription Agreements for our recent sale of 2,650,000 Shares contain the
following anti-dilution provisions.
If, during the latter of the date on which the above Registration Statement
becomes effective or a period of one (1) year following the Payment Date, the
Company sells Convertible Preferred Stock or a senior debt or equity security
convertible into Common Stock with a conversion price less than $1.50 per Share
(the "Conversion Price"), the Company shall issue to the undersigned such number
of additional shares of Common Stock as are necessary to adjust the
undersigned's cost for the Shares to eighty-five percent (85%) of the Conversion
Price. If, during the latter of the date on which the above Registration
Statement becomes effective or a period of one (1) year following the Payment
Date, the Company sells Common Stock with any warrant coverage, the Company
shall issue warrants on the same terms and conditions to the undersigned. If,
during the latter of the date on which the above Registration Statement becomes
effective or a period of one (1) year following the Payment Date, the Company
sells Common Stock at a price lower than $1.25 per Share, the Company shall
issue to the undersigned such number of additional shares of Common Stock as are
necessary to adjust the undersigned's cost for the Shares to that price.
20
The Warrants issued in connection with the recent sale of the 2,650,000 Shares
contain an anti-dilution provision that requires us to reduce the exercise price
of the Warrants or, if any of the Warrants are exercised, issue additional
Shares if, during the 5-year term of the Warrants, we sell Shares or securities
bearing warrants or convertible into Shares at a price less than $1.25 per
share.
Registration Of Shares
Included in the Registration Statement of which this prospectus is a part are
2,650,000 outstanding Shares sold in our recent private offering, 212,000 Shares
which may be issued in the event of the exercise of outstanding Warrants issued
in connection with this private offering, which Warrants are exercisable at a
price of $1.25 per share and expire in December 2011, 600,000 Shares issuable
under our 2007 Non-Qualified Stock Option Plan and an indeterminate number of
Shares which we may be required to issue pursuant to anti-dilution provisions of
the Subscription Agreements for recent sale of the aforementioned 2,650,000
Shares and the 212,000 Warrants issued in connection with such sale of Shares.
Transfer Agent
The transfer agent and registrar for our Shares is American Stock Transfer and
Trust Company, 40 Wall Street, New York, New York.
THE COMMISSION'S POLICY ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
Article 12 of our Certificate of Incorporation contains provisions relating to
the indemnification of our directors and officers to the fullest extent
permitted by Nevada law. Section 78.751 of the Nevada Revised Statutes, as
amended, authorizes us to indemnify any director or officer under certain
prescribed circumstances and, subject to certain limitations, against certain
costs and expenses, including attorneys' fees actually and reasonably incurred
in connection with any action, suit, or proceeding, whether civil, criminal,
administrative or investigative, to which the director is a party by reason of
being our director or a director of our subsidiary, if it is determined that the
director acted in accordance with the applicable standard of conduct set forth
in those statutory provisions.
We may also purchase and maintain insurance for the benefit of any director or
officer that may cover claims for which we could not otherwise indemnify him or
her.
Insofar as indemnification for liabilities arising under the Act may be
permitted to our directors, officers, and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
SHARES AVAILABLE FOR FUTURE SALE
The 2,650,000 recently sold Shares, the 212,000 Shares issuable in the event of
exercise of presently outstanding Warrants, the 600,000 Shares issuable in the
event of exercise of stock options under our 2007 Non-Qualified Stock Option
Plan and an indeterminate number of Shares we may be required to issue pursuant
to anti-dilution provisions of the Warrants and Subscription Agreements for the
2,650,000 shares are included in this Prospectus, and, when issued, will be
freely tradable without restriction imposed by, or further registration under,
the Securities Act. The above notwithstanding, Shares held by Dr. Loeb, our
other executive officers and directors and other controlling shareholders may be
sold only pursuant to Rule 144 of the Securities and Exchange Commission, which
imposes limitations on the number of our Shares which may be sold during certain
periods.
PLAN OF DISTRIBUTION
Sales of the Shares by the Selling Stockholders may be affected by them from
time to time on the Bulletin Board or in such other public forum where our
Shares are publicly traded or listed for quotation. Sales may also be made in
negotiated transactions through the timing of exercises of Warrants or Stock
Options or, at fixed prices, which may be charged at market prices prevailing at
the time of sale, at prices related to such prevailing market prices or at
negotiated prices. The Selling Stockholders may effect such transactions by
selling the Shares through broker-dealers, and the broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
Selling Stockholders and/or the purchasers of the Shares for which the
broker-dealer may act as agent or to whom they sell as principal, or both. The
compensation as to a particular broker-dealer may be in excess of customary
compensation.
The Selling Stockholders and any broker-dealers who act in connection with the
sale of the Shares hereunder may be deemed to be Underwriters within the meaning
of Section 2(11) of the Securities Act, and any commissions received by them and
any profit on any sale of the Shares as principal might be deemed to be
underwriting discounts and commissions under the Securities Act.
21
SELLING SECURITY HOLDERS
We are registering certain shares which are presently outstanding as the result
of our recent sale of Shares, Shares we have agreed to issue in the event of the
exercise of outstanding Warrants or Options Under Our 2007 Option Plan and an
indeterminate number of shares which we may be required to issue pursuant to the
anti-dilution provisions of the Warrants and the Subscription Agreements for the
Shares.
Other than the costs of preparing this Prospectus and a registration fee to the
SEC, we are not paying any costs relating to the sales of Shares by the Selling
Security Holders. Each of the Selling Security Holders, or their transferees,
and intermediaries to whom such securities may be sold may be deemed to be an
"underwriter" of the common stock offered in this prospectus, as that term is
defined under the Securities Act. Each of the Selling Security Holders, or their
transferees, may sell Shares from time to time for their own account in the open
market at the prevailing prices, or in individually negotiated transactions at
such prices as may be agreed upon. Except for the net proceeds from any
exercises of the Warrants or Stock Options granted under our 2007 Option Plan,
which will accrue to us, the net proceeds from the sale of Shares by the Selling
Security Holders will inure entirely to their benefit and not to ours.
The Shares may be offered for sale from time to time in regular brokerage
transactions in the Over-The-Counter market, or through brokers or dealers, or
in private sales or negotiated transactions, or otherwise, at prices related to
the then prevailing market prices. The Selling Security Holders may be required
to deliver a current prospectus in connection with the offer or sale of their
Shares. In the absence of a current prospectus, if required, these Shares may
not be sold publicly without restriction unless held by a non-affiliate for two
years, or after one year subject to volume limitations and satisfaction of other
conditions. The Selling Security Holders are hereby advised that Regulation M of
the General Rules and Regulations promulgated under the Securities Exchange Act
of 1934 will be applicable to their sales of these Shares. These rules contain
various prohibitions against trading by persons interested in a distribution and
against so-called "stabilization" activities.
The Selling Security Holders, or their transferees, might be deemed to be
"underwriters" within the meaning of Section 2(11) of the Act and any profit on
the resale of these Shares as principal might be deemed to be underwriting
discounts and commissions under the Act. Any sale of these Shares by Selling
Security Holders, or their transferees, through broker-dealers may cause the
broker-dealers to be considered as participating in a distribution and subject
to Regulation M promulgated under the Securities Exchange Act of 1934, as
amended. If any such transaction were a "distribution" for purposes of
Regulation M, then such broker-dealers might be required to cease making a
market in our equity securities for either two or nine trading days prior to,
and until the completion of, such activity.
NO. OF SHARES NO. OF SHARES NO. OF
SHARES
SHAREHOLDER NAME PRIOR TO OFFERING (1) BEING OFFERED AFTER OFFERING
---------------- -------------------- ------------- --------------
Leviticus Partners LP(2) 400,000 400,000 0
Jacob Shulman (3) 80,000 80,000 0
Lewis Opportunity Fund, LP (4) (10) 850,000 850,000 0
LAM Opportunity, Ltd. (4) (10) 150,000 150,000 0
Corsair Capital Partners, LP (5) (11) 688,902 688,902 0
Corsair Capital Investors, Ltd.(5) (11) 66,362 66,362 0
Corsair Capital Partners 100, LP (5) (11) 34,761 34,761 0
Corsair Long/Short International, Ltd (5) (11) 9,975 9,975 0
Crescent International Ltd. (6) 320,000 320,000 0
Thomas R. Ulie (7) 50,000 50,000 0
J. H. Darbie & Co., Inc. (8) 208,000 208,000 0
First Island Capital, Inc. (9) 4,000 4,000 0
------------
(1) Includes Shares outstanding and Shares issuable upon exercise of
outstanding Warrants.
(2) 405 Lexington Avenue, 45th, New York, N.Y. 10174
(3) 607 Monmouth Avenue, Lakewood, N.J. 08701
(4) c/o Lewis Asset Management, 45 Rockefeller Plaza, Suite 2570, New York,
N.Y. 10111
(5) c/o Corsair Capital LLC, 717 Fifth Avenue, 24th Floor, New York, N.Y.
10022 (6) c/o Cantora (Switzerland) SA, 84 Avenue Louis-Casai
CH-1216 Cointria/Geneva, Switzerland
(7) P.O. Box, 814, Mercer Island, WA 98040
(8) Shares underlying Warrants - 99 Wall Street, 6th Floor, New York, N.Y. 10005
(9) Shares underlying Warrants - P.O. Box 814, Mercer Island, WA 98040 (10)
Managed by Lewis Asset Management, Inc.
(11) Managed by Corsair Capital LLC
22
LEGAL MATTERS
In connection with this offering, the law firm of Heller, Horowitz & Feit, P.C.,
New York, New York, is opining that we are in good standing in the State of
Nevada with due authority to conduct our business and that the Shares offered
herein have been duly and validly authorized and issued and are fully paid,
non-assessable. A copy of this opinion has been filed as Exhibit 5 to the
registration statement of which this Prospectus forms a part.
EXPERTS
The consolidated financial statements included in this Prospectus of Trimedyne,
Inc. as of September 30, 2006 and the two-year period then ended have been
audited by Corbin & Company, LLP, an independent registered public accounting
firm, as stated in their report appearing elsewhere herein, and have been so
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
AVAILABLE INFORMATION
We are subject to the information requirements of the Securities Exchange Act of
1934, as amended. This Act requires us to file reports, proxy statements and
other information with the Securities and Exchange Commission. Copies of the
reports, proxy statements and other information we file can be inspected at the
Headquarters Office of the Securities and Exchange Commission located at 100 F
Street, N.E. Washington, D.C. 20549.
Copies of the material we file may also be obtained from the Public Reference
Section of the Commission, at 100 F Street, N.E., Washington, D.C. 20549 at
prescribed rates. The Public Reference Room can be reached at (202) 942-8090.
The Commission also maintains a web site that contains reports, proxy and
information statements and other information regarding us. This material can be
found at http://www.sec.gov.
23
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR FISCAL YEARS 2006 AND 2005
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheet at September 30, 2006 F-3
Consolidated Statements of Income for the years ended
September 30, 2006 and 2005 F-4
Consolidated Statements of Stockholders' Equity for the
years ended September 30, 2006 and 2005 F-5
Consolidated Statements of Cash Flows for the years
ended September 30, 2006 and 2005 F-6
Notes to Consolidated Financial Statements F-7
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, 2006, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the two-year period 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 audits.
We conducted our audits 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 evaluati ng the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Trimedyne, Inc. and its subsidiaries as of September 30, 2006, and the
consolidated results of their operations and their cash flows for each of the
years in the two-year period then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Corbin & Company, LLP
Irvine, California
December 20, 2006
---------------------------------
F-2
TRIMEDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
September 30,
2006
-------------
Current assets:
Cash and cash equivalents $ 802,000
Trade accounts receivable, net of allowance
for doubtful accounts of $12,000 742,000
Inventories 2,596,000
Other current assets 184,000
------------
Total current assets 4,324,000
Note due from related party 38,000
Property and equipment, net 925,000
Other 39,000
Goodwill 544,000
------------
$ 5,870,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 323,000
Accrued expenses 399,000
Deferred revenue 48,000
Accrued warranty 23,000
Income tax payable 4,000
Notes payable and current portion of long-term debt 71,000
------------
Total current liabilities 868,000
Senior convertible secured note due to officer 200,000
Accrued interest due to officer 111,000
Deferred rent 97,000
Long-term debt, net of current portion 2,000
------------
Total liabilities 1,278,000
------------
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,
14,770,511 shares issued, 14,668,902 shares outstanding 149,000
Additional paid-in capital 47,979,000
Accumulated deficit (42,823,000)
------------
5,305,000
Treasury stock, at cost (101,609 shares) (713,000)
------------
Total stockholders' equity 4,592,000
------------
$ 5,870,000
============
See accompanying notes to consolidated financial statements
F-3
TRIMEDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For The Years Ended
September 30,
----------------------------
2006 2005
------------ ------------
Net revenues:
Products $ 4,484,000 $ 4,813,000
Service and rental 1,753,000 1,669,000
------------ ------------
6,237,000 6,482,000
------------ ------------
Cost of sales:
Products 2,489,000 2,358,000
Service and rental 1,260,000 1,134,000
------------ ------------
3,749,000 3,492,000
------------ ------------
Gross profit 2,488,000 2,990,000
Selling, general and administrative expenses 2,279,000 2,423,000
Research and development expenses 633,000 623,000
------------ ------------
Loss from operations (424,000) (56,000)
------------ ------------
Other income (expense):
Interest income 21,000 16,000
Royalty income 478,000 262,000
Interest expense (29,000) (30,000)
Creditor settlements and recoveries 55,000 13,000
Loss on disposal of equipment (3,000) (12,000)
------------ ------------
Total other income, net 522,000 249,000
------------ ------------
Income before provision for income taxes 98,000 193,000
Provision for income taxes 1,000 7,000
------------ ------------
Net income $ 97,000 $ 186,000
============ ============
Basic net income per share $ 0.01 $ 0.01
============ ============
Basic weighted average
common shares outstanding: 14,625,662 14,704,540
============ ============
Diluted net income per share $ 0.01 $ 0.01
============ ============
Diluted weighted average
common shares outstanding: 15,611,086 15,471,328
============ ============
See accompanying notes to consolidated financial statements
F-4
TRIMEDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional
------------ Paid-In Accumulated Treasury
Shares Amount Capital Deficit Stock Total
------------ ------------ ------------ ------------ ------------ ------------
Balances at
September 30, 2004 14,704,540 $ 148,000 $ 47,945,000 $(43,106,000) $ (713,000) $ 4,274,000
Net income -- -- -- 186,000 -- 186,000
------------ ------------ ------------ ------------ ------------ ------------
Balances at
September 30, 2005 14,704,540 $ 148,000 $ 47,945,000 $(42,920,000) $ (713,000) $ 4,460,000
Exercise of
stock options 65,971 1,000 34,000 -- -- 35,000
Net income -- -- -- 97,000 -- 97,000
------------ ------------ ------------ ------------ ------------ ------------
Balances at
September 30, 2006 14,770,511 $ 149,000 $ 47,979,000 $(42,823,000) $ (713,000) $ 4,592,000
============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements
F-5
TRIMEDYNE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended September 30,
---------------------------------
2006 2005
----------- -----------
Cash flows from operating activities:
Net income $ 97,000 $ 186,000
Adjustments to reconcile net income to net cash
(used in) operating activities:
Depreciation and amortization 174,000 143,000
Loss on disposal of equipment 3,000 12,000
Changes in operating assets and liabilities:
Trade accounts receivable 38,000 13,000
Inventories (458,000) (174,000)
Other assets 69,000 (63,000)
Accounts payable (27,000) (47,000)
Trade note from related party (38,000) --
Accrued expenses -- (114,000)
Deferred revenue 5,000 (8,000)
Accrued warranty (20,000) (1,000)
Accrued interest due officer 24,000 25,000
Income tax payable (10,000) (5,000)
Deferred Rent 97,000 --
----------- -----------
Net cash (used in) operating activities (46,000) (33,000)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (738,000) (100,000)
----------- ------------
Net cash used in investing activities (738,000) (100,000)
----------- -----------
Cash flows from financing activities:
Excercise of stock options 35,000 --
Payments on debt (146,000) (137,000)
Borrowings on notes payable 174,000 110,000
----------- -----------
Net cash provided by (used in) financing activities 63,000 (27,000)
----------- -----------
Net (decrease) increase in cash and cash equivalents (721,000) (160,000)
Cash and cash equivalents at beginning of year 1,523,000 1,683,000
----------- -----------
Cash and cash equivalents at end of year $ 802,000 $ 1,523,000
=========== ===========
Cash paid for income taxes in the years ended September 30, 2006 and 2005 was
$8,000 and $16,000, repectively. Cash paid for interest in the years ended
September 30, 2006 and 2005 was $3,000 and $5,000, repectively.
See accompanying notes to consolidated financial statements
F-6
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY
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 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 11).
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, 2006 three customers accounted
for 48% of the Company's receivables, one of which accounted for 12% of the
Company's revenues for the year ended September 30, 2005 and accounted for 11%
of the Company's revenues for the year ended September 30, 2006. The customers'
terms are payment through bank letter of credit and net 30 days. The Company
performs limited credit evaluations of its customers and generally does not
require collateral. The Company maintains reserves for potential credit losses.
In some cases, management requires payment in full before goods are shipped.
During fiscal 2006 and 2005, credit losses were not significant.
At September 30, 2006, the Company had cash balances in excess of federally
insured limits of $100,000 in the amount of $668,000.
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.
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.
Goodwill and Other Intangible Assets
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, 2006 and 2005.
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.
F-7
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"
prescribes accounting and reporting standards for all stock-based compensation
plans, including employee stock option plans. As allowed by SFAS No. 123, the
Company has elected to continue to account for its employee stock-based
compensation plans using the intrinsic value method in accordance with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related Interpretations, which does not require compensation
to be recorded if the consideration to be received is at least equal to the fair
value of the common stock to be received at the measurement date. Under the
requirements of SFAS No. 123, non-employee stock-based transactions require
compensation to be recorded based on the fair value of the securities issued or
the services received, whichever is more reliably measurable.
The following table illustrates the effect on net income and net income per
share had compensation cost for the employee stock-based compensation plans been
determined based on grant date fair values of awards under the provisions of
SFAS No. 123:
Years ended
September 30,
2006 2005
----------- -----------
Net income, as reported $ 97,000 $ 186,000
Deduct: total stock-based employee compensation
expense determined under fair value based method
for awards, net of related tax effects (53,000) (126,000)
----------- -----------
Pro forma net income $ 44,000 $ 60,000
=========== ===========
Net income per share - basic:
As reported $ 0.01 $ 0.01
=========== ===========
Pro forma $ -- $ --
=========== ===========
Net income per share - diluted:
As reported $ 0.01 $ 0.01
=========== ===========
Pro forma $ -- $ --
=========== ===========
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
Years ended
September 30,
2006 2005
---------- ----------
Dividend yield -- --
Expected volatility 89% 81%
Risk-free interest rate 3.56% 3.47%
Expected lives 5 years 5 years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility and time
to exercise. Because awards held by employees and directors have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
the opinion of management, the existing models do not necessarily provide a
reliable single measure of the fair value of these options.
F-8
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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, and losses for contingencies and certain accrued
liabilities.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, accounts
receivable, accounts payable, accrued expenses, long-term debt and two senior
convertible secured notes due to the Chief Executive Officer. The carrying
amounts of the Company's financial instruments generally approximate their fair
values as of September 30, 2006 because of the short maturity of these
instruments. Senior convertible secured notes due to officer cannot be
objectively and fairly valued due to the related party nature of the
instruments.
Revenue Recognition
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 delivery and disposable devices 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 laser systems 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 the
service contract.
Trimedyne, Inc. 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, 2006 and
2005, four lasers were being rented by Trimedyne, Inc., 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.
F-9
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
For The Years Ended
September 30,
----------------------------
2006 2005
------------ ------------
Balance at beginning of period $ 43,000 $ 44,000
Charges to costs and expenses 65,000 89,000
Costs incurred (85,000) (90,000)
------------ ------------
Balance at end of period $ 23,000 $ 43,000
============ ============
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.
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.
Per Share Information
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average common shares outstanding.
The following is a reconciliation of the shares used in the denominator for
calculating basic and diluted earnings per share:
Years ended
September 30,
2006 2005
----------- -----------
Weighted average common shares outstanding
used in calculating basic earnings per share 14,625,662 14,704,540
Effect of dilutive stock options 246,424 90,288
Effect of senior convertible secured
notes due to officer and accrued interest 739,000 676,500
----------- -----------
Weighted average common and common equivalent
shares used in calculating diluted earnings per share 15,611,086 15,471,328
=========== ===========
The following is a reconciliation of the net income available to common
stockholders:
Net income $ 97,000 $ 186,000
Add - Interest on senior convertible
secured notes due to officer 24,000 24,000
----------- -----------
Net income available to common stockholders $ 121,000 $ 210,000
=========== ===========
F-10
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment information
The Company reports information about operating segments, as well as disclosures
about products and services, geographic areas and major customers (see Note 11).
Operating segments are defined as revenue-producing components of the
enterprise, which are generally used internally for evaluating segment
performance.
Comprehensive Income
Comprehensive income is not presented in the Company's consolidated financial
statements since the Company did not have any items of comprehensive income in
any period presented.
Recently Issued Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("Statement 123(R)") to provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. Statement 123(R) covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Statement 123(R) replaces SFAS No. 123,
"Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees." SFAS No. 123, as originally issued
in 1995, established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that statement
permitted entities the option of continuing to apply the guidance in APB
Opinion 25, as long as the footnotes to financial statements disclosed what net
income (loss) would have been had the preferable fair-value-based method been
used. The Company is required to adopt this standard during the fiscal quarter
ending December 31, 2006. The Company is in the process of evaluating whether
the adoption of SFAS 123(R) will have a significant impact on the Company's
overall consolidated results of operations or financial position.
In March 2005, the SEC staff issued Staff Accounting Bulletin No. 107 ("SAB
107") to give guidance on the implementation of SFAS 123R. The Company will
consider SAB 107 during implementation of SFAS123R.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections -- a replacement of APB Opinion No. 20 and FASB Statement No. 3."
This statement applies to all voluntary changes in accounting principle and
changes required by an accounting pronouncement where no specific transition
provisions are included. SFAS No. 154 requires retrospective application to
prior periods' financial statements of changes in accounting principle, unless
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. Retrospective application is limited to the
direct effects of the change; the indirect effects should be recognized in the
period of the change. This statement carries forward without change the guidance
contained in APB Opinion No. 20 for reporting the correction of an error in
previously issued financial statements and a change in accounting estimate.
However, SFAS No. 154 redefines restatement as the revising of previously issued
financial statements to reflect the correction of an error. The provisions of
SFAS No. 154 are effective for accounting changes and corrections of errors made
in fiscal periods that begin after December 15, 2005, although early adoption is
permitted. The implementation of this standard has not had a material impact on
its consolidated results of operations, cash flows or financial position.
In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty
in -Income Taxes-an interpretation of FASB Statement No. 109" ("FIN 48"), which
clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. The Interpretation requires that the Company recognize in the
financial statements the impact of tax position, if that position is more likely
than not of being sustained on audit, based on the technical merits of the
position. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods and disclosure. The
provisions of FIN 48 are effective for fiscal years beginning after December 15,
2006 with the cumulative effect of the change in accounting principle recorded
as an adjustment to beginning retained earnings. The adoption of this statement
is not expected to have a material impact on the Company's consolidated
financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements".
This standard defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures about
fair value measurements. This statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007. Earlier application
is encouraged. The adoption of this accounting pronouncement is not expected to
have a material effect on our consolidated financial statements.
F-11
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In September, 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108 "Considering the Effects of Prior Year Misstatements
When Quantifying Misstatements in Current Year Financial Statements" (SAB 108"),
which provides interpretive guidance on how the effects of the carryover or
reversal of prior year misstatements should be considered in quantifying a
current year misstatement. The guidance is applicable of our fiscal 2008. The
Group does not believe SAB 108 will have a material impact on the consolidated
financial statements.
NOTE 3. COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS
Inventories at September 30, 2006, consist of the following:
Raw materials $ 842,000
Work-in-process 636,000
Finished goods 1,118,000
-----------
2,596,000
===========
Property and equipment, net consists of the following at September 30, 2006:
Furniture and equipment $ 2,497,000
Leasehold improvements 614,000
Other 216,000
-----------
3,327,000
Less accumulated depreciation and amortization (2,402,000)
-----------
$ 925,000
===========
Accrued expenses consist of the following at September 30, 2006:
Accrued vacation $ 126,000
Accrued compensation 89,000
Sales and use tax 55,000
Accrued professional fees 53,000
Customer deposits 42,000
Commissions 19,000
Accrued payroll tax 7,000
Other 8,000
-----------
Total accrued expenses $ 399,000
===========
NOTE 4. NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following at September 30, 2006:
Loan payable to leasing company, bearing interest at 8% per annum;
principal and interest due monthly in equal installments of $211
through May 2008. The loan is secured by the related forklift. $ 4,000
Notes payable to finance company, issued in connection with
financing certain insurance policies. The notes bear interest
at 6.566% per annum and require monthly principal and interest
payments of $17,369 through January 2007. 69,000
-----------
73,000
Less: current portion (71,000)
-----------
$ 2,000
===========
Future scheduled payments on notes payable and long-term debt as of September
30, 2006 are as follows:
Fical Year Ending
September 30, Amount
------------- ---------
2007 71,000
2008 2,000
---------
$ 73,000
=========
F-12
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. SENIOR CONVERTIBLE SECURED NOTES DUE TO OFFICER
The Company has 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 bear interest at 12%, per annum, with maturity dates of
February 27, and April 15, 2007, respectively, and are convertible, including
accrued interest, into common stock, based on $0.40 per share and $0.50 per
share (the "Conversion Price"), respectively. The Conversion Price was
determined based on the closing market price of the Company's common stock on
the date of issuance. The Convertible Notes are secured by substantially all the
Company's assets. The conversion prices of the Convertible Notes are subject to
reduction if the Company issues or sells any shares of its common stock for
consideration per share less than the Conversion Price, at upon which the
Conversion Price will be reduced to the price at which the shares of common
stock were sold. However, no later sale of common stock at a price higher than
the Conversion Price shall cause the Conversion Price to be increased. On
November 3, 2006, the Chief Executive officer elected to convert the above notes
and their respective accrued interest into common stock upon their maturity.
As of September 30, 2006, the Company has accrued $111,000 in interest on the
above Convertible Notes. No interest was paid during the years ended September
30, 2006 and 2005.
NOTE 6. INCOME TAXES
The deferred income tax balances at September 30, 2006, are comprised of the
following:
Deferred income tax assets (liabilities):
Net operating loss carry forwards $ 13,630,000
Reserves and accruals (463,000)
Research and development credits 3,148,000
Valuation allowance (16,315,000)
--------------
--
==============
The valuation allowance for deferred tax assets decreased approximately
$1,309,000 and $1,416,000 during the years ended September 30, 2006 and 2005,
respectively, primarily due to a portion of the Company's net operating loss
carryforwards ("NOLS") and tax credits that were fully reserved expiring. For
the years ended September 30, 2006 and 2005, the Company recorded a current
provision for state income taxes of $1,000 and $7,000 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 December 31, 2006 and 2005:
September 30,
2005 2006
---------- ----------
Statutory federal income tax rate 34.0% 34.0%
Increase (decrease) in tax rate resulting from:
State tax benefit, net of federal benefit 6.1% 2.4%
Other 0.0% 0.4%
Valuation Allowance (38.0)% (33.1)%
---------- ----------
Effective income tax rate 2.1% 3.7%
========== ==========
At September 30, 2006, the Company had NOL carry forwards for Federal and
California income tax purposes totaling approximately $38.1 million and $8.5
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.
F-13
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company has two non-cancelable operating leases that are currently in
effect, which include a lease for MST's facility in Dallas, Texas, which expires
in August 2007, 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, 2006 are as follows:
Years ending
September 30,
-------------
2007 356,000
2008 367,000
2009 372,000
2010 384,000
2011 183,000
-----------
Total $ 1,662,000
===========
Rent expense for the years ended September 30, 2006 and 2005 was approximately
$559,000 and $548,000, 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 $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
straigh t-line basis is recorded as a deferred rent liability.
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 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, 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, 2006 and 2005 the Company recognized as income
$478,000 and $262,000, respectively, in royalties from Lumenis. These amounts
are all included as other income in the accompanying statements of income.
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.
F-14
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. STOCKHOLDERS' EQUITY
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 2005, the board of directors authorized the grant of non-qualified
stock options to purchase 138,000 shares at an exercise of $0.60 per share based
on the closing price of the Company's common stock on the date of grant. These
options generally vest over five years and expire ten (10) years from the date
of grant.
During fiscal 2006, the board of directors authorized the grant of non-qualified
stock options to purchase 175,750 shares as follows:
Number of Option Exercise
Options(1) Price Per Share(2)
--------- -----------------
25,000 $0.59
10,000 $0.66
750 $0.68
10,000 $0.87
100,000 $0.92
30,000 $1.75
(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.
Activity during the years ended September 30, 2006 and 2005 under the plans was
as follows:
Stock Options Outstanding
Number of Option Exercise Weighted Average
Options Price Per Share Exercise Price
---------- ----------------- --------------
October 1, 2004 1,322,600 $0.14 - $3.84 $1.20
Granted 138,000 $0.60 $0.60
Exercised --
Canceled (63,400) $0.33 - $2.75 $0.70
----------
September 30, 2005 1,397,200 $0.14 - $3.84 $1.16
Granted 175,750 $0.59 - $1.75 $1.00
Exercised (65,971) $0.14 - $1.25 $0.53
Canceled (81,000) $0.50 - $2.75 $1.33
----------
September 30, 2006 1,425,979 $0.14 - $3.84 $1.16
==========
The weighted-average fair value of the stock options granted for the years ended
September 30, 2006 and 2005, was $0.53 and $0.24, repectively.
The following table summarizes information concerning outstanding and
exercisable options at September 30, 2006:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------ -------------------
Outstanding Weighted-Average Exercisable Weighted-
Range of as of Remaining Weighted-Average as of Average
Exercise Prices 9/30/2006 Contractual Life (years) Exercise Price 9/30/2006 Exercise Price
----------------- --------- ------------------------ -------------- --------- --------------
$0.00 - $0.38 85,000 6.2 $0.17 45,000 $0.20
$0.39 - $0.94 645,879 6.7 $0.60 422,029 $0.56
$0.95 - $1.88 462,200 4.7 $1.30 432,200 $1.27
$1.89 - $2.61 64,000 1.4 $2.17 64,000 $2.17
$2.62 - $3.38 120,900 3.0 $2.73 120,900 $2.73
$3.39 - $4.25 48,000 3.5 $3.84 48,000 $3.84
---------- ---------- -------- ---------- --------
1,425,979 5.4 $1.16 1,132,129 $1.28
========== ========== ======== ========== ========
F-15
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As stock options are generally granted at an exercise price equal to the fair
market value of the underlying stock at the date of grant, there are generally
no charges to income in connection with the issuance of stock options. Upon
exercise, proceeds from the sale of shares under the stock options plans are
credited to common stock and additional paid-in capital.
Contingent Common Stock Arrangement
During the fiscal year ended September 30, 2004, the Company's President elected
to defer $10,000 per year in cash compensation with the option of being paid in
shares of the Company's common stock, based on the closing price at the end of
the month in which the compensation was earned. During the fiscal year ended
September 30, 2005, the Company's President elected to be paid cash for the
above in lieu of the right to receive shares of the Company's stock.
No such agreements existed in the fiscal year ended September 30, 2006.
Common Stock Awards
There were no shares of common stock awarded during the fiscal years ended
September 30, 2006 and 2005.
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 totaled $26,000 for fiscal 2006 and $12,000 for fiscal 2005.
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, 2006 For the year ended September 30, 2005
Service and Service and
Product Rental Total Product Rental Total
----------------------------------------- ------------------------------------------
Revenue $4,484,000 $1,753,000 $6,237,000 $ 4,813,000 $1,669,000 $6,482,000
Cost of sales 2,489,000 1,260,000 3,749,000 2,358,000 1,134,000 3,492,000
----------------------------------------- ------------------------------------------
Gross profit 1,995,000 493,000 2,488,000 2,455,000 535,000 2,990,000
Expenses:
Selling, general and
administrative 1,915,000 364,000 2,279,000 1,926,000 497,000 2,423,000
Research and development 633,000 -- 633,000 623,000 -- 623,000
----------------------------------------- ------------------------------------------
(Loss) income from operations $ (553,000) $ 129,000 (424,000) $ (94,000) $ 38,000 (56,000)
========== ========= =========== =========
Other income (expense):
Interest income 21,000 16,000
Royalty income 478,000 262,000
Interest expense (29,000) (30,000)
Creditor settlements and recoveries 55,000 13,000
Loss on disposal of equipment (3,000) (12,000)
---------- ----------
Income before provision for income taxes 98,000 193,000
Provision for income taxes 1,000 7,000
---------- ----------
Net income $ 97,000 $ 186,000
========== ==========
F-16
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sales in foreign countries in fiscal 2006 and 2005 accounted for approximately
29.7% and 28.1%, respectively, of the Company's total sales. The breakdown by
geographic region is as follows:
2006 2005
---------- ----------
Asia $1,005,000 $1,039,000
Europe 312,000 387,000
Latin America 110,000 87,000
Middle East 1,000 1,000
Australia 85,000 --
Africa 41,000 --
Other 299,000 308,000
---------- ----------
$1,853,000 $1,822,000
========== ==========
Sales to customers by similar products and services for the years ended
September 30, 2006 and 2005 were:
2006 2005
---------- ----------
By similar products and services:
Laser equipment and accessories $ 948,000 $1,429,000
Delivery and disposable devices 3,536,000 3,384,000
Service and rental 1,753,000 1,669,000
---------- ----------
Total $6,237,000 $6,482,000
========== ==========
All the Company's long-lived assets were located in the United States at
September 30, 2006 with the exception of one demo 80 watt laser located in
Belgium.
NOTE 11. RELATED PARTY TRANSACTIONS
During the year ended September 30, 2005, the Company incurred $6,000 of legal
services rendered by a Director. During the year ended September 30, 2006, the
Company incurred $3,800 of legal services rendered by a Director, of which
$2,000 was still outstanding and included in accounts payable as of September
30, 2006.
Another member of the board of directors was engaged as a consultant to MST,
Inc. to faciliate increases to administrative efficiency. During the years ended
September 30, 2006 and 2005 the Company incurred $16,000 and $82,000,
respectivley, in consulting expenses associated with the arrangement which was
included in adminstrative expense. The arrangement was terminated during the
current fiscal year in December 2005.
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 matures on
March 31, 2008. The Note is secured by a personal guarantee from the
Chairman/CEO of the Company. During the year ended September 30, 2006, the
Company received $13,000 in principal reduction payments from Cardiomedics,
reducing the principal balance of the Note to $38,000 and recorded $1,000 in
interest income.
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 year
ended September 30, 2006 the Company incurred $13,000 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,
2006.
F-17
TRIMEDYNE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. SUBSEQUENT EVENTS
During the period October through December 2006, the Company sold 2,600,000
shares of its common stock through J. H. Darbie & Co., Inc. ("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.
The Company paid Darbie $260,000 and issued a warrant exercisable over a period
of five (5) years, to Darbie to purchase 208,000 shares of common stock at a
price of $1.25 per share, with a customary anti-dilution provision.
In November 2006, the Company sold through First Island Capital, Inc. ("FIC")
50,000 shares of common stock at a price of $1.25 per Share for $62,500 to an
accredited individual and issued a warrant, exercisable over a period of five
(5) years, to FIC to purchase 4,000 shares of common stock at a price of $1.25
per share, with a customary anti-dilution provision.
The Subscription Agreements covering the sale of these shares included customary
anti-dilution provisions, an undertaking to file a Registration Statement with
the SEC and cause it to become effective 120 days after the date of sale and a
provision for a penalty of 1% per month for each month, after a period of 120
days from the date of sale, during which the registration statement is not
effective.
After estimated underwriting fees and costs of $300,000, the net proceeds to the
Company from the two above transactions is estimated to be $3,012,500.
On December 21, 2006, the Company intends to file a Registration Statement on
Form SB-2 with the SEC covering the potential resale of the above 2,650,000
shares of common stock by the holders thereof, the shares underlying the 212,000
Warrants issued to Darbie and FIC, 600,000 Shares reserved for issuance pursuant
to Non-Qualified Stock Options which may be granted under the Company's 2007
Non-Qualified Stock Option Plan and resales of such Shares, and an indeterminate
number of Shares which the Company may be required to issue under the
anti-dilution provisions of the above described Subscription Agreements and
Warrants.
Under the Non-qualified 2007 Stock Option Plan, options may be granted to
officers, directors, employees and consultants at fair market value and, unless
otherwise approved by the Board of Directors, are exercisable over a period of
six years and vest at 20% per year.
On November 3, 2006 the Chief Executive Officer elected to convert two Senior
Convertible Secured Notes in the amounts of $150,000 and $50,000, and their
respective accrued interest, into 760,000 shares of common stock based on their
conversion price of $0.40 and $0.50 per share, respectively, upon their
maturity.
F-18
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 78.751 of the Nevada Revised Statutes, as amended, authorizes us to
indemnify any of our directors or officers under certain prescribed
circumstances and, subject to certain limitations, against certain costs and
expenses, including attorneys' fees actually and reasonably incurred in
connection with any action, suit or proceeding, whether civil, criminal,
administrative or investigative, to which the director is a party by reason of
being one of our directors or officers, if it is determined that the director
acted in accordance with the applicable standard of conduct set forth in those
statutory provisions. Article 12 of our Certificate of Incorporation contains
provisions relating to the indemnification of our directors and officers to the
fullest extent permitted by Nevada law.
We may also purchase and maintain insurance for the benefit of any director or
officer that may cover claims for which we could not indemnify such person.
Item 25. Other Expenses of Issuance and Distribution
In addition to $260,000 of commissions on the sale of the aforementioned
2,650,000 Shares, the following statement, sets forth the estimated expenses in
connection with the offering described in the Registration Statement.
Securities and Exchange Commission Fee.................. $ 522.31
Accountants' Fees and Expenses.......................... 10,000.00
Legal Fees and Expenses................................. 20,000.00
Blue Sky Fees and Expenses.............................. 3,000.00
Printing and Mailing Costs.............................. 1,000.00
Miscellaneous........................................... 1,000.00
-------------
TOTAL $ 35,522.31
=============
Item 26. Recent Sales of Unregistered Securities
(a) We sold $200,000 of 12% Senior, Secured Convertible Notes to our
Chairman/CEO in private transactions in February and April 2002. On
November 3, 2006 the Chairman/CEO elected to convert these notes and
their accrued interest upon their maturity in 2007.
(b) In October through December 2006, we sold an aggregate of 2,650,000
shares of common stock in a private placement to six (6) accredited
investors and in December 2006 we issued an aggregate of 212,000
warrants to the private placement agents in connection with the sale
of the 2,650,000 shares.
Item 27. Exhibits
--------
The following exhibits are filed with this Registration Statement:
5 Opinion of Counsel
23(a) Consent of Independent Registered Public Accounting Firm
II-1
Item 28. Undertakings
------------
The undersigned Registrant hereby undertakes;
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement to include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment hall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) The undersigned registrant hereby undertakes that, for the purpose
of determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Act of 1934) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities being offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(5) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing a Registration Statement on Form SB-2 and has duly
caused this Registration Statement or Amendment to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Lake Forest, State of California, on the 21st day of December, 2006.
TRIMEDYNE, INC.
By: /s/ Marvin P. Loeb
------------------------------------
Marvin P. Loeb
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement or Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Marvin P. Loeb Chairman, Chief Executive December 21, 2006
---------------------- Officer and Director
Marvin P. Loeb
/s/ Glenn D. Yeik President and Director December 21, 2006
----------------------
Glenn D. Yeik
/s/ Jeffrey S. Rudner Treasurer December 21, 2006
----------------------
Jeffrey S. Rudner
/s/ Donald Baker Director December 21, 2006
----------------------
Donald Baker
/s/ Richard F. Horowitz Secretary and Director December 21, 2006
----------------------
Richard F. Horowitz
II-3