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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 19971998
OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD OF _______ TO ________
COMMISSION FILE NUMBER 1-11388
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PLC SYSTEMS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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BRITISH COLUMBIA,-------------------
YUKON TERRITORY, CANADA 04-3153858
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
10 FORGE PARK, FRANKLIN, MASSACHUSETTS
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
02038
(ZIP CODE)
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(508) 541-8800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B)12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK, NO PAR VALUE AMERICAN STOCK EXCHANGE
------------------------SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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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), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X]X No
[ ]--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the last sale price for such stock on March 23, 1998,1999,
was $262,345,727.$77,128,690. As of March 23, 1998, 18,973,1141999, 20,230,476 shares of Common Stock, no
par value per share, were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
PART OF FORM 10-K
IN WHICH
DOCUMENT DOCUMENT IS INCORPORATED
-------- ------------------------
Registration Statement on Form S-1 Part IV
(File No. 33-58258).
Registration Statement on Form S-1 Part IV
(File No. 33-48340).
COMPLIANCE WITH COMPANY ACT REGULATIONS (BRITISH COLUMBIA)
This Annual Report on Form 10-K is intended to complyPortions of the registrant's preliminary proxy statement, which will be
issued in connection with the requirements1999 Annual Meeting of Section 6 of the Company Act Regulations (British Columbia).
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2
PART I
ITEM 1. BUSINESS.Shareholders (Part III),
are incorporated by reference.
FORWARD-LOOKING STATEMENTS
This report (and information incorporated by reference) contains
forward-looking statements regardingwithin the U.S. Food and
Drug Administration ("FDA") approval, anticipated increases in revenues,
marketingmeaning of products and proposed products, product performance, adequacySection 27A of the Company's facilities, patentsSecurities
Act of 1933 and patent applications, competition and other
matters.Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements include statements in addition to statements made in conjunction with
the words "anticipate," "expect," "intend," "believe," "seek," "estimate"Item 1. Business; Item 3.
Legal Proceedings; Item 7. Management's Discussion and Analysis of Financial
Condition and Result of Operations; and Item 7A. Quantitative and Qualitative
Disclosures about Market Risk. Statements containing terms such as "believes",
"plans", "expects", "anticipates", "intends", "estimates" and similar
expressions contain uncertainty and are forward-looking statements that involve a number of
risks and uncertainties. Suchstatements.
Forward-looking statements are based on management's current plans and expectations and
are subject to a number of factorsinvolve known and unknown risks and uncertainties that could cause actual
results to differ materially from those described in the forward-looking
statements. Such factors and uncertainties include, but are not limited to: approvalthe
successful ability to secure any required financing; the ability to convince
health care professionals and third party payers of the medical and economic
benefits of the Company's products; the absence of reimbursement for health care
providers who use the Company's products, or the risk that reimbursement, if
provided, will be inadequate; restrictions imposed by regulatory agencies such
as the U.S. Food and Drug Administration, ability to secure
any required additional financing,Administration; competitive developments; business
conditions, and growth in certain market segments, and economic conditions, competition, market acceptance of the Company's products and proposed products, reimbursement policies of government
and insurance carriers, thegeneral economy;
uncertainty that existing patents will be held
valid, that any additional patents will be issued or that the scope of any patent protection will exclude competitors and other risks and uncertainties
indicated from time to time inor that the
Company's filings withproducts do not infringe any intellectual property rights of others;
and, risk factors in Item 7, Item 7A, the SecuritiesCompany's other SEC reports, and Exchange Commission.the
Company's press releases.
PART I
ITEM 1. BUSINESS.
GENERAL
PLC Systems Inc. ("PLC" or the "Company") has developed a patented
high-powered carbon dioxide ("CO(2)"CO2") laser system known as The Heart Laser
System(TM)(1)Laser-TM-
System for broad applicationuse in the treatment of coronary artery disease in a surgical laser
procedure, pioneered by the Company and its clinical investigators, known as
transmyocardial revascularization ("TMR").
TMR is a revolutionary new way of relieving debilitating pain in patients
suffering from severe coronary artery disease ("CAD"). The Company
believes that TMR using the Heart Laser System may provide an alternative or
adjunct therapyCompany's patented
high-energy CO2 laser is used by a cardiovascular surgeon to conventional revascularization treatments, such as coronary
bypass surgerycreate between 20
and balloon angioplasty or may be used to treat patients who
cannot be helped by these treatments.
TMR, using the Heart Laser System creates new40 tiny channels in the heart wall of a patient suffering from severe CAD.
The Company's Heart Laser System was developed specifically for TMR and it is
believed to be the only TMR system that permit oxygenated blood presentcan create a channel completely through
the heart wall with a single laser pulse. In addition, the Company's Heart
Laser System uses patented technology to fire this single laser pulse in the
left ventriclefraction of a second between a patient's heartbeats. This patented
"synchronization" technology ensures that The Heart Laser System will only fire
at a relatively safe point in a patient's heartbeat cycle when the heart is
relatively still and unresponsive to flow
outwardly to the ischemic (oxygen starved) areas of the heart muscle affected by
atherosclerosis. Throughstimuli. The procedure does not require a
heart-lung bypass machine and is performed through a small incision made between the
patient's ribs while the Heart Laser Systempatient's heart is usedbeating. A patient's recovery is
therefore expected to drill approximately 20-40 tiny channels from the
exterior of the heart muscle into the interior of the left ventricle. This
procedure is performed on a beating heartbe quicker, less traumatic and does notless costly than in
surgical procedures, such as bypass surgery, which require the use of a heart-lung
machine.
Clinical test results have indicatedThe Company estimates that througheach year approximately 120,000 patients
worldwide are diagnosed with severe CAD which is not treatable by conventional
revascularization techniques. CAD is a form of heart disease caused by the
body's
normal healing process, the endblockage of each hole on the exterior of the heart muscle
closes, but the channels createdblood flow into the interior remain open resulting in
oxygenatedcoronary arteries which supply oxygen-rich blood flowing outwardly from the left ventricle
to the ischemic areasheart. Typically, severe CAD patients experience excruciating spasmodic
attacks of the heart muscle. Studies conducted at the Max Planck Institut in Germany
using myocardial contrast echocardiography (MCE)chest pain, or "angina", and often shortness of breath and fatigue.
No longer candidates for traditional surgery, these patients are generally on
maximum drug therapy. U.S. clinical studies have demonstrated patent (open)
channels in the heart muscles of TMR patients which was further confirmed by a
study conducted at University Hospital in Hamburg, Germany using a revolutionary
ultrasound system.
Under the Company's first indication for the Heart Laser System, for which
PLC has submitted a PreMarket Approval application ("PMA"), the U.S. Food and
Drug Administration ("FDA") has authorized the Company to utilize theThe Heart Laser
System to treatbe safe and effective in decreasing angina by two or more classes
(angina is measured in classes from one to four, one being the least painful and
four being the most) in nearly 75% of the patients who were not suitable for conventional bypass
surgery or other revascularization procedures. Management believes that clinical
testing to date has been positive, with benefits including reduced length of
hospital stays by patients, more efficient all-inclusive treatment costs,
reduction of angina pain, increased activity level, improved quality of life and
reduced incidents of adverse side effects and restenosis compared to alternative
treatments. Management notes, however, thatstudied; in fact, TMR using
theThe Heart Laser System is
stilleliminated all angina in the testing stage and that at this time no assurance can be given
regarding the ultimate safety or efficacyone-third of the device as treatment for
cardiovascular disease.
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1The Heart Laser is a trademark of PLC Medical Systems, Inc.
1
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Well over 3,500patients
studied.
Over 4,300 patients have been treated with TMR using the Company's Heart Laser System
in the United States and overseas. The Heart Laser System has been
shipped to 30 sites in the United States, andabroad. As of December 31, 1998, the Company had
sold or placed
(through December 31, 1997) 69shipped over 100 Heart Laser Systems overseas. At the same time, a
number of studies and scientific conferences have been held favorably reporting
on the use of TMR using the Heart Laser System as an adjunct or alternative to
bypass and angioplasty procedures on patients that were not eligible for these
procedures.worldwide.
RECENT DEVELOPMENTS
Since the Company's last annual report on Form 10-K, the following
significant events and accomplishments have taken place:
Review of PMA byoccurred:
RECEIPT OF FDA Circulatory System Devices Advisory Panel. In July
1997, the circulatory systems devices panel of the FDA convened to review the
Company's PMA application for TMR using the Heart Laser System. In a nine to two
vote, the panel recommended that the PMA application not be recommended for
approval pending further patient data. In September 1997,APPROVAL. On August 20, 1998, the Company received a
letterapproval
from the U.S. FDA which agreed with the panel's recommendation of
non-approval and completion of the follow-up data. Included in this letter were
12 requests for further information relating to follow-up data, which when
answered, would place the PMA application in "approvable form."
PLC Systems Completes Data Submission to the FDA for The Heart Laser
System. In December 1997, the Company submitted all of the requested data on
TMR usingmarket The Heart Laser System throughout the U.S. for
treatment of the estimated 80,000 domestic patients each year who suffer from
severe CAD but cannot be treated with conventional coronary revascularization
techniques such as bypass surgery or angioplasty. PLC was the first company to
receive FDA approval to commercialize a product to perform TMR. As part of this
approval process, the FDA conducted an inspection of the Company's manufacturing
facility in June 1998. The FDA completed its inspection of PLC's manufacturing
facility without finding any deficiencies in the Company's manufacturing and
quality systems.
MEDICARE REIMBURSEMENT FOR TMR FORTHCOMING. In February 1999, the Health Care
Financing
1
Administration (HCFA) announced that Medicare will provide coverage for TMR
procedures performed with devices approved by the FDA. The submissiondecision rescinds the
national noncoverage instruction for TMR implemented by HCFA in May 1997 and
sets a new coverage policy to allow payment for TMR consistent with FDA-approved
uses of TMR devices. HCFA has not yet determined the effective date of this
policy change.
FAVORABLE ASSESSMENT OF TMR BY BLUE CROSS/BLUE SHIELD TEC. In January
1999, the Blue Cross and Blue Shield Association Technology Evaluation Center
("TEC") completed a favorable assessment of TMR. The TEC concluded that TMR
meets all five criteria used to evaluate new medical technologies: (1) final
approval from the FDA; (2) scientific evidence of improvement in health
outcomes; (3) net benefit in health outcomes; (4) health outcomes at least as
beneficial as any established alternative; and (5) improvements achievable
outside investigational settings. The TEC's determination that TMR meets its
criteria is a significant step in obtaining reimbursement for TMR by major
payers. The TEC's conclusion was based upon a review of data showing the safety
and effectiveness of TMR by the TEC program staff, and the TEC's assessment was
approved by its panel of independent medical advisors. The TEC program is
sponsored by the national Blue Cross and Blue Shield Association, whose members
include local Blue Cross and Blue Shield plans nationwide, as well as other
major managed care organizations including Kaiser Permanente. TEC assessments
are released as reports to TEC program subscribers. Nearly all major payers in
responsethe U.S., including governmental payers, private third party payers, and managed
care organizations, subscribe to the listTEC program and receive TEC assessment
reports for use in their own coverage and payment policy decision making.
PLC ESTABLISHES CENTER OF EXCELLENCE. In 1998, PLC established a state of
12 requests received from the FDA following the July 1997 panel
meeting.art training program at Rush Presbyterian Medical Center in Chicago to
ensure that surgeons and medical staff who will use The 12 month data from the controlled randomized study of TMR versus
medical management suggests that patients with end-stage or chronic coronary
artery disease who undergo TMR using the CO(2) Heart Laser System fare
significantly better than patientsare
fully trained in the safe and effective use of the system. This comprehensive
program focuses on medicalensuring the best possible patient outcomes, and includes
intensive discussions on patient selection and management. Course participants
view live, narrated procedures via closed circuit television. Actual hands on
training is also provided during a laboratory session.
PLC RECEIVES ISO 9001 CERTIFICATION. In addition to the 12
month data on the controlled randomized study,March 1999, PLC received ISO 9001
certification, allowing the Company also submitted
favorable long-term, threeto place the CE Mark on its products.
PLC OBTAINS FAVORABLE SETTLEMENT OF PATENT LITIGATION. In January 1999,
the Company settled its outstanding patent infringement litigation with a
competitor, CardioGenesis Corporation. Under the settlement, CardioGenesis
agreed that key PLC patents are valid and enforceable. The PLC patents cover
the Company's synchronization technology, a critical factor in ensuring the
safety of TMR and PMR procedures. As part of the settlement, CardioGenesis must
pay:
- a minimum of $2.5 million to PLC over the next 42 months; and
- license fees and ongoing royalties through at least the year angina data on more than 60 TMR patients from
its earlier studies.
New FDA Advisory Panel Scheduled2009 (so
long as the patents remain valid).
GE CAPITAL SIGNS EXCLUSIVE AGREEMENT WITH PLC. In September 1998, a unit
of GE Capital, a leading vendor financing organization, entered into an
exclusive agreement with the Company to Review TMR using Theprovide a broad array of financing
alternatives to U.S. hospitals interested in acquiring the PLC Heart Laser
System. In March 1998, the Company was advised that an FDA Advisory Panel would
review the PMA applicationGE Capital Trans Leasing, a unit of GE Capital's Vendor Financial
Services, which specializes in working with equipment manufacturers and
dealer/distributors, agreed to work exclusively with PLC to provide financing
for TMR using the Heart Laser System on April 24,
1998. Written notification of the advisory panel meeting is expected to be
posted in the Federal Register approximately 15 days prior to the meeting. All
FDA advisory panel schedules are subject to change. No assurance can be given
that the advisory panel will recommend approval for the Company's Heart Laser
System at the April panel meeting, or at any future meeting.laser revascularization systems. These financing alternatives provide PLC Systems Completes $20 Million Convertible Debenture Financing. In
August 1997, the Company completed, through Smith Barney, a $20 million
financing from funds advised by Brown Simpson Asset Management, LLC. Under the
terms of the financing, the Company received $20 million from the issuance of
convertible debentures due July 17, 2002. All debentures were converted into
Common Stock beginning September 10, 1997 and ending February 9, 1998. The money
raised provides the Company
with a solid cash positionnon-dilutive source of capital to continue its clinical
studies of TMR in the U.S. and prepare the Company for the potential worldwide
launchfinance placements of The Heart Laser
System.
William C. Dow Appointed PresidentRENEWAL OF JAPANESE DISTRIBUTION AGREEMENT. In early 1999, PLC renewed its
distribution agreement
2
in Japan with Imatron Japan Inc. ("Imatron") to distribute The Heart Laser
System in Japan and CEOcomplete the Japanese regulatory approval process. The
agreement includes a commitment by Imatron to purchase a minimum of five Heart
Laser Systems during 1999. Along with the United States and Germany, Japan is
believed to be one of the three largest markets in the world for products used
in the treatment of cardiovascular disease. Between 1995 and 1997, Imatron
purchased 12 Heart Laser Systems from PLC Systems.to conduct clinical studies in Japan.
PLC and Imatron submitted data from these studies to the Japanese Government in
December 1998 in support of their application to market The Heart Laser System
in Japan. The companies anticipate approval of their application during the
second half of 1999. In August 1997,
William C. Dow, joined the Company as President and CEO. Mr. Dow joined the
Company after serving as President and CEO of Deknatel Snowden Pencer Worldwide,
Inc.,early 1999, PLC also hired a $100 million medical device manufacturer and marketing subsidiary of
Genzyme Corporation. Mr Dow hasdirect representative with
more than 25 years of broad-based experience in
the medical device and services industry. Mr. Dow holds a Bachelor of Science in
Engineering from the United States Naval Academy and served as a Lieutenant in
the U.S. Navy where he was a pilot and a supply officer.
TMR Studies Underwayselling cardiovascular products in Japan Using PLC Systems CO2 Heart Laser System. In
March 1997, The Heart Institute of Japan located at Tokyo Women's Medical Center
performed the country's first TMR procedure as partto
support development of the Ministry of Health
and Welfare (MHW) approval process in that country. In compliance with the MHW
approved protocol, a total of 60 patients will be enrolled in the Japanese study. To date, 54 patients have been enrolled in this study. The Company is
working closely with its distributor IMATRON Japan to provide technical support
and training in Japan during the clinical studies. The Company believes MHW
approval for TMR using The Heart Laser System could be granted sometime in the
2
4
period beginning late 1998 through early 1999. No assurance can be given that an
MHW approval will be granted in this timeframe, if at all.
HCFA/Medicare Institutes a Non-Coverage Policy for TMR Patients in the
United States. Effective May 1997, the Health Care Financing Administration
(HCFA) instituted a non-coverage instruction for Medicare patients in the U. S.
receiving TMR. The Company has been in regular contact with HCFA and continues
to advise the agency of the Company's progress through the FDA regulatory
approval process. The Company is hopeful that upon PMA approval, Medicare
reimbursement for TMR using the Heart Laser System will be implemented as
reimbursement policies will continue to impact the Company's business and
revenues. No assurance can be given that Medicare reimbursement will be
implemented after PMA approval and no assurance can be given that the FDA will
grant a PMA approval for the Heart Laser System.
PLC Systems Strengthens Team with Addition of New Executive Managers. In
January 1998, the Company announced the addition of several new senior
management positions. New senior managers include: Vincent Puglisi, Corporate
Sales; Paul Levesque, Marketing and New Business Development; Cindy Crosby,
Regulatory and Quality Assurance and Jennifer Miller, General Counsel. The
Company has expanded its management team with executives with experience in
transitioning businesses from research and development to commercialization.market.
BACKGROUND
In 1981, the Company's former Chairman, Dr. Robert I. Rudko, formed Laser
Engineering, Inc. ("LEI"), now PLC Medical Systems, Inc., to develop and
commercialize the
development of sealed-off carbon dioxide ("CO(2)") lasers. Dr. Rudko, who holds a
Ph.D. in electrical engineering from Cornell University, had spent over
twenty-five years designing and developing CO(2) laser systems for Raytheon
Company. In 1988,the late 1980s, a heart surgeon at the San Francisco Heart
Institute, advanced $250,000 to assistDr. John Crew, was performing early studies of TMR on hearts that had
been stopped and placed on a heart-lung machine. Although these early studies
appeared promising, the Company inefficacy of the development of a high-powered CO(2) laser whichTMR treatment could not be proven unless
the procedure could be used for TMRperformed on a beating heart. Since no laser existed at
that time which could perform such a medical procedure, the San Francisco Heart
Institute turned to Dr. Rudko and LEI to design and develop such a laser. The
result of that effort was The Heart Laser System, a high-powered laser system
capable of creating a channel completely through a human heart wall with a
single laser pulse delivered in the fraction of a second between heartbeats.
In November 1990, the Company received a Phase I Investigational Device
Exemption ("IDE") for its Heart Laser System from the FDA. In grantingapproving the
Phase I study, the FDA permitted the use of theThe Heart Laser System for patients
considered not suitable for any other intervention. Phase I trials were
performed by Dr. John Crew at Seton Medical Center in Daly City, California and were completed in October 1991. In April 1992,
the Company received Phase II clearance from the FDA to perform TMR on 50
patients at four clinical sites. This clearance was periodically expanded to eventually
include 201 patients at eight clinical sites. In 1995, the FDA grantedapproved three
new IDE'sIDEs for studies of TMR using theThe Heart Laser System. The first was a 100
patient randomized study (Phase III) comparing TMR patients to patients
receiving medical management. The study was later expanded to 200 patients.
The second study iswas a 400 patient randomized trial comparing TMR patients to
patients receiving a second bypass surgery. The third iswas a study comparing
patients receiving TMR in conjunction with bypass surgery to patients receiving
only bypass surgery.
The Phase I, IICompany recently undertook an effort to gather long-term (more than 12
months) data on its clinical study patients. The long-term TMR analysis included
70 patients at eight hospitals. Each patient had been suffering from severe CAD,
including chronic angina, before receiving treatment with The Heart Laser
System. The average age of the patients at enrollment was 63. The average
preoperative angina class for the group was 3.8. Angina is measured in classes
ranging from one to four, with one being the least painful and III studies have been completedfour being the
most painful. After an average of 34 months following the TMR procedure, the
group's average angina class was significantly improved from 3.8 to 1.5. This
was virtually unchanged from the 1.4 average angina class reported at 12 months
postoperatively. In fact, three years after TMR with The Heart Laser System, 23%
of the patients reported having no angina and a PMA application was filed58% were in February
1997. The PMA application was reviewed by the circulatory systems device panel
in July 1997 which resulted in a recommendation for non-approval pending further
patient data.class 1 or 2.
Since April 1992, the Company has received 1114 U.S. patents relating to the
underlying laser technology, the use of a laser on a beating heart, theThe Heart
Laser System handpiece, and other laser accessories. The Company also has 12
U.S. patent applications pending that cover various aspects of the technology
for theThe Heart Laser System and the process by which a laser is used to
revascularize the
3
myocardium, as well as other laser technologies. The Company also holds a
number of foreign patents and patent applications.
The Company was incorporated pursuant to the Company ActCOMPANY ACT of British
Columbia, Canada on March 3, 1987 and has1987. The Company transferred its jurisdiction of
incorporation to the Yukon Territory of Canada in March 1999. The Company's
principal offices and manufacturing facilities are at 10 Forge Park, Franklin,
Massachusetts 02038. The Company's telephone number is (508) 541-8800. As used
herein, the term "Company" means, unless the context requires otherwise, PLC and
its subsidiaries, PLC Medical Systems, Inc., PLC Sistemas Medicos Internacionais
Lda, PLC Sistemas Medicos Internacionais GmbH, PLC Medical Systems AG, PLC
Medical Systems France, PLC Medical Systems Asia/Pacific Pte Ltd and PLC Medical
Systems Australia Pty Ltd.
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5
CARDIOVASCULAR DISEASE AND CURRENT THERAPIES
Cardiovascular disease is the leading cause of death in the U.S. with more
than 954,000950,000 deaths annually. This represents over 40% of all U.S. deaths. Over
13 million Americans suffer from coronary heart disease with 350,000 new cases
every year. Atherosclerosis, the principal form of cardiovascular disease and
primary cause of heart attacks, is characterized by a progressive accumulation
of fatty deposits known as "plaque" in the walls of arteries and the resulting
narrowing of the interior of the arteries. Atherosclerosis reduces blood flow
to the muscle wall ("myocardium") of the heart, causing ischemia and resulting
angina pain and can further lead to a complete occlusion of the artery causing a
heart attack. According to the 1998 Heart and Stroke Facts Statistics published
by the American Heart Association (the "AHA"), approximately 573,000 coronary
bypass operations were performed on 360,000 patients and 434,000 balloon
angioplasty procedures were performed in the U.S. on 408,000 patients in 1995.
The AHA estimates the cost of cardiovascular disease in 1997 at $259.1 billion,
including physician and nursing services, hospital and nursing home services,
the cost of medications and lost productivity resulting from disability.
Traditional treatment of atherosclerosis includes drug therapy, coronary
bypass surgery and
angioplasty. Drug therapy alleviates some of the symptoms of atherosclerosis
but is often ineffective in serious cases. Conventional bypass surgery involves
cutting open the patient's chest, cutting through the sternum, connecting the
patient to a heart-lung machine, and stopping the heart, attaching a vein or artery
removed from another part of the patient's body to create a bypass around the
diseased blood vessel and restarting the heart. Hospital
charges for bypass surgery are typically between $25,000 to $45,000 and bypass
requires prolonged hospitalization and extensive recuperation periods. In
addition bypass grafts eventually fail. Certain patients are not
suitable for bypass procedures, including those who have previously undergone
bypass surgeries,surgery, patients with extremely diffuse diseases, patients with vessels
that are too small to graft, patients with chronic obstructive pulmonary
disease, some diabetics, and others who are too ill to survive the use of a
heart lung machine.
A less invasive alternative to bypass surgery is balloon angioplasty. The
most common form of angioplasty involves the use of balloon-tipped catheters
insertedinserting into a diseased artery.artery a
catheter with a balloon at the tip. By inflating the balloon at the site of
blockage, ("lesion"), the arterial plaque can be pressed against the arterial walls and
reshaped, resulting in increased blood flow. Metallic stents were developed to
help prevent the sudden closures that sometimesometimes occur after angioplasty and to
help reduce restenosis. These stents are inserted into the artery after balloon
angioplasty to hold the expanded plaque in place. Because it is less traumatic
and less costly, balloon angioplasty is preferred over bypass surgery when the
blockages are not complicated and involve few coronary arteries. While offering
certain benefits compared to bypass surgery, certain studies including the 1991
Coronary Artery Descriptors and Restenosis Study ("CADRE") and the 1993 Emory
Angioplasty vs. Surgery Trial ("EAST") suggest restenosis or reocclusion is a
serious problem with traditional angioplasty treatment. While stents have been
shown to help reduce restenosis, and are used extensively, restenosis continues
to occur at a significant rate. Atherectomy, another angioplasty-type
treatment, involves the use of a catheter that contains a rotating mechanical
device to cut, grind away and remove the plaque.
4
Management believes that TMR utilizing theusing The Heart Laser System may beis useful as a
treatment for patients who have severe, stable angina and who are no longer
candidates for either angioplasty or bypass because of either extensive disease
or small coronary arteries. The U.S. FDA has approved The Heart Laser System for
such patients. TMR is designed to be less invasive and less expensive than
traditional bypass surgery, and may avoid the restenosis problem inherent with
bypass surgery and balloon angioplasty by not targeting the coronary arteries
for treatment. Also, with additional clinical research, TMR may be proven useful
in conjunction with angioplasty or bypass to obtain more complete
revascularization.
In addition to the more conventional treatmenttreatments described above, there are
a number of newer treatments and therapies including minimally invasive direct
coronary artery bypass ("MIDCAB"), "trap door""off-pump" coronary artery bypass ("OPCAB")
and the use of angiogenic growth factors. Some of these techniques and
therapies may offer certain improvements in relation to conventional treatments.
Management believes that with further clinical research, TMR canmay be usedfound useful
in conjunction with these less invasive procedures to more effectively
revascularize the heart muscle.
4
6heart.
TMR UTILIZING THE HEART LASER SYSTEM
The main challenge in treating atherosclerosis is to allow adequate blood
to flow to the heart muscle without significantly damaging the heart.
Conventional and newer techniques described above are used to bypass, reopen or
widen blocked or narrowed arteries and could eventually fail due to restenosis
or natural disease progression. TMR using theThe Heart Laser System involves a
different technique where channels are created into the myocardium as a means of
supplying oxygen-rich blood from the left ventricular chamber into the ischemic
myocardium. TMR does not target the coronary arteries for treatment.
Heart muscle, like all tissues of the body, must be constantly supplied
with oxygen in order to function effectively. Oxygen is delivered to the
myocardium by the blood, which is distributed to the myocardium through the
right and left coronary arteries. If these arteries are narrowed or blocked as
a result of atherosclerosis, sufficient oxygen-rich blood cannot supplymay be unable to reach
the heart to satisfy the metabolic demanddemands of the myocardium. Cardiovascular
disease eventually may cause myocardial ischemia, often evidenced by severe and
debilitating angina or chest pains caused by lack of oxygen to the heart muscle, which can
progress to myocardial infarction (the death of an area of the heart muscle).
Advanced multi vesselmulti-vessel ischemic heart disease is typically treated with bypass
surgery.
During the TMR procedure, the patient is given general anaesthesia.anesthesia. An
incision is made in the patient's side between the ribs, exposing the heart.
The laser's outputHeart Laser System is computer synchronized with the patient's heartbeat,
firing only when the left ventricle is filled with blood and is electrically
insensitive. The Company believes that synchronization minimizes arrhythmiamay reduce the risk of
arrhythmias (irregular heart
beat)heartbeats) and their associated morbidity and mortality.
In fact, researchResearch studies conducted by the Texas Heart Institute havein animal models
indicated that failure to
synchronizeperforming TMR without synchronization may lead to a significantbe associated with an
increase in life threatening arrhythmias. The synchronization processtechnology is
covered under a patent owned by the Company and
is accomplished using an EKG monitor located on the laser and a computer used to
control the laser system.Company. The Heart Laser System is capable
of drilling a transmural channel in less than 0.05 seconds with a single laser
pulse in a patient whose heart has not been stopped and who has not been placed
on a heart lungheart-lung bypass machine. The surgeon can vary the pulse width of the
laser using a touch key control panel to accommodate for the thickness of the
patient's heart muscle.wall. Transesophageal Echocardiography (TEE) ultrasound is used to determineconfirm
that complete channels are made by the laser. Generally, 20-4020 to 40 new channels
are drilledcreated during the procedure to create
new alternative channels for blood flow to the ischemic heart muscle.procedure. Each TMR procedure requires a sterile, single
use, TMR kit containing a lens cell,
assorted TMR hand pieces, EKG electrodes, drapes and other disposable
items.
In accordance with the FDA protocol governing the multi-center
non-randomized, Phase II clinical trial, all of the 201 study patients treated
with the TMR procedure were critically ill with extensive coronary artery
disease and were not suitable candidates for coronary bypass or angioplasty
revascularization due to the severity of their coronary artery disease. Of the
201 study patients, 15 patients died within 30 days of the surgery and 17 died
during the 12 months follow-up period. An additional seven patients died from
other non-cardiac reasons. This mortality rate is well within the mortality rate
for second bypass surgery despite the fact that the TMR patients tended to be
much sicker than those who are typically eligible for a second bypass surgery.
Physician reports indicate that none of these deaths were directly related to
the TMR procedure.
In July of 1995, the Company began a multi-center randomized control study
comparing TMR using the Heart Laser System to continued medical therapy for the
treatment of end stage coronary artery disease in patients who were not suitable
candidates for coronary bypass or angioplasty revascularization. Following
submission by the Company of preliminary study results, the FDA ended the
randomization process of the study in September 1996, allowing all subsequent
patients enrolled in the study to receive TMR treatment. Of the 192 patients
randomized into the study, 91 patients have received TMR treatment and 101 were
placed in the control arm of the study. Three of the 91 TMR patients died within
30 days of the surgery. Ten TMR patients died during the 12 month follow-up
period. Twenty two of the 101 patients randomized to the medical management
group died.
The PMA application for the Heart Laser System was filed by the FDA in
February 1997. In July 1997, the PMA application was reviewed by the circulatory
systems device panel of the FDA. The panel voted 9 to 2 that the PMA application
not be recommended for approval pending further patient data. In September 1997,
5
7
the Company received a letter from the FDA which agreed with the panel's
recommendation and outlined 12 items which when completed, would place the PMA
in "approvable form". In December 1997, the Company completed the submission of
the data related to the 12 requested items. The information included all the
follow-up data on the 192 patients enrolled in the randomized study. The Company
is currently waiting for a subsequent advisory panel review which is tentatively
scheduled for April 24, 1998.
After the one year follow-up, the Company was no longer required by the FDA
to ask patients to come in for regular testing, however, the Company recently
undertook an effort to gather long-term (more than 12 months) data on the Phase
I, II, and III patients. The Company was able to collect three year follow-up on
62 patients. The average angina class of these patients, which was 3.8
preoperatively, was down to 1.5 three years postoperatively. The three year
survival rate for these patients was 73%. Based on these results, management
believes that the possibility of a "placebo effect" being responsible for angina
improvements, is unlikely as "placebo effects" typically do not last longer than
six months.
Recent technical advances in echocardiography technology have made it
possible to visualize blood flow in TMR channels at follow-up. These clinical
findings confirm previous postmortem examination on two TMR patients treated
with the Heart Laser System which indicated that the TMR channels were still
open after 3 and 12 months. These channels were active and collateral growth
(growth of new blood vessels) had occurred. It also appears that additional
mechanisms of action such as angiogenesis may be occurring. The exact mechanism
of action has yet to be proven and it should be noted that defining the
mechanism is not a requirement for FDA approval.
In addition to the work on patients with no other alternative, the Company
continues to enroll patients in its two other clinical trials; patients eligible
for redo bypass and patients who are having a combination bypass-TMR procedure.
The results of these studies indicate that TMR could potentially have expanded
applications in the treatment of coronary artery disease.
POTENTIAL BENEFITS OF TMR
Based on clinical results to date, the Company believes that TMR using theThe
Heart Laser System provides a number of benefits, although no assurance can be
given that any of the mentioned benefits will
5
be received by patients and no assurance can be given that the FDA will approve
theadditional indications for use of The Heart Laser System. These current
anticipated benefits include:
Potentially a Third Revascularization Option. InTHERAPY FOR PATIENTS NOT SUITABLE FOR CORONARY BYPASS. The U.S. FDA has
approved the future, TMR may be
used onuse of The Heart Laser System for patients as an alternative to bypass or angioplasty procedures.
Therapy for Patients Not Suitable for Coronary Bypass. TMR may allow
patients who have severe, stable
angina and would otherwise not be suitable for coronary bypass surgery, and for
whom other surgical or interventional techniques may not be available or
advisable to alleviate the effects of atherosclerotic illness.
Potential Use in Conjunction with Both Conventional and Minimally Invasive
Coronary Bypass.POTENTIAL USE IN CONJUNCTION WITH BOTH CONVENTIONAL AND MINIMALLY INVASIVE
CORONARY BYPASS. TMR may allow the surgeon to provide oxygenated blood to areas
of the heart muscle that are not accessible by coronary bypass grafts. With the
advent of the "trap-door"OPCAB procedure wherein which coronary artery bypass graft surgery is
performed on a beating heart, management believes that with additional clinical
research, TMR willmay be found to be an effective complement to this procedure. TMR
can be performed on the anterior, posterior and lateral walls of the heart while
the "trap-door"OPCAB procedure usually is only performed on the anterior wall of the heart.
Potentially Lower Medical Costs.POTENTIALLY A THIRD REVASCULARIZATION OPTION. In the future, with
additional clinical research, TMR may be found to be useful as an alternative to
bypass or angioplasty procedures.
POTENTIAL THERAPY FOR HEART TRANSPLANT PATIENTS. With additional clinical
research, TMR could potentially be found useful for post-transplant patients
suffering from chronic rejection atherosclerosis. Presently, the only treatment
for this condition is re-transplantation.
POTENTIALLY LOWER MEDICAL COSTS. Management believes the medical costs
associated with TMR using theThe Heart Laser System will be less than the costs of
traditional bypass surgery which requires a larger surgical team, more
supporting equipment and a longer hospital stay. The cost of TMR in some
situations may also be less than angioplasty when combinations of additional
devices such as atherectomy catheters, stents or intravascular ultrasound are
required.
Potentially Quicker Recovery. SincePOTENTIALLY QUICKER RECOVERY. Because TMR using theThe Heart Laser System is
less invasive and does not involve stopping and starting the heart, the patient
may recover more quickly than if conventional bypass 6
8
techniques were used, with
a potentially reduced riskrisks of complications compared
with the risks associated with bypass surgery.
Potentially Minimally Invasive Surgery. Management believes that
development of a thoracoscopic delivery device, would allow TMR to be performed
less invasively. Testing to date has been very encouraging. Management believes
that a thoracoscopic delivery device could potentially reduce complication risks
and the length of hospital stay as well as provide a further reduction in
hospital and post operative costs.
Not Dependent on Plaque Type or Location and Potentially Less Risk of
Restenosis.complications.
NOT DEPENDENT ON PLAQUE TYPE OR LOCATION AND POTENTIALLY LESS RISK OF
RESTENOSIS. Unlike angioplasty, atherectomy devices and stents, which may be
more or less effective, depending on the composition, extent or location of the
plaque occluding the artery and which have evidenced high restenosis rates, TMR
is not dependent upon plaque type or location.
Preliminary results from patients
treated with TMR suggest less risk that the new channels created by the laser
will become narrowed or blocked due to restenosis.
Potential Therapy for Heart Transplant Patients. TMR could potentially be
used on post transplant patients suffering from chronic rejection
atherosclerosis. Presently, the only treatment for this condition is re-
transplantation.
DEVELOPMENT OF MARKETING STRATEGY
The Company's strategy is to establish TMR using theThe Heart Laser System as
an appropriate meansa standard of care for treating patients suffering from coronary artery disease.
Currently, the Heart Laser System is an investigational device in the
U.S. and cannot be marketed as a commercial product. The Heart Laser System is commercially available outsidein the U.S. with, the
exception of Japan, AustraliaEuropean Community (except France), China and certain countries in Southeast Asia, wherethat do not
require governmental approval for commercialization is also required. In October 1997, thecommercialization. The Company was notified
that the French Ministry of Health was instituting a commercial moratorium on
lasers usedhas submitted
applications for TMR pending further evaluation. This moratorium was placed on
lasers whether or not they had received CE approval. (See "Government
Regulation").government approval to sell The Heart Laser System in other
countries including Japan, Taiwan and South Korea.
The Company has also developed a number of single use surgical products to
be used with theThe Heart Laser System in performing TMR to address concerns
regarding the spread of infections. The Company sells sterile, single use, TMR
procedure kits containing components such as a lens holder, a set of handpieces, drapes and other TMR single use
items.
The Company also intends to sell
individual handpieces. The Heart Laser System handpieces have been incorporated
under the IDE with the Heart Laser System. In addition, the Company is seeking
patent protection on these handpieces.6
The Company has developed a marketing strategy to address the challenges of marketing
high dollarcost capital equipment. In markets with minimal credit risk, economic
stability, whereadequate health care is reimbursed,reimbursement, and whererequisite government regulations permit,approvals,
the Company intends to market TMRhas offered The Heart Laser System on a usage basis whereby the
hospital receives aobtains The Heart Laser System in exchange for payment of an initial
installation chargefee and pays
the Company for the use of the machineusage fees each time a TMR procedure is performed. The use
of the machine is typically subject to contractual yearly minimums for a defined
period of time with renewal options. The Heart Laser System remains the
property of the Company and is depreciated. Repairs, maintenance, upgrades and
disposables aredepreciated over the responsibilityterm of the Company.placement
contract. The Company refers to this approach as a placement contract. Such
placement contracts are appealing to hospitals when capital equipment funds are
scarce or unavailable or when it is difficult to predict early usage as is the
case with new technology such as TMR. In unstable economic markets where credit risks are high,The Company's agreement with GE Capital
enables the Company's
plan would beCompany to monetize future payment streams associated with certain
domestic placements. If utilization becomes more predictable, the Company
expects a significant number of new accounts to opt for conventional leasing, or
direct purchase.
The Company will also sell theThe Heart Laser System outright as capital
equipment. The disposable sterile kits would be sold for each procedure, along
with yearly maintenanceservice contracts after expiration of theany applicable warranty
period. There
is no single retail price for the Company's Heart Laser System.
The Company has several different marketing strategies to sell this product lineor place The
Heart Laser System and accessories depending upon the particular circumstances,
including direct sales, sales through distributors, placement type sales,
rentals, and placement (leasing) type sale.leasing. Pricing varies depending upon the particular marketing
strategy used and the country in which theThe Heart Laser System is sold. 7
9
United States. It is critical to the Company's success to obtain PMA
approval from the FDA for the Heart Laser System initially for patients who are
not suitable for bypass surgery or other interventions. The
Company submitted
its PMA applicationplans to launch a new purchase program in 1999 that combines aggressive
pricing, flexible financing arrangements, and trade-in allowances for this indication in April 1995 which subsequently
received expedited review status in May 1995. This application was filed by the
FDA in February 1997. In July 1997, the circulatory systems devices panel of the
FDA reviewed the Company's PMA application and recommended non-approval of the
PMA pending further patient data.customers
who have purchased other TMR systems. No assurance can be given that such
programs will be implemented successfully, or at all.
UNITED STATES. The Company submitted the patient data
requested by the FDA in November and December of 1997 and has been advised of an
April 1998 panel meeting date. Given the current uncertainties on the time
required by the FDA to approve a PMA application, the Company cannot project
when, if at all, such approval would occur.
In addition to PMA approval, reimbursement for the TMR procedure by
government and private insurers will be required for rapid product
commercialization. At present there is a significant pent-up demand for TMR that
will only be satisfied when reimbursement is allowed. (See "Third Party
Reimbursements").
While it is not possible to predict when or if PMA approval is forthcoming,
the Company has developed a comprehensive product launch plan with built-in
contingencies to reflect PMA approval. Such a launch plan has been developed in
close association with a leading medical product marketing agency experienced in
product introductions similar to the Company's Heart Laser System.
In February 1998, the Company hired a Vice President of Marketing and
Business Development to lead the Company launch and develop the necessary
organization needed to support and promote the Company's products
internationally and in the U.S. after PMA approval has been received. The
Company presently intends to utilizeusing a direct sales force in the United
States to market The Heart Laser System. The sales force is comprised of
personnel with a high degree of professionalism and experience in the
cardiovascular device business. The Company has invested considerable resources
in recruiting and training of the sales force during 1998. Initial marketing
efforts following FDA approval were directed at The Heart Laser System to hospitals. A sales management team was hireduser, the
cardiothoracic surgeon, whose influence is critical in the fourth quarter of 1996.hospital decision to
purchase The Company has hired 11 new direct territory
representatives and a launch campaign is currently being established in
anticipation of an FDA approval of the Heart Laser System. International.Subsequent marketing efforts are expected to
shift to the hospital administration and the referring physician, with a focus
on promoting the economics and viability of TMR as a new hospital technology and
driving the growth of TMR procedures. No assurance can be given that such
programs will be implemented successfully, or at all.
Supporting the direct sales force is a promotional program that consists of
media advertising, direct mail, trade shows and educational symposia, all
focused on disseminating critical information to decision makers and key
purchase influencers.
In 1998, PLC established a state of the art training program at Rush
Presbyterian Medical Center in Chicago to train new surgeons and medical staff
who will use The Heart Laser System in the safe and effective use of the system
and facilitate interaction and discussion among experienced users about best
clinical practices. This comprehensive program focuses on ensuring the best
possible patient outcomes, and includes intensive discussions on patient
selection and management. Course participants view live, narrated procedures
via closed circuit television. Actual hands on training is also provided during
the laboratory session.
INTERNATIONAL. The Company currently markets itsThe Heart Laser System
overseas both directly and through distributors.
In the fourth quarter of 1994,
the Company incorporated an EC subsidiary, PLC Sistemas Medicos Internacionais
Lda, in Madeira, Portugal and in the first quarter of 1996 a subsidiary was
incorporated in Hamburg, Germany as a sales office to market the Heart Laser
System throughout Germany. In the fourth quarter of 1996, the Company
incorporated two additional subsidiaries in Switzerland and France. Sales,
service and clinical support personnel are located throughout the European
subsidiaries.7
PLC received the CE Mark for theThe Heart Laser System in the third quarter of
1995. The CE Mark approval indicates that a product conforms to mandatory
European safety and efficacy requirements. The approval allows the Company to sell the Heart Laser System
commercially in all European Community countries. In
October 1997,countries (except in France). Despite
receiving the Company was notified thatCE Mark, the French Ministry of Health was
institutinginstituted a commercial
moratorium on lasers used for TMR pending further
evaluation. (See "Governmentprocedures in France in October 1997 ("See Government
Regulation").
In the spring of 1996,March 1999, PLC received ISO 9001 certification, allowing the Company began to
pursue ISO 9001 as set out byself certify and place the International Standards Organization
which will be required byCE Mark on its products itself.
The Company installed a new Managing Director, Vincent Puglisi, for the
European Communityregion in 1998.
The Company hired a Managing Director for the Far East and Australia in
February 1995August 1998 to increase sales and marketing efforts of thefor The
Heart Laser System in this part of the world through both direct sales and the use of distributors.
The Company incorporated a subsidiary in Singaporeregion. Mr. Puglisi also assumed responsibility for
operations in the fourth quarter of 1996
and a second subsidiaryAsia Pacific region in Australia was incorporated in the second quarter of
1997 to handle sales and service for these areas of the world.late 1998.
In the third quarter of 1995,early 1999, the Company signed a distributorrenewed its distribution agreement in Japan with
IMATRON JapanImatron to manage, fund and distribute theThe Heart Laser System in accordance with Ministry of HealthJapan and Welfare ("MHW") clinical trials to be
conducted in Japan. The first TMR procedure in Japan was performed in March
1997, which begancomplete the 60 patient clinical study required by the MHWJapanese
regulatory approval process. The Companyagreement includes a commitment by Imatron to
purchase a minimum of five Heart Laser Systems during 1999. Along with the
United States and Germany, Japan is working closely with IMATRONbelieved to provide technical
supportbe one of the three largest
markets in the world for products used in the treatment of cardiovascular
disease. Imatron also distributes medical equipment in Japan for its parent,
Imatron, Inc. a U.S. based manufacturer of diagnostic imaging equipment. Between
1995 and training during these clinical trials. To date,1997, Imatron purchased 12 Heart Laser Systems have been soldfrom PLC to IMATRONconduct
clinical studies in Japan. PLC and 54 patients have received TMRImatron submitted data from these studies to
the Japanese Government in December 1998 in support of their application to
market The Heart Laser System in Japan. The Company believes that MHWjoint application is believed to be
the first submitted by a laser revascularization company seeking to market its
product in Japan. The companies anticipate approval for TMR could be granted sometime inof their application during
the later partsecond half of 1998 or
8
10
early in 1999. No assurance can be given that an MHWJapanese regulatory
approval will be granted to The Heart Laser System in this timeframe, ifor at all.
IMATRON Japan is just one among several distributors
working with PLC also hired a direct representative, Hiroshi Nikko, to support development of
the Japanese market. Mr. Nikko brings to PLC more than 25 years of experience
selling cardiovascular products in Japan. Prior to joining PLC, Mr. Nikko worked
for Nissho Corporation, which distributes the Asia/Pacific territory.left ventricle assist systems
developed by Thermo Cardiosystems and manufactures a hemodialysis filter.
As of December 31, 1997,1998, the Company had shipped 69over 70 Heart Laser
Systems to the international markets which include 35 to Europe and Middle East, 27 to the
Asia/Pacific area and seven to South America.markets. Foreign sales may be subject to certain
risks, including foreign medical, electrical and safety regulations, export and
import restrictions, tariffs and currency fluctuations.
PRODUCTS AND CUSTOMERS
The Company operates indevelops and markets one industry segment: the development, manufacture
and sales of medical lasers and related products.principal product: The Heart Laser
System. Approximately 20%89.5% of the Company's revenuesrevenue in Fiscalthe fiscal year ended
December 31, 1998 and 93.2% in the fiscal year ended December 31, 1997 camewas
derived from one customer, while no oneThe Heart Laser System. No single customer accounted for more than
10% of the Company's revenues in Fiscal 1996, and one customer
accounted for more than 43% of revenues in Fiscal 1995.fiscal 1998. In 1997, and 1995, the
customer was the Company's exclusive
distributor in Japan. Management does not
believe thatJapan accounted for approximately 20% of the possible lack of future relationships with any of these
customers will have a material adverse effect on futureCompany's revenues.
MANUFACTURING
The Company manufactures and tests its products at its 37,000 square foot
facility in Franklin, Massachusetts, approximately 40 miles west of Boston. The
Company moved to this facility in September 1996 and believes that its
manufacturing capacity will be sufficient to meet the market demands anticipated upon PMA approval.in
the coming year.
The Company purchases components for its laser systems and its related
disposables from a number of sources and management believes that most
components are available from multiple sources. For those components that are
purchased from a single sourced,source, management has entered into exclusive supplier
agreements which provide access to technologies, processes and bills of material
to enable the Company to
8
manufacture the components or to have the components manufactured elsewhere.
The Company's manufacturing facilities are subject to periodic inspection by
regulatory authorities to ensure compliance with FDA and European Community
quality regulations. The Company's business is not subject to seasonal
fluctuations.
GOVERNMENT REGULATION
The Heart Laser System, as well as other medical devices that have been and
are being developed by the Company, are subject to extensive regulation by the
FDA. Pursuant to the Federal Food, Drug, and Cosmetic Act, as amended, the FDA
regulates design, development, manufacturing, and the clinical testing,
manufacture,installation, servicing, labeling, distribution and promotion of medical devices
in the U.S. The Company's laser products are subject to additional FDA
regulation under the Radiation Control for Health and Safety Act of 1968
("Radiation Act"), which imposes labeling and other safety requirements related
to radiation hazards. In addition, various foreign countries in which the
Company's products are or may be sold impose additional regulatory requirements.
On August 20, 1998, the Company received approval from the U.S. FDA to
market The Heart Laser System requires a PMA. The first step inthroughout the PMA
application process isU.S. to treat the submission to the FDA of the results of product
tests, laboratory and animal studies and a request for permission to clinically
evaluate the device in humans under an IDE. Initiation of the study requires the
approval of the Institutional Review Board of the hospitals participating in the
clinical trials and written, informed consent from all participating patients.
In March 1990, the Company submitted to the FDA its first Heart Laser
System IDE application consisting of product information and bench and animal
test results and requested permission to evaluate the device in humans. The
Company received agency permission to conduct a Phase I clinical evaluation of
the Heart Laser System in November 1990. Authorization was limited to one
clinical site and 15 patients. Dr. John Crew, a member of the Company's Medical
Advisory Board, performed all of the Phase I tests of TMR using the Heart Laser
System at Seton Medical Center in Daly City, California. In December 1991, the
Company requested permission from the FDA to initiate Phase II of the clinical
study and obtained authority to proceed in April 1992. Under Phase II, up to 16
sites were permitted to use the Heart Laser System which led to the treatment of
201estimated
80,000 domestic patients with TMR, rather than the one site used for Phase I on 15 patients.
The
9
11
Phase II study protocol involved patientseach year who suffer from severe coronary artery
disease and who were not candidates forbut cannot be treated with conventional CABGcoronary revascularization
techniques such as bypass surgery or angioplasty
procedures.angioplasty. PLC was the first company
to receive FDA approval to commercialize a product to perform TMR. As part of
this approval process, the FDA conducted an inspection of the Company's
manufacturing facility in June 1998. The sites for Phase II testing are sites which perform a large
numberFDA completed its inspection of
open heart procedures and are experienced in taking part in clinical
trials.
The second stepPLC's manufacturing facility without any adverse findings or observations of
deficiencies in the approval process requires submission to theCompany's manufacturing and quality systems. FDA of a
comprehensive PMA application which includes results of all the human clinical
testing performedimposed
certain post-approval requirements as well as detailed product manufacturing, quality controls
and facility descriptions. In May 1995, the Company submitted its PMA
application and was assigned expedited review status. The FDA grants expedited
review status for medical devices intended for use in the following
circumstances; life threatening or irreversible debilitating condition with no
alternative modalities, or for which the device provides an earlier diagnosis, a
revolutionary breakthrough device, or a device whose availability is in the best
interest of public health.
In December 1994, the Company requested permission from the FDA to initiate
Phase IIIconditions of its existing clinicalAugust clearance.
These requirements include a 600 patient post-market study to further assess
mortality, a specific "TMR" surigical informed consent, and obtained authority to proceed in
June 1995. The Phase III study was a randomized study designed to specifically
compare the use of the Heart Laser System to a control treatment, medical
management,certain
disclaimers placed on end stage cardiac patients. Authorization was granted to permit
up to 20 clinical sitesall promotion and 350 patients. Based on early results of this study
submitted by the Company to the FDA in August 1996, the FDA granted permission
to no longer require the control treatment. Therefore, all future patients
enrolled in the study could receive TMR with the Heart Laser System.
Efforts towards finalizing the market approval of the Heart Laser System
continue. In December 1996, the Company submitted an amendment to its PMA
application to provide the most current clinical test results from the Phase II
and Phase III studies. In February 1997, the FDA, under its administrative
policies, agreed to file the Company's PMA and to undergo a substantive review
of the application. Since that time, the Company has received multiple requests
from the FDA for additional information, indicating the continuation of this
substantive review process. In July 1997, a public meeting with the FDA
circulatory systems device advisory panel resulted in a decision to not
recommend approval of the Heart Laser System at that time, pending further
patient data. The Company submitted the patient data requested by the FDA in
November and December of 1997 and has been advised of an April 1998 panel
meeting date. Pre-approval inspections of the Company and its clinical sites
have taken place in 1997 and 1998 with one more waiting to be scheduled by the
Company.advertising materials.
Once a product obtains market approval, any modifications to the existing
design or manufacturing process as well as any desire to change its labeling
(i.e., intended use) must proceed throughbe approved by the FDA approval process once again.FDA. The Company intends to
continuously improve theThe Heart Laser System after market introduction and may
therefore intends to submit future IDE, PMA and PMA supplement applications to the FDA. No
assurance can be given that approval of thesesuch new IDE's, PMA'sIDEs, PMAs or PMA supplements
will be received from the FDA on a timely basis, ifor at all.
International shipments of investigational medical devices are subject to
FDA export requirements. Investigational devices may be freely exported to any
Tier 1 country (European Economic Area member states, South Africa, Australia,
Canada, Israel, Japan, New Zealand and Switzerland), without receiving FDA
export approval provided a valid market authorization from one of these
countries is obtained. FDA requires notification only at the time of the first
shipment. In September 1995, the Heart Laser System was afforded an EC Type
examination certificate, which allows the Company to place the CE Mark on each
Heart Laser System and list its devices after inspection by a notified body. The CE Mark permits market distribution of the Heart Laser System throughout member
states of the European Union. For all other countries outside of this list, FDA
export approval must be obtained and is contingent upon obtaining an approval
letter or a letter of no objection from a regulatory authority of the importing
country. Theinternational regulatory approval process varies from country to
country and thereis subject to change in a given country as regulatory requirements
change. There is no assurance that this information can be obtained in a timely manner,
in a manner thatforeign regulatory authorities will satisfy the FDAallow
use or that a foreign agency will authorize
the usesale of theThe Heart Laser System in such country.a particular country on a timely basis,
or at all.
In October 1997, the Company was notified thataddition, regulatory authorities can suspend or modify approvals
previously granted in certain circumstances. For example, the French Ministry of
Health was institutinginstituted a commercial moratorium on lasers used for TMR asprocedures in their opinion,France in October
1997. The French Ministry of Health deemed the procedure was considered to be experimental and should"experimental",
although The Heart Laser System had been approved for commercial distribution in
the European Community since 1995. As a result, TMR can only be performed
within the context of a clinical study.study in France. An evaluation of the safety
10
12
of TMRThe Heart Laser System is currently under review by a panel of French
experts and the results of
this review will determine the status of TMR.experts. The Company has provided a dossier
of its clinical results to the panel and is
actively working with the Ministry
to have thisthe moratorium lifted. No assuranceThere can be given as to whetherno assurance that
the Company will be successful in its efforts to have this situation modified.having the moratorium lifted or that other
countries will not impose restrictions on use of the Company's products.
As a device manufacturer, the Company is also required to register with the
FDA. As such, the Company is subject to inspection on a routine basis for
compliance with the FDA's Quality Systems
9
regulations. These regulations require that the Company manufacture its
products and maintain its documents in a prescribed manner with respect to
manufacturing, testing and control activities. Further, the Company is required
to comply with various FDA requirements for reporting. The Medical Device
Reporting Act regulations require that the Company provide information to the
FDA on death or serious injuries alleged to have been associated with the use of
its laser systems,products, as well as product malfunctions that would likely cause or
contribute to death or serious injury if the malfunction were to recur. The FDA
also prohibits an approved device from being marketed for unapproved
applications. In addition to the requirements generally
applicable to devices, there are additional regulatory requirements specifically
applicable to lasers under the Radiation Control for Health and Safety Act of
1968 ("Radiation Act") and FDA regulations thereunder. The Company's laser products are subject to periodic inspection
under the Radiation Act for compliance with labeling and other safety
regulations. If the FDA believes that a company is not in compliance with the
law, proceedings can be instituted to detain or seize products or force
notification and correction of hazards or defects (including a recall), enjoin
future violations and assess civil and criminal penalties against the Company,
its officers or its employees. Failure to comply with regulatory requirements
could have a material adverse effect on the Company's business, financial
conditions and results of operations.
THIRD PARTY REIMBURSEMENTSREIMBURSEMENT
Heath care providers, such as hospitals and physicians, that purchase
medical devices such as theThe Heart Laser System for use on their patients
generally rely on third party payors,payers, principally Medicare, Medicaid and private
health insurance plans, to reimburse all or part of the costs and fees
associated with
the procedures performed with these devices.
In November 1995, the FDA designated the Company's IDE for TMR with the
Heart Laser System as Category B forFebruary 1997, the Health Care Financing Administration ("HCFA"), the agency responsible for administering the Medicare program. This
classification meant that procedures performed with the Heart Laser System were
eligible for Medicare reimbursement during the clinical trials. The Rule
allowing coverage for Category B devices left the coverage determination for
procedures involving those devices to the discretion of local Medicare
contractors in the absence of a national coverage instruction.
In February 1997, HCFA
published a national non-coverage instruction for TMR based on its belief that
scientific evidence substantiating the safety and effectiveness of TMR was not
currently available. It is not unusual for HCFA to deny reimbursement for
procedures performed using devices that have not yet received FDA approval. The
non-coverage instruction applied to procedures performed on or after May 19,
1997 on Medicare beneficiaries.
The Company has
been working withIn February 1999, HCFA staff to seek withdrawal of the non-coverage instruction.
HCFA has agreed to look at the Company's safety and effectiveness data at the
time of the FDA panel review in April 1998, possibly leading to a withdrawal ofrescinded the national non-coverage instruction. The Company isinstruction for
TMR implemented in the process of
notifying HCFA of the scheduled FDA Panel date in AprilMay 1997 and announced that Medicare will request a
meeting to further discuss the modification or withdrawal of the non-coverage
instruction.
The Company believes, although no assurance can be given, that FDA approval
may be granted in 1998, and that the data submitted to support an FDA approval
may warrant a withdrawal of the non-coverage instruction made by HCFA. The
Company is not sure if any reversal in theprovide coverage instruction will be product
specific to the Heart Laser System or will apply to the TMR procedure in
general. The Company has also discussed the benefits of TMR and the potential
adverse effects of HCFA's non-coverage instruction on the Medicare population
with some members of Congress. No assurance can be given that the non-coverage
instruction will be withdrawn and no assurance can be given that the FDA will
grant a PMA approval for the Heart Laser System in 1998, if at all.
11
13
Even if a device has FDA clearance, Medicare and other third party payors
may deny coverage if they conclude that TMR is not a reasonable and necessary
procedure. No assurance can be given that, even if coverage is granted, the
payors' reimbursement levels will not adversely affect the Company's ability to
sell its products. Private insurance companies and HMO's have already made
reimbursement
for TMR procedures performed with devices approved by the FDA. The decision set
a new coverage policy to allow payment for TMR consistent with FDA-approved uses
of TMR devices. HCFA has not yet determined the effective date of this policy
change.
In January 1999, the Blue Cross and Blue Shield Association TEC completed a
favorable assessment of TMR. The TEC concluded that TMR meets all five criteria
used to evaluate new medical technologies: (1) final approval from the U.S. Food
and Drug Administration; (2) scientific evidence of improvement in some cases during clinical trials.health
outcomes; (3) net benefit in health outcomes; (4) health outcomes at least as
beneficial with any established alternative; and (5) improvements achievable
outside investigational settings. The TEC's determination that TMR meets its
criteria is a significant step in obtaining reimbursement for TMR by major
payers. The TEC's conclusion was based upon a review of data showing the safety
and effectiveness of TMR by the TEC program staff, and the TEC's assessment was
approved by its panel of independent medical advisors. The TEC program is
sponsored by the national Blue Cross and Blue Shield Association, whose members
include local Blue Cross and Blue Shield plans nationwide, as well as other
major managed care organizations. TEC assessments are released as reports to TEC
program subscribers. Nearly all major payers in the US, including governmental
payers, private third party payers and managed care organizations, subscribe to
the TEC program and receive TEC assessment reports for use in their own coverage
and payment policy making.
Economic data derived from the IDECompany's clinical studies indicates that
thereTMR using The Heart Laser System may beresult in a significant reduction in the
cost of treating the patient population of the
studies.patients with severe CAD. Potentially, this could mean that
TMR performed with theThe Heart Laser System is a procedure that offers real
economic advantageadvantages to the managed care market, in particular, in which over 70%
of all privately insured
10
Americans are covered at least in part. The Company has begun an effort to educate the different segments of the
market concerning TMR reimbursement. It is importantNo assurance can be given that the hospital and
physician providers, the insurance industry, the health plan underwriters,
employers and patients understand the clinical andsuch
economic benefits ofwill be realized by customers.
Certain private insurance companies and HMOs currently provide
reimbursement for TMR as
indicated by the IDE studies. Study results are concurrent with the quality of
care and economic issues currently driving theprocedures. No assurance can be given, however, that
additional payers will reimburse health care market. It shouldproviders who perform TMR
procedures or that reimbursement, if provided, will be noted thattimely or adequate. In
addition, the market for the Company's products also could be adversely affected by
future legislation to reform the nation's health care system or by changes in
industry practices regarding reimbursement policies and procedures.
PRODUCT LIABILITY AND INSURANCE
The Company's business involves the risk of product liability claims. No
claims have been made against theThe Heart Laser System to date. The Company
maintains product liability insurance with aggregate coverage limits of $4$10
million. No assurance can be given that product liability claims will not
exceed such insurance coverage limits, which couldthat such claims will not have a material
adverse effect on the Company, or that such insurance will be available aton
commercially reasonable terms or at all.
PROPRIETARY PROCESSES, PATENTS, LICENSES AND OTHER RIGHTS
The Company's policy is to file patent applications to protect technology,
inventions and product improvements. The Company also relies on trade secret
protection for certain confidential and proprietary information.
Since April 1992, the Company has received 14 U.S. patents, of which 1112
involve theThe Heart Laser System and its related technologies. The first patent,
which was issued in April 1992, provides patent protection until 2009 and
relates to the underlying laser technology needed to create a pulsed, fast flow
laser system (allowing the laser gas to flow through the laser to the vacuum at
high speed).system. The second patent, which was issued in June 1992, provides patent
protection until 2009 and relates to the use of a laser on a beating heart to
revascularize the heart using TMR. The third patent, which was also issued in
June 1992, provides patent protection until 2009 and relates to the system used
to time the heart's contractions to synchronize the laser firing at the correct
time. The fourth patent, which was issued in April 1993, provides patent
protection until 2010 and relates to theThe Heart Laser System handpiece, which is
used to deliver the laser energy to the heart. The fifth patent, which was
issued in June 1993, provides patent protection until 2010 and relates to a
specialized laser beam manipulator used for conventional laser surgery. The
sixth patent, which was issued in October 1993, provides patent protection until
2010 and relates to a self-aligning coupler for a laser endoscope. The seventh
patent, which was issued in August 1994, provides patent protection until 2011
and relates to the synchronization of a surgical smoke evacuator to a laser
system or other medical device. The eighth patent, which was issued in April
1996, provides patent protection until 2013 and relates to the use of an ECG
monitor. The ninth patent, which was issued in September 1996, provides patent
protection until 2013 and relates to medical laser technology. The tenth
patent, which was issued in January 1997, provides patent protection until 2014
and relates to theThe Heart Laser System handpiece. The eleventh patent, which was
issued in April 1997, provides patent protection until 2014 and relates to the
lens cell for theThe Heart Laser System. The twelfth patent, which was issued in
November 1997, provides patent protection until 2014 and relates to a
thoracoscopic cannula system. The thirteenth patent which was issued in
December 1997, provides patent protection until 2014 and relates to a
thoracoscopic TMR handpiece. The fourteenth patent, which was issued in March
1998, provides patent protection until 2015 and relates to ultrasound detection
of 12
14
revascularization. The Company also has tentwelve U.S. patent applications
pending relating to theThe Heart Laser System handpiece, other technology used in
theThe Heart Laser System, technology associated with minimally invasive surgical
techniques and technologies associated with percutaneous TMR.
11
In April 1996, the Company received patents from the European Patent Office
and the Japanese Patent Office providing patent protection on its heart
synchronization technology. A patent covering this technology was issued in
April 1997 in Canada. Additional Japanese issued patents cover a TMR handpiece,
a self-aligning coupler for a laser endoscope, laser beam manipulation and a
laser beam status indicator. In December 1996, a patent was issued in Canada
covering a self aligning coupler for a laser endoscope. The Company has
over 30numerous patents pending related to theThe Heart Laser System and its components in
various international patent offices. The Company intendsexpects to file additional
patent applications overseas in the next year. The Company expects to continue to file
domestic and foreign patent applications on various features of the Heart Laser
System,year, although there can be no assurance that
any additional applications will be filed or that any additional patents will be
issued.
In September 1996, CardioGenesis Corporation ("CardioGenesis") filed, a civil lawsuit incompetitor of the United States District Court forCompany,
agreed to the Northern Districtvalidity and enforceability of California seeking to havecertain of the Company's patents in
connection with a settlement of all outstanding litigation between the
companies. The patents, U.S. Patent No. 5,125,926 and related international
patents, cover the Company's proprietary synchronization patent declared
invalid, or, alternatively, askingtechnology, a critical
factor in ensuring the courtsafety of TMR and PMR procedures. PLC granted
CardioGenesis a non-exclusive worldwide license to determine whetherthe patents in exchange for
payment of a license fee and ongoing royalties over of the life of the patents.
A minimum of $2.5 million will be paid by CardioGenesis infringes on this patent. In October 1996,to the Company filed an answer and
counterclaim alleging that CardioGenesis infringes onin
connection with this patent. The
counterclaim seeks both injunctive relief and monetary damages against
CardioGenesis. In October 1997, CardioGenesis filed an amended complaint seeking
to have the Company's synchronization patent declared unenforceable.
CardioGenesis is not seeking monetary damages from the Company.license agreement. (See "Item 3. Legal Proceedings")
In February 1998, the Company filed an application with the United States
Patent Office to reissue the Company's synchronization patent with 32 additional
claims directed to various features of its synchronized laser system technology
including the use of a fiber optic laser delivery device.
In January 1997, CardioGenesis Corporation, filed a challenge to the
Company's European synchronization patent in the European Patent Office and in
March 1997 the Company filed its response. In addition, in April 1997, the
Company filed an infringement lawsuit against CardioGenesis in the Munich
District Court alleging infringement of its synchronization patent. An oral
hearing has been scheduled in the Munich District Court on October 1, 1998. (See
"Item 3. Legal Proceedings").
Although the Company believes its patents to be strong, successful
litigation against these patents by a competitor could have a material adverse
effect on the Company's business, financial condition and results of operations.
No assurance can be given that the existing patents will be held valid if
challenged, that any additional patents will be issued or that the scope of any
patent protection will exclude competitors. The breadth of claims in medical
technology patents involve complex legal and factual issues and therefore can be
highly uncertain. Further, no assurance can be given that the scope of the
claims of the Company's synchronization patent will remain unchanged during the
patent office review of the Company's reissue application, or that any claims
will be approved.
The Company also relies upon unpatented proprietary technology and trade
secrets that it seeks to protect, in part, through confidentiality agreements
with employees and other parties. No assurance can be given that these
agreements will not be breached, that the Company will have adequate remedies
for any breach, that others will not independently develop or otherwise acquire
substantially equivalent proprietary technology and trade secrets or disclose
such technology or that the Company can meaningfully protect its rights in such
unpatented technology. In addition, others may hold or receive patents which
contain claims that may cover products developed by the Company.
The Company believes its patents to be valid and enforceable. However,
there has been substantial litigation regarding patent and other intellectual
property rights in the medical device industry. Litigation, which could result
in substantial cost to and diversion of effort by the Company, may be necessary
to enforce patents issued to the Company, to protect trade secrets or know-how
owned by the Company, to defend the Company against claimed infringement of the
rights of others and to determine the scope and validity of the proprietary
rights of others. Adverse determinations in litigation could subject the
Company to significant 13
15
liabilities to third parties, could require the Company
to seek licenses from third parties and could prevent the Company from
manufacturing, selling or using its products, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
In February 1996, PLC Medical Systems, Inc. filed suit against Eclipse
Surgical Technologies, Inc. ("Eclipse") in the United States District Court for
the District of Massachusetts alleging copyright infringement of certain
copyrighted works and unfair and deceptive trade practices. The Company is
seeking injunctive relief and damages for, among other things, any profits
derived by Eclipse, attorney's fees, treble damages and other relief.COMPETITION
The Company believes that trademarks maythe majority of TMR procedures completed
worldwide to date have been performed using The Heart Laser System. As of
December 31, 1998, over 4,300 TMR procedures had been performed using The Heart
Laser System. In addition, the Company believes that the majority of peer
reviewed medical journal articles on TMR report results of TMR procedures
performed with The Heart Laser System.
12
A number of other companies have entered or are attempting to enter the TMR
market. These companies are believed to be important to its business.using other types of lasers such as
holmium and excimer lasers. Holmium and excimer lasers have different physical
properties and interact differently with human tissue than the Company's carbon
dioxide laser. The Company believes that The Heart Laser System is the only TMR
product that can create a channel completely through the heart wall with a
single laser pulse. Research conducted at the Texas Heart Institute in animal
models has indicated that the Company's synchronized, single pulse CO2 laser may
cause significantly less damage to the heart than a U.S. registered trademarkholmium laser used to
perform TMR. Holmium lasers currently used for "THE HEART LASER AND DESIGN" which
was issued on December 19, 1995TMR are not capable of creating
a patent channel in one pulse, and three foreign registered trademarks for "THE
HEART LASER," which were issued on September 9, 1991 in France, on March 29,
1993 in Switzerland and on March 31, 1994 in Japan. Additionally,must therefore use a fiber-optic probe that
"drills" its way from the Company
has three pending U.S. trademark applications for "TMR and DESIGN," "HEART
DESIGN," "TMR TRANSMYOCARDIAL REVASCULARIZATION and Design" which were filed on
July 13, 1995, July 20, 1995 and July 24, 1995, respectively. In 1996, Eclipse
filed oppositionsoutside of the heart to eachthe blood-filled left
ventricle. The presence of these trademark applicationsthe probe within the heart muscle may contribute to
an increased risk of arrhythmias. Moreover, since four to seven firings are
required to create a channel, channels formed in the United States
Trademark Office. Thereheart wall by such holmium
systems have been observed to be jagged and segmented. The Company believes
that there is one pending foreign trademark application for "THE
HEART LASER AND DESIGN" in Germany.ample opportunity to successfully differentiate its CO2 laser and
plans to implement an appropriate marketing effort accordingly. No assurance
can be given that the Company's
trademarkssuch a marketing effort will be registeredimplemented successfully, or
that others do not have prior rights to such
marks.
COMPETITION
Many treatments are available for coronary artery disease. The Company
believes that if the Heart Laser System receives approval for expanded
indications, the Heart Laser System should be able to successfully compete with
some of these technologies.
The Company is aware of number of other companies who have entered the TMR
market or have announced their intention to enter the TMR market. The majority
of these companies are using holmium lasers, two are using excimer lasers and
one company is developing a short pulsed CO(2) laser for TMR. Most of these
companies are in the early stages of clinical tests or in the development of
clinical testing. Based on public information and published results, the Company
has performed the highest number of TMR procedures and has the most published
data and peer reviewed articles. To date, only two of the Companies using a
holmium laser have presented data on their results, which show reduction in
angina and improvement in quality of life.
The Company is investigating whether these competitors violate in any way,
existing patents issued to the Company and has brought claims against
CardioGenesis in both the U.S. and in Europe. (See "Proprietary Processes,
Patents, Licenses and Other Rights" and "Legal Proceedings")at all.
Several of the companies who have entered the TMR market are developing
percutaneous"percutaneous" methods of performing TMR. To date there has been very little
information presented on patient outcomes other than claims that benefits
derived may be equivalent to surgical treatment.TMR, known as "PMR". PMR procedures are
performed via a catheter inserted through an incision in a patient's leg. The
Company is currently
developinghas a proprietary percutaneous program.PMR development program underway. PMR may provide a
less invasive method of creating channels in a human heart if it can be proven
safe and effective. No assurance can be given that the Company's PMR development
program will be successful.
The Company's two principal competitors, Eclipse and CardioGenesis, merged
on March 17, 1999. Both companies have holmium laser systems undergoing
clinical studies. In February 1999, Eclipse received FDA approval to market its
holmium laser in the U.S. to perform TMR. According to public information, the
laser revascularization systems developed by Eclipse and CardioGenesis can be
used to perform both TMR and PMR procedures.
Many treatments are available for coronary artery disease. The Company
believes that the primary competitive factors in the medical treatment of
coronary artery disease are clinical safety and efficacy, product safety and
reliability, regulatory approval, availability of reimbursement from insurance
companies and other payers, product quality, innovation, price, reputation for quality,
customer service and ease of use. The Company believes that its competitive
success will be based on its ability to create and maintain scientifically
advancedeffective and safe technology, obtain required regulatory approvals, obtain
third party reimbursement for use of its products, attract and retain scientific
personnel, obtain patent or other protection for its products, obtain required regulatory approvals and manufacture
and successfully market its products either directly or through outside parties.
If a PMA is granted under expedited review in the current year,
management expects that the Heart Laser System would be the first FDA approved
TMR device and should enjoy a market lead time over its competitors. No
assurance can be given however that a PMA will be granted in the current year,
if at all, and if granted, that it would necessarily be in advance of any
competitors or provide the Company with a sustainable competitive advantage.
14
16
If the FDA grants a PMA for TMR using the Heart Laser System, theThe Company believes that the primary competitive factors within the
interventional cardiovascular market are the ability to treat safely and
effectively various types of coronary disease, physician familiarity with and
acceptance of the procedure, third party reimbursement policies, and to a lesser
extent, ease of product use, product reliability, and price.
The medical care products industry is characterized by extensive research
efforts and rapid technological progress. New technologies and developments are
expected to continue at a rapid pace in both industry and academia. Competition
in the market for surgical lasers and for the treatment of cardiovascular
disease is intense and is expected to increase. Management believes that theThe
Heart Laser System if approved for general sale by the FDA, willmust compete primarilynot only with currentTMR and PMR systems, but with
medical management (drugs) as well as conventionaland other coronary procedures (e.g. coronary bypass,
balloon angioplasty, and new coronary procedures (including
atherectomy, laser angioplasty, and metallic stents). Many of the
companies manufacturing these devicesproducts have substantially greater capital, as well as
greater research and development, regulatory, manufacturing and marketing resources and
experience than the Company and represent significant competition for the
Company. Such companies may succeed in developing products that are more
effective or less costly in treating coronary disease than theThe Heart Laser
System, and may be more successful than the Company in manufacturing and
marketing their products. No
13
assurance can be given that the Company's competitors or others will not succeed
in developing technologies, products or procedures that are more effective than
any being developed by the Company or that would render the Company's technology
and products obsolete or noncompetitive. Although the Company will continue to
work to develop new products and advance existingimproved products, the advent of either new devices or
new pharmaceutical agents could hinder the Company's ability to compete
effectively and have a material adverse effect on its business, financial
condition and results of operations.
RESEARCH AND DEVELOPMENT
Research and development expenses were $4,468,000, $5,158,000, $2,835,000 and
$2,246,000$2,835,000 for the years ended December 31, 1998, 1997 1996 and 1995,1996, respectively.
Although the initial design of theThe Heart Laser System is now completed,
management expectsplans to continue to refine theThe Heart Laser System design, to develop
new less invasive methods for use of the Heart Laser System inperforming TMR procedures, including endoscopic
and percutaneous delivery systems and to fund clinical trials. The Company
intends to continue to monitor all technologies that may be applicable to TMR to
maintain itsa leadership position as a technology leader in this marketplace.market. No assurance can be given that
the Company's research and development goals will be implemented successfully or
that the Company will maintain its leadership position in this market.
EMPLOYEES
As of March 23, 1998,22, 1999, the Company had 8168 full-time domestic employees,
including its executive officers. Of these, 1516 are employed in general and
administrative activities, 22 are involved in sales and marketing, 1913 are
involved in research and development and 2517 are involved in manufacturing. The
Company also employs one part-time employee. None of the Company's employees
are represented by a union. In addition, the Company has 1412 full time
employees/consultants for its international operations. Management considers
its relations with employees to be satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY.
In September 1996, the Company moved into its current 37,000 square foot
facility in Franklin, Massachusetts where it maintains its principal executive
offices and manufacturing operations. The premises are leased from an
independent third party under a lease which expires in August 2001. The lease
provides for two renewal periods of three years each. The total base rental
payments for the term of the lease are approximately $296,400 per year plus
operating and maintenance costs and real estate taxes.
ITEM 3. LEGAL PROCEEDINGS.
In September 1996, CardioGenesis filed a civil lawsuit in the United States
District Court for the Northern District of California asking the court to
declare the Company's synchronization patent (U.S. Patent No. 5,125,926) invalid
and unenforceable, or, alternatively, to find that CardioGenesis' TMR and PMR
lasers do not infringe this patent. The Company filed a counterclaim alleging
that all of CardioGenesis' TMR and PMR lasers infringe U.S. Patent No.
5,125,926. In January 1997, CardioGenesis filed an opposition in the European
Patent Office to have the Company's German synchronization patent declared
invalid. In April 1997, the Company filed an infringement lawsuit against
CardioGenesis and one of its distributors in the Munich District Court alleging
that CardioGenesis' TMR and PMR lasers infringe the Company's German
synchronization patent.
The PLC patents at issue in these lawsuits cover the Company's
synchronization technology, a critical factor in ensuring the safety of TMR and
PMR procedures. In January 1999, the Company settled its outstanding patent
infringement litigation with CardioGenesis. Under the settlement, CardioGenesis
agreed that U.S. Patent No. 5,125,926 and related international patents of the
Company are valid and enforceable. PLC granted CardioGenesis a non-exclusive
worldwide license to the patents in exchange for
14
payment of a license fee and ongoing royalties over the life of the patents (at
least 10 years unless the patents are all held invalid in future lawsuits). As
part of the settlement, CardioGenesis must pay the Company:
- a minimum of $2.5 million over the next 42 months; and
- license fees and ongoing royalties on sales of all covered products
for at least 10 years (unless the patents are all held invalid in
future lawsuits).
In July 1997, an FDA advisory panel recommended against approval of the
Company's application to market The Heart Laser System in the United States.
Following this recommendation, the Company was named as defendant in 21
purported class action lawsuits filed between August 1997 and November 1997 in
the United States District Court for the District of Massachusetts. The
lawsuits seek an unspecified amount of damages in connection with alleged
violations of the federal securities laws based on the Company's failure to
obtain a favorable FDA panel recommendation in 1997. Nineteen of these
complaints have been consolidated by the court into a single action for pretrial
purposes. Two of these suits have been dismissed. The Company moved to
dismiss all of the remaining claims. On March 26, 1999, the court issued an
order dismissing some, but not all of the remaining claims. The Company has
also been named as a defendant in a lawsuit filed in Massachusetts Superior
Court in September 1998. This suit seeks over $2 million in damages for alleged
negligent misrepresentations and fraud arising from the Company's failure to
obtain a favorable FDA recommendation in 1997. The Company cannot make a
meaningful estimate of the amount or range of loss that could result from an
unfavorable outcome of these lawsuits, but an unfavorable outcome could have a
material adverse affect on the Company's business, financial position and
results of operations. The Company believes that it has valid defenses to these
litigation matters and it continues to vigorously defend itself in these
matters.
In August 1997, the Company received from the United States Securities and
Exchange Commission (the "Commission") an informal request for information
relating to the decision by the FDA Advisory Panel not to recommend approval of
The Heart Laser System in July 1997. The Company has responded and has not
received any further communication from the Commission regarding this matter
since June 1998.
In February 1996, PLC Medical Systems, Inc. filed suit against Eclipse
Surgical Technologies, Inc. ("Eclipse") in the United States District Court for
the District of Massachusetts alleging copyright infringement of certain
copyrighted works and unfair and
deceptive trade practices.practices based on Eclipse's misappropriation and copying of one
of PLC's confidential clinical study protocols. The Company is seeking
15
17
injunctive relief and damages, for, among other things,as well as any profits derived by Eclipse as a
result of the misappropriation, attorney's fees, and treble damages and other relief. (See "Proprietary
Processes, Patents, Licenses and Other Rights"damages.
In November 1998, a hospital in France, Centre Medico Chirurgical Foch
("Foch Hospital") In September 1996, CardioGenesis Corporation, ("CardioGenesis") filed a
civil lawsuit in the United States District Court for the Northern District of
California seeking to havesued the Company's synchronization patent declared
invalid, or, alternatively, asking the court to determine whether CardioGenesis
infringes on this patent. In October 1996, the Company filed an answerPortuguese subsidiary, PLC Sistemas Medicos
Internacionais Lda., and counterclaima third party, Johnson & Johnson Leasing GmbH in Paris,
France alleging that CardioGenesis infringes on this patent. The
counterclaim seeks both injunctive relief and monetary damages against
CardioGenesis.breach of contract. In October 1997, CardioGenesis filed an amended complaintthe French Ministry of
Health suspended commercial use of TMR devices in France. Foch Hospital is
seeking
to have the Company's synchronization patent declared unenforceable.
CardioGenesis is not seeking monetary damages from the Company but will seek reimbursement of its legal expenses if successful in the lawsuit. Trial has been
scheduled to begin in January 1999. (See "Proprietary Processes, Patents,
Licenses and Other Rights")
In January 1997, CardioGenesis Corporation, filed a challenge to the
Company's European synchronization patent in the European Patent Office and in
March 1997 the Company filed its response. In addition, in April 1997, the
Company filed an infringement lawsuit against CardioGenesis in the Munich
District Court alleging infringement of its synchronization patent. An oral
hearing has been scheduled in the Munich District Court on October 1, 1998. (See
"Proprietary Processes, Patents, Licenses and Other Rights")
The Company and certain of its officers have been named as defendants in 21
purported class action lawsuits filed between August 1997 and November 1997 in
the United States District Courtlease payments made for the District of Massachusetts.Heart Laser System. The
suits
allege violations of the federal securities laws. The plaintiffs are seeking
damages in connection with such alleged violations. Nineteen of these complaints
have been consolidated by the court into a single action for pretrial purposes.
A motion has been filed to consolidate the other two suits with each other.
These matters are in the earliest stages of litigation and the Company intends
to seek motions to dismiss all of these claims. There can be no assurance that
the motions to dismiss these claims will be successful. Management is unable to
make a meaningful estimate of the amount or range of loss that could result from
an unfavorable outcome of these pending litigation matters. It is possible that
the Company's result of operations or cash flows in a particular quarter or
annual period or its financial position could be materially affected by an
ultimate unfavorable outcome of this pending litigation. The Company believes
that it has valid defenses to these class action litigation matters and intends to vigorously defend itself in these matters.
In August 1997,this matter. This matter is in
the Company received from the Securitiesearliest stage of litigation and Exchange
Commission an informal request for information relating to the decision by the
FDA Advisory Panel to not recommend approvala meaningful estimate of the Heart Laser System. The
Company has responded and to dateloss that
could result from this matter has not received any further communication
with the Commission regarding this matter.been made.
The Company is not involved in any other litigation of a material nature.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
1615
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since September 17, 1992, the Company's Common Stock has traded on the
American Stock Exchange ("AMEX") under the symbol "PLC". From March 3, 1992
through September 16, 1992, the Company's Common Stock was traded on the
over-the-counter market through the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"). On March 23, 199822, 1999 the closing sale price
of the Company's Common Stock as reported by the AMEX was $14.75$2.94 per share.
For the periods indicated, the following table sets forforth the range of high
and low saleclosing prices for the Common Stock as reported by AMEX from January 1,
1996.1997.
SALES
---------------------
HIGH LOW
------ ---------- ---
19961997
----
First Quarter............................................... $34.88 $16.63
Second Quarter.............................................. $33.88 $20.38
Third Quarter............................................... $28.63 $13.25
Fourth Quarter.............................................. $27.25 $19.63
1997
First Quarter...............................................Quarter . . . . . . . . . . . . . . . . $27.63 $16.63
Second Quarter..............................................Quarter. . . . . . . . . . . . . . . . $22.88 $12.38
Third Quarter...............................................Quarter . . . . . . . . . . . . . . . . $26.81 $10.25
Fourth Quarter..............................................Quarter. . . . . . . . . . . . . . . . $14.38 $ 6.88$6.88
1998
----
First Quarter . . . . . . . . . . . . . . . . $18.19 $8.00
Second Quarter. . . . . . . . . . . . . . . . $18.13 $9.25
Third Quarter . . . . . . . . . . . . . . . . $12.38 $3.75
Fourth Quarter. . . . . . . . . . . . . . . . $6.63 $3.06
1999
----
First Quarter (through March 23, 1998)...................... $14.75 $ 7.8822, 1999). . . . $6.81 $2.94
As of March 23, 1998,1999, there were approximately 647751 record holders of the
Company's Common Stock. Management believes that there are approximately 16,00019,000
beneficial owners of the Company's Common Stock.
DIVIDENDS
The Company has never paid cash dividends. The Company currently intends
to retain all future earnings, if any, for use in its business and does not
anticipate paying any cash dividends in the foreseeable future.
1716
19
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data with respect to the Company for the
five years ended December 31, 1997,1998, are derived from the audited financial
statements of the Company. The data should be read in conjunction with the
financial statements, related notes and other financial information included
herein.
SELECTED FINANCIAL DATA
FOR THE YEARS ENDED DECEMBER 31
------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
1993
-------- ------- ------- ------- ----------- ---- ---- ---- ----
(ALL AMOUNTS ARE IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue:
Product sales.........................sales. . . . . . . . . . . . . . $ 3,088 $ 5,687 $ 9,082 $11,938 $ 5,068
$ 3,322
Placement and service fees............fees . . . . . . . 2,605 3,254 2,790 1,407 111 --
Costs and expenses:
Cost of product sales.................sales. . . . . . . . . . 1,945 2,721 2,911 4,177 2,851 2,982
Cost of placement and service fees....fees . . . 2,622 2,595 1,155 386 17
--
Selling, general and administrative...administrative. . . 13,718 13,049 7,023 5,035 3,030
2,637
Research and development..............development . . . . . . . . 4,468 5,158 2,835 2,246 2,211
1,930-------- -------- -------- ------- ------- ------- ---------------
Income (loss) from operations...........operations. . . . . . (17,060) (14,582) (2,052) 1,501 (2,930)
(4,227)
Other income............................income . . . . . . . . . . . . . . 457 178 512 588 366
254-------- -------- -------- ------- ------- ------- ---------------
Income (loss) before income taxes.......taxes . . . (16,603) (14,404) (1,540) 2,089 (2,564)
(3,973)
Provision for income taxes..............taxes . . . . . . . -- -- -- 85 --
---------- -------- -------- ------- ------- ------- ---------------
Net income (loss)........................ . . . . . . . . . . . $(16,603) $(14,404) $(1,540) $ 2,004 $(2,564)
$(3,973)
======== ======= ======= ======= =======-------- -------- -------- ------- --------
-------- -------- -------- ------- --------
Net income (loss) per share -- Basic....- Basic. . . $ (.86) $ (.84) $ (.09) $ .13 $ (.18)
$ (.31)
======== ======= ======= ======= =======-------- -------- -------- ------- --------
-------- -------- -------- ------- --------
Net income (loss) per share --Diluted...- Diluted. . $ (.86) $ (.84) $ (.09) $ .12 $ (.18)
$ (.31)
======== ======= ======= ======= =======-------- -------- -------- ------- --------
-------- -------- -------- ------- --------
Shares used to compute net
income (loss) per share -- Basic....................- Basic . . . . 19,218 17,050 16,376 15,868 14,372 12,868
Shares used to compute net
income (loss) per share -- Diluted..................- Diluted . . . 19,218 17,050 16,376 16,590 14,372 12,868
AS OF DECEMBER 31
------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
1993
-------- ------- ------- ------- ----------- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital......................... $ 12,793capital . . . . . . . . . . . . $5,050 $12,793 $11,245 $13,541 $12,431
$ 5,873
Total assets............................assets . . . . . . . . . . . . . . 16,257 27,017 19,417 18,290 14,337
7,595
Long term obligations...................obligations. . . . . . . . . . 37 121 27 32 7
14
Stockholders' equity....................equity . . . . . . . . . . 10,662 19,009 16,467 15,508 13,059 6,658
The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128 "Earnings Per
Share". For further discussion regarding the calculation of earnings per share,
see Note 1 to the Consolidated Financial Statements.
1817
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
Prior to Fiscal 1994, a significant portion of the Company's product sales,
gross profit and operating expenses was related to its general purpose CO(2)
surgical lasers, laser components and related accessories. The Company exited
this part of its surgical laser business by the end of 1995offers placement, purchase and leasing alternatives to
focus its full
resources on thecustomers interested in acquiring The Heart Laser System. The exit strategy included fulfilling
existing contracts and orders, and a sale of technologies associated with a part
of this business.
The Company has both aIn placement
strategy and a direct/distributor sales
strategy for Heart Laser System purchases. The placement program allows the
Company to receive recurring revenues based on the usage of the Heart Laser
System rather than one-time revenues for the sale of each Heart Laser System.
Under the placement model,transactions, an installation fee is paid when theThe Heart Laser System is installedshipped
and the Company then receives a procedure fee per use. Typically, customers
commit to pay for a minimum number of procedures during the term of a placement
agreement. Sterile handpieces and other disposables are included in the per
procedure fee. Revenues from these contracts are classified as placement fees.
The cost of theThe Heart Laser System, which is owned by the Company, is
depreciated over the term of the contract. In the near term, it
is expected that placement revenues will continue to be impacted by
reimbursement policies until the U.S. Food and Drug Administration ("FDA")
approval is granted.
In foreign countries where credit risk is high or where health care is not
reimbursed by the government or insurance, theagreement.
The Heart Laser System is also sold as
capital equipmentto customers, and the related sterile
handpieces and other disposables are sold separately for each procedure. The
Company sells The Heart Laser SystemsSystem directly and through distributors. These
sales are classified as product sales.
In September 1998, the Company entered into an exclusive agreement with GE
Capital Trans Leasing ("GE Capital") to provide a broad array of lease financing
alternatives to U.S. hospitals interested in acquiring The Heart Laser System.
The lease financing alternatives available through GE Capital are expected to
complement the Company's traditional placement and sales strategies. In
addition, GE Capital agreed to monetize certain prospective domestic placement
agreements by providing funding to the Company in an amount equal to the present
value of minimum procedure payments contained in such agreements, subject to
approval of creditworthiness and other terms. No revenue was recognized on such
transactions in 1998. No assurance can be given that the Company will recognize
any revenue as a result of its agreement with GE Capital.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Total revenues of $5,693,000 for the year ended December 31, 1998 decreased
$3,248,000 or 36% when compared to total revenues of $8,941,000 for the year
ended December 31, 1997. For the year ended December 31, 1998, product sales of
$3,088,000 decreased $2,599,000 or 46% when compared to product sales of
$5,687,000 for the year ended December 31, 1997. The major factor in these
decreases is the decline in the number of sales transactions. In 1998, the
Company recorded revenue on six sales compared with revenue recognition on ten
sales in 1997.
Placement and service fees of $2,605,000 for the year ended December 31,
1998 decreased 20% from placement and service fees of $3,254,000 for the year
ended December 31, 1997. Although the Company increased the number of its
placement contracts in 1998, revenue from these contracts decreased. In May
1997, the Health Care Financing Administration ("HCFA") instituted a
non-coverage policy for TMR procedures performed on Medicare patients in the
United States. The HCFA announcement, coupled with delays in the FDA Pre-Market
Approval ("PMA") process, caused the Company to examine its contractual
requirements during 1997 and amend substantially all of its placement contracts,
temporarily replacing contractual minimal billings with actual usage billings.
Following receipt of the PMA from the FDA on August 20, 1998, placement
contracts that provide for minimum billings were reinstated, and the Company is
renegotiating those placement agreements that do not provide for minimum
billings following FDA approval. In February 1999, HCFA announced its intention
to provide coverage for TMR but did not specify an effective date for such
coverage.
Total gross profit decreased to $1,126,000 or 20% of total revenues for the
year ended December 31, 1998 as compared with $3,625,000 or 41% of total
revenues for the year ended December 31, 1997. This decrease has resulted from
three factors. First, the decrease in revenue in 1998 generated fewer gross
margin dollars as compared to 1997. Second, the Company produced fewer Heart
Laser Systems than planned in
18
1998, resulting in unfavorable manufacturing variances. These unfavorable
manufacturing variances are expected to continue until production increases to
levels which will fully absorb manufacturing overhead. Third, depreciation on
Heart Laser Systems shipped pursuant to placement contracts increased at a
greater rate than the corresponding revenue generated from placement contracts.
Selling, general and administrative expenses of $13,718,000 for the year
ended December 31, 1998 increased $669,000 or 5% when compared with $13,049,000
for the year ended December 31, 1997. The increase in 1998 reflects sales and
marketing expenses incurred to initiate rapid commercialization of The Heart
Laser System upon receipt of the PMA.
Research and development expenditures of $4,468,000 decreased $690,000 or
13% for the year ended December 31, 1998 when compared with $5,158,000 for the
year ended December 31, 1997. The decrease in 1998 compared to 1997 reflects
the reduced demands for clinical study compilation and data preparation
following the FDA panel recommendation of approval for The Heart Laser System,
offset in part by higher costs associated with the development of new products.
Other income of $457,000 for the year ended December 31, 1998 increased
$279,000 or 157% when compared to $178,000 for the year ended December 31, 1997,
primarily because of gains recorded in connection with foreign currency
transactions.
There was no provision for income tax for the years ended December 31, 1998
or 1997 due to the net losses of $16,603,000 and $14,404,000, respectively.
The Company incurred a net loss for the year ended December 31, 1998 of
$16,603,000 compared with a net loss of $14,404,000 for the year ended December
31, 1997. The larger net loss resulted from lower total revenues and lower
gross margin dollars in 1998 when compared with 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Total revenues of $8,941,000 for the year ended December 31, 1997 decreased
$2,931,000 or 25% when compared to total revenues of $11,872,000 for the year
ended December 31, 1996. For the year ended December 31, 1997, product sales of
$5,687,000 decreased $3,395,000 or 37% when compared to product sales of
$9,082,000 for the year ended December 31, 1996. The major factors in both of
these year to date decreases arewere declines in the number of Heart Laser Systems sold and the
customer mix. In 1997, the Company recorded revenue on sales of ten Heart Laser
Systems, under the sales strategy of whichincluding two were sold directly and eight were sold to distributors as compared todistributors. In 1996,
the Company recorded revenue recorded on 13 Heart Laser Systems under thethirteen sales, strategy in 1996six of which six were sold directly
and seven of which were sold to distributors. Heart Laser Systems sold directly
to customers typically generate higher revenues than those sold to distributors.
Placement and service fees of $3,254,000 for the year ended December 31, 1997
increased 17% over placement and service fees of $2,790,000 for the year ended
December 31, 1996. Although the Company has increased its placement
contract base, revenue dollars have not proportionately increased. The Company
generates a revenue stream over the life of the placement contract. Typically,
the revenue generated in the initial periods of the contract are less than in
later periods when PreMarket Approval ("PMA") approval is anticipated and
minimum contractual billings are increased. In May 1997, the Health Care
Financing Administration (HCFA) instituted a non-coverage policy for TMR
procedures performed on Medicare patients in the United States. The HCFA
announcement coupled with the July 28, 1997 FDA Advisory Panel recommendation of
non-approval caused the Company to reexamine its requirement of contractual
minimum billings prior to FDA approval. As a result, the Company permitted a
slowdown in the contractual minimum billings to an actual usage billing. Until
PMA approval, of which no assurance can be given, the Company expects that
future billings under placement contracts will be impacted similarly and the
effect on future revenue on existing contracts cannot be predicted.
Total gross1996
Gross profit decreased to $3,625,000 or 41% of total revenues for the year
ended December 31, 1997 as compared with $7,806,000 or 66% of total revenues for
the year ended December 31, 1996. Gross profit on product sales
decreased to $2,966,000 or 52% of product sales for the year ended December 31,
1997 from $6,171,000 or 68% of product sales for the year ended December 31,
1996. This overallThe decrease has resulted primarily from three
factors. First, in
September 1996, the Company moved into a new facility to
19
21
accommodate higher levels of manufacturing in anticipation of FDA approval. In
1997, the Company continued to increase overall staffing and other related fixed manufacturing costs which in turn caused overall manufacturing spending to be
higherincreased in 1997 than in 1996 coupled with lowerand production
levels of production in 1997 than
in 1996. The combination of these factors resulteddecreased, resulting in unfavorable capacity and
manufacturing variances in 1997, which caused a deterioration in the gross
margin. The Company anticipates that after PMA approval, of which no assurance
can be given, production levels will increase to levels that will absorb
manufacturing overhead and mitigate these variances. Secondly, as previously
discussed,Second, the
Company shippedsold fewer units under its sales strategy in 1997 than in 1996 and the
mix was primarily to distributors in 1997 as compared to direct sales in 1996.
Heart Laser Systems sold directly to customers typically carry a higher gross
profit than those sold to distributors. Thirdly, the Company
generated less gross margin dollars from placement contracts in 1997 than in
1996 as discussed below.
Gross profit on placement and service fees of $659,000 or 20% of total
revenues for the year ended December 31, 1997 decreased $976,000 when compared
to $1,635,000 or 59% of total revenues for the year ended December 31, 1996. The
Company's existing placement contracts are in the pre-PMA contractual minimum
billings period, which are typically lower than minimums required after PMA
approval, of which no assurance can be given, at which time annual minimums
increase. The cost of the laser is charged on a straight-line basis over the
life of the placement contract. The overallThird, depreciation on Heart Laser
Systems under existingshipped pursuant to placement contracts is increasingincreased at a fastergreater rate than
the corresponding revenue generated due to the lower pre-PMA minimum billings. This
has resulted in a lower gross margin in 1997 as compared to 1996. Until such
time that the Company sees an increase to its minimum billings on existing and
futurefrom placement contracts, the gross margin is expected to be negatively
impacted.contracts.
Selling, general and administrative expenses of $13,049,000 for the year
ended December 31, 1997 increased $6,026,000 or 86% when compared with
$7,023,000 for the year ended December 31, 1996. The Company continuesincurred
significant expenses to prepare for an FDA panel review of theits PMA application
for theThe
19
Heart Laser System. In 1997,addition, the Company expanded its management team and
as well as its sales force. The Company feels these additional expenditures are necessary and
should enable the Company to be well positioned for the U.S. launch of the Heart
Laser System upon approval from the FDA, of which no assurance can be given.
Research and development expenditures of $5,158,000 increased $2,323,000 or
82% for the year ended December 31, 1997 when compared with $2,835,000 for the
year ended December 31, 1996. The Company continues to makeThese expenditures were incurred in connection
with itsthe Company's clinical study compilation and data preparation for FDA
submissions.submissions and an FDA panel review. These activities have required additional
staffing and consultants in 1997 for these
growing demands. In addition, the Company continues its investments in the
research and development of new products.consultants.
Other income of $178,000 for the year ended December 31, 1997 decreased
$334,000 or 65% when compared to $512,000 for the year ended December 31, 1996.
Included in other income is interest income, interest expense and other expense.
Interest income was $553,000 in 1997 and $594,000 in 1996. The slight decrease1996
primarily because of an increase in interest income is a result of a lower average cash and marketable securities
balances in 1997 than in 1996. Interest expense was $207,000 in 1997 and $13,000
in 1996.expense. In July and August 1997,
the Company received $18.8 million in net proceeds from the issuance of 5%
Convertible Debentures.
See Note 6 to the
Consolidated Financial Statements. The Company recorded interest expense on the
outstanding debentures throughout the year. Other expense was $168,000 in 1997
and $69,000 in 1996. Included in other expense are gains and losses from foreign
currency transactions.
There was no provision for income tax for the yearyears ended December 31, 1997
orand 1996 due to the net losslosses of $14,404,000 and $1,540,000, respectfully.respectively.
The Company incurred a net loss for the year ended December 31, 1997 of
$14,404,000 when compared to a net loss of $1,540,000 for the year ended December 31,
1996. This is a result ofThe increased loss resulted from lower total revenues in 1997 when
compared
with 1996, coupledcombined with higher overall expenses in 1997 related to preparation
for an FDA panel review of The Heart Laser System.
LIQUIDITY AND CAPITAL RESOURCES
During 1997 and 1998 the PMA approval process.Company incurred significant operating losses and
utilized significant amounts of cash to fund operations. The Company is
reaching a critical stage in its growth as it transitions from a research and
development company to a commercial company with complete sales, marketing and
production capabilities. During this time the Company increased its overall
operating expenses and overhead to be positioned to further increase its sale
and production capabilities in anticipation of possible FDA approval. In order
to be adequately positioned to meet these demands, the Company obtained equity
financing. The Company continues to seek equity financing as its primary means
of funding operations during this transition.
On March 4, 1999, the Company announced that it had obtained a provisional
equity financing commitment of $8 million from a major institutional investor.
The commitment contemplates the sale by the Company of up to $2 million in
common stock during consecutive 20 22day periods at prices based on the trailing
volume weighted average price of the common stock on the American Stock Exchange
on each day during such periods, less a seven percent discount. The $.84 and $.09 lossCompany is
unable to use the commitment on any trading day to the extent that the volume
weighted average price of the Company's common stock is less than $3.50 per
share, forunless the years ended December 31, 1997Company and 1996, respectively, was calculated using only the weighted average numberinvestor mutually agree to a reduction in such
price. If the Company is unable to use the commitment on any given trading day,
the commitment amount is automatically reduced by $100,000 on such day.
The use of the commitment is also dependent upon the Company being eligible
to sell shares outstandingof its common stock under a Form S-3 Registration Statement under
the Securities Act of 1933, as amended, which form requires, among other things,
that the Company have a market capitalization of at least $75 million held by
non-affiliates of the Company during the year.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Total revenuesimmediately preceding 60-day period.
As of $11,872,000 for the year ended December 31, 1996
decreased $1,473,000 or 11% when compared to total revenues of $13,345,000 for
the year ended December 31, 1995. For the year ended December 31, 1996, product
sales of $9,082,000 decreased $2,856,000 or 24% when compared to product sales
of $11,938,000 for the year ended December 31, 1995. The major factors in both
of these year to date decreases are the number of Heart Lasers shipped and the
method of sale. In 1996, there wereMarch 30, units shipped, 13 of which were sales, as
compared with 23 shipped in 1995, 15 of which were sales. In addition, in 1995,1999, the Company had a significant salesold 323,231 shares of common stock under
this commitment, resulting in net proceeds to a distributor IMATRON Japan ("IMATRON") of
six Heart Lasers at approximately $5.7 million. In 1996, the Company did not
haveof $885,000. As of
March 31, 1999, the Company is unable to utilize this commitment due to its
stock price.
While the Company anticipates being able to utilize this commitment or
obtain other sources of equity financing, there can be no assurance that the
Company will be able to raise additional equity financing or that the Company
will maintain its eligibility to use Form S-3. To the extent that the Company
raises
20
additional capital by issuing equity or convertible securities, ownership
dilution to the stockholders will result.
During the second half of 1998, the Company implemented a comparable contractnumber of
programs to reduce its consumption of cash, including operating expense
reductions and the financing agreement with IMATRON or any other distributor.
PlacementGE Capital, which enables the
Company to obtain an upfront cash payment on certain domestic placement
agreements. While the Company is encouraged by the recent developments with
respect to FDA approval and service feesthe HCFA announcement that Medicare will provide
coverage for TMR procedures performed with devices approved by the FDA, the
historical absence of $2,790,000widespread reimbursement for the year ended December 31,
1996 increased 98% over placementTMR procedure by third
party payers, principally Medicare, Medicaid, and service feesprivate health insurance
plans, has limited demand for and use of $1,407,000 for the year
ended December 31, 1995 which reflects an increaseThe Heart Laser System in the number ofUnited
States. Although Medicare reimbursement is expected to begin in 1999 and some
private insurance plans have begun reimbursing health care providers for TMR
procedures using The Heart Lasers
under placement contracts. In 1996Laser System, the Company hadbelieves that operating
losses are likely to continue until such time as third party payers begin to
provide widespread reimbursement to healthcare providers for use of The Heart
Laser System.
Recognizing the deliberate nature that accompanies a totalhighly regulated
process such as the above, management of 27the Company has outlined a plan of
appropriate action steps to attempt to ensure that the Company has adequate
sources of cash to meet its working capital needs for at least the next
twelve months. In March 1999, management of the Company received approval
from the Board of Directors to implement this action plan. The key elements
of the plan are as follows:
- Further operating expense reductions to eliminate certain expenditures
which are not critically essential to achieving critical business
objectives at this time (e.g., discretionary spending, further
development efforts)
- Strategic realignment of the Company's international sales
organization.
- Pursuit of strategic alternatives related to the Company's domestic
sales efforts that can help it further penetrate existing markets.
- Pursuit of strategic financing alternatives including the sale of debt
securities, bank financing, strategic alliances, joint ventures or by
other means.
While the Company has not yet finalized the specific details of its plan,
management is committed to developing restructuring alternatives, which, if
implemented, would result in a material charge to operations in 1999.
As a result of implementing the above actions, management believes that
its existing cash resources and cash from operations will meet working
capital requirements over the next twelve months and improve operating
results. However, unanticipated decreases in operating revenues, increases in
expenses or further delays in the process of third party payers committing to
provide reimbursement to healthcare providers, may adversely impact the
Company's cash position and require further cost reductions. No assurance
can be given that the Company will be successful in achieving broad
commercial acceptance of The Heart Lasers
under placement contracts as compared withLaser System or that the Company will be
able to operate profitably on a total of 11 in 1995.
Total gross profit decreased to $7,806,000 or 66% of total revenues for the
year ended December 31, 1996 as compared with $8,782,000 or 66% of total
revenues for the year ended December 31, 1995. Gross profit on product sales
decreased to $6,171,000 or 68% of product sales for the year ended December 31,
1996 from $7,761,000 or 65% of product sales for the year ended December 31,
1995. The decrease in gross margin dollars is a function of lower product sales
discussed previously. The gross margin percentage on product sales increased
slightly in 1996 as compared with 1995.consistent basis.
During the year ended December 31, 1995,1998, the Company expensed certain inventory related with the exit strategy of its
general purpose CO(2) surgical laser product line, which had an unfavorable
impact on the gross margin percentage in 1995.
Gross profit on placement and service fees of $1,635,000 or 59% for the
year ended December 31, 1996 increased $614,000 when compared to $1,021,000 or
73% for the year ended December 31, 1995. In 1996, the Company had a majority of
its placement contracts in their first contract year. The first year of a
placement contract generally produces lower annual minimum contractual revenues
than in subsequent years. In addition, the Company records installation revenue
at the commencement of the placement contract. In 1996, the timing of both of
these factors reflected a lower gross margin percentage when compared to 1995.
Selling, general and administrative expenses of $7,023,000 for the year
ended December 31, 1996 increased $1,988,000 or 39% when compared with
$5,035,000 for the year ended December 31, 1995. In 1996, the Company expanded
its international sales and marketing efforts with the establishment of four
international subsidiaries in Europe and Asia, which accounted for more than
one-third of the overall increase. In addition to the expansion internationally,
the Company has also strengthened its domestic marketing efforts, increased
overall staffing, and moved its operations to a new 37,000 square foot facility.
Research and development expenditures of $2,835,000 increased $589,000 or
26% for the year ended December 31, 1996 when compared with $2,246,000 for the
year ended December 31, 1995. The increase is primarily related to increased
staffing requirements associated with growing demands for clinical study
compilation and the development of a second generation Heart Laser System.
Other income of $512,000 for the year ended December 31, 1996 decreased
$76,000 or 13% when compared to $588,000 for the year ended December 31, 1995.
This decrease is the result of lower interest income due to lower interest rates
throughout 1996 as compared to 1995. In addition, with the establishment of the
Company's new subsidiaries in 1996, foreign currency transactions resulted in a
$51,000 loss for the year ended December 31, 1996.
There was no provision for income tax for the year ended December 31, 1996
due to the net loss of $1,540,000. Although the Company had sufficient net
operating loss carryforwards to offset income taxes for
21
23
the year ended December 31, 1995, the provision for income taxes represents the
tax liability under the alternative minimum tax regulations which cannot be
offset by net operating loss carryforwards.
The Company incurred a net loss forof
$16,603,000, which resulted in the year ended December 31, 1996use of $1,540,000 when comparedapproximately $14,300,000 to net income of $2,004,000 for the year ended December
31, 1995. This is a result of lower total revenues in 1996 when compared with
1995, coupled with higher overall expenses in 1996support
operations. Cash provided by investing activities was approximately $10,300,000
primarily related to both international
and domestic expansion.
The $.09 loss per share for the year ended December 31, 1996net maturities of approximately $12,800,000 of
marketable securities, offset by an investment of $2,600,000 in fixed assets,
primarily related to its placement contract activity. Cash provided by
financing activities was calculated
using onlyapproximately $5,400,000, primarily related to the weighted average number of shares outstanding during the year.
Earnings per share of $.13 for the year ended December 31,1995 was calculated
using the weighted average number of shares outstanding during the year.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had cash and cash equivalents of
$3,484,000 and short-term investments of $12,845,000. In July and August 1997,
the Company received $18,800,000 in net
proceeds of $4,700,000 obtained through the issuance of 5%
Convertible Debentures due July 2002convertible debentures
and August 2002. In September 1997
$15,900,000$600,000 in proceeds from the sale of these debentures were converted into the Company's Common Stock.
In January and February 1998, the remaining $4,250,000common stock, offset by
principal payments on capital lease obligations of these debentures
converted into the Company's Common Stock. See Note 6 to the Consolidated
Financial Statements.$79,000.
21
During the year ended December 31, 1997, the Company incurred a loss of
$14,404,000, which resulted in the use of approximately $10,050,000 to support
operations. Cash used in investing activities was approximately $10,000,000
primarily related to the net purchase of $7,300,000$7,400,000 of marketable securities fromand
the proceedsinvestment of the convertible debentures discussed previously. In
addition, the Company invested $2,600,000 in fixed assets, primarily related to its placement
contract activity. Cash provided by financing activities was approximately
$20,800,000, primarily related to the net proceeds of $18,800,000 through the
issuance of convertible debentures and $2,000,000 from proceeds of the sale of
the Company's common stock.
During the year ended December 31, 1996, the Company received approximately
$2,499,000 in proceeds from the exercise of stock options and warrants, and
$119,000 from the repayment of shareholder loans. An additional $1,030,000 of
cash was generated from the maturities of short-term investments which were not
reinvested. Cash provided from operating activities approximated $3,100,000,
principally related to its collection in January 1996 of its $5,700,000
outstanding receivable from IMATRON, offset by investments in inventories, and
increases in prepaid expenses and other assets. Approximately $4,200,000 was
used to acquire capital equipment, principally Heart Lasers used for placement
contracts coupled with leasehold improvements related to the Company's new
facility. On September 3, 1996, the Company moved into its new facility in
Franklin, Massachusetts under a five-year operating lease.
In February 1997, the Company's PMA was filed by the FDA. In anticipation
of a possible FDA approval, the Company had been increasing its overall
operating expenses and overhead to be positioned to further increase its
production capacities. In order to be adequately positioned to meet these
demands, the Company secured financing in July 1997. On July 28, 1997, an FDA
Advisory Panel recommended a non-approval at that meeting with the requirement
of additional data to complete the randomized study. In December 1997, the
Company submitted all of the data on the Heart Laser System to the FDA and its
Advisory Panel from the request of the July 28, 1997 FDA Advisory Panel meeting.
The Company has been notified of a scheduled FDA Advisory Panel date on April
24, 1998. Given this delay, the Company has monitored its operating expenses
closely and minimized increases to expenses and overhead during this period.
With the $16.3 million in cash and marketable securities at December 31, 1997,
the Company believes that it has sufficient resources to meet its working
capital demands for at least the next twelve months.
The Company and certain of its officers have been named as defendants in 21
purported class action lawsuits filed between August 1997 and November 1997. See
Note 5 to the Consolidated Financial Statement and Item 3 Legal Proceedings for
further discussion. The Company has an insurance policy of which the maximum
deductible has been recorded in the results of operations for the year ended
1997.
22
24
Unanticipated decreases in operating revenues, increases in expenses, or a
further delay in the expected FDA approval, may adversely impact the Company's
cash position. The Company may seek additional financing through the issuance
and sale of debt or equity securities, bank financing, joint ventures or by
other means. The availability of such financing and the reasonableness of any
related terms in comparison to market conditions cannot be assured.
For the reasons discussed above, the Company believes that operating losses
are likely until after such time as the Company receives its PMA from the FDA
for the Heart Laser System. Although the Heart Laser System has been granted
"expedited review" status by the FDA, the Company cannot project when, if at
all, such approval will be granted or that any approval will include desirable
claims. Any failure or delay in receiving any such approval would have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company must also convince health care
professionals, third party payors and the general public of the medical and
economic benefits of the Heart Laser System. No assurance can be given that the
Company will be successful in marketing the Heart Laser System or that the
Company will be able to operate profitably on a consistent basis.
This report contains forward-looking statements regarding anticipated
increases in revenues, marketing of products and proposed products and other
matters. These statements, in addition to statements made in conjunction with
the words "anticipate," "expect," "intend," "believe," "seek," "estimate" and
similar expressions are forward-looking statements that involve a number of
risks and uncertainties. The following is a list of factors, among others, that
would cause actual results to differ materially from the forward-looking
statements: approval by the FDA, successful ability to secure any required
additional financing, business conditions and growth in certain market segments
and general economy, an increase in competition, increased or continued market
acceptance of the Company's products and proposed products, and other risks and
uncertainties indicated from time to time in the Company's filings with the
Securities and Exchange Commission.
At December 31, 1997,1998, the Company had U.S. net operating loss carryforwards
of approximately $19.2$34.5 million available to reduce future taxable income which
expire at various dates through 2011,2012, and the Company had foreign net operating
loss carryforwards of approximately $3.7$5.7 million. In addition, various other
deferred tax assets have been generated related primarily to intercompany
profit, accruals, and research and development tax credits. SinceBecause the
Company believes that, as of December 31, 19971998, it is more likely than not, that
all of the deferred tax assets will not be realized, no tax benefit for prior
year losses and other deferred items has been provided. These amounts could
provide a benefit to the Company in the future in profitable years, subject to
the expirations noted.
The Company and certain of its officers have been named as defendants in 21
purported class action lawsuits filed between August 1997 and November 1997. See
Note 5 in the accompanying consolidated financial statements for further
discussion.
YEAR 2000
The Year 2000 Issue refers to potential problems withproblem is the result of computer systems or
any equipment with computer chips or softwareprograms that uses dates where the date has
been stored as justuse two
digits (e.g., 97 for 1997).rather than four to define the applicable year. On January 1, 2000,
any
clockcomputer equipment and programs that have time-sensitive software may not be
able to distinguish whether "00" means 1900 or date recording mechanism incorporating date sensitive software which
uses only two digits to represent the year may recognize a date using 00 as the
year 1900 rather than the year 2000. This could result incause a major
system failure or miscalculations causing disruption of operations, including, among other things,
a temporary inabilitycould create erroneous results. The Company could be unable
to process transactions, send invoices, or engage in similar business
activities. The Company may also be vulnerable to other companies' Year 2000
issues.
In 1998, the Company formed a task force to determine what if any Year 2000
compliance issues the Company faces. The task force has developed and
implemented a Year 2000 readiness plan that defines compliance and sets critical
milestones to identify any deficiencies and correct them. The task force
identified three basic operational areas that have been and will continue to be
examined:
- Products -- products the Company currently sells, products the Company
sold previously, and products of the Company's most significant
suppliers;
- Business Systems -- computer hardware and software used to operate the
Company's business, including purchasing, manufacturing, sales and
finance; and
- Peripherals -- the Company's telephone, e-mail, security and shipping
systems.
In 1998, The Heart Laser System was tested and is presently evaluatingbelieved to be Year 2000
compliant in all material respects. In addition, the Company has purchased and
implemented new enterprise resource planning system software that the vendor has
represented is Year 2000 compliant. This new software system has replaced
substantially all of the Company's previous financial software systems. Current
estimates of the impact of the Year 2000 Issueproblem on the Company's operations and
financial results do not include costs and time that may be incurred as it affects business operations, interfaces with customers
and vendors, and contingencies relateda result
of vendor or customer failures to products thatbecome Year 2000 compliant, but no significant
costs have been soldidentified to date.
22
Despite investigation and testing by the Company and its business partners,
the Company's products and systems may contain errors or defects associated with
Year 2000 date functions. The Company believes that may
need to be modified. To date,its new enterprise resource
planning software substantially addresses its material Year 2000 risks; however,
the Company is unawarecontinuing to test its secondary systems and investigate third
party compliance efforts. In a worst case scenario, known and unknown errors
and defects that could affect the operation of our products or systems could
result in:
- delay or loss of revenue;
- cancellation of customer contracts;
- increased service and/or warranty costs;
- increased litigation costs;
- diversion of product development and personnel resources; and
- damage to our reputation.
Furthermore, the Company has not developed a Year 2000 contingency plan to
address any situationsfailure of noncomplianceour Year 2000 compliance review to identify and correct
significant Year 2000 risks. Development of contingency plans is in progress
and will continue during calendar year 1999. Such plans could include
stockpiling inventory parts and raw materials, accelerating replacement of
affected equipment or software, using back-up equipment and software, developing
temporary manual procedures to compensate for system deficiencies, and
identifying alternative Year 2000 capable suppliers. The Company cannot be sure
that would materially adversely effect its operations or financial
condition. There can be no assurance, however, that instancessuch contingency plans will adequately address the year 2000 problem. Any
of noncompliance
whichthese occurrences could have a material adverse effect on the Company's operations orour business,
financial condition and results of operations.
RISK FACTORS
OUR COMPANY HAS A LIMITED OPERATING HISTORY AND A HISTORY OF LOSSES
PLC Systems Inc. was founded in 1987. We have incurred operating losses in
every year of our existence except 1995. We have incurred net losses of
$16,603,000 for the year ended December 31, 1998, $14,404,000 for the year ended
December 31, 1997, and $1,540,000 for the year ended December 31, 1996. As of
December 31, 1998, we have an accumulated deficit of $68,136,000. We have not
achieved profitability and expect to continue to incur net losses for at least
the next fiscal year. Moreover, although our business is not seasonal in
nature, our revenues tend to vary significantly from fiscal quarter to fiscal
quarter.
OUR COMPANY IS DEPENDENT ON ONE PRINCIPAL PRODUCT
We develop and market one principal product: a patented high-powered carbon
dioxide laser system known as The Heart Laser System. Approximately 93.2% of
our revenue in the fiscal year ended December 31, 1997 and 89.5% in the fiscal
year ended December 31, 1998 was derived from The Heart Laser System.
OUR COMPANY MAY BE UNABLE TO RAISE NEEDED FUNDS
As of December 31, 1998, we had cash and cash equivalents totaling
$4,846,000, a decrease of $11,483,000 from the balance of $16,329,000 we had as
of December 31, 1997. The lack of widespread reimbursement for use of The Heart
Laser System by third party payers such as Medicare, Medicaid and private health
insurance plans has limited demand for and use of The Heart Laser System in the
United States.
23
Although Medicare reimbursement is expected to begin in 1999 and some private
insurance plans have begun reimbursing health care providers for TMR
procedures using The Heart Laser System, we believe that operating losses are
likely to continue until such time as third party payers begin to provide
widespread reimbursement to healthcare providers for use of The Heart Laser
System. Although we announced an $8 million equity financing commitment on
March 4, 1999, we have been unable to access that commitment in full (see
"Liquidity and Capital Resources" above). We have developed an action plan
to ensure that the Company has adequate sources of cash to meet its working
capital needs for at least the next twelve months. (See "Liquidity and
Capital Resources" above). We are currently exploring a number of
alternatives to raise additional capital. We may not be able to raise
additional capital upon satisfactory terms and our business, financial
condition and results of operations could be materially and adversely
affected.
IN ORDER TO COMPETE EFFECTIVELY, WE NEED TO GAIN COMMERCIAL ACCEPTANCE
The Heart Laser System is designed for use in the treatment of coronary
artery disease in a surgical laser procedure we pioneered known as
transmyocardial revascularization. Transmyocardial revascularization is
commonly referred to in our industry as "TMR." TMR is a new technology that is
only recently becoming known. We may never achieve widespread commercial
acceptance. To be successful, we need to:
- demonstrate to the medical community in general, and to heart surgeons
and cardiologists in particular, that TMR procedures and The Heart
Laser System are effective, relatively safe and cost effective; and
- train heart surgeons to perform TMR procedures using The Heart Laser
System.
To date, we have trained only a limited number of heart surgeons and will need
to expand our marketing and training capabilities.
Over 4,000 patients have been treated with TMR procedures using The Heart
Laser System in the United States and overseas. As of December 31, 1998, we had
shipped over 100 Heart Laser Systems worldwide. Although The Heart Laser System
has received FDA approval and the CE Mark, and a number of research studies have
reported favorably on The Heart Laser System, we have not yet received
widespread commercial acceptance. If we are unable to maintain regulatory
approvals or to achieve widespread commercial acceptance of The Heart Laser
System, our business, financial condition and results of operations will be
materially and adversely affected.
RESULTS OF LONG-TERM CLINICAL STUDIES MAY ADVERSELY AFFECT OUR BUSINESS
Patients have only been treated with The Heart Laser System since January
1990, and, as a result, there have been few long-term follow-up studies. If
patients suffer harmful, long-term consequences from The Heart Laser System, our
business, financial condition and results of operations will be materially and
adversely affected.
RAPID TECHNOLOGICAL CHANGES IN OUR INDUSTRY COULD MAKE THE HEART LASER SYSTEM
OBSOLETE
Our industry is characterized by rapid technological change and intense
competition. New technologies and products and new industry standards will
develop at a rapid pace. They could make The Heart Laser System obsolete. The
advent of new devices and procedures and advances in new drugs and genetic
engineering are especially threatening. Our future success will depend upon our
ability to develop and introduce a variety of product enhancements to address
the increasingly sophisticated needs of our
24
customers. Material delays in introducing product enhancements may cause
customers to forego purchases of our product and purchase those of our
competitors.
Many of our competitors have substantially greater financial resources and
are in a better financial position to exploit marketing and research and
development opportunities. Most of our direct competitors are using a different
type of laser than ours, including holmium and excimer lasers. Several of the
companies that have entered the market are developing less invasive methods of
performing TMR procedures. These new methods may eliminate the need to make an
incision in the patient's chest, reducing costs and speeding recovery. These
new methods may erode the potential TMR market.
WE MUST RECEIVE AND MAINTAIN GOVERNMENT APPROVAL IN ORDER TO MARKET OUR PRODUCT
GENERAL
The Heart Laser System and our manufacturing activities are subject to
extensive, rigorous and changing federal and state regulation in the United
States and to similar regulatory requirements in other major markets, including
the European Community and Japan. To date, we have received regulatory approval
in the United States and the European Community, but not in Japan. Without
regulatory approval, we cannot market The Heart Laser System in Japan. Even if
granted, regulations may significantly restrict the use of The Heart Laser
System. The process of obtaining and maintaining required regulatory approval
is lengthy, expensive and uncertain.
UNITED STATES -- ALTHOUGH WE HAVE RECEIVED FDA APPROVAL, THE FDA HAS RESTRICTED
THE USE OF THE HEART LASER SYSTEM AND COULD REVERSE ITS APPROVAL AT ANY TIME
In August 1998, we became the first company to receive FDA approval to
market a laser system for TMR procedures. However, the FDA:
- has not allowed us to market the Heart Laser System to treat patients
whose condition is amenable to conventional treatments, such as heart
bypass surgery and angioplasty; and
- could reverse its ruling and prohibit use of The Heart Laser System at
any time.
EUROPE -- ALTHOUGH WE HAVE RECEIVED REGULATORY APPROVAL FROM THE EUROPEAN
COMMUNITY, THE EUROPEAN COMMUNITY COULD REVERSE ITS APPROVAL AT ANY TIME AND
FRANCE HAS PROHIBITED COMMERCIAL USE OF THE HEART LASER SYSTEM
The Heart Laser System received the CE Mark, which is similar to FDA
approval, from the European Community in 1995. The CE Mark allows us to market
The Heart Laser System in all European Community countries. However:
- The European Community could reverse its ruling and prohibit use of
The Heart Laser System at any time;
- We cannot market The Heart Laser System in France; and
- Other European Community countries could prohibit or restrict use of
The Heart Laser System.
Despite receiving the CE Mark, The French Ministry of Health instituted a
commercial moratorium on TMR procedures in October 1997. In its opinion, the
procedure is considered to be experimental and should only be performed within
the context of a clinical study. An evaluation of the safety of The Heart Laser
System
25
is currently under review by a panel of French experts. We have provided our
clinical results to the panel and are actively working to have this moratorium
lifted. There is no assurance when or if we will be successful.
ASIA -- WE CANNOT MARKET OUR PRODUCT IN MAJOR ASIAN MARKETS UNTIL WE RECEIVE
GOVERNMENT APPROVAL
We believe that Japan represents the largest potential market for The Heart
Laser System in Asia. Prior to marketing The Heart Laser System in Japan, we
must receive approval from the Japanese Government. This approval requires a
clinical study in Japan with at least 60 patients. This study was completed in
1998. We submitted the results of this study to the Japanese Government in
December 1998. We do not know whether the clinical study will be sufficient or
when, if ever, we will receive approval to sell The Heart Laser System in Japan.
Additional regulatory applications are pending in Taiwan and South Korea.
We cannot be sure when, if at all, we will obtain regulatory approval in any
particular country.
ASSERTING AND DEFENDING INTELLECTUAL PROPERTY RIGHTS MAY IMPACT RESULTS OF
OPERATION REGARDLESS OF SUCCESS
In our industry, competitors often assert intellectual property
infringement claims against one another. The success of our business depends on
our ability to successfully defend our intellectual property. Future litigation
may have a material impact on our financial condition even if we are successful
in marketing The Heart Laser System. We may not be successful in defending or
asserting our intellectual property rights.
WE MAY BE SUBJECT TO PRODUCT LIABILITY LAWSUITS; OUR INSURANCE MAY NOT BE
SUFFICIENT TO COVER DAMAGES
We may be subject to product liability claims. A recent United States
Supreme Court decision held that compliance with FDA regulations will not shield
a company from common-law negligent design claims or manufacturing and labeling
claims based on state rules. Although we have product liability insurance with
a yearly aggregate maximum of $10 million, we cannot be identified,sure that our insurance
is adequate to cover any product liability law suits. Our insurance is
expensive and in the systemsfuture may not be available on acceptable terms, if at all.
If a successful product liability claim or series of other companies
with whichclaims exceeded our
insurance coverage, it would divert the Company transacts business will be corrected on a timely basis;
or that failure by such entities to correct a Year 2000 problem or a correction
which is incompatible withattention of our key personnel, degrade
the Company's information systems would notreputation and marketability of our technology and products, and could have
a material adverse effect on our business, financial condition and results of
operations.
26
WE HAVE BEEN SUED FOR ALLEGED VIOLATIONS OF SECURITIES LAW
In July 1997, an FDA advisory panel recommended against approval of our
application to market The Heart Laser System. Following this recommendation,
we were named as defendant in 21 purported class action lawsuits filed
between August 1997 and November 1997 in the United States District Court for
the District of Massachusetts. The lawsuits seek an unspecified amount of
damages in connection with alleged violations of the federal securities laws
based on our failure to obtain a favorable FDA panel recommendation in 1997.
Nineteen of these complaints have been consolidated by the court into a
single action for pretrial purposes and two suits have been dismissed. The
Company moved to dismiss all of the remaining claims. On March 26, 1999, the
court issued an order dismissing some, but not all of the remaining claims.
We have also been named as a defendant in a lawsuit filed in Massachusetts
Superior Court in September 1998. This suit seeks over $2 million in damages
for alleged negligent misrepresentations and fraud arising from our failure
to obtain a favorable FDA recommendation in 1997. We cannot make a meaningful
estimate of the amount or range of loss that could result from an unfavorable
outcome of these lawsuits, but an unfavorable outcome could have a material
adverse affect on our business, financial position and results of operations.
We may not be able to pay the amount of any judgment against us. We believe
that we have valid defenses to these litigation matters and are conducting a
vigorous defense.
BECAUSE WE ARE INCORPORATED IN CANADA, YOU MAY 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 by
courts in the United States against us or our Canadian directors. The status of
the law in Canada is unclear as to whether a U.S. citizen can enforce a judgment
from a U.S. court in Canada for violations of U.S. securities laws. A separate
suit may need to be brought directly in Canada.
ANTITAKEOVER PROVISIONS MAY PREVENT YOU FROM REALIZING A PREMIUM RETURN
Provisions of Canadian law could make it more difficult for a third party
to acquire us, even if the acquisition would be beneficial to you.
Specifically, Canadian law requires any person who makes a tender offer that
would increase the person's stock ownership to more than 20% of our outstanding
common stock to make a tender offer for all of our common stock. These
provisions could prevent you from realizing the premium return that stockholders
may realize in conjunction with corporate takeovers.
In addition, our Articles provide for three classes of directors, with
one-third elected each year for a three year term. These provisions may have
the effect of delaying or preventing a corporate takeover or a change in our
management. This could adversely affect the market price of your common stock.
MARKET PRICE OF OUR STOCK MAY FALL IF OTHER STOCKHOLDERS SELL THEIR STOCK
If our stockholders sell substantial amounts of our common stock in the
public market, the market price of our common stock could fall. Such sales also
might make it more difficult for us to sell equity or equity-related securities
in the future at a price we deem appropriate.
THE VALUE OF YOUR COMMON STOCK MAY DECREASE IF OTHER SECURITY HOLDERS EXERCISE
THEIR OPTIONS AND WARRANTS OR CONVERT THEIR DEBT INTO COMMON STOCK
As shown in the table below, we have reserved an additional 3,186,290 shares of
common stock for future issuance upon exercise or conversion of outstanding
options, redeemable warrants and convertible debt.
27
Range of Weighted Average Shares Reserved
Exercise/ Exercise/ for Future
Conversion Prices Conversion Price Issuance
Options $3.69 - $8.88 $5.16 2,868,161
Redeemable $15.78 - $27.81 $21.33 154,864
Warrants
Convertible Debt $6.125 $6.125 163,265
----------
Total 3,186,290
----------
----------
We plan to issue additional options and warrants in the future. If any of these
securities are exercised or converted, you may experience significant dilution
in the market value and earnings per share of your common stock.
WE HAVE NO INTENTION TO PAY DIVIDENDS
We have never paid any cash dividends on our common stock. We currently
intend to retain all future earnings, if any, for use in our business and do not
expect to pay any dividends in the foreseeable future.
THE YEAR 2000 PROBLEM COULD CAUSE US TO EXPERIENCE MANUFACTURING DELAYS
The Year 2000 problem is the result of computer programs that use two
digits rather than four to define the applicable year. On January 1, 2000,
computer equipment and programs that have time-sensitive software may not be
able to distinguish whether "00" means 1900 or 2000. This could cause a major
system failure or could create erroneous results. We could be unable to process
transactions, send invoices, or engage in similar business activities. We may
also be vulnerable to other companies' Year 2000 issues.
Despite investigation and testing by us and our business partners, our
products may contain errors or defects associated with Year 2000 date functions.
We believe that our new enterprise resource planning software substantially
addresses our material Year 2000 risks; however, we are continuing to test our
secondary systems and continuing to investigate third party compliance efforts.
In a worst case scenario, known and unknown errors and defects that affect the
operation of our products or software could result in:
- delay or loss of revenue;
- cancellation of customer contracts;
- diversion of product development resources;
- damage to our reputation; and
- increased service, warranty and litigation costs.
Furthermore, we have not developed a Year 2000 contingency plan to address
any failure of our Year 2000 compliance review to identify and correct
significant Year 2000 risks. Development of contingency plans is in progress
and will continue during calendar year 1999. Such plans could include
28
stockpiling inventory parts and raw materials, accelerating replacement of
affected equipment or software, using back-up equipment and software, developing
temporary manual procedures to compensate for system deficiencies, and
identifying alternative Year 2000 capable suppliers. We cannot be sure that our
contingency plans will adequately address the year 2000 problem. Any of these
occurrences could have a material adverse effect on our business, financial
condition and results of operations.
OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN
FORWARD-LOOKING STATEMENTS
This annual report and information incorporated by reference contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements deal with our current plans and expectations and
involve known and unknown risks and uncertainties. Statements containing terms
such as:
- believes
- does not believe
- plans
- expects
- intends
- estimates
- anticipates
and other phrases of similar meaning are considered to contain uncertainty and
are forward-looking statements.
No forward-looking statement is a guarantee of future performance. Our
actual results could differ materially from those anticipated in these
forward-looking statements. We make cautionary statements in certain sections
of this annual report, including in the risk factors identified above, and in
materials incorporated by reference. You should read these cautionary
statements as being applicable to all related forward-looking statements,
wherever they appear in this annual report, in the materials referred to in this
annual report, in the materials incorporated by reference into this annual
report, or in our press releases. You should not place undue reliance on any
forward-looking statement.
29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A portion of the Company's operations consists of sales activities in
foreign jurisdictions. The Company manufactures its products in the United
States and sells the products. As a result, the Company's financial condition.
23
25
NEW ACCOUNTING PRONOUNCEMENT
Financial Accounting Standards Board Statement No. 130, "Reporting
Comprehensive Income" ("Statement 130").
Financial Accounting Standards Board Statement No. 131, "Disclosures About
Segmentsresults
could be significantly affected by factors such as changes in foreign currency
exchange rates or weak economic conditions in the foreign markets in which the
Company distributes its products. The Company's operating results are exposed
to changes in exchanges rates between the U.S. dollar and Swiss Franc and the
German Mark. When the U.S. dollar strengthens against the Franc or Mark, the
value of an Enterprisenonfunctional currency sales decreases. When the U.S. dollar weakens,
the functional currency amount of sales increases. Overall, the Company is a
net receiver of currencies other than the U.S. dollar and, Related Information" ("Statement 131").as such, benefits
from a weaker dollar, but is adversely affected by a stronger dollar relative to
major currencies worldwide. The Company's exposures are not significant.
The Company's interest income and expense are most sensitive to changes in
the general level of U.S. interest rates. In this regard, changes in U.S.
interest rates affect the interest earned on the Company's cash equivalents as
well as interest paid on its debt.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 below and the Index therein for a listing of the financial
statements and supplementary data filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
2430
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the ages of and positions and offices
presently heldThis information is incorporated by each director and each executive officer of the Company as of
March 23, 1998.
CLASS TO
WHICH THE
DIRECTOR
NAME AGE POSITION BELONGS
- ---- --- -------- ---------
Robert I. Rudko, Ph.D..... 55 Chairman of the Board of Directors and Chief I
Scientist
William C. Dow............ 51 President, Chief Executive Officer and Director II
Edward H. Pendergast...... 64 Lead Outside Director I
Harold P. Capozzi......... 73 Director III
H.B. Brent Norton,
M.D. ................... 37 Director III
Kenneth J. Pulkonik....... 57 Director II
Roberts A. Smith,
Ph.D. .................. 69 Director III
Patricia L. Murphy........ 47 Chief Financial Officer and Treasurer N/A
The Company's Articles, as amended, provide that the members of the Board
of Directors shall be classified and elected as nearby as possible into three
classes, each with approximately one-third of the members of the Board of
Directors. The classified board is designed to assure continuity and stability
in the Board of Directors' leadership and policies. Dr. Rudko and Mr. Pendergast
are classified as Class I directors and serve a three year term, expiring at the
1998 Annual Meeting, Messrs. Dow and Pulkonik are classified as Class II
directors and serve until the 2000 Annual Meeting, and Drs. Norton and Smith and
Mr. Capozzi are classified as Class III directors and serve until the 1999
Annual Meeting. The successors to the class of directors whose terms expire at
that meeting would be elected for a term of office to expire at the third
succeeding annual meeting after their election and until their successors have
been duly elected by the stockholders. Directors chosen to fill vacancies on a
classified board shall hold office until the next election of the class for
which directors shall have been chosen, and until their successors are duly
elected by the stockholders. Officers are elected by and serve at the discretion
of the Board of Directors, subject to their employment contracts.
The Company Act (British Columbia) requires that the Corporation's
President serve on the Board of Directors. With the resignation of Mr. M. Lee
Hibbs as President and Director of the Corporation effective June 30, 1997, Dr.
Rudko agreed to become the Interim Acting President of the Corporation until a
successor was hired which satisfied this requirement. However, there was a
vacancy on the Board. Ms. Patricia L. Murphy was nominated and elected to serve
as a member of the Board of Directors to fill this vacancy. In order to continue
to satisfy the Company Act requirement, Ms. Murphy agreed with the Corporation
to resign as a director effective immediately upon the Corporation hiring a new
President and Chief Executive Officer. On August 15, 1997, Mr. Dow was elected
as President, Chief Executive Officer and Director of the Corporation, at which
point Ms. Murphy and Dr. Rudko resignedreference from their respective interim positions.
Under British Columbia corporate law, a majority of the Company's directors
mustProxy
Statement to be residents of Canada and one director must be a resident of British
Columbia. As a result, stockholders may be limited in the persons they can
nominate and elect as directors.
No director or executive officer is related to any other director or
executive officer by blood or marriage.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
executive officers and directors, and persons who beneficially own more than ten
percent (10%) of the Company's stock to file initial reports of ownership on
Form 3, reports of changes in ownership on Form 4 and annual statements of
changes
25
27
in beneficial ownership on Form 5filed with the Securities and Exchange Commission ("SEC") and any national securities exchange on whichin connection
with the Company's securities
are registered. Executive officers, directors and greater than ten percent (10%)
beneficial owners are required1999 Annual Meeting of Stockholders.
ITEM 11. COMPENSATION OF OFFICERS AND DIRECTORS
This information is incorporated by SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms furnished to the
Company and written representationsreference from the executive officers and directors,
the Company believes that all Section 16(a) filing requirements applicable to
its executive officers, directors and greater than ten percent (10%) beneficial
owners were complied with for Fiscal 1997, except for the following filed by
Harold P. Capozzi: (i) one late Form 4 reporting one sale transaction, which
Form 4 inadvertently under reported the number of shares beneficially owned; and
(ii) Mr. Capozzi inadvertently over reported the number of options he
beneficially owned in a timely filed Form 4.
BACKGROUND
The following is a brief account of the business experience of each
director and executive officer:
ROBERT I. RUDKO, PH.D. Dr. Rudko has served as Chairman of the Company
since April 1992, President of the Company from April 1992 until October 1993,
Chief Scientist of the Company since October 1993 and President of Laser
Engineering, Inc. (now known as PLC Medical Systems, Inc. "PLC Medical"), a
wholly owned subsidiary of the Company, since 1981. Dr. Rudko has 26 years of
experience in the analysis, design, development, and manufacture of lasers and
surgical laser systems. Prior to founding PLC Medical in 1981, Dr. Rudko was
employed by the Research Division of Raytheon Company, a publicly traded defense
contractor, from 1967 to 1981, first as a Senior Research Scientist and then as
Principal Research Scientist. Dr. Rudko received his Ph.D. degree in electrical
engineering from Cornell University.
WILLIAM C. DOW. Mr. Dow has served as the President, Chief Executive
Officer and director of the Company since August 1997. Prior to joining the
Company, from 1993 to 1997, Mr. Dow served as President and Chief Executive
Officer of Deknatel Snowden Pencer Worldwide, Inc., a $100 million medical
device manufacturer. Deknatel Snowden Pencer Worldwide, Inc., became a
manufacturing and marketing subsidiary of Genzyme Corporation in 1996. Mr. Dow
has over 25 years of broad based experience in the medical device and service
industry having held various positions in sales, marketing, distribution and
general management with Griffith Micro Science, Kendall, Terumo and American
Hospital Supply. Mr. Dow is a graduate of the United States Navel Academy with a
Bachelor of Science in Engineering and served as both a pilot and a Supply Corps
officer in the U.S. Navy.
EDWARD H. PENDERGAST. Mr. Pendergast was a director of PLC Medical from
its incorporation in 1981 until 1992. Mr. Pendergast has served as a director of
PLC Systems Inc. since September 1992 and as its Lead Outside Director since
March 1995. Mr. Pendergast is the President of Pendergast & Company, a privately
held management consulting firm. Mr. Pendergast also serves as Chairman of the
Board of Formware Corporation, a privately held software company. From 1984 to
1989, Mr. Pendergast served as the Chairman of Kennedy & Lehan, a public
accounting firm. Mr. Pendergast also serves as a member of the Board of
Directors of several other private companies. Mr. Pendergast is a Certified
Public Accountant and the former President of the Massachusetts Society of
Certified Public Accountants.
HAROLD P. CAPOZZI. Mr. Capozzi has served as a director of the Company
since 1991. For approximately the last 25 years through the present, Mr. Capozzi
has acted in various managerial and operational capacities for several
family-owned businesses. These businesses, Capozzi Enterprises, Ltd., Pasadena
Investments, Ltd. and Catalina Properties Ltd., operate primarily in the real
estate and real estate leasing markets and are privately held. He served seven
years as a member of the Legislative Assembly for the Province of British
Columbia and was a founding director of McDonald's Canada Ltd. and Expo '86.
From 1987 to 1991, Mr. Capozzi was a director for Pineridge Capital Group Inc.,
a publicly traded venture capital company. Mr. Capozzi is currently a director
of Richland Mines Inc. and Knightsbridge Corporation, both publicly traded
companies.
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Resources Ltd., a publicly traded mining company. He has also served as a
director for Comac Food Group Inc., from 1991 to 1993. He has been a director of
Richland Mines Inc., a publicly traded company, since 1993.
KENNETH J. PULKONIK. Mr. Pulkonik has served as a director of the Company
since 1992. Mr. Pulkonik has served as President and Chairman of the Board of
Rush Electronics Ltd. of Ontario, Canada, a privately held business, since 1983.
Mr. Pulkonik has also served as the Chairman of the Board for Rush Corporation,
the United States subsidiary of Rush Electronics Ltd., a privately held company,
since 1987. In 1971, Mr. Pulkonik co-founded Rush Industries, Inc., a privately
held industrial distributor to the electronics industry in the New England area.
ROBERTS A. SMITH, PH.D. Dr. Smith has served as a director of the Company
since January 1993. From 1980 to 1986 and from 1988 to 1994, Dr. Smith has been
the President of Viratek, Inc., a pharmaceutical development company. He was the
Vice President of SPI Pharmaceuticals, a pharmaceutical marketing company from
1990 to 1992, and from 1985 to 1988, Dr. Smith was the Vice President and a
director of the Nucleic Acid Research Institute. Dr. Smith has been the Vice
Chairman since 1992 and a founding director since 1959 of ICN Pharmaceuticals,
Inc. From 1958 to 1987, Dr. Smith was a full Professor and from 1987 to the
present, Dr. Smith has been a Professor Emeritus, at the University of
California, Los Angeles where he instructs in biochemistry.
H. B. BRENT NORTON, M.D. Dr. Norton has served as a director of the
Company since June 1994. He has served since 1991 as the President of IMI
International Medical Innovations Inc. formerly IMI Diagnatech Inc., a publicly
held biotechnology commercialization company. Additionally, since 1990, he has
owned and been the President of the Ontario Workers Health Clinic, a privately
held health assessment company. From 1990 to 1993, Dr. Norton was an associate
at the Institute for Sport Medicine and Human Performance, a privately held
provider of medical care to athletes. From 1989 to 1990, Dr. Norton served as
the consultant Medical Director of Mueller Medical International Inc., a
publicly traded medical technology company. Dr. Norton received his degree as a
Doctor of Medicine from McGill University and a Master of Business
Administration degree from the University of Western Ontario.
PATRICIA L. MURPHY. Ms. Murphy has served as the Company's Chief Financial
Officer and Treasurer since May 1992 and as PLC Medical's Corporate Controller
since December 1991. Prior to joining the Company, she was Assistant Corporate
Controller of Town & Country Corporation from 1989 to December 1991, a publicly
traded jewelry manufacturer, and Corporate Controller at Bytex Corporation, a
publicly traded manufacturer of computer network switching devices, from 1983 to
1989. Ms. Murphy has also worked in public accounting at Coopers & Lybrand LLP
and is a Certified Public Accountant.
KEY EMPLOYEES
The significant employees of the Company, their ages and positions in the
Company are as follows as of March 23, 1998:
NAME AGE POSITION
- ---- --- --------
Stephen J. Linhares................ 41 Vice President of Research and Development and
Clinical Trials -- PLC Medical
John R. Serino..................... 50 Vice President of Sales and Marketing -- PLC Medical
Jennifer T. Miller................. 31 General Counsel
Vincent C. Puglisi................. 49 Vice President of Corporate Sales -- PLC Medical
Paul A. Levesque................... 50 Vice President of Marketing and New Business
Development -- PLC Medical
The following is a brief account of the business experience of each officer
and key employee of the Company:
STEPHEN J. LINHARES. Mr. Linhares has served as PLC Medical's Vice
President of Research and Development and Clinical Trials since January 1996.
Mr. Linhares was PLC Medical's Director of Engineering from 1987 to 1995. He
joined PLC Medical in 1983 as an engineer and was subsequently
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29
appointed Operations Manager in 1985 and Director of Engineering in 1987. His
responsibilities currently include managing all aspects of PLC Medical's product
research and development as well as clinical affairs. Prior to joining PLC
Medical, he was employed in the Research Division of Raytheon Company, a
publicly traded defense contractor, as an Associate Scientist from 1979 to 1983.
JOHN R. SERINO. Mr. Serino has served as PLC Medical's Vice President of
Global Sales since December 1997 and as PLC Medical's Vice President of Sales
and Marketing since December 1995. From 1994 to 1995, Mr. Serino was the
President of Paradigm Medical, Inc., a medical consulting company. From 1989 to
1994, Mr. Serino served as Vice President of Marketing at Medtronic
Cardiopulmonary, a manufacturer of instruments used in open heart surgery. From
1976 to 1989, Mr. Serino held various positions at Shiley, Inc., a division of
Pfizer Hospital, which manufactured and marketed specialty medical products for
use in cardiovascular and respiratory care.
JENNIFER T. MILLER. Ms. Miller has served as General Counsel since
September 1997. From 1991 to 1997, Ms. Miller was an attorney with the firm of
Fish & Richardson P.C. Ms. Miller is a magna cum laude graduate of Tufts
University, where she was awarded a Fulbright Scholarship. Ms. Miller received
her law degree from Harvard Law School.
VINCENT C. PUGLISI. Mr. Puglisi has served as PLC Medical's Vice President
of Corporate Sales since December 1997. His responsibilities include managing
PLC Medical's reimbursement, national account and managed care initiatives. From
1984 to 1997, he was President of Medrep, an independent manufacturers'
representative for several medical supply and equipment companies. Prior to
founding Medrep in 1984, Mr. Puglisi served as Vice President, Marketing and
Sales for Professional Disposables, Inc. beginning in 1980. He began his career
in healthcare with American Hospital Supply in 1975 and held several positions
there until 1980. Mr. Puglisi attended the U.S. Air Force Academy and served as
a Captain in the USAF until 1975.
PAUL A. LEVESQUE. Mr. Levesque has served as PLC Medical's Vice President
of Marketing and Business Development since February 1998. Prior to joining PLC
Medical, Mr. Levesque was Vice President of Marketing and Sales for Corometrics
Medical System, a division of American Home Products. From 1984 to 1991, Mr.
Levesque held senior marketing positions at General Electric Medical Systems and
Zoll Medical. In addition, Mr. Levesque has over 11 years experience at Hewlett
Packard, medical products group, where he served in various professional sales
and marketing positions.
ITEM 11. EXECUTIVE COMPENSATION
During Fiscal 1997, the aggregate cash compensation paid or payable to the
Company's executive officers was approximately $1,285,442 which includes
severance payments to Mr. Hibbs of $161,404.
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30
The following table sets forth the compensation paid to the Company's
President and Chief Executive Officer and each of the four other most highly
compensated persons who were serving as executive officers of the Company as of
December 31, 1997 (collectively the "named executive officers") with respect to
services rendered to the Company during Fiscal 1997, Fiscal 1996 and Fiscal
1995.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------------- ------------
(A) (B) (C) (D) (E) (G) (I)
SECURITIES
UNDERLYING
OTHER ANNUAL OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(3) (#) COMPENSATION
- --------------------------- ---- -------- ------- --------------- ------------ ------------
Robert I. Rudko, Ph.D.... 1997 $192,500(1) $48,000(1) $28,875 0 $ 0
Chairman of the 1996 $192,500(1) $38,500(1) $28,875 0 $ 0
Board and 1995 $175,000(1) $84,000(1) $26,250 100,000 $ 0
Chief Scientist
William C. Dow........... 1997(5) $116,538(2) $50,000(2) $17,481 660,000 $ 0
President, Chief
Executive Officer and
Director
M. Lee Hibbs............. 1997 $215,000(4) $ 0 $35,794(4) 0 $161,404(4)
Former President, 1996 $215,000 $43,000 $32,250 25,000 $ 23,540
Chief Executive........ 1995 $195,000 $113,600 $29,250 100,000 $ 13,170
Officer and Director
Patricia L. Murphy....... 1997 $127,000 $12,700 $19,050 0 $ 0
Chief Financial 1996 $115,000 $23,000 $17,250 10,000 $ 0
Officer and Treasurer 1995 $100,000 $15,000 $15,000 55,000 $ 0
Stephen J. Linhares...... 1997 $100,000 $ 6,000 $ 6,000 0 $ 0
PLC Medical's 1996(5) $ 77,012 $11,500 $ 6,000 5,000 $ 0
Vice President of R&D and
Clinical Affairs
John R. Serino........... 1997 $135,000 $ 8,100 $ 6,000 0 $ 0
PLC Medical's 1996 $125,000 $31,250 $ 6,000 50,000 $ 10,390
Vice President of 1995(5) $ 4,800 $ 0 $ 0 0 $ 0
Global Sales
- ---------------
(1) Amounts shown indicate annual cash compensation earned and received by Dr.
Rudko, Mr. Dow, Mr. Hibbs, Ms. Murphy, Mr. Linhares and Mr. Serino.
Executive officers, including Dr. Rudko, Mr. Dow, Ms. Murphy, Mr. Linhares
and Mr. Serino participate in the Company's group life, health and long-term
disability insurance, at generally the same benefit levels as are available
to all of the Company's full time employees. Effective in September 1994,
the Compensation Committee recommended and the Board of Directors approved
an employment agreement which provided for a base salary of $175,000 for Dr.
Rudko and benefits,Proxy
Statement to be selected by him equal to 15% of his base salary.
This agreement was automatically renewed for one year on January 1, 1998,
provides for annual reviews of salary increases and bonus plans by the Board
of Directors for each fiscal year beginning January 1, 1996. Effective
January 1, 1996, the base salary of Dr. Rudko increased from $175,000 to
$192,500. No salary increase was provided for Dr. Rudko for fiscal 1997.
This agreement also provides that Dr. Rudko may receive a bonus, commencingfiled with Fiscal 1995, of a sliding scale based upon the Company achieving a
certain percentage of its annual plan for sales and placements of the Heart
Laser, provided that the Company must achieve at least 70% of plan for the
bonus to be paid. If the Company achieves at least 70% of its plan, the
executive will receive 28% of his base salary as a bonus. If the Company
achieves 100% of its plan the officer will receive 40% of his base salary.
The bonus available provides for linear increases such that the maximum
bonus the officer may receive is 120% of base salary if the Company achieves
190% of
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31
its plan. Pursuant to the terms of this agreement bonuses in the amounts of
$38,500 and $84,000 were paid to Dr. Rudko for Fiscal 1996 and 1995,
respectively. In Fiscal 1997, the Compensation Committee approved a $23,000
bonus for Dr. Rudko for acting as Interim President of the Company as well
as a $25,000 annual bonus.
(2) Effective August 15, 1997, the Compensation Committee recommended and the
Board of Directors approved an employment agreement through August 31, 2000,
for Mr. Dow which provided for a base salary of $300,000 per annum through
December 31, 1998. Increases for future years shall be established by the
Board of Directors. This agreement also provided that Mr. Dow may receive a
yearly incentive bonus, commencing with a guaranteed bonus of $50,000 for
Fiscal 1997, followed by an incentive bonus commencing in Fiscal 1998, of a
sliding scale based upon the Company achieving a certain percentage of its
annual plan for sales and placements of the Heart Laser, revenue, operating
results and other strategic goals equal to or at least 70% of the
performance plan as approved by the Board of Directors. The incentive bonus
will range from 70% to 120% of 50% of Mr. Dow's then base salary for the
fiscal year. Pursuant to this agreement, a bonus of $50,000 was paid for
Fiscal 1997.
(3) In Fiscal 1995, the Compensation Committee approved a benefit allowance of
up to 15% of base salary for Dr. Rudko and Mr. Hibbs. Ms. Murphy was also
given the same benefit allowance starting in Fiscal 1995. In August 1997, a
15% benefit allowance was approved as part of Mr. Dow's employment
agreement. The determination of such benefits is up to the individual. In
Fiscal 1997 and 1996 Mr. Serino received a $500 per month compensatory car
allowance. Mr. Linhares received the same allowance in 1997.
(4) On April 18, 1997, Mr. Hibbs and the Company entered into a severance
agreement and release (the "Agreement"). Pursuant to the terms of the
Agreement, Mr. Hibbs agreed to resign as Chief Executive Officer of the
Corporation on July 31, 1997. Mr. Hibbs continued to receive his annual base
salary of $215,000 through December 31, 1997 as an employee of the
Corporation. Mr. Hibbs received his accrued and unpaid 15% benefit allowance
of $11,151 and accrued and unpaid vacation of $24,643 which is reflected in
the "Other Annual Compensation" column. He also received an additional 15%
annual benefit allowance of $32,250 and $20,000 in professional expenses as
part of his severance. From January 1, 1998 through April 18, 1998, he will
receive severance pay at the rate of $215,000 per annum which will total
$66,154. In addition, pursuant to the terms of his employment agreement, he
is entitled to receive $43,000 payable in twelve (12) equal monthly
installments which commenced on August 1, 1997.
(5) Mr. Dow joined the Company in August 1997 and Mr. Serino joined PLC Medical
in December 1995. Mr. Linhares became PLC Medical's Vice President of
Research and Development and Clinical Trials in January 1996.
Except for the Agreement with Mr. Hibbs, the Company has no plans other
than as set out herein pursuant to which cash or non-cash compensation was paid
or distributed to the executive officers during Fiscal 1997 or is proposed to be
paid or distributed in a subsequent year. No other compensation was paid by the
Company to the executive officers during Fiscal 1997, including personal
benefits and securities or property paid or distributed other than pursuant to a
formal plan which compensation is not offered on the same terms to all full time
employees, except as noted above.
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32
The following table sets forth the options granted to the named executive
officers in Fiscal 1997.
OPTION GRANTS IN FISCAL YEAR 1997
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(5)
-------------------------------------------------------- -------------------------
(A) (B) (D) (E) (F) (G)
NUMBER OF (C)
SECURITIES % OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE OR
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED(#) FISCAL YEAR(3) ($/SH) DATE(4) 5% 10%
---- ----------- --------------- ----------- ---------- ---------- -----------
William C. Dow....... 644,466(1) 74% $12.88 08/15/2007 $5,218,253 $13,224,078
William C. Dow....... 15,534(2) 2% $12.88 08/15/2007 $ 125,828 $ 318,873
- ---------------
(1) These non-qualified options were granted on August 15, 1997 with 99,466 of
the options vesting over time as follows: 20,983 on August 15, 1997, 20,983
on December 1, 1997, 28,750 on March 1, 1998 and 28,750 on June 1, 1998. The
remaining 545,000 vest on performance criteria as follows: (i) 115,000 vest
on the earlier of August 15, 2000 or receipt of PMA from the FDA,
(ii)115,000 vest on the earlier of August 15, 2000 or release of audited
financial statements reporting positive earnings after taxes, (iii) 115,000
vest on the earlier of August 15, 2000 or the 30th consecutive day when the
Company's closing price for its Common Stock exceeds $15.00 per share, (iv)
50,000 vest on the earlier of August 15, 2002 or the 30th consecutive day
when the Company's closing price for its Common Stock exceeds $18.00 per
share, (v) 50,000 vest on the earlier of August 15, 2002 or the 30th
consecutive day when the Company's closing price for its Common Stock
exceeds $21.50 per share, (vi) 50,000 vest on the earlier of August 15, 2002
or the 30th consecutive day when the Company's closing price for its Common
Stock exceeds $35.00 per share, and (vii) 50,000 vest on the earlier of
August 15, 2002 or the 30th consecutive day when the Company's closing price
for its Common Stock exceeds $40.00 per share. All options vest upon a sale
or acquisition of substantially all of the stock or assets of the Company.
(2) These incentive stock options were granted on August 15, 1997 and vest as
follows; 7,767 vested on August 15, 1997 and 7,767 vest on January 1, 1998.
(3) In Fiscal 1997, options to purchase 872,500 shares of Common Stock were
granted to Company employees, including executive officers.
(4) The options are subject to earlier termination upon certain events related
to termination of employment.
(5) Amounts for the named executives shown in these columns have been derived by
multiplying (i) the difference between (a) the product of the per share
market price at the time of the grant and the sum of 1 plus the adjusted
stock price appreciation rate (the assumed rate of appreciation compounded
annually over the term of the option) and (b) the per share exercise price
of the option; and (ii) the number of securities underlying the option. The
dollar gains under these columns result from calculations assuming
hypothetical growth rates as set by the Securities and Exchange Commission and are not intended to forecast possible future price appreciation, if any,
ofin connection
with the Company's Common Stock.
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33
The following table indicates the options that were exercised in Fiscal
1997 and sets forth the value1999 Annual Meeting of outstanding options held by the named executive
officers of the Company during the year ended December 31, 1997.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997
AND FY-END OPTION VALUES
(A) (B) (C) (D) (E)
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT FY-END OPTIONS AT FY-END
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED($) UNEXERCISABLE UNEXERCISABLE(1)(2)
- -------------------------------- ------- ---------- --------------- ----------------
Robert I. Rudko, Ph.D. ......... 0 0 172,900/200,000 $643,960/$718,750
William C. Dow.................. 0 0 49,733/610,267 $0/$0
M. Lee Hibbs.................... 375,000 $3,130,461(3) 0/0 $0/$0
Patricia L. Murphy.............. 0 0 83,755/6,666 $306,410/$0
John R. Serino.................. 0 0 16,667/33,333 $0/$0
Stephen J. Linhares............. 0 0 14,960/7,500 $8,910/$0
- ---------------
(1) In-the-Money options are those options for which the fair market value of
the underlying Common Stock is greater than the exercise prices of the
option.
(2) The value of unexercised options is determined by multiplying the number of
options held by the difference between the fair market value of the Common
Stock underlying the options at the end of Fiscal 1997 ($7.59 per share as
determined by the average of the high and low sale prices of the Common
Stock as reported by the American Stock Exchange on December 31, 1997) and
the exercise price of the options granted. Since the fair market value at
the end of Fiscal 1997 was less than the exercise price of certain options
held, the following options were not included in the In the Money table; Mr.
Dow: 660,000 options, Ms. Murphy: 10,000 options (3,334 exercisable and
6,666 unexercisable), Mr. Serino: 50,000 options and Mr. Linhares: 20,000
options (12,500 exercisable and 7,500 unexercisable).
(3) The value realized is calculated by determining the difference between the
fair market value of the Common Stock acquired at exercise and the exercise
price.
COMPENSATION OF DIRECTORS
Each of the non-employee directors receives a fee of $650 for each meeting
of the Board of Directors plus reimbursement for related travel expenses. Each
of the non-employee directors receives an additional $2,000 per quarter.
Eligible directors also received an aggregate of 240,000 stock options through
1996 pursuant to the Company's 1993 Formula Stock Option Plan. In June 1997, an
aggregate of 70,000 stock options were granted to the non-employee directors
pursuant to the 1995 Stock Option Plan, except Mr. Capozzi. Mr. Capozzi's option
to purchase 10,000 shares was granted pursuant to the 1993 Formula Plan which
plan was extinguished with the grant of this option. See "Beneficial Ownership
of Common Stock." In March 1995, Mr. Pendergast agreed to serve as the Lead
Outside Director of the Company and effective January 17, 1997, he receives an
additional $4,000 per quarter for his services as lead outside director in
addition to the fees and expenses referenced above. Mr. Pendergast may also
receive $200 per hour for other consulting activities provided to the Company in
excess of eight hours each month on a pre-approved basis by the Board of
Directors. Mr. Pendergast was also granted an option on August 4, 1995 to
purchase up to 10,000 shares of Common Stock at an exercise price of $12.56 per
share through August 3, 2005, subject to certain requirements and his continued
service as Lead Outside Director for the Company. See "Beneficial Ownership of
Common Stock." The Company has no arrangements, pursuant to which directors were
compensated for their services in their capacity as directors during Fiscal 1997
or thereafter, except as described above.
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34
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
The Company has arrangements with respect to compensation received or that
may be received by the named executive officers to compensate such officers in
the event of termination of employment (resignation, retirement, change in
control) or in the event of a change in responsibilities following a change in
control.
An employment agreement was entered into in May 1992 between Dr. Rudko and
the Company providing for payment of 24 months' base salary and prior bonus to
Dr. Rudko. The agreement was amended in September 1994 to provide that in
addition to the severance benefits discussed above, in the event of a sale or
change of control in the Company, and if Dr. Rudko's employment is terminated
without cause, or if Dr. Rudko is transferred outside of Eastern Massachusetts
or if he has a significant reduction in responsibility with the Company, then he
shall be entitled to receive 299% of his prior year's compensation (as
determined by Section 280G of the Internal Revenue Code of 1986, as amended). In
addition, this employment agreement, as modified, provides that if Dr. Rudko
remains with the Company for one year after a sale or change of control in the
Company, then he shall receive as a bonus an amount equal to 18 months of his
then current base salary.
An employment agreement was entered into in August 1997 between Mr. Dow and
the Company providing for payment of Severance Benefits of 150% of his then
current base salary, 150% of his incentive bonus earned in the Company's most
recent fiscal year and any other benefits allowed under his benefit allowance.
The agreement further provides, in the event of a sale or change of control in
the Company, and if Mr. Dow's employment is terminated without cause, then he
shall be entitled to receive 299% of his Severance Benefits. In addition, this
employment agreement provides that if Mr. Dow remains with the Company for one
year after a sale or change of control in the Company, then he shall receive as
a bonus an amount equal to 100% of his then current base salary and incentive
bonus paid during the preceding fiscal year and the fair market value of all
other benefits then payable, irrespective of whether he thereafter actually
terminates employment with the Company.
In addition, the Company entered into an agreement with each of Ms. Murphy
and Mr. Linhares in April 1996 that provide for a severance payment equal to 12
months' base salary if either Ms. Murphy or Mr. Linhares is terminated without
cause. These agreements also provide that in the event of a sale or change of
control in the Company, and if Ms. Murphy's or Mr. Linhares' employment is
terminated without cause, or their base salary or Company-paid benefits are
reduced, or if they are transferred outside of Eastern Massachusetts or if they
have a significant reduction in responsibility with the Company, then they shall
be entitled to receive 100% of their prior year's compensation.
33
35Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 23, 1998, certainThis information concerning stock ownership of the Companyis incorporated by (i) each person who is known by the
Company to own of record or beneficially more than five percent (5%) ofreference from the Company's Common Stock, (ii) each of the Company's directors and named executive
officers and (iii) all current directors and executive officers as a group.
Except as otherwise indicated, the stockholders listed in the table have sole
voting and investment powersProxy
Statement to be filed with respect to the shares indicated.
NUMBER OF SHARES PERCENTAGE
NAME OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) OF CLASS
--------------------------- --------------------- ----------
Robert I. Rudko, Ph.D.(3)................................... 1,294,762 6.8%
William C. Dow(4)........................................... 115,000 *
M. Lee Hibbs................................................ 339,000 *
Edward H. Pendergast(5)(6)(7)(8)(9)......................... 123,092 *
Harold P. Capozzi(6)(8)(10)(11)............................. 53,000 *
Kenneth J. Pulkonik(5)(6)(8)(11)............................ 75,000 *
Roberts A. Smith, Ph.D.(6)(8)(11)(12)....................... 55,000 *
Brent H. B. Norton, M.D.(8)(11)(13)......................... 47,000 *
Patricia L. Murphy(14)...................................... 122,381 *
Stephen J. Linhares(15)..................................... 80,667 *
John R. Serino(16).......................................... 21,667 *
Scudder Kemper Investments, Inc.(17)........................ 961,000 5.1%
All current directors and executive officers as a group (8
persons) (3)(4)(5)(6)(7)(8)(9)(10)(11)(12)(13)(14)........ 1,885,235 9.6%
- ---------------
* Less than 1%.
(1) Each of such persons, with the exception of Scudder Kemper Investments,
Inc., may be reached through the Company at 10 Forge Park, Franklin,
Massachusetts 02038. The address for Scudder Kemper Investments, Inc. is
Two International Place, Boston, Massachusetts 02110.
(2) Pursuant to the rules of the Securities and Exchange Commission shares of
Common Stock which an individual or group has a right to acquire within 60
days pursuant to the exercise of options or warrants are deemed to be
outstanding for the purpose of computing the percentage ownership of such
individual or group, but are not deemed to be outstanding for the purpose
of computing the percentage ownership of any other person shown in the
table.
(3) The figures presented in the table include 100,000 shares of an option to
purchase up to 300,000 shares of Common Stock through December 31, 1999 at
a price of $4.00 per share, which option fully vests at December 31, 1999
or earlier upon receipt of PMA of the Heart Laser System from the FDA,
except that all such options shall vest immediately in the event of a sale
or acquisition of all or substantially all of the assets of the Company or
the sale of all or substantially all ofconnection
with the Company's stock to an acquiring
party. The figures in this table also include an option granted on March 3,
1995 to purchase up to 72,900 shares1999 Annual Meeting of Common Stock at an exercise price
of $3.69 per share which vested on December 2, 1997 and terminates on March
2, 2005. Also includes 94,762 shares of Common Stock held by Dr. Rudko's
wife, but as to which Dr. Rudko disclaims any beneficial interest. Excludes
13,750 shares of Common Stock held by Dr. Rudko's adult children, as to
which he disclaims any beneficial interest.
(4) Includes (i) 15,534 shares of an option granted on August 15, 1997 at an
exercise price of $12.88 per share which is fully vested and terminates on
August 15, 2007 and (ii) 99,466 shares of an option to purchase up to
644,466 shares of Common Stock granted on August 15, 1997 at an exercise
price of $12.88 per share which terminates on August 15, 2007. See "Option
Grants in Fiscal Year 1997" for vesting details.
(5) Includes an option granted on September 16, 1993 to purchase up to 30,000
shares of Common Stock at an exercise price of $4.00 per share through
September 15, 2003 which is fully vested.
34
36
(6) Includes an option granted on June 19, 1995 to purchase up to 10,000 shares
of Common Stock at an exercise price of $10.44 per share through June 18,
2005, which is fully vested.
(7) Includes an option granted on August 4, 1995 to purchase up to 10,000
shares of Common Stock at an exercise price of $12.56 per share through
August 3, 2005, which is fully vested. Excludes 1,000 shares of Common
Stock owned by a trust established for the benefit of a child of Mr.
Pendergast over which Mr. Pendergast has no control, and of which he
disclaims any beneficial ownership.
(8) Includes an option granted on June 17, 1996 to purchase up to 10,000 shares
of Common Stock at an exercise price of $24.50 per share through June 16,
2006, which is fully vested.
(9) Includes an option granted on June 30, 1997 to purchase up to 30,000 shares
of Common Stock at an exercise price of $20.75 per share through June 30,
2007, which fully vests on April 1, 1998.
(10) Includes 17,438 shares of Common Stock owned by Mr. Capozzi as well as an
option granted on September 16, 1993 to purchase up to 5,562 shares of
Common Stock at an exercise price of $4.00 per share through September 15,
2003, which is fully vested.
(11) Includes an option granted on June 30, 1997 to purchase up to 10,000 shares
of Common Stock at an exercise price of $20.75 per share through June 30,
2007, which fully vests on April 1, 1998.
(12) Includes an option granted on September 16, 1993 to purchase up to 25,000
shares of Common Stock at an exercise price of $4.00 per share through
September 15, 2003, which is fully vested.
(13) Includes an option granted on June 9, 1994 to purchase up to 27,000 shares
of Common Stock at an exercise price of $4.63 per share through June 9,
2004, which is fully vested.
(14) Includes (i) 35,293 shares of Common Stock; (ii) 13,571 shares of an option
granted on July 28, 1994 at an exercise price of $3.97, which is fully
vested and terminates on January 5, 2004; (iii) 13,333 shares of an option
granted on July 28, 1994 at an exercise price of $3.97 per share, which is
fully vested and terminates on July 27, 2004; (iv) 53,517 shares of an
option granted on March 3, 1995 at an exercise price of $3.69 per share,
which is fully vested and terminates on March 2, 2005 and (v) 6,667 shares
of an option to purchase up to 10,000 shares of Common Stock granted on
January 2, 1996 at an exercise price of $16.31 per share, which vests on
January 2, 1999 and terminates on January 1, 2006.
(15) Includes (i) 59,040 shares of Common Stock, (ii) 2,460 shares of an option
granted on July 28, 1994 at an exercise of $3.97 per share, which is fully
vested and terminates on December 31, 2003; (iii) 10,000 shares of an
option to purchase up to 15,000 shares of Common Stock granted on August 4,
1995 at an exercise price of $12.56 per share, which vests on August 4,
1998 and terminates on August 3, 2005; (iv) 2,500 shares of an option to
purchase up to 5,000 shares of Common Stock granted on July 17, 1996 at an
exercise price of $14.88, which vests on the earlier of August 1, 2001 or
upon receipt of the PMA from the FDA and terminates on July 16, 2006 and
(v) 6,667 shares of an option to purchase up to 20,000 shares of Common
Stock granted on January 16, 1998 at an exercise price of $8.88 per share,
such option vests in equal installments over three years beginning April
23, 1998 and terminates on April 22, 2008.
(16) Includes (i) 16,667 shares of an option to purchase up to 50,000 shares of
Common Stock granted on January 2, 1996 at an exercise price of $16.31 per
share, such option vests in equal installments over three years beginning
on January 2, 1997 and terminates on January 1, 2006; and (ii) 5,000 shares
of an option to purchase up to 25,000 shares of Common Stock granted on
January 16, 1998 at an exercise price of $8.88 per share, such option vests
15,000 shares in equal installments over three years beginning April 23,
1998 with the remaining 10,000 vesting on the earlier of April 23, 2000 or
on the following performance criteria: 1,000 shares for each Heart Laser
sold in Fiscal 1998. Such option terminates on April 22, 2008.
(17) Based solely on a Schedule 13G filed in February 1998 by Scudder Kemper
Investments, Inc. ("Scudder"). Scudder has sole voting power as to 358,700
shares and shared voting power as to 374,600 shares. Scudder has sole
dispositive power as to all 961,000 shares.
35
37Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During Fiscal 1991,This information is incorporated by reference from the Corporation loaned Corhart Management Group, Inc.
("Corhart")Company's Proxy
Statement to be filed with the sumSecurities and Exchange Commission in connection
with the Company's 1999 Annual Meeting of $126,061 on a demand basis. Corhart provided office and
administrative services for the Corporation's Vancouver office. Corhart then
loaned a portion of the $126,061 to Dr. Rudko, the Corporation's Chairman of the
Board and Chief Scientist. The balance of the loan to Dr. Rudko plus accrued
interest is approximately $85,000. The loan currently bears interest at 8.65%.
No insider of the Company and no associate or affiliate of the foregoing
persons has or has had any material interest, direct or indirect, in any
transaction since the commencement of Fiscal 1997 or in any proposed transaction
which in either such case has materially affected or will materially affect the
Company, except as described above.
The Company believes that the aforementioned transactions were on terms as
favorable as could have been obtained from independent third parties, and that
any future transaction by the Company with its officers, directors or principal
stockholders will be on terms no less favorable than could be obtained from
independent third parties and will be subject to approval by a majority of the
independent directors.Stockholders.
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements.FINANCIAL STATEMENTS. The financial statements required to be
filed by Item 8 herewith are as follows:
PLC SYSTEMS INC. PAGE
----------------Page
----
Report of Independent Auditors..............................Auditors. . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 and
1996....................................................... . . F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 1996 and 1995..........................1996. . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 1996 and 1995..............1996. . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 1996 and 1995..........................1996. . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements..................Statements. . . . . . . . . . . . . F-7
(a)(2) Financial Statement Schedules.FINANCIAL STATEMENT SCHEDULES. The following financial statement
schedules are filed herewith:
Schedule II Valuation and Qualifying Accounts..............Schedule II Valuation and Qualifying Accounts S-1
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
(a)(3) Exhibits.
36
38
(i) The following exhibits, required by Item 601 of Regulation S-K, are
filed herewith:EXHIBITS.
EXHIBIT INDEX
EXHIBIT
NO. TITLE
------- ------------------------------------------------------------NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
21 Subsidiaries3.1 Certificate of Incorporation, incorporated by reference to the
Registrant,Registrant's registration statement on Form S-1 (SEC File No. 33-48340)
and amendments thereto, as amended.
23 Consentpreviously filed with the Securities and
Exchange Commission.
3.2 Articles of Ernst & Young LLP.
27a Financial DataContinuance, pursuant to the Yukon Business Corporations
Act, incorporated by reference to the Registrant's Definitive Proxy
Statement on Schedule for fiscal year ended December 31,
1997.
27b Restated Financial Data Schedule for14A dated May 26, 1998, as previously filed with
the quarter ended
September 30, 1997.
27c Restated Financial Data Schedule forSecurities and Exchange Commission.
3.3 Memorandum and Articles (Bylaws), incorporated by reference to the
quarter ended June
30, 1997.
27d Restated Financial Data Schedule forRegistrant's registration statement on Form S-1 (SEC File No. 33-48340)
and amendments thereto, as previously filed with the quarter ended March
31, 1997.
27e Restated Financial Data Schedule forSecurities and
Exchange Commission.
3.4 Amendment to Memorandum and Articles (Bylaws), incorporated by reference
to the quarter ended
December 31, 1996.
27f Restated Financial Data Schedule forRegistrant's registration statement on Form S-1 (SEC File No.
33-48340) and amendments thereto, as previously filed with the
quarter ended
September 30, 1996.
27g Restated Financial Data Schedule for the quarter ended June
30, 1996.
27h Restated Financial Data Schedule for the quarter ended March
31, 1996.
(ii) The following exhibits were filed as part of the Company's Report on
Form 10-Q for the quarter ended September 30, 1997, filed with the Commission on
November 14, 1997 and are herein incorporated by reference:
EXHIBIT
NO. TITLE
------- ------------------------------------------------------------
10a**Securities and Exchange Commission.
4.1 Form of Key Employment Agreement of William C. Dow.
10b** 1997 ExecutiveCommon Stock Certificate, incorporated by reference to the
Registrant's registration statement on Form S-1 (SEC File No. 33-48340)
and amendments thereto, as previously filed with the Securities and
Exchange Commission.
10.1 1992 Stock Option Plan.
(iii) The following exhibits were filed as part of the Company's Report on
Form 10-Q for the quarter ended June 30, 1997, filed with the Commission on
August 14, 1997 and are herein incorporated by reference:
EXHIBIT
NO. TITLE
------- ------------------------------------------------------------
10a Convertible Debenture Agreement.
10b First AmendmentPlan, incorporated by reference to Convertible Debenture Agreement.
10c Second Amendmentthe Registrant's
registration statement on Form S-1 (SEC File No. 33-48340) and
amendments thereto, as previously filed with the Securities and Exchange
Commission.
10.2 1993 Stock Option Plan, incorporated by reference to Convertible Debenture Agreement.
10dthe Registrant's
registration statement on Form of Convertible Denbenture.
10eS-1 (SEC File No. 33-58258) and
amendments thereto, as previously filed with the
32
Securities and Exchange Commission.
10.3 1993 Formula Stock Option Plan, incorporated by reference to the
Registrant's registration statement on Form of Redeemable Warrant.
10f Registration Rights Agreement.
(iv) The following exhibits were filed as part of the Company's Annual
Report on Form 10-K for the year ended December 31, 1994 as filed with the
Commission on March 31, 1995 and are herein incorporated by reference:
EXHIBIT
NO. TITLE
------- ------------------------------------------------------------
10a**S-1 (SEC File No. 33-58258)
and amendments thereto, as previously filed with the Securities and
Exchange Commission.
10.4 Revised Form of Key Employee Agreement for Dr. Robert I. Rudko.
10b**Rudko,
incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1994 (SEC File No. 1-11388), as
previously filed with the Securities and Exchange Commission.
10.5 1995 Stock Option Plan.
37
39
(v) The following exhibits were filed as part of the Company's Form S-1
Registration Statement (33-58258) declared effective by the Commission on
November 5, 1993 and are herein incorporated by reference:
EXHIBIT
NO. TITLE
------- ------------------------------------------------------------
10a** 1993Plan, incorporated by reference to the Registrant's
Registration Statement on Form S-8 (SEC File No. 33-95168), as
previously filed with the Securities and Exchange Commission.
10.6 Convertible Debenture Agreement, incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997 (SEC File No. 1-11388), as previously filed with the Securities
and Exchange Commission.
10.7 First Amendment to Convertible Debenture Agreement, incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 (SEC File No. 1-11388), as previously filed
with the Securities and Exchange Commission.
10.8 Second Amendment to Convertible Debenture Agreement, incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 (SEC File No. 1-11388), as previously filed
with the Securities and Exchange Commission.
10.9 Form of Convertible Debenture, incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997 (SEC File No. 1-11388), as previously filed with the Securities
and Exchange Commission.
10.10 Form of Redeemable Warrant, incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997 (SEC File No. 1-11388), as previously filed with the Securities
and Exchange Commission.
10.11 Registration Rights Agreement, incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1997 (SEC File No. 1-11388), as previously filed with the Securities
and Exchange Commission.
10.12 Form of Key Employment Agreement for William C. Dow, incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997 (SEC File No. 1-11388), as previously
filed with the Securities and Exchange Commission.
10.13 1997 Executive Stock Option Plan.
10b 1993 FormulaPlan, incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 (SEC File No. 1-11388), as previously filed with the
Securities and Exchange Commission.
10.14 Convertible Debenture Purchase Agreement dated as of April 23, 1998
between Southbrook International Investment, Ltd., Brown Simpson
Strategic Growth Fund, L.P. and Brown Simpson Strategic Growth Fund,
Ltd. and the Registrant, incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the Quarter ended March 31, 1998 (File
No. 1-11388), as previously filed with the Securities and Exchange
Commission.
10.15 Form of Convertible Debenture, incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the Quarter ended March
31, 1998 (File No. 1-11388), as previously filed with the Securities and
Exchange Commission.
10.16 Form of Redeemable Warrant, incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the Quarter ended March
31, 1998 (File No. 1-11388), as previously filed with the Securities and
Exchange Commission.
10.17 Registration Rights Agreement dated as of April 23, 1998 between
Southbrook International Investment, Ltd., Brown Simpson Strategic
Growth Fund, L.P. and Brown Simpson Strategic Growth Fund, Ltd. and the
Registrant, incorporated by reference to the Registrant's Quarterly
Report on Form 10-Q for the Quarter ended March 31, 1998 (File
33
No. 1-11388), as previously filed with the Securities and Exchange
Commission.
10.18 Key Employee Agreement of Robert Svikhart, incorporated by reference to
the Registrant's Quarterly Report on Form 10-Q for the Quarter ended
June 30, 1998 (File No. 1-11388), as previously filed with the
Securities and Exchange Commission.
10.19 Form of Common Stock Option Plan.Purchase Agreement, incorporated by reference to
the Registrant's Current Report on Form 8-K dated March 12, 1999 (File
No. 1-11388), as previously filed with the Securities and Exchange
Commission.
21.1 * Subsidiaries of the Registrant.
23.1 * Consent of Ernst & Young LLP.
27.1 * Financial Data Schedule.
* Filed with this Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
(vi) The following exhibits were filed as part of the Company's Form S-1
Registration Statement (33-48340) declared effective by the Commission on
September 17, 1992 and are incorporated herein by reference:
EXHIBIT
NO. TITLE
------- ------------------------------------------------------------
3a Certificate of Incorporation.
3b Articles.
4a Rights of security holders (included in Exhibits 3a and 3b).
4c Specimen Stock Certificate.
10g** 1992 Stock Option Plan.
- ---------------
** Management contracts or compensatory plan or arrangements required to be
filed as an exhibit to this Form 10-K pursuant to Item 14(c) of this report.
(b) Reports on FormREPORTS ON FORM 8-K. No reports on Form 8-K were filed during the
last quarter of the period covered by this report.
(c) Exhibits.EXHIBITS. The Company hereby files as part of this Form 10-K the
exhibits listed in Item 14(a)(3) as set forth above.
(d) Financial Statement Schedules.FINANCIAL STATEMENT SCHEDULES. See Item 14(a)(2) above.
3834
40
SIGNATURES
Pursuant to the requirements of SectionPURSUANT TO THE REQUIREMENTS OF SECTION 13 or 15(d) of the Securities
Exchange Act ofOR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
PLC SYSTEMS INC.
Date: March 31, 19981999 By: /s/ WILLIAMWilliam C. DOW
------------------------------------Dow
---------------------------------------
William C. Dow
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act ofPURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, this
Report has been signed by the following persons on behalf of the registrant and
in the capacities and on the date indicated.THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AND ON THE DATE INDICATED.
NAME CAPACITY DATEName Capacity Date
---- -------- ----
/s/ WILLIAM C. DOW President and Chief ExecutiveEdward H. Pendergast Chairman of the Board of Directors March 31, 19981999
- --------------------------------------------------- Officer------------------------------- (Principal Executive William C. Dow Officer)
Edward H. Pendergast
/s/ PATRICIA L. MURPHYRobert Svikhart Chief Financial Officer March 31, 19981999
- ---------------------------------------------------------------------------------- (Principal Financial and Patricia L. Murphy Accounting
Robert Svikhart Officer)
/s/ ROBERT I. RUDKO, PH.D. Chairman of the Board ofWilliam C. Dow President and Chief Executive Officer March 31, 19981999
- --------------------------------------------------- Directors-------------------------------
William C. Dow
/s/ Harold P. Capozzi Director March 31, 1999
- -------------------------------
Harold P. Capozzi
/s/ H.B. Brent Norton, M.D. Director March 31, 1999
- -------------------------------
H.B. Brent Norton, M.D.
/s/ Kenneth J. Pulkonik Director March 31, 1999
- -------------------------------
Kenneth J. Pulkonik
/s/ Robert I. Rudko, Ph.D. Director March 31, 1999
- -------------------------------
Robert I. Rudko, Ph.D.
/s/ HAROLD P. CAPOZZIRoberts A. Smith, Ph.D. Director March 31, 19981999
- ---------------------------------------------------
Harold P. Capozzi
/s/ H.B. BRENT NORTON, M.D. Director March 31, 1998
- ---------------------------------------------------
H.B. Brent Norton, M.D.
/s/ EDWARD H. PENDERGAST Director March 31, 1998
- ---------------------------------------------------
Edward H. Pendergast
/s/ KENNETH J. PULKONIK Director March 31, 1998
- ---------------------------------------------------
Kenneth J. Pulkonik
/s/ ROBERTS A. SMITH, PH.D. Director March 31, 1998
- ----------------------------------------------------------------------------------
Roberts A. Smith, Ph.D.
3935
41
PLC SYSTEMS INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 1998, 1997, 1996
1995
40
42
PLC SYSTEMS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGEPage
----
Report of Independent Auditors..............................Auditors . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 and
1996....................................................... . . . . . F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 and 1995........................... . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996 and 1995............... . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 and 1995........................... . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements..................Statements . . . . . . . . . . . . . . . F-7
Financial Statement Schedule:
Schedule II --- Valuation and Qualifying Accounts..........Accounts. . . . . . . . . . . . S-1
F-1
43
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
PLC Systems Inc.
We have audited the accompanying consolidated balance sheets of PLC Systems Inc.
as of December 31, 19971998 and 1996,1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. Our audits also included the financial
statement schedule listed in the index at Item 14(a).1998. These financial statements
and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and
schedule based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PLC
Systems Inc. at December 31, 19971998 and 1996,1997, and the consolidated results of its
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 19971998 in conformity with generally accepted
accounting principles.
Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
Ernst & Young LLP
Boston, Massachusetts
February 20, 199819, 1999 except for Note 11,
as to which the date is March 4, 1999
F-2
44
PLC SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
DECEMBERDecember 31, 1998 and 1997 AND 1996
1998 1997
1996
-------- --------
(IN THOUSANDS)---- ----
(In thousands)
ASSETS
ASSETS
Current assets:
Cash and cash equivalents.................................equivalents $ 4,846 $ 3,484
$ 3,039
Marketable securities.....................................securities - 12,845 5,470
Accounts receivable, net..................................net 2,262 1,337
2,635
Inventories, net..........................................net 2,953 2,512 2,345
Prepaid expenses and other current assets.................assets 547 502
679
-------- --------------- -------
Total current assets..............................assets 10,608 20,680 14,168
Equipment, furniture and leasehold improvements, net........net 5,091 5,636
4,712
Other assets................................................assets 558 701
537
-------- --------------- -------
Total assets...................................... $ 27,017 $ 19,417
======== ========assets $16,257 $27,017
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..........................................payable $ 986 $ 917
$ 867
Accrued clinical costs....................................costs 1,016 1,292
935
Accrued compensation......................................compensation 989 570
467
Accrued expenses..........................................expenses 1,127 923
304
Deferred revenue..........................................revenue 195 70 339
5% Convertible Debentures.................................Debentures due 2002 - 3,819
--Convertible Debentures due 2003 934 -
Secured borrowings 240 -
Other accrued liabilities.................................liabilities 72 296
11
-------- -------------- ------
Total current liabilities.........................liabilities 5,559 7,887 2,923
Capital lease obligations...................................obligations 37 121 27
Commitments and contingencies
Stockholders' equity:
Preferred stock, no par value, 5,000 shares
authorized
Common stock, no par value, 25,00050,000 shares
authorized,
18,36819,740 and 16,51318,368 shares issued and outstanding
in 1998 and 1997, and 1996, respectively.................................respectively 79,521 71,115
54,030
Accumulated deficit.........................................deficit (68,136) (51,533)
(37,129)
Foreign currency translation................................Accumulated other comprehensive loss (724) (573)
(434)
-------- --------------- -------
10,661 19,009
16,467
-------- --------------- -------
Total liabilities and stockholders' equity........ $ 27,017 $ 19,417
======== ========equity $16,257 $27,017
------- -------
------- -------
The accompanying notes are an intergalintegral part of the consolidated
financial statements.
F-3
45
PLC SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBERFor The Years Ended December 31, 1998, 1997 and 1996 AND 1995
1998 1997 1996
1995
-------- ------- -------
(IN THOUSANDS)---- ---- ----
(In thousands, except per share data)
Revenue:
Product sales.............................................sales
$ 3,088 $ 5,687 $ 9,082
$11,938
Placement and service fees................................fees 2,605 3,254 2,790
1,407
-------- ------- --------------- --------
Total revenues....................................revenues 5,693 8,941 11,872 13,345
Cost of revenues:
Product sales.............................................sales 1,945 2,721 2,911 4,177
Placement and service fees................................fees 2,622 2,595 1,155
386
-------- ------- --------------- --------
Total cost of revenues............................revenues 4,567 5,316 4,066
4,563
-------- ------- --------------- --------
Gross Profit................................................Profit 1,126 3,625 7,806 8,782
Operating expenses:
Selling, general and administrative.......................administrative 13,718 13,049 7,023
5,035
Research and development..................................development 4,468 5,158 2,835
2,246
-------- ------- --------------- --------
Total operating expenses..........................expenses 18,186 18,207 9,858
7,281
-------- ------- -------
Income (loss)-------- --------
Loss from operations...............................operations (17,060) (14,582) (2,052)
1,501
Other income, (expense), net.................................net 457 178 512
588
-------- ------- -------
Income (loss) before provision for income taxes............. (14,404)-------- --------
Net loss $(16,603) $(14,404) $ (1,540)
2,089
Provision for income taxes.................................. -- -- 85
-------- ------- --------------- --------
-------- -------- --------
Net income (loss)........................................... $(14,404) $(1,540) $ 2,004
Net income (loss)loss per share -- Basic........................- Basic $ (.86) $ (.84) $ (.09)
$ .13
Net income (loss)loss per share -- Diluted......................- Diluted $ (.86) $ (.84) $ (.09) $ .12
Shares used to compute net income (loss)loss per share
-- Basic..................................................- Basic 19,218 17,050 16,376
15,868
-- Diluted................................................- Diluted 19,218 17,050 16,376 16,590
The accompanying notes are an intergalintegral part of the consolidated
financial statements.
F-4
46
PLC SYSTEMS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBERFor The Years Ended December 31, 1998, 1997 and 1996 AND 1995
COMMON STOCK FOREIGN
----------------- ACCUMULATED CURRENCY
SHARES AMOUNT DEFICIT TRANSLATION TOTALAccumulated
Common Stock Other
------------ Accumulated Comprehensive
Shares Amount Deficit Loss Total
------ ------ ------- ----------- ----------- --------
(IN THOUSANDS)------ -----
(In Thousands)
Balance, December 31, 1994........... 15,845 $50,943 $(37,593) $(291) $ 13,059
Exercise of stock options............ 99 399 399
Repayment of stockholder notes....... -- 69 69
Net income........................... 2,004 2,004
Currency translation adjustment...... (23) (23)
------ ------- -------- ----- --------
Balance, December 31, 1995...........1995 15,944 51,411 (35,589) (314) 15,508$51,411 $(35,589) $(314) $15,508
Exercise of stockholder warrants.....warrants 351 1,680 1,680
Exercise of stock options............options 218 820 820
Repayment of stockholder notes....... --notes - 119 119
Comprehensive loss:
Net loss.............................loss (1,540)
(1,540)
CurrencyForeign currency translation adjustment...... (120)
(120)
------Total comprehensive loss (1,660)
-------- --------- ---------- ------- -------- ----- ------------------
Balance, December 31, 1996...........1996 16,513 54,030 (37,129) (434) 16,467
Exercise of stock options............options 435 1,909 1,909
Exercise of warrants.................warrants 17 94 94
Conversion of debentures.............debentures 1,403 14,465 14,465
Issuance of warrants................. --warrants - 617 617
Comprehensive loss:
Net loss.............................loss (14,404)
(14,404)
CurrencyForeign currency translation adjustment...... (139)
(139)
------Total comprehensive loss (14,543)
-------- --------- ---------- ------- -------- ----- ------------------
Balance, December 31, 1997...........1997 18,368 $71,115 $(51,533) $(573) $71,115 (51,533) (573) 19,009
====== ======= ======== ===== ========Exercise of stock options 142 623 623
Conversion of 5% debentures due 2002 577 3,923 3,923
Conversion of debentures due 2003 653 3,810 3,810
Issuance of warrants - 50 50
Comprehensive loss:
Net loss (16,603)
Foreign currency translation (151)
Total comprehensive loss (16,754)
-------- --------- ---------- ------- ----------
Balance, December 31, 1998 19,740 $79,521 $(68,136) $(724) $10,661
-------- --------- ---------- ------- ----------
-------- --------- ---------- ------- ----------
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
47
PLC SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBERFor The Years Ended December 31, 1998, 1997 and 1996 AND 1995
1998 1997 1996
1995
-------- -------- -------
(IN THOUSANDS)---- ---- ----
(In thousands)
Operating activities:
Net income (loss).........................................loss $(16,603) $(14,404) $ (1,540) $ 2,004$(1,540)
Adjustments to reconcile net income (loss)loss to
net cash provided by (used for) operating activities:
Depreciation and amortization.............................amortization 3,170 2,007 1,228 565
Change in assets and liabilities:
Accounts receivable....................................receivable (973) 1,389 4,149
(6,387)
Inventory..............................................Inventory (475) (136) (556) (435)
Prepaid expenses and other assets......................assets 89 (20) (359)
(399)
Account payable........................................payable 82 24 303
220
Deferred revenue.......................................revenue 142 (77) 107
33
Accrued liabilities....................................liabilities 304 1,163 (252)
1,225
-------- --------------- ------- -------
Net cash provided by (used for) operating activities........activities (14,264) (10,054) 3,080 (3,174)
Investing activities:
Purchase of marketable securities.........................securities (1,986) (17,827) (19,419) (8,500)
Maturities of marketable securities.......................securities 14,831 10,452 20,449 9,858
Purchase of fixed assets..................................assets (2,574) (2,642) (4,216)
(1,584)
-------- --------------- ------- -------
Net cash used forprovided by (used for) investing activities......................activities 10,271 (10,017) (3,186) (226)
Financing activities:
Issuance of 5% Convertible Debentures, net of
issuance costs..................................................costs - 18,779 -- ---
Secured borrowing 240 - -
Net proceeds from sale of common stock....................stock 623 2,003 2,499
388
Tax benefit relating to stock option plans................ -- -- 11Issuance of Convertible Debentures, net of issuance costs 4,659 - -
Repayment of stockholder notes............................ --notes - - 119 69
Principal payments on capital lease obligations...........obligations (79) (25) (13)
(17)
-------- --------------- ------- -------
Net cash provided by financing activities...................activities 5,443 20,757 2,605 451
Effect of exchange rate changes on cash and cash equivalents...............................................equivalents (88) (241) (164)
(46)
-------- --------------- ------- -------
Net increase (decrease) in cash and cash equivalents........equivalents 1,362 445 2,335 (2,995)
Cash and cash equivalents at beginning of year..............year 3,484 3,039 704
3,699
-------- --------------- ------- -------
Cash and cash equivalents at end of year....................year $ 4,846 $ 3,484 $ 3,039
$ 704
======== ======== =======------- ------- -------
------- ------- -------
Non-Cash Financing Activities:
Conversion of Convertible Debentures and accrued
interest into Common Stock...................................... 14,464 -- --
Warrant value.............................................Stock 7,733 14,465 -
Ascribed warrant value 50 617 -- ---
Capital leases............................................leases - 150 -- ---
Supplemental disclosure:
Interest paid.............................................paid $ - $ 2 $ 1
$ 6
Income taxes paid (refunded).............................. $ - $ (29) $ 91 $ --
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
48
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBERDecember 31, 19971998
1. NATURE OF BUSINESS
The accompanying financial statements have been presented on the assumption
that the Company is a multinational manufacturergoing concern, which contemplates the realization of
medical lasersassets and related
products operating primarilythe satisfaction of liabilities in the United States with sales offices in Europenormal course of business.
During 1997 and 1998 the Pacific Rim. The Company's primary product is The Heart Laser(TM)(1) TMR
System ("Heart Laser System") which is a patented CO(2) laser used for a
surgical technique known as Transmyocardial Revascularization.Company incurred significant operating losses and
utilized significant amounts of cash to fund operations. The Company is
currently conducting clinical testsreaching a critical stage in its growth as it transitions from a research and
development company to a commercial company with complete sales, marketing and
production capabilities. During this time the Company increased its overall
operating expenses and overhead to be positioned to further increase its sales
and production capabilities in anticipation of possible FDA approval. In order
to be adequately positioned to meet these demands, the Company obtained equity
financing. The Company continues to seek equity financing as its primary means
of funding operations during this transition. On March 4, 1999, the Company
announced that it had obtained a provisional equity financing commitment of $8
million from a major institutional investor. The Company is unable to utilize
this commitment at this time due to its stock price.
During the second half of 1998, the Company implemented a number of
programs to reduce its consumption of cash, including operating expense
reductions and the financing agreement with GE Capital, which enables the
Company to obtain an upfront cash payment on certain domestic placement
agreements. While the Company is encouraged by the recent developments with
respect to FDA approval and the HCFA announcement that Medicare will provide
coverage for TMR procedures performed with devices approved by the FDA, the
historical absence of widespread reimbursement for the TMR procedure by third
party payers, principally Medicare, Medicaid, and private health insurance
plans, has limited demand for and use of The Heart Laser System in the United
States under the regulation of the FoodStates. Although Medicare reimbursement is expected to begin in 1999 and Drug Administration.some
private insurance plans have begun reimbursing health care providers for TMR
procedures using The Heart Laser System, is being marketed internationallythe Company believes that operating
losses are likely to continue until such time as third party payers begin to
provide widespread reimbursement to healthcare providers for use of The Heart
Laser System.
Recognizing the deliberate nature that accompanies a highly regulated
process such as the above, management of the Company has outlined a plan of
appropriate action steps to attempt to ensure that the Company has adequate
sources of cash to meet its working capital needs for at least the next
twelve months. In March 1999, management of the Company received approval
from the Board of Directors to implement this action plan. The key elements
of the plan are as follows:
- Further operating expense reductions to eliminate certain expenditures
which are not essential to achieving critical business objectives at
this time (e.g., discretionary spending, further development efforts)
- Strategic realignment of the Company's international sales
organization.
- Pursuit of strategic alternatives related to the Company's domestic
sales efforts that can help it further penetrate existing markets.
- Pursuit of strategic financing alternatives including the sale of debt
securities, bank financing, strategic alliances, joint ventures or by
other means.
As a result of implementing the above actions, management believes that
its existing cash resources and cash from operations will meet working
capital requirements over the next twelve months and improve operating
results.
Unanticipated decreases in countries where it has received
regulatory approvalsoperating revenues, increases in expenses or
further delays in the process of third
F-7
party payers committing to provide reimbursement to healthcare providers, may
adversely impact the Company's cash position and require further cost reductions
or the need to obtain additional financing. Should additional financing not be
available on terms and conditions acceptable to the Company, additional actions
may be required that could adversely impact the Company's ability to continue to
realize assets and satisfy liabilities in other countries where no approval is required.the normal course of business. The
financial statements do not include any adjustments to reflect the possible
future effects of these uncertainties.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of PresentationBASIS OF PRESENTATION
The consolidated financial statements include the accounts of PLC Systems
Inc. (PLC or the "Company") and its seven wholly-owned subsidiaries, PLC Medical
Systems, Inc., PLC Sistemas Medicos Internacionais, Lda, PLC Sistemas Medicos
GmbH, PLC Medical Systems AG, PLC Medical Systems Asia/Pacific Pte Ltd, PLC
Medical Systems France and PLC Medical Systems Australia Pty Ltd. All
intercompany accounts and transactions have been eliminated.
These consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles (GAAP). Had the statements
been prepared in accordance with Canadian GAAP, certain transactions would have
been accounted for differently. Under Canadian GAAP, the 5% Convertible
Debentures, net of issuance costs, would be classified as equity since the
Company has the right to settle the principal and interest amounts due on the
debentures by issuing common stock.
Accordingly, if the accompanying financial statements had been prepared
under Canadian GAAP at December 31, 1998 and 1997, common stock would be
$934,000 and $3,697,000, respectively, greater due to the inclusion of the 5%
Convertible Debentures and accrued expenses would be reduced by $33,000 in 1998
and $75,000 in 1997 due to the elimination of accrued interest on the debt. In
addition, the accumulated deficit would be reduced by $252,000 in 1998 and
$197,000 in 1997 as a result of the elimination of interest and other debt
issuance expenses included in the accompanying statement of operations for the
year ended December 31, 1998 and 1997, as required under U.S. GAAP.
Cash and Marketable SecuritiesCASH AND MARKETABLE SECURITIES
Investments with a maturity of three months or less at the date of purchase
are considered to be cash equivalents and those with maturities greater than
three months are considered to be marketable securities. Marketable securities
are stated at cost, which approximates fair value. Cash equivalents and
marketable securities, which are classified as available-for-sale securities,
consist primarily of time deposits, bankers acceptances and obligations of U.S.
government and agencies. There were no unrealized gains or losses at December
31, 1997. Maturities of marketable securities at December 31, 1997 1996 or 1995.
Inventorywere less
than six months.
F-8
INVENTORY
Inventory is stated at the lower of average cost or market value.
Equipment, Furniture and Leasehold ImprovementsEQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Equipment, fixtures and leasehold improvements are stated on the basis of
cost. Depreciation is computed principally on the straight-line method for
financial reporting purposes and on accelerated methods for income tax purposes.
- ---------------
1.Depreciation and amortization are based on the following useful lives:
Equipment 3-5 years
Equipment under placement contracts Life of contract
Office furniture and fixtures 5 years
Equipment under capital lease 5 years
Leasehold improvements Life of lease
The Heart Laser isCompany reviews and evaluates long-lived assets for impairment on a
trademarkregular basis. In management's opinion, long-lived assets are not impaired as
of PLC Medical Systems, Inc.
F-7
49
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognitionthe balance sheet dates presented. The amounts capitalized have future value
to the Company.
REVENUE RECOGNITION
Revenues from product sales, except sales to certain distributors, are
recognized at the time of shipment. Shipments made to distributors, where
payment is dependent on the resale of the product, are recognized at the time of
payment from the distributor. Revenues from placement contracts are recognized
as earned based on the terms of each placement contract. Placement contracts
currently in place have either a "minimum billings" clause or a "pay per actual
usage" clause. Revenues from service contracts are recognized ratably over the
life of the contract.
Foreign Currency TranslationFOREIGN CURRENCY TRANSLATION
Assets and liabilities are translated into U.S. dollars at current exchange
rates, while income and expense items are translated at average rates of
exchange prevailing during the year. Exchange gains and losses arising from
translation are accumulated as a separate component of stockholders' equity.
Gains and losses from foreign currency transactions are recorded in the
accompanying statements of operations and are not material.
Net Income (Loss) per ShareNET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share" ("Statement 128") which replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earningsloss per share amounts for all periods have been
presented, and have been restated, to conform to Statement 128.
At December 31,
1995, the difference between basic and diluted shares used in the computation of
earnings per share is approximately 722,000 weighted average common equivalent
shares resulting from outstanding common stock options.
Stock Based CompensationF-9
STOCK BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees
and certain other individuals with exercise prices equal to the fair value of
the shares at the dates of grant. The Company has adopted the disclosure only
provisions of Statement of Financial Accounting Standards No. 123, Accounting
for Stock-based CompensationACCOUNTING
FOR STOCK-BASED COMPENSATION ("FAS 123") and will continue to account for its
stock option plans in accordance with the provisions of APB 25 Accounting for
Stock Issued to Employees.ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES. Accordingly, no compensation cost has been
recognized for the stock option plans.
Use of EstimatesUSE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make 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. The
Company has provided a valuation allowance for all deferred tax assets due to
the inability to assume the realization of such tax benefits in the foreseeable
future.
ImpactCOMPREHENSIVE INCOME
As of Recently Issued Accounting Standards
During 1997,January 1, 1998, the Financial Accounting Standards Board issuedCompany adopted Statement No.
130, "ReportingReporting
Comprehensive Income"Income ("Statement 130"). The Company will adopt
the provisions of Statement 130 during fiscal 1998. At that time,establishes new rules for
the Company
will be required to disclosereporting and display of comprehensive income and comprehensive income per
share. Comprehensive income is generally defined as all changesits components in the
financial statements. The Company has changed the format of its consolidated
statements of stockholders' equity exclusive of transactions with owners such as capital investments and
dividends.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures About Segments of an Enterprise and Related Information"
("Statement 131") which is required to be adopted for
F-8
50
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
years beginning after December 15, 1997. Management of the Company does not
expect the adoption of Statement 131 to have a material impact on the Company's
financial statement disclosures.present comprehensive income.
3. INVENTORIESINVENTORY
Inventories consist of the following at December 31 (in thousands):
1998 1997
1996
------ ---------- ----
Raw materials..............................................materials $1,035 $1,141 $1,043
Work in process............................................process 145 10
306
Finished goods.............................................goods 1,773 1,361 996
------ ------
$2,953 $2,512
$2,345
====== ======------ ------
------ ------
F-10
4. EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Equipment, furniture and leasehold improvements consist of the following at
December 31 (in thousands):
1998 1997
1996
------ ---------- ----
Equipment..................................................Equipment $2,461 $2,010 $1,995
Equipment under placement contracts........................contracts 6,617 5,760 3,387
Office furniture and fixtures..............................fixtures 929 1,082 834
Equipment under capital lease..............................lease 429 455
284
Leasehold improvements.....................................improvements 587 576587
------ ------
11,023 9,894 7,076
Less accumulated depreciation
and amortization.............amortization 5,932 4,258 2,364
------ ------
$5,091 $5,636
$4,712
====== ======------ ------
------ ------
Equipment under placement contracts represents Heart Lasers that the
Company has provided to customers under contracts which require the customers to
pay a fee for each use of the equipment, subject to guaranteed annual minimum
fees. The Company maintains title to the equipment, which is depreciated over
the term of the contract, and is responsible for maintenance. Depreciation
expense was $3,116,000, $1,894,000, and $717,000 respectively for the years
ended December 31,1998, 1997, and 1996.
5. LEGAL PROCEEDINGS
In September 1996, CardioGenesis Corporation, ("CardioGenesis") filed a
civil lawsuit in the United States District Court for the Northern District of
California seekingasking the court to havedeclare the Company's synchronization patent
declared(U.S. Patent No. 5,125,926) invalid and unenforceable, or, alternatively, asking the court to
determine whether CardioGenesis
infringes onfind that CardioGenesis' TMR and PMR lasers do not infringe this patent. In October 1996, theThe
Company filed an answer anda counterclaim alleging that CardioGenesis infringes on this patent. The
counterclaim seeks both injunctive reliefall of CardioGenesis' TMR and monetary damages against
CardioGenesis.PMR
lasers infringe U.S. Patent No. 5,125,926. In OctoberJanuary 1997, CardioGenesis filed
an amended complaint seeking
to have the Company's synchronization patent declared unenforceable.
CardioGenesis is not seeking monetary damages from the Company.
In January 1997, CardioGenesis Corporation, filed a challenge to the
Company's European synchronization patentopposition in the European Patent Office and in
March 1997to have the Company filed its response.Company's German
synchronization patent declared invalid. In addition, in April 1997, the Company filed an
infringement lawsuit against CardioGenesis in the Munich
District Courts alleging infringementand one of its synchronization patent. An oral
hearing has been scheduleddistributors in the
Munich District Court alleging that CardioGenesis' TMR and PMR lasers infringe
the Company's German synchronization patent.
The PLC patents at issue in these lawsuits cover the Company's
synchronization technology, a critical factor in ensuring the safety of TMR and
PMR procedures. In January 1999, the Company settled its outstanding patent
infringement litigation with CardioGenesis. Under the settlement, CardioGenesis
acknowledged that U.S. Patent No. 5,125,926 and related international patents of
the Company are valid and enforceable. PLC granted CardioGenesis a non-exclusive
worldwide license to the patents in exchange for payment of a license fee and
ongoing royalties over the life of the patents (at least 10 years unless the
patents are all held invalid in future lawsuits). As part of the settlement,
CardioGenesis must pay the Company:
- a minimum of $2.5 million over the next 42 months; and
- license fees and ongoing royalties on October 1, 1998.
F-9
51
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)sales of all covered products
for at least 10 years (unless the patents are all held invalid in
future lawsuits).
In July 1997, an FDA advisory panel recommended against approval of the
Company's application to market The Heart Laser System in the United States.
Following this recommendation, the Company and certain of its officers have beenwas named as defendantsdefendant
F-11
in 21 purported class action lawsuits filed between August 1997 and November
1997 in the United States District Court for the District of Massachusetts. The
suits
allegelawsuits seek an unspecified amount of damages in connection with alleged
violations of the federal securities laws. The plaintiffs are seeking
damageslaws based on the Company's failure to
obtain a favorable FDA panel recommendation in connection with such alleged violations.1997. Nineteen of these
complaints have been consolidated by the court into a single action for pretrial
purposes. A motion hasTwo of these suits have been filed to consolidate the other two suits with each other.
These matters are in the earliest stages of litigation and thedismissed. The Company intends
to seek motionsmoved to
dismiss all of thesethe remaining claims. There can be no assurance thatOn March 26, 1999, the motionscourt issued an
order dismissing some, but not all of the remaining claims. The Company has
also been named as a defendant in a lawsuit filed in Massachusetts Superior
Court in September 1998. This suit seeks over $2 million in damages for alleged
negligent misrepresentations and fraud arising from the Company's failure to
dismiss these claims will be successful. Management is unable toobtain a favorable FDA recommendation in 1997. The Company cannot make a
meaningful estimate of the amount or range of loss that could result from an
unfavorable outcome of these pending litigation matters. It is possible that
the Company's result of operations or cash flows inlawsuits, but an unfavorable outcome could have a
particular quarter or
annual period or itsmaterial adverse affect on our business, financial position could be materially affected by an
ultimate unfavorable outcomeand results of
this pending litigation.operations. The Company believes that it has valid defenses to these class action litigation
matters and intendsit has and continues to vigorously defend itself in these matters.
In August 1997, the Company received from the United States Securities and
Exchange Commission (the "Commission") an informal request for information
relating to the decision by the FDA Advisory Panel not to recommend approval of
The Heart Laser System in July 1997. The Company has responded and has not
received any further communication from the Commission regarding this matter
since June 1998.
In February 1996, PLC Medical Systems, Inc. filed suit against Eclipse
Surgical Technologies, Inc. ("Eclipse") in the United States District Court for
the District of Massachusetts alleging copyright infringement and unfair and
deceptive trade practices based on Eclipse's misappropriation and copying of one
of PLC's confidential clinical study protocols. The Company is seeking
injunctive relief and damages, as well as any profits derived by Eclipse as a
result of the misappropriation, attorney's fees, treble damages and other
relief.
In November 1998, a hospital in France, Centre Medico Chirurgical Foch
("Foch Hospital") sued the Company's Portuguese subsidiary, PLC Sistemas Medicos
Internacionais Lda., and a third party, Johnson & Johnson Leasing GmbH in Paris,
France alleging breach of contract. In October 1997, the French Ministry of
Health suspended commercial use of TMR devices in France. Foch Hospital is
seeking reimbursement of lease payments made for the Heart Laser System. The
Company intends to vigorously defend itself in this matter. This matter is in
the earliest stage of litigation and a meaningful estimate of the loss that
could result from this matter has not been made.
The Company is not involved in any other litigation of a material nature.
6. ISSUANCE OF CONVERTIBLE DEBENTURES
a. 5% Convertible Debentures due July 17, 2002 and August 14, 2002
In July 1997, the Company entered into a $20 million financing commitment.
Under the terms of the financing, the Company received $10,075,000 in July 1997
and $10,075,000 in August 1997 from the issuance of five-year convertible
debentures to accredited investors through Smith Barney Inc. as placement agent.
The convertible debentures accrue interest at 5% per annum, payable in cash or
common stock at the Company's option, at the time of conversion. The debentures
are convertible into common shares under a predetermined formula. The first
tranche of the debentures are convertible into common shares at the lesser of
(a) $25.98, or (b) the market price of the Company's Common Stock at the time of
conversion, with no more than 1,007,500 shares of Common Stock issuable in full
payment of all accrued interest and principal.investors. In September 1997, the entire first tranche
of convertible debentures of $10,075,000 and related accrued interest converted into 890,394
shares of common stock. The second tranche of
the debentures are convertible into common shares at the lesser of (a) $14.60,
or (b) the market price of the Company's Common Stock at the time of conversion,
with no more than 1,507,500 shares of Common Stock issuable in full payment of
all accrued interest and principal. In September 1997, $5,825,000 of the second tranche of
convertible debentures and related accrued interest converted into 512,572
shares of common stock. In January and February 1998, the remaining $4,250,000
of the second tranche of convertible debtdebentures and related accrued interest
converted into 576,606 shares of common stock.
In connection with the issuance of the first tranche of convertible
debentures, the Company issued 69,875 redeemable warrants to purchase shares of
its Common Stock at $27.81 per share. In connection with the issuance of the
second tranche of convertible debentures, the Company issued 80,125 redeemable
warrants to purchase shares of its Common Stock at $15.78 per share. If the
average closing sale price of its Common Stock for any consecutive 30 trading
day period commencing January 17, 1999 exceeds the exercise price by more than
50%, the Company has the right, exercisable at any time upon 30 days notice to
the holder, to redeem the warrant at a price of $.10 per warrant share. The
warrants issued in connection with the first tranche expire on July 17, 2002.
The warrants issued in connection with the second tranche expire on August 14,
2002. The detachable warrants were valued at $617,000 (using the Black-Scholes
formula), classified as a component of equity, and disclosed separately in the
Consolidated Statement of Stockholders' Equity.
F-12
b. Convertible Debentures due April 23, 2003
In April 1998, the Company obtained a $10 million financing commitment from
three institutional investors. Pursuant to the terms of the financing, the
Company received approximately $5 million in April 1998 from the issuance of
non-interest bearing, five-year convertible debentures. As of December 31,
1998, $4,000,000 of the convertible debentures outstanding converted into
653,063 shares of the Company's Common Stock. In January 1999, the remaining
$1,000,000 of the convertible debentures outstanding converted into 163,264
shares of the Company's Common Stock. The remaining $5 million of the
commitment expired on December 31, 1998.
In connection with the First Tranche, the Company issued 4,864 redeemable
warrants to purchase shares of its Common Stock at $19.53 per share. If the
average closing sale price of its Common Stock for any consecutive thirty
trading day period commencing April 23, 1999 exceeds the exercise price by more
than 50%, the Company has the right, exercisable at any time upon 30 days notice
to the holder, to redeem the warrants at a price of $.10 per warrant. The
warrants expire on April 23, 2003. The detachable warrants were valued at
$50,000 (using the Black-Scholes formula), classified as a component of equity,
and disclosed separately in the Consolidated Statement of Stockholders' Equity.
7. STOCKHOLDERS' EQUITY
The Company has three stock option plans, theCompany's 1992 Stock Option Plan ("1992 Plan"), the 1993 Stock Option
Plan ("1993 Plan") and the 1995 Stock Option Plan ("1995 Plan"), which provide for option grants to primarily employees, officers
and consultants. The Plans allow for the
granting of options aggregating 2,505,000 shares of common stock. All of the
Plans consist of both incentive stock options and nonqualifiednon-qualified options.
Incentive stock options are issuable only to employees of the Company, while
nonqualifiednon-qualified options may be issued to nonemployeenon-employee directors, consultants, and
others, as well as to employees. The options granted
F-10
52
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) under all the Plans
generally become exercisable ratably over one to three years from the date of
grant, or based on the attainment of specific performance criteria, and expire
ten years from the date of grant.
The per share exercise price of the common stock subject to an incentive
stock option may not be less than the fair market value of the common stock on
the date the option is granted. The Company must grant nonqualified options at
an exercise price of at least 85% of the fair market value of the common stock
on the date the option is granted.
The Company also has theCompany's 1993 Formula Stock Option Plan (the "Formula Plan") that provides
for the grant of nonqualifiednon-qualified options to nonemployeenon-employee directors to purchase up
to 250,000 shares of common stock. The Plan is administered by the Board of
Directors. Annually, the Company grants 10,000 options to each of its
nonemployeenon-employee directors. A director must attend at least 60% of all Board
meetings, as well as committee meetings, to receive the grant. The options vest
over one year on a quarterly basis and expire ten years from the date of grant.
The exercise price is the fair market value of the Company's common stock on the
last business day preceding the date of grant. In addition, in 1995, the Company
granted 10,000 nonqualifiednon-qualified options at $12.88 per share to the Company's Lead
Outside Director. As of December 31, 1997,1998, the options are fully exercisable
and expire ten years from the date of grant.
The Company has aCompany's 1997 Executive Stock Option Plan ("1997 Executive Plan")
that provides for the grant of nonqualifiednon-qualified options to an executiveofficers and directors of the
Company to purchase up to 650,000 shares of common stock. In 1998, the Board of
Directors voted to increase the shares available in this plan to 1,000,000. The
options vest over a combination of time and the attainment of specific
performance criteria.
The per share exercise price of the common stock subject to an incentive
stock option may not be less than the fair market value of the common stock on
the date the option is granted. The Company must grant non-qualified options at
an exercise price of at least 85% of the fair market value of the common stock
on the date the option is granted.
During 1998, the Board of Directors (together with its Compensation and
Executive Committees) adopted the following incentive compensation programs:
a.) In January 1998, the outstanding options of all employees (except
executive officers and directors)
F-13
having a higher exercise price were repriced to $8.88 per share. As a result,
the exercise price of options to purchase 526,784 shares of Common Stock was
reduced to $8.88 per share.
b.) In August, 1998, the outstanding options of all directors and
executive employees having a higher exercise price were repriced to $7.75 per
share. As a result, the exercise price of options to purchase 1,373,500
shares of Common Stock was reduced to $7.75 per share.
c.) In September 1998, a new Senior Management Investment Program ("SMIP")
was adopted to promote investment in the Company's stock by directors and
members of our senior management team. Under the SMIP, individuals who
purchased additional shares of the Company's stock between September 15, 1998
and December 15, 1998 (the "Participants") received options to purchase an
additional 1.5 shares of Common Stock at an exercise price equal to the
Participant's share purchase price (the "Share Purchase Price"). In addition,
Participants received ten "option credits" for each share of Common Stock
purchased between September 15, 1998 and December 15, 1998. Participants could
use each "option credit" to: (i) reduce the exercise price of an outstanding
option (vested or unvested) to purchase one share of Common Stock to the
Participant's Share Purchase Price; or (ii) extend the expiration date of any
outstanding option (vested or unvested) for an additional three years; or (iii)
acquire new vested options with an exercise price equal to the Participant's
Share Purchase Price (at a rate of 6.67 option credits for each new option to
purchase one share of Common Stock). Under this program, the Company granted
options to purchase an additional 331,575 shares of Common Stock at exercise
prices ranging from $3.875 to $6.625 per share under the SMIP. Furthermore, the
Company has reduced the exercise prices of options to purchase 1,243,500 shares
of common Stock to new exercise prices ranging from $4.6875 to $5.5625.
d.) In December 1998, the outstanding options held by employees not
eligible to participate in the SMIP having a higher exercise price were
repriced to $4.875 per share. As a result, the exercise price of options to
purchase 332,316 shares of Common Stock was repriced to $4.875 per share.
The following is a summary of option activity under all Plans (in
thousands, except per option data):
1998 1997 1996 1995
---- ---- ----
Outstanding at beginning of year....year 2,187 1,914 1,635
1,153
Granted...........................Granted 823 938 500
615
Exercised.........................Exercised (142) (435) (220)
(99)
Canceled..........................Canceled (80) (230) (1)
(34)
----- ----- ------------ ------ -------
Outstanding at end of year..........year 2,788 2,187 1,914
1,635
===== ===== =====------- ------ -------
------- ------ -------
Exercisable at end of year..........year 1,711 878 874 693
Available for grant at end of year..............................year 71 463 521 321
F-14
1998 1997 1996 1995
---- ---- ----
Weighted-averageWeighted - average exercise price:
Outstanding at beginning of
year...........................$8.75 $ 8.18 $ 4.67
$4.15
Granted...........................Granted $5.39 $13.56 $17.83
$5.49
Canceled..........................Canceled $9.09 $11.50 $ 3.97
$3.69
Exercised.........................Exercised $4.39 $ 4.39 $ 3.73
$4.09
Outstanding at end of year........$5.16 $10.84 $ 8.18 $4.67
Exercisable at end of year........$4.88 $ 8.75 $ 5.34
$4.22
Weighted-averageWeighted - average fair value of
optionsOptions granted during the year...$3.33 $ 8.20 $ 5.56
--
Price range per share
Range of outstanding
options........................... $ 3.69 - $24.50 $ 3.69 - $24.50Exercise Prices
------------------------
$3.69 - $16.25
Price range per share of options
granted........................... $10.03$5.00 $5.13 - $22.19 $14.88 - $24.50$8.88 $3.69 - $16.25
Price range per share of options
exercised......................... $ 3.69 - $21.25 $3.69 - $16.25 $3.69 - $ 7.25
F-11
53
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Exercise prices for options outstanding as of December 31, 1997 ranged from
$3.69 to $24.50. The weighted-average contractual life of those options is 7.6
years.
RANGE OF EXERCISE PRICES
------------------------------------------------------------
$3.69 - $5.38 $8.06 - $12.88 $14.13 - $22.19 $24.50$8.88
------------- -------------- --------------- ------------------- -------------
OPTIONS OUTSTANDING:Options Outstanding:
--------------------
Number (in thousands)............... 761 859 517 50 1,283 1,505 2,788
Weighted-Average
Remaining
Contractual Life.................. 4.6 9.4 8.8 8.5Life 6.6 8.6 7.7
Weighted-Average
Exercise Price..... $3.97 $12.39 $17.06 $24.50
OPTIONS EXERCISABLE:Price $4.39 $5.81 $5.16
Options Exercisable:
--------------------
Number (in thousands)............... 542 123 163 50 1,023 688 1,711
Weighted-Average
Exercise Price..... $3.96 $11.70 $17.61 $24.50Price $4.28 $5.77 $4.88
In January 1998, the Board of Directors approved the repricing of all
options priced greater than $8.88 other than to executive officers and Board
Members.
Pursuant to the requirements of FAS 123, the following are the pro forma
net income (loss)loss and net income (loss)loss per share for 1998, 1997 1996 and 1995,1996, as if the compensation
cost for the option plans had been determined based on the fair value at the
grant date for grants in 1998, 1997 1996 and 1995,1996, consistent with the provisions of
FAS 123.
1998 1997 1996
1995
-------- ------- ---------- ---- ----
Proforma net income (loss)(inloss (in thousands).............. $(22,438) $(16,523) $(2,404)
$1,868
Proforma net income (loss)loss per share..................share $ (1.17) $ (.97) $ (.15) $ .12
The fair value of options issued at the date of grant were estimated using
the Black-Scholes model with following weighted average assumptions:
1998 1997 1996
1995
---- ---- ---------
Expected life (years)................................. 2 2 2
Interest rate.........................................rate 5.53% 6.01% 5.65%
6.55%
Volatility............................................Volatility .761 1.141 .576 .422
The Company has never declared nor paid dividends on any of its capital
stock and does not expect to do so in the foreseeable future.F-15
The effects on 1997, 1996 and 1995 pro forma net income (loss) and net
income (loss) per sharedisclosures of expensing the estimated fair value of stock optionsapplying FAS 123 are not necessarilylikely to
be representative of the effects on reportingpro forma disclosures of future years.
Because FAS 123 is applicable only to options granted subsequent to October 28,
1995, the results of
operations for future years aspro forma effect has been fully reflected in the periods presented include only one and two
years, respectively, of option grants under the Company's plans.
Atyear ended December
31, 1995,1998.
As of December 31, 1998, the Company had twothe following outstanding warrants
to purchase common stock. The first warrant provided for the purchase of 145,000stock: 69,875 shares at $6.00$27.81 per share and 72,500expiring July 22,
2002; 80,125 shares at $4.80$15.78 per share. In March 1996, the
majority of these warrants were exercisedshare expiring August 14, 2002 and the remaining 11,180 of the $6.00
warrants and 5,590 of the $4.80 warrants were exercised in 1997. The second
warrant provided for the purchase of 150,0004,864
shares at $3.94$19.53 per share and was
exercised in full in March 1996.expiring April 23, 2003.
At December 31, 1997,1998, there were 2,810,0003,023,026 shares of authorized but
unissued common stock reserved for issuance under all stock option plans and
stock warrants. In conjunction with the conversion of the debentures, and related
accrued interest in January and February 1998 and the FDA approval contingency
shares, the
Company has reserved an additional 1,076,606163,264 shares. See Note 6 for a further
discussion.
F-12
54
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)The Company has unlimited authorized shares of preferred stock. The
Board of Directors is authorized to fix designations, relative rights,
preferences and limitations in the preferred stock at time of issuance. In
addition, the Company has unlimited authorized shares of common stock.
The Company has never declared nor paid dividends on any of its capital
stock and does not expect to do so in the foreseeable future.
8. LEASE COMMITMENTS AND CONTINGENCIES
The Company occupies its worldwide facilities under operating leaseslease
agreements, which expire through March 2002. The Company has the option to
renew the U.S. facilities lease for up to sixfive years. In addition to the
minimum lease payments, the agreement requires payment of the Company's pro-rata
share of property taxes and building operating expenses. The Company also
leases certain equipment.
As of December 31, 1997,1998, future minimum lease payments are as follows (in
thousands):
YEARYear
----
1998........................................................ $ 372
1999........................................................ 372
2000........................................................ 337
2001........................................................ 223
2002........................................................ 6
------
$1,310
======1999 $374
2000 338
2001 224
2002 7
----
$943
----
----
Total rent expense was $375,000 in 1998, $458,000 in 1997 and $370,000 in
1996 and $227,000 in
1995.1996.
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets as of December 31 are as follows
(in thousands):
F-16
1998 1997
1996
-------- ----------- ----
Net U.S. net operating loss carryforwards...................carryforwards $ 13,791 $ 7,682
$ 3,064
Foreign netNet foreign operating loss carryforwards................carryforwards 2,263 1,482
484
Intercompany profit.....................................profit 313 637 781
Accrued clinical costs..................................costs 406 516 373
Research & development credits..........................credits 679 561 350
Inventory and warranty reserves.........................reserves 497 331 162
Alternative minimum tax credit..........................credit 63 63
Other...................................................Accrued salaries 195 -
Deferred revenue 173 -
Other 4 56
22
-------- ---------------
Total deferred tax assets..........................assets 18,384 11,328
5,299
Valuation allowance................................allowance (18,384) (11,328)
(5,299)
-------- ---------------
Net deferred tax assets.......................assets $ -- $ --
======== =======-
-------- --------
-------- --------
The valuation allowance increased by approximately $6,000,000$7,000,000 primarily due
to additional net operating loss carryforwards. The Company recorded the
valuation allowance due to the uncertainty of the realizability of the related
net deferred tax asset of $11,328,000.$18,384,000.
Income (loss) before taxes consisted of the following (in thousands):
1998 1997 1996
1995
-------- ------- ---------- ---- ----
Domestic......................................Domestic $(14,137) $(11,340) $(1,244)
$2,094
Foreign.......................................Foreign (2,472) (3,064) (296)
(5)--------- -------- ------- --------------
$(16,603) $(14,404) $(1,540)
$2,089
======== ======= ======--------- -------- --------
--------- -------- --------
F-13
55
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income taxes (benefit) computed at the federal statutory rate differ from
amounts provided as follows (in thousands):
1998 1997 1996
1995
------- ----- --------- ---- ----
Statutory income tax provision...................provision $(5,645) $(4,898) $(524) $ 710
Utilization of loss carryforwards................ -- -- (641)carryforwards (85) - -
Unbenefited U.S. losses..........................losses 4,807 3,856 423
--
Unbenefited foreign losses.......................losses 923 1,042 100
--
Other............................................ --Other - - 1
16
------- ------------ -----
Provision for income taxes.......................taxes $ --- $ --- $ 85
======= ===== =====-
------- ------- -----
------- ------- -----
The 1995 income tax provision of $85,000 represented the current liability
due under the alternative minimum tax regulations.
At December 31, 19971998 the Company had U.S. net operating loss carryforwards
available to reduce future taxable income of approximately $19.2$34.5 million which
expire at various dates through 2011.2012. In addition, the Company had foreign net
operating loss carryforwards of approximately $3.7$5.7 million.
F-17
10. SEGMENT INFORMATION
The Company operates in one industry segment --- the development, manufacture
and sales of medical lasers and related products. Net revenue,
operating income and assets by geographic areasales to unaffiliated
customers (by origin) are summarized below (in thousands).
Transfers to foreign subsidiaries are at prices comparable to those
charged to third party distributors.
NORTH
AMERICA EUROPE OTHER ELIMINATIONS TOTAL
------- ------ ----- ------------ --------North
America Europe Other Eliminations Total
-------------------------------------------------------
1998
Net sales to unaffiliated
customers $3,992 $1,615 $ 86 $ - $ 5,693
Long-lived assets $ 558 $ - $ - $ - $ 558
1997
Net sales to unaffiliated
customers......................Customers $4,092 $4,683 $ 4,092 $4,683 $166166 $ --- $ 8,941
Transfers between areas.......... 2,800 -- -- (2,800) --
------- ------ ---- ------- --------
6,892 4,683 166 (2,800) 8,941
Operating income (loss).......... (12,318) (1,650) (806) 370 (14,404)
Identifiable assets.............. 22,652 5,363 597 (1,595) 27,017Long-lived assets $ 701 $ - $ - $ - $ 701
1996
Net sales to unaffiliated
customers...................... $ 5,657Customers $5,657 $6,215 $ --- $ --- $11,872
Long-lived assets $ 11,872
Transfers between areas.......... 4,700 2,900 -- (7,600) --
------- ------ ---- ------- --------
10,357 9,115 -- (7,600) 11,872
Operating income (loss).......... (1,954) 272 (106) (264) (2,052)
Identifiable assets.............. 15,430 5,517 425 (1,955) 19,417
1995
Net sales to unaffiliated
customers...................... $10,231 $3,114 -- --537 $ 13,345
Transfers between areas.......... 4,050 -- -- (4,050) --
------- ------ ---- ------- --------
14,281 3,114 -- (4,050) 13,345
Operating income................. 3,149 43 -- (1,691) 1,501
Identifiable assets.............. 16,714 3,267 -- (1,691) 18,290- $ - $ - $ 537
Included in North America net sales for 1997 are export sales of $2,026,000
of which $1,023,000 related to the Far East and $563,000 to South America.
Included in North American net sales for 1996 are export
F-14
56
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
sales of $3,980,000 of which $2,547,000 related to Asia. Included in North
American net sales for 1995 are export sales of $9,199,000 of which $8,002,000
related to Asia.
Approximately 20% of the Company's revenues for the year ended December 31,
1997 came from one customer.
No one customer accounted for more than 10% of the Company's revenues for
the year ended December 31, 1996.1998. Approximately 43%20% of the Company's revenues
for the year ended December 31, 19951997 came from one customer.customer, Imatron Japan. No
one customer accounted for more than 10% of the Company's revenues for the year
ended December 31, 1996. The Company believes that its exposure to
concentrations of credit risk is not significant based on experiences with these
customers. In addition, letters of credit or payment in advance are required in
credit risk situations. The Company does not believe its future revenues to be
dependent on those generated from any single customer.
F-1511. SUBSEQUENT EVENT
On March 4, 1999, the Company announced that it had obtained a
provisional equity financing commitment of $8 million from a major
institutional investor. The commitment contemplates the sale by the Company
of up to $2 million in common stock during consecutive 20 day periods at
prices based on the trailing volume weighted average price of the common
stock on the American Stock Exchange on each day during such periods, less a
seven percent discount. The Company is unable to use the commitment on any
trading day to the extent that the volume weighted average price of the
Company's common stock is less than $3.50 per share, unless the Company and
the investor mutually agree to a reduction in such price. If the Company is
unable to use the commitment on any given trading day, the commitment amount
is automatically reduced by $100,000 on such day.
The use of the commitment is also dependent upon the Company being eligible
to sell shares of its common stock under a Form S-3 Registration Statement under
the Securities Act of 1933, as amended, which form requires,
F-18
57
SCHEDULEamong other things, that the Company have a market capitalization of at least
$75 million held by non-affiliates of the Company during the immediately
preceding 60-day period. There can be no assurance that the Company will be
able to use this commitment in the future or that the Company will maintain its
eligibility to use Form S-3. As of March 31, 1999, the Company had sold 323,231
shares of common stock under this commitment, resulting in proceeds to the
Company (net of all issuance costs payable upon closing) of $885,000 and had $6
million in unused availability under the commitment.
F-19
Schedule II
PLC SYSTEMS INC.
VALUATION AND QUALIFYING ACCOUNTSValuation and Qualifying Accounts
COLUMNColumn A COLUMNColumn B COLUMNColumn C COLUMNColumn D COLUMNColumn E
-------- -------- -------- ---------- ---------
Additions Deductions
Balance at Charged to ---------- Balance at
Beginning Costs and End of
Description of Period Expenses Period
----------- --------- -------- --------
ADDITIONS DEDUCTIONS
---------- ----------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES PERIOD
----------- ---------- ---------- ----------------
For the Year Ended December 31, 1998
Allowance for Doubtful Accounts $140,000 $100,000 $12,000 $228,000
For the Year Ended December 31, 1997
Allowance for Doubtful Accounts............... $28,000Accounts $ 28,000 $112,000 $ 0 $140,000
------- -------- ------ --------
For the Year Ended December 31, 1996
Allowance for Doubtful Accounts............... $29,000Accounts $ 0 $1,000 $ 28,000
------- -------- ------ --------
For the Year Ended December 31, 1995
Allowance for Doubtful Accounts............... $10,000 $ 19,00029,000 $ 0 $ 29,000
------- -------- ------ --------1,000 $28,000
S-1
58
PLC SYSTEMS INC.
QUARTERLY DATA (UNAUDITED)
MARCHMarch 31 JUNEJune 30 SEPTEMBERSeptember 30 DECEMBERDecember 31 TOTAL
-------- ------- ------------ ----------- --------Total
TOTAL REVENUE $ 945 $ 680 $1,615 $2,453 $ 5,693
GROSS PROFIT (LOSS) 257 (351) 320 900 1,126
LOSS FROM OPERATIONS (4,087) (5,569) (4,032) (3,372) (17,060)
NET LOSS (3,936) (5,402) (4,006) (3,259) (16,603)
LOSS PER SHARE, BASIC AND DILUTED (.21) (.28) (.21) (.17) (.86)
1997
Total revenue...................... $ 1,588 $ 3,422 $ 1,885 $ 2,046 $ 8,941revenue $1,588 $3,422 $1,885 $2,046 $8,941
Gross profit.......................profit 758 1,952 666 249 3,625
Loss from operations...............operations (3,130) (2,712) (3,590) (5,150) (14,582)
Net loss...........................loss (3,022) (2,697) (3,562) (5,123) (14,404)
Loss per share.....................share, basic and diluted (.18) (.16) (.21) (.28) (.84)
1996
Total revenue...................... 4,829 1,431 2,493 3,119 11,872
Gross profit....................... 3,439 1,055 1,584 1,728 7,806
Income (loss) from operations...... 1,229 (1,095) (696) (1,490) (2,052)
Net income (loss).................. 1,277 (903) (562) (1,352) (1,540)
Income (loss) per share............ .08 (.05) (.03) (.08) (.09)
The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128 "Earnings Per
Share". For further discussion regarding the calculation of earnings per share,
see Note 1 to the Consolidated Financial Statements.
59
EXHIBIT INDEX
EXHIBIT
NO. TITLEExhibit
No. Title
- ------- -----
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP.
27a27 Financial Data Schedule for fiscal year ended December 31,
1997.
27b Restated Financial Data Schedule for the quarter ended
September 30, 1997.
27c Restated Financial Data Schedule for the quarter ended June
30, 1997.
27d Restated Financial Data Schedule for the quarter ended March
31, 1997.
27e Restated Financial Data Schedule for fiscal year ended
December 31, 1996.
27f Restated Financial Data Schedule for the quarter ended
September 30, 1996.
27g Restated Financial Data Schedule for the quarter ended June
30, 1996.
27h Restated Financial Data Schedule for the quarter ended March
31, 1996.Schedule.