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, 2006 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)
25091 Commercecentre Dr., Lake Forest, CA 92630
(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 [_]
(Issuers involved in bankruptcy procedings during the past five years)
Not applicable
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 122b-2 of the Exchange Act).
Yes [ ] No [X]
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 19, 2006
----------------------------- ------------------------------------
Common Stock, $0.01 par value 14,628,302 shares
ITEM 1.
TRIMEDYNE, INC.
Page Number
-----------
PART I. Financial Information 3
ITEM 1. Financial Statements (Unaudited) 3
Consolidated Balance Sheet 3
Consolidated Statements of Operations 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 15
ITEM 3. Controls and Procedures 19
PART II. Other Information 20
SIGNATURE PAGE 21
CERTIFICATIONS 22
2
TRIMEDYNE, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
March 31,
2006
-------------
Current assets:
Cash and cash equivalents $ 1,445,000
Trade accounts receivable, net of allowance for doubtful
accounts of $12,000 669,000
Inventories 2,184,000
Other 319,000
------------
Total current assets 4,617,000
Goodwill 544,000
Other assets 30,000
Property and equipment, net 573,000
Note due from related party 51,000
------------
$ 5,815,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 469,000
Accrued expenses 380,000
Deferred revenue 38,000
Accrued warranty 50,000
Income tax payable 8,000
Senior convertible secured note due to officer 150,000
Current portion of long-term debt 2,000
------------
Total current liabilities 1,097,000
Senior convertible secured note due to officer 50,000
Accrued interest due to officer 99,000
Long-term debt, net of current portion 3,000
------------
Total liabilities 1,249,000
------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $0.01 par value, 1,000,000 shares
authorized, none issued and outstanding --
Common stock - $0.01 par value; 30,000,000 shares
authorized, 14,729,911 shares issued,
14,628,302 shares outstanding 148,000
Additional paid-in capital 47,954,000
Accumulated deficit (42,823,000)
------------
5,279,000
Treasury stock, at cost (101,609 shares) (713,000)
------------
Total stockholders' equity 4,566,000
------------
$ 5,815,000
============
See accompanying notes to consolidated financial statements
3
TRIMEDYNE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
March 31, March 31,
2006 2005 2006 2005
------------ ------------ ------------ ------------
Net revenues $ 1,545,000 $ 1,392,000 $ 3,330,000 $ 3,231,000
Cost of revenues 928,000 681,000 2,076,000 1,617,000
------------ ------------ ------------ ------------
Gross profit 617,000 711,000 1,254,000 1,614,000
Operating expenses:
Selling, general and administrative 585,000 632,000 1,165,000 1,255,000
Research and development 150,000 144,000 295,000 277,000
------------ ------------ ------------ ------------
Total operating expenses 735,000 776,000 1,460,000 1,532,000
------------ ------------ ------------ ------------
Income (loss) from operations (118,000) (65,000) (206,000) 82,000
Other income, net 203,000 45,000 306,000 71,000
------------ ------------ ------------ ------------
Income (loss) before provision for income taxes 85,000 (20,000) 100,000 153,000
Provision for income taxes 2,000 4,000 3,000 4,000
------------ ------------ ------------ ------------
Net (loss) income $ 83,000 $ (24,000) $ 97,000 $ 149,000
============ ============ ============ ===========
Net (loss) income per share:
Basic $ 0.01 $ -- $ 0.01 $ 0.01
============ ============ ============ ============
Diluted $ 0.01 $ -- $ 0.01 $ 0.01
============ ============ ============ ============
Weighted average number of
shares outstanding:
Basic 14,715,580 14,704,540 14,709,969 14,704,540
============ ============ ============ ============
Diluted 15,575,082 14,704,540 15,550,402 15,408,119
============ ============ ============ ============
See accompanying notes to consolidated financial statements
4
TRIMEDYNE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
March 31,
2006 2005
----------- -----------
Cash flows from operating activities:
Net income $ 97,000 $ 149,000
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 70,000 69,000
Loss on disposal of property and equipment 3,000 3,000
Changes in operating assets and liabilities:
Accounts receivable 111,000 66,000
Inventories (46,000) (74,000)
Other assets (57,000) 123,000
Note due from related party (51,000) --
Accounts payable 119,000 49,000
Accrued expenses (19,000) (91,000)
Deferred revenue (5,000) (3,000)
Accrued warranty 7,000 11,000
Accrued interest due officer 12,000 12,000
Income taxes payable (6,000) --
----------- -----------
Net cash provided by operating activities 235,000 314,000
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (282,000) (35,000)
----------- -----------
Net cash used in investing activities (282,000) (35,000)
----------- -----------
Cash flows from financing activities:
Exercise of stock options 9,000 --
Payments on debt (40,000) (65,000)
----------- -----------
Net cash used in financing activities (31,000) (65,000)
----------- -----------
Net increase (decrease) in cash and cash equivalents (78,000) 214,000
Cash and cash equivalents at beginning of period 1,523,000 1,683,000
----------- -----------
Cash and cash equivalents at end of period $ 1,445,000 $1,897,000
=========== ===========
Cash paid for income taxes during the six months ended March 31, 2006 and 2005 was $6,000 and
$4,000, respectively. Cash paid for interest during both the six months ended March 31, 2006 and
2005 was approximately $1,000, respectively.
See accompanying notes to consolidated financial statements
5
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006 and 2005
(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, 2006 and the results of operations and its cash flows
for the six months ended March 31, 2006 and 2005. Results for the six months
ended March 31, 2006 are not necessarily indicative of the results to be
expected for the year ending September 30, 2006.
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 2006 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
The Company's revenues include revenues from the sale of delivery and disposable
devices, the sale and rental of laser equipment and accessories, and service
contracts for lasers manufactured by the Company.
In accordance with Staff Accounting Bulletin 104, "Revenue Recognition," the
Company recognizes revenue from products sold once all of the following criteria
for revenue recognition have been met: (i) persuasive evidence that an
arrangement exists, (ii) the products have been shipped, (iii) the prices are
fixed and determinable and not subject to refund or adjustment, and (iv)
collection of the amounts due is reasonably assured.
Revenues from the sale of delivery and disposable devices and lasers are
recognized upon shipment and passage of title of the products, provided that all
other revenue recognition criteria have been met. Generally, customers are
required to insure the goods from the Company's place of business. Accordingly,
the risk of loss transfers to the customer once the goods have been shipped from
the Company's warehouse. The Company sells its products primarily through
commission sales representatives in the United States and distributors in
foreign countries. In cases where the Company utilizes distributors, it
recognizes revenue upon shipment, provided that all other revenue recognition
criteria have been met, and ownership risk has transferred. In general, the
Company does not have any post shipment obligations such as installation or
acceptance provisions. All domestic laser systems are sold with a one year
warranty which includes parts and labor. All international lasers systems are
sold with a one year parts only warranty. As each laser sale is recognized, a
liability is accrued for estimated future warranty costs.
The Company utilizes distributors for international sales only. All laser system
sales are non-returnable. Our international distributors typically locate
customers for laser systems before ordering and in general do not maintain
inventories. The Company's return policy for laser accessories, delivery and
disposable devices sold to distributors is as follows: 1) The Company will
accept returns of any unopened, undamaged, standard catalogue items (except
laser systems) within sixty (60) days of invoice date. Acceptable returned
products will be subject to a 20% restocking fee. 2) A return authorization
number is required for all returns. The number can be obtained by contacting the
Customer Service Department. 3) Should a product be found defective at the time
of initial use, the Company will replace it free of charge.
6
The Company offers service contracts on its lasers. These service contracts are
offered at different pricing levels based on the level of coverage, which
include periodic maintenance and different levels of parts and labor to be
provided. Since the service contracts have a twelve month term, the revenue of
each service contract is deferred and recognized ratably over the term of each
service contract.
Trimedyne, Inc. will rent its lasers for a flat monthly charge for a period of
years or on a month-to-month basis, or on a fee per case basis sometimes with a
minimum monthly rental fee. During the six months ended March 31, 2005 and March
31, 2006, four lasers were being rented by Trimedyne, Inc., each on a
month-to-month basis. For these lasers, rental revenue is recorded ratably over
the rental period. MST generally enters into rental service contracts with
customers for a two year period, which unless cancelled, are renewed on an
annual basis after the initial period. During the rental service contract period
customers do not maintain possession of any rental equipment unless it is for
the Company's convenience. Customers are billed on a fee per case basis for
rentals, which includes the services of the laser operator and, in some cases,
the use of a reusable or single use laser delivery device. Revenue from these
rental service contracts is recognized as the cases are performed.
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, 2006.
Impairment of Long-Lived Assets
SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets",
requires that long-lived assets, such as property and equipment and purchased
intangibles subject to amortization, be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of the asset is measured by comparison of
its carrying amount to undiscounted future cash flows the asset is expected to
generate. If such assets are considered to be impaired, the impairment to be
recognized is measured as the amount by which the carrying amount of the asset
exceeds its fair market value. Estimates of expected future cash flows represent
management's best estimate based on currently available information and
reasonable and supportable assumptions. Any impairment recognized in accordance
with SFAS No. 144 is permanent and may not be restored. To date, the Company has
not recognized any impairment of long-lived assets in connection with SFAS No.
144.
Stock Option Plans
SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"
prescribes accounting and reporting standards for all stock-based compensation
plans, including employee stock option plans. As allowed by SFAS No. 123, the
Company has elected to continue to account for its employee stock-based
compensation plan using the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations, which does not require compensation to
be recorded if the consideration to be received is at least equal to the fair
value of the common stock to be received at the measurement date. Under the
requirements of SFAS No. 123, non-employee stock-based transactions require
compensation to be recorded based on the fair value of the securities issued or
the services received, whichever is more reliably measurable.
7
The following table illustrates the effect on net income (loss) 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,
2006 2005 2006 2005
--------- --------- --------- ---------
Net income (loss), as reported $ 83,000 $ (24,000) $ 97,000 $ 149,000
Deduct: total stock-based employee compensation
expense determined under fair value based method
for awards, net of related tax effects (19,000) (38,000) (20,000) (38,000)
--------- --------- --------- ---------
Pro forma net income (loss) $ 64,000 $ (62,000) $ 77,000 $ 111,000
========= ========= ========= =========
Net income (loss) per share - basic:
As reported $ 0.01 $ 0.00 $ 0.01 $ 0.01
Pro forma $ 0.01 $ 0.00 $ 0.01 $ 0.01
========= ========= ========= =========
Net income (loss) per share - diluted:
As reported $ 0.01 $ 0.00 $ 0.01 $ 0.01
========= ========= ========= =========
Pro forma $ 0.01 $ 0.00 $ 0.01 $ 0.01
========= ========= ========= =========
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:
Six Months Ended
March 31,
2006 2005
---------- ----------
Dividend yield -- --
Expected volatility 85% 80%
Risk-free interest rate 3.58% 2.11%
Expected lives 5 years 5 years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility and time
to exercise. Because awards held by employees and directors have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
the opinion of management, the existing models do not necessarily provide a
reliable single measure of the fair value of these options.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant estimates and assumptions include inventory valuation, allowances
for doubtful accounts and deferred income tax assets, recoverability of goodwill
and long-lived assets, losses for contingencies and certain accrued liabilities.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, note receivable from related party, accounts
payable, accrued expenses and long-term debt, and two senior convertible secured
notes due to the Chief Executive Officer. The carrying amounts of the Company's
financial instruments generally approximate their fair values as of March 31,
2006 because of the short maturity of these instruments. Senior convertible
secured notes due to officer cannot be objectively and fairly valued due to the
related party nature of the instruments.
8
Warranty Costs
The Company provides warranties for certain products and maintains warranty
reserves for estimated product warranty costs at the time of sale. In estimating
its future warranty obligations, the Company considers various relevant factors,
including the Company's stated warranty policies and practices, the historical
frequency of claims and the cost to replace or repair its products under
warranty. The following table provides a reconciliation of the activity related
to the Company's accrued warranty expense:
Three Months Ended Six Months Ended
March 31, March 31,
---------------------------- ----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Balance at beginning of period $ 58,000 $ 44,000 $ 43,000 $ 45,000
Charges to costs and expenses 16,000 35,000 48,000 46,000
Costs incurred (24,000) (24,000) (41,000) (36,000)
------------ ------------ ------------ ------------
Balance at end of period $ 50,000 $ 55,000 $ 50,000 $ 55,000
============ ============ ============ ============
Research and development costs
All research and development costs, including licensing costs, are charged to
expense as incurred. In accordance with this policy, all costs associated with
the design, development and testing of the Company's products have been expensed
as incurred.
Recently Issued Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 151 "Inventory Costs, an amendment of ARB No. 43, Chapter 4." The amendments
made by Statement 151 clarify that abnormal amounts of facility expense,
freight, handling costs, and wasted materials (spoilage) should be recognized as
current-period charges and require the allocation of fixed production overheads
to inventory based on the normal capacity of the production facilities. The
guidance is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. Earlier application is permitted for inventory costs
incurred during fiscal years beginning after November 23, 2004. The Company has
adopted SFAS No. 151 and determined there was no impact on the Company's overall
consolidated results of operations or financial position.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("Statement 123(R)") to provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. Statement 123(R) covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Statement 123(R) replaces SFAS No. 123,
"Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees." SFAS No. 123, as originally issued
in 1995, established as preferrable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion
25, as long as the footnotes to financial statements disclosed what net income
would have been had the preferable fair-value-based method been used. The
Company is required to adopt this standard during the fiscal quarter ending
December 31, 2006. The Company is in the process of evaluating whether the
adoption of SFAS 123(R) will have a significant impact on the Company's overall
consolidated results of operations or financial position.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections -- a replacement of APB Opinion No. 20 and FASB Statement No. 3."
This statement applies to all voluntary changes in accounting principle and
changes required by an accounting pronouncement where no specific transition
provisions are included. SFAS No. 154 requires retrospective application to
prior periods' financial statements of changes in accounting principle, unless
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. Retrospective application is limited to the
direct effects of the change; the indirect effects should be recognized in the
period of the change. This statement carries forward without change the guidance
contained in APB Opinion No. 20 for reporting the correction of an error in
previously issued financial statements and a change in accounting estimate.
However, SFAS No. 154 redefines restatement as the revising of previously issued
financial statements to reflect the correction of an error. The provisions of
SFAS No. 154 are effective for accounting changes and corrections of errors made
in fiscal periods that begin after December 15, 2005, although early adoption is
permitted. The Company does not anticipate that the implementation of this
standard will have a material impact on its condensed consolidated results of
operations, cash flows or financial position
9
NOTE 2 - Balance Sheet Items
March 31,
2006
------------
Inventories, net of reserves, consist of the following:
Raw material $ 596,000
Work-in-process 639,000
Finished goods 949,000
-----------
$ 2,184,000
===========
For the six months ended March 31, 2006, the aggregate net realizable value of
demonstration and evaluation lasers did not comprise a material amount in
inventories.
Other current assets consist of the following:
Royalty receivable $ 191,000
Prepaid rent 28,000
Short-term deposits 82,000
Other 18,000
------------
Total other current assets $ 319,000
============
Property and equipment consist of the following:
Furniture and equipment $ 2,423,000
Leasehold improvements 478,000
Other 216,000
------------
3,117,000
Less accumulated depreciation and amortization (2,544,000)
------------
Total property and equipment $ 573,000
============
Accrued expenses consist of the following:
Accrued vacation $ 120,000
Accrued salaries and wages 95,000
Sales and use tax 47,000
Accrued professional expenses 40,000
Customer deposits 32,000
Accrued commissions 25,000
Accrued payroll taxes 9,000
Accrued 401(k) 5,000
Other 7,000
------------
Total accrued expenses $ 380,000
============
NOTE 3 - 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. $ 5,000
Less: current portion (2,000)
------------
$ 3,000
============
NOTE 4 - Senior Secured Convertible Notes Due to Officer
At March 31, 2006, the Company had two outstanding senior, secured convertible
notes due to its chief executive officer. These notes have a face value of
$150,000 and $50,000 bear interest at 12% per annum, mature on February 28 and
April 14, 2007, respectively and are convertible at prices of $0.40 and $0.50
per share respectively. The holder of these notes has the right at any time or
times, prior to the payment of these notes in full, including any unpaid
interest, to convert either or both of these notes for Common Stock at their
respective convertible price.
Accrued interest on these notes was $99,000 at March 31, 2006.
10
NOTE 5 - Earnings (Loss) Per Share Information
Basic income (loss) per share is based on the weighted-average number of shares
of common stock outstanding during the period. Diluted income (loss) 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 (loss) per share:
Three months ended Six months ended
March 31, March 31,
2006 2005 2006 2005
---------- ---------- ---------- ----------
Denominator
Weighted average common shares outstanding
used in calculating basic earnings per share 14,715,580 14,704,540 14,709,969 14,704,540
Effect of Dilutive Options 149,002 * 129,934 53,524
Effect of Senior Convertible Secured
Notes due to Officer and accrued interest 710,500 * 710,500 650,250
---------- ---------- ---------- ----------
Weighted average common shares outstanding
used in calculating diluted earnings per share 15,575,082 14,704,540 15,550,403 15,408,119
========== ========== ========== ==========
Numerator
Net income (loss) $ 83,000 $ (24,000) $ 97,000 $ 149,000
Add - interest on Senior Convertible
Secured Notes due to Officer 6,000 * 12,000 12,000
----------- ----------- ---------- ----------
Net income (loss) available to
common stockholders $ 89,000 $ (24,000) $ 109,000 $ 161,000
=========== =========== ========== ==========
* The effects are anti-dilutive, and therefore, they are not considered in the
calculation of diluted income (loss) per share. Had the effect of the
dilutive options and convertible debt outstanding been added to the diluted
weighted-average common shares outstanding, the diluted common shares
outstanding would have been 698,095 greater.
NOTE 6 - Contingencies
Product liability
The Company was a defendant in one product liability lawsuit. This case was
settled during the current quarter ended March 31, 2006 within the limits of the
deductible amount of the Company's insurance policy. The Company has insurance
to cover product liability claims. This insurance provides the Company with
$5,000,000 of coverage for each occurrence with a general aggregate coverage of
$5,000,000. Trimedyne's liability is limited to a maximum of $50,000 per
occurrence unless the judgment against the Company exceeds the $5,000,000
insurance coverage. In such case, Trimedyne would be liable for any liability in
excess of $5,000,000. Management had previously accrued $50,000 for this claim
based on the deductible under the insurance policy, which been paid in full as
of March 31, 2006.
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.
11
Guarantees and Indemnities
The Company has made certain indemnities and guarantees, under which it may be
required to make payments to a guaranteed or indemnified party. The Company
indemnifies its directors, officers, employees and agents to the maximum extent
permitted under the laws of the State of California. In connection with its
facility leases, the Company has indemnified its lessors for certain claims
arising from the use of the facilities. The duration of the guarantees and
indemnities varies, and in many cases is indefinite. These guarantees and
indemnities do not provide for any limitation of the maximum potential future
payments the Company could be obligated to make. Historically, the Company has
not been obligated to make any payments for these obligations and no liabilities
have been recorded for these indemnities and guarantees in the accompanying
consolidated balance sheet.
NOTE 7 Other Income
In November 2003, the Company settled its litigation against Lumenis, Inc.
("Lumenis"). Under the settlement agreement, Lumenis agreed to pay a 7.5%
royalty on their sales of certain side-firing and angled-firing devices
manufactured by Lumenis or purchased by Lumenis from third-party suppliers.
During the six month period ended March 31, 2006 and 2005, the Company recorded
$276,000 and $82,000, respectively, in royalties in connection with the terms of
a settlement agreement. These royalties are included in other income in the
accompanying financial statements.
Note 8 Related Party Transactions
The Company entered into a service agreement with Cardiomedics, Inc.
("Cardiomedics"), a privately-held corporation in which the Chairman/CEO of
Trimedyne, Inc. holds a majority interest and is a member of the Board of
Directors. The COO/President of the Company is also a board member of
Cardiomedics. Under the agreement, Trimedyne agreed to provide warranty service,
periodic maintenance and repair on Cardiomedics' heart assist devices for which
Trimedyne billed Cardiomedics $40,000 on account and recorded as service income,
including $29,000 for the six months ended March 31, 2006. During the quarter
ended March 31, 2006 Cardiomedics' account with Trimedyne, Inc. became
delinquent and the Company ceased providing services for Cardiomedics.
Cardiomedics also entered into a reimbursement agreement with the Company for
business expenses incurred by the CEO/Chairman of the Company on behalf of
Cardiomedics in the amount of $11,000.
The above balances due were consolidated and converted into a $51,000 promissory
note (the "Note"). The Note bears interest at 8.0% per annum, and matures on
March 31, 2008. The Note is secured by a personal guarantee from the
Chairman/CEO of Trimedyne.
On April 7, 2006, the Company entered into an agreement to employ Cardiomedics
as a consultant to provide graphics arts services, since the Company had no
employee with experience in the design and production of brochures and other
marketing materials. Under this agreement, Cardiomedics will provide the
services of a graphics arts specialist at a rate comparable to those presently
prevaling in the market in the design and production of marketing materials. The
Company expects to incur a maximum of $11,000 in expense per quarter for the
services provided under the agreement.
NOTE 9 Stockholder's Equity
During the three months ended March 31, 2006, 25,371 stock options were
exercised by employees for $9,000.
NOTE 10 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 and six months
ended March 31, 2006 and March 31, 2005 are as follows:
12
For the quarter ended March 31, 2006 For the quarter ended March 31, 2005
(Unaudited) (Unaudited)
Service and Service and
Products Rental Total Products Rental Total
---------------------------------------- ----------------------------------------
Revenue $ 1,125,000 $ 420,000 $ 1,545,000 $ 1,010,000 $ 382,000 $ 1,392,000
Cost of sales 560,000 368,000 928,000 416,000 265,000 681,000
---------------------------------------- ----------------------------------------
Gross profit 565,000 52,000 617,000 594,000 117,000 711,000
Expenses:
Selling, general and
administrative 502,000 83,000 585,000 548,000 84,000 632,000
Reasearch and development 150,000 -- 150,000 144,000 -- 144,000
---------------------------------------- -----------------------------------------
Income (loss) from operations $ (87,000) $ (31,000) (118,000) $ (98,000) $ 33,000 (65,000)
========================== ===========================
Other:
Interest income 6,000 4,000
Interest expense (6,000) (6,000)
Royalty income 191,000 50,000
Settlements and recoveries 11,000 (3,000)
Income taxes (1,000) (4,000)
------------ ----------
Net income (loss) $ 83,000 $ (24,000)
============ ==========
For the six months ended March 31, 2006 For the six months ended March 31, 2005
(Unaudited) (Unaudited)
Service and Service and
Products Rental Total Products Rental Total
--------------------------------------- ---------------------------------------
Revenue $ 2,467,000 $ 863,000 $ 3,330,000 $ 2,421,000 $ 810,000 $ 3,231,000
Cost of sales 1,385,000 691,000 2,076,000 1,055,000 562,000 1,617,000
--------------------------------------- ---------------------------------------
Gross profit 1,082,000 172,000 1,254,000 1,366,000 248,000 1,614,000
Expenses:
Selling, general and
administrative 967,000 198,000 1,165,000 991,000 264,000 1,255,000
Research and development 295,000 -- 295,000 277,000 -- 277,000
--------------------------------------- ---------------------------------------
Income (loss) from operations $ (180,000) $ (26,000) (206,000) $ 98,000 $ (16,000) 82,000
========================== =========================
Other:
Interest income 11,000 7,000
Interest expense (12,000) (15,000)
Loss on disposal of equipment (3,000) (3,000)
Royalty income 276,000 81,000
Settlements and recoveries 34,000 1,000
Income taxes (3,000) (4,000)
------------ ----------
Net income $ 97,000 $ 149,000
============ ==========
Sales and gross profit to customers by similar products and services for the
three and six months ended March 31, 2006 (unaudited) and March 31, 2005
(unaudited) were as follows:
13
For the three months ended March 31, For the six months ended March 31,
(Unaudited) (Unaudited)
2006 2005 2006 2005
----------- ----------- ----------- -----------
By similar products and services:
Revenues:
Products:
Laser equipment and accessories $ 237,000 $ 345,000 $ 747,000 $ 836,000
Delivery and disposable devices 888,000 665,000 1,720,000 1,585,000
Service and rental 420,000 382,000 863,000 810,000
----------- ----------- ------------ -----------
Total $1,545,000 $1,392,000 $ 3,330,000 $ 3,231,000
=========== =========== ============ ===========
Gross profit
Products:
Laser equipment and accessories $ 74,000 $ 133,000 $ 132,000 $ 417,000
Delivery and disposable devices 492,000 461,000 950,000 949,000
Service and rental 51,000 117,000 172,000 248,000
----------- ----------- ------------ -----------
Total $ 617,000 $ 711,000 $ 1,254,000 $ 1,614,000
=========== =========== ============ ===========
The Company's revenue base is derived from the sales of medical products and
services on a worldwide basis originating from the United States. 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, 2006 (unaudited) and
March 31, 2005 (unaudited) accounted for approximately 32% and 22% of the
Company's total sales, respectively. Sales in foreign countries for the six
months ended March 31, 2006 (unaudited) and March 31, 2005 (unaudited) accounted
for approximately 35% and 27% 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, 2006 31, 2005 31, 2006 31, 2005
------------ ------------ ------------ ------------
Asia $ 212,000 $ 187,000 $ 575,000 $ 501,000
Europe 62,000 119,000 244,000 283,000
Latin America 94,000 3,000 98,000 84,000
Australia 4,000 -- 81,000 --
Africa 3,000 -- 3,000 --
Other 127,000 1,000 150,000 4,000
------------ ------------ ------------- ------------
$ 502,000 $ 310,000 $ 1,151,000 $ 872,000
============= ============ ============= ============
All long-lived assets were located in the United States during the three months
ended March 31, 2006. With the exception of one demo 80 watt laser located in
Belgium, all the Company's remaining long-lived assets were located in the
United States at March 31, 2006.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF FINANCIAL CONDITION
AND OPERATIONS
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
The Company's revenues includes revenues from the sale of delivery and
disposable devices, the sale and rental of laser equipment and accessories, and
service contracts for lasers manufactured by the Company.
In accordance with Staff Accounting Bulletin 104, "Revenue Recognition," the
Company recognizes revenue from products sold once all of the following criteria
for revenue recognition have been met: (i) persuasive evidence that an
arrangement exists, (ii) the products have been shipped, (iii) the prices are
fixed and determinable and not subject to refund or adjustment, and (iv)
collection of the amounts due is reasonably assured.
Revenues from the sale of delivery and disposable devices and lasers are
recognized upon shipment and passage of title of the products, provided that all
other revenue recognition criteria have been met. Generally, customers are
required to insure the goods from the Company's place of business. Accordingly,
the risk of loss transfers to the customer once the goods have been shipped from
the Company's warehouse. The Company sells its products primarily through
commission sales representatives in the United States and distributors in
foreign countries. In cases where the Company utilizes distributors, it
recognizes revenue upon shipment, provided that all other revenue recognition
criteria have been met, and ownership risk has transferred. In general, the
Company does not have any post shipment obligations such as installation or
acceptance provisions. All domestic laser systems are sold with a one year
warranty which includes parts and labor. All international lasers systems are
sold with a one year parts only warranty. As each laser sale is recognized, a
liability is accrued for estimated future warranty costs.
The Company utilizes distributors for international sales only. All laser system
sales are non-returnable. Our international distributors typically locate
customers for laser systems before ordering and in general do not maintain
inventories. The Company's return policy for laser accessories, delivery and
disposable devices sold to distributors is as follows: 1) The Company will
accept returns of any unopened, undamaged, standard catalogue items (except
laser systems) within sixty (60) days of invoice date. Acceptable returned
products will be subject to a 20% restocking fee. 2) A return authorization
number is required for all returns. The number can be obtained by contacting the
Customer Service Department. 3) Should a product be found defective at the time
of initial use, the Company will replace it free of charge.
The Company offers service contracts on its lasers. These service contracts are
offered at different pricing levels based on the level of coverage, which
include periodic maintenance and different levels of parts and labor to be
provided. Since the service contracts have a twelve month term, the revenue of
each service contract is deferred and recognized ratably over the term of each
service contract.
Trimedyne, Inc. will rent its lasers for a flat monthly charge for a period of
years or on a month-to-month basis, or on a fee per case basis sometimes with a
minimum monthly rental fee. During the six months ended March 31, 2005 and March
31, 2006, four lasers were being rented by Trimedyne, Inc., each on a
month-to-month basis. For these lasers, rental revenue is recorded ratably over
the rental period. MST generally enters into rental service contracts with
customers for a two year period, which unless cancelled, are renewed on an
annual basis after the initial period. During the rental service contract period
customers do not maintain possession of any rental equipment unless it is for
the Company's convenience. Customers are billed on a fee per case basis for
rentals, which includes the services of the laser operator and, in some cases,
the use of a reusable or single use laser delivery device. Revenue from these
rental service contracts is recognized as the cases are performed.
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.
15
Inventories
Inventories consist of raw materials and component parts, work in process and
finished good lasers and dispensing systems. Inventories are recorded at the
lower of cost or market, cost being determined principally by use of the
average-cost method, which approximates the first-in, first-out method. Cost is
determined at the actual cost for raw materials, and at production cost
(materials, labor and indirect manufacturing overhead) for work-in-process and
finished goods.
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.
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, 2006 compared to quarter ended March 31, 2005
During the quarter ended March 31, 2006, net revenues were $1,545,000 as
compared to $1,392,000 for the same period of the previous year, a $153,000 or
11.0% increase. Net sales from lasers and accessories decreased by $19,000 or
31.3% to $237,000 during the three months ended March 31, 2006 from $345,000 in
the same period of the prior year. Net sales from delivery and disposable
devices increased by $223,000 or 33.5% to $888,000 in the current quarter from
$665,000 in the same quarter of the prior year. Net sales from service and
rental increased by $38,000 or 10.0% to $420,000 from $382,000 for the same
quarters. Export sales increased by $192,000 or 61.9% due to an increase in
laser sales in Asia and Latin America combined with an increase delivery device
systems sales in Canada.
16
Cost of sales during the quarter ended March 31, 2006 was $928,00 or 60% of net
revenues as compared to $681,00 or 49% the prior year quarter. Gross profit from
the sale of lasers and accessories was 31% as compared to 36% for the prior year
three-month period. Gross profit from the sale of delivery and disposable
devices was 55% as compared to 69% for the prior year three-month period. This
increase was due to an increase in the cost of raw materials combined with the
payment of overtime wages to production personnel and the hiring of temporary
personnel to increase inventory in preparation for the expected loss of
manufacturing capacity due to the relocation of the Company's facility. Gross
profit from revenue received from service and rentals was 12% as compared to 31%
for the prior year three-month period. This increase was due to an increase in
service personnel to support periodic maintenance and warranty repairs for the
Company's installed laser base and rental lasers.
Selling, general and administrative expenses decreased in the current quarter to
$585,000 from $632,000 in the prior year quarter, an decrease of $47,000 or 7%.
The decrease in selling, general and administrative expenses was primarily the
result of decreases of $11,000 in marketing due to a reduction of staff and
expenses related to trade shows and conventions, $24,000 in commission expenses,
a reduction of general office and telephone expenses of $11,000.
Research and development expenditures for the quarter ended March 31, 2006
increased $6,000 or 4% to $150,000 as compared to $144,000 in the quarter ended
March 31, 2005. This increase was a result the Company continuing its product
development efforts and staff in readying its new VaporMAX(TM) Side-Firing
Device for the market.
Other income, net increased by $158,000 or 296% to $203,000 in the quarter ended
March 31, 2006 from $45,000 in the same quarter of the prior year. Other income
during the quarter ended March 31, 2006 primarily consisted of $191,000 of
royalty income (see Note 7) and $18,000 resulting from the write down of
previous accruals, for which the Company no longer had obligations, offset by
$6,000 in interest expense. During the three months ended March 31, 2005, the
Company received $50,000 in royalty income offset by interest accrued on notes
due to an officer.
For the current quarter, the Company had net income of $83,000 or $0.01 per
share, based on 14,715,580 basic weighted average number of common shares
outstanding, as compared to a net loss of $24,000, or $0.00 per share, based on
14,704,540 basic weighted average number of common shares outstanding in the
same quarter of the previous year.
Six months ended March 31, 2006 compared to six months ended March 31, 2005
During the six months ended March 31, 2006, net revenues were $3,330,000 as
compared to $3,231,000 for the same period of the previous year, a $99,000 or 3%
increase. Net sales from lasers and accessories decreased by $89,000 or 11% to
$747,000 during the six months ended March 31, 2006 from $836,000 in the the
same period of the prior year. Net revenues from delivery and disposable devices
increased by $135,000 or 9% to $1,720,000 during the six months ended March 31,
2005 from $1,585,000 for the same period of the prior year. During the six
months ended March 31, 2006 export sales increased by $279,000 or 32% to
$1,151,000 as compared to $872,000 in the the same period of the prior year.
This increase was primarily due an increase in delivery system sales to existing
customers increasing their yearly inventory and the acquisition of new
customers. Net sales from service and rental increased by $53,000 or 7% to
$863,000 from $810,000 for the same quarters in the prior year. This increase
was primarily due to an increase in service revenue from MST.
Cost of sales increased to 62% of net sales in the six months ended March 31,
2006 compared to 50% for the six months ended March 2005. Gross profit from the
sale of lasers and accessories was 17% as compared to 50% for the prior year
six-month period. Gross profit from the sale of delivery and disposable devices
was 55% as compared to 60% for the prior year six-month period. This increase
was due to an increase in the cost of raw materials combined with the payment of
overtime wages to production personnel and the hiring of temporary personnel to
increase inventory in preparation for the relocation of the Company's facility.
Gross profit from revenue received from service and rentals was 20% as compared
to 31% for the prior year six-month period. This increase was due to an increase
in service personnel to support periodic maintenance and warranty repairs for
the Company's installed laser base and rental lasers.
For the six months ended March 31, 2006, selling, general and administrative
expenses totaled $1,165,000 as compared to $1,255,000 for the same period of the
previous year, a $90,000 or 7% decrease. This decrease in selling, general and
administrative expenses since the prior year period is prmarily the result of a
decrease of sales and marketing expense of $69,000 along with $22,000 in audit
and tax expense.
17
During the six months ended March 31, 2006, reasearch and development expenses
increased to $295,000 from $277,000 in the prior year six month period, an
increase of $18,000 or 7%. This increase was a result the Company increasing its
product development efforts and staff in readying its new VaporMAX(TM)
Side-Firing Device for the market.
Other income increased by $235,000 to $306,000 in the current six-month period
from $71,000 in the six-month period of fiscal 2005. During the six months ended
March 31, 2006 the Company received $275,000 in royalty income as compared to
$81,000 in the prior year six-month period (see Note 7). Due to rising interest
rates, during the six months ended March 31, 2006, the Company also received
$11,000 in interest income as compared to $7,000 during the same prior year
period. During the six months ended March 31, 2006, the Company reversed $35,000
of previous accruals for which the Company no longer had obligations which was
offset by interest accrued on notes due to an officer.
For the six months ended March 31, 2006, Trimedyne had net income of $97,000 or
$0.01 per share, based on 14,709,969 basic weighted average number of common
shares outstanding, as compared to a net income of $149,000, or $0.01 per share,
based on 14,704,540 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, 2006, the Company had working capital of $3,670,000 compared to
$3,773,000 at the end of the fiscal year ended September 30, 2005. Cash
decreased by $78,000 to $1,445,000 from $1,523,000 at the fiscal year ended
September 30, 2005. We believe our existing working capital will be sufficient
to meet Trimedyne's operating needs, and the operating needs of our wholly-
owned laser rental subsidiary for the next twelve months. During the six month
period ended March 31, 2006 net cash provided by operating activities was
$235,000. Net cash used in investing activities was $282,000 which was the
result of payment for leasehold improvements. The Company took occupancy of a
new facility on May 12, 2006. Net cash used in financing activities during the
same six month period was $31,000: $40,000 for payments on debt incurred for
financing general business liability insurance, offset by $9,000 received for
the exercise of employee stock options. 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 profi tability, 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 an officer of the Company
(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.
18
ITEM 3. CONTROLS AND PROCEDURES
As of March 31, 2006, an evaluation was carried out under the supervision and
with the participation of the Company's management, including our Chief
Executive Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934). Based upon that evaluation, the
Chief Executive Officer concluded that the design and operation of these
disclosure controls and procedures were effective. No significant changes were
made in our internal controls or in other factors that could significantly
affect these controls subsequent to March 31, 2006.
(a) Evaluation of Disclosure Controls and Procedures. The Company carried out an
evaluation under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer ("CEO") of the
effectiveness of the Company's disclosure controls and procedures. Based upon
that evaluation, the CEO concluded that as of March 31, 2006 our disclosure
controls and procedures were effective in timely alerting them to the material
information relating to the Company (or the Company's consolidated subsidiaries)
required to be included in the Company's periodic filings with the SEC, subject
to the various limitations on effectiveness set forth below under the heading,
"LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROLS," such that the
information relating to the Company, required to be disclosed in SEC reports (i)
is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms, and (ii) is accumulated and communicated to
the Company's management, including our CEO, as appropriate to allow timely
decisions regarding required disclosure.
(b) Changes in internal control over financial reporting. There has been no
change in the Company's internal control over financial reporting that occurred
during the fiscal quarter ended March 31, 2006 that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROLS
The Company's management, including the CEO, does not expect that our disclosure
controls and procedures or our internal control over financial reporting will
necessarily prevent all fraud and material error. An internal control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of the control system must reflect the fact that there are resource
constraints and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
internal control. The design of any system of controls also is based in part
upon certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions. Over time, control may become inadequate
because of changes in conditions, and/or the degree of compliance with the
policies or procedures may deteriorate.
19
PART II
Other Information
ITEM 1. Legal Proceedings
The Company was a defendant in one product liability lawsuit. This case was
settled during the current quarter ended March 31, 2006 within the limits of the
deductible amount of the Company's insurance policy. The Company has insurance
to cover product liability claims. This insurance provides the Company with
$5,000,000 of coverage for each occurrence with a general aggregate coverage of
$5,000,000. Trimedyne's liability is limited to a maximum of $50,000 per
occurrence unless the judgment against the Company exceeds the $5,000,000
insurance coverage. In such case, Trimedyne would be liable for any liability in
excess of $5,000,000. Management had previously accrued $50,000 for this claim
based on the deductible under the insurance policy, which been paid in full as
of March 31, 2006.
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
(a) Exhibits
31.1 Certification of CEO
31.2 Certification of Controller
32.1 Officer Certification
32.2 Controller Certification
20
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 22, 2006 /s/ Marvin P. Loeb
-------------------------- ------------------------------------
Marvin P. Loeb
Chairman and
Chief Executive Officer
Date: May 22, 2006 /s/ Jeffrey S. Rudner
-------------------------- ------------------------------------
Jeffrey S. Rudner
Controller
21