SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED COMMISSION FILE NUMBER
June 30, 2005 0-10581
----------------- -------
TRIMEDYNE, INC.
(Exact name of Registrant as specified in its charter)
Nevada 36-3094439
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
15091 Bake Parkway, Irvine, CA 92618
(Address of principal executive offices) (Zip Code)
(949/951-3800)
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal
year, if changed since last report).
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [_]
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the last practicable date.
Class Outstanding at August 15, 2005
---------------------------- ------------------------------------
Common Stock, $.01 par value 14,602,931 shares
ITEM 1.
TRIMEDYNE, INC.
Page Number
-----------
PART I. Financial Information 3
ITEM 1. Financial Statements (Unaudited) 3
Consolidated Balance Sheet 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
ITEM 3. Controls and Procedures 17
PART II. Other Information 18
SIGNATURE PAGE 19
CERTIFICATIONS 20
2
TRIMEDYNE, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
ASSETS
June 30,
2005
------------
Current assets:
Cash and cash equivalents $ 1,517,000
Trade accounts receivable, net of allowance for doubtful
accounts of $86,000 801,000
Inventories 2,210,000
Other 122,000
------------
Total current assets 4,650,000
Property and equipment, net 386,000
Goodwill 544,000
Other assets 90,000
------------
$ 5,670,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 472,000
Accrued expenses 456,000
Deferred revenue 49,000
Accrued warranty 54,000
Income tax payable 14,000
Notes payable and current portion of long-term debt 70,000
------------
Total current liabilities 1,115,000
Senior convertible secured notes due to officer 200,000
Accrued interest due officer 80,000
Long-term debt, net of current portion 5,000
------------
Total liabilities 1,400,000
------------
Commitments and contigencies
Stockholders' equity:
Preferred stock - $0.01 par value, 1,000,000 shares
authorized, none issued and outstanding --
Common stock - $0.01 par value; 30,000,000 shares
authorized, 14,704,540 shares issued, 14,602,931
shares outstanding 148,000
Capital in excess of par value 47,945,000
Accumulated deficit (43,110,000)
------------
4,983,000
Treasury stock, at cost (101,609 shares) (713,000)
------------
Total stockholders' equity 4,270,000
------------
$ 5,670,000
============
See accompanying notes to consolidated financial statements
3
TRIMEDYNE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
June 30, June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net revenues $ 1,552,000 $ 1,696,000 $ 4,783,000 $ 4,350,000
Cost of revenues 918,000 864,000 2,535,000 2,232,000
------------ ------------ ------------ ------------
Gross profit 634,000 832,000 2,248,000 2,118,000
Operating expenses:
Selling, general and administrative 657,000 578,000 1,912,000 1,685,000
Research and development 180,000 84,000 457,000 245,000
------------ ------------ ------------ ------------
Total operating expenses 837,000 662,000 2,369,000 1,930,000
------------ ------------ ------------ ------------
Income (loss) from operations (203,000) 170,000 (121,000) 188,000
Other income, net 54,000 13,000 125,000 313,000
------------ ------------ ------------ ------------
Income (loss) before income taxes (149,000) 183,000 4,000 501,000
Provision for income taxes 4,000 25,000 8,000 29,000
------------ ------------ ------------ ------------
Net income (loss) $ (153,000) $ 158,000 $ (4,000) $ 472,000
============ ============ ============ ===========
Net income (loss)per share:
Basic $ (0.01) $ 0.01 $ -- $ 0.03
============ ============ ============ ============
Diluted $ (0.01) $ 0.01 $ -- $ 0.03
============ ============ ============ ============
Weighted average number of
shares outstanding:
Basic 14,602,931 14,597,876 14,602,931 14,548,428
============ ============ ============ ============
Diluted 14,602,931 15,493,036 14,602,931 15,478,849
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
4
TRIMEDYNE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
June 30,
2005 2004
----------- ----------
Cash flows from operating activities:
Net income (loss) $ (4,000) $ 472,000
Adjustment to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 105,000 189,000
Loss on disposal of property and equipment 3,000 5,000
Changes in operating assets and liabilities:
Accounts receivable (8,000) (457,000)
Inventories (246,000) (126,000)
Other assets 17,000 53,000
Accounts payable 75,000 4,000
Accrued expenses (57,000) (77,000)
Deferred revenue (2,000) 15,000
Accrued warranty 10,000 (4,000)
Accrued interest due to officer 18,000 18,000
Income tax payable (5,000) 14,000
----------- -----------
Net cash provided by (used in) operating activities (94,000) 106,000
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (75,000) (83,000)
----------- -----------
Net cash used in investing activities (75,000) (83,000)
----------- -----------
Cash from financing activities:
Exercise of stock options -- 70,000
Issuance of notes payable 110,000 --
Payments on debt (107,000) (116,000)
----------- -----------
Net cash provided by (used in) financing activities 3,000 (46,000)
----------- -----------
Net decrease in cash and cash equivalents (166,000) (23,000)
Cash and cash equivalents at beginning of period 1,683,000 1,346,000
----------- -----------
Cash and cash equivalents at end of period $ 1,517,000 $ 1,323,000
=========== ===========
Cash paid for interest and income taxes was insignificant in 2005 and 2004.
See accompanying notes to consolidated financial statements
5
TRIMEDYNE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 and 2004
(UNAUDITED)
NOTE 1 - Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Trimedyne, Inc., its wholly owned subsidiary, Mobile Surgical Technologies, Inc.
("MST"), and its 90% owned subsidiary, Cardiodyne, Inc. ("Cardiodyne")
(collectively, the "Company"). All intercompany accounts and transactions have
been eliminated in consolidation.
Unaudited Interim Financial Information
In the opinion of management, the accompanying condensed consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the Company's consolidated financial
position as of June 30, 2005 and the results of its operations and its cash
flows for the three months and nine months ended June 30, 2005 and 2004. Results
for the nine months ended June 30, 2005 are not necessarily indicative of the
results to be expected for the year ending September 30, 2005.
While management believes that the disclosures presented are adequate to make
the information not misleading, it is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and the notes included in the Company's 2005 Annual Report on Form
10-KSB.
Accounts Receivable
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral. The Company maintains reserves for potential credit
losses and such losses have been within management's expectation.
Revenue Recognition
In accordance with Staff Accounting Bulletin 104, "Revenue Recognition," the
Company recognizes revenue from products sold once all of the following criteria
for revenue recognition have been met: (i) persuasive evidence that an
arrangement exists, (ii) the products have been shipped, (iii) the prices are
fixed and determinable and not subject to refund or adjustment, and (iv)
collection of the amounts due is reasonably assured.
Revenues from the sale of delivery and disposable devices are recognized upon
shipment and passage of title of the products, provided that all other revenue
recognition criteria have been met. Generally, customers are required to insure
the goods from the Company's place of business. Accordingly, the risk of loss
transfers to the customer once the goods have been shipped from the Company's
warehouse. The Company sells its products primarily through commission sales
representatives in the United States and distributors in foreign countries. In
cases where the Company utilizes distributors, it recognizes revenue upon
shipment, provided that all other revenue recognition criteria have been met,
and ownership risk has transferred. Revenues from the rental of equipment is
recognized over the rental period. Revenues from service contracts are
recognized monthly throughout the term of the service agreement.
Goodwill
Goodwill represents the excess of the cost over the acquired assets of MST. On
October 1, 2002, the Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets."
As a result of adopting SFAS No. 142, the Company's goodwill is no longer
amortized, but is subject to an annual impairment test, or whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. There was no impairment of goodwill at June 30, 2005.
6
Impairment of Long-Lived Assets
SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets",
requires that long-lived assets, such as property and equipment and purchased
intangibles subject to amortization, be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of the asset is measured by comparison of its
carrying amount to undiscounted future net cash flows the asset is expected to
generate. If such assets are considered to be impaired, the impairment to be
recognized is measured as the amount by which the carrying amount of the asset
exceeds its fair market value. Estimates of expected future cash flows represent
management's best estimate based on currently available information and
reasonable and supportable assumptions. Any impairment recognized in accordance
with SFAS 144 is permanent and may not be restored. To date, the Company has not
recognized any impairment of long-lived assets in connection with SFAS 144.
Stock Option Plans
SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure,"
prescribes accounting and reporting standards for all stock-based compensation
plans, including employee stock option plans. As allowed by SFAS No. 123, the
Company has elected to continue to account for its employee stock-based
compensation plan using the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations, which does not require compensation to
be recorded if the consideration to be received is at least equal to the fair
value of the common stock to be received at the measurement date. Under the
requirements of SFAS No. 123, non-employee stock-based transactions require
compensation to be recorded based on the fair value of the securities issued or
the services received, whichever is more reliably measurable.
The following table illustrates the effect on net income (loss) and net income
(loss) per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation:
Three months ended Nine months ended
June 30, June 30,
2005 2004 2005 2004
--------- --------- --------- ---------
Net income (loss), as reported $(153,000) $ 158,000 $ (4,000) $ 472,000
Deduct: total stock-based employee compensation
expense determined under fair value based method
for awards, net of related tax effects (61,000) (29,000) (99,000) (39,000)
--------- --------- --------- ---------
Pro forma net income (loss) $(214,000) $ 129,000 $(103,000) $ 433,000
========= ========= ========= =========
Net income (loss) per share - basic:
As reported $ (0.01) $ 0.01 $ -- $ 0.03
========= ========= ========= =========
Pro forma $ (0.01) $ 0.01 $ (0.01) $ 0.03
========= ========= ========= =========
Net income (loss) per share - diluted:
As reported $ (0.01) $ 0.01 $ -- $ 0.03
========= ========= ========= =========
Pro forma $ (0.01) $ 0.01 $ (0.01) $ 0.03
========= ========= ========= =========
7
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
Three months ended Nine months ended
June 30, June 30,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Dividend yield -- -- -- --
Expected volatility 80% 80% 80% 80%
Risk-free interest rate 3.47% 2.11% 3.47% 2.11%
Expected lives 5 years 5 years 5 years 5 years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility and time
to exercise. Because awards held by employees and directors have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
the opinion of management, the existing models do not necessarily provide a
reliable single measure of the fair value of these options.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant estimates and assumptions include inventory valuation, allowances
for doubtful accounts and deferred income tax assets, recoverability of goodwill
and long-lived assets, losses for contingencies and certain accrued liabilities.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, accrued expenses, notes
payable and long-term debt, and two senior convertible secured notes due to the
Chief Executive Officer. The carrying amounts of the Company's financial
instruments generally approximate their fair values as of June 30, 2005 because
of the short maturity of these instruments. Senior convertible secured notes due
to officer cannot be objectively and fairly valued due to the related party
nature of the instrument.
Warranty Costs
The Company provides warranties for certain products and maintains warranty
reserves for estimated product warranty costs at the time of sale. At June 30,
2005, the Company has accrued $54,000 for estimated future warranty costs.
Warranty activity for the periods presented was not significant.
Research and Development Costs
All research and development costs, including licensing costs, are charged to
expense as incurred. In accordance with this policy, all costs associated with
the design, development and testing of the Company's products have been expensed
as incurred.
Related Party Transactions
During the second quarter ended March 31, 2005, a member of the board of
directors was engaged as a consultant to MST, Inc. to faciliate increases to
administrative efficiency. The Company recorded $31,000 and $52,000 in
consulting expenses associated with the arrangement which was included in
adminstrative expense for the three and nine months periods ended June 30, 2005,
respectively. The consulting services are not expected to be extended beyond a
one year period.
Recently Issued Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151 "Inventory Costs, an amendment of
ARB No. 43, Chapter 4." The amendments made by Statement 151 clarify that
abnormal amounts of facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current-period charges and require
the allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. The guidance is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after November 23, 2004. The Company is in the process of evaluating
whether the adoption of SFAS No. 151 will have a significant impact on the
Company's overall results of operations or financial position.
8
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment." SFAS No. 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. SFAS No. 123(R) covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. SFAS No. 123(R) replaces SFAS No. 123, and
supersedes APB Opinion No. 25. SFAS No. 123, as originally issued in 1995,
established as preferrable a fair-value-based method of accounting for
share-based payment transactions with employees. However, SFAS No. 123 permitted
entities the option of continuing to apply the guidance in Opinion 25, as long
as the footnotes to financial statements disclosed what net income would have
been had the preferable fair-value-based method been used. The Company will be
required to apply SFAS No. 123(R) in fiscal 2007.The Company is in the process
of evaluating whether the adoption of SFAS No. 123(R) will have a significant
impact on the Company's overall results of operations or financial position.
NOTE 2 - Balance Sheet Items
June 30,
2005
-----------
Inventories consist of the following:
Raw material $ 929,000
Work-in-process 570,000
Finished goods 995,000
-----------
2,494,000
Less inventory reserve (284,000)
-----------
$ 2,210,000
===========
Other current assets consist of the following:
Prepaid insurance $ 108,000
Other 14,000
-----------
Total other current assets $ 122,000
===========
Property and equipment consist of the following:
Furniture and equipment $ 2,458,000
Leasehold improvements 214,000
Other 233,000
-----------
2,905,000
Less accumulated depreciation and amortization (2,519,000)
-----------
Total property and equipment, net $ 386,000
===========
Accrued expenses consist of the following:
Loss contingency $ 36,000
Accrued salaries and wages 32,000
Accrued vacation 113,000
Accrued compensation 18,000
Sales and use tax 38,000
Customer deposits 133,000
Accrued professional expenses 56,000
Accrued commissions 20,000
Accrued payroll taxes 3,000
Other 7,000
-----------
Total accrued expenses $ 456,000
===========
9
NOTE 3 - Notes Payable and Long-Term Debt
Loan payable to leasing company, bearing interest at 8% per
annum; principal and interest due monthly in equal
installments of $211 through May 2008. The loan is secured by
the related forklift. $ 7,000
Notes payable to finance company, issued in conection with
financing certain insurance policies. The notes bear interest
at 5.98% per annum and require monthly principal and interest
payments of $9,732 through January 2006. 68,000
------------
$ 75,000
Less: current portion (70,000)
-----------
$ 5,000
===========
NOTE 4 - Convertible Notes Due to Officer
At June 30, 2005, the Company had two outstanding
senior convertible notes due to its chief executive
officer. These notes mature, with interest at 12% per
annum, in February and April 2007, and are convertible
at prices of $0.40 and $0.50 per share. These
convertible notes are secured by substantially all of
the Company's assets. $ 200,000
===========
Accrued interest on these notes was $80,000 at June 30, 2005.
NOTE 5 - Income (Loss) Per Share Information
Basic income (loss) per share is based on the weighted-average number of shares
of common stock outstanding during the period. Diluted income per share also
includes the effect of stock options and other common stock equivalents
outstanding during the period, and assumes the conversion of the Company's
senior convertible secured notes due to officer for the period of time such
notes were outstanding, if such stock options and convertible notes are
dilutive.
The following table sets forth the computation of the numerator and denominator
of basic and diluted income (loss) per share:
Three months ended Nine months ended
June 30, June 30,
-------------------------- --------------------------
2005 2004 2005 2004
---------- ---------- ------------ -----------
Denominator
Weighted average common shares outstanding
used in calculating basic earnings per share 14,602,931 14,597,876 14,602,931 14,548,428
Effect of dilutive options *(1) 287,660 *(2) 322,921
Effect of senior convertible secured
notes due to officer and accrued interest *(1) 607,500 *(2) 607,500
---------- ---------- ---------- ----------
Weighted average common shares outstanding
used in calculating diluted earnings per share 14,602,931 15,493,036 14,602,931 15,478,849
========== ========== ========== ==========
Numerator
Net income (loss) $ (153,000) $ 158,000 $ (4,000) $ 472,000
Add - interest on senior convertible
secured notes due to officer *(1) 6,000 *(2) 18,000
----------- ----------- ---------- ----------
Net income (loss) available to common stockholders $ (153,000) $ 164,000 $ (4,000) $ 490,000
=========== =========== ========== ===========
(1) The effects are anti-dilutive, and therefore, they are not considered in the
calculation of diluted income (loss) per share. Note: had the effect of the
dilutive options and convertible debt outstanding been added to the diluted
weighted-average common shares outstanding, the diluted common shares
outstanding would have been 703,579 greater.
(2) The effects are anti-dilutive, and therefore, they are not considered in the
calculation of diluted income (loss) per share. Note: had the effect of the
dilutive options and convertible debt outstanding been added to the diluted
weighted-average common shares outstanding, the diluted common shares
outstanding would have been 717,829 greater.
10
NOTE 6 - Contingencies:
Litigation
On November 17, 2003, the Company and Lumenis entered into a settlement
agreement (the "Settlement Agreement"), under which the court dismissed the
litigation between them. The Settlement Agreement also provided that Lumenis
would apply a credit to royalties due by the Company under the License
Agreement, which the Company had accrued, and pay the Company $5,000 for the
remaining overpayment of royalties due under the License Agreement. The
Settlement Agreement also provided that the Company and Lumenis would enter into
an original equipment manufacture ("OEM") agreement whereby Lumenis would pay
the Company a technology access fee of $150,000 and purchase from the Company
certain side-firing and angled-firing fiber optic devices, which Lumenis will
market with its lasers, plus an amount equal to 7.5% of Lumenis' sales of
side-firing and angled-firing devices manufactured by Lumenis or purchased by
Lumenis from third-party suppliers. The above technology fee and royalties were
received during the fiscal year ended September 30, 2004 and royalties are
currently being received per the above agreement and included in other income
for the current three and nine month periods ended June 30, 2005 (see Note 7).
Product liability
The Company is currently a defendant in one product liability lawsuit. This case
relates to injuries that occurred in connection with medical procedures in which
the Company's laser was used. The Company has insurance to cover product
liability claims. This insurance provides the Company with $5,000,000 of
coverage for each occurrence with a general aggregate of $5,000,000. Trimedyne's
liability is limited to a maximum of $50,000 per occurrence unless the judgment
against the Company exceeds the insurance coverage. Trimedyne would be liable
for any judgement in excess of $5,000,000. At June 30, 2005, the Company accrued
$50,000 as a loss contigency on this claim, based on the deductible under the
insurance policy, of which $14,000 was paid in attorney fees as of June 30,
2005.
In the ordinary course of business, the Company is from time to time involved in
various pending or threatened legal actions. The litigation process is
inherently uncertain and it is possible that the resolution of such matters
might have a material adverse effect upon the financial condition and/or results
of operations of the Company. However, in the opinion of the Company's
management, matters currently pending or threatened against the Company, as
discussed above, are not expected to have a material adverse effect on the
financial position, results of operations or cash flows of the Company.
Licensing
The Company has license agreements with a number of universities and inventors,
under which royalties on sales, if any, are payable. Sales of products covered
by these licenses are presently not material. The Company has one license
agreement with a competitor under which royalties have been waived. Patent
applications have been filed with the U.S. Patent Office and U.S. Patents
covering certain of the Company's products have been issued to officers and
employees of the Company and have been assigned to the Company without royalty.
The above patent applications are currently being processed by the U.S. Patent
Office and, to the Company's knowledge, are proceeding in the normal course of
review.
Guarantees and Indemnities
The Company has made certain indemnities and guarantees, under which it may be
required to make payments to a guaranteed or indemnified party. The Company
indemnifies its directors, officers, employees and agents to the maximum extent
permitted under the laws of the State of California. In connection with its
facility leases, the Company has indemnified its lessors for certain claims
arising from the use of the facilities. The duration of the guarantees and
indemnities varies, and in many cases is indefinite. These guarantees and
indemnities do not provide for any limitation of the maximum potential future
payments the Company could be obligated to make. Historically, the Company has
not been obligated to make any payments for these obligations and no liabilities
have been recorded for these indemnities and guarantees in the accompanying
consolidated balance sheet.
11
NOTE 7 - Other Income
During the nine months ended June 30, 2005, the Company received $133,000 in
royalties in connection with the terms of the above Settlement Agreement (see
Note 6), which is included in other income for the nine month period ended June
30, 2005.
During the nine months ended June 30, 2004, the Company settled litigation with
Lumenis which resulted in a reduction of $88,000 previously accrued for
royalties. In January and March 2004, the Company received $155,000 in
technology fees and $26,000 in royalties, respectively, in connection with the
terms of the above settlement, which is included in other income for the nine
month period ended June 30, 2004 (see Note 6). The Company also received $53,000
from an insurance settlement for a damaged laser.
NOTE 8 Segment Information
The Company's revenue base is derived from the sales of medical products and
services. Products consist of lasers, and related products such as disposable
systems and component parts. Services consist of rentals, fees on a per-case
basis, as well as service and warranty repairs and maintenance. Data with
respect to these operating activities for the three and nine months
ended June 30, 2005 and June 30, 2004 are as follows (unaudited):
For the quarter ended June 30, 2005 For the quarter ended June 30, 2004
Service and Service and
Products Rental Total Products Rental Total
---------------------------------------- ----------------------------------------
Net revenues $ 1,194,000 $ 358,000 $ 1,552,000 $ 1,294,000 $ 402,000 $ 1,696,000
Cost of revenues 649,000 269,000 918,000 634,000 230,000 864,000
---------------------------------------- ---------------------------------------
Gross profit 545,000 89,000 634,000 660,000 172,000 832,000
Operating expenses:
Selling, general and
administrative 533,000 124,000 657,000 452,000 126,000 578,000
Research and development 180,000 -- 180,000 84,000 -- 84,000
---------------------------------------- ---------------------------------------
(Loss) income from operations $ (168,000) $ (35,000) (203,000) $ 124,000 $ 46,000 170,000
========================== =========================
Other income (expense):
Interest income 4,000 2,000
Interest expense (9,000) (8,000)
Royalty income 52,000 19,000
Settlements and recoveries 7,000 --
Income taxes (4,000) (25,000)
------------ ----------
Net (loss) income $ (153,000) $ 158,000
============ ==========
For the nine months ended June 30, 2005 For the nine months ended June 30, 2004
Service and Service and
Products Rental Total Products Rental Total
---------------------------------------- ----------------------------------------
Net revenues $ 3,615,000 $ 1,168,000 $ 4,783,000 $ 3,096,000 $ 1,254,000 $ 4,350,000
Cost of revenues 1,704,000 831,000 2,535,000 1,488,000 744,000 2,232,000
---------------------------------------- ----------------------------------------
Gross profit 1,911,000 337,000 2,248,000 1,608,000 510,000 2,118,000
Operating expenses:
Selling, general and
administrative 1,524,000 388,000 1,912,000 1,256,000 429,000 1,685,000
Research and development 457,000 -- 457,000 245,000 -- 245,000
---------------------------------------- ----------------------------------------
(Loss) income from operations $ (70,000) $ (51,000) (121,000) $ 107,000 $ 81,000 188,000
========================== =========================
Other income (expense):
Interest income 11,000 4,000
Interest expense (24,000) (27,000)
Loss on disposal of equipment (3,000) (5,000)
Royalty income 133,000 45,000
Settlements and recoveries 8,000 296,000
Income taxes (8,000) (29,000)
------------ ----------
Net (loss) income $ (4,000) $ 472,000
============ ==========
12
Sales and gross profit to customers by similar products and services for the
three and nine months ended June 30, 2005 and June 30, 2004 were as follows
(unaudited):
For the three months ended June 30, For the nine months ended June 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
By similar products and services:
Revenues:
Products:
Laser equipment and accessories $ 405,000 $ 406,000 $ 1,241,000 $ 595,000
Delivery and disposable devices 789,000 888,000 2,374,000 2,501,000
Service and rental 358,000 402,000 1,168,000 1,254,000
---------- ---------- ------------ -----------
Total $1,552,000 $1,696,000 $ 4,783,000 $ 4,350,000
========== ========== ============ ===========
Gross profit
Products:
Laser equipment and accessories $ 95,000 $ 155,000 $ 380,000 $ 200,000
Delivery and disposable devices 450,000 505,000 1,531,000 1,408,000
Service and rental 89,000 172,000 337,000 510,000
---------- ---------- ------------ -----------
Total $ 634,000 $ 832,000 $ 2,248,000 $ 2,118,000
========== ========== ============ ===========
The Company's revenue base is derived from the sales of medical products and
services on a worldwide basis originating from the United States. Although
discrete components that earn revenues and incur expenses exist, significant
expenses such as research and development and corporate administration are not
incurred by nor allocated to these operating units but rather are employed by
the entire enterprise. Additionally, the chief operating decision maker
evaluates resource allocation not on a product or geographic basis, but rather
on an enterprise-wide basis. Therefore, the Company has concluded that it
contains only one reportable segment, which is the medical systems business.
Sales in foreign countries for the quarters ended June 30, 2005 and June 30,
2004 accounted for approximately 22% and 8% of the Company's total sales,
respectively. Sales in foreign countries for the nine months ended June 30, 2005
and June 30, 2004 accounted for approximately 18% and 10% of the Company's
total sales, respectively. The breakdown by geographic region is as follows:
Three months Three months Nine months Nine months
ended June ended June ended June ended June
30, 2005 30, 2004 30, 2005 30, 2004
------------ ----------- ------------ ------------
Asia $ 299,000 $ 325,000 $ 800,000 $ 497,000
Europe 37,000 131,000 320,000 328,000
Latin America 2,000 5,000 86,000 14,000
Middle East 1,000 5,000 1,000 17,000
Other 25,000 -- 29,000 11,000
------------ ----------- ------------ ------------
$ 364,000 $ 466,000 $ 1,236,000 $ 867,000
============= =========== ============ ============
All long-lived assets were located in the United States during the three and
nine months ended June 30, 2005 and 2004.
13
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
In accordance with Staff Accounting Bulletin 104, "Revenue Recognition," the
Company recognizes revenue from products sold once all of the following criteria
for revenue recognition have been met: (i) persuasive evidence that an
arrangement exists, (ii) the products have been shipped, (iii) the prices are
fixed and determinable and not subject to refund or adjustment, and (iv)
collection of the amounts due is reasonably assured.
Revenues from the sale of delivery and disposable devices are recognized upon
shipment and passage of title of the products, provided that all other revenue
recognition criteria have been met. Generally, customers are required to insure
the goods from the Company's place of business. Accordingly, the risk of loss
transfers to the customer once the goods have been shipped from the Company's
warehouse. The Company sells its products primarily through commission sales
representatives in the United States and distributors in foreign countries. In
cases where the Company utilizes distributors, it recognizes revenue upon
shipment, provided that all other revenue recognition criteria have been met,
and ownership risk has transferred.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of the Company's customers to make required
payments. The allowance for doubtful accounts is based on specific
identification of customer accounts and the Company's best estimate of the
likelihood of potential loss, taking into account such factors as the financial
condition and payment history of major customers. The Company evaluates the
collectibility of its receivables at least quarterly. If the financial condition
of the Company's customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required. The
differences could be material and could significantly impact cash flows from
operating activities.
Goodwill
Goodwill represents the excess of the cost over the acquired assets of MST. On
October 1, 2002, the Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Tangible Assets." As
a result of adoption SFAS No. 142, the Company's goodwill is no longer
amortized, but is subject to an annual impairment test, or whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable.
Deferred Taxes
The Company records a valuation allowance to reduce the deferred tax assets to
the amount that is more likely than not to be realized. The Company has
considered estimated future taxable income and ongoing tax planning strategies
in assessing the amount needed for the valuation allowance. Based on these
estimates, all of the Company's deferred tax assets have been reserved. If
actual results differ favorably from those estimates used, the Company may be
able to realize all or part of the Company's net deferred tax assets. Such
realization could positively impact our operating results and cash flows from
operating activities.
Stock-based Compensation
The Company accounts for its employee stock-based compensation plans under the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
The Company has adopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" - an amendment of FASB
Statement No. 123.
14
RESULTS OF OPERATIONS
The statements contained in this Quarterly Report on Form 10-QSB that are not
historical facts may contain forward-looking statements that involve a number of
known and unknown risks and uncertainties that could cause actual results to
differ materially from those discussed or anticipated by management. Potential
risks and uncertainties include, among other factors, general business
conditions, government regulations governing medical device approvals and
manufacturing practices, competitive market conditions, success of the Company's
business strategy, delay of orders, changes in the mix of products sold,
availability of suppliers, concentration of sales in markets and to certain
customers, changes in manufacturing efficiencies, development and introduction
of new products, fluctuations in margins, timing of significant orders, and
other risks and uncertainties currently unknown to management.
Method of Presentation
The consolidated financial statements include the accounts of the Trimedyne,
Inc., its wholly owned subsidiary Mobile Surgical Technologies, Inc. ("MST") and
its 90% owned subsidiary, Cardiodyne, Inc. ("Cardiodyne").
Quarter ended June 30, 2005 compared to quarter ended June 30, 2004:
During the quarter ended June 30, 2005, net revenues were $1,552,000 as compared
to $1,696,000 for the same period of the previous year, a $144,000 or 8%
decrease. Net revenues from delivery and disposable devices decreased by $99,000
or 11% to $789,000 in the current quarter from $888,000 in the same quarter of
the prior year. Net revenues from service and rental decreased by $44,000 or 11%
to $358,000 from $402,000 for the same quarters. This decrease was primarily due
to the decrease in billable service for the current quarter.
Cost of revenues during the quarter ended June 30, 2005 was 59% of net revenues
as compared to 50% of net revenues during the quarter ended June 30, 2004. This
increase was primarily due to a decrease in service revenue while maintaining
current service staffing costs, which resulted in higher cost per service call,
combined with additional periodic maintenance of rental inventory for our
service subsidiary, Mobile Surgical Technologies, Inc.
Selling, general and administrative expenses increased in the current quarter to
$657,000 from $578,000 in the prior year quarter, an increase of $79,000 or 13%.
The increase in selling, general and administrative expenses was primarily the
result of the following: the loss of $45,000 in rental income from a subtenant
whose lease terminated in June 2004 which offset rent expense, and $31,000 in
consultant fees (see Related Party Transactions).
Research and development expenses increased in the current quarter to $180,000
from $84,000 in the prior year quarter, an increase of $96,000 or 114%. This
increase was a result of Trimedyne increasing its efforts to improve and develop
new delivery systems through an increase in staff.
Other income, net increased by $41,000 or 315% to $54,000 in the third quarter
of fiscal 2005 from $13,000 in the third quarter of 2004. During the three
months ended June 30, 2005, the Company received $52,000 in royalties in
connection with the terms of a settlement with a competitor (see Note 6).
For the current quarter, the Company had a net loss of $153,000 or $(0.01) per
share, based on 14,602,931 basic weighted average number of common shares
outstanding, as compared to net income of $158,000, or $0.01 per share, based on
14,597,876 basic weighted average number of common shares outstanding in the
same quarter of the previous year, resulting from the above mentioned
factors.
Nine months ended June 30, 2005 compared to nine months ended June 30, 2004:
During the nine months ended June 30, 2005, net revenues were $4,783,000 as
compared to $4,350,000 for the same period of the previous year, a $433,000 or
10% increase. Net revenues from lasers and accessories increased by $646,000 or
209% to $1,241,000 during the nine months ended June 30, 2005 from $595,000 in
the the same period of the prior year. Net revenues from delivery and disposable
devices decreased by $127,000 or 5% to $2,374,000 during the nine months ended
June 30, 2005 from $2,501,000 for the same period of the prior year. Net
revenues from service and rental decreased by $86,000 or 7% to $1,168,000 from
$1,254,000 for the same quarters in the prior year, which was primarily due to a
decrease in billable service calls combined with a decrease in laser service
rental fees from MST.
Cost of revenues increased to 53% of net sales in the nine months ended June 30,
2005 compared to 51% for the nine months ended June 30, 2004. This increase was
primarily due to a decrease in service revenue while maintaining current service
staffing costs, which resulted in higher cost per service call.
15
For the nine months ended June 30, 2005, selling, general and administrative
expenses totaled $1,912,000 as compared to $1,685,000 for the same period of the
previous year, a $148,000 or 13% increase. This increase in selling, general and
administrative expenses since the prior year period is primarily the result of
the loss of $152,000 in rental income from a subtenant whose lease terminated in
June 2004 which offset rent expense and $52,000 in consultant expenses incurred
by MST, Inc. (see Related Party Transactions) offset by a decrease in
administrative salaries of $37,000 and a decrease in marketing expenses of
$18,000.
During the nine months ended June 30, 2005, research and development expenses
increased to $457,000 from $245,000 in the prior year nine month period, an
increase of $212,000 or 87%. This increase was a result of Trimedyne increasing
its efforts to improve and develop new delivery systems through an increase in
staff along with the preparation of related regulatory submissions.
Other income, net decreased by $188,000 to $125,000 in the current nine-month
period from $313,000 in the nine- month period of fiscal 2004. During the
current year nine-month period $133,000 was received in royalties, $11,000 in
interest income. Other income during the current nine-month period ended June
30, 2005 was offset by accrued interest on notes due to the CEO. In November
2003, the Company settled litigation with Lumenis, Inc. which resulted in the
reduction of $88,000 in the liability for royalties in the quarter ended
December 31, 2003 and the receipt of $155,000 in technology fees and royalties
of $26,000 during the quarter ended June 30, 2004. During the previous year's
quarter ended December 31, 2003 the Company also received $53,000 for an
unrelated cash insurance settlement for a damaged laser. Other income for the
previous nine-month period ended June 30, 2004 was offset by accrued on notes
due to the CEO.
For the nine months ended June 30, 2005, Trimedyne had a net loss of $4,000 or
$(0.00) per share, based on 14,602,931 basic weighted average number of common
shares outstanding, as compared to a net income of $472,000, or $0.03 per share,
based on 14,548,428 basic weighted average number of common shares outstanding
in the same period of the previous year, resulting from the above mentioned
factors.
Liquidity and Capital Resources
-------------------------------
At June 30, 2005, the Company had working capital of $3,535,000 compared to
$3,529,000 at the end of the fiscal year ended September 30, 2004. Cash and cash
equivalents decreased by $166,000 to $1,517,000 from $1,683,000 at the fiscal
year ended September 30, 2004. During the nine month period ended June 30, 2005,
net cash of $94,000 was used by operating activities along with $75,000 used in
investing activities purchasing and upgrading computer equipment company-wide
and purchasing rental equipment for MST, Inc. Notes payable increased by
$110,000, primarily for the financing of insurance policies, while $107,000 was
used for payments on debt, which resulted in net cash provided by financing
activities of $3,000. We believe our existing working capital will be sufficient
to meet Trimedyne's operating needs, and the operating needs of our 100% owned
laser rental subsidiary for the next twelve months. While we expect to operate
at a profit, we could incur losses in the future if we fail to generate revenues
sufficient to offset the costs associated with manufacturing and marketing our
current products, our overhead, and the development of new products. If we fail
to operate profitably, or if we undertake the development, testing and marketing
of additional new products in the future, we will likely need to raise
substantial additional capital. There can be no assurance that we will be able
to operate profitably in the future.
We have $200,000 of Senior Convertible Notes due to our chief executive officer
(the "Notes") outstanding which are due, with interest at 12% per annum, in
2007. The Notes and accrued interest are convertible into shares of the
Company's common stock at prices of $0.40 and $0.50 per share. If the Notes and
accrued interest are not converted, we may have to raise additional capital to
pay the Note holder the principal and interest due on the Notes. Sources of such
financing may include the sale of additional equity securities or the sale or
licensing of patent rights. The issuance of additional common stock or shares of
preferred stock will dilute the equity interests of our shareholders. There is
no assurance such financing, if and when needed, will be available to us on
acceptable terms.
16
Item 3. CONTROLS AND PROCEDURES
As of June 30, 2005, an evaluation was carried out under the supervision and
with the participation of the Company's management, including our Chief
Executive Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934). Based upon that evaluation, the
Chief Executive Officer concluded that the design and operation of these
disclosure controls and procedures were effective. No significant changes were
made in our internal controls or in other factors that could significantly
affect these controls subsequent to June 30, 2005.
(a) Evaluation of Disclosure Controls and Procedures. The Company carried out an
evaluation under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer ("CEO") of the
effectiveness of the Company's disclosure controls and procedures. Based upon
that evaluation, the CEO concluded that as of June 30, 2005 our disclosure
controls and procedures were effective in timely alerting them to the material
information relating to the Company (or the Company's consolidated subsidiaries)
required to be included in the Company's periodic filings with the SEC, subject
to the various limitations on effectiveness set forth below under the heading,
"LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROLS," such that the
information relating to the Company, required to be disclosed in SEC reports (i)
is recorded, processed, summarized and reported within the time periods
specified in SEC rules and forms, and (ii) is accumulated and communicated to
the Company's management, including our CEO, as appropriate to allow timely
decisions regarding required disclosure.
(b) Changes in internal control over financial reporting. There has been no
change in the Company's internal control over financial reporting that occurred
during the fiscal quarter ended June 30, 2005 that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROLS
The Company's management, including the CEO, does not expect that our disclosure
controls and procedures or our internal control over financial reporting will
necessarily prevent all fraud and material error. An internal control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of the control system must reflect the fact that there are resource
constraints and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
internal control. The design of any system of controls also is based in part
upon certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions. Over time, control may become inadequate
because of changes in conditions, and/or the degree of compliance with the
policies or procedures may deteriorate.
17
PART II
Other Information
ITEM 1. Legal Proceedings
On November 17, 2003, the Company and Lumenis entered into a settlement
agreement (the "Settlement Agreement"), under which the court dismissed the
litigation between them. The Settlement Agreement also provided that Lumenis
would apply a credit to royalties due by the Company under the License
Agreement, which the Company had accrued, and pay the Company $5,000 for the
remaining overpayment of royalties due under the License Agreement. The
Settlement Agreement also provided that the Company and Lumenis would enter into
an original equipment manufacture ("OEM") agreement whereby Lumenis would pay
the Company a technology access fee of $150,000 and purchase from the Company
certain side-firing and angled-firing fiber optic devices, which Lumenis will
market with its lasers, plus an amount equal to 7.5% of Lumenis' sales of
side-firing and angled-firing devices manufactured by Lumenis or purchased by
Lumenis from third-party suppliers. The above technology fee and royalties were
received during the fiscal year ended September 30, 2004 and royalties are
currently being received per the above agreement and included in other income
for the current three and nine months periods ended June 30, 2005.
The Company is currently a defendant in one product liability lawsuit. This case
relates to injuries that occurred in connection with medical procedures in which
the Company's laser was used. The Company has insurance to cover product
liability claims. This insurance provides the Company with $5,000,000 of
coverage for each occurrence with a general aggregate of $5,000,000. Trimedyne's
liability is limited to a maximum of $50,000 per occurrence unless the judgment
against the Company exceeds the insurance coverage. Trimedyne would be liable
for any judgement in excess of $5,000,000. At June 30, 2005, the Company accrued
$50,000 as a loss contigency on this claim, based on the deductible under the
insurance policy, of which $14,000 was paid in attorney fees as of June 30,
2005.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
(a) Exhibits
99.1 Officer Certification
99.2 Controller Certification
18
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
TRIMEDYNE, INC.
Date: August 19, 2005 /s/ Marvin P. Loeb
-------------------------- ------------------------------------
Marvin P. Loeb
Chairman and
Chief Executive Officer
Date: August 19, 2005 /s/ Jeffrey S. Rudner
-------------------------- ------------------------------------
Jeffrey S. Rudner
Controller
19
TRIMEDYNE, INC.
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Marvin P. Loeb, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Trimedyne, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report.
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the small business issuer as of, and for, the periods presented in this
report;
4. The small business issuer's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e)(4) and 15d-15(e)(4)) for the
registrant and have:
(a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the small
business issuer, including its consolidated subsidiaries, is made know
to us by others within those entities, particularly during the period
in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) disclose in future reports any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the small business issuer's fourth fiscal
quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect the registrant's internal
control over financial reporting;
5. The small business issuer's other certifying officer and I will disclose in
future filings, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial
information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer'
internal control over financial reporting.
DATED: August 19, 2005
/s/ Marvin P. Loeb
------------------------------------
Marvin P. Loeb
Chairman and Chief Executive Officer
20
CERTIFICATION OF CONTROLLER
I, Jeffrey s. Rudner, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Trimedyne, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report.
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the small business issuer as of, and for, the periods presented in this
report;
4. The small business issuer's other certifying officer and I am responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e)(4) and 15d-15(e)(4)) for the
registrant and have:
(a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the small
business issuer, including its consolidated subsidiaries, is made know
to us by others within those entities, particularly during the period
in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) disclose in future reports any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the small business issuer's fourth fiscal
quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect the registrant's internal
control over financial reporting;
5. The small business issuer's other certifying officer and I will disclose in
future filings, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial
information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the small business issuer'
internal control over financial reporting.
DATED: August 19, 2005
/s/ Jeffrey S. Rudner
--------------------------------
Jeffrey S. Rudner
Controller
21