SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED COMMISSION FILE NUMBER
JUNE 30, 2002 -------
----------------- 0-10581
TRIMEDYNE, INC.
(Exact name of Registrant as specified in its charter)
Nevada 36-3094439
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
15091 Bake Parkway, Irvine, CA 92618
(Address of principal executive offices) (Zip Code)
(949/559-5300)
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal
year, if changed since last report).
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), (2) has been subject to such filing
requirements for the past 90 days.
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the last practicable date.
Class Outstanding at August 13, 2002
---------------------------- ------------------------------------
Common Stock, $.01 par value 13,739,760 shares
1
TRIMEDYNE, INC.
Page Number
-----------
PART I. Financial Information 3
ITEM 1. Financial Statements 3
Consolidated Balance Sheet June 30, 2002 3
Consolidated Statements of Operations and
Comprehensive Loss for the three
and nine months ended June 30, 2002 4
and June 30, 2001 (as restated)
Consolidated Statements of Cash Flows for
the nine months ended June 30, 2002 5
and June 30, 2001 (as restated)
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. Other Information 16
SIGNATURE PAGE 17
2
TRIMEDYNE, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
June 30,
2002
------------
Current assets:
Cash and cash equivalents $ 174,000
Trade accounts receivable, net of allowance for
doubtful accounts of $68,000 1,050,000
Inventories (Note 2) 2,090,000
Other Current Assets 184,000
-------------
Total current assets 3,498,000
Goodwill, net of accumulated
amortization of $105,000 (Notes 1 and 4) 561,000
Net properties (Note 2) 623,000
Other Assets 58,000
-------------
$ 4,740,000
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,504,000
Accrued expenses (Note 2) 649,000
Deferred income 157,000
Current portion of long-term debt (Note 5) 46,000
Other current liabilities 79,000
-------------
Total current liabilities 2,435,000
Long-term debt, net of current portion -
Senior Convertible Secured Notes due officer (Note 6) 200,000
-------------
Total liabilities 2,635,000
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred Stock - $10 par value; 1,000,000 shares authorized,
none issued or outstanding --
Common stock - $0.01 par value; 30,000,000 shares authorized,
13,591,369 shares issued, 13,489,760 shares outstanding 137,000
Capital in excess of par value 47,656,000
Accumulated deficit (44,975,000)
-------------
2,818,000
Less 101,609 shares of common stock in treasury, at cost (713,000)
-------------
Total stockholders' equity 2,105,000
-------------
$ 4,740,000
=============
See accompanying notes to consolidated financial statements
3
TRIMEDYNE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
Three Months Ended Nine Months Ended
June 30, June 30,
2001 2002 2001 2002
------------- ------------- ------------- -------------
(as restated) (as restated)
Net revenues
Products $ 1,122,000 $ 1,616,000 $ 4,135,000 $ 4,353,000
Service and rental 707,000 280,000 1,310,000 1,055,000
------------- ------------- ------------- -------------
1,829,000 1,896,000 5,445,000 5,408,000
------------- ------------- ------------- -------------
Cost of revenues
Products 1,022,000 784,000 3,391,000 2,325,000
Service and rental 232,000 151,000 879,000 646,000
------------- ------------- ------------- -------------
1,254,000 935,000 4,270,000 2,971,000
------------- ------------- ------------- -------------
Gross profit 575,000 961,000 1,175,000 2,437,000
Operating expenses:
Selling, general and administrative,
including stock-based compensation of
$97,000 and $173,000 respectively in 2002 1,422,000 928,000 4,118,000 2,479,000
Research and development 491,000 348,000 1,825,000 1,136,000
------------- ------------- ------------- -------------
Total costs and operating expenses 1,913,000 1,276,000 5,943,000 3,615,000
------------- ------------- ------------- -------------
Loss from operations (1,338,000) (315,000) (4,768,000) (1,178,000)
Loss from permanent impairment
of marketable securities (953,000) -- (953,000) --
Fair value of make-up shares -- -- (660,000) --
Other income (expense) 100,000 28,000 19,000 128,000
------------- ------------- ------------- -------------
Net Loss (2,191,000) (287,000) (6,362,000) (1,050,000)
Comprehensive Loss $ (2,191,000) $ (287,000) (6,362,000) (1,050,000)
============= ============= ============= =============
Basic and diluted net loss per common share $ (0.17) $ (0.02) $ (0.51) $ (0.08)
============= ============= ============= =============
Weighted average number of shares outstanding 12,447,811 13,614,760 12,274,228 13,531,510
============= ============= ============= =============
See accompanying notes to consolidated financial statements.
4
TRIMEDYNE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
June 30,
2001 2002
---------- ----------
(as restated)
Cash flows from operating activities:
Net Loss $(6,362,000) $(1,050,000)
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 149,000 202,000
Stock-based compensation -- 173,000
Impairment of inventory 596,000 --
Fair value of make up shares issued 660,000 --
Loss from permanent impairment of
Marketable securities 953,000 --
Gain on sale of fixed assets -- (37,000)
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable (359,000) 191,000
(Increase) decrease in inventories 221,000 774,000
(Increase) decrease in other current assets 38,000 29,000
Increase (decrease) in accounts payable 1,636,000 (272,000)
Increase (decrease) in accrued expense 222,000 (75,000)
Increase (decrease) in other current liabilities -- (85,000)
Increase (decrease) in deferred income 4,000 38,000
------------ ------------
Net cash used in operating activities (2,242,000) (112,000)
Cash flows from investing activities:
(Purchases) sales of fixed assets (258,000) 37,000
Sale of marketable securities 2,232,000 --
Acquisition of MST, net of cash received (1,000) --
------------ ------------
Net cash provided by investing activities 1,973,000 37,000
Cash flows from financing activities:
Payments on long-term obligations (123,000) (35,000)
Proceeds from senior convertible secured
note due officer -- 200,000
Proceeds from exercise of stock options 25,000 --
------------ ------------
Net cash provided by (used in) financing activities (98,000) 165,000
------------ ------------
Net increase in cash and cash equivalents (367,000) 90,000
Cash and cash equivalents at beginning of period 466,000 84,000
------------ ------------
Cash and cash equivalents at end of period $ 99,000 $ 174,000
============ ============
Non-cash investing and financing activities:
Common stock issued for acquisition of MST $ 775,000 $ --
============ ============
See accompanying notes to consolidated financial statements
5
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(UNAUDITED)
NOTE 1 - Basis of Presentation
Interim Reporting
In the opinion of management, the accompanying condensed consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the Company's consolidated financial
position as of June 30, 2002, and the results of operations and of cash flows
for the three and nine-month periods ended June 30, 2001 as restated, and 2002.
Results for the nine months ended June 30, 2002, are not necessarily indicative
of the results to be expected for the year ending September 30, 2002.
While management believes that the disclosures presented are adequate to make
the information not misleading, it is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and the notes included in the Company's latest annual report on Form
10-KSB as amended.
Going Concern
The Company has incurred losses from operations throughout its recent past. At
June 30, 2002, the Company had working capital of approximately $1.2 million,
and excluding inventories, the Company's current liabilities exceed the current
liquid assets by $1.1 million. In addition, the Company's trade payables are
significantly past due. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans with
respect to these matters include efforts to reduce certain of its expenses by
eliminating certain personnel positions, reducing certain overhead costs, and
raising additional capital. Sources of additional financing include the sale of
debt or equity securities of the Company, the sale of Cardiodyne and/or the sale
or licensing of certain patent rights. During the nine months ended June 30,
2002, the Company sold 12% Senior Convertible Secured Notes to its chief
executive totaling $200,000, with the intent to sell additional notes in the
aggregate amount of $800,000, for a total offering of $1,000,000. Management
will attempt to register the shares in a registration statement on Form SB-2
with the Securities and Exchange Commission (the "SEC"). There is no assurance
that additional capital will be raised or obtained by the Company, or that a
registration of securities will be completed. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Restatement of Consolidated Interim Financial Statements
The Company restated its consolidated financial statements for the three and
nine months ended June 30, 2001, to comply with accounting standards generally
accepted in the United States.
During the three months ended December 31, 2000, the Company reversed sales and
related costs totaling $120,000 because the sale did not meet its revenue
recognition criteria. The Company also recorded a charge to operations totaling
$660,000 for the value of "make-up" shares of common stock issued pursuant to an
anti-dilution clause related to its private placement in fiscal 2000, which was
triggered by the acquisition of MST. During the Company's annual count of its
inventories, they noted certain inventory discrepancies between the general
ledger and the perpetual inventory at year end. Management believed these
discrepancies are due to over-absorption of overhead costs, resulting in
inconsistencies in the standard costing of products sold. Management has
allocated these additional inventory costs totaling $387,000 and $1,005,000 to
cost of sales during the three and nine months ended June 30, 2001. In addition,
during the three and nine months ended June 30, 2001 certain provisions for slow
moving and obsolete inventories aggregating $158,000 and $596,000, respectively.
Management believes the bases used for reporting these charges to operations
constitute errors requiring restatement on their results of operations during
the nine months ended June 30, 2001. The effects of the Company's restatement on
their results of operations for the three and nine months ended June 30, 2001,
are as follows:
6
Three months ended Nine months ended
June 30, 2001 June 30, 2001
------------------------- --------------------------
Net Loss Net Loss
Net Loss Per Share Net Loss Per Share
Net loss, as previously presented $ (1,886,000) $ (0.15) $ (4,101,000) $ (0.33)
Provision for obsolete and
slow moving inventory (158,000) (0.01) (596,000) (0.04)
Physical inventory and excess
overhead adjustments (387,000) (0.03) (1,005,000) (0.08)
Fair value of "make-up" shares
issued -- -- (660,000) (0.05)
Revenue adjustment 240,000 0.02 --
------------- ---------- ------------- ----------
Net loss, as adjusted $ (2,191,000) $ (0.17) $ (6,362,000) $ (0.51)
============= ========== ============= ==========
Adjustments to previously reported quarterly fiscal 2002 unaudited financial
statements
During the nine months ended June 30, 2002, the Company's chief executive has
not received cash compensation for his services. On May 21, 2002, the board of
directors approved that 230,000 shares be issued as compensation. Management
estimates the fair value of the services provided the chief executive to be
approximately $150,000, annually. Management did not accrue such services prior
to payment in May 2002 through the issuance of common stock. The impact is to
increase selling, general and administrative expenses by approximately $38,000
during the three months ended December 31, 2001 and March 31, 2002, each. As a
result of an inventory discrepancy which management believes to be due to
over-absorption of overhead costs during the six-month period ended March 31,
2002, management has allocated the additional costs of $162,000 to the first
quarter ended December 31, 2001 based upon net sales and sales mix. The effects
of the Company's restatement on their results of operations for the previously
reported quarterly financial information for three months ended December 31,
2001 and March 31, 2002, are as follows:
Unaudited (in thousands, except per share information)
-------------------------------------------------------
Three months ended Three months ended
December 31, 2001 March 31, 2002
--------------------- ----------------------
As As
Originally As Originally As
Reported Restated Reported Restated
--------- --------- --------- ---------
Revenues, net $ 1,836 $ 1,836 $ 1,675 $ 1,675
Cost of sales 957 1,119 949 949
--------- --------- --------- ---------
Gross profit 879 717 726 726
Total operating expenses 1,093 1,131 1,140 1,178
--------- --------- --------- ---------
Loss from operations (214) (414) (414) (452)
Total other income (expense) 101 101 2 2
--------- --------- --------- ---------
Net loss (113) (313) (412) (450)
========= ========= ========= =========
Basic and diluted loss
Per share $ (0.01) (0.02) (0.03) (0.03)
========= ========= ========= =========
7
Intangible Assets
In June 2001, the Financial Accounting Standards Board finalized Statements of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and
No. 142, "Goodwill and Other Intangible Assets." SFAS 141 requires the use of
the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001. SFAS 141 also requires that the Company recognize acquired
intangible assets apart from goodwill if the acquired intangible assets meet
certain criteria. SFAS 141 applies to all business combinations initiated after
June 30, 2001, and for purchase business combinations completed on or after July
1, 2001. It also requires, upon adoption of SFAS 142 that the Company reclassify
the carrying amounts of intangible assets and goodwill based on the criteria in
SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 121. SFAS 142 requires the Company to adopt
this standard as of October 1, 2002 applying to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. Management has
not determined the impact of adoption of SFAS 142.
Recently Issued Accounting Policies
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" (SFAS 145). SFAS
145 updates, clarifies and simplifies certain existing accounting
pronouncements. Currently, SFAS 145 impacts ANZA only with respect to the
rescission of SFAS 4. Prior to the issuance of SFAS 145, SFAS 4 required all
gains and losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. As a
result of the rescission of SFAS 4, the criteria in APB No. 30 will now be used
to classify those gains and losses. SFAS 145 is required to be adopted for
fiscal years beginning after May 2002. The adoption of SFAS No. 145 is not
expected to have a significant impact on The Company's statements of operations.
8
NOTE 2 - Balance Sheet Items
Inventories consist of the following:
June 30, 2002
----------------
Raw material $ 1,002,000
Work-in-process 485,000
Finished goods 603,000
-------------
Total inventory $ 2,090,000
=============
Net properties consist of the following:
Furniture and equipment $ 3,270,000
Leasehold improvements 272,000
Other 116,000
-------------
Total Properties 3,658,000
Accumulated depreciation (3,035,000)
-------------
Net properties $ 623,000
=============
NOTE 3 - Earnings Per Share Information
For all periods presented, the net earnings available to common shareholders and
the weighted average shares outstanding are the same for both basic and diluted
EPS, since the effects of the Company's stock options would be antidilutive.
Basic and diluted EPS do not differ from earnings per share previously
presented. The number of shares which would have been included in the weighted
average shares outstanding had the effects been dilutive during the nine months
ended June 30, 2002, were approximately 100,000 shares each.
NOTE 4 - Intangible Assets
The Company's intangible assets consist of goodwill relating to Mobile Surgical
Technologies, Inc. ("MST"). Goodwill is amortized on a straight-line basis over
ten years. During the nine months ended June 30, 2002, amortization expense was
$49,000. No impairments of goodwill have been charged to operations since MST is
generating positive cash flows from operations.
NOTE 5 - Long-term debt
Various loans payable to banks, bearing interest at 9.5% to 10% per annum, with
principal and interest due monthly in aggregate installments of $6,552, which
mature from November 2002 through April 2003. The loans are secured by lasers
and automobiles.
NOTE 6 - Senior convertible secured notes due to officer
During the nine months ended June 30, 2002, the Company sold two 12% Senior
Convertible Secured Notes (the "Convertible Notes") to its chief executive
totaling $200,000, with the intent to sell additional notes in the aggregate
amount of $800,000, for a total offering of $1,000,000. The Convertible Notes
sold in the amount of $150,000 and $50,000 bear interest at 12%, per annum,
payable annually on December 31 through December 31, 2006, with a maturity date
of February 27 and April 15, 2007, respectively, and are convertible into common
stock, based on $0.40 per share and $0.50 per share (the "Conversion Price"),
respectively. The Convertible Notes are secured by substantially all the
Company's assets. The Convertible Notes are subject to reduction if the Company
issues or sells any shares of its common stock for a consideration per share
less than the Conversion Price at which the Conversion Price will be reduced to
the price at which the shares of common ctock 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. The Company intends to file a registration
statement with the SEC to register the underlying common stock.
NOTE 7 - Contingencies
The Company elected not to pay the minimum quarterly royalty for the quarter
ended September 30, 2000, under a patent license in urology from Lumenis, Inc.
("Lumenis"), as sales of products covered by the license were insignificant. The
license, by its terms, terminated on September 30, 2000, due to said
non-payment, and the Company ceased marketing products covered by the license.
In January 2002, Lumenis filed a lawsuit against the Company in the Federal
District Court for the Central District of California in Los Angeles, alleging
the Company contributed to customers' infringing Lumenis' patents. The Company
believes the lawsuit is entirely without merit and will be rigorously defended.
The Company has filed counterclaims against Lumenis, including claims alleging
violation of the anti-trust laws, price fixing, trade libel, patent misuse and
that Lumenis infringed two the of Company's patents.
9
At June 30, 2002, the Company is disputing claims of two lawsuits, one filed by
a supplier and one filed by a building contractor. The Company believes the
supplier's suit includes charges for materials not delivered, and the Company
suffered expenses due to delays caused by the building contractor that offset,
at least partially, the amount claimed. The total amount claimed in each suit is
included in accounts payable as of June 30, 2002. Subsequent to June 30, 2002,
the Company settled the above claims with no significant effect on operations.
In the ordinary course of business, the Company is from time to time involved in
various pending or threatened legal actions from vendors. The litigation process
is inherently uncertain and it is possible that the resolution of such matters
might have a material adverse effect upon the financial condition and/or results
of operations of the Company. However, in the opinion of the Company's
management, matters currently pending or threatened against the Company are not
expected to have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
NOTE 8 STOCK-BASED COMPENSATION
Common stock transactions
On April 17, 2002, the board of directors authorized the grant of 10,000 shares
of the Company's common stock valued at $5,000 or $0.50 per share to a financial
consultant. The shares are fully vested and charged to operations, at the time
of board approval, during the three months ended June 30, 2002.
On May 21, 2002, the board of directors authorized the grant of 230,000 shares
of the Company's common stock valued at $115,000 or $0.50 per share. Such
compensation was provided primarily for services during the nine-months ended
June 30, 2002. The Company charged operations for $115,000 during the nine
months ended June 30, 2002, of which approximately $38,000 is included in
operations during the three months ended June 30, 2002.
Contingent common stock arrangement
On April 17, 2002, the board of directors authorized the grant of 185,000 shares
of the Company's common stock to certain employees, subject to the completion of
an effective registration statement. In the event the registration is not
completed, the shares will not be issued.
Stock options
The Company has adopted stock option plans that authorize the granting of
options to key employees and directors in the form of incentive stock options
intended to qualify under IRS regulations, and/or non-qualified stock options
consultants to purchase unissued common stock subject to certain conditions,
such as continued employment. Options are generally granted at the fair market
value of the Company's common stock at the date of grant, become exercisable
over a period of five years from the date of grant, and expire in ten years.
Forfeitures of stock options are returned to the Company and become available
for grant under the respective plan.
On April 17, 2002, the board of directors authorized the grant of incentive
stock options to purchase 286,000 shares at an exercise price of $0.50 per share
to employees.
On April 17, 2002, the board of directors authorized the grant of non-qualified
stock options to purchase 365,000 shares at various exercise prices ranging from
$0.50 per share to $2.50 per share. Options to purchase 350,000 shares of common
stock are fully vested. The Company used the Black-Scholes valuation model to
value the options. Average assumptions used are: i. a volatility of 60%, ii. a
risk-free interest rate of 4.75%, iii. no dividend yield, and iv. an expected
life of 3 years. The total value ascribed to options issued to consultants
amounted to $53,000 and charged to operations during the three and nine months
ended June 30, 2002. These options generally expire in 5 years from the date of
grant. Options to purchase 340,000 shares are exercisable as of June 30, 2002.
NOTE 9 Other Income (Expense)
During the nine months ended June 30, 2002, the Company received a reimbursement
of legal fees of $51,000 related to the successful defense of the litigation
brought on by the co-inventor of the Company's Urolase product. Additionally,
the Company received %37,000 for the sale of obsolete equipment and reversed
approximately $30,000 in accruals which did not materialize in payments by the
Company.
10
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. Export sales
during the six months ended June 30, 2001 and June 30, 2002, were $721,000 and
$915,000, respectively. Although discrete components that earn revenues and
incur expenses exist, significant expenses such as research and development and
corporate administration are not incurred by nor allocated to these operating
units but rather are employed by the entire enterprise. Additionally, the chief
operating decision maker evaluates resource allocation not on a product or
geographic basis, but rather on an enterprise-wide basis. Therefore, the Company
has concluded that it contains only one reportable segment, which is the medical
systems business.
Sales and gross profit to customers by similar products and services for the
nine months ended June 30, 2001 and 2002 were:
2001 2002
--------- ---------
By similar products and services:
Revenues:
Products
Laser equipment and accessories $ 1,904,000 $ 1,656,000
Delivery and disposable devices 2,449,000 2,479,000
Service and rental 1,055,000 1,310,000
------------ ------------
Total $ 5,408,000 $ 5,445,000
============ ============
Gross profit (loss)
Products
Laser equipment and accessories $ (259,000) $ 514,000
Delivery and disposable devices 1,003,000 1,514,000
Service and rental 431,000 409,000
------------ ------------
Total $ 1,175,000 $ 2,437,000
============ ============
The gross profit (loss) on experienced during the nine-months ended June 30,
2001, was largely due to write-downs of inventories due to obsolescence, and
physical inventory and overhead adjustments at year-end September 30, 2001.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
The statements contained in this Quarterly Report on Form 10-QSB 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. 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.
Method of Presentation
The consolidated financial statements include the accounts of the Company, its
wholly owned subsidiary Mobile Surgical Technologies, Inc. ("MST") from the date
of acquisition, November 30, 2000 and its 90% owned subsidiary, Cardiodyne, Inc.
("Cardiodyne").
Critical Accounting Policies
----------------------------
Revenue recognition and allowances for doubtful accounts
We recognize revenue when title and risk of ownership have passed to the buyer.
Allowances for doubtful accounts are estimated based on estimates of losses
related to customer receivable balances. Estimates are developed by using
standard quantitative measures 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 reserve
balances required.
Inventories
We value our inventories at the lower of cost or market. Cost is determined by
the first-in, first-out (FIFO) method, including material, labor and factory
overhead. We write down our inventory for estimated obsolescence equal to the
salvage value of the obsolete inventory. Product obsolescence may be caused by
changes in technology, discontinuance of a product line, replacement products in
the marketplace, or other competitive situations.
Valuation of long-lived and intangible assets
We assess the fair value and recoverability of our long-lived assets, including
goodwill, whenever events and circumstances indicate the carrying value of an
asset may not be recoverable from estimated future cash flows expected to result
from its use and eventual disposition. In doing so, we make assumptions and
estimates regarding future cash flows and other factors to make our
determination. The fair value of our long-lived assets and goodwill is dependent
upon the forecasted performance of our business and the overall economic
environment. When we determine that the carrying value of our long-lived assets
and goodwill may not be recoverable, we measure any impairment based upon a
forecasted discounted cash flow method or fair value. If these forecasts are not
met, we may have to record impairment charges not previously recognized.
Restatement of June 30, 2001 financial statements
We restated our consolidated financial statements for the three and nine months
ended June 30, 2001. During our annual count of our inventories, we noted
certain inventory discrepancies between the general ledger and the perpetual
inventory at year end. Management believes these discrepancies are due to
over-absorption of overhead costs, resulting in inconsistencies in the standard
costing of products sold. Management has allocated these additional inventory
costs totaling $387,000 and $1,005,000 to cost of sales during the three and
nine months ended June 30, 2001. We also provided write-downs of inventory costs
due to obsolete products and parts. We charged the financial statements
aggregating $158,000 and $596,000, during the three and nine months ended June
30, 2001, respectively. We have reevaluated our standard costs due to changes in
product sales mixes, changes in manufacturing costs and the anticipated level of
production. We also anticipate cycle counting our inventory as a supplement to
our year end count. We believe that our procedures implemented will reduce the
risk of restatement of our financial statements in the future.
12
Quarter ended June 30, 2002 compared to quarter ended June 30, 2001, as restated
During the quarter ended June 30, 2002, Trimedyne's net revenues increased
$67,000 or 4% from the same quarter of the previous year, $1,896,000 vs.
$1,829,000. Net sales from lasers increased by $327,000 or 45% from $401,000 in
the prior year quarter to $728,000 in the current quarter. Net sales from
delivery and disposable devices decreased by $12,000 or 1% FROM $882,000 to
$894,000 for the same quarters. Net sales from service and rental decreased by
$302,000 or 331% from $394,000 to $92,000 for the same quarters. The decrease is
due to the departure of a major participant in the revenue share program for
non-payment. Additionally, the acquisition of MST contributed approximately
$187,000 to revenues in the current quarter, compared to $172,000 in the prior
year quarter.
Cost of goods sold was 49% of net sales in the third quarter of fiscal 2002
compared to 69% for the third quarter of fiscal 2001. The decrease in cost of
goods sold as a percentage of revenues was primarily the result of the Company's
cost reduction efforts. In March 2001, the Company relocated its manufacturing
facilities and began reducing costs. Furthermore, costs of sales in the third
quarter ending June 30, 2001 contained provisions for excess and obsolete
inventories totaling $158,000 and a charge for excess physical inventories and
capitalized overhead costs totaling $387,000.
Selling, general and administrative expenses decreased from $1,422,000 to
$928,000 a decrease of $494,000 or 53%. The decrease in selling, general and
administrative expenses is primarily attributed to cost containment measures
including employee layoffs of $428,000, including two executives, and reductions
in advertising and marketing of approximately $68,000. Stock-based compensation,
which was included in selling, general and administration expenses, totaled
$97,000 during the three months ended June 30, 2002, with no corresponding
charge in the comparable period in the prior year. We used our common stock and
common stock purchase options to compensate our Chief Executive in the amount of
$38,000, as well as employees and certain consultants. Because of our lack of
liquidity, we may be required to provide compensation through common stock in
the future.
Research and development expenditures for the quarter ended June 30, 2002,
decreased $143,000 or 41% to $348,000 from $491,000. The decrease is primarily
attributed to the Company reducing the product development efforts of Cardiodyne
and other projects, along with employee attrition.
Other expense decreased by $881,000 or 3,146% from $853,000 in the third quarter
of fiscal 2001, which included a net loss on investments of $853,000, to other
income of $28,000 in the third quarter of 2002. All investments were sold in
fiscal 2001.
The net loss for the current quarter was $287,000 or $0.02 per share, on
13,489,760 weighted average shares outstanding, a reduction of 663% from the net
loss for the same quarter of the prior year of $2,191,000 or $0.17 per share,
which included charges and adjustments of $288,000 or $0.02 per share, on
12,447,811 weighted average shares outstanding. We continue to monitor our costs
to reduce our operating losses.
13
Nine months ended June 30, 2002 compared to nine months ended June 30, 2001, as
restated
During the nine months ended June 30, 2002, Trimedyne's net revenues decreased
$37,000 or 1% from the same period of the previous year, $5,445,000 vs.
$5,408,000. Net sales from lasers increased by $248,000 or 15% from $1,656,000
in the prior year to $1,904,000 in the current nine-month period. Net sales from
delivery and disposable devices decreased by $30,000 or 1% from $2,479,000 to
$2,449,000 for the nine-month periods ending 2001 and 2002, respectively. Net
sales from service and rental decreased by $255,000 or 19% from $1,310,000 to
$1,055,000 for the nine-month periods ending 2001 and 2002, respectively. The
decrease is due to the Company's canceling a revenue sharing agreement with a
rental company, due to its failure to timely pay amounts due to the Company.
Additionally, the acquisition of MST contributed approximately $526,000 in the
current nine-month period compared to $385,000 in the prior year nine-month
period.
Cost of goods sold was 55% of net sales in the nine months ended June 30, 2002
compared to 78% for the nine months ended June 30, 2001. The decrease in cost of
goods sold as a percentage of revenues was primarily the result of the Company's
cost reduction efforts, which began upon the relocation of its manufacturing
facilities in March 2001. Furthermore, costs of sales in the nine months ended
June 30, 2001 contained provisions for excess and obsolete inventories totaling
$596,000 and a charge for excess physical inventories and capitalized overhead
costs totaling $1,005,000.
Selling, general and administrative expenses decreased from $4,118,000 to
$2,479,000, a decrease of $1,639,000 or 66%. The decrease in selling, general
and administrative expenses is primarily attributed to cost containment measures
including employee layoffs representing reductions of approximately $595,000,
reductions in advertising and marketing of approximately $320,000, and reduction
of legal fees of $237,000 resulting from the settlement of the Company's lawsuit
against C. R. Bard.
Stock-based compensation, which was charged to selling, general and
administrative expenses, totaled $173,000 during the nine months ended June 30,
2002, with no corresponding charge in the comparable period in the prior year.
We used our common stock and common stock purchase options to compensate our
chief Executive in the amount of $115,000, as well as employees and certain
consultants. Because of our lack of liquidity, we may be required to provide
compensation through common stock in the future.
Research and development expenditures for the nine months ended June 30, 2002,
decreased $689,000 or 61% from $1,825,000 to $1,136,000. The decrease is
primarily attributed to the Company reducing the product development efforts of
Cardiodyne and other projects, as well as employee attrition.
Other expense decreased by $1,722,000 to income of $128,000 in the current
nine-month period from expense of $1,594,000 in the nine-month period of fiscal
2001, which was primarily attributed to a $660,000 charge for the value of
"make-up" shares of common stock issued pursuant to an anti-dilution clause
related to the private placement in fiscal 2000, triggered by the acquisition of
MST along with a loss on the sale of investments of $953,000. Income in the
current nine-month period includes approximately $51,000 in proceeds from the
successful settlement of a lawsuit filed by the co-inventor of the Company's
Urolase(R) product, who was seeking a share of the settlement of the lawsuit
which the Company brought against C.R. Bard, $37,000 from the sale of fixed
assets and the reversal of approximately $30,000 in accruals which did not
materialize in payments by the Company.
The net loss for the nine months ended June 30, 2002, was $1,050,000 or $0.08
per share, a reduction of 506% from the net loss for the same period of the
prior year of $6,362,000 or $0.51 per share, which included charges and
adjustments of $2,484,000 or $0.18 per share.
14
Liquidity and Capital Resources
-------------------------------
The Company's working capital decreased from $1,622,000 at September 30, 2001 to
$1,063,000 at June 30, 2002. Cash and cash equivalents increased by $90,000 to
$174,000 at June 30, 2002, from $84,000 at September 30, 2001.
During the nine-month period ended June 30, 2002, net cash used in operating
activities was $112,000 which resulted principally from losses incurred of
$1,136,000, offset by non-cash adjustments for depreciation and amortization of
$202,000 and stock-based compensation of $173,00 and a charge of $25,000 from
the modification of certain stock option grants.
Net cash provided by investing activities during the current nine-month period
was $37,000 from the sale of fixed assets.
Net cash provided from financing activities during the nine-month period ending
June 30, 2002, was $165,000, which included a loan of $200,000 from the chief
executive officer offset by payments on long-term obligations totaling
approximately $35,000.
The Company has incurred losses from operations throughout its recent past.
Because of the Company's losses during 2001, the Company's liquid assets
declined dramatically and trade payables have become significantly past due.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans with respect to these matters include
efforts to reduce certain of its expenses (personnel and overhead) and raising
additional capital. Sources of additional financing include the sale of equity
securities of the Company, the sale of Cardiodyne and/or the sale or licensing
of certain patent rights. There are no assurances that additional capital will
be raised or obtained by the Company. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
15
Part II
Other Information
Item 1. Legal Proceedings Previously reported.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities None
Item 4. Submission of Matters to Vote of Security Holders
None
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Convertible Note form
99.1 Officer Certification
(b) Reports on Form 8-K
None
16
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
TRIMEDYNE, INC.
Date: August 9, 2002 /s/ Marvin P. Loeb
--------------------------- ------------------------------------
Marvin P. Loeb
President and
Chief Executive Officer
Date: August 9, 2002 /s/ Jeffrey S. Rudner
---------------------------- --------------------------------------
Jeffrey S. Rudner
Controller
17