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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, 1998
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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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) 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 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, 1999,
was $77,128,690. As of March 23, 1999, 20,230,476 shares of Common Stock, no
par value per share, were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's preliminary proxy statement, which will be
issued in connection with the 1999 Annual Meeting of Shareholders (Part III),
are incorporated by reference.
FORWARD-LOOKING STATEMENTS
This report (and information incorporated by reference) contains
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. These
forward-looking statements include statements in 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.
Forward-looking statements are based on current plans and expectations and
involve 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: the
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; competitive developments; business
conditions, growth in certain market segments, and the general economy;
uncertainty that any patent protection will exclude competitors or that the
Company's products do not infringe any intellectual property rights of others;
and, risk factors in Item 7, Item 7A, the Company's other SEC reports, and 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 ("CO2") laser system known as The Heart Laser-TM-
System for use 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's patented
high-energy CO2 laser is used by a cardiovascular surgeon to create between 20
and 40 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 can 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
fraction 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 stimuli. The procedure does not require a
heart-lung bypass machine and is performed through a small incision between the
patient's ribs while the patient's heart is beating. A patient's recovery is
therefore expected to be quicker, less traumatic and less costly than in
surgical procedures, such as bypass surgery, which require a heart-lung
machine.
The Company estimates that each 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
blockage of blood flow into the coronary arteries which supply oxygen-rich blood
to the heart. Typically, severe CAD patients experience excruciating spasmodic
attacks of 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 The Heart Laser
System to be 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 studied; in fact, TMR using
The Heart Laser System eliminated all angina in one-third of the patients
studied.
Over 4,300 patients have been treated with the Company's Heart Laser System
in the United States and abroad. As of December 31, 1998, the Company had
shipped over 100 Heart Laser Systems worldwide.
RECENT DEVELOPMENTS
Since the Company's last annual report on Form 10-K, the following
significant events and accomplishments have occurred:
RECEIPT OF FDA APPROVAL. On August 20, 1998, the Company received approval
from the U.S. FDA to market 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 decision 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
the U.S., 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 decision making.
PLC ESTABLISHES CENTER OF EXCELLENCE. In 1998, PLC established a state of
the art training program at Rush Presbyterian Medical Center in Chicago to
ensure that surgeons and medical staff who will use The Heart Laser System are
fully trained in the safe and effective use of the system. 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 a laboratory session.
PLC RECEIVES ISO 9001 CERTIFICATION. In March 1999, PLC received ISO 9001
certification, allowing the Company to 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 2009 (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 provide a broad array of financing
alternatives to U.S. hospitals interested in acquiring the PLC Heart Laser
System. GE 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 laser revascularization systems. These financing alternatives provide PLC
with a non-dilutive source of capital to finance placements of The Heart Laser
System.
RENEWAL OF JAPANESE DISTRIBUTION AGREEMENT. In early 1999, PLC renewed its
distribution agreement
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in Japan with Imatron Japan Inc. ("Imatron") to distribute The Heart Laser
System in Japan and complete 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 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 early 1999, PLC also hired a direct representative with
more than 25 years experience selling cardiovascular products in Japan to
support development of the Japanese 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 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 the late 1980s, a heart surgeon at the San Francisco Heart
Institute, Dr. 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 efficacy of the TMR treatment could not be proven unless
the procedure could be performed 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 approving the
Phase I study, the FDA permitted the use of The Heart Laser System for patients
considered not suitable for any other intervention. Phase I trials were
performed by Dr. John Crew 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 expanded to eventually
include 201 patients at eight clinical sites. In 1995, the FDA approved three
new IDEs for studies of TMR using The 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 was a 400 patient randomized trial comparing TMR patients to
patients receiving a second bypass surgery. The third was a study comparing
patients receiving TMR in conjunction with bypass surgery to patients receiving
only bypass surgery.
The Company 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 four 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 58% were in class 1 or 2.
Since April 1992, the Company has received 14 U.S. patents relating to the
underlying laser technology, the use of a laser on a beating heart, The 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 The 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 ACT of British
Columbia, Canada on March 3, 1987. 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.
CARDIOVASCULAR DISEASE AND CURRENT THERAPIES
Cardiovascular disease is the leading cause of death in the U.S. with more
than 950,000 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 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, 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, 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. Certain patients are not
suitable for bypass procedures, including those who have previously undergone
bypass 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 inserting into a diseased artery a
catheter with a balloon at the tip. By inflating the balloon at the site of
blockage, 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 sometimes 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.
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Management believes that TMR using The Heart Laser System is 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 treatments described above, there are
a number of newer treatments and therapies including minimally invasive direct
coronary artery bypass ("MIDCAB"), "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 may be found useful
in conjunction with these less invasive procedures to more effectively
revascularize the heart.
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 The 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 may be unable to reach
the heart to satisfy the metabolic demands of the myocardium. Cardiovascular
disease eventually may cause myocardial ischemia, often evidenced by severe and
debilitating angina 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-vessel ischemic heart disease is typically treated with bypass
surgery.
During the TMR procedure, the patient is given general anesthesia. An
incision is made in the patient's side between the ribs, exposing the heart.
The Heart 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 may reduce the risk of
arrhythmias (irregular heartbeats) and their associated morbidity and mortality.
Research studies conducted by the Texas Heart Institute in animal models
indicated that performing TMR without synchronization may be associated with an
increase in life threatening arrhythmias. The synchronization technology is
covered under a patent owned by the 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-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 wall. Transesophageal Echocardiography (TEE) is used to confirm
that complete channels are made by the laser. Generally, 20 to 40 new channels
are created during the procedure. Each TMR procedure requires a sterile, single
use, TMR kit containing assorted TMR hand pieces, drapes and other disposable
items.
POTENTIAL BENEFITS OF TMR
Based on clinical results to date, the Company believes that TMR using The
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
additional indications for use of The Heart Laser System. These current
anticipated benefits include:
THERAPY FOR PATIENTS NOT SUITABLE FOR CORONARY BYPASS. The U.S. FDA has
approved the use of The Heart Laser System for 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. 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 OPCAB procedure in which coronary artery bypass graft surgery is
performed on a beating heart, management believes that with additional clinical
research, TMR may 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 OPCAB procedure usually is only performed on the anterior wall of the heart.
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 The 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. Because TMR using The 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 techniques were used, with
potentially reduced risks of 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.
DEVELOPMENT OF MARKETING STRATEGY
The Company's strategy is to establish TMR using The Heart Laser System as
a standard of care for treating patients suffering from coronary artery disease.
Currently, The Heart Laser System is commercially available in the U.S., the
European Community (except France), China and certain countries that do not
require governmental approval for commercialization. The Company has submitted
applications for 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 The Heart Laser System in performing TMR to address concerns
regarding the spread of infections. The Company sells sterile, single use, TMR
procedure kits containing a set of handpieces, drapes and other TMR single use
items.
6
The Company has developed a strategy to address the challenges of marketing
high cost capital equipment. In markets with minimal credit risk, economic
stability, adequate health reimbursement, and requisite government approvals,
the Company has offered The Heart Laser System on a usage basis whereby the
hospital obtains The Heart Laser System in exchange for payment of an initial
installation fee and usage 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 over the term of the 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. The Company's agreement with GE Capital
enables the Company 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 The Heart Laser System outright as capital
equipment. The disposable sterile kits would be sold for each procedure, along
with yearly service contracts after expiration of any applicable warranty
period.
The Company has several different marketing strategies to sell or place The
Heart Laser System and accessories depending upon the particular circumstances,
including direct sales, sales through distributors, placement type sales,
rentals, and leasing. Pricing varies depending upon the particular marketing
strategy used and the country in which The Heart Laser System is sold. The
Company plans to launch a new purchase program in 1999 that combines aggressive
pricing, flexible financing arrangements, and trade-in allowances for 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 is using 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 user, the
cardiothoracic surgeon, whose influence is critical in the hospital decision to
purchase The Heart Laser System. 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 The Heart Laser System
overseas both directly and through distributors.
7
PLC received the CE Mark for The Heart Laser System in the third quarter of
1995. The CE Mark allows the Company to sell the Heart Laser System
commercially in European Community countries (except in France). Despite
receiving the CE Mark, the French Ministry of Health instituted a commercial
moratorium on TMR procedures in France in October 1997 ("See Government
Regulation").
In March 1999, PLC received ISO 9001 certification, allowing the Company to
self certify and place the CE Mark on its products itself.
The Company installed a new Managing Director, Vincent Puglisi, for the
European region in August 1998 to increase sales and marketing efforts for The
Heart Laser System in this region. Mr. Puglisi also assumed responsibility for
operations in the Asia Pacific region in late 1998.
In early 1999, the Company renewed its distribution agreement in Japan with
Imatron to distribute The Heart Laser System in Japan and complete 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. Imatron also distributes medical equipment in Japan for its parent,
Imatron, Inc. a U.S. based manufacturer of diagnostic imaging equipment. Between
1995 and 1997, Imatron purchased 12 Heart Laser Systems from PLC 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 joint application is believed to be
the first submitted by a laser revascularization company seeking to market its
product in Japan. The companies anticipate approval of their application during
the second half of 1999. No assurance can be given that Japanese regulatory
approval will be granted to The Heart Laser System in this timeframe, or at all.
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 left ventricle assist systems
developed by Thermo Cardiosystems and manufactures a hemodialysis filter.
As of December 31, 1998, the Company had shipped over 70 Heart Laser
Systems to international 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 develops and markets one principal product: The Heart Laser
System. Approximately 89.5% of the Company's revenue in the fiscal year ended
December 31, 1998 and 93.2% in the fiscal year ended December 31, 1997 was
derived from The Heart Laser System. No single customer accounted for more than
10% of the Company's revenues in fiscal 1998. In 1997, the Company's exclusive
distributor in Japan accounted for approximately 20% of the Company'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 market demands anticipated 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 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,
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 throughout the U.S. to treat the estimated
80,000 domestic patients each year who suffer from severe coronary artery
disease 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 any adverse findings or observations of
deficiencies in the Company's manufacturing and quality systems. FDA imposed
certain post-approval requirements as conditions of its August clearance.
These requirements include a 600 patient post-market study to further assess
mortality, a specific "TMR" surigical informed consent, and certain
disclaimers placed on all promotion and 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 be approved by the FDA. The Company intends to
continuously improve The Heart Laser System after market introduction and may
therefore submit future IDE, PMA and PMA supplement applications to the FDA. No
assurance can be given that approval of such new IDEs, PMAs or PMA supplements
will be received from the FDA on a timely basis, or at all.
The international regulatory approval process varies from country to
country and is subject to change in a given country as regulatory requirements
change. There is no assurance that foreign regulatory authorities will allow
use or sale of The Heart Laser System in a particular country on a timely basis,
or at all.
In addition, regulatory authorities can suspend or modify approvals
previously granted in certain circumstances. For example, the French Ministry of
Health instituted a commercial moratorium on TMR procedures in France in October
1997. The French Ministry of Health deemed the procedure to be "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 in France. An evaluation of the safety
of The Heart Laser System is currently under review by a panel of French
experts. The Company has provided its clinical results to the panel and is
actively working to have the moratorium lifted. There can be no assurance that
the Company will be successful in 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 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. 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 REIMBURSEMENT
Heath care providers, such as hospitals and physicians, that purchase
medical devices such as The Heart Laser System for use on their patients
generally rely on third party payers, principally Medicare, Medicaid and private
health insurance plans, to reimburse all or part of the costs associated with
the procedures performed with these devices.
In February 1997, the Health Care Financing Administration ("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.
In February 1999, HCFA rescinded the national non-coverage instruction for
TMR implemented in May 1997 and announced that Medicare will provide coverage
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 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 Company's clinical studies indicates that
TMR using The Heart Laser System may result in a significant reduction in the
cost of treating patients with severe CAD. Potentially, this could mean that
TMR performed with The Heart Laser System is a procedure that offers real
economic advantages to the managed care market, in particular, in which over 70%
of all privately insured
10
Americans are covered at least in part. No assurance can be given that such
economic benefits will be realized by customers.
Certain private insurance companies and HMOs currently provide
reimbursement for TMR procedures. No assurance can be given, however, that
additional payers will reimburse health care providers who perform TMR
procedures or that reimbursement, if provided, will be timely or adequate. In
addition, the market for the Company's products 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 The Heart Laser System to date. The Company
maintains product liability insurance with aggregate coverage limits of $10
million. No assurance can be given that product liability claims will not
exceed such insurance coverage limits, that such claims will not have a material
adverse effect on the Company, or that such insurance will be available on
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 12
involve The 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. 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 The 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 The 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 The 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 revascularization. The Company also has twelve U.S. patent applications
pending relating to The Heart Laser System handpiece, other technology used in
The 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
numerous patents pending related to The Heart Laser System and its components in
various international patent offices. The Company expects to file additional
patent applications in the next year, although there can be no assurance that
any additional applications will be filed or that any additional patents will be
issued.
CardioGenesis Corporation ("CardioGenesis"), a competitor of the Company,
agreed to the validity and enforceability of certain 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 technology, a critical
factor in ensuring the safety of TMR and PMR procedures. PLC granted
CardioGenesis a non-exclusive worldwide license to the 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 to the Company in
connection with this license agreement. (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.
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 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.
COMPETITION
The Company believes that the 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 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 holmium laser used to
perform TMR. Holmium lasers currently used for TMR are not capable of creating
a patent channel in one pulse, and must therefore use a fiber-optic probe that
"drills" its way from the outside of the heart to the blood-filled left
ventricle. The presence of the 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 heart wall by such holmium
systems have been observed to be jagged and segmented. The Company believes
that there is ample opportunity to successfully differentiate its CO2 laser and
plans to implement an appropriate marketing effort accordingly. No assurance
can be given that such a marketing effort will be implemented successfully, or
at all.
Several of the companies who have entered the TMR market are developing
"percutaneous" methods of performing TMR, known as "PMR". PMR procedures are
performed via a catheter inserted through an incision in a patient's leg. The
Company has a proprietary 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, 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
effective 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, and manufacture
and successfully market its products either directly or through outside parties.
The 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 The
Heart Laser System must compete not only with TMR and PMR systems, but with
medical management (drugs) and other coronary procedures (e.g. coronary bypass,
balloon angioplasty, atherectomy, laser angioplasty, and stents). Many of the
companies manufacturing these products have substantially greater 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 The 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 and improved 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, and
$2,835,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Although the initial design of The Heart Laser System is now completed,
management plans to continue to refine The Heart Laser System design, to develop
new less invasive methods for performing 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 a leadership position in this 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 22, 1999, the Company had 68 full-time domestic employees,
including its executive officers. Of these, 16 are employed in general and
administrative activities, 22 are involved in sales and marketing, 13 are
involved in research and development and 17 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 12 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 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, and treble damages.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
15
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 22, 1999 the closing sale price
of the Company's Common Stock as reported by AMEX was $2.94 per share.
For the periods indicated, the following table sets forth the range of high
and low closing prices for the Common Stock as reported by AMEX from January 1,
1997.
SALES
-----
HIGH LOW
---- ---
1997
----
First Quarter . . . . . . . . . . . . . . . . $27.63 $16.63
Second Quarter. . . . . . . . . . . . . . . . $22.88 $12.38
Third Quarter . . . . . . . . . . . . . . . . $26.81 $10.25
Fourth Quarter. . . . . . . . . . . . . . . . $14.38 $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 22, 1999). . . . $6.81 $2.94
As of March 23, 1999, there were approximately 751 record holders of the
Company's Common Stock. Management believes that there are approximately 19,000
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.
16
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data with respect to the Company for the
five years ended December 31, 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
---- ---- ---- ---- ----
(ALL AMOUNTS ARE IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue:
Product sales. . . . . . . . . . . . . . $ 3,088 $ 5,687 $ 9,082 $11,938 $ 5,068
Placement and service fees . . . . . . . 2,605 3,254 2,790 1,407 111
Costs and expenses:
Cost of product sales. . . . . . . . . . 1,945 2,721 2,911 4,177 2,851
Cost of placement and service fees . . . 2,622 2,595 1,155 386 17
Selling, general and administrative. . . 13,718 13,049 7,023 5,035 3,030
Research and development . . . . . . . . 4,468 5,158 2,835 2,246 2,211
-------- -------- -------- ------- --------
Income (loss) from operations. . . . . . (17,060) (14,582) (2,052) 1,501 (2,930)
Other income . . . . . . . . . . . . . . 457 178 512 588 366
-------- -------- -------- ------- --------
Income (loss) before income taxes . . . (16,603) (14,404) (1,540) 2,089 (2,564)
Provision for income taxes . . . . . . . -- -- -- 85 --
-------- -------- -------- ------- --------
Net income (loss). . . . . . . . . . . . $(16,603) $(14,404) $(1,540) $ 2,004 $(2,564)
-------- -------- -------- ------- --------
-------- -------- -------- ------- --------
Net income (loss) per share - Basic. . . $ (.86) $ (.84) $ (.09) $ .13 $ (.18)
-------- -------- -------- ------- --------
-------- -------- -------- ------- --------
Net income (loss) per share - Diluted. . $ (.86) $ (.84) $ (.09) $ .12 $ (.18)
-------- -------- -------- ------- --------
-------- -------- -------- ------- --------
Shares used to compute net
income (loss) per share - Basic . . . . 19,218 17,050 16,376 15,868 14,372
Shares used to compute net
income (loss) per share - Diluted . . . 19,218 17,050 16,376 16,590 14,372
AS OF DECEMBER 31
--------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working capital . . . . . . . . . . . . $5,050 $12,793 $11,245 $13,541 $12,431
Total assets . . . . . . . . . . . . . . 16,257 27,017 19,417 18,290 14,337
Long term obligations. . . . . . . . . . 37 121 27 32 7
Stockholders' equity . . . . . . . . . . 10,662 19,009 16,467 15,508 13,059
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
The Company offers placement, purchase and leasing alternatives to
customers interested in acquiring The Heart Laser System. In placement
transactions, an installation fee is paid when The Heart Laser System is shipped
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
procedure fee. Revenues from these contracts are classified as placement fees.
The cost of The Heart Laser System, which is owned by the Company, is
depreciated over the term of the placement agreement.
The Heart Laser System is also sold to customers, and the related sterile
handpieces and other disposables are sold separately for each procedure. The
Company sells The Heart Laser System 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 decreases were 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, including two sold directly and eight sold to distributors. In 1996,
the Company recorded revenue on thirteen sales, six of which 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
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. The decrease resulted primarily from three
factors. First, fixed manufacturing costs increased in 1997 and production
levels decreased, resulting in unfavorable manufacturing variances. Second, the
Company sold 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. 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 $13,049,000 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 incurred
significant expenses to prepare for an FDA panel review of its PMA application
for The
19
Heart Laser System. In addition, the Company expanded its management team and
its sales force.
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. These expenditures were incurred in connection
with the Company's clinical study compilation and data preparation for FDA
submissions and an FDA panel review. These activities required additional
staffing and 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
primarily because of an increase in interest expense. In July and August 1997,
the Company received $18.8 million in net proceeds from the issuance of 5%
Convertible Debentures.
There was no provision for income tax for the years ended December 31, 1997
and 1996 due to net losses of $14,404,000 and $1,540,000, respectively.
The Company incurred a net loss for the year ended December 31, 1997 of
$14,404,000 compared to a net loss of $1,540,000 for the year ended December 31,
1996. The increased loss resulted from lower total revenues in 1997 compared
with 1996, combined 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 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 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, among 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.
As of March 30, 1999, the Company had sold 323,231 shares of common stock under
this commitment, resulting in net proceeds to the Company of $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 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. 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, the 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 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 Laser System or that the Company will be
able to operate profitably on a consistent basis.
During the year ended December 31, 1998, the Company incurred a net loss of
$16,603,000, which resulted in the use of approximately $14,300,000 to support
operations. Cash provided by investing activities was approximately $10,300,000
primarily related to the net 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 approximately $5,400,000, primarily related to the net
proceeds of $4,700,000 obtained through the issuance of convertible debentures
and $600,000 in proceeds from the sale of the Company's common stock, offset by
principal payments on capital lease obligations of $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 $7,400,000 of marketable securities and
the investment of $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.
At December 31, 1998, the Company had U.S. net operating loss carryforwards
of approximately $34.5 million available to reduce future taxable income which
expire at various dates through 2012, and the Company had foreign net operating
loss carryforwards of approximately $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. Because the
Company believes that, as of December 31, 1998, 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 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. 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 believed 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 problem on the Company's operations and
financial results do not include costs and time that may be incurred as a result
of vendor or customer failures to become Year 2000 compliant, but no significant
costs have been identified 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 its new enterprise resource
planning software substantially addresses its material Year 2000 risks; however,
the Company is continuing 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 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
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 such 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.
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 sure that our insurance
is adequate to cover any product liability law suits. Our insurance is
expensive and in the future may not be available on acceptable terms, if at all.
If a successful product liability claim or series of claims exceeded our
insurance coverage, it would divert the attention of our key personnel, degrade
the reputation 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 results
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 nonfunctional 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, 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.
30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information is incorporated by reference from the Company's Proxy
Statement to be filed with the Securities and Exchange Commission in connection
with the Company's 1999 Annual Meeting of Stockholders.
ITEM 11. COMPENSATION OF OFFICERS AND DIRECTORS
This information is incorporated by reference from the Company's Proxy
Statement to be filed with the Securities and Exchange Commission in connection
with the Company's 1999 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated by reference from the Company's Proxy
Statement to be filed with the Securities and Exchange Commission in connection
with the Company's 1999 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference from the Company's Proxy
Statement to be filed with the Securities and Exchange Commission in connection
with the Company's 1999 Annual Meeting of Stockholders.
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS. The financial statements required to be
filed by Item 8 herewith are as follows:
PLC SYSTEMS INC. Page
----
Report of Independent Auditors. . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 . . . F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996. . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996. . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996. . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements. . . . . . . . . . . . . F-7
(a)(2) FINANCIAL STATEMENT SCHEDULES. The following financial statement
schedules are filed herewith:
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.
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------ -----------------------
3.1 Certificate of Incorporation, 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.
3.2 Articles of Continuance, pursuant to the Yukon Business Corporations
Act, incorporated by reference to the Registrant's Definitive Proxy
Statement on Schedule 14A dated May 26, 1998, as previously filed with
the Securities and Exchange Commission.
3.3 Memorandum and Articles (Bylaws), 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.
3.4 Amendment to Memorandum and Articles (Bylaws), 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.
4.1 Form of Common 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, 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.
10.2 1993 Stock Option Plan, incorporated by reference to the Registrant's
registration statement on Form S-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 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,
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, 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, 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 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.
(b) REPORTS 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. 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. See Item 14(a)(2) above.
34
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 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.
PLC SYSTEMS INC.
Date: March 31, 1999 By: /s/ William C. Dow
---------------------------------------
William C. Dow
President and Chief Executive Officer
PURSUANT 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.
Name Capacity Date
---- -------- ----
/s/ Edward H. Pendergast Chairman of the Board of Directors March 31, 1999
- ------------------------------- (Principal Executive Officer)
Edward H. Pendergast
/s/ Robert Svikhart Chief Financial Officer March 31, 1999
- ------------------------------- (Principal Financial and Accounting
Robert Svikhart Officer)
/s/ William C. Dow President and Chief Executive Officer March 31, 1999
- -------------------------------
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/ Roberts A. Smith, Ph.D. Director March 31, 1999
- -------------------------------
Roberts A. Smith, Ph.D.
35
PLC SYSTEMS INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 1998, 1997, 1996
PLC SYSTEMS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 . . . . . . F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . F-7
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts. . . . . . . . . . . . S-1
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, 1998 and 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, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements 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, 1998 and 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, 1998 in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Boston, Massachusetts
February 19, 1999 except for Note 11,
as to which the date is March 4, 1999
F-2
PLC SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
1998 1997
---- ----
(In thousands)
ASSETS
Cash and cash equivalents $ 4,846 $ 3,484
Marketable securities - 12,845
Accounts receivable, net 2,262 1,337
Inventories, net 2,953 2,512
Prepaid expenses and other current assets 547 502
------- -------
Total current assets 10,608 20,680
Equipment, furniture and leasehold improvements, net 5,091 5,636
Other assets 558 701
------- -------
Total assets $16,257 $27,017
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 986 $ 917
Accrued clinical costs 1,016 1,292
Accrued compensation 989 570
Accrued expenses 1,127 923
Deferred revenue 195 70
5% Convertible Debentures due 2002 - 3,819
Convertible Debentures due 2003 934 -
Secured borrowings 240 -
Other accrued liabilities 72 296
------ ------
Total current liabilities 5,559 7,887
Capital lease obligations 37 121
Commitments and contingencies
Stockholders' equity:
Preferred stock, no par value, 5,000 shares
authorized
Common stock, no par value, 50,000 shares
authorized,
19,740 and 18,368 shares issued and outstanding
in 1998 and 1997, respectively 79,521 71,115
Accumulated deficit (68,136) (51,533)
Accumulated other comprehensive loss (724) (573)
------- -------
10,661 19,009
------- -------
Total liabilities and stockholders' equity $16,257 $27,017
------- -------
------- -------
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
PLC SYSTEMS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
(In thousands, except per share data)
Revenue:
Product sales
$ 3,088 $ 5,687 $ 9,082
Placement and service fees 2,605 3,254 2,790
-------- -------- --------
Total revenues 5,693 8,941 11,872
Cost of revenues:
Product sales 1,945 2,721 2,911
Placement and service fees 2,622 2,595 1,155
-------- -------- --------
Total cost of revenues 4,567 5,316 4,066
-------- -------- --------
Gross Profit 1,126 3,625 7,806
Operating expenses:
Selling, general and administrative 13,718 13,049 7,023
Research and development 4,468 5,158 2,835
-------- -------- --------
Total operating expenses 18,186 18,207 9,858
-------- -------- --------
Loss from operations (17,060) (14,582) (2,052)
Other income, net 457 178 512
-------- -------- --------
Net loss $(16,603) $(14,404) $ (1,540)
-------- -------- --------
-------- -------- --------
Net loss per share - Basic $ (.86) $ (.84) $ (.09)
Net loss per share - Diluted $ (.86) $ (.84) $ (.09)
Shares used to compute net loss per share
- Basic 19,218 17,050 16,376
- Diluted 19,218 17,050 16,376
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
PLC SYSTEMS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Years Ended December 31, 1998, 1997 and 1996
Accumulated
Common Stock Other
------------ Accumulated Comprehensive
Shares Amount Deficit Loss Total
------ ------ ------- ------ -----
(In Thousands)
Balance, December 31, 1995 15,944 $51,411 $(35,589) $(314) $15,508
Exercise of stockholder warrants 351 1,680 1,680
Exercise of stock options 218 820 820
Repayment of stockholder notes - 119 119
Comprehensive loss:
Net loss (1,540)
Foreign currency translation (120)
Total comprehensive loss (1,660)
-------- --------- ---------- ------- ----------
Balance, December 31, 1996 16,513 54,030 (37,129) (434) 16,467
Exercise of stock options 435 1,909 1,909
Exercise of warrants 17 94 94
Conversion of debentures 1,403 14,465 14,465
Issuance of warrants - 617 617
Comprehensive loss:
Net loss (14,404)
Foreign currency translation (139)
Total comprehensive loss (14,543)
-------- --------- ---------- ------- ----------
Balance, December 31, 1997 18,368 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
PLC SYSTEMS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
(In thousands)
Operating activities:
Net loss $(16,603) $(14,404) $(1,540)
Adjustments to reconcile net loss to
net cash provided by (used for) operating activities:
Depreciation and amortization 3,170 2,007 1,228
Change in assets and liabilities:
Accounts receivable (973) 1,389 4,149
Inventory (475) (136) (556)
Prepaid expenses and other assets 89 (20) (359)
Account payable 82 24 303
Deferred revenue 142 (77) 107
Accrued liabilities 304 1,163 (252)
------- ------- -------
Net cash provided by (used for) operating activities (14,264) (10,054) 3,080
Investing activities:
Purchase of marketable securities (1,986) (17,827) (19,419)
Maturities of marketable securities 14,831 10,452 20,449
Purchase of fixed assets (2,574) (2,642) (4,216)
------- ------- -------
Net cash provided by (used for) investing activities 10,271 (10,017) (3,186)
Financing activities:
Issuance of 5% Convertible Debentures, net of
issuance costs - 18,779 -
Secured borrowing 240 - -
Net proceeds from sale of common stock 623 2,003 2,499
Issuance of Convertible Debentures, net of issuance costs 4,659 - -
Repayment of stockholder notes - - 119
Principal payments on capital lease obligations (79) (25) (13)
------- ------- -------
Net cash provided by financing activities 5,443 20,757 2,605
Effect of exchange rate changes on cash and cash equivalents (88) (241) (164)
------- ------- -------
Net increase in cash and cash equivalents 1,362 445 2,335
Cash and cash equivalents at beginning of year 3,484 3,039 704
------- ------- -------
Cash and cash equivalents at end of year $ 4,846 $ 3,484 $ 3,039
------- ------- -------
------- ------- -------
Non-Cash Financing Activities:
Conversion of Convertible Debentures and accrued
interest into Common Stock 7,733 14,465 -
Ascribed warrant value 50 617 -
Capital leases - 150 -
Supplemental disclosure:
Interest paid $ - $ 2 $ 1
Income taxes paid (refunded) $ - $ (29) $ 91
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
1. NATURE OF BUSINESS
The accompanying financial statements have been presented on the assumption
that the Company is a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business.
During 1997 and 1998 the 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 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. 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, the 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 operating 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 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 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 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
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 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 were less
than six months.
F-8
INVENTORY
Inventory is stated at the lower of average cost or market value.
EQUIPMENT, 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.
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 Company reviews and evaluates long-lived assets for impairment on a
regular basis. In management's opinion, long-lived assets are not impaired as
of the 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 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 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 loss per share amounts for all periods have been
presented, and have been restated, to conform to Statement 128.
F-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 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. Accordingly, no compensation cost has been
recognized for the stock option plans.
USE 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.
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income ("Statement 130"). Statement 130 establishes new rules for
the reporting and display of comprehensive income and its components in the
financial statements. The Company has changed the format of its consolidated
statements of stockholders' equity to present comprehensive income.
3. INVENTORY
Inventories consist of the following at December 31 (in thousands):
1998 1997
---- ----
Raw materials $1,035 $1,141
Work in process 145 10
Finished goods 1,773 1,361
------ ------
$2,953 $2,512
------ ------
------ ------
F-10
4. EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Equipment, furniture and leasehold improvements consist of the following at
December 31 (in thousands):
1998 1997
---- ----
Equipment $2,461 $2,010
Equipment under placement contracts 6,617 5,760
Office furniture and fixtures 929 1,082
Equipment under capital lease 429 455
Leasehold improvements 587 587
------ ------
11,023 9,894
Less accumulated depreciation
and amortization 5,932 4,258
------ ------
$5,091 $5,636
------ ------
------ ------
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 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
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 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
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
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 our business, financial position and results of
operations. The Company believes that it has valid defenses to these litigation
matters and it 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. In September 1997, the entire first tranche
of convertible debentures and related accrued interest converted into 890,394
shares of common stock. 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 debentures 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's 1992 Stock Option Plan ("1992 Plan"), the 1993 Stock Option
Plan ("1993 Plan") and the 1995 Stock Option Plan ("1995 Plan") 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 non-qualified options.
Incentive stock options are issuable only to employees of the Company, while
non-qualified options may be issued to non-employee directors, consultants, and
others, as well as to employees. The options granted 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 Company's 1993 Formula Stock Option Plan (the "Formula Plan") provides
for the grant of non-qualified options to non-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
non-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 non-qualified options at $12.88 per share to the Company's Lead
Outside Director. As of December 31, 1998, the options are fully exercisable
and expire ten years from the date of grant.
The Company's 1997 Executive Stock Option Plan ("1997 Executive Plan")
provides for the grant of non-qualified options to officers 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
---- ---- ----
Outstanding at beginning of year 2,187 1,914 1,635
Granted 823 938 500
Exercised (142) (435) (220)
Canceled (80) (230) (1)
------- ------ -------
Outstanding at end of year 2,788 2,187 1,914
------- ------ -------
------- ------ -------
Exercisable at end of year 1,711 878 874
Available for grant at end of year 71 463 521
F-14
1998 1997 1996
---- ---- ----
Weighted - average exercise
Outstanding at $8.75 $ 8.18 $ 4.67
Granted $5.39 $13.56 $17.83
Canceled $9.09 $11.50 $ 3.97
Exercised $4.39 $ 4.39 $ 3.73
Outstanding at end of $5.16 $10.84 $ 8.18
Exercisable at end of $4.88 $ 8.75 $ 5.34
Weighted - average fair value of
Options granted during the $3.33 $ 8.20 $ 5.56
Range of Exercise Prices
------------------------
$3.69 - $5.00 $5.13 - $8.88 $3.69 - $8.88
------------- ------------- -------------
Options Outstanding:
--------------------
Number (in thousands) 1,283 1,505 2,788
Weighted-Average
Contractual Life 6.6 8.6 7.7
Weighted-Average
Exercise Price $4.39 $5.81 $5.16
Options Exercisable:
--------------------
Number (in thousands) 1,023 688 1,711
Weighted-Average
Exercise Price $4.28 $5.77 $4.88
Pursuant to the requirements of FAS 123, the following are the pro forma
net loss and net loss per share for 1998, 1997 and 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 and 1996, consistent with the provisions of
FAS 123.
1998 1997 1996
---- ---- ----
Proforma net loss (in thousands) $(22,438) $(16,523) $(2,404)
Proforma net loss per share $ (1.17) $ (.97) $ (.15)
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
---- ---- ----
Expected life (years) 2 2 2
Interest rate 5.53% 6.01% 5.65%
Volatility .761 1.141 .576
F-15
The effects on pro forma disclosures of applying FAS 123 are not likely to
be representative of the effects on pro forma disclosures of future years.
Because FAS 123 is applicable only to options granted subsequent to October 28,
1995, the pro forma effect has been fully reflected in the year ended December
31, 1998.
As of December 31, 1998, the Company had the following outstanding warrants
to purchase common stock: 69,875 shares at $27.81 per share expiring July 22,
2002; 80,125 shares at $15.78 per share expiring August 14, 2002 and 4,864
shares at $19.53 per share expiring April 23, 2003.
At December 31, 1998, there were 3,023,026 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, the
Company has reserved an additional 163,264 shares. See Note 6 for a further
discussion.
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
The Company occupies its worldwide facilities under operating lease
agreements, which expire through March 2002. The Company has the option to
renew the U.S. facilities lease for up to five 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, 1998, future minimum lease payments are as follows (in
thousands):
Year
----
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.
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
---- ----
Net U.S. operating loss carryforwards $ 13,791 $ 7,682
Net foreign operating loss carryforwards 2,263 1,482
Intercompany profit 313 637
Accrued clinical costs 406 516
Research & development credits 679 561
Inventory and warranty reserves 497 331
Alternative minimum tax credit 63 63
Accrued salaries 195 -
Deferred revenue 173 -
Other 4 56
-------- --------
Total deferred tax assets 18,384 11,328
Valuation allowance (18,384) (11,328)
-------- --------
Net deferred tax assets $ -- $ -
-------- --------
-------- --------
The valuation allowance increased by approximately $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 $18,384,000.
Income (loss) before taxes consisted of the following (in thousands):
1998 1997 1996
---- ---- ----
Domestic $(14,137) $(11,340) $(1,244)
Foreign (2,472) (3,064) (296)
--------- -------- --------
$(16,603) $(14,404) $(1,540)
--------- -------- --------
--------- -------- --------
Income taxes (benefit) computed at the federal statutory rate differ from
amounts provided as follows (in thousands):
1998 1997 1996
---- ---- ----
Statutory income tax provision $(5,645) $(4,898) $(524)
Utilization of loss carryforwards (85) - -
Unbenefited U.S. losses 4,807 3,856 423
Unbenefited foreign losses 923 1,042 100
Other - - 1
------- ------- -----
Provision for income taxes $ - $ - $ -
------- ------- -----
------- ------- -----
At December 31, 1998 the Company had U.S. net operating loss carryforwards
available to reduce future taxable income of approximately $34.5 million which
expire at various dates through 2012. In addition, the Company had foreign net
operating loss carryforwards of approximately $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 sales to unaffiliated
customers (by origin) are summarized below (in thousands).
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 $4,092 $4,683 $ 166 $ - $ 8,941
Long-lived assets $ 701 $ - $ - $ - $ 701
1996
Net sales to unaffiliated
Customers $5,657 $6,215 $ - $ - $11,872
Long-lived assets $ 537 $ - $ - $ - $ 537
No one customer accounted for more than 10% of the Company's revenues for
the year ended December 31, 1998. Approximately 20% of the Company's revenues
for the year ended December 31, 1997 came from one 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.
11. 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
among 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 Accounts
Column A Column B Column C Column D Column E
-------- -------- -------- ---------- ---------
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 $ 28,000 $112,000 $ 0 $140,000
For the Year Ended December 31, 1996
Allowance for Doubtful Accounts $ 29,000 $ 0 $ 1,000 $28,000
S-1
PLC SYSTEMS INC.
QUARTERLY DATA (UNAUDITED)
March 31 June 30 September 30 December 31 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 $8,941
Gross profit 758 1,952 666 249 3,625
Loss from operations (3,130) (2,712) (3,590) (5,150) (14,582)
Net loss (3,022) (2,697) (3,562) (5,123) (14,404)
Loss per share, basic and diluted (.18) (.16) (.21) (.28) (.84)
EXHIBIT INDEX
Exhibit
No. Title
- ------- -----
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule.