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
MARCH 31, 2004 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)
(949/951-3800)
(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.
YES [X] NO [_]
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 May 24, 2004
---------------------------- ------------------------------------
Common Stock, $.01 par value 14,698,540 shares
TRIMEDYNE, INC.
Page Number
-----------
PART I. Financial Information 3
ITEM 1. Financial Statements (Unaudited) 3
Consolidated Balance Sheet 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
ITEM 3. Controls and Procedures 15
PART II. Other Information 16
SIGNATURE PAGE 17
CERTIFICATIONS 19
2
TRIMEDYNE, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
March 31,
2004
-------------
Current assets:
Cash and cash equivalents $ 1,449,000
Trade accounts receivable, net of allowance for doubtful
accounts of $86,000 730,000
Inventories 1,633,000
Other 33,000
-------------
Total current assets 3,845,000
Goodwill 544,000
Other assets 44,000
Property and equipment, net 439,000
-------------
$ 4,872,000
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 498,000
Accrued expenses 397,000
Deferred revenue 90,000
Accrued warranty 21,000
Current portion of long-term debt 24,000
-------------
Total current liabilities 1,030,000
Senior convertible secured notes due to officer 200,000
Accrued interest due officer 50,000
Long-term debt, net of current portion 6,000
-------------
Total liabilities 1,286,000
-------------
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, 14,698,540 shares issued, 14,534,831
shares outstanding 148,000
Capital in excess of par value 47,944,000
Accumulated deficit (43,793,000)
-------------
4,229,000
Treasury stock, at cost (101,609 shares) (713,000)
-------------
Total stockholders' equity 3,586,000
-------------
$ 4,872,000
=============
See accompanying notes to consolidated financial statements
3
TRIMEDYNE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
March 31, March 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net revenues $ 1,274,000 $ 1,653,000 $ 2,654,000 $ 3,338,000
Cost of revenues 664,000 827,000 1,368,000 1,689,000
------------ ------------ ------------ ------------
Gross profit 610,000 826,000 1,286,000 1,649,000
Operating expenses:
Selling, general and administrative 540,000 580,000 1,107,000 1,055,000
Research and development 94,000 36,000 161,000 103,000
------------ ------------ ------------ ------------
Total operating expenses 634,000 616,000 1,268,000 1,158,000
------------ ------------ ------------ ------------
Income (loss) from operations (24,000) 210,000 18,000 491,000
Other income, net 177,000 23,000 300,000 32,000
------------ ------------ ------------ ------------
Income before income taxes 153,000 233,000 318,000 523,000
Provision for income taxes 4,000 26,000 4,000 26,000
------------ ------------ ------------ ------------
Net income $ 149,000 $ 207,000 $ 314,000 $ 497,000
============ ============ ============ ===========
Net income per share:
Basic $ 0.01 $ 0.02 $ 0.02 $ 0.04
============ ============ ============ ============
Diluted $ 0.01 $ 0.02 $ 0.02 $ 0.04
============ ============ ============ ============
Weighted average number of
shares outstanding:
Basic 14,576,541 13,147,760 14,523,859 13,147,760
============ ============ ============ ============
Diluted 15,409,509 13,729,760 15,346,422 13,729,760
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
4
TRIMEDYNE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
March 31,
2004 2003
----------- ----------
Cash flows from operating activities:
Net income $ 314,000 $ 497,000
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 127,000 60,000
Loss from disposal of property and equipment 5,000 --
Changes in operating assets and liabilities:
Trade accounts receivable (93,000) (125,000)
Inventories (128,000) 360,000
Other assets 114,000 85,000
Accounts payable (26,000) (238,000)
Accrued expenses (226,000) (81,000)
Deferred revenue 31,000 (7,000)
Accrued warranty (21,000) 5,000
Accrued interest 12,000 14,000
Other liabilities -- (25,000)
------------ -----------
Net cash provided by operating activities 109,000 545,000
------------ -----------
Cash flows from investing activities:
Purchase of property and equipment (55,000) --
------------ -----------
Cash flows from financing activities:
Excercise of stock options 69,000 --
Payments on debt (20,000) --
------------ -----------
Net cash provided by financing activities 49,000 --
------------ -----------
Net increase in cash and cash equivalents 103,000 545,000
Cash and cash equivalents at beginning of period 1,346,000 317,000
------------ -----------
Cash and cash equivalents at end of period $ 1,449,000 $ 862,000
============ ===========
See accompanying notes to consolidated financial statements
5
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004 and 2003
(UNAUDITED)
NOTE 1 - Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Trimedyne, Inc., its wholly owned subsidiary, Mobile Surgical Technologies,
Inc. ("MST"), and its 90% owned subsidiary, Cardiodyne, Inc. ("Cardiodyne")
(collectively, the "Company"). All intercompany accounts and transactions
have been eliminated in consolidation.
Unaudited Interim Financial Information
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 March 31, 2004 and the results of operations and its cash flows
for the three and six-month periods ended March 31, 2004 and 2003. Results for
the three and six months ended March 31, 2004 are not necessarily indicative of
the results to be expected for the year ending September 30, 2004.
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 2003 annual report on Form
10-KSB. Certain prior period amounts have been reclassed to conform to the
current period presentation.
Accounts Receivable
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral. The Company maintains reserves for potential credit
losses and such losses have been within management's expectation.
Revenue Recognition
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 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.
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 of goodwill at March 31, 2004.
6
Stock Option Plans
The Company accounts for its 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. The following table illustrates the effect on net income and
net income per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation:
Three months ended Six months ended
March 31, March 31,
2004 2003 2004 2003
--------- --------- --------- ---------
Net income, as reported $ 149,000 $ 207,000 $ 314,000 $ 497,000
Deduct: total stock-based employee compensation
expense determined under fair value based method
for awards, net of related tax effects 5,000 23,000 10,000 45,000
--------- --------- --------- ---------
Pro forma net income $ 144,000 $ 184,000 $ 304,000 $ 452,000
========= ========= ========= =========
Net income per share - basic:
As reported $ 0.01 $ 0.02 $ 0.02 $ 0.04
========= ========= ========= =========
Pro forma $ 0.01 $ 0.02 $ 0.02 $ 0.03
========= ========= ========= =========
Net income per share - diluted:
As reported $ 0.01 $ 0.02 $ 0.02 $ 0.04
========= ========= ========= =========
Pro forma $ 0.01 $ 0.02 $ 0.02 $ 0.03
========= ========= ========= =========
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 used:
Three months ended Six months ended
March 31, March 31,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Dividend yield -- -- -- --
Expected volatility 80% 78% 80% 78%
Risk-free interest rate 2.11% 2.11% 2.11% 2.11%
Expected lives 5 years 5 years 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.
7
NOTE 2 - Balance Sheet Items
March 31,
2004
-----------
Inventories consist of the following:
Raw material $ 730,000
Work-in-process 426,000
Finished goods 477,000
------------
Total inventory $ 1,633,000
============
Property and equipment consist of the following:
Furniture and equipment $ 2,386,000
Leasehold improvements 218,000
Other 166,000
------------
2,770,000
Less accumulated depreciation and amortization (2,331,000)
------------
Total property and equipment $ 439,000
============
Accrued expenses consist of the following:
Loss contigency $ 100,000
Accrued compensation 89,000
Sales and use tax 74,000
Accrued payroll tax 5,000
Sublease deposit 15,000
Customer deposits 34,000
Accrued commissions 16,000
Other 64,000
------------
Total accrued expenses $ 397,000
============
NOTE 3 - Earnings Per Share Information
Basic income per share is based on the weighted-average number of shares of
common stock outstanding during the period. Diluted income per share also
includes the effect of stock options and other common stock equivalents
outstanding during the period, and assumes the conversion of the Company's
senior convertible secured notes due to officers for the period of time such
notes were outstanding, if such stock options and convertible notes are
dilutive.
The following table sets forth the computation of the numerator and denominator
of basic and diluted earnings per share:
Three months ended Six months ended
March 31, March 31,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Denominator
Weighted average common shares outstanding
used in calculating basic earnings per share 14,576,541 13,147,760 14,523,839 13,147,760
Effect of Dilutive Options 357,968 107,000 347,583 107,000
Effect of Senior Convertible Secured
Notes due to Officer 475,000 475,000 475,000 475,000
----------- ----------- ----------- -----------
Weighted average common shares outstanding
used in calculating diluted earnings per share 15,409,509 13,729,760 15,346,422 13,729,760
=========== =========== =========== ===========
Numerator
Net income $ 149,000 $ 207,000 $ 314,000 $ 497,000
Add - interest on Senior Convertible
Secured Note due to Officer 6,000 6,000 12,000 12,000
----------- ----------- ----------- -----------
Net income available to common shareholders $ 155,000 $ 213,000 $ 326,000 $ 509,000
=========== =========== =========== ===========
8
NOTE 4 - Contingencies
Litigation
The Company was a defendant and counterclaimant in Lumenis, Inc. ("Lumenis") v.
Trimedyne, Inc. Lumenis alleged that the Company had infringed on two of its
patents. The Company filed an answer to Lumenis' complaint and also filed
counterclaims against Lumenis alleging infringement of two of the Company's
patents, unfair business practices, trade libel and anti-trust violations. The
Company was a party to a license agreement (the "License Agreement"), which
required it to pay royalties to Lumenis. At September 30, 2003, the Company had
accrued royalties under this license agreement in the amount of $88,000.
On November 25, 2003, the Company and Lumenis entered into a settlement
agreement (the "Settlement Agreement"), under which the court dismissed the
litigation between them. The Settlement Agreement also provided that Lumenis
would apply a credit to royalties due by the Company under the License
Agreement, which the Company had accrued, and pay the Company $5,000 for the
remaining overpayment of royalties due under the License Agreement. The
Settlement Agreement also provided that the Company and Lumenis would enter into
an original equipment manufacture ("OEM") agreement whereby Lumenis would pay
the Company a technology access fee of $150,000 and purchase from the Company
certain side-firing and angled-firing fiber optic devices, which Lumenis will
market with its lasers, plus an amount equal to 7.5% of Lumenis' sales of
side-firing and angled-firing devices manufactured by Lumenis or purchased by
Lumenis from third-party suppliers.
In January and March 2004, the Company received $155,000 in technology fees and
$26,000 in royalties, respectively, in connection with the terms of the
settlement agreement, which is included in other income for the three and six
month periods ended March 31, 2004.
Product liability
The Company is currently a defendant in three product liability lawsuits. These
cases relate to injuries that occurred in connection to medical procedures in
which the Company's lasers were used. All of these cases are currently in
litigation. The Company has insurance to cover product liability claims. This
insurance provides the Company with $5,000,000 of coverage for each occurrence
with a general aggregate of $5,000,000. Trimedyne's liability is limited to a
maximum of $50,000 per occurrence unless the judgment against the Company
exceeds the insurance coverage. In such case, Trimedyne would be liable for any
liability in excess of $5,000,000. Management has accrued in prior periods a
loss contingency for these claims in the amount of $100,000 ($50,000 for each of
the two claims), based on the deductible under the insurance policy. In another
product liability lawsuit, the cost of defense has exceeded the insurance
deductible that was accrued in prior periods. Management is not accruing any
additional provision for this claim, as it is not expected that this claim will
exceed the limits of the insurance coverage.
In the ordinary course of business, the Company is from time to time involved in
various pending or threatened legal actions. 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, as
discussed above, are not expected to have a material adverse effect on the
financial position, results of operations or cash flows of the Company.
Licensing
The Company has license agreements with a number of universities and inventors,
under which royalties on sales, if any, are payable. Sales of products covered
by these licenses are presently not material. The Company has one license
agreement with a competitor under which royalties have been waived. Patent
applications have been filed with the U.S. Patent Office and U.S. Patents
covering certain of the Company's products have been issued to officers and
employees of the Company and have been assigned to the Company without royalty.
The above patent applications are currently being processed by the U.S. Patent
Office and, to the Company's knowledge, are proceeding in the normal course of
review.
NOTE 5 - Other Income
During the six months ended March 31, 2004, the Company settled litigation with
Lumenis which resulted in a reduction of $88,000 previously accrued for
royalties. In January and March 2004, the Company received $155,000 in
technology fees and $26,000 in royalties, respectively, in connection with the
terms of the above settlement, which is included in other income for the three
and six month periods ended March 31, 2004 (see Note 4). The Company also
received $53,000 from an insurance settlement for a damaged laser.
9
NOTE 6 Segment Information
The Company's revenue base is derived from the sales of medical products and
services. Products consist of lasers, and related products such as disposable
systems and component parts. Services consist of rentals, fees on a per-case
basis, as well as service and warranty repairs and maintenance. Data with
respect to these operating activities for the three months and six months ended
March 31, 2004 and March 31, 2003 are as follows:
For the quarter ended March 31, 2004 For the quarter ended March 31, 2003
Service and Service and
Products Rental Total Products Rental Total
---------------------------------------- ------------------------------------------
Revenue $ 837,000 $ 437,000 $ 1,274,000 $ 1,289,000 $ 364,000 $ 1,653,000
Cost of sales 571,000 93,000 664,000 663,000 164,000 827,000
---------------------------------------- ------------------------------------------
Gross profit 266,000 344,000 610,000 626,000 200,000 826,000
Expenses:
Selling, general and
administrative 389,000 151,000 540,000 448,000 132,000 580,000
Reasearch and development 94,000 -- 94,000 36,000 -- 36,000
---------------------------------------- ------------------------------------------
Income (loss) from operations $ (217,000) $ 193,000 (24,000) $ 142,000 $ 68,000 210,000
========================== ===========================
Other:
Interest income 2,000 --
Interest expense (6,000) (7,000)
Royalty income 26,000 1,000
Settlements and recoveries 155,000 29,000
Income taxes (4,000) (26,000)
------------ ------------
Net income $ 149,000 $ 207,000
============ ============
For the six months ended March 31, 2004 For the six months ended March 31, 2003
Service and Service and
Products Rental Total Products Rental Total
---------------------------------------- ------------------------------------------
Revenue $ 1,802,000 $ 852,000 $ 2,654,000 $ 2,576,000 $ 762,000 $ 3,338,000
Cost of sales 1,035,000 333,000 1,368,000 1,297,000 392,000 1,689,000
---------------------------------------- ------------------------------------------
Gross profit 767,000 519,000 1,286,000 1,279,000 370,000 1,649,000
Expenses:
Selling, general and
administrative 804,000 303,000 1,107,000 788,000 267,000 1,055,000
Research and development 161,000 -- 161,000 103,000 -- 103,000
---------------------------------------- ------------------------------------------
Income (loss) from operations $ (198,000) $ 216,000 18,000 $ 388,000 $ 103,000 491,000
========================== ==========================
Other:
Interest income 2,000 1,000
Interest expense (19,000) (13,000)
Loss on disposal of equipment (5,000) --
Royalty income 26,000 2,000
Settlements and recoveries 298,000 42,000
Income taxes (4,000) (26,000)
------------ ------------
Net income $ 314,000 $ 497,000
============ ============
Sales and gross profit to customers by similar products and services for the
three and six months ended March 31, 2004 (unaudited) and March 31, 2003
were as follows:
10
For the three months ended March 31, For the six months ended March 31,
2004 2003 2004 2003
----------- ----------- ----------- -----------
By similar products and services:
Revenues:
Products:
Laser equipment and accessories $ 96,000 $ 557,000 $ 189,000 $ 996,000
Delivery and disposable devices 741,000 732,000 1,613,000 1,580,000
Service and rental 437,000 364,000 852,000 762,000
----------- ----------- ------------ -----------
Total $1,274,000 $1,653,000 $ 2,654,000 $ 3,338,000
=========== =========== ============ ===========
Gross profit
Products:
Laser equipment and accessories $ 33,000 $ 255,000 $ 55,000 $ 494,000
Delivery and disposable devices 233,000 371,000 712,000 785,000
Service and rental 344,000 200,000 519,000 370,000
----------- ----------- ------------ -----------
Total $ 610,000 $ 826,000 $ 1,286,000 $ 1,649,000
=========== =========== ============ ===========
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 three months ended March 31, 2004 decreased by $299,000 or 68% to
$137,000 from $436,000 from the prior year three month period. Export sales
during the six months ended March 31, 2004 decreased by $540,000 or 57% to
$401,000 from $941,000 from the prior year six month period. 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 in foreign countries for the quarters ended March 31, 2004 and March 31,
2003 accounted for approximately 8% and 26% of the Company's total sales,
respectively. Sales in foreign countries for the six months ended March 31, 2004
and March 31, 2003 accounted for approximately 15% and 17% of the Company's
total sales, respectively. The breakdown by geographic region is as follows:
Three months Three months Six months Six months
ended March ended March ended March ended March
31, 2004 31, 2003 31, 2004 31, 2003
------------ ------------ ------------ ------------
Asia $ 83,000 $ 237,000 $ 172,000 $ 565,000
Europe 34,000 32,000 197,000 198,000
Latin America 9,000 159,000 9,000 161,000
Middle East 3,000 5,000 12,000 14,000
Other 8,000 3,000 11,000 3,000
------------ ------------ ------------- ------------
$ 137,000 $ 436,000 $ 401,000 $ 941,000
============= ============ ============= ============
All long-lived assets were located in the United States during the three and six
months ended March 31, 2004 and 2003.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
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 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.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of the Company's customers to make required
payments. The allowance for doubtful accounts is based on specific
identification of customer accounts and the Company's best estimate of the
likelihood of potential loss, taking into account such factors as the financial
condition and payment history of major customers. The Company evaluates the
collectibility of our receivables at least quarterly. If the financial condition
of the Company's customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required. The
differences could be material and could significantly impact cash flows from
operating activities.
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 Tangible 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 of goodwill at March 31, 2004.
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 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.
12
Method of Presentation
The consolidated financial statements include the accounts of the Trimedyne,
Inc., its wholly owned subsidiary Mobile Surgical Technologies, Inc. ("MST") and
its 90% owned subsidiary, Cardiodyne, Inc. ("Cardiodyne").
Quarter ended March 31, 2004 compared to quarter ended March 31, 2003:
During the quarter ended March 31, 2004, net revenues were $1,274,000 as
compared to $1,653,000 for the same period of the previous year, a $379,000 or
23% decrease. This overall decrease was the result of lower laser sales during
the current period. Lasers typically sell between $35,000 and $110,000,
depending upon the type of laser. The number of lasers sold in a typical quarter
during the past two years has ranged from one to six per quarter. Net sales from
delivery and disposable devices increased by $9,000 or 1% to $741,000 in the
current quarter from $732,000 in the same quarter of the prior year. Net sales
from service and rental increased by $73,000 or 20% to $437,000 from $364,000
for the same quarters. This increase was primarily due to the growth of the
Company's subsidiary MST, which is expanding its territory into other states.
Cost of sales during the quarter ended March 31, 2004 was 52% of net sales as
compared to 50% of net sales during the quarter ended March 31, 2003.
Selling, general and administrative expenses decreased in the current quarter to
$540,000 from $580,000 in the prior year quarter, a decrease of $40,000 or 7%.
The decrease in selling, general and administrative expenses was primarilty the
result of the following: decreases of $42,000 in bad debt expense, $36,000 in
commissions expense due to a decrease in sales, $16,000 in adminstrative payroll
and $13,000 in miscellaneous adminstration expenses offset by increases of
$36,000 in depreciation expense, $17,000 in audit and tax preparation expense
and $11,000 in rent expense. Research and development expenditures for the
quarter ended March 31, 2004, increased $58,000 to $94,000 as compared to
$36,000 in the quarter ended March 31, 2003. This increase was a result of
Trimedyne increasing its efforts to develop new delivery systems and Holmium
lasers.
Other income increased by $154,000 or 670% from $23,000 in the second quarter of
fiscal 2003 to $177,000 in the second quarter of 2004. During the three months
ended December 31, 2003, the Company settled litigation with a competitor which
resulted in the receipt of $155,000 in technology fees and royalties of $26,000
during the current quarter offset by interest accrued on notes due to the CEO.
For the current quarter, the Company had net income of $149,000 or $0.01 per
share, based on 14,576,541 basic weighted average number of common shares
outstanding, as compared to net income of $207,000, or $0.02 per share, based on
13,729,760 basic weighted average number of common shares outstanding in the
same quarter of the previous year.
Six months ended March 31, 2004 compared to six months ended March 31, 2003:
During the six months ended March 31, 2004, net revenues were $2,654,000 as
compared to $3,338,000 for the same period of the previous year, a $684,000 or
20% decrease. Net sales from lasers and accessories decreased by $774,000 or 23%
to $1,802,000 during the six months ended March 31, 2004 from $2,576,000 in the
the same period of the prior year. Export sales also decreased by $187,000 or
31% due to a reduction in laser sales in Asia and Latin America. Net revenues
from delivery and disposable devices increased by $33,000 or 2% to $1,613,000
during the six months ended March 31, 2003 from $1,580,000 for the same period
of the prior year. Net sales from service and rental increased by $90,000 or 11%
to $852,000 from $762,000 for the same quarters in the prior year. This increase
was primarily due to the growth of the Company's subsidiary MST, which is
expanding its territory into other states.
Cost of sales remained relatively unchanged at 52% of net sales in the six
months ended March 31, 2004 compared to 51% for the six months ended March 2003.
For the six months ended March 31, 2004, selling, general and administrative
expenses totaled $1,107,000 as compared to $1,055,000 for the same period of the
previous year, a $52,000 or 5% increase. This increase in selling, general and
administrative expenses since the prior year period is the result of the
following: the Company being named in an additional product liability lawsuit
and accruing a charge of $50,000 representing the contingency for insurance
deductible, a rent increase of $18,000 per the leasing contract of the Company's
Irvine location, a $47,000 increase in salaries and wages due to the hiring of
additional operations staff, the increase of insurance expense of $17,000, and
an increase of repairs and maintenance of $23,000 and depreciation of $30,000
due to the purchase of additional assets for the Company's subsidiary, MST, all
offset by reductions in bad debt expense of $42,000, commissions expense of
$67,000, telephone expense of $13,000 and reductions in miscellaneous
administration expenses of $10,000.
13
Research and development expenditures for the six months ended March 31, 2004,
increased $58,000 or 56% to $161,000 from $103,000. The increase is primarily
due to Trimedyne increasing its product development efforts which include the
testing and research of new and current products, along with preparation of
regulatory submissions.
Other income increased by $268,000 to $300,000 in the current six-month period
from $32,000 in the six-month period of fiscal 2003. In November 2003, the
Company settled litigation with Lumenis, Inc. which resulted in the reduction of
$88,000 in the liability for royalties in the previous quarter ended December
31, 2003 and the receipt of $155,000 in technology fees and royalties of $26,000
during the current quarter ended March 31, 2004. During the previous year's
quarter ended December 31, 2003 the Company also received $53,000 for an
unrelated cash insurance settlement for a damaged laser. Other income was
primarily offset by interest accrued on notes due to the CEO.
For the six months ended March 31, 2004, Trimedyne had net income of $314,000 or
$0.02 per share, based on 14,523,859 basic weighted average number of common
shares outstanding, as compared to a net income of $497,000, or $0.04 per share,
based on 13,729,760 basic weighted average number of common shares outstanding
in the same period of the previous year, resulting from the above mentioned
factors.
Liquidity and Capital Resources
-------------------------------
At March 31, 2004, the Company had working capital of $2,815,000 compared to
$1,549,000 at the end of the second quarter ending March 31, 2003. Cash
increased by $103,000 to $1,449,000 from $1,346,000 at the fiscal year ending
September 30, 2003. We believe our existing working capital will be sufficient
to meet Trimedyne's operating needs, and the operating needs of our 100% owned
laser rental subsidiary for the next twelve months. During the six months period
ended March 31, 2004, net cash provided by consolidated operations was $109,000.
Net cash used in investing activities was $55,000 primarily as a result of the
purchase of additional fixed assets to support the continuing expansion of MST.
Net cash provided by financing activities was $49,000 of which $69,000 was the
result of stock options exercised offset by $20,000 in payments on debt. 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. If we fail to continue to operate profitability, or
if we undertake the development, testing and marketing of additional new
products in the future, we will likely need to raise substantial additional
capital. There can be no assurance that we will be able to operate profitably in
the future.
We have $200,000 of Senior Convertible Notes due to our chief executive officer
(the "Notes") outstanding which are due, with interest at 12% per annum, in
2007. The Notes and accrued interest are convertible at prices of $0.40 and
$0.50 per share. If the Notes and accrued interest are not converted, we may
have to raise additional capital to pay the Note holder the principal and
interest due on the Notes. Sources of such financing may include the sale of
additional equity securities or the sale or licensing of patent rights. The
issuance of additional common stock or shares of preferred stock will dilute the
equity interests of our shareholders. There is no assurance such financing, if
and when needed, will be available to us on acceptable terms.
14
Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company's chief executive officer and chief financial officer carried out an
evaluation of the effectiveness and operation of the Company's disclosure
controls and procedures. They have concluded after evaluating the effectiveness
of the Company's disclosure controls and procedures as of a date (the
"Evaluation Date") within 90 days before the filing date of this quarterly
report, that as of the Evaluation Date, the Company's disclosure controls and
procedures were effective and designed to ensure that material information
relating to the Company would be made known to them by others.
Changes in Internal Controls
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect those controls subsequent to the
Evaluation Date.
15
Part II
Other Information
Item 1. Legal Proceedings
The Company was a defendant and counterclaimant in Lumenis, Inc. ("Lumenis") v.
Trimedyne, Inc. Lumenis alleged that the Company had infringed on two of its
patents. The Company filed an answer to Lumenis' complaint and also filed
counterclaims against Lumenis alleging infringement of two of the Company's
patents, unfair business practices, trade libel and anti-trust violations. The
Company was a party to a license agreement (the "License Agreement"), which
required it to pay royalties to Lumenis. At September 30, 2003, the Company had
accrued royalties under this license agreement in the amount of $88,000.
On November 25, 2003, the Company and Lumenis entered into a settlement
agreement (the "Settlement Agreement"), under which the court dismissed the
litigation between them. The Settlement Agreement also provided that Lumenis
would apply a credit to royalties due by the Company under the License
Agreement, which the Company had accrued, and pay the Company $5,000 for the
remaining overpayment of royalties due under the License Agreement. The
Settlement Agreement also provided that the Company and Lumenis would enter into
an original equipment manufacture ("OEM") agreement whereby Lumenis would pay
the Company a technology access fee of $150,000 and purchase from the Company
certain side-firing and angled-firing fiber optic devices, which Lumenis will
market with its lasers, plus an amount equal to 7.5% of Lumenis' sales of
side-firing and angled-firing devices manufactured by Lumenis or purchased by
Lumenis from third-party suppliers.
In January and March 2004, the Company received $155,000 in technology fees and
$26,000 in royalties, respectively, in connection with the terms of the
settlement agreement, which is included in other income for the three and six
month periods ended March 31, 2004.
The Company is currently a defendant in three product liability lawsuits. These
cases relate to injuries that occurred in connection to medical procedures in
which the Company's lasers were used. All of these cases are currently in
litigation. The Company has insurance to cover product liability claims. This
insurance provides the Company with $5,000,000 of coverage for each occurrence
with a general aggregate of $5,000,000. Trimedyne's liability is limited to a
maximum of $50,000 per occurrence unless the judgment against the Company
exceeds the insurance coverage. In such case, Trimedyne would be liable for any
liability in excess of $5,000,000. Management has accrued in prior periods a
loss contingency for these claims in the amount of $100,000 ($50,000 for each of
the two claims), based on the deductible under the insurance policy. In another
product liability lawsuit, the cost of defense has exceeded the insurance
deductible that was accrued in prior periods. Management is not accruing any
additional pr ovision for this claim, as it is not expected that this claim will
exceed the limits of the insurance coverage.
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
99.1 Officer Certification
99.2 Controller 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: May 24, 2004 /s/ Marvin P. Loeb
-------------------------- ------------------------------------
Marvin P. Loeb
President and
Chief Executive Officer
Date: May 24, 2004 /s/ Jeffrey S. Rudner
-------------------------- ------------------------------------
Jeffrey S. Rudner
Controller
17
CERTIFICATION
I, Marvin P. Loeb, hereby certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Trimedyne,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact, or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial position, results of operations, and
cash flows of the issuer as of, and for, the periods presented in this
quarterly report.
4. I am responsible for establishing and maintaining disclosure controls
and procedures for the issuer and have:
(i) Designed such disclosure controls and procedures to ensure
that material information relating to the issuer is made
known to me, particularly during the period in which the
periodic reports are being prepared;
(ii) Evaluated the effectiveness of the issuer's disclosure
controls and procedures as of March 31, 2004; and
(iii) Presented in the report our conclusions about the
effectiveness of the disclosure controls and procedures based
on my evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the issuer's
auditors and the audit committee of the board of directors (or persons
fulfilling the equivalent function):
(i) All significant deficiencies in the design or operation of
internal controls which could adversely affect the issuer's
ability to record, process, summarize and report financial
data and have identified for the issuer's auditors any
material weaknesses in internal controls; and
(ii) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
issuer's internal controls; and
6. I have indicated in the report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 24, 2004
/s/ Marvin P. Loeb
------------------------
Marvin P. Loeb, CEO
18
CERTIFICATION
I, Jeffrey Rudner, hereby certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Trimedyne,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact, or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial position, results of operations, and
cash flows of the issuer as of, and for, the periods presented in this
quarterly report.
4. I am responsible for establishing and maintaining disclosure controls
and procedures for the issuer and have:
a. Designed such disclosure controls and procedures to ensure
that material information relating to the issuer is made
known to me, particularly during the period in which the
periodic reports are being prepared;
b. Evaluated the effectiveness of the issuer's disclosure
controls and procedures as of March 31, 2004; and
c. Presented in the report our conclusions about the
effectiveness of the disclosure controls and procedures based
on my evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the issuer's
auditors and the audit committee of the board of directors (or persons
fulfilling the equivalent function):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the issuer's
ability to record, process, summarize and report financial
data and have identified for the issuer's auditors any
material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
issuer's internal controls; and
6. I have indicated in the report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 24, 2004
/s/ Jeffrey Rudner
------------------------
19