-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VL397edzFZSfxzfzOK3A3stZ33tjQtLD93sxR3GOjuC2ar2uMCEGATflAE/SjgUc JXI/889tYZx36C9I1O7vew== 0001019687-04-001856.txt : 20040819 0001019687-04-001856.hdr.sgml : 20040819 20040818180234 ACCESSION NUMBER: 0001019687-04-001856 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040819 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRIMEDYNE INC CENTRAL INDEX KEY: 0000357001 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 363094439 STATE OF INCORPORATION: NV FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-10581 FILM NUMBER: 04984961 BUSINESS ADDRESS: STREET 1: 15091 BAKE PARKWAY CITY: IRVINE STATE: CA ZIP: 92619 BUSINESS PHONE: 7145595300 MAIL ADDRESS: STREET 1: 15091 BAKE PARKWAY CITY: IRVINE STATE: CA ZIP: 92619 10QSB 1 trimedyne_10q-063004.txt 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, 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 August 20, 2004 - ---------------------------- ------------------------------------ Common Stock, $.01 par value 14,699,540 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 13 ITEM 3. Controls and Procedures 16 PART II. Other Information 17 SIGNATURE PAGE 18 CERTIFICATIONS 19 2 TRIMEDYNE, INC. CONSOLIDATED BALANCE SHEET (UNAUDITED) ASSETS June 30, 2004 ------------- Current assets: Cash and cash equivalents $ 1,323,000 Trade accounts receivable, net of allowance for doubtful accounts of $86,000 1,094,000 Inventories 1,631,000 Other 206,000 ------------- Total current assets 4,254,000 Goodwill 544,000 Other assets 55,000 Property and equipment, net 405,000 ------------- $ 5,258,000 ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 528,000 Accrued expenses 470,000 Deferred revenue 74,000 Accrued warranty 38,000 Income tax payable 24,000 Notes payable and current portion of long-term debt 117,000 ------------- Total current liabilities 1,251,000 Senior convertible secured notes due to officer 200,000 Accrued interest due officer 56,000 Long-term debt, net of current portion 6,000 ------------- Total liabilities 1,513,000 ------------- 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, 14,699,540 shares issued, 14,597,931 shares outstanding 148,000 Capital in excess of par value 47,945,000 Accumulated deficit (43,635,000) ------------- 4,458,000 Treasury stock, at cost (101,609 shares) (713,000) ------------- Total stockholders' equity 3,745,000 ------------- $ 5,258,000 ============= See accompanying notes to consolidated financial statements 3 TRIMEDYNE, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended June 30, June 30, 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Net revenues $ 1,696,000 $ 1,497,000 $ 4,350,000 $ 4,835,000 Cost of revenues 864,000 644,000 2,232,000 2,333,000 ------------ ------------ ------------ ------------ Gross profit 832,000 853,000 2,118,000 2,502,000 Operating expenses: Selling, general and administrative 578,000 486,000 1,685,000 1,541,000 Research and development 84,000 24,000 245,000 127,000 ------------ ------------ ------------ ------------ Total operating expenses 662,000 510,000 1,930,000 1,668,000 ------------ ------------ ------------ ------------ Income (loss) from operations 170,000 343,000 188,000 834,000 Other income, net 13,000 5,000 313,000 37,000 ------------ ------------ ------------ ------------ Income before income taxes 183,000 348,000 501,000 871,000 Provision for income taxes 25,000 17,000 29,000 43,000 ------------ ------------ ------------ ------------ Net income $ 158,000 $ 331,000 $ 472,000 $ 828,000 ============ ============ ============ =========== Net income per share: Basic $ 0.01 $ 0.03 $ 0.03 $ 0.06 ============ ============ ============ ============ Diluted $ 0.01 $ 0.02 $ 0.03 $ 0.06 ============ ============ ============ ============ Weighted average number of shares outstanding: Basic 14,597,876 13,147,760 14,548,428 13,147,760 ============ ============ ============ ============ Diluted 15,360,536 13,729,760 15,346,349 13,729,760 ============ ============ ============ ============ See accompanying notes to consolidated financial statements. 4
TRIMEDYNE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended June 30, 2004 2003 ----------- ----------- Cash flows from operating activities: Net income $ 472,000 $ 828,000 Adjustment to reconcile net income to net cash provided by operating activities: Depreciation and amortization 189,000 80,000 Loss from disposal of property and equipment 5,000 -- Changes in operating assets and liabilities: Trade accounts receivable (457,000) 69,000 Inventories (126,000) 361,000 Other assets 53,000 (126,000) Accounts payable 4,000 (273,000) Accrued expenses (77,000) 96,000 Deferred revenue 15,000 (37,000) Accrued warranty (4,000) 17,000 Accrued interest 18,000 18,000 Income taxes 14,000 -- ------------ ----------- Net cash provided by operating activities 106,000 1,033,000 ------------ ----------- Cash flows from investing activities: Purchase of property and equipment (83,000) (10,000) ------------ ----------- Cash flows from financing activities: Excercise of stock options 70,000 -- Payments on debt (116,000) (40,000) ------------ ----------- Net cash provided by (used in) financing activities (46,000) (40,000) ------------ ----------- Net (decrease) increase in cash and cash equivalents (23,000) 983,000 Cash and cash equivalents at beginning of period 1,346,000 317,000 ------------ ----------- Cash and cash equivalents at end of period $ 1,323,000 $1,300,000 ============ =========== Cash paid for interest and income taxes was insignificant in 2004 and 2003. See accompanying notes to consolidated financial statements 5
TRIMEDYNE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 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 June 30, 2004 and the results of operations and its cash flows for the three and nine-month periods ended June 30, 2004 and 2003. Results for the three and nine months ended June 30, 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 June 30, 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 Nine months ended June 30, June 30, 2004 2003 2004 2003 --------- --------- --------- --------- Net income, as reported $ 158,000 $ 331,000 $ 472,000 $ 828,000 Deduct: total stock-based employee compensation expense determined under fair value based method for awards, net of related tax effects (29,000) (23,000) (39,000) (68,000) --------- --------- --------- --------- Pro forma net income $ 129,000 $ 308,000 $ 433,000 $ 760,000 ========= ========= ========= ========= Net income per share - basic: As reported $ 0.01 $ 0.03 $ 0.03 $ 0.06 ========= ========= ========= ========= Pro forma $ 0.01 $ 0.02 $ 0.03 $ 0.06 ========= ========= ========= ========= Net income per share - diluted: As reported $ 0.01 $ 0.02 $ 0.03 $ 0.04 ========= ========= ========= ========= Pro forma $ 0.01 $ 0.02 $ 0.03 $ 0.06 ========= ========= ========= =========
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 June 30, June 30, 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 June 30, 2004 ------------ Inventories consist of the following: Raw material $ 744,000 Work-in-process 511,000 Finished goods 376,000 ------------ Total inventory $ 1,631,000 ============ Other current assets consist of the folowing: Prepaid insurance $ 195,000 Other 11,000 ------------ Total other current assets $ 206,000 ============ Property and equipment consist of the following: Furniture and equipment $ 2,386,000 Leasehold improvements 218,000 Other 194,000 ------------ 2,798,000 Less accumulated depreciation and amortization (2,393,000) ------------ Total property and equipment $ 405,000 ============ Accrued expenses consist of the following: Loss contigency $ 90,000 Accrued compensation 120,000 Sales and use tax 86,000 Sublease deposit 15,000 Customer deposits 61,000 Accrued insurance 35,000 Accrued professional expenses 28,000 Accrued commissions 14,000 Other 21,000 ------------ Total accrued expenses $ 470,000 ============ NOTE 3 - Notes Payable and Long-term Debt 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. $ 9,000 Loan payable to vendor, bearng interest at 8.3% per annum: principal and interest due monthly in equal installments of $4,223 through July 2004. The loan is secured by the related laser. 8,000 Notes payable to finance company, issued in conection with financing certain insurance policies. The notes bear interest at 4.8% per annum and require monthly principal and interest payments of $14,933 through January 2005. 116,000 ------------ 123,000 Less: current portion (6,000) ------------ Notes payable and long-term debt $ 117,000 ============ NOTE 4 - Convertible Notes Due to Officer At September 30, 2004, the Company had two outstanding senior convertible notes due to its chief executive officer. These notes mature, with interest at 12% per annum, in February and April 2007, and are convertible At prices of $0.40 and $0.50 per share. $ 200,000 ============ 8 NOTE 5 - 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 officer 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 Nine months ended June 30, June 30, -------------------------- -------------------------- 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Denominator Weighted average common shares outstanding used in calculating basic earnings per share 14,597,876 13,147,760 14,548,428 13,147,760 Effect of Dilutive Options 287,660 107,000 322,921 107,000 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 15,360,536 13,729,760 15,346,349 13,729,760 ============ ============ ============ ============ Numerator Net income $ 158,000 $ 331,000 $ 472,000 $ 828,000 Add - interest on Senior Convertible Secured Notes due to Officer 6,000 6,000 18,000 18,000 ------------ ------------ ------------ ------------ Net income available to common shareholders $ 164,000 $ 337,000 $ 490,000 $ 846,000 ============ ============ ============ ============
NOTE 6 - 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. The Company received $155,000 in technology fees and $45,000 in royalties, respectively, in connection with the terms of the settlement agreement, which is included in other income for the nine month period ended June 30, 2004. 9 Product liability The Company is currently a defendant in two 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, based on the deductible under the insurance policy. 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 7 - Other Income During the nine months ended June 30, 2004, the Company settled litigation with Lumenis which resulted in a reduction of $88,000 previously accrued for royalties. The Company received $155,000 in technology fees and $45,000 in royalties, respectively, in connection with the terms of the above settlement, which is included in other income for the nine month period ended June 30, 2004 (see Note 6). The Company also received $53,000 from an insurance settlement for a damaged laser. 10 NOTE 8 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 nine months ended June 30, 2004 and June 30, 2003 are as follows:
For the quarter ended June 30, 2004 For the quarter ended June 30, 2003 Service and Service and Products Rental Total Products Rental Total ---------------------------------------- ------------------------------------------ Revenue $ 1,294,000 $ 402,000 $ 1,696,000 $ 1,120,000 $ 377,000 $ 1,497,000 Cost of sales 634,000 230,000 864,000 419,000 225,000 644,000 ---------------------------------------- ------------------------------------------ Gross profit 660,000 172,000 832,000 701,000 152,000 853,000 Expenses: Selling, general and administrative 452,000 126,000 578,000 346,000 140,000 486,000 Reasearch and development 84,000 -- 84,000 24,000 -- 24,000 ---------------------------------------- ------------------------------------------ Income from operations $ 124,000 $ 46,000 170,000 $ 331,000 $ 12,000 343,000 =========================== =========================== Other: Interest income 2,000 -- Interest expense (8,000) (7,000) Royalty income 19,000 1,000 Settlements and recoveries -- 11,000 Income taxes (25,000) (17,000) ------------ ------------ Net income $ 158,000 $ 331,000 ============ ============ For the nine months ended June 30, 2004 For the nine months ended June 30, 2003 Service and Service and Products Rental Total Products Rental Total ---------------------------------------- ------------------------------------------ Revenue $ 3,096,000 $ 1,254,000 $ 4,350,000 $ 3,696,000 $ 1,139,000 $ 4,835,000 Cost of sales 1,488,000 744,000 2,232,000 1,716,000 617,000 2.333,000 ---------------------------------------- ------------------------------------------ Gross profit 1,608,000 510,000 2,118,000 1,980,000 522,000 2,502,000 Expenses: Selling, general and administrative 1,256,000 429,000 1,685,000 1,134,000 407,000 1,541,000 Research and development 245,000 -- 245,000 127,000 -- 127,000 ---------------------------------------- ------------------------------------------ Income from operations $ 107,000 $ 81,000 188,000 $ 719,000 $ 115,000 834,000 ========================== ========================== Other: Interest income 4,000 1,000 Interest expense (27,000) (20,000) Loss on disposal of equipment (5,000) -- Royalty income 45,000 3,000 Settlements and recoveries 296,000 53,000 Income taxes (29,000) (43,000) ------------ ------------ Net income $ 472,000 $ 828,000 ============ ============
Sales and gross profit to customers by similar products and services for the three and nine months ended June 30, 2004 (unaudited) and June 30, 2003 (unaudited) were as follows: 11 For the three months For the nine months ended June 30, ended June 30, 2004 2003 2004 2003 ---------- ---------- ---------- ---------- By similar products and services: Revenues: Products: Laser equipment and accessories $ 406,000 $ 240,000 $ 595,000 $1,226,000 Delivery and disposable devices 888,000 880,000 2,501,000 2,470,000 Service and rental 402,000 377,000 1,254,000 1,139,000 ---------- ---------- ---------- ---------- Total $1,696,000 $1,497,000 $4,350,000 $4,835,000 ========== ========== ========== ========== Gross profit Products: Laser equipment and accessories $ 155,000 $ 175,000 $ 200,000 $ 632,000 Delivery and disposable devices 505,000 526,000 1,408,000 1,348,000 Service and rental 172,000 152,000 510,000 522,000 ---------- ---------- ---------- ---------- Total $ 832,000 $ 853,000 $2,118,000 $2,502,000 ========== ========== ========== ==========
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 June 30, 2004 increased by $219,000 or 89% to $466,000 from $247,000 from the prior year three month period. Export sales during the nine months ended June 30, 2004 decreased by $321,000 or 27% to $867,000 from $1,188,000 from the prior year nine 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 June 30, 2004 and June 30, 2003 accounted for approximately 10% and 16% of the Company's total sales, respectively. Sales in foreign countries for the nine months ended June 30, 2004 and June 30, 2003 accounted for approximately 20% and 25% of the Company's total sales, respectively. The breakdown by geographic region is as follows: Three months Three months Nine months Nine months ended June ended June ended June ended June 30, 2004 30, 2003 30, 2004 30, 2003 ------------ ------------ ------------ ------------ Asia $ 325,000 $ 169,000 $ 497,000 $ 734,000 Europe 131,000 40,000 328,000 238,000 Latin America 5,000 25,000 14,000 186,000 Middle East 5,000 13,000 17,000 27,000 Other -- -- 11,000 3,000 ------------ ------------ ------------- ------------ $ 466,000 $ 247,000 $ 867,000 $ 1,188,000 ============= ============ ============= ============ All long-lived assets were located in the United States during the three and six months ended June 30, 2004 and 2003. 12 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. 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. 13 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 June 30, 2004 compared to quarter ended June 30, 2003: During the quarter ended June 30, 2004, net revenues were $1,696,000 as compared to $1,497,000 for the same period of the previous year, a $199,000 or 13% increase. Net sales from lasers and accessories increased by $166,000 or 69% to $406,000 during the three months ended June 30, 2004 from $240,000 in the the same period of the prior year. Net sales from delivery and disposable devices increased by $8,000 or 1% to $888,000 in the current quarter from $880,000 in the same quarter of the prior year. Net sales from service and rental increased by $25,000 or 6% to $402,000 from $377,000 for the same quarters. This increase was primarily due to the growth of the Company's subsidiary MST, which is expanding its territory. Export sales increased by $219,000 or 89% due to an increase in laser sales in Asia and Europe. Cost of sales during the quarter ended June 30, 2004 was 51% of net revenues as compared to 43% of net revenues during the quarter ended June 30, 2003. The increase of cost of goods was largely due to slightly lower selling prices for lasers, a higher proportion of new lasers being sold, versus older, partially amortized units, and the cost of expanding operations of the Company's wholly owned laser rental subsidiary, which is expected to result in increased revenues in the future. Selling, general and administrative expenses increased in the current quarter to $578,000 from $486,000 in the prior year quarter, an increase of $92,000 or 19%. The increase in selling, general and administrative expenses was primarilty the result of the following: $9,000 in commissions expense due to a increase in sales, $26,000 in adminstrative payroll, $10,000 in telephone expense, $28,000 in depreciation expense, $15,000 in audit and tax preparation expense and $10,000 in rent expense. Research and development expenditures for the quarter ended June 30, 2004, increased $60,000 to $84,000 as compared to $24,000 in the quarter ended June 30, 2003. This increase was a result of Trimedyne increasing its efforts to develop new delivery systems and Holmium lasers. Other income increased by $8,000 or 160% in the third quarter of fiscal 2003 from $5,000 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 royalties of $19,000 during the current quarter offset by interest accrued on notes due to the CEO. For the current quarter, the Company had net income of $158,000 or $0.01 per share, based on 14,597,896 basic weighted average number of common shares outstanding, as compared to net income of $331,000, or $0.03 per share, based on 13,147,760 basic weighted average number of common shares outstanding in the same quarter of the previous year. Nine months ended June 30, 2004 compared to nine months ended June 30, 2003: During the nine months ended June 30, 2004, net revenues were $4,350,000 as compared to $4,835,000 for the same period of the previous year, a $485,000 or 10% decrease. Net sales from lasers and accessories decreased by $631,000 or 51% to $595,000 during the nine months ended June 30, 2004 from $1,226,000 in the the same period of the prior year. Net revenues from delivery and disposable devices increased by $31,000 or 1% to $2,501,000 during the nine months ended June 30, 2003 from $2,470,000 for the same period of the prior year. Net sales from service and rental increased by $115,000 or 10% to $1,254,000 from $1,139,000 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. Export sales during the nine months ended June 30, 2004 decreased by $321,000 or 27% to $867,000 from $1,188,000 from the prior year nine month period. Cost of sales increased 3% to 51% of net revenues in the nine months ended June 30, 2004 compared to 48% for the nine months ended March 2003. The increase of cost of goods was largely due to slightly lower selling prices for lasers, a higher proportion of new lasers being sold, versus older, partially amortized units, and the cost of expanding operations of the Company's wholly owned laser rental subsidiary, which is expected to result in increased revenues in the future. For the nine months ended June 30, 2004, selling, general and administrative expenses totaled $1,685,000 as compared to $1,541,000 for the same period of the previous year, a $144,000 or 9% 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 $32,000 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 $18,000, and depreciation of $55,000 due to the purchase of additional assets for the Company's subsidiary, MST, all offset by reductions in bad debt expense of $34,000, sales and marketing expense of $16,000, and reductions in miscellaneous administration expenses of $13,000. 14 Research and development expenditures for the nine months ended June 30, 2004, increased $118,000 or 92% to $245,000 from $127,000. 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 $276,000 to $313,000 in the current nine-month period from $37,000 in the nine-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 the receipt of royalties of $45,000 during the nine months ended June 30, 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 during both periods by interest accrued on notes due to the CEO. For the nine months ended June 30, 2004, Trimedyne had net income of $472,000 or $0.03 per share, based on 14,548,428 basic weighted average number of common shares outstanding, as compared to a net income of $828,000, or $0.06 per share, based on 13,147,760 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 June 30, 2004, the Company had working capital of $3,003,000 compared to $1,891,000 at the end of the third quarter ending June 30, 2003. Cash decreased by $23,000 to $1,323,000 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 nine months period ended June 30, 2004, net cash provided by consolidated operations was $106,000. Net cash used in investing activities was $83,000 primarily as a result of the purchase of additional fixed assets to support the continuing expansion of MST. Net cash used by financing activities was $46,000 of which $70,000 was the result of stock options exercised offset by $116,000 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. 15 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. 16 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. 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 nine month periods ended June 30, 2004. The Company is currently a defendant in two 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, based on the deductible under the insurance policy 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 17 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 18, 2004 /s/ Marvin P. Loeb -------------------------- ------------------------------------ Marvin P. Loeb President and Chief Executive Officer Date: August 18, 2004 /s/ Jeffrey S. Rudner -------------------------- ------------------------------------ Jeffrey S. Rudner Controller 18 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 June 30, 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: August 18, 2004 /s/ Marvin P. Loeb - ------------------------ Marvin P. Loeb, CEO 19 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 June 30, 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: August 18, 2004 /s/ Jeffrey Rudner - ------------------------ 20 EX-99.1 2 trimed_10qex99-1.txt EXHIBIT 99.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly filing of Trimedyne, Inc., a Nevada corporation (the "Company"), on Form 10-QSB for the period ended June 30, 2004, as filed with the Securities and Exchange Commission (the "Report"), the undersigned, Marvin P. Loeb, the Chief Executive Officer of the Company, hereby certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.ss.1350), that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 18, 2004 /s/ Marvin P. Loeb - ------------------------ 21 EX-99.2 3 trimed_10qex99-2.txt EXHIBIT 99.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly filing of Trimedyne, Inc., a Nevada corporation (the "Company"), on Form 10-QSB for the period ended June 30, 2004, as filed with the Securities and Exchange Commission (the "Report"), the undersigned, Jeffrey Rudner, the Controller of the Company, hereby certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.ss.1350), that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 18, 2004 /s/ Jeffrey Rudner - ------------------------ Jeffrey Rudner, Chief Accounting Officer 22 -----END PRIVACY-ENHANCED MESSAGE-----