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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, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 1-11388
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PLC SYSTEMS INC.
(Exact name of registrant as specified in its charter)
YUKON TERRITORY, CANADA 04-3153858
(State or other jurisdiction of (IRS 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:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
ON WHICH REGISTERED
COMMON STOCK, NO PAR VALUE AMERICAN STOCK EXCHANGE
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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 16, 2001 was
$18,214,328. As of March 16, 2001, 29,298,667 shares of Common Stock, no par
value per share, were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement, which will be
issued in connection with the 2001 Annual Meeting of Shareholders, are
incorporated by reference in Part III of its annual report on Form 10-K.
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K (including certain information incorporated
herein by reference) contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. 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 Results 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 important
risks and uncertainties that could cause actual results to differ materially
from those described in the forward-looking statements. Such important 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 the risk factors set
forth in Item 7, Item 7A, and the Company's other SEC reports.
PART I
ITEM 1. BUSINESS.
GENERAL
PLC Systems Inc. ("PLC" or the "Company") has developed a patented
high-powered carbon dioxide ("CO(2)") laser system known as The Heart Laser
("HL1") for use in the treatment of severe coronary artery disease ("CAD") in a
surgical laser procedure, pioneered by the Company and its clinical
investigators, known as transmyocardial revascularization ("TMR"). In
January 2001, the Company obtained U.S. Food and Drug Administration ("FDA")
approval to market its second-generation laser, the CO(2) Heart Laser 2 ("HL2").
The HL2 is less than half the weight and size than the HL1, but delivers the
equivalent laser energy, wavelength and beam characteristics. The HL1 and HL2
collectively are referred to throughout this report as the "Heart Laser
Systems".
TMR is a laser based treatment for relieving debilitating pain in patients
suffering from severe CAD. Each TMR procedure requires a sterile, single use,
TMR kit containing assorted TMR handpieces, drapes and other disposable items.
The Heart Laser Systems are 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 Heart Laser Systems were developed specifically for TMR and they are
believed to be the only TMR systems that can create a channel completely through
the heart wall with a single laser pulse. In addition, the Heart Laser Systems
use 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 Systems 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 typically performed through a small incision between the
patient's ribs while the patient's heart is beating.
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
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. A U.S. clinical study has demonstrated the HL1 to be safe
and effective in decreasing angina by two or more classes after one year (angina
is measured in classes from one to four, one being the least painful and four
being the most) in 72% of the patients studied; in fact, TMR using the HL1
eliminated all angina in one-third of the patients treated.
Over 6,500 patients have been treated with the Company's HL1 in the United
States and abroad. As of December 31, 2000, the Company had shipped 156 HL1
systems worldwide.
RECENT DEVELOPMENTS
Since the Company's last annual report on Form 10-K, the following
significant events have occurred:
REGULATORY APPROVALS. In 2001, the HL2 received regulatory clearance in the
United States and the European Union. On January 29, 2001, PLC received FDA
approval to market the HL2. On February 27, 2001, PLC received approval to place
the CE Mark on the HL2, thereby allowing PLC to begin marketing its new laser in
the European Union and other countries that base regulatory clearance on the
European CE Mark.
STRATEGIC PARTNERSHIP WITH EDWARDS LIFESCIENCES. On January 9, 2001, PLC
announced a strategic marketing alliance and exclusive distributorship agreement
with Edwards Lifesciences LLC, a subsidiary
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of Edwards Lifesciences Corporation (collectively referred to as "Edwards").
Edwards is a focused cardiovascular company with market leadership positions in
areas such as artificial heart valves, hemodynamic monitoring and peripheral
vascular disease. Edwards has annual sales of approximately $800,000,000.
Under an exclusive, multi-year agreement, Edwards will market and distribute
the HL2, as well as all disposable TMR kits and accessories, to customers in the
United States. PLC intends to maintain its capital (laser) equipment sales
force, at least through 2001, to assist Edwards in marketing the HL2 in the
United States. PLC will sell the HL2 and TMR kits to Edwards at a discount to
list price and Edwards will remarket the HL2 and TMR kits to hospitals. Edwards'
Research Medical Incorporated sales force will be principally responsible for
driving increased TMR procedures and kit utilization, as well as providing the
PLC capital sales force with HL2 sales leads.
In conjunction with this transaction, Edwards purchased 5,333,333 newly
issued shares of PLC common stock for $4,000,000 and PLC issued to Edwards
warrants to purchase an additional 3,000,000 shares of common stock at exercise
prices ranging from $1.50 to $3.50. The warrants expire over a three to five
year period.
SETTLEMENT OF FEDERAL SECURITIES CLASS ACTION LAWSUIT. On February 9, 2001,
the United States District Court for the District of Massachusetts issued final
approval of the settlement of the federal securities class action litigation
against PLC. Under the terms of the settlement agreement PLC made no admission
or concession of any liability or wrongdoing, or lack of merit in its defenses.
Furthermore, PLC's insurance carriers paid the entire settlement amount to the
plaintiffs in the case.
CPT CODING ESTABLISHED FOR CERTAIN TMR PROCEDURES. On January 1, 2001, a
physician reimbursement ("CPT") code was assigned for the TMR procedure when
performed as an adjunct to coronary artery bypass grafting. Establishment of a
CPT code provides surgeons the ability to electronically submit for
reimbursement of the procedure and is believed to provide for quicker and more
reliable claim processing.
FIVE YEAR DATA ON SUSTAINED ANGINA RELIEF RELEASED. On November 15, 2000,
the first long term study on the efficacy of TMR with the HL1 was presented at
the American Heart Association meeting. This study has demonstrated that the
CO(2) TMR procedure provides significant long-term angina relief.
NEW DIRECTOR JOINS PLC BOARD. In May 2000, Mr. Benjamin Holmes was
appointed to PLC's Board of Directors. Since December 1994, Mr. Holmes has
served as President of the Holmes, Co., a consulting firm that specializes in
healthcare with a focus on the medical device industry. From 1985 to 1994, he
served as General Manager and Vice President of Hewlett-Packard Medical Products
Group. Currently, Mr. Holmes serves as Director of Haemonetics Corporation,
Project Hope, the UCLA Foundation and The Wood River Medical Center Foundation.
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 CO(2) lasers. Dr. Rudko, who holds a Ph.D. in
electrical engineering from Cornell University, has spent over thirty years
designing and developing CO(2) laser systems. In the late 1980s, a 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, at that time it was felt that
the efficacy of the TMR treatment should be proven by performing the procedure
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 HL1, a
high-powered laser system capable of creating a channel completely
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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 HL1 from the FDA. In approving the Phase I study, the
FDA permitted the use of the HL1 for patients considered not suitable for any
other intervention. Phase I trials were performed by Dr. Crew and 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 HL1. 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 study compared 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 eligible patients from its Phase II and Phase III clinical
studies. The long-term TMR analysis included 78 patients at nine hospitals. Each
patient had been suffering from chronic angina and from severe CAD before
receiving treatment with the HL1. The average age of the patients at enrollment
was 61. The average preoperative angina class for the group was 3.7 out of a
maximum of 4. 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
55 months following the TMR procedure, the group's average angina class improved
from 3.7 to 1.6. This was virtually unchanged from the 1.5 average angina class
reported at 12 months postoperatively. In fact, five years after TMR with the
HL1, 17% of the patients reported having no angina and 64% were in class 1 or 2.
Since April 1992, the Company has received 24 U.S. patents relating to the
underlying laser technology, the use of a laser on a beating heart, the HL1
handpiece and other laser accessories. The Company also has patent applications
pending that cover various aspects of the technology for the Heart Laser Systems
and the process by which a laser is used to revascularize the myocardium, as
well as other laser technologies. The Company also holds a number of foreign
patents and patent applications.
On August 20, 1998, the Company received approval from the FDA to market the
HL1 throughout the U.S. to treat the estimated 80,000 domestic patients each
year who suffer from severe CAD but have regions of the heart that 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.
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 located 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 GmbH and PLC Medical Systems AG.
CARDIOVASCULAR DISEASE AND CURRENT THERAPIES
According to the 2001 Heart and Stroke Statistical Update ("2001 HSSU")
published by the American Heart Association (the "AHA"), in 1998 an estimated
60.8 million Americans suffered from cardiovascular disease with an estimated
12.4 million Americans suffering from coronary heart disease. Cardiovascular
disease is the leading cause of death in the U.S., resulting in approximately
41% (or 950,000) of all deaths in the U.S. annually. Arteriosclerosis, the
principal form of cardiovascular disease
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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. Arteriosclerosis
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 2001 HSSU, an estimated
553,000 coronary artery bypass procedures were performed on 336,000 patients and
539,000 balloon angioplasty procedures were performed on 528,000 patients in the
U.S. in 1998. The AHA estimates the cost of cardiovascular disease in the year
2001 at $298.2 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, usually
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 some 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 surgery.
A less invasive alternative to bypass surgery is balloon angioplasty. The
most common form of angioplasty involves inserting a catheter with a balloon at
the tip into a diseased artery. 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.
The Company believes that TMR using the Heart Laser Systems 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 FDA has approved the Heart Laser Systems for
such patients. TMR is designed to be less invasive and less expensive than
traditional bypass surgery, and may avoid the restenosis problem common 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 surgery 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. The
Company believes that with further clinical research, TMR may be found useful in
conjunction with these less invasive procedures to more effectively
revascularize the heart.
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TMR USING THE HEART LASER SYSTEMS
The main challenge in treating atherosclerosis is to allow adequate blood to
flow to the heart muscle without significantly damaging the heart. The
conventional and newer techniques described above are used to bypass, reopen or
widen blocked or narrowed arteries and can eventually fail due to restenosis or
natural disease progression. TMR using the Heart Laser Systems 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 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 a sole therapy TMR procedure, the patient is given general anesthesia
and an incision is made in the patient's side between the ribs, exposing the
heart. A 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 Systems are
capable of drilling a transmural channel in less than 0.1 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 Systems provides a number of benefits, although no assurance can be
given that any of the mentioned benefits will be received by patients and no
assurance can be given that the FDA will approve additional indications for use
of the Heart Laser Systems. These current anticipated benefits include:
THERAPY FOR PATIENTS NOT SUITABLE FOR CORONARY BYPASS. The FDA has approved
the use of the Heart Laser Systems for patients who have severe, stable angina
refractory to medical treatment and secondary to objectively demonstrated
coronary artery atherosclerosis and with a region of the myocardium not amenable
to direct coronary revascularization.
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 MIDCAB and OPCAB procedures, in which coronary artery bypass graft
surgery is performed on a beating heart, the Company believes that with
additional clinical research, TMR may be found to be an effective complement to
these procedures. TMR can be performed on the anterior, posterior and lateral
walls of the heart while the MIDCAB procedure usually is only performed on the
anterior wall of the heart. Further, although the
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OPCAB procedure can be performed on posterior and lateral walls of the heart, it
generally entails great technical difficulty.
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 potentially could be found useful for post-transplant patients
suffering from chronic rejection atherosclerosis. Presently, the only treatment
for this condition is re-transplantation.
POTENTIALLY REDUCED HOSPITAL READMISSION COSTS. The Company believes that
TMR is a cost effective treatment based on studies indicating that patients who
receive TMR have fewer readmissions to the hospital for chest pain than those
who receive only drug therapy.
POTENTIALLY QUICKER RECOVERY. Because TMR using the Heart Laser Systems is
less invasive and usually 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.
POTENTIAL DELIVERY MECHANISM FOR ANGIOGENIC AGENTS. The TMR therapy
utilizing the Heart Laser Systems may have the potential, with future
development, to deliver angiogenic agents, which may assist in the treatment of
CAD. This potentially could be accomplished through the use of standalone
devices or by a device integrated into the current Heart Laser System
handpieces, which would concomitantly with the TMR therapy, inject these agents
into the myocardium.
POTENTIAL ANGIOGENIC RESPONSE STIMULATOR. With additional clinical
research, the TMR therapy potentially could be found to be synergistic with
delivered growth factors, which may prove useful in treating patients with CAD.
DEVELOPMENT OF MARKETING STRATEGY
The Company's strategy is to establish TMR using the Heart Laser Systems as
a standard of care for treating patients suffering from severe CAD. Currently,
the Heart Laser Systems are commercially available in the U.S. and the European
Union (except France). The HL1 is also commercially available in China, South
Korea and Taiwan. The Company has submitted applications for government approval
to sell the HL1 in other countries, including Japan, although the Company cannot
predict when, if ever, approval will be obtained.
The Company has also developed a procedural kit, which includes single use
surgical products to be used with the Heart Laser Systems in performing TMR. The
TMR procedure kit contains a set of handpieces, drapes and other TMR surgical
accessories.
The Company has developed and implemented a strategy to address the
challenges of marketing high cost capital equipment by offering the Heart Laser
Systems on a usage basis to hospitals. The Company believes Edwards, as the
exclusive distributor for the HL2 in the United States, will continue with this
strategy in marketing the HL2 to hospitals.
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The structure of a particular usage based contract, including the length of
contract, price billed per procedure and end of term options for purchase,
depends primarily on whether the hospital is willing and able to commit to a
certain minimum volume of procedures over a defined period of time. If the
hospital cannot commit to a sufficient number of procedures, the Heart Laser
Systems may be installed with usage fees billed as agreed upon with the
hospital. The Company refers to this type of usage arrangement as a retained
placement contract. Under a retained placement contract, placement and service
fee revenue is recorded over the term of the usage agreement, and the Heart
Laser Systems remain the property of the Company and are depreciated over the
term of the usage agreement.
If the hospital is willing and able to commit to a sufficient number of
procedures at a sufficient procedural fee, such that the substantial risks and
benefits of ownership of the Heart Laser Systems have transferred from the
Company to the hospital, then the Company classifies the usage agreement as a
minimum procedure sales contract (qualifying as a sales-type lease). Under a
minimum procedure sales contract, the Company records product revenue at a
discounted present value of the guaranteed minimum procedure payments, and
records product cost of sale at the time of acceptance of the Heart Laser
Systems.
The Company believes retained placement and minimum procedure sales
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 financing arrangements with leasing
vendors has enabled the Company to monetize future payment streams associated
with certain placements. If utilization becomes more predictable, the Company
expects a significant number of new accounts to opt for conventional leasing or
direct purchase.
The Heart Laser Systems are also sold to customers, and the related sterile
handpieces and other disposables are sold separately. These sales are classified
as product sales.
Beginning in 2001, under the Edwards distribution arrangement, Edwards will
determine the best programs, including sale, lease and rental offerings, which
Edwards believes will be most effective in the United States in marketing the
HL2 and related TMR kits to hospitals. PLC will sell these products to Edwards
at a discount off list price and will generally recognize product sales at the
time of shipment to Edwards.
UNITED STATES. The Company has used a direct sales force in the United
States to market the HL1. In 2001, the Company plans to continue to employ a
direct sales force to assist Edwards in the marketing of the HL2. The sales
force is comprised of personnel with a high degree of professionalism and
experience in the cardiovascular device business. Initial marketing efforts
following FDA approval were directed at cardiothoracic surgeons, whose influence
is believed to be critical in a hospital's decision to purchase the Heart Laser
Systems. Recent marketing efforts also have emphasized educating hospital
administration and referring physicians, 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
electronic media advertising, public relations, direct mail, trade shows and
educational symposia, all focused on disseminating critical information to
decision makers and key purchase influencers.
In 2000, PLC's Center of Excellence training program was expanded to the
Northeast and Northwest regions to facilitate increased TMR surgeon training for
potential sales closure, new site initiation and increasing the number of
surgeons trained at current TMR sites. This expansion effort is founded on the
programs established at Rush Presbyterian Medical Center in Chicago and Texas
Heart Institute in Houston. Both institutions have hosted the Company's training
program, which is focused on educating prospective surgeons as well as surgeons
from new and existing customer sites in the use of the Heart Laser Systems.
These comprehensive programs facilitate interaction among experienced
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users enabling them to discuss best practices and focus on ensuring the best
possible patient outcomes, including 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 Systems
overseas primarily through distributors. International Sales (by origin)
accounted for 19%, 12% and 30% of the Company's total revenues in 2000, 1999,
and 1998 respectively. The Company had no sales by origin in Canada, its
principle business location.
PLC received the CE Mark for the HL1 in the third quarter of 1995 and for
the HL2 in March 2001. The CE Mark allows the Company to sell the Heart Laser
Systems commercially in European Union countries. Despite the Company's receipt
of the CE Mark for the HL1, 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.
In early 1999, the Company renewed its distribution agreement in Japan with
Imatron Japan, Inc. ("Imatron") to distribute the HL1 in Japan and complete the
Japanese regulatory approval process. 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 HL1's 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 HL1 in Japan. The
joint application is believed to be the first submitted by a laser
revascularization company seeking to market its product in Japan.
In early January 2001, the Company notified Imatron that it was terminating
the existing distribution agreement as a result of Imatron's failure to timely
obtain approval from the Japanese government to market the HL1 in Japan. The
Company continues to work with Imatron to try and obtain approval to market the
HL1 in Japan. However, by canceling the existing distribution agreement with
Imatron the Company provides itself with flexibility to explore other
alternatives, if necessary. No assurance can be given that Japanese regulatory
approval will ever be granted for the HL1.
As of December 31, 2000, 74 HL1s had been shipped 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
Prior to 2001, the Company marketed one principal product: the HL1.
Approximately 90% of the Company's revenues in the fiscal year ended
December 31, 2000, 89% in the fiscal year ended December 31, 1999 and 90% in the
fiscal year ended December 31, 1998 was derived from the sales and service of
HL1 and related disposables sales. No single customer accounted for more than
10% of the Company's revenues in fiscal 2000, 1999 or 1998.
MANUFACTURING
The Company manufactures and tests its product 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.
8
The Company purchases components for its Heart Laser Systems and its related
disposables from a number of sources, and management believes that most, but not
all, components are available from multiple sources. Should the supply of
certain critical components be interrupted or become unavailable, the Company
may not be able to meet demand for its products, which could have a material
adverse effect on the Company's business and results of operations.
The Company's manufacturing facilities are subject to periodic inspection by
regulatory authorities to ensure compliance with FDA and European Union quality
regulations.
GOVERNMENT REGULATION
The Heart Laser Systems, 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 "FDC
Act"), the FDA regulates the design, development, manufacturing and 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 health and safety provisions of
the FDC 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 FDA to market the
HL1 throughout the U.S. to treat 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.
The FDA imposed certain post-approval requirements as conditions of its August
1998 clearance. These requirements included a 600 patient post-market study to
further assess mortality, a specific TMR surgical informed consent and the
placement of certain disclaimers on all promotion and advertising materials.
Once a product obtains market approval from the FDA, any material
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 its products after market
introduction and may therefore submit future Investigational Device Exemption
("IDE"), Pre-Market Approval ("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 (or will
continue to allow) the use or sale of the Heart Laser Systems 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 HL1 had been approved for commercial distribution
in the European Union in 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 HL1
has been under review by a panel of French experts. 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 the use or sale 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 regulations. These regulations require
that the Company manufacture its products and maintain its
9
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 FDC Act and medical device reporting regulations
require that the Company provide information to the FDA on death or serious
injuries alleged to have been caused or contributed to by 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 uses. The
Company's laser products are subject to periodic inspection under the radiation
health and safety provisions of the FDC 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, directors or employees. Failure to comply
with regulatory requirements could have a material adverse effect on the
Company's business, financial condition and results of operations.
THIRD PARTY REIMBURSEMENT
Health care providers, such as hospitals and physicians, that purchase
medical devices such as the Heart Laser Systems 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 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 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.
In February 1999, HCFA rescinded a prior national non-coverage instruction
to hospitals for the TMR procedure 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 effective July 1, 1999.
In October 1999, HCFA issued an addendum clarifying Medicare coverage for
TMR procedures. In response to questions from practicing physicians, HCFA
announced that Medicare coverage would be provided in cases where TMR is used as
an adjunct to coronary artery bypass grafting.
On January 1, 2001, a physician reimbursement ("CPT") code was assigned for
the TMR procedure when performed as an adjunct to coronary artery bypass
grafting. Establishment of a CPT code provides surgeons the ability to
electronically submit for reimbursement of the procedure and is believed to
provide for quicker and more reliable claim processing. In January 2000, a CPT
code was assigned for the TMR procedure when performed as a sole therapy.
Economic data derived from the Company's clinical studies indicate that TMR
using the Heart Laser Systems may result in a significant reduction in the cost
of treating patients with severe CAD.
10
Potentially, this could mean that TMR performed with the Heart Laser Systems is
a procedure that offers real economic advantages to the managed care market,
which the Company believes covers a substantial number of privately insured
Americans. No assurance can be given that such economic benefits will be
realized by customers.
Certain private insurance companies and health maintenance organizations
currently provide reimbursement for TMR procedures performed with the Company's
products. No assurance can be given, however, that these payers will continue to
reimburse health care providers who perform TMR procedures using the Company's
products. Further, no assurance can be given that additional payers will
reimburse health care providers who perform TMR procedures using the Company's
products 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.
Notwithstanding the FDA approval and Medicare coverage for TMR procedures,
the historical absence of widespread reimbursement for the TMR procedure by
third party payers, as well as concerns over the lack of a consensus view on the
reason or reasons why a TMR procedure relieves angina in patients who undergo
the procedure, has limited demand for and use of the Heart Laser Systems.
Although Medicare reimbursement began in July 1999, and some private insurance
plans have begun reimbursing health care providers for TMR procedures using the
Heart Laser Systems, the Company believes that market acceptance of TMR
procedures is likely to be limited until such time as third party payers begin
to provide widespread reimbursement to healthcare providers for use of the Heart
Laser Systems. In addition, the Company believes that hospitals may delay the
implementation of a TMR program until there is documentation of the medical
processes by which TMR procedures relive angina, if ever.
PRODUCT LIABILITY AND INSURANCE
The Company's business involves the risk of product liability claims. No
claims have been made against the Heart Laser Systems to date. The Company
maintains product liability insurance with per claim and aggregate coverage
limits of $10 million, subject to a $50,000 per occurrence and $250,000
aggregate self-insured deductible. No assurance can be given that product
liability claims, if brought, 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
It is the Company's policy to file patent applications to protect its
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 24 U.S. patents. These patents
have terms which expire from 2009 through 2017 and cover, among other things,
the underlying laser technology needed to create a pulsed, fast-flow laser
system, the use of a laser on a beating heart to revascularize the heart using
TMR related disposable components, and the system used to time the heart's
contractions to synchronize the laser firing at the correct time. The Company
also has U.S. patent applications pending relating to the Heart Laser Systems,
handpiece, other technology used in the Heart Laser Systems, and technologies
associated with percutaneous myocardial revascularization.
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 also 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
11
coupler for a laser endoscope. The Company has numerous patents pending related
to the Heart Laser Systems and their components in various international patent
offices. The Company may 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.
In January 1999, CardioGenesis Corporation ("CardioGenesis"), a competitor
of the Company that subsequently merged with Eclipse Surgical
Technologies, Inc. ("Eclipse"), agreed to the validity and enforceability of
certain of the Company's patents in connection with a settlement of certain
litigation between the companies. The patents, U.S. Patent No. 5,125,926 and
related international patents, cover the Company's proprietary synchronization
technology, which the Company believes is a critical factor in increasing the
safety of TMR 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 to the Company in connection with this license agreement.
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, require the Company to seek
licenses from third parties and 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
As of December 31, 2000, over 6,500 TMR procedures had been performed using
the HL1. In addition, the Company believes that the majority of peer reviewed
medical journal articles on TMR report results of TMR procedures performed with
the HL1.
The Company's two principal competitors, Eclipse and CardioGenesis, merged
on March 17, 1999. Both companies have holmium laser systems. 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 may be adaptable to be used to perform
not only TMR, but also a "percutaneous" method of performing TMR, known as
"PMR".
12
PMR procedures are performed via a catheter inserted through an incision in
a patient's leg. PMR may provide a less invasive method of creating channels in
a human heart if it can be proven safe and effective. Although the Company has a
proprietary PMR product design, the Company is not currently actively pursuing
its development. No assurance can be given that the Company will ever
successfully pursue, develop or market a PMR product.
The Company believes several other companies, in addition to Eclipse, are
developing PMR. The results of a six-month clinical study ("DIRECT"), which
utilized a Johnson & Johnson holmium PMR laser, presented at the Transcatheter
Therapeutics Conference ("TCT") in Washington, D.C. on October 20, 2000
demonstrated no significant differences in the clinical outcomes measured
between those receiving the PMR therapy and those in a control group of
patients. The principal investigator who presented the results at the TCT
concluded that the similar outcomes between those in the treatment group and
those in the control group was suggestive of a strong placebo effect, as opposed
to any real therapeutic benefit from the PMR laser revascularization procedure.
Although the Company believes there are distinct clinical differences and
therapeutic outcomes between a surgical laser TMR procedure and an
interventional laser PMR procedure, the negative publicity resulting from the
DIRECT study with respect to all laser revascularization procedures, including
the Company's CO(2) laser TMR approach, poses a significant challenge for the
Company in attempting to convince cardiovascular surgeons and referring
clinicians of the efficacy of TMR as a procedure. The Company has taken steps to
distinguish surgical TMR from PMR, and its CO(2) laser from holmium lasers.
However, no assurance can be given that the Company's efforts to make these
distinctions between the therapies and lasers used will be successful. If the
Company is unable to do so, the Heart Laser Systems may never gain broad
commercial acceptance.
In addition to Eclipse, other companies may enter the TMR market and use
lasers such as holmium and excimer lasers. The Company believes that the Heart
Laser Systems are the only TMR products 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 CO(2) laser may cause significantly less damage to
the heart than a holmium laser used to perform TMR. Holmium and excimer lasers
have different physical properties and interact differently with human tissue
than the Company's CO(2) laser. 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 during 2000 it began to successfully differentiate its
CO(2) laser.
Many treatments are available for CAD. The Company believes that the primary
competitive factors in the medical treatment of CAD 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 and maintain required
regulatory approvals, obtain and maintain third party reimbursement for use of
its products, attract and retain key personnel, obtain and maintain patent or
other protection for its products and successfully differentiate, price,
manufacture and 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.
13
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. The Company believes that the
Heart Laser Systems must compete not only with other TMR systems and potentially
PMR systems, but also 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. Such companies
may succeed in developing products that are more effective or less costly in
treating coronary disease than the Heart Laser Systems and may be more
successful than the Company in manufacturing and marketing their products. No
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 $1,680,000, $2,672,000 and $4,468,000
for the years ended December 31, 2000, 1999, and 1998, respectively. Since the
HL1 received final approval from the FDA in late August 1998, there has been a
significant reduction in research and development expenses related to clinical
trials. The Company continues to refine the Heart Laser Systems.
The Company continues to monitor all technologies that may be applicable to
TMR to keep it at the forefront of this field. No assurance can be given that
the Company's research and development goals will be implemented successfully or
that the Company will maintain its position in this market.
EMPLOYEES
As of March 16, 2001, the Company had 46 full-time domestic employees,
including its executive officers. Of these, 9 are employed in general and
administrative positions, 15 are involved in sales and marketing, 8 are involved
in research and development, 7 are involved in manufacturing, 4 are involved in
service and 3 are involved in quality and regulatory affairs. The Company also
employs one part-time employee. None of the Company's employees are represented
by a union. In addition, the Company has 3 full time employees for its
international operations. The Company considers its relationships with its
employees to be satisfactory.
ITEM 2. PROPERTIES
Since September 1996, the Company has leased its current 37,000 square foot
facility in Franklin, Massachusetts where it maintains its principal executive
offices and manufacturing operations. In January 2001, the Company renewed its
lease for a period of three years through August 2004. The lease provides for
another renewal period of three years. The total base rental payments beginning
in September 2001 for the term of the lease are expected to be approximately
$422,000 per year plus operating and maintenance costs and real estate taxes.
14
ITEM 3. LEGAL PROCEEDINGS
In January 1999, the Company settled its outstanding patent infringement
litigation with CardioGenesis, who subsequently merged with Eclipse Surgical
Technologies, Inc. The original CardioGenesis lawsuit, and counterclaim by the
Company, dealt with the Company's synchronization patent (U.S. Patent
No. 5,125,926). Under the settlement, CardioGenesis agreed that U.S. Patent
No. 5,125,926 and related international patents of the Company were 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 agreed to 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 HL1 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 sought 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 were consolidated by
the court into a single action for pretrial purposes (hereafter referred to as
the "federal suit"). Two of these suits were voluntarily dismissed. The Company
moved to dismiss all claims in the federal suit. On March 26, 1999, the court
issued an order dismissing some, but not all, of the claims in the federal suit.
The parties filed cross motions for reconsideration and on October 12, 1999, the
court dismissed additional, but not all remaining claims in the federal suit. On
February 9, 2001, the Court issued an Order approving the settlement of the
federal suit and entered a judgment of dismissal. The settlement of the federal
suit did not have a material impact on the Company's financial statements.
The Company also was named as a defendant in a lawsuit filed in
Massachusetts Superior Court in September 1998 (hereafter referred to as the
"state suit") seeking 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. On April 13, 2000, the parties filed a
Stipulation of Dismissal in connection with the settlement of the state suit.
The settlement did not have a material impact on the Company's financial
statements.
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 sought reimbursement of lease payments made for the HL1. On April 18,
2000, the Tribunal de Grande Instance de Paris dismissed this suit for lack of
jurisdiction. The Company can make no assurance as to whether Foch Hospital will
appeal this decision or bring suit in another jurisdiction.
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". On March 16, 2001, the
closing sale price of the Company's Common Stock was $0.80 per share.
For the periods indicated, the following table sets forth the range of high
and low sales prices for the Common Stock from January 1, 1999.
HIGH LOW
-------- --------
1999
First Quarter............................................... $7.44 $2.38
Second Quarter.............................................. $4.88 $2.31
Third Quarter............................................... $4.88 $2.63
Fourth Quarter.............................................. $3.19 $1.81
2000
First Quarter............................................... $4.63 $2.06
Second Quarter.............................................. $2.50 $1.19
Third Quarter............................................... $1.56 $0.94
Fourth Quarter.............................................. $0.94 $0.31
As of March 16, 2001, there were approximately 741 record holders of the
Company's Common Stock. The Company believes that there are approximately 14,754
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.
CANADIAN TAX MATTERS
SALES OR OTHER DISPOSITIONS OF SHARES
Gains on sales or other dispositions of the Company's shares by a
non-resident of Canada are generally not subject to Canadian income tax, unless
the holder realizes the gains in connection with a business carried on in
Canada.
DIVIDENDS
Under the United States--Canada Income Tax Convention (1980) (the
"Convention"), a Canadian withholding tax of 15% generally applies to dividends
(including stock dividends) paid or credited to the beneficial owners of the
Company's shares:
- who are resident in the United States for the purposes of the Convention,
and
- who do not hold the shares in connection with a business carried on
through a permanent establishment or a fixed base in Canada.
The Convention provides an exemption from withholding tax on dividends paid
or credited to certain tax-exempt organizations that are resident in the United
States for purposes of the Convention. Persons who are subject to the United
States federal income tax on dividends may be entitled, subject to certain
limitations, to either a credit or deduction with respect to Canadian income
taxes withheld with respect to dividends paid or credited on the Company's
shares.
16
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company for the five years
ended December 31, 2000, are derived from the audited consolidated financial
statements of the Company. The data should be read in conjunction with the
consolidated financial statements, related notes and other financial information
included elsewhere herein.
SELECTED FINANCIAL DATA
FOR THE YEARS ENDED DECEMBER 31
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(ALL AMOUNTS ARE IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Product sales................................. $ 6,803 $ 8,400 $ 3,088 $ 5,687 $ 9,082
Placement and service fees.................... 3,437 3,236 2,605 3,254 2,790
------- ------- -------- -------- -------
Total Revenues................................ 10,240 11,636 5,693 8,941 11,872
Costs and expenses:
Cost of product sales......................... 3,765 3,615 1,945 2,721 2,911
Cost of placement and service fees............ 3,168 2,061 2,622 2,595 1,155
Selling, general and administrative........... 9,430 10,054 13,718 13,049 7,023
Research and development...................... 1,680 2,672 4,468 5,158 2,835
------- ------- -------- -------- -------
Loss from operations.......................... (7,803) (6,766) (17,060) (14,582) (2,052)
Other income.................................. 393 211 457 178 512
------- ------- -------- -------- -------
Net loss...................................... $(7,410) $(6,555) $(16,603) $(14,404) $(1,540)
======= ======= ======== ======== =======
Net loss per share--Basic and diluted......... $ (.32) $ (.32) $ (.86) $ (.84) $ (.09)
======= ======= ======== ======== =======
Shares used to compute net loss per
share--Basic and diluted.................... 23,266 20,675 19,218 17,050 16,376
AS OF DECEMBER 31
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working capital................................ $ 5,010 $ 5,459 $ 5,050 $12,793 $11,245
Total assets................................... 15,078 15,319 16,257 27,017 19,417
Long term obligations.......................... -- -- 37 121 27
Secured borrowings, long-term.................. 3,079 2,082 -- -- --
Stockholders' equity........................... 6,216 8,885 10,662 19,009 16,467
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 Systems. The Company has developed a
strategy to address the challenges of marketing high cost capital equipment by
offering the Heart Laser Systems on a usage basis to hospitals. The particular
structure of a usage based contract, including the length of contract, price
billed per procedure and end of term options for purchase, depends primarily on
whether the hospital is willing and able to commit to a certain minimum volume
of procedures over a defined period of time. If the hospital cannot commit to a
sufficient number of procedures, the Heart Laser Systems may be installed with
usage fees billed as agreed upon with the hospital. The Company refers to this
type of usage arrangement as a retained placement contract. Under a retained
placement contract, placement and service fee revenues are recorded over the
term of the usage agreement and the Heart Laser Systems remain the property of
the Company and are depreciated over the term of the usage agreement.
If the hospital is willing and able to commit to a sufficient number of
procedures at a sufficient procedural fee, such that the substantial risks and
benefits of ownership of the Heart Laser Systems have transferred to the
hospital, then the Company classifies the usage agreement as a minimum procedure
sales contract (qualifying as a sales type lease). Under a minimum procedure
sales contract, the Company records product revenues, at a discounted present
value of the guaranteed minimum procedure payments, and records product cost of
sale at the time of acceptance of the Heart Laser Systems.
The Company believes that retained placement and minimum procedure sales
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 financing arrangements with leasing
vendors has enabled the Company to monetize future payment streams associated
with certain agreements. If utilization becomes more predictable, the Company
expects a significant number of new accounts to opt for conventional leasing, or
direct purchase.
The Heart Laser Systems are also sold directly to customers, and the related
sterile handpieces and other disposables are sold separately. These sales are
classified as product sales.
Customers are given the option to purchase service contracts to cover the
cost of maintaining the Heart Laser Systems beyond the applicable warranty
period. These service revenues are recorded ratably over the service contract
and are classified as a component of placement and service fees.
Beginning in 2001, under an exclusive distribution arrangement with Edwards,
Edwards will determine the best programs, including sale, lease and rental
offerings, which it believes will be most effective in the United States in
marketing the HL2 and related TMR kits to hospitals. PLC will sell these
products to Edwards at a discount off list price and will generally recognize
product sales revenues at the time of shipment to Edwards.
The Company expects that its revenues and gross profit in 2001 will likely
be lower than corresponding quarters in 2000 (excluding the impact on gross
margin of a non-recurring charge in the fourth quarter of 2000) as a result of
the discounted sale price of lasers and TMR procedural kits when sold to
Edwards, until such time, if ever, that Edwards' marketing efforts result in
substantially increased TMR procedural volumes and corresponding kit sales.
A portion of the Company's operations is conducted outside of the United
States. Historically the impact of foreign currency fluctuations on the
Company's overall consolidated results of operations has not been material (See
Item 7A--Quantitative and Qualitative Disclosures about Market Risk).
18
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Total revenues of $10,240,000 for the year ended December 31, 2000 decreased
$1,396,000 or 12% when compared to total revenues of $11,636,000 for the year
ended December 31, 1999. For the year ended December 31, 2000, product sales of
$6,803,000 decreased $1,597,000 or 19% when compared to product sales of
$8,400,000 for the year ended December 31, 1999. Contributing factors to the
decrease in revenues are a decline in the number of HL1 sales transactions
recognized during the year coupled with a decrease in the average selling price
for the HL1 in 2000 and reduced royalties. The Company recorded 18 HL1 sales
transactions in 2000 compared to 24 HL1 sales transactions in 1999. The decrease
in the number of HL1 sales transactions recognized resulted primarily from the
Company's shift from a sale to a placement business model strategy and, in the
latter part of the year, redirected focus on launching the next-generation HL2,
for which the Company received FDA approval in January 2001.
Placement and service fees of $3,437,000 for the year ended December 31,
2000 increased 6% from placement and service fees of $3,236,000 for the year
ended December 31, 1999. This increase in placement and service revenues is
primarily due to the Company's implementation of its laser redeployment
strategy, which focused on moving lasers from less active sites to sites which
are potentially more productive.
Management of the Company also monitors disposable kit shipments as an
important metric in evaluating its business. Management believes kit shipments,
although not a direct measure, are reasonable indicators of the pace of the
adoption of TMR as a therapy in the marketplace.
For the year ended December 31, 2000, the Company shipped 1,606 disposable
kits, an increase of 41% over the 1,136 disposable kits shipped during the year
ended December 31, 1999. Management believes the overall increase is primarily
due to (i) the Company's increased efforts to promote TMR in international
markets, (ii) Medicare reimbursement policies, (iii) the Company's increased
base of installed lasers, and (iv) increased Company training programs for
physicians throughout 2000.
Total gross profit decreased to $3,307,000 or 32% of total revenues for the
year ended December 31, 2000 as compared with the gross profit of $5,960,000 or
51% of total revenues for the year ended December 31, 1999. The decrease in
gross margin for the year 2000 is primarily due to a non-recurring charge of
$2,117,000 which the Company incurred in the fourth quarter to write down the
value of its HL1 inventory and capital equipment due to the transition to the
new HL2 product. Without this charge, gross margin in 2000 would have been 53%
of revenues, slightly up from 51% of revenues in 1999 as a result of decreased
manufacturing overhead expenditures partially offset by lower sales. Of the
$2,117,000 charge, $1,265,000 was allocated to placement cost of revenues for
the write down of the Company's installed HL1 placement laser base to its
estimated net realizable value and $852,000 was allocated to product cost of
revenues for potentially obsolete HL1 inventory at December 31, 2000.
Selling, general and administrative expenses of $9,430,000 for the year
ended December 31, 2000 decreased $624,000 or 6% when compared with expenses of
$10,054,000 for the year ended December 31, 1999. The decrease is primarily
attributable to a decrease in compensation related expenditures as a result of a
reduced headcount throughout 2000 when compared to 1999. The Company has used a
portion of the savings from the headcount reduction to increase its sales and
marketing initiatives, particularly in the areas of physician training,
internet/web expansion, and advertising and marketing literature.
Research and development expenses of $1,680,000 for the year ended
December 31, 2000 decreased $992,000 or 37% when compared with expenses of
$2,672,000 for the year ended December 31, 1999. This decrease is a result of
reduced expenses in monitoring and data collection, project materials and new
product development, partially offset by an increase in compensation. The
19
transition of the next generation CO(2) laser from research and development to
manufacturing contributed to the decrease in expenditures in this area in 2000.
Other income of $393,000 for the year ended December 31, 2000 increased
$182,000 or 86% when compared to other income of $211,000 for the year ended
December 31, 1999. The increase is a result of both higher average invested cash
balances and higher rates of interest on invested funds.
There was no provision for income tax for the years ended December 31, 2000
or 1999 due to net losses of $7,410,000 and $6,555,000, respectively.
The Company incurred a net loss of $7,410,000 for the year ended
December 31, 2000 compared with a net loss of $6,555,000 for the year ended
December 31, 1999. The higher net loss resulted from lower total revenues and
lower gross margins, which is primarily due to a non-recurring charge of
$2,117,000 which the Company incurred in the fourth quarter to writedown the
value of its HLI inventory and capital equipment due to the transition to the
new HL2 product.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Total revenues of $11,636,000 for the year ended December 31, 1999 increased
$5,943,000 or 104% when compared to total revenues of $5,693,000 for the year
ended December 31, 1998. For the year ended December 31, 1999, product sales of
$8,400,000 increased $5,312,000 or 172% when compared to product sales of
$3,088,000 for the year ended December 31, 1998. The major factors in both
increases are primarily due to the 1999 periods reflecting increased sales of
the HL1 and related disposables due to the Company's receipt of FDA approval to
market the HL1 in August 1998, as well as license and royalty fees associated
with the CardioGenesis settlement.
Placement and service fees of $3,236,000 for the year ended December 31,
1999 increased 24% from placement and service fees of $2,605,000 for the year
ended December 31, 1998. 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 PMA process, caused the Company to examine its contractual
requirements during 1997 and amend substantially all of its retained placement
contracts, temporarily replacing contractual minimum billings with actual usage
billings. Following approval of the PMA by the FDA on August 20, 1998, the
Company renegotiated usage agreements with its customers on a case-by-case
basis. The 1999 period reflects revenues from these retained placement contracts
with the renegotiated usage agreements following FDA approval. The 1998 period
reflects revenues primarily from retained placement contracts with actual usage
billings.
For the year ended December 31, 1999, the Company shipped 1,136 disposable
kits, an increase of 44% over the 788 disposable kits shipped during the year
ended December 31, 1998. Management believes the overall increase is primarily
due to marketplace awareness of TMR as an approved procedure subsequent to the
August 1998 approval by the FDA and the Company's increased base of installed
lasers.
Total gross profit increased to $5,960,000 or 51% of total revenues for the
year ended December 31, 1999 as compared with the gross profit of $1,126,000 or
20% of total revenues for the year ended December 31, 1998. In the 1998 period,
the Company did not generate sufficient sales volume to efficiently cover
manufacturing costs, resulting in lower gross margins. In 1999, gross margins
improved as a result of an increase in sales volumes and manufacturing cost
reductions implemented by the Company.
Selling, general and administrative expenses of $10,054,000 for the year
ended December 31, 1999 decreased $3,664,000 or 27% when compared with expenses
of $13,718,000 for the year ended December 31, 1998. This reduction is primarily
due to a restructuring of the Company's workforce in April 1999. The 1999
periods reflect reduced headcount and compensation and related benefits related
to the reduced workforce.
20
Research and development expenditures of $2,672,000 decreased $1,796,000 or
40% for the year ended December 31, 1999 when compared with expenditures of
$4,468,000 for the year ended December 31, 1998. The decreases in 1999 compared
to 1998 reflect the reduced demands for clinical study compilation and data
preparation following the FDA approval for the HL1 in August 1998. In addition,
in April 1999, the Company reduced its workforce, and the 1999 periods reflect
reduced headcount and compensation and related benefits related to the reduced
workforce.
Other income of $211,000 for the year ended December 31, 1999 decreased
$246,000 or 54% when compared to other income of $457,000 for the year ended
December 31, 1998, primarily due to lower interest income as a result of lower
average cash balances in 1999 as compared to 1998.
There was no provision for income tax for the years ended December 31, 1999
or 1998 due to the net losses of $6,555,000 and $16,603,000, respectively.
The Company incurred a net loss for the year ended December 31, 1999 of
$6,555,000 compared with a net loss of $16,603,000 for the year ended
December 31, 1998. The smaller net loss resulted from higher total revenues and
higher gross margin dollars coupled with lower overall operating expenses in
1999 when compared with 1998.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, the Company had cash, cash equivalents and marketable
securities of $6,014,000.
Over the past three years, the Company incurred significant operating losses
and utilized significant amounts of cash to fund operations. During 1999 and
2000, the Company implemented a number of programs to reduce its consumption of
cash, including operating expense reductions and establishment of third party
financing alliances to enable the Company to monetize certain of its minimum
procedure sales contracts.
Throughout 2000, the Company has been in a critical stage of its development
as it continues to transition from a research and development oriented company
to a commercial enterprise with complete sales, marketing and production
capabilities. In March 2000, the Company closed an equity financing with two
institutional investors. In conjunction with this financing, the Company sold
2,683,000 shares of common stock at $2.00 per share, resulting in proceeds to
the Company (net of all issuance costs) of approximately $5,012,000.
Most recently, in January 2001, the Company entered into a strategic
marketing alliance and exclusive distribution agreement with Edwards to
distribute the new HL2 laser and all disposable TMR kits throughout the United
States. In conjunction with this agreement, the Company received a $4,000,000
equity investment through the sale of 5,333,333 newly issued shares of common
stock at $.75 per share and issued warrants to purchase an additional 3,000,000
shares at exercise prices ranging from $1.50 to $3.50. See Note 6 in the
accompanying consolidated financial statements.
The Company believes that its existing cash resources, including cash raised
in the January 2001 sale of common stock to Edwards, will meet its working
capital requirements through December 31, 2001. However, the Company expects
that its revenues and gross profit in 2001 will likely be lower than
corresponding quarters in 2000 (excluding the impact on gross margin of the
non-recurring charge in the fourth quarter of 2000) as a result of the
discounted sale price of lasers and TMR procedural kits when sold to Edwards,
until such time, if ever, that Edwards' marketing efforts result in
substantially increased TMR procedural volumes and corresponding kit sales.
Should TMR procedural volume not increase sufficiently to offset the impact of
selling lasers and kits to Edwards at a discounted price, the Company's
liquidity and capital resources will be negatively impacted. Additionally, other
unanticipated decreases in operating revenues or increases in expenses, the
inability to monetize usage agreements or further delays in third party
reimbursement to healthcare providers using the Company's products may adversely
impact the Company's cash position and require further cost reductions or the
need to obtain
21
additional financing. No assurance can be given that the Company will be
successful in achieving broad commercial acceptance of the Heart Laser Systems
or that the Company will be able to operate profitably on a consistent basis.
The Company may need to raise additional capital to fund operations during the
next twelve months. There can be no assurance that, should the Company require
additional financing, such financing will be available on terms and conditions
acceptable to the Company. 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 consolidated
financial statements set forth in this annual report do not include any
adjustments to reflect the possible future effects of these uncertainties.
The Company has seen an increasing trend on the part of its hospital
customers to acquire the Heart Laser Systems on a usage basis rather than as a
capital equipment purchase. The Company believes that this trend is the result
of limitations many hospitals currently have on acquiring expensive capital
equipment as well as competitive pressures in the marketplace. This shift to a
usage business model may result in the deferral of both revenues and the receipt
of cash. The Company's cash position and its need for additional financing to
fund operations will be dependent in part upon the number of hospitals that
acquire Heart Laser Systems on a usage basis and the number and frequency of TMR
procedures performed by these hospitals. No assurance can be given that a usage
based sales model will be successful, whether implemented by the Company or
Edwards.
During the year ended December 31, 2000, the Company incurred a net loss of
$7,410,000, which resulted in the use of approximately $1,965,000 to support
operations. Cash used for investing activities was approximately $1,591,000 and
related to the Company's $1,303,000 cost to manufacture and deploy placement
lasers at customer sites and the purchase of $288,000 of marketable securities..
Cash provided by financing activities was approximately $5,047,000, primarily
consisting of the net proceeds of $5,037,000 obtained from the sale of the
Company's common stock.
At December 31, 2000, the Company had U.S. net operating loss carryforwards
of approximately $46 million available to reduce future taxable income, which
expire at various dates through 2020, and the Company had foreign net operating
loss carryforwards of approximately $4.7 million. In addition, various other
deferred tax assets have been generated related primarily to intercompany
profit, depreciation, accruals, and research and development tax credits.
Because the Company believes that, as of December 31, 2000, 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, if any, subject to the expirations noted.
RISK FACTORS
OUR COMPANY HAS A HISTORY OF OPERATING 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
$7,410,000 for the year ended December 31, 2000, $6,555,000 for the year ended
December 31, 1999 and $16,603,000 for the year ended December 31, 1998. As of
December 31, 2000, we had an accumulated deficit of $82,101,000. We have not
achieved profitability and expect to continue to incur net losses for at least
the foreseeable future. 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 line, which consists of two
patented high-powered carbon dioxide laser systems known as the Heart Laser
Systems and related disposables. Approximately 90% of our revenues in the fiscal
year ended December 31, 2000 and 89% in the fiscal year ended
22
December 31, 1999 was derived from the sales and service of our first generation
laser and related disposables.
OUR COMPANY MAY BE UNABLE TO RAISE NEEDED FUNDS
As of December 31, 2000, we had cash, cash equivalents and marketable
securities totaling $6,014,000. Based on our current operating plan, we
anticipate that our existing capital resources, including cash raised in our
January 2001 sale of common stock to Edwards, should be sufficient to meet our
working capital requirements through December 31, 2001. If our business does not
progress in accordance with our current business plan, we may need to raise
additional funds. We may not be able to raise additional capital upon
satisfactory terms or at all, and our business, financial condition and results
of operations could be materially and adversely affected. To the extent that we
raise additional capital by issuing equity or convertible securities, ownership
dilution to our stockholders will result.
IN ORDER TO COMPETE EFFECTIVELY, OUR HEART LASER SYSTEMS NEED TO GAIN COMMERCIAL
ACCEPTANCE
The Heart Laser Systems are 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. Our products 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
Systems are effective, relatively safe and cost effective;
- support third party efforts to document the medical processes by which TMR
procedures relieve angina, if any;
- train heart surgeons to perform TMR procedures using the Heart Laser
Systems; and
- obtain widespread third party reimbursement for the TMR procedure.
To date, we have trained only a limited number of heart surgeons and will need
to expand our marketing and training capabilities.
Although the Heart Laser Systems have received FDA approval and the CE Mark,
they 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 Systems, 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 HL1 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 Systems, our business,
financial condition and results of operations will be materially and adversely
affected.
Our business may be adversely affected by a recent six-month clinical study
("DIRECT"), the results of which were released on October 20, 2000 at the
Transcatheter Therapeutics Conference. The DIRECT study, which used a Johnson &
Johnson holmium PMR laser, demonstrated no significant differences in the
clinical outcomes measured between patients receiving PMR therapy and patients
in the control group. The principal investigator of the DIRECT study concluded
that the similar outcomes in patients in the treatment group and patients in the
control group suggests a strong placebo effect, as opposed to any real
therapeutic benefit from the PMR laser revascularization procedure. Although we
believe that there are distinct clinical differences and therapeutic outcomes
between a surgical laser
23
TMR procedure and an interventional laser PMR procedure, the negative publicity
resulting from the DIRECT study with respect to all laser revascularization
procedures, including our CO(2) laser TMR approach, makes it more challenging
for us to distinguish our surgical TMR from PMR, and our CO(2) laser from
holmium lasers. If we are unable to distinguish these procedures and therapies,
the Heart Laser Systems may never gain broad commercial acceptance and,
therefore, our business will be materially and adversely affected.
RAPID TECHNOLOGICAL CHANGES IN OUR INDUSTRY COULD MAKE THE HEART LASER SYSTEMS
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 Systems 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 product enhancements to address the needs of
our 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. Our competitors' products use different types of
lasers than we use in the Heart Laser Systems, including holmium and excimer
lasers that may gain more widespread market acceptance than the Heart Laser
Systems. In addition, we believe that several companies are attempting to
develop 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 technologies and methods may erode the
potential TMR market, which could have a material adverse effect on our
business, financial condition and results of operations.
WE MUST RECEIVE AND MAINTAIN GOVERNMENT APPROVAL IN ORDER TO MARKET OUR PRODUCT
GENERAL
The Heart Laser Systems 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 Union and Japan. To date, we have received regulatory approval in
the United States and have the ability to market the Heart Laser Systems in the
European Union (excluding France). We have not received regulatory approval in
Japan. Without regulatory approval, we cannot market the Heart Laser Systems in
Japan. Even if granted, regulations may significantly restrict the use of the
Heart Laser Systems. 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 SYSTEMS AND COULD REVERSE ITS APPROVAL
AT ANY TIME
We received FDA approval to market the HL1 and HL2 for TMR procedures in
August 1998 and January 2001, respectively. However, the FDA:
- has not allowed us to market the Heart Laser Systems 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 Systems at
any time.
24
EUROPE--ALTHOUGH WE HAVE THE ABILITY TO MARKET OUR PRODUCT IN THE EUROPEAN
UNION, INDIVIDUAL MEMBERS OF THE EUROPEAN UNION COULD, AND FRANCE HAS,
PROHIBITED COMMERCIAL USE OF THE HEART LASER SYSTEMS
We received the CE Mark from the European Union for the HL1 and HL2 in
March 1995 and March 2001, respectively. However:
- the European Union could reverse its ruling and prohibit use of the Heart
Laser Systems at any time;
- we cannot market the Heart Laser Systems in France; and
- other European Union countries could prohibit or restrict use of the Heart
Laser Systems.
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 HL1 has been currently under review by
a panel of French experts. There can be no assurance that this moratorium will
be lifted on a timely basis or at all.
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 Systems in Asia. Prior to marketing the Heart Laser Systems in Japan, we
must receive approval from the Japanese government. This approval requires a
clinical study in Japan with at least 60 patients. A study was completed in 1998
with the HL1. Although the results of this study have been submitted to the
Japanese government, we do not know whether the clinical study will be
sufficient or when, if ever, we will receive approval to sell the HL1 in Japan.
WE COULD INCUR SUBSTANTIAL COSTS DEFENDING AGAINST POSSIBLE LEGAL CLAIMS IN THE
FUTURE
We have been sued for alleged securities law violations in the past, and may
be subject to similar claims or other claims in the future. Between August 1997
and November 1997, we were named as defendant in 21 class action lawsuits
alleging violations of federal securities laws because we failed to obtain a
favorable FDA panel recommendation to market the HL1. Nineteen of the claims
were consolidated into a single action and some of the claims were dismissed in
1999. All remaining claims were settled in February 2001. The settlement of
these claims did not have a material impact on our financial statements.
However, any future litigation or claims, whether or not valid, could result in
substantial costs and diversion of resources with no assurance of success.
ASSERTING AND DEFENDING INTELLECTUAL PROPERTY RIGHTS MAY IMPACT OUR RESULTS OF
OPERATIONS
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 Systems. We may not be successful in defending or
asserting our intellectual property rights.
An adverse outcome in any litigation or interference proceeding could
subject us to significant liabilities to third parties and require us to cease
using the technology that is at issue or to license the technology from third
parties. In addition, a finding that any of our intellectual property is invalid
could allow our competitors to more easily and cost-effectively compete with us.
Thus, an unfavorable outcome in any patent litigation or interference proceeding
could have a material adverse effect on our business, financial condition or
results of operations.
The cost to us of any patent litigation or interference proceeding could be
substantial. Uncertainties resulting from the initiation and continuation of
patent litigation or interference proceedings could have a material adverse
effect on our ability to compete in the marketplace. Patent litigation and
interference proceedings may also absorb significant management time.
25
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. The United States Supreme
Court has stated 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. Such claims may absorb significant management time and
could degrade the reputation of PLC and the marketability of the Heart Laser
Systems. If product liability claims are made with respect to our products, we
may need to recall the implicated product which could have a material adverse
effect on our business, financial condition and results of operations. In
addition, although we maintain product liability insurance with a per claim and
yearly aggregate maximum of $10 million, subject to a $50,000 per occurrence and
$250,000 aggregate self-insured deductible, we cannot be sure that our insurance
will be adequate to cover potential product liability lawsuits. 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 could have a material adverse effect on our business,
financial condition and results of operations.
WE ARE DEPENDENT ON CERTAIN SUPPLIERS
Some of the components for our laser systems, most notably the power supply,
ECG card and certain optics and fabricated parts, are only available from one
supplier. We have no assurance that we will ever be able to source some or all
of our sole sourced components from more than one supplier. Any interruption in
supply from these suppliers could prevent us from meeting commercial demands for
the Heart Laser Systems, which could have a material adverse effect on our
business, financial condition and results of operations.
WE HAVE LIMITED MANUFACTURING EXPERIENCE BUILDING THE HL2
We have only recently begun to manufacture the HL2. The HL2 is based on a
different design than the HL1. In order to achieve certain manufacturing cost
savings, we have taken a more vertically integrated approach to the manufacture
of the HL2 than we did with the HL1. As a result, we may experience
manufacturing difficulties, including but not limited to:
- shortages in component parts due to supplier manufacturing or procurement
delays;
- lack of experienced technical personnel;
- production yields; and
- changing processes and controls over the manufacturing procedures
employed.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
A portion of our product sales are generated from operations outside of the
United States. Establishing and expanding international sales can be expensive.
Managing and overseeing foreign operations may be difficult and products may not
receive market acceptance. Risks of doing business outside the U.S. include the
following: agreements may be difficult to enforce and receivables difficult to
collect through a foreign country's legal system; foreign customers may have
longer payment cycles; foreign countries may impose additional withholding taxes
or otherwise tax our foreign income, impose tariffs or adopt other restrictions
on foreign trade; U.S. export licenses may be difficult to obtain; and the
protection of intellectual property in foreign countries may be more difficult
to enforce. There can be no assurance that our international business will grow
or that any of the foregoing risks will not result in a material adverse effect
on our business or results of operations.
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
26
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, we have three classes of directors, with approximately
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 our common stock.
THE MARKET PRICE OF OUR STOCK MAY FALL IF OTHER SHAREHOLDERS SELL THEIR STOCK
Certain current shareholders hold large amounts of our restricted stock,
which they will be able to sell in the public market in the near future. Sales
of a substantial number of shares of our common stock within a short period of
time could cause our stock price to fall. In addition, the sale of these shares
could impair our ability to raise capital through the sale of additional stock.
THE VALUE OF YOUR COMMON STOCK MAY DECREASE IF OTHER SECURITY HOLDERS EXERCISE
THEIR OPTIONS AND WARRANTS
As shown in the table below, as of December 31, 2000 we have reserved an
additional 4,728,742 shares of common stock for future issuance upon exercise of
outstanding options and redeemable warrants.
WEIGHTED AVERAGE
RANGE OF EXERCISE/ EXERCISE/ SHARES RESERVED FOR
CONVERSION PRICES CONVERSION PRICE FUTURE ISSUANCE
--------------------- ---------------- -------------------
Options...................................... $.53 - $8.88 $ 3.00 4,071,501
Redeemable Warrants.......................... $1.00 - $27.81 $11.37 316,190
Employee Stock Purchase Plan................. $.43 $ .43 341,051
---------
Total........................................ 4,728,742
=========
We may issue additional options and warrants in the future. If any of these
securities are exercised, you may experience significant dilution in the market
value of your common stock. In January 2001, we issued additional warrants and
adjusted the purchase price for certain outstanding warrants.
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.
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,
27
- 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 on Form 10-K, including in the risk factors identified above,
and in materials incorporated herein 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.
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 exclusively in the
United States and sells the products in the United States and abroad. 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 exchange rates between
the U.S. dollar and foreign currencies, especially the 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. In the past, the Company's
support of its foreign operations has benefited from a stronger U.S. dollar, but
has been adversely affected by a weaker U.S. dollar relative to major currencies
worldwide. No assurance can be given that foreign currency fluctuations in the
future may not adversely affect the Company's business financial condition and
results of operations, although at the present the Company does not believe that
its exposure is 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 and
marketable securities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
All financial statements required to be filed hereunder are filed as
Appendix A hereto, are listed under Item 14(a) and are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference to
the Company's Definitive Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the Company's 2001 Annual Meeting of
Shareholders (the "Definitive Proxy Statement") under the caption "Item
No. 1--Election of Directors".
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to
the Company's Definitive Proxy Statement under the caption "Item
No. 1--Election of Directors".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to
the Company's Definitive Proxy Statement under the caption "Security Ownership
of Certain Beneficial Owners and Management".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to
the Company's Definitive Proxy Statement under the caption "Certain
Relationships and Related Transactions".
29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS. The following documents are filed as Appendix A
hereto and are included as part of this Annual Report on Form 10-K.
PAGE
--------
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998.......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2000, 1999 and 1998.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
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.
(b) REPORTS ON FORM 8-K.
Not Applicable.
(c) EXHIBITS. The exhibits filed as part of this annual report on
Form 10-K are set forth on the Exhibit Index immediately preceding such
exhibits, and are incorporated herein by reference.
(d) FINANCIAL STATEMENT SCHEDULES.
See Item 14(a) above.
30
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 29, 2001 By: /s/ MARK R. TAUSCHER
-----------------------------------------
Mark R. Tauscher
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 DATES INDICATED.
NAME CAPACITY DATE
---- -------- ----
/s/ MARK R. TAUSCHER
--------------------------------- President and Chief Executive Officer March 29, 2001
Mark R. Tauscher (Principal Executive Officer)
/s/ JAMES G. THOMASCH Chief Financial Officer
--------------------------------- (Principal Financial and Principal March 29, 2001
James G. Thomasch Accounting Officer)
/s/ EDWARD H. PENDERGAST
--------------------------------- Chairman of the Board of Directors March 29, 2001
Edward H. Pendergast
/s/ KEVIN J. DUNN
--------------------------------- Director March 29, 2001
Kevin J. Dunn
/s/ BENJAMIN HOLMES
--------------------------------- Director March 29, 2001
Benjamin Holmes
/s/ ALAN H. MAGAZINE
--------------------------------- Director March 29, 2001
Alan H. Magazine
/s/ H.B. BRENT NORTON, M.D.
--------------------------------- Director March 29, 2001
H.B. Brent Norton, M.D.
/s/ KENNETH J. PULKONIK
--------------------------------- Director March 29, 2001
Kenneth J. Pulkonik
31
NAME CAPACITY DATE
---- -------- ----
/s/ ROBERT I. RUDKO, PH.D.
--------------------------------- Director March 29, 2001
Robert I. Rudko, Ph.D.
/s/ ROBERTS A. SMITH, PH.D.
--------------------------------- Director March 29, 2001
Roberts A. Smith, Ph.D.
32
APPENDIX A
PLC SYSTEMS INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 2000, 1999, 1998
PLC SYSTEMS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 2000 and
1999...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998.......................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2000, 1999 and 1998.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts.............. S-1
REPORT OF INDEPENDENT AUDITORS
To The Board of Directors and Stockholders of
PLC Systems Inc.
We have audited the accompanying consolidated balance sheets of PLC
Systems Inc. as of December 31, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2000. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, 2000 and 1999, and the consolidated results of
its operations, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Ernst & Young LLP
Boston, Massachusetts
February 16, 2001
F-2
PLC SYSTEMS INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
-------- --------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,726 $ 4,467
Marketable securities..................................... 288 --
Accounts receivable, net.................................. 1,400 1,894
Lease receivables, net.................................... 1,680 642
Inventories, net.......................................... 1,440 2,348
Prepaid expenses and other current assets................. 259 460
------- -------
Total current assets.................................... 10,793 9,811
Equipment, furniture and leasehold improvements, net........ 1,049 3,336
Lease receivables, net...................................... 2,836 1,782
Other assets................................................ 400 390
------- -------
Total assets............................................ $15,078 $15,319
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,276 $ 1,338
Accrued clinical costs.................................... 576 769
Accrued compensation...................................... 799 653
Accrued other............................................. 626 630
Deferred revenue.......................................... 531 138
Secured borrowings........................................ 1,975 824
------- -------
Total current liabilities............................... 5,783 4,352
Secured borrowings.......................................... 3,079 2,082
Commitments and contingencies
Stockholders' equity:
Preferred stock, no par value, unlimited shares authorized,
none issued and outstanding
Common stock, no par value, unlimited shares authorized,
23,965 and 21,223 shares issued and outstanding in 2000
and 1999, respectively.................................... 89,417 84,380
Accumulated deficit......................................... (82,101) (74,691)
Accumulated other comprehensive loss........................ (1,100) (804)
------- -------
6,216 8,885
------- -------
Total liabilities and stockholders' equity.................. $15,078 $15,319
======= =======
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, 2000, 1999 AND 1998
2000 1999 1998
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Product sales............................................. $ 6,803 $ 8,400 $ 3,088
Placement and service fees................................ 3,437 3,236 2,605
-------- -------- --------
Total revenues.......................................... 10,240 11,636 5,693
Cost of revenues:
Product sales............................................. 3,765 3,615 1,945
Placement and service fees................................ 3,168 2,061 2,622
-------- -------- --------
Total cost of revenues.................................. 6,933 5,676 4,567
-------- -------- --------
Gross profit................................................ 3,307 5,960 1,126
Operating expenses:
Selling, general and administrative....................... 9,430 10,054 13,718
Research and development.................................. 1,680 2,672 4,468
-------- -------- --------
Total operating expenses................................ 11,110 12,726 18,186
-------- -------- --------
Loss from operations........................................ (7,803) (6,766) (17,060)
Other income, net........................................... 393 211 457
-------- -------- --------
Net loss.................................................... $ (7,410) $ (6,555) $(16,603)
======== ======== ========
Net loss per share -- Basic and Diluted..................... $ (.32) $ (.32) $ (.86)
Shares used to compute net loss per share
--Basic and Diluted..................................... 23,266 20,675 19,218
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, 2000, 1999 AND 1998
ACCUMULATED
COMMON STOCK OTHER
------------------- ACCUMULATED COMPREHENSIVE
SHARES AMOUNT DEFICIT LOSS TOTAL
-------- -------- -------------- ------------- --------
(IN THOUSANDS)
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) -- (16,603)
Foreign currency translation............ -- -- -- (151) (151)
------ ------- -------- ------- -------
Total comprehensive loss................ (16,754)
------ ------- -------- ------- -------
Balance, December 31, 1998.............. 19,740 $79,521 $(68,136) $ (724) $10,661
Exercise of stock options............... 4 17 -- -- 17
Conversion of debentures due 2003....... 163 972 -- -- 972
Issuance of common stock................ 1,316 3,786 -- -- 3,786
Compensation expense.................... -- 84 -- -- 84
Comprehensive loss:
Net loss................................ -- -- (6,555) -- (6,555)
Foreign currency translation............ (80) (80)
------ ------- -------- ------- -------
Total comprehensive loss................ (6,635)
------ ------- -------- ------- -------
Balance, December 31, 1999.............. 21,223 $84,380 $(74,691) $ (804) $ 8,885
Issuance of common stock................ 2,742 5,037 -- -- 5,037
Comprehensive loss:
Net loss................................ -- -- (7,410) -- (7,410)
Foreign currency translation............ -- -- -- (296) (296)
------ ------- -------- ------- -------
Total comprehensive loss................ (7,706)
------ ------- -------- ------- -------
Balance, December 31, 2000.............. 23,965 $89,417 $(82,101) $(1,100) $ 6,216
====== ======= ======== ======= =======
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, 2000, 1999 AND 1998
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Operating activities:
Net loss.................................................. $(7,410) $(6,555) $(16,603)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization........................... 3,641 2,959 3,170
Compensation on stock options........................... -- 84 --
Change in assets and liabilities:
Accounts receivable................................... 488 313 (973)
Inventories........................................... 908 607 (475)
Prepaid expenses and other assets..................... 138 234 89
Accounts payable...................................... (63) 342 82
Deferred revenue...................................... 355 (57) 142
Accrued liabilities................................... (22) (1,139) 304
------- ------- --------
Net cash used for operating activities...................... (1,965) (3,212) (14,264)
Investing activities:
Additions to equipment.................................... (1,303) (1,166) (2,574)
Purchase of marketable securities......................... (288) -- (1,986)
Maturities of marketable securities....................... -- -- 14,831
------- ------- --------
Net cash provided by (used for) investing activities........ (1,591) (1,166) 10,271
Financing activities:
Net proceeds from sale of common stock.................... 5,037 3,803 623
Secured borrowing......................................... 55 242 240
Principal payments on capital lease obligations........... (45) (66) (79)
Issuance of convertible debentures, net of issuance
costs................................................... -- -- 4,659
------- ------- --------
Net cash provided by financing activities................... 5,047 3,979 5,443
Effect of exchange rate changes on cash and cash
equivalents............................................... (232) 20 (88)
------- ------- --------
Net increase (decrease) in cash and cash equivalents........ 1,259 (379) 1,362
Cash and cash equivalents at beginning of year.............. 4,467 4,846 3,484
------- ------- --------
Cash and cash equivalents at end of year.................... $ 5,726 $ 4,467 $ 4,846
======= ======= ========
Non-cash financing activities:
Conversion of convertible debentures and accrued interest
into common stock......................................... -- $ 972 $ 7,733
Ascribed warrant value...................................... -- -- 50
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. NATURE OF BUSINESS
PLC Systems Inc. ("PLC" or the "Company") has developed a patented
high-powered carbon dioxide laser system known as The Heart Laser ("HL1") for
use in the treatment of coronary artery disease ("CAD") in a surgical laser
procedure, pioneered by the Company and its clinical investigators, known as
transmyocardial revascularization ("TMR"). TMR is a laser based treatment for
relieving debilitating pain in patients suffering from severe CAD. The Company's
CO(2) 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. Each TMR
procedure requires a sterile, single use, TMR kit containing assorted TMR
handpieces, drapes and other disposable items.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of PLC and its
three wholly owned subsidiaries, PLC Medical Systems, Inc., PLC Sistemas Medicos
GmbH, and PLC Medical Systems AG. All intercompany accounts and transactions
have been eliminated. Certain prior year amounts may have been reclassified to
conform to the current year's presentation.
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 and mature within six months
from the purchase date. Cash equivalents and marketable securities, which are
classified as available-for-sale securities consist primarily of time deposits.
INVENTORIES
Inventory is stated at the lower of 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.
F-7
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company sells it principal product, the HL1, and related disposable
surgical kits to hospital customers both directly and through distributors.
Revenues from the sale of disposable kits are recorded as product sales at the
time of shipment. Revenues from the sale or lease of the HL1, which result in
substantially all the risks and benefits of ownership of the HL1 being
transferred to the customer, are recorded as product sales at the time of
ownership transfer. In sales transactions this typically occurs at time of
shipment. In lease transactions this typically occurs upon lease commencement,
at which time the Company records revenues equal to the present value of the
guaranteed minimum lease payments.
The Company also installs the HL1 in hospitals under placement agreements
which do not transfer substantial ownership of the equipment to the customer.
Revenues from these transactions are recognized over the life of the placement
agreement in accordance with the specific terms of the contract.
Revenues from service and maintenance contracts are recognized ratably over
the life of the contract.
In the fourth quarter, the Company adopted Staff Accounting Bulletin
No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB 101"), which provides
guidance in applying generally accepted accounting principles to certain revenue
recognition issues. The adoption of SAB 101 did not have a material impact on
the Company's financial position or overall trends in results of operations.
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
Basic earnings per share is computed based only on the weighted average
number of common shares outstanding during the period. Diluted earnings per
share is computed using the weighted average number of common shares outstanding
during the period, plus the dilutive effect of future issues of common stock
relating to stock option programs and convertible debt financing. In calculating
diluted earnings per share, the dilutive effect of stock options is computed
using the average market price for the period unless their inclusion would be
antidilutive.
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,
F-8
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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.
3. INVENTORIES
Inventories consist of the following at December 31 (in thousands):
2000 1999
-------- --------
Raw materials............................................. $ 946 $ 1,044
Work in process........................................... 43 439
Finished goods............................................ 451 865
------- -------
$ 1,440 $ 2,348
======= =======
At December 31, 2000, inventories are stated net of a reserve of $1,374,000
for potentially obsolete inventory.
4. EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
Equipment, furniture and leasehold improvements consist of the following at
December 31 (in thousands):
2000 1999
-------- --------
Equipment................................................. $ 2,956 $ 2,614
Equipment under placement contracts....................... 6,434 6,354
Office furniture and fixtures............................. 881 881
Equipment under capital lease............................. 429 429
Leasehold improvements.................................... 591 591
------- -------
11,291 10,869
Less accumulated depreciation and amortization............ 10,242 7,533
------- -------
$ 1,049 $ 3,336
======= =======
Depreciation expense was $3,187,000, $2,340,000 and $3,116,000,
respectively, for the years ended December 31, 2000, 1999 and 1998. Included in
2000 depreciation expense is $1,265,000 related to the write down of the
Company's installed HL1 laser base.
F-9
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
5. LEGAL PROCEEDINGS
CARDIOGENESIS SUIT
In January 1999, the Company settled its outstanding patent infringement
litigation with CardioGenesis, who subsequently merged with Eclipse Surgical
Technologies, Inc. The original CardioGenesis lawsuit, and counterclaim by the
Company, dealt with the Company's synchronization patent (U.S. Patent
No. 5,125,926). Under the settlement, CardioGenesis agreed that U.S. Patent
No. 5,125,926 and related international patents of the Company were 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 agreed to 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).
CLASS ACTION SUITS
In July 1997, a U.S. Food and Drug Administration ("FDA") advisory panel
recommended against approval of the Company's application to market the HL1 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 sought 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 were consolidated by the court into a single action
for pretrial purposes (hereafter referred to as the "federal suit"). Two of
these suits were voluntarily dismissed. The Company moved to dismiss all claims
in the federal suit. On March 26, 1999, the court issued an order dismissing
some, but not all, of the claims in the federal suit. The parties filed cross
motions for reconsideration and on October 12, 1999, the court dismissed
additional, but not all, remaining claims in the federal suit. On February 9,
2001, the Court issued an Order approving the settlement of the federal suit and
entered a judgment of dismissal. The settlement of the federal suit did not have
a material impact on the Company's financial statements.
The Company also was named as a defendant in a lawsuit filed in
Massachusetts Superior Court in September 1998 (hereafter referred to as the
"state suit") seeking over $2.0 million in damages for alleged negligent
misrepresentations and fraud arising from the Company's failure to obtain a
favorable FDA panel recommendation in 1997. The state suit settled on
confidential terms, and a Stipulation of Dismissal was filed on April 13, 2000.
The settlement of the state suit did not have a material impact on the Company's
financial statements.
F-10
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
5. LEGAL PROCEEDINGS (CONTINUED)
FOCH HOSPITAL SUIT
In October 1997, the French Ministry of Health suspended commercial use of
TMR devices in France. In November 1998, a hospital in France, Centre Medico
Chirurgical Foch ("Foch Hospital"), sued the Company's former Portuguese
subsidiary, PLC Sistemas Medicos Internacionais Lda., and a third party,
Johnson & Johnson Leasing GmbH, in Paris, France alleging breach of contract and
seeking reimbursement of lease payments made for the HL1. On April 18, 2000, the
Tribunal de Grande Instance de Paris dismissed this suit for lack of
jurisdiction. The Company can make no assurance as to whether Foch Hospital will
appeal this decision or bring suit in another jurisdiction.
6. STOCKHOLDERS' EQUITY
In March 1999, the Company obtained a provisional equity financing
commitment of up to $8 million from a major institutional investor. In 1999, the
Company had sold 649,474 shares of common stock under this commitment, resulting
in proceeds to the Company (net of all issuance costs payable upon closing) of
approximately $1,900,000. This commitment expired on July 16, 1999. In
July 1999, the Company also sold 666,666 shares of common stock to another
investor resulting in net proceeds to the Company of approximately $1,900,000.
On March 28, 2000, the Company closed an equity financing with two
institutional investors. The Company sold 2,683,000 shares of common stock at
$2.00 per share, resulting in proceeds to the Company (net of all issuance
costs) of approximately $5,012,000 and issued the placement agent a three year
warrant for 61,326 shares of common stock with an exercise price of $3.15 per
share. Based on certain events defined in the warrant agreement, the Company was
obligated to issue warrants to purchase 11,025 additional shares of common stock
at an adjusted purchase price of $2.67 per share and adjusted the original
purchase price of the warrant for 61,326 shares to $2.67 per share in
conjunction with the transaction discussed below.
In January 2001, the Company entered into an exclusive five-year agreement
with Edward Lifesciences LLC ("Edwards"). Edwards will distribute the Company's
next generation carbon-dioxide ("CO(2)") TMR laser (which was approved on
January 9, 2001 by the FDA) and all associated TMR disposable components to
hospitals throughout the United States. In conjunction with this agreement, the
Company issued 5,333,333 shares of common stock at $.75 per share resulting in
gross proceeds of approximately $4,000,000. Edwards has certain preemptive
rights to maintain their ownership position relative to future stock offerings.
The Company also issued 1,000,000 warrants to purchase shares of common stock at
$1.50 per share, 1,000,000 warrants to purchase shares of common stock at $2.50
per share, and 1,000,000 warrants to purchase shares of common stock at $3.50
per share. These warrants expire in January 2004, January 2005 and
January 2006, respectively.
As of December 31, 2000, 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; 4,864 shares
at $19.53 per share expiring April 23, 2003; and 61,326 shares at $3.15 per
share expiring March 27, 2003. Under the terms of a previous arrangement, the
Company also committed to issue an additional warrant to purchase 100,000 shares
at $1.00 per share, which will expire five years from the date of issuance.
F-11
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
6. STOCKHOLDERS' EQUITY (CONTINUED)
At December 31, 2000, there were 4,728,742 shares of authorized but unissued
common stock reserved for issuance under all stock option plans, the employee
stock purchase plan and stock warrants.
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.
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.
7. STOCK OPTION AND STOCK PURCHASE PLANS
During 2000, the Board of Directors, through its Compensation Committee,
adopted the following incentive compensation programs:
a) In May 2000, the Company adopted the 2000 Employee Stock Purchase Plan
(the "Purchase Plan") for all eligible employees. Under the Purchase
Plan, shares of the Company's common stock may be purchased at six-month
intervals at 85% of the lower of the fair market value on the first or
the last day of each six-month period. Employees may purchase shares
having a value not exceeding 10% of their gross compensation during an
offering period. During 2000, employees purchased 58,949 shares at a
price of $.43 per share. At December 31, 2000, 341,051 shares were
reserved for future issuance.
b) In May 2000, the Company adopted the 2000 Equity Incentive Plan ("2000
Plan"), which provides for the grant of incentive stock options and
non-qualified stock options of up to 500,000 shares of common stock.
c) In October 2000, the Company adopted the 2000 Non-Qualified Stock Option
Plan ("2000 Non-Qualified Plan"), which provides for the grant of
non-qualified stock options to substantially all employees of up to
317,672 shares of common stock.
d) In November 2000, the Company adopted the 2000 Non-Qualified Retention
and Performance Equity Plan ("2000 Retention Plan"), which provides for
the grant of non-qualified stock options of up to 400,000 shares of
common stock.
The Company's 1992 Stock Option Plan ("1992 Plan"), 1993 Formula Stock
Option Plan (the "Formula Plan"), 1993 Stock Option Plan ("1993 Plan"), 1995
Stock Option Plan ("1995 Plan"), 1997 Executive Stock Option Plan ("1997
Executive Plan"), 2000 Plan, 2000 Non-Qualified Plan and 2000 Retention Plan
(collectively, the "Plans") allow for the granting of options aggregating
4,972,672 shares of common stock. The Company's Formula Plan provides for the
grant of non-qualified options to non-employee directors. 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 four years from the date of grant, or based on
the attainment of specific performance criteria, and expire ten years from the
date of grant.
F-12
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
7. STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED)
Annually, the Company grants 10,000 options to each of its non-employee
directors who have fully vested in their initial option grant of 30,000 options.
A director must attend at least 60% of all Board meetings, as well as committee
meetings, to receive the grant. In addition, the Chairman of the Board receives
an annual grant of 20,000 options. 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.
During 1998, the Board of Directors, through 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) 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 the Company's 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. Furthermore, prior to December 15, 1998 the Company 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 were repriced to $4.875 per
share.
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.
F-13
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
7. STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED)
The following is a summary of option activity under all Plans (in thousands,
except per option data):
2000 1999 1998
-------- -------- --------
Outstanding at beginning of year...................... 2,706 2,788 2,187
Granted............................................. 800 1,204 823
Exercised........................................... -- (4) (142)
Canceled............................................ (386) (1,282) (80)
----- ------ -----
Outstanding at end of year............................ 3,120 2,706 2,788
===== ====== =====
Exercisable at end of year............................ 1,808 1,681 1,711
Available for grant at end of year.................... 952 152 71
2000 1999 1998
-------- -------- --------
Weighted-average exercise price:
Outstanding at beginning of year................... $3.84 $5.16 $8.75
Granted............................................ $0.86 $2.53 $5.39
Canceled........................................... $4.62 $5.46 $9.09
Exercised.......................................... $ -- $3.91 $4.39
Outstanding at end of year......................... $3.00 $3.84 $5.16
Exercisable at end of year......................... $4.06 $4.47 $4.88
Weighted-average fair value of
Options granted during the year........................ $0.40 $1.44 $3.33
RANGE OF EXERCISE PRICES
----------------------------------------------
$.53125 - $1.99 $2.00 - 5.00 $5.01 - $8.88
--------------- ------------ -------------
Options Outstanding:
Number (in thousands)................... 755 1,954 411
Weighted-Average Remaining
Contractual Life...................... 9.73 6.69 6.88
Weighted-Average
Exercise Price........................ $0.79 $3.27 $5.81
Options Exercisable:
Number (in thousands)................... 44 1,369 395
Weighted-Average
Exercise Price........................ $1.66 $3.66 $5.74
Pursuant to the requirements of FAS 123, the following are the pro forma net
loss and net loss per share for 2000, 1999 and 1998, as if the compensation cost
for the option plans had been determined
F-14
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
7. STOCK OPTION AND STOCK PURCHASE PLANS (CONTINUED)
based on the fair value at the grant date for grants in 2000, 1999 and 1998,
consistent with the provisions of FAS 123.
2000 1999 1998
-------- -------- --------
Proforma net loss (in thousands)................. $(8,383) $(5,163) $(22,438)
Proforma net loss per share...................... $ (.36) $ (.25) $ (1.17)
The fair value of options issued at the date of grant were estimated using
the Black-Scholes model with following weighted average assumptions:
2000 1999 1998
-------- -------- --------
Expected life (years).................................... 2 2 2
Interest rate............................................ 6.41% 5.87% 5.53%
Volatility............................................... .821 1.052 .761
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.
8. LEASE RECEIVABLES
The Company has entered into third-party financing arrangements to provide
an array of lease financing alternatives to hospitals interested in acquiring
the HL1. The lease financing alternatives available complement the Company's
traditional placement and sales strategies.
Under these arrangements, the Company receives payment from the leasing
company equal to the present value of guaranteed minimum procedure payments due
from the customer after customer acceptance of the HL1. In transactions where
the Company has transferred substantially all of the risks and rewards of
ownership to the customer and the customer has accepted the HL1, the Company
recognizes revenues, which are reported as a component of product sales. The
Company recognizes a lease receivable equal to the present value of the
guaranteed minimum lease payments until such time as the Company can legally
isolate the lease receivables. The payment received from the leasing company is
recognized as a secured borrowing. Interest income and interest expense related
to the lease receivables and secured borrowing, respectively, are recognized
over time using the effective interest method. Equal amounts of interest income
and interest expense are included as a component of other income, net, in the
Consolidated Statement of Operations.
9. LEASE COMMITMENTS
The Company occupies its worldwide facilities under operating lease
agreements which expire through August 2004. The Company has the option to renew
the U.S. facilities lease for up to three 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.
F-15
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
9. LEASE COMMITMENTS (CONTINUED)
As of December 31, 2000, future minimum lease payments are estimated to be
as follows (in thousands):
FUTURE MINIMUM
YEAR LEASE PAYMENTS
- ---- --------------
2001........................................................ $ 354
2002........................................................ 433
2003........................................................ 422
2004........................................................ 281
------
$1,490
======
Total rent expense was $327,000 in 2000, $424,000 in 1999 and $375,000 in
1998.
10. 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):
2000 1999
-------- --------
Net U.S. operating loss carryforwards....................... $18,383 $16,279
Net foreign operating loss carryforwards.................... 1,865 1,775
Intercompany profit......................................... 19 189
Accrued expenses and reserves............................... 1,342 991
Tax credits................................................. 838 824
Deferred revenue............................................ 39 55
Other....................................................... 426 (62)
------- -------
Total deferred tax assets................................. 22,912 20,051
Valuation allowance....................................... (22,912) (20,051)
------- -------
Net deferred tax assets................................. $ -- $ --
======= =======
The valuation allowance increased by approximately $2,861,000 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 $22,912,000.
Loss before taxes consisted of the following (in thousands):
2000 1999 1998
-------- -------- --------
Domestic.................................................... $(7,029) $(5,027) $(14,137)
Foreign..................................................... (381) (1,528) (2,466)
------- ------- --------
$(7,410) $(6,555) $(16,603)
======= ======= ========
F-16
PLC SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
10. INCOME TAXES (CONTINUED)
Income taxes (benefit) computed at the federal statutory rate differ from
amounts provided as follows (in thousands):
2000 1999 1998
-------- -------- --------
Statutory income tax benefit................................ $(2,520) $(2,229) $(5,645)
Utilization of loss carryforwards........................... -- (290) (85)
Unbenefited U.S. losses..................................... 2,390 1,709 4,807
Unbenefited foreign losses.................................. 130 810 923
------- ------- -------
Benefit for income taxes.................................... $ -- $ -- $ --
======= ======= =======
At December 31, 2000 the Company had U.S. net operating loss carryforwards
available to reduce future taxable income of approximately $46 million, which
expire at various dates through 2020. In addition, the Company had foreign net
operating loss carryforwards of approximately $4.7 million.
11. 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
-------- -------- --------- ------------ --------
2000
Net sales to unaffiliated customers............. $ 8,319 $1,921 $ -- $ -- $10,240
Long-lived assets............................... $ 192 $ -- $ -- $ -- $ 192
1999
Net sales to unaffiliated customers............. $10,196 $1,440 $ -- $ -- $11,636
Long-lived assets............................... $ 391 $ -- $ -- $ -- $ 391
1998
Net sales to unaffiliated customers............. $ 3,992 $1,615 $ 86 $ -- $ 5,693
Long-lived assets............................... $ 558 $ -- $ -- $ -- $ 558
No one customer accounted for more than 10% of the Company's revenues for
the year ended December 31, 2000, 1999 or 1998. 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 believes its future
revenues will be largely dependent on sales of its products to its principal
customer, Edwards, beginning in 2001.
F-17
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, 2000
Allowance for Doubtful Accounts................... $418,000 $226,000 $276,000 $368,000
For the Year Ended December 31, 1999
Allowance for Doubtful Accounts................... $228,000 $190,000 $ 0 $418,000
For the Year Ended December 31, 1998
Allowance for Doubtful Accounts................... $140,000 $100,000 $ 12,000 $228,000
PLC SYSTEMS INC.
QUARTERLY DATA (UNAUDITED)
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31* TOTAL
-------- -------- ------------ ------------ --------
2000
Total revenue............................. 1,742 3,580 2,549 2,369 10,240
Gross profit (loss)....................... 756 2,056 1,140 (645) 3,307
Loss from operations...................... (2,280) (997) (1,434) (3,092) (7,803)
Net loss.................................. (2,183) (882) (1,317) (3,028) (7,410)
Net loss per share, basic and diluted..... (.10) (.04) (.06) (.13) (.32)
1999
Total revenue............................. $2,846 $3,492 $2,542 $2,756 $11,636
Gross profit.............................. 1,484 1,720 1,232 1,524 5,960
Loss from operations...................... (2,206) (1,830) (1,443) (1,287) (6,766)
Net loss.................................. (2,199) (1,705) (1,395) (1,256) (6,555)
Net loss per share, basic and diluted..... (.11) (.08) (.07) (.06) (.32)
(*) In the fourth quarter ended December 31, 2000, the Company recorded a
one-time charge of $2,117,000 related to the estimated costs of writing down
inventory and capital equipment as a result of the Company's product
transition from the HL1 to its next generation laser, the CO(2) Heart Laser
2.
S-1
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 annual report on Form 10-K for the fiscal
year ended December 31, 1999, as previously filed with the
Securities and Exchange Commission.
3.3 By-Law No. 1, a By-Law relating generally to the transaction
of the business and affairs of PLC Systems Inc.,
incorporated by reference to the Registrant's annual
report on Form 10-K for the fiscal year ended December 31,
1999, 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 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 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.
10.7 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.
10.8 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.
10.9 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.
10.10 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.
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
10.11 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 No. 1-11388), as previously filed with the
Securities and Exchange Commission.
10.12* Employment Agreement of James G. Thomasch, dated November 4,
1999.
10.13* Employment Agreement of Mark R. Tauscher, dated December 22,
1999.
10.14* 2000 Non-qualified Performance and Retention Equity Plan.
21.1* Subsidiaries of the Registrant.
23.1* Consent of Ernst & Young LLP.
- ------------------------
* Filed with this annual report on Form 10-K for the fiscal year ended
December 31, 2000.