**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

** **

**FORM10-Q**

 
| **ý**                              | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934.**                                                                                                                                                                                            |
|-----------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                    |       |                                                                                                                                                                                                                                                                                     |
| ** **                              |       | **For the quarterly period ended June 30, 2004.**                                                                                                                                                                                                                                        |
|                                    |       |                                                                                                                                                                                                                                                                                     |
| **OR**                                  |
|                                    |       |                                                                                                                                                                                                                                                                                     |
| **o**                                   | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.**                                                                                                                                                                                           |
|                                    |       |                                                                                                                                                                                                                                                                                     |
| ** **                              |       | **For the transition period from                        to**                     |
|                                    |       |                                                                                                                                                                                                                                                                                     |
| **Commission  File Number:****1-11388** |

 

| **PLC SYSTEMS INC.**                                                         |
|------------------------------------------------------------------------------|
| (Exact Name of Registrant as Specified in Its Charter)                       |
|                                                                         |   |   |
| **Yukon  Territory, Canada**                                                 | ** ** | **04-3153858** |
| (State or Other Jurisdiction of  Incorporation or Organization)              | * * | (I.R.S. Employer Identification No.) |
|                                                                         |   |   |
| **10  Forge Park, Franklin, Massachusetts**                                  | ** ** | **02038** |
| (Address of Principal Executive Offices)                                     | * * | (Zip Code) |
|                                                                         |   |   |
| Registrant’s telephone  number, including area code: **(508) 541-8800** |

 

Indicate by check mark whether the registrant: (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. **Yes ****ý****  No ****o**

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act)  **Yes**** ****o   No ****ý**

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 
| **Class**                  | ** ** | **Outstanding at August 9, 2004** |
|----------------------------|------------|-----------------------------------|
| Common Stock, no par value |       | 30,058,877                        |

 

 

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**PLC SYSTEMS INC.**

 

**Index**

 
| Part I.  | Financial Information: |                                                                                        |
|----------|------------------------|---------------------------------------------------------------------------------------------|
|     |                   |                                                                                        |   |
|     | Item 1.                | Financial Statements                                                                        |   |
|     |                   |                                                                                        |   |
|     |                   | Condensed  Consolidated Balance Sheets (unaudited)                                          |   |
|     |                   |                                                                                        |   |
|     |                   | Condensed  Consolidated Statements of Operations (unaudited)                                |   |
|     |                   |                                                                                        |   |
|     |                   | Condensed  Consolidated Statements of Cash Flows (unaudited)                                |   |
|     |                   |                                                                                        |   |
|     |                   | Notes  to Condensed Consolidated Financial Statements (unaudited)                           |   |
|     |                   |                                                                                        |   |
|     | Item  2.               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|     |                   |                                                                                        |   |
|     | Item  3.               | Quantitative  and Qualitative Disclosures about Market Risk                                 |   |
|     |                   |                                                                                        |   |
|     | Item 4.                | Controls and Procedures                                                                     |   |
|     |                   |                                                                                        |   |
| Part II. | Other Information:     |                                                                                        |
|     |                   |                                                                                        |   |
|     | Item  4.               | Submission  of Matters to a Vote of Security Holders                                        |   |
|     |                   |                                                                                        |   |
|     | Item 6.                | Exhibits and  Reports on Form 8-K                                                           |   |

** **

2

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** **

**PLC SYSTEMS INC.**

**Part I.****              FinancialInformation**

**Item 1.****           FinancialStatements**

**PLC SYSTEMS INC.**

CONDENSED CONSOLIDATEDBALANCE SHEETS

(In thousands)

(Unaudited)

 
| ** **                                                                                                                                                      | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ASSETS                                                                                                                                                          | ** ** | ** **         | ** ** | ** **             | ** ** |
| Current assets:                                                                                                                                                 |       |               |       |                   |       |
| Cash and cash  equivalents                                                                                                                                      |       | $                  | 10,251     |                   | $          | 6,377 |   |
| Accounts  receivable, net of allowance of $127 and $115 in 2004 and 2003, respectively                                                                          |       | 1,182              |       | 1,239                  |       |
| Lease  receivables                                                                                                                                              |       | 156                |       | 376                    |       |
| Inventories, net                                                                                                                                                |       | 1,148              |       | 885                    |       |
| Prepaid expenses  and other current assets                                                                                                                      |       | 662                |       | 490                    |       |
| Total current  assets                                                                                                                                           |       | 13,399             |       | 9,367                  |       |
|                                                                                                                                                            |       |               |       |                   |       |
| Equipment,  furniture and leasehold improvements, net                                                                                                           |       | 257                |       | 206                    |       |
| Other assets                                                                                                                                                    |       | 258                |       | 276                    |       |
| Total assets                                                                                                                                                    |       | $                  | 13,914     |                   | $          | 9,849 |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                       |       |               |       |                   |       |
| Current  liabilities:                                                                                                                                           |       |               |       |                   |       |
| Accounts payable                                                                                                                                                |       | $                  | 551        |                   | $          | 297 |   |
| Accrued  compensation                                                                                                                                           |       | 432                |       | 376                    |       |
| Accrued other                                                                                                                                                   |       | 316                |       | 358                    |       |
| Deferred revenue                                                                                                                                                |       | 974                |       | 555                    |       |
| Secured borrowings                                                                                                                                              |       | 156                |       | 376                    |       |
| Total current  liabilities                                                                                                                                      |       | 2,429              |       | 1,962                  |       |
|                                                                                                                                                            |       |               |       |                   |       |
| Deferred revenue                                                                                                                                                |       | 4,447              |       | 331                    |       |
| Total long-term  liabilities                                                                                                                                    |       | 4,447              |       | 331                    |       |
| Commitments and  contingencies                                                                                                                                  |       |               |       |                   |       |
|                                                                                                                                                            |       |               |       |                   |       |
| Stockholders’  equity:                                                                                                                                     |       |               |       |                   |       |
| Preferred stock,  no par value, unlimited shares authorized,   none issued and outstanding                                                                 |       |               |       |                   |       |
| Common stock, no  par value, unlimited shares authorized, 30,059 and 29,896 shares issued and  outstanding at June 30, 2004 and December 31, 2003, respectively |       | 93,725             |       | 93,636                 |       |
| Accumulated  deficit                                                                                                                                            |       | (86,350            | )          | (85,749                | )          |
| Accumulated  other comprehensive loss                                                                                                                           |       | (337               | )          | (331                   | )          |
| Total  stockholders’ equity                                                                                                                                |       | 7,038              |       | 7,556                  |       |
| Total  liabilities and stockholders’ equity                                                                                                                |       | $                  | 13,914     |                   | $          | 9,849 |   |

 

The accompanying notesare an integral part of the condensed consolidated financial statements.

 

3

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**PLC SYSTEMS INC.**

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

(In thousands, except pershare data)

(Unaudited)

 
| ** **                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                                    | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Product sales                                |       | $                                | 1,354      |                           | $          | 1,578 |   | $ | 2,885 |   | $ | 2,984 |   |
| Placement and  service fees                  |       | 442                              |       | 433                            |       | 820 |   | 761 |   |
| Total revenues                               |       | 1,796                            |       | 2,011                          |       | 3,705 |   | 3,745 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Cost of  revenues:                           |       |                             |       |                           |       |   |   |   |   |
| Product sales                                |       | 575                              |       | 499                            |       | 1,165 |   | 1,024 |   |
| Placement and  service fees                  |       | 172                              |       | 125                            |       | 348 |   | 241 |   |
| Total cost of  revenues                      |       | 747                              |       | 624                            |       | 1,513 |   | 1,265 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Gross profit                                 |       | 1,049                            |       | 1,387                          |       | 2,192 |   | 2,480 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Operating  expenses:                         |       |                             |       |                           |       |   |   |   |   |
| Selling, general  and administrative         |       | 866                              |       | 975                            |       | 1,856 |   | 1,831 |   |
| Research and  development                    |       | 516                              |       | 220                            |       | 1,045 |   | 461 |   |
| Total operating  expenses                    |       | 1,382                            |       | 1,195                          |       | 2,901 |   | 2,292 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Income (loss)  from operations               |       | (333                             | )          | 192                            |       | (709 | ) | 188 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Other income,  net                           |       | 82                               |       | 11                             |       | 108 |   | 30 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Net income  (loss)                           |       | $                                | (251       | )                              | $          | 203 |   | $ | (601 | ) | $ | 218 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Basic and  diluted earnings (loss) per share |       | $                                | (0.01      | )                              | $          | 0.01 |   | $ | (0.02 | ) | $ | 0.01 |   |
|                                         |       |                             |       |                           |       |   |   |   |   |
| Average shares  outstanding:                 |       |                             |       |                           |       |   |   |   |   |
| Basic                                        |       | 30,056                           |       | 29,810                         |       | 29,990 |   | 29,804 |   |
| Diluted                                      |       | 30,056                           |       | 30,019                         |       | 29,990 |   | 29,916 |   |

** **

Theaccompanying notes are an integral part of the condensed consolidated financialstatements.

 

4

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**PLC SYSTEMS INC.**

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 
| ** **                                                                                    | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                    | ** ** | **2004**                       | ** ** | **2003** | ** ** |
| Operating activities:                                                                         | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net income  (loss)                                                                            |       | $                              | (601       | ) | $ | 218 |   |
|                                                                                          |       |                           |       |   |   |
| Adjustments to  reconcile net income to net cash provided by (used for) operating activities: |       |                           |       |   |   |
| Depreciation and  amortization                                                                |       | 71                             |       | 74 |   |
| Change in assets  and liabilities:                                                            |       |                           |       |   |   |
| Accounts  receivable                                                                          |       | 59                             |       | (139 | ) |
| Inventory                                                                                     |       | (262                           | )          | (183 | ) |
| Prepaid expenses  and other assets                                                            |       | (173                           | )          | (443 | ) |
| Accounts payable                                                                              |       | 254                            |       | 129 |   |
| Deferred revenue                                                                              |       | 4,535                          |       | 670 |   |
| Accrued  liabilities                                                                          |       | 15                             |       | (351 | ) |
| Net cash  provided by (used for) operating activities                                         |       | 3,898                          |       | (25 | ) |
|                                                                                          |       |                           |       |   |   |
| Investing  activities:                                                                        |       |                           |       |   |   |
| Investment in  equipment                                                                      |       | (104                           | )          | — |   |
|                                                                                          |       |                           |       |   |   |
| Financing  activities:                                                                        |       |                           |       |   |   |
| Proceeds from  sales of common shares                                                         |       | 90                             |       | 19 |   |
| Secured  borrowings                                                                           |       | —                         |       | (58 | ) |
| Net cash  provided by (used for) financing activities                                         |       | 90                             |       | (39 | ) |
|                                                                                          |       |                           |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                                 |       | (10                            | )          | 25 |   |
| Net increase  (decrease) in cash and cash equivalents                                         |       | 3,874                          |       | (39 | ) |
|                                                                                          |       |                           |       |   |   |
| Cash and cash  equivalents at beginning of period                                             |       | 6,377                          |       | 5,932 |   |
| Cash and cash  equivalents at end of period                                                   |       | $                              | 10,251     |   | $ | 5,893 |   |

** **

Theaccompanying notes are an integral part of the condensed consolidated financialstatements.

 

5

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**PLC SYSTEMS INC.**

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

June 30, 2004

 

***1.******                                     ******Natureof Business***

 

PLC Systems Inc. (“PLC” or the “Company”) is a medical device companythat specializes in the design, development and manufacturing of a patentedcarbon dioxide (CO2) laser and disposable handpieces, known as TheHeart Laser System, that is used to treat patientswith severe angina in a surgical procedure known as transmyocardialrevascularization, or TMR.  In the UnitedStates, the Company sells its TMR products to Edwards Lifesciences.  Edwards has the exclusive right to market anddistribute the Company’s TMR products in the United States.

 

PLC’s current businessstrategy involves broadening and diversifying its product portfolio beyond itscurrent TMR offerings, by developing or acquiring new and innovative medicaldevices to address cardiac and vascular related markets. In February 2004, theCompany, consistent with this business strategy, entered into a new agreementwith Edwards to develop and manufacture a surgical cardiac ablation laserdesigned to treat cardiac arrhythmias (See Note 3).

 

Edwards is our largestshareholder, owning approximately 18% of our outstanding common stock as ofJune 30, 2004, and has a representative on our Board of Directors.  Edwards is also our largest customer,accounting for approximately 89% of the Company’s total sales in 2003 and 87%of the Company’s total sales for the six months ended June 30, 2004.

 

***2.******                                     ******Basis of Presentation***

 

The accompanying unaudited condensed consolidatedfinancial statements of the Company have been prepared in accordance withgenerally accepted accounting principles for interim financial information andwith the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.  In theopinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for a fair presentation have been included.  Operating results for the three and sixmonths ended June 30, 2004 are not necessarily indicative of the results thatmay be expected for the year ending December 31, 2004.  These financial statements should be read inconjunction with the consolidated financial statements and footnotes theretoincluded in the Company’s annual report on Form 10-K for the year endedDecember 31, 2003.

 

***3.******                                     ******Edwards Transaction***

 

In February 2004, the Company signed an agreement with Edwards toassume development of a surgical cardiac ablation laser system designed totreat cardiac arrhythmias. Under the terms of the agreement, the Company willhave exclusive manufacturing rights to build the new laser system and otherrelated surgical products. The Company will be responsible, among other things,for ongoing research and development and manufacture of the product and forobtaining regulatory approvals.  Edwardswill be responsible for the approval, funding and conduct of any clinicalstudies designed to obtain data in support of a new product approval 

 

6

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orclearance as required by the FDA or other regulatory body.

 

In conjunction with signing this new agreement, the terms of theCompany’s TMR distribution agreement with Edwards were modified to (1) extendthe term of the agreement until at least October 17, 2017 and (2) reduce the Company’sshare of revenue on TMR kits sold to hospitals. The Company received asconsideration from Edwards, a lump-sum payment of $4,533,333, which initiallywas recorded as deferred revenue in the Company’s consolidated balance sheet.   The Company expects to amortize the$4,533,333 into its consolidated statement of operations as revenue over thenext seven years under the units-of-revenue method as prescribed by EmergingIssues Task Force (EITF) 88-18, *Sales of Future Revenue*.  For the three and six months ended June 30,2004, the Company has recorded amortization of $57,000 and $72,000,respectively.

 

***4.******                                      Earnings(Loss) per Share***

 

In 2004, basic and dilutedloss per share was computed using only the weighted average number of commonshares outstanding during the period without giving effect to any potentialfuture issues of common stock related to stock option programs and warrantssince their inclusion would be antidilutive.

 

In 2003, basic earnings pershare was computed using only the weighted average number of common sharesoutstanding during the period, while diluted earnings per share was computedusing the weighted average number of common shares outstanding during theperiod plus the effect of outstanding stock options and warrants using the treasurystock method.  In calculating dilutedearnings per share, the dilutive effect of stock options and warrants iscomputed using the average market price for the respective period.

 

For the three and six monthsended June 30, 2004 and 2003, 6,190,422 and 4,668,430 shares attributable tooutstanding stock options and warrants were excluded from the calculation ofdiluted earnings (loss) per share because the effect was antidilutive.  The following table sets forth thecomputation of basic and diluted earnings (loss) per share:

 
| ** **                                           | ** ** | **Three Months Ended  June 30,**              | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------|------------|--------------------------------|------------|
| ** **                                           | ** ** | **2004**                                      | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                           | ** ** | **(In thousands, except earnings per share)** | ** ** |
| Net income (loss) available for common shareholders  |       | $                                             | (251)      |                           | $          | 203 |   | $ | (601) |   | $ | 218 | ** ** |
| Weighted average  outstanding shares of common stock |       | 30,056                                        |       | 29,810                         |       | 29,990 |   | 29,804 |   |
| Dilutive effect  of employee stock options           |       | —                                        |       | 209                            |       | — |   | 112 |   |
| Common stock and  common stock equivalents           |       | 30,056                                        |       | 30,019                         |       | 29,990 |   | 29,916 |   |
|                                                 |       |                                          |       |                           |       |   |   |   |   |
| Earnings (loss)  per share:                          |       |                                          |       |                           |       |   |   |   |   |
| Basic                                                |       | $                                             | (0.01      | )                              | $          | 0.01 |   | $ | (0.02 | ) | $ | 0.01 |   |
| Diluted                                              |       | $                                             | (0.01      | )                              | $          | 0.01 |   | $ | (0.02 | ) | $ | 0.01 |   |

 

7

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*** ***

***5.******                                      StockBased Compensation***

 

The Company grants stockoptions for a fixed number of shares to employees and certain other individualswith exercise prices equal to the fair value of the shares at the dates ofgrant. The Company has adopted the disclosure only provisions of Statement ofFinancial Accounting Standards No. 123, *Accounting for Stock-basedCompensation* (“FAS 123”) as amended, and will continue to accountfor its stock option plans in accordance with the provisions of AccountingPrinciples Board Opinion 25, *Accounting for StockIssued to Employees*.

 

Thefollowing table illustrates the effect on net income (loss) and basic earnings(loss) per share if the Company had applied the fair value recognitionprovisions of FAS 123 to stock-based employee compensation:

 
| ** **                                                                                                           | ** ** | **Three Months Ended  June 30,**          | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                           | ** ** | **2004**                                  | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                           | ** ** | **(In thousands, except per share data)** | ** ** |
| Net income  (loss) attributable to common stockholders— As reported                                             |       | $                                         | (251       | )                              | $          | 203 |   | $ | (601 | ) | $ | 218 |   |
| Deduct total  stock-based compensation expense determined under fair value based method for  all stock option awards |       | (359                                      | )          | (35                            | )          | (392 | ) | (76 | ) |
| Net income  (loss) attributable to common stockholders-Pro forma                                                     |       | $                                         | (610       | )                              | $          | 168 |   | $ | (993 | ) | $ | 142 |   |
| Earnings (loss)  per basic and diluted share attributable to common stockholders-As reported                         |       | $                                         | (0.01      | )                              | $          | 0.01 |   | $ | (0.02 | ) | $ | 0.01 |   |
| Earnings (loss)  per basic and diluted share attributable to common stockholders-Pro forma                           |       | $                                         | (0.02      | )                              | $          | 0.01 |   | $ | (0.03 | ) | $ | 0.00 |   |

 

The fair value of issued options at the date of grant were estimatedusing the Black-Scholes model with the following weighted average assumptions:

 
| ** **             | ** ** | **Three Months Ended  June 30,** | ** ** |
|------------------------|------------|----------------------------------|------------|
| ** **             | ** ** | **2004**                         | ** ** | **2003** | ** ** |
| Expected life  (years) |       | 3                                |       | 3 |   |
| Interest rate          |       | 2.53                             | %          | 1.59 | % |
| Volatility             |       | .734                             |       | .585 |   |

 

***6.******                                      ComprehensiveIncome (Loss)***

 

Totalcomprehensive loss for the three and six month periods ended June 30, 2004amounted to $254,000 and $607,000, respectively, as compared to totalcomprehensive income of $201,000 and $205,000 in the three and six monthperiods ended June 30, 2003. Comprehensive income (loss) is comprised of net income (loss) plus theincrease/decrease in

 

8

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currency translation adjustment.

 

***7.******                                      Inventories***

 

Inventoriesare stated at the lower of cost or market using the first-in, first-out (FIFO)method and consist of the following (in thousands):

 

| ** **       | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------------|------------|--------------------|------------|------------------------|------------|
| Raw materials    |       | $                  | 619        |                   | $          | 668 |   |
| Work in progress |       | 169                |       | 70                     |       |
| Finished goods   |       | 360                |       | 147                    |       |
|             |       | $                  | 1,148      |                   | $          | 885 |   |

 

At June 30, 2004 and December 31, 2003, inventoriesare stated net of a reserve of $804,000 and $806,000, respectively, forpotentially obsolete inventory.

 

***8.******                                      RevenueRecognition***

 

The Company records revenuefrom the sale of TMR kits at the time of shipment to Edwards.  TMR kit revenues include the amount invoicedto Edwards for kits shipped pursuant to written purchase orders received, aswell as an amortized portion of deferred revenue related to Edwards’ lump sumTMR kit prepayment received in February 2004. The Company expects to amortize the prepayment into its consolidated statementof operations as revenue over the next seven years under the units-of-revenuemethod as prescribed by Emerging Issues Task Force (EITF) 88-18, *Sales of Future Revenue*. For the three and six months endedJune 30, 2004, the Company has recorded amortization of $57,000 and$72,000, respectively.

 

Lasers are billed to Edwardsin accordance with purchase orders that the Company receives. Invoiced lasersare recorded as other current assets and deferred revenue on the Company’sconsolidated balance sheet until such time as the laser is shipped to ahospital, at which time the Company records revenue and cost of revenue.

 

Under the terms of theEdwards TMR distribution agreement, once Edwards has recovered a prescribedamount of revenue from a hospital for the use or purchase of a laser, anyadditional revenues earned by Edwards are shared with the Company pursuant to aformula established in the distribution agreement. The Company only records itsshare of such additional revenue, if any, at the time the revenue is earned.

 

TheCompany records revenue from the sale of TMR kits and lasers to internationaldistributors or hospitals at the time of shipment.

 

Prior to enteringinto the Edwards TMR distribution agreement, the Company installed lasers inhospitals under placement contracts that did not transfer substantial ownershipof the equipment to the customer. Revenues from these transactions arerecognized over the life of the placement agreement in accordance with thespecific terms of the contract.

 

Revenues from service and maintenance contracts arerecognized ratably over the life of the contract.

 

9

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Installation revenues related to a laser transaction arerecorded as a component of placement and service fees when the laser isinstalled.

 

***9.******                                      Warrantyand Preventative Maintenance**Costs***

 

The Company warranties its products against manufacturing defects undernormal use and service during the warranty period.  The Company obtains similar warranties from amajority of its suppliers, including those who supply critical Heart LaserSystem components.  In addition, underthe terms of our TMR distribution agreement with Edwards, the Company is ableto bill Edwards for actual warranty costs, including preventative maintenanceservices, up to a specified amount during the warranty period.

 

The Company evaluates theestimated future unrecoverable costs of warranty and preventative maintenanceservices for its installed base of lasers on a quarterly basis and adjusts itswarranty reserve accordingly.  TheCompany considers all available evidence, including historical experience andinformation obtained from supplier audits.

 

Changes in thewarranty accrual were as follows (in thousands):

 
| ** **                                                 | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                 | ** ** | **2004**                       | ** ** | **2003** | ** ** |
| Balance,  beginning of period                              |       | $                              | 60,000     |   | $ | 100,000 |   |
| Payments made                                              |       | —                         |       | — |   |
| Change in  liability for warranties issued during the year |       | 7                              |       | — |   |
| Change in  liability for preexisting warranties            |       | (7                             | )          | — |   |
|                                                       |       |                           |       |   |   |
| Balance, end of  period                                    |       | $                              | 60,000     |   | $ | 100,000 |   |

 

**Item 2.****                     Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

This quarterly report (including certain informationincorporated herein by reference) contains forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended.  Statements containing terms such as“believes”, “plans”, “expects”, “anticipates”, “intends”, “estimates” andsimilar expressions contain uncertainty and are forward-looking statements.Forward-looking statements are based on current plans and expectations andinvolve known and unknown important risks and uncertainties that could causeactual results to differ materially from those described in the forward-lookingstatements. Such important factors and uncertainties include, but are notlimited to, those set forth below under the heading “Certain Factors that MayAffect our Future Results” and elsewhere in this quarterly report.

 

**Application of Critical AccountingPolicies and Estimates**

 

This management’sdiscussion and analysis of financial condition and results of operations isbased on our condensed consolidated financial statements, which have been

 

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prepared in accordance withaccounting principles generally accepted in the United States.  Our significant accounting policies are morefully described in Note 2 of the Notes to Consolidated Financial Statements aswell as in “Item 7 - Management’s Discussion and Analysis of FinancialCondition and Results of Operations – Critical Accounting Policies andEstimates”, each as contained in our Annual Report on Form 10-K for the yearended December 31, 2003.  No significantchanges were made to those policies during the three months ended June 30,2004, other than an addition to the Company’s revenue recognition policy toaccount for Edwards’ prepayment of future TMR kit revenues in accordance withEITF 88-18, *Sales of Future Revenues*.  The Company’s revenue recognition policy hasbeen updated as follows:

 

***RevenueRecognition***

 

The Company records revenuefrom the sale of TMR kits at the time of shipment to Edwards.  TMR kit revenues include the amount invoicedto Edwards for kits shipped pursuant to written purchase orders received, aswell as an amortized portion of deferred revenue related to Edwards’ lump sumTMR kit prepayment received in February 2004. The Company expects to amortize the prepayment into its consolidatedstatement of operations as revenue over the next seven years under theunits-of-revenue method as prescribed by Emerging Issues Task Force (EITF)88-18, *Sales of Future Revenue*.

 

Lasers are billed to Edwardsin accordance with purchase orders that the Company receives. Invoiced lasersare recorded as other current assets and deferred revenue on the Company’sconsolidated balance sheet until such time as the laser is shipped to ahospital, at which time the Company records revenue and cost of revenue.

 

Under the terms of the EdwardsTMR distribution agreement, once Edwards has recovered a prescribed amount ofrevenue from a hospital for the use or purchase of a laser, any additionalrevenues earned by Edwards are shared with the Company pursuant to a formulaestablished in the distribution agreement. The Company only records its shareof such additional revenue, if any, at the time the revenue is earned.

 

TheCompany records revenue from the sale of TMR kits and lasers to internationaldistributors or hospitals at the time of shipment.

 

Prior to enteringinto the Edwards TMR distribution agreement, the Company installed lasers inhospitals under placement contracts that did not transfer substantial ownershipof the equipment to the customer. Revenues from these transactions are recognizedover the life of the placement agreement in accordance with the specific termsof the contract.

 

Revenues from service and maintenance contracts arerecognized ratably over the life of the contract.

 

Installation revenues related to a laser transaction arerecorded as a component of placement and service fees when the laser isinstalled.

 

**Results of Operations**

 

Results for the three and six months ended June 30,2004 and 2003 and the related percent of revenues were as follows:

 

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| ** **                             | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                             | ** ** | **2004**                         | ** ** | **2003**                       | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                             | ** ** | **$**                            | ** ** | **%**                          | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                             | ** ** | **(dollars  in thousands)**      | ** ** |
|                                   |       |                             |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total revenue                          |       | 1,796                            |       | 100                            |       | 2,011 |   | 100 |   | 3,705 |   | 100 |   | 3,745 |   | 100 |   |
| Total cost of  revenues                |       | 747                              |       | 42                             |       | 624 |   | 31 |   | 1,513 |   | 41 |   | 1,265 |   | 34 |   |
| Gross profit                           |       | 1,049                            |       | 58                             |       | 1,387 |   | 69 |   | 2,192 |   | 59 |   | 2,480 |   | 66 |   |
| Selling, general  & administrative |       | 866                              |       | 48                             |       | 975 |   | 48 |   | 1,856 |   | 50 |   | 1,831 |   | 49 |   |
| Research &  development            |       | 516                              |       | 29                             |       | 220 |   | 11 |   | 1,045 |   | 28 |   | 461 |   | 12 |   |
| Income (loss)  from operations         |       | (333                             | )          | (19                            | )          | 192 |   | 10 |   | (709 | ) | (19 | ) | 188 |   | 5 |   |
| Other income                           |       | 82                               |       | 5                              |       | 11 |   | 1 |   | 108 |   | 3 |   | 30 |   | 1 |   |
| Net income  (loss)                     |       | (251                             | )          | (14                            | )          | 203 |   | 11 |   | (601 | ) | (16 | ) | 218 |   | 6 |   |

 
| ** **                                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Increase (decrease)  over 2003** | ** ** | **Six Months Ended  June 30,** | ** ** | **Increase (decrease)  over 2003** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|------------------------------------|------------|--------------------------------|------------|------------------------------------|------------|
| ** **                                      | ** ** | **2004**                         | ** ** | **2003**                           | ** ** | ** **                     | **2004**   | ** **                         | **2003**   | ** ** | ** ** |
| ** **                                      | ** ** | **$**                            | ** ** | **$**                              | ** ** | **$**                          | ** ** | **%**                              | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                      | ** ** | **(dollars  in thousands)**      | ** ** |
|                                            |       |                             |       |                               |       |                           |       |                               |       |   |   |   |   |   |   |   |   |
| Product sales                                   |       | 1,354                            |       | 1,578                              |       | (224                           | )          | (14                                | )          | 2,885 |   | 2,984 |   | (99 | ) | (3 | ) |
| Placement and  service fees                     |       | 442                              |       | 433                                |       | 9                              |       | 2                                  |       | 820 |   | 761 |   | 59 |   | 8 |   |
| Total revenues                                  |       | 1,796                            |       | 2,011                              |       | (215                           | )          | (11                                | )          | 3,705 |   | 3,745 |   | (40 | ) | (1 | ) |
| Product cost of  sales                          |       | 575                              |       | 499                                |       | 76                             |       | 15                                 |       | 1,165 |   | 1,024 |   | 141 |   | 14 |   |
| Placement and  service fees cost of sales       |       | 172                              |       | 125                                |       | 47                             |       | 38                                 |       | 348 |   | 241 |   | 107 |   | 44 |   |
| Total cost of  revenues                         |       | 747                              |       | 624                                |       | 123                            |       | 20                                 |       | 1,513 |   | 1,265 |   | 248 |   | 20 |   |
| Gross profit                                    |       | 1,049                            |       | 1,387                              |       | (338                           | )          | (24                                | )          | 2,192 |   | 2,480 |   | (288 | ) | (12 | ) |
| Selling, general  & administrative expenses |       | 866                              |       | 975                                |       | (109                           | )          | (11                                | )          | 1,856 |   | 1,831 |   | 25 |   | 1 |   |
| Research &  development expenses            |       | 516                              |       | 220                                |       | 296                            |       | 135                                |       | 1,045 |   | 461 |   | 584 |   | 127 |   |
| Total operating  expenses                       |       | 1,382                            |       | 1,195                              |       | 187                            |       | 16                                 |       | 2,901 |   | 2,292 |   | 609 |   | 27 |   |
| Other income                                    |       | 82                               |       | 11                                 |       | 71                             |       | 645                                |       | 108 |   | 30 |   | 78 |   | 260 |   |
| Net income  (loss)                              |       | (251                             | )          | 203                                |       | (454                           | )          | (224                               | )          | (601 | ) | 218 |   | (819 | ) | (376 | ) |

 

***Product Sales***

 

Product sales decreased$224,000 and $99,000 during the three and six months ended June 30, 2004,respectively, as compared to three and six months ended June 30, 2003.

 

The first factor, laserrevenues, which is the largest component of product sales, decreased by$213,000 and $78,000, respectively, for the three and six month periods endedJune 30, 2004 as compared to the three and six month periods ended June 30,2003.

 

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In the three months ended June 30, 2004, this decreaseis attributable to a $93,000 decrease in domestic laser revenue and a $120,000decrease in international laser revenue. Domestic laser revenue declined as a result of (1) a decrease in therevenue sharing earned under the TMR distribution agreement with Edwards and(2) a lower average selling price on domestic laser transactions. These factorscausing a decline were offset in part by an increase in the number of domesticunits sold.  The decline in internationallaser revenue was a result of a decrease in the number of international unitssold.

 

In the six months ended June 30, 2004, the decrease inlaser revenue is primarily attributable to lower international laser revenue of$125,000.  This decrease was offset inpart by an increase in domestic laser revenue of $47,000, resulting from anincrease in the number of domestic units sold, offset by a lower averageselling price on laser transactions and a decrease in the revenue sharingearned under the TMR distribution agreement with Edwards.

 

The second factor,disposable TMR kit revenues, which is the second largest component of productsales, decreased by $38,000 and $72,000, respectively, for the three and sixmonth periods ended June 30, 2004 as compared to the three and six monthperiods ended June 30, 2003.

 

In the three months ended June 30, 2004, the decreaseis primarily related to a decrease in international disposable revenue stemmingfrom a lower volume of kit shipments to international customers.  This overall decrease was partially offset byhigher domestic disposable revenue. The increase in domestic disposable revenuewas the result of an increase in the number of TMR kits shipped to Edwards,offset by a reduced share of revenue on TMR kits. The reduced share of revenueon TMR kits is a result of a modification to the TMR distribution agreement inFebruary 2004, whereby the Company’s share of revenue on TMR kits sold tohospitals was reduced to 36.5% of the customer generated revenue.  The impact of this reduced share was offsetin part by $57,000 of amortization of deferred revenue.

 

In the six months ended June 30, 2004, the decrease indisposable revenues is primarily related to (1) a decrease in the number ofinternational TMR kits shipped to hospitals, (2) a decrease in the number ofdomestic TMR kits shipped to Edwards, and (3) a reduced share of revenue on TMRkits (as a result of the aforementioned modification to the TMR distributionagreement).  The negative impact of thesefactors was offset in part by $72,000 of amortization of deferred revenue.

 

The third factor, otherproduct sales, increased $27,000 and $51,000, respectively, for the three andsix month periods ended June 30, 2004 compared to the three and six monthperiods ended June 30, 2003.

 

***Placement and Service Fees***

 

Placement and services fees increased $9,000 and $59,000 during thethree and six months ended June 30, 2004, respectively, as compared to thethree and six months ended June 30, 2003.

 

Placement fees declined$8,000 and $60,000, respectively, for the three and six month periods endedJune 30, 2004 as compared to the three and six month periods ended June 30,2003.

 

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Domestic placementfees decreased $94,000 and $129,000 in the three and six months ended June 30,2004. These decreases are attributable to a reduction in domestic placementfees associated with the Company’s older installed base of HL1’s.  International placement fees increased$86,000 and $69,000 in the three and six months ended June 30, 2004 due toincreased billings to HL2 placement contract customers.

 

Service fees increased$17,000 and $119,000, respectively, for the three and six month periods endedJune 30, 2004 as compared to the three and six month periods ended June 30,2003 due to more domestic lasers in service in 2004, which resulted inincreased billings to Edwards for service contracts and other service relatedcalls.

 

***Gross Profit***

 

Total gross profit for the three and six months ended June 30, 2004 was$1,049,000, or 58% of revenues, and $2,192,000, or 59% of revenues,respectively, as compared to $1,387,000, or 69% of revenues, and $2,480,000, or66% of revenues, for the comparable periods in 2003.  The lower gross margin dollars in thethree and six months ended June 30, 2004 is due to (1) lower additional sharedrevenue on domestic laser transactions, (2) lower international laser revenue,(3) lower placement fees, (4) lower average domestic laser selling prices and(5) lower disposable revenue.  Thesedecreases were offset in part by (1) an increase in the number of lasers sold,and (2) increased other product sales.

 

***Selling, General and AdministrativeExpenses***

 

Selling, general andadministrative expenditures were $866,000 and $1,856,000 for the three and sixmonths ended June 30, 2004, a decrease of $109,000 and an increase of $25,000,respectively, when compared to expenditures of $975,000 and $1,831,000 in thethree and six months ended June 30, 2003. The overall decrease in selling, general and administrative expenses inthe three months ended June 30, 2004 as compared to the three months ended June30, 2003, is primarily a result of decreased expenditures related to employeecompensation, offset by increased legal and administrative fees.  Selling, general and administrative expensesin the six months ended June 30, 2004 as compared to the six months ended June30, 2003 did not change significantly.

 

***Research and Development Expenses***

 

Research anddevelopment expenditures were $516,000 and $1,045,000 for the three and sixmonths ended June 30, 2004, increases of $296,000 and $584,000, respectively,when compared to $220,000 and $461,000 in the three and six months ended June30, 2003.  The increased expenditureswere incurred in connection with the development of the Optimaze System andadditional product development work on longer term research and developmentprojects.

 

We expect to continue to incur significant new research and developmentexpenditures in future quarters in pursuit of our business strategy to broadenand diversify our product portfolio beyond our current TMR offerings. Inparticular, we expect our 2004 third and fourth quarter research anddevelopment expenditures to increase in the aggregate approximately $1.0million compared to the third and fourth quarters of 2003 as we complete thedevelopment of the Optimaze System and advance certain other longer termresearch and development projects.

 

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***Other Income***

 

Other income forthe three and six months ended June 30, 2004 includes proceeds from aninsurance settlement. In addition, interest income increased in the three andsix months ended June 30, 2004 as compared to the three and six months endedJune 30, 2003 due to higher average cash balances.

 

***Net Income (Loss)***

 

The Company incurred a netloss in the three and six months ended June 30, 2004 as compared to net incomein the three and six months ended June 30, 2003 due to higher operatingexpenses and lower gross margin dollars.

 

There was no provision forincome tax for the three and six months ended June 30, 2004 or June 30, 2003due to a net loss in 2004 and U.S. net operating loss carryforwards beingavailable to reduce taxable income in 2003.

 

We expect to incur a netloss in the remaining two quarters of 2004, primarily as a result of ourplanned increased investment in research and development, as discussed above.

 

***Kit Shipments***

 

We view disposable kit shipments to end users by Edwards as animportant metric in evaluating our business. We believe such kit shipments, although not a direct measure, are areasonable indicator for the adoption of TMR as a therapy in themarketplace.  Disposable kit shipments toend users during the three and six months ended June 30, 2004 and June 30, 2003were as follows:

 
| ** **    | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,**         | ** ** |
|---------------|------------|---------------------------------|------------|---------------------------------------|------------|
| ** **    | ** ** | **2004**                        | ** ** | **% Increase  (decrease)  over 2003** | ** ** | **2003** | ** ** | **2004** | ** ** | **% Increase  (decrease)  over 2003** | ** ** | **2003** | ** ** |
|          |       |                            |       |                                  |       |   |   |   |   |   |   |   |   |
| Domestic      |       | 502                             |       | (4                                    | )%         | 524 |   | 884 |   | (3 | )% | 907 |   |
| International |       | 1                               |       | (99                                   | )%         | 85 |   | 46 |   | (60 | )% | 115 |   |
| Total         |       | 503                             |       | (17                                   | )%         | 609 |   | 930 |   | (9 | )% | 1,022 |   |

 

**Liquidity and Capital Resources**

 

At June 30, 2004,the Company had cash and cash equivalents of $10,251,000.

 

During thesix-month period ended June 30, 2004, the Company recorded a net loss of$601,000.  The net loss was offset byfavorable working capital changes, primarily deferred revenue of $4,535,000(receipt of funds from Edwards) accounts payable and accounts receivable partlyoffset by unfavorable working capital changes in prepaid expenses andinventory, which resulted in net cash provided by operating activities ofapproximately $3,898,000.  Cash used ininvesting activities was approximately $104,000, consisting of an investment inequipment.  Cash provided by financingactivities was approximately $90,000, consisting of proceeds from the exerciseof stock options and shares purchased under the employee stock purchaseplan.  The

 

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Company believes that its existing cash resources will meet its workingcapital requirements through the next 12 months.

 

We are largely dependent onthe success of Edwards’ sales and marketing efforts in the U.S. to continue toincrease the installed base of HL2 lasers and substantially increase TMRprocedural volumes and revenues. Should the installed base of HL2 lasers or TMRprocedural volume not increase sufficiently, our liquidity and capitalresources will be negatively impacted. Additionally, other unanticipated decreases in operating revenues orincreases in expenses or further changes or delays in third-party reimbursementto healthcare providers using our products may adversely impact our cashposition and require further cost reductions or the need to obtain additionalfinancing.  It is not certain that we,working with Edwards and our international distributors, will be successful inachieving broad commercial acceptance of the Heart Laser Systems, or that wewill be able to operate profitably in the future on a consistent basis, if atall.

 

Some hospital customers prefer to acquire the Heart LaserSystems on a usage basis rather than as a capital equipment purchase.  We believe this is the result of limitationsmany hospitals currently have on acquiring expensive capital equipment as wellas competitive pressures in the marketplace. A usage business model may result in a longer recovery period forEdwards to recoup its investment in lasers it purchases from us.  This could result in (1) a delay in ourability to receive additional shared revenue, if any, that we otherwise areentitled to receive under the terms of our distribution agreement with Edwards(see “Application of Critical Accounting Policies and Estimates — RevenueRecognition”) and (2) a delay in the purchase of new lasers by Edwards if itsinstalled base of placement lasers under usage contracts are under-performingand it chooses to re-deploy these lasers to other new hospital sites in lieu ofpurchasing a new laser from us.  Our cashposition and our need for additional financing to fund operations will bedependent in part upon the number of hospitals that acquire Heart Laser Systemsfrom Edwards on a usage basis and the number and frequency of TMR proceduresperformed by these hospitals.  We cannotpredict whether a usage based sales model will be successful, whetherimplemented by us or Edwards.

 

Furthermore, we have recently undertaken a new businessstrategy that involves broadening and diversifying our product portfolio beyondour current TMR offerings, by developing or acquiring new and innovativemedical devices to address cardiac and vascular related markets. We believethis strategy will result in our incurring losses for at least the next 12months as we increase our investments in both manufacturing and research anddevelopment staff and capital equipment necessary to pursue these new strategicinitiatives, including, but not limited to, the Optimaze System.  In addition to our anticipated increase inresearch and development expenditures, we expect our capital expenditures inthe next 12 months to be in the range of $300,000 to $400,000.  We cannot be certain that we will besuccessful in implementing our new business strategy or thatfuture sales, if any, from these planned new products will recover theinvestments we plan to make. If we are unsuccessful in implementing our newbusiness strategy, our liquidity and capital resources will be adverselyaffected and we may need to obtain additional financing.

 

There can be no assurancethat, should we require additional financing, such financing will be availableon terms and conditions acceptable to us. Should additional financing not be available on terms and conditionsacceptable to us, additional actions may be required that could adverselyimpact our ability to continue to realize assets and satisfy liabilities in thenormal course of business.  The condensedconsolidated financial statements set forth in this quarterly report do notinclude any adjustments to reflect the possible future effects of theseuncertainties.

 

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**Off-Balance Sheet Arrangements**

 

None.

 

## **Certain Factors that MayAffect our Future Results**

 

The risks and uncertaintiesdescribed below are not the only risks we face. Additional risks and uncertainties not presently known to us orcurrently deemed immaterial may also impair our business operations.  If any of the following risks actually occur,our financial condition and operating results could be materially adverselyaffected.

 

***We expect to incur significant operatinglosses in the near future***

 

We incurred a net loss in the quarter ended June 30, 2004.  We expect to continue to incur net losses forat least the next 12 months as we increase our spending in the areas ofmanufacturing and research and development for the Optimaze System. Moreover,as we continue to pursue our new business strategy of acquiring or developingnew medical devices to address cardiac and vascular related markets, we maycontinue to incur expenses that exceed the revenues we generate.  We cannot provide any assurance that we willbe successful with our new business strategy or that we will ever return toprofitability.

 

***Our company is currently dependenton one principal product line to generate revenues***

 

We currently market one principal product line, which consists of twopatented high-powered carbon dioxide lasers and related TMR disposable kitsknown as the Heart Laser Systems. Approximately 92% and 93%, respectively, of our revenues in the threeand six months ended June 30, 2004 and 95% in the year ended December 31, 2003,were derived from the sales and service of our Heart Laser Systems.  This absence of a diversified product linemeans that we are directly and materially impacted by changes in the market forHeart Laser Systems.

 

***Our company is dependent on oneprincipal customer***

 

Pursuant to the terms of our TMR distribution agreement with Edwards,Edwards is our exclusive distributor for our HL2 and TMR kits in the UnitedStates.  In addition, pursuant to theterms of our new distribution agreement with Edwards for the Optimaze System (aswell as any other additional surgical products that we may develop for thetreatment of atrial fibrillation, referred to as AF, or atrial flutter),Edwards is our exclusive worldwide distributor of those products.  As a result of the TMR relationship, Edwardsaccounted for 85% and 87% of our total revenue in the three and six monthsended June 30, 2004 and 89% in the year ended December 31, 2003, respectively, and we expect Edwards to account for thesignificant majority of our revenue in the future.  If our relationship with Edwards does notprogress as anticipated, or if Edwards’ sales and marketing strategies fail togenerate sales of our products in the future, our revenue will decreasesignificantly and our business, financial condition and results of operationswill be seriously harmed.

 

***Our company is dependent on certain suppliers***

 

Some of the components for our Heart Laser Systems, mostnotably the power supply and certain optics and fabricated parts for the HL2,and certain components for the Optimaze System,

 

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are only available from onesupplier, and we have no assurance that we will be able to source any of oursole-sourced components from additional suppliers.  We are dependent upon our sole suppliers toperform their obligations in a timely manner. In the past, we have experienced delays in product delivery from oursole suppliers and, because we do not have an alternative supplier to producethese products for us, we have little leverage to enforce timely delivery. Anydelay in product delivery or other interruption in supply from these supplierscould prevent us from meeting our commercial demands for our products, whichcould have a material adverse effect on our business, financial condition andresults of operations.  Furthermore, wedo not require significant quantities of any components because we produce alimited number of our products each year. Our low-quantity needs may not generate substantial revenue for oursuppliers.  Therefore, it may bedifficult for us to continue our relationships with our current suppliers orestablish relationships with additional suppliers on commercially reasonableterms, if at all, and such difficulties may seriously harm our business,financial condition and results of operations.

 

***We must complete development of theOptimaze System and be able to manufacture it in required volumes atcommercially reasonable costs***

 

We mustsuccessfully complete development of the Optimaze System.  We expect to outfit our facility with thenecessary production and test equipment and train our employees on how to buildthe product. This will include the need to manufacture highly specializeddisposable handpieces for which we have no comparable prior experienceproducing at any volume.  Until such timeas we become more proficient in these manufacturing methods, if ever, we mayencounter problems related to:

 

•                  production yields;

•                  quality control;

•                  training;

•                  shortages of qualified personnel; and

•                  potential capacity constraints.

 

Suchproblems could severely affect our ability to adequately scale up productionand meet demand for our products on a timely basis, which could harm ourbusiness, financial condition and results of operations.

 

***We are dependent upon our key personnel andwill need to hire additional key personnel in the near future***

 

Ourability to operate our business successfully depends in significant part uponthe retention and motivation of certain key technical, regulatory, productionand managerial personnel and our ongoing ability to hire and retain additionalqualified personnel in these areas. Competition for such personnel is intense,particularly in the Greater Boston area. We cannot be certain that we will beable to attract such personnel and the loss of any of our current key employeescould have a significant adverse impact on our business.

 

***Our company may be unable to raise neededfunds***

 

As of June 30, 2004, we had cash and cash equivalents totaling$10,251,000, which includes $4,533,333 received from our February 2004transaction with Edwards.  Based on ourcurrent operating plan, we anticipate that our existing capital resourcesshould be sufficient to

 

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meet our working capitalrequirements for at least the next 12 months. However, if our business does not progress in accordance with ourcurrent business plan, we may need to raise additional funds in thefuture.  We may not be able to raiseadditional capital upon satisfactory terms, or at all, and our business,financial condition and results of operations could be materially and adverselyaffected.  To the extent that we raiseadditional capital by issuing equity or convertible securities, ownershipdilution to our stockholders will result. To the extent that we raise additional capital through the incurrence ofdebt, our activities may be restricted by the repayment obligations and otherrestrictive covenants related to the debt.

 

***In order to compete effectively, ourcurrent and future products need to gain commercial acceptance***

 

TMR and surgical ablation for cardiac arrhythmias are still bothemerging technologies.  Our current andplanned future products may never achieve widespread commercialacceptance.  To be successful, we needto:

 

•                  demonstrate to the medical community ingeneral, and to heart surgeons and cardiologists in particular, that TMR andsurgical tissue ablation for cardiac arrhythmias are procedures that areeffective, relatively safe and cost effective;

 

•                  support third-party efforts to document themedical processes by which TMR procedures relieve angina and surgical tissueablation cures cardiac arrhythmias;

 

•                  have more heart surgeons trained to performTMR procedures using the Heart Laser Systems and surgical tissue ablationprocedures using the Optimaze System, assuming the latter becomes commerciallyavailable in the future; and

 

•                  maintain and expand third-party reimbursementfor both the TMR procedure and the use of surgical tissue ablation for thetreatment of cardiac arrhythmias.

 

To date, only a limitednumber of heart surgeons have been trained in the use of TMR, and we aredependent on Edwards to expand related marketing and training efforts in theU.S. for the use of our current and planned future products.

 

Although the Heart LaserSystems have received FDA approval and the CE Mark, they have not yet receivedwidespread commercial acceptance.  Inaddition, although the Optimaze System has received FDA clearance, it has notyet secured the CE Mark and it is not yet ready for widespread commercialization.If we are unable to maintain regulatory clearances, secure the CE Mark for theOptimaze System or achieve widespread commercial acceptance of the Heart LaserSystems or the Optimaze System, our business, financial condition and resultsof operations will be materially and adversely affected.

 

***Our competitor in TMR may obtain FDAapproval to market a new device, the impact of which is uncertain on the futureadoption rate of TMR***

 

Our primary TMR competitor,CardioGenesis, is attempting to obtain FDA approval to market their“percutaneous” method of performing myocardial revascularization, known as PMR,which would provide a less invasive method of creating channels in theheart.  If PMR can be shown to be safe and effective and is approved bythe FDA, it would eliminate the need in certain

 

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patients to make an incision inthe chest, reducing costs and speeding recovery.  It is unclear what impact, if any, anapproval of a PMR device would have on the future adoption rate for TMRprocedures.  If PMR is approved, it coulderode the potential TMR market which would have a material adverse effect onour business, financial condition and results of operations.

 

***Rapid technological changes in our industrycould make our products obsolete***

 

Our industry is characterized by rapid technological change and intensecompetition.  New technologies andproducts and new industry standards will develop at a rapid pace, which couldmake our current and future planned products obsolete. The advent of newdevices and procedures and advances in new drugs and genetic engineering areespecially concerning competitive threats. Our future success will depend upon our ability to develop and introduceproduct enhancements to address the needs of our customers.  Material delays in introducing productenhancements may cause customers to forego purchases of our products andpurchase those of our competitors.

 

Many potential competitors have substantially greater financialresources and are in a better financial position to exploit marketing andresearch and development opportunities. In addition, we are aware that other companies are developing or alreadyhave developed proprietary systems for the treatment of cardiac arrhythmias,and specifically AF, that may be safer, clinically more effective, easier andmore cost effective to use and, in the case of percutaneous devices, lessinvasive than the system we are developing.

 

***We must receive and maintain governmentclearances or approvals in order to market our products***

 

Our products and our manufacturing activities are subject to extensive,rigorous and changing federal and state regulation in the U.S. and to similarregulatory requirements in other major international markets, including theEuropean Union and Japan.  Theseregulations and regulatory requirements are broad in scope and govern, amongother things:

 

•                  product design and development;

•                  product testing;

•                  product labeling;

•                  product storage;

•                  premarket clearance and approval;

•                  advertising and promotion; and

•                  product sales and distribution.

 

Furthermore, regulatoryauthorities subject a marketed product, its manufacturer and the manufacturingfacilities to continual review and periodic inspections.  We will be subject to ongoing FDArequirements, including required submissions of safety and other post-marketinformation and reports, registration requirements, Quality Systemsregulations, and recordkeeping requirements. The FDA’s Quality Systems regulations include requirements relating toquality control and quality assurance, as well as the corresponding maintenanceof records and documentation.  Edwards,our distributor, depending on its activities, is also subject to certainrequirements under the Federal Food, Drug, and Cosmetic Act and the regulationspromulgated thereunder, and state laws andregistration requirements covering the distribution of our products.  Regulatory agencies may change existingrequirements or adopt new requirements

 

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or policies that could affect ourregulatory responsibilities or the regulatory responsibilities of a distributorlike Edwards.  We may be slow to adapt ormay not be able to adapt to these changes or new requirements.

 

Later discovery ofpreviously unknown problems with our products, manufacturing processes, or ourfailure to comply with applicable regulatory requirements may result inenforcement actions by the FDA and other international regulatory authorities,including, but not limited to:

 

•                  warning letters;

•                  patient or physician notification;

•                  restrictions on our products or manufacturing processes;

•                  voluntary or mandatory recalls;

•                  product seizures;

•                  refusal to approve pending applications orsupplements to approved applications that we submit;

•                  refusal to permit the import or export of ourproducts;

•                  fines;

•                  injunctions;

•                  suspension or withdrawal of marketing approvals orclearances; and

•                  civil and criminal penalties.

 

Should any of theseenforcement actions occur, our business, financial condition and results ofoperations could be materially and adversely affected.

 

To date, we have receivedthe following regulatory approvals for our products:

 

***Heart Laser Systems***

 

*United States —*We received FDA approval to market the HL1 Heart Laser System in August1998 and the HL2 Heart Laser System in January 2001.  However, although we have received FDAapproval, the FDA:

 

•                  has restricted the use of the Heart LaserSystems by not allowing us to market these products to treat patients whosecondition is amenable to conventional treatments, such as heart bypass surgery,stenting and angioplasty; and

 

•                  could impose additional restrictions orreverse its ruling and prohibit use of the Heart Laser Systems at any time.

 

*Europe —*Although we have the ability to market our Heart Laser System in theEuropean Union, individual members of the European Union could prohibit, andFrance has prohibited, commercial use of the Heart Laser Systems.

 

We received the CE Mark fromthe European Union for the HL1 and HL2 in March 1995 and February 2001,respectively.  However:

 

•                  the European Union could impose additionalrestrictions or reverse its ruling and prohibit use of the Heart Laser Systemsat any time; and

 

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•                  other European Union countries could prohibit orrestrict use of the Heart Laser Systems.

 

*Japan —*We cannot market our product in Japan until we receive governmentapproval.

 

We believe that Japan represents the largest potential market for theHeart Laser Systems in Asia.  Prior tomarketing the Heart Laser Systems in Japan, we must receive approval from theJapanese government.  This approvalrequires a clinical study in Japan with at least 60 patients.  A study was completed in 1998 with the HL1.Although the results of this study have been submitted to the Japanesegovernment, we do not know whether the clinical study will be sufficient orwhen, if ever, we will receive approval to sell the HL1 in Japan.  In addition, it is unclear what impact theintroduction of the HL2 into the U.S. and other international markets will haveon our ability to market the HL1 in Japan.

 

***Optimaze System***

 

*United States —*The FDA has givenclearance to the Optimaze System through the 510(k) premarket notificationprocess with indications for use as a surgical instrument for coagulation ofsoft tissue, including cardiac tissue, in conjunction with or withoutendoscopic equipment in the contact or non contact mode in open or closedsurgical procedures.

 

Although we have received clearance from the FDA only forthe indications of use stated above, physicians, under the practice of medicineexception, may use the Optimaze System in any manner they choose in treating anindividual patient, including using the device to treat patients with AF.  However, neither we nor Edwards haveconducted any clinical trials designed to obtain data to submit to the FDA forthe purpose of obtaining a specific indication for use of the Optimaze Systemthat would allow us to make claims or otherwise market this device for thetreatment of AF. We are aware of at least one company which has indicated theyhave submitted data to the FDA in support of a labeling claim that, ifclearance is obtained, would allow them to market their device for thetreatment of AF.

 

In the event this company or other competitors aresuccessful in obtaining specific indications of use for their devices in thetreatment of AF, our cardiac ablation products and specifically the OptimazeSystem may be at a competitive marketing disadvantage until such time, if ever,that Edwards conducts a clinical trial, submits sufficient data to the FDA bymeans of a new 510(k) and obtains clearance to market the Optimaze System forthe treatment of AF. We cannot provide any assurance that Edwards will everconduct such a clinical trial or, if they do, that the data they obtain andsubmit to the FDA will be sufficient for the FDA to expand the currentindications of use and provide clearance for the Optimaze System to be marketedfor the treatment of AF. Also, we cannot assure you that even if such clearanceis obtained, that it will be obtained in a timely enough fashion for ourproducts to remain competitive in the marketplace.

 

*Europe —*The Optimaze System cannot be marketed in the EUuntil such time as it receives CE Mark approval. We need to complete and submitthe relevant technical documentation to the appropriate certifying body inorder to be able to apply the CE Mark that, if granted, will enable the productto be distributed in the EU.

 

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***Changes in third party reimbursement forour TMR procedure could materially affect future demand for our TMR products***

 

Currently, Medicare and Blue Cross Blue Shield provide coverage for TMRwhen it is performed as both a sole therapy treatment and when used as anadjunct to bypass surgery. Certain other private insurance companies andhealth maintenance organizations also currently provide reimbursement for theseTMR procedures performed with our products and physician reimbursement codes have been established for both surgicalprocedures; however, we have limited data as to the breadth of this coveragefor the TMR procedures by private insurance companies and health maintenanceorganizations. Should third party insurance reimbursement for our TMRproducts be reduced or eliminated in the future, our business, financialcondition and results of operations would be materially and adversely affected.

 

In July 2004, the Centers for Medicare and MedicaidServices (CMS) convened the Medicare Coverage Advisory Committee (MCAC) toreview and discuss the evidence and clinical data regarding TMR. The MCAC is anadvisory panel consisting of clinicians and other medical experts which CMSutilizes to supplement their own internal expertise. Although the MCAC was notconvened for the purpose of making a reimbursement coverage recommendation, webelieve CMS is likely to review the information presented at the MCAC meetingand decide among the following options: (1) continue existing Medicare coveragefor TMR without any modification, (2) issue new guidelines clarifying thepatient criteria for Medicare reimbursement, (3) reduce or modify the existingreimbursement coverage for TMR, (4) eliminate reimbursement coverage for TMRaltogether, or (5) request additional clinical studies to be performed.  We believe the most likely course of actionCMS will take is to issue new guidelines clarifying the patient criteria for Medicarereimbursement of TMR and request additional clinical studies to be performed.However, no assurance can be given that CMS will choose this course of actionor not adopt another outcome.

 

***Asserting and defending intellectualproperty rights may impact our results of operations***

 

In our industry, competitors often assert intellectual propertyinfringement claims against one another. The success of our business depends on our ability to successfullydefend our intellectual property.  Futurelitigation may have a material impact on our financial condition even if we aresuccessful in marketing our products. We may not be successful in defending orasserting our intellectual property rights.

 

An adverse outcome in any litigation or interference proceeding couldsubject us to significant liabilities to third parties and require us to ceaseusing the technology that is at issue or to license the technology from thirdparties.  In addition, a finding that anyof our intellectual property is invalid could allow our competitors to moreeasily and cost-effectively compete with us. Thus, an unfavorable outcome in any patent litigation or interferenceproceeding could have a material adverse effect on our business, financialcondition or results of operations.

 

The cost to us of any patentlitigation or interference proceeding could be substantial.  Uncertainties resulting from the initiationand continuation of patent litigation or interference proceedings could have amaterial adverse effect on our ability to compete in the marketplace.  Patent litigation and interferenceproceedings may also absorb significant management time.

 

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***We may be subject to product liabilitylawsuits; our insurance may not be sufficient to cover damages***

 

We may be subject to product liability claims.  The United States Supreme Court has statedthat compliance with FDA regulations will not shield a company from common lawnegligent design claims or manufacturing and labeling claims based on staterules.  Such claims may absorb significantmanagement time and could degrade our reputation and the marketability of ourproducts.  If product liability claimsare made with respect to our products, we may need to recall the implicatedproduct which could have a material adverse effect on our business, financialcondition and results of operations. In addition, although we maintain productliability insurance, we cannot be sure that our insurance will be adequate tocover potential product liability lawsuits. Our insurance is expensive and inthe future may not be available on acceptable terms, if at all. If a successfulproduct liability claim or series of claims exceeds our insurance coverage, itcould have a material adverse effect on our business, financial condition andresults of operations.

 

***We are subject to risks associated withinternational operations***

 

A portion of our product sales are generated from operations outside ofthe U.S.  Establishing, maintaining andexpanding international sales can be expensive. Managing and overseeing foreign operations may be difficult and productsmay not receive market acceptance.  Risksof doing business outside the U.S. include, but are not limited to, thefollowing: agreements may be difficult to enforce and receivables difficult tocollect through a foreign country’s legal system; foreign customers may havelonger payment cycles; foreign countries may impose additional withholdingtaxes or otherwise tax our foreign income, impose tariffs or adopt otherrestrictions on foreign trade; U.S. export licenses may be difficult to obtain;and the protection of intellectual property rights in foreign countries may bemore difficult to enforce.  There can beno assurance that our international business will grow or that any of theforegoing risks will not result in a material adverse effect on our business orresults of operations.

 

***Because we are incorporated in Canada, youmay not be able to enforce judgments against us and our Canadian directors***

 

Under Canadian law, you may not be able to enforce a judgment issued bycourts in the U.S. against us or our Canadian directors. The status of the lawin Canada is unclear as to whether a U.S. citizen can enforce a judgment from aU.S. court in Canada for violations of U.S. securities laws. A separate suit mayneed to be brought directly in Canada.

 

***Our stock price has historically fluctuatedand may continue to fluctuate significantly in the future which may result inlosses for our investors***

 

Our stock price has been and may continue to be volatile. Some of thefactors that can affect our stock price are:

 

•                  the announcement of new products, services ortechnological innovations by us or our competitors;

•                  actual or anticipated quarterly increases ordecreases in revenue, gross margin or earnings, and changes in our business,operations or prospects;

•                  speculation or actual news announcements in the media orindustry trade journals

 

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about our company, our products, the TMR procedureor changes in reimbursement policies by Medicare and/or private insurancecompanies;

•                  announcements relating to strategic relationships ormergers;

•                  conditions or trends in the medical device industry;

•                  changes in the economic performance or marketvaluations of other medical device companies; and

•                  general market conditions or domestic orinternational macroeconomic and geopolitical factors unrelated to ourperformance.

 

***The market price of our stock may fall ifshareholders sell their stock***

 

Certain current shareholders hold large amounts of our stock, whichthey could sell in the public market from time to time.  Sales of a substantial number of shares ofour common stock within a short period of time could cause our stock price tofall.  In addition, the sale of theseshares could impair our ability to raise capital through the sale of additionalstock.

 

***Wehave no intention to pay dividends***

 

We have never paid any cash dividends on our common stock. We currentlyintend to retain all future earnings, if any, for use in our business and donot expect to pay any dividends in the foreseeable future.

 

**Item3.****                     Quantitativeand Qualitative Disclosures about Market Risk**

 

A portion of our operations consists of salesactivities in foreign jurisdictions.  Wemanufacture our products exclusively in the U.S. and sell our products in theU.S. and abroad. As a result, our financial results could be affected byfactors such as changes in foreign currency exchange rates or weak economicconditions in the foreign markets in which we distribute our products.  Our operating results are exposed to changesin exchange rates between the U.S. dollar and foreign currencies, especiallythe Swiss Franc and the Euro. When the U.S. dollarstrengthens against the Franc or Euro, the value of foreign sales decreases.When the U.S. dollar weakens, the functional currency amountof sales increases. No assurance can be given that foreign currencyfluctuations in the future may not adversely affect our business, financialcondition and results of operations, although at the present we do not believethat our exposure is significant.

 

The Company does not hedge any balance sheet exposuresand intercompany balances against future movements in foreign exchangerates.  We do not believe that a 10%change to the applicable exchange rates would have a material impact on ourfuture results of operations or cash flows. However, the Company’s sensitivity analysis of the effects of changes inforeign currency exchange rates in such magnitude does not factor in apotential change in sales levels or local prices for its products as a resultof the currency fluctuations or otherwise.

 

Our interest income is sensitive to changes in thegeneral level of U.S. and foreign interest rates. In this regard, changes inU.S. and foreign interest rates affect the interest earned on our cash and cashequivalents.  We do not believe that a10% change to interest rates would have a material impact on our future resultsof operations or cash flows.

 

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**Item 4.****                     Controlsand Procedures**

 

Our management, with the participation of our ChiefExecutive Officer, or CEO, and Chief Financial Officer, or CFO, evaluated theeffectiveness of our disclosure controls and procedures (as defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of June 30, 2004.Based on this evaluation, our CEO and CFO concluded that, as of June 30, 2004,our disclosure controls and procedures were (1) designed to ensure thatmaterial information relating to us, including our consolidated subsidiaries,is made known to our CEO and CFO by others within those entities, particularlyduring the period in which this report was being prepared and (2) effective, inthat they provide reasonable assurance that information required to bedisclosed by us in the reports that we file or submit under the SecuritiesExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules and forms.

 

No change in our internalcontrol over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)under the Securities Exchange Act) occurred during the fiscal quarter endedJune 30, 2004 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

# **Part II.  Other Information**

 

**Item 4.****                     Submissionof Matters to a Vote of Security Holders**

 

On May 19, 2004, the Company held its 2004 AnnualMeeting of Shareholders (the “Shareholders Meeting”).  At the Shareholders Meeting, the followingmatters were approved by the vote specified below:

 

1.                                       DonaldE. Bobo, Jr., Edward H. Pendergast, Robert I. Rudko, Ph.D. and Mark R. Tauscherwere elected as Class I directors and will hold office until the annual meetingof shareholders in 2007 or until their successors are duly elected andqualified.  Mr. Pendergast wassubsequently reclassified as a Class II director and will hold office until theannual meeting of shareholders in 2006 or until his successor is duly electedand qualified.   Mr. Bobo received27,849,299 shares of common stock voting in favor of his election and 370,072shares of common stock were withheld. Mr. Pendergast received 27,848,540 shares of common stock voting infavor of his election and 370,831 shares of common stock were withheld.  Dr. Rudko received 27,816,208 shares ofcommon stock voting in favor of his election and 403,163 shares of common stockwere withheld.  Mr. Tauscher received27,827,737 shares of common stock voting in favor of his election and 391,634shares of common stock were withheld.  Inaddition, the terms of the following other directors continued after theShareholders Meeting:  Kevin J. Dunn,H.B. Brent Norton, M.D., Benjamin L. Holmes and Alan H. Magazine.

 

2.                                       Theratification of the appointment of Ernst & Young LLP as the Company’sindependent auditors for the year ending December 31, 2004 was approved.  The votes were cast as follows: 28,025,894shares of common stock were voted for the ratification, 147,044 shares ofcommon stock were voted against the ratification and 46,434 shares of commonstock abstained from the vote.

 

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**Item 6.****                     Exhibitsand Reports on Form 8-K**

 

a)                                      Exhibits

 
| 10.1   | Form of Stock Option Grant Letter to Employees of  the Registrant under the Registrant’s 1995 Stock Option Plan, 1997 Executive  Stock Option Plan, 2000 Equity Incentive Plan and 2000 Non-Qualified  Performance and Retention Plan. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                        |
| 31.1   | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                       |
|   |                                                                                                                                                                                                                                        |
| 31.2   | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                       |
|   |                                                                                                                                                                                                                                        |
| 32.1   | Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                    |

 

b)                                     Reportson Form 8-K

 

None.

 

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** **

**SIGNATURES**

 

**Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.**

 
|   |            | PLC SYSTEMS INC. |
|--------|-----------------|------------------|
|   |            |             |   |
| Date:  | August 11, 2004 | By:              | /s/ James G. Thomasch |   |
|   |            |             | James G. Thomasch |
|   |            |             | Chief Financial Officer |
|   |            |             | (Principal Financial Officer and Chief Accounting  Officer) |

 

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** **

**EXHIBIT INDEX**

 
| **Exhibit**Number | ** ** | **Description  of Document**                                                                                                                                                                                                                |
|-------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |       |                                                                                                                                                                                                                                        |
| 10.1              |       | Form of Stock Option Grant  Letter to Employees of the Registrant under the Registrant’s 1995 Stock  Option Plan, 1997 Executive Stock Option Plan, 2000 Equity Incentive Plan and  2000 Non-Qualified Performance and Retention Plan. |
|              |       |                                                                                                                                                                                                                                        |
| 31.1              |       | Certification of Chief  Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities  Exchange Act of 1934, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                           |
|              |       |                                                                                                                                                                                                                                        |
| 31.2              |       | Certification of Chief Financial  Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange  Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                           |
|              |       |                                                                                                                                                                                                                                        |
| 32.1              |       | Certification pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                   |

 

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